What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-10-29 compared with 2024-08-02 · 164 added, 128 removed, 245 unchanged (54% of the section changed)

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(xiv) other risks inherent in the real estate business, including potential liability relating to environmental matters and illiquidity of real estate investments;

and (xv) any additional factors included under Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission (the “SEC”).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 (xv) any additional factors included under Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2024 and June 30, 2024, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission (the “SEC”).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, seniors housing and other healthcare-related properties.

As of June 30, 2024, we owned, directly or indirectly through joint ventures, and leased to independent operators 235 skilled nursing facilities (“SNFs”), multi-service campuses, assisted living facilities (“ALFs”) and independent living facilities (“ILFs”) consisting of 25,058 operational beds and units located in 30 states with the highest concentration of properties by rental income located in California and Texas.

As of June 30, 2024, we also had other real estate related investments consisting of two preferred equity investments, 11 real estate secured loans receivable and four mezzanine loans receivable with a carrying value of $433.5 million.

As of September 30, 2024, 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 24,512 operational beds and units located in 31 states with the highest concentration of properties by rental income located in California and Texas.

As of September 30, 2024, we also had other real estate related investments consisting of three preferred equity investments, 12 real estate secured loans receivable and four mezzanine loans receivable with a carrying value of $740.7 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.

Recent macroeconomic conditions, particularly inflation (including higher 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 have also increased our costs of capital to finance acquisitions and increased our borrowing costs.

We continue to monitor changes in the interest rate environment and the effect of changing rates on our business.

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, our tenants are continuing to experience increased operating costs at their facilities.

Our tenants are also experiencing labor shortages resulting in higher operating costs.

As a result of the above factors, our tenants are continuing to experience elevated operating costs at their facilities.

At a portfolio wide level, occupancy levels at our seniors housing facilities, comprising our ALFs and ILFs, continue to remain below occupancy levels at the onset of the COVID-19 pandemic.

Within our SNFs, occupancy levels have continued to improve since their trough in January 2021 and remained stable for the three months ended March 31, 2024 compared to the three months ended December 31, 2023, for most of our tenants.

As a result of impacts experienced by our operators since the onset of the COVID-19 pandemic, the ability of some of our tenants and borrowers to meet their financial obligations to us in full has been negatively impacted.

Within our SNFs, occupancy levels have continued to improve since their trough in January 2021 and have reached or exceeded occupancy levels prior to the onset of the COVID-19 pandemic, for most of our tenants.

As a result of impacts experienced by our operators since the onset of the COVID-19 pandemic and due to recent market trends and uncertainties, the ability of some of our tenants and borrowers to meet their financial obligations to us in full has been negatively impacted.

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.

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

During the three months ended June 30, 2024, we collected 98.3% of contractual rents and interest due from our operators and borrowers excluding cash deposits.

During the three months ended September 30, 2024, we collected 98.7% of contractual rents and interest due from our operators and borrowers excluding cash deposits.

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

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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, which was initially required to be effective 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.

On June 22, 2024, the Governor of California announced that the implementation of SB 525 will be delayed until October 15, 2024 at the earliest and no later than January 1, 2025.

In March 2024, The Centers for Medicare and Medicaid Services (“CMS”) proposed a payment rate update to SNF reimbursements for fiscal 2025, which includes a net increase of 4.1%, or approximately $1.4 billion in Medicare Part A payments to SNFs.

In July 2023, 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.

After the initial implementation was delayed by the Governor of California in June 2024, SB 525 went into effect on October 16, 2024.

The Centers for Medicare and Medicaid Services (“CMS”) issued a final rule on July 31, 2024, updating Medicare payment policies and rates for SNFs for fiscal year 2025.

This update includes a 4.2% increase in Medicare Part A payments to SNFs, totaling approximately $1.4 billion.

These increases are expected to partially offset some of our tenants’ higher operating costs.

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Recent Investments

The following table summarizes our acquisitions from January 1, 2024 through August 1, 2024 (dollars in thousands):

The following table summarizes our acquisitions from January 1, 2024 through October 29, 2024 (dollars in thousands):

Type of Property Purchase Price (1)

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Skilled nursing (4)

$ 224,453 $ 18,569 11 1,080

Multi-service campuses (5)

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(3) The number of beds/units includes operating beds at acquisition date.

(4) Includes one ALF held through a joint venture.

