CareTrust REIT, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-Looking Statements Certain statements in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements regarding: future financing plans, business strategies, growth prospects and operating and financial performance; expectations regarding the making of distributions and the payment of dividends; and compliance with and changes in governmental regulations. Words such as “anticipate(s),” “expect(s),” “intend(s),” “plan(s),” “believe(s),” “may,” “will,” “would,” “could,” “should,” “seek(s)” and similar expressions, or the negative of these terms, are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. 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 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; (iii) the risk that we may have to incur additional impairment charges related to our assets held for sale if we are unable to sell such assets at the prices we expect; (iv) the ability of our tenants to comply with applicable laws, rules and regulations in the operation of the properties we lease to them; (v) the ability and willingness of our tenants to renew their leases with us upon their expiration, and the ability to reposition our properties on the same or better terms in the event of nonrenewal or in the event we replace an existing tenant, as well as any obligations, including indemnification obligations, we may incur in connection with the replacement of an existing tenant; (vi) the availability of and the ability to identify (a) tenants who meet our credit and operating standards, and (b) suitable acquisition opportunities, and the ability to acquire and lease the respective properties to such tenants on favorable terms; (vii) the ability to generate sufficient cash flows to service our outstanding indebtedness; (viii) access to debt and equity capital markets; (ix) fluctuating interest rates; (x) the ability to retain our key management personnel; (xi) the ability to maintain our status as a real estate investment trust (“REIT”); (xii) changes in the U.S. tax law and other state, federal or local laws, whether or not specific to REITs; (xiii) other risks inherent in the real estate business, including potential liability relating to environmental matters and illiquidity of real estate investments; and (xiv) any additional factors included under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, including in the section entitled “Risk Factors” in Item 1A of Part I of such report, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission (the “SEC”). Forward-looking statements speak only as of the date of this report. Except in the normal course of our public disclosure obligations, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any statement is based. Overview 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 March 31, 2023, we owned and leased to independent operator s, 215 skilled nursing facilities (“SNFs”), multi-service campuses, assisted living facilities (“ALFs”) and independent living facilities (“ILFs”) consisting of 22,727 operational beds and units located in 28 states with the highest concentration of properties by rental revenues located in California, Texas, Louisiana, Idaho and Arizona. As of March 31, 2023, we also had other real estate related investments consisting of three real estate secured loans receivable and one mez zanine loan receivable with an aggregate carrying value of $140.8 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 purposes. We expect to grow our portfolio by pursuing opportunities to acquire additional properties that will be leased to a 19 Table of Contents 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. In addition, we actively monitor the clinical, regulatory and financial operating results of our tenants, and work to identify opportunities within their operations and markets that could improve their operating results at our facilities. We communicate such observations to our tenants; however, we have no contractual obligation to do so. Moreover, our tenants have sole discretion with respect to the day-to-day operation of the facilities they lease from us, and how and whether to implement any observation we may share with them. We also actively monitor the overall occupancy, skilled mix, and other operating metrics of our tenants on at least a monthly basis including, beginning in the quarter ended June 30, 2020, any stimulus funds received by each tenant. 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 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. We have also provided select tenants with strategic capital for facility upkeep and modernization, as well as short-term working capital loans when they are awaiting licensure and certification or conducting turnaround work in one or more of our properties, and we may continue to do so in the future. In addition, we periodically reassess the investments we have made and the tenant relationships we have entered into, and have selectively disposed of facilities or investments, or terminated such relationships, and we expect to continue making such reassessments and, where appropriate, taking such actions. 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. Our tenants are also experiencing labor shortages resulting in limited admissions, reduced occupancy and higher agency expense. While our tenants have experienced some recent increases in occupancy, occupancy rates are still below pre-pandemic levels. 