CareTrust REIT, Inc 10-Q for FY2024 Q3
CareTrust REIT, Inc. (CTRE)
10-Q
2024-10-29
For: 2024-09-30
View Original
Added on
April 08, 2026
About this 10-Q
CareTrust REIT, Inc filed this 10-Q on October 29, 2024, covering the quarter ended September 30, 2024 (FY2024 Q3).
Headline figures
Quarter ended September 30, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $77.38M
- up 38.5% from $55.88M a year earlier
- Net income
- $33.44M
- up 284.6% from net income of $8.7M a year earlier
- Diluted EPS
- $0.21
- up 162.5% from $0.08 a year earlier
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 September 30, 2024
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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (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 | ||||||
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:
| ☒ | 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 October 28, 2024, there were 171,450,194 shares of common stock outstanding.
INDEX
| PART I—FINANCIAL INFORMATION | ||||||||
| Item 1. | Financial Statements (Unaudited) | |||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II—OTHER INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
CARETRUST REIT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
| September 30, 2024 | December 31, 2023 | ||||||||||
| Assets: | |||||||||||
| Real estate investments, net | $ | $ | |||||||||
Other real estate related investments (including accrued interest of $ | |||||||||||
| Assets held for sale | |||||||||||
| Cash and cash equivalents | |||||||||||
| Accounts and other receivables | |||||||||||
| Prepaid expenses and other assets, net | |||||||||||
| Deferred financing costs, net | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Equity: | |||||||||||
| Senior unsecured notes payable, net | $ | $ | |||||||||
| Senior unsecured term loan, net | |||||||||||
| Accounts payable, accrued liabilities and deferred rent liabilities | |||||||||||
| Dividends payable | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 12) | |||||||||||
| Equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Cumulative distributions in excess of earnings | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
1
CARETRUST REIT, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Rental income | $ | $ | $ | $ | |||||||||||||||||||
| Interest and other income | |||||||||||||||||||||||
| Total revenues | |||||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Property taxes | |||||||||||||||||||||||
| Impairment of real estate investments | |||||||||||||||||||||||
| Property operating expenses | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Total expenses | |||||||||||||||||||||||
| Other loss: | |||||||||||||||||||||||
| Loss on extinguishment of debt | ( | ( | |||||||||||||||||||||
| (Loss) gain on sale of real estate, net | ( | ( | |||||||||||||||||||||
| Unrealized gain (loss) on other real estate related investments, net | ( | ( | ( | ||||||||||||||||||||
| Total other loss | ( | ( | ( | ( | |||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Net loss attributable to noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||
| Net income attributable to CareTrust REIT, Inc. | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per common share attributable to CareTrust REIT, Inc: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted-average number of common shares: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
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 Stockholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Issuance of common stock, net | — | — | |||||||||||||||||||||||||||||||||||||||
| Vesting of stock-based compensation awards, net of shares withheld for employee taxes | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||
| Amortization of stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Common dividends ($ | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2024 | ( | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net | — | — | |||||||||||||||||||||||||||||||||||||||
| Vesting of stock-based compensation awards | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Amortization of stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Common dividends ($ | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2024 | ( | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net | — | — | |||||||||||||||||||||||||||||||||||||||
| Amortization of stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Common dividends ($ | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||
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 Stockholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Vesting of stock-based compensation awards, net of shares withheld for employee taxes | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||
| Amortization of stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Common dividends ($ | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | ( | ||||||||||||||||||||||||||||||||||||||||
| Vesting of stock-based compensation awards | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Amortization of stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Common dividends ($ | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | ( | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net | — | — | |||||||||||||||||||||||||||||||||||||||
| Amortization of stock-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Common dividends ($ | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
CARETRUST REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| For the Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization (including below-market ground leases) | |||||||||||
| Amortization of deferred financing costs | |||||||||||
| Loss on extinguishment of debt | |||||||||||
| Unrealized loss on other real estate related investments, net | |||||||||||
| Amortization of stock-based compensation | |||||||||||
| Straight-line rental income | |||||||||||
| Amortization of lease incentives | |||||||||||
| Amortization of below market leases | ( | ||||||||||
| Noncash interest income | ( | ( | |||||||||
| Loss (gain) on sale of real estate, net | ( | ||||||||||
| Impairment of real estate investments | |||||||||||
| Change in operating assets and liabilities: | |||||||||||
| Accounts and other receivables | ( | ||||||||||
| Prepaid expenses and other assets, net | ( | ( | |||||||||
| Accounts payable, accrued liabilities and deferred rent liabilities | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisitions of real estate, net of deposits applied | ( | ( | |||||||||
| Purchases of equipment, furniture and fixtures and improvements to real estate | ( | ( | |||||||||
| Preferred equity investments | ( | ||||||||||
| Investment in real estate related investments and other loans receivable | ( | ( | |||||||||
| Principal payments received on real estate related investments and other loans receivable | |||||||||||
| Escrow deposits for potential acquisitions of real estate | ( | ( | |||||||||
| Net proceeds from sales of real estate | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from the issuance of common stock, net | |||||||||||
| Proceeds from the secured borrowing | |||||||||||
| Borrowings under unsecured revolving credit facility | |||||||||||
| Payments on unsecured revolving credit facility | ( | ||||||||||
| Payments on senior unsecured term loan | ( | ||||||||||
| Payment on secured borrowing | ( | ||||||||||
| Payments on extinguishment of debt and deferred financing costs | ( | ( | |||||||||
| Net-settle adjustment on restricted stock | ( | ( | |||||||||
| Dividends paid on common stock | ( | ( | |||||||||
| Contributions from noncontrolling interests | |||||||||||
| Distributions to noncontrolling interests | ( | ||||||||||
| Net cash provided by financing activities | |||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents as of the beginning of period | |||||||||||
| Cash and cash equivalents as of the end of period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Interest paid | $ | $ | |||||||||
| Supplemental schedule of noncash investing and financing activities: | |||||||||||
| Increase in dividends payable | $ | $ | |||||||||
| Right-of-use asset obtained in exchange for new operating lease obligation | $ | $ | |||||||||
| Transfer of pre-acquisition costs to acquired assets | $ | $ | |||||||||
| Sale of real estate settled with note receivable | $ | $ | |||||||||
| Liabilities assumed by buyer in connection with sale of real estate | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
5
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
1. ORGANIZATION
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, 2023. 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. The accompanying consolidated financial statements of the Company include the accounts of CareTrust REIT, its wholly-owned subsidiaries, and variable interest entities (“VIEs”) over which the Company exercises control. All intercompany transactions and account balances within the Company have been eliminated, and net earnings are reduced by the portion of net earnings attributable to noncontrolling interests.
3. REAL ESTATE INVESTMENTS, NET
The following table summarizes the Company’s investment in owned properties, and properties held in consolidated joint ventures, held for use as of September 30, 2024 and December 31, 2023 (dollars in thousands):
| September 30, 2024 | December 31, 2023 | ||||||||||
| Land | $ | $ | |||||||||
| Buildings and improvements | |||||||||||
| Integral equipment, furniture and fixtures | |||||||||||
| Identified intangible assets | |||||||||||
| Real estate investments | |||||||||||
| Accumulated depreciation and amortization | ( | ( | |||||||||
| Real estate investments, net | $ | $ | |||||||||
As of September 30, 2024, all of the Company’s owned and held for investment facilities were leased to various operators under triple-net leases. During the third quarter of 2022, the Company entered into a triple-net lease agreement for two of the Company’s facilities which are being repurposed to behavioral health facilities, one of which was classified as held for sale during the three months ended September 30, 2024. All of the triple-net 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. As of September 30, 2024, 8 facilities were held for sale. See Note 4, Impairment of Real Estate Investments, Assets Held for Sale and Asset Sales, for additional information.
6
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
As of September 30, 2024, the Company’s total future contractual minimum rental income for all of its tenants, excluding operating expense reimbursements, assets held for sale and assets being repurposed, was as follows (dollars in thousands):
| Year | Amount | ||||
| 2024 (three months) | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 2029 | |||||
| Thereafter | |||||
| Total | $ | ||||
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 | Option Period Open Date(1) | Option Type(2) | Current Cash Rent(3) | |||||||||||||||||||||
| SNF | March 2029 | 4/1/2022 | (4) | A / B(6) | $ | |||||||||||||||||||||
| SNF | November 2034 | 12/1/2024 | (4) | A | ||||||||||||||||||||||
| SNF / Campus | October 2032 | 11/1/2026 | (5) | B | (7) | |||||||||||||||||||||
| SNF / Campus | May 2034 | 6/1/2026 | (8) | B | (9) | |||||||||||||||||||||
| SNF / Campus | May 2034 | 6/1/2027 | (8) | B | (9) | |||||||||||||||||||||
(1) The Company has not received notice of exercise for the option periods that are currently open.
(2) Option type includes:
A - Fixed base price.
B - Fixed capitalization rate on lease revenue.
(3) Based on annualized cash revenue for contracts in place as of September 30, 2024.
(4) Option window is open until the expiration of the lease term.
(5) Option window is open for six months from the option period open date.
(6) Purchase option reflects two option types.
(7) Purchase option provides for purchase of two of three facilities. The current cash rent shown is an average of the range of $3.2 million to $3.4 million.
(8) Purchase option window is open for nine months from the option period open date.
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 September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| Rental Income | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
Contractual rent due(1) | $ | $ | $ | $ | |||||||||||||||||||
| Straight-line rent | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of lease incentives | ( | ( | |||||||||||||||||||||
| Amortization of below-market leases | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Recent Real Estate Acquisitions
The following table summarizes the Company’s acquisitions for the nine months ended September 30, 2024 (dollars in thousands):
| Type of Property | Purchase Price(1) | Initial Annual Cash Rent(2) | Number of Properties | Number of Beds/Units(3) | |||||||||||||||||||
Skilled nursing(4) | $ | $ | |||||||||||||||||||||
Multi-service campuses(5) | |||||||||||||||||||||||
Assisted living(6) | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
(1) Purchase price includes capitalized acquisition costs.
(2) Initial annual cash rent represents initial cash rent for the first twelve months.
(3) The number of beds/units includes operating beds at the acquisition date.
(4) Includes one SNF held through a joint venture. See Note 11, Variable Interest Entities, for additional information.
(5) Includes two multi-service campuses held through a joint venture. See Note 11, Variable Interest Entities, for additional information.
Lease Amendments and Terminations
Lease Termination and Amended Ensign Lease. Effective September 1, 2024, one SNF in Kansas was removed from a master lease with a skilled nursing operator and the Company terminated the master lease. Annual cash rent under the terminated master lease prior to lease termination was approximately $0.8 million. In connection with the lease termination, the Company amended and extended one existing triple-net master lease with subsidiaries of The Ensign Group, Inc. (“Ensign”) to include the one SNF. The amended lease has a remaining term of approximately 15 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 $0.6 million.
Lease Termination and New Jaybird Lease. Effective August 1, 2024, two ALFs in Illinois were removed from a master lease with a seniors housing operator and the Company terminated the master lease. In connection with the lease termination, the Company entered into a new master lease (the “Jaybird Lease”) with affiliates of Jaybird Senior Living, Inc. (“Jaybird”) with respect to the two ALFs. The new Jaybird Lease commenced on August 1, 2024 with an initial term of approximately 12 years, featuring two five-year renewal options and CPI-based rent escalators. Under the Jaybird Lease, Jaybird will receive three months of abated rent, followed by fifteen months of rent calculated as a percentage of the tenants’ gross revenue. Subsequently, the next twelve months will have a fixed annual cash rent amount of $1.8 million. Annual rent under the terminated master lease was $1.8 million.
8
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
New Bayshire Lease. On April 1, 2024, a new master lease with affiliates of Bayshire, LLC (“Bayshire”) commenced to lease one SNF that was previously under a short-term master lease until Bayshire received regulatory approval. The short-term master lease was terminated. The Bayshire master lease had a term of approximately 15 years at the date of the lease, with two five-year renewal options and 3 % fixed rent escalators. Initial annual cash rent under the new Bayshire master lease was $2.6 million. The Bayshire lease provides for a rent deferral of $0.4 million in the first year to be repaid in 15 installments beginning in year two.
Amended Eduro Lease and Amended Ensign Lease. On March 1, 2024, operations of two SNFs in Colorado operated by affiliates of Eduro Healthcare, LLC (“Eduro”) were transferred to subsidiaries of Ensign. In connection with the transfer, the Company partially terminated the Eduro master lease and amended one existing triple-net master lease with Ensign to include the two SNFs and extended the initial lease term by 15 years. The applicable Ensign master lease, as amended, had a remaining term at the date of amendment of approximately 20 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 $2.1 million and annual cash rent under the Eduro master lease, as amended, decreased by the same amount.
