UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-36181

CareTrust REIT, Inc.

(Exact name of registrant as specified in its charter)

Maryland	46-3999490
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
905 Calle Amanecer, Suite 300, San Clemente, CA	92673
(Address of principal executive offices)	(Zip Code)

(949) 542-3130

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	CTRE	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

As of August 3, 2022, there were 97,028,742 shares of common stock outstanding.

INDEX

 

PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Equity	3
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	30
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 6.	Exhibits	33
	Signatures	34

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

CARETRUST REIT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(Unaudited)

 

	June 30, 2022		December 31, 2021
Assets:
Real estate investments, net	$	1,390,286	$	1,589,971
Other real estate investments	115,168		15,155
Assets held for sale, net	141,767		4,835
Cash and cash equivalents	30,267		19,895
Accounts and other receivables	875		2,418
Prepaid expenses and other assets, net	6,837		7,512
Deferred financing costs, net	572		1,062
Total assets	$	1,685,772	$	1,640,848
Liabilities and Equity:
Senior unsecured notes payable, net	$	394,706	$	394,262
Senior unsecured term loan, net	199,242		199,136
Unsecured revolving credit facility	205,000		80,000
Accounts payable, accrued liabilities and deferred rent liabilities	21,749		25,408
Dividends payable	26,807		26,285
Total liabilities	847,504		725,091
Commitments and contingencies (Note 11)
Equity:
Preferred stock, $0.01 par value; 100,000,000 shares authorized, no shares issued and outstanding as of June 30, 2022 and December 31, 2021	—		—
Common stock, $0.01 par value; 500,000,000 shares authorized, 96,605,112 and 96,296,673 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively	966		963
Additional paid-in capital	1,195,282		1,196,839
Cumulative distributions in excess of earnings	(357,980)		(282,045)
Total equity	838,268		915,757
Total liabilities and equity	$	1,685,772	$	1,640,848

See accompanying notes to condensed consolidated financial statements.

1

CARETRUST REIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

 

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
Revenues:
Rental income	$	46,806	$	47,744	$	92,813	$	92,990
Interest and other income	747		514		1,216		1,019
Total revenues	47,553		48,258		94,029		94,009
Expenses:
Depreciation and amortization	12,559		13,843		26,134		27,316
Interest expense	6,303		6,534		12,045		12,296
Property taxes	1,254		766		2,674		1,462
Impairment of real estate investments	1,701		—		61,384		—
Provision for loan losses, net	—		—		3,844		—
Property operating expenses	89		—		536		—
General and administrative	4,978		5,798		10,193		10,940
Total expenses	26,884		26,941		116,810		52,014
Other income (loss):
Gain (loss) on sale of real estate	—		—		186		(192)
Net income (loss)	$	20,669	$	21,317	$	(22,595)	$	41,803
Earnings (loss) per common share:
Basic	$	0.21	$	0.22	$	(0.24)	$	0.43
Diluted	$	0.21	$	0.22	$	(0.24)	$	0.43
Weighted-average number of common shares:
Basic	96,564		96,082		96,487		95,732
Diluted	96,598		96,120		96,487		95,755

See accompanying notes to condensed consolidated financial statements.

2

CARETRUST REIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands, except share and per share amounts)

(Unaudited)

	Common Stock			Additional Paid-in Capital		Cumulative Distributions in Excess of Earnings		Total Equity
	Shares	Amount
Balance at January 1, 2022	96,296,673	$	963	$	1,196,839	$	(282,045)	$	915,757
Vesting of restricted common stock, net of shares withheld for employee taxes	190,393	2		(2,774)		—		(2,772)
Amortization of stock-based compensation	—	—		1,521		—		1,521
Common dividends ($0.275 per share)	—	—		—		(26,659)		(26,659)
Net loss	—	—		—		(43,264)		(43,264)
Balance at March 31, 2022	96,487,066	$	965	$	1,195,586	$	(351,968)	$	844,583
Vesting of restricted common stock, net of shares withheld for employee taxes	118,046	1		(1,698)		—		(1,697)
Amortization of stock-based compensation	—	—		1,394		—		1,394
Common dividends ($0.275 per share)	—	—		—		(26,681)		(26,681)
Net income	—	—		—		20,669		20,669
Balance at June 30, 2022	96,605,112	$	966	$	1,195,282	$	(357,980)	$	838,268

See accompanying notes to condensed consolidated financial statements.

3

CARETRUST REIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands, except share and per share amounts)

(Unaudited)

	Common Stock			Additional Paid-in Capital		Cumulative Distributions in Excess of Earnings		Total Equity
	Shares	Amount
Balance at January 1, 2021	95,215,797	$	952	$	1,164,402	$	(251,212)	$	914,142
Issuance of common stock, net	702,000	7		16,184		—		16,191
Vesting of restricted common stock, net of shares withheld for employee taxes	63,265	1		(1,331)		—		(1,330)
Amortization of stock-based compensation	—	—		1,585		—		1,585
Common dividends ($0.265 per share)	—	—		—		(25,633)		(25,633)
Net income	—	—		—		20,486		20,486
Balance at March 31, 2021	95,981,062	$	960	$	1,180,840	$	(256,359)	$	925,441
Issuance of common stock, net	288,000	3		6,752		—		6,755
Vesting of restricted common stock	27,611	—		—		—		—
Amortization of stock-based compensation	—	—		1,810		—		1,810
Common dividends ($0.265 per share)	—	—		—		(25,714)		(25,714)
Net income	—	—		—		21,317		21,317
Balance at June 30, 2021	96,296,673	$	963	$	1,189,402	$	(260,756)	$	929,609

See accompanying notes to condensed consolidated financial statements.