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. In some cases, we may have to restructure tenants’ long-term obligations and may not be able to do so on terms that are as favorable to us as those currently in place. 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 fourth quarter of 2021; however, seniors housing facilities occupancy began to increase in the beginning of the first quarter of 2022 and continued to increase through the three months ended March 31, 2023. 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 first quarter of 2023. 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 March 31, 2023 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 March 31, 2023 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 and temporary suspensions are retired. On January 30, 2023, the U.S. Department of Health and Human Services (“HHS”) announced that the COVID-19 Public Health Emergency (“PHE”) will end on May 11, 2023. The PHE has allowed HHS to provide temporary regulatory waivers, including the waiver of the three-day hospital stay requirement for a patient’s Medicare benefits to refresh. The temporary 6.2% increase in Federal Medical Assistance Percentages (“FMAP”) was approved retroactive to January 1, 2020, but is expected to be phased down by December 31, 2023 under the Consolidated Appropriations Act of 2023 and the ending of the PHE. With the expiration of the PHE and the potential lifting of the three-day hospital stay requirement, SNFs may experience decreases in occupancy levels or revenues, which may adversely impact the business and financial condition of the operators of our SNFs. 20 Table of Contents As a result of the foregoing impacts of the COVID-19 pandemic and actions taken in response, 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 months ended March 31, 2023, we collected 96.3% of contractual rents due from our operators excluding cash deposits. In April 2023, we collected 97.5% of contractual rents due from our operators excluding cash deposits. Impact of Macroeconomic Conditions 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 signs of a potential broader economic slowdown. 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, has adversely impacted and could continue to 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. For more information regarding the potential impact of COVID-19 and macroeconomic conditions on our business, see “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 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 10% of contractual cash rent as of March 31, 2022. As of March 31, 2023, five of the original 27 properties remain held for sale. During the three months ended March 31, 2023, we determined one SNF met the criteria to be classified as held for sale. During the three months ended March 31, 2023, we recognized an impairment charge of $1.9 million related to four of the six facilities that were classified as held for sale at March 31, 2023, which is reported in impairment of real estate investments in the condensed consolidated statements of operations. 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 the date of this report, we are considering the sale of a SNF portfolio consisting of 11 properties. If the likelihood of proceeding with a plan to sell the SNF portfolio significantly increases or certain held for sale criteria are met with respect to the portfolio, we expect we would recognize a material impairment to reduce the portfolio to its estimated fair value in the period in which the circumstances change regarding our potential plans to sell. As of March 31, 2023, the portfolio was considered recoverable using a weighted average probability of expected undiscounted cash flows based on management’s consideration of various scenarios as of March 31, 2023. Asset Sales and Held for Sale Reclassifications The following table summarizes the Company’s dispositions for the three months ended March 31, 2023 and 2022 (dollars in thousands): Three Months Ended March 31, 2023 2022 Number of facilities 1 1 Net sales proceeds $ 3,230 $ 959 Net carrying value 3,300 773 Net (loss) gain on sale $ (70) $ 186 21 Table of Contents The following table summarizes the Company’s assets held for sale activity for the periods presented (dollars in thousands): Net Carrying Value Number of Facilities December 31, 2022 $ 12,291 5 Additions to assets held for sale 10,374 2 Assets sold (3,300) (1) Impairment of real estate held for sale (1,886) — March 31, 2023 $ 17,479 6 Recent Investments From January 1, 2023 through May 10, 2023, we acquired three SNFs and two ALFs for approximately $47.5 million, which includes estimated capitalized acquisition costs and capital expenditure commitments. These acquisitions are expected to generate initial annual cash revenues of approximately $4.5 million and an initial blended yield of approximately 9.6% before the impact of any rent abatement. At-The-Market Offering of Common Stock On February 24, 2023, 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 addition to the issuance and sale of shares of our common stock, we may also enter into one or more forward sales agreements (each, an “ATM forward contract”) with sales