What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-08-04 · 196 added, 109 removed, 195 unchanged (61% of the section changed)

10 unchanged sentences

Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to:

(i) the COVID-19 pandemic, including the risk of additional surges of COVID-19 infections due to the rate of public acceptance and efficacy of COVID-19 vaccines or to new and more contagious and/or vaccine resistant variants, and the measures taken to prevent the spread of COVID-19 and the related impact on our business or the businesses of our tenants;

(i) the impact of possible additional surges of COVID-19 infections or the risk of other pandemics, epidemics or infectious disease outbreaks, measures taken to prevent the spread of such outbreaks and the related impact on our business or the businesses of our tenants;

(ii) the ability and willingness of our tenants to meet and/or perform their obligations under the triple-net leases we have entered into with them, including, without limitation, their respective obligations to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities;

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

As of June 30, 2022, we owned and leased to independent operators, 228 skilled nursing facilities (“SNFs”), multi-service campuses, assisted living facilities (“ALFs”) and independent living facilities (“ILFs”) consisting of 23,876 operational beds and units located in 29 states wit h the highest concentration of properties by rental revenues located in California, Texas, Louisiana, Idaho and Arizona.

As of June 30, 2022, we also had other real estate investments consisting of one senior secured loan receivable and two mezzanine loans receivable with an aggregate carrying value of $115.2 million.

As of September 30, 2022, we owned and leased to independent operator s, 221 skilled nursing facilities (“SNFs”), multi-service campuses, assisted living facilities (“ALFs”) and independent living facilities (“ILFs”) consisting of 23,135 operational beds and units located in 29 states with the highest concentration of properties by rental revenues located in California, Texas, Louisiana, Idaho and Arizona.

As of September 30, 2022, we also had other real estate related investments consisting of three real estate secured loans receivable and two mezzanine loans receivable with an aggregate carrying value of $158.7 million.

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 (including property taxes, insurance, maintenance and repair costs and capital expenditures, subject to certain exceptions in the case of properties leased to Ensign and Pennant).

From time to time, we also extend secured mortgage loans to healthcare operators, secured by healthcare-related properties, and secured mezzanine loans to healthcare operators, secured by membership interests in healthcare-related properties.

We conduct and manage our business as one operating segment for internal reporting and internal decision-making

We expect to grow our portfolio by pursuing opportunities to acquire additional properties that will be leased to a diverse group of local, regional and national healthcare providers, which may include new or existing skilled nursing operators, as well as seniors housing operators, behavioral health facilities and related businesses.

We conduct and manage our business as one operating segment for internal reporting and internal decision-making purposes.

We expect to grow our portfolio by pursuing opportunities to acquire additional properties that will be leased to a

diverse group of local, regional and national healthcare providers, which may include new or existing skilled nursing operators, as well as seniors housing operators, behavioral health facilities and related businesses.

We also anticipate diversifying our portfolio over time, including by acquiring properties in different geographic markets, and in different asset classes.

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We have replaced tenants in the past, and may elect to replace tenants in the future, if they fail to meet the terms and conditions of their leases with us.

In addition, we may, from time to time, repurpose facilities for other uses, such as behavioral health.

In addition, we have, and may from time to time in the future, repurpose facilities for other uses, such as behavioral health.

The replacement tenants may include tenants with whom we have had no prior landlord-tenant relationship as well as current tenants with whom we are comfortable expanding our relationships.

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

Seniors housing occupancy modestly increased through the first two quarters of 2022 compared to the fourth quarter of 2021, but still lags compared to pre-pandemic occupancy levels.

Occupancy levels at our SNFs, which declined at the onset of the COVID-19 pandemic and continued to decline through January 2021, had been on a slow incline from February 2021 through the second quarter of 2022, but have not reached pre-pandemic levels.

Seniors housing occupancy modestly increased through the first three quarters of 2022 compared to the fourth quarter of 2021, but still lags compared to pre-pandemic occupancy levels.

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 slow incline from February 2021 through the third quarter of 2022, but have not reached pre-pandemic levels.

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

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Because of the temporary waiver of the three-day hospital stay requirement, overall skilled mix began increasing at the start of the COVID-19 pandemic and peaked in December 2020, at which time it began declining while still remaining above pre-pandemic levels.

Skilled mix increased again during the first quarter of 2022 compared to the pre-pandemic skilled mix during the three months ended March 31, 2020.

However, the skilled mix in our SNFs during the three months ended June 30, 2022 decreased compared to the three months ended March 31, 2022 and was lower than the peak level seen in December 2020, and we anticipate that the skilled mix in our SNFs will continue to decline if cases of COVID-19 decline or if the suspension of the three-day hospital stay requirement is lifted.

Skilled mix remained elevated during the first three quarters of 2022 compared to the pre-pandemic skilled mix during the three months ended March 31, 2020.

However, the skilled mix in our SNFs during the three months ended September 30, 2022 is lower compared to the peak level seen in December 2020, and we anticipate that the skilled mix in our SNFs will continue to decline if cases of COVID-19 decline or if the suspension of the three-day hospital stay requirement is lifted as referenced below.

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.

Department of Health and Human Services (“HHS”) recently renewed the COVID-19 Public Health Emergency, which is currently set to be in force through October 2022, and that allows HHS to continue providing temporary regulatory waivers, including the waiver of the three-day hospital stay requirement for a patient’s Medicare benefits to refresh.

