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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

Commission File Number: 001-36181

CareTrust REIT, Inc.
(Exact name of registrant as specified in its charter)

Maryland46-3999490
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
905 Calle Amanecer Suite 300San ClementeCA92673
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareCTREThe Nasdaq Stock Market LLC
(Nasdaq Global Select Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes      No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes      No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No
As of August 5, 2020, there were 95,736,651 shares of common stock outstanding.





Table of Contents
INDEX
 
PART I—FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II—OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 6.





Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
CARETRUST REIT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
 
June 30, 2020December 31, 2019
Assets:
Real estate investments, net$1,420,112  $1,414,200  
Other real estate investments, net13,924  33,300  
Assets held for sale, net  34,590  
Cash and cash equivalents5,798  20,327  
Accounts and other receivables, net1,746  2,571  
Prepaid expenses and other assets5,900  10,850  
Deferred financing costs, net2,533  3,023  
Total assets$1,450,013  $1,518,861  
Liabilities and Equity:
Senior unsecured notes payable, net$296,290  $295,911  
Senior unsecured term loan, net198,819  198,713  
Unsecured revolving credit facility  60,000  
Accounts payable and accrued liabilities13,318  14,962  
Dividends payable24,140  21,684  
Total liabilities532,567  591,270  
Commitments and contingencies (Note 10)
Equity:
Preferred stock, $0.01 par value; 100,000,000 shares authorized, no shares issued and outstanding as of June 30, 2020 and December 31, 2019
    
Common stock, $0.01 par value; 500,000,000 shares authorized, 95,214,080 and 95,103,270 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively
952  951  
Additional paid-in capital1,162,446  1,162,990  
Cumulative distributions in excess of earnings(245,952) (236,350) 
Total equity917,446  927,591  
Total liabilities and equity$1,450,013  $1,518,861  











See accompanying notes to condensed consolidated financial statements.

1

Table of Contents
CARETRUST REIT, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
(Unaudited)
 
 For the Three Months Ended June 30,For the Six Months Ended June 30,
 2020201920202019
Revenues:
Rental income$42,507  $44,123  $84,971  $82,470  
Independent living facilities615  887  1,240  1,747  
Interest and other income1,046  1,191  2,297  1,642  
Total revenues44,168  46,201  88,508  85,859  
Expenses:
Depreciation and amortization13,239  13,437  26,399  25,339  
Interest expense5,849  7,285  12,563  14,145  
Property taxes837  456  1,322  1,282  
Independent living facilities 546  719  1,092  1,426  
General and administrative4,762  4,606  8,816  7,916  
Total expenses25,233  26,503  50,192  50,108  
Other loss:
Loss on sale of real estate    (56)   
Net income$18,935  $19,698  $38,260  $35,751  
Earnings per common share:
Basic$0.20  $0.21  $0.40  $0.39  
Diluted$0.20  $0.21  $0.40  $0.39  
Weighted-average number of common shares:
Basic95,208  94,036  95,185  91,039  
Diluted95,208  94,036  95,185  91,039  













See accompanying notes to condensed consolidated financial statements.
2

Table of Contents
CARETRUST REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share and per share amounts)
(Unaudited)



Common StockAdditional
Paid-in
Capital
Cumulative
Distributions in Excess of Earnings
Total
Equity
SharesAmount
Balance at January 1, 202095,103,270  $951  $1,162,990  $(236,350) $927,591  
Issuance of common stock, net—  —  (90) —  (90) 
Vesting of restricted common stock, net of shares withheld for employee taxes93,061  1  (1,987) —  (1,986) 
Amortization of stock-based compensation—  —  884  —  884  
Common dividends ($0.25 per share)
—  —  —  (23,931) (23,931) 
Net income—  —  —  19,325  19,325  
Balance at March 31, 202095,196,331  $952  $1,161,797  $(240,956) $921,793  
Issuance of common stock, net—  —  (314) —  (314) 
Vesting of restricted common stock, net of shares withheld for employee taxes17,749      —    
Amortization of stock-based compensation—  —  963  —  963  
Common dividends ($0.25 per share)
—  —  —  (23,931) (23,931) 
Net income—  —  —  18,935  18,935  
Balance at June 30, 202095,214,080  $952  $1,162,446  $(245,952) $917,446  
































See accompanying notes to condensed consolidated financial statements.

