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OFFON

CARETRUST REIT, INC.

(CTRE)
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CARETRUST REIT, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

11/08/2021 | 09:02am EST
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 COVID-19 pandemic, including the risk of additional surges of
COVID-19 infections due to the rate of public acceptance and efficacy of
COVID-19 vaccines or to new and more contagious and/or vaccine resistant
variants, and the measures taken to prevent the spread of COVID-19 and the
related impact on our business or the businesses of our tenants; (ii) 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; (iii) the
ability of our tenants to comply with applicable laws, rules and regulations in
the operation of the properties we lease to them; (iv) 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; (v) 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;
(vi) the ability to generate sufficient cash flows to service our outstanding
indebtedness; (vii) access to debt and equity capital markets; (viii)
fluctuating interest rates; (ix) the ability to retain our key management
personnel; (x) the ability to maintain our status as a real estate investment
trust ("REIT"); (xi) changes in the U.S. tax law and other state, federal or
local laws, whether or not specific to REITs; (xii) other risks inherent in the
real estate business, including potential liability relating to environmental
matters and illiquidity of real estate investments; and (xiii) any additional
factors included under "Risk Factors" in our Annual Report on Form 10-K for the
year ended December 31, 2020, 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 September 30, 2021, we owned and leased to
independent operators, 225 skilled nursing, multi-service campuses, assisted
living and independent living facilities ("ILFs") consisting of 23,541
operational beds and units located in 28 states with the highest concentration
of properties by rental revenues located in California, Texas, Louisiana, Idaho
and Arizona. As of September 30, 2021, we also had other real estate investments
consisting of one mezzanine loan receivable with a carrying value of
$15.2 million.
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, maintenance and repair costs and capital expenditures, subject
to certain exceptions in the case of properties leased to Ensign and Pennant).
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 new or existing skilled nursing operators, as well as seniors
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
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monitor the clinical, regulatory and financial operating results of our tenants,
and work to identify opportunities within their operations and markets that
could improve their operating results at our facilities. We communicate such
observations to our tenants; however, we have no contractual obligation to do
so. Moreover, our tenants have sole discretion with respect to the day-to-day
operation of the facilities they lease from us, and how and whether to implement
any observation we may share with them. We also actively monitor the overall
occupancy, skilled mix, and other operating metrics of our tenants on at least a
monthly basis including, beginning in the quarter ended June 30, 2020, any
stimulus funds received by each tenant. We have replaced tenants in the past,
and may elect to replace tenants in the future, if they fail to meet the terms
and conditions of their leases with us. The replacement tenants may include
tenants with whom we have had no prior landlord-tenant relationship as well as
current tenants with whom we are comfortable expanding our relationships. We
have also provided select tenants 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 continue to do so in the future. In addition,
we periodically reassess the investments we have made and the tenant
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 Developments


