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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-36181
 
 
CareTrust REIT, Inc.
(Exact name of registrant as specified in its charter) 
 
Maryland
 
46-3999490
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
905 Calle Amanecer, Suite 300, San Clemente, CA
 
92673
(Address of principal executive offices)
 
(Zip Code)
(949) 542-3130
(Registrant’s telephone number, including area code)
 
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.    x  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).    x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
 
x
  
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    x  No
As of May 6, 2019, there were 95,582,455 shares of common stock outstanding.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
CTRE
The Nasdaq Stock Market LLC
(Nasdaq Global Select Market)




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)
 
 
March 31, 2019
 
December 31, 2018
Assets:
 
 
 
Real estate investments, net
$
1,259,336

 
$
1,216,237

Other real estate investments, net
29,419

 
18,045

Cash and cash equivalents
214,354

 
36,792

Accounts and other receivables, net
8,360

 
11,387

Prepaid expenses and other assets
8,759

 
8,668

Deferred financing costs, net
3,758

 
633

Total assets
$
1,523,986

 
$
1,291,762

Liabilities and Equity:
 
 
 
Senior unsecured notes payable, net
$
295,342

 
$
295,153

Senior unsecured term loan, net
198,555

 
99,612

Unsecured revolving credit facility
185,000

 
95,000

Accounts payable and accrued liabilities
13,972

 
15,967

Dividends payable
20,086

 
17,783

Total liabilities
712,955

 
523,515

Commitments and contingencies (Note 10)

 

Equity:
 
 
 
Preferred stock, $0.01 par value; 100,000,000 shares authorized, no shares issued and outstanding as of March 31, 2019 and December 31, 2018

 

Common stock, $0.01 par value; 500,000,000 shares authorized, 88,398,273 and 85,867,044 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
884

 
859

Additional paid-in capital
1,012,295

 
965,578

Cumulative distributions in excess of earnings
(202,148
)
 
(198,190
)
Total equity
811,031

 
768,247

Total liabilities and equity
$
1,523,986

 
$
1,291,762

See accompanying notes to condensed consolidated financial statements.


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CARETRUST REIT, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
(Unaudited)
 
 
For the Three Months Ended March 31,
 
2019
 
2018
Revenues:
 
 
 
Rental income
$
38,347

 
$
33,816

Tenant reimbursements

 
2,968

Independent living facilities
860

 
799

Interest and other income
451

 
518

Total revenues
39,658

 
38,101

Expenses:
 
 
 
Depreciation and amortization
11,902

 
11,577

Interest expense
6,860

 
7,092

Property taxes
826

 
2,968

Independent living facilities
707

 
716

General and administrative
3,310

 
3,192

Total expenses
23,605

 
25,545

Other income:
 
 
 
Gain on sale of real estate

 
2,051

Net income
$
16,053

 
$
14,607

Earnings per common share:
 
 
 
Basic
$
0.18

 
$
0.19

Diluted
$
0.18

 
$
0.19

Weighted-average number of common shares:
 
 
 
Basic
88,010

 
75,504

Diluted
88,010

 
75,504

See accompanying notes to condensed consolidated financial statements.


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

 
Common Stock
 
Additional
Paid-in
Capital
 
Cumulative
Distributions in Excess of Earnings
 
Total
Equity
Shares
 
Amount
 
Balance at January 1, 2018
75,478,202

 
$
755

 
$
783,237

 
$
(189,375
)
 
$
594,617

Issuance of common stock, net

 

 
(27
)
 

 
(27
)
Vesting of restricted common stock, net of shares withheld for employee taxes
43,844

 

 
(605
)
 

 
(605
)
Amortization of stock-based compensation

 

 
904

 

 
904

Common dividends ($0.205 per share)

 

 

 
(15,608
)
 
(15,608
)
Net income

 

 

 
14,607

 
14,607

Balance at March 31, 2018
75,522,046

 
$
755

 
$
783,509

 
$
(190,376
)
 
$
593,888



 
Common Stock
 
Additional
Paid-in
Capital
 
Cumulative
Distributions in Excess of Earnings
 
Total
Equity
Shares
 
Amount
 
Balance at January 1, 2019
85,867,044

 
859

 
965,578

 
(198,190
)
 
768,247

Issuance of common stock, net
2,459,000

 
24

 
47,219

 

 
47,243

Vesting of restricted common stock, net of shares withheld for employee taxes
72,229

 
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, 2019
88,398,273

 
$
884

 
$
1,012,295

 
$
(202,148
)
 
$
811,031

See accompanying notes to condensed consolidated financial statements.


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CARETRUST REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

 
For the Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
16,053

 
$
14,607

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization (including a below-market ground lease)
11,906

 
11,582

Amortization of deferred financing costs
541

 
484

Amortization of stock-based compensation
994

 
904

Straight-line rental income
(463
)
 
(591
)
Noncash interest income
(10
)
 
(106
)
Gain on sale of real estate

 
(2,051
)
Change in operating assets and liabilities:
 
 
 
Accounts and other receivables, net
(1,220
)
 
(155
)
Prepaid expenses and other assets
(116
)
 
(36
)
Accounts payable and accrued liabilities
2,389

 
(2,579
)
Net cash provided by operating activities
30,074

 
22,059

Cash flows from investing activities:
 
 
 
Acquisitions of real estate
(52,697
)
 
(47,103
)
Improvements to real estate
(452
)
 
(11
)
Purchases of equipment, furniture and fixtures
(1,806
)
 
(27
)
Investment in real estate mortgage and other loans receivable
(11,389
)
 

Principal payments received on real estate mortgage and other loans receivable
411

 
23

Escrow deposits for acquisitions of real estate
(375
)
 
(1,000
)
Net proceeds from the sale of real estate
131

 
13,004

Net cash used in investing activities
(66,177
)
 
(35,114
)
Cash flows from financing activities:
 
 
 
Proceeds from the issuance of common stock, net
47,260

 
(10
)
Proceeds from the issuance of senior unsecured term loan
200,000

 

Borrowings under unsecured revolving credit facility
185,000

 
60,000

Payments on unsecured revolving credit facility
(95,000
)
 
(25,000
)
Payments on senior unsecured term loan
(100,000
)
 

Payments of deferred financing costs
(4,390
)
 

Net-settle adjustment on restricted stock
(1,495
)
 
(605
)
Dividends paid on common stock
(17,710
)
 
(14,044
)
Net cash provided by financing activities
213,665

 
20,341

Net increase in cash and cash equivalents
177,562

 
7,286

Cash and cash equivalents, beginning of period
36,792

 
6,909

Cash and cash equivalents, end of period
$
214,354

 
$
14,195

Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
2,242

 
$
2,675

Supplemental schedule of noncash investing and financing activities:
 
 
 
Increase in dividends payable
$
2,303

 
$
1,564

Increase in deferred financing costs payable
$
144

 
$

See accompanying notes to condensed consolidated financial statements.

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CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)



1. ORGANIZATION
Description of Business—CareTrust REIT, Inc.’s (“CareTrust REIT” or the “Company”) primary business consists of acquiring, financing, developing and owning real property to be leased to third-party tenants in the healthcare sector. As of March 31, 2019, the Company owned and leased to independent operators, including The Ensign Group, Inc. (“Ensign”), 199 skilled nursing, multi-service campuses, assisted living and independent living facilities consisting of 19,668 operational beds and units located in Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Maryland, Michigan, Minnesota, Montana, Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oregon, South Dakota, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin. The Company also owns and operates three independent living facilities which have a total of 264 units located in Texas and Utah. As of March 31, 2019, the Company also had other real estate investments consisting of two preferred equity investments totaling $5.7 million and two mortgage loans receivable of $23.7 million.