New Embassy Lease and Hillstone Lease Termination. On December 31, 2023, the Company terminated its master lease with affiliates of Hillstone Healthcare, Inc. (“Hillstone”). Effective January 1, 2024, in connection with the December 31, 2023 lease termination, one SNF was removed from the Hillstone master lease, was classified as held for sale as of March 31, 2024 and was sold during the three months ended June 30, 2024. See Note 4, Impairment of Real Estate Investments, Assets Held for Sale and Asset Sales, for additional information. In connection with the lease termination, the Company entered into a new triple-net master lease with a subsidiary of Embassy Healthcare Holdings, Inc. (“Embassy”) with respect to one multi-service campus. The Embassy lease has an initial term of approximately 10 years with two five-year renewal options and CPI-based rent escalators. Initial annual cash rent under the lease is approximately $0.6 million and the master lease provides Embassy with a partial rent abatement until required authorizations with respect to the ALF portion of the facility are obtained and occupancy levels reach a certain percentage.
Premier Termination and Amended Ridgeline Lease. Effective September 1, 2023, six ALFs in Michigan and North Carolina were removed from the master lease with affiliates of Premier Senior Living, LLC (“Premier”) and the Company terminated the Premier master lease. Annual cash rent under the Premier master lease prior to lease termination was approximately $2.7 million. In connection with the lease termination, the Company amended its existing triple-net master lease with affiliates of Ridgeline Properties, LLC (“Ridgeline”) with respect to the six ALFs. The Ridgeline lease had a remaining term at the date of the lease amendment of approximately 15 years with two five-year renewal options and CPI-based rent escalators. Annual cash rent under the amended lease increased by approximately $2.7 million. The amended lease provides for $0.2 million in rent abatement and a $0.2 million rent deferral to be repaid beginning in December 2024.
Amended Pennant Lease. On July 6, 2023, the Company amended its master lease with the Pennant Group, Inc. (“Pennant”) (the “Pennant Master Lease”). In connection with the lease amendment, the Company extended the initial lease term. The Pennant Master Lease, as amended, had a remaining term at the date of amendment of approximately 15 years, with two five-year renewal options and CPI-based rent escalators. Annual cash rent under the amended Pennant Master Lease remained unchanged.
Noble VA Lease Termination and New Pennant Lease. Effective March 16, 2023, two ALFs in Wisconsin were removed from a master lease with affiliates of Noble VA Holdings (“Noble VA”) and the Company terminated the applicable Noble VA master lease. Annual cash rent under the applicable Noble VA master lease prior to lease termination was approximately $2.3 million. In connection with the lease termination, the Company entered into a new lease (the “New Pennant Lease”) with Pennant with respect to the two ALFs. The New Pennant Lease had an initial term at the date of the lease of approximately 15 years with two five-year renewal options and CPI-based rent escalators. Annual cash rent under the new lease was approximately $0.8 million and the master lease provides Pennant with three months deferred rent to be repaid before the expiration or termination of the lease.
9
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
4. IMPAIRMENT OF REAL ESTATE INVESTMENTS, ASSETS HELD FOR SALE AND ASSET SALES
Impairment of Real Estate Investments Held for Sale
During the three and nine months ended September 30, 2024, the Company recognized aggregate impairment charges of $8.4 million and $36.9 million, respectively, related to properties held for sale, which is reported in impairment of real estate investments in the condensed consolidated income statements. During the three and nine months ended September 30, 2023, the Company recognized aggregate impairment charges of $0.2 million and $23.5 million, respectively, related to properties held for sale, which is reported in impairment of real estate investments in the condensed consolidated income statements.
During the three months ended September 30, 2024, the Company determined that two facilities held for sale no longer met the criteria to be held for sale and were reclassified as held for investment. As of September 30, 2024, there were 8 facilities classified as held for sale, all of which have been marked down to fair value less estimated costs to sell.
The fair values of the assets held for sale were based on estimated sales prices, which are considered to be Level 3 (as defined below) 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) binding agreements for sales and non-binding offers to purchase from unrelated third-parties. There are inherent uncertainties in making these assumptions. For the Company’s impairment calculations during the nine months ended September 30, 2024, the Company’s fair value estimates primarily relied on a market approach and utilized prices per unit ranging from $5,000 to $94,000 , with a weighted average price per unit of $36,000 . For the Company’s impairment calculations during the nine months ended September 30, 2023, the Company’s fair value estimates primarily relied on a market approach and utilized prices per unit ranging from $18,000 to $35,000 , with a weighted average price per unit of $23,000 .
Impairment of Real Estate Investments Held for Investment
During the three and nine months ended September 30, 2023, the Company recognized an impairment charge of $8.0 one SNF. The Company wrote down its carrying value of $8.7 million to its estimated fair value of $0.7 million as of September 30, 2023, which is included in real estate investments, net on the Company’s consolidated balance sheets. The fair value of the asset was based on comparable market transactions and considered Level 3 (as defined below) measurements within the fair value hierarchy. For the Company’s impairment calculation, the Company’s fair value estimates primarily relied on a market approach and utilized a price per unit of $7,000 .
Asset Sales and Held for Sale Reclassifications
On August 30, 2024, the Company completed the sale of a portfolio of 11 SNFs located in Iowa and Georgia, leased to affiliates of Arboreta Healthcare, Inc., as shown in the table below.
The following table summarizes the Company’s dispositions for the three and nine months ended September 30, 2024 and 2023 (dollars in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Number of facilities | |||||||||||||||||||||||
Net sales proceeds(1) | $ | $ | $ | $ | |||||||||||||||||||
| Net carrying value | |||||||||||||||||||||||
| Net (loss) gain on sale | $ | ( | $ | $ | ( | $ | |||||||||||||||||
(1) Net sales proceeds for the nine months ended September 30, 2024 includes $1.0 million of seller financing in connection with the sale of one ALF in January 2024. Net sales proceeds for the three and nine months ended September 30, 2024 includes $2.8 11 SNFs. Net sales proceeds for the nine months ended September 30, 2023 includes $2.0 million of seller financing in connection with the sale of one ALF in June 2023.
10
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
The following table summarizes the Company’s assets held for sale activity for the periods presented (dollars in thousands):
| Net Carrying Value | Number of Facilities | ||||||||||||||||
| December 31, 2023 | $ | ||||||||||||||||
| Additions to assets held for sale | |||||||||||||||||
| Assets sold | ( | ( | |||||||||||||||
| Impairment of real estate held for sale | ( | ||||||||||||||||
| Assets reclassified to held for investment | ( | ( | |||||||||||||||
September 30, 2024 | $ | ||||||||||||||||
| December 31, 2022 | $ | ||||||||||||||||
| Additions to assets held for sale | |||||||||||||||||
| Assets sold | ( | ( | |||||||||||||||
| Impairment of real estate held for sale | ( | ||||||||||||||||
September 30, 2023 | $ | ||||||||||||||||
5. OTHER REAL ESTATE RELATED AND OTHER INVESTMENTS
As of September 30, 2024 and December 31, 2023, the Company’s other real estate related investments, inclusive of accrued interest, consisted of the following (dollars in thousands):
Facility Count and Type | As of September 30, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||
| Loans Receivable, at Fair Value: | SNF | Campus | ALF | ILF | Principal Balance as of September 30, 2024 | Fair Value as of September 30, 2024 | Fair Value as of December 31, 2023 | Weighted Average Contractual Interest Rate(1), (2) | Maturity Date | ||||||||||||||||||||||||||||||||||||||
Mortgage secured loans receivable(3) | $ | $ | $ | % | 5/31/2025 - 6/29/2033 | ||||||||||||||||||||||||||||||||||||||||||
Mezzanine loans receivable(3) | % | 7/25/2027 - 6/30/2032 | |||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
As of September 30, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other Investments: | Principal Balance as of September 30, 2024 | Book Value as of September 30, 2024 | Book Value as of December 31, 2023 | Weighted Average Contractual Interest Rate | Maturity Date | ||||||||||||||||||||||||||||||||||||||||||
| Preferred equity | $ | $ | $ | % | N/A | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
(2)
(3) If the Company also has extended mezzanine financing to an affiliate of the borrower under a mortgage loan receivable, the applicable facility counts are included in both respective totals.
11
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
The following table summarizes the Company’s other real estate related investments activity for the nine months ended September 30, 2024 and 2023 (dollars in thousands):
Nine Months Ended September 30, | ||||||||||||||
2024 | 2023 | |||||||||||||
| Origination of other real estate related investments | $ | $ | ||||||||||||
| Accrued interest, net | ||||||||||||||
| Unrealized loss on other real estate related investments, net | ( | ( | ||||||||||||
| Prepayments of other real estate related investments | ( | |||||||||||||
| Net change in other real estate related investments | $ | $ | ||||||||||||
2024 Other Real Estate Related Investment Transactions
On January 1, 2024, the Company closed on the sale of one ALF. In connection with the sale, the Company provided affiliates of the purchaser of the property with a $1.0 million mortgage loan which bears interest at a rate of 9.0 %. The mortgage loan is secured by the ALF and is set to mature on January 1, 2027. The mortgage loan may be prepaid in whole before the maturity date. The Company elected the fair value option for the mortgage loan.
On January 25, 2024, the Company extended a $9.8 million mezzanine loan for a portfolio of ten SNFs located in Missouri secured by a pledge of membership interests in an up-tier holding company of the borrower group. The Company participated in the loan alongside a co-lender pursuant to a participation agreement entered into between the Company and the co-lender. Pursuant to such agreement, the Company provided $9.8 million in mezzanine loan proceeds and the co-lender provided the remaining $10.2 million of loan proceeds. As a participant in the loan, and subject to limited exceptions, the Company is entitled to receive its proportionate share of loan payments made by the borrower with each co-lender’s proportionate share being given equal weight. The loan bears interest at term SOFR plus 8.75 %, with a term SOFR floor of 6 %, payable monthly and net of a 0.75 % subservicing fee. Commencing on February 1, 2026, monthly principal payments shall be due. The mezzanine loan is set to mature on July 25, 2027, with two six-month extension options and may (subject to certain restrictions) be prepaid in whole before the maturity date for an exit fee ranging from 1 % to 2 % of the loan plus unpaid interest payments equal to 24 months (less the amount of monthly interest payments made by the borrower through the date of prepayment). The Company elected the fair value option for the mezzanine loan.
On February 1, 2024, the Company extended a $7.4 million mezzanine loan for one SNF located in California secured by a pledge of membership interests in an up-tier holding company of the borrower group. The loan bears interest at 11.5 %, payable monthly. The mezzanine loan is set to mature on January 31, 2029, and may not (subject to certain limited exceptions) be prepaid prior to the date that is 18 months following the loan closing. The Company elected the fair value option for the mezzanine loan.
On February 2, 2024, the Company extended a $35.0 million mezzanine loan for a portfolio of 15 SNFs located in Virginia secured by a pledge of membership interests in an up-tier holding company of the borrower group. The Company participated in the loan alongside a co-lender pursuant to a participation agreement entered into between the Company and the co-lender. Pursuant to such agreement, the Company provided $35.0 million in mezzanine loan proceeds and the co-lender provided the remaining $50.0 million of loan proceeds. As a participant in the loan, and subject to limited exceptions, the Company is entitled to receive its proportionate share of loan payments made by the borrower with each co-lender’s proportionate share being given equal weight. The loan bears interest at term SOFR plus 8.75 %, with a term SOFR floor of 6 %, payable monthly and net of a 0.75 % subservicing fee. Commencing on February 2, 2026, monthly principal payments shall be due. The mezzanine loan is set to mature on August 1, 2027, with two six-month extension options and may (subject to certain restrictions) be prepaid in whole before the maturity date for an exit fee ranging from 1 % to 2 % of the loan plus unpaid interest payments equal to 18 months (less the amount of monthly interest payments made by the borrower through the date of prepayment). The Company elected the fair value option for the mezzanine loan.
On May 1, 2024, the Company extended a $26.7 million mortgage loan to a skilled nursing real estate owner. The mortgage loan is secured by two SNFs and bears interest at a rate of 9.1 %, payable monthly. The mortgage loan is set to mature on May 1, 2031 and includes a one year extension option. The mortgage loan may not be prepaid prior to July 31, 2029, subject to certain limited exceptions. The mortgage loan includes a purchase option with an exercise window that opens during the initial 90-day period of each of the 4th, 5th and 6th loan years, with the purchase option price for the facilities being calculated by dividing the amount of the then annual base rent by an agreed upon lease yield. The Company elected the fair value option for the mortgage loan.