agents for the sale of shares of our common stock under the ATM Program. There was no ATM Program activity (or activity under any predecessor at-the-market equity offering programs) for the three months ended March 31, 2023 and 2022. As of March 31, 2023, we had $500.0 million available for future issuances under the ATM Program. In April 2023, we executed a 12-month forward equity sale under the ATM Program with a financial institution acting as a forward purchaser to sell 1,757,500 shares of common stock at a weighted average sales price of $19.91 per share before commissions and offering expenses. We did not receive any proceeds from the sale of our shares of common stock by the forward sellers. We currently expect to fully physically settle the forward equity sales by delivery of shares of common stock to the forward purchaser and receive cash proceeds upon one or more settlement dates, at our discretion, prior to the final settlement date in the second quarter of 2024, at which time we expect to receive aggregate net cash proceeds at settlement equal to the number of shares specified in such forward equity sale multiplied by the relevant forward price per share. The weighted average forward sale price that we expect to receive upon physical settlement will be subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchaser’s stock borrowing costs and (iii) scheduled dividends through the settlement. We have not settled any portion of this forward equity sale as of the date of this report. 22 Table of Contents Results of Operations Three Months Ended March 31, 2023 Compared to Three Months Ended December 31, 2022: Three Months Ended Increase (Decrease) Percentage Difference March 31, 2023 December 31, 2022 (dollars in thousands) Revenues: Rental income $ 46,163 $ 47,675 $ (1,512) (3) % Interest and other income 4,443 4,135 308 7 % Expenses: Depreciation and amortization 12,238 11,926 312 3 % Interest expense 9,827 9,608 219 2 % Property taxes 880 968 (88) (9) % Impairment of real estate investments 1,886 5,356 (3,470) (65) % Property operating expenses 963 695 268 39 % General and administrative 5,061 4,813 248 5 % Other loss: Loss on sale of real estate (70) (1,668) 1,598 * Unrealized losses on other real estate related investments, net (454) (2,396) 1,942 * • Not meaningful Rental income . Rental income decreased by $1.5 million as detailed below: Three Months Ended Increase/(Decrease) (in thousands) March 31, 2023 December 31, 2022 Contractual cash rent (1) $ 45,461 $ 47,363 $ (1,902) Tenant reimbursements 709 749 (40) Total contractual rent 46,170 48,112 (1,942) Straight-line rent (7) 3 (10) Adjustment for collectibility (2) — (440) 440 Total change in rental income $ 46,163 $ 47,675 $ (1,512) (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 decreased by $1.9 million due to a $2.2 million decrease in rental income related to lower cash collections from tenants on a cash basis method of accounting, partially offset by an increase of $0.3 million from increases in rental rates for our existing tenants. (2) During the three months ended December 31, 2022, the Company wrote off $0.4 million of uncollectible rent. Interest and other income. The $0.3 million, or 7%, increase in interest and other income was primarily due to a prepayment penalty of $0.5 million related to the prepayment of one mezzanine loan receivable during the three months ended March 31, 2023, partially offset by a decrease of $0.1 million due to repayments of other loans and a decrease of $0.1 million due to fewer number of days during the three months ended March 31, 2023 compared to the three months ended December 31, 2022. Depreciation and amortizati on. The $0.3 million, or 3%, increase in depreciation and amortization was primarily due to an increase of $0.3 million due to reclassifying assets out of held for sale during the three months ended December 31, 2022 and an increase of $0.1 million due to capital improvements made after October 1, 2022, partially offset by a decrease of $0.1 million due to assets becoming fully depreciated after October 1, 2022. 23 Table of Contents Interest expense. Interest expense increased by $0.2 million as detailed below: Change in interest expense for the three months ended March 31, 2023 compared to the three months ended December 31, 2022 (in thousands) Decrease in outstanding borrowing amount for the Revolving Facility, net $ (598) Increase in interest rates for the Term Loan (as defined below) 385 Increase in interest rates for the Revolving Facility (as defined below) 366 Other changes in interest expense 66 Net change in interest expense $ 219 Property taxes. The $0.1 million, or 9%, decrease in property taxes was primarily due to the sale of properties in December 2022. Impairment of real estate investments. During the three months ended March 31, 2023, we recognized an impairment charge of $1.9 million related to four properties classified as held for sale during the quarter. See above under “Recent Developments - Impairment of Real Estate Assets, Assets Held for Sale, and Asset Sales” for additional information. During the three months ended December 31, 2022, we recognized an aggregate impairment charge of $5.4 million related to three properties that met the held for sale criteria during the quarter and one property held for investment. Property