COVID-19 Update
Tenants of our properties operating pursuant to triple-net master leases have
been adversely impacted, and we expect that they will continue to be adversely
impacted, by the COVID-19 pandemic. Our tenants are experiencing increased
operating costs as a result of actions they are taking to prevent or mitigate
the outbreak or spread of COVID-19 at their facilities, including in connection
with their implementation of safety protocols and procedures and other
regulatory requirements, as well as labor shortages resulting in limited
admissions, reduced occupancy and higher agency expense. To help offset these
costs as well as occupancy declines, various relief programs have been enacted
by federal and state governments, which have provided, and we expect will
continue to provide, some payments to our tenants, subject to the programs'
respective terms and conditions. The Coronavirus Aid, Relief, and Economic
Security Act (the "CARES Act") established a grant program administered by the
U.S. Department of Health and Human Services ("HHS") under which grants have
been made available to eligible healthcare providers for healthcare related
expenses or lost revenues attributable to COVID-19 (the "Provider Relief
Funds"). HHS recently closed the application portal for its Phase 4 allocation
of approximately $17 billion of Provider Relief Funds and an allocation of
approximately $8.5 billion in American Rescue Plan resources for providers
serving patients living in rural areas. We expect that our tenants pursued
additional funding from these allocations, and will pursue any future funding
that may become available, though there can be no assurance that our tenants
will qualify for, or receive, any Phase 4 or American Rescue Plan, or any
future, funding. The estimated federal and state relief approved, received and
retained to date by our operators, as reported by our operators, is
approximately $146.4 million. At September 30, 2021, two of our operators who
received Provider Relief Funds have disclosed that they have returned all or a
portion of the Provider Relief Funds issued to them.
At a portfolio wide level, occupancy levels at our seniors housing facilities
remained relatively stable from the onset of the COVID-19 pandemic until the
beginning of the fourth quarter of 2020, at which time we began to see a
decline. This decline in occupancy continued through the first quarter of 2021
and remained flat through the third quarter of 2021. Occupancy levels at our
skilled nursing facilities ("SNFs"), which declined at the onset of the COVID-19
pandemic and continued to decline through January 2021, have been on a steady
incline since February 2021 and continued to increase through the third quarter
of 2021. Beginning in early 2020, the federal government temporarily suspended
the three-day hospital stay requirement for a patient's Medicare benefits to
refresh. Providers can now "skill in place," eliminating the risk of
transferring the patient to the hospital. Because of this temporary rule change,
overall skilled mix remained slightly elevated in the three months ended
September 30, 2021 compared to the pre-pandemic skilled mix during the three
months ended March 31, 2020. An increase in skilled mix can, but may not
necessarily, offset some or all of the adverse financial impact to the operator
of the SNF from a decline in occupancy. However, the skilled mix in our SNFs
during the three months ended September 30, 2021 was lower than the peak level
seen in December 2020, and we anticipate that skilled mix in our SNFs will
continue to decline as cases of COVID-19 decline.
The higher operating costs affecting our tenants, and the impact of lower
occupancy levels and labor shortages, have adversely impacted and may continue
to adversely impact the ability of our tenants to satisfy their rental
obligations to us in full or on a timely basis. Provider Relief Funds not
previously being made available to our seniors housing facilities has also
impacted some of our tenants' ability to continue to meet some of their
financial obligations, as they continue to experience lower occupancy levels and
higher operating costs. During the six months ended June 30, 2021, we collected
all contractual rents due from our operators. During the three months ended
September 30, 2021, we agreed to provide affiliates of Noble Senior Services and
Noble VA Holdings, LLC (collectively, "Noble"), a deferral of the unpaid portion
of contractual rent for
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the months of July, August and September, totaling $1.8 million and representing
approximately 4% of our total contractual base rent for the three months ended
September 30, 2021. In connection with our agreement to the rent deferral, we
also entered into a purchase agreement to acquire two assisted living facilities
owned by Noble, which will be leased back to Noble under a short-term lease
agreement upon closing of the acquisition while we pursue other tenants for the
long-term. The deferred rent, as well as all contractual rent for the fourth
quarter of 2021, is required to be paid in full upon closing of the acquisition
of the two facilities. During the three months ended September 30, 2021, one
facility leased to Noble was designated as held for sale, and we expect to
remove the facility from the applicable master lease following the sale. See
Note 3, Real Estate Investments, Net, for additional information. With respect
to our other operators, 100.0% of our contractual rent obligations due for the
third quarter of 2021 have been collected from our tenants before considering
any cash deposits on-hand from which we may offset any shortfalls in rent
received. With respect to our entire portfolio, approximately 96.1% of our
contractual rent obligations due for October 2021 have been collected from our
tenants before considering any cash deposits on-hand from which we may offset
any shortfalls in rent received.
Federal laws and regulations related to COVID-19 vaccine mandates may increase
operating costs of our tenants if those mandates make recruiting and retaining
qualified nursing and other personnel more difficult. The Biden-Harris
administration issued an Interim Final Rule requiring Medicare and
Medicaid-participating facilities and employers with more than 100 employees
must mandate their employees to be vaccinated. Some states have also issued
their own orders to employers and healthcare providers that may or may not align
with federal directives. The legality of both federal and state vaccine mandates
will likely be decided by the courts. Until pending laws and regulations related
to vaccine mandates are both finalized and adjudicated, our tenants will
continue to manage in different ways - from mandating vaccines for all employees
to waiting to see how the issue is ultimately resolved. The mandates, as
presently written, may cause disruption to tenants' operations if employees
refuse vaccination and are terminated, and our tenants are not able to replace
them in a timely manner or experience increased costs to do so.
The duration and extent of the COVID-19 pandemic's effect on our operational and
financial performance, and the operational and financial performance of our
tenants, will depend on future developments, which are highly uncertain and
cannot be predicted at this time, including the rate of public acceptance and
usage of vaccines and the effectiveness of vaccines in limiting the spread of
COVID-19 and its variants, resurgences of COVID-19 and, in particular, new and
more contagious and/or vaccine resistant variants, actions taken to contain the
spread of COVID-19, restrictions imposed on unvaccinated individuals and
employee vaccine mandates, labor shortages resulting from the foregoing
restrictions and mandates and how quickly and to what extent normal economic and
operating conditions can resume. The adverse impact of the COVID-19 pandemic on
our business, results of operations and financial condition could be material.
Senior Notes Issuance and Redemption
On June 17, 2021, our wholly owned subsidiary, CTR Partnership, L.P. (the
"Operating Partnership"), and its wholly owned subsidiary, CareTrust Capital
Corp. (together with the Operating Partnership, the "Issuers") completed a
private offering of $400.0 million aggregate principal amount of 3.875% Senior
Notes due 2028 (the "Notes") to persons reasonably believed to be qualified
institutional buyers pursuant to Rule 144A and to non-U.S. persons outside the
United States in reliance on Regulation S under the Securities Act of 1933, as
amended (the "Securities Act"). The aggregate net proceeds from the sale of the
Notes were approximately $393.8 million after deducting underwriting fees and
other offering expenses. We used a portion of the net proceeds from the sale of
the Notes to redeem all of the Issuers' outstanding 5.25% Senior Notes due 2025
(the "2025 Notes") and the remaining proceeds to repay a portion of the
borrowings outstanding under our Revolving Facility (as defined below).
On July 1, 2021 (the "Redemption Date"), the Issuers redeemed all $300.0 million
aggregate principal amount of their outstanding 2025 Notes. The 2025 Notes were
redeemed at a redemption price equal to 102.625% of the principal amount of the
2025 Notes, plus accrued and unpaid interest thereon up to, but not including,
the Redemption Date. During the third quarter of 2021, we recorded a loss on
extinguishment of debt of $10.8 million in our condensed consolidated income
statements, including a prepayment penalty of $7.9 million and a $2.9 million
write-off of deferred financing costs, associated with the redemption of the
2025 Notes.

