CareTrust REIT, Inc. 10-K

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The discussion below contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those which are discussed in the section titled “Risk Factors.” Also see “Statement Regarding Forward-Looking Statements” preceding Part I. The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and the notes thereto. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows: • Overview • Recent Developments • Results of Operations • Liquidity and Capital Resources • Critical Accounting Estimates • Impact of Inflation Overview CareTrust REIT is a self-administered, publicly-traded REIT engaged in the ownership, acquisition, financing, development and leasing of skilled nursing, seniors housing and other healthcare-related properties. As of December 31, 2023, we owned, directly or indirectly through joint ventures, and leased to independent operators 226 skilled nursing facilities (“SNFs”), multi-service campuses, assisted living facilities (“ALFs”) and independent living facilities (“ILFs”), consisting of 23,928 operational beds and units located in 28 states with the highest concentration of properties by rental income located in California and Texas. As of December 31, 2023, we also had other real estate related investments consisting of one preferred equity investment, eight real estate secured loans receivable and one mezzanine loan receivable with a carrying value of $180.4 million. Recent Developments Market Trends and Uncertainties Current macroeconomic conditions, particularly inflation (including higher wages and supply costs), elevated interest rates and related changes to consumer spending, including, but not limited to, causing individuals to delay or defer moves to seniors housing, has adversely impacted and could continue to adversely impact our tenants’ ability to meet some of their financial obligations to us. Higher interest rates also increase our costs of capital to finance acquisitions and increase our borrowing costs. In addition, current macroeconomic conditions and the resulting market volatility may adversely impact our ability to sell properties on acceptable terms, if at all, which could result in additional impairment charges. As a result of the above factors, together with the additional protective measures taken by our tenants in response to and following the COVID-19 pandemic, our tenants are continuing to experience increased operating costs at their facilities. Our tenants are also experiencing labor shortages resulting in reduced admissions and higher operating costs. 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 and are reaching pre-COVID occupancy levels for most 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 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 twelve months ended December 31, 2023, we collected 100.0% and 97.7% of contractual rents due from our operators excluding cash deposits, respectively. 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 have also restructured tenants’ long-term obligations. In the event our tenants are unable to satisfy their obligations to 41 Table of Contents 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 would be adversely impacted and we may incur additional expenses or obligations and be required to recognize additional impairment charges. For more information regarding the potential impact of public health crises, including COVID-19, and macroeconomic conditions on our business, see “Risk Factors” in Item 1A of this report. Regulatory Updates 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. On October 13, 2023, California Senate Bill No. 525 (“SB 525”) was signed into law, requiring a substantial increase in the minimum wage for workers operating in certain health care facilities. As a result of SB 525, certain health care facilities (including licensed skilled nursing facilities) operating in California are required to increase the wages of their covered health care employees to at least $21 per hour from June 1, 2024 to May 31, 2026, $22 or $23 per hour (depending on facility type) from June 1, 2026 to May 31, 2028, and $25 per hour after June 1, 2028. Recent Investments The following table summarizes the Company’s acquisitions from January 1, 2023 through February 8, 2024 (dollars in thousands): Type of Property Purchase Price (1) Initial Annual Cash Rent (2) Number of Properties Number of Beds/Units (3) Skilled nursing (4) $ 169,181 $ 13,764 10 1,256 Multi-service campuses 25,276 1,916 1 168 Assisted living (5) 50,354 4,517 5 327 Total $ 244,811 $ 20,197 16 1,751 (1) Purchase price includes capitalized acquisition costs. (2) Initial annual cash rent represents initial cash rent for the first twelve months excluding the impact of straight-line rent or rent abatement in the first one to three months, if applicable. (3) The number of beds/units includes operating beds at acquisition date. (4) Includes three SNFs held through joint ventures. See Note 3, Real Estate Investments, Net , and Note 11, Variable Interest Entities for additional information. (5) Includes on ALF held through a joint venture. See Note 14, Subsequent Events , for additional information. 