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Item 7. Management’s Discussion and Analysis

2022-02-16 compared with 2021-02-10 · 155 added, 277 removed, 111 unchanged (80% of the section changed)

2 unchanged sentences

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those which are discussed in the section titled “Risk Factors.” Also see “Statement Regarding Forward-Looking Statements” preceding Part I.

The following discussion and analysis should be read in conjunction with the “Selected Financial Data” above and our accompanying consolidated financial statements and the notes thereto.

The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and the notes thereto.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:

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• Liquidity and Capital Resources

• Obligations and Commitments

• Capital Expenditures

• Critical Accounting Policies

• Critical Accounting Estimates

• Impact of Inflation

• Off-Balance Sheet Arrangements

CareTrust REIT is a self-administered, publicly-traded REIT engaged in the ownership, acquisition, development and leasing of skilled nursing, seniors housing and other healthcare-related properties.

As of December 31, 2020, CareTrust REIT’s real estate portfolio consisted of 218 skilled nursing facilities (“SNFs”), multi-service campuses and assisted living facilities (“ALFs”) consisting of 22,466 operational beds and units located in 28 states with the highest concentration of properties by rental income located in California, Texas, Louisiana, Idaho and Arizona.

As of December 31, 2021, CareTrust REIT’s real estate portfolio consisted of 227 skilled nursing facilities (“SNFs”), multi-service campuses, assisted living facilities (“ALFs”) and independent living facilities (“ILFs”) consisting of 23,650 operational beds and units located in 29 states with the highest concentration of properties by rental income located in California, Texas, Louisiana, Idaho and Arizona.

As of December 31, 2021, we also had other real estate investments consisting of one mezzanine loan receivable with a carrying value of $15.2 million .

Recent Developments

The COVID-19 pandemic has led governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to reduce its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business limitations and closures (subject to exceptions for essential operations and businesses), quarantines and shelter-in-place orders.

Although some of these governmental restrictions have since been lifted or scaled back, resurgences of COVID-19 and the emergence of new variants thereof have resulted in the reimposition of certain restrictions and may lead to other restrictions being implemented in response to efforts to reduce the spread of COVID-19 and its variants.

Given the dynamic nature of these circumstances and the related adverse impact these restrictions have had, and may continue to have, on the economy generally, our business, results of operations and financial condition may be adversely impacted by the COVID-19 pandemic.

Tenants operating our properties pursuant to triple-net master leases have been adversely impacted, and we expect that they will continue to be adversely impacted, by the COVID-19 pandemic.

Our tenants are experiencing increased operating costs as a result of actions they are taking to prevent or mitigate the outbreak or spread of COVID-19 at their facilities, including in connection with their implementation of safety protocols and procedures, the cost of increased purchases of personal protective equipment, the costs of mandated testing and other regulatory requirements, and increased staffing costs.

To assist and protect our tenants and their residents, patients and staffs, we employed our scale and purchasing power to procure approximately $1.2 million of then-scarce personal protective equipment (“PPE”) from March 27, 2020 to December 31, 2020, and offered it to our tenants at our volume-discounted cost.

This not only enabled them to obtain critical PPE at a time when its availability was limited to smaller purchasers, it also enabled them to benefit from the cost efficiencies of our bulk order.

Tenants who received PPE from us have fully reimbursed the discounted cost thereof to us as of December 31, 2020.

At a portfolio wide level, occupancy levels at our seniors housing facilities have remained relatively stable from the onset of the COVID-19 pandemic through the third quarter of 2020, but began to decline slightly in the fourth quarter of 2020, while occupancy levels at our skilled nursing facilities (“SNFs”), which declined at the onset of the COVID-19 pandemic, continued to decline during the three months ended December 31, 2020 compared to occupancy levels in the third quarter of 2020, and may continue to decline primarily due to, among other things, (i) state mandated temporary suspensions on new admissions during COVID-19 outbreaks, (ii) with respect to our SNFs, governmental restrictions that require the temporary deferral of elective surgeries in referring hospitals, (iii) with respect to our SNFs, the imposition of strict visitation policies that may deter prospective patients from seeking admission, and (iv) with respect to our seniors housing properties, declines in inquiries and tours, deferred move-ins and increased move-outs due to concerns about possible COVID-19 outbreaks.

COVID-19 Update

Tenants of our properties operating pursuant to triple-net master leases have been adversely impacted, and we expect that they will continue to be adversely impacted, by the COVID-19 pandemic.

Our tenants are experiencing increased operating costs as a result of actions they are taking to prevent or mitigate the outbreak or spread of COVID-19 at their facilities, including in connection with their implementation of safety protocols and procedures and other regulatory requirements, as well as labor shortages resulting in limited admissions, reduced occupancy and higher agency expense.

To help offset these costs and occupancy declines, various relief programs have been enacted by federal and state governments, which have provided, and we expect will continue to provide, some payments to our tenants, subject to the programs’ respective terms and conditions.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) established a grant program administered by the U.S.

Department of Health and Human Services (“HHS”) under which grants have been made available to eligible healthcare providers for healthcare related expenses or lost revenues attributable to COVID-19 (the “Provider Relief Funds”).

During the fo urth quarter of 2021, HHS closed the application portal for its Phase 4 allocation of approximately $17 billion of Provider Relief Funds and an allocation of approximately $8.5 billion in American Rescue Plan resources for providers serving patients living in rural areas.

Our tenants pursued additional funding from these allocations, and we expect that they will pursue any future funding that may become available, although there can be no assurance that our tenants will qualify for, or receive, any Phase 4 or American Rescue Plan, or any future, funding.

The estimated federal and state relief approved, received and retained to date by our operators, as reported by our operators, is approximate ly $171.4 million .

At December 31, 2021 , two of our ope rators who received Provider Relief Funds have disclosed that they have returned all or a portion of the Provider Relief Funds issued to them.

HHS recently renewed the COVID-19 Public Health Emergency, and it is currently set to be in force through April 16, 2022, which allows HHS to continue providing temporary regulatory waivers, including the waiver of the three-day hospital stay requirement.

The CARES Act also includes a temporary suspension of a 2% Medicare sequestration cut until April 1, 2022, and reduces the cuts from 2% to 1% from April 1 through June 30, 2022.

In addition, a temporary increase in Federal Medical Assistance Percentages, which was approved retroactive to January 1, 2020, is effective through March 31, 2022.

At a portfolio wide level, occupancy levels at our seniors housing facilities remained relatively stable from the onset of the COVID-19 pandemic until the beginning of the fourth quarter of 2020, at which time we began to see a decline.

This decline in occupancy continued through the first quarter of 2021 and remained flat through the fourth quarter of 2021.

Occupancy levels at our SNFs, which declined at the onset of the COVID-19 pandemic and continued to decline through January 2021, have been on a steady incline through the fourth quarter of 2021.

Beginning in early 2020, the federal government temporarily suspended the three-day hospital stay requirement for a patient’s Medicare benefits to refresh.

Providers can now “skill in place,” eliminating the risk of transferring the patient to the hospital.

Because of this temporary rule change, skilled mix in some facilities has continued to increase during the three months ended December 31, 2020, compared to the third quarter of 2020, while overall occupancy has declined.

An increase in skilled mix could, but may not necessarily, offset some or all of the adverse financial impact to the operator of the SNF from a decline in occupancy.

The higher operating costs affecting our tenants, and the impact of lower occupancy levels, have adversely impacted and may continue to adversely impact the ability of our tenants to satisfy their rental obligations to us in full or on a timely basis.

Two SNF tenants proposed rent deferrals shortly after the pandemic was declared;

however, after undergoing a financial and operating performance review, and considering the impact of stimulus funding, both tenants determined that no rent deferral or other assistance was necessary.

One seniors housing tenant proposed partial rent relief, and in the fourth quarter of 2020 the five facilities operated by the tenant were transitioned to another operator with whom we had an existing landlord-tenant relationship, with all outstanding rent paid in full upon transition.

Wh ile we have not seen a need to grant any rent relief to any tenant to date, future adverse changes to tenants’ operating fundamentals, or a reduction in or discontinuation of government support, could change our expectations.

Approximatel y 100% of our contractual rent obligations due for January 2021 have b een collected from our tenants before considering any cash deposits on-hand from which we may offset any shortfalls in rent received.

Additionally, all of our outstanding mortgage loans receivable wer e repaid during the year ended December 31, 2020, except for one mezzanine loan entered into during the fourth quarter of 2020 which is current but not yet due.

