EX-99.1 2 d621793dex991.htm EX-99.1 EX-99.1
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Exhibit 99.1

 

 

LOGO

                    , 2013

Dear Ensign Stockholder:

We are pleased to inform you that the board of directors of The Ensign Group, Inc. (“Ensign”) has approved a plan to separate its healthcare business and its real estate business into two separate, publicly traded companies:

 

    Ensign, which will continue to provide healthcare services through its existing operations; and

 

    CareTrust REIT, Inc. (“CareTrust”), which will own, acquire and lease real estate serving the healthcare industry.

Ensign will accomplish the separation by distributing all of the outstanding shares of CareTrust common stock to Ensign stockholders on a pro rata basis (the “Spin-Off”). At the time of the Spin-Off, CareTrust, which is currently a wholly owned subsidiary of Ensign, will hold substantially all of the real property owned by Ensign, and will own and operate three independent living facilities. After the Spin-Off, all of these properties (other than the three independent living facilities that CareTrust will operate) will be leased to Ensign on a triple-net basis, under which Ensign will be responsible for all costs at the properties, including property taxes, insurance and maintenance and repair costs. CareTrust intends to elect to be taxed and intends to qualify as a real estate investment trust for U.S. federal income tax purposes commencing with its taxable year ending December 31, 2014.

You will receive                     share(s) of CareTrust common stock for every share of Ensign common stock that you held at the close of business on                     , 2014, the record date for the Spin-Off. Following the Spin-Off, you will own shares in both Ensign and CareTrust. The number of Ensign shares you own will not change as a result of the Spin-Off. CareTrust has applied to list its common stock on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “CTRE.” Ensign common stock will continue to be listed and traded on NASDAQ under the symbol “ENSG.”

No vote of Ensign stockholders is required in connection with the Spin-Off. You do not need to make any payment, surrender or exchange your shares of Ensign common stock or take any other action to receive your shares of CareTrust common stock.

The enclosed information statement, which is being made available to all Ensign stockholders, describes the Spin-Off in detail and contains important information about CareTrust and its business. We urge you to read the information statement carefully and in its entirety.

We want to thank you for your continued support for Ensign, and we look forward to your support for CareTrust in the future.

 

Sincerely,

 

Christopher R. Christensen

Chief Executive Officer


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LOGO

                    , 2013

Dear Future Stockholder of CareTrust REIT, Inc.:

It is our pleasure to welcome you as a stockholder of our company, CareTrust REIT, Inc. (“CareTrust”). Following the distribution of all of the outstanding shares of CareTrust common stock by The Ensign Group, Inc. (“Ensign”) to its stockholders, CareTrust will be a newly listed, publicly traded company that will own, acquire and lease real estate serving the healthcare industry, and will own and operate independent living facilities.

Our initial portfolio will consist of substantially all of the skilled nursing, assisted living and independent living facilities owned by Ensign. All of these properties will be leased to Ensign on a triple-net basis, except for three independent living facilities that we will operate. We expect to diversify our tenant base in the future by acquiring additional properties and leasing them to other local, regional and national healthcare providers. We also expect to grow and diversify our portfolio in the future through the acquisition of properties in different geographic markets, and in different asset classes.

We invite you to learn more about CareTrust and its business by reviewing the enclosed information statement. We urge you to read the information statement carefully and in its entirety. We are excited by our future prospects, and look forward to your support as a holder of our common stock.

 

Sincerely,

 

Gregory K. Stapley

President and Chief Executive Officer


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Information contained herein is subject to completion or amendment. A registration statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

Preliminary and Subject to Completion, dated November 7, 2013

INFORMATION STATEMENT

CareTrust REIT, Inc.

Common Stock

(Par Value $0.01 Per Share)

 

 

This information statement is being furnished in connection with the pro rata distribution (the “Spin-Off”) by The Ensign Group, Inc. (“Ensign”) to its stockholders of all of the outstanding shares of common stock of CareTrust REIT, Inc. (“CareTrust”), which is currently a wholly owned subsidiary of Ensign. At the time of the Spin-Off, CareTrust will hold substantially all of the real property owned by Ensign, which, on a pro forma basis as of June 30, 2013, consists of 96 skilled nursing, assisted living and independent living facilities. After the Spin-Off, all of these properties, and potentially any additional properties we may acquire prior to the Spin-Off, will be leased to Ensign on a triple-net basis, except for three independent living facilities that CareTrust will operate. The Spin-Off is intended to be tax-free to Ensign stockholders for U.S. federal income tax purposes, except for cash paid in lieu of fractional shares.

For every share of common stock of Ensign held of record by you as of the close of business on                     , 2014 (the “record date”), you will receive                     share(s) of CareTrust common stock. You will receive cash in lieu of any fractional shares of CareTrust common stock which you would have otherwise received. The date on which the shares of CareTrust common stock will be distributed to you (the “distribution date”) is expected to be                     , 2014. After the Spin-Off is completed, CareTrust will be a separate, publicly traded company.

No vote of Ensign’s stockholders is required in connection with the Spin-Off. Therefore, you are not being asked for a proxy, and you are requested not to send us a proxy. You will not be required to make any payment, surrender or exchange your shares of Ensign common stock or take any other action to receive your shares of CareTrust common stock.

Ensign currently owns all of the outstanding shares of CareTrust common stock, so there is no current trading market for CareTrust common stock. We anticipate that a limited market, commonly known as a “when-issued” trading market, will develop shortly before the record date, and that “regular-way” trading in shares of CareTrust common stock will begin on the first trading day following the distribution date. If trading begins on a “when-issued” basis, you may purchase or sell CareTrust common stock up to and including the distribution date, but your transaction will not settle until after the distribution date. CareTrust has applied to list its common stock on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “CTRE.” As discussed under “The Spin-Off—Listing and Trading of Our Shares,” if you sell your Ensign common stock in the “due-bills” market after the record date and before the distribution date, you also will be selling your right to receive shares of CareTrust common stock in connection with the Spin-Off. However, if you sell your Ensign common stock in the “ex-distribution” market before the distribution date, you will still receive shares of CareTrust common stock in the Spin-Off.

CareTrust intends to elect to be taxed and intends to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes commencing with its taxable year ending December 31, 2014. To assist CareTrust in qualifying as a REIT, among other purposes, CareTrust’s charter will contain certain restrictions relating to the ownership and transfer of its stock, including a provision generally restricting a stockholder from owning more than 9.8% of the outstanding shares of CareTrust common stock or more than 9.8% in value or number, whichever is more restrictive, of the outstanding shares of all classes and series of CareTrust stock, without the prior consent of CareTrust’s board of directors. See “Description of Our Capital Stock—Restrictions on Transfer and Ownership of CareTrust Stock.”

Following the Spin-Off, CareTrust will be an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and, as such, is allowed to provide in this information statement more limited disclosures than an issuer that would not so qualify. In addition, for so long as we remain an emerging growth company, we may also take advantage of certain limited exceptions from investor protection laws such as Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), and the Investor Protection and Securities Reform Act of 2010 for limited periods. See “Summary—Emerging Growth Company Status.”

In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 16.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

Ensign first mailed this information statement to its stockholders on or about                 , 2013.

 

 

The date of this information statement is                     , 2013.


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TABLE OF CONTENTS

 

     Page  

SUMMARY

     1   

RISK FACTORS

     16   

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     38   

THE SPIN-OFF

     39   

DIVIDEND POLICY

     48   

FINANCING

     50   

CAPITALIZATION

     51   

CARETRUST’S UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     52   

ENSIGN’S UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     57   

SELECTED COMBINED HISTORICAL FINANCIAL DATA

     63   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     64   

BUSINESS

     78   

MANAGEMENT

     87   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     93   

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     95   

OUR RELATIONSHIP WITH ENSIGN FOLLOWING THE SPIN-OFF

     96   

DESCRIPTION OF OUR CAPITAL STOCK

     103   

U.S. FEDERAL INCOME TAX CONSIDERATIONS

     113   

WHERE YOU CAN FIND MORE INFORMATION

     133   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

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SUMMARY

The following is a summary of material information included in this information statement. This summary may not contain all of the details concerning the Spin-Off or other information that may be important to you. To better understand the Spin-Off and CareTrust’s business, you should carefully review this entire information statement.

Unless the context otherwise requires, any references in this information statement to “we,” “our,” “us” and the “Company” refer to CareTrust and its consolidated subsidiaries. References in this information statement to “Ensign” generally refer to The Ensign Group, Inc. and its consolidated subsidiaries (other than CareTrust and its consolidated subsidiaries after the Spin-Off), unless the context requires otherwise. The Ensign Group, Inc. is a holding company with no direct operating assets, employees or revenues. All of its operations are conducted by separate, wholly owned, independent subsidiaries that have their own management, employees and assets.

This information statement has been prepared on a prospective basis on the assumption that, among other things, the Spin-Off and the related transactions contemplated to occur prior to or contemporaneously with the Spin-Off will be consummated as contemplated by this information statement. There can be no assurance, however, that any or all of such transactions will occur or will occur as so contemplated.

You should not assume that the information contained in this information statement is accurate as of any date other than the date set forth on the cover. Changes to the information contained in this information statement may occur after that date, and we undertake no obligation to update the information, except in the normal course of our public disclosure obligations. In particular, a number of matters contained in this information statement relate to agreements or arrangements that have not yet been finalized and expectations of what may occur. It is possible that prior to the Spin-Off, these agreements, arrangements and expectations may change.

Our Company

At the time of the Spin-Off, CareTrust will hold substantially all of the real property owned by Ensign, which, on a pro forma basis as of June 30, 2013, consists of 96 skilled nursing, assisted living and independent living facilities. After the Spin-Off, CareTrust will lease all of these properties, and potentially any additional properties we may acquire prior to the Spin-Off, to Ensign pursuant to five separate long-term, triple-net leases (each, a “Master Lease” and, collectively, the “Master Leases”), except for three independent living facilities, which CareTrust will operate. See “Our Relationship with Ensign Following the Spin-Off—Master Leases.” On a pro forma basis as of June 30, 2013, the 93 facilities that will be leased to Ensign have a total of 10,052 operational beds and units and are located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Texas, Utah and Washington, and the three independent living facilities that CareTrust will operate have a total of 264 units and are located in Texas and Utah.

Following the Spin-Off, CareTrust will be a publicly traded, self-administered, self-managed REIT primarily engaged in the ownership, acquisition and leasing of healthcare facilities. We expect CareTrust to generate revenues primarily by leasing healthcare facilities to healthcare operators in triple-net lease arrangements, under which the tenant is solely responsible for the costs related to the property (including property taxes, insurance, and maintenance and repair costs). We intend to conduct and manage the CareTrust business as one operating segment for internal reporting and internal decision making purposes. We expect to grow the CareTrust portfolio by pursuing opportunities to acquire additional facilities that will be leased to a diverse group of local, regional and national healthcare providers, which may include Ensign, as well as senior housing operators and related businesses. We also anticipate diversifying the CareTrust portfolio over time, including by acquiring properties in different geographic markets, and in different asset classes.

 


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Approximately 42 current full-time equivalent employees of Ensign are expected to be employed by CareTrust immediately following the Spin-Off. Substantially all of these employees will be employed in connection with the operation of the three independent living facilities.

To maintain REIT status, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. See “U.S. Federal Income Tax Considerations.”

Overview of the Spin-Off

The board of directors of Ensign has announced a plan to separate its healthcare business and its real estate business into two separate, publicly traded companies:

 

    Ensign, which will continue to provide healthcare services through its existing operations; and

 

    CareTrust, which will own, acquire and lease real estate serving the healthcare industry.

Ensign will accomplish the separation by contributing to CareTrust the entities that own substantially all of Ensign’s real property interests, the entities that operate three independent living facilities, and related assets and liabilities, and then distributing all of the outstanding shares of CareTrust common stock to Ensign’s stockholders. Prior to the Spin-Off, CareTrust and Ensign will enter into five Master Leases, under which Ensign will lease CareTrust’s healthcare facilities on a triple-net basis. Ensign and CareTrust will also enter into a number of other agreements to govern the relationship between them following the Spin-Off. See “Our Relationship with Ensign Following the Spin-Off.”

Ensign will effect the Spin-Off by distributing to Ensign’s stockholders                     share(s) of CareTrust common stock for each share of Ensign common stock that they held at the close of business on                     , 2014, the record date for the Spin-Off. Ensign’s stockholders will receive cash in lieu of any fractional shares of CareTrust common stock which they would have otherwise received. We expect the shares of CareTrust common stock to be distributed by Ensign on                     , 2014.

Ensign will allocate its accumulated earnings and profits (as determined for U.S. federal income tax purposes) for periods prior to the Spin-Off between Ensign and CareTrust in a manner that, in its best judgment, is in accordance with the provisions of the Internal Revenue Code of 1986, as amended (the “Code”). As a result of its intended election to be taxed as a REIT for U.S. federal income tax purposes, in order to comply with certain REIT qualification requirements, CareTrust will declare a dividend to its stockholders to distribute any accumulated earnings and profits attributable to any non-REIT years, including any earnings and profits allocated to CareTrust in connection with the Spin-Off (the “Purging Distribution”). The Purging Distribution will be paid to CareTrust stockholders in a combination of cash and CareTrust stock, with the cash portion not to exceed 25% of the total amount of the Purging Distribution. CareTrust expects to make the Purging Distribution shortly after the Spin-Off. See “The Spin-Off—The Purging Distribution.”

The Spin-Off is subject to the satisfaction or waiver of a number of conditions. See “The Spin-Off—Conditions to the Spin-Off.” In addition, Ensign’s board of directors has reserved the right, in its sole discretion, to amend, modify or abandon the Spin-Off or any related transaction at any time prior to the distribution date.

Reasons for the Spin-Off

The strategic considerations and nature of Ensign’s healthcare business currently dictate and limit the size and scope of its real estate business. After the Spin-Off, CareTrust will be able to make decisions regarding the real estate business without regard to the Ensign healthcare business. As a result, CareTrust intends to expand into new geographic areas, acquire properties in different asset classes, diversify its tenant base and reduce its

 

 

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financing costs. At the same time, Ensign expects to realize benefits from being a “pure play” healthcare operator and intends to continue to pursue its historical growth practices and strategies. As such, management, regulators, market analysts and investors will be able to focus solely on Ensign’s healthcare operations.

Our Relationship with Ensign

After the Spin-Off, Ensign will continue to provide healthcare services through its existing operations. As of June 30, 2013, Ensign operated 118 facilities, nine home health operations, seven hospice operations and five urgent care centers located in 11 western states. Prior to the Spin-Off, Ensign will separate the healthcare operations from the independent living operations at two locations. Giving pro forma effect to this separation and the Spin-Off, as of June 30, 2013, Ensign will operate 93 facilities under the Master Leases, 23 facilities under long-term lease arrangements with other parties and one skilled nursing facility that it will continue to own.

To govern their relationship after the Spin-Off, Ensign and CareTrust will enter into, among others: (1) a separation and distribution agreement setting forth the mechanics of the Spin-Off, certain organizational matters and other ongoing obligations of Ensign and CareTrust (the “Separation and Distribution Agreement”), (2) the Master Leases, (3) an agreement relating to tax matters (the “Tax Matters Agreement”), (4) an agreement pursuant to which Ensign will provide certain administrative and support services to CareTrust on a transitional basis (the “Transition Services Agreement”), and (5) an agreement relating to employee matters (the “Employee Matters Agreement”). See “Our Relationship with Ensign Following the Spin-Off.”

Financing

We expect to put in place a capital structure that provides us with the flexibility to grow and a cost of debt capital that allows us to compete for investment opportunities. Our financing arrangements may include bank debt, bonds, a revolving credit facility and long-term mortgage financing. Prior to the Spin-Off, we anticipate that we will issue up to $350.0 million aggregate principal amount of unsecured notes. We also anticipate that we will enter into a credit agreement providing for a revolving credit facility in an aggregate principal amount of up to $150.0 million to be provided by a syndicate of banks and other financial institutions. We expect that approximately $             million of the proceeds from the issuance of the notes will be transferred to Ensign in connection with the contribution of assets to us by Ensign prior to the Spin-Off. We expect that Ensign would use the funds received from us to repay certain outstanding third-party bank debt and other indebtedness and, subject to approval of and declaration by Ensign’s board of directors, pay up to eight regular quarterly dividends. We expect that we will use borrowings under our unsecured notes and the revolving credit facility after the Spin-Off for working capital purposes, to fund acquisitions and for general corporate purposes. The notes are expected to have terms customary for notes of this type, including customary restrictive covenants, redemption and repurchase provisions and events of default. The revolving credit facility is expected to contain customary affirmative and negative covenants, as well as customary events of default. We also anticipate that the revolving credit facility will require us to comply with specified financial maintenance covenants. We have not yet entered into any commitments with respect to our financing arrangements, and, accordingly, the terms of such financing arrangements have not yet been determined, remain under discussion and are subject to change, including as a result of market conditions. For additional information concerning this indebtedness, see “Financing.”

Restrictions on Ownership and Transfer of Our Common Stock

To assist us in complying with the limitations on the concentration of ownership of REIT stock imposed by the Code, among other purposes, our charter will provide for restrictions on ownership and transfer of our shares of stock, including, subject to certain exceptions, prohibitions on any person beneficially or constructively owning more than 9.8% of the outstanding shares of our common stock or 9.8% in value or in number, whichever is more restrictive, of the outstanding shares of all classes and series of our stock. A person

 

 

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that did not acquire more than 9.8% of our outstanding stock may become subject to our charter restrictions if repurchases by us cause such person’s holdings to exceed 9.8% of our outstanding stock. Under certain circumstances, our board of directors may waive the ownership limits. Our charter will provide that shares of our capital stock acquired or held in excess of the ownership limit will be transferred to a trust for the benefit of a designated charitable beneficiary, and that any person who acquires shares of our capital stock in violation of the ownership limit will not be entitled to any dividends on the shares or be entitled to vote the shares or receive any proceeds from the subsequent sale of the shares in excess of the lesser of the price paid for the shares or the amount realized from the sale (net of any commissions and other expenses of sale). A transfer of shares of our capital stock in violation of the ownership limit may be void under certain circumstances. Our 9.8% ownership limitation may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for our stockholders. See “Description of Our Capital Stock—Restrictions on Transfer and Ownership of CareTrust Stock.”

Our Tax Status

We intend to elect to be taxed and intend to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2014. Our qualification as a REIT will depend upon our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels to our stockholders and the concentration of ownership of our capital stock. We believe that, commencing with our taxable year ending December 31, 2014, we will be organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our intended manner of operation will enable us to meet the requirements for qualification and taxation as a REIT. In connection with the Spin-Off, we will receive an opinion of Skadden, Arps, Slate, Meagher & Flom LLP to the effect that we have been organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT.

Emerging Growth Company Status

Following the Spin-Off, we will be an “emerging growth company,” as defined in the JOBS Act. For as long as we remain an emerging growth company, we may take advantage of certain limited exemptions from various reporting requirements that are applicable to other public companies. These provisions include, but are not limited to:

 

    not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for up to five years;

 

    reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We have not made a decision whether to take advantage of any or all of these exemptions. We cannot predict if investors will find our common stock less attractive if we decide to rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile and adversely affected.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Exchange Act for complying with

 

 

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new or revised accounting standards applicable to public companies. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We may elect to take advantage of this extended transition period. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards. The election to comply with these public company effective dates is irrevocable pursuant to Section 107(b) of the JOBS Act.

We will remain an emerging growth company until the earliest of (1) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (2) the date on which we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 under the Exchange Act or any successor statute, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period, and (4) the end of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement filed under the Securities Act of 1933, as amended (the “Securities Act”).

Risk Associated with Our Business and the Spin-Off

You should carefully consider the matters discussed under the heading “Risk Factors” in this information statement.

Our Corporate Information

We were formed as a Maryland corporation and a wholly owned subsidiary of Ensign on October 29, 2013. Our principal executive offices are located at 27101 Puerta Real, Suite 450, Mission Viejo, CA 92691 and our telephone number is (949) 540-2000. We will own all of our properties, and conduct all of our operations, through our operating partnership, CareTrust Partnership, L.P. (the “Operating Partnership”). We will maintain a website at www.CareTrustREIT.com.

 

 

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Questions and Answers about CareTrust and the Separation

 

What is CareTrust, and how will the separation of Ensign’s healthcare operating business and real estate business benefit the two companies and their stockholders?    CareTrust is currently a wholly owned subsidiary of Ensign and will hold substantially all of the real property currently owned by Ensign following the Spin-Off. The separation of CareTrust from Ensign and the distribution of CareTrust common stock are intended to provide you with equity investments in two separate companies, each able to focus on its particular business. Ensign will continue to provide healthcare services through its existing operations in substantially the same manner as it has done historically. CareTrust will own, acquire and lease real estate serving the healthcare industry, and will own and operate independent living facilities. CareTrust will hold substantially all of Ensign’s real property which, on a pro forma basis as of June 30, 2013, consists of 96 skilled nursing, assisted living and independent living facilities. After the Spin-Off, all of these properties, and potentially any additional properties we may acquire prior to the Spin-Off, will be leased to Ensign on a triple-net basis, except for three independent living facilities that CareTrust will operate.
What are the reasons for the Spin-Off?    The strategic considerations and nature of Ensign’s healthcare business currently dictate and limit the size and scope of its real estate business. After the Spin-Off, CareTrust will be able to make decisions regarding the real estate business without regard to the Ensign healthcare business. As a result, CareTrust intends to expand into new geographic areas, acquire properties in different asset classes, diversify its tenant base and reduce its financing costs. At the same time, Ensign expects to realize benefits from being a “pure play” healthcare operator and intends to continue to pursue its historical growth practices and strategies. As such, management, regulators, market analysts and investors will be able to focus solely on Ensign’s healthcare operations. See “The Spin-Off—Reasons for the Spin-Off.”
Why is CareTrust referred to as a REIT, and what is a REIT?   

Following the Spin-Off, CareTrust intends to elect to be taxed and intends to qualify as a real estate investment trust or “REIT” for U.S. federal income tax purposes commencing with its taxable year ending December 31, 2014.

 

A REIT is a company that derives most of its income from real property or real estate mortgages and has elected to be taxed as a REIT. If a corporation elects to be taxed and qualifies as a REIT, it will generally not be subject to U.S. federal corporate income taxes on income that it currently distributes to its stockholders. A company’s qualification as a REIT depends on its ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of its gross income, the composition and values of its assets, its distribution levels to its stockholders and the concentration of ownership of its capital stock.

Why is the separation of CareTrust structured as a distribution?    Ensign believes that a Spin-Off, or distribution, of CareTrust common stock to Ensign stockholders is an efficient way to separate

 

 

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   CareTrust’s real estate business from Ensign’s healthcare business. Ensign believes that the separation will create benefits and value for CareTrust, Ensign and their respective stockholders.
How will the separation of CareTrust work?    Ensign will distribute the shares of CareTrust common stock to the holders of Ensign common stock on a pro rata basis. Holders of Ensign common stock will receive cash in lieu of any fractional shares of CareTrust common stock which they would have otherwise received.
What is the record date for the Spin-Off?    Record ownership will be determined as of the close of business on                     , 2014.
When will the Spin-Off occur?    We expect that Ensign will distribute the shares of CareTrust common stock on                     , 2014, to holders of record of Ensign common stock as of the record date, subject to certain conditions described under “The Spin-Off—Conditions to the Spin-Off.”
What do stockholders need to do to participate in the Spin-Off?    No action is required on the part of stockholders. Stockholders who hold Ensign common stock as of the record date will not be required to take any action to receive shares of CareTrust common stock in the Spin-Off. No stockholder approval of the Spin-Off is required or sought. We are not asking you for a proxy, and you are requested not to send us a proxy.
If I sell my shares of Ensign common stock prior to the Spin-Off, will I still be entitled to receive shares of CareTrust in the Spin-Off?    If you hold shares of Ensign common stock as of the record date and decide to sell the shares prior to the distribution date, you may choose to sell such shares with or without your entitlement to receive shares of CareTrust common stock. If you sell your Ensign common stock in the “due-bills” market after the record date and prior to the distribution date, you also will be selling your right to receive shares of CareTrust common stock in connection with the Spin-Off. However, if you sell your Ensign common stock in the “ex-distribution” market prior to the distribution date, you will still receive shares of CareTrust common stock in the Spin-Off.
   If you sell your Ensign common stock prior to the distribution date, you should make sure your bank or broker understands whether you want to sell your Ensign common stock or the CareTrust common stock you will receive in the Spin-Off or both. You should consult your financial advisors, such as your bank, broker or tax advisor, to discuss your options and alternatives. See “The Spin-Off—Listing and Trading of Our Shares” for additional details.
How will fractional shares be treated in the Spin-Off?    No fractional shares will be distributed in connection with the Spin-Off. Instead, holders of Ensign common stock will receive a cash payment equal to the value of such shares in lieu of fractional shares.

 

 

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Can Ensign decide to cancel the Spin-Off even if all the conditions have been satisfied?    Yes. The Spin-Off is subject to the satisfaction or waiver of certain conditions. Until the Spin-Off has occurred, Ensign has the right to terminate the transaction, even if all of the conditions have been satisfied, if the board of directors of Ensign determines that the Spin-Off is not in the best interests of Ensign and its stockholders or that market conditions or other circumstances are such that the Spin-Off is no longer advisable at that time.
What are the conditions to the Spin-Off?    The Spin-Off is subject to the satisfaction of a number of conditions, including, among others:
  

•    the final approval by the board of directors of Ensign of the Spin-Off and all related transactions (and such approval not having been withdrawn) and determination of the record date;

  

•    CareTrust’s registration statement on Form 10, of which this information statement is a part, becoming effective under the Exchange Act, and no stop order relating to the registration statement being in effect;

  

•    the mailing by Ensign of this information statement to record holders of Ensign common stock as of the record date;

  

•    the receipt by Ensign of the IRS Ruling (as defined below) in a form satisfactory to Ensign in its sole and absolute discretion, to the effect, among other things, that the Spin-Off will qualify as a tax-free transaction for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Code;

  

•    the receipt by Ensign of the Tax Opinion (as defined below), in form and substance satisfactory to Ensign in its sole and absolute discretion, to the effect that certain requirements for tax-free treatment, on which the Internal Revenue Service (the “IRS”) will not rule, will be satisfied;

  

•    the receipt by CareTrust of a tax opinion, in form and substance reasonably satisfactory to CareTrust, to the effect that, commencing with CareTrust’s taxable year ending on December 31, 2014, CareTrust has been organized in conformity with the requirements for qualification as a REIT under the Code, and its proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT;

  

•    the approval of the listing of CareTrust’s common stock on NASDAQ, subject to official notice of issuance;

 

 

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•   the transfer by CareTrust to Ensign of a portion of the proceeds from our Operating Partnership’s issuance of notes;

  

•   the absence of any order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing consummation of the Spin-Off or any of the transactions related thereto, including the transfers of assets and liabilities contemplated by the Separation and Distribution Agreement;

  

•   the absence of any events or developments having occurred prior to the Spin-Off that, in the judgment of the board of directors of Ensign, would result in the Spin-Off having a material adverse effect on Ensign or its stockholders;

  

•   the adoption by CareTrust of its amended and restated charter and bylaws;

  

•   the execution by the parties of the Separation and Distribution Agreement and all other ancillary agreements relating to the Spin-Off, including the Master Leases; and

  

•   Ensign’s receipt of applicable regulatory approvals relating to the Spin-Off.

   We cannot assure you that any or all of the conditions will be satisfied or waived. See “The Spin-Off—Conditions to the Spin-Off” for additional details.
Does CareTrust intend to pay cash dividends?    Following the Spin-Off, CareTrust intends to make regular quarterly dividend payments of all or substantially all of its REIT taxable income to holders of its common stock out of assets legally available for this purpose. Dividends will be authorized by CareTrust’s board of directors and declared by CareTrust based on a number of factors including actual results of operations, dividend restrictions under Maryland law, its liquidity and financial condition, its taxable income, the annual distribution requirements under the REIT provisions of the Code, its operating expenses and other factors its directors deem relevant. For more information, see “Dividend Policy.”
What will happen to Ensign equity awards in connection with the separation?    It is expected that outstanding Ensign equity awards at the time of the Spin-Off will be treated as follows:
  

 

Restricted Stock. Awards of restricted Ensign common stock will be treated in the same manner as other shares of Ensign common stock, as described above.

 

 

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   Stock Options. No changes will be made with respect to Ensign options held by anyone who is employed by Ensign immediately after the Spin-Off, or former or retired employees, other than appropriate adjustments to increase the number of shares subject to each option and reduce the exercise price per share so as to preserve the value that existed with respect to such option immediately prior to the Spin-Off.
What will be the relationship between Ensign and CareTrust following the Spin-Off?    Ensign will not own any shares of CareTrust common stock following the Spin-Off. CareTrust and Ensign will enter into the Separation and Distribution Agreement, the five Master Leases, the Tax Matters Agreement, the Transition Services Agreement and the Employee Matters Agreement. Such agreements will govern CareTrust’s relationship with Ensign after the Spin-Off, including certain transition services, allocations of assets and liabilities and obligations attributable to periods prior to the Spin-Off, and indemnification arrangements for certain liabilities. See “Our Relationship with Ensign Following the Spin-Off.”
Will I receive physical certificates representing shares of CareTrust common stock following the Spin-Off?    No. Following the Spin-Off, neither Ensign nor CareTrust will be issuing physical certificates representing shares of CareTrust common stock. Instead, Ensign, with the assistance of                     , the distribution agent, will electronically issue shares of CareTrust common stock to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. The distribution agent will mail you a book-entry account statement that reflects your shares of CareTrust common stock, or your bank or brokerage firm will credit your account for the shares. A benefit of issuing stock electronically in book-entry form is that there will be none of the physical handling and safekeeping responsibilities that are inherent in owning physical stock certificates. See “The Spin-Off—Manner of Effecting the Spin-Off.”
What will the price be for my shares of CareTrust common stock and when will I be able to trade such shares?    Ensign currently owns all of the outstanding shares of CareTrust common stock, so there is no current trading market for CareTrust common stock. CareTrust has applied to list its common stock on NASDAQ under the symbol “CTRE.” We anticipate that a limited market, commonly known as a “when-issued” trading market, will develop shortly before the record date, and that “regular-way” trading in shares of CareTrust common stock will begin on the first trading day following the distribution date. If trading begins on a “when-issued” basis, you may purchase or sell CareTrust common stock up to and including the distribution date, but your transaction will not settle until after the distribution date. We cannot predict the trading prices for CareTrust common stock before, on or after the distribution date.

 

 

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Will the number of shares of Ensign common stock that I own change as a result of the Spin-Off?    No. The number of shares of Ensign common stock you own will not change as a result of the Spin-Off.
Will my shares of Ensign common stock continue to trade after the Spin-Off?    Yes. Ensign common stock will continue to be listed and traded on NASDAQ under the symbol “ENSG.” See “The Spin-Off—Listing and Trading of Our Shares” for additional details.
Are there risks associated with owning CareTrust common stock?    Yes. CareTrust’s business is subject to both general and specific risks and uncertainties relating to its business, including risks specific to its industry and operations, its leverage, its relationship with Ensign and its status as a separate, publicly traded company. Its business is also subject to risks relating to the Spin-Off. These risks are described in the “Risk Factors” section of this information statement beginning on page 16. We encourage you to read that section carefully.
Do I have appraisal rights in connection with the Spin-Off?    No. Ensign stockholders will not have any appraisal rights in connection with the Spin-Off.
What are the material U.S. federal income tax consequences of the Spin-Off?    Ensign is seeking a private letter ruling from the IRS substantially to the effect that, on the basis of certain facts presented and representations and assumptions set forth in the request submitted to the IRS, the Spin-Off will qualify as tax-free under Sections 368(a)(1)(D) and 355 of the Code (the “IRS Ruling”). Ensign has requested and expects to receive the IRS Ruling from the IRS prior to the mailing date of this information statement. The IRS Ruling does not address certain requirements for tax-free treatment of the Spin-Off under Section 355 of the Code, and Ensign expects to receive opinions from its tax advisors (collectively, the “Tax Opinion”), substantially to the effect that, with respect to such requirements on which the IRS will not rule, such requirements will be satisfied.
   The tax consequences to you of the Spin-Off depend on your individual situation. You are urged to consult with your tax advisor as to the particular tax consequences of the Spin-Off to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws. For additional details, see “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off” and “U.S. Federal Income Tax Considerations.”
How will the Spin-Off affect my tax basis and holding period in Ensign common stock?    Assuming that the Spin-Off is tax-free to Ensign stockholders, your tax basis in Ensign common stock held by you immediately prior to the Spin-Off will be allocated between your Ensign common stock and CareTrust common stock that you receive in the Spin-Off in proportion to the relative fair market values of each immediately following the Spin-Off. Your holding period for such Ensign shares will not be affected by the Spin-Off. Your holding period for the

 

 

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   shares of CareTrust common stock that you receive in the Spin-Off will include the holding period of your shares of Ensign common stock, provided that such Ensign shares are held as capital assets immediately following the Spin-Off. Ensign will provide its stockholders with information to enable them to compute their tax basis in both Ensign and CareTrust common stock. This information will be posted on Ensign’s website, www.ensigngroup.net, promptly following the distribution date. See “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.” You are urged to consult with your tax advisor as to the particular tax consequences of the Spin-Off to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.
What is the Purging Distribution?    Ensign will allocate its accumulated earnings and profits (as determined for U.S. federal income tax purposes) for periods prior to the Spin-Off between Ensign and CareTrust in a manner that, in its best judgment, is in accordance with applicable provisions of the Code. As a result of its intended election to be taxed as a REIT for U.S. federal income tax purposes, in order to comply with certain REIT qualification requirements, CareTrust will declare a dividend to its stockholders to distribute any accumulated earnings and profits attributable to any non-REIT years, including any earnings and profits allocated to CareTrust in connection with the Spin-Off.
What will I receive in connection with the Purging Distribution?    The Purging Distribution will be paid to CareTrust stockholders in a combination of cash and CareTrust stock, with the cash portion not to exceed 25% of the total amount of the Purging Distribution. CareTrust expects to make the Purging Distribution shortly after the Spin-Off. See “The Spin-Off—The Purging Distribution.”
What are the U.S. federal income tax consequences of the Purging Distribution?    Ensign is seeking the IRS Ruling, which will address, in addition to the treatment of the Spin-Off, certain issues relevant to CareTrust’s payment of the Purging Distribution in a combination of cash and CareTrust stock. Ensign has requested and expects to receive the IRS Ruling prior to the mailing date of this information statement. In general, the IRS Ruling will provide, subject to the terms and conditions contained therein, that (1) any and all of the cash and stock distributed by CareTrust to its stockholders as part of the Purging Distribution will be treated as a distribution of property with respect to CareTrust stock, and as a dividend to the extent of CareTrust’s current and accumulated earnings and profits (as determined for U.S. federal income tax purposes) and (2) the amount of any distribution of stock received by any of CareTrust’s stockholders as part of the Purging Distribution will be considered to equal the amount of the money which could have been received instead. In the Purging Distribution, a holder of CareTrust common stock will be required to report dividend income as a result of the Purging Distribution even if CareTrust distributes no cash or only nominal amounts of cash to such stockholder.

 

 

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   You are urged to consult with your tax advisor as to the particular tax consequences of the Purging Distribution to you, including the applicability of any U.S. federal, state and local and non-U.S. tax laws. See “The Spin-Off—The Purging Distribution.”
Who is the transfer agent for CareTrust shares?   
Where can I get more information?   

Before the Spin-Off, if you have any questions relating to the Spin-Off, you should contact Ensign at:

 

The Ensign Group, Inc.

27101 Puerta Real, Suite 450

Mission Viejo, CA 92691

Phone: (949) 487-9500

 

After the Spin-Off, if you have any questions relating to us or our common stock, you should contact us at:

 

CareTrust REIT, Inc.

27101 Puerta Real, Suite 450

Mission Viejo, CA 92691

Phone: (949) 540-2000

 

 

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Summary Historical and Pro Forma Condensed Combined Financial Data

The following table sets forth summary and selected financial data for Ensign Properties (as described below) on a historical basis, as well as for us on a pro forma basis. Prior to the Spin-Off, we will not have operated our business separate from Ensign. We use the term “Ensign Properties” to mean the carve-out business of the entities that own the skilled nursing, assisted living and independent living facilities that we will own following the Spin-Off, and the operations of the three independent living facilities that we will operate following the Spin-Off. Ensign Properties is the predecessor of CareTrust.

The summary historical financial data as of December 31, 2012 and 2011, and for each of the years ended December 31, 2012, 2011 and 2010, has been derived from Ensign Properties’ audited combined financial statements included elsewhere in this information statement. The summary historical financial data as of June 30, 2013, and for the six months ended June 30, 2013 and 2012, has been derived from Ensign Properties’ unaudited condensed combined financial statements included elsewhere in this information statement. Our management believes the assumptions underlying Ensign Properties’ combined financial statements and accompanying notes are reasonable. However, such combined financial statements may not necessarily reflect our financial condition and results of operations in the future, or what they would have been had we been a separate, stand-alone company during the periods presented.

The unaudited pro forma combined financial data as of and for the six months ended June 30, 2013, and for the year ended December 31, 2012, is derived from the combined pro forma financial statements which appear elsewhere in this information statement. This pro forma data gives effect to the Spin-Off and the related transactions, including: (i) additional rental income associated with new master lease agreements between Ensign Properties and Ensign that were previously leased under intercompany lease agreements; (ii) the distribution of approximately              million shares of CareTrust common stock by Ensign to Ensign stockholders; (iii) the anticipated issuance by our Operating Partnership of $350.0 million aggregate principal amount of unsecured notes, and the anticipated interest expense related thereto; (iv) a $              million repayment of debt attributed to Ensign Properties; (v) the elimination of all income tax provisions in conjunction with the achievement of REIT status; and (vi) the effect of the Purging Distribution. The unaudited pro forma combined statements of income presented for the six months ended June 30, 2013 and the year ended December 31, 2012 assume the Spin-Off and the related transactions occurred on January 1, 2012. The unaudited pro forma combined balance sheet assumes the Spin-Off and the related transactions occurred on June 30, 2013. The pro forma financial data is not necessarily indicative of what our actual financial condition and results of operations would have been as of the date and for the periods indicated if we had been a separate, stand-alone company during the periods presented, nor does it purport to represent our future financial condition or results of operations.