4

CARETRUST REIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	For the Six Months Ended June 30,
	2022		2021
Cash flows from operating activities:
Net (loss) income	$	(22,595)	$	41,803
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization (including below-market ground leases)	26,167		27,345
Amortization of deferred financing costs	1,040		1,012
Amortization of stock-based compensation	2,915		3,395
Straight-line rental income	(11)		(20)
Adjustment for collectibility of rental income	977		—
Noncash interest income	(13)		—
(Gain) loss on sale of real estate	(186)		192
Impairment of real estate investments	61,384		—
Provision for loan losses, net	3,844		—
Change in operating assets and liabilities:
Accounts and other receivables	578		(93)
Prepaid expenses and other assets, net	(1,724)		88
Accounts payable, accrued liabilities and deferred rent liabilities	(4,074)		(3,165)
Net cash provided by operating activities	68,302		70,557
Cash flows from investing activities:
Acquisitions of real estate, net of deposits applied	(21,915)		(147,807)
Purchases of equipment, furniture and fixtures and improvements to real estate	(3,628)		(3,463)
Investment in real estate related and other loans receivable	(102,086)		(700)
Principal payments received on real estate related and other loans receivable	1,026		113
Net proceeds from sales of real estate	959		6,814
Net cash used in investing activities	(125,644)		(145,043)
Cash flows from financing activities:
Proceeds from the issuance of common stock, net	—		22,946
Proceeds from the issuance of senior unsecured notes payable	—		400,000
Borrowings under unsecured revolving credit facility	125,000		170,000
Payments on unsecured revolving credit facility	—		(170,000)
Payments on debt extinguishment and deferred financing costs	—		(5,577)
Net-settle adjustment on restricted stock	(4,469)		(1,331)
Dividends paid on common stock	(52,817)		(49,513)
Net cash provided by financing activities	67,714		366,525
Net increase in cash and cash equivalents	10,372		292,039
Cash and cash equivalents as of the beginning of period	19,895		18,919
Cash and cash equivalents as of the end of period	$	30,267	$	310,958
Supplemental disclosures of cash flow information:
Interest paid	$	10,987	$	10,664
Supplemental schedule of noncash investing and financing activities:
Increase in dividends payable	$	522	$	1,834
Increase in deferred financing costs payable	$	—	$	618
Transfer of pre-acquisition costs to acquired assets	$	7	$	358

See accompanying notes to condensed consolidated financial statements.

5

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

(Unaudited)

1. ORGANIZATION

Description of Business—CareTrust REIT, Inc.’s (“CareTrust REIT” or the “Company”) primary business consists of acquiring, financing, developing and owning real property to be leased to third-party tenants in the healthcare sector. As of June 30, 2022, the Company owned and leased to independent operators, 228 skilled nursing facilities (“SNFs”), multi-service campuses, assisted living facilities (“ALFs”) and independent living facilities (“ILFs”) consisting of 23,876 operational beds and units located in 29 states with the highest concentration of properties by rental income located in California, Texas, Louisiana, Idaho and Arizona. As of June 30, 2022, the Company also had other real estate investments consisting of one senior secured loan receivable and two mezzanine loans receivable with an aggregate carrying value of $115.2 million.

COVID-19—The COVID-19 pandemic has had and may continue to have an adverse impact on the economy generally and the Company’s business, results of operations and financial condition. The duration and extent of the COVID-19 pandemic’s effect on the Company’s operational and financial performance, and the operational and financial performance of the Company’s tenants, will depend on future developments, which are highly uncertain and cannot be predicted at this time, including the rate of public acceptance and usage of vaccines and the effectiveness of vaccines in limiting the spread of COVID-19 and its variants, resurgences of COVID-19 and, in particular, new and more contagious and/or vaccine resistant variants, actions taken to contain the spread of COVID-19 and how quickly and to what extent normal economic and operating conditions can resume. The adverse impact of the COVID-19 pandemic on the Company’s business, results of operations and financial condition could be material.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The accompanying condensed consolidated financial statements of the Company were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly, the condensed consolidated financial statements do not include all of the disclosures required by GAAP for a complete set of annual audited financial statements. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. In the opinion of management, all adjustments which are of a normal and recurring nature and considered necessary for a fair presentation of the results of the interim periods presented have been included. The results of operations for the interim periods are not necessarily indicative of results for the full year. All intercompany transactions and account balances within the Company have been eliminated.