The following relief progra ms enacted by the government have provided, and we expect will continue to provide some benefits to our tenants subject to the programs’ respective terms and conditions, including, but not limited to, attestation, recordkeeping and reporting requirements to Department of Health and Human Services (“HHS”):

• The Families First Coronavirus Response Act (“Families First Act”) - Under the Families First Act, a temporary 6.2% increase in Federal Medical Assistance Percentages (“FMAP”) was approved retroactive to January 1, 2020, and several states have directed FMAP funds to SNFs, including some of our tenants.

• The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) - Under the CARES Act, a substantial number of our tenants have received, or are expected to receive, assistance from a relief fund in excess of $100 billion (such funds, the “Provider Relief Funds”) provided for eligible health care providers, which includes operators of SNFs.

Additionally, a Payroll Protection Program was established under the CARES Act to provide Small Business Administration loans to businesses with fewer than 500 employees that may be partially forgivable.

The CARES Act also includes a temporary suspension from May 1, 2020 through March 31, 2021 of a 2% Medicare sequestration cut, and a deferral of the employer’s Social Security remittances through December 31, 2020 with a repayment period through December 31, 2021.

On December 27, 2020, the President signed a stimulus package which includes two important provisions impacting the Provider Relief Funds for those recipients that accepted one or more payments exceeding $10,000 in the aggregate.

Recipients of relief funds will be required to report their use of funds by submitting healthcare related expenses attributable to COVID-19 that another source has not reimbursed and lost revenues, up to the amount of difference between such provider’s budgeted revenue and actual revenue if such budgeted revenue had been established and approved prior to March 27, 2020 or by comparing year-over-year rev enue.

The new stimulus package allows the parent organization to allocate all or any portion of such reimbursement among the subsidiary eligible health care providers of the parent organization.

Under the current rules, recipients of Provider Relief Funds have until June 30, 2021 to expend relief funds.

Any funds received in excess of expenses attributable to COVID-19 and the recipient’s lost revenue, as described above, will be required to be returned.

The estimated federal and state COVID-19-related relief approved, received and retained to date by our operators, as reported by our operators, i s approximately $150.8 million.

At December 31, 2 020, two of our ope rators who have received Provider Relief Funds have disclosed that they have returned, or plan to return, all or a portion of the Provider Relief Funds issued to them.

In July 2020, the federal government announced that it would send point-of-care testing supplies for COVID-19 to all SNFs in the country.

In connection with the initiatives discussed above, the federal government is requiring that all SNFs in states with a 5% positivity rate or greater test all SNF staff each week.

The new testing mandate has resulted in higher operating costs when the amount of tests received does not cover the amount of tests required by each facility.

In December 2020, the U.S.

Food and Drug Administration issued the first emergency use authorization for a vaccine for the prevention of COVID-19 which allows distribution in the United States, followed by a second vaccine in the same month.

The Centers for Disease Control and Prevention recommends that health care workers, long-term care workers and residents of long-term care facilities should be among the first to receive the vaccine.

As of February 10, 2021, based on information provided by operators who have reported such information to us, the majority of our operators’ residents have received the first dose of the vaccine, while less than half of such operators’ staff have been vaccinated.

The duration and extent of the COVID-19 pandemic’s effect on our operational and financial performance, and the operational and financial performance of our tenants, will depend on future developments, which are highly uncertain and cannot be predicted at this time, including new information which may emerge concerning the severity of COVID-19, timing of vaccine rollouts, public acceptance and usage of vaccines and the effectiveness of vaccines in limiting the spread of COVID-19 and its variants , a ctions taken to contain the spread of COVID-19, resurgences of COVID-19 and its variants that may continue to occur, and how quickly and to what extent normal economic and operating conditions can resume.

Because of this temporary rule change, overall skilled mix remained slightly elevated in the three months ended December 31, 2021 compared to the pre-pandemic skilled mix during the three months ended March 31, 2020.

An increase in skilled mix can, but may not necessarily, offset some or all of the adverse financial impact to the operator of the SNF from a decline in occupancy.

However, the skilled mix in our SNFs during the three months ended December 31, 2021 was lower than the peak level seen in December 2020, and we anticipate that skilled mix in our SNFs will continue to decline as cases of COVID-19 decline.

The higher operating costs affecting our tenants, and the impact of lower occupancy levels and labor shortages, have adversely impacted and may continue to adversely impact the ability of our tenants to satisfy their rental obligations to us in full or on a timely basis.

Provider Relief Funds not previously being made available to our seniors housing facilities has also impacted some of our tenants’ ability to continue to meet some of their financial obligations, as they continue to experience lower occupancy levels and higher operating costs.

During the three months ended September 30, 2021, we agreed to provide affiliates of Noble Senior Services and Noble VA Holdings, LLC (collectively, “Noble”), a deferral of the unpaid portion of contractual rent for the months of July, August and September, totaling $1.8 million and representing approximately 4% of our total contractual base rent for the three months ended September 30, 2021.

In connection with our agreement to the rent deferral, we also entered into a purchase agreement to acquire two ALFs owned by Noble, which are currently leased back to Noble under a short-term lease agreement upon closing of the acquisition in December 2021 while we pursue other tenants for the long-term.

The deferred rent, as well as all contractual rent for the fourth quarter of 2021, was paid in full upon closing of the acquisition of the two facilities in December 2021.

One other facility leased to Noble is designated as held for sale at December 31, 2021, and we expect to remove the facility from the applicable master lease following the sale.

See Note 3, Real Estate Investments, Net , for additional information.

Approximately 100.0% of our contractual rent obligations due for the fourth quarter of 2021, and approximately 93.2% due for January 2022, have been collected from our tenants before considering any cash deposits on-hand from which we may offset any shortfalls in rent received.

In connection with our ongoing review and monitoring of our investment portfolio and the performance of our tenants, we plan to pursue the sale, re-tenanting, or repurposing of up to 32 assets in fiscal 2022, representing approximately 10% of contractual cash rent.

Federal laws and regulations related to COVID-19 vaccine mandates may increase operating costs of our tenants if those mandates make recruiting and retaining qualified nursing and other personnel more difficult.

The Biden-Harris administration issued an Interim Final Rule requiring Medicare and Medicaid-participating facilities and employers with more than 100 employees to mandate their employees to be vaccinated.

Some states have also issued their own orders to employers and healthcare providers that may or may not align with federal directives.

The legality of both federal and state vaccine mandates will likely be decided by the courts.

Until pending laws and regulations related to vaccine mandates are both finalized and adjudicated, our tenants will continue to manage in different ways — from mandating vaccines for all employees to waiting to see how the issue is ultimately resolved.

The mandates, as presently written, may cause disruption to tenants’ operations if employees refuse vaccination and are terminated, and our tenants are not able to replace them in a timely manner or experience increased costs to do so.

The duration and extent of the COVID-19 pandemic’s effect on our operational and financial performance, and the operational and financial performance of our tenants, will depend on future developments, which are highly uncertain and cannot be predicted at this time, including the rate of public acceptance and usage of vaccines and the effectiveness of vaccines in limiting the spread of COVID-19 and its variants , resurgences of COVID-19 and, in particular, new and more contagious and/or vaccine resistant variants, actions taken to contain the spread of COVID-19, restrictions imposed on unvaccinated individuals and employee vaccine mandates, labor shortages resulting from the foregoing restrictions and mandates and how quickly and to what extent normal economic and operating conditions can resume.

The adverse impact of the COVID-19 pandemic on our business, results of operations and financial condition could be material.

Portfolio Changes

Twenty/20 Lease Termination and New Noble Master Lease

On December 1, 2020, five assisted living facilities in Virginia operated by Twenty/20 Management, Inc.

(“Twenty/20”) were transferred to affiliates of Noble Senior Services (“Noble”).

In connection with the transfer, we entered into a new triple-net master lease with Noble.

The new lease has a remaining initial term of approximately 14 years, with two five-year renewal options and CPI-based rent escalators.

Initial annual cash rent under the new lease is approximately $3.2 million.

Asset Sales and Assets Held for Sale

On February 14, 2020, we closed on the sale of six skilled nursing facilities formerly operated by affiliates of Metron Integrated Health Systems (“Metron”).

In connection with the sale for $36.0 million, we received $3.5 million in cash and provided subsidiaries of Cascade Capital Group, LLC (“Cascade”), the purchaser of the properties, with a short-term mortgage loan secured by these properties for $32.4 million.

The mortgage loan bore interest at 7.5% and initially had a maturity date of March 31, 2020.

