CareTrust REIT, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-Looking Statements Certain statements in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements regarding: future financing plans, business strategies, growth prospects and operating and financial performance; expectations regarding the making of distributions and the payment of dividends; and compliance with and changes in governmental regulations. Words such as “anticipate(s),” “expect(s),” “intend(s),” “plan(s),” “believe(s),” “may,” “will,” “would,” “could,” “should,” “seek(s)” and similar expressions, or the negative of these terms, are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to: (i) the ability and willingness of our tenants to meet and/or perform their obligations under the triple-net leases we have entered into with them, including, without limitation, their respective obligations to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities; (ii) the risk that we may have to incur additional impairment charges related to our assets held for sale if we are unable to sell such assets at the prices we expect; (iii) the impact of healthcare reform legislation, including minimum staffing level requirements, on the operating results and financial conditions of our tenants; (iv) the ability of our tenants to comply with applicable laws, rules and regulations in the operation of the properties we lease to them; (v) the ability and willingness of our tenants to renew their leases with us upon their expiration, and the ability to reposition our properties on the same or better terms in the event of nonrenewal or in the event we replace an existing tenant, as well as any obligations, including indemnification obligations, we may incur in connection with the replacement of an existing tenant; (vi) the availability of and the ability to identify (a) tenants who meet our credit and operating standards, and (b) suitable acquisition opportunities, and the ability to acquire and lease the respective properties to such tenants on favorable terms; (vii) the ability to generate sufficient cash flows to service our outstanding indebtedness; (viii) access to debt and equity capital markets; (ix) fluctuating interest rates; (x) the impact of public health crises, including significant COVID-19 outbreaks as well as other pandemics or epidemics; (xi) the ability to retain our key management personnel; (xii) the ability to maintain our status as a real estate investment trust (“REIT”); (xiii) changes in the U.S. tax law and other state, federal or local laws, whether or not specific to REITs; (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 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. Except in the normal course of our public disclosure obligations, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any statement is based. Overview CareTrust REIT is a self-administered, publicly-traded REIT engaged in the ownership, acquisition, financing, development and leasing of skilled nursing, seniors housing and other healthcare-related properties. 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 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 26 Table of Contents 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 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 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 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. Regulatory Updates 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, 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. 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. On April 22, 2024, CMS issued a final rule regarding minimum staffing requirements and increased inspections at nursing homes in order to establish comprehensive nurse staffing requirements. The rule consists of three core staffing requirements: (1) overall minimum standard of 3.48 total nurse staff hours per resident day; (2) minimum nurse staffing standards of 0.55 hours per resident day for registered nurses and 2.45 hours of care from a certified nurse’s aid per resident per day; and (3) a requirement to have a registered nurse onsite 24 hours a day, seven days a week. The rule includes a staggered implementation approach for which CMS will publish additional details on compliance as the implementation dates approach. The rule also includes possible waivers and temporary hardship exemptions for select facilities, however no funding for the additional staff will be provided. We are currently evaluating the impact of the rule, but believe the unfunded mandate to increase staff may have a material and adverse impact on the financial condition of our tenants. 27 Table of Contents Recent Investments The following table summarizes our acquisitions from January 1, 2024 through October 29, 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) $ 224,453 $ 18,569 11 1,080 Multi-service campuses (5) 91,234 7,467 5 683 Assisted living (6) 11,036 1,022 1 86 Total $ 326,723 $ 27,058 17 1,849 (1) Purchase price includes capitalized acquisition costs. (2) Initial annual cash rent represents initial cash rent for the first twelve months. (3) The number of beds/units includes operating beds at acquisition date. (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. (5) Includes two multi-service campuses held through a joint venture. See Note 3, Real Estate Investments, Net , and Note 11, Variable Interest Entities for additional information. (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) Investment Annual Initial Interest Income (2) Number of Properties Number of Beds/Units (3) Mortgage secured loan receivable $ 485,365 $ 43,241 49 5,112 Mezzanine loans receivable 52,165 7,119 26 3,202 Preferred equity 52,000 5,734 N/A N/A Total $ 589,530 $ 56,094 75 8,314 (1) Table excludes a $1.0 million mortgage loan originated in connection with the sale of one ALF during the period presented. (2) Represents annualized acquisition-date interest income, less subservicing fees, if applicable. For floating rate loans, interest income has been calculated using the benchmark rate at loan origination. (3) The number of beds/units includes operating beds at the investment date. 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. 