operating expenses. During the three months ended March 31, 2023 and December 31, 2022, we recognized $1.0 million and $0.7 million, respectively, of property operating expenses related to assets we plan to sell or repurpose, or have sold. General and administrative expense. General and administrative expense increased by $0.2 million as detailed below: Three Months Ended Increase/(Decrease) (in thousands) March 31, 2023 December 31, 2022 Cash compensation $ 1,550 $ 1,339 $ 211 Share-based compensation 936 1,463 (527) Incentive compensation 1,550 600 950 Professional services 474 598 (124) Taxes and insurance 204 205 (1) Other expenses 347 608 (261) Total change in general and administrative expense $ 5,061 $ 4,813 $ 248 Loss on sale of real estate. During the three months ended March 31, 2023, we recorded a $0.1 million loss on sale of real estate related to the sale of one ALF. During the three months ended December 31, 2022, we recorded a $1.7 million loss on sale of real estate related to the sale of five ALFs. Unrealized losses on other real estate related investments, net. During the three months ended March 31, 2023, we recorded a $1.0 million unrealized loss on one mezzanine loan receivable, partially offset by a $0.5 million reversal of a previously recognized unrealized loss related to the prepayment of one mezzanine loan receivable. During the three months ended December 31, 2022, we recorded a $2.4 million unrealized loss on two mortgage secured loans receivable. The unrealized losses are due to rising interest rates. 24 Table of Contents Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022: Three Months Ended Increase (Decrease) Percentage Difference March 31, 2023 March 31, 2022 (dollars in thousands) Revenues: Rental income $ 46,163 $ 46,007 $ 156 — % Interest and other income 4,443 469 3,974 * Expenses: Depreciation and amortization 12,238 13,575 (1,337) (10) % Interest expense 9,827 5,742 4,085 71 % Property taxes 880 1,420 (540) (38) % Impairment of real estate investments 1,886 59,683 (57,797) (97) % Provision for loan losses, net — 3,844 (3,844) * Property operating expenses 963 447 516 115 % General and administrative 5,061 5,215 (154) (3) % Other loss: (Loss) gain on sale of real estate (70) 186 (256) (138) % Unrealized losses on other real estate related investments, net (454) — (454) * • Not meaningful Rental income . Rental income increased by $0.2 million as detailed below: Three Months Ended Increase/(Decrease) (in thousands) March 31, 2023 March 31, 2022 Contractual cash rent (1) $ 45,461 $ 46,342 $ (881) Tenant reimbursements 709 636 73 Total contractual rent 46,170 46,978 (808) Straight-line rent (7) 6 (13) Adjustment for collectibility (2) — (977) 977 Total change in rental income $ 46,163 $ 46,007 $ 156 (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 decreased by $0.9 million due to a $1.8 million decrease in rental income related to lower cash collections from tenants on a cash basis method of accounting and a $0.6 million decrease due to dispositions, partially offset by an increase of $1.3 million from increases in rental rates for our existing tenants and an increase of $0.3 million from real estate investments made after January 1, 2022. (2) During the three months ended March 31, 2022, the Company wrote off $1.0 million of uncollectible rent. Interest and other income. The $4.0 million increase in interest and other income was primarily due to an increase of $3.5 million due to the origination of loans receivable in June, August and September 2022 and a prepayment penalty of $0.5 million during the three months ended March 31, 2023. Depreciation and amortization. The $1.3 million, or 10%, decrease in depreciation and amortization was primarily due to a decrease of $1.0 million due to assets becoming fully depreciated after January 1, 2022 and a decrease of $0.7 million due to classifying assets as held for sale during the three months ended March 31, 2022, partially offset by an increase of $0.3 million related to new real estate investments and capital improvements made after January 1, 2022 and a $0.1 million increase due to reclassifying assets out of held for sale during the three months ended December 31, 2022. 25 Table of Contents Interest expense. Interest expense increased by $4.1 million as detailed below: Change in interest expense for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 (in thousands) Increase in interest rates for the Term Loan $ 2,284 Increase in interest rates for the Revolving Facility 1,129 Increase in outstanding borrowing amount for the Revolving Facility, net 586 Other changes in interest expense 86 Net change in interest expense $ 4,085 Property taxes. The $0.5 million, or 38%, decrease in property taxes was primarily due to a decrease of $0.4 million due to 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, and a decrease of $0.2 million due to the sale of properties in September 2022, December 2022 and January 2023, partially offset by an increase of $0.1 million due to reassessments. Impairment of real estate investments. During the three months ended March 31, 2023, we recognized an impairment charge of $1.9 million related to four properties classified as held for sale during the quarter. See above under “Recent Developments - Impairment of Real Estate Assets, Assets Held for Sale, and Asset Sales” for additional information. 