3

Table of Contents
CARETRUST REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share and per share amounts)
(Unaudited)

 Common StockAdditional
Paid-in
Capital
Cumulative
Distributions in Excess of Earnings
Total
Equity
SharesAmount
Balance at January 1, 201985,867,044  $859  $965,578  $(198,190) $768,247  
Issuance of common stock, net2,459,000  24  47,219  —  47,243  
Vesting of restricted common stock, net of shares withheld for employee taxes72,229  1  (1,496) —  (1,495) 
Amortization of stock-based compensation—  —  994  —  994  
Common dividends ($0.225 per share)
—  —  —  (20,011) (20,011) 
Net income—  —  —  16,053  16,053  
Balance at March 31, 201988,398,273  $884  $1,012,295  $(202,148) $811,031  
Issuance of common stock, net6,641,250  67  148,731  —  148,798  
Vesting of restricted common stock, net of shares withheld for employee taxes33,700  —  (1,029) —  (1,029) 
Amortization of stock-based compensation—  —  1,147  —  1,147  
Common dividends ($0.225 per share)
—  —  —  (21,508) (21,508) 
Net income—  —  —  19,698  19,698  
Balance at June 30, 201995,073,223  $951  $1,161,144  $(203,958) $958,137  



















See accompanying notes to condensed consolidated financial statements.
4

Table of Contents
CARETRUST REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 For the Six Months Ended June 30,
 20202019
Cash flows from operating activities:
Net income$38,260  $35,751  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including below-market ground leases)26,428  25,354  
Amortization of deferred financing costs975  1,028  
Amortization of stock-based compensation1,847  2,141  
Straight-line rental income(48) (937) 
Noncash interest income  (21) 
Loss on sale of real estate56    
Interest income distribution from other real estate investment1,346  463  
Change in operating assets and liabilities:
Accounts and other receivables, net806  (2,091) 
Prepaid expenses and other assets528  (185) 
Accounts payable and accrued liabilities(2,256) 235  
Net cash provided by operating activities67,942  61,738  
Cash flows from investing activities:
Acquisitions of real estate, net of deposits applied(25,905) (285,946) 
Improvements to real estate(6,122) (68) 
Purchases of equipment, furniture and fixtures(112) (2,613) 
Investment in real estate mortgage and other loans receivable(13,958) (11,389) 
Principal payments received on real estate mortgage and other loans receivable 66,961  482  
Repayment of other real estate investment2,327  2,204  
Net proceeds from sales of real estate2,134  131  
Net cash provided by (used in) investing activities25,325  (297,199) 
Cash flows from financing activities:
Proceeds from (costs paid for) the issuance of common stock, net(404) 196,041  
Proceeds from the issuance of senior unsecured term loan  200,000  
Borrowings under unsecured revolving credit facility15,000  195,000  
Payments on unsecured revolving credit facility(75,000) (245,000) 
Payments on senior unsecured term loan  (100,000) 
Payments of deferred financing costs  (4,534) 
Net-settle adjustment on restricted stock(1,986) (2,524) 
Dividends paid on common stock(45,406) (37,685) 
Net cash (used in) provided by financing activities(107,796) 201,298  
Net decrease in cash and cash equivalents(14,529) (34,163) 
Cash and cash equivalents, beginning of period20,327  36,792  
Cash and cash equivalents, end of period$5,798  $2,629  
Supplemental disclosures of cash flow information:
Interest paid$11,586  $12,963  
Supplemental schedule of noncash investing and financing activities:
Increase in dividends payable$2,456  $3,834  
Right-of-use asset obtained in exchange for new operating lease obligation$599  $1,010  
Transfer of pre-acquisition costs to acquired assets$167  $242  
Increase in pre-acquisition costs payable$  $86  
Sale of real estate settled with note receivable$32,400  $  
See accompanying notes to condensed consolidated financial statements.
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1. ORGANIZATION
Description of Business—CareTrust REIT, Inc.’s (“CareTrust REIT” or the “Company”) primary business consists of acquiring, financing, developing and owning real property to be leased to third-party tenants in the healthcare sector. As of June 30, 2020, the Company owned and leased to independent operators, including The Ensign Group, Inc. (“Ensign”), 212 skilled nursing, multi-service campuses, assisted living and independent living facilities consisting of 21,659 operational beds and units located in 28 states with the highest concentration of properties by rental revenues located in California, Texas, Louisiana, Idaho and Arizona. As of June 30, 2020, the Company also owned and operated one independent living facility which had a total of 168 units located in Texas and also had one other real estate investment consisting of a mortgage loan receivable of $13.9 million.
In December 2019, COVID-19 was first reported in Wuhan, China, and on March 11, 2020, the World Health Organization declared COVID-19 a pandemic. In recent months, the COVID-19 outbreak has spread globally and has led governments and other authorities around the world, including federal, state and local authorities in the United States, to impose measures intended to reduce its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business limitations and closures (subject to exceptions for essential operations and businesses), quarantines and shelter-in-place orders. Although some of these governmental restrictions have since been lifted or scaled back, a recent surge of COVID-19 has resulted in the reimposition of certain restrictions and may lead to other restrictions being reimplemented in response to efforts to reduce the spread of COVID-19. Given the dynamic nature of these circumstances and the related adverse impact these restrictions have had, and may continue to have, on the economy generally, the Company’s business, results of operations and financial condition may be adversely impacted by the COVID-19 pandemic.
The duration and extent of the COVID-19 pandemic’s effect on the Company’s operational and financial performance, and the operational and financial performance of the Company’s tenants, will depend on future developments, which are highly uncertain and cannot be predicted at this time, including new information which may emerge concerning the severity of COVID-19, actions taken to contain COVID-19, any future resurgence of COVID-19 that may occur after the initial outbreak subsides, and how quickly and to what extent normal economic and operating conditions can resume. The adverse impact of the COVID-19 pandemic on the Company’s business, results of operations and financial condition could be material.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation—The accompanying condensed consolidated financial statements of the Company were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly, the condensed consolidated financial statements do not include all of the disclosures required by GAAP for a complete set of annual audited financial statements. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. In the opinion of management, all adjustments which are of a normal and recurring nature and considered necessary for a fair presentation of the results of the interim periods presented have been included. The results of operations for the interim periods are not necessarily indicative of results for the full year. All intercompany transactions and account balances within the Company have been eliminated.