 Recent Accounting Pronouncements—In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides optional relief to applying reference rate reform to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”). For U.S. Dollar LIBOR, the overnight, one-month, three-month, six-month and one-year LIBOR rates will be discontinued in June 2023, while other U.S. Dollar LIBOR rates were discontinued at the end of 2021. The amendments in this update are effective immediately and may be applied through December 31, 2022. Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

6

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

(Unaudited)

3. REAL ESTATE INVESTMENTS, NET

The following table summarizes the Company’s real estate properties held for investment at June 30, 2022 and December 31, 2021 (dollars in thousands):

	June 30, 2022		December 31, 2021
Land	$	236,682	$	251,787
Buildings and improvements	1,430,948		1,622,019
Integral equipment, furniture and fixtures	96,128		104,722
Identified intangible assets	2,832		1,257
Real estate investments	1,766,590		1,979,785
Accumulated depreciation and amortization	(376,304)		(389,814)
Real estate investments, net	$	1,390,286	$	1,589,971

As of June 30, 2022, 226 of the Company’s 228 facilities were leased to various operators under triple-net leases. All of these leases contain annual escalators based on the percentage change in the Consumer Price Index (“CPI”) (but not less than zero), some of which are subject to a cap, or fixed rent escalators. Two of the Company’s 228 facilities are non-operational and are leased under a short term lease with an expected term of less than one year as of June 30, 2022. As of June 30, 2022, 27 facilities were held for sale.

As of June 30, 2022, the Company’s total future contractual minimum rental income for all of its tenants, excluding operating expense reimbursements, was as follows (dollars in thousands):

Year	Amount
2022 (six months)	$	98,897
2023	197,657
2024	196,480
2025	196,452
2026	196,557
2027	193,547
Thereafter	1,011,035
Total	$	2,090,625

Tenant Purchase Options

Certain of the Company’s operators hold purchase options allowing them to acquire properties they currently lease from the Company. A summary of these purchase options is presented below (dollars in thousands):

Asset Type	Properties		Lease Expiration	Next Option Open Date		Option Type(1)	Current Cash Rent(2)
ALF	5	(6)	October 2034	1/1/2023	(3)	A	$	2,287
SNF	11		November 2030	1/1/2023	(3)	C	4,944
SNF	1		March 2029	4/1/2022	(4)	B / C(5)	805
SNF / Campus	2		October 2032	1/1/2023	(3)	B	1,065
SNF	4		November 2034	12/1/2024	(4)	B	3,796
ALF	2	(6)	October 2034	1/1/2026	(3)	A	1,598

(1) Option type includes:

A - Fixed base price plus a specified share on any appreciation.

B - Fixed base price.

C - Fixed capitalization rate on lease revenue.

(2) Based on annualized cash revenue for contracts in place as of June 30, 2022.

(3) Option window is open for six months.

(4) Option window is open until the expiration of the lease term.

(5) Purchase option reflects two option types.

(6) Includes properties classified as held for sale as of June 30, 2022.

7

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

(Unaudited)

Rental Income

The following table summarizes components of the Company’s rental income (dollars in thousands):

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
Rental Income	2022		2021		2022		2021
Contractual rent due(1)	$	46,801	$	47,736	$	93,779	$	92,907
Straight-line rent	5		8		11		20
Adjustment for collectibility(2)	—		—		(977)		—
Lease termination revenue(3)	—		—		—		63
Total	$	46,806	$	47,744	$	92,813	$	92,990

(1) Includes initial contractual cash rent and tenant operating expense reimbursements, as adjusted for applicable rental escalators and rent increases due to capital expenditures funded by the Company. For tenants on a cash basis, this represents the lesser of the amount that would be recognized on a straight-line basis or cash that has been received. Tenant operating expense reimbursements for the three months ended June 30, 2022 and 2021 were $0.7 million and $0.8 million, respectively. Tenant operating expense reimbursements for the six months ended June 30, 2022 and 2021 were $1.3 million and $1.5 million, respectively.

(2)    During the six months ended June 30, 2022, and in accordance with Accounting Standards Codification 842, the Company evaluated the collectibility of lease payments through maturity and determined that it was not probable that the Company would collect substantially all of the contractual obligations from four existing and former operators. As such, the Company reversed $0.7 million of operating expense reimbursements, $0.2 million of contractual rent and $0.1 million of straight-line rent during the six months ended June 30, 2022. If lease payments are subsequently deemed probable of collection, the Company will increase rental income for such recoveries.

(3) During the six months ended June 30, 2021, in connection with the agreement to terminate its lease agreements with Metron Integrated Health Systems (“Metron”) and to sell the facilities to a third party, the Company received approximately $0.1 million from Metron affiliates.

Recent Real Estate Acquisitions

The following table summarizes the Company’s acquisitions for the six months ended June 30, 2022 (dollars in thousands):

Type of Property	Purchase Price(1)		Initial Annual Cash Rent		Number of Properties	Number of Beds/Units(2)
Skilled nursing	$	8,918	$	815	1	135
Multi-service campuses	13,003		1,235		1	130
Total	$	21,921	$	2,050	2	265

(1) Purchase price includes capitalized acquisition costs.

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

Lease Amendments

Noble Partial Lease Termination and New Landmark Lease. On June 16, 2022, one ALF in Florida was removed from a master lease with affiliates of Noble Senior Services (“Noble”) and the Company amended the applicable Noble master lease to reflect the removal of the ALF. Annual cash rent under the applicable Noble master lease decreased by approximately $0.6 million. In connection with the partial lease termination, the Company entered into a lease with Landmark Recovery of Florida, LLC (“Landmark”) to repurpose the facility as a behavioral health treatment center. Rent under the lease will commence one year following commencement of the lease term or, if earlier, upon Landmark obtaining all licensure, permits, and other required regulatory authorizations with respect to operating the facility. The lease will expire on the 20th anniversary of the rent commencement date and contains one 10-year renewal option and CPI-based rent escalators.