Department of Health and Human Services (“HHS”) recently renewed the COVID-19 Public Health Emergency, which is currently set to be in force through January 2023, and that allows HHS to continue providing temporary regulatory waivers, including the waiver of the three-day hospital stay requirement for a patient’s Medicare benefits to refresh.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) included a temporary suspension of a 2% Medicare sequestration cut through the end of March 2022.

Beginning April 1, 2022, a 1% sequestration cut went into effect through June 30, 2022 with the full 2% cut resuming thereafter.

A temporary 6.2% increase in Federal Medical Assistance Percentages, which was approved retroactive to January 1, 2020, is effective through December 31, 2022.

and other funds for our SNFs, 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.

A temporary 6.2% increase in Federal Medical Assistance Percentages (“FMAP”), which was approved retroactive to January 1, 2020, is effective through March 31, 2023.

If the COVID-19 Public Health Emergency expires or the three-day hospital stay requirement suspension is otherwise lifted or temporary FMAP increases end, our SNFs may experience decreases in occupancy levels or revenues, which may adversely impact the business and financial condition of the operators of our SNFs.

The current limited availability or unavailability of grants and other funds being made available to our seniors housing facilities for healthcare related expenses or lost revenues attributable to COVID-19, as well as the tapering of grants and other funds for our SNFs, 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.

As a result of the foregoing impacts of the COVID-19 pandemic, our tenants’ ability to continue to meet some of their financial obligations to us has been negatively impacted.

See “Impairment of Real Estate Assets, Assets Held for Sale and Asset Sales” below.

During the three and six months ended June 30, 2022, we collected 93.9% and 94.4% of contractual rents due from our operators including cash deposits used to offset rent shortfalls, and 92.1% and 92.0% excluding cash deposits, respectively.

In July 2022, we collected 102.1% of contractual rents due from our operators, which includes cash deposits.

During the three and nine months ended September 30, 2022, we collected 93.4% and 94.2% of contractual rents due from our operators including cash deposits used to offset rent shortfalls, and 92.5% and 93.1% excluding cash deposits, respectively.

In October 2022, we collected 95.6% of contractual rents due from our operators, which includes cash deposits.

Excluding those cash deposits, contractual cash rents collected was 92.7%.

During the three months ended March 31, 2022, we determined that it was not probable that we would collect substantially all of the contractual obligations from four existing and former operators and, accordingly, we reversed $0.7 million of operating expense reimbursements, $0.2 million of contractual rent and $0.1 million of straight-line rent.

In addition, we determined that the collectibility of contractual rents from two operators is not reasonably assured and we moved these two operators to a cash basis method of accounting during the three months ended March 31, 2022.

In addition, we determined that the collectibility of contractual rents from two operators was not reasonably assured and we moved these two operators to a cash basis method of accounting during the three months ended March 31, 2022.

During the three months ended June 30, 2022, we moved one additional operator to a cash basis method of accounting.

The substantial inflationary pressures that our economy continues to face has resulted in many headwinds for us and our tenants, most notably in the form of rising interest rates, volatility in the capital markets, a softening of consumer sentiment and early signs of a potential broader economic slowdown.

These current macroeconomic conditions, particularly inflation (including rising wages and supply costs) and related changes to consumer spending, including, but not limited to, causing individuals to delay or defer moves to seniors housing, could adversely impact our tenants’ ability to meet some of their financial obligations to us.

These current macroeconomic conditions, particularly inflation (including rising wages and supply costs), rising interest rates and related changes to consumer spending, including, but not limited to, causing individuals to delay or defer moves to seniors housing, could adversely impact our tenants’ ability to meet some of their financial obligations to us.

Rising interest rates also increase our costs of capital to finance acquisitions and increase our borrowing costs, and future changes in market interest rates could materially impact the estimated discounted cash flows that are used to determine the fair value of our other real estate related investments.

In addition, current macroeconomic conditions and the resulting market volatility may adversely impact our ability to sell properties on acceptable terms, if at all, which could result in additional impairment charges.

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CMS estimates that the aggregate impact of the payment policies in the final rule will result in an increase of approximately $904 million in Medicare Part A payments to SNFs in fiscal year 2023 compared to fiscal year 2022.

The payment rates will become effective on October 1, 2022.

The payment rates became effective on October 1, 2022.

Impairment of Real Estate Assets, Assets Held for Sale, and Asset Sales

In connection with our ongoing review and monitoring of our investment portfolio and the performance of our tenants, during the first quarter of 2022, we determined to pursue the sale of 27 properties and the repurposing of three properties, representing an aggregate of approximately 9% of contractual cash rent as of June 30, 2022.

As of March 31, 2022, we determined that these 27 properties met the criteria to be classified as assets held for sale and, in connection with this determination, we recognized an aggregate impairment charge of $59.7 million related to 20 of the 27 held for sale properties, which is reported in impairment of real estate investments in the condensed consolidated statements of operations for the six months ended June 30, 2022.

The impairment charge was recognized to write down the properties’ aggregate carrying value to their aggregate fair value, less estimated costs to sell.

As of June 30, 2022, the net book value of these 27 properties was $141.8 million.

Following the asset sales and held for sale reclassifications discussed below, 19 properties continued to meet the criteria to be classified as held for sale as of September 30, 2022.

During the third quarter of 2022, we recognized an aggregate impairment charge of $12.3 million related to 16 of the 19 held for sale properties to reduce their carrying value to estimated fair value less costs to sell.