Asset Held for Sale and Sale of Real Estate
During the third quarter of 2021, we met the held for sale criteria on one
assisted living facility. As of September 30, 2021, the property continued to be
held for sale and the carrying value of $4.9 million is primarily comprised of
real estate assets.
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On February 1, 2021, we closed on the sale of one skilled nursing facility
consisting of 90 beds located in Washington with a carrying value of $7.2
million, for net sales proceeds of $7.0 million. We recorded a loss of $0.2
million in connection with the sale. The facility was classified as held for
sale as of December 31, 2020.

Recent Investments
From January 1, 2021 through November 8, 2021, we acquired 4 skilled nursing
facilities and 4 multi-service campuses for approximately $183.7 million, which
includes capitalized acquisition costs. These acquisitions are expected to
generate initial annual cash revenues of approximately $13.1 million and an
initial blended yield of approximately 7.3%. See Note 3, Real Estate
Investments, Net in the Notes to condensed consolidated financial statements for
additional information.

At-The-Market Offering of Common Stock
On March 10, 2020, we entered into a new equity distribution agreement to issue
and sell, from time to time, up to $500.0 million in aggregate offering price of
our common stock through an "at-the-market" equity offering program (the "ATM
Program"). In connection with the entry into the equity distribution agreement
and the commencement of the ATM Program, our "at-the-market" equity offering
program pursuant to our prior equity distribution agreement, dated as of March
4, 2019, was terminated (the "Prior ATM Program").
There was no ATM Program activity for the three months ended September 30, 2021
and there was no Prior ATM Program or ATM Program activity for the three and
nine months ended September 30, 2020. The following table summarizes the ATM
Program activity for the nine months ended September 30, 2021 (in thousands,
except per share amounts).
                                        For the Nine Months Ended
                                            September 30, 2021
Number of shares                                              990
Average sales price per share          $                    23.74
Gross proceeds(1)                      $                   23,505


(1) Total gross proceeds is before $0.3 million of commissions paid to the sales
agents during the nine months ended September 30, 2021 under the ATM Program.
As of September 30, 2021, we had $476.5 million available for future issuances
under the ATM Program.