42 Table of Contents The following table summarizes other real estate related investments, by the Company from January 1, 2023 through February 8, 2024 (dollars in thousands): Investment Type Investment Annual Initial Interest Income (1) Number of Properties Number of Beds/Units (2) Mortgage secured loans receivable $ 51,584 $ 4,806 9 772 Mezzanine loans receivable 52,165 7,119 N/A N/A Preferred equity 1,782 267 N/A N/A Total $ 105,531 $ 12,192 9 772 (1) Represents annualized acquisition-date interest income on any mortgage secured loans receivable and mezzanine loans, less subservicing fees, if applicable. For floating rate loans, interest income has been calculated using the benchmark rate floor. (2) The number of beds/units includes operating beds at the investment date. At-The-Market Offering of Common Stock On February 24, 2023, we entered into an 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 “Previous ATM Program”). On September 15, 2023, we terminated the Previous ATM Program and 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 together with the Previous 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. There were no outstanding ATM forward contracts that had not settled as of December 31, 2023. The following tables summarize the ATM Program activity (or activity under any predecessor at-the-market equity offering programs) for the year ended December 31, 2023 (in thousands, except per share amounts). For the Year Ended December 31, 2023 Number of shares 30,869 Average sales price per share $ 20.86 Gross proceeds (1) $ 643,802 (1) Total gross proceeds is before $8.3 million of commissions paid to the sales agents and forward adjustments during the year ended December 31, 2023, under the ATM Program. As of December 31, 2023, we had $274.1 million available for future issuances under the ATM Program. Impairment of Real Estate Assets, Assets Held for Sale, and Asset Sales Impairment of Real Estate Assets During the year ended December 31, 2023, we recognized aggregate impairment charges of $36.3 million, of which $26.8 million related to properties held for sale, $8.0 million related to properties held for investment, and $1.5 million related to properties that were sold. 43 Table of Contents Asset Sales and Held for Sale Reclassifications The following table summarizes our dispositions for the twelve months ended December 31, 2023 (dollars in thousands): Twelve Months Ended December 31, 2023 Number of facilities 5 Net sales proceeds $ 18,313 Net carrying value 16,095 Net gain on sale $ 2,218 The following table summarizes our assets held for sale activity for the periods presented (dollars in thousands): Net Carrying Value Number of Facilities December 31, 2022 $ 12,291 5 Additions to assets held for sale 47,114 14 Assets sold (16,095) (5) Impairment of real estate held for sale (28,299) — December 31, 2023 (1) $ 15,011 14 (1) Includes two facilities sold subsequent to December 31, 2023. Subsequent to December 31, 2023, we closed on the sale of one SNF and one ALF with an aggregate carrying value of $1.0 million, which approximated the net sales proceeds received. These facilities were classified as held for sale as of December 31, 2023. 44 Table of Contents Results of Operations Operating Results Our primary business consists of acquiring, developing, financing and owning real property to be leased to third party tenants in the healthcare sector. Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 Year Ended December 31, Increase (Decrease) Percentage Difference 2023 2022 (dollars in thousands) Revenues: Rental income $ 198,599 $ 187,506 $ 11,093 6 % Interest and other income 19,171 8,626 10,545 122 % Expenses: Depreciation and amortization 51,199 50,316 883 2 % Interest expense 40,883 30,008 10,875 36 % Property taxes 6,170 4,333 1,837 42 % Impairment of real estate investments 36,301 79,062 (42,761) (54) % Provision for loan losses, net — 3,844 (3,844) (100) % Property operating expenses 3,423 5,039 (1,616) (32) % General and administrative 21,805 20,165 1,640 8 % Other (loss) income: Gain (loss) on sale of real estate, net 2,218 (3,769) 5,987 (159) % Unrealized loss on other real estate related investments, net (6,485) (7,102) 617 (9) % Net loss attributable to noncontrolling interests Net loss attributable to noncontrolling interests (13) — (13) * • Not meaningful Rental income. Rental income increased by $11.1 million as detailed below: Year Ended (in thousands) December 31, 2023 December 31, 2022 Increase/(Decrease) Contractual cash rent $ 192,746 $ 186,131 $ 6,615 Tenant reimbursements 5,498 2,775 2,723 Total contractual rent 198,244 188,906 9,338 Straight-line rent (29) 17 (46) Below market lease 384 — 384 Adjustment for collectibility — (1,417) 1,417 Total amount in rental income $ 198,599 $ 187,506 $ 11,093 Total contractual rent includes initial contractual cash rent and tenant reimbursements, as adjusted for applicable rental escalators and rent increases due to capital expenditures funded by us. 