What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-10 · 117 added, 120 removed, 224 unchanged (51% of the section changed)

24 unchanged sentences

(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entitled “Risk Factors” in Item 1A of Part I of such report, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission (the “SEC”).

and (xiv) any additional factors included under Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 and this report, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission (the “SEC”).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.

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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 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.

As of June 30, 2023, we owned and leased to independent operato rs, 224 skilled nursing facilities (“SNFs”), multi-service campuses, assisted living facilities (“ALFs”) and independent living facilities (“ILFs”) consisting of 23,694 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 June 30, 2023, we also had other real estate related investments consisting of five real estate secured loans receivable and one mezzanine loan receivable with an aggregate carrying value of $166.8 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).

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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.

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.

Post COVID-19 Pandemic Conditions and Outlook

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 adverse conditions that emerged, and have continued, during the COVID-19 pandemic.

Our tenants are experiencing increased operating costs as a result of actions they took 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, higher operating costs and continued reduced occupancy levels.

At a portfolio wide level, occupancy levels at our seniors housing facilities, comprising our ALFs and ILFs, are continuing to show signs of recovery following the onset of the COVID-19 pandemic, although they have not yet fully normalized to pre-pandemic levels.

Within our SNFs, occupancy levels have continued to improve since their trough in January 2021, but still remain below pre-COVID occupancy levels for most of our tenants.

Federal and state governmental relief programs enacted during the pandemic provided temporary assistance to many of our tenants during the COVID-19 pandemic.

These included the Public Health and Social Services Emergency Fund that began funding in late 2021, a temporary suspension of Medicare sequestration cuts under the Coronavirus Aid, Relief, and Economic Security Act and a temporary 6.2% increase in Federal Medical Assistance Percentage (“FMAP”) that was approved retroactive to January 1, 2020 and will be phased down by December 31, 2023 under the Consolidated Appropriations Act of 2023.

The tapering and/or end of these relief programs has impacted, and may continue to adversely impact, the business and financial condition of our tenants, as they continue to experience lower occupancy levels and higher operating costs.

In response to the COVID-19 pandemic, the U.S.

Department of Health and Human Services (“HHS”) enacted the COVID-19 Public Health Emergency (“PHE”) that allowed HHS to provide temporary regulatory waivers, including waiver of the three-day hospital stay requirement for a patient’s Medicare benefits to refresh.

This waiver had the effect of increasing skilled mix in our SNFs periodically during the COVID-19 pandemic, especially during surges in COVID-19 outbreaks.

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 occupancy declines.

The PHE, including HHS’s waiver of the three-day hospital stay requirement, expired on May 11, 2023.

With the expiration of the PHE and the lifting of the three-day hospital stay requirement, our SNFs may experience decreases in occupancy levels or revenues, which may have a further adverse impact on the business and financial condition of the operators of our SNFs.

State specific approaches have been developed including various states having increased their Medicaid base rates or taken other measures to account for the increase in expenses as a result of the COVID-19 pandemic.

For example, Texas has increased its Medicaid rate to offset the expiration of the FMAP, which is effective through at least August 2023.

There is no assurance that these measures will continue, will be widely available to our tenants or will sufficiently offset the impact that the government relief programs previously provided.

In July 2023, The Centers for Medicare and Medicaid Services approved its payment rate update to SNF reimbursements for fiscal 2024, commencing October 1, 2023, which includes a net increase of 4.0%, or approximately $1.4

billion, in Medicare Part A payments to SNFs.

This increase is expected to partially offset some of our tenants’ higher operating costs.

As a result of impacts experienced by our tenants since the onset of the COVID-19 pandemic, the ability of some of our tenants to continue to meet their financial obligations to us in full 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.

During the three and six months ended June 30, 2023, we collected 96.7% and 96.4%, respectively, of contractual rents due from our operators excluding cash deposits.

In July 2023, we collected 98.0% of contractual rents due from our operators excluding cash deposits.

From time to time in the past, we have taken actions to reposition one or more properties with a replacement tenant or sell the property and, in certain cases, we may also determine to restructure tenants’ long-term obligations.

In the event our tenants are unable to satisfy their obligations to us and we are unable to effect these actions on terms that are as favorable to us as those currently in place, our rental income could be adversely impacted and we may incur additional expenses or obligations and be required to recognize additional impairment charges.

Impact of Macroeconomic Conditions

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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.

During the six months ended June 30, 2023, we decided to pursue the sale of a SNF portfolio consisting of 11 properties as well as one additional property and classified these 12 SNFs as held for sale.

During the three and six months ended June 30, 2023, we recognized an impairment charge on 12 and 15 facilities of $21.4 million and $23.3 million, respectively, which is reported in impairment of real estate investments in the condensed consolidated statements of operations.

Two of the 15 facilities impaired and classified as held for sale were sold during the three months ended June 30, 2023.