The following should be read in conjunction with Ensign Properties’ combined financial statements and accompanying notes, our unaudited pro forma combined financial statements and accompanying notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each of which are included elsewhere in this information statement.

 

 

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     As of or For the Six Months Ended
June 30,
     As of or For the Year Ended
December 31,
 
     Pro Forma
2013
     2013      2012      Pro Forma
2012
     2012      2011      2010  

Operating data:

                    

Total net revenues

    $                     $ 23,388          $ 20,419          $                     $ 42,063          $ 31,941          $ 22,187     
Income (loss) before
income taxes
    $          $ 1,150          $ (187)         $          $ 232          $ (6,514)         $ (3,815)    

Net income (loss)

    $          $ 1,066          $ (84)         $          $ 110          $ (5,341)         $ (2,473)    

Balance sheet data:

                    

Total assets

    $          $ 427,766        $ 386,629        $          $ 398,978        $ 374,466        $ 246,039   

Total liabilities

    $          $ 219,714        $ 207,885        $          $ 214,430        $ 194,857        $ 147,639   

Total equity

    $          $ 208,052        $ 178,745        $          $ 184,548        $ 179,609        $ 98,400   

Other financial data:

                    

FFO (1)

       $ 12,458        $ 10,021           $ 21,213        $ 11,277        $ 9,234   

AFFO (1)

       $ 13,024        $ 10,480           $ 22,122        $ 14,902        $ 9,891   

 

(1) We believe that net income, as defined by U.S. generally accepted accounting principles (“GAAP”), is the most appropriate earnings measure. We also believe that funds from operations (“FFO”), as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), and adjusted funds from operations (“AFFO”) (and related per share amounts) are important non-GAAP supplemental measures of operating performance for a REIT. We consider FFO and AFFO to be useful measures for reviewing comparative operating and financial performance because, by excluding real estate depreciation and amortization and, for AFFO, by excluding non-cash expenses (including stock-based compensation expense and amortization of deferred financing costs) and acquisition pursuit costs, FFO and AFFO can help investors compare our operating performance between periods or as compared to other companies. See further discussion of FFO and AFFO in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Discussion of Historical Results of Operations of Ensign Properties—Non-GAAP Measurements.”

The following table reconciles our calculations of FFO and AFFO for the years ended December 31, 2012, 2011, and 2010, for the six months ended June 30, 2013 and 2012 and the unaudited pro forma combined financial data for the six months ended June 30, 2013, and for the year ended December 31, 2012 to net income, the most directly comparable GAAP financial measure, for the same periods (in thousands).

 

     As of or For the Six Months Ended
June 30,
    As of or For the Year Ended
December 31,
 
     Pro Forma
2013
     2013      2012     Pro Forma
2012
     2012      2011     2010  
Net income (loss)     $                     $ 1,066        $ (84    $                     $ 110        $ (5,341    $ (2,473
Depreciation and amortization         11,392         10,105           21,103         16,618        11,707   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

FFO

        12,458         10,021           21,213         11,277        9,234   
Acquisition pursuit costs         211         108           189         467        135   
Stock-based compensation         5         7           15         15          
Amortization of deferred financing costs         350         344           705         601        522   
Loss on extinguishment of debt                                   2,542          
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
AFFO     $          $ 13,024        $ 10,480       $          $ 22,122        $ 14,902       $ 9,891   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

 

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RISK FACTORS

You should carefully consider the following risks and other information in this information statement in evaluating us and our common stock. Any of the following risks, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our business, financial condition or results of operations, and could, in turn, impact the trading price of our common stock.

RISKS RELATED TO OUR SPIN-OFF FROM ENSIGN

We may be unable to achieve some or all the benefits that we expect to achieve from the Spin-Off.

The Spin-Off may not have the full or any strategic and financial benefits that we expect, or such benefits may be delayed or may not materialize at all. The anticipated benefits of the Spin-Off are based on a number of assumptions, which may prove incorrect. For example, we believe that the Spin-Off will allow us to expand into new geographic areas, acquire properties in different asset classes, diversify our tenant base and reduce our financing costs. In the event that the Spin-Off does not have these and other expected benefits for any reason, the costs associated with the transaction could have a negative effect on our financial condition and our ability to make distributions to our stockholders.

After the Spin-Off, we may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as a separate, publicly traded company primarily focused on owning a portfolio of healthcare properties.

We have no historical operations as an independent company and may not, at the time of the Spin-Off, have the infrastructure and personnel necessary to operate as a separate, publicly traded company. As a result of the Spin-Off, immediately after the distribution date, we will be directly subject to, and responsible for, regulatory compliance, including the reporting and other obligations under the Exchange Act, the requirements of the Sarbanes-Oxley Act and compliance with NASDAQ’s continued listing requirements, as well as compliance with generally applicable tax and accounting rules.

The Exchange Act requires that we file annual, quarterly, and current reports about our business and financial condition. Under the Sarbanes-Oxley Act, we must maintain effective disclosure controls and procedures and internal control over financial reporting, which require significant resources and management oversight. As an emerging growth company, we will be excluded from Section 404(b) of the Sarbanes-Oxley Act, which otherwise would have required our auditors to formally attest to and report on the effectiveness of our internal control over financial reporting. If we cannot maintain effective disclosure controls and procedures or favorably assess the effectiveness of our internal control over financial reporting, or once we are no longer an emerging growth company, our independent registered public accounting firm cannot provide an unqualified attestation report on the effectiveness of our internal control over financial reporting, investor confidence and, in turn, the market price of our common stock could decline.

Upon the completion of the Spin-Off, Ensign will be obligated to provide certain transition services to us pursuant to the Transition Services Agreement, which will allow us time, if necessary, to build the infrastructure and retain the personnel necessary to operate as a separate, publicly traded company without relying on such transition services. Following the expiration of the Transition Services Agreement, Ensign will be under no obligation to provide further assistance to us. Because our business has not been operated as a separate, publicly traded company, we cannot assure you that we will be able to successfully implement the infrastructure or retain the personnel necessary to operate as a separate, publicly traded company or that we will not incur costs in excess of anticipated costs to establish such infrastructure and retain such personnel.

 

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If the Spin-Off were to fail to qualify as a tax-free transaction for U.S. federal income tax purposes, Ensign, Ensign stockholders and we could be subject to significant tax liabilities and, in certain circumstances, we could be required to indemnify Ensign for material taxes pursuant to indemnification obligations under the Tax Matters Agreement that we will enter into with Ensign.

Ensign is seeking the IRS Ruling substantially to the effect that, on the basis of certain facts presented and representations and assumptions set forth in the request submitted to the IRS, the Spin-Off will qualify as tax-free under Sections 368(a)(1)(D) and 355 of the Code. Ensign has requested and expects to receive the IRS Ruling from the IRS prior to the mailing date of this information statement. The IRS Ruling does not address certain requirements for tax-free treatment of the Spin-Off under Section 355 of the Code, and Ensign expects to receive a Tax Opinion, substantially to the effect that, with respect to such requirements on which the IRS will not rule, such requirements will be satisfied. The IRS Ruling, and the Tax Opinion that Ensign expects to receive, will rely on, among other things, certain facts, representations, assumptions and undertakings, including those relating to the past and future conduct of our and Ensign’s businesses, and the IRS Ruling and the Tax Opinion would not be valid if such facts, representations, assumptions and undertakings were incorrect in any material respect. Notwithstanding the IRS Ruling and the Tax Opinion, the IRS could determine the Spin-Off should be treated as a taxable transaction for U.S. federal income tax purposes if it determines any of the facts, representations, assumptions or undertakings that will be included in the request for the IRS Ruling are false or have been violated or if it disagrees with the conclusions in the opinions that are not covered by the IRS Ruling. For more information regarding the IRS Ruling and the opinion, see “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

If the Spin-Off ultimately is determined to be taxable, then a stockholder of Ensign that received shares of our common stock in the Spin-Off would be treated as having received a distribution of property in an amount equal to the fair market value of such shares on the distribution date and could incur significant income tax liabilities. Such distribution would be taxable to such stockholder as a dividend to the extent of Ensign’s current and accumulated earnings and profits (including earnings and profits resulting from the recognition of gain by Ensign in the Spin-Off). Any amount that exceeded Ensign’s earnings and profits would be treated first as a non-taxable return of capital to the extent of such stockholder’s tax basis in its shares of Ensign stock with any remaining amount being taxed as a capital gain. In addition, if the Spin-Off is determined to be taxable, Ensign would recognize taxable gain in an amount equal to the excess, if any, of the fair market value of the shares of our common stock held by Ensign on the distribution date over Ensign’s tax basis in such shares. Such taxable gain and resulting tax liability would be substantial.

In addition, under the terms of the Tax Matters Agreement that we will enter into with Ensign, we generally will be responsible for any taxes imposed on Ensign that arise from the failure of the Spin-Off to qualify as tax-free for U.S. federal income tax purposes, within the meaning of Sections 368(a)(1)(D) and 355 of the Code, to the extent such failure to qualify is attributable to certain actions, events or transactions relating to our stock, assets or business, or a breach of the relevant representations or any covenants made by us in the Tax Matters Agreement, the materials submitted to the IRS in connection with the request for the IRS Ruling or the representation letter provided in connection with the Tax Opinion relating to the Spin-Off. Our indemnification obligations to Ensign and its subsidiaries, officers and directors will not be limited by any maximum amount. If we are required to indemnify Ensign under the circumstance set forth in the Tax Matters Agreement, we may be subject to substantial tax liabilities. For more information regarding the Tax Matters Agreement, see “Our Relationship with Ensign Following the Spin-Off—Tax Matters Agreement.”

We may not be able to engage in desirable strategic transactions and equity issuances following the Spin-Off because of certain restrictions relating to requirements for tax-free distributions for U.S. federal income tax purposes. In addition, we could be liable for adverse tax consequences resulting from engaging in significant strategic or capital-raising transactions.

Our ability to engage in significant strategic transactions and equity issuances may be limited or restricted after the Spin-Off in order to preserve, for U.S. federal income tax purposes, the tax-free nature of the Spin-Off. Even if the Spin-Off otherwise qualifies for tax-free treatment under Sections 368(a)(1)(D) and 355 of the Code,

 

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it may result in corporate level taxable gain to Ensign under Section 355(e) of the Code if 50% or more, by vote or value, of shares of our stock or Ensign’s stock are acquired or issued as part of a plan or series of related transactions that includes the Spin-Off. The process for determining whether an acquisition or issuance triggering these provisions has occurred is complex, inherently factual and subject to interpretation of the facts and circumstances of a particular case. Any acquisitions or issuances of our stock or Ensign stock within a two-year period after the Spin-Off generally are presumed to be part of such a plan, although we or Ensign, as applicable, may be able to rebut that presumption.

Under the Tax Matters Agreement that we will enter into with Ensign, we also will generally be responsible for any taxes imposed on Ensign that arise from the failure of the Spin-Off to qualify as tax-free for U.S. federal income tax purposes, within the meaning of Sections 368(a)(1)(D) and 355 of the Code, to the extent such failure to qualify is attributable to actions, events or transactions relating to our stock, assets or business, or a breach of the relevant representations or any covenants made by us in the Tax Matters Agreement, the materials submitted to the IRS in connection with the request for the IRS Ruling or the representation letter provided to counsel in connection with the Tax Opinion. For a more detailed description, see “Our Relationship with Ensign Following the Spin-Off—Tax Matters Agreement.”

Our agreements with Ensign may not reflect terms that would have resulted from arm’s-length negotiations with unaffiliated third parties.

The agreements related to the Spin-Off, including the Separation and Distribution Agreement, the five Master Leases, the Tax Matters Agreement, the Transition Services Agreement and the Employee Matters Agreement, will have been negotiated in the context of the Spin-Off while we are still a wholly owned subsidiary of Ensign. As a result, although those agreements are intended to reflect arm’s-length terms, they may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties. Conversely, certain agreements related to the Spin-Off may include terms that are more favorable than those that would have resulted from arm’s-length negotiations among unaffiliated third parties. Following expiration of those agreements, we may have to enter into new agreements with unaffiliated third parties, and such agreements may include terms that are less favorable to us. The terms of the agreements being negotiated in the context of the Spin-Off concern, among other things, divisions and allocations of assets and liabilities and rights and obligations, between Ensign and us. For a more detailed description, see “Our Relationship with Ensign Following the Spin-Off.”

Until the Spin-Off occurs, Ensign has the sole discretion to change the terms of the Spin-Off in ways that may be unfavorable to us.

Until the Spin-Off occurs, Ensign’s board of directors will have the sole and absolute discretion to determine and change the terms of the Spin-Off, including the establishment of the record date and distribution date. These changes could be unfavorable to us. In addition, the Spin-Off is subject to the satisfaction or waiver of a number of conditions. For a more detailed description of these conditions, see the section entitled “The Spin-Off—Conditions to the Spin-Off.” We cannot assure you that any or all of these conditions will be met. The fulfillment of the conditions to the Spin-Off will not create any obligation on Ensign’s part to effect the Spin-Off. Ensign’s board of directors may, in its absolute and sole discretion, decide at any time prior to the Spin-Off not to proceed with the Spin-Off.

Ensign Properties’ combined historical financial data and our pro forma combined financial data included in this information statement do not purport to be indicative of the results we would have achieved as a separate, publicly traded company and may not be a reliable indicator of future results.

Ensign Properties’ combined historical financial data and our pro forma combined financial data included in this information statement may not reflect our business, financial position or results of operations had we been a separate, publicly traded company during the periods presented, or what our business, financial position or results of operations will be in the future when we are a separate, publicly traded company. Prior to

 

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the Spin-Off, our business will have been operated by Ensign as part of one corporate organization and not operated as a stand-alone company. Because we will not acquire ownership of the entities that own our real estate assets until immediately prior to the Spin-Off, there are no historical financial statements for us as we will exist following the Spin-Off. Significant changes will occur in our cost structure, financing and business operations as a result of our operation as a stand-alone company and the entry into transactions with Ensign that have not existed historically, including the Master Leases.

The pro forma financial data included in this information statement includes adjustments based upon available information that our management believes to be reasonable to reflect these factors. However, the assumptions may change or may be incorrect, and actual results may differ, perhaps significantly. In addition, the pro forma financial data does not include adjustments for estimated general and administrative expenses. For these reasons, our cost structure may be higher and our future financial costs and performance may be worse than the performance implied by the pro forma financial data presented in this information statement. For additional information about the basis of presentation of Ensign Properties’ combined historical financial data and our pro forma combined financial data included in this information statement, see “Financing,” “Capitalization,” “Summary—Summary Historical and Pro Forma Condensed Combined Financial Data,” “CareTrust’s Unaudited Pro Forma Combined Financial Statements,” “Selected Combined Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Ensign Properties’ combined historical financial statements and accompanying notes, included elsewhere in this information statement.

The ownership by our chief executive officer, Gregory K. Stapley, and one of our directors, Christopher R. Christensen, of shares of Ensign common stock may create, or may create the appearance of, conflicts of interest.

Because of their current or former positions with Ensign, our chief executive officer, Gregory K. Stapley, and one of our directors, Christopher R. Christensen, own shares of Ensign common stock. After the Spin-Off, Mr. Stapley and Mr. Christensen will own shares of our common stock and Ensign common stock. Their individual holdings of shares of our common stock and Ensign common stock may be significant compared to their respective total assets. These equity interests may create, or appear to create, conflicts of interest when they are faced with decisions that may not benefit or affect CareTrust and Ensign in the same manner.

After the Spin-Off, Christopher R. Christensen, one of our directors, may have actual or potential conflicts of interest because of his position at Ensign.

After the Spin-Off, Christopher R. Christensen, one of our director nominees, will continue to serve as the chief executive officer of Ensign as well as a member of Ensign’s board of directors. These overlapping positions could create, or appear to create, potential conflicts of interest when our or Ensign’s management and directors pursue the same corporate opportunities or face decisions that could have different implications for us and Ensign. For example, potential conflicts of interest could arise in connection with the resolution of any dispute between us and Ensign (or its subsidiaries) regarding the terms of the agreements between us and Ensign governing our relationship with Ensign following the Spin-Off (e.g., the Master Leases). Potential conflicts of interest could also arise if we and Ensign enter into any commercial arrangements with each other in the future.

Ensign’s inability to obtain all material authorizations, consents, approvals and clearances of third parties including lenders and U.S. federal, state and local governmental agencies (“Third-Party Approvals”) in connection with the Spin-Off may have a material adverse effect on Ensign’s ability to consummate the Spin-Off.

Ensign may be required, or deem it desirable, to obtain certain Third-Party Approvals to consummate the Spin-Off and the restructuring of Ensign’s business in connection therewith, including consents of mortgage lenders. There is no assurance that Ensign will be able to obtain these Third-Party Approvals. Ensign may decide not to consummate the Spin-Off if it does not receive some or all of these Third-Party Approvals, unless it believes that the inability to obtain one or more Third-Party Approvals would not reasonably be expected to have a material adverse effect on the business, financial position or results of operations of Ensign or us. However, there can be no assurance that such a material adverse effect will not occur.

 

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The Spin-Off could give rise to disputes or other unfavorable effects, which could materially and adversely affect our business, financial position or results of operations.

The Spin-Off may lead to increased operating and other expenses, of both a nonrecurring and a recurring nature, and to changes to certain operations, which expenses or changes could arise pursuant to arrangements made between Ensign and us or could trigger contractual rights of, and obligations to, third parties. Disputes with third parties could also arise out of these transactions, and we could experience unfavorable reactions to the Spin-Off from employees, lenders, ratings agencies, regulators or other interested parties. These increased expenses, changes to operations, disputes with third parties, or other effects could materially and adversely affect our business, financial position or results of operations. In addition, following the completion of the Spin-Off, disputes with Ensign could arise in connection with any of the Master Leases, the Separation and Distribution Agreement, the Transition Services Agreement, the Employee Matters Agreement, the Tax Matters Agreement or other agreements.

Our potential indemnification liabilities pursuant to the Separation and Distribution Agreement could materially and adversely affect us.

The Separation and Distribution Agreement between us and Ensign will provide for, among other things, the principal corporate transactions required to effect the Spin-Off, certain conditions to the Spin-Off and provisions governing the relationship between us and Ensign after the Spin-Off. For a description of the Separation and Distribution Agreement, see “Our Relationship with Ensign Following the Spin-Off—Separation and Distribution Agreement.” Among other things, the Separation and Distribution Agreement will provide for indemnification obligations designed to make us financially responsible for substantially all liabilities that may exist relating to or arising out of our business. If we are required to indemnify Ensign under the circumstances set forth in the Separation and Distribution Agreement, we may be subject to substantial liabilities.

In connection with the Spin-Off, Ensign will indemnify us for certain liabilities. However, there can be no assurance that these indemnities will be sufficient to insure us against the full amount of such liabilities, or that Ensign’s ability to satisfy its indemnification obligation will not be impaired in the future.

Pursuant to the Separation and Distribution Agreement, the Tax Matters Agreement and other agreements we will enter into in connection with the Spin-Off, Ensign will agree to indemnify us for certain liabilities. However, third parties could seek to hold us responsible for any of the liabilities that Ensign will agree to retain pursuant to these agreements, and there can be no assurance that Ensign will be able to fully satisfy its indemnification obligations under these agreements. Moreover, even if we ultimately succeed in recovering from Ensign any amounts for which we are held liable, we may be temporarily required to bear these losses while seeking recovery from Ensign.

The Spin-Off may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws.

The Spin-Off and related transactions, including the Purging Distribution, are subject to review under various state and federal fraudulent conveyance laws. Under U.S. federal bankruptcy law and comparable provisions of state fraudulent transfer or conveyance laws, which vary from state to state, the Spin-Off or any of the related transactions could be voided as a fraudulent transfer or conveyance if Ensign (a) distributed property with the intent of hindering, delaying or defrauding creditors or (b) received less than reasonably equivalent value or fair consideration in return for such distribution, and one of the following is also true at the time thereof: (1) Ensign was insolvent or rendered insolvent by reason of the Spin-Off or any related transaction, (2) the Spin-Off or any related transaction left Ensign with an unreasonably small amount of capital or assets to carry on the business, or (3) Ensign intended to, or believed that, it would incur debts beyond its ability to pay as they mature.

As a general matter, value is given under U.S. law for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or a valid antecedent debt is secured or satisfied. A debtor will generally not be considered to have received value under U.S. law in connection with a distribution to its stockholders.

 

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We cannot be certain as to the standards a U.S. court would use to determine whether or not Ensign was insolvent at the relevant time. In general, however, a U.S. court would deem an entity insolvent if: (1) the sum of its debts, including contingent and unliquidated liabilities, was greater than the value of its assets, at a fair valuation; (2) the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or (3) it could not pay its debts as they became due.

If a U.S. court were to find that the Spin-Off was a fraudulent transfer or conveyance, a court could void the Spin-Off, require stockholders to return to Ensign some or all of the shares of common stock distributed in the Spin-Off or require stockholders to pay as money damages an equivalent of the value of the shares of common stock at the time of the Spin-Off. If a U.S. court were to find that the Purging Distribution was a fraudulent transfer or conveyance, a court could void the Purging Distribution, require stockholders to return to us some or all of the Purging Distribution or require stockholders to pay as money damages an equivalent of the value of the Purging Distribution. Moreover, stockholders could be required to return any dividends previously paid by us. With respect to any transfers from Ensign to us, if any such transfer was found to be fraudulent transfer, a court could void the transaction or Ensign could be awarded monetary damages for the difference between the consideration received by Ensign and the fair market value of the transferred property at the time of the Spin-Off.

We are currently subject to applicable requirements of Ensign’s 2013 Corporate Integrity Agreement with the Office of the Inspector General for the U.S. Department of Health & Human Services, and we will remain subject to such requirements following the Spin-Off.

We are currently required to maintain a corporate compliance program pursuant to a corporate integrity agreement (the “CIA”) that Ensign entered into in October 2013 with the Office of the Inspector General of the U.S. Department of Health & Human Services. The CIA requires, among other things, that Ensign and its subsidiaries maintain such corporate compliance programs as part of compliance with various requirements of federal and private healthcare programs. After the Spin-Off, we have agreed to certain continuing obligations as part of Ensign’s compliance program pursuant to the CIA, including training in Medicare and Medicaid laws for our employees. Failure to timely comply with the applicable terms of the CIA could result in substantial civil or criminal penalties, which could adversely affect our financial condition and results of operations.

RISKS RELATED TO OUR TAXATION AS A REIT

If we do not qualify to be taxed as a REIT, or fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.

We intend to operate in a manner that will allow us to qualify to be taxed as a REIT for U.S. federal income tax purposes, which we currently expect to occur commencing with our taxable year ending December 31, 2014. References throughout this document to the “first taxable year” for which we have elected to be taxed as a REIT refer to the taxable year ending December 31, 2014. We expect to receive an opinion of Skadden, Arps, Slate, Meagher & Flom LLP with respect to our qualification as a REIT in connection with this transaction. Investors should be aware, however, that opinions of advisors are not binding on the IRS or any court. The opinion of Skadden, Arps, Slate, Meagher & Flom LLP represents only the view of Skadden, Arps, Slate, Meagher & Flom LLP based on its review and analysis of existing law and on certain representations as to factual matters and covenants made by us, including representations relating to the values of our assets and the sources of our income. The opinion is expressed as of the date issued. Skadden, Arps, Slate, Meagher & Flom LLP will have no obligation to advise us or the holders of our common stock of any subsequent change in the matters stated, represented or assumed or of any subsequent change in applicable law. Furthermore, both the validity of the opinion of Skadden, Arps, Slate, Meagher & Flom LLP and our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis, the results of which will not be monitored by Skadden, Arps, Slate,

 

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Meagher & Flom LLP. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals.

If we were to fail to qualify to be taxed as a REIT in any taxable year, we would be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and dividends paid to our stockholders would not be deductible by us in computing our taxable income. Any resulting corporate liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of our common stock. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify to be taxed as a REIT.

Qualifying as a REIT involves highly technical and complex provisions of the Code.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to qualify to be taxed as a REIT may depend in part on the actions of third parties over which we have no control or only limited influence.

Legislative or other actions affecting REITs could have a negative effect on us.

The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury (the “Treasury”). Changes to the tax laws or interpretations thereof, with or without retroactive application, could materially and adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify to be taxed as a REIT or the U.S. federal income tax consequences to our investors and us of such qualification.

We could fail to qualify to be taxed as a REIT if income we receive from Ensign or its subsidiaries is not treated as qualifying income.

Under applicable provisions of the Code, we will not be treated as a REIT unless we satisfy various requirements, including requirements relating to the sources of our gross income. See “U.S. Federal Income Tax Considerations—Taxation of REITs in General—Income Tests.” Rents received or accrued by us from Ensign or its subsidiaries will not be treated as qualifying rent for purposes of these requirements if the Master Leases are not respected as true leases for U.S. federal income tax purposes and are instead treated as service contracts, joint ventures or some other type of arrangement. If the Master Leases are not respected as true leases for U.S. federal income tax purposes, we will likely fail to qualify to be taxed as a REIT.

In addition, subject to certain exceptions, rents received or accrued by us from Ensign or its subsidiaries will not be treated as qualifying rent for purposes of these requirements if we or a beneficial or constructive owner of 10% or more of our stock beneficially or constructively owns 10% or more of the total combined voting power of all classes of Ensign stock entitled to vote or 10% or more of the total value of all classes of Ensign stock. Our charter will provide for restrictions on ownership and transfer of our shares of stock, including restrictions on such ownership or transfer that would cause the rents received or accrued by us from Ensign or its subsidiaries to be treated as non-qualifying rent for purposes of the REIT gross income requirements. The provisions of our charter that will restrict the ownership and transfer of our stock are described in “Description of Our Capital Stock—Restrictions on Transfer and Ownership of CareTrust Stock.”

 

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Nevertheless, there can be no assurance that such restrictions will be effective in ensuring that rents received or accrued by us from Ensign or its subsidiaries will not be treated as qualifying rent for purposes of REIT qualification requirements.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum U.S. federal income tax rate applicable to income from “qualified dividends” payable by U.S. corporations to U.S. stockholders that are individuals, trusts and estates is currently 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates. Although these rules do not adversely affect the taxation of REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our stock.

REIT distribution requirements could adversely affect our ability to execute our business plan.

We generally must distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, in order for us to qualify to be taxed as a REIT (assuming that certain other requirements are also satisfied) so that U.S. federal corporate income tax does not apply to earnings that we distribute. To the extent that we satisfy this distribution requirement and qualify for taxation as a REIT but distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, we will be subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal income tax laws. We intend to make distributions to our stockholders to comply with the REIT requirements of the Code.

Initially our funds from operations will be generated primarily by rents paid under the Master Leases. From time to time, we may generate taxable income greater than our cash flow as a result of differences in timing between the recognition of taxable income and the actual receipt of cash or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments. If we do not have other funds available in these situations, we could be required to borrow funds on unfavorable terms, sell assets at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions in order to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax, including the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our common stock.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state, and local taxes on our income and assets, including taxes on any undistributed income and state or local income, property and transfer taxes. See “U.S. Federal Income Tax Considerations—Taxation of CareTrust.” For example, we may hold some of our assets or conduct certain of our activities through one or more taxable REIT subsidiaries (each, a “TRS”) or other subsidiary corporations that will be subject to U.S. federal, state, and local corporate-level income taxes as regular C corporations. In addition, we may incur a 100% excise tax on transactions with a TRS if they are not conducted on an arm’s-length basis. Any of these taxes would decrease cash available for distribution to our stockholders.

Complying with REIT requirements may cause us to forego otherwise attractive acquisition opportunities or liquidate otherwise attractive investments.

To qualify to be taxed as a REIT for U.S. federal income tax purposes, we must ensure that, at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government

 

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securities and “real estate assets” (as defined in the Code). The remainder of our investments (other than government securities, qualified real estate assets and securities issued by a TRS) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our total assets (other than government securities, qualified real estate assets and securities issued by a TRS) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by securities of one or more TRSs. See “U.S. Federal Income Tax Considerations—Taxation of CareTrust.” If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate or forego otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

In addition to the asset tests set forth above, to qualify to be taxed as a REIT we must continually satisfy tests concerning, among other things, the sources of our income, the amounts we distribute to our stockholders and the ownership of our stock. We may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make certain attractive investments.

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The REIT provisions of the Code substantially limit our ability to hedge our assets and liabilities. Income from certain hedging transactions that we may enter into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets does not constitute “gross income” for purposes of the 75% or 95% gross income tests that apply to REITs, provided that certain identification requirements are met. To the extent that we enter into other types of hedging transactions or fail to properly identify such transaction as a hedge, the income is likely to be treated as non-qualifying income for purposes of both of the gross income tests. See “U.S. Federal Income Tax Considerations—Taxation of CareTrust.” As a result of these rules, we may be required to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because the TRS may be subject to tax on gains or expose us to greater risks associated with changes in interest rates that we would otherwise want to bear. In addition, losses in the TRS will generally not provide any tax benefit, except that such losses could theoretically be carried back or forward against past or future taxable income in the TRS.

Even if we qualify to be taxed as a REIT, we could be subject to tax on any unrealized net built-in gains in our assets held before electing to be treated as a REIT.

Following our REIT election, we will own appreciated assets that were held by a C corporation and will be acquired by us in a transaction in which the adjusted tax basis of the assets in our hands will be determined by reference to the adjusted basis of the assets in the hands of the C corporation. If we dispose of any such appreciated assets during the ten-year period following our qualification as a REIT, we will be subject to tax at the highest corporate tax rates on any gain from such assets to the extent of the excess of the fair market value of the assets on the date that we became a REIT over the adjusted tax basis of such assets on such date, which are referred to as built-in gains. We would be subject to this tax liability even if we qualify and maintain our status as a REIT. Any recognized built-in gain will retain its character as ordinary income or capital gain and will be taken into account in determining REIT taxable income and our distribution requirement. Any tax on the recognized built-in gain will reduce REIT taxable income. We may choose not to sell in a taxable transaction appreciated assets we might otherwise sell during the ten-year period in which the built-in gain tax applies in order to avoid the built-in gain tax. However, there can be no assurances that such a taxable transaction will not occur. If we sell

 

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such assets in a taxable transaction, the amount of corporate tax that we will pay will vary depending on the actual amount of net built-in gain or loss present in those assets as of the time we became a REIT. The amount of tax could be significant.

RISKS RELATED TO OUR BUSINESS

We will be dependent on Ensign to make payments to us under the Master Leases, and an event that materially and adversely affects Ensign’s business, financial position or results of operations could materially and adversely affect our business, financial position or results of operations.

Immediately following the Spin-Off, Ensign will be the lessee of substantially all of our properties pursuant to the Master Leases and, therefore, will be the source of substantially all of our revenues. Additionally, because each Master Lease is a triple-net lease, we will depend on Ensign to pay all insurance, taxes, utilities and maintenance and repair expenses in connection with these leased properties and to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities arising in connection with its business. There can be no assurance that Ensign will have sufficient assets, income and access to financing to enable it to satisfy its payment obligations under the Master Leases. The inability or unwillingness of Ensign to meet its rent obligations under the Master Leases could materially adversely affect our business, financial position or results of operations, including our ability to pay dividends to our stockholders as required to maintain our status as a REIT. The inability of Ensign to satisfy its other obligations under the Master Leases, such as the payment of insurance, taxes and utilities, could materially and adversely affect the condition of the leased properties as well as the business, financial position and results of operations of Ensign. For these reasons, if Ensign were to experience a material and adverse effect on its business, financial position or results of operations, our business, financial position or results of operations could also be materially and adversely affected.

For example, Ensign is dependent on the healthcare industry and may be susceptible to the risks associated with healthcare reform, which could materially and adversely affect Ensign’s business, financial position or results of operations. In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Affordable Care Act”) were signed into law. Together, these two measures make the most sweeping and fundamental changes to the U.S. health care system since the creation of Medicare and Medicaid. These new laws include a large number of health-related provisions that are scheduled to take effect over the next four years, including expanding Medicaid eligibility, requiring most individuals to have health insurance, establishing new regulations on health plans, establishing health insurance exchanges, and modifying certain payment systems to encourage more cost-effective care and a reduction of inefficiencies and waste, including through new tools to address fraud and abuse. Because substantially all of our properties will be used as healthcare properties, we will be impacted by the risks associated with the healthcare industry, including healthcare reform. While the expansion of healthcare coverage may result in some additional demand for services provided by Ensign and its subsidiaries, reimbursement may be lower than the cost required to provide such services, which could materially and adversely affect the ability of Ensign to generate profits and pay rent under the Master Leases.

Due to our dependence on rental payments from Ensign as our primary source of revenues, we may be limited in our ability to enforce our rights under, or to terminate, the Master Leases. Failure by Ensign to comply with the terms of the Master Leases or to comply with the healthcare regulations to which the leased properties are subject could require us to find another lessee for such leased property and there could be a decrease or cessation of rental payments by Ensign. In such event, we may be unable to locate a suitable lessee at similar rental rates or at all, which would have the effect of reducing our rental revenues.

Additional risks relating to Ensign’s business can be found in Ensign’s public filings with the SEC. To find out where you can get copies of these public filings, see “Where You Can Find More Information.”

 

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Tenants that fail to comply with the requirements of, or changes to, governmental reimbursement programs such as Medicare or Medicaid, may cease to operate or be unable to meet their financial and other contractual obligations to us.

Ensign and other healthcare operators to which we lease properties in the future are subject to complex federal, state and local laws and regulations relating to governmental healthcare reimbursement programs. See “Business—Government Regulation, Licensing and Enforcement.” For the six months ended June 30, 2013, Ensign received 72.7% of its revenue from government payors, primarily Medicare and Medicaid. As a result, Ensign is, and future tenants may be, subject to the following risks, among others:

 

    statutory and regulatory changes;

 

    retroactive rate adjustments;

 

    recovery of program overpayments or set-offs;

 

    administrative rulings;

 

    policy interpretations;

 

    payment or other delays by fiscal intermediaries or carriers;

 

    government funding restrictions (at a program level or with respect to specific facilities); and

 

    interruption or delays in payments due to any ongoing governmental investigations and audits.

Healthcare reimbursement will likely continue to be of significant importance to federal and state authorities. We cannot make any assessment as to the ultimate timing or the effect that any future legislative reforms may have on our tenants’ costs of doing business and on the amount of reimbursement by government and other third-party payors. The failure of Ensign or any of our other tenants to comply with these laws, requirements and regulations could materially and adversely affect their ability to meet their financial and contractual obligations to us.

Tenants that fail to comply with federal, state and local licensure, certification and inspection laws and regulations may cease to operate our healthcare facilities or be unable to meet their financial and other contractual obligations to us.

Ensign and other healthcare operators to which we lease properties in the future are subject to extensive federal, state, local and industry-related licensure, certification and inspection laws, regulations and standards. Our tenants’ failure to comply with any of these laws, regulations or standards could result in loss of accreditation, denial of reimbursement, imposition of fines, suspension or decertification from federal and state healthcare programs, loss of license or closure of the facility. For example, operations at our properties may require a license, registration, certificate of need, provider agreement or certification. Failure of any tenant to obtain, or the loss of, any required license, registration, certificate of need, provider agreement or certification would prevent a facility from operating in the manner intended by such tenant. Additionally, failure of our tenants to generally comply with applicable laws and regulations could adversely affect facilities owned by us, and therefore could materially and adversely affect us. See “Business—Government Regulation, Licensing and Enforcement—Healthcare Licensure and Certificate of Need.”

Our tenants depend on reimbursement from government and other third-party payors; reimbursement rates from such payors may be reduced, which could cause our tenants’ revenues to decline and affect their ability to meet their obligations to us.

The federal government and a number of states are currently managing budget deficits, which may put pressure on Congress and the states to decrease reimbursement rates for Ensign and other healthcare operators to

 

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which we lease properties in the future, with the goal of decreasing state expenditures under Medicaid programs. The need to control Medicaid expenditures may be exacerbated by the potential for increased enrollment in Medicaid due to unemployment and declines in family incomes. These potential reductions could be compounded by the potential for federal cost-cutting efforts that could lead to reductions in reimbursement to our tenants under both the Medicaid and Medicare programs. Potential reductions in Medicaid and Medicare reimbursement to our tenants could reduce the cash flow of our tenants and their ability to meet their obligations to us.

The bankruptcy, insolvency or financial deterioration of our tenants could delay or prevent our ability to collect unpaid rents or require us to find new tenants.

We receive substantially all of our income as rent payments under leases of our properties. We have no control over the success or failure of the businesses of Ensign and other healthcare operators to which we may lease properties in the future and, at any time, any of our tenants may experience a downturn in its business that may weaken its financial condition. As a result, our tenants may fail to make rent payments when due or declare bankruptcy. Any tenant failures to make rent payments when due or tenant bankruptcies could result in the termination of the tenant’s lease and could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders. This risk is magnified in situations where we lease multiple properties to a single tenant, as a multiple property tenant failure could reduce or eliminate rental revenue from multiple properties.

If tenants are unable to comply with the terms of the leases, we may be forced to modify the leases in ways that are unfavorable to us. Alternatively, the failure of a tenant to perform under a lease could require us to declare a default, repossess the property, find a suitable replacement tenant, hire third-party managers to operate the property or sell the property. There is no assurance that we would be able to lease a property on substantially equivalent or better terms than the prior lease, or at all, find another qualified tenant, successfully reposition the property for other uses or sell the property on terms that are favorable to us. It may be more difficult to find a replacement tenant for a healthcare property than it would be to find a replacement tenant for a general commercial property due to the specialized nature of the business. Even if we are able to find a suitable replacement tenant for a property, transfers of operations of healthcare facilities are subject to regulatory approvals not required for transfers of other types of commercial operations, which may affect our ability to successfully transition a property.