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 $9.3 million due to an increase of $9.1 million in contractual cash rent from real estate investments made after January 1, 2022, an increase of $5.7 million from increases in rental rates for our existing tenants and a $2.7 million increase in tenant reimbursements, partially offset by a $7.8 million decrease in rental income related to certain tenants on a cash basis method of accounting and a $0.4 million decrease due to dispositions. During the year ended December 31, 2022, the Company wrote off $1.4 million of uncollectible rent. 45 Table of Contents Interest and other income. The $10.5 million, or 122%, increase in interest and other income is primarily due to an increase of $10.3 million related to the origination of loans receivable subsequent to January 1, 2022, an increase of $1.3 million in interest income on money market funds and an increase of $0.6 million related to prepayment penalties, partially offset by a decrease of $1.4 million related to repayments of loans receivable and a decrease of $0.3 million related to a loan origination fee during the year ended December 31, 2022. See above under “Recent Developments” for additional information on the origination of loans receivable. Depreciation and amortization. Depreciation and amortization expense increased $0.9 million, or 2%, for the year ended December 31, 2023 to $51.2 million compared to $50.3 million for the year ended December 31, 2022. The $0.9 million increase in depreciation and amortization was primarily due to an increase of $4.0 million related to new real estate investments and capital improvements made after January 1, 2022 and an increase of $1.1 million related to properties reclassified to held for investment during the year ended December 31, 2022, partially offset by a decrease in depreciation of $2.8 million due to assets becoming fully depreciated after January 1, 2022 and a $1.4 million decrease from assets sold and classified as held for sale. Interest expense. Interest expense increased by $10.9 million as detailed below: Change in interest expense for the year ended December 31, 2023 compared to the year ended December 31, 2022 (in thousands) Increase in interest rates for the senior unsecured term loan $ 6,826 Increase in interest rates for the unsecured revolving credit facility 5,275 Decrease in outstanding borrowing amount for the unsecured revolving facility, net (1,607) Other changes in interest expense 381 Total change to interest expense $ 10,875 Property taxes . Property taxes increased $1.8 million, or 42%, for the year ended December 31, 2023 compared to December 31, 2022. The increase was primarily due to a $1.4 million increase in property taxes due to new real estate investments made after January 1, 2022, 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 $0.4 million increase in property taxes due to existing operators that no longer make direct tax payments and an increase of $0.2 million of property taxes due to reassessments and increased effective tax rates, partially offset by a decrease of $1.0 million related to properties sold after January 1, 2022 and a decrease of $0.1 million due to the transfer of certain properties to new operators that make direct tax payments. Impairment of real estate investments. During the twelve months ended December 31, 2023, we recognized aggregate impairment charges of $36.3 million, of which $26.8 million related to properties held for sale, $8.0 million related to properties held for investment, and $1.5 million related to properties that were sold. During the year ended December 31, 2022, we recognized aggregate impairment charges of $79.1 million, of which $14.4 million related to properties held for sale, $19.7 million related to properties held for investment, and $45.0 million related to properties that were sold. See above under “Recent Developments” for additional information. Provision for loan losses, net. During the year ended December 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 provision for loan losses was recognized during the year ended December 31, 2023. Property operating expenses. During the years ended December 31, 2023 and 2022, we recognized $3.4 million and $5.0 million, respectively, of property operating expenses related to assets we plan to sell or repurpose, re-tenant, or have sold. 46 Table of Contents General and administrative expense. General and administrative expense increased by $1.6 million as detailed below: Year Ended (in thousands) December 31, 2023 December 31, 2022 Increase/(Decrease) Cash compensation $ 5,636 $ 6,107 $ (471) Incentive compensation 5,350 3,550 1,800 Share-based compensation 5,153 5,758 (605) Professional services 2,399 1,897 502 Other administrative expense 1,041 923 118 Taxes and insurance 908 897 11 Other expenses 1,318 1,033 285 Total change in general and administrative expense $ 21,805 $ 20,165 $ 1,640 Gain (loss) on sale of real estate, net . During the year ended December 31, 2023, we recorded a $2.3 million gain on sale of real estate related to the sale of 2 ALFs and one SNF, partially offset by a $0.1 million loss on sale of real estate related to the sale of two ALFs. During the year ended December 31, 2022, we recorded a $3.8 million loss on sale of real estate related to the sale of six SNFs, five ALFs 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 loss on other real estate related investments, net . During the year ended December 31, 2023, we recorded an unrealized loss of $8.1 million on our secured and mezzanine loans receivable due to rising interest rates and a $0.3 million loss due to a loan origination fee paid, partially offset by unrealized gains of $0.7 million due to a decrease in projected forward interest rates and a reversal of a previously recognized unrealized loss of $1.2 million related to the repayment of one mezzanine loan receivable and the partial repayment of one mortgage loan receivable. During the year ended December 31, 2022, we recorded a $7.1 million unrealized loss on our secured and mezzanine loans receivable. The unrealized loss was due to rising interest rates. Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 For discussion related to the results of operations and changes in financial condition for fiscal 2022 compared to fiscal 2021, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our fiscal 2022 Annual Report on Form 10-K, which was filed with the SEC on February 9, 2023. Liquidity and Capital Resources To qualify as a REIT for federal income tax purposes, we are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, to our stockholders on an annual basis. Accordingly, we intend to make, but are not contractually bound to make, regular quarterly dividends to common stockholders from cash flow from operating activities. All such dividends are at the discretion of our board of directors. Our short-term liquidity requirements consist primarily of operating and interest expenses directly associated with our properties, including: • interest expense and scheduled debt maturities on outstanding indebtedness; • general and administrative expenses; • dividend plans; • operating lease obligations; and • capital expenditures for improvements to our properties. Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions and other investments (including mortgage and mezzanine loan originations), capital expenditures, and scheduled debt maturities. We intend to invest in and/or develop additional healthcare and seniors housing properties as suitable opportunities arise and so long as adequate sources of financing are available. We expect that future investments in and/or development of properties, including any improvements or renovations of current or newly-acquired properties, will depend on and will be financed by, in whole or in part, our existing cash, borrowings available to us under the Second Amended Credit Facility (as defined below), future borrowings or the proceeds from sales of shares of our common stock pursuant to our ATM Program or additional issuances of 47 Table of Contents common stock or other securities. In addition, we may seek financing from U.S. government agencies, including through Fannie Mae and the U.S. Department of Housing and Urban Development, in appropriate circumstances in connection with acquisitions and refinancing of existing mortgage loans. We believe that our expected operating cash flow from rent collections and interest payments on our other real estate related investments, together with o ur cash balance of $294.4 million, available borrowing capacity of $600.0 million under the Revolving Facility (as defined below), and availability of $274.1 million under the ATM Program, each at December 31, 2023, will be sufficient to meet ongoing debt service requirements, dividend plans, operating lease obligations, capital expenditures, working capital requirements and other needs for at least the next 12 months. We expect to meet our long-term liquidity needs with cash flows from operations and financing arrangements. While we are currently pursuing the sale, re-tenanting or repurposing of certain of our assets in connection with our ongoing review and monitoring of our investment portfolio, we currently do not expect to sell any of our properties to meet liquidity needs, although we may do so in the future. Our quarterly cash dividend and any failure of our operators to pay rent or of our borrowers to make interest or principal payments may impact our available capital resources. We have filed an automatic shelf registration statement with the U.S. Securities and Exchange Commission that expires in February 2026 and at or prior to such time we expect to file a new shelf registration statement. The shelf registration statement allows us or certain of our subsidiaries, as applicable, to offer and sell shares of common stock, preferred stock, warrants, rights, units and debt securities through underwriters, dealers or agents or directly to purchasers, in one or more offerings on a continuous or delayed basis, in amounts, at prices and on terms we determine at the time of the offering. On 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. See “At-The-Market Offering of Common Stock” for information regarding activity under the ATM Program. Although we are subject to restrictions on our ability to incur indebtedness, we expect that we will be able to refinance existing indebtedness or incur additional indebtedness for acquisitions or other purposes, if needed. However, there can be no assurance that we will be able to refinance our indebtedness, incur additional indebtedness or access additional sources of capital, such as by issuing common stock or other debt or equity securities, on terms that are acceptable to us or at all. We currently are in compliance with all debt covenants on our outstanding indebtedness. Cash Flows The following table presents selected data from our consolidated statements of cash flows for the years presented: Year Ended December 31, 2023 2022 (dollars in thousands) Net cash provided by operating activities $ 154,767 $ 144,415 Net cash used in investing activities (267,815) (127,400) Net cash provided by (used in) financing activities 394,318 (23,732) Net increase (decrease) in cash and cash equivalents 281,270 (6,717) Cash and cash equivalents as of the beginning of period 13,178 19,895 Cash and cash equivalents as of the end of period $ 294,448 $ 13,178 Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 Net cash provided by operating activities for the year ended December 31, 2023 was $154.8 million compared to $144.4 million for the year ended December 31, 2022, an increase of $10.4 million. Operating cash inflows are derived primarily from the rental payments received under our lease agreements, including as a result of new investments, and interest payments received 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 $10.4 million in cash provided by operating activities for the year ended December 31, 2022 is primarily due to an increase in rental income received, interest income received on our other real estate related investments, and a decrease in cash paid for operating expenses related to assets we plan to sell, have sold, or repurpose, partially offset by an increase in cash paid for interest expense. 