12
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
On June 3, 2024, the Company extended a $165.0 million mortgage loan to a regional health care real estate owner. The mortgage loan is secured by eight SNFs located in North Carolina and bears interest at a rate of SOFR plus 4.25 %, with a term SOFR floor of 5.15 %, payable monthly and net of a 0.25 % subservicing fee. Commencing on June 1, 2027, monthly principal payments will be due. The mortgage loan is set to mature on June 1, 2029, and includes two six-month extension options. The mortgage loan may not be prepaid prior to June 1, 2026, subject to certain limited exceptions. The Company elected the fair value option for the mortgage loan. Concurrently with closing, KeyBank National Association purchased a $75.0 million participation in the mortgage loan from the Company. On July 30, 2024, the Company exercised the call option on the $75.0 million secured borrowing at a call purchase price equal to the principal amount plus accrued and unpaid interest and an exit fee of $0.4 million. See Note 7, Debt, for additional information.
In addition, on June 3, 2024, the Company funded a $9.0 million preferred equity investment in an uptier parent entity of the borrower under the $165.0 million mortgage loan described above. The Company's initial contractual yield on its preferred equity investment is 11 %. Prepayment of the preferred equity investment is restricted, subject to certain carveouts, prior to the senior mortgage loan being paid off in full.
On August 1, 2024, the Company extended a $260.0 million mortgage loan to a skilled nursing real estate owner. The loan is secured by a first priority mortgage lien on a real estate portfolio of 37 SNFs, ALFs and multi-service campuses located in various states and bears interest at a fixed rate of 8.4 %, payable monthly. The mortgage loan is set to mature on August 1, 2029 and has a 24-month lockout period on prepayment subject to certain exceptions. The mortgage loan may otherwise be prepaid in part or in whole after the 24-month lockout period with agreed upon exit fees, as applicable. In addition, on August 1, 2024, the Company funded a $43.0 million preferred equity investment in an uptier holding company of the 37 -property skilled nursing and assisted living portfolio. The Company's initial contractual yield on its preferred equity investment is 11 %.
Other Loans Receivables
As of September 30, 2024 and December 31, 2023, 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 September 30, 2024 | |||||||||||||||||||||||||||||||||||
| Investment | Principal Balance as of September 30, 2024 | Book Value as of September 30, 2024 | Book Value as of December 31, 2023 | Weighted Average Contractual Interest Rate | Maturity Date | ||||||||||||||||||||||||||||||
| Other loans receivable | $ | $ | $ | % | 6/30/2024(1) - 4/26/2027 | ||||||||||||||||||||||||||||||
| Expected credit loss | — | ( | ( | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||||||||||||||||||||
(1) One other loan receivable with a principal balance of $
The following table summarizes the Company’s other loans receivable activity for the nine months ended September 30, 2024 and 2023 (dollars in thousands):
Nine Months Ended September 30, | ||||||||||||||
2024 | 2023 | |||||||||||||
| Origination of other loans receivable | $ | $ | ||||||||||||
| Principal payments | ( | ( | ||||||||||||
| Accrued interest, net | ||||||||||||||
| Net change in other loans receivable | $ | $ | ||||||||||||
Expected credit losses and recoveries are recorded in provision for loan losses, net in the condensed consolidated income statements. During both the nine months ended September 30, 2024 and 2023, the Company had no
13
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
The following table summarizes the interest and other income recognized from the Company’s loans receivable and other investments during the three and nine months ended September 30, 2024 and 2023 (dollars in thousands):
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| Investment | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Mortgage secured loans receivable | $ | $ | $ | $ | |||||||||||||||||||
| Mezzanine loans receivable | |||||||||||||||||||||||
| Preferred equity investment | |||||||||||||||||||||||
| Other loans receivable | |||||||||||||||||||||||
Other(1) | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
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:
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.
14
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
Items Measured at Fair Value on a Recurring Basis
The following table presents information about the Company’s assets measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023, 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 September 30, 2024 | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Mortgage secured loans receivable | $ | $ | $ | $ | |||||||||||||||||||
| Mezzanine loans receivable | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Balance as of December 31, 2023 | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Mortgage secured loans receivable | $ | $ | $ | $ | |||||||||||||||||||
| Mezzanine loans receivable | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
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 Real Estate Secured Loans | Investments in Mezzanine Loans | ||||||||||
Balance at December 31, 2023 | $ | $ | |||||||||
| Loan originations | |||||||||||
| Accrued interest, net | |||||||||||
| Unrealized (loss) gain on other real estate related investments, net | ( | ||||||||||
Balance as of September 30, 2024 | $ | $ | |||||||||
Real estate secured and mezzanine loans receivable: The fair values of the 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. During the three months ended September 30, 2024, the Company recorded unrealized gains of $5.9 million, which were partially offset by unrealized losses of $4.1 million, on its secured and mezzanine loans receivable to bring the interest rates in line with market rates. During the nine months ended September 30, 2024, the Company recorded unrealized losses on its secured and mezzanine loans receivable of $7.3 million, which were partially offset by unrealized gains of $6.6 million, to bring the interest rates in line with market rates. Future changes in market interest rates or collateral value could materially impact the estimated discounted cash flows that are used to determine the fair value of the secured and mezzanine loans receivable. As of September 30, 2024 and December 31, 2023, the Company did no
The following table shows the quantitative information about unobservable inputs related to the Level 3 fair value measurements comprising the investments in secured and mezzanine loans receivables as of September 30, 2024:
| Type | Book Value as of September 30, 2024 | Valuation Technique | Unobservable Inputs | Range | |||||||||||||||||||
| Mortgage secured loans receivable | $ | Discounted cash flow | Discount Rate | ||||||||||||||||||||
| Mezzanine loans receivable | Discounted cash flow | Discount Rate | |||||||||||||||||||||
For the nine months ended September 30, 2024, there were no classification changes in assets and liabilities with Level 3 inputs in the fair value hierarchy.
15
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 Company’s preferred equity investments and the Notes (as defined in Note 7, Debt, below) as of September 30, 2024 and December 31, 2023 is as follows (dollars in thousands):
| September 30, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||
| Level | Face Value | Carrying Amount | Fair Value | Face Value | Carrying Amount | Fair Value | |||||||||||||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||||||||||||||
| Preferred equity investments | 3 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||||||||||||||
| Senior unsecured notes payable | 2 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
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.
Preferred equity investments: The fair value of the preferred equity investments was 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. The Company utilized discount rates of 11 % to 15 % in its fair value calculation. As such, the Company classifies these instruments as Level 3.
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 and spreads for similar debt arrangements.
7. DEBT
The following table summarizes the balance of the Company’s indebtedness as of September 30, 2024 and December 31, 2023 (dollars in thousands):
| September 30, 2024 | December 31, 2023 | ||||||||||||||||||||||
| Principal Amount | Deferred Loan Fees | Carrying Amount | Principal Amount | Deferred Loan Fees | Carrying Amount | ||||||||||||||||||
| Senior unsecured notes payable | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||
| Senior unsecured term loan | ( | ||||||||||||||||||||||
Unsecured revolving credit facility(1) | |||||||||||||||||||||||
| $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||
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.
16
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
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. 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.
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 September 30, 2024, the Company was in compliance with all applicable financial covenants under the indenture governing the Notes.
Unsecured Revolving Credit Facility and Term Loan
On December 16, 2022, 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 a second amended and restated credit and guaranty agreement with KeyBank National Association, as administrative agent, an issuing bank and swingline lender (as amended from time to time, the “Second Amended Credit Agreement”). The Second Amended Credit Agreement, which amends and restates the Company’s amended and restated credit and guaranty agreement, dated as of February 8, 2019 (as amended, the “Prior Credit Agreement”) provides for: (i) an unsecured revolving credit facility (the “Revolving Facility”) with revolving commitments in an aggregate principal amount of $600.0 million, including a letter of credit subfacility for 10 % of the then available revolving commitments and a swingline loan subfacility for 10 % of the then available revolving commitments and (ii) the continuation of the unsecured term loan credit facility which was previously extended under the Prior Credit Agreement (the “Term Loan” and together with the Revolving Facility, the “Second Amended Credit Facility”) in an aggregate principal amount of $200.0 million. Future borrowings under the Second Amended Credit Facility will be used for working capital purposes, for capital expenditures, to fund acquisitions and for general corporate purposes.
On October 10, 2023, the Operating Partnership, the Company, CareTrust GP, LLC, certain of the Operating Partnership’s wholly owned subsidiaries and KeyBank National Association entered into the First Amendment to the Second Amended Credit Agreement (the “First Amendment”). The First Amendment restates the definition of Consolidated Total Asset Value to include net proceeds from at-the-market forward commitments executed but not yet closed as of the relevant date as if such proceeds had actually been received.
The interest rates applicable to loans under the Revolving Facility are, at the Operating Partnership’s option, equal to either a base rate plus a margin ranging from 0.10 % to 0.55 % per annum or Adjusted Term SOFR or Adjusted Daily Simple SOFR (each as defined in the Second Amended Credit Agreement) plus a margin ranging from 1.10 % to 1.55 % per annum based on the debt to asset value ratio of the Company and 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 Adjusted Term SOFR or Adjusted Daily Simple SOFR plus a margin ranging from 1.50 % to 2.20 % per annum based on the debt to asset value ratio of the Company and 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
17
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
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).
On September 19, 2024 (the “Prepayment Date”), the Company elected to prepay all $200.0 million aggregate principal amount of their outstanding Term Loan. The Term Loan was prepaid at the principal amount of the Term Loan, plus accrued and unpaid interest thereon up to, but not including, the Prepayment Date. During the third quarter of 2024, the Company recorded a loss on extinguishment of debt of $0.3 million related to the write-off of deferred financing costs associated with the prepayment of the Term Loan. As of September 30, 2024, the Operating Partnership had no borrowings outstanding under the Revolving Facility.
The Revolving Facility has a maturity date of February 9, 2027, and includes, at the sole discretion of the Operating Partnership, two six-month extension options. Prior to prepayment, the Term Loan had a maturity date of February 8, 2026.
The Second Amended Credit Facility is guaranteed, jointly and severally, by the Company and its wholly owned subsidiaries that are party to the Second Amended Credit Agreement (other than the Operating Partnership). The Second 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 payments. The Second 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 Second Amended Credit Agreement also contains certain customary events of default, including the failure to make timely payments under the Second 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 September 30, 2024, the Company was in compliance with all applicable financial covenants under the Second Amended Credit Agreement.
Secured Borrowing
8. EQUITY
Common Stock
At-The-Market Offering—On August 29, 2024, the Company entered into a new equity distribution agreement to issue and sell, from time to time, up to $750.0 million in aggregate offering price of its common stock through an “at-the-market” equity offering program (the “New ATM Program”) and terminated its previous $500.0 million “at-the-market” equity offering program (together, with all previous at-the-market equity offering programs, the “Previous ATM Programs” and together with the New ATM Program, the “ATM Program”). In addition to the issuance and sale of shares of its common stock, the ATM Program also provides for the ability to enter into one or more forward sales agreements (each, an “ATM forward contract”) with sales agents for the sale of the Company’s shares of common stock under the ATM Program.
18
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
In the event the Company enters into an ATM forward contract to sell shares of common stock pursuant to the ATM Program, the Company would expect to fully physically settle forward equity sales by delivery of shares of common stock to the forward purchaser and receive cash proceeds upon one or more settlement dates, which are typically a one-year term, at the Company’s discretion, prior to the final settlement date, at which time the Company would expect to receive aggregate net cash proceeds at settlement equal to the number of shares sold on a forward basis multiplied by the relevant forward price per share. The weighted average forward sale price that the Company would expect to receive upon physical settlement would be subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchaser’s stock borrowing costs and (iii) scheduled dividends through the settlement.
The following table summarizes the ATM Program activity for the three and nine months ended September 30, 2024 and 2023 (in thousands, except per share amounts):
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | ||||||||||||||||||||
| Number of shares | |||||||||||||||||||||||
| Average sales price per share | $ | $ | $ | $ | |||||||||||||||||||
Gross proceeds(1) | $ | $ | $ | $ | |||||||||||||||||||
(1) Total gross proceeds is before $6.2 million and $4.0 million of commissions paid to the sales agents and forward adjustments during the three months ended September 30, 2024 and 2023, respectively, under the ATM Program. Total gross proceeds is before $13.4 million and $4.0 million of commissions paid to the sales agents and forward adjustments during the nine months ended September 30, 2024 and 2023, respectively, under the ATM Program.