(4) Includes one SNF held through a joint venture.

See Note 3, Real Estate Investments, Net , and Note 11, Variable Interest Entities , for additional information.

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See Note 3, Real Estate Investments, Net , and Note 11, Variable Interest Entities for additional information.

The following table summarizes our other real estate related investments from January 1, 2024 through August 1, 2024 (dollars in thousands):

(6) Includes one ALF held through a joint venture.

See Note 3, Real Estate Investments, Net , and Note 11, Variable Interest Entities for additional information.

The following table summarizes our other real estate related investments from January 1, 2024 through October 29, 2024 (dollars in thousands):

Investment Type (1)

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(3) The number of beds/units includes operating beds at the investment date.

Payment on Secured Borrowing

Entry into a Material Definitive Agreement

On October 29, 2024, in connection with a joint venture arrangement (the “Tennessee JV”) between the Operating Partnership and an unaffiliated third party, the Operating Partnership became bound by the terms of an Asset Purchase Agreement (the “Purchase Agreement”) pursuant to which the Tennessee JV has agreed to acquire 31 skilled nursing facilities (the “Tennessee SNF Facilities”) for an aggregate purchase price of approximately $500 million, exclusive of transaction costs.

In connection with the Tennessee JV’s acquisition of the Tennessee SNF Facilities, the Operating Partnership is expected to contribute approximately $442 million toward the aggregate purchase price to the Tennessee JV and, in exchange, the Operating Partnership will own 100% of the preferred equity ownership interests in the Tennessee JV representing 92.5% of the total investment and 50% of the common ownership interests in the Tennessee JV representing 3.75% of the total investment.

The Tennessee SNF Facilities consist of a total of 3,290 licensed beds, with 30 of the facilities located in Tennessee and one in Alabama.

We contributed $8.5 million to the Tennessee JV, which was used to partially fund the earnest money deposit under the Purchase Agreement.

Completion of the Tennessee JV’s acquisition of the Tennessee SNF Facilities is subject to customary closing conditions, and is expected to close in two phases during December 2024.

At closing, the Tennessee SNF Facilities are anticipated to be operated by affiliates of PACS Group, Inc.

(twelve facilities), The Ensign Group (nine facilities), and Links Healthcare Group (seven facilities), who are all current tenants of ours, as well as one new operator relationship (three facilities), under long-term master leases.

Three of Ensign’s nine facilities will be acquired by Ensign’s real estate subsidiary with the remaining six to be included in a new master lease.

Initial annual base rent to the Tennessee JV relating to the Tennessee SNF Facilities is expected to aggregate approximately $44.4 million.

Financing Activities

On September 19, 2024, we prepaid in full the $200.0 million aggregate principal amount outstanding under the Term Loan (as defined under “― Liquidity and Capital Resources ― Material Cash Requirements” below).

See Note 7, Debt , for additional information.

On July 30, 2024, we exercised the call option on the $75.0 million secured borrowing.

See Note 14, Subsequent Events , for additional information.

See Note 7, Debt , for additional information.

At-The-Market Offering of Common Stock

On May 6, 2024, 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”).

On August 29, 2024, we entered into a new equity distribution agreement to issue and sell, from time to time, up to $750.0 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 (together, with all previous at-the-market equity offering programs, the “Previous ATM Programs” and together with the New ATM Program, the “ATM Program”).

In addition to the issuance and sale of shares of our common stock, the ATM Program also provides for the ability to enter into one or more forward sales agreements (each, an “ATM forward contract”) with sales agents for the sale of our shares of common stock under the ATM Program.

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The weighted average forward sale price that we would expect to receive upon physical settlement would 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.

The following tables summarize the ATM Program activity for the three and six months ended June 30, 2024 (in thousands, except per share amounts).

For the Three Months Ended For the Six Months Ended

June 30, 2024

The following tables summarize the ATM Program activity for the three and nine months ended September 30, 2024 and 2023 (in thousands, except per share amounts).

For the Three Months Ended For the Nine Months Ended

September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

Number of shares 17,241 16,285 40,986 16,285

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$ 500,085 $ 323,886 $ 1,079,852 $ 323,886

(1) Total gross proceeds is before $3.8 million and $7.2 million of commissions paid to the sales agents during the three and six months ended June 30, 2024, respectively, under the ATM Program.