As of September 30, 2022, the real estate assets comprising the remaining 19 properties classified as held for sale had an aggregate carrying value of $77.7 million.

During the second quarter of 2022, we recognized an impairment charge of $1.7 million related to one SNF.

We wrote down its carrying value of $2.8 million to its estimated fair value of $1.1 million.

Asset Sales and Held for Sale Reclassifications

During the first quarter of 2022, we determined that one ALF that was classified as held for sale at December 31, 2021 no longer met the held for sale criteria.

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During the first quarter of 2022, we closed on the sale of one SNF consisting of 83 beds located in Washington with a carrying value of $0.8 million, for net sales proceeds of $1.0 million.

During the three months ended March 31, 2022, we recorded a gain of $0.2 million in connection with the sale.

During the nine months ended September 30, 2022, we recorded a gain of $0.2 million in connection with the sale.

During the third quarter of 2022, we determined that one ALF, with a carrying value of $4.9 million, that

was classified as held for sale at June 30, 2022 no longer met the held for sale criteria.

We reclassified this ALF out

of assets held for sale at its fair value at the date of the decision not to sell of approximately $4.9 million.

During the third quarter of 2022, we closed on the sale of six SNFs and one multi-service campus, operated by

affiliates of Trio Healthcare Holdings, LLC (“Trio”), consisting of 708 beds located in Ohio for net proceeds of $32.8 million.

In connection with the sale, we provided affiliates of the purchaser of the properties with a $7.0 million term loan that bears interest at 8.5% and has a maturity date of September 30, 2025.

We also provided a $5.0 million bridge loan to four individuals that bears interest at 8.5% and has a maturity date of November 29, 2022.

The seven properties were classified as held for sale at June 30, 2022 with a carrying value of $46.9 million.

During the three months ended September 30, 2022, we recorded a loss of $2.1 million in connection with the sale.

Portfolio Activity

During the second quarter of 2022, we entered into a lease with Landmark Recovery of Florida, LLC (“Landmark”) to repurpose an existing ALF (previously leased to affiliates of Noble Senior Services) as a behavioral health treatment center.

Rent under the Landmark lease will commence one year following commencement of the lease term or, if earlier, upon Landmark obtaining all licensure, permits, and other required regulatory authorizations with respect to operating the facility.

During the third quarter of 2022, a lease we entered into with Landmark Recovery of Maryland, LLC (“Landmark Maryland”) commenced.

In connection with this lease, we are repurposing an existing ALF (previously leased to affiliates of Noble Senior Services) as a behavioral health treatment center that will be operated by Landmark Maryland.

Rent under the lease will commence one year following commencement of the lease term or, if earlier, upon Landmark Maryland obtaining all licensure, permits, and other required regulatory authorizations with respect to operating the facility.

The lease will expire on the 20th anniversary of the rent commencement date and contains one 10-year renewal option and CPI-based rent escalators.

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

During the second quarter of 2022, we entered into leases with Landmark to repurpose two additional Noble facilities into behavioral health treatment centers, which will commence upon the occurrence of certain events.

Recent Investments

From January 1, 2022 through August 4, 2022, we acquired 1 SNF and 1 multi-service campus for approximately $21.9 million, which includes capitalized acquisition costs.

From January 1, 2022 through November 8, 2022, we acquired 1 SNF and 1 multi-service campus for approximately $21.9 million, which includes capitalized acquisition costs.

These acquisitions are expected to generate initial annual cash revenues of approximately $2.1 million and an initial blended yield of approximately 9.4%.

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

In June 2022, we extended a $75.0 million term loan to a skilled nursing real estate owner as part of a larger, multi-tranche, senior secured term loan facility.

The senior secured term loan was structured with an “A” tranche, a “B” tranche, and a “C” tranche (with the “C” tranche being the most subordinate).

Our $75.0 million term loan constituted the entirety of the “C” tranche with its payments subordinated accordingly.

The senior secured term loan facility is secured by an 18-facility skilled nursing portfolio in the Mid-Atlantic region, to be operated by a large, regional skilled nursing operator.

In connection with the senior secured term loan facility and the borrower’s acquisition of the skilled nursing portfolio, we also extended to the borrower group a $25.0 million mezzanine loan.

The “C” tranche term loan bears interest at 8.5%, less a servicing fee equal to the positive difference, if any, between the lesser of the contractual interest payment and actual payment of interest made by the borrower and a hypothetical interest payment at a rate of 8.25%, resulting in an effective interest rate of 8.375%.

The ”C” tranche term loan is set to mature on June 30, 2027 and may (subject to certain restrictions) be prepaid in whole or in part before the maturity date for an exit fee ranging from 1% to 3% of the loan plus unpaid interest payments through the end of the month of prepayment;

In September 2022, we extended a $24.9 million term loan as part of a larger, multi-tranche real estate secured term loan facility to a skilled nursing real estate owner.

The secured term loan was structured with an “A” and a “B” tranche (with the payments on the “B” tranche being subordinate to the “A” tranche pursuant to the terms of a written agreement between the lenders).

Our $24.9 million secured term loan constituted the entirety of the “B” tranche with its payments subordinated accordingly.

The secured term loan is primarily secured by four skilled nursing faciliti es operated by an operator in the Southeast.