If any lease expires or is terminated, we could be responsible for all of the operating expenses for that property until it is re-leased or sold. If we experience a significant number of un-leased properties, our operating expenses could increase significantly. Any significant increase in our operating costs may have a material adverse effect on our business, financial condition and results of operations, and our ability to make distributions to our stockholders.

If one or more of our tenants files for bankruptcy relief, the U.S. federal Bankruptcy Code provides that a debtor has the option to assume or reject the unexpired lease within a certain period of time. Any bankruptcy filing by or relating to one of our tenants could bar all efforts by us to collect pre-bankruptcy debts from that tenant or seize its property. A tenant bankruptcy could also delay our efforts to collect past due balances under the leases and could ultimately preclude collection of all or a portion of these sums. It is possible that we may recover substantially less than the full value of any unsecured claims we hold, if any, which may have a material adverse effect on our business, financial condition and results of operations, and our ability to make distributions to our stockholders. Furthermore, dealing with a tenant’s bankruptcy or other default may divert management’s attention and cause us to incur substantial legal and other costs.

We intend to pursue acquisitions of additional properties and seek other strategic opportunities, which may result in the use of a significant amount of management resources or significant costs, and we may not fully realize the potential benefits of such transactions.

We intend to pursue acquisitions of additional properties and seek acquisitions and other strategic opportunities. Accordingly, we may often be engaged in evaluating potential transactions and other strategic

 

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alternatives. In addition, from time to time, we may engage in discussions that may result in one or more transactions. Although there is uncertainty that any of these discussions will result in definitive agreements or the completion of any transaction, we may devote a significant amount of our management resources to such a transaction, which could negatively impact our operations. We may incur significant costs in connection with seeking acquisitions or other strategic opportunities regardless of whether the transaction is completed and in combining our operations if such a transaction is completed. In the event that we consummate an acquisition or strategic alternative in the future, there is no assurance that we would fully realize the potential benefits of such a transaction.

We will operate in a highly competitive industry and face competition from other REITs, investment companies, private equity and hedge fund investors, sovereign funds, healthcare operators, lenders and other investors, some of whom are significantly larger and have greater resources and lower costs of capital. Increased competition will make it more challenging to identify and successfully capitalize on acquisition opportunities that meet our investment objectives. If we cannot identify and purchase a sufficient quantity of suitable properties at favorable prices or if we are unable to finance acquisitions on commercially favorable terms, our business, financial position or results of operations could be materially and adversely affected. Additionally, the fact that we must distribute 90% of our net taxable income in order to maintain our qualification as a REIT may limit our ability to rely upon rental payments from our leased properties or subsequently acquired properties in order to finance acquisitions. As a result, if debt or equity financing is not available on acceptable terms, further acquisitions might be limited or curtailed.

Acquisitions of properties we might seek to acquire entail risks associated with real estate investments generally, including that the investment’s performance will fail to meet expectations or that the tenant, operator or manager will underperform.

Required regulatory approvals can delay or prohibit transfers of our healthcare properties, which could result in periods in which we are unable to receive rent for such properties.

Some of our tenants will be operators of skilled nursing and other healthcare facilities, which operators must be licensed under applicable state law and, depending upon the type of facility, certified or approved as providers under the Medicare and/or Medicaid programs. Prior to the transfer of the operations of such healthcare properties to successor operators, the new operator generally must become licensed under state law and, in certain states, receive change of ownership approvals under certificate of need laws (which provide for a certification that the state has made a determination that a need exists for the beds located on the property) and, if applicable, Medicare and Medicaid provider approvals. If an existing lease is terminated or expires and a new tenant is found, then any delays in the new tenant receiving regulatory approvals from the applicable federal, state or local government agencies, or the inability to receive such approvals, may prolong the period during which we are unable to collect the applicable rent.

We may be required to incur substantial renovation costs to make certain of our healthcare properties suitable for other operators and tenants.

Healthcare facilities are typically highly customized and may not be easily adapted to non-healthcare-related uses. The improvements generally required to conform a property to healthcare use, such as upgrading electrical, gas and plumbing infrastructure, are costly and at times tenant-specific. A new or replacement tenant to operate one or more of our healthcare facilities may require different features in a property, depending on that tenant’s particular operations. If a current tenant is unable to pay rent and vacates a property, we may incur substantial expenditures to modify a property before we are able to secure another tenant. Also, if the property needs to be renovated to accommodate multiple tenants, we may incur substantial expenditures before we are able to release the space. These expenditures or renovations could materially and adversely affect our business, financial condition or results of operations.

 

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We may not be able to sell properties when we desire because real estate investments are relatively illiquid, which could materially and adversely affect our business, financial position or results of operations.

Real estate investments generally cannot be sold quickly. In addition, some of our properties will serve as collateral for our secured debt obligations and cannot readily be sold unless the underlying mortgage indebtedness is concurrently repaid. We may not be able to vary our portfolio promptly in response to changes in the real estate market. A downturn in the real estate market could materially and adversely affect the value of our properties and our ability to sell such properties for acceptable prices or on other acceptable terms. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property or portfolio of properties. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could materially and adversely affect our business, financial position or results of operations.

Our level of indebtedness could materially and adversely affect our financial position, including reducing funds available for other business purposes and reducing our operational flexibility, and we may have future capital needs and may not be able to obtain additional financing on acceptable terms.

In connection with the Spin-Off, we anticipate that our Operating Partnership will issue up to $350.0 million aggregate principal amount of unsecured notes, and will enter into a credit agreement providing for a revolving credit facility in an aggregate principal amount of up to $150.0 million, although we have not yet entered into commitments with respect to such financing arrangements. We expect that approximately $             million of the proceeds from the issuance of the notes will be transferred to Ensign in connection with the contribution of assets to us by Ensign prior to the Spin-Off. In addition, at the time of the Spin-Off and based on the outstanding principal amount of Ensign’s mortgage indebtedness at June 30, 2013, we anticipate that our subsidiaries will have aggregate mortgage indebtedness to third parties of approximately $             million on             of the facilities to be owned by us following completion of the Spin-Off. Although it is anticipated that our debt agreements will restrict the amount of our indebtedness, we may incur additional indebtedness in the future to refinance our existing indebtedness, refinance mortgages on our properties or to finance newly-acquired properties. Any significant additional indebtedness could require a substantial portion of our cash flow to make interest and principal payments due on our indebtedness. Greater demands on our cash resources may reduce funds available to us to pay dividends, make capital expenditures and acquisitions, or carry out other aspects of our business strategy. Increased indebtedness can also limit our ability to adjust rapidly to changing market conditions, make us more vulnerable to general adverse economic and industry conditions and create competitive disadvantages for us compared to other companies with relatively lower debt levels. Increased future debt service obligations may limit our operational flexibility, including our ability to acquire properties, finance or refinance our properties, contribute properties to joint ventures or sell properties as needed.

Moreover, our ability to obtain additional financing and satisfy our financial obligations under indebtedness outstanding from time to time will depend upon our future operating performance, which is subject to then prevailing general economic and credit market conditions, including interest rate levels and the availability of credit generally, and financial, business and other factors, many of which are beyond our control. A worsening of credit market conditions could materially and adversely affect our ability to obtain financing on favorable terms, if at all.

We may be unable to obtain additional financing or financing on favorable terms or our operating cash flow may be insufficient to satisfy our financial obligations under indebtedness outstanding from time to time (if any). Among other things, the absence of an investment grade credit rating or any credit rating downgrade could increase our financing costs and could limit our access to financing sources. If financing is not available when needed, or is available on unfavorable terms, we may be unable to complete acquisitions or otherwise take advantage of business opportunities or respond to competitive pressures, any of which could materially and adversely affect our business, financial condition and results of operations.

 

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Covenants in our debt agreements may limit our operational flexibility, and a covenant breach or default could materially and adversely affect our business, financial position or results of operations.

The agreements governing our indebtedness are expected to contain customary covenants, which may limit our operational flexibility. The notes are expected to have terms customary for notes of this type, including customary restrictive covenants, redemption and repurchase provisions and events of default; and the revolving credit facility is expected to contain customary affirmative and negative covenants, as well as customary events of default. We also anticipate that the revolving credit facility will require us to comply with specified financial maintenance covenants. In addition, mortgages on certain of our properties contain customary covenants such as those that restrict our ability, without the consent of the lender, to further encumber or sell the applicable properties or replace the applicable tenant. Such consent could be difficult or expensive to obtain. Breaches of certain covenants may result in defaults under the mortgages on our properties and cross-defaults under certain of our other indebtedness, even if we satisfy our payment obligations to the respective obligee. In addition, defaults under the Master Leases, including defaults associated with the bankruptcy of the applicable tenants, may result in defaults under the mortgages on certain of our properties and cross-defaults under certain of our other indebtedness.

Covenants that limit our operational flexibility, as well as covenant breaches or defaults under our debt instruments, could materially and adversely affect our business, financial position or results of operations, or our ability to incur additional indebtedness or refinance existing indebtedness.

An increase in market interest rates could increase our interest costs on existing and future debt and could adversely affect our stock price.

If interest rates increase, so could our interest costs for any new debt and our variable rate debt obligations on the revolving credit facility. This increased cost could make the financing of any acquisition more costly, as well as lower our current period earnings. Rising interest rates could limit our ability to refinance existing debt when it matures or cause us to pay higher interest rates upon refinancing. In addition, an increase in interest rates could decrease the access third parties have to credit, thereby decreasing the amount they are willing to pay for our assets and consequently limiting our ability to reposition our portfolio promptly in response to changes in economic or other conditions. Further, the dividend yield on our common stock, as a percentage of the price of such common stock, will influence the price of such common stock. Thus, an increase in market interest rates may lead prospective purchasers of our common stock to expect a higher dividend yield, which could adversely affect the market price of our common stock.

Our charter will restrict the ownership and transfer of our outstanding stock, which may have the effect of delaying, deferring or preventing a transaction or change of control of our company.

In order for us to qualify to be taxed as a REIT, not more than 50% in value of our outstanding shares of stock may be owned, beneficially or constructively, by five or fewer individuals at any time during the last half of each taxable year after the first year for which we elect to be taxed and qualify as a REIT. Additionally, at least 100 persons must beneficially own our stock during at least 335 days of a taxable year (other than the first taxable year for which we elect to be taxed and qualify as a REIT). Our charter, with certain exceptions, will authorize our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Our charter will also provide that, unless exempted by the board of directors, no person may own more than 9.8% of the outstanding shares of our common stock or more than 9.8% in value or number, whichever is more restrictive, of the outstanding shares of all classes and series of our stock. See “Description of Our Capital Stock—Restrictions on Transfer and Ownership of CareTrust Stock” and “U.S. Federal Income Tax Considerations.” The constructive ownership rules are complex and may cause shares of stock owned directly or constructively by a group of related individuals or entities to be constructively owned by one individual or entity. These ownership limits could delay or prevent a transaction or a change in control of us that might involve a premium price for shares of our stock or otherwise be in the best interests of our stockholders. The acquisition of less than 9.8% of our outstanding stock by an individual or entity could cause that individual or entity to own

 

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constructively in excess of 9.8% in value of our outstanding stock, and thus violate our charter’s ownership limit. Our charter will also prohibit any person from owning shares of our stock that would result in our being “closely held” under Section 856(h) of the Code or otherwise cause us to fail to qualify to be taxed as a REIT. In addition, our charter will provide that (i) no person shall beneficially own shares of stock to the extent such beneficial ownership of stock would result in us failing to qualify as a “domestically controlled qualified investment entity” within the meaning of Section 897(h) of the Code, and (ii) no person shall beneficially or constructively own shares of stock to the extent such beneficial or constructive ownership would cause us to own, beneficially or constructively, more than a 9.9% interest (as set forth in Section 856(d)(2)(B) of the Code) in a tenant of our real property. Any attempt to own or transfer shares of our stock in violation of these restrictions may result in the transfer being automatically void.

Maryland law and provisions in our charter and bylaws may delay or prevent takeover attempts by third parties and therefore inhibit our stockholders from realizing a premium on their stock.

Our charter and bylaws will contain, and Maryland law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids and to encourage prospective acquirors to negotiate with our board of directors rather than to attempt a hostile takeover. Our charter and bylaws will, among other things (1) contain transfer and ownership restrictions on the percentage by number and value of outstanding shares of our stock that may be owned or acquired by any stockholder; (2) provide that stockholders are not allowed to act by non-unanimous written consent; (3) permit the board of directors, without further action of the stockholders, to (a) issue and fix the terms of one or more classes or series of preferred stock, which may have rights senior to those of the common stock, and (b) amend the charter to increase or decrease the aggregate number of authorized shares or the number of shares of any class or series that we have the authority to issue; (4) permit only the board of directors to amend the bylaws; (5) establish certain advance notice procedures for stockholder proposals, and require all director candidates to be recommended by the nominating committee of the board of directors; (6) provide that special meetings of stockholders may only be called by the Company or upon written request of stockholders entitled to be at the meeting; (7) provide that a director may only be removed by stockholders for cause and upon the vote of 66-2/3% of the outstanding shares of common stock; (8) provide for supermajority approval requirements for amending or repealing certain provisions in our charter; and (9) provide for a classified board of directors of three separate classes with staggered terms.

In addition, specific anti-takeover provisions of the Maryland General Corporation Law (“MGCL”) could make it more difficult for a third party to attempt a hostile takeover. These provisions include:

 

    “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter impose special appraisal rights and special stockholder voting requirements on these combinations; and

 

    “control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by

 

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some stockholders and could delay or prevent an acquisition that our board of directors determines is not in our best interests. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.

If we lose our key management personnel, we may not be able to successfully manage our business and achieve our objectives.

Our success depends in large part upon the leadership and performance of our executive management team, particularly Gregory K. Stapley and other key employees. If we lose the services of Mr. Stapley or any of our other key employees, we may not be able to successfully manage our business or achieve our business objectives.

We or our tenants may experience uninsured or underinsured losses, which could result in a significant loss of the capital we have invested in a property, decrease anticipated future revenues or cause us to incur unanticipated expense.

The Master Leases will require, and new lease agreements that we enter into are expected to require, that the tenant maintain comprehensive insurance and hazard insurance, and we will maintain customary insurance for the independent living facilities that we own and operate. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, hurricanes and floods, that may be uninsurable or not economically insurable. Insurance coverage may not be sufficient to pay the full current market value or current replacement cost of a loss. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace the property after such property has been damaged or destroyed. Under such circumstances, the insurance proceeds received might not be adequate to restore the economic position with respect to such property.

If one of our properties experiences a loss that is uninsured or that exceeds policy coverage limits, we could lose the capital invested in the damaged property as well as the anticipated future cash flows from the property. If the damaged property is subject to recourse indebtedness, we could continue to be liable for the indebtedness even if the property is irreparably damaged.

In addition, even if damage to our properties is covered by insurance, a disruption of business caused by a casualty event may result in loss of revenue for our tenants or us. Any business interruption insurance may not fully compensate them or us for such loss of revenue. If one of our tenants experiences such a loss, it may be unable to satisfy its payment obligations to us under its lease with us.

Environmental compliance costs and liabilities associated with real estate properties owned by us may materially impair the value of those investments.

Under various federal, state and local laws, ordinances and regulations, as a current or previous owner of real estate, we may be required to investigate and clean up certain hazardous or toxic substances or petroleum released at a property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by the third parties in connection with the contamination. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and the costs it incurs in connection with the contamination. Ensign does not carry, and following the Spin-Off we do not expect to carry, environmental insurance on our properties. Although we will generally require our tenants, as operators of our healthcare properties, to undertake to indemnify us for environmental liabilities they cause, such liabilities could exceed the financial ability of the tenant to indemnify us or the value of the contaminated property. The presence of contamination or the failure to remediate contamination may materially adversely affect our ability to sell or lease the real estate or to borrow using the real estate as collateral. As the owner of a site, we may also be held liable to third parties for damages and injuries resulting from environmental contamination emanating from the site. Although we will be generally indemnified by our tenants for contamination caused by them, these indemnities may not adequately cover all environmental costs. We may also experience environmental liabilities arising from conditions not known to us.

 

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The impact of the comprehensive healthcare regulation enacted in 2010 on us and our tenants cannot accurately be predicted.

Legislative proposals are introduced or proposed in Congress and in some state legislatures each year that would affect major changes in the healthcare system, either nationally or at the state level.

Notably, in March 2010, President Obama signed into law the Affordable Care Act. The passage of the Affordable Care Act has resulted in comprehensive reform legislation that is expected to expand healthcare coverage to millions of currently uninsured people beginning in 2014 and provide for significant changes to the U.S. healthcare system over the next ten years. To help fund this expansion, the Affordable Care Act outlines certain reductions in Medicare reimbursements for various healthcare providers, including long-term acute care hospitals and skilled nursing facilities, as well as certain other changes to Medicare payment methodologies. This comprehensive healthcare legislation provides for extensive future rulemaking by regulatory authorities, and also may be altered or amended. We cannot accurately predict whether any pending legislative proposals will be adopted or, if adopted, what effect, if any, these proposals would have on our tenants and, thus, our business. Similarly, while we can anticipate that some of the rulemaking that will be promulgated by regulatory authorities will affect our tenants and the manner in which they are reimbursed by the federal healthcare programs, we cannot accurately predict today the impact of those regulations on our tenants and, thus, on our business.

The Supreme Court’s decision upholding the constitutionality of the individual mandate while striking down the provisions linking federal funding of state Medicaid programs with a federally mandated expansion of those programs has not reduced the uncertain impact that the law will have on healthcare delivery systems over the next decade. We can expect that the federal authorities will continue to implement the law, but, because of the Supreme Court’s mixed ruling, the implementation will take longer than originally expected, with a commensurate increase in the period of uncertainty regarding the law’s full long term financial impact on the delivery of and payment for healthcare.

RISKS RELATED TO OUR COMMON STOCK

There is no existing market for our common stock and a trading market that will provide you with adequate liquidity may not develop for our common stock. In addition, once our common stock begins trading, the market price and trading volume of our common stock may fluctuate widely.

Ensign currently owns all of the outstanding shares of our common stock, so there is no current trading market for our common stock. Our common stock issued in the Spin-Off will be trading publicly for the first time. We anticipate that a limited market, commonly known as a “when-issued” trading market, will develop shortly before the record date, and that “regular-way” trading in shares of our common stock will begin on the first trading day following the distribution date. However, there can be no assurance that an active trading market for our common stock will develop as a result of the Spin-Off or be sustained in the future. The lack of an active trading market may make it more difficult for you to sell your shares and could lead to our share price being depressed or more volatile.

For many reasons, including the risks identified in this information statement, the market price of our common stock following the Spin-Off may be more volatile than the market price of Ensign common stock before the Spin-Off. These factors may result in short-term or long-term negative pressure on the value of our common stock.

We cannot predict the prices at which our common stock may trade after the Spin-Off. The market price of our common stock may fluctuate significantly, depending upon many factors, some of which may be beyond our control, including, but not limited to:

 

    a shift in our investor base;

 

 

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    our quarterly or annual earnings, or those of other comparable companies;

 

    actual or anticipated fluctuations in our operating results;

 

    our ability to obtain financing as needed;

 

    changes in laws and regulations affecting our business;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    announcements by us or our competitors of significant investments, acquisitions or dispositions;

 

    the failure of securities analysts to cover our common stock after the Spin-Off;

 

    changes in earnings estimates by securities analysts or our ability to meet those estimates;

 

    the operating performance and stock price of other comparable companies;

 

    overall market fluctuations; and

 

    general economic conditions and other external factors.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.

The combined post-Spin-Off value of Ensign common stock and our common stock may not equal or exceed the pre-Spin-Off value of Ensign common stock.

We cannot assure you that the combined trading prices of Ensign common stock and our common stock after the Spin-Off will be equal to or greater than the trading price of Ensign common stock prior to the Spin-Off. Until the market has fully evaluated the business of Ensign without our business, the price at which Ensign common stock trades may fluctuate more significantly than might otherwise be typical. Similarly, until the market has fully evaluated the stand-alone business of our company, the price at which shares of our common stock trades may fluctuate more significantly than might otherwise be typical, including volatility caused by general market conditions.

Substantial sales of our common stock may occur in connection with the Spin-Off, which could cause the market price of our common stock to decline.

Our common stock that Ensign intends to distribute in the Spin-Off generally may be sold immediately in the public market. Although we have no actual knowledge of any plan or intention on the part of any holder of Ensign common stock to sell our common stock on or after the record date, it is possible that some Ensign stockholders will decide to sell some or all of the shares of our common stock that they receive in the Spin-Off.

In addition, some of the holders of Ensign common stock are index funds tied to stock or investment indices, or are institutional investors bound by various investment guidelines. Companies are generally selected for investment indices, and in some cases selected by institutional investors, based on factors such as market capitalization, industry, trading liquidity and financial condition. As an independent company, we expect to initially have a lower market capitalization than Ensign has today, and our business will differ from the business of Ensign prior to the Spin-Off. As a result, our common stock may not qualify for those investment indices. In addition, our common stock may not meet the investment guidelines of some institutional investors. Consequently, these index funds and institutional investors may have to sell some or all of our common stock they receive in the Spin-Off.

The sale of significant amounts of our common stock, the perception in the market that this will occur or the sale by holders of Ensign common stock that are index funds or institutional investors of some or all of our common stock, may cause the price of our common stock to fall. Any such decline could impair our ability to

 

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raise capital through future sales of our common stock. Further, our common stock may not qualify for other investment indices, including indices specific to REITs, and any such failure may discourage new investors from investing in our common stock.

Following the Spin-Off, we will be an emerging growth company and cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

Following the Spin-Off, we will be an emerging growth company as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies. We have not made a decision whether to take advantage of any or all of these exemptions. If we do take advantage of all of these exemptions, we will not be required to, among other things, (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (2) comply with any new rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (3) comply with any new audit rules adopted by the Public Company Accounting Oversight Board after April 5, 2012 unless the SEC determines otherwise, (4) comply with any new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies under Section 102(b)(1) of the JOBS Act, (5) provide certain disclosure regarding executive compensation required of larger public companies in our periodic reports, proxy statements and registration statements, or (6) hold a nonbinding advisory vote on executive compensation and obtain stockholder approval of any golden parachute payments not previously approved. Accordingly, the information that we provide stockholders in this information statement and in our other filings with the SEC may be different than what is available with respect to other public companies. We cannot predict if investors will find our common stock less attractive if we decide to rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile and adversely affected.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Exchange Act for complying with new or revised accounting standards applicable to public companies. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We may elect to take advantage of this extended transition period. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards. The election to comply with these public company effective dates is irrevocable pursuant to Section 107(b) of the JOBS Act.

We will remain an emerging growth company until the earliest of (1) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (2) the date on which we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 under the Exchange Act or any successor statute, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period, and (4) the end of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement filed under the Securities Act.

Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could materially and adversely affect our business and the market price of our common stock.

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control over financial reporting is complex and may be revised over time to adapt to changes in our business, or changes in applicable accounting rules. We cannot assure you that our internal control over financial reporting will be effective in the future or that a material weakness will not be discovered with respect to a prior period for which we had previously believed that internal controls were effective. Matters impacting our internal controls may cause us to be unable to report our financial data on a timely basis, or may cause us to restate previously issued financial data, and thereby subject us to adverse regulatory consequences, including sanctions or investigations by the SEC, or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to suffer if we or our independent registered public accounting firm reports a material weakness in our internal control over financial reporting. This could materially adversely affect us by, for example, leading to a decline in the market price for our comment stock and impairing our ability to raise capital.

As an emerging growth company, we will be excluded from Section 404(b) of the Sarbanes-Oxley Act, which otherwise would have required our auditors to formally attest to and report on the effectiveness of our internal control over financial reporting. If we cannot maintain effective disclosure controls and procedures or favorably assess the effectiveness of our internal control over financial reporting, or once we are no longer an “emerging growth company,” our independent registered public accounting firm cannot provide an unqualified attestation report on the effectiveness of our internal control over financial reporting, investor confidence and, in turn, the market price of our common stock could decline.

We cannot assure you of our ability to pay dividends in the future.

We expect to make quarterly dividend payments in cash in an amount equal to approximately             % of our AFFO, but in no event will the annual dividend be less than 90% of our REIT taxable income on an annual basis, determined without regard to the dividends paid deduction and excluding any net capital gains. Our ability to pay dividends may be adversely affected by a number of factors, including the risk factors described in this information statement. Dividends will be authorized by our board of directors and declared by us based upon a number of factors, including actual results of operations, restrictions under Maryland law or applicable debt covenants, our financial condition, our taxable income, the annual distribution requirements under the REIT provisions of the Code, our operating expenses and other factors our directors deem relevant. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash dividends or year-to-year increases in cash dividends in the future.

Furthermore, while we are required to pay dividends in order to maintain our REIT status (as described above under “Risks Related to Our Taxation as a REIT—REIT distribution requirements could adversely affect our ability to execute our business plan”), we may elect not to maintain our REIT status, in which case we would no longer be required to pay such dividends. Moreover, even if we do elect to maintain our REIT status, after completing various procedural steps, we may elect to comply with the applicable distribution requirements by distributing, under certain circumstances, a portion of the required amount in the form of shares of our common stock in lieu of cash. If we elect not to maintain our REIT status or to satisfy any required distributions in shares of common stock in lieu of cash, such action could negatively affect our business and financial condition as well as the market price of our common stock. No assurance can be given that we will pay any dividends on shares of our common stock in the future.

We may issue preferred stock with terms that could dilute the voting power or reduce the value of our common stock.

While we have no specific plan to issue preferred stock, our charter will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, powers, privileges, preferences, including preferences over our common stock respecting dividends and distributions, terms of redemption and relative participation, optional or other rights, if any, of the shares of each

 

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such series of preferred stock and any qualifications, limitations or restrictions thereof, as our board of directors may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock. For a more detailed description, see “Description of Our Capital Stock—Preferred Stock.”

ERISA may restrict investments by plans in our common stock.

A plan fiduciary considering an investment in our common stock should consider, among other things, whether such an investment is consistent with the fiduciary obligations under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), including whether such investment might constitute or give rise to a prohibited transaction under ERISA, the Code or any substantially similar federal, state or local law and, if so, whether an exemption from such prohibited transaction rules is available.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this information statement 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: the anticipated timing, structure, benefits and tax treatment of the Spin-Off; 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:

 

    the ability to achieve some or all the benefits that we expect to achieve from the Spin-Off;

 

    delays or the nonoccurrence of the consummation of the Spin-Off;

 

    the ability and willingness of Ensign to meet and/or perform its obligations under any contractual arrangements that are entered into with us in connection with the Spin-Off, including the Master Leases, and any of its obligations to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities;

 

    the ability of Ensign to comply with laws, rules and regulations in the operation of the properties we will lease to it following the Spin-Off;

 

    the ability and willingness of our tenants, including Ensign, 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, and obligations, including indemnification obligations, we may incur in connection with the replacement of an existing tenant;

 

    the availability of and the ability to identify suitable acquisition opportunities and the ability to acquire and lease the respective properties on favorable terms;

 

    the ability to generate sufficient cash flows to service our outstanding indebtedness;

 

    access to debt and equity capital markets;

 

    fluctuating interest rates;

 

    the ability to retain our key management personnel;

 

    the ability to qualify or maintain our status as a REIT;

 

    changes in the U.S. tax law and other state, federal or local laws, whether or not specific to REITs;

 

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

 

    additional factors discussed in the sections entitled “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this information statement.

Forward-looking statements speak only as of the date of this information statement. 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.

 

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THE SPIN-OFF

Background of the Spin-Off

On November 7, 2013, the board of directors of Ensign announced a plan to separate its healthcare business and its real estate business into two separate, publicly traded companies:

 

    Ensign, which will continue to provide healthcare services through its existing operations; and

 

    CareTrust, which will own, acquire and lease real estate serving the healthcare industry.

Ensign will accomplish the separation by contributing to CareTrust the entities that own substantially all of Ensign’s real property interests, the entities that operate three independent living facilities, and related assets and liabilities, and then distributing all of the outstanding shares of CareTrust to Ensign’s stockholders. Immediately prior to the Spin-Off, CareTrust and Ensign will enter into the five Master Leases, under which Ensign will lease CareTrust’s healthcare facilities on a triple-net basis. Ensign and CareTrust will also enter into a number of other agreements to govern the relationship between them following the Spin-Off. See “Our Relationship with Ensign Following the Spin-Off.”

Upon the satisfaction or waiver of the conditions to the Spin-Off, which are described in more detail in “—Conditions to the Spin-Off” below, Ensign will effect the Spin-Off by distributing to Ensign’s stockholders share(s) of CareTrust common stock for each share of Ensign common stock that they held at the close of business on                     , 2014, the record date for the Spin-Off. We expect the shares of CareTrust common stock to be distributed by Ensign on                     , 2014.

You will not be required to make any payment, surrender or exchange your shares of Ensign common stock or take any other action to receive your shares of our common stock.

Ensign will allocate its accumulated earnings and profits (as determined for U.S. federal income tax purposes) for periods prior to the Spin-Off between Ensign and CareTrust in a manner that, in its best judgment, is in accordance with the provisions of the Code. As a result of its intended election to be taxed as a REIT for U.S. federal income tax purposes, in order to comply with certain REIT qualification requirements, CareTrust will make the Purging Distribution by declaring a dividend to its stockholders to distribute any accumulated earnings and profits attributable to any non-REIT years, including any earnings and profits allocated to CareTrust in connection with the Spin-Off. The Purging Distribution will be paid to CareTrust stockholders in a combination of cash and CareTrust stock, with the cash portion not to exceed 25% of the total amount of the Purging Distribution. CareTrust expects to make the Purging Distribution shortly after the Spin-Off. See “—The Purging Distribution.”

The Spin-Off is subject to the satisfaction or waiver of certain conditions. Until the Spin-Off has occurred, Ensign has the right to terminate the transaction, even if all of the conditions have been satisfied, if the board of directors of Ensign determines that the Spin-Off is not in the best interests of Ensign and its stockholders or that market conditions or other circumstances are such that the Spin-Off is no longer advisable at that time. We cannot provide any assurances that the Spin-Off will be completed. For a more detailed description of these conditions, see the section entitled “—Conditions to the Spin-Off” below.

Reasons for the Spin-Off

The strategic considerations and nature of Ensign’s healthcare business currently dictate and limit the size and scope of its real estate business. After the Spin-Off, CareTrust will be able to make decisions regarding the real estate business without regard to the Ensign healthcare business. As a result, CareTrust intends to expand into new geographic areas, acquire properties in different asset classes, diversify its tenant base and reduce its

 

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financing costs. At the same time, Ensign expects to realize benefits from being a “pure play” healthcare operator and intends to continue to pursue its historical growth practices and strategies. As such, management, regulators, market analysts and investors will be able to focus solely on Ensign’s healthcare operations.

Geographic Expansion by CareTrust

Ensign’s business model is focused on, among other things, operating its healthcare business using a “cluster” system, pursuant to which groups of geographically-proximate operations share clinical best practices, real-time financial data, and other resources and information, in order to control costs and improve operating results. In addition, Ensign’s growth strategy into new markets may be affected by the availability of management leadership. In contrast, CareTrust will have the flexibility to enter geographic markets without facing the operational considerations Ensign is confronted with as a healthcare operator.

Diversification of CareTrust Asset Classes

CareTrust intends to pursue opportunities with respect to both performing and nonperforming properties. Ensign primarily acquires skilled nursing and assisted living facilities that it will operate, occasionally acquiring non-healthcare independent living properties either (1) as part of a larger portfolio containing skilled nursing and/or assisted living facilities, or (2) with a view toward converting such properties to assisted living facilities. Following the Spin-Off, CareTrust, as a real estate company, will have the flexibility to choose which markets, asset classes and prospective tenants to pursue based solely on the exigencies and opportunities associated with the real estate business. CareTrust is expected to acquire not only skilled nursing and assisted living properties but also diversify into different property categories, such as medical office buildings, long-term acute care hospitals and inpatient rehabilitation facilities, and expand its portfolio of independent living properties. CareTrust may also engage in an expanded range of real estate related business activities, such as the provision of mortgage financing.

Diversification of Tenant Base

As a stand-alone company, CareTrust will be able, and intends, to take on tenants other than Ensign and divide large portfolios among numerous tenant operators, thus reducing the credit and regulatory risks associated with a single tenant. CareTrust anticipates that, as a real estate company, it will form business relationships with a diverse group of healthcare operators and that these relationships could lead to property acquisition opportunities.

Evaluation of Different Businesses Using Appropriate Operating Metrics

The Spin-Off will allow management, regulators, market analysts and investors to evaluate CareTrust as a stand-alone real estate company, and Ensign as a “pure play” healthcare operator, in each case, using appropriate industry metrics. Thus, we expect the Spin-Off will improve and simplify reporting and transparency in both businesses.

Reduced Risks and Financing Costs of the Real Estate Business

Healthcare companies are subject to unique regulatory, litigation, and reimbursement risks. As a result, healthcare companies generally have a higher cost of capital than real estate companies, and their shares typically trade at a lower earnings multiple. In contrast, CareTrust, which will enter into triple-net leases with its skilled nursing and senior housing tenants, will primarily be subject to simple premises liability risks, and the credit risks associated with its tenants. As CareTrust diversifies both its tenant base and its asset classes, we expect that its aggregate credit risk, regulatory risk and cost of capital may decline.

More Attractive Acquisition and Compensation Currency

The Spin-Off will make CareTrust and Ensign “pure plays” in their respective fields of real estate and healthcare, which should appeal to different groups of potential investors, making it easier and less costly to raise

 

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equity capital to advance their business plans. After the Spin-Off, we expect CareTrust and Ensign will be able to use their shares as consideration for acquisitions in a more effective manner with less dilution to existing stockholders. We expect the Spin-Off will also enhance the value and effectiveness of any equity incentive programs at Ensign and CareTrust because any equity (or equity based awards) will be more closely aligned with the performance of each company’s business.

Manner of Effecting the Spin-Off

The general terms and conditions relating to the Spin-Off will be set forth in the Separation and Distribution Agreement between us and Ensign. Under the Separation and Distribution Agreement, the Spin-Off is anticipated to be effective as of                     , 2014.

For each share of Ensign common stock that you owned at the close of business on                     , 2014, the record date, you will receive                     share(s) of our common stock on the distribution date. The actual total number of shares of our common stock to be distributed will depend on the number of shares of Ensign common stock outstanding on the record date. The shares of our common stock to be distributed will constitute 100% of the outstanding shares of our common stock.

Neither we nor Ensign will be issuing physical certificates representing shares of our common stock. Instead, if you own Ensign common stock as of the close of business on the record date, the shares of our common stock that you are entitled to receive in the Spin-Off will be issued electronically, as of the distribution date, to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. A benefit of issuing stock electronically in book-entry form is that there will be none of the physical handling and safekeeping responsibilities that are inherent in owning physical stock certificates.

If you hold physical stock certificates that represent your shares of Ensign common stock and you are the registered holder of the Ensign shares represented by those certificates, the distribution agent will mail you an account statement that reflects the number of shares of our common stock that have been registered in book-entry form in your name. If you have any questions concerning the mechanics of having shares of Ensign common stock registered in book-entry form, you are encouraged to contact                      by mail at                     , by phone at                      or by email at                     .

Most Ensign stockholders hold their shares of Ensign common stock through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the stock in “street name” and ownership would be recorded on the bank or brokerage firm’s books. If you hold your Ensign common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares of our common stock that you are entitled to receive in the Spin-Off. If you have any questions concerning the mechanics of having shares of our common stock held in “street name,” you are encouraged to contact your bank or brokerage firm.

Results of the Spin-Off

After the Spin-Off, we will be a separate, publicly traded company. Immediately following the Spin-Off, we expect to have approximately                      stockholders of record, based on the number of registered stockholders of Ensign common stock on                     , 2014, and                      shares of our common stock outstanding. The actual number of shares to be distributed will be determined on the record date and will reflect any changes in the number of shares of Ensign common stock between                     , 2014 and the record date. The Spin-Off will not affect the number of outstanding shares of Ensign common stock or any rights of Ensign stockholders.

Prior to the Spin-Off, we and Ensign will enter into the Master Leases, under which Ensign will lease CareTrust’s healthcare facilities on a triple-net basis. Ensign and CareTrust will also enter into a number of other agreements to govern their relationship following the Spin-Off, and divide and allocate various assets and liabilities and rights and obligations. For a more detailed description of these agreements, see the section entitled “Our Relationship With Ensign Following the Spin-Off.”

 

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Treatment of Fractional Shares

The transfer agent will not distribute any fractional shares of our common stock in connection with the Spin-Off. Instead, the transfer agent will aggregate all fractional shares of our common stock into whole shares and sell them on the open market at the prevailing market prices on behalf of those registered holders who otherwise would be entitled to receive a fractional share. We anticipate that these sales will occur as soon as practicable after the distribution date. The transfer agent will then distribute to such registered holders the aggregate cash proceeds of such sale, in an amount equal to their pro rata share of the total proceeds of those sales. Any applicable expenses, including brokerage fees, will be paid by us. We do not expect the amount of any such fees to be material to us.

If you hold physical stock certificates that represent your shares of Ensign common stock and you are the registered holder of the Ensign shares represented by those certificates, your check for any cash that you may be entitled to receive instead of fractional shares of our common stock will be mailed to you separately. If you hold your shares of Ensign common stock through a bank or brokerage firm, your bank or brokerage firm will receive, on your behalf, your pro rata share of the aggregate net cash proceeds from the sales and will electronically credit your account for your share of such proceeds.