28 Table of Contents 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 7, Debt , for additional information. At-The-Market Offering of Common Stock 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. In the event we enter into an ATM forward contract to sell shares of common stock pursuant to the ATM Program, we would expect to fully physically settle forward equity sales by delivery of shares of common stock to the forward purchaser and receive cash proceeds upon one or more settlement dates, which are typically a one-year term, at our discretion, prior to the final settlement date, at which time we would expect to receive aggregate net cash proceeds at settlement equal to the number of shares sold on a forward basis multiplied by the relevant forward price per share. The weighted average forward sale price that we 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 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 Average sales price per share $ 29.01 $ 19.89 $ 26.35 $ 19.89 Gross proceeds (1) $ 500,085 $ 323,886 $ 1,079,852 $ 323,886 (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 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. 29 Table of Contents Asset Sales and Held for Sale Reclassifications We periodically reassess our investments and tenant relationships, and from time to time we have selectively disposed of certain facilities or investments, or terminated tenant relationships, and we expect to continue making such reassessments and, where appropriate, taking such actions. 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 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. 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, 2024 2024 Number of facilities 11 14 Net sales proceeds (1) $ 7,712 $ 8,852 Net carrying value 9,998 11,106 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): Net Carrying Value Number of Facilities December 31, 2023 $ 15,011 14 Additions to assets held for sale 54,021 10 Assets sold (11,106) (14) Impairment of real estate held for sale (36,872) — Assets reclassified to held for investment (5,008) (2) September 30, 2024 $ 16,046 8 30 Table of Contents Results of Operations Three Months Ended September 30, 2024 Compared to Three Months Ended June 30, 2024: Three Months Ended Increase (Decrease) Percentage Difference September 30, 2024 June 30, 2024 (dollars in thousands) Revenues: Rental income $ 57,153 $ 55,407 $ 1,746 3 % Interest and other income 20,228 13,484 6,744 50 % Expenses: Depreciation and amortization 14,009 13,860 149 1 % Interest expense 8,281 8,679 (398) (5) % Property taxes 2,115 1,976 139 7 % Impairment of real estate investments 8,417 25,711 (17,294) (67) % Property operating expenses 3,477 255 3,222 * General and administrative 6,663 6,136 527 9 % Other loss: 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 income Net loss attributable to noncontrolling interests (165) (340) 175 51 % • Not meaningful Rental income . Rental income increased by approximately $1.7 million as detailed below: Three Months Ended Increase (Decrease) (in thousands) September 30, 2024 June 30, 2024 Contractual cash rent $ 54,658 $ 52,972 $ 1,686 Tenant reimbursements 1,698 1,871 (173) Total contractual rent 56,356 54,843 1,513 Straight-line rent (7) (7) — 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 Total contractual rent includes initial contractual cash rent and tenant operating expense reimbursements, as adjusted for applicable rental escalators and rent increases due to capital expenditures funded by the Company. For tenants on a cash basis, this represents the lesser of the amount that would be recognized on a straight-line basis or cash that has been received. 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 $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 $0.1 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 31 Table of Contents 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 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) 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 $0.1 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 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 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 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 increased by $0.5 million as de tailed below: Three Months Ended Increase (Decrease) (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) Professional services 570 628 (58) Taxes and insurance 211 345 (134) Other expenses 668 715 (47) General and administrative expense $ 6,663 $ 6,136 $ 527 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. 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 32 Table of Contents 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 Difference September 30, 2024 September 30, 2023 (dollars in thousands) Revenues: Rental income $ 166,062 $ 145,126 $ 20,936 14 % Interest and other income 43,280 12,910 30,370 * Expenses: Depreciation and amortization 41,317 37,988 3,329 9 % Interest expense 25,188 32,617 (7,429) (23) % Property taxes 5,892 4,437 1,455 33 % Impairment of real estate investments 36,872 31,510 5,362 17 % Property operating expenses 4,392 2,860 1,532 54 % General and administrative 19,637 15,298 4,339 28 % Other loss: 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 income Net loss attributable to noncontrolling interests (501) (11) (490) * • Not meaningful Rental income . Rental income increased by $20.9 million as detailed below: Nine Months Ended Increase (Decrease) (in thousands) September 30, 2024 September 30, 2023 Contractual cash rent $ 159,060 $ 141,231 $ 17,829 Tenant reimbursements 5,073 3,916 1,157 Total contractual rent 164,133 145,147 18,986 Straight-line rent (21) (21) — Amortization of lease incentives (9) — (9) Amortization of below market leases 1,959 — 1,959 Total amount in rental income $ 166,062 $ 145,126 $ 20,936 Total contractual rent includes initial contractual cash rent and tenant operating expense reimbursements, as adjusted for applicable rental escalators and rent increases due to capital expenditures funded by the Company. For tenants on a cash basis, this represents the lesser of the amount that would be recognized on a straight-line basis or cash that has been received. 