The “B” tranche secured term loan is set to mature on September 8, 2025, with two one-year extension options and ma y (subject to certain restrictions) be prepaid in whole or in part before the maturity date for an exit fee ranging from 1% to 3% of the loan plus unpaid interest payments;

provided, however, that no exit fee is payable in connection with portions of the loan being refinanced pursuant to a loan (or loans) provided by or insured by the United States Department of Housing and Urban Development, Federal Housing Administration, or a similar governmental authority.

The mezzanine loan bears interest at 11% and is secured by a pledge of membership interests in an up-tier affiliate of the borrower group.

The mezzanine loan is set to mature on June 30, 2032, and may (subject to certain restrictions) be prepaid in whole or in part before the maturity date, commencing on June 30, 2029, for an exit fee ranging from 1% to 3% of the loan plus unpaid interest payments through the date of prepayment.

The “C” tranche term loan and mezzanine loan both require monthly interest payments.

On August 1, 2022, we extended a $22.3 million “B” tranche secured term loan to a skilled nursing real estate owner in connection with the borrower’s acquisition of five skilled nursing facilities located in the state of California.

The secured loan was structured with an “A” tranche and a “B” tranche (with the payments on the “B” tranche being subordinate to the “A” tranche pursuant to the terms of a written agreement between the lenders).

The loan facility is primarily secured by the five skilled nursing facilities, four of which will be operated by an existing operator and one of which will be operated by a large, regional skilled nursing operator.

The “B” tranche term loan carries a three-year maturity (with two, 1-year extension options) and bears interest at a rate based on term secured overnight financing rate, with a floor of approximately 8.5%.

The $22.3 million “B” tranche term loan was funded using a combination of cash on hand and borrowings under our Revolving Facility (as defined below).

The “B” tranche secured term loan provides for an earnout advance of $4.7 million if certain conditions are met.

The “B” tranche secured term loan bears interest at a rate based on term secured overnight financing rate (“SOFR”), calculated as a fraction, with the numerator being the difference between (i) the monthly payment of interest of term SOFR plus a 4.50% spread and (ii) the amount of such monthly payment of interest of term SOFR plus a 2.85% spread, and with the denominator being the average daily balance of the outstanding principal amount during the applicable month, with such fraction expressed as a percentage and annualized, with a term SOFR floor of 1.00% and less a subservicing fee of 100% over 9.00%.

The “B” tranche secured term loan requires monthly interest payments.

In August 2022, we extended a $22.3 million term loan as part of a larger, multi-tranche real estate secured term loan facility to a skilled nursing real estate owner.

Our $22.3 million secured term loan constituted the entirety of the “B” tranche with its payments subordinated accordingly.

The secured term loan is primarily secured by five skilled nursing facilities, four of which will be operated by an existing operator and one of which will be operate d by a large, regional skilled nursing operator.

The “B” tranche secured term loan is set to mature on August 1, 2025, with two one-year extension options and may (subject to certain restrictions) be prepaid in whole or in part before the maturity date for an ex it fee ranging from 2% to 3% of the loan plus unpaid interest payments;

The “B” tranche secured term loan bears interest at a rate based on term SOFR, calculated as a fraction, with the numerator being the difference between (i) the monthly payment of interest of term SOFR plus a 4.25% spread and (ii) the amount of such monthly payment of interest of term SOFR plus a 2.75% spread, and with the denominator being the average daily balance of the outstanding principal amount during the applicable month, with such fraction expressed as a percentage and annualized, with a term SOFR floor of 1.00% and less a subservicing fee of 50% over 8.25%.

The “B” tranche secured term loan requires monthly interest payments.

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”).

There was no ATM Program activity for the three and six months ended June 30, 2022.

The following table summarizes the ATM Program activity for the three and six months ended June 30, 2021 (in thousands, except per share amounts).

For the Three Months Ended For the Six Months Ended

June 30, 2021 June 30, 2021

There was no ATM Program activity for the three and nine months ended September 30, 2022 and the three months ended September 30, 2021.

The following table summarizes the ATM Program activity for the nine months ended September 30, 2021 (in thousands, except per share amounts).

For the Nine Months Ended

September 30, 2021

Number of shares 990

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Gross proceeds (1)

$ 6,926 $ 23,505

(1) Total gross proceeds is before $0.1 million and $0.3 million of commissions paid to the sales agents during the three and six months ended June 30, 2021, respectively, under the ATM Program.

As of June 30, 2022, we had $476.5 million available for future issuances under the ATM Program.

(1) Total gross proceeds is before $0.3 million of commissions paid to the sales agents during the nine months ended September 30, 2021 under the ATM Program.

As of September 30, 2022, we had $476.5 million available for future issuances under the ATM Program.

Results of Operations

Three Months Ended June 30, 2022 Compared to Three Months Ended March 31, 2022:

Three Months Ended September 30, 2022 Compared to Three Months Ended June 30, 2022:

Three Months Ended Increase

(Decrease) Percentage

June 30, 2022 March 31, 2022

September 30, 2022 June 30, 2022

(dollars in thousands)

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Impairment of real estate investments 12,322 1,701 10,621 624 %

Provision for loan losses, net — 3,844 (3,844) (100) %

Property operating expenses 3,808 89 3,719 *

General and administrative 5,159 4,978 181 4 %

Other income:

Gain on sale of real estate — 186 (186) (100) %

Loss on sale of real estate (2,287) — (2,287) *

Unrealized loss on other real estate related investments (4,706) — (4,706) *

• Not meaningful

Rental income .