In connection with the sale, we recognized a loss of approximately $0.1 million during the three months ended March 31, 2020.

In April 2020, the mortgage loan was settled in connection with a new mortgage loan transaction between us and a third-party institutional lender as co-lenders, pursuant to which we received $18.9 million in cash and a new mortgage loan for $13.9 million.

The new mortgage loan with Cascade was secured by the same six skilled nursing facilities purchased by Cascade and was for a combined principal amount of $33.9 million, with our $13.9 million portion of the indebtedness initially bearing interest at a variable rate equal to LIBOR plus 4.00%, subject to a LIBOR floor of 1.75%.

The new mortgage loan had a maturity date of April 29, 2022 and included two six-month extension options.

In July 2020, prepayment for the mortgage loan of $13.9 million and accrued interest was received in full by us.

On November 1 , 2020, we sold our one remaining owned and operated independent living facility consisting of 168 units located in Texas with an aggregate carrying value of $4.2 million for gross proceeds of $4.5 million.

In connection with the sale, we recognized a gain of $20,000.

During the fourth quarter of 2020, we met the criteria to classify one skilled nursing facility operated by affiliates of Five Oaks as held for sale.

Senior Notes Issuance and Redemption

On June 17, 2021, our wholly owned subsidiary, CTR Partnership, L.P.

(the “Operating Partnership”), and its wholly owned subsidiary, CareTrust Capital Corp.

(together with the Operating Partnership, the “Issuers”) completed a private offering of $400.0 million aggregate principal amount of 3.875% Senior Notes due 2028 (the “Notes”) to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A and to non-U.S.

persons outside the United States in reliance on Regulation S under the Securities Act of 1933, as amended (the “Securities Act”).

The aggregate net proceeds from the sale of the Notes were approxi mately $393.8 million after deducting underwriting fees and other offering expenses.

We used a portion of the net proceeds from the sale of the Notes to redeem all of the Issuers’ outstanding 5.25% Senior Notes due 2025 (the “2025 Notes”) and the remaining proceeds to repay a portion of the borrowings outstanding under our Revolving Facility (as defined below).

On July 1, 2021 (the “Redemption Date”), the Issuers redeemed all $300.0 million aggregate principal amount of their outstanding 2025 Notes.

The 2025 Notes were redeemed at a redemption price equal to 102.625% of the principal amount of the 2025 Notes, plus accrued and unpaid interest thereon up to, but not including, the Redemption Date.

During the third quarter of 2021, we recorded a loss on extinguishment of debt of $10.8 million in our consolidated income statements, including a prepayment penalty of $7.9 million and a $2.9 million write-off of deferred financing costs, associated with the redemption of the 2025 Notes.

Recent Dispositions and Assets Held for Sale

From January 1, 2021 through February 16, 2022, we sold one SNF and one land parcel, resulting in a net loss on sale of property of $0.1 million.

During the third quarter of 2021, we met the held for sale criteria on one ALF.

As of December 31, 2021, the property continued to be held for sale and the carrying value of $4.8 million is primarily comprised of real estate assets.

In February 2021, the property was sold.

See Note 13, Subsequent Events, for further detail.

At-The-Market Offering of Common Stock

On March 10, 2020, we entered into a new equity distribution agreement to issue and sell, from time to time, up to $500.0 million in aggregate offering price of our common stock through an “at-the-market” equity offering program (the “New ATM Program”).

In connection with the entry into the equity distribution agreement and the commencement of the New ATM Program, our “at-the-market” equity offering program pursuant to our prior equity distribution agreement, dated as of March 4, 2019, was terminated (the “Prior ATM Program”).

There was no New ATM Program or Prior ATM Program activity (or activity under any predecessor at-the-market equity offering programs) during 2020.

As of December 31, 2020, we had $500.0 million available for future issuances under the New ATM Program.

See Liquidity and Capital Resources for additional information.

Share Repurchase Program

On March 20, 2020, our board of directors authorized a share repurchase program to repurchase up to $150.0 million of outstanding shares of our common stock (the “Repurchase Program”).

Repurchases under the Repurchase Program, which expires on March 31, 2023, may be made through open market purchases, privately negotiated transactions, structured or derivative transactions, including accelerated share repurchase transactions, or other methods of acquiring shares, in each case subject to market conditions and at such times as shall be permitted by applicable securities laws and determined by management.

Repurchases under the Repurchase Program may also be made pursuant to a plan adopted under Rule 10b5-1 promulgated under the Exchange Act.

We expect to finance any share repurchases under the Repurchase Program using available cash and may also use short-term borrowings under the Revolving Facility.

We did not repurchase any shares of common stock under the Repurchase Program during the year ended December 31, 2020.

The Repurchase Program may be modified, discontinued or suspended at any time.

Recent Investments

From January 1, 2020 through February 10, 2021, we acquired six skilled nursing facilities, one multi-service campus and one assisted living facility for approximately $89.8 million, which includes capitalized acquisition costs.

From January 1, 2021 through February 16, 2022, we acquired five SNFs and four multi-service campuses for approxima tely $192.5 million, which includes capitalized acquisition costs.

These acquisitions are expected to generate initial annual cash revenues of approximately $13.9 million and an initial blended yield of approximately 7.4%.

In addition, we acquired two ALFs for approximately $12.4 million, which includes capitalized acquisition costs.

We are in the process of identifying an operator for the two ALFs, which are currently not operational.

See Note 3, Real Estate Investments, Net in the Notes to consolidated financial statements for additional information.

In November 2020, we provided Next VA Star Realty Holdings, LLC a mezzanine loan for nine skilled nursing facilities secured by membership interests in affiliates of Next VA Star Realty Holdings, LLC for approximately $15.0 million, at an annual fixed interest rate of 12%.

The loan requires monthly interest payments, is set to mature on November 30, 2025 and may (subject to certain restrictions) be prepaid before the maturity date if paid in full and for an exit fee ranging from 1% to 3% of the loan plus unpaid interest payments equal to 24 months (less the amount of monthly interest payments made by the borrower through the date of the prepayment).

At-The-Market Offering of Common Stock

In connection with the entry into the equity distribution agreement and the commencement of the ATM Program, our “at-the-market” equity offering program pursuant to our prior equity distribution agreement, dated as of March 4, 2019, was terminated.

The following table summarizes the ATM Program activity for the year ended December 31, 2021 (in thousands, except per share amounts).

For the Year Ended

December 31, 2021

Number of shares 990

Average sales price per share $ 23.74

Gross proceeds (1)

(1) Total gross proceeds is before $0.3 million of commissions paid to the sales agents during the year ended December 31, 2021 under the ATM Program.

As of December 31, 2021, we had $476.5 million available for future issuances under the ATM Program.

Results of Operations

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Independent living facilities — 1,869 (1,869) (100) %

Impairment of real estate investments — 16,692 (16,692) (100) %

Provision for loan losses — 1,076 (1,076) (100) %

General and administrative 26,874 16,302 10,572 65 %

Other (loss) income:

(Loss) gain on sale of real estate (37) 1,777 (1,814) (102) %

Loss on extinguishment of debt (10,827) — (10,827) *

Loss on sale of real estate (77) (37) (40) 108 %

• Not meaningful

Rental income.

Rental income was $190.2 million for the year ended December 31, 2021 compared to $173.6 million for the year ended December 31, 2020.

The $17.9 million, or 12%, increase in rental income is primarily due to $12.9 million from real estate investments made after January 1, 2019, a $11.7 million reversal for collectibility of rental income during the year ended December 31, 2019, $1.8 million from increases in rental rates for our existing tenants, $1.2 million of lease termination revenue, $1.0 million from recovery of previously reversed rent, and $0.3 million increase in tenant reimbursements, partially offset by a $6.2 million decrease in rental income due to the disposal of assets in September 2019 and February 2020, a $4.4 million decrease in cash rents due to lease amendments and $0.4 million decrease from replacing existing tenants during the prior year.

The $16.6 million, or 10%, increase in rental income is primarily due to a $14.8 million increase in rental income from real estate investments made after January 1, 2020, a $3.6 million increase from contractual increases in rental rates for our existing tenants, a $0.6 million net increase in cash rents due to lease amendments and a $0.5 million net increase in tenant reimbursements, partially offset by a $1.1 million decrease in lease termination revenue, a $1.0 million decrease from the recovery of previously reversed rent and a $0.8 million decrease in rental income due to the disposal of assets in February 2020 and February 2021.

Independent living facilities.

Revenues for the ILFs that we owned and operated was $2.1 million for the year ended December 31, 2020 compared to $3.4 million for the year ended December 31, 2019.