48 Table of Contents Cash used in investing activities for the year ended December 31, 2023 was primarily comprised of $297.9 million in acquisitions of real estate and investments in real estate related investments and other loans receivable, $11.0 million of purchases of equipment, furniture and fixtures and improvements to real estate, and $1.8 million in preferred equity investments, partially offset by $26.5 million of payments received on real estate related investments and other loans receivable and $16.3 million in net proceeds from real estate sales. Cash used in investing activities for the year ended December 31, 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 $7.3 million of purchases of equipment, furniture and fixtures and improvements to real estate, partially offset by $6.3 million of payments received from our other loans receivable and $45.1 million in net proceeds from real estate sales. Our cash flows provided by financing activities for the year ended December 31, 2023 were primarily comprised of $634.4 million of net proceeds from the issuance of common stock under the ATM Program and $1.9 million in net contributions from noncontrolling interests, partially offset by $125.0 million in net payments under our Revolving Credit Facility (as defined below), $115.5 million in dividends paid and $1.5 million in net settlement adjustment on restricted stock. Our cash flows used in financing activities for the year ended December 31, 2022 were primarily comprised of $106.1 million in dividends paid, $5.4 million in payments of deferred financing costs and a $4.5 million net settlement adjustment on restricted stock, partially offset by $47.2 million of net proceeds from the issuance of common stock under the Prior ATM Program and $45.0 million in net borrowings under our Revolving Facility. Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 For discussion related to the cash flows for fiscal 2022 compared to fiscal 2021, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our fiscal 2022 Annual Report on Form 10-K, which was filed with the SEC on February 9, 2023. Material Cash Requirements Our material cash requirements from known contractual and other obligations include: 3.875% Senior Unsecured Notes due 2028 On June 17, 2021, our wholly owned subsidiary, CTR Partnership, L.P. (the “Operating Partnership”), and its wholly owned subsidiary, CareTrust Capital Corp. (together with the Operating Partnership, the “Issuers”), completed a private offering of $400.0 million aggregate principal amount of 3.875% Senior Notes due 2028 (the “Notes”). The Notes mature on June 30, 2028. The Notes accrue interest at a rate of 3.875% per annum payable semiannually in arrears on June 30 and December 30 of each year, commencing on December 30, 2021. The obligations under the Notes are guaranteed, jointly and severally, on an unsecured basis, by us and all of our subsidiaries (other than the Issuers) that guarantee obligations under the Second Amended Credit Facility (as defined below). As of December 31, 2023, we were in compliance with all applicable financial covenants under the indenture governing the Notes. See Note 7, Debt, to our 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 (as amended from time to time, 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 substantially all of our subsidiaries. The Second Amended Credit Agreement, which amends and restates our amended and restated credit and guaranty agreement, dated as of February 8, 2019 (as amended, the “Prior Credit Agreement”) provides for: (i) an unsecured revolving credit facility (the “Revolving Facility”) with revolving commitments in an aggregate principal amount of $600.0 million, including a letter of credit subfacility for 10% of the then available revolving commitments and a swingline loan subfacility for 10% of the then available revolving commitments and (ii) the continuation of the unsecured term loan credit facility which was previously extended under the Prior Credit Agreement (the “Term Loan” and together with the Revolving Facility, the “Second Amended Credit Facility”) in an aggregate principal amount of $200.0 million. Future borrowings under the Second Amended Credit Facility will be used for working capital purposes, for capital expenditures, to fund acquisitions and for general corporate purposes. 