The $0.8 million, or 2%, increase in rental income is primarily due to a $1.0 million write-off of uncollectible rent during the three months ended March 31, 2022, an increase of $0.4 million due to contractual increases in rental rates for our existing tenants and $0.3 million from real estate investments made after January 1, 2022, partially offset by a $0.9 million decrease in rental income and tenant reimbursements related to moving certain tenants to a cash basis method of accounting subsequent to January 1, 2022.

Rental income increased by $0.2 million as detailed below:

Three Months Ended

(in thousands) September 30, 2022 June 30, 2022 Increase/(Decrease)

Contractual cash rent [1]

$ 46,338 $ 46,088 $ 250

Tenant reimbursements 677 713 (36)

Total contractual rent 47,015 46,801 214

Straight-line rent 3 5 (2)

Total change in rental income $ 47,018 $ 46,806 $ 212

[1] Includes initial contractual cash rent, as adjusted for applicable rental escalators and rent increases due to capital expenditures funded by the Company.

For tenants on a cash basis, this represents the lesser of the amount that would be recognized on a straight-line basis or cash that has been received.

Contractual cash rent increased by $0.3 million due to an increase of $0.4 million from increases in rental rates for our existing tenants, partially offset by a $0.1 million decrease in rental income related to moving certain tenants to a cash basis method of accounting.

Interest and other income.

The $0.3 million, or 59%, incr ease in interest and other income was primarily due to the origination of loans receivable in June 2022.

The $2.5 million, or 338%, increase in interest and other income was primarily due to the origination of loans receivable in June, August and September 2022.

See above under “Recent Developments” for additional information.

Depreciation and amortization.

The $1.0 million, or 7%, decrease in depreciation and amortization was primarily due to a decrease of $1.0 million due to assets reclassified as held for sale at March 31, 2022 and a decrease of $0.2 million due to assets becoming fully depreciated after January 1, 2022, partially offset by an increase of $0.2 million related to new real estate investments and capital improvements made after January 1, 2022.

The $0.3 million, or 2%, decrease in depreciation and amortization was primarily due to assets becoming fully depreciated after April 1, 2022.

Interest expense.

The $0.6 million, or 10%, increase in interest expense was primarily due to an increase in interest expense of $0.5 million related to a higher interest rate under the Revolving Facility and the Term Loan (as defined below) and an increase of $0.1 million related to a higher weighted average debt balance under the Revolving Facility during the three months ended June 30, 2022.

Interest expense increased by $2.1 million as detailed below:

Change in interest expense for the three months ended September 30, 2022 compared to the three months ended June 30, 2022

(in thousands)

Increase in interest rates for the Revolving Facility (as defined below) $ 798

Increase in interest rates for the Term Loan (as defined below) 772

Increase in outstanding borrowing amount for the Revolving Facility, net 486

Other changes in interest expense (4)

Total change in interest expense $ 2,052

Property taxes.

The $0.2 million, or 12%, decrease in property taxes was primarily due to changes in estimates of property taxes expected to be paid directly by us as a result of certain assets being designated as held for sale during the three months ended March 31, 2022.

The $0.6 million, or 45%, decrease in property taxes was primarily due to $0.5 million of changes in estimates during the three months ended September 30, 2022 of property taxes expected to be paid directly by us as a result of certain assets being designated as held for sale and a $0.1 million decrease due to reassessments.

Impairment of real estate investments.

During the three months ended June 30, 2022, we recognized an impairment charge of $1.7 million related to one property.

During the three months ended March 31, 2022, we recognized an aggregate impairment charge of $59.7 million related to 20 properties that all met the held for sale criteria during the quarter.

During the three months ended September 30, 2022, we recognized an impairment charge of $12.3 million related to 16 properties classified as held for sale during the quarter.

See above under “Recent Developments” for additional information.

Provision for loan losses, net.

During the three months ended March 31, 2022, we recorded a $4.6 million expected credit loss related to two other loans receivable that were placed on a non-accrual status, partially offset by a $0.8 million recovery related to one other loan receivable that was previously written off.

No provision for loan losses was recorded during the three months ended June 30, 2022.

During the three months ended June 30, 2022, we recognized an impairment charge of $1.7 million related to one property.

Property operating expenses.

During the three months ended September 30, 2022, we recognized $3.8 million of property operating expenses related to assets we plan to sell or repurpose, or have sold.

During the three months ended June 30, 2022, we recognized $0.1 million of property operating expenses related to assets we plan to sell or repurpose.

During the three months ended March 31, 2022, we recognized $0.4 million of property operating expenses related to assets we plan to sell or repurpose.

General and administrative expense.

The $0.2 million, or 5%, decrease in general and administrative expense was primarily related to a decrease in incentive compensation of $0.5 million, a decrease in stock compensation expense of $0.1 million and a decrease in cash wages of $0.1 million, partially offset by an increase in legal and other professional services of $0.2 million, an increase in other administrative costs of $0.2 million and an increase in state and local taxes of $0.1 million during the three months ended June 30, 2022 compared to the three months ended March 31, 2022.

Gain on sale of real estate.