Pennant Partial Lease Termination and Amended Ensign Master Leases. On April 1, 2022, operations at two ALFs in California and Washington operated by affiliates of The Pennant Group, Inc. (“Pennant”) were transferred to affiliates of The Ensign Group, Inc. (“Ensign”). In connection with the transfers, the Company amended the Pennant master lease to reflect the removal of the two ALFs and amended two existing triple-net master leases with Ensign to include the two ALFs. The applicable Ensign master leases have remaining terms of approximately five years and 16 years, respectively, both with three five-year renewal options and CPI-based rent escalators. Annual cash rent under each of the two applicable Ensign master leases, as amended, increased by approximately $0.4 million and annual cash rent under the Pennant master lease, as amended, decreased by $0.8 million.

8

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

(Unaudited)

On March 1, 2022, operations at one ALF in Arizona operated by affiliates of Pennant were transferred to affiliates of Ensign. In connection with the transfer, the Company amended the Pennant master lease to reflect the removal of the ALF and amended an existing triple-net master lease with Ensign to include the one ALF. The applicable Ensign master lease had a remaining term at the date of amendment of approximately 11 years, with two five-year renewal options and CPI-based rent escalators. Annual cash rent under the applicable Ensign master lease, as amended, increased by approximately $0.3 million and annual cash rent under the Pennant master lease, as amended, decreased by the same amount.

Amended Eduro Master Lease. On February 1, 2022, the Company acquired one SNF. In conjunction with the acquisition, the Company amended its existing triple-net master lease with affiliates of Eduro Healthcare, LLC (“Eduro”) to include the one SNF and extended the initial lease term. The Eduro master lease, as amended, had a remaining term at the date of amendment of approximately 12 years, with two five-year renewal options and CPI-based rent escalators. Annual cash rent under the Eduro master lease, as amended, increased by approximately $0.8 million.

Amended WLC Master Lease. On March 1, 2022, the Company acquired one multi-service campus. In conjunction with the acquisition, the Company amended its existing triple-net master lease with affiliates of WLC Management Firm, LLC (“WLC”) to include the one multi-service campus. The WLC master lease, as amended, had a remaining term at the date of amendment of approximately 12 years, with two five-year renewal options and CPI-based rent escalators. Annual cash rent under the WLC master lease, as amended, increased by approximately $1.2 million.

4. IMPAIRMENT OF REAL ESTATE INVESTMENTS, ASSETS HELD FOR SALE, NET AND ASSET SALES

In connection with the Company’s ongoing review and monitoring of its investment portfolio and the performance of its tenants, during the first quarter of 2022, the Company determined to pursue the sale of 27 properties and the repurposing of three properties representing an aggregate of approximately 9% of contractual cash rent as of June 30, 2022. As of March 31, 2022, the Company determined that these 27 properties met the criteria to be classified as assets held for sale and, in connection with this determination, the Company recognized an aggregate impairment charge of $59.7 million related to 20 of the 27 held for sale properties, which is reported in impairment of real estate investments in the condensed consolidated statements of operations for the six months ended June 30, 2022. The impairment charge was recognized to write down the properties’ aggregate carrying value to their aggregate fair value, less estimated costs to sell. As of June 30, 2022, the net book value of the 27 properties classified as held for sale was $141.8 million, which is comprised of the real estate assets.

The fair value of the assets held for sale was based on estimated sales prices, which are considered to be Level 3 measurements within the fair value hierarchy. Estimated sales prices were determined using a market approach (comparable sales model), which relies on certain assumptions by management, including: (i) comparable market transactions, (ii) estimated prices per unit, and (iii) negotiations with prospective buyers. There are inherent uncertainties in making these assumptions. For the Company’s impairment calculations, the Company’s fair value estimates primarily relied on a market approach and utilized prices per unit ranging from $40,000 to $175,000, with a weighted average price per unit of $91,000.

During the second quarter of 2022, the Company recognized an impairment charge of $1.7 million related to one SNF. The Company wrote down its carrying value of $2.8 million to its estimated fair value of $1.1 million, which is included in real estate investments, net on the Company’s condensed consolidated balance sheets. The fair value of the asset was based on comparable market transactions. For the Company’s impairment calculation, the Company’s fair value estimates primarily relied on a market approach and utilized prices per unit of $20,000.

During the first quarter of 2022, the Company determined that one ALF that was classified as held for sale at December 31, 2021 no longer met the held for sale criteria. The Company reclassified this ALF’s carrying value of $4.8 million out of assets held for sale and recorded catch-up depreciation of approximately $0.1 million during the six months ended June 30, 2022.

On February 22, 2022, the Company closed on the sale of one SNF, operated by affiliates of Cascadia Healthcare, LLC (“Cascadia”), consisting of 83 beds located in Washington with a carrying value of $0.8 million, for net sales proceeds of $1.0 million. During the six months ended June 30, 2022, the Company recorded a gain of $0.2 million in connection with the sale. There was no rent reduction under the Cascadia master lease in connection with the sale.