During the three and nine months ended September 30, 2023, the Company entered into ATM forward contracts under the ATM Program with a financial institution acting as a forward purchaser to sell 9,058,140 and 15,794,229 shares of common stock, respectively, at a weighted average initial sales price of $19.99 and $19.87 per share, respectively, before commissions and offering expenses. During the three months ended September 30, 2023, the Company settled 10,893,229 shares outstanding under the ATM forward contracts at a weighted average sales price of $19.57 for net proceeds of $213.1 million. No forward equity sales were executed or settled under the ATM Program during the three and nine months ended September 30, 2024, and there were no
As of September 30, 2024, the Company had $440.1 million available for future issuances under the New ATM Program.
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 nine months of 2024 (dollars in thousands, except per share amounts):
| For the Three Months Ended | ||||||||||||||
| March 31, 2024 | June 30, 2024 | September 30, 2024 | ||||||||||||
| Dividends declared per share | $ | $ | $ | |||||||||||
| Dividends payment date | April 15, 2024 | July 15, 2024 | October 15, 2024 | |||||||||||
| Dividends payable as of record date | $ | $ | $ | |||||||||||
| Dividends record date | March 28, 2024 | June 28, 2024 | September 30, 2024 | |||||||||||
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 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.
19
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
Under the Plan, restricted stock awards (“RSAs”) vest in equal annual installments over a three year period for the RSAs granted after 2020 and a four year period for the RSAs granted in 2020. 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 one year . Performance stock awards (“PSAs”) granted were subject to both time and performance based conditions and vested over a -to-three year period for PSAs granted in 2021 and over a -to-four year period for PSAs granted in 2020. The amount of such PSAs that ultimately vested was dependent on the Company’s Normalized Funds from Operations (“NFFO”) per share, as defined by the Compensation Committee, meeting or exceeding a specified per share amount for the applicable vesting period. Relative total shareholder return units (“TSR Units”) granted are subject to both time and market based conditions and cliff vest after a three-year period. The amount of such market awards that will ultimately vest is dependent on the Company’s total shareholder return (“TSR”) performance relative to a custom TSR peer group consisting of other publicly traded healthcare REITs and will range from 0 % to 200 % of the TSR Units initially granted. The RSAs and Board Awards are valued on the date of grant based on the closing price of the Company’s common stock, while the TSR Units are valued on the date of grant using a Monte Carlo valuation model. The vesting of certain awards may accelerate, as defined in the grant agreement, upon retirement, a change in control or other events.
The following table summarizes the status of the restricted stock award and performance award activity for the nine months ended September 30, 2024:
| Shares | Weighted Average Share Price | ||||||||||
| Unvested balance at December 31, 2023 | $ | ||||||||||
| Granted: | |||||||||||
| Board Awards | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Unvested balance at September 30, 2024 | $ | ||||||||||
As of September 30, 2024, the weighted-average remaining vesting period of such awards was 1.5 years.
The following table summarizes the stock-based compensation expense recognized for the periods presented (dollars in thousands):
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Stock-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
For the nine months ended September 30, 2023, approximately $0.6 million of previously recognized stock-based compensation expense related to the PSAs was reversed as the awards were not expected to meet the performance conditions. For the nine months ended September 30, 2023, approximately $0.9 million of previously recognized stock-based compensation expense was reversed due to forfeitures of stock awards.
20
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
10. EARNINGS PER COMMON SHARE
The following table presents the calculation of basic and diluted earnings per common share attributable to CareTrust REIT, Inc. (“EPS”) for the Company’s common stock for the three and nine months ended September 30, 2024 and 2023, 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 (dollars and shares in thousands, except per share amounts):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to CareTrust REIT, Inc. | $ | $ | $ | $ | |||||||||||||||||||
| Less: Net income allocated to participating securities | ( | ( | ( | ( | |||||||||||||||||||
| Numerator for basic and diluted earnings available to common stockholders | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average basic common shares outstanding | |||||||||||||||||||||||
| Dilutive potential common shares - TSR Units | |||||||||||||||||||||||
| Dilutive potential common shares - forward equity agreements | |||||||||||||||||||||||
| Weighted-average diluted common shares outstanding | |||||||||||||||||||||||
| Earnings per common share attributable to CareTrust REIT, Inc., basic | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per common share attributable to CareTrust REIT, Inc., diluted | $ | $ | $ | $ | |||||||||||||||||||
Antidilutive unvested RSAs, TSR Units and PSAs excluded from the computation(1) | |||||||||||||||||||||||
(1)For the three and nine months ended September 30, 2024, RSAs are antidilutive. For the three months ended September 30, 2023, RSAs were antidilutive. For the nine months ended September 30, 2023, RSAs and certain TSR Units were antidilutive.
11. VARIABLE INTEREST ENTITIES
Noncontrolling Interests—The Company has entered into multiple ventures with unrelated third parties to own real estate and has concluded that such ventures are VIEs. As the Company exercises power over and receives economic benefits from the VIEs, the Company is considered the primary beneficiary and consolidates the VIEs. Pursuant to the Company’s joint ventures (“JVs”), the Company typically contributes 97.5 % of the JV’s total investment amount and the Company receives 100 % of the preferred equity interest in the JV in exchange for 95 % of that total investment and a 50 % common equity interest in the JV in exchange for the remaining 2.5 % of that investment. The JV partner contributes the remaining 2.5 % of the JV’s total investment amount in exchange for a 50 % common ownership interest in the JV. As of September 30, 2024, the Company held four SNFs, two multi-service campuses and one ALF in multiple VIEs.
On January 3, 2024, the Company entered into a JV, pursuant to which the Company contributed $10.8 million into the JV that purchased one ALF located in California for $11.0 million. The JV partner contributed the remaining $0.2 million of the total investment.
On April 1, 2024, the Company entered into a JV, pursuant to which the Company contributed $28.1 million into the JV that purchased two multi-service campuses located in California for $28.8 million. The JV partner contributed the remaining $0.7 million of the total investment.
21
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
On August 7, 2024, the Company entered into a JV, pursuant to which the Company contributed $24.5 million into the JV that purchased one SNF located in California for $25.1 million. The JV partner contributed the remaining $0.6 million of the total investment.
Total assets and total liabilities include VIE assets and liabilities as follows (dollars in thousands):
September 30, 2024 | December 31, 2023 | ||||||||||
| Assets: | |||||||||||
| Real estate investments, net | $ | $ | |||||||||
| Cash and cash equivalents | |||||||||||
| Accounts and other receivables | |||||||||||
| Prepaid and other assets | |||||||||||
| Total assets | |||||||||||
| Liabilities: | |||||||||||
| Accounts payable, accrued liabilities and deferred rent liabilities | |||||||||||
| Total liabilities | $ | $ | |||||||||
12. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are and may become from time to time a party to various claims and lawsuits arising in the ordinary course of business, which are not individually or in the aggregate anticipated to have a material adverse effect on the Company’s results of operations, financial condition or cash flows. Claims and lawsuits may include matters involving general or professional liability asserted against the Company’s tenants, which are the responsibility of the Company’s tenants and for which the Company is entitled to be indemnified by its tenants under the insurance and indemnification provisions in the applicable leases.
In the normal course of business, the Company enters into various commitments, typically consisting of funding of capital expenditures and short-term working capital loans to existing tenants while they await licensure and certification or are conducting turnaround work in one or more of the Company’s properties.
Capital expenditures for each property leased under the Company’s triple-net leases are generally the responsibility of the tenant, except for the facilities leased under certain master lease agreements, with subsidiaries of Ensign and Pennant, under which the tenant will have an option to require the Company to finance certain capital expenditures up to an aggregate of 20 % of the Company’s initial investment in such property, subject to a corresponding rent increase at the time of funding. For the Company’s other triple-net master leases, the tenants also have the option to request capital expenditure funding that would generally be subject to a corresponding rent increase at the time of funding, which are subject to tenant compliance with the conditions to the Company’s approval and funding of their requests. The Company has also provided select tenants with strategic capital for facility upkeep and modernization. The Company’s Tenant Code of Conduct and Corporate Responsibility policy (the “Tenant ESG Program”) provides eligible triple-net tenants of the Company with monetary inducements to make sustainable improvements to the Company’s properties. Incentive options include a wide variety of opportunities for tenants to upgrade everything from energy and environmental systems to water-saving landscaping and more. The Company’s board of directors has authorized annual allocations of up to $500,000 to fund the Tenant ESG Program.
22
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
The table below summarizes the Company’s existing, known commitments and contingencies as of September 30, 2024 (in thousands):
| Remaining Commitment | |||||||||||||||||||||||
Capital expenditures(1) | $ | ||||||||||||||||||||||
Mortgage loans(2) | |||||||||||||||||||||||
Other loans receivable(3) | |||||||||||||||||||||||
Earn-out obligation(4) | |||||||||||||||||||||||
| $ | |||||||||||||||||||||||
(1)As of September 30, 2024, the Company had committed to fund expansions, construction, capital improvements and ESG incentives at certain triple-net leased facilities totaling $14.8 million, of which $7.2 million is subject to rent increase at the time of funding.
(2)One mortgage loan includes an earn-out advance upon satisfaction of certain conditions. On October 11, 2024, these conditions were satisfied and the earn-out was funded.
(3)Represents working capital loan commitments.
(4)Includes an earn-out obligation of up to $10.0 million under a purchase and sale agreement for one SNF in Virginia, which was acquired during 2024. The earn-out is available, contingent on the operator achieving certain thresholds per the agreement, beginning in October 2025 through October 2026.
13. CONCENTRATION OF RISK
Concentrations of credit risk arise when one or more tenants, operators, or obligors related to the Company’s investments are engaged in similar business activities or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions.
Major operator concentration – The Company has operators from which it derived 10% or more of its revenue for the three and nine months ended September 30, 2024 and 2023. The following table sets forth information regarding the Company’s major operators as of September 30, 2024 and 2023:
| Number of Facilities | Number of Beds/Units | Percentage of Total Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||
| Operator/Borrower | SNF | Campus | ALF/ILF | SNF | Campus | ALF/ILF | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||
September 30, 2024(1) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Ensign(3) | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Priority Management Group | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2023(2) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Ensign(3) | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Priority Management Group | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||
(1) The Company’s rental income and interest income on other real estate related investments, exclusive of operating expense reimbursements.
(2) The Company’s rental income, exclusive of operating expense reimbursements.
(3) Ensign is subject to the registration and reporting requirements of the SEC and is required to file with the SEC annual reports containing audited financial information and quarterly reports containing unaudited financial information. Ensign’s financial statements, as filed with the SEC, can be found at http://www.sec.gov. The Company has not verified this information through an independent investigation or otherwise.
23
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
Major geographic concentration – The following table provides information regarding the Company’s concentrations with respect to certain states, from which the Company derived 10% or more of its revenue for the three and nine months ended September 30, 2024 and 2023:
| Number of Facilities | Number of Beds/Units | Percentage of Total Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||
| State | SNF | Campus | ALF/ILF | SNF | Campus | ALF/ILF | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||
September 30, 2024(1) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| CA | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| TX | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2023(2) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| CA | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| TX | % | % | ||||||||||||||||||||||||||||||||||||||||||||||||
(1) Based on the Company’s rental income and interest income on other real estate related investments, exclusive of operating expense reimbursements.
(2) Based on the Company’s rental income, exclusive of operating expense reimbursements.
14. SUBSEQUENT EVENTS
The Company evaluates subsequent events in accordance with ASC 855, Subsequent Events. The Company evaluates subsequent events up until the date the condensed consolidated financial statements are issued.
Recent Acquisitions
On October 1, 2024, the Company acquired two SNFs and one multi-service campus in Maryland for $55.5 million, which includes estimated capitalized acquisition costs. In connection with the acquisition of the facilities, the Company entered into a new master lease with a skilled nursing operator. The new master lease has an initial term of approximately 15 years, with two five-year renewal options and CPI-based rent escalators. Initial annual cash rent under the new master lease is $5.2 million.
Recent Investments
On October 1, 2024, and in connection with the $55.5 million skilled nursing acquisition described above, the Company extended a $19.2 million mortgage loan to a skilled nursing operator. The loan is secured by a first priority ground leasehold mortgage lien on a SNF located in Maryland and bears interest at an initial annual rate of 9.35 % with annual CPI-based escalators, payable monthly. The mortgage loan has a term of 15 years and is set to mature on September 30, 2039, with two five-year extension options. The mortgage loan provides for a put option, giving the borrower the right to require the lender to purchase the underlying ground leasehold and property associated with the mortgage loan. The exercise window for the put option is 30 days prior to the maturity date. The mortgage loan also provides for a purchase option in favor of the Company (subject to certain requirements) with two exercise windows. The first exercise window is on or before October 1, 2026. The second purchase option window opens January 1, 2039, and remains open for 6 months.