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Results of Operations
Operating Results
Three Months Ended September 30, 2021 Compared to Three Months Ended September
30, 2020:
                                                   Three Months Ended September 30,              Increase               Percentage
                                                       2021                   2020              (Decrease)              Difference
                                                                                (dollars in thousands)
Revenues:
Rental income                                   $         48,087          $   45,036          $     3,051                          7  %

Independent living facilities                                  -                 634                 (634)                      (100) %
Interest and other income                                    518                  17                  501                   *

Expenses:

Depreciation and amortization                             13,968              13,086                  882                          7  %
Interest expense                                           5,692               5,519                  173                          3  %

Property taxes                                             1,004                 857                  147                         17  %
Independent living facilities                                  -                 568                 (568)                      (100) %

General and administrative                                 5,196               4,105                1,091                         27  %
Other loss:
Loss on extinguishment of debt                           (10,827)                  -              (10,827)                       100  %


•Not meaningful
Rental income. The $3.1 million, or 7%, increase in rental income is primarily
due to a $4.1 million increase in rental income from real estate investments
made after July 1, 2020, $1.0 million from contractual increases in rental rates
for our existing tenants, a $0.1 million increase in tenant reimbursements and
$0.1 million in cash rents due to lease amendments, partially offset by a $1.1
million decrease in lease termination revenue, a $1.0 million decrease from the
recovery of previously reversed rent and a $0.1 million decrease in rental
income due to the disposal of assets in February 2021.
Independent living facilities. The $0.6 million, or 100%, decrease in revenues
from our ILFs was due to the sale of our one remaining ILF to a third party in
November 2020. The $0.6 million, or 100%, decrease in expenses from our ILFs was
for the same reason indicated for the decrease in revenues.
Interest and other income. The $0.5 million increase in interest and other
income was primarily due to our mezzanine loan to Next VA Star Realty Holdings,
LLC originated in November 2020. See Note 4, Other Real Estate Investments, Net.
Depreciation and amortization. The $0.9 million, or 7%, increase in depreciation
and amortization was primarily due to an increase in depreciation and
amortization of $1.7 million related to new real estate investments and capital
improvements made after July 1, 2020, partially offset by a decrease in
depreciation of $0.7 million due to assets becoming fully depreciated after July
1, 2020 and a decrease in depreciation of $0.1 million related to the disposal
of assets in February 2021.
Interest expense. The $0.2 million, or 3%, increase in interest expense was
primarily due to an increase of $0.3 million in interest expense related to a
higher weighted average debt balance under the Revolving Facility and a $3.9
million increase in interest expense related to the issuance of the Notes on
June 17, 2021, partially offset by a $4.0 million decrease in interest expense
due to the redemption of the 2025 Notes on July 1, 2021.
Property taxes. The $0.1 million, or 17%, increase in property taxes was
primarily due to a $0.3 million increase due to new real estate investments made
after July 1, 2020, partially offset by a decrease of $0.2 million in property
taxes due to reassessments and decreased effective tax rates.
General and administrative expense. The $1.1 million, or 27%, increase in
general and administrative expense was primarily related to higher stock
compensation expense of $0.8 million and higher cash wages of $0.3 million.
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Loss on extinguishment of debt. During the three months ended September 30,
2021, we recorded a $10.8 million loss on extinguishment of debt, including a
prepayment penalty of $7.9 million and a $2.9 million write-off of deferred
financing costs associated with the redemption of the 2025 Notes.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020:
                                                    Nine Months Ended September 30,              Increase               Percentage
                                                       2021                   2020              (Decrease)              Difference
                                                                                (dollars in thousands)
Revenues:
Rental income                                   $        141,077          $  130,007          $    11,070                          9  %

Independent living facilities                                  -               1,874               (1,874)                      (100) %
Interest and other income                                  1,537               2,314                 (777)                       (34) %

Expenses:

Depreciation and amortization                             41,284              39,485                1,799                          5  %
Interest expense                                          17,988              18,082                  (94)                        (1) %

Property taxes                                             2,466               2,179                  287                         13  %
Independent living facilities                                  -               1,660               (1,660)                      (100) %

General and administrative                                16,136              12,921                3,215                         25  %
Other loss:
Loss on extinguishment of debt                           (10,827)                  -              (10,827)                       100  %
Loss on sale of real estate                                 (192)                (56)                (136)                       243  %