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

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,

The following table summarizes our dispositions for the three and six months ended June 30, 2023 and 2022 (dollars in thousands):

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Number of facilities 3 — 4 1

1 unchanged sentence

Net carrying value 11,206 — 14,506 773

Net (loss) gain on sale $ (70) $ 186

The following table summarizes the Company’s assets held for sale activity for the periods presented (dollars in thousands):

Net gain on sale $ 2,028 $ — $ 1,958 $ 186

The following table summarizes our assets held for sale activity for the periods presented (dollars in thousands):

Net Carrying Value Number of Facilities

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Impairment of real estate held for sale (23,278) —

March 31, 2023 $ 17,479 6

June 30, 2023 $ 21,554 15

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.

From January 1, 2023 through August 3, 2023, we acquired seven SNFs, one multi-service campus, and four ALFs for approximately $172.5 million, which includes estimated capitalized acquisition costs.

These acquisitions are expected to generate initial annual cash revenues of approximately $14.5 million and an initial blended yield of approximately 8.4% before the impact of any rent abatement.

From January 1, 2023 through August 3, 2023, we originated $41.7 million in mortgage loans.

These investments are expected to generate annual interest income of approximately $3.8 million and an initial blended yield of approximately 9.0%.

At-The-Market Offering of Common Stock

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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.

From January 1, 2023 through August 3, 2023, we executed forward equity sales under the ATM Program with a financial institution acting as a forward purchaser to sell an aggregate of 10,575,437 shares of common stock at a weighted average sales price of $19.80 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.

We currently expect to fully physically settle forward equity sales by delivery of shares of common stock to the forward purchaser and receive cash proceeds upon one or more settlement dates, which are typically a one-year term, at our discretion, prior to the final settlement date, at which time we expect to receive aggregate net cash proceeds at settlement equal to the number of shares sold on a forward basis 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.

We have not settled any portion of these forward equity sales as of the date of this report.

There was no ATM Program activity (or activity under any predecessor at-the-market equity offering programs) for the three and six months ended June 30, 2022.

As of August 3, 2023 , we had $290.7 million available for future issuances under the ATM Program.

Results of Operations

Three Months Ended March 31, 2023 Compared to Three Months Ended December 31, 2022:

Three Months Ended June 30, 2023 Compared to Three Months Ended March 31, 2023:

Three Months Ended Increase

(Decrease) Percentage

March 31, 2023 December 31, 2022

June 30, 2023 March 31, 2023

(dollars in thousands)

7 unchanged sentences

General and administrative 4,718 5,061 (343) (7) %

Loss on sale of real estate (70) (1,668) 1,598 *

Gain (loss) on sale of real estate, net 2,028 (70) 2,098 *

Unrealized losses on other real estate related investments, net (2,151) (454) (1,697) *

1 unchanged sentence

Rental income .

Rental income decreased by $1.5 million as detailed below:

Rental income increased by $1.6 million as detailed below:

Three Months Ended Increase/(Decrease)

(in thousands) March 31, 2023 December 31, 2022

(in thousands) June 30, 2023 March 31, 2023

Contractual cash rent $ 46,536 $ 45,461 $ 1,075

$ 45,461 $ 47,363 $ (1,902)

Tenant reimbursements 1,216 709 507

Total contractual rent (1)

47,752 46,170 1,582

Straight-line rent (7) (7) —

Adjustment for collectibility (2)

Total change in rental income $ 46,163 $ 47,675 $ (1,512)

Rental income $ 47,745 $ 46,163 $ 1,582

(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.

Total contractual cash rent increased by $1.6 million due to a $1.2 million increase in rental income from real estate investments made after January 1, 2023, a $0.5 million increase in tenant reimbursements, and a $0.4 million increase in rental rates for our existing tenants, partially offset by a $0.4 million decrease in rental income related to lower cash collections from tenants on a cash basis method of accounting and a $0.1 million decrease in rental income related to dispositions in June 2023.

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.

The $0.6 million, or 14%, decrease in interest and other income was primarily due to a prepayment penalty received of $0.5 million related to the prepayment of one mezzanine loan receivable during the three months ended March 31, 2023 and a decrease of $0.4 million due to repayment of the mezzanine loan, partially offset by an increase of $0.2 million of interest income on money market funds and an increase of $0.1 million of interest income on other loans due to rising interest rates and a higher number of days during the three months ended June 30, 2023 compared to the three months ended March 31, 2023.

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.

The $0.5 million, or 4%, increase in depreciation and amortization was primarily due to an increase of $0.6 million due to acquisitions and capital improvements made after January 1, 2023, partially offset by a decrease of $0.1 million due to assets becoming fully depreciated after January 1, 2023.

Interest expense.