On October 1, 2024, the Company extended a $9.8 million mortgage loan to a skilled nursing real estate owner. The loan is secured by a first priority mortgage lien on a SNF located in Colorado and bears interest at a fixed rate of 8.5 %, payable monthly. The mortgage loan is set to mature on September 30, 2034. The mortgage provides a one-year extension option and may (subject to certain restrictions) be prepaid in whole, after the 18th month following the loan closing, for an exit fee ranging from 0 % to 2 % of the loan plus unpaid interest payments.
Entry into a Material Definitive Agreement
On October 29, 2024, in connection with a joint venture arrangement (the “Tennessee JV”) between the Operating Partnership and an unaffiliated third party, the Operating Partnership became bound by the terms of an Asset Purchase Agreement (the “Purchase Agreement”) pursuant to which the Tennessee JV has agreed to acquire 31 skilled nursing facilities (the “Tennessee SNF Facilities”) for an aggregate purchase price of approximately $500 million, exclusive of transaction costs. In connection with the Tennessee JV’s acquisition of the Tennessee SNF Facilities, the Operating Partnership is expected to
24
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)
contribute approximately $442 million toward the aggregate purchase price to the Tennessee JV and, in exchange, the Operating Partnership will own 100 % of the preferred equity ownership interests in the Tennessee JV representing 92.5 % of the total investment and 50 % of the common ownership interests in the Tennessee JV representing 3.75 % of the total investment. The Tennessee SNF Facilities consist of a total of 3,290 licensed beds, with 30 of the facilities located in Tennessee and one in Alabama. The Company has contributed $8.5 million to the Tennessee JV, which was used to partially fund the earnest money deposit under the Purchase Agreement.
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Certain statements in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements regarding: future financing plans, business strategies, growth prospects and operating and financial performance; expectations regarding the making of distributions and the payment of dividends; and compliance with and changes in governmental regulations.
Words such as “anticipate(s),” “expect(s),” “intend(s),” “plan(s),” “believe(s),” “may,” “will,” “would,” “could,” “should,” “seek(s)” and similar expressions, or the negative of these terms, are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to: (i) the ability and willingness of our tenants to meet and/or perform their obligations under the triple-net leases we have entered into with them, including, without limitation, their respective obligations to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities; (ii) the risk that we may have to incur additional impairment charges related to our assets held for sale if we are unable to sell such assets at the prices we expect; (iii) the impact of healthcare reform legislation, including minimum staffing level requirements, on the operating results and financial conditions of our tenants; (iv) the ability of our tenants to comply with applicable laws, rules and regulations in the operation of the properties we lease to them; (v) the ability and willingness of our tenants to renew their leases with us upon their expiration, and the ability to reposition our properties on the same or better terms in the event of nonrenewal or in the event we replace an existing tenant, as well as any obligations, including indemnification obligations, we may incur in connection with the replacement of an existing tenant; (vi) the availability of and the ability to identify (a) tenants who meet our credit and operating standards, and (b) suitable acquisition opportunities, and the ability to acquire and lease the respective properties to such tenants on favorable terms; (vii) the ability to generate sufficient cash flows to service our outstanding indebtedness; (viii) access to debt and equity capital markets; (ix) fluctuating interest rates; (x) the impact of public health crises, including significant COVID-19 outbreaks as well as other pandemics or epidemics; (xi) the ability to retain our key management personnel; (xii) the ability to maintain our status as a real estate investment trust (“REIT”); (xiii) changes in the U.S. tax law and other state, federal or local laws, whether or not specific to REITs; (xiv) other risks inherent in the real estate business, including potential liability relating to environmental matters and illiquidity of real estate investments; and (xv) any additional factors included under Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2024 and June 30, 2024, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission (the “SEC”).
Forward-looking statements speak only as of the date of this report. Except in the normal course of our public disclosure obligations, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any statement is based.
Overview
CareTrust REIT is a self-administered, publicly-traded REIT engaged in the ownership, acquisition, financing, development and leasing of skilled nursing, seniors housing and other healthcare-related properties. As of September 30, 2024, we owned, directly or indirectly through joint ventures, and leased to independent operators 226 skilled nursing facilities (“SNFs”), multi-service campuses, assisted living facilities (“ALFs”) and independent living facilities (“ILFs”) consisting of 24,512 operational beds and units located in 31 states with the highest concentration of properties by rental income located in California and Texas. As of September 30, 2024, we also had other real estate related investments consisting of three preferred equity investments, 12 real estate secured loans receivable and four mezzanine loans receivable with a carrying value of $740.7 million.
Recent Developments
Market Trends and Uncertainties
Recent macroeconomic conditions, particularly inflation (including higher supply costs), elevated interest rates and related changes to consumer spending, including, but not limited to, causing individuals to delay or defer moves to seniors housing, has adversely impacted and could continue to adversely impact our tenants’ ability to meet some of their financial
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obligations to us. Higher interest rates have also increased our costs of capital to finance acquisitions and increased our borrowing costs. We continue to monitor changes in the interest rate environment and the effect of changing rates on our business. In addition, current macroeconomic conditions and the resulting market volatility may adversely impact our ability to sell properties on acceptable terms, if at all, which could result in additional impairment charges.
As a result of the above factors, our tenants are continuing to experience elevated operating costs at their facilities. At a portfolio wide level, occupancy levels at our seniors housing facilities, comprising our ALFs and ILFs, continue to remain below occupancy levels at the onset of the COVID-19 pandemic. Within our SNFs, occupancy levels have continued to improve since their trough in January 2021 and have reached or exceeded occupancy levels prior to the onset of the COVID-19 pandemic, for most of our tenants.
As a result of impacts experienced by our operators since the onset of the COVID-19 pandemic and due to recent market trends and uncertainties, the ability of some of our tenants and borrowers to meet their financial obligations to us in full has been negatively impacted. From time to time in the past, we have taken actions to reposition one or more properties with a replacement tenant or sell the property and, in certain cases, we have also restructured tenants’ long-term obligations. See “Impairment of Real Estate Assets, Assets Held for Sale and Asset Sales” below. During the three months ended September 30, 2024, we collected 98.7% of contractual rents and interest due from our operators and borrowers excluding cash deposits. In the event our tenants or borrowers are unable to satisfy their obligations to us and we are unable to effect these actions on terms that are as favorable to us as those currently in place, our rental and interest income would be adversely impacted and we may incur additional expenses or obligations and be required to recognize additional impairment charges or fair value adjustments.
Regulatory Updates
On October 13, 2023, California Senate Bill No. 525 (“SB 525”) was signed into law, requiring a substantial increase in the minimum wage for workers operating in certain health care facilities. As a result of SB 525, certain health care facilities (including licensed skilled nursing facilities) operating in California are required to increase the wages of their covered health care employees to at least $21 per hour, which was initially required to be effective from June 1, 2024 to May 31, 2026, $22 or $23 per hour (depending on facility type) from June 1, 2026 to May 31, 2028, and $25 per hour after June 1, 2028. After the initial implementation was delayed by the Governor of California in June 2024, SB 525 went into effect on October 16, 2024.
The Centers for Medicare and Medicaid Services (“CMS”) issued a final rule on July 31, 2024, updating Medicare payment policies and rates for SNFs for fiscal year 2025. This update includes a 4.2% increase in Medicare Part A payments to SNFs, totaling approximately $1.4 billion. These increases are expected to partially offset some of our tenants’ higher operating costs.
On April 22, 2024, CMS issued a final rule regarding minimum staffing requirements and increased inspections at nursing homes in order to establish comprehensive nurse staffing requirements. The rule consists of three core staffing requirements: (1) overall minimum standard of 3.48 total nurse staff hours per resident day; (2) minimum nurse staffing standards of 0.55 hours per resident day for registered nurses and 2.45 hours of care from a certified nurse’s aid per resident per day; and (3) a requirement to have a registered nurse onsite 24 hours a day, seven days a week. The rule includes a staggered implementation approach for which CMS will publish additional details on compliance as the implementation dates approach. The rule also includes possible waivers and temporary hardship exemptions for select facilities, however no funding for the additional staff will be provided. We are currently evaluating the impact of the rule, but believe the unfunded mandate to increase staff may have a material and adverse impact on the financial condition of our tenants.
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Recent Investments
The following table summarizes our acquisitions from January 1, 2024 through October 29, 2024 (dollars in thousands):
| Type of Property | Purchase Price(1) | Initial Annual Cash Rent(2) | Number of Properties | Number of Beds/Units(3) | |||||||||||||||||||
Skilled nursing(4) | $ | 224,453 | $ | 18,569 | 11 | 1,080 | |||||||||||||||||
Multi-service campuses(5) | 91,234 | 7,467 | 5 | 683 | |||||||||||||||||||
Assisted living(6) | 11,036 | 1,022 | 1 | 86 | |||||||||||||||||||
| Total | $ | 326,723 | $ | 27,058 | 17 | 1,849 | |||||||||||||||||
(1)Purchase price includes capitalized acquisition costs.
(2)Initial annual cash rent represents initial cash rent for the first twelve months.
(3)The number of beds/units includes operating beds at acquisition date.
(4)Includes one SNF held through a joint venture. See Note 3, Real Estate Investments, Net, and Note 11, Variable Interest Entities, for additional information.
(5)Includes two multi-service campuses held through a joint venture. See Note 3, Real Estate Investments, Net, and Note 11, Variable Interest Entities for additional information.
(6)Includes one ALF held through a joint venture. See Note 3, Real Estate Investments, Net, and Note 11, Variable Interest Entities for additional information.
The following table summarizes our other real estate related investments from January 1, 2024 through October 29, 2024 (dollars in thousands):
Investment Type(1) | Investment | Annual Initial Interest Income(2) | Number of Properties | Number of Beds/Units(3) | |||||||||||||||||||
| Mortgage secured loan receivable | $ | 485,365 | $ | 43,241 | 49 | 5,112 | |||||||||||||||||
| Mezzanine loans receivable | 52,165 | 7,119 | 26 | 3,202 | |||||||||||||||||||
| Preferred equity | 52,000 | 5,734 | N/A | N/A | |||||||||||||||||||
| Total | $ | 589,530 | $ | 56,094 | 75 | 8,314 | |||||||||||||||||
(1)Table excludes a $1.0 million mortgage loan originated in connection with the sale of one ALF during the period presented.
(2)Represents annualized acquisition-date interest income, less subservicing fees, if applicable. For floating rate loans, interest income has been calculated using the benchmark rate at loan origination.
(3)The number of beds/units includes operating beds at the investment date.
Entry into a Material Definitive Agreement
On October 29, 2024, in connection with a joint venture arrangement (the “Tennessee JV”) between the Operating Partnership and an unaffiliated third party, the Operating Partnership became bound by the terms of an Asset Purchase Agreement (the “Purchase Agreement”) pursuant to which the Tennessee JV has agreed to acquire 31 skilled nursing facilities (the “Tennessee SNF Facilities”) for an aggregate purchase price of approximately $500 million, exclusive of transaction costs. In connection with the Tennessee JV’s acquisition of the Tennessee SNF Facilities, the Operating Partnership is expected to contribute approximately $442 million toward the aggregate purchase price to the Tennessee JV and, in exchange, the Operating Partnership will own 100% of the preferred equity ownership interests in the Tennessee JV representing 92.5% of the total investment and 50% of the common ownership interests in the Tennessee JV representing 3.75% of the total investment. The Tennessee SNF Facilities consist of a total of 3,290 licensed beds, with 30 of the facilities located in Tennessee and one in Alabama. We contributed $8.5 million to the Tennessee JV, which was used to partially fund the earnest money deposit under the Purchase Agreement.
Completion of the Tennessee JV’s acquisition of the Tennessee SNF Facilities is subject to customary closing conditions, and is expected to close in two phases during December 2024. At closing, the Tennessee SNF Facilities are anticipated to be operated by affiliates of PACS Group, Inc. (twelve facilities), The Ensign Group (nine facilities), and Links Healthcare Group (seven facilities), who are all current tenants of ours, as well as one new operator relationship (three facilities), under long-term master leases. Three of Ensign’s nine facilities will be acquired by Ensign’s real estate subsidiary with the remaining six to be included in a new master lease. Initial annual base rent to the Tennessee JV relating to the Tennessee SNF Facilities is expected to aggregate approximately $44.4 million.