The $1.3 million, or 39%, decrease in ILF revenues is primarily due to a reduction in revenue of $1.5 million related to the sale of one ILF to a third party and the lease of a second ILF to Ensign concurrently with the Pennant Spin during the fourth quarter ended December 31, 2019, partially offset by a $0.2 million increase in revenue for our remaining ILF, due to occupancy increases, through the date of sale on November 1, 2020.

Expenses for the ILFs were $1.9 million for the year ended December 31, 2020 compared to $2.9 million for the year ended December 31, 2019.

The $1.0 million, or 36%, decrease in expenses was primarily for the same reasons indicated for the decrease in revenues.

The $2.1 million, or 100%, decrease in revenues from our ILFs was due to the sale of our one remaining ILF to a third party in November 2020.

The $1.9 million, or 100%, decrease in expenses from our ILFs was for the same reason indicated for the decrease in revenues.

Interest and other income.

Interest and other income decreased $0.5 million, or 18%, for the year ended December 31, 2021 to $2.2 million compared to $2.6 million for the year ended December 31, 2020.

The decrease was primarily due to a decrease in preferred return related to the repayment of two preferred equity investments in June 2019 and January 2020, respectively, of $1.3 million and a decrease in interest income of $1.6 million due to the repayment of mortgage loans receivable by Covenant Care in August 2019, Providence Group in December 2019, Manteca in May 2020 and CommuniCare in May 2020, partially offset by approximately $1.2 million of interest income related to our mortgage and other loans receivable that we provided to Manteca in July 2019, CommuniCare in September 2019, Cascade in February 2020 and a mezzanine loan to Next VA Star Realty Holdings, LLC in November 2020.

The decrease was primarily due to a decrease in interest income of $2.0 million due to the repayment of mortgage loans receivable, partially offset by approximately $1.5 million of interest income related to our mezzanine loan originated in November 2020.

See Note 4, Other Real Estate Investments, Net.

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Depreciation and amortization expense increased $2.6 million, or 5%, for the year ended December 31, 2021 to $55.3 million compared to $52.8 million for the year ended December 31, 2020.

The $0.9 million increase was primarily due to depreciation and amortization of $3.4 million related to new real estate investments made after

January 1, 2019, partially offset by $2.0 million of depreciation related to the disposal of assets and $0.5 million due to assets becoming fully depreciated during the year ended December 31, 2020.

The $2.6 million increase in depreciation and amortization was primarily due to an increase in depreciation and amortization of $5.7 million related to new real estate investments and capital improvements made after January 1, 2020, partially offset by a decrease in depreciation of $2.7 million due to assets becoming fully depreciated after January 1, 2020 and a decrease in depreciation of $0.4 million related to the disposal of assets in February 2020 and February 2021.

Interest expense.

Interest expense decreased $4.5 million, or 16%, for the year ended December 31, 2020 to $23.7 million compared to $28.1 million for the year ended December 31, 2019 due to a lower weighted average debt balance of approximately $18.0 million and lower weighted average interest rates of approximately 0.7%.

Interest expense was $23.7 million for both the years ended December 31, 2021 and 2020.

Interest expense decreased for the year ended December 31, 2021 compared to December 31, 2020 by $1.0 million due to a lower weighted-average interest rate on the term loan and by $7.9 million due to the redemption of the 2025 Notes on July 1, 2021.

These decreases were offset by an $8.3 million increase in interest expense related to the issuance of the Notes on June 17,

2021, and a $0.5 million increase in interest expense related to a higher weighted-average debt balance under the Revolving Facility (as defined below), and an increase of $0.1 million in interest expense related to the amortization of deferred financing fees.

Property taxes .

Property taxes decreased $0.2 million, or 7%, for the year ended December 31, 2020 compared to December 31, 2019.

The decrease was primarily due to $1.0 million of property taxes related to the disposal of assets and the transfer of certain properties to new operators in the year ended December 31, 2020 that make direct tax payments, partially offset by property taxes of $0.8 million due to new real estate investments made after January 1, 2019.

Impairment of real estate investments.

On September 1, 2019, we sold three of the seven skilled nursing properties in Ohio operated by Trillium for a purchase price of $28.0 million.

Prior to the disposition, we recorded an impairment of approximately $7.8 million during the three months ended September 30, 2019.

Additionally, during the three months ended September 30, 2019, we met the criteria to classify six skilled nursing facilities operated by Metron as held for sale, which resulte d in an impairment expense of approximately $8.8 million to reduce the carrying value to fair value less costs to sell the facilities.

There was no impairment of real estate investments during the year ended December 31, 2020.

Provision for loan losses.

During the year ended December 31, 2019, we determined the remaining contractual obligations under the bridge loan agreement to Priority Life Care, LLC (“Priority”) were not collectible and recorded a $1.1 million provision for loan losses.

There was no provision for loan losses during the year ended December 31, 2020.

Property taxes increased $0.7 million, or 26%, for the year ended December 31, 2021 compared to December 31, 2020.

The increase was primarily due to a $0.7 million increase in property taxes due to new real estate investments made after January 1, 2020 and a $0.4 million increase in property taxes due to closing credits realized upon the disposition of assets in February 2020 and the transfer of certain properties to new operators in January 2021 that do not make direct tax payments, partially offset by a decrease of $0.4 million of property taxes due to reassessments and decreased effective tax rates.

General and administrative expense.

General and administrative expense increased $10.6 million, or 65%, for the year ended December 31, 2021 to $26.9 million compared to $16.3 million for the year ended December 31, 2020.

The increase is primarily related to higher cash wages of $1.0 million, an increase of $0.4 million in state franchise tax and a $0.2 million increase in due diligence costs, partially offset by a decrease of $0.3 million related to stock-based compensation and $0.1 million related to other corporate expenses.

Gain on sale of real estate .

During the year ended December 31, 2020, we recorded a $0.1 million loss on sale of real estate related to the sale of six skilled nursing facilities and a $20,000 gain on sale of real estate related to the sale of our last remaining owned and operated ILF.

Du ring the year ended December 31, 2019, we recorded a $1.6 million gain on sale of real estate related to the sale of one independent living facility and a $0.2 million gain on sale of real estate related to the sale of three skilled nursing facilities.

The increase is primarily related to a $7.1 million increase in stock-based compensation, which includes a $0.9 million out of period adjustment in the fourth quarter of 2021 (see Note 8, Stock-based Compensation , for further information), higher cash wages of $2.3 million, $1.2 million of non-routine transaction costs and an increase of $0.3 million in other administrative costs, partially offset by a decrease of $0.3 million in state and local taxes.

Loss on extinguishment of debt.

During the year ended December 31, 2021, we recorded a $10.8 million loss on extinguishment of debt, including a prepayment penalty of $7.9 million and a $2.9 million write-off of deferred financing costs associated with the redemption of the 2025 Notes.

Loss on sale of real estate .

During the year ended December 31, 2021, we recorded a $0.2 million loss on sale of real estate related to the sale of one SNF, partially offset by a $0.1 million gain on sale of real estate related to the sale of a land parcel adjacent to one of our SNFs.

During the year ended December 31, 2020, we recorded a $0.1 million loss on sale of real estate related to the sale of six SNFs, partially offset by a $20,000 gain on sale of real estate related to the sale of our last remaining owned and operated ILF.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

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All such dividends are at the discretion of our board of directors.

As of December 31, 2020, we had cash and cash equivalents of $18.9 million .

During the year ended December 31, 2019, we sold 2.5 million shares of common stock under our predecessor ATM Program for gross proceeds of $47.9 million.

No shares of common stock were sold under the New ATM Program or Prior ATM Program during the year ended December 31, 2020 and, as of December 31, 2020, we had $500.0 million available for future issuances under the New ATM Program.

As of December 31, 2020, there w as $50.0 million outstanding under the Revolving Facility (as defined below).

We believe that our available cash, expected operating cash flows, and the availability under the New ATM Program and Amended Credit Facility (as defined below) will provide sufficient funds for our operations, anticipated scheduled debt service payments and dividend plans for at least the next twelve months.

We intend to invest in and/or develop additional healthcare and seniors housing properties as suitable opportunities arise and adequate sources of financing are available.

We expect that future investments in and/or development of properties, including any improvements or renovations of current or newly-acquired properties, will depend on and will be financed by, in whole or in part, our existing cash, borrowings available to us under the Amended Credit Facility, future borrowings or the proceeds from sales of shares of our common stock pursuant to our New ATM Program or additional issuances of common stock or other securities.