9

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

(Unaudited)

5. OTHER REAL ESTATE INVESTMENTS AND OTHER LOANS RECEIVABLE

As of June 30, 2022 and December 31, 2021, the Company’s other real estate investments consisted of the following (dollars in thousands):

								As of June 30, 2022
Investment	Facility Count and Type	Principal Balance as of June 30, 2022		Book Value as of June 30, 2022		Book Value as of December 31, 2021		Weighted Average Contractual Interest Rate		Maturity Date
Senior secured loan receivable	18 SNF/Campus	$	75,000	$	75,018	$	—	8.5	%	6/30/2027
Mezzanine loan receivable	9 SNF	15,000		15,150		15,155		12.0	%	11/30/2025
Mezzanine loan receivable	18 SNF/Campus	25,000		25,000		—		11.0	%	6/30/2032
		$	115,000	$	115,168	$	15,155

The following table summarizes the Company’s other real estate investments activity for the six months ended June 30, 2022 and 2021 (dollars in thousands):

	Six Months Ended June 30,
	2022		2021
Origination of other real estate investments	$	100,000	$	—
Accrued interest, net	13		150
Net increase in other real estate investments	$	100,013	$	150

In June 2022, the Company extended a $75.0 million term loan to a skilled nursing real estate owner as part of a larger, multi-tranche, senior secured term loan facility. The senior secured term loan was structured with an “A” tranche, a “B” tranche, and a “C” tranche (with the “C” tranche being the most subordinate). The Company’s $75.0 million term loan constituted the entirety of the “C” tranche with its payments subordinated accordingly. The senior secured term loan facility is secured by an 18-facility skilled nursing portfolio in the Mid-Atlantic region, to be operated by a large, regional skilled nursing operator. In connection with the senior secured term loan facility and the borrower’s acquisition of the skilled nursing portfolio, the Company also extended to the borrower group a $25.0 million mezzanine loan. The “C” tranche of the senior secured term loan bears interest at 8.5%, less a servicing fee equal to the positive difference, if any, between the lesser of the contractual interest payment and actual payment of interest made by the borrower and a hypothetical interest payment at a rate of 8.25%, resulting in an effective interest rate of 8.375%. The “C” tranche term loan is set to mature on June 30, 2027 and may (subject to certain restrictions) be prepaid in whole or in part before the maturity date for an exit fee ranging from 1% to 3% of the loan plus unpaid interest payments through the end of the month of prepayment; provided, however, that no exit fee is payable in connection with portions of the loan being refinanced pursuant to a loan (or loans) provided by or insured by the United States Department of Housing and Urban Development, Federal Housing Administration, or a similar governmental authority. The mezzanine loan bears interest at 11% and is secured by a pledge of membership interests in an up-tier affiliate of the borrower group. The mezzanine loan is set to mature on June 30, 2032, and may (subject to certain restrictions) be prepaid in whole or in part before the maturity date, commencing on June 30, 2029, for an exit fee ranging from 1% to 3% of the loan plus unpaid interest payments through the date of prepayment. The “C” tranche term loan and mezzanine loan both require monthly interest payments. The Company elected the fair value option for both the “C” tranche term loan and the mezzanine loan. The fair value option is elected on an instrument by instrument basis and must be applied to an entire instrument and is irrevocable once elected. The Company’s primary purpose in electing the fair value option for these instruments was to align with management’s view of the underlying economics of the loans and the manner in which they are managed.

See Note 12, Subsequent Events for information regarding a $22.3 million “B” tranche term loan extended by the Company to a borrower in August 2022.

10

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

(Unaudited)

As of June 30, 2022 and December 31, 2021, the Company’s other loans receivable, included in prepaid expenses and other assets, net on the Company’s condensed consolidated balance sheets, consisted of the following (dollars in thousands):

							As of June 30, 2022
Investment	Principal Balance as of June 30, 2022		Book Value as of June 30, 2022		Book Value as of December 31, 2021		Weighted Average Contractual Interest Rate		Maturity Date
Other loans receivable	$	5,377	$	5,383	$	3,161	8.0	%	9/1/2023 - 12/31/2023
Expected credit loss	(4,594)		(4,594)		—
Total	$	783	$	789	$	3,161

The following table summarizes the Company’s other loans receivable activity for the six months ended June 30, 2022 and 2021 (dollars in thousands):

	Six Months Ended June 30,
	2022		2021
Origination of loans receivable	$	2,500	$	700
Principal payments	(276)		(113)
Accrued interest	(2)		5
Expected credit loss	(5,344)		—
Loan loss recovery	750		—
Net change in other loans receivable	$	(2,372)	$	592

Expected credit losses and recoveries are recorded in provision for loan losses, net in the condensed consolidated statements of operations. During the six months ended June 30, 2022, the Company recorded a $4.6 million expected credit loss related to two other loans receivable that were placed on non-accrual status, including an unfunded loan commitment of $0.4 million, net of a loan loss recovery of $0.8 million related to a loan previously written-off. As of December 31, 2021, the Company had no expected credit loss and did not consider any loan receivable investments to be impaired.

The following table summarizes the interest and other income recognized from the Company’s loans receivable and other investments during the three and six months ended June 30, 2022 and 2021 (dollars in thousands):

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
Investment	2022		2021		2022		2021
Senior secured loan receivable	$	17	$	—	$	17	$	—
Mezzanine loans receivable	713		455		1,163		905
Other	17		59		36		114
Total	$	747	$	514	$	1,216	$	1,019

6. FAIR VALUE MEASUREMENTS

The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. GAAP guidance defines three levels of inputs that may be used to measure fair value:

11

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

(Unaudited)

Level 1 – Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

Level 3 – Unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and, depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. Changes in the type of inputs may result in a reclassification for certain assets. The Company does not expect that changes in classifications between levels will be frequent.