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Financing Activities
On September 19, 2024, we prepaid in full the $200.0 million aggregate principal amount outstanding under the Term Loan (as defined under “― Liquidity and Capital Resources ― Material Cash Requirements” below). See Note 7, Debt, for additional information.
On July 30, 2024, we exercised the call option on the $75.0 million secured borrowing. See Note 7, Debt, for additional information.
At-The-Market Offering of Common Stock
On August 29, 2024, we entered into a new equity distribution agreement to issue and sell, from time to time, up to $750.0 million in aggregate offering price of our common stock through an “at-the-market” equity offering program (the “New ATM Program”) and terminated our previous $500.0 million “at-the-market” equity offering program (together, with all previous at-the-market equity offering programs, the “Previous ATM Programs” and together with the New ATM Program, the “ATM Program”). In addition to the issuance and sale of shares of our common stock, the ATM Program also provides for the ability to enter into one or more forward sales agreements (each, an “ATM forward contract”) with sales agents for the sale of our shares of common stock under the ATM Program.
In the event we enter into an ATM forward contract to sell shares of common stock pursuant to the ATM Program, we would expect to fully physically settle forward equity sales by delivery of shares of common stock to the forward purchaser and receive cash proceeds upon one or more settlement dates, which are typically a one-year term, at our discretion, prior to the final settlement date, at which time we would expect to receive aggregate net cash proceeds at settlement equal to the number of shares sold on a forward basis multiplied by the relevant forward price per share. The weighted average forward sale price that we would expect to receive upon physical settlement would be subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchaser’s stock borrowing costs and (iii) scheduled dividends through the settlement.
The following tables summarize the ATM Program activity for the three and nine months ended September 30, 2024 and 2023 (in thousands, except per share amounts).
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | ||||||||||||||||||||
| Number of shares | 17,241 | 16,285 | 40,986 | 16,285 | |||||||||||||||||||
| Average sales price per share | $ | 29.01 | $ | 19.89 | $ | 26.35 | $ | 19.89 | |||||||||||||||
Gross proceeds(1) | $ | 500,085 | $ | 323,886 | $ | 1,079,852 | $ | 323,886 | |||||||||||||||
(1) Total gross proceeds is before $6.2 million and $13.4 million of commissions paid to the sales agents during the three and nine months ended September 30, 2024, respectively, under the ATM Program. Total gross proceeds is before $4.0 million of commissions paid to the sales agents and forward adjustments during both the three and nine months ended September 30, 2023, respectively, under the ATM Program.
During the three and nine months ended September 30, 2023, we entered into ATM forward contracts under the ATM Program with a financial institution acting as a forward purchaser to sell 9,058,140 and 15,794,229 shares of common stock, respectively, at a weighted average initial sales price of $19.99 and $19.87 per share, respectively, before commissions and offering expenses. During the three months ended September 30, 2023, we settled 10,893,229 shares outstanding under the ATM forward contracts at a weighted average sales price of $19.57 for net proceeds of $213.1 million. No forward equity sales were executed or settled under the ATM Program during the three and nine months ended September 30, 2024, and there were no outstanding ATM forward contracts that had not settled as of September 30, 2024.
As of September 30, 2024, we had $440.1 million available for future issuances under the New ATM Program.
Impairment of Real Estate Assets, Assets Held for Sale, and Asset Sales
During the three months ended September 30, 2024, we determined that one ALF met the held for sale criteria and classified this property as held for sale as of September 30, 2024. During the three months ended September 30, 2024, we determined that two facilities held for sale no longer met the criteria to be held for sale and were reclassified as held for investment as of September 30, 2024. During the three and nine months ended September 30, 2024, we recognized an impairment charge of $8.4 million and $36.9 million, respectively, related to properties held for sale, which is reported in impairment of real estate investments in the condensed consolidated income statements.
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Asset Sales and Held for Sale Reclassifications
We periodically reassess our investments and tenant relationships, and from time to time we have selectively disposed of certain facilities or investments, or terminated tenant relationships, and we expect to continue making such reassessments and, where appropriate, taking such actions. We classify our real estate investments as held for sale when the applicable criteria have been met, which includes a formal plan to sell the properties that is expected to be completed within one year, among other criteria. Upon designation as held for sale, we cease depreciation and record the investment at the lower of carrying value or estimated fair value less costs to sell, which could result in an impairment of the real estate investments held for sale, if necessary.
On August 30, 2024, we completed the sale of a portfolio of 11 SNFs located in Iowa and Georgia, leased to affiliates of Arboreta Healthcare, Inc., as shown in the table below.
The following table summarizes our dispositions for the three and nine months ended September 30, 2024 (dollars in thousands):
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2024 | ||||||||||||||||||||||
| Number of facilities | 11 | 14 | |||||||||||||||||||||
Net sales proceeds(1) | $ | 7,712 | $ | 8,852 | |||||||||||||||||||
| Net carrying value | 9,998 | 11,106 | |||||||||||||||||||||
| Net loss on sale | $ | (2,286) | $ | (2,254) | |||||||||||||||||||
The following table summarizes our assets held for sale activity for the periods presented (dollars in thousands):
| Net Carrying Value | Number of Facilities | ||||||||||||||||
| December 31, 2023 | $ | 15,011 | 14 | ||||||||||||||
| Additions to assets held for sale | 54,021 | 10 | |||||||||||||||
| Assets sold | (11,106) | (14) | |||||||||||||||
| Impairment of real estate held for sale | (36,872) | — | |||||||||||||||
| Assets reclassified to held for investment | (5,008) | (2) | |||||||||||||||
| September 30, 2024 | $ | 16,046 | 8 | ||||||||||||||
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Results of Operations
Three Months Ended September 30, 2024 Compared to Three Months Ended June 30, 2024:
| Three Months Ended | Increase (Decrease) | Percentage Difference | |||||||||||||||||||||
| September 30, 2024 | June 30, 2024 | ||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Rental income | $ | 57,153 | $ | 55,407 | $ | 1,746 | 3 | % | |||||||||||||||
| Interest and other income | 20,228 | 13,484 | 6,744 | 50 | % | ||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Depreciation and amortization | 14,009 | 13,860 | 149 | 1 | % | ||||||||||||||||||
| Interest expense | 8,281 | 8,679 | (398) | (5) | % | ||||||||||||||||||
| Property taxes | 2,115 | 1,976 | 139 | 7 | % | ||||||||||||||||||
| Impairment of real estate investments | 8,417 | 25,711 | (17,294) | (67) | % | ||||||||||||||||||
| Property operating expenses | 3,477 | 255 | 3,222 | * | |||||||||||||||||||
| General and administrative | 6,663 | 6,136 | 527 | 9 | % | ||||||||||||||||||
| Other loss: | |||||||||||||||||||||||
| Loss on extinguishment of debt | (657) | — | (657) | * | |||||||||||||||||||
| (Loss) gain on sale of real estate, net | (2,286) | 21 | (2,307) | * | |||||||||||||||||||
| Unrealized gain (loss) on other real estate related investments, net | 1,800 | (1,877) | 3,677 | * | |||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Net loss attributable to noncontrolling interests | (165) | (340) | 175 | 51 | % | ||||||||||||||||||
•Not meaningful
Rental income. Rental income increased by approximately $1.7 million as detailed below:
| Three Months Ended | Increase (Decrease) | |||||||||||||||||||
| (in thousands) | September 30, 2024 | June 30, 2024 | ||||||||||||||||||
| Contractual cash rent | $ | 54,658 | $ | 52,972 | $ | 1,686 | ||||||||||||||
| Tenant reimbursements | 1,698 | 1,871 | (173) | |||||||||||||||||
| Total contractual rent | 56,356 | 54,843 | 1,513 | |||||||||||||||||
| Straight-line rent | (7) | (7) | — | |||||||||||||||||
| Amortization of lease incentives | (5) | (4) | (1) | |||||||||||||||||
| Amortization of below market leases | 809 | 575 | 234 | |||||||||||||||||
| Total amount in rental income | $ | 57,153 | $ | 55,407 | $ | 1,746 | ||||||||||||||
Total contractual rent includes initial contractual cash rent and tenant operating expense reimbursements, as adjusted for applicable rental escalators and rent increases due to capital expenditures funded by the Company. For tenants on a cash basis, this represents the lesser of the amount that would be recognized on a straight-line basis or cash that has been received. Total contractual rent increased by $1.5 million due to a $1.6 million increase in rental income from real estate investments made after March 31, 2024, a $0.9 million increase in rental rates for our existing tenants, and an increase of $0.1 million related to the transfer of one facility to a new operator, partially offset by a $0.9 million decrease in rental income related to certain tenants on a cash basis method of accounting and a decrease of $0.2 million in tenant reimbursements.
Interest and other income. The $6.7 million, or 50%, increase in interest and other income was primarily due to an increase of $7.6 million of interest income on new loan investments made after March 31, 2024, and an increase of $0.1 million of interest income due to a higher number of days during the three months ended September 30, 2024 compared to the three months ended June 30, 2024, partially offset by a decrease of $0.8 million of interest earned on money market funds and a decrease of $0.2 million related to a loan origination fee received during the three months ended June 30, 2024.
Depreciation and amortization. The $0.1 million, or 1%, increase in depreciation and amortization was primarily due to an increase of $0.7 million due to acquisitions and capital improvements made after March 31, 2024, partially offset by a
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decrease of $0.4 million due to classifying assets as held for sale and a decrease of $0.2 million due to assets becoming fully depreciated after March 31, 2024.
Interest expense. Interest expense decreased by approximately $0.4 million as detailed below:
Change in interest expense for the three months ended September 30, 2024 compared to the three months ended June 30, 2024 | ||||||||
| (in thousands) | ||||||||
| Decreases to interest expense due to: | ||||||||
| Decrease due to the prepayment of Term Loan | $ | (499) | ||||||
| Total decreases to interest expense | (499) | |||||||
| Increases to interest expense due to: | ||||||||
| Increase in interest rates for the Term Loan | 80 | |||||||
| Other changes in interest expense | 21 | |||||||
| Total increase increases to interest expense | 101 | |||||||
| Total change to interest expense | $ | (398) | ||||||
Property taxes. The $0.1 million, or 7%, increase in property taxes was primarily due to reassessments and increased effective tax rates.
Impairment of real estate investments. During the three months ended September 30, 2024, we recognized impairment charges of $8.4 million related to properties held for sale. See above under “Recent Developments — Impairment of Real Estate Assets, Assets Held for Sale, and Asset Sales” for additional information. During the three months ended June 30, 2024, we recognized impairment charges of $25.7 million primarily related to classifying eight properties as held for sale.
Property operating expenses. During the three months ended September 30, 2024 and June 30, 2024, we recognized $3.5 million and $0.3 million, respectively, of property operating expenses related to assets we plan to sell or repurpose, re-tenant, or have sold.
General and administrative expense. General and administrative expense increased by $0.5 million as detailed below:
| Three Months Ended | Increase (Decrease) | |||||||||||||||||||
| (in thousands) | September 30, 2024 | June 30, 2024 | ||||||||||||||||||
| Incentive compensation | $ | 2,500 | $ | 1,500 | $ | 1,000 | ||||||||||||||
| Cash compensation | 1,571 | 1,542 | 29 | |||||||||||||||||
| Share-based compensation | 1,143 | 1,406 | (263) | |||||||||||||||||
| Professional services | 570 | 628 | (58) | |||||||||||||||||
| Taxes and insurance | 211 | 345 | (134) | |||||||||||||||||
| Other expenses | 668 | 715 | (47) | |||||||||||||||||
| General and administrative expense | $ | 6,663 | $ | 6,136 | $ | 527 | ||||||||||||||
Loss on extinguishment of debt. During the three months ended September 30, 2024, we recorded a $0.7 million loss on extinguishment of debt related to the exit fee associated with the call of the secured borrowing and the write-off of deferred financing costs associated with the prepayment of the Term Loan (as defined below). No loss on extinguishment of debt was recognized during the three months ended June 30, 2024.
(Loss) gain on sale of real estate, net. During the three months ended September 30, 2024, we recorded a $2.3 million loss on sale of real estate related to the sale of 11 SNFs. During the three months ended June 30, 2024, we recorded a $21,000 gain on sale of real estate related to the sale of one SNF.
Unrealized gain (loss) on other real estate related investments, net. During the three months ended September 30, 2024, we recorded $5.9 million of unrealized gains on our secured and mezzanine loans receivable, partially offset by unrealized losses of $4.1 million, to bring the interest rates in line with market rates. During the three months ended June 30, 2024, we recorded a $2.4 million unrealized loss on our secured and mezzanine loans receivable due to an increase in estimated
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credit spreads, partially offset by unrealized gains of $0.5 million due to an increase in expected cash flows on floating rate loans.
Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023:
| Nine Months Ended | Increase (Decrease) | Percentage Difference | |||||||||||||||||||||
| September 30, 2024 | September 30, 2023 | ||||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Rental income | $ | 166,062 | $ | 145,126 | $ | 20,936 | 14 | % | |||||||||||||||
| Interest and other income | 43,280 | 12,910 | 30,370 | * | |||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Depreciation and amortization | 41,317 | 37,988 | 3,329 | 9 | % | ||||||||||||||||||
| Interest expense | 25,188 | 32,617 | (7,429) | (23) | % | ||||||||||||||||||
| Property taxes | 5,892 | 4,437 | 1,455 | 33 | % | ||||||||||||||||||
| Impairment of real estate investments | 36,872 | 31,510 | 5,362 | 17 | % | ||||||||||||||||||
| Property operating expenses | 4,392 | 2,860 | 1,532 | 54 | % | ||||||||||||||||||
| General and administrative | 19,637 | 15,298 | 4,339 | 28 | % | ||||||||||||||||||
| Other loss: | |||||||||||||||||||||||
| Loss on extinguishment of debt | (657) | — | (657) | * | |||||||||||||||||||
| (Loss) gain on sale of real estate, net | (2,254) | 1,958 | (4,212) | * | |||||||||||||||||||
| Unrealized loss on other real estate related investments, net | (689) | (7,856) | 7,167 | (91) | % | ||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Net loss attributable to noncontrolling interests | (501) | (11) | (490) | * | |||||||||||||||||||
•Not meaningful
Rental income. Rental income increased by $20.9 million as detailed below:
Nine Months Ended | Increase (Decrease) | |||||||||||||||||||
| (in thousands) | September 30, 2024 | September 30, 2023 | ||||||||||||||||||
| Contractual cash rent | $ | 159,060 | $ | 141,231 | $ | 17,829 | ||||||||||||||
| Tenant reimbursements | 5,073 | 3,916 | 1,157 | |||||||||||||||||
| Total contractual rent | 164,133 | 145,147 | 18,986 | |||||||||||||||||
| Straight-line rent | (21) | (21) | — | |||||||||||||||||
| Amortization of lease incentives | (9) | — | (9) | |||||||||||||||||
| Amortization of below market leases | 1,959 | — | 1,959 | |||||||||||||||||
| Total amount in rental income | $ | 166,062 | $ | 145,126 | $ | 20,936 | ||||||||||||||
Total contractual rent includes initial contractual cash rent and tenant operating expense reimbursements, as adjusted for applicable rental escalators and rent increases due to capital expenditures funded by the Company. For tenants on a cash basis, this represents the lesser of the amount that would be recognized on a straight-line basis or cash that has been received. Total contractual rent increased by $19.0 million due to a $15.7 million increase in rental income from real estate investments made after December 31, 2022, a $3.9 million increase in rental rates for our existing tenants, a $1.2 million increase in tenant reimbursements, and a $0.5 million increase in rental income due to the transfer of facilities between operators, partially offset by a $1.9 million decrease in rental income related to certain tenants on a cash basis method of accounting, and a $0.4 million decrease in rental income related to dispositions made after December 31, 2022.
Interest and other income. The $30.4 million increase in interest and other income was primarily due to an increase of $19.0 million due to the origination of loans receivable after December 31, 2022, an increase of $12.5 million of interest income on money market funds, an increase of $0.5 million due to originations of other loans, and an increase of $0.2 million related to a loan origination fee received during the nine months ended September 30, 2024, partially offset by a decrease of
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$1.3 million of interest income due to loan repayments and a decrease of $0.5 million related to a prepayment penalty on one mezzanine loan receivable during the nine months ended September 30, 2023.
Depreciation and amortization. The $3.3 million, or 9%, increase in depreciation and amortization was primarily due to an increase of $6.5 million related to acquisitions and capital improvements made after December 31, 2022, partially offset by a decrease of $2.1 million due to assets becoming fully depreciated after December 31, 2022 and a decrease of $1.1 million due to classifying assets as held for sale after December 31, 2022.
Interest expense. Interest expense decreased by $7.4 million as detailed below:
Change in interest expense for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 | ||||||||
| (in thousands) | ||||||||
| Decreases to interest expense due to: | ||||||||
| Decrease in outstanding borrowing amount for the Revolving Facility | $ | (8,519) | ||||||
| Decrease due to prepayment of Term Loan | (499) | |||||||
| Other changes in interest expense | (29) | |||||||
| Total decreases to interest expense | (9,047) | |||||||
| Increases to interest expense due to: | ||||||||
| Issuance of secured borrowing | 931 | |||||||
| Increase in interest rates for the Term Loan | 687 | |||||||
| Total increases to interest expense | 1,618 | |||||||
| Total change in interest expense | $ | (7,429) | ||||||
Property taxes. The $1.5 million, or 33%, increase in property taxes was due to a $2.5 million increase related to acquisitions made after December 31, 2022, partially offset by $1.0 million of changes in estimates during the nine months ended September 30, 2024 of property taxes paid directly by us as a result of certain assets being designated as held for sale and being disposed of.
Impairment of real estate investments. During the nine months ended September 30, 2024, we recognized impairment charges of $30.4 million related to properties classified as held for sale, $4.4 million related to properties held for investment, and $2.1 million related to properties that were sold. See above under “Recent Developments — Impairment of Real Estate Assets, Assets Held for Sale, and Asset Sales” for additional information. During the nine months ended September 30, 2023, we recognized impairment charges of $23.1 million related to properties classified as held for sale, $8.0 million related to properties held for investment, and $0.4 million related to properties that were sold.
Property operating expenses. During the nine months ended September 30, 2024 and 2023, we recognized $4.4 million and $2.9 million, respectively, of property operating expenses related to assets we plan to sell or repurpose, re-tenant or have sold.
General and administrative expense. General and administrative expense increased by $4.3 million as detailed below:
Nine Months Ended | Increase/(Decrease) | |||||||||||||||||||
| (in thousands) | September 30, 2024 | September 30, 2023 | ||||||||||||||||||
| Incentive compensation | $ | 5,500 | $ | 3,700 | $ | 1,800 | ||||||||||||||
| Cash compensation | 4,878 | 4,256 | 622 | |||||||||||||||||
| Share-based compensation | 4,669 | 3,379 | 1,290 | |||||||||||||||||
| Professional services | 1,936 | 1,783 | 153 | |||||||||||||||||
| Taxes and insurance | 761 | 704 | 57 | |||||||||||||||||
| Other expenses | 1,893 | 1,476 | 417 | |||||||||||||||||
| General and administrative expense | $ | 19,637 | $ | 15,298 | $ | 4,339 | ||||||||||||||
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Loss on extinguishment of debt. During the nine months ended September 30, 2024, we recorded a $0.7 million loss on extinguishment of debt related to the exit fee associated with the call of the secured borrowing and the write-off of deferred financing costs associated with the prepayment of the Term Loan (as defined below). No loss on extinguishment of debt was recognized during the nine months ended September 30, 2023.
(Loss) gain on sale of real estate, net. During the nine months ended September 30, 2024, we recorded a $2.3 million loss on sale of real estate, net related to the sale of 13 SNFs and one ALF. During the nine months ended September 30, 2023, we recorded a $2.1 million gain on sale of real estate related to the sale of one SNF and one ALF, partially offset by a $0.1 million loss on sale of real estate related to the sale of two ALFs.
Unrealized loss on other real estate related investments, net. During the nine months ended September 30, 2024, we recorded a $7.3 million unrealized loss on our secured and mezzanine loans receivable due to an increase in interest rates during the first half of 2024, partially offset by unrealized gains of $6.6 million primarily due to a decrease in interest rates during the third quarter of 2024. During the nine months ended September 30, 2023, we recorded an unrealized loss of $8.1 million on our secured and mezzanine loans receivable due to rising interest rates and a $0.3 million loss due to a loan origination fee paid, partially offset by a reversal of a previously recognized unrealized loss of $0.5 million related to the repayment of one mezzanine loan receivable.
Liquidity and Capital Resources
To qualify as a REIT for federal income tax purposes, we are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, to our stockholders on an annual basis. Accordingly, we intend to make, but are not contractually bound to make, regular quarterly dividends to common stockholders from cash flow from operating activities. All such dividends are at the discretion of our board of directors.
Our short-term liquidity requirements consist primarily of operating and interest expenses directly associated with our properties, including:
•interest expense and scheduled debt maturities on outstanding indebtedness;
•general and administrative expenses;
•dividend plans;
•operating lease obligations; and
•capital expenditures for improvements to our properties.
Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions and other investments (including mortgage and mezzanine loan originations), capital expenditures, and scheduled debt maturities. We intend to invest in and/or develop additional healthcare and seniors housing properties as suitable opportunities arise and so long as adequate sources of financing are available. We expect that future investments in and/or development of properties, including any improvements or renovations of current or newly-acquired properties, will depend on and will be financed by, in whole or in part, our existing cash, borrowings available to us under the Second Amended Credit Facility (as defined below), future borrowings or the proceeds from sales of shares of our common stock pursuant to our ATM Program or additional issuances of common stock or other securities. In addition, we may seek financing from U.S. government agencies, including through Fannie Mae and the U.S. Department of Housing and Urban Development, in appropriate circumstances in connection with acquisitions and refinancing of existing mortgage loans.
We believe that our expected operating cash flow from rent collections and interest payments on our other real estate related investments, together with our cash balance, available borrowing capacity under the Revolving Facility (as defined below) and availability under the ATM Program will be sufficient to meet ongoing debt service requirements, dividend plans, operating lease obligations, capital expenditures, working capital requirements and other needs for at least the next 12 months. We expect to meet our long-term liquidity needs with cash flows from operations and financing arrangements. While we may from time to time sell properties as part of our hold / investment strategy on an investment-by-investment basis, we currently do not expect to sell any of our properties to meet liquidity needs. Our quarterly cash dividend and any failure of our operators to pay rent or of our borrowers to make interest or principal payments may impact our available capital resources.
We have filed an automatic shelf registration statement with the U.S. Securities and Exchange Commission that expires in February 2026 and at or prior to such time we expect to file a new shelf registration statement. The shelf registration statement allows us or certain of our subsidiaries, as applicable, to offer and sell shares of common stock, preferred stock, warrants, rights, units and debt securities through underwriters, dealers or agents or directly to purchasers, in one or more offerings on a continuous or delayed basis, in amounts, at prices and on terms we determine at the time of the offering. On August 29, 2024, we entered into the New ATM Program. In addition to the issuance and sale of shares of our common stock, we may also enter into one or more ATM forward contracts with sales agents for the sale of shares of our common stock under
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the ATM Program. See “At-The-Market Offering of Common Stock” for information regarding activity under the ATM Program.
Although we are subject to restrictions on our ability to incur indebtedness, we expect that we will be able to refinance existing indebtedness or incur additional indebtedness for acquisitions or other purposes, if needed. However, there can be no assurance that we will be able to refinance our indebtedness, incur additional indebtedness or access additional sources of capital, such as by issuing common stock or other debt or equity securities, on terms that are acceptable to us or at all.
As of September 30, 2024, we are in compliance with all debt covenants on our outstanding indebtedness.
Cash Flows
The following table presents selected data from our condensed consolidated statements of cash flows for the periods presented (dollars in thousands):
| For the Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net cash provided by operating activities | $ | 169,043 | $ | 112,096 | |||||||
| Net cash used in investing activities | (828,087) | (232,305) | |||||||||
| Net cash provided by financing activities | 741,698 | 110,516 | |||||||||
| Net increase (decrease) in cash and cash equivalents | 82,654 | (9,693) | |||||||||
| Cash and cash equivalents as of the beginning of period | 294,448 | 13,178 | |||||||||
| Cash and cash equivalents as of the end of period | $ | 377,102 | $ | 3,485 | |||||||
Net cash provided by operating activities increased for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Operating cash inflows are derived primarily from the rental payments received under our lease agreements, including as a result of new investments, and interest payments on our other real estate related investments. Operating cash outflows consist primarily of interest expense on our borrowings and general and administrative expenses. The net increase of $56.9 million in cash provided by operating activities for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 is primarily due to an increase in rental income received, an increase in interest income received on our other real estate related investments, and a decrease in cash paid for interest expense, partially offset by an increase in cash paid for general and administrative expense.