During the three and six months ended June 30, 2023, we executed forward equity sales under the ATM Program with a financial institution acting as a forward purchaser to sell 6,736,089 shares of common stock at a weighted average sales price of $19.71 per share before commissions and offering expenses.

We did not receive any proceeds from the sales of our shares of common stock by the forward sellers.

As of June 30, 2023, we had not settled any portion of these forward equity sales, which were subsequently settled during the second half of 2023.

No forward equity sales were executed or settled under the ATM Program during the three and six months ended June 30, 2024, and there were no outstanding ATM forward contracts that had not settled as of June 30, 2024.

As of June 30, 2024, we had $193.5 million available for future issuances under the New ATM Program.

(1) Total gross proceeds is before $6.2 million and $13.4 million of commissions paid to the sales agents during the three and nine months ended September 30, 2024, respectively, under the ATM Program.

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.

During the three and nine months ended September 30, 2023, we entered into ATM forward contracts under the ATM Program with a financial institution acting as a forward purchaser to sell 9,058,140 and 15,794,229 shares of common stock, respectively, at a weighted average initial sales price of $19.99 and $19.87 per share, respectively, 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.

No forward equity sales were executed or settled under the ATM Program during the three and nine months ended September 30, 2024, and there were no outstanding ATM forward contracts that had not settled as of September 30, 2024.

As of September 30, 2024, we had $440.1 million available for future issuances under the New ATM Program.

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

During the three months ended June 30, 2024, we determined that a portfolio of eight ALFs met the held for sale criteria and classified these properties as held for sale at June 30, 2024.

During the three and six months ended June 30, 2024, we recognized an impairment charge of $25.7 million and $28.5 million, respectively, related to properties held for sale, which is reported in impairment of real estate investments in the condensed consolidated statements of operations.

During the three months ended September 30, 2024, we determined that one ALF met the held for sale criteria and classified this property as held for sale as of September 30, 2024.

During the three months ended September 30, 2024, we determined that two facilities held for sale no longer met the criteria to be held for sale and were reclassified as held for investment as of September 30, 2024.

During the three and nine months ended September 30, 2024, we recognized an impairment charge of $8.4 million and $36.9 million, respectively, related to properties held for sale, which is reported in impairment of real estate investments in the condensed consolidated income statements.

Asset Sales and Held for Sale Reclassifications

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Upon designation as held for sale, we cease depreciation and record the investment at the lower of carrying value or estimated fair value less costs to sell, which could result in an impairment of the real estate investments held for sale, if necessary.

The following table summarizes our dispositions for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2024 2023 2024 2023

On August 30, 2024, we completed the sale of a portfolio of 11 SNFs located in Iowa and Georgia, leased to affiliates of Arboreta Healthcare, Inc., as shown in the table below.

The following table summarizes our dispositions for the three and nine months ended September 30, 2024 (dollars in thousands):

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Number of facilities 11 14

Net sales proceeds (1)

$ 7,712 $ 8,852

Net carrying value 9,998 11,106

Net gain on sale $ 21 $ 2,028 $ 32 $ 1,958

Net loss on sale $ (2,286) $ (2,254)

(1) Net sales proceeds for the nine months ended September 30, 2024 includes $1.0 million of seller financing in connection with the sale of one ALF in January 2024.

Net sales proceeds for the three and nine months ended September 30, 2024 includes $2.8 million of liabilities assumed by the buyer in connection with the sale of 11 SNFs.

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 (36,872) —

June 30, 2024 $ 28,753 20

Assets reclassified to held for investment (5,008) (2)

September 30, 2024 $ 16,046 8

Results of Operations

Three Months Ended June 30, 2024 Compared to Three Months Ended March 31, 2024:

Three Months Ended September 30, 2024 Compared to Three Months Ended June 30, 2024:

Three Months Ended Increase

(Decrease) Percentage

June 30, 2024 March 31, 2024

September 30, 2024 June 30, 2024

(dollars in thousands)

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General and administrative 6,663 6,136 527 9 %

Gain on sale of real estate, net 21 11 10 91 %

Unrealized loss on other real estate related investments, net (1,877) (612) (1,265) *

Net (loss) income attributable to noncontrolling interests (340) 4 (344) *

Loss on extinguishment of debt (657) — (657) *

(Loss) gain on sale of real estate, net (2,286) 21 (2,307) *

Unrealized gain (loss) on other real estate related investments, net 1,800 (1,877) 3,677 *