 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation—The accompanying condensed consolidated financial statements of the Company reflect, for all periods presented, the historical financial position, results of operations and cash flows of the Company and its consolidated subsidiaries consisting of (i) the net-leased skilled nursing, multi-service campuses, assisted living and independent living facilities, (ii) the operations of the three independent living facilities that the Company owns and operates; and (iii) the preferred equity investments and the mortgage loans receivable.
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, 2018. In the opinion of management, all adjustments which are of a normal and recurring nature and considered necessary for a fair presentation of the results of the interim periods presented have been included. The results of operations for the interim periods are not necessarily indicative of results for the full year. All intercompany transactions and account balances within the Company have been eliminated.

Recent Accounting Standards Adopted by the Company—On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) that sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a lease agreement (i.e., lessees and lessors). Upon adoption of the lease ASU on January 1, 2019, the Company elected the following practical expedients provided by ASU No. 2018-11, Leases - Targeted Improvements and ASU No. 2018-20, Narrow Scope Improvements for Lessors (together with ASU 2016-02, the “new lease ASUs”):

Package of practical expedients – requires the Company not to reevaluate its existing or expired leases as of January 1, 2019, under the new lease ASUs.
Optional transition method practical expedient – requires the Company to apply the new lease ASUs prospectively from the adoption date of January 1, 2019.
Single component practical expedient – requires the Company to account for lease and nonlease components associated with that lease as a single component under the new lease ASUs, if certain criteria are met.
Short-term leases practical expedient – for the Company’s operating leases with a term of less than 12 months in which it is the lessee, this expedient requires the Company not to record on its balance sheet related lease liabilities and right-of-use assets.
Overview related to both lessee and lessor accounting—The lease ASUs set new criteria for determining the classification of finance leases for lessees and sales-type leases for lessors. The criteria to determine whether a lease should be accounted for as a finance (sales-type) lease include the following: (i) ownership is transferred from lessor to lessee by the end of the lease term, (ii) an option to purchase is reasonably certain to be exercised, (iii) the lease term is for the major part of the underlying asset’s remaining economic life, (iv) the present value of lease payments equals or exceeds substantially all of the fair value of the underlying asset, and (v) the underlying asset is specialized and is expected to have no alternative use at the end of the lease term. If any of these criteria is met, a lease is classified as a finance lease by the lessee and as a sales-type lease

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CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


by the lessor. If none of the criteria are met, a lease is classified as an operating lease by the lessee, but may still qualify as a direct financing lease or an operating lease for the lessor. The existence of a residual value guarantee from an unrelated third party other than the lessee may qualify the lease as a direct financing lease by the lessor. Otherwise, the lease is classified as an operating lease by the lessor.
The election of the package of practical expedients discussed above and the optional transition method allowed the Company not to reassess:

Whether any expired or existing contracts as of January 1, 2019, were leases or contained leases.
This practical expedient is primarily applicable to entities that have contracts containing embedded leases. As of January 1, 2019, the Company had no such contracts, therefore this practical expedient had no effect on the Company.
The lease classification for any leases expired or existing as of January 1, 2019.
The election of the package of practical expedients required the Company not to reassess the classification of its leases existing as of January 1, 2019. For example, all of the Company’s leases that were classified as operating leases in accordance with the lease accounting standards in effect prior to January 1, 2019, continue to be classified as operating leases after adoption of the new lease ASUs.
The Company applied the package of practical expedients consistently to all leases (i.e., in which the Company was the lessee or a lessor) that commenced before January 1, 2019. The election of this package permits the Company to “run off” its leases that commenced before January 1, 2019, for the remainder of their lease terms and to apply the new lease ASUs to leases commencing or modified after January 1, 2019.
Lessor Accounting—Under the new lease ASUs, each lease agreement is evaluated to identify the lease and nonlease components at lease inception. The total consideration in the lease agreement is allocated to the lease and nonlease components based on their relative stand-alone selling prices. The new lease ASUs govern the recognition of revenue for lease components, and revenue related to nonlease components is subject to the revenue recognition ASU. Tenant recoveries for utilities, repairs and maintenance, and common area expenses are considered nonlease components. 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. As such, the Company has concluded its leases do not contain material nonlease components. Tenant reimbursements related to property taxes and insurance are neither lease nor nonlease components under the new lease ASUs. If a lessee makes payments for taxes and insurance directly to a third party on behalf of a lessor, lessors are required to exclude them 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.
On January 1, 2019, the Company elected the single component practical expedient, which allows a lessor, by class of underlying asset, not to allocate the total consideration to the lease and nonlease components based on their relative stand-alone selling prices. This single component practical expedient requires the Company to account for the lease component and nonlease component(s) associated with that lease as a single component if (i) the timing and pattern of transfer of the lease component and the nonlease component(s) associated with it are the same and (ii) the lease component would be classified as an operating lease if it were accounted for separately. If the Company determines that the lease component is the predominant component, the Company accounts for the single component as an operating lease in accordance with the new lease ASUs. Conversely, the Company is required to account for the combined component under the new revenue recognition standard if the Company determines that the nonlease component is the predominant component. As a result of this assessment, rental revenues and tenant recoveries from the lease of real estate assets that qualify for this expedient are accounted for as a single component under the new lease ASUs, with tenant recoveries primarily as variable consideration. Tenant recoveries that do not qualify for the single component practical expedient and are considered nonlease components are accounted for under the revenue recognition standard. The components of the Company’s operating leases qualify for the single component presentation.
For the three months ended March 31, 2018, the Company recognized tenant recoveries for real estate taxes of $3.0 million, which were classified as tenant reimbursements on the Company’s condensed consolidated income statements. Prior to the adoption of Accounting Standard Codification (“ASC”) 842, the Company recognized tenant recoveries as tenant reimbursement revenues regardless of whether the third party was paid by the lessor or lessee. Effective January 1, 2019, such tenant recoveries are recognized to the extent that the Company pays the third party directly and classified as rental income on