During the three months ended March 31, 2022, we recorded a $0.2 million gain on sale of real estate related to the sale of one SNF.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021:

Six Months Ended June 30, Increase

General and administrative expense increased by $0.2 million as detailed below:

Three Months Ended

(in thousands) September 30, 2022 June 30, 2022 Increase/(Decrease)

Cash compensation $ 1,332 $ 1,716 $ (384)

Incentive compensation 1,300 600 700

Share-based compensation 1,380 1,394 (14)

Professional services 412 548 (136)

Taxes and insurance 205 279 (74)

Other expenses 530 441 89

Total change in general and administrative expense $ 5,159 $ 4,978 $ 181

Loss on sale of real estate.

During the three months ended September 30, 2022, we recorded a $2.1 million loss on sale of real estate related to the sale of six SNFs and one multi-service campus and a $0.2 million loss on sale of real estate related to the sale of a land parcel.

Unrealized loss on other real estate related investments.

During the three months ended September 30, 2022, we recorded a $4.7 million unrealized loss on one secured loan receivable and two mezzanine loans receivable .

The unrealized loss is due to rising interest rates.

No unrealized losses were recognized during the three months ended June 30, 2022.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021:

Nine Months Ended September 30,

(Decrease) Percentage

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General and administrative 15,352 16,136 (784) (5) %

Other income (loss):

Gain (loss) on sale of real estate 186 (192) 378 (197) %

Loss on extinguishment of debt — (10,827) 10,827 (100) %

Loss on sale of real estate, net (2,101) (192) (1,909) 994 %

Unrealized loss on other real estate related investments (4,706) — (4,706) *

• Not meaningful

Rental income .

The $0.2 million decrease in rental income is primarily due to a $5.6 million decrease in rental income and tenant reimbursements related to moving certain tenants to a cash basis method of accounting and a $1.0 million write-off of uncollectible rent, partially offset by a $4.7 million increase in rental income from real estate investments made

after January 1, 2021, $1.2 million due to contractual increases in rental rates for our existing tenants and a $0.5 million increase in tenant reimbursements.

Rental income decreased by $1.2 million as detailed below:

Nine Months Ended

(in thousands) September 30, 2022 September 30, 2021 Increase/(Decrease)

Contractual cash rent $ 138,768 $ 138,491 $ 277

Tenant reimbursements 2,026 2,497 (471)

Total contractual rent [1]

140,794 140,988 (194)

Straight-line rent 14 26 (12)

Adjustment for collectibility [2]

(977) — (977)

Lease termination revenue [3]

Total change in rental income $ 139,831 $ 141,077 $ (1,246)

[1] Includes initial contractual cash rent and tenant reimbursements, as adjusted for applicable rental escalators and rent increases due to capital expenditures funded by the Company.

For tenants on a cash basis, this represents the lesser of the amount that would be recognized on a straight-line basis or cash that has been received.

Total contractual cash rent decreased by $0.2 million due to a $8.3 million decrease related to moving certain tenants to a cash basis method of accounting subsequent to January 1, 2022 and a $0.5 million decrease in tenant reimbursements, partially offset by an increase of $5.3 million in contractual cash rent from real estate investments made after January 1, 2021 and $3.4 million due to increases in rental rates for our existing tenants.

[2] During the nine months ended September 30, 2022, the Company wrote off $1.0 million of uncollectible rent.

[3] During the nine months ended September 30, 2021, the Company received approximately $0.1 million of lease termination revenue.

Interest and other income.

The $0.2 million, or 19%, increase in interest and other income is primarily due to the origination of loans receivable in June 2022.

The $3.0 million, or 192%, increase in interest and other income is primarily due to an increase of $3.1 million related to the origination of loans receivable in June, August and September 2022 partially offset by a decrease of $0.1 million related to repayments of other loans.

See above under “Recent Developments” for additional information.

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Interest expense.

The $0.3 million, or 2%, decrease in interest expense was primarily due to a $7.9 million decrease in interest expense related to the redemption of the prior senior notes on July 1, 2021 and a decrease of $0.1 million related to a lower weighted average debt balance under the Revolving Facility, partially offset by an increase of $7.2 million related to the issuance of the Notes (as defined below) o n June 17, 2021 and an increase of $0.5 million related to a higher interest rate under the Revolving Facility and the Term Loan during the six months ended June 30, 2022.

Interest expense increased by $2.4 million as detailed below:

Change in interest expense for the nine months ended September 30, 2022 compared to September 30, 2021

(in thousands)

Increases to interest expense due to:

Issuance of the Notes - June 17, 2021 $ 7,110

Increase in interest rates for the Term Loan 1,461

Increase in outstanding borrowing amount for the Revolving Facility, net 976

Increase in interest rates for the Revolving Facility 714

Other changes in interest expense 29

Total increases to interest expense 10,290

Decreases to interest expense due to:

Redemption of the prior senior notes - July 1, 2021 (7,878)

Total decreases to interest expense (7,878)

Total change in interest expense $ 2,412

Property taxes.

The $1.2 million, or 83%, inc rease in property taxes was primarily due to a $0.6 million increase due to new real estate investments made after January 1, 2021, a $0.4 million increase due to changes in estimates of property taxes expected to be paid directly by us as a result of certain assets being designated as held for sale during the six months ended June 30, 2022, a $0.1 million increase related to the transfer of certain properties to new operators that do not make direct tax payments and a $0.1 million increase related to two non-operational properties at June 30, 2022.

The $0.9 million, or 36%, increase in property taxes was primarily due to a $0.7 million increase due to new real estate investments made after January 1, 2021, a $0.1 million increase related to the transfer of certain properties to new operators that do not make direct tax payments and a $0.1 million increase related to two non-operational properties at September 30, 2022.