Net loss attributable to noncontrolling interests (165) (340) 175 51 %

• Not meaningful

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Three Months Ended Increase (Decrease)

(in thousands) June 30, 2024 March 31, 2024

(in thousands) September 30, 2024 June 30, 2024

Contractual cash rent $ 54,658 $ 52,972 $ 1,686

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Straight-line rent (7) (7) —

Amortization of lease incentive (4) — (4)

Amortization of below market lease intangible 575 575 —

Amortization of lease incentives (5) (4) (1)

Amortization of below market leases 809 575 234

Total amount in rental income $ 57,153 $ 55,407 $ 1,746

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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 $1.9 million due to a $2.4 million increase in rental income from real estate investments made after January 1, 2024, a $0.4 million increase in rental rates for our existing tenants, and a $0.4 million

increase in tenant reimbursements, partially offset by a $1.3 million decrease in rental income related to certain tenants on a cash basis method of accounting.

Total contractual rent increased by $1.5 million due to a $1.6 million increase in rental income from real estate investments made after March 31, 2024, a $0.9 million increase in rental rates for our existing tenants, and an increase of $0.1 million related to the transfer of one facility to a new operator, partially offset by a $0.9 million decrease in rental income related to certain tenants on a cash basis method of accounting and a decrease of $0.2 million in tenant reimbursements.

Interest and other income.

The $3.9 million, or 41%, increase in interest and other income was primarily due to an increase of $2.3 million of interest income on new loan investments made after January 1, 2024, an increase of $1.5 million on money market funds and an increase of $0.2 million related to a loan origination fee received during the three months ended June 30, 2024.

The $6.7 million, or 50%, increase in interest and other income was primarily due to an increase of $7.6 million of interest income on new loan investments made after March 31, 2024, and an increase of $0.1 million of interest income due to a higher number of days during the three months ended September 30, 2024 compared to the three months ended June 30, 2024, partially offset by a decrease of $0.8 million of interest earned on money market funds and a decrease of $0.2 million related to a loan origination fee received during the three months ended June 30, 2024.

Depreciation and amortization.

The $0.4 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 January 1, 2024, partially offset by a decrease of $0.3 million due to assets becoming fully depreciated after January 1, 2024.

The $0.1 million, or 1%, increase in depreciation and amortization was primarily due to an increase of $0.7 million due to acquisitions and capital improvements made after March 31, 2024, partially offset by a

decrease of $0.4 million due to classifying assets as held for sale and a decrease of $0.2 million due to assets becoming fully depreciated after March 31, 2024.

Interest expense.

Interest expense increased by approximately $0.5 million as detailed below:

Change in interest expense for the three months ended June 30, 2024 compared to the three months ended March 31, 2024

Interest expense decreased by approximately $0.4 million as detailed below:

Change in interest expense for the three months ended September 30, 2024 compared to the three months ended June 30, 2024

(in thousands)

Interest on the secured borrowing $ 456

Decrease in interest for the Term Loan (as defined below) (5)

Decreases to interest expense due to:

Decrease due to the prepayment of Term Loan $ (499)

Total decreases to interest expense (499)

Increases to interest expense due to:

Increase in interest rates for the Term Loan 80

Other changes in interest expense 21

Total increase increases to interest expense 101

Total change to interest expense $ (398)

Property taxes.

The $0.2 million, or 10%, increase in property taxes was primarily due to a $0.3 million increase related to acquisitions made after January 1, 2024, partially offset by a decrease of $0.1 million due to the sale of one SNF.

The $0.1 million, or 7%, increase in property taxes was primarily due to reassessments and increased effective tax rates.

Impairment of real estate investments.

During the three months ended June 30, 2024, we recognized impairment charges of $25.7 million related to properties held for sale.

During the three months ended September 30, 2024, we recognized impairment charges of $8.4 million related to properties 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, 2024, we recognized an impairment charge of $2.7 million related to properties held for sale.

During the three months ended June 30, 2024, we recognized impairment charges of $25.7 million primarily related to classifying eight properties as held for sale.

Property operating expenses.

During the three months ended June 30, 2024 and March 31, 2024, we recognized $0.3 million and $0.7 million, respectively, of property operating expenses related to assets we plan to sell or repurpose, re-tenant, or have sold.