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 49 Table of Contents 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 December 31, 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, two, six-month extension options. The Term Loan has a maturity date of February 8, 2026. The interest rates applicable to loans under the Revolving Facility are, at the Operating Partnership’s option, equal to either a base rate plus a margin ranging from 0.10% to 0.55% per annum or Adjusted Term SOFR or Adjusted Daily Simple SOFR (each as defined in the Second Amended Credit Agreement) plus a margin ranging from 1.10% to 1.55% per annum based on the debt to asset value ratio of the Company and our consolidated subsidiaries (subject to decrease at the Operating Partnership’s election if we obtain certain specified investment grade ratings on our senior long-term unsecured debt). The interest rates applicable to loans under the Term Loan are, at the Operating Partnership’s option, equal to either a base rate plus a margin ranging from 0.50% to 1.20% per annum or Adjusted Term SOFR or Adjusted Daily Simple SOFR plus a margin ranging from 1.50% to 2.20% per annum based on the debt to asset value ratio of the Company and our consolidated subsidiaries (subject to decrease at the Operating Partnership’s election if we obtain certain specified investment grade ratings on our senior long-term unsecured debt). In addition, the Operating Partnership will pay a facility fee on the revolving commitments under the Revolving Facility ranging from 0.15% to 0.35% per annum, based on the debt to asset value ratio of the Company and our consolidated subsidiaries (unless we obtain certain specified investment grade ratings on our senior long-term unsecured debt and the Operating Partnership elects to decrease the applicable margin as described above, in which case the Operating Partnership will pay a facility fee on the revolving commitments ranging from 0.125% to 0.30% per annum based off the credit ratings of our senior long-term unsecured debt). As of December 31, 2023, we were in compliance with all applicable financial covenants under the Second Amended Credit Agreement. See Note 7, Debt, to our consolidated financial statements included in this report for further information about the Second Amended Credit Agreement. Capital Expenditures As of December 31, 2023, we had committed to fund expansions, construction, capital improvements and ESG incentives at certain triple-net leased facilities tot aling $9.2 million, of which $2.4 million is s ubject to rent increase at the time of funding. We expect to fund the capital expenditures in the next one to two years. See Note 12, Commitments and Contingencies, to our consolidated financial statements included in this report for further information regarding our obligation to finance certain capital expenditures under our triple-net leases. Dividend Plans We are required to pay dividends in order to maintain our REIT status, and we expect to make quarterly dividend payments in cash with the annual dividend amount no less than 90% of our annual REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. See Note 8, Equity, to our consolidated financial statements included in this report for a summary of the cash dividends per share of our common stock declared by our board of directors for 2023, 2022 and 2021. Critical Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that the assumptions and estimates used in preparation of the underlying consolidated financial statements are reasonable. Actual results, however, could differ from those estimates and assumptions. Accounting estimates are deemed critical if they involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Below is a summary of the critical accounting estimates used in the preparation of our consolidated financial statements. For a discussion of our significant accounting policies, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in this report. Impairment of Long-Lived Assets. At each reporting period, we evaluate our real estate investments held for use for potential impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be 50 Table of Contents recoverable. The judgment regarding the existence of impairment indicators, used to determine if an impairment assessment is necessary, is based on factors such as, but not limited to, market conditions, operator performance and legal structure. If indicators of impairment are present, we evaluate the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying facilities. The most significant inputs to the undiscounted cash flows include, but are not limited to, historical and projected facility level financial results, a lease coverage ratio, the intended hold period by us, and a terminal capitalization rate. The analysis is also significantly impacted by determining the lowest level of cash flows, which generally would be at the master lease level of cash flows. Provisions for impairment losses related to long-lived assets are recognized when expected future undiscounted cash flows are determined to be less than the carrying values of the assets. The impairment is measured as the excess of carrying value over fair value. The fair value of the real estate investment is based on current market conditions and considers matters such as the forecasted operating cash flows, lease coverage ratios, capitalization rates, and, where applicable, terms of recent lease agreements or the results of negotiations with prospective tenants. We classify our real estate investments as held for sale when the applicable criteria have been met, which includes a formal plan to sell the properties that is expected to be completed within one year, among other criteria. Upon designation as held for