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CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


the Company’s condensed consolidated income statements. Due to the application of the new lease ASUs, the Company recognized, on a gross basis, real estate taxes of $0.8 million for the three months ended March 31, 2019.
Under the new lease ASUs, the Company recognizes rental revenue, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases, if any, from tenants under lease arrangements with minimum fixed and determinable increases on a straight-line basis over the non-cancellable term of the related leases when collectability is probable. For the three months ended March 31, 2019, the Company did not recognize any adjustments to rental income related to recognized rental income in the prior periods.
Lessee Accounting—Under the new lease ASUs, lessees are required to apply a dual approach by classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, which corresponds to a similar evaluation performed by lessors. In addition to this classification, a lessee is also required to recognize a right-of-use asset and a lease liability for all leases regardless of their classification, whereas a lessor is not required to recognize a right-of-use asset and a lease liability for any operating leases.
As of March 31, 2019, the remaining contractual payments under the Company’s ground and office lease arrangements for which it is the lessee aggregated approximately $0.1 million. While these leases are subject to this ASU application effective January 1, 2019, the lease liability and corresponding right-of-use asset do not have a material effect on the Company’s condensed consolidated financial statements.
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, acquisitions that are income-producing real estate are recorded as a business combination. If the acquisition does not meet the definition of a business, acquisitions are recorded as an asset acquisition. The assets acquired and liabilities assumed are measured at their acquisition date fair values for a business combination and at relative fair values for an asset acquisition. For transactions that are business combinations, acquisition costs are expensed as incurred and restructuring costs that do not meet the definition of a liability at the acquisition date are expensed in periods subsequent to the acquisition date. For transactions that are asset acquisitions, acquisition costs are capitalized as incurred. The Company’s real estate acquisitions generally are classified as asset acquisitions.
In addition, for such asset acquisitions, no goodwill is recognized and third party transaction costs are capitalized. 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. 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, management evaluates the Company’s real estate investments for impairment indicators, including the evaluation of the useful lives of the Company’s assets. Management also assesses the carrying value of the Company’s real estate investments whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The judgment regarding the existence of impairment indicators is

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CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


based on factors such as, but not limited to, market conditions, operator performance and legal structure. If indicators of impairment are present, management evaluates the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying facilities. Provisions for impairment losses related to long-lived assets are recognized when expected future undiscounted cash flows are determined to be less than the carrying values of the assets. An adjustment is made to the net carrying value of the real estate investments for the excess of carrying value over fair value. All impairments are taken as a period cost at that time, and depreciation is adjusted going forward to reflect the new value assigned to the asset.
If the Company decides to sell real estate properties, it evaluates the recoverability of the carrying amounts of the assets. If the evaluation indicates that the carrying value is not recoverable from estimated net sales proceeds, the property is written down to estimated fair value less costs to sell.
In the event of impairment, the fair value of the real estate investment is determined by market research, which includes valuing the property in its current use as well as other alternative uses, and involves significant judgment. Management’s estimates of cash flows and fair values of the properties are based on current market conditions and consider matters such as rental rates and occupancies for comparable properties, recent sales data for comparable properties, and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. 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.
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 Pronouncements—In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”) that changes the impairment model for most financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses as required currently by the other-than-temporary impairment model. ASU 2016-13 will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases, and off-balance-sheet credit exposures (e.g., loan commitments). ASU 2016-13 is effective for reporting periods beginning after December 15, 2019, with early adoption permitted, and will be applied as a cumulative adjustment to retained earnings as of the effective date. The Company is currently assessing the potential effect the adoption of ASU 2016-13 will have on the Company’s condensed consolidated financial statements.















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CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


3. REAL ESTATE INVESTMENTS, NET
The following table summarizes the Company’s investment in owned properties as of March 31, 2019 and December 31, 2018 (dollars in thousands):
 
 
March 31, 2019
 
December 31, 2018
Land
$
176,798

 
$
166,948

Buildings and improvements
1,243,331

 
1,201,209

Integral equipment, furniture and fixtures
90,656

 
87,623

Identified intangible assets
1,400

 
2,382

Real estate investments
1,512,185

 
1,458,162

Accumulated depreciation and amortization
(252,849
)
 
(241,925
)
Real estate investments, net
$
1,259,336

 
$
1,216,237

As of March 31, 2019, 93 of the Company’s 202 facilities were leased to subsidiaries of Ensign under eight master leases (the “Ensign Master Leases”) which commenced on June 1, 2014. The obligations under the Ensign Master Leases are guaranteed by Ensign. A default by any subsidiary of Ensign with regard to any facility leased pursuant to an Ensign Master Lease will result in a default under all of the Ensign Master Leases. As of March 31, 2019, annualized revenues from the Ensign Master Leases were $59.8 million and are escalated annually by an amount equal to the product of (1) the lesser of the percentage change in the Consumer Price Index (“CPI”) (but not less than zero) or 2.5%, and (2) the prior year’s rent. In addition to rent, the subsidiaries of Ensign that are tenants under the Ensign Master Leases are solely responsible for the costs related to the leased properties (including property taxes, insurance, and maintenance and repair costs).
As of March 31, 2019, 106 of the Company’s 202 facilities were leased to various other operators under triple-net leases. All of these leases contain annual escalators based on CPI, some of which are subject to a cap, or fixed rent escalators.
The Company’s three remaining properties as of March 31, 2019 are the independent living facilities that the Company owns and operates.
The Company has only one identified intangible asset which relates to a below-market ground lease. The ground lease has a remaining term of 79 years.
As of March 31, 2019, the Company’s total future minimum rental revenues for all of its tenants, excluding operating expense reimbursements, were (dollars in thousands): 
Year
Amount
2019 (nine months)
$
113,386

2020
151,591

2021
152,057

2022
152,541

2023
152,882

2024
153,150

Thereafter
988,982

 
$
1,864,589






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CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


As of December 31, 2018, the Company’s total future minimum rental revenues for all of its tenants, excluding operating expense reimbursements, were (dollars in thousands):
Year
Amount
2019
$
146,010

2020
146,560

2021
147,132

2022
147,719

2023
148,169

Thereafter
1,055,012

 
$
1,790,602


Recent Real Estate Acquisitions

The following table summarizes the Company’s acquisitions for the three months ended March 31, 2019 (dollars in thousands):

Type of Property
Purchase Price(1)
 
Initial Annual Cash Rent
 
Number of Properties
 
Number of Beds/Units(2)
Skilled nursing
$
43,938

 
$
3,983

 
4

 
492

Multi-service campuses
8,940

 
854

 
1

 
128

Assisted living

 

 

 

Total
$
52,878

 
$
4,837

 
5

 
620

    
(1) Purchase price includes capitalized acquisition costs.
(2) The number of beds/units includes operating beds at acquisition date.

See Note 13, Subsequent Events, for information regarding the Company’s acquisitions since March 31, 2019.


4. OTHER REAL ESTATE INVESTMENTS

In July 2016, the Company completed a $2.2 million preferred equity investment with an affiliate of Cascadia Development, LLC. The preferred equity investment yields 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 Nampa, Idaho. In connection with its investment, the Company holds 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 fourth quarter 2017 and began lease-up during the first quarter of 2018.

In September 2016, the Company completed a $2.3 million preferred equity investment with an affiliate of Cascadia Development, LLC. The preferred equity investment yields 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 holds 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 2018 and began lease-up in the second quarter of 2018.

The Company recognized no interest income from its preferred equity investments in the three months ended March 31, 2019. During the three months ended March 31, 2018, the Company recognized $0.1 million in interest income from its preferred equity investments.




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CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


In October 2017, the Company provided an affiliate of Providence Group, Inc. (“Providence”) a mortgage loan secured by a skilled nursing facility for approximately $12.5 million inclusive of transaction costs, which bears a fixed interest rate of 9%. The mortgage loan requires Providence Group to make monthly principal and interest payments and is set to mature on October 26, 2020 and has an option to be prepaid before the maturity date.

In February 2019, the Company provided affiliates of Covenant Care a mortgage loan secured by first mortgages on five skilled nursing facilities for approximately $11.4 million, at an annual interest rate of 9%. The loan requires monthly interest payments and is set to mature on February 11, 2020, and includes twosix-month extension options.