During the three months ended September 30, 2024 and June 30, 2024, we recognized $3.5 million and $0.3 million, respectively, of property operating expenses related to assets we plan to sell or repurpose, re-tenant, or have sold.

General and administrative expense.

General and administrative expense decreased by $0.7 million as detailed below:

General and administrative expense increased by $0.5 million as de tailed below:

Three Months Ended Increase (Decrease)

(in thousands) June 30, 2024 March 31, 2024

Cash compensation $ 1,542 $ 1,765 $ (223)

(in thousands) September 30, 2024 June 30, 2024

Incentive compensation $ 2,500 $ 1,500 $ 1,000

Cash compensation 1,571 1,542 29

Share-based compensation 1,143 1,406 (263)

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General and administrative expense $ 6,663 $ 6,136 $ 527

Gain on sale of real estate, net.

Loss on extinguishment of debt.

During the three months ended September 30, 2024, we recorded a $0.7 million loss on extinguishment of debt related to the exit fee associated with the call of the secured borrowing and the write-off of deferred financing costs associated with the prepayment of the Term Loan (as defined below).

No loss on extinguishment of debt was recognized during the three months ended June 30, 2024.

(Loss) gain on sale of real estate, net.

During the three months ended September 30, 2024, we recorded a $2.3 million loss on sale of real estate related to the sale of 11 SNFs.

During the three months ended June 30, 2024, we recorded a $21,000 gain on sale of real estate related to the sale of one SNF.

During the three months ended March 31, 2024, we recorded an $11,000 gain on sale of real estate, net related to the sale of one SNF and one ALF.

Unrealized loss on other real estate related investments, net.

During the three months ended June 30, 2024, we recorded a $2.4 million unrealized loss on our secured and mezzanine loans receivable due to an increase in estimated credit spreads, partially offset by unrealized gains of $0.5 million due to an increase in expected cash flows on floating rate loans.

During the three months ended March 31, 2024, we recorded an $0.8 million unrealized loss on our secured and mezzanine loans receivable due to an increase in interest rates, partially offset by unrealized gains of $0.2 million due to an increase in expected cash flows on floating rate loans.

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023:

Six Months Ended Increase

Unrealized gain (loss) on other real estate related investments, net.

During the three months ended September 30, 2024, we recorded $5.9 million of unrealized gains on our secured and mezzanine loans receivable, partially offset by unrealized losses of $4.1 million, to bring the interest rates in line with market rates.

During the three months ended June 30, 2024, we recorded a $2.4 million unrealized loss on our secured and mezzanine loans receivable due to an increase in estimated

credit spreads, partially offset by unrealized gains of $0.5 million due to an increase in expected cash flows on floating rate loans.

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023:

Nine Months Ended Increase

(Decrease) Percentage

June 30, 2024 June 30, 2023

September 30, 2024 September 30, 2023

(dollars in thousands)

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General and administrative 19,637 15,298 4,339 28 %

Gain on sale of real estate, net 32 1,958 (1,926) (98) %

Unrealized losses on other real estate related investments, net (2,489) (2,605) 116 (4) %

Loss on extinguishment of debt (657) — (657) *

(Loss) gain on sale of real estate, net (2,254) 1,958 (4,212) *

Unrealized loss on other real estate related investments, net (689) (7,856) 7,167 (91) %

Net loss attributable to noncontrolling interests (501) (11) (490) *

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Rental income increased by $20.9 million as detailed below:

Six Months Ended

Nine Months Ended

Increase (Decrease)

(in thousands) June 30, 2024 June 30, 2023

(in thousands) September 30, 2024 September 30, 2023

Contractual cash rent $ 159,060 $ 141,231 $ 17,829

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Amortization of lease incentives (9) — (9)

Amortization of below market lease intangible 1,150 — 1,150

Amortization of below market leases 1,959 — 1,959

Total amount in rental income $ 166,062 $ 145,126 $ 20,936

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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 $13.9 million due to a $9.8 million increase in rental income from real estate investments made after January 1, 2023, a $2.5 million increase in rental rates for our existing tenants, a $1.5 million increase in tenant reimbursements, and a $0.5 million increase in rental income related to certain tenants on a cash basis method of accounting, partially offset by a $0.4 million decrease in rental income related to dispositions made after January 1, 2023.