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. 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 non-accrual status, partially offset by a $0.8 million recovery related to one other loan receivable that was previously written off. No such provision for loan losses was recorded during the three months ended March 31, 2023. Property operating expenses. During the three months ended March 31, 2023 and March 31, 2022, we recognized $1.0 million and $0.4 million, respectively, of property operating expenses related to assets we plan to sell or repurpose, or have sold. General and administrative expense. General and administrative expense decreased by $0.2 million as detailed below: Three Months Ended Increase/(Decrease) (in thousands) March 31, 2023 March 31, 2022 Cash compensation $ 1,550 $ 1,720 $ (170) Share-based compensation 936 1,521 (585) Incentive compensation 1,550 1,050 500 Professional services 474 339 135 Taxes and insurance 204 209 (5) Other expenses 347 376 (29) Total change in general and administrative expense $ 5,061 $ 5,215 $ (154) (Loss) gain on sale of real estate. During the three months ended March 31, 2023, we recorded a $0.1 million loss on sale of real estate related to the sale of one ALF. 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. Unrealized losses on other real estate related investments, net. During the three months ended March 31, 2023, we recorded a $1.0 million unrealized loss on one mezzanine loan receivable, partially offset by a $0.5 million reversal of a previously recognized unrealized loss related to the prepayment of one mezzanine loan receivable. No unrealized losses were recognized during the three months ended March 31, 2022. 26 Table of Contents 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 debt maturities 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 and other investments (including mortgage and mezzanine loan originations) 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 Second 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. 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. We believe that our expected operating cash flow from rent collections, interest payments on our other real estate related investments, and borrowings under our Second Amended Credit Facility, together with our cash balance of $28.1 million, available borrowing capacity of $465.0 million unde r the Revolving Facility and availability of $500 million under the ATM Program, each at March 31, 2023, 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. While we are currently pursuing the sale, re-tenanting or repurposing of certain of our assets in connection with our ongoing review and monitoring of our investment portfolio as described under “Recent Developments” above, 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 and any failure of our operators to pay rent or of our borrowers to make interest or principal payments may impact our available capital resources. We have filed an automatic shelf registration statement with the U.S. Securities and Exchange Commission that expires in February 2026 and at or prior to such time we expect to file a new shelf registration statement. The shelf registration statement allows 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. On February 24, 2023, we entered into the ATM Program. In addition to the issuance and sale of shares of our common stock, we may also enter into one or more ATM forward contracts with sales agents for the sale of shares of our common stock under the ATM Program. See “At-The-Market Offering of Common Stock” for information regarding activity under the ATM Program. 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. 27 Table of Contents Cash Flows The following table presents selected data from our condensed consolidated statements of cash flows for the periods presented (dollars in thousands): For the Three Months Ended March 31, 2023 2022 Net cash provided by operating activities $ 35,120 $ 34,579 Net cash used in investing activities (818) (24,072) Net cash used in financing activities (19,410) (3,816) Net increase in cash and cash equivalents 14,892 6,691 Cash and cash equivalents as of the beginning of period 13,178 19,895 Cash and cash equivalents as of the end of period $ 28,070 $ 26,586 Net cash provided by operating activities remained stable for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. 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 related investments. Operating cash outflows consist primarily of interest expense on our borrowings and general and administrative expenses. The net increase of $0.5 million in cash provided by operating activities for the three months ended March 31, 2023 is primarily due to an increase in interest income received on our other real estate related investments, partially offset by an increase in cash paid for interest expense, general and administrative expense and operating expenses related to assets we plan to sell, have sold, or repurpose. Cash used in investing activities for the three months ended March 31, 2023 was primarily comprised of $17.2 million in escrow deposits for acquisition of real estate and $2.0 million of purchases of equipment, furniture and fixtures and improvements to real estate, partially offset by $15.1 million of