Interest expense increased by $1.2 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

Change in interest expense for the three months ended June 30, 2023 compared to the three months ended March 31, 2023

(in thousands)

Decrease in outstanding borrowing amount for the Revolving Facility, net $ (598)

Increase in outstanding borrowing amount for the Revolving Facility, net $ 985

Increase in interest rates for the Term Loan (as defined below) 187

Increase in interest rates for the Revolving Facility (as defined below) 41

Other changes in interest expense 66

Net change in interest expense $ 1,213

Property taxes.

The $0.1 million, or 9%, decrease in property taxes was primarily due to the sale of properties in December 2022.

The $0.5 million, or 58%, increase in property taxes was primarily due to $0.4 million of changes in estimates during the three months ended June 30, 2023 of property taxes paid directly by us as a result of certain assets being designated as held for sale and a $0.1 million increase in property taxes due to the transfer of certain properties to new operators in March 2023 that do not make direct tax payments.

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.

During the three months ended June 30, 2023, we recognized an impairment charge of $21.4 million related to 12 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.

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.

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.

During the three months ended June 30, 2023 and March 31, 2023, we recognized $0.7 million and $1.0 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:

General and administrative expense decreased by $0.3 million as detailed below:

Three Months Ended Increase/(Decrease)

(in thousands) March 31, 2023 December 31, 2022

(in thousands) June 30, 2023 March 31, 2023

Cash compensation $ 1,267 $ 1,550 $ (283)

Share-based compensation 936 1,463 (527)

Incentive compensation 1,025 1,550 (525)

Share-based compensation 924 936 (12)

Professional services 704 474 230

1 unchanged sentence

Other expenses 522 347 175

Total change in general and administrative expense $ 5,061 $ 4,813 $ 248

Loss on sale of real estate.

General and administrative expense $ 4,718 $ 5,061 $ (343)

Gain (loss) on sale of real estate, net.

During the three months ended June 30, 2023, we recorded a $2.1 million gain on sale of real estate related to the sale of one SNF and one ALF, partially offset by a $0.1 million loss on sale of real estate related to the sale of one ALF.

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 June 30, 2023, we recorded a $1.9 million unrealized loss on three mortgage loans and one mezzanine loan receivable and a $0.3 million loss related to a loan origination fee paid.

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.

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022:

Three Months Ended Increase

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022:

Six Months Ended Increase

(Decrease) Percentage

March 31, 2023 March 31, 2022

June 30, 2023 June 30, 2022

(dollars in thousands)

8 unchanged sentences

General and administrative 9,779 10,193 (414) (4) %

(Loss) gain on sale of real estate (70) 186 (256) (138) %

Gain on sale of real estate, net 1,958 186 1,772 *

Unrealized losses on other real estate related investments, net (2,605) — (2,605) *

2 unchanged sentences

Rental income increased by $1.1 million as detailed below:

Three Months Ended Increase/(Decrease)

(in thousands) March 31, 2023 March 31, 2022

Six Months Ended

Increase/(Decrease)

(in thousands) June 30, 2023 June 30, 2022

Contractual cash rent $ 91,997 $ 91,453 $ 544

$ 45,461 $ 46,342 $ (881)

Tenant reimbursements 1,925 1,349 576

Total contractual rent (1)

93,922 92,802 1,120

Straight-line rent (14) 11 (25)

Adjustment for collectibility (2)

Total change in rental income $ 46,163 $ 46,007 $ 156

Rental income $ 93,908 $ 92,813 $ 1,095

(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.

Total contractual cash rent increased by $1.1 million due to a $1.6 million increase in rental rates for our existing tenants, an increase of $1.2 million from real estate investments made after January 1, 2022, a $1.0 million write-off of uncollectible rent, and a $0.6 million increase in tenant reimbursements, partially offset by a $3.2 million decrease in rental income related to lower cash collections from tenants on a cash basis method of accounting and a $0.1 million decrease due to dispositions.

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.

The $7.0 million increase in interest and other income was primarily due to an increase of $7.1 million due to the origination of loans receivable after January 1, 2022 and a prepayment penalty of $0.5 million during the six months ended June 30, 2023, partially offset by a decrease of $0.4 million of interest income due to a loan repayment and a decrease of $0.2 million of interest income due to a loan origination fee received during the six months ended June 30, 2022.

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.

The $1.2 million, or 5%, decrease in depreciation and amortization was primarily due to a decrease of $1.8 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 after January 1, 2022, partially offset by an increase of $0.9 million related to new real estate investments and capital improvements made after January 1, 2022 and a $0.4 million increase due to reclassifying assets out of held for sale during the three months ended December 31, 2022.

Interest expense.

Interest expense increased by $8.8 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

Change in interest expense for the six months ended June 30, 2023 compared to the six months ended June 30, 2022

(in thousands)

5 unchanged sentences

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.

The $0.4 million, or 15%, decrease in property taxes was primarily due to a decrease of $0.5 million due to the sale of properties after January 1, 2022, partially offset by an increase of $0.1 million due to the transfer of certain properties to new operators in March 2023 that do not make direct tax payments.

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.

During the six months ended June 30, 2023, we recognized an impairment charge of $23.3 million related to 15 properties classified as held for sale.

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.

During the six months ended June 30, 2022, we recognized an aggregate impairment charge of $61.4 million related to 21 properties.

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.

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 such provision for loan losses was recorded during the six months ended June 30, 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.

During the six months ended June 30, 2023 and June 30, 2022, we recognized $1.6 million and $0.5 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 $0.4 million as detailed below:

Three Months Ended Increase/(Decrease)

(in thousands) March 31, 2023 March 31, 2022

Six Months Ended

Increase/(Decrease)

(in thousands) June 30, 2023 June 30, 2022

Cash compensation $ 2,817 $ 3,436 $ (619)

Share-based compensation 936 1,521 (585)

Incentive compensation 2,575 1,650 925

Share-based compensation 1,860 2,915 (1,055)

Professional services 1,179 888 291

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Other expenses 868 816 52

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.

General and administrative expense $ 9,779 $ 10,193 $ (414)

Gain on sale of real estate, net.

During the six months ended June 30, 2023, we recorded a $2.1 million gain on sale of real estate related to the sale of one SNF and one ALF, partially offset by a $0.1 million loss on sale of real estate related to the sale of two ALFs.

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.

Unrealized losses on other real estate related investments, net.

No unrealized losses were recognized during the three months ended March 31, 2022.

During the six months ended June 30, 2023, we recorded a $2.8 million unrealized loss on three mortgage loans receivable and one mezzanine loan receivable and a $0.3 million loss due to a loan origination fee paid, 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 six months ended June 30, 2022.

Liquidity and Capital Resources

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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 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 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 $1.1 million, available borrowing capacity of $320.0 million under the Revolving Facility, approximately $132.8 million in forward equity sales which can be settled at any time through the second quarter of 2024, before commissions and offering expenses, and availability of $367.2 million under the ATM Program, each at June 30, 2023, will be sufficient to meet ongoing debt service requirements, dividend plans, operating lease obligations, capital expenditures, working capital requirements and ot her 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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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.

As of June 30, 2023, we are in compliance with all debt covenants on our outstanding indebtedness.

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,

For the Six Months Ended June 30,

Net cash provided by operating activities $ 66,986 $ 68,302

Net cash used in investing activities (176,644) (125,644)

Net cash used in financing activities (19,410) (3,816)

Net increase in cash and cash equivalents 14,892 6,691

Net cash provided by financing activities 97,625 67,714

Net (decrease) increase in cash and cash equivalents (12,033) 10,372

Cash and cash equivalents as of the beginning of period 13,178 19,895

Cash and cash equivalents as of the end of period $ 1,145 $ 30,267

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.

Net cash provided by operating activities decreased for the six months ended June 30, 2023 compared to the six months ended June 30, 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).

The net decrease of $1.3 million in cash provided by operating activities for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 is primarily due to an increase in cash paid for interest expense and operating expenses related to assets we plan to sell, have sold, or repurpose, partially offset by an increase in interest income received on our other real estate related investments, an increase in rental income received, and a decrease in cash paid for general and administrative expense.

Cash used in investing activities for the six months ended June 30, 2023 was primarily comprised of $200.0 million in acquisitions of real estate, investment in real estate related investments and other loans receivable and escrow deposits for potential acquisitions of real estate and $6.4 million of purchases of equipment, furniture and fixtures and improvements to real estate, partially offset by $15.3 million of principal payments received from our other real estate related investments and other loans receivable and $14.5 million in net proceeds from real estate sales.

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.

Our cash flows provided by financing activities for the six months ended June 30, 2023 were primarily comprised of $155.0 million in borrowings under our Revolving Facility (as defined below), partially offset by $55.2 million in dividends paid, a $1.5 million net settlement adjustment on restricted stock and $0.6 million in costs paid for the issuance of common stock.

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 Prior Credit Agreement (as defined below), partially offset by $52.8 million in dividends paid and a $4.5 million net settlement adjustment on restricted stock.

Material Cash Requirements

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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.

As of June 30, 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.

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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.

As of June 30, 2023, we had $200.0 million outstanding under the Term Loan and $280.0 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.

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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.

As of June 30, 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.

As of June 30, 2023, we had committed to fund expansions, construction and capital improvements at certain triple-net leased facilities totaling $14.2 million, of which $2.7 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.

See Note 11, Commitments and Contingencies, to our condensed consolidated financial statements included in this report for further i nformation 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

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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.

There have been no material changes in such critical accounting policies during the six months ended June 30, 2023.

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