Total contractual rent increased by $19.0 million due to a $15.7 million increase in rental income from real estate investments made after December 31, 2022, a $3.9 million increase in rental rates for our existing tenants, a $1.2 million increase in tenant reimbursements, and a $0.5 million increase in rental income due to the transfer of facilities between operators, partially offset by a $1.9 million decrease in rental income related to certain tenants on a cash basis method of accounting, and a $0.4 million decrease in rental income related to dispositions made after December 31, 2022.

Interest and other income.

The $14.8 million increase in interest and other income was primarily due to an increase of $8.3 million of interest income on money market funds, an increase of $7.4 million due to the origination of loans receivable after January 1, 2023, an increase of $0.4 million due to originations of other loans, and an increase of $0.2 million related to a loan origination fee received during the six months ended June 30, 2024, partially offset by a decrease of $1.0 million of interest income due to loan repayments and a decrease of $0.5 million related to a prepayment penalty on one mezzanine loan receivable during the six months ended June 30, 2023.

The $30.4 million increase in interest and other income was primarily due to an increase of $19.0 million due to the origination of loans receivable after December 31, 2022, an increase of $12.5 million of interest income on money market funds, an increase of $0.5 million due to originations of other loans, and an increase of $0.2 million related to a loan origination fee received during the nine months ended September 30, 2024, partially offset by a decrease of

$1.3 million of interest income due to loan repayments and a decrease of $0.5 million related to a prepayment penalty on one mezzanine loan receivable during the nine months ended September 30, 2023.

Depreciation and amortization.

The $2.4 million, or 9%, increase in depreciation and amortization was primarily due to an increase of $4.3 million related to acquisitions and capital improvements made after January 1, 2023, partially offset by a decrease of $1.2 million due to assets becoming fully depreciated after January 1, 2023 and a decrease of $0.7 million due to classifying assets as held for sale after January 1, 2023.

The $3.3 million, or 9%, increase in depreciation and amortization was primarily due to an increase of $6.5 million related to acquisitions and capital improvements made after December 31, 2022, partially offset by a decrease of $2.1 million due to assets becoming fully depreciated after December 31, 2022 and a decrease of $1.1 million due to classifying assets as held for sale after December 31, 2022.

Interest expense.

Interest expense decreased by $7.4 million as detailed below:

Change in interest expense for the six months ended June 30, 2024 compared to the six months ended June 30, 2023

Change in interest expense for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023

(in thousands)

Decrease in interest due to reduction in outstanding borrowing amount for the Revolving Facility, net $ (4,990)

Increase in interest rates for the Term Loan 608

Interest on the secured borrowing 456

Decreases to interest expense due to:

Decrease in outstanding borrowing amount for the Revolving Facility $ (8,519)

Decrease due to prepayment of Term Loan (499)

Other changes in interest expense (29)

Total change to interest expense $ (3,960)

Total decreases to interest expense (9,047)

Increases to interest expense due to:

Issuance of secured borrowing 931

Increase in interest rates for the Term Loan 687

Total increases to interest expense 1,618

Total change in interest expense $ (7,429)

Property taxes.

The $1.5 million, or 66%, increase in property taxes was due to a $1.9 million increase related to acquisitions made after January 1, 2023, partially offset by $0.4 million of changes in estimates during the six months ended June 30, 2024 of property taxes paid directly by us as a result of certain assets being designated as held for sale.

The $1.5 million, or 33%, increase in property taxes was due to a $2.5 million increase related to acquisitions made after December 31, 2022, partially offset by $1.0 million of changes in estimates during the nine months ended September 30, 2024 of property taxes paid directly by us as a result of certain assets being designated as held for sale and being disposed of.

Impairment of real estate investments.

During the six months ended June 30, 2024, we recognized impairment charges of $28.5 million related to properties held for sale.

During the nine months ended September 30, 2024, we recognized impairment charges of $30.4 million related to properties classified as held for sale, $4.4 million related to properties held for investment, and $2.1 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, 2023, we recognized an impairment charge of $23.3 million related to properties classified as held for sale.

During the nine months ended September 30, 2023, we recognized impairment charges 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.

Property operating expenses.

During the six months ended June 30, 2024 and 2023, we recognized $0.9 million and $1.6 million, respectively, of property operating expenses related to assets we plan to sell or repurpose, re-tenant or have sold.

During the nine months ended September 30, 2024 and 2023, we recognized $4.4 million and $2.9 million, respectively, of property operating expenses related to assets we plan to sell or repurpose, re-tenant or have sold.