Items Measured at Fair Value on a Recurring Basis

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021, aggregated by the level in the fair value hierarchy within which those instruments fall (dollars in thousands):

	Level 1		Level 2		Level 3		Balance as of June 30, 2022
Assets:
Senior secured loan receivable	$	—	$	—	$	75,018	$	75,018
Mezzanine loans receivable	—		—		40,150		40,150

	Level 1		Level 2		Level 3		Balance as of December 31, 2021
Assets:
Mezzanine loan receivable	$	—	$	—	$	15,155	$	15,155

The following table details the Company’s assets measured at fair value on a recurring basis using Level 3 inputs (dollars in thousands):

	Investments in Senior Secured Loan		Investments in Mezzanine Loans
Balance at December 31, 2021	$	—	$	15,155
Loan originations	75,000		25,000
Accrued interest, net	18		(5)
Balance as of June 30, 2022	$	75,018	$	40,150

Senior secured and mezzanine loans receivables: The fair value of the senior secured and mezzanine loans receivables were estimated using an internal valuation model that considered the expected future cash flows of the investment, the underlying collateral value, market interest rates and other credit enhancements. As such, the Company classifies each instrument as Level 3 due to the significant unobservable inputs used in determining market interest rates for investments with similar terms. As of June 30, 2022, the fair values of the senior secured loan receivable and the mezzanine loan receivable originated in June 2022 are not sensitive to market interest rates due to the recent issuance of the loans at market interest rates. Future changes in market interest rates could materially impact the estimated discounted cash flows. As of June 30, 2022 and December 31, 2021, the Company did not have any loans measured at fair value that were 90 days or more past due.

For the three and six months ended June 30, 2022, there were no classification changes in assets and liabilities with Level 3 inputs in the fair value hierarchy.

12

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

(Unaudited)

Items Disclosed at Fair Value

Considerable judgment is necessary to estimate the fair value disclosure of financial instruments. The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. A summary of the face value, carrying amount and fair value of the Notes (as defined in Note 7, Debt, below) as of June 30, 2022 and December 31, 2021 using Level 2 inputs is as follows (dollars in thousands):  

		June 30, 2022						December 31, 2021
	Level	Face Value		Carrying Amount		Fair Value		Face Value		Carrying Amount		Fair Value
Financial liabilities:
Senior unsecured notes payable	2	$	400,000	$	394,706	$	336,000	$	400,000	$	394,262	$	410,500

Cash and cash equivalents, accounts and other receivables, accounts payable, and accrued liabilities: The carrying values for these instruments approximate their fair values due to the short-term nature of these instruments.

Senior unsecured notes payable: The fair value of the Notes was determined using third-party quotes derived from orderly trades.

Unsecured revolving credit facility and senior unsecured term loan: The fair values approximate their carrying values as the interest rates are variable and approximate prevailing market interest rates for similar debt arrangements.

7. DEBT

The following table summarizes the balance of the Company’s indebtedness as of June 30, 2022 and December 31, 2021 (dollars in thousands):

	June 30, 2022						December 31, 2021
	Principal Amount		Deferred Loan Fees		Carrying Value		Principal Amount		Deferred Loan Fees		Carrying Value
Senior unsecured notes payable	$	400,000	$	(5,294)	$	394,706	$	400,000	$	(5,738)	$	394,262
Senior unsecured term loan	200,000		(758)		199,242		200,000		(864)		199,136
Unsecured revolving credit facility	205,000		—		205,000		80,000		—		80,000
	$	805,000	$	(6,052)	$	798,948	$	680,000	$	(6,602)	$	673,398

Senior Unsecured Notes Payable

2028 Senior Notes. On June 17, 2021, the Company’s wholly owned subsidiary, CTR Partnership, L.P. (the “Operating Partnership”), and its wholly owned subsidiary, CareTrust Capital Corp. (together with the Operating Partnership, the “Issuers”), completed a private offering of $400.0 million aggregate principal amount of 3.875% Senior Notes due 2028 (the “Notes”) to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A and to non-U.S. persons outside the United States in reliance on Regulation S under the Securities Act of 1933, as amended. The Notes were issued at par, resulting in gross proceeds of $400.0 million and net proceeds of approximately $393.8 million after deducting underwriting fees and other offering expenses. The Notes mature on June 30, 2028. The Notes accrue interest at a rate of 3.875% per annum payable semiannually in arrears on June 30 and December 30 of each year, commencing on December 30, 2021.

The Issuers may redeem some or all of the Notes at any time prior to March 30, 2028 at a price equal to 100% of the principal amount of the Notes redeemed plus accrued and unpaid interest on the Notes, if any, to, but not including, the redemption date, plus a “make-whole” premium. At any time on or after March 30, 2028, the Issuers may redeem some or all of the Notes at a redemption price equal to 100% of the principal amount of the Notes redeemed plus accrued interest on the Notes, if any, to, but not including, the redemption date. In addition, at any time on or prior to June 30, 2024, up to 40% of the aggregate principal amount of the Notes may be redeemed with the net proceeds of certain equity offerings at a redemption price of 103.875% of the aggregate principal amount of Notes to be redeemed plus accrued and unpaid interest on the Notes, if any, to, but not including, the redemption date. If certain changes of control of the Company occur, the Issuers will be required to make an offer to holders of the Notes to repurchase their Notes at a price of 101% of their principal amount plus accrued and unpaid interest, if any, to, but not including, the repurchase date.