Our short-term liquidity requirements consist primarily of operating and interest expenses directly associated with our properties, including:

• interest expense and scheduled principal payments on outstanding indebtedness;

• general and administrative expenses;

• dividend plans;

• operating lease obligations;

• capital expenditures for improvements to our properties.

Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, capital expenditures, and scheduled debt maturities.

We intend to invest in and/or develop additional healthcare and seniors housing properties as suitable opportunities arise and so long as adequate sources of financing are available.

We expect that future investments in and/or development of properties, including any improvements or renovations of current or newly-acquired properties, will depend on and will be financed by, in whole or in part, our existing cash, borrowings available to us under the Amended Credit Facility, future borrowings or the proceeds from sales of shares of our common stock pursuant to our ATM Program or additional issuances of common stock or other securities.

In addition, we may seek financing from U.S.

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Department of Housing and Urban Development, in appropriate circumstances in connection with acquisitions and refinancing of existing mortgage loans.

We believe that our expected operating cash flow from rent collections, interest payments on our other real estate investments, and borrowings under our Amended Credit Facility, together with our cash balance of $19.9 million, available borrowing capacity of $520.0 million under the Revolving Facility and availability under the ATM Program, each at December 31, 2021, will be sufficient to meet ongoing debt service requirements, dividend plans, operating lease obligations, capital expenditures, working capital requirements and other needs for at least the next 12 months.

We expect to meet our long-term liquidity needs with cash flows from operations and financing arrangements.

We currently do not expect to sell any of our properties to meet liquidity needs, although we may do so in the future.

Our quarterly cash dividend, any share repurchases under our Repurchase Program (as defined below) and any failure of our operators to pay rent may impact our available capital resources.

On March 20, 2020, our board of directors authorized a share repurchase program to repurchase up to $150.0 million of outstanding shares of our common stock (the “Repurchase Program”).

Repurchases under the Repurchase Program may also be made pursuant to a plan adopted under Rule 10b5-1 promulgated under the Exchange Act.

We expect to finance any share repurchases under the Repurchase Program using available cash and may also use short-term borrowings under the Revolving Facility.

We did not repurchase any shares of common stock under the Repurchase Program during the year ended December 31, 2021.

The Repurchase Program may be modified, discontinued or suspended at any time.

We have filed an automatic shelf registration statement with the U.S.

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However, there can be no assurance that we will be able to refinance our indebtedness, incur additional indebtedness or access additional sources of capital, such as by issuing common stock or other debt or equity securities, on terms that are acceptable to us or at all.

We currently are in compliance with all debt covenants on our outstanding indebtedness.

The following table presents selected data from our consolidated statements of cash flows for the years presented:

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Net cash used in investing activities (192,633) (41,582)

Net cash (used in) provided by financing activities (105,561) 173,247

Net decrease in cash and cash equivalents (1,408) (16,465)

Net cash provided by (used in) financing activities 36,738 (105,561)

Net increase (decrease) in cash and cash equivalents 976 (1,408)

Cash and cash equivalents at beginning of period 18,919 20,327

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Net cash provided by operating activities for the year ended December 31, 2021 was $156.9 million compared to $145.7 million for the year ended December 31, 2020, an increase of $11.1 million.

The increase was primarily due to an increase of $12.9 million in rental income due to acquisitions, $5.0 million in improved rent collections compared to the prior year, $1.8 million in increases in rental rates for existing tenants subsequent to December 31, 2018, a decrease of $4.5 million in interest paid on outstanding indebtedness due to lower weighted average interest rates and a lower weighted average debt balance, $1.2 million of lease termination revenue and $1.0 million from recovery of previously reversed rent, partially offset by a decrease in rental income of $6.2 million due to the disposal of assets in September 2019 and February 2020 and higher cash wages of $1.0 million.

Cash used in investing activities for the year ended December 31, 2020 was primarily comprised of $123.1 million in acquisitions of real estate, investments in real estate mortgage and other loans receivable and escrow deposits for potential acquisitions, and $8.3 million of purchases of, and improvements to, e quipment, furniture and fixtures and real estate, partially offset by $83.3 million of payments received from our preferred equity investment and mortgage and other loans receivable and $6.6 million in net proceeds from real estate sales.

C ash used in investing activities for the year ended December 31, 2019 was primarily comprised of $339.7 million in acquisitions of real estate, investments in real estate mortgage and other loans receivable and $6.3 million of purchases of, and improvements to, e quipment, furniture and fixtures and real estate , partially offset by $26.5 million of payments received from our preferred equity investment and mortgage and other loans receivable and $3.5 million in net proceeds from real estate sales.

Our cash flows used in financing activities for the year ended December 31, 2020 were primarily comprised of $93.2 million in dividends paid, a $2.0 million net settlement adjustment on restricted stock, $0.4 million in costs paid for the issuance

of common stock and $10.0 million in net repayments under our Amended Credit Facility (as defined below).

Our cash flows provided by financing activities for the year ended December 31, 2019 were primarily comprised of $196.0 million in net proceeds from common stock sales under our predecessor ATM Program and April 2019 equity offering and $65.0 million in net borrowings under our Amended Credit Facility and Prior Credit Facility, partially offset by $80.6 million in dividends paid, $4.5 million in payments of deferred financing costs and $2.5 million net settlement adjustment on restricted stock.

Operating cash inflows are derived primarily from the rental payments received under our lease agreements, including as a result of new investments, and interest payments on our other real estate investments.

Operating cash outflows consist primarily of interest expense on our borrowings and general and administrative expenses.

The net increase of $11.1 million in cash provided by operating activities for the year ended December 31, 2021 is primarily due to increased rental payments as a result of new investments, partially offset by an increase in cash paid for interest on outstanding indebtedness due to the timing of interest payments, a decrease in interest and other income due to the repayments of our other real estate investments and an increase in cash paid for general and administrative expenses.

Cash used in investing activities for the year ended December 31, 2021 was primarily comprised of $194.0 million in acquisitions of real estate and investments in real estate mortgage and other loans receivable, and $6.0 million of purchases of, and improvements to, equipment, furniture and fixtures and real estate, partially offset by $0.4 million of payments received from our mortgage and other loans receivable and $7.0 million in net proceeds from real estate sales.

Cash used in investing activities for the year ended December 31, 2020 was primarily comprised of $123.1 million in acquisitions of real estate, investments in real estate mortgage and other loans receivable and escrow deposits for potential acquisitions, and $8.3 million of purchases of, and improvements to, equipment, furniture and fixtures and real estate, partially offset by $83.3 million of payments received from our preferred equity investment and mortgage and other loans receivable and $6.6 million in net proceeds from real estate sales.

Our cash flows provided by financing activities for the year ended December 31, 2021 were primarily comprised of $393.8 million of net proceeds from the issuance of the Notes, $30.0 million in net borrowings under our Amended Credit Facility and $22.9 million of net proceeds from the issuance of common stock under the ATM Program, partially offset by $307.9 million of payments to redeem the 2025 Notes, $100.8 million in dividends paid, and a $1.3 million net settlement adjustment on restricted stock.

Our cash flows provided by financing activities for the year ended December 31, 2020 were primarily comprised of $93.2 million in dividends paid, a $2.0 million net settlement adjustment on restricted stock, $0.4 million in costs paid for the issuance of common stock and $10.0 million in net repayments under our Amended Credit Facility (as defined below).

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

For discussion related to the cash flows for fiscal 2020 compared to fiscal 2019, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our fiscal 2020 Annual Report on Form 10-K, which was filed with the SEC on February 10, 2021.

5.25% Senior Unsecured Notes due 2025 and Issuer and Guarantor Financial Information

On May 10, 2017, our wholly owned subsidiary, CTR Partnership, L.P.

(the “Operating Partnership”), and its wholly owned subsidiary, CareTrust Capital Corp.

(together with the Operating Partnership, the “Issuers”), completed a public offering of $300.0 million aggregate principal amount of 5.25% Senior Notes due 2025 (the “Notes”).

The Notes were issued at par, resulting in gross proceeds of $300.0 million and net proceeds of approximately $294.0 million after deducting underwriting fees and other offering expenses.

The Notes mature on June 1, 2025 and bear interest at a rate of 5.25% per year.

Interest on the Notes is payable on June 1 and December 1 of each year, beginning on December 1, 2017.

As of June 1, 2020, the Issuers may redeem the Notes any time at the redemption prices set forth in the indenture.

As of December 31, 2020, the Issuers have not elected to redeem any of the Notes.