Neither we, nor Ensign or the transfer agent, will guarantee any minimum sale price for the fractional shares of our common stock. Neither we nor Ensign will pay any interest on the proceeds from the sale of fractional shares. The receipt of cash in lieu of fractional shares will generally be taxable to the recipient stockholders. Each stockholder entitled to receive cash proceeds from these fractional shares should consult his, her or its own tax advisor as to the stockholder’s particular circumstances. See “—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

Listing and Trading of Our Shares

Ensign currently owns all of the outstanding shares of CareTrust common stock, so there is no current trading market for CareTrust common stock. A condition to the Spin-Off is the listing of our common stock on NASDAQ. We have applied to list our common stock on NASDAQ under the symbol “CTRE.”

Beginning shortly before the record date and continuing up to and including the distribution date, we expect that there will be two markets in Ensign common stock: a “due-bills” market and an “ex-distribution” market. Shares of Ensign common stock that trade on the “due-bills” market will trade with an entitlement to shares of our common stock distributed pursuant to the Spin-Off. Shares that trade on the “ex-distribution” market will trade without an entitlement to shares of our common stock distributed pursuant to the Spin-Off. Therefore, if you sell shares of Ensign common stock in the “due-bills” market after the record date and before the distribution date, you will be selling your right to receive shares of our common stock in connection with the Spin-Off. If you own shares of Ensign common stock at the close of business on the record date and sell those shares on the “ex-distribution” market before the distribution date, you will still receive the shares of our common stock that you would be entitled to receive pursuant to your ownership of the shares of Ensign common stock on the record date.

Furthermore, beginning on or shortly before the record date and continuing up to and including the distribution date, we expect that a limited market, commonly known as a “when-issued” trading market, will develop in our common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for shares of our common stock that will be distributed to Ensign stockholders on the distribution date. If you owned shares of Ensign common stock at the close of business on the record date, you would be entitled to shares of our common stock distributed pursuant to the Spin-Off. You may trade this entitlement to shares of our common stock, without trading the shares of Ensign common stock you own, on the “when-issued” market. On the first trading day following the distribution date, “when-issued” trading with respect to our common stock will end and “regular-way” trading will begin.

 

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The Purging Distribution

Ensign will allocate its accumulated earnings and profits (as determined for U.S. federal income tax purposes) for periods prior to the Spin-Off between Ensign and CareTrust in a manner that, in its best judgment, is in accordance with the provisions of the Code. As a result of its intended election to be taxed as a REIT for U.S. federal income tax purposes, in order to comply with certain REIT qualification requirements, CareTrust will make the Purging Distribution by declaring a dividend to its stockholders to distribute any accumulated earnings and profits attributable to any non-REIT years, including any earnings and profits allocated to CareTrust in connection with the Spin-Off. The Purging Distribution will be paid to CareTrust stockholders in a combination of cash and CareTrust stock, with the cash portion not to exceed 25% of the total amount of the Purging Distribution. CareTrust expects to make the Purging Distribution shortly after the Spin-Off.

Ensign is seeking the IRS Ruling, which will address, in addition to the treatment of the Spin-Off, certain issues relevant to CareTrust’s payment of the Purging Distribution in a combination of cash and CareTrust stock. Ensign has requested and expects to receive the IRS Ruling prior to the mailing date of this information statement. In general, the IRS Ruling will provide, subject to the terms and conditions contained therein, that (1) any and all of the cash and stock distributed by CareTrust to its stockholders as part of the Purging Distribution will be treated as a distribution of property with respect to CareTrust stock, and as a dividend to the extent of CareTrust’s current and accumulated earnings and profits (as determined for U.S. federal income tax purposes) and (2) the amount of any distribution of stock received by any of CareTrust’s stockholders as part of the Purging Distribution will be considered to equal the amount of the money which could have been received instead. In the Purging Distribution, a holder of CareTrust common stock will be required to report dividend income as a result of the Purging Distribution even if CareTrust distributes no cash or only nominal amounts of cash to such stockholder.

You are urged to consult with your tax advisor as to the particular tax consequences of the Purging Distribution to you, including the applicability of any U.S. federal, state and local and non-U.S. tax laws.

Material U.S. Federal Income Tax Consequences of the Spin-Off

The following is a summary of the material U.S. federal income tax consequences to Ensign and to the holders of shares of Ensign common stock in connection with the Spin-Off. This summary is based on the Code, the Treasury Regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect as of the date of this Information Statement and all of which are subject to differing interpretations and may change at any time, possibly with retroactive effect. Any such change could affect the tax consequences described below. This summary assumes that the Spin-Off will be consummated in accordance with the Separation and Distribution Agreement and as described in this information statement.

Except as specifically described below, this summary is limited to holders of shares of Ensign common stock that are U.S. Holders, as defined immediately below. For purposes of this summary, a U.S. Holder is a beneficial owner of Ensign common stock that is, for U.S. federal income tax purposes:

 

    an individual who is a citizen or a resident of the U.S.;

 

    a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized under the laws of the U.S. or any state thereof or the District of Columbia;

 

    an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

    a trust, if (1) a court within the U.S. is able to exercise primary jurisdiction over its administration and one or more U.S. persons have the authority to control all of its substantial decisions, or (2) in the case of a trust that was treated as a domestic trust under the law in effect before 1997, a valid election is in place under applicable Treasury Regulations.

 

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This summary also does not discuss all tax considerations that may be relevant to stockholders in light of their particular circumstances, nor does it address the consequences to stockholders subject to special treatment under the U.S. federal income tax laws, such as:

 

    dealers or traders in securities or currencies;

 

    tax-exempt entities;

 

    cooperatives;

 

    banks, trusts, financial institutions, or insurance companies;

 

    persons who acquired shares of Ensign common stock pursuant to the exercise of employee stock options or otherwise as compensation;

 

    stockholders who own, or are deemed to own, at least 10% or more, by voting power or value, of Ensign equity;

 

    holders owning Ensign common stock as part of a position in a straddle or as part of a hedging, conversion, constructive sale, synthetic security, integrated investment, or other risk reduction transaction for U.S. federal income tax purposes;

 

    certain former citizens or former long-term residents of the U.S.;

 

    holders who are subject to the alternative minimum tax; or

 

    persons that own Ensign common stock through partnerships or other pass-through entities.

This summary does not address the U.S. federal income tax consequences to Ensign stockholders who do not hold shares of Ensign common stock as a capital asset. Moreover, this summary does not address any state, local, or foreign tax consequences or any estate, gift or other non-income tax consequences.

If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds shares of Ensign common stock, the tax treatment of a partner in that partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership is urged to consult its tax advisor as to the tax consequences of the Spin-Off.

YOU ARE URGED TO CONSULT WITH YOUR TAX ADVISOR AS TO THE SPECIFIC U.S. FEDERAL, STATE AND LOCAL, AND NON-U.S. TAX CONSEQUENCES OF THE SPIN-OFF IN LIGHT OF YOUR PARTICULAR CIRCUMSTANCES AND THE EFFECT OF POSSIBLE CHANGES IN LAW THAT MIGHT AFFECT THE TAX CONSEQUENCES DESCRIBED IN THIS INFORMATION STATEMENT.

Treatment of the Spin-Off

Ensign is seeking the IRS Ruling substantially to the effect that, on the basis of certain facts presented and representations and assumptions set forth in the request submitted to the IRS for such IRS Ruling, the Spin-Off will qualify as tax-free under Sections 368(a)(1)(D) and 355 of the Code. Ensign has requested and expects to receive the IRS Ruling from the IRS prior to the mailing date of this information statement. The IRS Ruling does not address certain requirements for tax-free treatment of the Spin-Off under Section 355 of the Code, and Ensign expects to receive the Tax Opinion on certain aspects of the tax treatment of the Spin-Off not addressed by the IRS in the IRS Ruling.

 

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Assuming the Spin-Off qualifies under Sections 368(a)(1)(D) and 355 of the Code, for U.S. federal income tax purposes:

 

    no gain or loss will be recognized by Ensign as a result of the Spin-Off;

 

    no gain or loss will be recognized by, or be includible in the income of, a holder of Ensign common stock solely as a result of the receipt of our common stock in the Spin-Off;

 

    the aggregate tax basis of the shares of Ensign common stock and shares of our common stock, including any fractional share deemed received, in the hands of each Ensign stockholder immediately after the Spin-Off will be the same as the aggregate tax basis of the shares of Ensign common stock held by such holder immediately before the Spin-Off, allocated between the shares of Ensign common stock and shares of our common stock, including any fractional share deemed received, in proportion to their relative fair market values immediately following the Spin-Off;

 

    the holding period with respect to shares of our common stock received by Ensign stockholders will include the holding period of their shares of Ensign common stock, provided that such shares of Ensign common stock are held as capital assets immediately following the Spin-Off;

 

    Ensign stockholders that have acquired different blocks of Ensign common stock at different times or at different prices are urged to consult their tax advisors regarding the allocation of their aggregate adjusted basis among, and their holding period of, our shares distributed with respect to blocks of Ensign common stock; and

 

    a holder of Ensign common stock who receives cash in lieu of a fractional share of our common stock in the Spin-Off will recognize capital gain or loss measured by the difference between the tax basis of the fractional share deemed to be received, as determined above, and the amount of cash received.

Although the IRS Ruling generally will be binding on the IRS, the IRS Ruling will be based on certain facts and assumptions, and certain representations and undertakings, from Ensign and us that certain necessary conditions to obtain tax-free treatment under the Code have been satisfied. Furthermore, as a result of the IRS’s general ruling policy with respect to distributions under Section 355 of the Code, the IRS will not rule on whether a distribution satisfies certain critical requirements necessary to obtain tax-free treatment under the Code. Specifically, the IRS will not rule that a distribution was effected for a valid business purpose, that a distribution does not constitute a device for the distribution of earnings and profits, or that a distribution is not part of a plan described in Section 355(e) of the Code (as discussed below). Instead, the IRS Ruling will be based on representations made to the IRS by Ensign that these requirements have been established. In connection with obtaining the ruling, Ensign expects to obtain the Tax Opinion, which is expected to include a conclusion that the Spin-Off is being effected for a valid business purpose, that the Spin-Off does not constitute a device for the distribution of earnings and profits, and that the Spin-Off is not part of a plan described in Section 355(e) of the Code (as discussed below). The Tax Opinion will be expressed as of the date issued and will not cover subsequent periods, and the Tax Opinion will rely on the IRS Ruling. As a result, the Tax Opinion is not expected to be issued until after the date of this information statement. An opinion of counsel represents counsel’s best legal judgment based on current law and is not binding on the IRS or any court. We cannot assure you that the IRS will agree with the conclusions expected to be set forth in the Tax Opinion, and it is possible that the IRS or another tax authority could adopt a position contrary to one or all of those conclusions and that a court could sustain that contrary position. If any of the facts, representations, assumptions, or undertakings described or made in connection with the IRS Ruling or the Tax Opinion are not correct, are incomplete or have been violated, the IRS Ruling could be revoked retroactively or modified by the IRS, and our ability to rely on the Tax Opinion could be jeopardized. We are not aware of any facts or circumstances, however, that would cause these facts, representations, or assumptions to be untrue or incomplete, or that would cause any of these undertakings to fail to be complied with, in any material respect.

 

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If, notwithstanding the conclusions that we expect to be included in the IRS Ruling and the Tax Opinion, it is ultimately determined that the Spin-Off does not qualify as tax-free under Sections 368(a)(1)(D) and 355 of the Code for U.S. federal income tax purposes, then Ensign would recognize gain in an amount equal to the excess, if any, of the fair market value of our common stock distributed to Ensign stockholders on the distribution date over Ensign’s tax basis in such shares. In addition, each Ensign stockholder that receives shares of our common stock in the Spin-Off would be treated as receiving a distribution in an amount equal to the fair market value of our common stock that was distributed to the stockholder, which would generally be taxed as a dividend to the extent of the stockholder’s pro rata share of Ensign’s current and accumulated earnings and profits, including Ensign’s taxable gain, if any, on the Spin-Off, then treated as a non-taxable return of capital to the extent of the stockholder’s basis in the Ensign stock and thereafter treated as capital gain from the sale or exchange of Ensign stock.

Even if the Spin-Off otherwise qualifies for tax-free treatment under Sections 368(a)(1)(D) and 355 of the Code, the Spin-Off may result in corporate level taxable gain to Ensign under Section 355(e) of the Code if 50% or more, by vote or value, of our stock or Ensign stock is treated as acquired or issued as part of a plan or series of related transactions that includes the Spin-Off. If an acquisition or issuance of our stock or Ensign stock triggers the application of Section 355(e) of the Code, Ensign would recognize taxable gain as described above, but the distribution would generally be tax-free to each Ensign stockholder, as described above.

U.S. Treasury regulations require certain U.S. Holders who are “significant distributees” and who receive common stock in the Spin-Off to attach to their U.S. federal income tax returns for the year in which the Spin-Off occurs a statement setting forth certain information with respect to the transaction. Ensign will provide stockholders who receive our common stock in the Spin-Off with the information necessary to comply with such requirement. Holders are urged to consult their tax advisors to determine whether they are significant distributees required to provide the foregoing statement.

Cash in Lieu of Fractional Shares

No fractional shares of our common stock will be distributed to Ensign stockholders in connection with the Spin-Off. All such fractional shares resulting from the Spin-Off will be aggregated and sold by the transfer agent, and the proceeds, if any, less any brokerage commissions or other fees, will be distributed to Ensign stockholders in accordance with their fractional interest in the aggregate number of shares sold. A holder that receives cash in lieu of a fractional share of our common stock as a part of the Spin-Off will generally recognize capital gain or loss measured by the difference between the cash received for such fractional share and the holder’s tax basis in the fractional share determined as described above. Any such capital gain or loss will be long-term capital gain or loss if an Ensign stockholder held such stock for more than one year at the time of the Spin-Off. Long-term capital gains generally are subject to preferential rates of U.S. federal income tax for certain non-corporate U.S. holders (including individuals). The deductibility of capital losses is subject to significant limitations.

Conditions to the Spin-Off

We expect that the Spin-Off will be effective on the distribution date, provided that the following conditions have been satisfied or waived by the board of directors of Ensign:

 

    the final approval by the board of directors of Ensign of the Spin-Off and all related transactions (and such approval not having been withdrawn) and determination of the record date;

 

    the SEC declaring effective our registration statement on Form 10, of which this information statement is a part, under the Exchange Act, and no stop order relating to the registration statement being in effect;

 

    the mailing by Ensign of this information statement to record holders of Ensign common stock as of the record date;

 

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    the receipt by Ensign of the IRS Ruling in a form satisfactory to Ensign in its sole and absolute discretion, to the effect, among other things, that the Spin-Off will qualify as a tax-free transaction for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Code;

 

    the receipt by Ensign of the Tax Opinion, in form and substance satisfactory to Ensign in its sole and absolute discretion, to the effect that certain requirements for tax-free treatment, on which the IRS will not rule, will be satisfied;

 

    the receipt by CareTrust of a tax opinion, in form and substance reasonably satisfactory to CareTrust, to the effect that, commencing with CareTrust’s taxable year ending on December 31, 2014, CareTrust has been organized in conformity with the requirements for qualification as a REIT under the Code, and its proposed method of operation will enable it to meet the requirements for qualification and taxation as a REIT;

 

    the approval of the listing of our common stock on NASDAQ, subject to official notice of issuance;

 

    the transfer by CareTrust to Ensign of a portion of the proceeds from our Operating Partnership’s issuance of notes;

 

    the absence of any order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing consummation of the Spin-Off or any of the transactions related thereto, including the transfers of assets and liabilities contemplated by the Separation and Distribution Agreement;

 

    the absence of any events or developments having occurred prior to the Spin-Off that, in the judgment of the board of directors of Ensign, would result in the Spin-Off having a material adverse effect on Ensign or its stockholders;

 

    the adoption by CareTrust of its amended and restated charter and bylaws;

 

    the execution by the parties of the Separation and Distribution Agreement and all other ancillary agreements relating to the Spin-Off, including the Master Leases; and

 

    Ensign’s receipt of applicable regulatory approvals relating to the Spin-Off.

The fulfillment of the above conditions will not create any obligation on behalf of Ensign to effect the Spin-Off. Until the Spin-Off has occurred, Ensign has the right to terminate the Spin-Off, even if all the conditions have been satisfied, if the board of directors of Ensign determines that the Spin-Off is not in the best interests of Ensign and its stockholders or that market conditions or other circumstances are such that the separation of CareTrust and Ensign is no longer advisable at that time.

Regulatory Approvals

We must complete the necessary registration under U.S. federal securities laws of our common stock, as well as satisfy the applicable NASDAQ listing requirements for such shares. See “—Conditions to the Spin-Off.”

No Appraisal Rights

Ensign stockholders will not have any appraisal rights in connection with the Spin-Off.

Accounting Treatment

At the time of the Spin-Off, the balance sheet of CareTrust will include substantially all of the assets and liabilities associated with Ensign’s real estate business, as well as the assets and liabilities of the three

 

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independent living facilities that will be owned and operated by CareTrust. The assets and liabilities of CareTrust will be recorded at their respective historical carrying values at the time of the Spin-Off in accordance with the provisions of FASB ASC 505-60, “Spinoffs and Reverse Spinoffs.”

Financial Advisors

Citigroup Global Markets Inc. and Wells Fargo Securities, LLC are providing financial advice in connection with the Spin-Off. Each was retained in connection with the transaction because of the firm’s familiarity with Ensign’s assets and operations, and the firm’s qualifications and reputation.

Reasons for Furnishing this Information Statement

We are furnishing this information statement solely to provide information to Ensign stockholders who will receive shares of our common stock in the Spin-Off. You should not construe this information statement as an inducement or encouragement to buy, hold or sell any of our securities or any securities of Ensign. We believe that the information contained in this information statement is accurate as of the date set forth on the cover. Changes to the information contained in this information statement may occur after that date, and neither we nor Ensign undertake any obligation to update the information except in the normal course of Ensign’s business and our public disclosure obligations and practices.

DIVIDEND POLICY

We intend to elect to be taxed and intend to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2014. Commencing with our taxable year ending December 31, 2014, we expect to pay dividends in cash in an amount equal to approximately             % of our AFFO for each quarterly period, but in no event will the annual dividend be less than 90% of our REIT taxable income on an annual basis, determined without regard to the dividends paid deduction and excluding any net capital gains. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. For purposes of determining our cash dividends, our AFFO will be calculated by starting with the NAREIT definition of funds from operations, which is net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus real estate depreciation. The NAREIT definition will then be adjusted to exclude the effect of stock-based and other non-cash compensation expense and subtract maintenance capital expenditures, resulting in our AFFO.

Initially, cash available for distribution to our stockholders will be derived solely from the rental payments under the Master Leases and the income, if any, from operations of our three independent living facilities. All dividends will be made by us at the discretion of our board of directors and will depend on the financial position, results of operations, cash flows, capital requirements, debt covenants (which are expected to include limits on dividends by us), applicable law and other factors as our board of directors deems relevant. Our board of directors has not yet determined when any dividends will be declared or paid.

We currently intend to pay quarterly dividends in cash. For purposes of satisfying the minimum distribution requirement to qualify for and maintain REIT status, our taxable income will be calculated without reference to our cash flow. Consequently, under certain circumstances, we may not have available cash to pay our required distributions and a portion of our distributions may consist of our stock or our debt instruments. In either event, a stockholder of ours will be required to report dividend income as a result of such distributions even though we distributed no cash or only nominal amounts of cash to such stockholder. The IRS has issued private letter rulings to other REITs treating certain distributions that are paid partly in cash and partly in stock as taxable dividends that would satisfy the REIT annual distribution requirement and qualify for the dividends paid

 

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deduction for U.S. federal income tax purposes. Those rulings may be relied upon only by taxpayers to whom they were issued, but we could request a similar ruling from the IRS. We cannot rely on the IRS Ruling that Ensign is seeking from the IRS with respect to the payment of dividends other than the Purging Distribution. Accordingly, it is unclear whether and to what extent we will be able to make taxable dividends (other than the Purging Distribution) payable in-kind. For more information, see “U.S. Federal Income Tax Considerations—Taxation of REITs in General—Annual Distribution Requirements.” We currently believe that we will have sufficient available cash to pay our required distribution for 2014 in cash, but there can be no assurance that this will be the case.

Our dividend policy enables us to review from time to time alternative funding sources to pay our required distributions. We presently anticipate that any future property acquisitions will be financed through the debt we expect to incur in connection with the Spin-Off, other debt financing or the issuance of equity securities. To the extent those funding sources are insufficient to meet our cash needs, or the cost of such financing exceeds the cash flow generated by the acquired properties for any period, cash available for distribution could be reduced. To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may consider various funding sources to cover any such shortfall, including borrowing under available debt facilities, selling certain of our assets or using a portion of the net proceeds we receive in future offerings. However, the sale of any properties acquired from Ensign in connection with the Spin-Off within the ten-year period following the Spin-Off may subject us to adverse consequences. See “Risk Factors—Risks Related to Our Taxation as a REIT.”

We anticipate that our dividends will generally be taxable as ordinary income to our stockholders, although a portion of the dividends may be designated by us as qualified dividend income or capital gain or may constitute a return of capital. We will furnish annually to each of our stockholders a statement setting forth dividends paid during the preceding year and their characterization as ordinary income, return of capital, qualified dividend income or capital gain. For a more complete discussion of the U.S. federal income tax treatment of distributions to our stockholders, see “U.S. Federal Income Tax Considerations—Taxation of Stockholders—Taxation of Taxable U.S. Stockholders.”

 

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FINANCING

The following summary sets forth information based on our current expectations about the financing arrangements anticipated to be entered into prior to the Spin-Off. However, we have not yet entered into any commitments with respect to such financing arrangements, and, accordingly, the terms of such financing arrangements have not yet been determined, remain under discussion and are subject to change, including as a result of market conditions.

Notes Issuance

Prior to the Spin-Off, we anticipate that our Operating Partnership will issue up to $350.0 million aggregate principal amount of unsecured notes. We expect that approximately $         million of the proceeds from the issuance of the notes will be transferred to Ensign in connection with the contribution of assets to us by Ensign prior to the Spin-Off. We expect that Ensign would use the funds received from us to repay certain outstanding third-party bank debt and other indebtedness and, subject to approval of and declaration by Ensign’s board of directors, pay up to eight regular quarterly dividends. We expect that we will use the remaining proceeds for working capital purposes, to fund acquisitions and for general corporate purposes.

We anticipate that the notes will be guaranteed, jointly and severally, by us and by certain of our Operating Partnership’s 100% owned subsidiaries. The notes are expected to have terms customary for notes of this type, including customary restrictive covenants, redemption and repurchase provisions and events of default.

The foregoing summarizes some of the currently expected terms of our notes. However, the foregoing summary does not purport to be complete, and the terms of the notes have not yet been finalized. There may be changes to the expected principal amount and terms of the notes, some of which may be material. Nothing in this summary or otherwise herein shall constitute or be deemed to constitute an offer to sell or the solicitation of an offer to buy the notes.

Revolving Credit Facility

We anticipate that our Operating Partnership will enter into a credit agreement providing for a revolving credit facility in an aggregate principal amount of up to $150.0 million to be provided by a syndicate of banks and other financial institutions. We expect that we will use borrowings under the revolving credit facility after the Spin-Off for working capital purposes, to fund acquisitions and for general corporate purposes.

We anticipate that the revolving credit facility will be guaranteed, jointly and severally, by us and by certain of our Operating Partnership’s wholly owned subsidiaries. The revolving credit facility is expected to contain customary affirmative and negative covenants, as well as customary events of default. We also anticipate that the revolving credit facility will require us to comply with specified financial maintenance covenants.

The foregoing summarizes some of the currently expected terms of our revolving credit facility. However, the foregoing summary does not purport to be complete, and the terms of the revolving credit facility have not yet been finalized. There may be changes to the expected size and other terms of the revolving credit facility, some of which may be material.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2013, on a historical and on a pro forma basis to give effect to the Spin-Off and the transactions related thereto, including the financing transactions, as if they occurred on June 30, 2013. Explanation of the pro forma adjustments made to Ensign Properties’ combined historical financial statements can be found under “CareTrust’s Unaudited Pro Forma Combined Financial Statements.” The following table should be reviewed in conjunction with “CareTrust’s Unaudited Pro Forma Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Ensign Properties’ combined historical financial statements and accompanying notes included elsewhere in this information statement.

 

     Historical
June 30, 2013
     Pro Forma
June 30, 2013
 
     (in thousands)  

Cash and cash equivalents

    $ 779        $     
  

 

 

    

 

 

 

Long-term debt, including amounts due within one year:

     

Revolving credit facility

    $ 30,000          $             (1)   

Notes

     67,500             (1)   

Mortgage notes payable

     116,671           (2)   
  

 

 

    

 

 

 

Total debt

     214,171        

Total equity

     208,052        
  

 

 

    

 

 

 

Total capitalization

    $         422,223          $     
  

 

 

    

 

 

 

 

(1) Prior to the Spin-Off, we anticipate that our Operating Partnership will issue up to $         million aggregate principal amount of unsecured notes. We also anticipate that our Operating Partnership will enter into a credit agreement providing for a revolving credit facility in an aggregate principal amount of up to $         million. However, we have not yet entered into any commitments with respect to such financing arrangements, and, accordingly, the terms of such financing arrangements have not yet been determined, remain under discussion and are subject to change, including as a result of market conditions. See “Financing.”
(2) CareTrust will assume Ensign’s mortgage indebtedness associated with              of the properties that CareTrust will own following the Spin-Off.

 

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CARETRUST’S UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma combined financial statements presents our unaudited pro forma combined statements of income for the year ended December 31, 2012 and the six months ended June 30, 2013, and our unaudited pro forma combined balance sheet as of June 30, 2013, which have been derived from Ensign Properties’ combined historical financial statements included elsewhere in this information statement.

The following unaudited pro forma combined financial statements give effect to the Spin-Off and the related transactions, including: (i) additional rental income associated with new master lease agreements between CareTrust and Ensign for the properties that were previously leased under intercompany lease agreements; (ii) the distribution of approximately             million shares of CareTrust common stock by Ensign to Ensign stockholders; (iii) the anticipated issuance by our Operating Partnership of $350.0 million aggregate principal amount of unsecured notes, and the anticipated interest expense related thereto; (iv) a $             million repayment of debt attributed to Ensign Properties; (v) the elimination of all income tax provisions in conjunction with the achievement of REIT status; and (vi) the effect of the Purging Distribution. The unaudited pro forma combined statements of income presented for the six months ended June 30, 2013 and the year ended December 31, 2012 assume the Spin-Off and the related transactions occurred on January 1, 2012. The unaudited pro forma combined balance sheet assumes the Spin-Off and the related transactions occurred on June 30, 2013. The pro forma adjustments are based on currently available information and assumptions we believe are reasonable, factually supportable, directly attributable to our separation from Ensign, and for purposes of the statements of income, are expected to have a continuing impact on us.

The historical financial data has been adjusted to give pro forma effect to events that are directly attributable to the transactions described above, have an ongoing effect on our statement of operations and are factually supportable. Our unaudited pro forma combined financial statements and explanatory notes present how our financial statements may have appeared had our capital structure reflected the above transactions as of the dates noted above.

Our unaudited pro forma combined financial statements were prepared in accordance with Article 11 of Regulation S-X, using the assumptions set forth in the notes to our unaudited pro forma combined financial statements. The following unaudited pro forma combined financial statements are presented for illustrative purposes only and do not purport to reflect the results we may achieve in future periods or the historical results that would have been obtained had the above transactions been completed on January 1, 2012 or as of June 30, 2013, as the case may be. Our unaudited pro forma combined financial statements also do not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the transactions described above.

Our unaudited pro forma combined financial statements are derived from and should be read in conjunction with Ensign Properties’ combined historical financial statements and accompanying notes included elsewhere in this information statement.

 

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CARETRUST

UNAUDITED PRO FORMA

COMBINED BALANCE SHEET

 

     June 30, 2013  
       Historical       Pro Forma
  Adjustments  
         Note        Pro Forma
  Combined  
 
     (in thousands)  

Assets:

          

Real Estate investments, net of accumulated depreciation of $86,736 as of June 30, 2013

   $ 422,721      $                        $                

Cash and cash equivalents

     779               (1),(5)         

Accounts receivable

     30           

Prepaid expenses and other current assets

     871         (1)   

Deferred tax assets

     215           

Deferred financing costs, net

     3,150         (1)   
  

 

 

   

 

 

    

 

  

 

 

 

Total assets

   $ 427,766      $            $     
  

 

 

   

 

 

    

 

  

 

 

 

Liabilities and Invested Equity:

          

Mortgage notes payable

   $ 116,671      $         (1)    $     

Revolving credit facility

     30,000         (1)   

Unsecured notes payable

     67,500         (1)   

Fair value of interest rates swap

     1,948         (1)   

Accounts payable and accrued liabilities

     3,380         (1)   

Deferred tax liabilities

     215           
  

 

 

   

 

 

    

 

  

 

 

 

Total liabilities

     219,714           
  

 

 

   

 

 

    

 

  

 

 

 

Commitments and contingencies

          

Invested Equity:

          

Invested capital

     210,000         (1)   

Accumulated other comprehensive loss

     (1,948      (1)   
  

 

 

   

 

 

    

 

  

 

 

 

Total equity

     208,052           
  

 

 

   

 

 

    

 

  

 

 

 

Total liabilities and invested equity

   $             427,766      $            $     
  

 

 

   

 

 

    

 

  

 

 

 

 

 

 

See accompanying notes to unaudited pro forma combined financial statements.

 

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CARETRUST

UNAUDITED PRO FORMA

COMBINED STATEMENT OF INCOME

 

     Six Months Ended June 30, 2013  
       Historical        Pro Forma
  Adjustments  
         Note        Pro Forma
  Combined  
 
     (in thousands, except per share amounts)  

Revenues:

           

Rental income from Parent

   $             19,736       $                          (2)          $                

Tenant reimbursement from Parent

     2,438            

Other revenue

     1,214            
  

 

 

    

 

 

    

 

  

 

 

 

Total revenues

     23,388            
  

 

 

    

 

 

    

 

  

 

 

 

Expenses:

           

Depreciation and amortization

     11,392            

Interest expense

     5,833          (1)   

Interest – amortization of deferred financing costs

     350          (1)   

Property taxes

     2,438            

Acquisition costs

     211            

Operating expenses

     946            

General and administrative

     1,068            
  

 

 

    

 

 

    

 

  

 

 

 

Total expenses

     22,238            
  

 

 

    

 

 

    

 

  

 

 

 

Income before provision for income taxes

     1,150            

Provision (benefit) for income taxes

     84          (3)   
  

 

 

    

 

 

    

 

  

 

 

 

Net income

   $ 1,066       $            $     
  

 

 

    

 

 

    

 

  

 

 

 

Basic earnings per share:

   $              

Diluted earnings per share:

   $              

Weighted average number of shares outstanding:

           

Basic

         (4),(5)   

Diluted

         (4),(5)   

 

See accompanying notes to unaudited pro forma combined financial statements.

 

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CARETRUST

UNAUDITED PRO FORMA

COMBINED STATEMENT OF INCOME

 

     Year Ended December 31, 2012  
       Historical        Pro Forma
  Adjustments  
         Note        Pro Forma
  Combined  
 
     (in thousands, except per share amounts)  

Revenues:

           

Rental income from Parent

   $             35,048       $                          (2)          $                

Tenant reimbursement from Parent

     4,470            

Other revenue

     2,545            
  

 

 

    

 

 

    

 

  

 

 

 

Total revenues

     42,063            
  

 

 

    

 

 

    

 

  

 

 

 

Expenses:

           

Depreciation and amortization

     21,103            

Interest expense

     11,502          (1)   

Interest – amortization of deferred financing costs

     705          (1)   

Property taxes

     4,470            

Acquisition costs

     189            

Operating expenses

     2,074            

General and administrative

     1,788            
  

 

 

    

 

 

    

 

  

 

 

 

Total expenses

     41,831            
  

 

 

    

 

 

    

 

  

 

 

 

Income before provision for income taxes

     232            

Provision (benefit) for income taxes

     122          (3)   
  

 

 

    

 

 

    

 

  

 

 

 

Net income

   $ 110       $            $     
  

 

 

    

 

 

    

 

  

 

 

 

Basic earnings per share:

   $              

Diluted earnings per share:

   $              

Weighted average number of shares outstanding:

           

Basic

         (4),(5)   

Diluted

         (4),(5)   

 

See accompanying notes to unaudited pro forma combined financial statements.

 

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NOTES TO CARETRUST’S UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

Basis of Presentation

Immediately following the Spin-Off, we will own substantially all of Ensign’s real property interests, the entities that operate three independent living facilities, and the related assets and liabilities. The unaudited pro forma combined financial statements give effect to the Spin-Off and related transactions as discussed above.

Pro Forma Adjustments

 

(1) The adjustments reflect the following related to the Spin-Off:

 

    Issuance by our Operating Partnership of $350.0 million aggregate principal amount of unsecured notes.

 

    Elimination of certain mortgage notes payable, the revolving credit facility and unsecured notes payable as a result of the extinguishment of selected indebtedness attributed to Ensign Properties.

 

    Elimination of the deferred financing costs, interest expense and debt issue amortization cost associated with the extinguishment of selected indebtedness (e.g., certain mortgage notes payable, revolving credit facility and unsecured notes payable) that will be repaid.

 

    Incurrence of deferred financing costs associated with our Operating Partnership’s $350.0 million aggregate principal amount of unsecured notes and our Operating Partnership’s revolving credit facility in an aggregate principal amount of $150.0 million.

 

    Elimination of the interest rate swap associated with the indebtedness attributed to Ensign Properties that will be extinguished.

 

    Incurrence of interest expense as well as amortization of debt issuance costs in connection with the issuance by our Operating Partnership of $350.0 million aggregate principal amount of unsecured notes. We anticipate the notes will bear interest at an annual rate of         % with a term of years. A             % change in the annual interest rate would change our interest expense by approximately $         million annually.

 

(2) Reflects additional rental income associated with rent from subsidiaries of Ensign in connection with the new master lease agreements for properties of Ensign Properties that were previously leased under intercompany lease agreements.

 

(3) The adjustment to our historical provision for income taxes assumes that we have met all the conditions necessary for us to be treated as a REIT for all periods presented. As a result, we have eliminated the provision for income taxes for the six months ended June 30, 2013 and for the year ended December 31, 2012.

 

(4) Our pro forma earnings per share are based upon the distribution of          share(s) of our common stock for every share of Ensign common stock. Pro forma weighted average diluted shares outstanding reflect potential common shares from Ensign’s equity plans, in which our employees participate, based on the above distribution ratio. While the actual impact going forward will depend on various factors, we believe the estimate provides a reasonable approximation of the future dilutive impact of our equity plans.

 

(5) As a result of our intended election to be taxed as a REIT for U.S. federal income tax purposes, in order to comply with certain REIT qualification requirements following the Spin-Off, we will make the Purging Distribution by declaring a dividend to our stockholders to distribute any accumulated earnings and profits attributable to any non-REIT years, including any earnings and profits allocated to us in connection with the Spin-Off. The Purging Distribution will be paid to our stockholders in a combination of cash and our stock, with the cash amount not to exceed 25% of the total amount of the Purging Distribution. Accordingly, our basic and diluted weighted average shares outstanding will increase by          shares.

 

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ENSIGN’S UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma combined financial statements presents Ensign’s unaudited pro forma combined statements of income for the year ended December 31, 2012 and the six months ended June 30, 2013, and Ensign’s unaudited pro forma combined balance sheet as of June 30, 2013, which have been derived from Ensign’s combined historical financial statements that are not included in this information statement.

The following unaudited pro forma combined financial statements give effect to the Spin-Off and the related transactions, including: (i) the transfer to us of Ensign’s assets and liabilities that are specifically identifiable or otherwise allocable to us; (ii) the elimination of Ensign’s equity interest in us; and (iii) the removal of certain non-recurring transaction expenses directly related to the Spin-Off. The unaudited pro forma combined statements of income presented for the six months ended June 30, 2013 and the year ended December 31, 2012 assume the Spin-Off and the related transactions occurred on January 1, 2012. The unaudited pro forma combined balance sheet assumes the Spin-Off and the related transactions occurred on June 30, 2013. The pro forma adjustments are based on currently available information and assumptions we believe are reasonable, factually supportable, directly attributable to our separation from Ensign, and for purposes of the statements of income, are expected to have a continuing impact on Ensign.

The historical financial data has been adjusted to give pro forma effect to events that are directly attributable to the transactions described above, have an ongoing effect on Ensign’s statement of operations and are factually supportable. Ensign’s unaudited pro forma combined financial statements and explanatory notes present how Ensign’s financial statements may have appeared had its capital structure reflected the above transactions as of the dates noted above.

Ensign’s unaudited pro forma combined financial statements were prepared in accordance with Article 11 of Regulation S-X, using the assumptions set forth in the notes to the unaudited pro forma combined financial statements. The following unaudited pro forma combined financial statements are presented for illustrative purposes only and do not purport to reflect the results Ensign may achieve in future periods or the historical results that would have been obtained had the above transactions been completed on January 1, 2012 or as of June 30, 2013, as the case may be. Ensign’s unaudited pro forma combined financial statements also do not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the transactions described above.

Ensign’s unaudited pro forma combined financial statements are derived from and should be read in conjunction with Ensign’s historical financial statements and accompanying notes that are incorporated by reference into this information statement.

 

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THE ENSIGN GROUP, INC.