Rental income. The $11.1 million, or 9%, increase in rental income is primarily
due to a $10.8 million increase in rental income from real estate investments
made after January 1, 2020, $2.6 million from contractual increases in rental
rates for our existing tenants and $0.5 million in cash rents due to lease
amendments, partially offset by a $1.1 million decrease in lease termination
revenue, a $1.0 million decrease from the recovery of previously reversed rent
and a $0.7 million decrease in rental income due to the disposal of assets in
February 2020 and February 2021.
Independent living facilities. The $1.9 million, or 100%, decrease in revenues
from our ILFs was due to the sale of our one remaining ILF to a third party in
November 2020. The $1.7 million, or 100%, decrease in expenses from our ILFs was
for the same reason indicated for the decrease in revenues.
Interest and other income. The $0.8 million, or 34%, decrease in interest and
other income was primarily due to a decrease in interest income of $2.2 million
due to the repayment of mortgage loans and other loans receivable primarily by
Manteca in May 2020, CommuniCare in May 2020 and Cascade in July 2020, partially
offset by approximately $1.4 million of interest income related to our mezzanine
loan to Next VA Star Realty Holdings, LLC originated in November 2020. See Note
4, Other Real Estate Investments, Net.
Depreciation and amortization. The $1.8 million, or 5%, increase in depreciation
and amortization was primarily due to an increase in depreciation and
amortization of $4.0 million related to new real estate investments and capital
improvements made after January 1, 2020, partially offset by a decrease in
depreciation of $1.9 million due to assets becoming fully depreciated after
January 1, 2020 and a decrease in depreciation of $0.3 million related to the
disposal of assets in February 2020 and February 2021.
Interest expense. The $0.1 million, or 1%, decrease in interest expense was
primarily due a $1.0 million decrease in interest expense related to a lower
weighted average interest rate on the term loan, a $3.9 million decrease in
interest expense due to the redemption of the 2025 Notes on July 1, 2021 and a
lower weighted average interest rate, partially offset by a $4.5 million
increase in interest expense related to the issuance of the Notes on June 17,
2021, a $0.3 million increase in interest expense related to a higher weighted
average debt balance under the Revolving Facility and an increase of $0.1
million in interest expense related to the amortization of deferred financing
fees.
Property taxes. The $0.3 million, or 13%, increase in property taxes was
primarily due to a $0.4 million increase in property taxes due to closing
credits realized upon the disposition of assets in February 2020 and the
transfer of certain properties to new operators in January 2021 that do not make
direct tax payments and a $0.4 million increase due to new real
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estate investments made after January 1, 2020, partially offset by a decrease of
$0.5 million of property taxes due to reassessments and decreased effective tax
rates.
General and administrative expense. The $3.2 million, or 25%, increase in
general and administrative expense was primarily related to higher stock
compensation expense of $2.4 million and higher cash wages of $0.8 million
compared to the prior period.
Loss on extinguishment of debt. During the nine months ended September 30, 2021,
we recorded a $10.8 million loss on extinguishment of debt, including a
prepayment penalty of $7.9 million and a $2.9 million write-off of deferred
financing costs, associated with the redemption of the 2025 Notes.
Loss on sale of real estate. During the nine months ended September 30, 2021, we
recorded a $0.2 million loss on sale of real estate related to the sale of one
skilled nursing facility. During the nine months ended September 30, 2020, we
recorded a $0.1 million loss on sale of real estate related to the sale of six
skilled nursing facilities.
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 September 30, 2021, we had cash and cash equivalents of $17.7 million.
During the nine months ended September 30, 2021, we sold 990,000 shares of
common stock under our ATM Program for gross proceeds of $23.5 million. As of
September 30, 2021, we had $476.5 million available for future issuances under
the ATM Program.
As of September 30, 2021, we also had $80.0 million in borrowings outstanding
and $520.0 million of availability remaining under the Revolving Facility. We
believe that our available cash, expected operating cash flows, and the
availability under the ATM Program and Amended Credit Facility (as defined
below) will provide sufficient funds for our operations, anticipated scheduled
debt service payments and projected dividend payments 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 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 March 2023, 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.
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Cash Flows
The following table presents selected data from our condensed consolidated
statements of cash flows for the periods presented (dollars in thousands):
                                                                For the 

Nine Months Ended September 30,

                                                                      2021                   2020

Net cash provided by operating activities                       $      118,363          $    108,385
Net cash (used in) provided by investing activities                   (181,963)               22,062
Net cash provided by (used in) financing activities                     62,397              (131,673)
Net decrease in cash and cash equivalents                               (1,203)               (1,226)
Cash and cash equivalents as of the beginning of period                 18,919                20,327
Cash and cash equivalents as of the end of period               $       