General and administrative expense.

General and administrative expense increased by $4.3 million as detailed below:

Six Months Ended

Nine Months Ended

Increase/(Decrease)

(in thousands) June 30, 2024 June 30, 2023

Share-based compensation $ 3,526 $ 1,860 $ 1,666

Cash compensation 3,307 2,817 490

(in thousands) September 30, 2024 September 30, 2023

Incentive compensation $ 5,500 $ 3,700 $ 1,800

Cash compensation 4,878 4,256 622

Share-based compensation 4,669 3,379 1,290

Professional services 1,936 1,783 153

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General and administrative expense $ 19,637 $ 15,298 $ 4,339

Gain on sale of real estate, net.

During the six months ended June 30, 2024, we recorded a $32,000 gain on sale of real estate, net related to the sale of two SNFs and one ALF.

During the six months ended June 30, 2023, we recorded a $2.0 million gain on sale of real estate, net related to the sale of three ALFs and one SNF.

Unrealized losses on other real estate related investments, net.

During the six months ended June 30, 2024, we recorded a $3.2 million unrealized loss on our secured and mezzanine loans receivable due to an increase in interest rates, partially offset by unrealized gains of $0.7 million due to an increase in expected cash flows on floating rate loans due to an increase in projected forward interest rates.

During the six months ended June 30, 2023, we recorded a $2.8 million unrealized loss on our secured and mezzanine loans 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.

Loss on extinguishment of debt.

During the nine months ended September 30, 2024, we recorded a $0.7 million loss on extinguishment of debt related to the exit fee associated with the call of the secured borrowing and the write-off of deferred financing costs associated with the prepayment of the Term Loan (as defined below).

No loss on extinguishment of debt was recognized during the nine months ended September 30, 2023.

(Loss) gain on sale of real estate, net.

During the nine months ended September 30, 2024, we recorded a $2.3 million loss on sale of real estate, net related to the sale of 13 SNFs and one ALF.

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.

Unrealized loss on other real estate related investments, net.

During the nine months ended September 30, 2024, we recorded a $7.3 million unrealized loss on our secured and mezzanine loans receivable due to an increase in interest rates during the first half of 2024, partially offset by unrealized gains of $6.6 million primarily due to a decrease in interest rates during the third quarter of 2024.

During the nine months ended September 30, 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 a reversal of a previously recognized unrealized loss of $0.5 million related to the repayment of one mezzanine loan receivable.

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.

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.

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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 May 6, 2024, 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.

On August 29, 2024, 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.

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However, there can be no assurance that we will be able to refinance our indebtedness, incur additional indebtedness or access additional sources of capital, such as by issuing common stock or other debt or equity securities, on terms that are acceptable to us or at all.

As of June 30, 2024, we are in compliance with all debt covenants on our outstanding indebtedness.

As of September 30, 2024, 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 $ 169,043 $ 112,096

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Cash and cash equivalents as of the end of period $ 377,102 $ 3,485

Net cash provided by operating activities increased for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Net cash provided by operating activities increased for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

Operating cash inflows are derived primarily from the rental payments received under our lease agreements, including as a result of new investments, and interest payments on our other real estate related investments.

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

The net increase of $34.8 million in cash provided by operating activities for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 is primarily due to an increase in rental income received, an increase in interest income received on our other real estate related investments, and a decrease in cash paid for interest expense, partially offset by an increase in cash paid for general and administrative expense.

Cash used in investing activities for the six months ended June 30, 2024 was primarily comprised of $458.5 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, $9.0 million in preferred equity investments and $1.3 million of purchases of equipment, furniture and fixtures and improvements to real estate.

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.

Our cash flows provided by financing activities for the six months ended June 30, 2024 were primarily comprised of $572.2 million in net proceeds from the issuance of common stock, $75.0 million in proceeds from a secured borrowing and $0.6 million in contributions from noncontrolling interests, partially offset by $77.7 million in dividends paid and a $2.5 million net settlement adjustment on restricted stock.

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.

The net increase of $56.9 million in cash provided by operating activities for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 is primarily due to an increase in rental income received, an increase in interest income received on our other real estate related investments, and a decrease in cash paid for interest expense, partially offset by an increase in cash paid for general and administrative expense.