Impairment of real estate investments.

During the six months ended June 30, 2022, we recognized an aggregate impairment charge of $61.4 million related to 20 properties that all met the held for sale criteria during the quarter and one property that is currently held for investment.

During the nine months ended September 30, 2022, we recognized aggregate impairment charges of $73.7 million related to properties held for sale during fiscal 2022 and one property that is currently held for investment.

See above under “Recent Developments” for additional information.

No impairment charges were recognized during the six months ended June 30, 2021.

No impairment charges were recognized during the nine months ended September 30, 2021.

Provision for loan losses, net.

During the six months ended June 30, 2022, we recorded a $4.6 million expected credit loss related to two other loans receivable that were placed on non-accrual status, partially offset by a $0.8 million recovery related to one other loan receivable that was previously written off.

No provision for loan losses were recognized during the six months ended June 30, 2021.

During the nine months ended September 30, 2022, we recorded a $4.6 million expected credit loss related to two other loans receivable that were placed on non-accrual status, partially offset by a $0.8 million recovery related to one other loan receivable that was previously written off.

No provision for loan losses were recognized during the nine months ended September 30, 2021.

Property operating expenses.

During the six months ended June 30, 2022, we recognized $0.5 million of property operating expenses related to assets we plan to sell or repurpose.

No similar expenses were incurred during the six months ended June 30, 2021.

During the nine months ended September 30, 2022, we recognized $4.3 million of property operating expenses related to assets we plan to sell or repurpose, or have sold.

No similar expenses were incurred during the nine months ended September 30, 2021.

General and administrative expense.

The $0.7 million, or 7%, decrease in general and administrative expense was primarily related to a decrease in incentive compensation of $0.8 million, lower stock compensation expense of $0.5 million, lower professional services expense of $0.1 million and lower other administrative expense of $0.1 mill ion, partially offset by higher cash wages of $0.8 million during the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Gain (loss) on sale of real estate.

During the six months ended June 30, 2022, we recorded a $0.2 million gain on sale of real estate related to the sale of one SNF.

During the six months ended June 30, 2021, we recorded a $0.2 million loss on sale of real estate related to the sale of one SNF.

General and administrative expense decreased by $0.8 million as detailed below:

Nine Months Ended

(in thousands) September 30, 2022 September 30, 2021 Increase/(Decrease)

Cash compensation $ 4,767 $ 4,049 $ 718

Incentive compensation 2,950 3,550 (600)

Share-based compensation 4,295 5,197 (902)

Professional services 1,299 1,350 (51)

Taxes and insurance 693 641 52

Other expenses 1,348 1,349 (1)

Total change in general and administrative expense $ 15,352 $ 16,136 $ (784)

Loss on extinguishment of debt.

D uring the nine months ended September 30, 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 prior senior notes.

Loss on sale of real estate, net.

During the nine months ended September 30, 2022, we recorded a $2.1 million loss on sale of real estate related to the sale of six SNFs and one multi-service campus and a $0.2 million loss on sale of real estate related to the sale of a land parcel, partially offset by a $0.2 million gain on sale of real estate related to the sale of one SNF.

During the nine months ended September 30, 2021, we recorded a $0.2 million loss on sale of real estate related to the sale of one SNF.

Unrealized loss on other real estate related investments.

During the nine months ended September 30, 2022, we recorded a $4.7 million unrealized loss on one secured loan receivable and two mezzanine loans receivable .

The unrealized loss is due to rising interest rates.

No unrealized losses were recognized during the nine months ended September 30, 2021.

Liquidity and Capital Resources

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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.

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 (as defined below), 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 $30.3 million, available borrowing capacity of $395.0 million under the Revolving Facility and availability under the ATM Program of $476.5 million, each at June 30, 2022, 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 believe that our expected operating cash flow from rent collections, interest payments on our other real estate related investments, and borrowings under our Amended Credit Facility, together with our cash balance of $4.9 million, available

borrowing capacity of $420.0 million unde r the Revolving Facility and availability under the ATM Program of $476.5 million, each at September 30, 2022, 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.

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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.

Through June 30, 2022 , we have not repurchased any shares of common stock under the Repurchase Program and, as of June 30, 2022 , we had $150.0 million of remaining authorization under the Repurchase Program.

Through September 30, 2022 , we have not repurchased any shares of common stock under the Repurchase Program and, as of September 30, 2022 , we had $150.0 million of remaining authorization under the Repurchase Program.

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

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The following table presents selected data from our condensed consolidated statements of cash flows for the periods presented (dollars in thousands):

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Net cash provided by operating activities $ 110,672 $ 118,363

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Net cash provided by financing activities 16,053 62,397

Net increase in cash and cash equivalents 10,372 292,039

Net decrease in cash and cash equivalents (15,034) (1,203)

Cash and cash equivalents as of the beginning of period 19,895 18,919

Cash and cash equivalents as of the end of period $ 4,861 $ 17,716

Net cash provided by operating activities decreased $2.3 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

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.

Net cash provided by operating activities decreased $7.7 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

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

The net decrease of $2.3 million in cash provided by operating activities for the six months ended June 30, 2022 is primarily due to an increase in cash paid for general and administrative expense, interest expense and operating expenses related to assets we plan to sell or repurpose , partially offset by increased rental income due to timing of payments and increased interest payments on our other real estate investments.