17,716 $ 19,101



Net cash provided by operating activities increased $10.0 million for the nine
months ended September 30, 2021 compared to the nine months ended September 30,
2020. Operating cash inflows are derived primarily from the rental payments
received under our lease agreements, including as a result of new investments,
and interest payments on our other real estate investments. Operating cash
outflows consist primarily of interest expense on our borrowings and general and
administrative expenses. The net increase of $10.0 million in cash provided by
operating activities for the nine months ended September 30, 2021 is primarily
due to increased rental payments as a result of new investments, partially
offset by an increase in cash paid for interest on outstanding indebtedness due
to the timing of interest payments, a decrease in interest and other income due
to the repayments of our other real estate investments and an increase in cash
paid for general and administrative expenses.
Cash used in investing activities for the nine months ended September 30, 2021
was primarily comprised of $184.1 million in acquisitions of real estate and
investments in other loans and $4.8 million of purchases of equipment, furniture
and fixtures and improvements to real estate, partially offset by $6.8 million
in net proceeds from real estate sales and $0.2 million of payments received
from other loans receivable. Cash provided by investing activities for the nine
months ended September 30, 2020 was primarily comprised of $83.2 million of
payments received from our preferred equity investment and mortgage and other
loans receivable and $2.2 million in net proceeds from real estate sales,
partially offset by $57.0 million in acquisitions of real estate and investments
in real estate mortgage loans and $6.3 million of purchases of equipment,
furniture and fixtures and improvements to real estate.
Our cash flows provided by financing activities for the nine months ended
September 30, 2021 were primarily comprised of $400.0 million of proceeds from
the issuance of the Notes, $30.0 million in net borrowings under our Amended
Credit Facility and $22.9 million of net proceeds from the issuance of common
stock under the ATM Program, partially offset by $300.0 million of payments to
redeem the 2025 Notes, $75.1 million in dividends paid, $14.1 million in
payments on debt extinguishment and deferred financing costs and a $1.3 million
net settlement adjustment on restricted stock. Our cash flows used in financing
activities for the nine months ended September 30, 2020 were primarily comprised
of $69.3 million in dividends paid, a $2.0 million net settlement adjustment on
restricted stock, $0.4 million paid for common stock offering related costs and
$60.0 million in net repayments under our Amended Credit Facility.
Indebtedness
3.875% Senior Unsecured Notes due 2028
On June 17, 2021, the Issuers completed a private offering of $400.0 million
aggregate principal amount of 3.875% Senior Notes due 2028 to persons reasonably
believed to be qualified institutional buyers pursuant to Rule 144A and to
non-U.S. persons outside the United States in reliance on Regulation S under the
Securities Act. The Notes were issued at par, resulting in gross proceeds of
$400.0 million and net proceeds of approximately $393.8 million after deducting
underwriting fees and other offering expenses. The Notes mature on June 30,
2028. The Notes accrue interest at a rate of 3.875% per annum payable
semiannually in arrears on June 30 and December 30 of each year, commencing on
December 30, 2021.
The obligations under the Notes are fully and unconditionally guaranteed,
jointly and severally, on an unsecured basis, by the Company and all of
CareTrust's existing and future subsidiaries (other than the Issuers) that
guarantee obligations under the Amended Credit Facility; provided, however, that
such guarantees are subject to automatic release under certain customary
circumstances. See Note 6, Debt, for additional information.
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The indenture governing the Notes requires CareTrust REIT 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 September 30, 2021, we were in compliance with all applicable financial
covenants under the indenture governing the Notes.
5.25% Senior Unsecured Notes due 2025 and Issuer and Guarantor Financial
Information
On May 10, 2017, the Issuers completed a public offering of $300.0 million
aggregate principal amount of the 2025 Notes. The 2025 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 2025 Notes were scheduled to mature on June 1, 2025 and bore interest at a
rate of 5.25% per year. Interest on the 2025 Notes was payable on June 1 and
December 1 of each year, beginning on December 1, 2017. On July 1, 2021, the
Issuers redeemed all $300.0 million aggregate principal amount of the 2025
Notes. See above under "Recent Developments" and Note 6, Debt, for additional
information.
The obligations under the 2025 Notes were fully and unconditionally guaranteed,
jointly and severally, on an unsecured basis, by CareTrust REIT (the "Parent
Guarantor") and all of CareTrust REIT's existing and future subsidiaries (other
than the Issuers) that guaranteed obligations under the Amended Credit Facility;
provided, however, that such guarantees were subject to automatic release under
certain customary circumstances, including if the Subsidiary Guarantor was sold
or sold all or substantially all of its assets, the Subsidiary Guarantor was