Lessor Accounting—In accordance with Accounting Standards Codification (“ASC”) 842, Leases, the Company generally recognizes lease revenue on a straight-line basis of accounting. The Company generates revenues primarily by leasing healthcare-related properties to healthcare operators in triple-net lease arrangements, under which the tenant is solely responsible for the costs related to the property. Tenant reimbursements related to property taxes and insurance paid by the lessee directly to a third party on behalf of a lessor are required to be excluded from variable payments and from recognition in the lessors’ income statements. Otherwise, tenant recoveries for taxes and insurance are classified as additional rental income recognized by the lessor on a gross basis in its income statements. The Company recognized, on a gross basis, property taxes of $0.8 million and $1.6 million for the three and six months ended June 30, 2020, respectively. The Company recognized, on a gross basis, property taxes of $0.5 million and $1.3 million for the three and six months ended June 30, 2019, respectively.

The Company’s assessment of collectibility of its tenant receivables includes a binary assessment of whether or not substantially all of the amounts due under a tenant’s lease agreement are probable of collection. The Company considers the operator’s performance and anticipated trends, payment history, and the existence and creditworthiness of guarantees, among other factors, in making this determination. For such leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For such leases that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received
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from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectibility determination. For the three and six months ended June 30, 2020 and 2019, the Company did not recognize any write-off or recovery adjustments to rental income.
Estimates and Assumptions—The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management believes that the assumptions and estimates used in preparation of the underlying consolidated financial statements are reasonable. Actual results, however, could differ from those estimates and assumptions. 
 
Real Estate Acquisition Valuation— In accordance with ASC 805, Business Combinations, the Company’s acquisitions of real estate investments generally do not meet the definition of a business, and are treated as asset acquisitions. The assets acquired and liabilities assumed are measured at their acquisition date relative fair values. Acquisition costs are capitalized as incurred. The Company allocates the acquisition costs to the tangible assets, identifiable intangible assets/liabilities and assumed liabilities on a relative fair value basis. The Company assesses fair value based on available market information, such as capitalization and discount rates, comparable sale transactions and relevant per square foot or unit cost information. A real estate asset’s fair value may be determined utilizing cash flow projections that incorporate such market information. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, as well as market and economic conditions. The fair value of tangible assets of an acquired property is based on the value of the property as if it is vacant.

As part of the Company’s real estate acquisitions, the Company may commit to provide contingent payments to a seller or lessee (e.g., an earn-out payable upon the applicable property achieving certain financial metrics). Typically, when the contingent payments are funded, cash rent is increased by the amount funded multiplied by a rate stipulated in the agreement. Generally, if the contingent payment is an earn-out provided to the seller, the payment is capitalized to the property’s basis when earn-out becomes probable and estimable. If the contingent payment is an earn-out provided to the lessee, the payment is recorded as a lease incentive and is amortized as a yield adjustment over the life of the lease.
Impairment of Long-Lived Assets—At each reporting period, the Company evaluates its real estate investments to be held and used for potential impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The judgment regarding the existence of impairment indicators, used to determine if an impairment assessment is necessary, is based on factors such as, but not limited to, market conditions, operator performance and legal structure. If indicators of impairment are present, the Company evaluates the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying facilities. The most significant inputs to the undiscounted cash flows include, but are not limited to, facility level financial results, a lease coverage ratio, the intended hold period by the Company, and a terminal capitalization rate. The analysis is also significantly impacted by determining the lowest level of cash flows, which generally would be at the master lease level of cash flows. Provisions for impairment losses related to long-lived assets are recognized when expected future undiscounted cash flows are determined to be less than the carrying values of the assets. The impairment is measured as the excess of carrying value over fair value. All impairments are taken as a period cost at that time, and depreciation is adjusted going forward to reflect the new value assigned to the asset.

The Company classifies its real estate investments as held for sale when the applicable criteria have been met, which entails 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, the Company writes down the excess of the carrying value over the estimated fair value less costs to sell, resulting in an impairment of the real estate investments, if necessary, and ceases depreciation.

In the event of impairment, the fair value of the real estate investment is based on current market conditions and considers matters such as the forecasted operating cash flows, lease coverage ratios, capitalization rates, comparable sales data, and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers.

The Company’s ability to accurately estimate future cash flows and estimate and allocate fair values impacts the timing and recognition of impairments. While the Company believes its assumptions are reasonable, changes in these assumptions may have a material impact on financial results.