Cash used in investing activities for the nine months ended September 30, 2024 was primarily comprised of $777.1 million in acquisitions of real estate, investment in real estate related investments and other loans receivable and escrow deposits for potential acquisitions of real estate, $52.0 million in preferred equity investments and $4.2 million of purchases of equipment, furniture and fixtures and improvements to real estate, partially offset by $5.1 million in net proceeds from the sale of real estate and $0.1 million in principal payments received on other loans receivable. Cash used in investing activities for the nine months ended September 30, 2023 was primarily comprised of $253.3 million in acquisitions of real estate, investment in real estate related investments and other loans receivable and escrow deposits for potential acquisitions of real estate and $9.1 million of purchases of equipment, furniture and fixtures and improvements to real estate, partially offset by $15.7 million of principal payments received from our other real estate related investments and other loans receivable and $14.5 million in net proceeds from real estate sales.
Our cash flows provided by financing activities for the nine months ended September 30, 2024 were primarily comprised of $1.1 billion in net proceeds from the issuance of common stock, $75.0 million in proceeds from a secured borrowing and $1.2 million in contributions from noncontrolling interests, partially offset by a $200.0 million prepayment of the Term Loan, $122.4 million in dividends paid, a $75.0 million payment on the secured borrowing, a $2.5 million net settlement adjustment on restricted stock, and $0.4 million payment on extinguishment of debt and deferred financing costs. Our cash flows provided by financing activities for the nine months ended September 30, 2023 were primarily comprised of $319.0 million in net proceeds from the issuance of common stock and $1.1 million in contributions from noncontrolling interests, partially offset by $125.0 million in net payments under our Revolving Facility, $83.1 million in dividends paid and a $1.5 million net settlement adjustment on restricted stock.
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Material Cash Requirements
Our material cash requirements from known contractual and other obligations include:
3.875% Senior Unsecured Notes due 2028
On June 17, 2021, our wholly owned subsidiary, CTR Partnership, L.P. (the “Operating Partnership”), and its wholly owned subsidiary, CareTrust Capital Corp. (together with the Operating Partnership, the “Issuers”), completed a private offering of $400.0 million aggregate principal amount of 3.875% Senior Notes due 2028 (the “Notes”). The Notes mature on June 30, 2028. The Notes accrue interest at a rate of 3.875% per annum payable semiannually in arrears on June 30 and December 30 of each year, commencing on December 30, 2021. The obligations under the Notes are guaranteed, jointly and severally, on an unsecured basis, by us and all of our subsidiaries (other than the Issuers) that guarantee obligations under the Second Amended Credit Facility (as defined below). As of September 30, 2024, we were in compliance with all applicable financial covenants under the indenture governing the Notes. See Note 7, Debt, to our condensed consolidated financial statements included in this report for further information about the Notes.
Unsecured Revolving Credit Facility and Term Loan
On December 16, 2022, we, together with certain of our subsidiaries, entered into a second amended and restated credit and guaranty agreement with KeyBank National Association, as administrative agent, an issuing bank and swingline lender (as amended from time to time, the “Second Amended Credit Agreement”). The Operating Partnership is the borrower under the Second Amended Credit Agreement, and the obligations thereunder are guaranteed, jointly and severally, on an unsecured basis, by us and substantially all of our subsidiaries. The Second Amended Credit Agreement, which amends and restates our amended and restated credit and guaranty agreement, dated as of February 8, 2019 (as amended, the “Prior Credit Agreement”) provided for: (i) an unsecured revolving credit facility (the “Revolving Facility”) with revolving commitments in an aggregate principal amount of $600.0 million, including a letter of credit subfacility for 10% of the then available revolving commitments and a swingline loan subfacility for 10% of the then available revolving commitments and (ii) the continuation of the unsecured term loan credit facility which was previously extended under the Prior Credit Agreement (the “Term Loan” and together with the Revolving Facility, the “Second Amended Credit Facility”) in an aggregate principal amount of $200.0 million. Future borrowings under the Second Amended Credit Facility will be used for working capital purposes, for capital expenditures, to fund acquisitions and for general corporate purposes.
On October 10, 2023, we entered into the First Amendment to the Second Amended Credit Agreement with KeyBank National Association (the “First Amendment”). The First Amendment restates the definition of Consolidated Total Asset Value to include net proceeds from at-the-market forward commitments executed but not yet closed as of the relevant date as if such proceeds had actually been received.
On September 19, 2024 (the “Prepayment Date”), we prepaid all $200.0 million aggregate principal amount of our outstanding Term Loan. The Term Loan was prepaid at the principal amount of the Term Loan, plus accrued and unpaid interest thereon up to, but not including, the Prepayment Date. During the third quarter of 2024, we recorded a loss on extinguishment of debt of $0.3 million related to the write-off of deferred financing costs associated with the prepayment of the Term Loan.
As of September 30, 2024, we had no borrowings outstanding under the Revolving Facility. The Revolving Facility has a maturity date of February 9, 2027, and includes, at our sole discretion, two six-month extension options. Prior to prepayment, the Term Loan had a maturity date of February 8, 2026.
The interest rates applicable to loans under the Revolving Facility are, at the Operating Partnership’s option, equal to either a base rate plus a margin ranging from 0.10% to 0.55% per annum or Adjusted Term SOFR or Adjusted Daily Simple SOFR (each as defined in the Second Amended Credit Agreement) plus a margin ranging from 1.10% to 1.55% per annum based on the debt to asset value ratio of the Company and our consolidated subsidiaries (subject to decrease at the Operating Partnership’s election if we obtain certain specified investment grade ratings on our senior long-term unsecured debt). The interest rates applicable to loans under the Term Loan were, at the Operating Partnership’s option, equal to either a base rate plus a margin ranging from 0.50% to 1.20% per annum or Adjusted Term SOFR or Adjusted Daily Simple SOFR plus a margin ranging from 1.50% to 2.20% per annum based on the debt to asset value ratio of the Company and our consolidated subsidiaries (subject to decrease at the Operating Partnership’s election if we obtain certain specified investment grade ratings on our senior long-term unsecured debt). In addition, the Operating Partnership will pay a facility fee on the revolving commitments under the Revolving Facility ranging from 0.15% to 0.35% per annum, based on the debt to asset value ratio of the Company and our consolidated subsidiaries (unless we obtain certain specified investment grade ratings on our senior long-term unsecured debt and the Operating Partnership elects to decrease the applicable margin as described above, in which case the Operating Partnership will pay a facility fee on the revolving commitments ranging from 0.125% to 0.30% per annum based off the credit ratings of our senior long-term unsecured debt).
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As of September 30, 2024, we were in compliance with all applicable financial covenants under the Second Amended Credit Agreement. See Note 7, Debt, to our condensed consolidated financial statements included in this report for further information about the Second Amended Credit Agreement.
Capital Expenditures and Earn-Out Payments for Real Estate
As of September 30, 2024, we had committed to fund expansions, construction, capital improvements and ESG incentives, which provides eligible triple-net tenants with monetary inducements to make sustainable improvements to our properties, at certain triple-net leased facilities totaling $14.8 million, of which $7.2 million is subject to rent increase at the time of funding. We expect to fund the capital expenditures in the next one to two years. As of September 30, 2024, we entered into a purchase and sale agreement which provided for an earn-out obligation of up to $10.0 million for one SNF in Virginia which was acquired during 2024. The earn-out is available, contingent on the operator achieving certain thresholds per the agreement, beginning in October 2025 through October 2026. See Note 12, Commitments and Contingencies, to our condensed consolidated financial statements included in this report for further information regarding our obligation to finance certain capital expenditures under our triple-net leases.
Dividend Plans
We are required to pay dividends in order to maintain our REIT status and we expect to make quarterly dividend payments in cash with the annual dividend amount no less than 90% of our annual REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. See Note 8, Equity, to our condensed consolidated financial statements included in this report for a summary of the cash dividends per share of our common stock declared by our board of directors for the three months ended September 30, 2024.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information set forth in the Accounting Standards Codification, as published by the Financial Accounting Standards Board. GAAP requires us to make estimates and assumptions regarding future events that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base these estimates on our experience and assumptions we believe to be reasonable under the circumstances. However, if our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, we may have applied a different accounting treatment, resulting in a different presentation of our financial statements. We periodically reevaluate our estimates and assumptions, and in the event they prove to be different from actual results, we make adjustments in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. Please refer to “Critical Accounting Policies and Estimates” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 8, 2024, for further information regarding the critical accounting policies that affect our more significant estimates and judgments used in the preparation of our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. There have been no material changes in such critical accounting policies during the nine months ended September 30, 2024.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our primary market risk exposure is interest rate risk with respect to our variable rate indebtedness.
Our Second Amended Credit Agreement provides for revolving commitments in an aggregate principal amount of $600.0 million from a syndicate of banks and other financial institutions.
The interest rates applicable to loans under the Revolving Facility are, at the Company’s option, equal to either a base rate plus a margin ranging from 0.10% to 0.55% per annum or Adjusted Term SOFR or Adjusted Daily Simple SOFR (each as defined in the Second Amended Credit Agreement) plus a margin ranging from 1.10% to 1.55% per annum based on the debt to asset value ratio of the Company and 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). As of September 30, 2024, we had no borrowings outstanding under the Revolving Facility and the Term Loan was prepaid.
An increase in interest rates could make the financing of any acquisition by us more costly as well as increase the costs of our variable rate debt obligations. 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. Increased
38
inflation may also have a pronounced negative impact on the interest expense we pay in connection with our outstanding indebtedness, as these costs could increase at a rate higher than our rents.
We may, in the future, manage, or hedge, interest rate risks related to our borrowings by means of interest rate swap agreements. However, the REIT provisions of the Internal Revenue Code of 1986, as amended, substantially limit our ability to hedge our assets and liabilities. See “Risk Factors — Risks Related to Our Status as a REIT — Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities,” which is included in our Annual Report on Form 10-K for the year ended December 31, 2023. As of September 30, 2024, we had no swap agreements to hedge our interest rate risks. We also expect to manage our exposure to interest rate risk by maintaining a mix of fixed and variable rates for our indebtedness.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and regulations and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of September 30, 2024, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of September 30, 2024.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
The Company and its subsidiaries are and may become from time to time a party to various claims and lawsuits arising in the ordinary course of business, but none of the Company or any of its subsidiaries is, and none of their respective properties are, the subject of any material legal proceedings. Claims and lawsuits may include matters involving general or professional liability asserted against its tenants, which are the responsibility of its tenants and for which the Company is entitled to be indemnified by its tenants under the insurance and indemnification provisions in the applicable leases.
Item 1A. Risk Factors.
We have disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2024 and June 30, 2024 risk factors which materially affect our business, financial condition, or results of operations. There have been no material changes from the risk factors previously disclosed.
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Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit Number | Description of the Document | |||||||
| *101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||
| *101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| *101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| *101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| *101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| *101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| *104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |||||||
| * Filed herewith | ||||||||
| ** Furnished herewith | ||||||||
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CareTrust REIT, Inc. | |||||||||||
| October 29, 2024 | By: | /s/ David M. Sedgwick | |||||||||
| David M. Sedgwick | |||||||||||
President and Chief Executive Officer (duly authorized officer) | |||||||||||
| October 29, 2024 | By: | /s/ William M. Wagner | |||||||||
| William M. Wagner | |||||||||||
Chief Financial Officer and Treasurer (principal financial officer and principal accounting officer) | |||||||||||
42
Exhibit 31.1
CERTIFICATION
I, David M. Sedgwick, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of CareTrust REIT, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| By: | /s/ David M. Sedgwick | |||||||
David M. Sedgwick | ||||||||
| President and Chief Executive Officer | ||||||||
Date: October 29, 2024
Exhibit 31.2
CERTIFICATION
I, William M. Wagner, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of CareTrust REIT, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| By: | /s/ William M. Wagner | |||||||
| William M. Wagner | ||||||||
| Chief Financial Officer and Treasurer | ||||||||
Date: October 29, 2024
Exhibit 32.1
Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of CareTrust REIT, Inc. (the “Company”) for the quarterly period ended September 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), David M. Sedgwick, as President and Chief Executive Officer of the Company, and William M. Wagner, as Chief Financial Officer and Treasurer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to their knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ David M. Sedgwick | ||||||||
| Name: | David M. Sedgwick | |||||||
| Title: | President and Chief Executive Officer | |||||||
| Date: | October 29, 2024 | |||||||
| /s/ William M. Wagner | ||||||||
| Name: | William M. Wagner | |||||||
| Title: | Chief Financial Officer and Treasurer | |||||||
| Date: | October 29, 2024 | |||||||