13

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

(Unaudited)

The obligations under the Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by the Company and all of CareTrust’s existing and future subsidiaries (other than the Issuers) that guarantee obligations under the Amended Credit Facility (as defined below); provided, however, that such guarantees are subject to automatic release under certain customary circumstances.

The indenture governing the Notes contains customary covenants such as limiting the ability of the Company and its restricted subsidiaries to: incur or guarantee additional indebtedness; incur or guarantee secured indebtedness; pay dividends or distributions on, or redeem or repurchase, capital stock; make certain investments or other restricted payments; sell assets; enter into transactions with affiliates; merge or consolidate or sell all or substantially all of their assets; and create restrictions on the ability of the Issuers and their restricted subsidiaries to pay dividends or other amounts to the Issuers. The indenture governing the Notes also requires the Company and its restricted subsidiaries to maintain a specified ratio of unencumbered assets to unsecured indebtedness. These covenants are subject to a number of important and significant limitations, qualifications and exceptions. The indenture governing the Notes also contains customary events of default.

As of June 30, 2022, the Company was in compliance with all applicable financial covenants under the indenture governing the Notes.

Unsecured Revolving Credit Facility and Term Loan

On February 8, 2019, the Operating Partnership, as the borrower, the Company, as guarantor, CareTrust GP, LLC, and certain of the Operating Partnership’s wholly owned subsidiaries entered into an amended and restated credit and guaranty agreement with KeyBank National Association, as administrative agent, an issuing bank and swingline lender, and the lenders party thereto (the “Amended Credit Agreement”). The Amended Credit Agreement, which amended and restated the Company’s prior credit agreement, provides for: (i) an unsecured revolving credit facility (the “Revolving Facility”) with revolving commitments in an aggregate principal amount of $600.0 million, including a letter of credit subfacility for 10% of the then available revolving commitments and a swingline loan subfacility for 10% of the then available revolving commitments and (ii) an unsecured term loan credit facility (the “Term Loan” and, together with the Revolving Facility, the “Amended Credit Facility”) in an aggregate principal amount of $200.0 million. Borrowing availability under the Revolving Facility is subject to no default or event of default under the Amended Credit Agreement having occurred at the time of borrowing. Future borrowings under the Amended Credit Facility will be used for working capital purposes, for capital expenditures, to fund acquisitions and for general corporate purposes.

The interest rates applicable to loans under the Revolving Facility are, at the Operating Partnership’s option, equal to either a base rate plus a margin ranging from 0.10% to 0.55% per annum or LIBOR plus a margin ranging from 1.10% to 1.55% per annum based on the debt to asset value ratio of the Company and its consolidated subsidiaries (subject to decrease at the Operating Partnership’s election if the Company obtains certain specified investment grade ratings on its senior long-term unsecured debt). The interest rates applicable to loans under the Term Loan are, at the Operating Partnership’s option, equal to either a base rate plus a margin ranging from 0.50% to 1.20% per annum or LIBOR plus a margin ranging from 1.50% to 2.20% per annum based on the debt to asset value ratio of the Company and its consolidated subsidiaries (subject to decrease at the Operating Partnership’s election if the Company obtains certain specified investment grade ratings on its senior long-term unsecured debt). In addition, the Operating Partnership will pay a facility fee on the revolving commitments under the Revolving Facility ranging from 0.15% to 0.35% per annum, based on the debt to asset value ratio of the Company and its consolidated subsidiaries (unless the Company obtains certain specified investment grade ratings on its senior long-term unsecured debt and the Operating Partnership elects to decrease the applicable margin as described above, in which case the Operating Partnership will pay a facility fee on the revolving commitments ranging from 0.125% to 0.30% per annum based on the credit ratings of the Company’s senior long-term unsecured debt). As of June 30, 2022, the Operating Partnership had $200.0 million of borrowings outstanding under the Term Loan and $205.0 million outstanding under the Revolving Facility.

The Revolving Facility has a maturity date of February 8, 2023, and includes, at the sole discretion of the Operating Partnership, two, six-month extension options. The Term Loan has a maturity date of February 8, 2026.

The Amended Credit Facility is guaranteed, jointly and severally, by the Company and its wholly owned subsidiaries that are party to the Amended Credit Agreement (other than the Operating Partnership). The Amended Credit Agreement contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations, amend organizational documents and pay certain dividends and other restricted

14

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

(Unaudited)

payments. The Amended Credit Agreement requires the Company to comply with financial maintenance covenants to be tested quarterly, consisting of a maximum debt to asset value ratio, a minimum fixed charge coverage ratio, a minimum tangible net worth, a maximum cash distributions to operating income ratio, a maximum secured debt to asset value ratio, a maximum secured recourse debt to asset value ratio, a maximum unsecured debt to unencumbered properties asset value ratio, a minimum unsecured interest coverage ratio and a minimum rent coverage ratio. The Amended Credit Agreement also contains certain customary events of default, including the failure to make timely payments under the Amended Credit Facility or other material indebtedness, the failure to satisfy certain covenants (including the financial maintenance covenants), the occurrence of change of control and specified events of bankruptcy and insolvency.