designated "unrestricted" for covenant purposes under the indenture governing
the 2025 Notes, the Subsidiary Guarantor's guarantee of other indebtedness which
resulted in the creation of the guarantee of the 2025 Notes was terminated or
released, or the requirements for legal defeasance or covenant defeasance or to
discharge the indenture had been satisfied.
The following provides information regarding the entity structure of the Parent
Guarantor, the Issuers and the Subsidiary Guarantors of the 2025 Notes:
CareTrust REIT, Inc. - The Parent Guarantor was formed on October 29, 2013 in
connection with the separation of Ensign's healthcare business and its real
estate business into two separate and independent publicly traded companies (the
"Spin-Off"). The Parent Guarantor was a wholly owned subsidiary of Ensign prior
to the effective date of the Spin-Off on June 1, 2014. The Parent Guarantor has
not conducted any operations or had any business since the Spin-Off.
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. The
Operating Partnership directly invests in real estate and real estate related
assets and therefore does not rely solely on the cash flow generated by the
Subsidiary Guarantors and their ability to make cash available to the Issuers,
by dividend or otherwise. However, in the event that the earnings or available
assets of the Issuers were insufficient, the Issuers' ability to pay principal
and interest on the 2025 Notes could have been dependent on the cash flow
generated by the Subsidiary Guarantors and their ability to make such cash
available to the Issuers. CareTrust Capital Corp., a co-issuer of the 2025
Notes, has no material assets and conducts no operations. Therefore, it had no
independent ability to service the interest and principal obligations under the
2025 Notes.
Subsidiary Guarantors - The Subsidiary Guarantors consisted of all of the
subsidiaries of the Parent Guarantor other than the Issuers. The Parent
Guarantor conducts a substantial portion of its business operations through the
Subsidiary Guarantors.
The assets and liabilities and results of operations of the combined guarantors
(the Parent Guarantor and the Subsidiary Guarantors) and the Issuers of the 2025
Notes are not materially different than the corresponding amounts presented in
our condensed consolidated financial statements.
The indenture governing the 2025 Notes contained customary covenants such as
limiting the ability of CareTrust REIT and its restricted subsidiaries to: incur
or guarantee additional indebtedness; incur or guarantee secured indebtedness;
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 pay dividends or distributions on, or redeem or
repurchase, capital stock, including a restriction on the ability of the Issuers
and their restricted subsidiaries to pay dividends or other amounts to the
Issuers, subject to certain other exceptions, unless: (i) there was no default
or event of default under the indenture; (ii) the Issuers were in compliance
with specified limitations on indebtedness under the indenture; and (iii) the
payments did not exceed
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a specified restricted payment basket. Dividends or distributions were also
permitted if the Parent Guarantor's board of directors believed in good faith
they were necessary to maintain Parent Guarantor's REIT status or to avoid any
excise tax or income tax imposed on Parent Guarantor, provided there was no
default or event of default under the indenture. Further, the Issuers and their
restricted subsidiaries were not permitted to create or cause to become
effective any encumbrance or restriction on the ability of the Issuers to, among
other things, pay dividends or make distributions, pay indebtedness, make loans
or advances to the Issuers or their restricted subsidiaries or transfer property
or assets to the Issuers or their restricted subsidiaries, other than in
connection with certain customary exceptions such as in respect of the indenture
or the Amended Credit Facility.
Unsecured Revolving Credit Facility and Term Loan
On February 8, 2019, the Operating Partnership, as the borrower, the Company, as
guarantor, CareTrust GP, LLC, and certain of the Operating Partnership's wholly
owned subsidiaries entered into an amended and restated credit and guaranty
agreement with KeyBank National Association, as administrative agent, an issuing
bank and swingline lender, and the lenders party thereto (the "Amended Credit
Agreement"). The Amended Credit Agreement provides for: (i) an unsecured
revolving credit facility (the "Revolving Facility") with revolving commitments
in an aggregate principal amount of $600.0 million, including a letter of credit
subfacility for 10% of the then available revolving commitments and a swingline
loan subfacility for 10% of the then available revolving commitments and (ii) an
unsecured term loan credit facility (the "Term Loan" and, together with the
Revolving Facility, the "Amended Credit Facility") in an aggregate principal
amount of $200.0 million. Borrowing availability under the Revolving Facility is
subject to no default or event of default under the Amended Credit Agreement
having occurred at the time of borrowing. The proceeds of the Term Loan were
used, in part, to repay in full all outstanding borrowings under our prior term
loan and revolving facility under our prior credit agreement. Future borrowings
under the Amended Credit Facility will be used for working capital purposes, for
capital expenditures, to fund acquisitions and for general corporate purposes.