UNAUDITED PRO FORMA

COMBINED BALANCE SHEET

 

     June 30, 2013  
     Historical     Pro Forma
Adjustments
     Note    Pro Forma
Combined
 
     (in thousands)  

Assets:

          

Current assets:

          

Cash and cash equivalents

    $ 27,499         (1)     $                

Accounts receivable

     107,436         (1)   

Investments – current

     3,279           

Prepaid income taxes

     10,729           

Prepaid expenses and other current assets

     7,086         (1)   

Deferred tax assets – current

     13,351         (1)   
  

 

 

   

 

 

    

 

  

 

 

 

Total current assets

     169,380           

Property and equipment, net

     476,671         (1)   

Insurance subsidiary deposits and investment

     19,384           

Escrow deposits

     4,506           

Deferred tax asset

     3,490         (1)   

Restricted and other assets

     12,596         (1)   

Intangible assets, net

     6,302           

Goodwill

     23,523           

Other indefinite-lived intangibles

     7,740           
  

 

 

   

 

 

    

 

  

 

 

 

Total assets

    $ 723,592       $             $     
  

 

 

   

 

 

    

 

  

 

 

 

Liabilities and Equity:

          

Current liabilities

          

Accounts payable

    $ 21,315         (1)   

Accrued charge related to U.S. Government inquiry

     48,000           

Accrued wages and related liabilities

     34,511         (1)   

Accrued self-insurance liabilities – current

     14,662           

Other accrued liabilities

     19,216         (4)   

Current maturities of long-term debt

     7,297         (1)   
  

 

 

   

 

 

    

 

  

 

 

 

Total current liabilities

     145,001           

Long-term debt – less current maturities

     206,874         (1)   

Accrued self insurance liabilities – less current portion

     36,376           

Fair value of interest rate swap

     1,948         (1)   

Deferred rent and other long-term liabilities

     3,142           
  

 

 

   

 

 

    

 

  

 

 

 

Total liabilities

     393,341           
  

 

 

   

 

 

    

 

  

 

 

 

Equity:

          

Common stock

     22           

Additional paid-in capital

     95,703           

Retained earnings

     236,689         (8)   

Treasury stock

     (2,063        

Accumulated other comprehensive loss

     (1,186      (2)   
  

 

 

   

 

 

    

 

  

 

 

 

Total Ensign stockholders’ equity

     329,165           

Noncontrolling interests

     1,086           
  

 

 

   

 

 

    

 

  

 

 

 

Total equity

     330,251           
  

 

 

   

 

 

    

 

  

 

 

 

Total liabilities and equity

    $         723,592       $             $     
  

 

 

   

 

 

    

 

  

 

 

 

See accompanying notes to unaudited pro forma combined financial statements.

 

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THE ENSIGN GROUP, INC.

UNAUDITED PRO FORMA

COMBINED STATEMENT OF INCOME

 

    Six Months Ended June 30, 2013  
        Historical         Pro Forma
    Adjustments    
    Note   Pro Forma
    Combined    
 
    (in thousands, except per share amounts)  

Revenue

   $         438,287       $        (1)    $     

Expense:

       

Cost of services

    351,974        (1)  

Charge related to U.S. Government inquiry

    33,000         

Facility rent – cost of services

    6,652        (3)  

General and administrative expense

    17,720        (4)  

Depreciation and amortization

    16,403        (1), (5)  
 

 

 

   

 

 

   

 

 

 

 

 

Total expenses

    425,749         

Income from operations

    12,538         

Other income (expense):

       

Interest expense

    (6,260     (6)  

Interest Income

    222         
 

 

 

   

 

 

   

 

 

 

 

 

Other expense, net

    (6,038      
 

 

 

   

 

 

   

 

 

 

 

 

Income from continuing operations before provision for income taxes

    6,500         

Provision for income taxes

    4,833        (7)  
 

 

 

   

 

 

   

 

 

 

 

 

Income from continuing operations

    1,667         

Less: Income (loss) from continuing operations attributable to noncontrolling interests

    (327      
 

 

 

   

 

 

   

 

 

 

 

 

Income from continuing operations attributable to Ensign

   $ 1,994       $                          $                
 

 

 

   

 

 

   

 

 

 

 

 

Basic earnings per share:

   $ 0.09         

Diluted earnings per share:

   $ 0.09         

Weighted average number of shares outstanding:

       

Basic

    21,814        (8)  

Diluted

    22,267        (8)  

 

See accompanying notes to unaudited pro forma combined financial statements.

 

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THE ENSIGN GROUP, INC.

UNAUDITED PRO FORMA

COMBINED STATEMENT OF INCOME

 

     Year Ended December 31, 2012  
         Historical         Pro Forma
    Adjustments    
     Note   Pro Forma
    Combined    
 
     (in thousands, except per share amounts)  

Revenue

    $         824,719       $         (1)    $     

Expense:

         

Cost of services

     660,070         (1)  

Charge related to U.S. Government inquiry

     15,000          

Facility rent – cost of services

     13,319         (3)  

General and administrative expense

     31,819          

Depreciation and amortization

     28,464         (1),(5)  
  

 

 

   

 

 

    

 

 

 

 

 

Total Expenses

     748,672          

Income from operations

     76,047          

Other income (expense):

         

Interest expense

     (12,229      (6)  

Interest Income

     255          
  

 

 

   

 

 

    

 

 

 

 

 

Other expense, net

     (11,974       
  

 

 

   

 

 

    

 

 

 

 

 

Income from operations before provision for income taxes

     64,073          

Provision for income taxes

     24,265         (7)  
  

 

 

   

 

 

    

 

 

 

 

 

Net income

     39,808          

Less: net income (loss) attributable to noncontrolling interests

     (783       
  

 

 

   

 

 

    

 

 

 

 

 

Net income attributable to Ensign

    $ 40,591       $                       $                
  

 

 

   

 

 

    

 

 

 

 

 

Basic earnings per share:

    $ 1.89          

Diluted earnings per share:

    $ 1.85          

Weighted average number of shares outstanding:

         

Basic

     21,429         (8)  

Diluted

     21,942         (8)  

 

See accompanying notes to unaudited pro forma combined financial statements.

 

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NOTES TO ENSIGN’S UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

Basis of Presentation

Immediately following the Spin-Off, Ensign will continue to provide healthcare services through its existing operations. The unaudited pro forma combined financial statements give effect to the Spin-Off and related transactions as discussed above.

Pro Forma Adjustments

 

(1) The adjustments remove the assets, liabilities, equity and results of operations associated with us. These adjustments include, among others:

 

    Cash received from us in the amount of $         million.

 

    Removal of accounts receivable, prepaid expenses, other assets and property and equipment balances attributed and contributed to us consisting of and related to the entities that own substantially all of Ensign’s real property interests that we will own following the Spin-Off and the operations of the three independent living facilities that we will own and operate following the Spin-Off.

 

    Removal of deferred tax balances related to the operations that have been attributed to Ensign Properties.

 

    Elimination of accounts payable, accrued liabilities, and all outstanding debt, deferred financing costs and interest rate swap fair value that have been attributed and contributed to us.

 

    Incurrence of deferred financing costs associated with our Operating Partnership’s $350.0 million aggregate principal amount of unsecured notes and our Operating Partnership’s revolving credit facility in an aggregate principal amount of $150.0 million.

 

    Removal of Ensign’s equity interest in Ensign Properties.

 

    Removal of operations attributed and contributed to Ensign Properties consisting of the operations of the three independent living facilities that Ensign Properties will own and operate following the Spin-Off.

 

(2) To remove the accumulated other comprehensive loss and interest rate swap that has been attributed to Ensign Properties debt.

 

(3) The adjustments pertain to changes in rent charges resulting from the removal of intercompany rental charges and replacement of such in accordance with the Master Leases.

 

(4) Removes non-recurring expenses incurred during the six months ended June 30, 2013 that are directly related to the Spin-Off.

 

(5) To adjust depreciation expense for the property and equipment transferred from Ensign to Ensign Properties.

 

(6) To remove the interest expense associated with the debt that was attributed to Ensign Properties.

 

(7) The pro forma adjustments were tax effected using the statutory tax rate of 39.8% for the six months ended June 30, 2013 as well as the year ended December 31, 2012.

 

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(8) Pro forma diluted earnings per share and weighted average number of diluted shares outstanding were adjusted to reflect shares of Ensign common stock that will be issued in connection with awards granted prior to the Spin-Off under Ensign equity plans based on the distribution ratio of             . While the actual dilutive impact will depend on various factors, Ensign believes the estimate yields a reasonable approximation of the dilutive impact of the Ensign equity plans and is based upon Ensign’s weighted average number of diluted Ensign shares outstanding.

 

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SELECTED COMBINED HISTORICAL FINANCIAL DATA

The following table sets forth the combined historical financial data for Ensign Properties (as described below) on a historical basis. Prior to the Spin-Off, we will not have operated our business separate from Ensign. We use the term “Ensign Properties” to mean the carve-out business of the entities that own the skilled nursing, assisted living and independent living facilities that we will own following the Spin-Off, and the operations of the three independent living facilities that we will operate following the Spin-Off.

The combined historical financial data as of December 31, 2012 and 2011, and for each of the years ended December 31, 2012, 2011 and 2010, has been derived from Ensign Properties’ audited combined financial statements included elsewhere in this information statement. The combined historical financial data as of June 30, 2013, and for the six months ended June 30, 2013 and 2012, has been derived from Ensign Properties’ unaudited condensed combined financial statements included elsewhere in this information statement. Certain information and note disclosures normally included in the annual combined financial statements have been condensed or omitted, as permitted under applicable rules and regulations. Our management believes the assumptions underlying Ensign Properties’ combined financial statements and accompanying notes are reasonable. However, such combined financial statements may not necessarily reflect our financial condition and results of operations in the future, or what they would have been had we been a separate, stand-alone company during the periods presented. The results of operations presented in the combined financial statements are not necessarily representative of operations for the entire year.

The following should be read in conjunction with Ensign Properties’ combined financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each of which are included elsewhere in this information statement.

 

    As of or For the Six Months
Ended June 30,
    As of or For the Year Ended
December 31,
 
              2013                         2012                         2012                         2011                         2010            
    (in thousands)  

Operating data:

         

Total net revenues

  $ 23,388      $ 20,419      $ 42,063      $ 31,941      $ 22,187   

Income (loss) before income taxes

  $ 1,150      $ (187   $ 232      $ (6,514   $ (3,815

Net income (loss)

  $ 1,066      $ (84   $ 110      $ (5,341   $ (2,473

Balance sheet data:

         

Total assets

  $   427,766      $   386,629      $   398,978      $   374,466      $   246,039   

Mortgage notes payable

  $ 116,671      $ 119,899      $ 118,317      $ 99,745      $ 142,506   

Revolving credit facility

  $ 30,000      $ 10,000      $ 20,000      $ 15,000      $   

Senior unsecured notes payable

  $ 67,500      $ 71,250      $ 69,375      $ 73,125      $   

Stockholders’ equity

  $ 208,052      $ 178,745      $ 184,548      $ 179,609      $ 98,400   

Other financial data:

         

FFO

  $ 12,458      $ 10,021      $ 21,213      $ 11,277      $ 9,234   

AFFO

  $ 13,024      $ 10,480      $ 22,122      $ 14,902      $ 9,891   

 

 

(1) We believe that net income, as defined by GAAP, is the most appropriate earnings measure. We also believe FFO, as defined by the NAREIT, and AFFO (and related per share amounts) are important non-GAAP supplemental measures of operating performance for a REIT. We consider FFO and AFFO to be useful measures for reviewing comparative operating and financial performance because, by excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization, and, for AFFO, by excluding non-cash expenses (including stock-based compensation expense and amortization of deferred financing costs) and acquisition pursuit costs, FFO and AFFO can help investors compare our operating performance between periods or as compared to other companies. See further discussion of FFO and AFFO in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Discussion of Historical Results of Operations of Ensign Properties—Non-GAAP Measurements.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following is a discussion and analysis of (i) our anticipated financial condition immediately following the Spin-Off and (ii) Ensign Properties’ historical results of operations, consisting of the carve-out business of the entities that own the skilled nursing, assisted living and independent living facilities that we will own following the Spin-Off, and the operations of the three independent living facilities that we will operate following the Spin-Off. The following should be read in conjunction with Ensign Properties’ combined financial statements and accompanying notes, as well as our unaudited pro forma combined financial statements and accompanying notes, each of which are included elsewhere in this information statement. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected, forecasted or expected in these forward-looking statements as a result of various factors, including those which are discussed below and elsewhere in this information statement. See also “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.” Prior to the Spin-Off, we will not have operated our business separate from Ensign. Ensign Properties’ historical results of operations include the results of operations of the entities that own and operate, as applicable, the properties that Ensign will contribute to us prior to the Spin-Off, and our management believes the assumptions underlying Ensign Properties’ combined financial statements and accompanying notes are reasonable. However, such combined financial statements may not necessarily reflect our financial condition and results of operations in the future, or what they would have been had we been a separate, stand-alone company during the periods presented.

OVERVIEW

At the time of the Spin-Off, we will hold substantially all of the real property owned by Ensign, which, on a pro forma basis as of June 30, 2013, consists of 96 skilled nursing, assisted living and independent living facilities. After the Spin-Off, all of these properties, and potentially any additional properties we may acquire prior to the Spin-Off, will be leased to Ensign pursuant to the five separate Master Leases, except for three independent living facilities that we will operate. On a pro forma basis as of June 30, 2013, the 93 facilities that will be leased to Ensign have a total of 10,052 operational beds and units and are located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Texas, Utah and Washington, and the three independent living facilities that we will operate have a total of 264 units and are located in Texas and Utah.

Following the Spin-Off, we will be a publicly traded, self-administered, self-managed REIT primarily engaged in the ownership, acquisition and leasing of healthcare facilities. We expect to generate revenues primarily by leasing healthcare facilities to healthcare operators in triple-net lease arrangements, under which the tenant is solely responsible for the costs related to the property (including property taxes, insurance, and maintenance and repair costs). We intend to conduct and manage our business as one operating segment for internal reporting and internal decision making purposes. We expect to grow our portfolio by pursuing opportunities to acquire additional facilities that will be leased to a diverse group of local, regional and national healthcare providers, which may include Ensign, as well as senior housing operators and related businesses. We also anticipate diversifying our portfolio over time, including by acquiring properties in different geographic markets, and in different asset classes.

We intend to elect to be taxed and intend to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2014. We intend to operate through an umbrella partnership, commonly referred to as an UPREIT structure, in which substantially all of our properties and assets will be held through the Operating Partnership, of which we are the sole general partner. To maintain REIT status, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. See “U.S. Federal Income Tax Considerations.”

 

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COMPONENTS OF OUR REVENUES AND EXPENSES FOLLOWING THE SPIN-OFF

Revenues

Following the Spin-Off, our earnings will primarily be attributable to the rental revenue from the lease of our properties to Ensign pursuant to the Master Leases. The Master Leases consist of five separate triple-net leases pursuant to which Ensign is responsible for all facility maintenance and repair, insurance required in connection with the leased properties and the business conducted on the leased properties, taxes levied on or with respect to the leased properties and all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties. The rent will be a fixed component that will be initially set based on the trailing twelve months of operating margins of the leased properties. As of June 30, 2013, we anticipate that the annual revenues from the Master Leases will be approximately $59.0 million during each of the first two years of the Master Leases, and thereafter will be escalated annually by an amount equal to the product of (1) the lesser of the percentage change in the Consumer Price Index (but not less than zero) or 2.5%, and (2) the prior year’s rent.

General and Administrative Expenses

General and administrative costs are expected for items such as compensation costs (including stock based compensation awards), professional services, office costs and other costs associated with administrative activities. To the extent requested by us, Ensign will provide us with certain administrative and support services on a transitional basis pursuant to the Transition Services Agreement. We expect that the fees charged to us for transition services furnished pursuant to the Transition Services Agreement will approximate the actual cost incurred by Ensign in providing such transition services to us for the relevant period.

General and administrative expenses are anticipated to be approximately $         million to $         million in the first year after the Spin-Off. This amount includes corporate overhead and transitional services costs of approximately $         million. The details of our future anticipated equity grants and compensation has not yet been determined for our executive officers. The amount of compensation-related expense, including non-cash stock compensation expense, actually incurred by us in the first year after the Spin-Off will be based on determinations by our compensation and governance committee following the Spin-Off.

Real Estate Depreciation

We will incur depreciation expense for the property and equipment transferred to us from Ensign, which is expected to be approximately $23 million in the first year after the Spin-Off.

Revenues and Operating Expenses of Our Independent Living Operations

We will own and operate three independent living facilities. We anticipate these three independent living facilities will generate annual net revenues of approximately $2.5 million and incur annual operating expenses of approximately $2 million in the first year after the Spin-Off.

Interest Expense

We will incur interest expense from our borrowing obligations and the amortization of our debt issuance costs related to our indebtedness. Our current estimate of debt outstanding following the Spin-Off is approximately $         million in outstanding borrowings and annual interest costs of approximately $         million based on a weighted average interest rate of     %. This estimate will vary depending on the actual number of properties that we will own at the time of the Spin-Off and other factors. See “—Liquidity and Capital Resources” below for more information.

 

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DISCUSSION OF HISTORICAL RESULTS OF OPERATIONS OF ENSIGN PROPERTIES

Basis of Presentation

Ensign Properties’ combined financial statements were prepared on a stand-alone basis and were derived from the combined financial statements and accounting records of Ensign. These statements reflect the combined historical financial condition and results of operations of the carve-out business of the entities that own the skilled nursing, assisted living and independent living facilities that we will own following the Spin-Off, and the operations of the three independent living facilities that we will operate following the Spin-Off, in accordance with U.S. generally accepted accounting principles (“GAAP”). The various entities comprising Ensign Properties are wholly owned subsidiaries of Ensign, and we use the term “Parent” in the tables below to mean Ensign in such capacity.

These financial statements are presented as if such properties had been combined for all periods presented. All intercompany transactions and accounts have been eliminated.

Operating Results

Our primary business following the Spin-Off will consist of acquiring, financing and owning real property to be leased to third party tenants in the healthcare sector. As of June 30, 2013, after giving pro forma effect to the separation of the healthcare operations from the independent living operations at two locations, the 93 facilities that will be leased to Ensign have a total of 10,052 operational beds and units and are located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Texas, Utah and Washington, and the three independent living facilities that we will operate have a total of 264 units and are located in Texas and Utah.

Non-GAAP Measurements

We believe that net income, as defined by GAAP, is the most appropriate earnings measure. We also believe that funds from operations (or FFO), as defined in accordance with the definition used by the National Association of Real Estate Investment Trusts (or NAREIT), and adjusted funds from operations (or AFFO) (and related per share amounts) are important non-GAAP supplemental measures of operating performance for a REIT. Because the historical cost accounting convention used for real estate assets requires straight-line depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. However, since real estate values have historically risen or fallen with market and other conditions, presentations of operating results for a REIT that uses historical cost accounting for depreciation could be less informative. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. FFO is defined as net income, computed in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization. AFFO is defined as FFO excluding non-cash expenses (including stock-based compensation expense and amortization of deferred financing costs) and acquisition pursuit costs. We believe that the use of FFO and AFFO (and the related per share amounts), combined with the required GAAP presentations, improves the understanding of operating results of REITs among investors and makes comparisons of operating results among such companies more meaningful. We consider FFO and AFFO to be useful measures for reviewing comparative operating and financial performance because, by excluding gains or losses related to sales of previously depreciated operating real estate assets and real estate depreciation and amortization, and, for AFFO, by excluding non-cash expenses (including stock-based compensation expense and amortization of deferred financing costs) and acquisition pursuit costs, FFO and AFFO can help investors compare our operating performance between periods or as compared to other companies. While FFO and AFFO are relevant and widely used measures of operating performance of REITs, they do not represent cash flows from operations or net income as defined by GAAP and should not be considered an alternative to those measures in evaluating our liquidity or operating performance. FFO and AFFO also do not consider the costs associated with capital expenditures related to our real estate assets nor do they

 

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purport to be indicative of cash available to fund our future cash requirements. Further, our computation of FFO and AFFO may not be comparable to FFO and AFFO reported by other REITs that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREIT definition or define AFFO differently than we do.

The following table reconciles our calculations of FFO and AFFO for the years ended December 31, 2012, 2011, and 2010, for the six months ended June 30, 2013 and 2012 and the unaudited pro forma combined financial data for the six months ended June 30, 2013, and for the year ended December 31, 2012 to net income, the most directly comparable GAAP financial measure, for the same periods:

 

                                                                                                               
    For the Six Months Ended
June 30,
    For the Year
Ended December 31
 
    Pro Forma
        2013        
            2013                     2012             Pro Forma
        2012        
            2012                     2011                     2010          
    ( in thousands)  

Net income (loss)

   $                    $ 1,066        $ (84)        $                    $ 110        $ (5,341)        $ (2,473)    

Depreciation and amortization

        11,392           10,105             21,103           16,618           11,707    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO

      12,458         10,021           21,213         11,277         9,234    

Acquisition pursuit costs

      211         108           189         467         135    

Stock-based compensation

                      15         15           

Amortization of deferred financing costs

      350         344           705         601         522    

Loss on extinguishment of debt

                             2,542           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AFFO

   $                    $ 13,024        $ 10,480        $                    $ 22,122        $ 14,902        $ 9,891    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012 (dollars in thousands):

 

                                                                                       
     Six Months Ended
June 30,
             
    

        2013        

   

        2012        

   

Increase
    (Decrease)    

   

Percentage
    Difference    

 

Revenues:

        

Rental income from Parent

   $     19,736          $     16,810        $ 2,926          17%       

Tenant reimbursement

     2,438            2,280          158          7%       

Other revenue

     1,214            1,329          (115)         -9%       

Expenses:

        

Depreciation and amortization

     11,392            10,105          1,287          13%       

Interest expense

     5,833            5,878          (45)         -1%       

Interest - amortization of deferred financing costs

     350            344          6          2%       

Property taxes

     2,438            2,280          158          7%       

Acquisition costs

     211            108          103          *nm           

Operating expenses

     946            999          (53)         -5%       

General and administrative

     1,068            892          176          20%       

Provision (benefit) for income taxes

     84            (103)         187          *nm           

 

 

*not meaningful

Rental income from Parent. Rental income was $19.7 million for the six months ended June 30, 2013 compared to $16.8 million for the six months ended June 30, 2012. The $2.9 million increase in rental income is primarily due to an increase of $2.0 million from 17 properties acquired after January 1, 2012.

 

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Other revenue. Other revenue was $1.2 million for the six months ended June 30, 2013 compared to $1.3 million for the six months ended June 30, 2012. These revenues primarily relate to the three independent living facilities we will operate. The decrease in revenue was due to a decline in occupancy.

Depreciation and amortization. Depreciation and amortization expense increased $1.3 million or 13% for the six months ended June 30, 2013 to $11.4 million compared to $10.1 million for the six months ended June 30, 2012. The $1.3 million net increase in depreciation and amortization was primarily due to an increase of $0.7 million from 17 properties acquired after January 1, 2012.

Interest expense. We incur interest expense comprised of costs of borrowings. During the six months ended June 30, 2013 and June 30, 2012, we incurred approximately $5.8 and $5.9 million of interest expense, respectively. The slight decline in interest is primarily related to an increase in interest expense associated with an increase in debt of approximately $13.0 million which was more than offset by lower effective interest rates.

Interest – amortization of deferred financing costs. We incur interest amortization of deferred financing costs related to our indebtedness. During the six months ended June 30, 2013 and June 30, 2012, we incurred approximately $0.4 million and $0.3 million, respectively.

General and administrative expense. General and administrative expense increased $0.2 million or 20% for the six months ended June 30, 2013 to $1.1 million compared to $0.9 million for the six months ended June 30, 2012. The $0.2 million net increase is primarily related to the Spin-Off.

Provision for income taxes. Provision for income taxes for the six months ended June 30, 2013 was $0.1 million compared to benefit from income taxes of $0.1 million for the six months ended June 30, 2012.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 (dollars in thousands):

 

                                                                           
     Year Ended
December 31,
             
    

        2012        

   

        2011        

   

Increase
    (Decrease)    

   

Percentage
    Difference    

 

Revenues:

        

Rental income from Parent

   $     35,048          $     26,213        $     8,835          34%       

Tenant reimbursement

     4,470            3,912          558          14%       

Other revenue

     2,545            1,816          729          40%       

Expenses:

        

Depreciation and amortization

     21,103            16,618          4,485          27%       

Interest expense

     11,502            10,505          997          9%       

Interest - amortization of deferred financing costs

     705            601          104          17%       

Loss on extinguishment of debt

     —            2,542          (2,542)         *nm           

Property taxes

     4,470            3,912          558          14%       

Acquisition costs

     189            467          (278)         -60%       

Operating expenses

     2,074            1,433          641          45%       

General and administrative

     1,788            2,377          (589)         -25%       

Provision (benefit) for income taxes

     122            (1,173)         1,295          *nm           

 

 

*not meaningful

Rental income from Parent. Rental income was $35.0 million for the year ended December 31, 2012 compared to $26.2 million for the year ended December 31, 2011. The $8.8 million increase in rental income is primarily due to an increase of $6.4 million from 30 properties acquired after January 1, 2011. Amounts due under the terms do not have contingent rental income that may be derived from our properties.

 

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Other revenue. Other revenue was $2.5 million for the year ended December 31, 2012 compared to $1.8 million for the year ended December 31, 2011. The increase in revenue primarily relates to the acquisition of an independent living facility in December 2011.

Depreciation and amortization. Depreciation and amortization expense increased $4.5 million or 27% for the year ended December 31, 2012 to $21.1 million compared to $16.6 million for the year ended December 31, 2012. The increase in depreciation and amortization was primarily due to an increase of $2.4 million from 30 properties acquired after January 1, 2011.

Interest expense. We incur interest expense comprised of costs of borrowings. During the years ended December 31, 2012 and December 31, 2011, we incurred approximately $11.5 million and $10.5 million of interest expense, respectively. The increase in interest is primarily related to an increase in debt of approximately $20 million which was offset by lower effective interest rates.

Interest – amortization of deferred financing costs. We incur interest amortization of deferred financing costs related to our indebtedness. During the year ended December 31, 2012, we expensed approximately $0.7 million compared to $0.6 million for the year ended December 31, 2011.

Loss on extinguishment of debt. The loss on extinguishment of debt for the year ended December 31, 2011 related to an exit fee and related extinguishment fee of $2.5 million which was paid in connection with the termination of a revolving credit facility and prepayment of indebtedness under the Fourth Amended and Restated Loan Agreement by and among specified subsidiaries of Ensign as borrowers thereunder, General Electric Capital Corporation, and the other lenders thereunder, dated as of November 6, 2009 (the “Six Project Note”).

General and administrative expense. General and administrative expense decreased $0.6 million or 25% for the year ended December 31, 2012 to $1.8 million, compared to $2.4 million for the year December 31, 2011. The $0.6 million net decrease is primarily related to decreases in executive compensation.

Provision for income taxes. Provision for income taxes was $0.1 million for the year ended December 31, 2012 compared to benefit from income taxes of $1.2 million for the year ended December 31, 2011. This change resulted from the change in income before income taxes and change in the effective tax rate.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 (dollars in thousands):

 

                                                                           
     Year Ended
December 31,
             
    

        2011        

   

        2010        

   

Increase
    (Decrease)    

   

Percentage
    Difference    

 

Revenues:

        

Rental income from Parent

   $   26,213          $   19,116        $   7,097          37%       

Tenant reimbursement

     3,912            2,710          1,202          44%       

Other revenue

     1,816            361          1,455          403%       

Expenses:

        

Depreciation and amortization

     16,618            11,707          4,911          42%       

Interest expense

     10,505            8,346          2,159          26%       

Interest - amortization of deferred financing costs

     601            522          79          15%       

Loss on extinguishment of debt

     2,542            —          2,542          *nm           

Property taxes

     3,912            2,710          1,202          44%       

Acquisition costs

     467            135          332          *nm           

Operating expenses

     1,433            361          1,072          *nm           

General and administrative

     2,377            2,221          156          7%       

Provision (benefit) for income taxes

     (1,173)          (1,342)         169          -13%       

 

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*not meaningful

Rental income from Parent. Rental income was $26.2 million for the year ended December 31, 2011 compared to $19.1 million for the year ended December 31, 2010. The $7.1 million increase in rental income is primarily due to an increase of $6.3 million from 24 properties acquired after December 31, 2010. Amounts due under the terms do not have contingent rental income that may be derived from our properties.

Other revenue. Other revenue was $1.8 million for the year ended December 31, 2011 compared to $0.4 million for the year ended December 31, 2010. The increase in this revenue primarily relates to the acquisition of an independent living facility in February 2011.

Depreciation and amortization. Depreciation and amortization expense increased $4.9 million or 42% for the year ended December 31, 2011 to $16.6 million, compared to $11.7 million for the year ended December 31, 2010. The $4.9 million net increase in depreciation and amortization was primarily due to an increase of $3.0 million from 24 properties acquired after December 31, 2010.

Interest expense. We incur interest expense comprised of costs of borrowings. During the years ended December 31, 2011 and December 31, 2010, we incurred approximately $10.5 million and $8.3 million of interest expense, respectively. The increase in interest is primarily due to an increase in outstanding borrowings under the Senior Credit Facility with a five-bank lending consortium arranged by SunTrust and Wells Fargo.

Interest – amortization of deferred financing costs. We incur interest amortization of deferred financing costs related to our indebtedness. During the year ended December 31, 2011, we expensed approximately $0.6 million compared to $0.5 million for the year ended December 31, 2010.

Loss on extinguishment of debt. The loss on extinguishment of debt for the year ended December 31, 2011 related to an exit fee and related extinguishment fee of $2.5 million which was paid in connection with the termination of the revolving credit facility and prepayment of the Six Project Note.

General and administrative expense. General and administrative expense increased $0.2 million or 7% for the year ended December 31, 2011 to $2.4 million compared to $2.2 million for the year ended December 31, 2010.

Benefit from income taxes. Benefit from income taxes was $1.2 million for the year ended December 31, 2011 compared to benefit from income taxes of $1.3 million for the year ended December 31, 2010. This change resulted from the change in income before income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following table presents selected data from our combined statements of cash flows for the periods presented (dollars in thousands):

 

     Six Months Ended
June 30,
    Year Ended
December 31,
 
     2013     2012     2012     2011     2010  

Net cash provided by operating activities

   $ 13,057      $ 9,301      $ 24,136      $ 14,012      $ 9,499   

Net cash used in investing activities

     (40,223     (22,482     (49,505     (143,757     (39,210

Net cash provided by financing activities

     27,210        12,761        25,008        129,863        29,750   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     44        (420     (361     118        39   

Cash and cash equivalents at beginning of period

     735        1,096        1,096        978        939   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $        779      $        676      $        735      $     1,096      $        978   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Net cash provided by operating activities for the six months ended June 30, 2013 was $13.1 million compared to $9.3 million for the six months ended June 30, 2012, an increase of $3.8 million. The increase was primarily due to our improved operating results, which contributed $12.9 million in 2013 after adding back depreciation and amortization, deferred income taxes, and loss on disposition of equipment, furniture, and fixtures (non-cash charges), as compared to $10.3 million for 2012, an increase of $2.6 million.

Net cash used in investing activities for the six months ended June 30, 2013 was $40.2 million compared to $22.5 million for the six months ended June 30, 2012, an increase of $17.7 million. The increase was primarily the result of $40.8 million in cash paid for acquisitions of real estate and purchased equipment, furniture and fixtures in the six months ended June 30, 2013 compared to $22.6 million in the six months ended June 30, 2012.

Net cash provided by financing activities for the six months ended June 30, 2013 was $27.2 million as compared to $12.8 million for the six months ended June 30, 2012, an increase of $14.4 million. This increase was primarily due to a net contribution of $21.5 million from Parent during the six months ended June 30, 2013 as compared to a net distribution of $0.2 million to Parent during the six months ended June 30, 2012, as well as the reduction in long-term debt repayments from $8.3 million for the six months ended June 30, 2013 to $3.6 million for the six months ended June 30, 2012. These increases were partially offset by a decrease in proceeds received from issuance of debt from $21.5 million for the six months ended June 30, 2013 to $10.0 million for the six months ended June 30, 2012.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Net cash provided by operating activities for the year ended December 31, 2012 was $24.1 million compared to $14.0 million for the year ended December 31, 2011, an increase of $10.1 million. The increase was primarily due to our improved operating results, which contributed $22.2 million in 2012 after adding back depreciation and amortization, deferred income taxes, loss on extinguishment of debt, and loss on disposition of equipment, furniture, and fixtures (non-cash charges), as compared to $13.4 million for 2011, an increase of $8.8 million.

Net cash used in investing activities for the year ended December 31, 2012 was $49.5 million compared to $143.8 million for the year ended December 31, 2011, a decrease of $94.3 million. The decrease was primarily the result of $49.8 million in cash paid for acquisitions of real estate and purchased equipment, furniture and fixtures in the year ended December 31, 2012 compared to $144.5 million in the year ended December 31, 2011.

Net cash provided by financing activities for the year ended December 31, 2012 was $25.0 million as compared to $129.9 million for the year ended December 31, 2011, a decrease of $104.9 million. This decrease was primarily due to a net contribution of $5.6 million from Parent during the year ended December 31, 2012 as compared to a net contribution of $88.7 million from Parent during the year ended December 31, 2011, as well as a decrease in proceeds received from issuance of debt from $90.0 million for the year ended December 31, 2011 to $36.5 million for the year ended December 31, 2012. These decreases were partially offset by a reduction in long-term debt principal repayments from $44.8 million for the year ended December 31, 2011 to $16.8 million for the year ended December 31, 2012. The remaining decrease is offset by cash paid for extinguishment of debt and reduction in payments of deferred financing costs.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Net cash provided by operating activities for the year ended December 31, 2011 was $14.0 million compared to $9.5 million for the year ended December 31, 2010, an increase of $4.5 million. This increase was primarily due to our improved operating results, which contributed $13.4 million in 2011 after adding back depreciation and amortization, deferred income taxes, loss on extinguishment of debt and loss on disposition of equipment, furniture, and fixtures (non-cash charges), as compared to $8.5 million for 2010, an increase of $4.9 million.

 

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Net cash used in investing activities for the year ended December 31, 2011 was $143.8 million compared to $39.2 million for the year ended December 31, 2010, an increase of $104.6 million. The increase was primarily the result of $144.5 million in cash paid for acquisitions of real estate and purchased equipment, furniture, and fixtures in the year ended December 31, 2011 compared to $39.3 million in the year ended December 31, 2010, an increase of $105.2 million, that was partially offset by cash proceeds from the sale of equipment, furniture and fixtures.

Net cash provided by financing activities for the year ended December 31, 2011 was $129.9 million as compared to $29.8 million for the year ended December 31, 2010, an increase of $100.1 million. This increase was primarily due to a net contribution of $88.7 million to Parent during the year ended December 31, 2011 as compared to a net distribution of $2.8 million from Parent during the year ended December 31, 2010 as well as an increase in proceeds received from the issuance of debt of $90.0 million during the year ended December 31, 2011, as compared to $35.0 million in 2010. These increases were partially offset by an increase in long-term debt principal repayments of $44.8 million during the year ended December 31, 2011 as compared to $2.1 million during the year ended December 31, 2010. The remaining increase is offset by cash paid for debt extinguishment and deferred financing costs.

Notes Issuance

Prior to the Spin-Off, we anticipate that our Operating Partnership will issue up to $350.0 million aggregate principal amount of unsecured notes. We expect that approximately $         million of the proceeds from the issuance of the notes will be transferred to Ensign in connection with the contribution of assets to us by Ensign prior to the Spin-Off. We expect that Ensign would use the funds received from us to repay certain outstanding third-party bank debt and other indebtedness and, subject to approval of and declaration by Ensign’s board of directors, pay up to eight regular quarterly dividends. We expect that we will use the remaining proceeds for working capital purposes, to fund acquisitions and for general corporate purposes.

We anticipate that the notes will be guaranteed, jointly and severally, by us and by certain of our Operating Partnership’s wholly owned subsidiaries. The notes are expected to have terms customary for notes of this type, including customary restrictive covenants, redemption and repurchase provisions and events of default.

The foregoing summarizes some of the currently expected terms of our notes. However, the foregoing summary does not purport to be complete, and the terms of the notes have not yet been finalized. There may be changes to the expected principal amount and terms of the notes, some of which may be material. Nothing in this summary or otherwise herein shall constitute or be deemed to constitute an offer to sell or the solicitation of an offer to buy the notes.

Revolving Credit Facility

We anticipate that our Operating Partnership will enter into a credit agreement providing for a revolving credit facility in an aggregate principal amount of up to $150.0 million to be provided by a syndicate of banks and other financial institutions. We expect that we will use borrowings under the revolving credit facility after the Spin-Off for working capital purposes, to fund acquisitions and for general corporate purposes.

We anticipate that the revolving credit facility will be guaranteed, jointly and severally, by us and by certain of our Operating Partnership’s wholly owned subsidiaries. The revolving credit facility is expected to contain customary affirmative and negative covenants, as well as customary events of default. We also anticipate that the revolving credit facility will require us to comply with specified financial maintenance covenants.

The foregoing summarizes some of the currently expected terms of our revolving credit facility. However, the foregoing summary does not purport to be complete, and the terms of the revolving credit facility have not yet been finalized. There may be changes to the expected size and other terms of the revolving credit facility, some of which may be material.

 

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Mortgage Indebtedness

At the time of the Spin-Off and based on the outstanding principal amount of Ensign’s mortgage indebtedness at June 30, 2013, we anticipate that our subsidiaries will have aggregate mortgage indebtedness to third parties of approximately $         million on          of the facilities to be owned by us following completion of the Spin-Off.

We believe that our available cash at the time of the Spin-Off and expected operating cash flows will provide sufficient funds for our operations, anticipated scheduled debt service payments and dividend requirements for the twelve-month period following the Spin-Off.

We intend to invest in additional healthcare properties as suitable opportunities arise and adequate sources of financing are available. We expect that future investments in 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 pursuant to the credit agreement we expect to enter into in connection with the Spin-Off, future borrowings or the proceeds from 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 refinancings of existing mortgage loans.

Although we expect, pursuant to indebtedness we expect to incur in connection with the Spin-Off, to be 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.