As of June 30, 2022, the Company was in compliance with all applicable financial covenants under the Amended Credit Agreement.

8. EQUITY

Common Stock

At-The-Market Offering—On March 10, 2020, the Company entered into a new equity distribution agreement to issue and sell, from time to time, up to $500.0 million in aggregate offering price of its common stock through an “at-the-market” equity offering program (the “ATM Program”).

There was no ATM Program activity for the three and six months ended June 30, 2022. The following table summarizes the ATM Program activity for the three and six months ended June 30, 2021 (in thousands, except per share amounts).

	For the Three Months Ended		For the Six Months Ended
	June 30, 2021		June 30, 2021
Number of shares	288		990
Average sales price per share	$	24.05	$	23.74
Gross proceeds(1)	$	6,926	$	23,505

(1) Total gross proceeds is before $0.1 million and $0.3 million of commissions paid to the sales agents during the three and six months ended June 30, 2021, respectively, under the ATM Program.

As of June 30, 2022, the Company had $476.5 million available for future issuances under the ATM Program.

Share Repurchase Program—On March 20, 2020, the Company’s Board of Directors authorized a share repurchase program for up to $150.0 million of outstanding shares of the Company’s common stock (the “Repurchase Program”). Repurchases under the Repurchase Program, which expires on March 31, 2023, may be made through open market purchases, privately negotiated transactions, structured or derivative transactions, including accelerated share repurchase transactions, or other methods of acquiring shares, in each case subject to market conditions and at such times as shall be permitted by applicable securities laws and determined by management. Repurchases under the Repurchase Program may also be made pursuant to a plan adopted under Rule 10b5-1 promulgated under the Securities Exchange Act of 1934, as amended. The Company expects to finance any share repurchases under the Repurchase Program using available cash and may also use short-term borrowings under the Revolving Facility. Through June 30, 2022, the Company has not repurchased any shares of common stock under the Repurchase Program. As of June 30, 2022, $150.0 million remained available under the Repurchase Program. The Repurchase Program may be modified, discontinued or suspended at any time.

Dividends on Common Stock—The following table summarizes the cash dividends per share of common stock declared by the Company’s Board of Directors for the first six months of 2022 (dollars in thousands, except per share amounts):

	For the Three Months Ended
	March 31, 2022		June 30, 2022
Dividends declared per share	$	0.275	$	0.275
Dividends payment date	April 15, 2022		July 15, 2022
Dividends payable as of record date(1)	$	26,691	$	26,683
Dividends record date	March 31, 2022		June 30, 2022

(1)    Dividends payable includes dividends on performance stock awards that will be paid if and when the shares subject to such awards vest.

15

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

(Unaudited)

9. STOCK-BASED COMPENSATION

All stock-based awards are subject to the terms of the CareTrust REIT, Inc. and CTR Partnership, L.P. Incentive Award Plan (the “Plan”). The Plan provides for the granting of stock-based compensation, including stock options, restricted stock, performance awards, restricted stock units, relative total stockholder return based stock awards (“TSR Awards”) and other incentive awards to officers, employees and directors in connection with their employment with or services provided to the Company. Under the Plan, 5,000,000 shares have been authorized for awards.

Under the Plan, restricted stock awards (“RSAs”) granted in fiscal 2022 to employees vest in equal annual installments beginning on the first anniversary of the grant date over a three year period. RSAs granted to non-employee members of the Board of Directors (“Board Awards”) vest in full on the earlier to occur of the Company’s next annual meeting of stockholders or the first anniversary of the grant date. Performance stock awards (“PSA”) granted to employees are subject to both time and performance based conditions and vest over a one-to-three year period for PSAs granted in 2021 or over a one-to-four year period for PSAs granted prior to 2021.

The following table summarizes the RSAs and PSAs activity for the six months ended June 30, 2022:

	Shares	Weighted Average Share Price
Unvested balance at December 31, 2021	891,333	$	20.91
Granted:
RSAs	9,684	17.56
Board Awards	25,992	16.93
Vested	(501,479)	20.60
Forfeited	(1,900)	21.50
Unvested balance at June 30, 2022	423,630	$	20.96

As of June 30, 2022, the weighted-average remaining vesting period of such awards was 1.9 years.

The following table summarizes the stock-based compensation expense recognized for the periods presented (dollars in thousands):

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
Stock-based compensation expense	$	1,394	$	1,810	$	2,915	$	3,395

As of June 30, 2022, there was $8.9 million of unamortized stock-based compensation expense related to the unvested RSAs, PSAs and TSR Awards.

16

CARETRUST REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —

(Unaudited)

10. EARNINGS (LOSS) PER COMMON SHARE

The following table presents the calculation of basic and diluted earnings (loss) per common share (“EPS”) for the Company’s common stock for the three and six months ended June 30, 2022 and 2021, and reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS (amounts in thousands, except per share amounts):

 

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
Numerator:
Net income (loss)	$	20,669	$	21,317	$	(22,595)	$	41,803
Less: Net income allocated to participating securities	(94)		(116)		(211)		(234)
Numerator for basic and diluted earnings available to common stockholders	$	20,575	$