Other Real Estate InvestmentsIncluded in “Other real estate investments, net,” on the Company’s condensed consolidated balance sheet are mortgage loans receivable. Prior to the adoption of Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Subtopic 326) (“ASU 2016-13”), mortgage loans receivable were recorded at
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amortized cost, which consisted of the outstanding unpaid principal balance, net of unamortized costs and fees directly associated with origination of the loans. Interest income on the Company’s mortgage loans receivable was recognized over the life of the applicable investment using the interest method. Origination costs and fees directly related to the mortgage loans receivable were amortized over the term of the loan as an adjustment to interest income.

The Company evaluated at each reporting period each of its other real estate investments for indicators of impairment. An investment was impaired when, based on current information and events, it was probable that the Company would be unable to collect all amounts due according to the existing contractual terms. A reserve would be established for the excess of the carrying value of the investment over its fair value.

As of June 30, 2020, the Company had one mortgage loan receivable for which it had elected the fair value option upon origination. Instruments for which the fair value option has been elected are measured at fair value on a recurring basis with changes in fair value recognized in other loss on the Company’s condensed consolidated income statements. Interest income is recognized as earned within interest and other income in the condensed consolidated income statements.
Income Taxes—The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). The Company believes it has been organized and has operated, and the Company intends to continue to operate, in a manner to qualify for taxation as a REIT under the Code. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute to its stockholders at least 90% of the Company’s annual REIT taxable income (computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Company generally will not be subject to federal income tax to the extent it distributes as qualifying dividends all of its REIT taxable income to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. 
Recent Accounting Standards Adopted by the Company—In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, that changes the impairment model for most financial instruments by requiring companies to recognize an allowance for expected credit losses, rather than incurred losses as previously required by the other-than-temporary impairment model. ASU 2016-13 applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans receivable, held-to-maturity debt securities, net investments in leases, and off-balance-sheet credit exposures (e.g., loan commitments). In November 2018, the FASB released ASU No. 2018-19, Codification Improvements to Topic 326 Financial Instruments - Credit Losses (“ASU 2018-19”). ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of ASU 2016-13. Instead, impairment of receivables arising from operating leases should be accounted for under Subtopic 842-30 “Leases - Lessor.” Additionally, the FASB issued ASU No. 2019-05, Targeted Transition Relief (“ASU 2019-05”), to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. ASU 2016-13 became effective for reporting periods beginning after December 15, 2019, and was applied as a cumulative adjustment to retained earnings as of the effective date. The Company adopted ASU 2016-13 on January 1, 2020. With the Company’s primary business being leasing real property to third-party tenants, the majority of receivables that arise in the ordinary course of business qualify as operating leases and are not in the scope of ASU 2016-13.  However, based on the instruments held upon adoption on January 1, 2020, the standard applied to the Company’s then outstanding mortgage loans receivable, for which the Company elected the fair value option as provided for by ASU 2019-05.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”), which modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. ASU 2018-13 was effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted ASU 2018-13 on January 1, 2020. Adoption of the new standard did not have a material impact on the Company’s consolidated financial statements.
Recent Accounting Pronouncements— In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), that provides
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optional relief to applying reference rate reform to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”), which will be discontinued by the end of 2021. The amendments in this update are effective immediately and may be applied through December 31, 2022. The Company is still evaluating the impact of ASU 2020-04, but does not expect the adoption of the standard to have a material impact on the Company’s consolidated financial statements.

3. REAL ESTATE INVESTMENTS, NET
The following table summarizes the Company’s investment in owned properties as of June 30, 2020 and December 31, 2019 (dollars in thousands):
 
June 30, 2020December 31, 2019
Land$208,231  $204,154  
Buildings and improvements1,427,547  1,400,927  
Integral equipment, furniture and fixtures94,627  93,005  
Identified intangible assets1,650  1,650  
Real estate investments1,732,055  1,699,736  
Accumulated depreciation and amortization(311,943) (285,536) 
Real estate investments, net$1,420,112  $1,414,200  
As of June 30, 2020, 212 of the Company’s facilities were leased to various operators under triple-net leases. All of these leases contain annual escalators based on the percentage change in the Consumer Price Index (but not less than zero), some of which are subject to a cap, or fixed rent escalators.
As of June 30, 2020, the Company has one independent living facility that the Company owns and operates.
As of June 30, 2020, the Company’s total future minimum rental revenues for all of its tenants, excluding operating expense reimbursements, were (dollars in thousands): 
YearAmount
2020 (six months)$84,161  
2021168,585  
2022168,682  
2023168,378  
2024168,479  
2025168,581  
Thereafter966,894  
$1,893,760  

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


Recent Real Estate Acquisitions
The following table summarizes the Company’s acquisitions for the six months ended June 30, 2020 (dollars in thousands):

Type of Property
Purchase Price(1)
Initial Annual Cash RentNumber of Properties
Number of Beds/Units(2)
Skilled nursing$18,675  $1,669  1  99  
Multi-service campuses        
Assisted living7,396  590  1  62  
Total$26,071  $2,259  2  161  
        
        (1) Purchase price includes capitalized acquisition costs.
        (2) The number of beds/units includes operating beds at acquisition date.