The Company recognized $0.3 million of interest income related to the mortgage loans during each of the three months ended March 31, 2019 and 2018.


5. FAIR VALUE MEASUREMENTS
Financial Instruments: Considerable judgment is necessary to estimate the fair value 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 March 31, 2019 and December 31, 2018 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):
 
 
 
March 31, 2019
 
December 31, 2018
 
Face
Value
 
Carrying
Amount
 
Fair
Value
 
Face
Value
 
Carrying
Amount
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
Preferred equity investments
$
4,531

 
$
5,746

 
$
6,477

 
$
4,531

 
$
5,746

 
$
6,246

Mortgage loans receivable
23,739

 
23,673

 
23,739

 
12,375

 
12,299

 
12,375

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Senior unsecured notes payable
$
300,000

 
$
295,342

 
$
300,783

 
$
300,000

 
$
295,153

 
$
289,500

Cash and cash equivalents, accounts receivable, other loans receivable, and accounts payable and accrued liabilities: These balances approximate their fair values due to the short-term nature of these instruments.
Preferred equity investments: The fair values of the preferred equity investments were estimated using an internal valuation model that considered the expected future cash flows of the investment, the underlying collateral value and other credit enhancements.
Mortgage loans receivable: The fair values of the mortgage loans receivable were estimated using an internal valuation model that considered the expected future cash flows of the investments, the underlying collateral value and other credit enhancements.
Senior unsecured notes payable: The fair value of the Notes (as defined below) was determined using third-party quotes derived from orderly trades.
Unsecured revolving credit facility and senior unsecured term loan: The fair values approximate their carrying values as the interest rates are variable and approximate prevailing market interest rates for similar debt arrangements.
 










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CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


6. DEBT
The following table summarizes the balance of the Company’s indebtedness as of March 31, 2019 and December 31, 2018 (dollars in thousands):
 
March 31, 2019
 
December 31, 2018
 
Principal Amount
Deferred Loan Fees
Carrying Value
 
Principal Amount
Deferred Loan Fees
Carrying Value
Senior unsecured notes payable
$
300,000

$
(4,658
)
$
295,342

 
$
300,000

$
(4,847
)
$
295,153

Senior unsecured term loan
200,000

(1,445
)
198,555

 
100,000

(388
)
99,612

Unsecured revolving credit facility
185,000


185,000

 
95,000


95,000

 
$
685,000

$
(6,103
)
$
678,897

 
$
495,000

$
(5,235
)
$
489,765

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.
The Issuers may redeem the Notes any time before June 1, 2020 at a redemption price of 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 described in the indenture governing the Notes and, at any time on or after June 1, 2020, at the redemption prices set forth in the indenture. At any time on or before June 1, 2020, up to 40% of the aggregate principal amount of the Notes may be redeemed with the net proceeds of certain equity offerings if at least 60% of the originally issued aggregate principal amount of the Notes remains outstanding. In such case, the redemption price will be equal to 105.25% of the aggregate principal amount of the Notes to be redeemed plus accrued and unpaid interest, if any, to, but not including, the redemption date. 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 subsidiaries (other than the Issuers); provided, however, that such guarantees are subject to automatic release under certain customary circumstances, as described in Note 12, Summarized Condensed Consolidating Information.
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 March 31, 2019, 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

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CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


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 the Company’s compliance with certain financial covenants set forth in the Amended Credit Agreement governing the Revolving Facility, including a consolidated leverage ratio that requires the Company’s ratio of Adjusted Consolidated Debt to Consolidated Total Asset Value (each as defined in the Amended Credit Agreement) be less than 60%. 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 Company’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 Company’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 Company 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 Company 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 March 31, 2019, the Company had $200.0 million outstanding under the Term Loan and $185.0 million outstanding under the Revolving Facility. See Note 13, Subsequent Events, for additional information.
The Revolving Facility has a maturity date of February 8, 2023, and includes, at the sole discretion of the Company, 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 certain material agreements 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 and a maximum secured recourse debt to asset value ratio. The Amended Credit Agreement also contains certain customary events of default, including that the Company is required to operate in conformity with the requirements for qualification and taxation as a REIT.
As of March 31, 2019, the Company was in compliance with all applicable financial covenants under the Amended Credit Agreement.


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CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


Interest Expense
During the three months ended March 31, 2019, the Company incurred $6.9 million of interest expense, which included $0.5 million of amortization of deferred financing costs. During the three months ended March 31, 2018, the Company incurred $7.1 million of interest expense, which included $0.5 million of amortization of deferred financing costs. As of March 31, 2019 and December 31, 2018, the Company’s interest payable was $5.3 million and $1.3 million, respectively.


7. EQUITY
Common Stock
At-The-Market Offering—On March 4, 2019, the Company entered into a new equity distribution agreement to issue and sell, from time to time, up to $300.0 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 May 17, 2017, was terminated (the “Prior ATM Program”).

There was no New ATM Program activity for the three months ended March 31, 2019. The following table summarizes the Prior ATM Program activity for the three months ended March 31, 2019 (in thousands, except per share amounts):
 
For the Three Months Ended
 
March 31, 2019
Number of shares
2,459

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 three months ended March 31, 2019 under the Prior ATM Program.
As of March 31, 2019, the Company had $300.0 million available for future issuances under the New ATM Program.
Dividends on Common Stock—The following table summarizes the cash dividends on the Company’s common stock declared by the Company’s Board of Directors for 2019 (dollars in thousands, except per share amounts):
 
For the Three Months Ended
 
March 31, 2019
Dividends declared per share
$
0.225

Dividends payment date
April 15, 2019

Dividends payable as of record date
$
20,012

Dividends record date
March 29, 2019


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 March 31, 2019, there were 1,760 unvested restricted stock awards outstanding that were issued in connection with the Spin-Off.
In February 2019, the Compensation Committee of the Company’s Board of Directors granted 91,440 shares of restricted stock to officers and employees. Each share had a fair market value on the date of grant of $22.00 per share, based on the 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 February 2019, the Compensation Committee granted 71,440 performance stock awards to officers and employees. Each share had a fair market value on the date of grant of $22.00 per

14

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CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


share, based on the 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 meeting or exceeding fiscal year over year Normalized Funds from Operations (“NFFO”), as defined by the Compensation Committee, per share growth of 5.0% or greater.
The following table summarizes the stock-based compensation expense recognized (dollars in thousands):
 
For the Three Months Ended March 31,
 
2019
 
2018
Stock-based compensation expense
$
994

 
$
904

As of March 31, 2019, there was $6.9 million of unamortized stock-based compensation expense related to unvested awards and the weighted-average remaining vesting period of such awards was 2.4 years. 

9. EARNINGS PER COMMON SHARE
The following table presents the calculation of basic and diluted EPS for the Company’s common stock for the three months ended March 31, 2019 and 2018, and reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS (amounts in thousands, except per share amounts):
 
 
For the Three Months Ended March 31,
 
2019
 
2018
Numerator:
 
 
 
Net income
$
16,053

 
$
14,607

Less: Net income allocated to participating securities
(86
)
 
(126
)
Numerator for basic and diluted earnings available to common stockholders
$
15,967

 
$
14,481

Denominator:
 
 
 
Weighted-average basic common shares outstanding
88,010

 
75,504

Weighted-average diluted common shares outstanding
88,010

 
75,504

 
 
 
 
Earnings per common share, basic
$
0.18

 
$
0.19

Earnings per common share, diluted
$
0.18

 
$
0.19

The Company’s unvested restricted shares associated with its incentive award plan and unvested restricted shares issued to employees of Ensign at the Spin-Off have been excluded from the above calculation of earnings per diluted share for the three months ended March 31, 2019 and 2018, when their inclusion would have been anti-dilutive.