principal payments received from our other real estate related investments and other loans receivable and $3.2 million in net proceeds from real estate sales. Cash used in investing activities for the three months ended March 31, 2022 was primarily comprised of $24.0 million in acquisitions of real estate and investments in other loans and $1.9 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 $0.9 million of payments received from other loans receivable. Our cash flows used in financing activities for the three months ended March 31, 2023 were primarily comprised of $27.4 million in dividends paid, a $1.5 million net settlement adjustment on restricted stock and $0.5 million in costs paid for the issuance of common stock, partially offset by $10.0 million in borrowings under our Revolving Facility (as defined below). Our cash flows used in financing activities for the three months ended March 31, 2022 were primarily comprised of $26.0 million in dividends paid and a $2.8 million net settlement adjustment on restricted stock, partially offset by $25.0 million in borrowings under our Prior Credit Agreement (as defined below). 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, 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”). 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. The obligations under the Notes are guaranteed, jointly and severally, on an unsecured basis, by us and all of our subsidiaries (other than the Issuers). As of March 31, 2023, 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. Unsecured Revolving Credit Facility and Term Loan 28 Table of Contents On December 16, 2022, we, together with certain of our subsidiaries, entered into a second amended and restated credit and guaranty agreement with KeyBank National Association, as administrative agent, an issuing bank and swingline lender (the “Second Amended Credit Agreement”). The Operating Partnership is the borrower under the Second Amended Credit Agreement, and the obligations thereunder are guaranteed, jointly and severally, on an unsecured basis, by us and certain of our subsidiaries. The Second Amended Credit Agreement, which amends and restates our amended and restated credit and guaranty agreement, dated as of February 8, 2019 (as amended, the “Prior 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) the continuation of the unsecured term loan credit facility which was previously extended under the Prior Credit Agreement (the “Term Loan” and together with the Revolving Facility, the “Second Amended Credit Facility”) in an aggregate principal amount of $200.0 million. Future borrowings under the Second Amended Credit Facility will be used for working capital purposes, for capital expenditures, to fund acquisitions and for general corporate purposes. As of March 31, 2023, we had $200.0 million outstanding under the Term Loan and $135.0 million outstanding under the Revolving Facility. The Revolving Facility has a maturity date of February 9, 2027, and includes, at our sole discretion, t wo 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 Adjusted Term SOFR or Adjusted Daily Simple SOFR (each as defined in the Second Amended Credit Agreement) plus a margin ranging from 1.10% to 1.55% per annum based on the debt to asset value ratio of the Company and 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 Adjusted Term SOFR or Adjusted Daily Simple SOFR plus a margin ranging from 1.50% to 2.20% per annum based on the debt to asset value ratio of the Company and our consolidated subsidiaries (subject to decrease at the Operating Partnership’s election if we obtain certain specified investment grade ratings on our senior long-term unsecured debt). In addition, the Operating Partnership will pay a facility fee on the revolving commitments under the Revolving Facility ranging from 0.15% to 0.35% per annum, based on the debt to asset value ratio of the Company and 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). As of March 31, 2023, we were in compliance with all applicable financial covenants under the Second Amended Credit Agreement. See Note 7, Debt, to our condensed consolidated financial statements included in this report for further information about the Second Amended Credit Agreement. Capital Expenditures As of March 31, 2023 , we had committed to fund expansions, construction and capital improvements at certain triple-net leased facilities totaling $14.8 million, of which $1.6 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 11, Commitments and Contingencies, to our condensed 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 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 months ended March 31, 2023 . Critical Accounting Policies and Estimates Our condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information set forth in the Accounting Standards Codification, as published by the Financial Accounting Standards Board. 29 Table of Contents GAAP requires us to make estimates and assumptions regarding future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base these estimates on our experience and assumptions we believe to be reasonable under the circumstances. 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, 2022, filed with the SEC on February 9, 2023, 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 three months ended March 31, 2023.