Sale of Real Estate 
On February 14, 2020, the Company closed on the sale of six skilled nursing facilities formerly operated by affiliates of Metron Integrated Health Systems (“Metron”). In connection with the sale for $36.0 million, the Company received $3.5 million in cash and provided subsidiaries of Cascade Capital Group, LLC (“Cascade”), the purchaser of the properties, with a short-term mortgage loan secured by these properties for $32.4 million.  The mortgage loan bore interest at 7.5% and initially had a maturity date of March 31, 2020. In connection with the sale, the Company recognized a loss of approximately $0.1 million. In April 2020, the mortgage loan was settled with $18.9 million in cash and a new mortgage loan for $13.9 million. In July 2020, the Company received prepayment in full, including accrued interest, for the new $13.9 million mortgage loan. See Note 4, Other Real Estate Investments, Net, for further detail on the new mortgage loan.

4. OTHER REAL ESTATE INVESTMENTS, NET
Preferred Equity Investments—In September 2016, the Company completed a $2.3 million preferred equity investment with an affiliate of Cascadia Development, LLC. The preferred equity investment yielded a return equal to prime plus 9.5% but in no event less than 12.0% calculated on a quarterly basis on the outstanding carrying value of the investment. The investment was used to develop a 99-bed skilled nursing facility in Boise, Idaho. In connection with its investment, the Company held an option to purchase the development at a fixed-formula price upon stabilization, with an initial lease yield of at least 9.0%. The project was completed in the first quarter of 2018 and began lease-up in the second quarter of 2018. In January 2020, the Company purchased the skilled nursing facility for approximately $18.7 million, which included capitalized acquisition costs. The Company paid $15.0 million after receiving back its initial investment of $2.3 million and cumulative contractual preferred return through January 17, 2020, the acquisition date, of $1.4 million, of which less than $0.1 million was recognized as interest income during the six months ended June 30, 2020. The Company did not recognize any interest income during the three months ended June 30, 2020 related to preferred equity investments. As of June 30, 2020, the Company had no remaining preferred equity investments.

Mortgage Loans Receivable—In July 2019, the Company provided MCRC, LLC a real estate loan secured by a 176-bed skilled nursing facility in Manteca, California for $3.0 million, which bore a fixed interest rate of 8% and required monthly interest payments. Concurrently, the Company entered into a purchase and sale agreement to purchase the Manteca facility from MCRC, LLC for approximately $16.4 million subject to normal diligence and other contingencies. The loan documents provided for a maturity date of the earlier to occur of the closing date of the acquisition, or five business days following the termination of the purchase and sale agreement.  MCRC, LLC breached its obligation to sell the Manteca facility to the Company on the terms outlined in the purchase and sale agreement and to repay the real estate loan upon its stated maturity. As a result, the Company commenced non-judicial foreclosure proceedings with respect to the Manteca facility. In January 2020, the borrower further collateralized the loan by causing one of its affiliates to grant the Company a deed of trust in the real estate and improvements that constitute the Palm Gardens Assisted Living Facility in Yolo County, California. During the three months ended June 30, 2020, payment for the loan principal and accrued interest, including default interest, as well as reimbursement for attorney’s fees and certain other costs of suit, were received in full by the Company and, as a result, the Company withdrew all foreclosure-related proceedings related to the Manteca facility loan.

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In September 2019, the Company provided affiliates of CommuniCare Family of Companies (“CommuniCare”) a $26.5 million loan secured by mortgages on three skilled nursing facilities sold by the Company to CommuniCare, which bears a fixed interest rate of 10%. The mortgage loan, which requires CommuniCare to make monthly interest payments, was set to mature on February 29, 2020 and included an option to be prepaid before the maturity date. In January 2020, the Company amended the mortgage loan’s maturity date to April 30, 2020. In April 2020, the Company amended the mortgage loan’s maturity date to May 29, 2020. During the three months ended June 30, 2020, payment for the mortgage loan and accrued interest was received in full by the Company.

In February 2020, the Company provided subsidiaries of Cascade a $32.4 million loan secured by mortgages on the six skilled nursing facilities formerly operated by affiliates of Metron sold to Cascade in February 2020, as discussed in Note 3, Real Estate Investments, Net. The mortgage loan bore interest at a fixed rate of 7.5% and had a maturity date of March 31, 2020. In April 2020, the mortgage loan was settled in connection with a new mortgage loan transaction between the Company and a third-party institutional lender as co-lenders, pursuant to which the Company received $18.9 million in cash and a new mortgage loan for $13.9 million. The new mortgage loan with Cascade was secured by the same six skilled nursing facilities purchased by Cascade and was for a combined principal amount of $33.9 million, with the Company’s $13.9 million portion of the indebtedness initially bearing interest at a variable rate equal to LIBOR plus 4.00%, subject to a LIBOR floor of 1.75%. The new mortgage loan had a maturity date of April 29, 2022 and included two six-month extension options. In July 2020, prepayment for the mortgage loan of $13.9 million and accrued interest was received in full by the Company. See Note 12, Subsequent Events, for further detail.