If certain changes of control of CareTrust REIT occur, holders of the Notes will have the right to require the Issuers to repurchase their Notes at 101% of the principal amount plus accrued and unpaid interest, if any, to, but not including, the repurchase date.

The obligations under the Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by CareTrust REIT (the “Parent Guarantor”) and CareTrust REIT’s wholly owned existing and, subject to certain exceptions, future material subsidiaries (other than the Issuers) (the “Subsidiary Guarantors”);

provided, however, that such guarantees are subject to automatic release under certain customary circumstances, including if the Subsidiary Guarantor is sold or sells all or substantially all of its assets, the Subsidiary Guarantor is designated “unrestricted” for covenant purposes under the indenture, the Subsidiary Guarantor’s guarantee of other indebtedness which resulted in the creation of the guarantee of the Notes is terminated or released, or the requirements for legal defeasance or covenant defeasance or to discharge the indenture have been satisfied.

The following provides information regarding the entity structure of the Parent Guarantor, the Issuers and the Subsidiary Guarantors:

CareTrust REIT, Inc.

– The Parent Guarantor was formed on October 29, 2013 and became a separate and independent publicly-traded company on June 1, 2014.

The Parent Guarantor has not conducted any operations or had any business since that time.

CTR Partnership, L.P.

and CareTrust Capital Corp.

– The Issuers, each of which is a wholly owned subsidiary of the Parent Guarantor, were formed on May 8, 2014 and May 9, 2014, respectively.

The Issuers did not conduct any operations or have any business prior to June 1, 2014, the date the Parent Guarantor became a separate and independent publicly-traded company.

The Operating Partnership directly invests in real estate and real estate related assets and therefore does not rely solely on the cash flow generated by the Subsidiary Guarantors and their ability to make cash available to the Issuers, by dividend or otherwise.

However, in the event that the earnings or available assets of the Issuers are insufficient, the Issuers’ ability to pay principal and interest on the Notes could be dependent on the cash flow generated by the Subsidiary Guarantors and their ability to make such cash available to the Issuers.

CareTrust Capital Corp., a co-issuer of the Notes, has no material assets and conducts no operations.

Therefore, it has no independent ability to service the interest and principal obligations under the Notes.

Subsidiary Guarantors – The Subsidiary Guarantors consist of all of the subsidiaries of the Parent Guarantor other than the Issuers.

The Parent Guarantor conducts a substantial portion of its business operations through the Subsidiary Guarantors.

The assets and liabilities and results of operations of the combined guarantors (the Parent Issuer and the Subsidiary Guarantors) and the Issuers of the Notes are not materially different than the corresponding amounts presented in our consolidated financial statements.

The indenture contains customary covenants such as limiting the ability of CareTrust REIT and its restricted subsidiaries to:

incur or guarantee additional indebtedness;

incur or guarantee secured indebtedness;

make certain investments or other restricted payments;

enter into transactions with affiliates;

merge or consolidate or sell all or substantially all of their assets, and pay dividends or distributions on, or redeem or repurchase, capital stock, including a restriction on the ability of the Issuers and their restricted subsidiaries to pay dividends or other amounts to the Issuers, subject to certain other exceptions, unless:

(i) there is no default or event of default under the indenture;

(ii) the Issuers are in compliance with specified limitations on indebtedness under the indenture;

and (iii) the payments do not exceed a specified restricted payment basket.

Dividends or distributions are also permitted if the Parent Guarantor’s board of directors believes in good faith they are necessary to maintain Parent Guarantor’s REIT status or to avoid any excise tax or income tax imposed on Parent Guarantor, provided there is no default or event of default under the indenture.

Further, the Issuers and their restricted subsidiaries are not permitted to create or cause to become effective any encumbrance or restriction on the ability of the Issuers to, among other things, pay dividends or make distributions, pay indebtedness, make loans or advances to the Issuers or their restricted subsidiaries or transfer property or assets to the Issuers or their restricted subsidiaries, other than in connection with certain customary exceptions such as in respect of the indenture or the Amended Credit Facility.

The indenture also requires CareTrust REIT and its restricted subsidiaries to maintain a specified ratio of unencumbered assets to unsecured indebtedness.

These covenants are subject to a number of important and significant limitations, qualifications and exceptions.

The indenture also contains customary events of default.

As of December 31, 2020, we were in compliance with all applicable financial covenants under the indenture.

Material Cash Requirements

Our material cash requirements from known contractual and other obligations include:

3.875% Senior Unsecured Notes due 2028

On June 17, 2021, the Issuers completed a private offering of $400.0 million aggregate principal amount of 3.875% Senior Notes due 2028.

The Notes mature on June 30, 2028.

The Notes accrue interest at a rate of 3.875% per annum payable semiannually in arrears on June 30 and December 30 of each year, commencing on December 30, 2021.

As of December 31, 2021, we were in compliance with all applicable financial covenants under the indenture governing the Notes.

See Note 6, Debt, to our consolidated financial statements included in this report for further information about the Notes.

Unsecured Revolving Credit Facility and Term Loan

On August 5, 2015, the Company, CareTrust GP, LLC, the Operating Partnership, as the borrower, and certain of its wholly owned subsidiaries entered into a credit and guaranty agreement with KeyBank National Association, as administrative agent, an issuing bank and swingline lender, and the lenders party thereto (the “Prior Credit Agreement”).

As later amended on February 1, 2016, the Prior Credit Agreement provided the following:

(i) a $400.0 million unsecured asset based revolving credit facility (the “Prior Revolving Facility”), (ii) a $100.0 million non-amortizing unsecured term loan (the “Prior Term Loan” and, together with the Prior Revolving Facility, the “Prior Credit Facility”), and (iii) a $250.0 million uncommitted incremental facility.

The Prior Revolving Facility was scheduled to mature on August 5, 2019, subject to two, six-month extension options.

The Prior Term Loan was scheduled to mature on February 1, 2023, and could be prepaid at any time subject to a 2% premium in the first year after issuance and a 1% premium in the second year after issuance.

On February 8, 2019, the Operating Partnership, as the borrower, the Company, as guarantor, CareTrust GP, LLC, and certain of the Operating Partnership’s wholly owned subsidiaries entered into an amended and restated credit and guaranty agreement with KeyBank National Association, as administrative agent, an issuing bank and swingline lender, and the lenders party thereto (the “Amended Credit Agreement”).

The Amended Credit Agreement, which amended and restated the Prior Credit Agreement, provides for:

Our amended and restated credit and guaranty agreement with KeyBank National Association, as administrative agent, an issuing bank and swingline lender, and the lenders party thereto (the “Amended Credit Agreement”) provides for:

(i) an unsecured revolving credit facility (the “Revolving Facility”) with revolving commitments in an aggregate principal amount of $600.0 million, including a letter of credit subfacility for 10% of the then available revolving commitments and a swingline loan subfacility for 10% of the then available revolving commitments and (ii) an unsecured term loan credit facility (the “Term Loan” and together with the Revolving Facility, the “Amended Credit Facility”) in an aggregate principal amount of $200.0 million.

Borrowing availability under the Revolving Facility is subject to no default or event of default under the Amended Credit Agreement having occurred at the time of borrowing.

The proceeds of the Term Loan were used, in part, to repay in full all outstanding borrowings under the Prior Term Loan and Prior Revolving Facility under the Prior Credit Agreement.

Future borrowings under the Amended Credit Facility will be used for working capital purposes, for capital expenditures, to fund acquisitions and for general corporate purposes.

The interest rates applicable to loans under the Revolving Facility are, at the Operating Partnership’s option, equal to either a base rate plus a margin ranging from 0.10% to 0.55% per annum or LIBOR plus a margin ranging from 1.10% to 1.55% per annum based on the debt to asset value ratio of the Company and its consolidated subsidiaries (subject to decrease at the Operating Partnership’s election if the Company obtains certain specified investment grade ratings on its senior long-term unsecured debt).

The interest rates applicable to loans under the Term Loan are, at the Operating Partnership’s option, equal to either a base rate plus a margin ranging from 0.50% to 1.20% per annum or LIBOR plus a margin ranging from 1.50% to 2.20% per annum based on the debt to asset value ratio of the Company and its consolidated subsidiaries (subject to decrease at the Operating Partnership’s election if the Company obtains certain specified investment grade ratings on its senior long-term unsecured debt).