OBLIGATIONS AND COMMITMENTS

We will assume Ensign’s mortgage indebtedness associated with          of the properties that we will own following the Spin-Off, which is expected to total approximately $         million based on the outstanding principal amount of such indebtedness at June 30, 2013. In addition, prior to the Spin-Off, we anticipate issuing approximately $350.0 million aggregate principal amount of unsecured notes. We also anticipate entering into a $150.0 million revolving credit facility to be provided by a syndicate of banks and other financial institutions. However, we have not yet entered into any commitments with respect to such financing arrangements, and, accordingly, the terms of such financing arrangements have not yet been determined, remain under discussion and are subject to change, including as a result of market conditions. See “—Liquidity and Capital Resources” above for a further description of our expected indebtedness after the Spin-Off.

The following pro forma table summarizes our contractual obligations and commitments, including our mortgage indebtedness, at December 31, 2012 (in thousands), as if the Spin-Off, the issuance of the notes, the repayment of certain obligations attributable to Ensign Properties, and the entrance into a $150.0 million revolving credit facility had occurred on December 31, 2012:

 

                                                                                              
     Payments Due by Period  
         Total          Less than 1
Year
     1 Year to
Less than 3
Years
     3 years to Less
    than 5 Years    
     More than
    5 Years    
 
    

 

(in millions)

 

Notes (1)

    $                     $                     $                     $                     $                

Revolving credit facility(2)

              

Mortgage indebtedness (2)(3)

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

    $          $          $          $          $     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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(1) Notes includes interest payments payable semi-annually each                      and                     at a fixed rate of                    %. The notes are unsecured and mature on                    . Total interest on the notes is $                     per year.
(2) Assuming Ensign mortgage indebtedness and Ensign revolving credit attributable to Ensign Properties (in the amount of $                     ) is repaid in connection with the Spin-Off.
(3) We will assume Ensign’s mortgage indebtedness associated with         of the properties that we will own following the Spin-Off. Mortgage indebtedness includes principal payments and interest payments through the maturity dates. Total interest on mortgage indebtedness, based on contractual rates, is $                     million, of which $                     million is attributable to variable interest rates determined using the weighted average method.

CAPITAL EXPENDITURES

We anticipate incurring average annual capital expenditures of $                     million in connection with the operations of our three independent living facilities. Capital expenditures for each property leased under the Master Leases are generally the responsibility of the tenant, except that the tenant will have an option to require us to finance certain capital expenditures up to an aggregate of 20% of our initial investment in such property.

CRITICAL ACCOUNTING ESTIMATES

We make certain judgments and use certain estimates and assumptions when applying accounting principles in the preparation of our combined financial statements. The nature of the estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change. We have identified the accounting for income taxes, real estate properties, impairment of long-lived assets, fair value of financial instruments, revenue recognition and derivatives and hedging activities as critical accounting estimates, as they are the most important to our financial statement presentation and require difficult, subjective and complex judgments.

We believe the current assumptions and other considerations used to estimate amounts reflected in our combined financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our combined financial statements, the resulting changes could have a material adverse effect on our combined results of operations and, in certain situations, could have a material adverse effect on our combined financial condition.

Income Taxes

We anticipate that we will qualify to be taxed as a REIT for U.S. federal income tax purposes commencing with the taxable year ending December 31, 2014, and we intend to continue to be organized and to operate in a manner that will permit us to qualify as a REIT. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to stockholders. As a REIT, we will generally not be subject to U.S. federal income tax on income that we distribute as dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate income tax rates, and dividends paid to our stockholders would not be deductible by us in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income and net cash available for distribution to stockholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify to be taxed as a REIT.

Historically, our operations have been included in Ensign’s U.S. federal and state income tax returns and all income taxes have been paid by Ensign. Income tax expense and other income tax related information

 

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contained in these combined financial statements are presented on a separate tax return basis as if we filed our own tax returns. Management believes that the assumptions and estimates used to determine these tax amounts are reasonable. However, our combined financial statements may not necessarily reflect our income tax expense or tax payments in the future, or what our tax amounts would have been if we had been a stand-alone company during the periods presented.

Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at tax rates in effect when such temporary differences are expected to reverse. We generally expect to fully utilize our deferred tax assets; however, when necessary, we record a valuation allowance to reduce our net deferred tax assets to the amount that is more likely than not to be realized.

When we take uncertain income tax positions that do not meet the recognition criteria, we record a liability for underpayment of income taxes and related interest and penalties, if any. In considering the need for and magnitude of a liability for such positions, we must consider the potential outcomes from a review of the positions by the taxing authorities.

In determining the need for a valuation allowance or the need for and magnitude of liabilities for uncertain tax positions, we make certain estimates and assumptions. These estimates and assumptions are based on, among other things, knowledge of operations, markets, historical trends and likely future changes and, when appropriate, the opinions of advisors with knowledge and expertise in relevant fields. Due to certain risks associated with our estimates and assumptions, actual results could differ.

Real Estate Properties

Real estate properties consist of land, buildings and improvements, integral equipment, furniture and fixtures, and are stated at historical cost. Real estate costs related to the acquisition and improvement of properties are capitalized over the expected useful life of the asset. Repair and maintenance costs are charged to expense as incurred, and significant replacements and betterments are capitalized.

In accordance with ASC 805, Business Combinations, we allocate the purchase price of acquisitions to the various components of the acquisition using estimates based upon the relative fair value of each component. In determining fair value, we use current appraisals or other third party opinions of value. The most significant components of our allocations are typically the allocation of value to land and buildings. In the case of the value of buildings and the allocation of value to land and other intangibles, the estimates of the value of these components will affect the depreciation and amortization we record over the estimated useful life of the property acquired. Transaction costs related to acquisitions are expensed as incurred.

We consider the period of future benefit of an asset to determine its appropriate useful life. Depreciation on our buildings and improvements is computed using the straight-line method over an estimated useful life of from 5 years up to 40 years. If we use a shorter or longer estimated useful life, it could have a material impact on our results of operations. We believe that 5 to 40 years is an appropriate estimate of useful life. We continually monitor events and changes in circumstances that could indicate that the carrying amount of our property and equipment may not be recoverable or realized.

Impairment of Long-Lived Assets

Management periodically evaluates our real estate investments for impairment indicators, including the evaluation of our assets’ useful lives. Management also assesses the carrying value of our real estate investments whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The judgment regarding the existence of impairment indicators is based on factors such as, but not limited to, market conditions, operator performance and legal structure. If indicators of impairment are present,

 

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management evaluates the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying facilities. Provisions for impairment losses related to long-lived assets are recognized when expected future undiscounted cash flows are determined to be less than the carrying values of the assets. An adjustment is made to the net carrying value of the real estate investments for the excess of carrying value over fair value. All impairments are taken as a period cost at that time, and depreciation is adjusted going forward to reflect the new value assigned to the asset.

If we decide to sell real estate properties, we evaluate the recoverability of the carrying amounts of the assets. If the evaluation indicates that the carrying value is not recoverable from estimated net sales proceeds, the property is written down to estimated fair value less costs to sell.

In the event of impairment, the fair value of the real estate investment is determined by market research, which includes valuing the property in its current use as well as other alternative uses, and involves significant judgment. Our estimates of cash flows and fair values of the properties are based on current market conditions and consider matters such as rental rates and occupancies for comparable properties, recent sales data for comparable properties, and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. Our ability to accurately estimate future cash flows and estimate and allocate fair values impacts the timing and recognition of impairments. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on financial results.

Fair Value of Financial Instruments

Our financial instruments consist principally of cash and cash equivalents, an interest rate swap agreement, accounts receivable, and borrowings. We believe all of the financial instruments’ recorded values approximate fair values because of their nature or respective short durations. Our interest rate swap is carried at fair value on the balance sheet.

Revenue Recognition

We recognize rental revenue, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases, from tenants under lease arrangements with minimum fixed and determinable increases on a straight-line basis over the non-cancellable term of the related leases when collectability is reasonably assured. Tenant recoveries related to the reimbursement of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period the expenses are incurred. The reimbursements are recognized and presented gross, as we are generally the primary obligor, and, with respect to purchasing goods and services from third-party suppliers, we have discretion in selecting the supplier and bear the associated credit risk. The authoritative guidance does not provide for the recognition of contingent revenue until all possible contingencies have been eliminated.

Derivatives and Hedging Activities

We evaluate variable and fixed interest rate risk exposure on a routine basis, and to the extent we believe that it is appropriate, we will offset most of our variable risk exposure by entering into interest rate swap agreements. It is our policy to only utilize derivative instruments for hedging purposes (i.e., not for speculation). We formally designate our interest rate swap agreements as hedges and document all relationships between hedging instruments and hedged items. We formally assess effectiveness of our hedging relationships, both at the hedge inception and on an ongoing basis, then measure and record ineffectiveness. We would discontinue hedge accounting prospectively (i) if it is determined that the derivative is no longer effective in offsetting change in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated or exercised, (iii) if it is no longer probable that the forecasted transaction will occur, or (iv) if management determines that designation of the derivative as a hedge instrument is no longer appropriate. Our sole derivative is recorded on the balance sheet at its fair value.

 

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DIVIDENDS

We intend to elect to be taxed and intend to conduct our operations to qualify as a REIT for U.S. federal income tax purposes. We intend to make regular quarterly dividend payments to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. We intend to make regular quarterly dividend payments of all or substantially all of our taxable income to holders of our common stock out of assets legally available for this purpose, if and to the extent authorized by our board of directors. Before we make any dividend payments, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets or borrow funds to make cash dividends or we may make a portion of the required dividend in the form of a taxable distribution of stock or debt securities.

We will make dividend payments based on our estimate of taxable earnings per share of common stock, but not earnings calculated pursuant to GAAP. Our dividends and taxable and GAAP earnings will typically differ due to items such as fair value adjustments, differences in premium amortization and discount accretion, and non-deductible general and administrative expenses. Our quarterly dividends per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share.

OFF-BALANCE SHEET ARRANGEMENTS

As of the date of this information statement, we do not have any off-balance sheet arrangements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risk exposure will be interest rate risk with respect to our expected indebtedness after the Spin-Off. This indebtedness will include indebtedness that we expect to incur prior to the Spin-Off and assumed mortgage indebtedness of approximately $         million (based on the outstanding principal amount of such indebtedness at June 30, 2013) associated with certain of the properties that we will own following the Spin-Off. Prior to the Spin-Off, we anticipate that our Operating Partnership will issue up to $350.0 million aggregate principal amount of unsecured notes. We also anticipate that our Operating Partnership will enter into a credit agreement providing for a revolving credit facility in an aggregate principal amount of up to $150.0 million. See “—Liquidity and Capital Resources” above for a further description of our expected indebtedness after the Spin-Off.

An increase in interest rates could make the financing of any acquisition by us more costly. Rising interest rates could also limit our ability to refinance our debt when it matures or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness. We may manage, or hedge, interest rate risks related to our borrowings by means of interest rate swap agreements. We also expect to manage our exposure to interest rate risk by maintaining a mix of fixed and variable rates for our indebtedness. However, the REIT provisions of the Code substantially limit our ability to hedge our assets and liabilities. See “Risk Factors—Risks Related to Our Taxation as a REIT—Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.”

 

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BUSINESS

Overview

We were formed as a Maryland corporation and a wholly owned subsidiary of Ensign on October 29, 2013. Ensign is a provider of healthcare and independent living services which, as of June 30, 2013, operates 118 facilities, nine home health operations, seven hospice operations and five urgent care centers located in 11 western states. Ensign provides a broad spectrum of skilled nursing, assisted living, home health and hospice services, including physical, occupational and speech therapies, and other rehabilitative and healthcare services, for both long-term residents and short-stay rehabilitation patients.

On November 7, 2013, Ensign announced a plan to separate its healthcare business and its real estate business into two separate, publicly traded companies through the Spin-Off, in which Ensign will distribute all of the outstanding shares of our common stock to Ensign stockholders on a pro rata basis. Prior to the Spin-Off, Ensign will separate the healthcare operations from the independent living operations at two locations. At the time of the Spin-Off, we will hold substantially all of the real property owned by Ensign which, on a pro forma basis as of June 30, 2013, consists of 96 skilled nursing, assisted living and independent living facilities. After the Spin-Off, all of these properties, and potentially any additional properties we may acquire prior to the Spin-Off, will be leased to Ensign pursuant to the Master Leases, except for three independent living facilities that we will operate.

Following the Spin-Off, we will be a publicly traded, self-administered, self-managed REIT primarily engaged in the ownership, acquisition and leasing of healthcare facilities. We expect to generate revenues primarily by leasing healthcare facilities to healthcare operators in triple-net lease arrangements, under which the tenant is solely responsible for the costs related to the property (including property taxes, insurance, and maintenance and repair costs). We intend to conduct and manage our business as one operating segment for internal reporting and internal decision making purposes. We expect to grow our portfolio by pursuing opportunities to acquire additional facilities that will be leased to a diverse group of local, regional and national healthcare providers, which may include Ensign, as well as senior housing operators and related businesses. We also anticipate diversifying our portfolio over time, including by acquiring properties in different geographic markets, and in different asset classes.

Portfolio Summary

We will have a geographically diverse portfolio of properties, consisting of the following types:

 

    Skilled nursing facilities (“SNFs”) are licensed healthcare facilities that provide restorative, rehabilitative and nursing care for people not requiring the more extensive and sophisticated treatment available at acute care hospitals. Treatment programs include physical, occupational, speech, respiratory and other therapies, including sub-acute clinical protocols such as wound care and intravenous drug treatment. Charges for these services are generally paid from a combination of government reimbursement and private sources. As of June 30, 2013, our initial portfolio includes 81 SNFs, ten of which include assisted or independent living operations, and will all be operated by Ensign under the Master Leases.

 

   

Assisted living facilities (“ALFs”) are licensed healthcare facilities that provide personal care services, support and housing for those who need help with activities of daily living, such as bathing, eating and dressing, yet require limited medical care. The programs and services may include transportation, social activities, exercise and fitness programs, beauty or barber shop access, hobby and craft activities, community excursions, meals in a dining room setting and other activities sought by residents. These facilities are often in apartment-like buildings with private residences ranging from single rooms to large apartments. Certain ALFs may offer higher levels of personal assistance for residents requiring memory care as a result of Alzheimer’s disease or other

 

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forms of dementia. Levels of personal assistance are based in part on local regulations. As of June 30, 2013, our initial portfolio includes 11 ALFs, some of which also contain independent living units, and will all be operated by Ensign under the Master Leases.

 

    Independent living facilities (“ILFs”), also known as retirement communities or senior apartments, are not healthcare facilities. The facilities typically consist of entirely self-contained apartments, complete with their own kitchens, baths and individual living spaces, as well as parking for tenant vehicles. They are most often rented unfurnished, and generally can be personalized by the tenants, typically an individual or a couple over the age of 55. These facilities offer various services and amenities such as laundry, housekeeping, dining options/meal plans, exercise and wellness programs, transportation, social, cultural and recreational activities, on-site security and emergency response programs. Our initial portfolio of four ILFs will include one that will be operated by Ensign and three that will be operated by us.

Our portfolio of SNFs, ALFs and ILFs is broadly diversified by geographic location throughout the western United States. The following table displays, as of June 30, 2013, after giving pro forma effect to the separation of the healthcare operations from the independent living operations at two locations, the geographic distribution of our different types of properties and operational beds and units.

 

State

   No. of
Properties
     No. of
Operational
SNF and ALF
Beds(1)
     No. of Operational
ILF Units(1)
 

California

     18         1,967         24       

Arizona

     10         1,243         123       

Texas

     27         2,942         260       

Utah

     12         1,248         57       

Colorado

     5         463         —       

Washington

     5         486         —       

Idaho

     6         477         —       

Nevada

     3         252         52       

Nebraska

     5         366         —       

Iowa

     5         356         —       

Total

                         96                             9,800                             516       
  

 

 

    

 

 

    

 

 

 

 

(1) Operational beds or units refers to the number of beds or units for which a license has been issued and that are operational.

Our SNFs and ALFs accounted for             % and             %, respectively, of our total pro forma revenues for the six month period ended June 30, 2013, and             % and             %, respectively, of our total pro forma revenues for the year ended December 31, 2012. The carrying amount of our SNFs and ALFs, after adding back accumulated depreciation and amortization, totaled $445,869 at June 30, 2013

The three ILFs that we will own and operate are:

 

    Lakeland Hills Independent Living, located in Dallas, Texas with approximately 168 units as of June 30, 2013;

 

    The Cottages at Golden Acres, located in Dallas, Texas with 39 units as of June 30, 2013; and

 

    The Apartments at St. Joseph Villa, located in Salt Lake City, Utah with approximately 57 units as of June 30, 2013.

Of the properties to be owned by us,              will be subject to mortgage indebtedness to third parties that, based on the outstanding principal amount of such indebtedness as of June 30, 2013, is anticipated to total approximately $             million. The table below sets forth the amount of our anticipated mortgage indebtedness and related interest rate and maturity dates.

 

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Lender

   No. of
Properties
   Principal
Amount
(in millions)
   Interest Rate    Maturity
Date
   Principal at
Maturity
(in millions)
   Amortization
Period
                 
                 

Master Leases with Ensign

At the time of the Spin-Off, all of our properties (except for three ILFs) will be leased to Ensign pursuant to the Master Leases, which consist of five separate triple-net leases, each with its own pool of properties, that will have varying maturities and diversity in property geography. The five Master Leases will provide for initial terms of 12, 14, 16, 18 and 20 years, respectively, with no purchase options. At the option of Ensign, each Master Lease may be extended for up to either two or three five-year renewal terms beyond the initial term and, if elected, the renewal will be effective for all of the leased property then subject to the Master Lease. The rent will be a fixed component that will be initially set based on the trailing twelve months of operating margins of the leased properties. As of June 30, 2013, we anticipate that the annual revenues from the Master Leases will be approximately $59.0 million during each of the first two years of the Master Leases. Commencing in the third year, under the Master Leases, there is an annual rent escalator equal to the product of (1) the lesser of the percentage change in the Consumer Price Index (but not less than zero) or 2.5%, and (2) the prior year’s rent.

Because we will lease substantially all of our properties to Ensign under the Master Leases, Ensign initially will be the source of substantially all of our revenues, and Ensign’s financial condition and ability and willingness to satisfy its obligations under the Master Leases and its willingness to renew those leases upon expiration of the initial base terms thereof will significantly impact our revenues and our ability to service our indebtedness and to make distributions to our stockholders. There can be no assurance that Ensign will have sufficient assets, income and access to financing to enable it to satisfy its obligations under the Master Leases, and any inability or unwillingness on its part to do so would have a material adverse effect on our business, financial condition, results of operations and liquidity, on our ability to service our indebtedness and other obligations and on our ability to pay dividends to our stockholders, as required for us to qualify, and maintain our status, as a REIT. We also cannot assure you that Ensign will elect to renew its lease arrangements with us upon expiration of the initial base terms or any renewal terms thereof or, if such leases are not renewed, that we can reposition the affected properties on the same or better terms. See “Risk Factors—Risks Related to Our Business—We will be dependent on Ensign to make payments to us under the Master Leases, and an event that materially and adversely affects Ensign’s business, financial position or results of operations could materially and adversely affect our business, financial position or results of operations.”

Our Competitive Strengths

We believe that our ability to acquire, integrate and improve the facilities we will own will be a direct result of the following key competitive strengths:

Geographically Diverse Property Portfolio. The portfolio that we will own following the Spin-Off is broadly diversified by location across ten states in the western United States. The properties in any one state do not account for more than 30% of total operational beds as of June 30, 2013, and the properties in any one state do not account for more than     % of pro forma rental revenue during the six months ended June 30, 2013. We believe this geographic diversification will limit the effect of changes in any one market on our overall performance.

Long-Term, Triple-Net Lease Structure. At the time of the Spin-Off, all of our properties (except for three ILFs) will be leased to Ensign under the Master Leases, pursuant to which Ensign is responsible for all facility maintenance and repair, insurance required in connection with the leased properties and the business conducted on the leased properties, taxes levied on or with respect to the leased properties and all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties. The Master Leases consist of five separate leases, each with its own pool of properties, with initial

 

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terms of 12, 14, 16, 18 and 20 years, respectively, with no purchase options. At the option of Ensign, each Master Lease may be extended for up to either two or three five-year renewal terms beyond the initial term and, if elected, the renewal will be effective for all of the leased property then subject to the Master Lease. We retain substantially all of the risks and benefits of ownership of the leased real estate assets.

Financially Secure Tenant. Ensign is an established provider of healthcare services with strong financial performance. For more information about Ensign, see “Where You Can Find More Information.”

Experienced Chief Executive Officer. Although our management team has limited experience in operating a REIT, Gregory K. Stapley, our President and Chief Executive Officer, has extensive experience in the real estate and healthcare industries. Mr. Stapley has more than 27 years of experience in the acquisition, development and disposition of SNFs, other healthcare facilities and office, retail and industrial properties, including 14 years at Ensign. Through years of public company experience, Mr. Stapley also has experience accessing both debt and equity capital markets to fund growth and maintain a flexible capital structure.

Flexible UPREIT Structure. We intend to operate through an umbrella partnership, commonly referred to as an UPREIT structure, in which substantially all of our properties and assets will be held through the Operating Partnership. Conducting business through the Operating Partnership will allow us flexibility in the manner in which we structure and acquire properties. In particular, an UPREIT structure will enable us to acquire additional properties from sellers in exchange for limited partnership units, which provides property owners the opportunity to defer the tax consequences that would otherwise arise from a sale of their real properties and other assets to us. As a result, this structure will allow us to acquire assets in a more efficient manner and may allow us to acquire assets that the owner would otherwise be unwilling to sell because of tax considerations.

Investment and Financing Policies

Our investment objectives will be to increase cash flow, provide quarterly cash dividends, maximize the value of our properties and acquire properties with cash flow growth potential. We intend to invest primarily in SNFs and senior housing, including ALFs and ILFs, as well as medical office buildings, long-term acute care hospitals and inpatient rehabilitation facilities. Our current properties are located in ten western states, but we intend to acquire properties in other geographic areas throughout the United States. Although our initial portfolio consists of owned real property, future investments may include first mortgages, mezzanine debt and other securities issued by, or joint ventures with, REITs or other entities that own real estate consistent with our investment objectives.

There are no limitations on the percentage of total assets that may be invested in any particular type of property or investment. We expect that future investments in properties, including any improvements or renovations of current or newly-acquired properties, will be financed, in whole or in part, with cash flow from our operations, borrowings under our revolving credit facility, mortgage indebtedness or the proceeds from issuances of common stock, preferred stock, debt or other securities. There are no limitations on the number or amount of mortgages that may be placed on any property. At the time of the Spin-Off, all of our properties will be leased to Ensign pursuant to the Master Leases (except for three ILFs). As we acquire additional healthcare properties, we expect to enter into triple-net leases with other healthcare operators. We will be responsible for the management and operation of our ILFs. Our investment and financing policies and objectives are subject to change from time to time at the discretion of our board of directors without a vote of stockholders.

Business Strategies

Our primary goal is to create long-term stockholder value through the payment of consistent cash dividends and the growth of our asset base. To achieve this goal, we intend to pursue a business strategy focused on opportunistic acquisitions and property diversification. We will not have a fixed schedule of the number of acquisitions we intend to make over a particular time period, but instead intend to pursue those acquisitions and strategic opportunities that meet our investing and financing strategy and that are attractively priced, including

 

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funding development of properties through construction loans and thereafter entering into sale and leaseback arrangements with such developers as well as other secured term financing and mezzanine lending. We also intend to further develop our relationships with tenants and healthcare providers with a goal to progressively expand the mixture of tenants managing and operating our properties.

The key components of our business strategies include:

Diversify Asset Portfolio. We expect to diversify through the acquisition of new and existing facilities from third parties and the expansion and upgrade of current facilities. We will employ what we believe to be a disciplined, opportunistic acquisition strategy with a focus on the acquisition of skilled nursing, assisted living and independent living properties, as well as medical office buildings, long-term acute care hospitals and inpatient rehabilitation facilities. As we acquire additional properties, we expect to further diversify by geography, asset class and tenant within the healthcare and healthcare-related sectors.

Maintain Balance Sheet Strength and Liquidity. We plan to maintain a capital structure that provides the resources and flexibility to support the growth of our business. We intend to maintain a mix of credit facility debt, mortgage debt and unsecured debt which, together with our anticipated ability to complete future equity financings, we expect will fund the growth of our operations.

Develop New Tenant Relationships. We plan to cultivate new relationships with tenants and healthcare providers in order to expand the mix of tenants operating our properties and, in doing so, to reduce our dependence on Ensign. We expect that this objective will be achieved over time as part of our overall strategy to acquire new properties and further diversify our overall portfolio of healthcare properties.

Capital Source to Underserved Operators. We believe that there is a significant opportunity to be a capital source to healthcare operators through the acquisition and leasing of healthcare properties that are consistent with our investment and financing strategy at appropriate risk-adjusted rates of returns, but that, due to size and other considerations, are not a focus for larger healthcare REITs. We may also elect to offer secured term financing and mezzanine financing in appropriate circumstances. We will utilize our management team’s operating experience, network of relationships and industry insight to identify both large and small quality operators in need of capital funding for future growth. In appropriate circumstances, we may negotiate with operators to acquire individual healthcare properties from those operators and then lease those properties back to the operators pursuant to long-term triple-net leases.

Strategic Capital Improvements. We intend to support operators by providing capital to them for a variety of purposes, including capital expenditures and facility modernization. We expect to structure these investments as either lease amendments that produce additional rents or as loans that are repaid by operators during the applicable lease term.

Pursue Strategic Development Opportunities. We intend to work with operators and developers to identify strategic development opportunities. These opportunities may involve replacing or renovating facilities in our portfolio that may have become less competitive. We also intend to identify new development opportunities that present attractive risk-adjusted returns. We may provide funding to the developer of a property in conjunction with entering into a sale and leaseback transaction or an option to enter into a sale leaseback transaction for the property.

Government Regulation, Licensing and Enforcement

Overview

As operators of healthcare facilities, Ensign and any future tenants of our healthcare properties are typically subject to extensive and complex federal, state and local healthcare laws and regulations relating to fraud and abuse practices, government reimbursement, licensure and certificate of need and similar laws

 

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governing the operation of healthcare facilities, and we expect that the healthcare industry, in general, will continue to face increased regulation and pressure in the areas of fraud, waste and abuse, cost control, healthcare management and provision of services, among others. These regulations are wide-ranging and can subject our tenants to civil, criminal and administrative sanctions. Affected tenants may find it increasingly difficult to comply with this complex and evolving regulatory environment because of a relative lack of guidance in many areas as certain of our healthcare properties are subject to oversight from several government agencies and the laws may vary from one jurisdiction to another. Changes in laws and regulations and reimbursement enforcement activity and regulatory non-compliance by our tenants could have a significant effect on their operations and financial condition, which in turn may adversely affect us, as detailed below and set forth under “Risk Factors—Risks Related to Our Business.”

The following is a discussion of certain laws and regulations generally applicable to operators of our healthcare facilities, and in certain cases, to us.

Fraud and Abuse Enforcement

There are various extremely complex federal and state laws and regulations governing healthcare providers’ relationships and arrangements and prohibiting fraudulent and abusive practices by such providers. These laws include, but are not limited to, (i) federal and state false claims acts, which, among other things, prohibit providers from filing false claims or making false statements to receive payment from Medicare, Medicaid or other federal or state healthcare programs, (ii) federal and state anti-kickback and fee-splitting statutes, including the Medicare and Medicaid anti-kickback statute, which prohibit the payment or receipt of remuneration to induce referrals or recommendations of healthcare items or services, (iii) federal and state physician self-referral laws (commonly referred to as the “Stark Law”), which generally prohibit referrals by physicians to entities with which the physician or an immediate family member has a financial relationship, (iv) the federal Civil Monetary Penalties Law, which prohibits, among other things, the knowing presentation of a false or fraudulent claim for certain healthcare services and (v) federal and state privacy laws, including the privacy and security rules contained in the Health Insurance Portability and Accountability Act of 1996, which provide for the privacy and security of personal health information. Violations of healthcare fraud and abuse laws carry civil, criminal and administrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and Medicaid reimbursement and potential exclusion from Medicare, Medicaid or other federal or state healthcare programs. These laws are enforced by a variety of federal, state and local agencies and can also be enforced by private litigants through, among other things, federal and state false claims acts, which allow private litigants to bring qui tam or “whistleblower” actions. Ensign is, and many of our future tenants are expected to be, subject to these laws, and some of them may in the future become the subject of governmental enforcement actions if they fail to comply with applicable laws.

Reimbursement

Sources of revenue for Ensign include (and for our future tenants is expected to include), among other sources, governmental healthcare programs, such as the federal Medicare program and state Medicaid programs, and non-governmental payors, such as insurance carriers and health maintenance organizations. For the six months ended June 30, 2013, Ensign derived 72.7% of its revenues from governmental payors. As federal and state governments focus on healthcare reform initiatives, and as the federal government and many states face significant budget deficits, efforts to reduce costs by these payors will likely continue, which may result in reduced or slower growth in reimbursement for certain services provided by Ensign and some of our other future tenants.

Healthcare Licensure and Certificate of Need

Our healthcare facilities are subject to extensive federal, state and local licensure, certification and inspection laws and regulations. In addition, various licenses and permits are required to dispense narcotics, operate pharmacies, handle radioactive materials and operate equipment. Many states require certain healthcare

 

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providers to obtain a certificate of need, which requires prior approval for the construction, expansion and closure of certain healthcare facilities. The approval process related to state certificate of need laws may impact some of our tenants’ abilities to expand or change their businesses.

Americans with Disabilities Act (the “ADA”)

Although most of our properties are not required to comply with the ADA because of certain “grandfather” provisions in the law, some of our properties must comply with the ADA and similar state or local laws to the extent that such properties are “public accommodations,” as defined in those statutes. These laws may require removal of barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. Under our triple-net lease structure, our tenants would generally be responsible for additional costs that may be required to make our facilities ADA-compliant. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants.

Environmental Matters

A wide variety of federal, state and local environmental and occupational health and safety laws and regulations affect healthcare facility operations. These complex federal and state statutes, and their enforcement, involve a myriad of regulations, many of which involve strict liability on the part of the potential offender. Some of these federal and state statutes may directly impact us. Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property, such as us, may be liable for the costs of removal or remediation of hazardous or toxic substances at, under or disposed of in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including government fines and damages for injuries to persons and adjacent property). The cost of any required remediation, removal, fines or personal or property damages and the owner’s liability therefore could exceed or impair the value of the property, and/or the assets of the owner. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner’s ability to sell or rent such property or to borrow using such property as collateral which, in turn, could reduce our revenues. See “Risk Factors—Risks Related to Our Business—Environmental compliance costs and liabilities associated with real estate properties owned by us may materially impair the value of those investments.”

Compliance Process

As an operator of healthcare facilities, Ensign has a program to help it comply with various requirements of federal and private healthcare programs. In October 2013, Ensign entered into a corporate integrity agreement, or CIA, with the Office of the Inspector General of the U.S. Department of Health & Human Services. The CIA requires, among other things, that Ensign and its subsidiaries maintain a corporate compliance program to help comply with various requirements of federal and private healthcare programs. After the Spin-Off, we have agreed to certain continuing obligations under Ensign’s compliance program, including certain training in Medicare and Medicaid laws for our employees as required by the CIA.

REIT Qualification

We intend to elect to be taxed and intend to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2014. Our qualification as a REIT will depend upon our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels to our stockholders and the concentration of ownership of our capital stock. We believe that, commencing with our taxable year ending December 31, 2014, we will be organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our intended manner of operation will enable us to meet the requirements for qualification and taxation as a REIT.

 

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Competition

We will compete for real property investments with other REITs, investment companies, private equity and hedge fund investors, sovereign funds, pension funds, healthcare operators, lenders and other institutional investors. Some of these competitors are significantly larger and have greater financial resources and lower costs of capital than us. Increased competition will make it more challenging to identify and successfully capitalize on acquisition opportunities that meet our investment objectives. Our ability to compete is also impacted by national and local economic trends, availability of investment alternatives, availability and cost of capital, construction and renovation costs, existing laws and regulations, new legislation and population trends.

In addition, revenues from our properties will be dependent on the ability of our tenants and operators to compete with other healthcare operators. These operators compete on a local and regional basis for residents and patients and their ability to successfully attract and retain residents and patients depends on key factors such as the number of facilities in the local market, the types of services available, the quality of care, reputation, age and appearance of each facility and the cost of care in each locality. Private, federal and state payment programs and the effect of other laws and regulations may also have a significant impact on the ability of our tenants and operators to compete successfully for residents and patients at the properties.

Employees

Following the Spin-Off, we expect to employ approximately 42 full-time equivalent employees (including our executive officers), none of whom is expected to be subject to a collective bargaining agreement.

Legal Proceedings

It is expected that, pursuant to the Separation and Distribution Agreement, any liability arising from or relating to legal proceedings involving the assets to be owned by us will be assumed by us and that we will indemnify Ensign (and its subsidiaries, directors, officers, employees and agents and certain other related parties) against any losses arising from or relating to such legal proceedings. In addition, pursuant to the Separation and Distribution Agreement, Ensign has agreed to indemnify us (including our subsidiaries, directors, officers, employees and agents and certain other related parties) for any liability arising from or relating to legal proceedings involving Ensign’s healthcare business prior to the Spin-Off, and, pursuant to the Master Leases, Ensign or its subsidiaries will agree to indemnify us for any liability arising from operations at the real property leased from us. Ensign is currently a party to various legal actions and administrative proceedings, including various claims arising in the ordinary course of its healthcare business, which will be subject to the indemnities to be provided by Ensign to us. While these actions and proceedings are not believed to be material, individually or in the aggregate, the ultimate outcome of these matters cannot be predicted. The resolution of any such legal proceedings, either individually or in the aggregate, could have a material adverse effect on Ensign’s business, financial position or results of operations, which, in turn, could have a material adverse effect on our business, financial position or results of operations if Ensign or its subsidiaries are unable to meet their indemnification obligations.

The Operating Partnership

We intend to own substantially all of our assets and properties and conduct our operations through our Operating Partnership. We believe that conducting business through the Operating Partnership will provide flexibility with respect to the manner in which we structure and acquire properties. In particular, an UPREIT structure could enable us to acquire additional properties from sellers in tax deferred transactions. In these transactions, the seller would typically contribute its assets to the Operating Partnership in exchange for units of limited partnership interest in the Operating Partnership (“OP Units”). Holders of OP Units will have the right, after a 12 month holding period, to require the Operating Partnership to redeem any or all of such OP Units for cash based upon the fair market value of an equivalent number of shares of our common stock at the time of the redemption. Alternatively, we may elect to acquire those OP Units in exchange for shares of our common stock

 

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on a one-for-one basis. The number of shares of common stock used to determine the redemption value of OP Units, and the number of shares issuable in exchange for OP Units, is subject to adjustment in the event of stock splits, stock dividends, distributions of warrants or stock rights, specified extraordinary distributions and similar events. The Operating Partnership is managed by our wholly owned subsidiary, CareTrust GP, LLC, which is the sole general partner of the Operating Partnership.

The benefits of our UPREIT structure include the following:

 

    Access to capital. We believe the UPREIT structure will provide us with access to capital for refinancing and growth. Because an UPREIT structure includes a partnership as well as a corporation, we can access the markets through the Operating Partnership issuing equity or debt as well as the corporation issuing capital stock or debt securities. Sources of capital include possible future issuances of debt or equity through public offerings or private placements.

 

    Growth. The UPREIT structure will allow stockholders, through their ownership of common stock, and the limited partners, through their ownership of OP Units, an opportunity to participate in the growth of the real estate market through an ongoing business enterprise. In addition to the initial real property portfolio, we will provide stockholders an interest in all future investments in additional properties.

 

    Tax deferral. The UPREIT structure will provide property owners who transfer their real properties to the Operating Partnership in exchange for OP Units the opportunity to defer the tax consequences that otherwise would arise from a sale of their real properties and other assets to us or to a third party. As a result, this structure will allow us to acquire assets in a more efficient manner and may allow it to acquire assets that the owner would otherwise be unwilling to sell because of tax considerations.

Insurance

We will maintain, or require in our leases, including the Master Leases, that our tenants maintain, all applicable lines of insurance on our properties and their operations. We anticipate that the amount and scope of insurance coverage provided by our policies and the policies maintained by our tenants will be customary for similarly situated companies in our industry. However, we cannot assure you that our tenants will maintain the required insurance coverages, and the failure by any of them to do so could have a material adverse effect on us. We also cannot assure you that we will continue to require the same levels of insurance coverage under our leases, including the Master Leases, that such insurance will be available at a reasonable cost in the future or that the insurance coverage provided will fully cover all losses on our properties upon the occurrence of a catastrophic event, nor can we assure you of the future financial viability of the insurers.

 

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MANAGEMENT

Directors and Officers

Set forth below is certain biographical information and ages, as of November 7, 2013, for individuals who are expected to serve as our directors following the Spin-Off. Additional directors will be selected prior to the Spin-Off and information concerning those directors will be included in an amendment to this information statement. Each director will hold office until his or her successor is duly elected or appointed and qualified or until his or her earlier death, retirement, disqualification, resignation or removal. Upon completion of the Spin-Off, our board of directors will consist of five members, a majority of whom will be “independent,” as defined under the NASDAQ listing requirements.

Our bylaws will provide that our board of directors shall consist of not less than three and not more than nine directors as the board of directors may from time to time determine. Our board of directors will initially consist of five directors, and will be divided into three classes that are, as nearly as possible, of equal size. Each class of directors will be elected for a three-year term of office, but the terms will be staggered so that the term of only one class of directors expires at each annual meeting. The initial terms of the Class I, Class II and Class III directors will expire in 2014, 2015 and 2016, respectively. Following the Spin-Off, Christopher R. Christensen will serve as a Class I director,                      and                      will each serve as a Class II director, and Gregory K. Stapley and                      will each serve as a Class III director. All officers will serve at the discretion of the board of directors.