During the three and six months ended June 30, 2020, the Company recognized $0.9 million and $2.0 million, respectively, of interest income related to its mortgage loans. During the three and six months ended June 30, 2019, the Company recognized $0.5 million and $1.0 million, respectively, of interest income related to its mortgage loans.

5. 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 and 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.

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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 and liabilities measured at fair value on a recurring basis as of June 30, 2020, aggregated by the level in the fair value hierarchy within which those instruments fall (dollars in thousands):


Level 1Level 2Level 3Balance as of June 30, 2020
Assets:
Mortgage loan receivable$  $  $13,924  $13,924  

Mortgage loan receivable: The fair value of the mortgage loan receivable 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. As such, the Company classifies the instrument as Level 3 due to the significant unobservable inputs used in determining the fair value of the underlying collateral which includes capitalization rates in the range of 12% - 13%. A change in these rates could materially impact the estimated fair value of such estimates. The fair value is not sensitive to changes in market interest rates due to the short term nature of the loan and the recent issuance of the note at market interest rates. As of June 30, 2020, the Company did not have any loans that were 90 days or more past due and, subsequent to June 30, 2020 the Company received prepayment in full, including accrued interest, for the mortgage loan. See Note 12, Subsequent Events, for further detail.

For the three and six months ended June 30, 2020 and 2019, there were no changes in assets and liabilities with Level 3 inputs in the fair value hierarchy.
Items Measured at Fair Value on a Non-Recurring Basis
Real Estate Investments: The Company performs quarterly impairment review procedures, primarily through continuous monitoring of events and changes in circumstances that could indicate the carrying value of its real estate assets may not be recoverable. The Company estimates fair values using Level 3 inputs and uses a combined income and market approach. Specifically, the fair value of the real estate investment is based on current market conditions and considers matters such as the forecasted operating cash flows, lease coverage ratios, capitalization rates, comparable sales data, and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. For the three and six months ended June 30, 2020 and 2019, there were no real estate assets deemed to be impaired.

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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 values, carrying amounts and fair values of the Company’s financial instruments as of June 30, 2020 and December 31, 2019 using Level 2 inputs for the Notes (as defined in Note 6, Debt, below), and Level 3 inputs, for all other financial instruments, is as follows (dollars in thousands):  

 June 30, 2020December 31, 2019
 LevelFace
Value
Carrying
Amount
Fair
Value
Face
Value
Carrying
Amount
Fair
Value
Financial assets:
Preferred equity investments3$  $  $  $2,327  $3,800  $3,674  
Mortgage loans receivable(1)
3$  $  $  $29,500  $29,500  $29,500  
Financial liabilities:
Senior unsecured notes payable2$300,000  $296,290  $306,000  $300,000  $295,911  $312,750  

(1)The Company elected the fair value option for the mortgage loan receivable that was outstanding as of June 30, 2020. See “Items Measured at Fair Value on a Recurring Basis” above.

Cash and cash equivalents, accounts and other receivables, other loans receivable, and accounts payable and accrued liabilities: These balances approximate their fair values due to the short-term nature of these instruments.

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


6. DEBT
The following table summarizes the balance of the Company’s indebtedness as of June 30, 2020 and December 31, 2019 (dollars in thousands):
June 30, 2020December 31, 2019
Principal AmountDeferred Loan FeesCarrying ValuePrincipal AmountDeferred Loan FeesCarrying Value
Senior unsecured notes payable$300,000  $(3,710) $296,290  $300,000  $(4,089) $295,911  
Senior unsecured term loan200,000  (1,181) 198,819  200,000  (1,287) 198,713  
Unsecured revolving credit facility      60,000    60,000  
$500,000  $(4,891) $495,109  $560,000  $(5,376) $554,624  
Senior Unsecured Notes Payable
On May 10, 2017, 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 an underwritten public offering of $300.0 million aggregate principal amount of 5.25% Senior Notes due 2025 (the “Notes”). The Notes were issued at par, resulting in gross proceeds of $300.0 million and net proceeds of approximately $294.0 million after deducting underwriting fees and other offering expenses. The Notes mature on June 1, 2025 and bear interest at a rate of 5.25% per year. Interest on the Notes is payable on June 1 and December 1 of each year.
As of June 1, 2020, the Issuers may redeem the Notes any time at the redemption prices set forth in the indenture. If certain changes of control of the Company occur, holders of the Notes will have the right to require the Issuers to repurchase their Notes at 101% of the 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 certain of the Company’s wholly owned existing and, subject to certain exceptions, future material
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subsidiaries (other than the Issuers); provided, however, that such guarantees are subject to automatic release under certain customary circumstances.
The indenture 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 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 also contains customary events of default.
As of June 30, 2020, the Company was in compliance with all applicable financial covenants under the indenture.