In addition, the Operating Partnership will pay a facility fee on the revolving commitments under the Revolving Facility ranging from 0.15% to 0.35% per annum, based on the debt to asset value ratio of the Company and its consolidated subsidiaries (unless the Company obtains certain specified investment grade ratings on its senior long-term unsecured debt and the Operating Partnership elects to decrease the applicable margin as described above, in which case the Operating Partnership will pay a facility fee on the revolving commitments ranging from 0.125% to 0.30% per annum based off

the credit ratings of the Company’s senior long-term unsecured debt).

As of December 31, 2021, we had $200.0 million outstanding under the Term Loan and $80.0 million outstanding under the Revolving Facility.

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The Term Loan has a maturity date of February 8, 2026.

The Amended Credit Facility is guaranteed, jointly and severally, by the Company and its wholly-owned subsidiaries that are party to the Amended Credit Agreement (other than the Operating Partnership).

The Amended Credit Agreement contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations, amend organizational documents and pay certain dividends and other restricted payments.

The Amended Credit Agreement requires the Company to comply with financial maintenance covenants to be tested quarterly, consisting of a maximum debt to asset value ratio, a minimum fixed charge coverage ratio, a minimum tangible net worth, a maximum cash distributions to operating income ratio, a maximum secured debt to asset value ratio, a maximum secured recourse debt to asset value ratio, a maximum unsecured debt to unencumbered properties asset value ratio, a minimum unsecured interest coverage ratio and a minimum rent coverage ratio.

The Amended Credit Agreement also contains certain customary events of default, including the failure to make timely payments under the Amended Credit Facility or other material indebtedness, the failure to satisfy certain covenants (including the financial maintenance covenants), the occurrence of change of control and specified events of bankruptcy and insolvency.

As of December 31, 2020, the Company was in compliance with all applicable financial covenants under the Amended Credit Agreement.

Obligations and Commitments

The following table summarizes our contractual obligations and commitments at December 31, 2020 (in thousands):

Payments Due by Period

1 Year 1 Year

3 Years 3 Years

Senior unsecured notes payable (1) $ 370,875 $ 15,750 $ 31,500 $ 323,625 $ —

Senior unsecured term loan (2) 217,071 3,348 6,679 6,687 200,357

Unsecured revolving credit facility (3) 53,262 1,551 51,711 — —

Operating lease 3,793 261 337 104 3,091

Total $ 645,001 $ 20,910 $ 90,227 $ 330,416 $ 203,448

(1) Amounts include interest payments of $70.9 million.

(2) Amounts include interest payments of $17.1 million.

(3) Amounts include payments related to the credit facility fee of $1.9 million and interest payments of $1.3 million.

The interest rates applicable to loans under the Revolving Facility are, at the Operating Partnership’s option, equal to either a base rate plus a margin ranging from 0.10% to 0.55% per annum or LIBOR plus a margin ranging from 1.10% to 1.55% per annum based on the debt to asset value ratio of our consolidated subsidiaries (subject to decrease at the Operating Partnership’s election if we obtain certain specified investment grade ratings on our senior long-term unsecured debt).

The interest rates applicable to loans under the Term Loan are, at the Operating Partnership’s option, equal to either a base rate plus a margin ranging from 0.50% to 1.20% per annum or LIBOR plus a margin ranging from 1.50% to 2.20% per annum based on the debt to asset value ratio of our consolidated subsidiaries (subject to decrease at the Operating Partnership’s election if we obtain certain specified investment grade ratings on our senior long-term unsecured debt).

In addition, the Operating Partnership will pay a facility fee on the revolving commitments under the Revolving Facility ranging from 0.15% to 0.35% per

annum, based on the debt to asset value ratio of our consolidated subsidiaries (unless we obtain certain specified investment grade ratings on our senior long-term unsecured debt and the Operating Partnership elects to decrease the applicable margin as described above, in which case the Operating Partnership will pay a facility fee on the revolving commitments ranging from 0.125% to 0.30% per annum based off the credit ratings of our senior long-term unsecured debt).

Interest payments are due quarterly.

As of December 31, 2021, we were in compliance with all applicable financial covenants under the Amended Credit Agreement.

See Note 6, Debt, to our consolidated financial statements included in this report for further information about the Amended Credit Agreement.

Capital Expenditures

Capital expenditures for each property leased under our triple-net leases are generally the responsibility of the tenant, except that, for the facilities leased to subsidiaries of The Ensign Group, Inc.

and The Pennant Group, Inc., the tenant will have an option to require us to finance certain capital expenditures up to an aggregate of 20% of our initial investment in such property, subject to a corresponding rent increase at the time of funding.

For our other triple-net master leases, subject to approval by us, the tenants may request capital expenditure funding that would generally be subject to a corresponding rent increase at the time of funding, which are subject to tenant compliance with the conditions to our approval and funding of their requests.

As of December 31, 2020, we had committed to fund expansions, construction and capital improvements at certain triple-net leased f acilities totaling $15.4 million, of which $14.2 million is subject to rent increase at the time of funding.

Critical Accounting Policies

As of December 31, 2021, we had committed to fund expansions, construction and capital improvements at certain triple-net leased facilities totaling $7.3 million, of which $6.3 million is subject to rent increase at the time of funding.

We expect to fund the capital expenditures in the next one to two years.

See Note 10, Commitments and Contingencies, to our consolidated financial statements included in this report for further information regarding our obligation to finance certain capital expenditures under our triple-net leases.

Dividend Plans

We are required to pay dividends in order to maintain our REIT status and we expect to make quarterly dividend payments in cash with the annual dividend amount no less than 90% of our annual REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains.

See Note 7, Equity, to our consolidated financial statements included in this report for a summary of the cash dividends per share of our common stock declared by our Board of Directors for 2021, 2020 and 2019.

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods.

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Certain accounting policies are considered to be critical accounting policies.

Critical accounting policies are those policies that require management to make significant estimates and/or assumptions about matters that are

uncertain at the time the estimates and/or assumptions are made or where we are required to make significant judgments and assumptions with respect to the practical application of accounting principles in our business operations.

Critical accounting policies are those policies that require management to make significant estimates and/or assumptions about matters that are uncertain at the time the estimates and/or assumptions are made or where we are required to make significant judgments and assumptions with respect to the practical application of accounting principles in our business operations.

Critical accounting policies are by definition those policies that are material to our financial statements and for which the impact of changes in estimates, assumptions, and judgments could have a material impact to our financial statements.

The following critical accounting policies discussion reflects what we believe are the most significant estimates,

assumptions, and judgments used in the preparation of our consolidated financial statements.

This discussion of our

critical accounting policies is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates, assumptions, and judgments.

For further discussion of our significant accounting policies, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in this report.

Real Estate Depreciation and Amortization .

Real estate costs related to the acquisition and improvement of properties are capitalized and amortized over the expected useful life of the asset on a straight-line basis.

Repair and maintenance costs are charged to expense as incurred and significant replacements and betterments are capitalized.

Repair and maintenance costs include all costs that do not extend the useful life of the real estate asset.

We consider the period of future benefit of an asset to determine its appropriate useful life.

Expenditures for tenant improvements are capitalized and amortized over the shorter of the tenant’s lease term or expected useful life.

Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant judgment.

We anticipate the estimated useful lives of our assets by class to be generally as follows:

Buildings 25-40 years

Building improvements 10-25 years

Tenant improvements Shorter of lease term or expected useful life

Integral equipment, furniture and fixtures 5 years

Identified intangible assets Shorter of lease term or expected useful life

The following critical accounting policies discussion reflects what we believe are the most significant estimates, assumptions, and judgments used in the preparation of our consolidated financial statements.

This discussion of our critical accounting policies is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates, assumptions, and judgments.

For a discussion of our significant accounting policies, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in this report.

Real Estate Acquisition Valuation .

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Acquisition costs are capitalized as incurred.

We allocate the acquisition costs to the tangible assets, identifiable intangible assets/liabilities and assumed liabilities on a relative fair value ba sis.

We exercise judgment to determine the key assumptions used to allocate the purchase price of real estate acquired among its components.

W e assess fair value based on available market information, such as capitalization and discount rates, comparable sale transactions and relevant per square foot or unit cost information.

We allocate the acquisition costs to the tangible assets, identifiable intangible assets/liabilities and assumed liabilities on a relative fair value basis.

Purchase price allocations contain uncertainties because they require management to make significant estimates and assumptions and to apply judgment to allocate the purchase price of real estate acquired among its components.

We assess fair value based on available market information, such as capitalization and discount rates, comparable sale transactions and relevant per square foot or unit cost information.

A real estate asset’s fair value may be determined utilizing cash flow projections that incorporate such market information.

