CareTrust REIT, Inc. 10-K

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The discussion below contains forward-looking statements that involve risks and uncertainties. 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 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: • Overview • Recent Developments • Results of Operations • Liquidity and Capital Resources • Critical Accounting Estimates • Impact of Inflation Overview 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, 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 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. 37 Table of Contents 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, 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. 38 Table of Contents 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. Recent Investments 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. 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 “ATM Program”). 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) $ 23,505 (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. 39 Table of Contents Results of Operations Operating Results Our primary business consists of acquiring, developing, financing and owning real property to be leased to third party tenants in the healthcare sector. Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 Year Ended December 31, Increase (Decrease) Percentage Difference 2021 2020 (dollars in thousands) Revenues: Rental income $ 190,195 $ 173,612 $ 16,583 10 % Independent living facilities — 2,077 (2,077) (100) % Interest and other income 2,156 2,643 (487) (18) % Expenses: Depreciation and amortization 55,340 52,760 2,580 5 % Interest expense 23,677 23,661 16 — % Property taxes 3,574 2,836 738 26 % Independent living facilities — 1,869 (1,869) (100) % General and administrative 26,874 16,302 10,572 65 % Other loss: 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 $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. 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 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. Depreciation and amortization. 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 $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 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, 40 Table of Contents 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 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 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 For discussion related to the results of operations and changes in financial condition 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. Liquidity and Capital Resources To qualify as a REIT for federal income tax purposes, we are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, to our stockholders on an annual basis. Accordingly, we intend to make, but are not contractually bound to make, regular quarterly dividends to common stockholders from cash flow from operating activities. All such dividends are at the discretion of our board of directors. 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; and • 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. government agencies, including through Fannie Mae and the U.S. Department of Housing and Urban Development, in appropriate circumstances in connection with acquisitions and refinancing of existing mortgage loans. 41 Table of Contents 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, 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, 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. Securities and Exchange Commission that expires in March 2023, which will allow us or certain of our subsidiaries, as applicable, to offer and sell shares of common stock, preferred stock, warrants, rights, units and debt securities through underwriters, dealers or agents or directly to purchasers, in one or more offerings on a continuous or delayed basis, in amounts, at prices and on terms we determine at the time of the offering. Although we are subject to restrictions on our ability to incur indebtedness, we expect that we will be able to refinance existing indebtedness or incur additional indebtedness for acquisitions or other purposes, if needed. 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. Cash Flows The following table presents selected data from our consolidated statements of cash flows for the years presented: Year Ended December 31, 2021 2020 (dollars in thousands) Net cash provided by operating activities $ 156,871 $ 145,735 Net cash used in investing activities (192,633) (41,582) 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 Cash and cash equivalents at end of period $ 19,895 $ 18,919 Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 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. 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. 42 Table of Contents 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. 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 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. 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. As of December 31, 2021, we had $200.0 million outstanding under the Term Loan and $80.0 million outstanding under the Revolving Facility. The Revolving Facility has a maturity date of February 8, 2023, and includes, at our sole discretion, two, six-month extension options. The Term Loan has a maturity date of February 8, 2026. 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 43 Table of Contents 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 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. Management believes that the assumptions and estimates used in preparation of the underlying consolidated financial statements are reasonable. Actual results, however, could differ from those estimates and assumptions. 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 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 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 . In accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations , our acquisitions of real estate investments generally do not meet the definition of a business, and are treated as asset acquisitions. The assets acquired and liabilities assumed are measured at their acquisition date relative fair values. 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 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. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, as well as market and economic conditions. 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 44 Table of Contents 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. Impairment of Long-Lived Assets. At each reporting period, we evaluate our real estate investments to be held and used for potential impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The judgment regarding the existence of impairment indicators, used to determine if an impairment assessment is necessary, is based on factors such as, but not limited to, market conditions, operator performance and legal structure. 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 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. Provisions for impairment losses related to long-lived assets are recognized when expected future undiscounted cash flows are determined to be less than the carrying values of the assets. The impairment is measured as the excess of carrying value over fair value. 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. Upon designation as held for sale, we write down the excess of the carrying value over the estimated fair value less costs to sell, resulting in an impairment of the real estate investments, if necessary, and cease depreciation. In the event of impairment, the fair value of the real estate investment is based on current market conditions and considers matters such as the forecasted operating cash flows, lease coverage ratios, capitalization rates, comparable sales data, and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. 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 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. Revenue Recognition. We recognize lease revenue in accordance with ASC 842, Leases . 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. This assessment involves significant judgment by management and considers the operator’s performance and anticipated trends, payment history, and the existence and creditworthiness of guarantees, among other factors, in making this determination. For such leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term, if applicable. 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. 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 Our rental income in future years will be impacted by changes in inflation. 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.