Unsecured Revolving Credit Facility and Term Loan
On August 5, 2015, the Company, CareTrust GP, LLC, the Operating Partnership, as the borrower, and certain of its wholly owned subsidiaries entered into a credit and guaranty agreement with KeyBank National Association, as administrative agent, an issuing bank and swingline lender, and the lenders party thereto (the “Prior Credit Agreement”). As later amended on February 1, 2016, the Prior Credit Agreement provided the following: (i) a $400.0 million unsecured asset based revolving credit facility (the “Prior Revolving Facility”), (ii) a $100.0 million non-amortizing unsecured term loan (the “Prior Term Loan” and, together with the Prior Revolving Facility, the “Prior Credit Facility”), and (iii) a $250.0 million uncommitted incremental facility. The Prior Revolving Facility was scheduled to mature on August 5, 2019, subject to two six-month extension options. The Prior Term Loan was scheduled to mature on February 1, 2023 and could be prepaid at any time subject to a 2% premium in the first year after issuance and a 1% premium in the second year after issuance.
On February 8, 2019, the Operating Partnership, as the borrower, the Company, as guarantor, CareTrust GP, LLC, and certain of the Operating Partnership’s wholly owned subsidiaries entered into an amended and restated credit and guaranty agreement with KeyBank National Association, as administrative agent, an issuing bank and swingline lender, and the lenders party thereto (the “Amended Credit Agreement”). The Amended Credit Agreement, which amended and restated the Prior Credit Agreement, provides for: (i) an unsecured revolving credit facility (the “Revolving Facility”) with revolving commitments in an aggregate principal amount of $600.0 million, including a letter of credit subfacility for 10% of the then available revolving commitments and a swingline loan subfacility for 10% of the then available revolving commitments and (ii) an unsecured term loan credit facility (the “Term Loan” and, together with the Revolving Facility, the “Amended Credit Facility”) in an aggregate principal amount of $200.0 million. Borrowing availability under the Revolving Facility is subject to no default or event of default under the Amended Credit Agreement having occurred at the time of borrowing. The proceeds of the Term Loan were used, in part, to repay in full all outstanding borrowings under the Prior Term Loan and Prior Revolving Facility under the Prior Credit Agreement. Future borrowings under the Amended Credit Facility will be used for working capital purposes, for capital expenditures, to fund acquisitions and for general corporate purposes.
The interest rates applicable to loans under the Revolving Facility are, at the Operating Partnership’s option, equal to either a base rate plus a margin ranging from 0.10% to 0.55% per annum or LIBOR plus a margin ranging from 1.10% to 1.55% per annum based on the debt to asset value ratio of the Company and its consolidated subsidiaries (subject to decrease at the Operating Partnership’s election if the Company obtains certain specified investment grade ratings on its senior long-term unsecured debt). The interest rates applicable to loans under the Term Loan are, at the Operating Partnership’s option, equal to either a base rate plus a margin ranging from 0.50% to 1.20% per annum or LIBOR plus a margin ranging from 1.50% to 2.20% per annum based on the debt to asset value ratio of the Company and its consolidated subsidiaries (subject to decrease at the Operating Partnership’s election if the Company obtains certain specified investment grade ratings on its senior long-term unsecured debt). In addition, the Operating Partnership will pay a facility fee on the revolving commitments under the Revolving Facility ranging from 0.15% to 0.35% per annum, based on the debt to asset value ratio of the Company and its consolidated subsidiaries (unless the Company obtains certain specified investment grade ratings on its senior long-term unsecured debt and the Operating Partnership elects to decrease the applicable margin as described above, in which case the Operating Partnership will pay a facility fee on the revolving commitments ranging from 0.125% to 0.30% per annum based on the credit ratings of the Company’s senior long-term unsecured debt). As of June 30, 2020, the Operating Partnership had $200.0 million outstanding under the Term Loan and no borrowings outstanding under the Revolving Facility.
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The Revolving Facility has a maturity date of February 8, 2023, and includes, at the sole discretion of the Operating Partnership, two, six-month extension options. The Term Loan has a maturity date of February 8, 2026.
The Amended Credit Facility is guaranteed, jointly and severally, by the Company and its wholly owned subsidiaries that are party to the Amended Credit Agreement (other than the Operating Partnership). The Amended Credit Agreement contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and its subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations, amend organizational documents and pay certain dividends and other restricted payments. The Amended Credit Agreement requires the Company to comply with financial maintenance covenants to be tested quarterly, consisting of a maximum debt to asset value ratio, a minimum fixed charge coverage ratio, a minimum tangible net worth, a maximum cash distributions to operating income ratio, a maximum secured debt to asset value ratio, a maximum secured recourse debt to asset value ratio, a maximum unsecured debt to unencumbered properties asset value ratio, a minimum unsecured interest coverage ratio and a minimum rent coverage ratio. The Amended Credit Agreement also contains certain customary events of default, including the failure to make timely payments under the Amended Credit Facility or other material indebtedness, the failure to satisfy certain covenants (including the financial maintenance covenants), the occurrence of change of control and specified events of bankruptcy and insolvency.
As of June 30, 2020, the Company was in compliance with all applicable financial covenants under the Amended Credit Agreement.