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 $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 33 Table of Contents $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 $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 nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 (in thousands) 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 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 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 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 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 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: Nine Months Ended Increase/(Decrease) (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 Taxes and insurance 761 704 57 Other expenses 1,893 1,476 417 General and administrative expense $ 19,637 $ 15,298 $ 4,339 34 Table of Contents 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. All such dividends are at the discretion of our board of directors. Our short-term liquidity requirements consist primarily of operating and interest expenses directly associated with our properties, including: • interest expense and scheduled debt maturities on outstanding indebtedness; • general and administrative expenses; • dividend plans; • operating lease obligations; and • capital expenditures for improvements to our properties. Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions and other investments (including mortgage and mezzanine loan originations), capital expenditures, and scheduled debt maturities. We intend to invest in and/or develop additional healthcare and seniors housing properties as suitable opportunities arise and so long as adequate sources of financing are available. We expect that future investments in and/or development of properties, including any improvements or renovations of current or newly-acquired properties, will depend on and will be financed by, in whole or in part, our existing cash, borrowings available to us under the Second Amended Credit Facility (as defined below), future borrowings or the proceeds from sales of shares of our common stock pursuant to our ATM Program or additional issuances of common stock or other securities. In addition, we may seek financing from U.S. government agencies, including through Fannie Mae and the U.S. Department of Housing and Urban Development, in appropriate circumstances in connection with acquisitions and refinancing of existing mortgage loans. We believe that our expected operating cash flow from rent collections and interest payments on our other real estate related investments, together with our cash balance, available borrowing capacity under the Revolving Facility (as defined below) and availability under the ATM Program 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 may from time to time sell properties as part of our hold / investment strategy on an investment-by-investment basis, we currently do not expect to sell any of our properties to meet liquidity needs. 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 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 35 Table of Contents 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. As of September 30, 2024, we are in compliance with all debt covenants on our outstanding indebtedness. Cash Flows The following table presents selected data from our condensed consolidated statements of cash flows for the periods presented (dollars in thousands): For the Nine Months Ended September 30, 2024 2023 Net cash provided by operating activities $ 169,043 $ 112,096 Net cash used in investing activities (828,087) (232,305) Net cash provided by financing activities 741,698 110,516 Net increase (decrease) in cash and cash equivalents 82,654 (9,693) Cash and cash equivalents as of the beginning of period 294,448 13,178 Cash and cash equivalents as of the end of period $ 377,102 $ 3,485 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 $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. 36 Table of Contents 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 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. 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”) provided 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 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. 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). 37 Table of Contents 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. 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. Dividend Plans We are required to pay dividends in order to maintain our REIT status and we expect to make quarterly dividend payments in cash with the annual dividend amount no less than 90% of our annual REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. See Note 8, Equity, to our condensed consolidated financial statements included in this report for a summary of the cash dividends per share of our common stock declared by our board of directors for the three months ended September 30, 2024 . Critical Accounting Policies and Estimates Our condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information set forth in the Accounting Standards Codification, as published by the Financial Accounting Standards Board. GAAP requires us to make estimates and assumptions regarding future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base these estimates on our experience and assumptions we believe to be reasonable under the circumstances. However, if our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, we may have applied a different accounting treatment, resulting in a different presentation of our financial statements. We periodically reevaluate our estimates and assumptions, and in the event they prove to be different from actual results, we make adjustments in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. Please refer to “Critical Accounting Policies and Estimates” in the “Management’s Discussion and Analysis of Financial Condition and Results of Ope rations” section of our Annual Report on Form 10-K for the year ended December 31, 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 nine months ended September 30, 2024.