10. 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.






15

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CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


11. CONCENTRATION OF RISK
Major operator concentrations – As of March 31, 2019, Ensign leased 93 skilled nursing, multi-service campuses, assisted living and independent living facilities which had a total of 9,860 operational beds and are located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Texas, Utah and Washington. The four states in which Ensign leases the highest concentration of properties are California, Texas, Utah and Arizona. As of March 31, 2019, Ensign represents $59.8 million, or 40%, of the Company’s rental income, exclusive of operating expense reimbursements, on an annualized run-rate basis.
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.
 
12. SUMMARIZED CONDENSED CONSOLIDATING INFORMATION
The Notes issued by the Operating Partnership and CareTrust Capital Corp. on May 10, 2017 are jointly and severally, fully and unconditionally, guaranteed by CareTrust REIT, Inc., as the parent guarantor (the “Parent Guarantor”), and the wholly owned subsidiaries of the Parent Guarantor other than the Issuers (collectively, the “Subsidiary Guarantors” and, together with the Parent Guarantor, the “Guarantors”), subject to automatic release under certain customary circumstances, including if the Subsidiary Guarantor is sold or sells all or substantially all of its assets, the Subsidiary Guarantor is designated “unrestricted” for covenant purposes under the indenture governing the Notes, the Subsidiary Guarantor’s guarantee of other indebtedness which resulted in the creation of the guarantee of the Notes is terminated or released, or the requirements for legal defeasance or covenant defeasance or to discharge the indenture have been satisfied.
The following provides information regarding the entity structure of the Parent Guarantor, the Issuers and the Subsidiary Guarantors:
CareTrust REIT, Inc. – The Parent Guarantor was formed on October 29, 2013 in anticipation of the separation of Ensign’s healthcare business and its real estate business into two separate and independently publicly traded companies (the “Spin-Off”) and was a wholly owned subsidiary of Ensign prior to the effective date of the Spin-Off on June 1, 2014. The Parent Guarantor did not conduct any operations or have any business prior to the date of the consummation of the Spin-Off related transactions.
CTR Partnership, L.P. and CareTrust Capital Corp. – The Issuers, each of which is a wholly owned subsidiary of the Parent Guarantor, were formed on May 8, 2014 and May 9, 2014, respectively, in anticipation of the Spin-Off and the related transactions. The Issuers did not conduct any operations or have any business prior to the date of the consummation of the Spin-Off related transactions.
Subsidiary Guarantors – The Subsidiary Guarantors consist of all of the subsidiaries of the Parent Guarantor other than the Issuers.

Pursuant to Rule 3-10 of Regulation S-X, the following summarized consolidating information is provided for the Parent Guarantor, the Issuers, and the Subsidiary Guarantors. There are no subsidiaries of the Company other than the Issuers and the Subsidiary Guarantors. This summarized financial information has been prepared from the financial statements of the Company and the books and records maintained by the Company.

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CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)



CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2019
(in thousands, except share and per share amounts)
 
Parent
Guarantor
 
Issuers
 
Combined
Subsidiary
Guarantors
 
Elimination
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Real estate investments, net
$

 
$
935,419

 
$
323,917

 
$

 
$
1,259,336

Other real estate investments, net

 
23,673

 
5,746

 

 
29,419

Cash and cash equivalents

 
214,354

 

 

 
214,354

Accounts and other receivables, net

 
8,350

 
10

 

 
8,360

Prepaid expenses and other assets

 
8,756

 
3

 

 
8,759

Deferred financing costs, net

 
3,758

 

 

 
3,758

Investment in subsidiaries
831,117

 
495,487

 

 
(1,326,604
)
 

Intercompany

 

 
166,008

 
(166,008
)
 

Total assets
$
831,117

 
$
1,689,797

 
$
495,684

 
$
(1,492,612
)
 
$
1,523,986

Liabilities and Equity:
 
 
 
 
 
 
 
 
 
Senior unsecured notes payable, net
$

 
$
295,342

 
$

 
$

 
$
295,342

Senior unsecured term loan, net

 
198,555

 

 

 
198,555

Unsecured revolving credit facility

 
185,000

 

 

 
185,000

Accounts payable and accrued liabilities

 
13,775

 
197

 

 
13,972

Dividends payable
20,086

 

 

 

 
20,086

Intercompany

 
166,008

 

 
(166,008
)
 

Total liabilities
20,086

 
858,680

 
197

 
(166,008
)
 
712,955

Equity:
 
 
 
 
 
 
 
 
 
Common stock, $0.01 par value; 500,000,000 shares authorized, 88,398,273 shares issued and outstanding as of March 31, 2019
884

 

 

 

 
884

Additional paid-in capital
1,012,295

 
689,725

 
321,761

 
(1,011,486
)
 
1,012,295

Cumulative distributions in excess of earnings
(202,148
)
 
141,392

 
173,726

 
(315,118
)
 
(202,148
)
Total equity
811,031

 
831,117

 
495,487

 
(1,326,604
)
 
811,031

Total liabilities and equity
$
831,117

 
$
1,689,797

 
$
495,684

 
$
(1,492,612
)
 
$
1,523,986


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CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2018
(in thousands, except share and per share amounts)
 
Parent
Guarantor
 
Issuers
 
Combined
Subsidiary
Guarantors
 
Elimination
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Real estate investments, net
$

 
$
887,921

 
$
328,316

 
$

 
$
1,216,237

Other real estate investments, net

 
12,299

 
5,746

 

 
18,045

Cash and cash equivalents

 
36,792

 

 

 
36,792

Accounts and other receivables, net

 
9,359

 
2,028

 

 
11,387

Prepaid expenses and other assets

 
8,666

 
2

 

 
8,668

Deferred financing costs, net

 
633

 

 

 
633

Investment in subsidiaries
786,030

 
484,955

 

 
(1,270,985
)
 

Intercompany

 

 
151,242

 
(151,242
)
 

Total assets
$
786,030

 
$
1,440,625

 
$
487,334

 
$
(1,422,227
)
 
$
1,291,762

Liabilities and Equity:
 
 
 
 
 
 
 
 
 
Senior unsecured notes payable, net
$

 
$
295,153

 
$

 
$

 
$
295,153

Senior unsecured term loan, net

 
99,612

 

 

 
99,612

Unsecured revolving credit facility

 
95,000

 

 

 
95,000

Accounts payable and accrued liabilities

 
13,588

 
2,379

 

 
15,967

Dividends payable
17,783

 

 

 

 
17,783

Intercompany

 
151,242

 

 
(151,242
)
 

Total liabilities
17,783

 
654,595

 
2,379

 
(151,242
)
 
523,515

Equity:
 
 
 
 
 
 
 
 
 
Common stock, $0.01 par value; 500,000,000 shares authorized, 85,867,044 shares issued and outstanding as of December 31, 2018
859

 

 

 

 
859

Additional paid-in capital
965,578

 
661,686

 
321,761

 
(983,447
)
 