7. EQUITY
Common Stock
At-The-Market Offering—On March 10, 2020, the Company entered into a new equity distribution agreement to issue and sell, from time to time, up to $500.0 million in aggregate offering price of its common stock through an “at-the-market” equity offering program (the “New ATM Program”). In connection with the entry into the equity distribution agreement and the commencement of the New ATM Program, the Company’s “at-the-market” equity offering program pursuant to the Company’s prior equity distribution agreement, dated as of March 4, 2019, was terminated (the “Prior ATM Program”).
There was no New ATM Program or Prior ATM Program activity (or activity under any predecessor at-the-market equity offering programs) for the three months ended June 30, 2020 and 2019 or for the six months ended June 30, 2020. The following table summarizes predecessor at-the-market equity offering program activity for the six months ended June 30, 2019 (in thousands, expect per share amounts):
For the Six Months Ended
June 30, 2019
Number of shares2,459  
Average sales price per share$19.48  
Gross proceeds*$47,893  
*Total gross proceeds is before $0.6 million of commissions paid to the sales agents during the six months ended June 30, 2019 under the predecessor at-the-market equity offering program.
As of June 30, 2020, the Company had $500.0 million available for future issuances under the New ATM Program.

Share Repurchase Program—On March 20, 2020, the Company’s Board of Directors authorized a share repurchase program to repurchase up to $150.0 million of outstanding shares of the Company’s common stock (the “Repurchase Program”). Repurchases under the Repurchase Program, which expires on March 31, 2023, may be made through open market purchases, privately negotiated transactions, structured or derivative transactions, including accelerated share repurchase transactions, or other methods of acquiring shares, in each case subject to market conditions and at such times as shall be permitted by applicable securities laws and determined by management. Repurchases under the Repurchase Program may also be made pursuant to a plan adopted under Rule 10b5-1 promulgated under the Exchange Act. The Company expects to finance any share repurchases under the Repurchase Program using available cash and may also use short-term borrowings under the Revolving Facility. The Company did not repurchase any shares of common stock under the Repurchase Program during the three and six months ended June 30, 2020. The Repurchase Program may be modified, discontinued or suspended at any time.
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Dividends on Common StockThe following table summarizes the cash dividends on the Company’s common stock declared by the Company’s Board of Directors for the first six months of 2020 (dollars in thousands, except per share amounts):
For the Three Months Ended
March 31, 2020June 30, 2020
Dividends declared per share$0.25  $0.25  
Dividends payment dateApril 15, 2020July 15, 2020
Dividends payable as of record date$23,931  $23,931  
Dividends record dateMarch 31, 2020June 30, 2020

8. 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 and other incentive awards to officers, employees and directors in connection with their employment with or services provided to the Company.
Restricted Stock Awards— In connection with the separation of Ensign’s healthcare business and its real estate business into two separate and independently publicly traded companies (the “Spin-Off”), employees of Ensign who had unvested shares of restricted stock were given one share of CareTrust REIT unvested restricted stock totaling 207,580 shares at the Spin-Off. These restricted shares are subject to a time vesting provision only and the Company does not recognize any stock compensation expense associated with these awards. As of June 30, 2020, there were 1,760 unvested restricted stock awards outstanding that were issued in connection with the Spin-Off.
In January 2020 and March 2020, the Compensation Committee of the Company’s Board of Directors granted 27,000 and 107,790 shares of restricted stock, respectively, to officers and employees. Each share had a fair market value on the date of grant of $22.18 and $19.06 per share, respectively, based on the closing market price of the Company’s common stock on that date, and the shares vest in four equal annual installments beginning on the first anniversary of the grant date. Additionally, in March 2020, the Compensation Committee granted 107,790 performance stock awards to officers. Each share had a fair market value on the date of grant of $19.06 per share, based on the closing market price of the Company’s common stock on that date. Performance stock awards are subject to both time and performance based conditions and vest over a one- to four-year period. The amount of performance awards that will ultimately vest is dependent on the Company’s Normalized Funds from Operations (“NFFO”) per share, as defined by the Compensation Committee, meeting or exceeding fiscal year over year growth of 5.0% or greater.
In April 2020, the Compensation Committee of the Company's Board of Directors granted 27,611 shares of restricted stock to members of the Board of Directors. Each share had a fair market value on the date of grant of $16.48 per share, based on the closing market price of the Company's common stock on that date, and the shares vest in full on the earlier to occur of April 29, 2021 or the Company’s 2021 Annual Meeting of Stockholders.
The following table summarizes the stock-based compensation expense recognized (dollars in thousands):
 For the Three Months Ended June 30,For the Six Months Ended June 30,
 2020201920202019
Stock-based compensation expense$963  $1,147  $1,847  $2,141  
As of June 30, 2020, there was $7.5 million of unamortized stock-based compensation expense related to unvested awards and the weighted-average remaining vesting period of such awards was 2.8 years. 

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9. EARNINGS PER COMMON SHARE