Cash used in investing activities for the nine months ended September 30, 2024 was primarily comprised of $777.1 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, $52.0 million in preferred equity investments and $4.2 million of purchases of equipment, furniture and fixtures and improvements to real estate, partially offset by $5.1 million in net proceeds from the sale of real estate and $0.1 million in principal payments received on other loans receivable.

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.

Our cash flows provided by financing activities for the nine months ended September 30, 2024 were primarily comprised of $1.1 billion in net proceeds from the issuance of common stock, $75.0 million in proceeds from a secured borrowing and $1.2 million in contributions from noncontrolling interests, partially offset by a $200.0 million prepayment of the Term Loan, $122.4 million in dividends paid, a $75.0 million payment on the secured borrowing, a $2.5 million net settlement adjustment on restricted stock, and $0.4 million payment on extinguishment of debt and deferred financing costs.

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, $83.1 million in dividends paid and a $1.5 million net settlement adjustment on restricted stock.

Material Cash Requirements

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The obligations under the Notes are guaranteed, jointly and severally, on an unsecured basis, by us and all of our subsidiaries (other than the Issuers) that guarantee obligations under the Second Amended Credit Facility (as defined below).

As of June 30, 2024, we were in compliance with all applicable financial covenants under the indenture governing the Notes.

As of September 30, 2024, we were in compliance with all applicable financial covenants under the indenture governing the Notes.

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

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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.

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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 June 30, 2024, 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.

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).

On September 19, 2024 (the “Prepayment Date”), we prepaid all $200.0 million aggregate principal amount of our outstanding Term Loan.

The Term Loan was prepaid at the principal amount of the Term Loan, plus accrued and unpaid interest thereon up to, but not including, the Prepayment Date.

During the third quarter of 2024, we recorded a loss on extinguishment of debt of $0.3 million related to the write-off of deferred financing costs associated with the prepayment of the Term Loan.

As of September 30, 2024, we had 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.

Prior to prepayment, the Term Loan had a maturity date of February 8, 2026.

The interest rates applicable to loans under the Revolving Facility are, at the Operat ing 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 were, 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 June 30, 2024, we were in compliance with all applicable financial covenants under the Second Amended Credit Agreement.

As of September 30, 2024, 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.

Secured Borrowing

On June 3, 2024, KeyBank National Association purchased a $75.0 million undivided participation interest in a $165.0 million mortgage loan from us (see Note 5, Other Real Estate Related and Other Investments , for additional information), which bears interest at a rate of SOFR, with a term SOFR floor of 3.0%, plus 2.5% or 2.25%, depending on the debt yield of the loan, and payable monthly.

As the transaction did not qualify as a sale in accordance with GAAP, we recorded the participation interest as a secured borrowing in the amount of $75.0 million in the condensed consolidated balance sheet.

The participating interest may be prepaid in whole before the maturity date for an exit fee of up to 0.50% of the loan plus unpaid interest.

The participation interest provides for a put option, subject to certain restrictions and a call option for the then-outstanding loan amount plus accrued and unpaid interest.

As of June 30, 2024, the interest rate in effect for the secured borrowing was 7.83%.

On July 30, 2024, we exercised the call option on the $75.0 million secured borrowing.

Capital Expenditures

As of June 30, 2024, we had committed to fund expansions, construction, capital improvements and ESG incentives, which provides eligible triple-net tenants with monetary inducements to make sustainable improvements to our properties, at certain triple-net leased facilities totaling $14.3 million, of which $6.5 million is subject to rent increase at the

time of funding.

Capital Expenditures and Earn-Out Payments for Real Estate

As of September 30, 2024, we had committed to fund expansions, construction, capital improvements and ESG incentives, which provides eligible triple-net tenants with monetary inducements to make sustainable improvements to our properties, at certain triple-net leased facilities totaling $14.8 million, of which $7.2 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.

As of September 30, 2024, we entered into a purchase and sale agreement which provided for an earn-out obligation of up to $10.0 million for one SNF in Virginia which was acquired during 2024.

The earn-out is available, contingent on the operator achieving certain thresholds per the agreement, beginning in October 2025 through October 2026.

See Note 12, Commitments and Contingencies, to our condensed consolidated financial statements included in this report for further i nformation regarding our obligation to finance certain capital expenditures under our triple-net leases.

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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, 2024 .

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, 2023, filed with the SEC on February 8, 2024, 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, 2024.

There have been no material changes in such critical accounting policies during the nine months ended September 30, 2024.

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