965,578

Cumulative distributions in excess of earnings
(198,190
)
 
124,344

 
163,194

 
(287,538
)
 
(198,190
)
Total equity
768,247

 
786,030

 
484,955

 
(1,270,985
)
 
768,247

Total liabilities and equity
$
786,030

 
$
1,440,625

 
$
487,334

 
$
(1,422,227
)
 
$
1,291,762


 
 

18

Table of Contents
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


CONDENSED CONSOLIDATING INCOME STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(in thousands)
 
Parent
Guarantor
 
Issuers
 
Combined
Subsidiary
Guarantors
 
Elimination
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Rental income
$

 
$
23,569

 
$
14,778

 
$

 
$
38,347

Independent living facilities

 

 
860

 

 
860

Interest and other income

 
451

 

 

 
451

Total revenues

 
24,020

 
15,638

 

 
39,658

Expenses:
 
 
 
 
 
 
 
 
 
Depreciation and amortization

 
7,503

 
4,399

 

 
11,902

Interest expense

 
6,860

 

 

 
6,860

Property taxes

 
826

 

 

 
826

Independent living facilities

 

 
707

 

 
707

General and administrative
994

 
2,316

 

 

 
3,310

Total expenses
994

 
17,505

 
5,106

 

 
23,605

Income in Subsidiary
17,047

 
10,532

 

 
(27,579
)
 

Net income
$
16,053

 
$
17,047

 
$
10,532

 
$
(27,579
)
 
$
16,053


19

Table of Contents
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


CONDENSED CONSOLIDATING INCOME STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2018
(in thousands)
 
Parent
Guarantor
 
Issuers
 
Combined
Subsidiary
Guarantors
 
Elimination
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Rental income
$

 
$
19,398

 
$
14,418

 
$

 
$
33,816

Tenant reimbursements

 
1,764

 
1,204

 

 
2,968

Independent living facilities

 

 
799

 

 
799

Interest and other income

 
423

 
95

 

 
518

Total revenues

 
21,585

 
16,516

 

 
38,101

Expenses:
 
 
 
 
 
 
 
 
 
Depreciation and amortization

 
6,937

 
4,640

 

 
11,577

Interest expense

 
7,092

 

 

 
7,092

Property taxes

 
1,764

 
1,204

 

 
2,968

Independent living facilities

 

 
716

 

 
716

General and administrative
904

 
2,288

 

 

 
3,192

Total expenses
904

 
18,081

 
6,560

 

 
25,545

Gain on sale of real estate

 
2,051

 

 

 
2,051

Income in Subsidiary
15,511

 
9,956

 

 
(25,467
)
 

Net income
$
14,607

 
$
15,511

 
$
9,956

 
$
(25,467
)
 
$
14,607









20

Table of Contents
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2019
(in thousands)
 
 
Parent
Guarantor
 
Issuers
 
Combined
Subsidiary
Guarantors
 
Elimination
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$

 
$
15,308

 
$
14,766

 
$

 
$
30,074

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Acquisitions of real estate

 
(52,697
)
 

 

 
(52,697
)
Improvements to real estate

 
(452
)
 

 

 
(452
)
Purchases of equipment, furniture and fixtures

 
(1,806
)
 

 

 
(1,806
)
Investment in real estate mortgage and other loans receivable

 
(11,389
)
 

 

 
(11,389
)
Principal payments received on real estate mortgage and other loans receivable

 
411

 

 

 
411

Escrow deposits for acquisitions of real estate

 
(375
)
 

 

 
(375
)
Net proceeds from the sale of real estate

 
131

 

 

 
131

Distribution from subsidiary
17,710

 

 

 
(17,710
)
 

Intercompany financing
(45,765
)
 
14,766

 

 
30,999

 

Net cash used in investing activities
(28,055
)
 
(51,411
)
 

 
13,289

 
(66,177
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from the issuance of common stock, net
47,260

 

 

 

 
47,260

Proceeds from the issuance of senior unsecured term loan

 
200,000

 

 

 
200,000

Borrowings under unsecured revolving credit facility

 
185,000

 

 

 
185,000

Payments on senior unsecured term loan

 
(100,000
)
 

 

 
(100,000
)
Payments on unsecured revolving credit facility

 
(95,000
)
 

 

 
(95,000
)
Payments of deferred financing costs

 
(4,390
)
 

 

 
(4,390
)
Net-settle adjustment on restricted stock
(1,495
)
 

 

 

 
(1,495
)
Dividends paid on common stock
(17,710
)
 

 

 

 
(17,710
)
Distribution to Parent

 
(17,710
)
 

 
17,710

 

Intercompany financing

 
45,765

 
(14,766
)
 
(30,999
)
 

Net cash provided by (used in) financing activities
28,055

 
213,665

 
(14,766
)
 
(13,289
)
 
213,665

Net increase in cash and cash equivalents

 
177,562

 

 

 
177,562

Cash and cash equivalents, beginning of period

 
36,792

 

 

 
36,792

Cash and cash equivalents, end of period
$

 
$
214,354

 
$

 
$

 
$
214,354



 

21

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CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2018
(in thousands)

 
Parent
Guarantor
 
Issuers
 
Combined
Subsidiary
Guarantors
 
Elimination
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities:
$

 
$
7,295

 
$
14,764

 
$

 
$
22,059

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Acquisitions of real estate

 
(47,103
)
 

 

 
(47,103
)
Improvements to real estate

 

 
(11
)
 

 
(11
)
Purchases of equipment, furniture and fixtures

 
(23
)
 
(4
)
 

 
(27
)
Principal payments received on mortgage loan receivable

 
23

 

 

 
23

Escrow deposit for acquisition of real estate

 
(1,000
)
 

 

 
(1,000
)
Net proceeds from the sale of real estate

 
13,004

 

 

 
13,004

Distribution from subsidiary
14,044

 

 

 
(14,044
)
 

Intercompany financing
615

 
14,749

 

 
(15,364
)
 

Net cash provided by (used in) investing activities
14,659

 
(20,350
)
 
(15
)
 
(29,408
)
 
(35,114
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 


Proceeds from the issuance of common stock, net
(10
)
 

 

 

 
(10
)
Borrowings under unsecured revolving credit facility

 
60,000

 

 

 
60,000

Payments on unsecured revolving credit facility

 
(25,000
)
 

 

 
(25,000
)
Net-settle adjustment on restricted stock
(605
)
 

 

 

 
(605
)
Dividends paid on common stock
(14,044
)
 

 

 

 
(14,044
)
Distribution to Parent

 
(14,044
)
 

 
14,044

 

Intercompany financing

 
(615
)
 
(14,749
)
 
15,364

 

Net cash (used in) provided by financing activities
(14,659
)
 
20,341

 
(14,749
)
 
29,408

 
20,341

Net increase in cash and cash equivalents

 
7,286

 

 

 
7,286

Cash and cash equivalents, beginning of period

 
6,909

 

 

 
6,909

Cash and cash equivalents, end of period
$

 
$
14,195

 
$

 
$

 
$
14,195

 

22

Table of Contents
CARETRUST REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Unaudited)


13. SUBSEQUENT EVENTS

Recent Acquisitions
In April 2019, the Company, completed a previously-disclosed $211.0 million multi-asset acquisition. The contractual initial annual cash rents from the acquisition are approximately $19.0 million. The two-state transaction included seven skilled nursing facilities and one multi-service campus in Louisiana, which were re-tenanted at closing with the Company’s existing tenant Priority Management Group, LLC. The acquisition also included three skilled nursing facilities and one multi-service campus in Texas, which were re-tenanted with Texas-based Southwest LTC, Ltd. under a new triple-net master lease with the Company. The amended lease with Priority Management Group, LLC has a remaining term of approximately 12.5 years. The lease with Southwest LTC, Ltd. carries an initial term of 15 years, with two five-year renewal options and CPI-based rent escalators.
The aggregate purchase price for the acquisition was approximately $215.0 million, inclusive of capital expenditure commitments and estimated acquisition costs, and was funded using approximately $185.0 million in borrowings under the Company’s Revolving Credit Facility, with the remainder funded with cash on hand.
In May 2019, the Company acquired one skilled nursing facility for approximately $10.0 million, which includes estimated capitalized acquisition costs. The contractual initial annual cash rent from the acquisition is approximately $0.9 million and was funded using cash on hand.

Public Offering of Common Stock
On April 15, 2019, the Company completed an underwritten public offering of 6,641,250 shares of its common stock, par value $0.01 per share, at an initial price to the public of $23.35, including 866,250 shares of common stock sold pursuant to the full exercise of an option to purchase additional shares of common stock granted to the underwriters, resulting in approximately $148.4 million in net proceeds, after deducting the underwriting discount and estimated gross offering expenses. The Company used the proceeds from the offering to repay a portion of the outstanding borrowings on its Revolving Credit Facility, which had been used to fund a portion of the purchase price of the April 2019 acquisition disclosed above under “Recent Acquisitions.”



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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 ability of our tenants to comply with applicable laws, rules and regulations in the operation of the properties we lease to them; (iii) 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; (iv) 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; (v) the ability to generate sufficient cash flows to service our outstanding indebtedness; (vi) access to debt and equity capital markets; (vii) fluctuating interest rates; (viii) the ability to retain our key management personnel; (ix) the ability to maintain our status as a real estate investment trust (“REIT”); (x) changes in the U.S. tax law and other state, federal or local laws, whether or not specific to REITs; (xi) other risks inherent in the real estate business, including potential liability relating to environmental matters and illiquidity of real estate investments; and (xii) any additional factors included in our Annual Report on Form 10-K for the year ended December 31, 2018, including in the section entitled “Risk Factors” in Item 1A of Part I of such report, 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, development and leasing of seniors housing and healthcare-related properties. As of March 31, 2019, we owned and leased to independent operators, including Ensign, 199 skilled nursing, multi-service campuses, assisted living and independent living facilities consisting of 19,668 operational beds and units located in Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Maryland, Michigan, Minnesota, Montana, Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oregon, South Dakota, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin. As of March 31, 2019, the 93 facilities leased to Ensign had a total of 9,860 operational beds and units which are located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Texas, Utah and Washington and the 106 remaining leased properties had a total of 9,808 operational beds and units and are located in California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Maryland, Michigan, Minnesota, Montana, New Mexico, North Carolina, North Dakota, Ohio, Oregon, South Dakota, Texas, Virginia, Washington, West Virginia and Wisconsin. We also own and operate three independent living facilities (“ILFs”), which had a total of 264 units located in Texas and Utah. As of March 31, 2019, we also had other real estate investments consisting of two preferred equity investments totaling $5.7 million and two mortgage loans receivable of $23.7 million.



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Table of Contents

We generate 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 (including property taxes, insurance, and maintenance and repair costs). We conduct and manage our business as one operating segment for internal reporting and internal decision-making purposes. We expect to grow our portfolio by pursuing opportunities to acquire additional properties that will be leased to a diverse group of local, regional and national healthcare providers, which may include Ensign, as well as senior housing operators and related businesses. We also anticipate diversifying our portfolio over time, including by acquiring properties in different geographic markets, and in different asset classes. In addition, we actively monitor the clinical, regulatory and financial operating results of our tenants, and work to identify opportunities within their operations and markets to improve their operating results at our facilities. We may periodically communicate such observations to our tenants; however, the tenants have sole discretion with respect to the day-to-day operation of the facilities they lease from us, and whether to implement any change or otherwise respond to any observation or issue we may share with them. We also periodically monitor the overall financial and operating strength of our operators. We have replaced tenants in the past, and may elect to replace tenants in the future, with new operators, including operators with whom we have had no prior landlord-tenant relationship as well as current tenants with whom we are comfortable expanding our relationship. We have also provided operators with strategic capital for facility upkeep and modernization, as well as short-term working capital loans when they are awaiting licensure and certification or conducting turnaround work in one or more of our properties, and we may selectively do so in the future. In addition, we periodically reassess the investments we have made and the operator relationships we have entered into, and have selectively disposed of facilities or investments, or terminated such relationships, and we expect to continue making such reassessments and, where appropriate, taking such actions.

Recent Transactions

Recent Investments
From January 1, 2019 through May 7, 2019, we acquired fifteen skilled nursing facilities and three multi-service campuses for approximately $277.9 million, which includes capitalized acquisition costs. These acquisitions are expected to generate initial annual cash revenues of approximately $24.8 million and an initial blended yield of approximately 8.9%. These acquisitions include our $215.0 million multi-asset, two-state transaction completed in April 2019 pursuant to which we acquired seven skilled nursing facilities and one skilled nursing and assisted living campus in Louisiana and three skilled nursing facilities and one continuing care retirement community in Texas. See Note 3, Real Estate Investments, Net and Note 13, Subsequent Events in the Notes to condensed consolidated financial statements for additional information.

At-The-Market Offering of Common Stock

On March 4, 2019, we entered into a new equity distribution agreement to issue and sell, from time to time, up to $300.0 million in aggregate offering price of our 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, our “at-the-market” equity offering program pursuant to our prior equity distribution agreement, dated as of May 17, 2017, was terminated (the “Prior ATM Program”).

There was no New ATM Program activity for the three months ended March 31, 2019. The following table summarizes the Prior ATM Program activity for 2019 (shares and dollars in thousands, except per share amounts):
 
For the Three Months Ended
 
March 31, 2019
Number of shares
2,459

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 three months ended March 31, 2019 under the Prior ATM Program.

As of March 31, 2019, we had $300.0 million available for future issuances under the New ATM Program.




25

Table of Contents

Public Offering of Common Stock

On April 15, 2019, we completed an underwritten public offering of 6,641,250 shares of our common stock, par value $0.01 per share, at an initial price to the public of $23.35, including 866,250 shares of common stock sold pursuant to the full exercise of an option to purchase additional shares of common stock granted to the underwriters, resulting in approximately $148.4 million in net proceeds, after deducting the underwriting discount and estimated gross offering expenses. We used the proceeds from the offering to repay a portion of the outstanding borrowings on our Revolving Facility (as defined below), which had been used to fund a portion of the purchase price for the April 2019 acquisition disclosed above under “Recent Investments.”