Upon completion of the Spin-Off, we will have five directors, three of whom we believe will be determined to be independent, as defined under the NASDAQ listing requirements. We believe our board of directors will determine that                     ,                          and                      are independent directors. In making such determination, we expect that our board of directors will take into consideration,                      and                     .

Our charter will not provide for cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of common stock will be able to elect all of the directors standing for election, and the holders of the remaining shares will not be able to elect any directors.

 

Name Position Age

  

Description

Gregory K. Stapley

 

Director

 

Age: 54

   Mr. Stapley is the President and Chief Executive Officer of CareTrust. He has served in this position since our inception in 2013. Prior to joining CareTrust, he served as Executive Vice President and Secretary of Ensign, where he was instrumental in assembling the real estate portfolio that will be transferred to CareTrust in the Spin-Off. A co-founder of Ensign, he also served as Ensign’s Vice President, General Counsel and Assistant Secretary beginning shortly after Ensign’s founding in 1999. Mr. Stapley previously served as General Counsel for the Sedgwick Companies, an Orange County-based manufacturer, wholesaler and retailer with 192 retail outlets across the United States. Prior to that, Mr. Stapley was a member of the Phoenix law firm of Jennings, Strouss & Salmon PLC, where his practice emphasized real estate and business transactions and government relations. Having served as Executive Vice President of Ensign since 2009 and as Vice President and General Counsel of Ensign from 1999 to 2009, Mr. Stapley brings to our board of directors extensive management experience, critical knowledge of our properties and knowledge and understanding of the healthcare business in general.

 

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Name Position Age

  

Description

Christopher R. Christensen

 

Director

 

Age: 44

   Mr. Christensen is the President and Chief Executive Officer of Ensign. He has served as Ensign’s President since 1999 and its Chief Executive Officer since 2006. A co-founder of Ensign, Mr. Christensen has overseen Ensign’s growth since Ensign’s founding in 1999. Mr. Christensen has concurrently served as a member of Ensign’s Board of Directors since 1999, and currently sits on the quality assurance and compliance committee of Ensign’s Board of Directors. Mr. Christensen previously served as acting Chief Operating Officer of Covenant Care, Inc., a California-based provider of long-term care. Mr. Christensen will bring to our board of directors significant experience as a chief executive officer and proven ability to manage multiple properties and businesses.

Unless otherwise indicated, the following table shows the names and ages as of November 7, 2013 for individuals who are expected to serve as our executive officers and the positions they will hold following the completion of the Spin-Off. A description of the business experience of each for at least the past five years follows the table. Additional executive officers may be selected prior to the Spin-Off and information concerning those executive officers will be included in an amendment to this information statement.

 

Name

   Age     

Position

Gregory K. Stapley(1)

     54       President and Chief Executive Officer

 

 

(1) Currently serving as an officer of CareTrust.

Gregory K. Stapley. For information regarding Mr. Stapley, see above.

Committees of the Board of Directors

Upon completion of the Spin-Off, our board of directors will establish the following committees, each of which will operate under a written charter that will be posted to our website prior to the Spin-Off:

Audit Committee

The audit committee will be established in accordance with Rule 10A-3 under the Exchange Act and the NASDAQ listing requirements. The primary duties of the audit committee will be to, among other things:

 

    determine the appointment, compensation, retention and oversight of the work of our independent registered public accounting firm;

 

    review and approve in advance all permitted non-audit engagements and relationships between us and our independent registered public accounting firm;

 

    evaluate our independent registered public accounting firm’s qualifications, independence and performance;

 

    review and discuss with our independent registered public accounting firm their audit plan, including the timing and scope of audit activities;

 

    review our combined financial statements;

 

    review our critical accounting policies and practices;

 

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    review the adequacy and effectiveness of our accounting and internal control policies and procedures;

 

    review with our management all significant deficiencies and material weaknesses in the design and operation of our internal controls;

 

    review with our management any fraud that involves management or other employees who have a significant role in our internal controls;

 

    establish procedures for the receipt, retention and treatment of complaints regarding internal accounting controls or auditing matters and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters;

 

    review on an ongoing basis and approve or disapprove related party transactions;

 

    prepare the reports required by the rules of the SEC to be included in our annual proxy statement, if we are subject to the proxy rules under the Exchange Act; and

 

    discuss with our management and our independent registered public accounting firm the results of our annual audit and the review of our quarterly combined financial statements.

The audit committee will provide an avenue of communication among management, the independent registered public accounting firm, the corporate auditors and the board of directors.

The audit committee will be comprised of members that meet the independence requirements set forth by the SEC, in the NASDAQ listing requirements and the audit committee charter. Each member of the audit committee will be financially literate in accordance with the NASDAQ listing requirements. The audit committee will also have at least one member who meets the definition of an “audit committee financial expert” under SEC rules and regulations. The initial members of the audit committee will be determined prior to the effective date.

Nominating and Corporate Governance Committee

The primary responsibilities of the nominating and corporate governance committee will be to, among other things:

 

    assist in identifying, recruiting and evaluating individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors and the nomination and corporate governance committee;

 

    recommend to our board of directors individuals qualified to serve as directors and on committees of our board of directors;

 

    advise our board of directors with respect to board composition, procedures and committees;

 

    recommend to our board of directors certain corporate governance matters and practices; and

 

    conduct an annual self-evaluation for our board of directors.

The nominating and corporate governance committee will be comprised of members that meet the independence requirements set forth by the SEC and in the NASDAQ listing requirements and the nominating and corporate governance committee charter. The initial members of the nominating and corporate governance committee will be determined prior to the effective date.

 

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Compensation Committee

The primary responsibilities of the compensation committee will be to, among other things:

 

    review executive compensation plans and their goals and objectives, and make recommendations to our board of directors, as appropriate;

 

    evaluate the performance of our executive officers;

 

    review and approve the compensation of our executive officers and directors, including salary and bonus awards;

 

    establish overall employee compensation policies and recommend to our board of directors major compensation programs;

 

    administer our various employee benefit, pension and equity incentive programs;

 

    review and discuss with management our compensation discussion and analysis (the “CD&A”) and recommend to our board of directors that the CD&A be included in the annual proxy statement or annual report; and

 

    prepare an annual report on executive compensation for inclusion in our proxy statement.

The compensation committee will be comprised of members that meet the independence requirements set forth by the SEC and in the NASDAQ listing requirements and the compensation committee charter. The members of the compensation committee will be “non-employee directors” (within the meaning of Rule 16b-3 under the Exchange Act) and “outside directors” (within the meaning of Section 162(m) of the Code). None of our directors will have interlocking or other relationships with other boards of directors, compensation committees or our executive officers that would require disclosure under Item 407(e)(4) of Regulation S-K. The initial members of the compensation committee will be determined prior to the effective date.

Other Committees

Our board of directors may establish other committees as it deems necessary or appropriate from time to time.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee is or has at any time during the past fiscal year been an officer or employee of CareTrust. None of the members of the compensation committee has formerly been an officer of CareTrust. None of our executive officers serve, or in the past fiscal year has served, as a member of the board of directors or compensation committee of any other entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

Compensation of Directors

Following completion of the Spin-Off, we expect that we will pay an annual fee to each independent director equal to $            , payable semi-annually. In addition, we expect that an annual fee of $             will be paid to the chair of the audit committee of the board of directors. Fees to independent directors may be made by issuance of common stock, based on the value of such common stock at the date of issuance, rather than in cash, provided that any such issuance does not prevent such director from being determined to be independent and such shares are granted pursuant to a stockholder-approved plan or the issuance is otherwise exempt from NASDAQ listing requirements. We expect that each independent director will also receive             . For

 

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additional information on director equity compensation, see “             .” We expect that affiliated directors, however, will not be separately compensated by us. We expect that all members of the board of directors will be reimbursed for reasonable costs and expenses incurred in attending meetings of our board of directors.

Executive Officer Compensation

Executive Compensation

The following table provides certain summary information concerning the compensation paid by Ensign for the fiscal years ended December 31, 2012 and 2011 to Gregory K. Stapley, who is one of three individuals whom we expect will be our three most highly compensated executive officers following the Spin-Off (the “named executive officers”). The other two such individuals have not yet been determined. Prior to our inception, Mr. Stapley served as Executive Vice President and Secretary of Ensign. The amounts and forms of compensation reported below are not necessarily indicative of the compensation that our executive officers will receive following the Spin-Off.

SUMMARY COMPENSATION TABLE

 

Name and Principal Position   Year     Salary
($)
    Bonus ($)(1)     Stock
Awards ($)(2)
    Stock
Option
Awards ($)
    Non-Equity
Incentive
Plan
Compensation ($)
    All Other
Compensation ($)
    Total  

Gregory K. Stapley

    2012        354,299        488,140        72,649                      2,612 (3)      917,700   

Executive Vice President and Secretary of Ensign

 

    2011        354,299        905,256        235,133                      1,811        1,496,499   

 

 

(1) The amounts shown in this column constitute the cash bonuses made to certain named executive officers. Mr. Stapley participated in our executive incentive program.
(2) The amounts shown are the amounts of compensation cost to be recognized by us related to restricted stock awards which were granted during fiscal year 2012, as a result of the adoption of ASC 718. These amounts disregard the estimated forfeiture rate which is considered when recognizing the ASC 718 expense in the combined financial statements of Ensign. In addition, a portion of the bonuses paid to Mr. Stapley in 2012 and 2011 was in the form of stock awards.
(3) Consists of term life and accidental death and dismemberment insurance payments of $840 and a matching contribution to The Ensign Group, Inc. 401(k) retirement program of $1,772.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

There are no outstanding Ensign equity awards held by Mr. Stapley as of December 31, 2012.

Potential Payments Upon Termination Or Change In Control

There are no benefits guaranteed to be paid upon termination or a change in control.

Code of Business Conduct and Ethics

Prior to the Spin-Off, we intend to adopt a Code of Business Conduct and Ethics, effective as of the time of our listing on NASDAQ. The Code of Business Conduct and Ethics will confirm our commitment to conduct our affairs in compliance with all applicable laws and regulations and observe the highest standards of business ethics, and will seek to identify and mitigate conflicts of interest between our directors, officers and employees, on the one hand, and us on the other hand. The Code of Business Conduct and Ethics will also apply

 

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to ensure compliance with stock exchange requirements and to ensure accountability at a senior management level for that compliance. We intend that the spirit, as well as the letter, of the Code of Business Conduct and Ethics be followed by all of our directors, officers, employees and subsidiaries. This will be communicated to each new director, officer and employee. A copy of our Code of Business Conduct and Ethics will be available on our website.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of the date hereof, all of the outstanding shares of our common stock are owned by Ensign. After the Spin-Off, Ensign will own none of our common stock. The following table provides information with respect to the expected beneficial ownership of our common stock immediately following the completion of the Spin-Off by (1) each person who we believe will be a beneficial owner of more than 5% of our outstanding common stock, (2) each of our directors and named executive officers, and (3) all directors, director nominees and executive officers as a group. We based the share amounts on each person’s beneficial ownership of Ensign common stock as of                     , 2014, unless we indicate some other basis for the share amounts, and assuming a distribution ratio of              share(s) of our common stock for every share of Ensign common stock.

To the extent our directors and officers own Ensign common stock at the time of the Spin-Off, they will participate in the Spin-Off on the same terms as other holders of Ensign common stock.

Except as otherwise noted in the footnotes below, each person or entity identified below has sole voting and investment power with respect to such securities. Following the Spin-Off, we will have outstanding an aggregate of              shares of common stock based upon              shares of Ensign common stock outstanding on                     , 2014, assuming no exercise of Ensign options and applying the distribution ratio of              share(s) of our common stock for every share of Ensign common stock held as of the record date.

 

Name and Address of Beneficial Owner(1)

  Amount and Nature 
of
Beneficial Ownership
  Percent of 
Class(2)
 

Named Executive Officers and Directors:

   

Christopher R. Christensen (3)

              

Gregory K. Stapley (4)

              

All directors, nominees and executive
officers as a group (             persons)

              
 

 

 

 

 

 

Other Five Percent Stockholders:

   

FMR LLC (5)

              

Wasatch Advisors, Inc. (6)

              

Blackrock, Inc. (7)

              

 

 

* Denotes less than 1%.
(1) The address of all of the officers and directors listed above are in the care of CareTrust, 27101 Puerta Real, Suite 450, Mission Viejo, CA 92691.
(2) Percentages shown assume the exercise by such persons of all options to acquire shares of our common stock that are exercisable within 60 days of                     , 2013 and no exercise by any other person.
(3) Represents              shares held by Hobble Creek Investments, of which Christopher Christensen is the sole member,              restricted shares held by Mr. Christensen directly,              shares held by Mr. Christensen’s spouse, and              shares held by Mr. Christensen’s former spouse as custodian for their minor children under the California Uniform Transfers to Minors Act. Mr. Christensen’s former spouse holds voting and investment power over the shares held for their children.
(4) Represents              shares held by the Stapley Family Trust dated April 25, 2006,              restricted shares held by Mr. Stapley directly,              shares held by Deborah Stapley as custodian for the minor children of Gregory K. Stapley and Deborah Stapley under the California Uniform Transfers to Minor Act, and shares held by the Marian K. Stapley Revocable Trust dated April 29,1965, of which Mr. Stapley is trustee. Mr. Stapley and his spouse share voting and investment power over the shares held by the Stapley Family Trust, Mr. Stapley’s spouse holds voting and investment power over the shares held for their minor children and Mr. Stapley holds, as trustee, voting and investment power over the shares held by the Marian K. Stapley Revocable Trust.

 

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(5) Represents beneficial ownership as of                     , 2013 as reported on Schedule 13G filed by FMR LLC on                     , 2013, which indicates that FMR LLC held              shares. The business address of FMR LLC is 82 Devonshire Street, Boston, Massachusetts 02109.
(6) Represents beneficial ownership as of                     , 2013 as reported on Schedule 13G filed by Wasatch Advisors, Inc. on                     , 2013, which indicates that Wasatch Advisors, Inc. held              shares. The business address of Wasatch Advisors, Inc. is 150 Social Hall Avenue, Salt Lake City, Utah 84111.
(7) Represents beneficial ownership as of                     , 2013 as reported on Schedule 13G filed by Blackrock, Inc. on                     , 2013, which indicates that Blackrock, Inc. held              shares. The business address of Blackrock, Inc. is 40 East 52nd Street, New York, NY 10022.

 

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CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

Procedures for Approval of Related Person Transactions

We expect our board of directors to adopt a policy regarding the approval of any “related person transaction,” which is any transaction or series of transactions in which we or any of our subsidiaries is or are to be a participant, the amount involved exceeds $120,000, and a “related person” (as defined under SEC rules) has a direct or indirect material interest. Under the policy, a related person would need to promptly disclose to our Chief Financial Officer any proposed related person transaction and all material facts about the proposed transaction. Our Chief Financial Officer would then assess and promptly communicate that information to our audit committee. Based on our audit committee’s consideration of all of the relevant facts and circumstances, our audit committee will decide whether or not to approve such transaction and will generally approve only those transactions that are in, or are not inconsistent with, the best interests of CareTrust. If we become aware of an existing related person transaction that has not been pre-approved under this policy, the transaction will be referred to our audit committee, which will evaluate all options available, including ratification, revision or termination of such transaction. Our policy will require any director who may be interested in a related person transaction to recuse himself or herself from any consideration of such related person transaction.

Relationship between Ensign and CareTrust

To govern their relationship after the Spin-Off, Ensign and CareTrust will enter into: the Separation and Distribution Agreement; the five Master Leases; the Tax Matters Agreement; the Transition Services Agreement; and the Employee Matters Agreement. See “Our Relationship with Ensign Following the Spin-Off.”

 

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OUR RELATIONSHIP WITH ENSIGN FOLLOWING THE SPIN-OFF

After the Spin-Off, we and Ensign will operate separately, each as an independent, publicly traded company. To govern our relationship after the Spin-Off, we will enter into the following agreements with Ensign: the Separation and Distribution Agreement; the five Master Leases; the Tax Matters Agreement; the Transition Services Agreement; and the Employee Matters Agreement. The following is a summary of the material terms of those agreements.

The material agreements described below have been, or will be, filed as exhibits to the registration statement on Form 10 of which this information statement is a part, and the summaries of each of these agreements set forth the terms of the agreements that we believe are material. These summaries are qualified in their entirety by reference to the full text of the applicable agreements, which are incorporated by reference into this information statement. The terms of the agreements described below that will be in effect at the time of and following the Spin-Off have not yet been finalized; changes to these agreements, some of which may be material, may be made prior to the Spin-Off.

Separation and Distribution Agreement

The Separation and Distribution Agreement contains the key provisions relating to the separation of our real estate business from Ensign. It also contains other agreements that govern certain aspects of our relationship with Ensign that will continue after the Spin-Off.

Transfer of Assets and Assumption of Liabilities

The Separation and Distribution Agreement divides and allocates the assets and liabilities of Ensign prior to the Spin-Off between us and Ensign, and describes when and how any required transfers and assumptions of assets and liabilities will occur.

Termination of Intercompany Agreements

Effective as of the distribution date, all agreements between Ensign, on the one hand, and us, on the other hand, existing prior to the Spin-Off (excluding the Separation and Distribution Agreement, each ancillary agreement and the other agreements specified in the Separation and Distribution Agreement) will be terminated.

Settlement of Intercompany Accounts

Any receivables, payables or loans between Ensign, on the one hand, and us, on the other hand, existing prior to the Spin-Off (excluding any receivables, payables or loans that arise pursuant to the Separation and Distribution Agreement or any ancillary agreement) will be satisfied or settled in cash or otherwise canceled.

Replacement of Guarantees

The Separation and Distribution Agreement provides that the parties cooperate and use their reasonable best efforts to arrange, at our cost and expense, effective at or prior to the Spin-Off, the replacement of all guarantees by Ensign of any of our obligations with alternative arrangements that do not require credit support from Ensign. We will indemnify Ensign from and against any losses incurred after the Spin-Off with respect to any such guarantees that the parties are unable to replace prior to the Spin-Off.

The Spin-Off

The Separation and Distribution Agreement governs the rights and obligations of the parties regarding the Spin-Off. On the distribution date, Ensign will cause its agents to distribute, on a pro rata basis, all of the issued and outstanding shares of our common stock to Ensign’s stockholders as of the record date.

 

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Conditions

The Separation and Distribution Agreement provides that the Spin-Off is subject to several conditions that must be satisfied or waived by Ensign, in its sole discretion. For further information regarding these conditions, see “The Spin-Off—Conditions to the Spin-Off.” Even if all of the conditions have been satisfied, Ensign may, in its sole and absolute discretion, terminate and abandon the Spin-Off or any related transaction at any time prior to the distribution date.

No Representations or Warranties

Except as expressly set forth in any ancillary agreement, neither we nor Ensign will provide any representations or warranties in connection with the Separation and Distribution Agreement, and all transfers of assets will be “as is, where is.”

Access to Information

The Separation and Distribution Agreement provides that the parties will exchange certain information required to comply with requirements imposed on the requesting party by a government authority for use in any proceeding or to satisfy audit, accounting, claims defense, regulatory filings, litigation, tax or similar requirements, for use in compensation, benefit or welfare plan administration or other bona fide business purposes, or to comply with its obligations under the Separation and Distribution Agreement or any ancillary agreement. In addition, the parties will use reasonable best efforts to make available to each other directors, officers, other employees and agents as witnesses in any legal, administrative or other proceeding in which the other party may become involved to the extent reasonably required.

Releases, Allocation of Liabilities and Indemnification

The Separation and Distribution Agreement provides for a full and complete release and discharge of all liabilities existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed at or before the separation, between Ensign and us, except as expressly set forth in the Separation and Distribution Agreement.

The Separation and Distribution Agreement provides that (i) we will indemnify Ensign and its affiliates and each of their respective current and former directors, officers, agents and employees against any and all losses relating to (a) liabilities arising out of our real estate business, (b) any breach by us of any provision of the Separation and Distribution Agreement or any ancillary agreement, and (c) any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to information contained in the registration statement of which this information statement is a part (other than information regarding Ensign provided to us by Ensign for inclusion therein), and (ii) that Ensign will indemnify us and our affiliates and each of our respective current and former directors, officers, agents and employees against any and all losses relating to (a) liabilities arising out of the Ensign healthcare business, (b) any breach by Ensign of any provision of the Separation and Distribution Agreement or any ancillary agreement, and (c) any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to information contained in the registration statement of which this information statement is a part (solely with respect to information regarding Ensign provided to us by Ensign for inclusion therein).

The Separation and Distribution Agreement also establishes dispute resolution procedures with respect to claims subject to indemnification and related matters.

Indemnification with respect to taxes and employee benefits is governed by the Tax Matters Agreement and the Employee Matters Agreement, respectively.

 

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Termination

The Separation and Distribution Agreement provides that it may be terminated and the Spin-Off may be abandoned at any time prior to the distribution date by Ensign, in its sole discretion.

Expenses

Except as expressly set forth in the Separation and Distribution Agreement or in any ancillary agreement, we and Ensign will pay for our respective expenses in connection with the separation.

Master Leases

We will enter into five Master Leases with Ensign, pursuant to which Ensign will lease substantially all of the properties that we will own following the Spin-Off. The Master Leases will consist of five separate leases, each with its own pool of properties, that will have varying maturities and diversity in property geography. Under each Master Lease, our individual subsidiaries that own the properties subject to such Master Lease will be the landlords, and the individual subsidiaries of Ensign that operate those properties will be the tenants (collectively, the “Ensign Tenants”). The obligations of the Ensign Tenants under each Master Lease will be secured by a pledge of personal and intangible property of such Ensign Tenants. A default by an Ensign Tenant with regard to any property will cause a default with regard to the entire portfolio. Ensign will guaranty the obligations of the Ensign Tenants under the Master Leases.

The following description of the Master Leases does not purport to be complete, but contains a summary of certain material provisions of the Master Leases.

Term and Renewals

The Master Leases will provide for the lease of land, buildings, structures and other improvements on the land, easements and similar appurtenances to the land and improvements relating to the operation of the leased properties.

The five Master Leases will provide for initial terms of 12, 14, 16, 18 and 20 years, respectively, with no purchase options. At the option of the Ensign Tenants and subject to certain conditions being satisfied, each Master Lease may be extended for up to either two or three five-year renewal terms beyond the initial term, on the same terms and conditions. If the Ensign Tenants elect to renew the term of a Master Lease, the renewal will be effective as to all, but not less than all, of the leased property then subject to the Master Lease.

The Ensign Tenants will not have the ability to terminate their obligations under a Master Lease prior to its expiration without our consent. If a Master Lease is terminated prior to its expiration other than with our consent, the Ensign Tenants may be liable for damages and incur charges such as continued payment of rent through the end of the lease term and maintenance and repair costs for the leased property. See “Risk Factors—Risks Related to Our Business.”

Rental Amounts and Escalators

Each Master Lease is a triple-net lease. Accordingly, in addition to rent, the Ensign Tenants will be required to pay the following:

 

    all impositions and taxes levied on or with respect to the leased properties (other than taxes on our income);

 

    all utilities and other services necessary or appropriate for the leased properties and the business conducted thereon;

 

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    all insurance required in connection with the leased properties and the business conducted on the leased properties;

 

    all facility maintenance and repair costs; and

 

    all fees in connection with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted thereon.

The rent will be a fixed component that will be initially set based on the trailing twelve months of operating margins of the leased properties, which we expect to result in a lease coverage ratio of approximately 1.85x. The Ensign Tenants will make the rent payments in monthly installments. As of June 30, 2013, we anticipate that the annual revenues from the Master Leases will be approximately $59.0 million during each of the first two years of the Master Leases, and thereafter will be escalated annually by an amount equal to the product of (x) the lesser of the percentage change in the Consumer Price Index (but not less than zero) or 2.5%, and (y) the prior year’s rent.

Maintenance, Capital Expenditures and Alterations

The Ensign Tenants will be required to make all expenditures reasonably necessary to maintain the leased property in good appearance, repair and condition. The Ensign Tenants will own and be required to maintain all personal property located at the leased properties in good repair and condition as is necessary to operate all the leased property in compliance with applicable legal, insurance and licensing requirements. If the Ensign Tenants elect to make additional improvements to a leased property above and beyond the maintenance expenditures, we will finance such additional capital expenditures upon the Ensign Tenants’ request, up to an aggregate amount of 20% of our initial investment in such property.

Alterations (other than certain pre-approved alterations, which include non-material alterations costing $250,000 or less that (a) do not decrease the value of the property, (b) do not adversely affect the exterior appearance of the property, and (c) are consistent in terms of style, quality and workmanship to the property) will be permitted only with our consent. Prior to commencing any alterations, the Ensign Tenants will be required to provide us with copies of detailed plans, specifications, permits, licenses and other information as we shall request.

Use of the Leased Property

Each Master Lease will require that the Ensign Tenants utilize the leased property solely for the operation of a healthcare facility and related uses as specified in the Master Leases and such other uses of the leased property as we may otherwise approve in our sole discretion. The Ensign Tenants will be responsible for maintaining or causing to be maintained all licenses, certificates and permits necessary for the leased properties to comply with various regulations.

Events of Default

Under each Master Lease, an “Event of Default” will be deemed to occur upon certain events, including:

 

    the failure by the Ensign Tenants to pay rent or other amounts when due or within certain grace or cure periods of the due date;

 

    the revocation or termination of any license or other authorization that would have a material adverse effect on the operation of any property, the voluntary cessation of operations at any property, the sale or transfer of any portion of a license or other authorization, or the use of any property other than for the operation of a healthcare facility;

 

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    any material suspension, limitation or restriction placed upon the Ensign Tenants, any license or other authorization, any property or the operations at any property, which is not cured within any applicable grace period;

 

    the occurrence of a default under another agreement between us and the Ensign Tenants or our respective subsidiaries, which is not cured within any applicable grace period;

 

    the occurrence of a default under any other lease, guaranty, loan or financing agreement by Ensign or its subsidiaries, which is not cured within any applicable grace period;

 

    certain events of bankruptcy or insolvency with respect to Ensign or its subsidiaries;

 

    the breach by the Ensign Tenants or Ensign of a representation or warranty in the Master Leases or any guaranty in a manner which would impair the Ensign Tenants’ ability to perform their obligations under the Master Leases; and

 

    the failure by the Ensign Tenants to comply with the covenants set forth in the Master Lease when due or within any applicable cure period.

Remedies for an Event of Default

Upon an Event of Default under a Master Lease, we may (at our option) exercise certain remedies, including:

 

    sue for specific performance of any covenant;

 

    enter any property, terminate the Master Lease, dispossess the Ensign Tenant from any property and/or collect monetary damages by reason of the Ensign Tenant’s breach (including the acceleration of all rent which would have accrued after such termination);

 

    elect to leave the Master Lease in place and sue for rent and any other monetary damages;

 

    relet any property to the Ensign Tenant for such term, rent, conditions and uses as we may determine;

 

    sell any lease collateral in a non-judicial foreclosure sale; and

 

    seek any and all other rights and remedies available under law or in equity.

Assignment and Subletting

Except as noted below, each Master Lease will provide that the Ensign Tenants may not sublease, assign, encumber or otherwise transfer or dispose of the Master Lease or any leased property, including by virtue of a change of control of Ensign or the Ensign Tenants, or engage a management company without our consent.

Each Master Lease will also provide that the Ensign Tenants may assign the Master Lease or sublease any leased property to an affiliate, subject to our reasonable approval of the transfer documents and the satisfaction of certain conditions. Upon any such assignment or transfer to an affiliate of the Ensign Tenants, Ensign must guarantee the affiliate’s obligations under the Master Lease and the prior Ensign Tenant will not be released from its obligations under the applicable Master Lease.

 

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New Opportunities

Generally, neither we nor Ensign or the Ensign Tenants will be prohibited from developing, redeveloping, expanding, purchasing, building or operating facilities. However, the following limitations will apply:

 

    Ensign, the Ensign Tenants and their respective affiliates will not be able to move any patients or staff from any property in our portfolio to any property outside of our portfolio to the detriment of any of the properties in our portfolio (except as required for medically appropriate reasons) during the term of the Master Lease and for one year thereafter;

 

    during the term of each Master Lease, Ensign, the Ensign Tenants and their respective affiliates will provide us with a right of first offer to finance any acquisition of any new property (subject to certain exceptions) on terms that match, in all material respects, the best bona fide offer the Ensign Tenants can then find; and

 

    in certain cases, if we desire to acquire any new property or a portfolio of five or fewer properties within one year of the Spin-Off (excluding acquisitions in which a new operator would not be accepted), we will be required to give Ensign a right of first offer to either (at Ensign’s election) purchase and operate or lease and operate such new property(ies) (in the case of just operating, on terms that match the Master Lease) and if Ensign does not respond or exercise its right of first offer, we may proceed with the acquisition.

Licenses/Successor Lessee Provisions

Licenses and all other authorizations necessary to operate the facilities that will be subject to a Master Lease will be procured and maintained by the Ensign Tenants pursuant to the terms of the Master Lease. Each Master Lease will require the Ensign Tenants to transfer, to the extent permitted by law, licenses and all other authorizations at the expiration or earlier termination of the Master Lease to a successor lessee at no material cost to us or the transferee.

Tax Matters Agreement

The Tax Matters Agreement will govern our and Ensign’s respective rights, responsibilities and obligations with respect to taxes (including taxes arising in the ordinary course of business and taxes, if any, incurred as a result of any failure of the Spin-Off and certain related transactions to qualify as tax-free for U.S. federal income tax purposes), tax attributes, tax returns, tax contests and certain other tax matters.

In addition, the Tax Matters Agreement will impose certain restrictions on us and our subsidiaries (including restrictions on share issuances, business combinations, sales of assets and similar transactions) that will be designed to preserve the tax-free status of the Spin-Off and certain related transactions. The Tax Matters Agreement will provide special rules allocating tax liabilities in the event the Spin-Off, together with certain related transactions, was not tax-free. In general, under the Tax Matters Agreement, each party is expected to be responsible for any taxes imposed on Ensign that arise from the failure of the Spin-Off and certain related transactions to qualify as a tax-free transaction for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Code and certain other relevant provisions of the Code to the extent that the failure to qualify is attributable to actions, events, or transactions relating to such party’s respective stock, assets or business, or a breach of the relevant representations or covenants made by that party in the Tax Matters Agreement.

The Tax Matters Agreement will also set forth our and Ensign’s obligations as to the filing of tax returns, the administration of tax contests and assistance and cooperation on tax matters.

 

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Transition Services Agreement

Ensign will agree to provide us with certain administrative and support services on a transitional basis pursuant to the Transition Services Agreement for a period of up to one year (subject to an option, at our election, to extend certain services for up to one additional year). The transition services may include accounting services, financial systems and support, human resources support, tax and transfer pricing services, legal and corporate secretary services, internal audit services, information systems services and various other support services. We expect that the fees charged to us for transition services furnished pursuant to the Transition Services Agreement will approximate the actual cost incurred by Ensign in providing the transition services to us for the relevant period. The Transition Services Agreement will provide that we have the right to terminate a transition service after an agreed notice period, generally thirty days. The Transition Services Agreement also will contain provisions under which Ensign will generally agree to indemnify us for all losses incurred by us resulting from Ensign’s gross negligence, willful misconduct or material breach of the Transition Services Agreement.

Employee Matters Agreement

We will enter into an Employee Matters Agreement with Ensign that will address employment, compensation and benefits matters.

 

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DESCRIPTION OF OUR CAPITAL STOCK

Our charter and bylaws will be amended and restated prior to the Spin-Off. The following is a summary description of the material terms of our capital stock as will be set forth in our charter and bylaws that will govern the rights of holders of our common stock upon the consummation of the Spin-Off.

While the following attempts to describe the material terms of our capital stock, the description may not contain all of the information that is important to you. You are encouraged to read the full text of our charter and bylaws, the forms of which are included as exhibits to the registration statement on Form 10, of which this information statement is a part, as well as the provisions of applicable Maryland law.

General

Following the Spin-Off, our authorized stock will consist of                     shares of common stock, par value $0.01 per share, and                     shares of preferred stock, par value $0.01 per share.

Based on the                     shares of Ensign common stock outstanding as of                     , 2014, it is expected that we will have                     shares of common stock issued and outstanding upon completion of the Spin-Off , and                     shares of common stock issued and outstanding after the Purging Distribution. No shares of our preferred stock will be issued and outstanding at the time of the Spin-Off.

Common Stock

All of the shares of our common stock distributed in the Spin-Off will be duly authorized, fully paid and nonassessable. Subject to the preferential rights of any other class or series of our stock and the provisions of our charter that will restrict transfer and ownership of stock, the holders of shares of our common stock generally will be entitled to receive dividends on such stock out of assets legally available for distribution to the stockholders when, as and if authorized by our board of directors and declared by us. The holders of shares of our common stock will also be entitled to share ratably in our net assets legally available for distribution to stockholders in the event of our liquidation, dissolution or winding up, after payment of or adequate provision for all known debts and liabilities.

Subject to the rights of any other class or series of our stock and the provisions of our charter that will restrict transfer and ownership of stock, each outstanding share of our common stock will entitle the holder to one vote on all matters submitted to a vote of the stockholders, including the election of directors. Under our charter there will be no cumulative voting in the election of directors. Our bylaws will require that each director be elected by a plurality of votes cast with respect to such director.

Holders of shares of our common stock will generally have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and will have no preemptive rights to subscribe for any of our securities. Subject to the provisions of our charter that will restrict transfer and ownership of stock, all shares of our common stock will have equal dividend, liquidation and other rights.

Preferred Stock

Under our charter, our board of directors may from time to time establish and cause us to issue one or more classes or series of preferred stock and set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, or terms or conditions of redemption of such classes or series. Accordingly, our board of directors, without stockholder approval, may issue preferred stock with voting, conversion or other rights that could adversely affect the voting power and other rights of the holders of common stock. Preferred stock could be issued quickly with terms calculated to delay or prevent a change of control or make removal of management more difficult. Additionally, the issuance of preferred stock

 

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may have the effect of decreasing the market price of our common stock, may adversely affect the voting and other rights of the holders of our common stock, and could have the effect of delaying, deferring or preventing a change of control of our company or other corporate action. No shares of preferred stock are expected to be outstanding immediately following the Spin-Off and we have no present plans to issue any shares of preferred stock.

Power to Reclassify Our Unissued Shares

Our board of directors will have the power, without stockholder approval, to amend our charter to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series, to authorize us to issue additional authorized but unissued shares of common stock or preferred stock and to classify and reclassify any unissued shares of our common stock or preferred stock into other classes or series of stock, including one or more classes or series of common stock or preferred stock that have priority with respect to voting rights, dividends or upon liquidation over shares of our common stock. Prior to the issuance of shares of each new class or series, our board of directors will be required by the MGCL and our charter to set, subject to the provisions of our charter regarding restrictions on transfer and ownership of stock, the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption for each class or series of stock.

Restrictions on Transfer and Ownership of CareTrust Stock

In order for us to qualify as a REIT under the Code, our stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than the first year for which an election to be a REIT has been made) or during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of the outstanding shares of our stock may be owned, beneficially or constructively, by five or fewer individuals (as defined in the Code to include certain entities such as qualified pension plans) during the last half of a taxable year (other than the first year for which an election to be a REIT has been made). In addition, rent from related party tenants (generally, a tenant of a REIT owned, beneficially or constructively, 10% or more by the REIT, or a 10% owner of the REIT) is not qualifying income for purposes of the gross income tests under the Code. To qualify as a REIT, we must satisfy other requirements as well. See “U.S. Federal Income Tax Considerations—Taxation of REITs in General.”

Our charter will contain restrictions on the transfer and ownership of our stock. The relevant sections of our charter will provide that, subject to the exceptions described below, no person or entity may beneficially own, or be deemed to own by virtue of the applicable constructive ownership provisions of the Code, more than 9.8% of the outstanding shares of our common stock or more than 9.8% in value or in number, whichever is more restrictive, of the outstanding shares of all classes and series of our stock. These limits are collectively referred to herein as the “ownership limits.” The constructive ownership rules under the Code are complex and may cause stock owned beneficially or constructively by a group of related individuals or entities to be owned constructively by one individual or entity. As a result, the acquisition of less than 9.8% of our outstanding common stock or less than 9.8% of our outstanding capital stock, or the acquisition of an interest in an entity that beneficially or constructively owns our stock, could, nevertheless, cause the acquiror, or another individual or entity, to own constructively shares of our outstanding stock in excess of the ownership limits.

Upon receipt of certain representations and agreements and in its sole and absolute discretion, our board of directors will be able to, prospectively or retroactively, exempt a person from the ownership limits or establish a different limit on ownership, or an excepted holder limit, for a particular stockholder if the stockholder’s ownership in excess of the ownership limits would not result in us being “closely held” under Section 856(h) of the Code or otherwise failing to qualify as a REIT. As a condition of granting a waiver of the ownership limits or creating an excepted holder limit, our board of directors will be able to, but is not required to, require an IRS ruling or opinion of counsel satisfactory to our board of directors (in its sole discretion) as it may deem necessary or advisable to determine or ensure our status as a REIT.

 

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Our board of directors will also be able to, from time to time, increase or decrease the ownership limits unless, after giving effect to the increased or decreased ownership limits, five or fewer persons could beneficially own or constructively own, in the aggregate, more than 49.9% in value of our outstanding stock or we would otherwise fail to qualify as a REIT. Decreased ownership limits will not apply to any person or entity whose ownership of our stock is in excess of the decreased ownership limits until the person or entity’s ownership of our stock equals or falls below the decreased ownership limits, but any further acquisition of our stock will be in violation of the decreased ownership limits.