Cash used in investing activities for the six months ended June 30, 2022 was primarily comprised of $124.0 million in acquisitions of real estate and investments in real estate related and other loans and $3.6 million of purchases of equipment, furniture and fixtures and improvements to real estate, partially offset by $1.0 million in net proceeds from real estate sales and $1.0 million of payments received from other loans receivable.

Cash used in investing activities for the six months ended June 30, 2021 was primarily comprised of $148.5 million in acquisitions of real estate and investments in real estate related and other loans and $3.5 million of purchases of equipment, furniture and fixtures and improvements to real estate, partially offset by $6.8 million in net proceeds from real estate sales and $0.1 million of payments received from other loans receivable.

Our cash flows provided by financing activities for the six months ended June 30, 2022 were primarily comprised of $125.0 million in borrowings under our Amended Credit Facility, partially offset by $52.8 million in dividends paid and a $4.5 million net settlement adjustment on restricted stock.

Our cash flows provided by financing activities for the six months ended June 30, 2021 were primarily comprised of $400.0 million of proceeds from the issuance of the Notes and $22.9 million of net proceeds from the issuance of common stock under the ATM Program, partially offset by $49.5 million in dividends paid, $5.6 million in payments of deferred financing costs and a $1.3 million net settlement adjustment on restricted stock.

The net decrease of $7.7 million in cash provided by operating activities for the nine months ended September 30, 2022 is primarily due to an increase in cash paid for general and administrative expense, interest expense, a decrease in rental income received and operating expenses related to assets we plan to sell, have sold, or repurpose, partially offset by interest income received on our other real estate related investments.

Cash used in investing activities for the nine months ended September 30, 2022 was primarily comprised of $171.6 million in acquisitions of real estate and investments in real estate related and other loans and $5.5 million of purchases of equipment, furniture and fixtures and improvements to real estate, partially offset by $34.1 million in net proceeds from real estate sales and $1.2 million of principal payments received from other loans receivable.

C ash used in investing activities for the nine months ended September 30, 2021 was primarily comprised of $184.1 million in acquisitions of real estate and investments in other loans and $4.8 million of purchases of equipment, furniture and fixtures and improvements to real estate, partially offset by $6.8 million in net proceeds from real estate sales and $0.2 million of principal payments received from other loans receivable.

Our cash flows provided by financing activities for the nine months ended September 30, 2022 were primarily comprised of $100.0 million in net borrowings under our Amended Credit Facility, partially offset by $79.5 million in dividends paid and a $4.5 million net settlement adjustment on restricted stock.

O ur cash flows provided by financing activities for the nine months ended September 30, 2021 were primarily comprised of $400.0 million of 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 $300 million of payments to redeem the prior senior notes, $75.1 million in dividends paid, $14.1 million in payments on debt extinguishment and deferred financing costs and a $1.3 million net settlement adjustment on restricted stock.

Material Cash Requirements

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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 June 30, 2022, we were in compliance with all applicable financial covenants under the indenture governing the Notes.

As of September 30, 2022, we were in compliance with all applicable financial covenants under the indenture governing the Notes.

See Note 7, Debt, to our condensed consolidated financial statements included in this report for further information about the Notes.

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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:

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.

(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 June 30, 2022, we had $200.0 million outstanding under the Term Loan and $205.0 million outstanding under the Revolving Facility.

As of September 30, 2022, we had $200.0 million outstanding under the Term Loan and $180.0 million outstanding under the Revolving Facility.

The Revolving Facility has a maturity date of February 8, 2023, and includes, at our sole discretion, t wo, six-month extension options.

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Interest payments on the Term Loan and Revolving Facility are due monthly and facility fee payments are due quarterly.

As of June 30, 2022, we were in compliance with all applicable financial covenants under the Amended Credit Agreement.

As of September 30, 2022, we were in compliance with all applicable financial covenants under the Amended Credit Agreement.

See Note 7, Debt, to our condensed consolidated financial statements included in this report for further information about the Amended Credit Agreement.

Capital Expenditures

As of June 30, 2022 , we had committed to fund expansions, construction and capital improvements at certain triple-net leased facilities totaling $7.2 million, of which $1.9 million is subject to rent increase at the time of funding.

As of September 30, 2022 , we had committed to fund expansions, construction and capital improvements at certain triple-net leased facilities totaling $16.1 million, of which $3.9 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.

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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 8, Equity, to our condensed 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 the three and six months ended June 30, 2022 .

Critical Accounting Policies and Estimates

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However, if our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, we may have applied a different accounting treatment, resulting in a different presentation of our financial statements.

We periodically reevaluate our estimates and assumptions, and in the event they prove to be different from actual results, we make adjustments in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain.

Please refer to “Critical Accounting Policies and Estimates” in the

“Management’s Discussion and Analysis of Financial Condition and Results of Ope rations” section of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 16, 2022, for further information regarding the critical accounting policies that affect our more significant estimates and judgments used in the preparation of our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

There have been no material changes in such critical accounting policies during the six months ended June 30, 2022.

We periodically reevaluate our estimates and assumptions, and in the event

they prove to be different from actual results, we make adjustments in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain.

Please refer to “Critical Accounting Policies and Estimates” in the “Management’s Discussion and Analysis of Financial Condition and Results of Ope rations” section of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 16, 2022, for further information regarding the critical accounting policies that affect our more significant estimates and judgments used in the preparation of our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

There have been no material changes in such critical accounting policies during the nine months ended September 30, 2022.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis