What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-03 · 129 added, 90 removed, 251 unchanged (47% 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 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on Form 10-Q for the quarter ended March 31, 2023 and this report, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission (the “SEC”).

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 Reports on Form 10-Q for the quarters ended March 31, 2023 and June 30, 2023 and this report, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission (the “SEC”).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 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.

As of September 30, 2023, we owned, directly or through a joint venture, and leased to independent operators, 225 skilled nursing facilities (“SNFs”), multi-service campuses, assisted living facilities (“ALFs”) and independent living facilities (“ILFs”) consisting of 23,916 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 September 30, 2023, we also had other real estate related investments consisting of seven real estate secured loans receivable and one mezzanine loan receivable with an aggregate carrying value of $181.2 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 also partner with third-party institutional investors to invest in healthcare real estate through various joint

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

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

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

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

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

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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.

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 during, and have continued following, 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.

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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.

The tapering and/or end of these relief programs has adversely 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.

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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.

For example, Texas approved a $900 million general Medicaid rate increase as part of the overall state budget effective September 1, 2023, which will allow for the increase in its Medicaid rate to offset the expiration of the FMAP.

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 (“CMS”) approved its payment rate update to SNF reimbursements for fiscal 2024, which commenced October 1, 2023, and 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.

On September 1, 2023, CMS issued proposed rules regarding minimum staffing requirements and increased inspections at nursing homes in order to establish comprehensive nurse staffing requirements.

The proposed rule consists of three core staffing proposals:

(1) minimum nurse staffing standards of 0.55 hours per resident day for registered nurses and 2.45 hours of care from a nurse aid per resident per day;

(2) a requirement to have a registered nurse onsite 24 hours a day, seven days a week;

and (3) enhanced facility assessment requirements.

The proposed rule also includes a staggered implementation approach and possible hardship exemptions for select facilities.

Comments on the proposed rule had to be submitted by November 6, 2023.

It is uncertain when the proposed rules will be finalized and become effective, what the ultimate scope and timing of the staffing requirements will be thereunder, and whether any such requirements will be accompanied by additional funding to offset any increased costs associated with meeting these requirements for our operators.

Depending on the ultimate level of staffing required, an unfunded mandate to increase staff may have a material and adverse impact on the financial condition of our tenants.

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 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.

During the three and nine months ended September 30, 2023, we collected 97.5% and 96.9%, respectively, of contractual rents due from our operators excluding cash deposits.

In October 2023, we collected 99.3% 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.

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

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.

During the three months ended March 31, 2023, we recognized an impairment charge of $1.9 million on four facilities held for sale.

During the three months ended June 30, 2023, we recognized an impairment charge of $21.4 million on 12 facilities held for sale.

During the three months ended September 30, 2023, we recognized an impairment charge of $0.2 million on one facility held for sale.

These charges are reported in impairment of real estate investments in the condensed consolidated statements of operations.

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

During the three months ended September 30, 2023, we recognized an impairment charge of $8.0 million related to one SNF.

We wrote down its carrying value of $8.7 million to its estimated fair value of $0.7 million, which is included in real estate investments, net on our condensed consolidated balance sheets.

The fair value of the asset was based on comparable market transactions.

Asset Sales and Held for Sale Reclassifications

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,

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

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

2 unchanged sentences

Net carrying value — 47,444 14,506 48,217

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

Net (loss) gain on sale $ — $ (2,287) $ 1,958 $ (2,101)

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

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Impairment of real estate held for sale (23,508) —

June 30, 2023 $ 21,554 15

September 30, 2023 $ 21,341 15

On October 20, 2023, we closed on the sale of one ALF consisting of 135 beds located in Florida with a carrying value of $1.6 million, which approximated the net sales proceeds received.

The facility was classified as held for sale as of September 30, 2023.

New Lease Agreement

On October 24, 2023, the Company entered into a new master lease (the “New Ridgeline Lease”) with affiliates of Ridgeline Properties, LLC to lease two ALFs in New Jersey which were non-operational and under a short-term lease.

The New Ridgeline Lease has an initial term at the date of the lease of approximately 10 years from the facility opening date with two five-year renewal options and CPI-based rent escalators.

Annual cash rent under the new lease is approximately $1.0 million beginning on the first day of the second lease year.

Other Real Estate Investment Transactions

In March 2023, the Company received full repayment of the outstanding balance of a $15 million mezzanine loan receivable.

Recent Investments

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.

From January 1, 2023 through November 9, 2023, we acquired ten SNFs, one multi-service campus, and four ALFs for approximately $233.7 million, which includes estimated capitalized acquisition costs.

These acquisitions are expected to generate initial annual cash revenues of approximately $19.2 million and an initial blended yield of approximately 8.2% before the impact of any rent abatement.

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

From January 1, 2023 through November 9, 2023, we originated $45.3 million in mortgage loans.

These investments are expected to generate annual interest income of approximately $4.2 million and an initial blended yield of approximately 9.2%.

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”).

On September 15, 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 “New ATM Program”) and terminated our previous $500.0 million “at-the-market” equity offering program (the “Previous ATM Program” and together with the New ATM 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.

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.

From January 1, 2023 through November 9, 2023, we entered into ATM forward contracts under the ATM Program with a financial institution acting as a forward purchaser to sell an aggregate of 15,794,229 shares of common stock at a weighted average initial sales price of $19.87 per share before commissions and offering expenses.

During the three months ended September 30, 2023, we settled 10,893,229 shares outstanding under the ATM forward contracts at a weighted average sales price of $19.57 for net proceeds of $213.1 million.

For the remaining shares subject to the ATM forward contracts, we will not receive any proceeds from sales of those shares of common stock by the forward sellers until the forward contracts are settled.

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 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.

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

The following table summarizes the ATM Program activity under the ATM forward contracts and direct issuances for the three and nine months ended September 30, 2023 (in thousands, except per share amounts).

For the Three Months Ended For the Nine Months Ended

September 30, 2023 September 30, 2023

Number of shares 16,285 16,285

Average sales price per share $ 19.89 $ 19.89

Gross proceeds (1)

$ 323,886 $ 323,886

(1) Total gross proceeds is before $4.0 million of commissions paid to the sales agents and forward adjustments during both the three and nine months ended September 30, 2023, respectively, under the ATM Program.

As of September 30, 2023, 4,901,000 shares of common stock at the weighted average initial sales price of $20.00 per share as of September 30, 2023, before commissions and offering expenses, remain outstanding under the ATM forward contracts.

As of November 9, 2023 , w e had $496.0 million ava ilable for future issuances under the New ATM Program.

Results of Operations

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

Three Months Ended September 30, 2023 Compared to Three Months Ended June 30, 2023:

Three Months Ended Increase

(Decrease) Percentage

June 30, 2023 March 31, 2023

September 30, 2023 June 30, 2023

(dollars in thousands)

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General and administrative 5,519 4,718 801 17 %

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

Gain on sale of real estate, net — 2,028 (2,028) (100) %

Unrealized losses on other real estate related investments, net (5,251) (2,151) (3,100) 144 %

Net loss allocated to noncontrolling interests (11) — (11) *

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Three Months Ended Increase/(Decrease)

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

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

Contractual cash rent $ 49,234 $ 46,536 $ 2,698

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

Total contractual cash rent 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.

Total contractual cash rent increased by $3.5 million due to a $2.5 million increase in rental income from real estate investments made after April 1, 2023, a $0.8 million increase in tenant reimbursements, and a $0.4 million increase in rental rates for our existing tenants, partially offset by a $0.2 million decrease in rental income related to dispositions in June 2023.

Interest and other income.

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 $0.5 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.

The $0.9 million, or 22%, increase in interest and other income was primarily due to an increase of $1.0 million of interest income on new loan investments made after April 1, 2023 and an increase of $0.1 million of interest income on other loans due to a higher number of days during the three months ended September 30, 2023 compared to the three months ended June 30, 2023, partially offset by a decrease of $0.2 million of interest income on money market funds.

Depreciation and amortization.

The $0.3 million, or 3%, increase in depreciation and amortization was primarily due to an increase of $0.7 million due to acquisitions and capital improvements made after April 1, 2023, partially offset by a decrease of $0.3 million due to assets classified as held for sale and a decrease of $0.1 million due to assets becoming fully depreciated after April 1, 2023.

Interest expense.

Interest expense increased by $0.7 million as detailed below:

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

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

(in thousands)

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Property taxes.

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.

The $0.8 million, or 56%, increase in property taxes was primarily due to a $0.6 million increase related to acquisitions made after April 1, 2023 and a $0.2 million increase due to property taxes expected to be paid directly by us as a result of certain assets being designated as held for sale.

Impairment of real estate investments.

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.

During the three months ended September 30, 2023, we recognized impairment charges of $8.0 million related to one property held for investment and $0.2 million related to one property 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, 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.

Property operating expenses.

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.

During the three months ended September 30, 2023 and June 30, 2023, we recognized $1.2 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 decreased by $0.3 million as detailed below:

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

Three Months Ended Increase/(Decrease)

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

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

Cash compensation $ 1,439 $ 1,267 $ 172

Incentive compensation 1,025 1,550 (525)

Share-based compensation 1,519 924 595

Incentive compensation 1,125 1,025 100

Professional services 604 704 (100)

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General and administrative expense $ 5,519 $ 4,718 $ 801

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

Gain 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.

No gain or loss on sale of real estate was recognized during the three months ended September 30, 2023.

Unrealized losses on other real estate related investments, net.

During the three months ended September 30, 2023, we recorded a $5.3 million unrealized loss on four mortgage loans receivable and one mezzanine loan receivable.

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.

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

Six Months Ended Increase

The unrealized loss is due to rising interest rates.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022:

Nine Months Ended Increase

(Decrease) Percentage

June 30, 2023 June 30, 2022

September 30, 2023 September 30, 2022

(dollars in thousands)

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General and administrative 15,298 15,352 (54) — %

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

Gain (loss) on sale of real estate, net 1,958 (2,101) 4,059 (193) %

Unrealized losses on other real estate related investments, net (7,856) (4,706) (3,150) 67 %

Net loss allocated to noncontrolling interests (11) — (11) *

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Rental income increased by $5.3 million as detailed below:

Six Months Ended

Nine Months Ended

Increase/(Decrease)

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

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

Contractual cash rent $ 141,231 $ 138,768 $ 2,463

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Straight-line rent (21) 14 (35)

Adjustment for collectibility (2)

Rental income $ 145,126 $ 139,831 $ 5,295

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

Total contractual cash rent 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.

Total contractual cash rent increased by $4.4 million due to an increase of $4.9 million from real estate investments made after January 1, 2022, a $3.9 million increase in rental rates for our existing tenants and a $1.9 million increase in tenant reimbursements, partially offset by a $5.5 million decrease in rental income related to lower cash collections from tenants on a cash basis method of accounting and a $0.8 million decrease due to dispositions after January 1, 2022.

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

Interest and other income.

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.

The $8.4 million increase in interest and other income was primarily due to an increase of $8.9 million due to the origination of loans receivable after January 1, 2022, a prepayment penalty of $0.4 million during the nine months ended September 30, 2023, and an increase of $0.2 million of interest income on money market funds, partially offset by a decrease of $0.9 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 nine months ended September 30, 2022.

Depreciation and amortization.

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.

The $0.4 million, or 1%, decrease in depreciation and amortization was primarily due to a decrease of $2.4 million due to assets becoming fully depreciated after January 1, 2022 and a decrease of $1.0 million due to classifying assets as held for sale after January 1, 2022, partially offset by an increase of $2.3 million related to acquisitions and capital improvements made after January 1, 2022 and a $0.7 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 $12.2 million as detailed below:

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

Change in interest expense for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

(in thousands)

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Property taxes.

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.

The $1.1 million, or 32%, increase in property taxes was due to a $0.9 million increase due to property taxes expected to be paid directly by us as a result of certain assets being designated as held for sale, a $0.7 million increase related to acquisitions made after January 1, 2022, an increase of $0.2 million due to reassessments, and an increase of $0.2 million due to the transfer of certain properties to new operators in March 2023 that do not make direct tax payments, partially offset by a decrease of $0.9 million due to the sale of properties after January 1, 2022.

Impairment of real estate investments.

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.

During the nine months ended September 30, 2023, we recognized an impairment charge of $23.1 million related to properties classified as held for sale, $8.0 million related to properties held for investment, and $0.4 million related to properties that were sold.

See above under “Recent Developments - Impairment of Real Estate Assets, Assets Held for Sale, and Asset Sales” for additional information.

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

During the nine months ended September 30, 2022, we recognized an aggregate impairment charge of $73.7 million related to properties held for sale.

Provision for loan losses, net.

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

No such provision for loan losses was recorded during the six months ended June 30, 2023.

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

No such provision for loan losses was recorded during the nine months ended September 30, 2023.

Property operating expenses.

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.

During the nine months ended September 30, 2023 and 2022, we recognized $2.9 million and $4.3 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 $0.1 million as detailed below:

Six Months Ended

Nine Months Ended

Increase/(Decrease)

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

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

Cash compensation $ 4,256 $ 4,767 $ (511)

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General and administrative expense $ 15,298 $ 15,352 $ (54)

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.

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

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

Unrealized losses on other real estate related investments, net.

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.

During the nine months ended September 30, 2023, we recorded an unrealized loss of $8.1 million related to five mortgage loans and one mezzanine loan receivable due to rising interest rates and a $0.3 million loss due to a loan origination fee paid, partially offset by a reversal of a previously recognized unrealized loss of $0.5 million related to the repayment of one mezzanine loan receivable.

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

The unrealized loss is due to rising interest rates.

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 $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 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 $3.5 million, available borrowing capacity of $600.0 million under the Revolving Facility, 4,901,000 shares of common stock subject to forward equity sale contracts at the weighted average initial sales price of $20.00 per share, before commissions and offering expenses, which can be settled at any time before the one year anniversary of the applicable forward contract, and availability of $496.0 million under the ATM Program, each at September 30, 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.

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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.

On September 15, 2023, we entered into the New 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.

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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.

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

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.

As of September 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 Six Months Ended June 30,

For the Nine Months Ended September 30,

Net cash provided by operating activities $ 112,096 $ 110,672

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Net cash provided by financing activities 110,516 16,053

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

Net decrease in cash and cash equivalents (9,693) (15,034)

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

Cash and cash equivalents as of the end of period $ 3,485 $ 4,861

Net cash provided by operating activities decreased for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Net cash provided by operating activities increased for the nine months ended September 30, 2023 compared to the nine months ended September 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 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.

The net increase of $1.4 million in cash provided by operating activities for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 is primarily due to 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, partially offset by an increase in cash paid for interest expense.

Cash used in investing activities for the nine months ended September 30, 2023 was primarily comprised of $253.3 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 $9.1 million of purchases of equipment, furniture and fixtures and improvements to real estate, partially offset by $15.7 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 nine months ended September 30, 2022 was primarily comprised of $171.6 million in acquisitions of real estate and investments in real estate related investments and other loans receivable and $5.5 million of purchases of equipment, furniture and fixtures and improvements to real estate, partially offset by $34.1 million in net proceeds from real estate sales and $1.2 million of principal payments received from other loans receivable.

Our cash flows provided by financing activities for the nine months ended September 30, 2023 were primarily comprised of $319.0 million in net proceeds from the issuance of common stock and $1.1 million in contributions from noncontrolling interests, partially offset by $125.0 million in net payments under our Revolving Facility (as defined below), $83.1 million in dividends paid and a $1.5 million net settlement adjustment on restricted stock.

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

Material Cash Requirements

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

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 June 30, 2023, we were in compliance with all applicable financial covenants under the indenture governing the Notes.

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) that guarantee obligations under the Second Amended Credit Facility (as defined below).

As of September 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.

Unsecured Revolving Credit Facility and Term Loan

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.

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

On October 10, 2023, we entered into the First Amendment to the Second Amended Credit Agreement with KeyBank National Association (the “First Amendment”).

The First Amendment restates the definition of Consolidated Total Asset Value to include net proceeds from at-the-market forward commitments executed but not yet closed as of the relevant date as if such proceeds had actually been received.

As of September 30, 2023, we had $200.0 million outstanding under the Term Loan and no borrowings 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 June 30, 2023, we were in compliance with all applicable financial covenants under the Second Amended Credit Agreement.

As of September 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 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.

As of September 30, 2023, we had committed to fund expansions, construction and capital improvements at certain triple-net leased facilities totaling $11.8 million, of which $3.2 million is subject to rent increase at the time of funding.

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

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

See Note 8, Equity, to our condensed consolidated financial statements included in this report for a summary of the cash dividends per share of our common stock declared by our board of directors for the three months ended June 30, 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 six months ended June 30, 2023.

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