Results of Operations

Operating Results
Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018: 
 
Three Months Ended March 31,
 
Increase
(Decrease)
 
Percentage
Difference
 
2019
 
2018
 
 
(dollars in thousands)
Revenues:
 
 
 
 
 
 
 
Rental income
$
38,347

 
$
33,816

 
$
4,531

 
13
 %
Tenant reimbursements

 
2,968

 
(2,968
)
 
(100
)%
Independent living facilities
860

 
799

 
61

 
8
 %
Interest and other income
451

 
518

 
(67
)
 
(13
)%
Expenses:
 
 
 
 
 
 
 
Depreciation and amortization
11,902

 
11,577

 
325

 
3
 %
Interest expense
6,860

 
7,092

 
(232
)
 
(3
)%
Property taxes
826

 
2,968

 
(2,142
)
 
(72
)%
Independent living facilities
707

 
716

 
(9
)
 
(1
)%
General and administrative
3,310

 
3,192

 
118

 
4
 %
    

Rental income. Rental income was $38.3 million for the three months ended March 31, 2019 compared to $33.8 million for the three months ended March 31, 2018. The $4.5 million or 13% increase in rental income is primarily due to $2.8 million from real estate investments made after April 1, 2018, $0.9 million from increases in rental rates for our existing tenants, $0.8 million of tenant reimbursement revenue recognized and classified as rental income due to the adoption of Topic 842 (discussed below) and a $0.4 million increase in cash rents, partially offset by a $0.3 million decrease in rental income due to the sale of three assisted living facilities in March 2018 and a $0.1 million decrease in straight-line rent.
Tenant reimbursements and property taxes. Tenant reimbursements decreased $3.0 million or 100% for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Property taxes decreased $2.1 million or 72% for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. On January 1, 2019, we adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). Tenant reimbursements related to property taxes and insurance are neither lease nor nonlease components under the new lease ASUs. If a lessee makes payments for taxes and insurance directly to a third party on behalf of a lessor, lessors are required to exclude them from variable payments and from recognition in the lessors’ income statements. Otherwise, tenant recoveries for taxes and insurance are classified as additional lease revenue recognized by the lessor on a gross basis in its income statements. Prior to the adoption of the new ASU, we recognized tenant recoveries as tenant reimbursement revenues regardless of whether the third party was paid by the lessor or lessee. In the three months ended March 31, 2019, we recognized real estate taxes of $0.8 million, which were paid by us directly to third parties and classified as rental income on our condensed consolidated income statement.
Independent living facilities. Revenues and expenses from our three ILFs that we own and operate were flat for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.
Interest and other income. Interest and other income was flat at $0.5 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

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Table of Contents

Depreciation and amortization. Depreciation and amortization expense increased $0.3 million or 3% for the three months ended March 31, 2019 to $11.9 million compared to $11.6 million for the three months ended March 31, 2018, primarily due to new real estate investments made after April 1, 2018.
Interest expense. Interest expense decreased $0.2 million or 3% for the three months ended March 31, 2019 to $6.9 million compared to $7.1 million for the three months ended March 31, 2018. The decrease was primarily due to lower weighted average debt balance, partially offset by higher weighted average interest rates for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.
General and administrative expense. General and administrative expense increased $0.1 million or 4% for the three months ended March 31, 2019 to $3.3 million compared to $3.2 million for the three months ended March 31, 2018, primarily due to an increase related to amortization of stock-based compensation.

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.
As of March 31, 2019, we had cash and cash equivalents of $214.4 million.
During the three months ended March 31, 2019, we sold 2.5 million shares of common stock under our Prior ATM Program for gross proceeds of $47.9 million. The Prior ATM Program was terminated during the three months ended March 31, 2019 and, as of March 31, 2019, we had $300.0 million available for future issuances under the New ATM Program. See “Recent Transactions—At-The-Market Offering of Common Stock.” In addition, as of March 31, 2019, there was $185.0 million outstanding under the Revolving Facility (as defined below). Subsequent to March 31, 2019, we repaid approximately $150.0 million in borrowings under the Revolving Facility primarily using the net proceeds from our public offering of common stock in April 2019. See above under Recent Transactions—“Public Offering of Common Stock” for additional information. We believe that our available cash, expected operating cash flows, and the availability under our New ATM Program and Amended Credit Facility (as defined below) will provide sufficient funds for our operations, anticipated scheduled debt service payments and dividend plans for at least the next twelve months.
We intend to invest in and/or develop additional healthcare properties as suitable opportunities arise and 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 Amended Credit Facility, future borrowings or the proceeds from sales of shares of our common stock pursuant to our New 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 have filed an automatic shelf registration statement with the U.S. Securities and Exchange Commission that expires in May 2020, which will allow 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.
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.



27

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Cash Flows
The following table presents selected data from our condensed consolidated statements of cash flows for the periods presented: 
 
For the Three Months Ended March 31,
 
2019
 
2018
 
(dollars in thousands)
Net cash provided by operating activities
$
30,074

 
$
22,059

Net cash used in investing activities
(66,177
)
 
(35,114
)
Net cash provided by financing activities
213,665

 
20,341

Net increase in cash and cash equivalents
177,562

 
7,286

Cash and cash equivalents, beginning of period
36,792

 
6,909

Cash and cash equivalents, end of period
$
214,354

 
$
14,195

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
Net cash provided by operating activities for the three months ended March 31, 2019 was $30.1 million compared to $22.1 million for the three months ended March 31, 2018, an increase of $8.0 million. The increase was primarily due to an increase of collections of rental income due to acquisitions, increases in rental rates for existing tenants subsequent to March 31, 2018, and timing of payments to our vendors in settling accounts payable, and a decrease in interest paid on outstanding indebtedness.
Cash used in investing activities for the three months ended March 31, 2019 was primarily comprised of $64.5 million in acquisitions of real estate and investments in real estate mortgage loans. Cash used in investing activities for the three months ended March 31, 2018 consisted of $48.1 million related to acquisitions of real estate, partially offset by $13.0 million of net proceeds from real estate sales.
Our cash flows provided by financing activities for the three months ended March 31, 2019 was primarily comprised of $190.0 million in net borrowings under our Amended Credit Facility and Prior Credit Facility and $47.3 million in net proceeds from common stock sales under our Prior ATM Program, partially offset by $17.7 million in dividends paid and $4.4 million in payments of deferred financing costs. Our cash flows provided by financing activities for the three months ended March 31, 2018 was primarily comprised of $35.0 million in net borrowings under our Prior Credit Facility, partially offset by $14.0 million in dividends paid.

Indebtedness
Senior Unsecured Notes
On May 10, 2017, 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 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, beginning on December 1, 2017.
The Issuers may redeem the Notes any time before June 1, 2020 at a redemption price of 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 described in the indenture governing the Notes and, at any time on or after June 1, 2020, at the redemption prices set forth in the indenture. At any time on or before June 1, 2020, up to 40% of the aggregate principal amount of the Notes may be redeemed with the net proceeds of certain equity offerings if at least 60% of the originally issued aggregate principal amount of the Notes remains outstanding. In such case, the redemption price will be equal to 105.25% of the aggregate principal amount of the Notes to be redeemed plus accrued and unpaid interest, if any, to, but not including the redemption date. If certain changes of control of CareTrust REIT 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 CareTrust REIT and certain of CareTrust REIT’s wholly owned existing and, subject to certain exceptions, future

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material subsidiaries (other than the Issuers); provided, however, that such guarantees are subject to automatic release under certain customary circumstances, including if the subsidiary guarantor is sold or sells all or substantially all of its assets, the subsidiary guarantor is designated “unrestricted” for covenant purposes under