sale, we write down the excess of the carrying value over the estimated fair value less costs to sell, resulting in an impairment of the real estate investments, if necessary, and cease depreciation. The fair value of the assets held for sale is based on estimated sales prices, which are considered to be Level 3 measurements within the fair value hierarchy. Estimated sales prices are determined using a market approach (comparable sales model), which relies on certain assumptions by management, including: (i) comparable market transactions, (ii) estimated prices per unit, and (iii) binding agreements for sales and non-binding offers to purchase from unrelated third-parties. There are inherent uncertainties in making these assumptions. If circumstances arise that previously were considered unlikely and, as a result, we decide not to sell a real estate investment previously classified as held for sale or otherwise no longer meets the held for sale criteria, the respective assets are reclassified as real estate investments held for use. A real estate investment that is reclassified is measured and recorded individually at the lower of (a) its carrying amount before the real estate investment was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the real estate investment been continuously classified as held for use, or (b) the fair value at the date of the decision not to sell or change in circumstances that led to the real estate investment no longer meeting the criteria of held for sale. The fair value of the real estate investment is determined in a similar manner to the fair value determination for real estate investments held for use described above. Our ability to accurately estimate future cash flows and estimate and allocate fair values impacts the timing and recognition of impairments. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on financial results. Given the impacts of current macroeconomic events, the projected cash flows that we use to assess fair value for purposes of impairment testing are subject to greater uncertainty than normal. If in the future we reduce our estimate of cash flow projections, we may need to impair our real estate assets. We have not materially changed the assumptions used in the analysis during the year ended December 31, 2023. Revenue Recognition. We recognize lease revenue in accordance with ASC 842, Leases . See Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements for further detail. Our assessment of collectibility of tenant receivables includes a binary assessment of whether or not substantially all of the amounts due under a tenant’s lease agreement are probable of collection. This assessment involves significant judgment by management and considers the operator’s performance and anticipated trends, payment history, and the existence and creditworthiness of guarantees, among other factors, in making this determination. For such leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term, if applicable. For such leases that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectibility determination. Management’s judgement can impact the timing of write-offs and recovery adjustments. We did not materially change the assumptions used in the analysis during the year ended December 31, 2023. Fair Value of Other Real Estate Related Investments. We have elected the fair value option for our other real estate related investments for which such election is permitted, as provided for under ASC 825, Financial Instruments (“ASC 825”). For financial instruments that are traded in an "active market," the best measure of fair value is the quoted market price. In cases where market-observable data is not available, the data used for the measurement must reflect assumptions that market participants would use in pricing the asset or liability (including adjustments that market participants demand for the risk associated with the unobservable data or the model used to determine fair value). We have concluded to use a present value technique, a discounted cash flow model, to determine fair value. 51 Table of Contents The determination of estimated fair value of our other real estate related investments requires the use of both macroeconomic and microeconomic assumptions and/or inputs, which are generally based on current market and economic conditions, such as changes in the risk-free or benchmark rate and changes attributable to instrument-specific credit risk (e.g., changes in credit spread associated with the instrument). Changes in market and/or economic conditions could have a significant adverse effect on the estimated fair value of our financial instruments. Changes to assumptions, including assumed benchmark rates and credit spreads, may significantly impact the estimated fair value of our investments. Because of the inherent uncertainty of valuation, the estimated fair value of our financial instruments may differ significantly from the values that would have been used had a ready market for the financial instruments existed, and the differences could be material to our consolidated financial statements. Impact of Inflation Our rental income in future years will be impacted by changes in inflation. Almost all of our triple-net lease agreements, including the Ensign leases, provide for an annual rent escalator based on the percentage change in the Consumer Price Index (but not less than zero), subject to maximum fixed percentages.