Our charter will also prohibit:

 

    any person from beneficially or constructively owning shares of our stock to the extent such beneficial or constructive ownership would result in us being “closely held” under Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT;

 

    any person from transferring shares of our stock if the transfer would result in shares of our stock being beneficially owned by fewer than 100 persons;

 

    any person from beneficially owning shares of our stock to the extent such ownership would result in our failing to qualify as a “domestically controlled qualified investment entity,” within the meaning of Section 897(h) of the Code;

 

    any person from beneficially or constructively owning shares of our stock to the extent such beneficial or constructive ownership would cause us to own, beneficially or constructively, more than a 9.9% interest (as set forth in Section 856(d)(2)(B) of the Code) in a tenant of our real property; and

 

    any person from constructively owning shares of our stock to the extent such constructive ownership would cause any “eligible independent contractor” that operates a “qualified health care property” on behalf of a “taxable REIT subsidiary” of ours (as such terms are defined in Sections 856(d)(9)(A), 856(e)(6)(D)(i) and 856(l) of the Code, respectively) to fail to qualify as such.

Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of our stock that will or may violate the ownership limits, or any of the other restrictions on transfer and ownership of our stock, and any person who is the intended transferee of shares of our stock that are transferred to the charitable trust described below, will be required to give immediate written notice and, in the case of a proposed transaction, at least 15 days prior written notice, to us and provide us with such other information as we may request in order to determine the effect of the transfer on our status as a REIT. The provisions of our charter regarding restrictions on transfer and ownership of our stock will not apply if our board of directors determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT.

Any attempted transfer of our stock which, if effective, would result in our stock being beneficially owned by fewer than 100 persons will be null and void and the proposed transferee will acquire no rights in such shares of our stock. Any attempted transfer of our stock which, if effective, would violate any of the other restrictions described above will cause the number of shares causing the violation (rounded up to the nearest whole share) to be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries, and the proposed transferee will not acquire any rights in the shares. The trustee of the trust will be appointed by us and will be unaffiliated with us and any proposed transferee of the shares. The automatic transfer will be effective as of the close of business on the business day prior to the date of the violative transfer or other event that results in a transfer to the trust. Shares of our stock held in the trust will be issued and outstanding shares. If the transfer to the trust as described above is not automatically effective, for any reason, to prevent violation of the applicable restrictions on transfer and ownership of our stock, then the transfer of the shares will be null and void and the proposed transferee will acquire no rights in such shares.

Shares of our stock held in trust will be issued and outstanding shares. The proposed transferee will not benefit economically from ownership of any shares of our stock held in the trust, will have no rights to dividends

 

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and no rights to vote or other rights attributable to the shares of stock held in the trust. The trustee of the trust will exercise all voting rights and receive all dividends and other distributions with respect to shares held in the trust for the exclusive benefit of the charitable beneficiary of the trust. Any dividend or other distribution paid prior to our discovery that shares have been transferred to a trust as described above must be repaid by the recipient to the trustee upon demand. Subject to Maryland law, effective as of the date that the shares have been transferred to the trust, the trustee will have the authority, at the trustee’s sole discretion, to rescind as void any vote cast by a proposed transferee prior to our discovery that the shares have been transferred to the trust and to recast the vote in accordance with the desires of the trustee acting for the benefit of the charitable beneficiary of the trust. However, if we have already taken irreversible corporate action, then the trustee may not rescind and recast the vote.

If our board of directors or a committee thereof determines in good faith that a proposed transfer or other event has taken place that violates the restrictions on transfer and ownership of our stock set forth in our charter, our board of directors or such committee may take such action as it deems advisable to refuse to give effect to or to prevent such transfer, including, but not limited to, causing us to redeem shares of stock, refusing to give effect to the transfer on our books or instituting proceedings to enjoin the transfer; provided that any transfer or other event in violation of the above restrictions shall automatically result in the transfer to the trust described above, and, where applicable, such transfer or other event shall be null and void as provided above irrespective of any action or non-action by our board of directors or any committee or designee thereof.

Shares of stock transferred to the trustee will be deemed offered for sale to us, or our designee, at a price per share equal to the lesser of (1) the price paid per share in the transaction that resulted in such transfer to the charitable trust (or, in the case of a devise or gift, the market price of such stock at the time of such devise or gift) and (2) the market price of such stock on the date we, or our designee, accept such offer. We may reduce the amount so payable to the trustee by the amount of any dividend or other distribution that we made to the proposed transferee before we discovered that the shares had been automatically transferred to the trust and that are then owed by the proposed transferee to the trustee as described above, and we may pay the amount of any such reduction to the trustee for distribution to the charitable beneficiary. We will have the right to accept such offer until the trustee has sold the shares held in the charitable trust, as discussed below. Upon a sale to us, the interest of the charitable beneficiary in the shares sold will terminate and the trustee will be required to distribute the net proceeds of the sale to the proposed transferee, and any distributions held by the trustee with respect to such shares to the charitable beneficiary.

If we do not buy the shares, the trustee will be required, within 20 days of receiving notice from us of a transfer of shares to the trust, to sell the shares to a person or entity designated by the trustee who could own the shares without violating the ownership limits, or the other restrictions on transfer and ownership of our stock. After selling the shares, the interest of the charitable beneficiary in the shares transferred to the trust will terminate and the trustee will be required to distribute to the proposed transferee an amount equal to the lesser of (1) the price paid by the proposed transferee for the shares or, if the proposed transferee did not give value for the shares in connection with the event causing the shares to be held by the trust (e.g., in the case of a gift, devise or other such transaction), the market price of such stock on the day of the event causing the shares to be held by the trust and (2) the sales proceeds (net of any commissions and other expenses of sale) received by the trustee from the sale or other disposition of the shares. The trustee may reduce the amount payable to the proposed transferee by the amount of any dividends or other distributions that we paid to the proposed transferee before we discovered that the shares had been automatically transferred to the trust and that are then owed by the proposed transferee to the trustee as described above. Any net sales proceeds in excess of the amount payable to the proposed transferee will be paid immediately to the charitable beneficiary, together with any distributions thereon. If the proposed transferee sells such shares prior to the discovery that such shares have been transferred to the trustee, then (a) such shares shall be deemed to have been sold on behalf of the trust and (b) to the extent that the proposed transferee received an amount for such shares that exceeds the amount that such proposed transferee would have received if such shares had been sold by the trustee, such excess shall be paid to the trustee upon demand. The proposed transferee will have no rights in the shares held by the trustee.

 

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Any certificates representing shares of our stock will bear a legend referring to the restrictions on transfer and ownership described above.

Every owner of 5% or more (or such lower percentage as required by the Code or the regulations promulgated thereunder) of our stock, within 30 days after the end of each taxable year, will be required to give us written notice stating the person’s name and address, the number of shares of each class and series of our stock that the person beneficially owns, a description of the manner in which the shares are held and any additional information that we request in order to determine the effect, if any, of the person’s beneficial ownership on our status as a REIT and to ensure compliance with the ownership limits. In addition, any beneficial owner or constructive owner of shares of our stock and any person or entity (including the stockholder of record) who holds shares of our stock for a beneficial owner or constructive owner will be required to, on request, disclose to us in writing such information as we may request in order to determine the effect, if any, of the stockholder’s beneficial and constructive ownership of our stock on our status as a REIT and to comply, or determine our compliance with, the requirements of any governmental or taxing authority.

The restrictions on transfer and ownership described above could have the effect of delaying, deferring or preventing a change of control in which holders of shares of our stock might receive a premium for their shares over the then prevailing price.

Amendments to Our Charter and Bylaws and Approval of Extraordinary Actions

Under Maryland law, a Maryland corporation generally cannot amend its charter, merge, consolidate, sell all or substantially all of its assets, engage in a statutory share exchange or dissolve unless the action is advised by the board of directors and approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its charter for approval of these actions by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our charter will provide that the affirmative vote of at least a majority of the votes entitled to be cast on the matter will be required to approve all charter amendments or extraordinary actions. However, Maryland law permits a Maryland corporation to transfer all or substantially all of its assets without the approval of the stockholders of the corporation to one or more persons if all of the equity interests of the person or persons are owned, directly or indirectly, by the corporation.

Our board of directors will have the exclusive power to adopt, alter or repeal any provision of our bylaws and to adopt new bylaws.

Removal of Directors; Vacancies on Our Board of Directors

Our charter will provide that, subject to the rights of holders of any class or series of stock separately entitled to elect one or more directors, a director may be removed only with cause, by the affirmative vote of two-thirds of the combined voting power of all classes of stock entitled to vote in the election of directors, voting as a single class. We have elected to be subject to certain provisions of the MGCL, as a result of which our board of directors will have the exclusive power to fill vacancies on the board of directors.

Business Combinations

Under the MGCL, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:

 

    any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock; or

 

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    an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.

A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which such person otherwise would have become an interested stockholder. However, in approving a transaction, a board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board of directors.

After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:

 

    80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and

 

    two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder, voting together as a single class.

These supermajority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under the MGCL, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. Our board of directors has not opted out of the business combination provisions of the MGCL and, consequently, the five-year prohibition and the supermajority vote requirements will apply to business combinations between us and any interested stockholder of ours.

We will be subject to the business combination provisions described above. However, our board of directors may elect to opt out of the business combination provisions at any time in the future.

Control Share Acquisitions

Maryland law provides that issued and outstanding shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquiror, by officers or by employees who are directors of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock that, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to, directly or indirectly, exercise voting power in electing directors within one of the following ranges of voting power:

 

    one-tenth or more but less than one-third;

 

    one-third or more but less than a majority; or

 

    more than 50%.

Control shares do not include shares the acquiror is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition of control shares, subject to certain exceptions.

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consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction or waiver of certain conditions, including an undertaking to pay the expenses of the special meeting. If no request for a special meeting is made, the corporation may itself present the question at any stockholder meeting.

If voting rights are not approved at the special meeting or if the acquiror does not deliver an acquiring person statement as required by the statute, then the corporation may, subject to certain conditions and limitations, redeem for fair value any or all of the control shares, except those for which voting rights have previously been approved. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of the shares are considered and not approved. If voting rights for control shares are approved at a stockholder meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.

The control share acquisition statute does not apply (1) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or (2) to acquisitions approved or exempted by the charter or bylaws of the corporation.

Our bylaws will contain a provision that will exempt from the control share acquisition statute any and all acquisitions by any person of shares of our stock. There can be no assurance that this provision will not be amended or eliminated at any time in the future.

Subtitle 8

Subtitle 8 of Title 3 of the MGCL permits a Maryland corporation with a class of equity securities registered under the Exchange Act and at least three independent directors to elect to be subject, by provision in its charter or bylaws or by a resolution of its board of directors and notwithstanding any contrary provision in the charter or bylaws, to any or all of five provisions:

 

    a classified board;

 

    a two-thirds vote requirement for removing a director;

 

    a requirement that the number of directors be fixed only by vote of the directors;

 

    a requirement that a vacancy on the board be filled only by the affirmative vote of a majority of the remaining directors in office and such director shall hold office for the remainder of the full term of the class of directors in which the vacancy occurred and until a successor is elected and qualified; and

 

    a majority requirement for the calling of a special meeting of stockholders.

Our charter will provide that, at such time as we are eligible to make a Subtitle 8 election, we will elect to be subject to the provisions of Subtitle 8 that vests in the board the exclusive power to fix the number of directors and requires that vacancies on the board may be filled only by the remaining directors and for the remainder of the full term of the directors in which the vacancy occurred. Our charter will also provide for a classified board and two-thirds requirement for removing a director. Through provisions in our bylaws unrelated to Subtitle 8, we will require, unless called by our chairman, chief executive officer, president or the board of directors, the request of stockholders entitled to cast not less than a majority of the votes entitled to be cast at such meeting to call a special meeting of stockholders.

 

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Special Meetings of the Stockholders

Our chairman, chief executive officer, president or board of directors will have the power to call a special meeting of stockholders. A special meeting of our stockholders to act on any matter that may properly be brought before a meeting of stockholders will also be called by the secretary upon the written request of stockholders entitled to cast a majority of all the votes entitled to be cast on such matter at the meeting and containing the information required by our bylaws. The secretary will be required to inform the requesting stockholders of the reasonably estimated cost of preparing and mailing the notice of meeting (including its proxy materials), and the requesting stockholder will be required to pay such estimated cost to the secretary prior to the preparation and mailing of any notice for such special meeting.

Transactions Outside the Ordinary Course of Business

Under the MGCL, a Maryland corporation generally may not dissolve, merge or consolidate with another entity, sell all or substantially all of its assets or engage in a statutory share exchange unless the action is declared advisable by the board of directors and approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter, unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is specified in the corporation’s charter. Our charter provides that these actions must be approved by a majority of all of the votes entitled to be cast on the matter.

Dissolution of Our Company

The dissolution of our company must be declared advisable by a majority of our entire board of directors and approved by the affirmative vote of the holders of a majority of all of the votes entitled to be cast on the matter.

Advance Notice of Director Nomination and New Business

Our charter and bylaws will provide that, at any annual meeting of stockholders, nominations of individuals for election to the board of directors and proposals of business to be considered by stockholders may be made only (1) pursuant to our notice of the meeting, (2) by or at the direction of the board of directors or (3) by a stockholder who was a stockholder of record at the time of provision of notice and at the time of the meeting, is entitled to vote at the meeting in the election of directors or on such other proposed business and who has complied with the advance notice procedures of our bylaws. The stockholder generally must provide notice to the secretary not less than 120 days nor more than 150 days prior to the first anniversary of the date of our proxy statement for the solicitation of proxies for election of directors at the preceding year’s annual meeting.

Only the business specified in our notice of meeting may be brought before any special meeting of stockholders. Our bylaws will provide that nominations of individuals for election to our board of directors at a special meeting of stockholders may be made only (1) by or at the direction of its board of directors or (2) if the special meeting has been called for the purpose of electing directors, by any stockholder of record at the time of provision of the notice and at the time of the meeting, who is entitled to vote at the meeting in the election of each individual so nominated and who has complied with the advance notice provisions set forth in our bylaws. Such stockholder will be entitled to nominate one or more individuals, as the case may be, for election as a director if the stockholder’s notice, containing the information required by our bylaws, is delivered to the secretary not earlier than the 120th day prior to such special meeting and not later than 5:00 p.m., Eastern Time, on the later of (i) the 90th day prior to such special meeting or (ii) the tenth day following the day on which public announcement is first made of the date of the special predecessor in any of the capacities described above and any employee or agent of ours or our predecessor.

The purpose of requiring stockholders to give advance notice of nominations and other proposals is to afford our board of directors the opportunity to consider the qualifications of the proposed nominees or the

 

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advisability of the other proposals and, to the extent considered necessary by our board of directors, to inform stockholders and make recommendations regarding the nominations or other proposals. The advance notice procedures also permit a more orderly procedure for conducting stockholder meetings.

Effect of Certain Provisions of Maryland Law and of Our Charter and Bylaws

The restrictions on transfer and ownership of our stock will prohibit any person from acquiring more than 9.8% of the outstanding shares of our common stock or more than 9.8% in value or in number, whichever is more restrictive, of the outstanding shares of all classes and series of our stock, without the prior consent of our board of directors. The business combination statute may discourage others from trying to acquire more than 10% of our stock without the advance approval of our board of directors, and may substantially delay or increase the difficulty of consummating any transaction with or change in control of us. Because our board of directors will be able to approve exceptions to the ownership limits and exempt transactions from the business combination statute, the ownership limits and the business combination statute will not interfere with a merger or other business combination approved by our board of directors. The power of our board of directors to classify and reclassify unissued common stock or preferred stock, and authorize us to issue classified or reclassified shares, also could have the effect of delaying, deferring or preventing a change in control or other transaction.

Our charter will provide for a staggered board of directors consisting of three classes of directors. Directors of each class will be chosen for three-year terms upon the expiration of their current terms and each year one class of our directors will be elected by our stockholders. The terms of the first, second and third classes will expire in 2014, 2015 and 2016, respectively. We believe that classification of our board of directors will help to assure the continuity and stability of our business strategies and policies as determined by our board of directors. Additionally, there will be no cumulative voting in the election of directors. This classified board provision could have the effect of making the replacement of incumbent directors more time consuming and difficult. At least two annual meetings of stockholders, instead of one, will generally be required to effect a change in a majority of our board of directors. Thus, the classified board provision could increase the likelihood that incumbent directors will retain their positions. The staggered terms of directors may delay, defer or prevent a tender offer, an attempt to change control of us, even though a tender offer or change in control might be believed by our stockholders to be in their best interest.

The provisions described above, along with other provisions of the MGCL and our charter and bylaws discussed above, including provisions relating to the removal of directors and the filling of vacancies, the supermajority vote that will be required to amend certain provisions of our charter, the advance notice provisions and the procedures that stockholders will be required to follow to request a special meeting, alone or in combination, could have the effect of delaying, deferring or preventing a proxy contest, tender offer, merger or other change in control of us that might involve a premium price for shares of our common stockholders or otherwise be in the best interest of our stockholders, and could increase the difficulty of consummating any offer.

Transfer Agent and Registrar

After the Spin-Off, the registrar and transfer agent for our common stock will be             .

Listing

We have applied to list our common stock on NASDAQ under the symbol “CTRE.”

Indemnification of Directors and Executive Officers

Maryland law permits a Maryland corporation to include in its charter a provision that limits the liability of its directors and officers to the corporation and its stockholders for money damages, except for liability resulting from (1) actual receipt of an improper benefit or profit in money, property or services or

 

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(2) active or deliberate dishonesty that is established by a final judgment and that is material to the cause of action. Our charter will contain a provision that will limit, to the maximum extent permitted by Maryland statutory or decisional law, the liability of our directors and officers to us and our stockholders for money damages.

Maryland law requires a Maryland corporation (unless otherwise provided in its charter, which our charter will not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made or threatened to be made a party by reason of his or her service in that capacity. Maryland law permits a Maryland corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or threatened to be made a party by reason of their service in that capacity unless it is established that:

 

    the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty;

 

    the director or officer actually received an improper personal benefit in money, property or services; or

 

    in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

Under the MGCL, we may not indemnify a director or officer in a suit by us or in our right in which the director or officer was adjudged liable to us or in a suit in which the director or officer was adjudged liable on the basis that personal benefit was improperly received. A court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct or was adjudged liable on the basis that personal benefit was improperly received. However, indemnification for an adverse judgment in a suit by the corporation or in its right, or for a judgment of liability on the basis that personal benefit was improperly received, will be limited to expenses.

In addition, Maryland law permits a Maryland corporation to advance reasonable expenses to a director or officer upon receipt of (1) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification and (2) a written undertaking by him or her, or on his or her behalf, to repay the amount paid or reimbursed if it is ultimately determined that the standard of conduct was not met.

Our charter will require, to the maximum extent permitted by Maryland law, that we indemnify and pay or reimburse the reasonable expenses in advance of the final disposition of a proceeding of (1) any present or former director or officer and (2) any individual who, while a director or officer and, at our request, serves or has served another corporation, REIT, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner, trustee, member, manager, employee or agent from and against any claim or liability to which he or she may become subject or which he or she may incur by reason of his or her service in any of the foregoing capacities.

We will enter into indemnification agreements with each of our executive officers and directors providing for the indemnification of, and advancement of expenses to, each such person in connection with claims, suits or proceedings arising as a result of such person’s service as an officer or director of ours. We also will maintain insurance on behalf of our directors and officers, insuring them against liabilities that they may incur in such capacities or arising from this status.

 

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U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of the material U.S. federal income tax consequences of an investment in our common stock. For purposes of this section, references to “CareTrust,” “we,” “our” and “us” generally mean only CareTrust REIT, Inc. and not its subsidiaries or other lower-tier entities, except as otherwise indicated. This summary is based on the Code, the regulations promulgated by the Treasury, rulings and other administrative pronouncements issued by the IRS, and judicial decisions, all as currently in effect, and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. The summary is also based upon the assumption that we and our subsidiaries and affiliated entities will operate in accordance with our and their applicable organizational documents. This summary is for general information only and is not tax advice. It does not discuss any state, local or non-U.S. tax consequences relevant to us or an investment in our common stock, and it does not purport to discuss all aspects of U.S. federal income taxation that may be important to a particular investor in light of its investment or tax circumstances or to investors subject to special tax rules, such as:

 

    financial institutions;

 

    insurance companies;

 

    broker-dealers;

 

    regulated investment companies;

 

    partnerships, other pass-through entities and trusts;

 

    persons who hold our stock on behalf of other persons as nominees;

 

    persons who receive our stock as compensation;

 

    persons holding our stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security” or other integrated investment;

 

    persons who are subject to alternative minimum tax;

and, except to the extent discussed below:

 

    tax-exempt organizations; and

 

    foreign investors.

This summary assumes that investors will hold their common stock as a capital asset, which generally means property held for investment.

The U.S. federal income tax treatment of holders of our common stock depends, in some instances, on determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. In addition, the tax consequences to any particular stockholder of holding our common stock will depend on the stockholder’s particular tax circumstances. You are urged to consult with your tax advisor as to the U.S. federal, state, local, and foreign income and other tax consequences to you in light of your particular investment or tax circumstances of acquiring, holding, exchanging, or otherwise disposing of our common stock.

TAXATION OF CARETRUST

Following the Spin-Off, we intend to elect to be taxed as a REIT commencing with our taxable year beginning the day after the effective date of the Spin-Off and ending December 31, 2014, upon the filing of our

 

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U.S. federal income tax return for such period. We believe that we will be organized, and we expect to operate, in such a manner as to qualify for taxation as a REIT under the applicable provisions of the Code.

The law firm of Skadden, Arps, Slate, Meagher & Flom LLP has acted as our tax counsel (“Tax Counsel”) in connection with our intended election to be taxed as a REIT. We intend to operate in a manner that will allow us to qualify to be taxed as a REIT for U.S. federal income tax purposes, and we expect that we will receive an opinion of Tax Counsel with respect to our qualification to be taxed as a REIT in connection with our election to be taxed as a REIT. Investors should be aware, however, that opinions of counsel are not binding on the IRS or any court. The opinion of Tax Counsel represents only the view of Tax Counsel, based on its review and analysis of existing law and on certain representations as to factual matters and covenants made by Ensign and us, including representations relating to the values of our assets and the sources of our income. The opinion will be expressed as of the date issued. Tax Counsel will have no obligation to advise Ensign, us or the holders of our common stock of any subsequent change in the matters stated, represented or assumed or of any subsequent change in applicable law. Furthermore, both the validity of the opinion of Tax Counsel and our qualification to be taxed as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis, the results of which will not be monitored by Tax Counsel. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals.

TAXATION OF REITS IN GENERAL

As indicated above, our qualification and taxation as a REIT depend upon our ability to meet, on a continuing basis, various qualification requirements imposed upon REITs by the Code. The material qualification requirements are summarized below under “—Requirements for Qualification—General.” While we intend to operate so that we qualify to be taxed as a REIT, no assurance can be given that the IRS will not challenge our qualification or that we will be able to operate in accordance with the REIT requirements in the future. See “—Failure to Qualify.”

Provided that we qualify to be taxed as a REIT, generally we will be entitled to a deduction for dividends that we pay and therefore will not be subject to U.S. federal corporate income tax on our net REIT taxable income that is currently distributed to our stockholders. This treatment substantially eliminates the “double taxation” at the corporate and stockholder levels that generally results from an investment in a C corporation. A “C corporation” is a corporation that generally is required to pay tax at the corporate level. Double taxation means taxation once at the corporate level when income is earned and once again at the stockholder level when the income is distributed. In general, the income that we generate is taxed only at the stockholder level upon a distribution of dividends to our stockholders.

Beginning in 2013, most U.S. stockholders that are individuals, trusts or estates are taxed on corporate dividends at a maximum U.S. federal income tax rate of 20% (the same as long-term capital gains). With limited exceptions, however, dividends from us or from other entities that are taxed as REITs are generally not eligible for this rate and will continue to be taxed at rates applicable to ordinary income. Commencing in 2013, the highest marginal noncorporate U.S. federal income tax rate applicable to ordinary income is 39.6%. See “—Taxation of Stockholders—Taxation of Taxable U.S. Stockholders—Distributions.”

Any net operating losses, foreign tax credits and other tax attributes generally do not pass through to our stockholders, subject to special rules for certain items such as the capital gains that we recognize. See “—Taxation of Stockholders—Taxation of Taxable U.S. Stockholders—Distributions.”

If we qualify to be taxed as a REIT, we will nonetheless be subject to U.S. federal tax in the following circumstances:

 

    We will be taxed at regular corporate rates on any undistributed net taxable income, including undistributed net capital gains.

 

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    We may be subject to the “alternative minimum tax” on our items of tax preference, including any deductions of net operating losses.

 

    If we have net income from prohibited transactions, which are, in general, sales or other dispositions of inventory or property held primarily for sale to customers in the ordinary course of business, other than foreclosure property, such income will be subject to a 100% tax. See “—Prohibited Transactions” and “—Foreclosure Property.”

 

    If we elect to treat property that we acquire in connection with a foreclosure of a mortgage loan or certain leasehold terminations as “foreclosure property,” we may thereby avoid the 100% tax on gain from a resale of that property (if the sale would otherwise constitute a prohibited transaction), but the income from the sale or operation of the property may be subject to corporate income tax at the highest applicable rate (currently 35%).

 

    If we fail to satisfy the 75% gross income test or the 95% gross income test, as discussed below, but nonetheless maintain our qualification to be taxed as a REIT because we satisfy other requirements, we will be subject to a 100% tax on an amount based on the magnitude of the failure, as adjusted to reflect the profit margin associated with our gross income.

 

    If we violate the asset tests (other than certain de minimis violations) or other requirements applicable to REITs, as described below, and yet maintain our qualification to be taxed as a REIT because there is reasonable cause for the failure and other applicable requirements are met, we may be subject to a penalty tax. In that case, the amount of the penalty tax will be at least $50,000 per failure, and, in the case of certain asset test failures, will be determined as the amount of net income generated by the non-qualifying assets in question multiplied by the highest corporate tax rate (currently 35%) if that amount exceeds $50,000 per failure.

 

    If we fail to distribute during each calendar year at least the sum of (1) 85% of our ordinary income for such year, (2) 95% of our capital gain net income for such year and (3) any undistributed net taxable income from prior periods, we will be subject to a nondeductible 4% excise tax on the excess of the required distribution over the sum of (a) the amounts that we actually distributed and (b) the amounts we retained and upon which we paid income tax at the corporate level.

 

    We may be required to pay monetary penalties to the IRS in certain circumstances, including if we fail to meet record-keeping requirements intended to monitor our compliance with rules relating to the composition of a REIT’s stockholders, as described below in “—Requirements for Qualification—General.”

 

    A 100% tax may be imposed on transactions between us and a TRS that do not reflect arm’s-length terms.

 

    If we recognize gain on the disposition of any asset held by us on the day after the effective date of the Spin-Off (when our election to be subject to tax as a REIT is expected to become effective) during a specified period (generally, ten years) thereafter, then we will owe tax at the highest corporate tax rate on the lesser of (1) the excess of the fair market value of the asset on the effective date of our election to be subject to tax as a REIT over its basis in the asset at such time, and (2) the gain recognized upon the disposition of such asset.

 

    If after the effective date of our election to be subject to tax as REIT, we acquire appreciated assets from a corporation that is not a REIT (i.e., a corporation taxable under subchapter C of the Code) in a transaction in which the adjusted tax basis of the assets in our hands is determined by reference to the adjusted tax basis of the assets in the hands of the subchapter C corporation, we may be subject to tax on such appreciation at the highest corporate income tax rate then applicable if we subsequently recognize gain on a disposition of any such assets during the ten-year period following their acquisition from the subchapter C corporation.

 

    The earnings of our TRSs will generally be subject to U.S. federal corporate income tax.

 

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In addition, we and our subsidiaries may be subject to a variety of taxes, including payroll taxes and state, local, and foreign income, property, gross receipts and other taxes on our assets and operations. We could also be subject to tax in situations and on transactions not presently contemplated.

Requirements for Qualification—General

The Code defines a REIT as a corporation, trust or association:

 

  (1) that is managed by one or more trustees or directors;

 

  (2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;

 

  (3) that would be taxable as a domestic corporation but for its election to be subject to tax as a REIT;

 

  (4) that is neither a financial institution nor an insurance company subject to specific provisions of the Code;

 

  (5) the beneficial ownership of which is held by 100 or more persons;

 

  (6) in which, during the last half of each taxable year, not more than 50% in value of the outstanding stock is owned, directly or indirectly, by five or fewer “individuals” (as defined in the Code to include specified tax-exempt entities); and

 

  (7) that meets other tests described below, including with respect to the nature of its income and assets.

The Code provides that conditions (1) through (4) must be met during the entire taxable year, and that condition (5) must be met during at least 335 days of a taxable year of twelve months, or during a proportionate part of a shorter taxable year. Conditions (5) and (6) need not be met during a corporation’s initial tax year as a REIT (which, in our case, is expected to be 2014). Our charter will provide restrictions regarding the ownership and transfers of shares of our stock, which are intended to assist us in satisfying the stock ownership requirements described in conditions (5) and (6) above, among other purposes. These restrictions, however, may not ensure that we will, in all cases, be able to satisfy the share ownership requirements described in conditions (5) and (6) above. If we fail to satisfy these share ownership requirements, except as provided in the next sentence, our status as a REIT will terminate. If, however, we comply with the rules contained in applicable Treasury regulations that require us to ascertain the actual ownership of our shares and we do not know, or would not have known through the exercise of reasonable diligence, that we failed to meet the requirement described in condition (6) above, we will be treated as having met this requirement.

To monitor compliance with the stock ownership requirements, we generally are required to maintain records regarding the actual ownership of our stock. To do so, we must demand written statements each year from the record holders of significant percentages of our stock pursuant to which the record holders must disclose the actual owners of the stock (i.e., the persons required to include our dividends in their gross income). We must maintain a list of those persons failing or refusing to comply with this demand as part of our records. We could be subject to monetary penalties if we fail to comply with these record-keeping requirements. If such record holder fails or refuses to comply with the demands, such record holder will be required by Treasury regulations to submit a statement with such record holder’s tax return disclosing such record holder’s actual ownership of our stock and other information.

In addition, a corporation generally may not elect to become a REIT unless its taxable year is the calendar year. We intend to adopt December 31 as our year-end, and thereby satisfy this requirement.

 

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Effect of Subsidiary Entities

Ownership of Partnership Interests

If we are a partner in an entity that is treated as a partnership for U.S. federal income tax purposes, Treasury regulations provide that we are deemed to own our proportionate share of the partnership’s assets, and to earn our proportionate share of the partnership’s income, for purposes of the asset and gross income tests applicable to REITs. Our proportionate share of a partnership’s assets and income is based on our capital interest in the partnership (except that for purposes of the 10% value test, described below, our proportionate share of the partnership’s assets is based on our proportionate interest in the equity and certain debt securities issued by the partnership). In addition, the assets and gross income of the partnership are deemed to retain the same character in our hands. Thus, our proportionate share of the assets and items of income of any of our subsidiary partnerships will be treated as our assets and items of income for purposes of applying the REIT requirements.

If we become a limited partner or non-managing member in any partnership or limited liability company and such entity takes or expects to take actions that could jeopardize our status as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity. In addition, it is possible that a partnership or limited liability company could take an action which could cause us to fail a gross income or asset test, and that we would not become aware of such action in time to dispose of our interest in the partnership or limited liability company or take other corrective action on a timely basis. In that case, we could fail to qualify to be taxed as a REIT unless we were entitled to relief, as described below under “—Income Tests—Failure to Satisfy the Gross Income Tests” and “—Asset Tests.”

Disregarded Subsidiaries

If we own a corporate subsidiary that is a “qualified REIT subsidiary,” that subsidiary is generally disregarded as a separate entity for U.S. federal income tax purposes, and all of the subsidiary’s assets, liabilities and items of income, deduction and credit are treated as our assets, liabilities and items of income, deduction and credit, including for purposes of the gross income and asset tests applicable to REITs. A qualified REIT subsidiary is any corporation, other than a TRS (as described below), that is directly or indirectly wholly owned by a REIT. Other entities that are wholly owned by us, including single member limited liability companies that have not elected to be taxed as corporations for U.S. federal income tax purposes, are also generally disregarded as separate entities for U.S. federal income tax purposes, including for purposes of the REIT income and asset tests. Disregarded subsidiaries, along with any partnerships in which we hold an equity interest, are sometimes referred to herein as “pass-through subsidiaries.”

In the event that a disregarded subsidiary of ours ceases to be wholly owned—for example, if any equity interest in the subsidiary is acquired by a person other than us or another disregarded subsidiary of ours—the subsidiary’s separate existence would no longer be disregarded for U.S. federal income tax purposes. Instead, the subsidiary would have multiple owners and would be treated as either a partnership or a taxable corporation. Such an event could, depending on the circumstances, adversely affect our ability to satisfy the various asset and gross income requirements applicable to REITs, including the requirement that REITs generally may not own, directly or indirectly, more than 10% of the securities of another corporation. See “—Asset Tests” and “—Income Tests.”

Taxable REIT Subsidiaries.

In general, we may jointly elect with a subsidiary corporation, whether or not wholly owned, to treat such subsidiary corporation as a TRS. We generally may not own more than 10% of the securities of a taxable corporation, as measured by voting power or value, unless we and such corporation elect to treat such corporation as a TRS. The separate existence of a TRS or other taxable corporation is not ignored for U.S. federal income tax purposes. Accordingly, a TRS or other taxable subsidiary corporation generally is subject to corporate income tax on its earnings, which may reduce the cash flow that we and our subsidiaries generate in the aggregate, and may reduce our ability to make distributions to our stockholders.

 

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We are not treated as holding the assets of a TRS or other taxable subsidiary corporation or as receiving any income that the subsidiary earns. Rather, the stock issued by a taxable subsidiary corporation to us is an asset in our hands, and we treat the dividends paid to us from such taxable subsidiary corporation, if any, as income. This treatment can affect our income and asset test calculations, as described below. Because we do not include the assets and income of TRSs or other taxable subsidiary corporations on a look-through basis in determining our compliance with the REIT requirements, we may use such entities to undertake indirectly activities that the REIT rules might otherwise preclude us from doing directly or through pass-through subsidiaries. For example, we may use TRSs or other taxable subsidiary corporations to perform services or conduct activities that give rise to certain categories of income or to conduct activities that, if conducted by us directly, would be treated in our hands as prohibited transactions.

A TRS may not directly or indirectly operate or manage a healthcare facility. The Code defines a “healthcare facility” generally to mean a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients. If the IRS were to treat a subsidiary corporation of ours as directly or indirectly operating or managing a healthcare facility, such subsidiary would not qualify as a TRS, which could jeopardize our REIT qualification under the REIT 5% and 10% gross asset tests.

Although a TRS may not operate or manage a healthcare facility, rent received by a REIT from the lease of a healthcare facility to a TRS may qualify as “rents from real property” for purposes of both the 75% and 95% gross income tests, provided that the facility is operated by an “eligible independent contractor.” Qualification as an eligible independent contractor, however, involves the application of highly technical and complex Code provisions for which only limited authorities exist.

The TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. Further, the rules impose a 100% excise tax on transactions between a TRS and its parent REIT or the REIT’s tenants that are not conducted on an arm’s-length basis. We intend that all of our transactions with our TRSs, if any, will be conducted on an arm’s-length basis.

Income Tests

In order to qualify to be taxed as a REIT, we must satisfy two gross income requirements on an annual basis. First, at least 75% of our gross income for each taxable year, excluding gross income from sales of inventory or dealer property in “prohibited transactions,” discharge of indebtedness and certain hedging transactions, generally must be derived from “rents from real property,” gains from the sale of real estate assets, interest income derived from mortgage loans secured by real property (including certain types of mortgage-backed securities), dividends received from other REITs and specified income from temporary investments. Second, at least 95% of our gross income in each taxable year, excluding gross income from prohibited transactions, discharge of indebtedness and certain hedging transactions, must be derived from some combination of income that qualifies under the 75% gross income test described above, as well as other dividends, interest, and gain from the sale or disposition of stock or securities, which need not have any relation to real property. Income and gain from certain hedging transactions will be excluded from both the numerator and the denominator for purposes of both the 75% and 95% gross income tests.

Rents from Real Property

Rents we receive from a tenant will qualify as “rents from real property” for the purpose of satisfying the gross income requirements for a REIT described above only if all of the conditions described below are met.

 

    The amount of rent is not based in whole or in part on the income or profits of any person. However, an amount we receive or accrue will generally not be excluded from the term “rents from real property” solely because it is based on a fixed-percentage or percentages of receipts or sales;

 

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    Neither we nor an actual or constructive owner of 10% or more of our stock actually or constructively owns 10% or more of the interests in the assets or net profits of a noncorporate tenant, or, if the tenant is a corporation (but excluding any TRS), 10% or more of the total combined voting power of all classes of stock entitled to vote or 10% or more of the total value of all classes of stock of the tenant. Rents we receive from such a tenant that is a TRS of ours, however, will not be excluded from the definition of “rents from real property” as a result of this condition if at least 90% of the space at the property to which the rents relate is leased to third parties, and the rents paid by the TRS are substantially comparable to rents paid by our other tenants for comparable space. Whether rents paid by a TRS are substantially comparable to rents paid by other tenants is determined at the time the lease with the TRS is entered into, extended, and modified, if such modification increases the rents due under such lease. Notwithstanding the foregoing, however, if a lease with a “controlled TRS” is modified and such modification results in an increase in the rents payable by such TRS, any such increase will not qualify as “rents from real property.” For purposes of this rule, a “controlled TRS” is a TRS in which the parent REIT owns stock possessing more than 50% of the voting power or more than 50% of the total value of the outstanding stock of such TRS. In addition, rents we receive from a tenant that also is our TRS will not be excluded from the definition of “rents from real property” as a result of our ownership interest in the TRS if the property to which the rents relate is a qualified lodging facility or a qualified health care property, and such property is operated on behalf of the TRS by a person who is an independent contractor and certain other requirements are met. Our TRSs will be subject to U.S. Federal income tax on their income from the operations of these properties;

 

    Rent attributable to personal property that is leased in connection with a lease of real property is not greater than 15% of the total rent received under the lease. If this condition is not met, then the portion of the rent attributable to personal property will not qualify as “rents from real property”; and