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The fair value of land is derived from comparable sales of land within the same submarket and/or region.

The fair value of buildings and improvements and integral equipment, furniture and fixtures considers the value of the property as if it was vacant as well as replacement costs, depreciation factors, and other relevant market information.

The fair value of buildings and improvements and integral equipment, furniture and fixtures considers the value of the

property as if it was vacant as well as replacement costs, depreciation factors, and other relevant market information.

The use of different assumptions in these fair value inputs could significantly affect the reported amounts of the allocation of the acquisition on a relative fair value basis and the related depreciation expense recorded for such assets.

If actual results are materially different than the assumptions used to determine fair value of the assets acquired and liabilities assumed, it is possible that adjustments to the carrying values of such assets and liabilities will have a material impact on our financial position and results of operations.

Furthermore, if actual results are not consistent with estimates or assumptions, we may be exposed to an impairment charge that could materially adversely impact our financial position and results of operations.

We have not materially changed the assumptions used in the analysis during the year ended December 31, 2021.

As part of the real estate acquisitions, we may commit to provide contingent payments to a seller or lessee (e.g., an earn-out payable upon the applicable property achieving certain financial metrics).

Typically, when the contingent payments are funded, cash rent is increased by the amount funded multiplied by a rate stipulated in the agreement.

Generally, if the contingent payment is an earn-out provided to the seller, the payment is capitalized to the property’s basis when the earn-out becomes probable and estimable.

If the contingent payment is an earn-out provided to the lessee, the payment is recorded as a lease incentive and is amortized as a yield adjustment over the life of the lease.

Impairment of Long-Lived Assets.

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If indicators of impairment are present, we evaluate the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying facilities.

The most significant inputs to the undiscounted cash flows include, but are not limited to, facility level financial results, a lease coverage ratio, the intended hold period by the Company, and a

terminal capitalization rate.

The most significant inputs to the undiscounted cash flows include, but are not limited to, facility level financial results, a lease coverage ratio, the intended hold period by us, and a terminal capitalization rate.

The analysis is also significantly impacted by determining the lowest level of cash flows, which generally would be at the master lease level of cash flows.

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The impairment is measured as the excess of carrying value over fair value.

All impairments are taken as a period cost at that time, and depreciation is adjusted going forward to reflect the new value assigned to the asset.

We classify our real estate investments as held for sale when the applicable criteria have been met, which entails a formal plan to sell the properties that is expected to be completed within one year, among other criteria.

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Our ability to accurately estimate future cash flows and estimate and allocate fair values impacts the timing and recognition of impairments.

While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on financial re sults.

While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on financial results.

Given the ongoing impacts of COVID-19, the projected cash flows that we use to assess fair value for purposes of impairment testing are subject to greater uncertainty than normal.

If in the future we reduce our estimate of cash flow projections, we may need to impair some of these assets.

We have not materially changed the assumptions used in the analysis during the year ended December 31, 2021.

Other Real Estate Investments.

Included in other real estate investments, net on our consolidated balance sheets at December 31, 2020, is one mezzanine loan receivable.

At December 31, 2019, included in other real estate investments, net is one preferred equity investment and two mortgage loans receivable.

The preferred equity investment was accounted for at unpaid principal balance, plus accrued return, net of reserves.

We recognize return income on a quarterly basis based on the outstanding investment including any accrued and unpaid return, to the extent there is outside contributed equity or cumulative earnings from operations.

As the preferred member of the joint venture, we are not entitled to share in the joint venture’s earnings or losses.

Rather, we are entitled to receive a preferred return, which is deferred if the cash flow of the joint venture is insufficient to pay all of the accrued preferred return.

The unpaid accrued preferred return is added to the balance of the preferred equity investment up to the estimated economic outcome assuming a hypothetical liquidation of the book value of the joint venture.

Any unpaid accrued preferred return, whether recorded or unrecorded by us, will be repaid upon redemption or as available cash flow is distributed from the joint venture.

Prior to the adoption of Accounting Standards Update (“ASU”) No.

2016-13, Financial Instruments - Credit Losses (Subtopic 326) (“ASU 2016-13”), mortgage and mezzanine loans receivable were recorded at amortized cost, which consists of the outstanding unpaid principal balance, net of unamortized costs and fees directly associated with the origination of the loan.

Interest income on our mortgage and mezzanine loans receivable was recognized over the life of the applicable investment using the interest method.

Origination costs and fees directly related to loans receivable were amortized over the term of the loan as an adjustment to interest income.

For instruments recorded at amortized cost, we evaluated at each reporting period each of our other real estate investments for indicators of impairment.

An investment is impaired when, based on current information and events, it was probable that we would be unable to collect all amounts due according to the existing contractual terms.

A reserve would be established for the excess of the carrying value of the investment over its fair value.

We adopted ASU 2016-13 on January 1, 2020.

With our primary business being leasing real property to third-party tenants, the majority of receivables that arise in the ordinary course of business qualify as operating leases and are not in the scope of ASU 2016-13.

However, based on the instruments held upon adoption on January 1, 2020, the standard applied to our then outstanding mortgage loans receivable, for which we elected the fair value option as provided for by ASU 2019-05.

Fair value was estimated using an internal valuation model that considered the expected future cash flows of the investment, the underlying collateral value, market interest rates and other credit enhancements.

Instruments for which the fair value option has been elected are measured at fair value on a recurring basis with changes in fair value recognized in other income (loss) on our consolidated income statements.

Interest income is recognized as earned within interest and other income in the consolidated income statements.

As of December 31, 2020, we had one mezzanine loan receivable for which the fair value option had been elected.

Revenue Recognition.

We recognize lease revenue in accordance with ASC 842, Leases .

Our lease agreements typically contain annual escalators based on the percentage change in the Consumer Price Index which are accounted for as variable lease payments in the period in which the change occurs.

For lease agreements that contain fixed rent escalators, we generally recognize lease revenue on a straight-line basis of accounting.

We generate revenues primarily by leasing healthcare-related

properties to healthcare operators in triple-net lease arrangements, under which the tenant is solely responsible for the costs related to the property.

Tenant reimbursements related to property taxes and insurance paid by lessee directly to a third party on behalf of a lessor are required to be excluded from variable payments and from recognition in the lessors’ income statements.

Otherwise, tenant recoveries for taxes and insurance are classified as additional rental income recognized by the lessor on a gross basis in its income statements.

For the year ended December 31, 2018, we recognized tenant recoveries for real estate taxes of $11.9 million, which were classified as tenant reimbursements on our consolidated income statements.

Prior to the adoption of ASC 842, we recognized tenant recoveries as tenant reimbursement revenues regardless of whether the third party was paid by the lessor or lessee.

Effective January 1, 2019, such tenant recoveries are recognized to the extent that we pay the third party directly and classified as rental income on our consolidated income statements.

Due to the application of ASC 842, we recognized, on a gross basis, tenant recoveries related to real estate taxes of $3.1 million and $2.9 million, for the years ended December 31, 2020 and December 31, 2019, respectively.

See Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements for further detail.

Our assessment of collectibility of tenant receivables includes a binary assessment of whether or not substantially all of the amounts due under a tenant’s lease agreement are probable of collection.

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For such leases that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectibility determination.

Such write-offs and recoveries are recorded as decreases or increases through rental income on our consolidated income statements.

For the year ended December 31, 2020, we recorded recovery adjustments of $1.0 million and did not recognize any write-off adjustments to rental income.

For the year ended December 31, 2019, we recorded $11.8 million of write-off adjustments to rental income related to rental income recognized in prior periods.

See Note 3, Real Estate Investments, Net, in the Notes to the Consolidated Financial Statements for further detail.

Income Taxes.

We elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”).

We believe we have been organized and have operated, and we intend to continue to operate, in a manner to qualify for taxation as a REIT under the Code.

To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute to our stockholders at least 90% of our annual REIT taxable income (computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP).

As a REIT, we generally will not be subject to federal income tax to the extent we distribute as qualifying dividends all of our REIT taxable income to our stockholders.

If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions.

Management’s judgement can impact the timing of write-offs and recovery adjustments.

We did not materially change the assumptions used in the analysis during the year ended December 31, 2021.

Impact of Inflation

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Almost all of our triple-net lease agreements, including the Ensign leases, provide for an annual rent escalator based on the percentage change in the Consumer Price Index (but not less than zero), subject to maximum fixed percentages.

Off-Balance Sheet Arrangements

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What changed 10-K

Item 7. Management’s Discussion and Analysis