The interest rates applicable to loans under the Revolving Facility are, at the
Operating Partnership's option, equal to either a base rate plus a margin
ranging from 0.10% to 0.55% per annum or LIBOR plus a margin ranging from 1.10%
to 1.55% per annum based on the debt to asset value ratio of the Company and its
consolidated subsidiaries (subject to decrease at the Operating Partnership's
election if the Company obtains certain specified investment grade ratings on
its senior long-term unsecured debt). The interest rates applicable to loans
under the Term Loan are, at the Operating Partnership's option, equal to either
a base rate plus a margin ranging from 0.50% to 1.20% per annum or LIBOR plus a
margin ranging from 1.50% to 2.20% per annum based on the debt to asset value
ratio of the Company and its consolidated subsidiaries (subject to decrease at
the Operating Partnership's election if the Company obtains certain specified
investment grade ratings on its senior long-term unsecured debt). In addition,
the Operating Partnership will pay a facility fee on the revolving commitments
under the Revolving Facility ranging from 0.15% to 0.35% per annum, based on the
debt to asset value ratio of the Company and its consolidated subsidiaries
(unless the Company obtains certain specified investment grade ratings on its
senior long-term unsecured debt and the Operating Partnership elects to decrease
the applicable margin as described above, in which case the Operating
Partnership will pay a facility fee on the revolving commitments ranging from
0.125% to 0.30% per annum based off the credit ratings of the Company's senior
long-term unsecured debt). As of September 30, 2021, we had $200.0 million
outstanding under the Term Loan and $80.0 million outstanding under the
Revolving Facility.
The Revolving Facility has a maturity date of February 8, 2023, and includes, at
our sole discretion, two, six-month extension options. The Term Loan has a
maturity date of February 8, 2026.
The Amended Credit Facility is guaranteed, jointly and severally, by the Company
and its wholly-owned subsidiaries that are party to the Amended Credit Agreement
(other than the Operating Partnership). The Amended Credit Agreement contains
customary covenants that, among other things, restrict, subject to certain
exceptions, the ability of the Company and its subsidiaries to grant liens on
their assets, incur indebtedness, sell assets, make investments, engage in
acquisitions, mergers or consolidations, amend organizational documents and pay
certain dividends and other restricted payments. The Amended Credit Agreement
requires the Company to comply with financial maintenance covenants to be tested
quarterly, consisting of a maximum debt to asset value ratio, a minimum fixed
charge coverage ratio, a minimum tangible net worth, a maximum cash
distributions to operating income ratio, a maximum secured debt to asset value
ratio, a maximum secured recourse debt to asset value ratio, a maximum unsecured
debt to unencumbered properties asset value ratio, a minimum unsecured interest
coverage ratio and a minimum rent coverage ratio. The Amended Credit Agreement
also contains certain customary events of default, including the failure to make
timely payments under the Amended Credit Facility or other material
indebtedness, the failure to satisfy certain covenants (including the financial
maintenance covenants), the occurrence of change of control and specified events
of bankruptcy and insolvency.
As of September 30, 2021, we were in compliance with all applicable financial
covenants under the Amended Credit Agreement.
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Obligations and Commitments
The following table summarizes our contractual obligations and commitments as of
September 30, 2021 (in thousands):
                                                                       Payments Due by Period
                                                                               1 Year            3 Years
                                                             Less             to Less            to Less              More
                                                             than               than               than               than
                                          Total             1 Year            3 Years            5 Years            5 years
2028 Senior unsecured notes payable
(1)                                    $ 509,103          $ 16,103          $  31,000          $  31,000          $ 431,000
Senior unsecured term loan (2)           214,020             3,221              6,433            204,366                  -
Unsecured revolving credit facility
(3)                                       82,550             1,878             80,672                  -                  -
Operating leases                           3,597               266                176                104              3,051
Total                                  $ 809,270          $ 21,468          $ 118,281          $ 235,470          $ 434,051



(1)Amounts include interest payments of $109.1 million.
(2)Amounts include interest payments of $14.0 million.
(3)Amounts include payments related to the credit facility fee of $1.3 million
and interest payments of $1.3 million.
Capital Expenditures
Capital expenditures for each property leased under our triple-net leases are
generally the responsibility of the tenant, except that, for the facilities
leased to subsidiaries of Ensign and Pennant, the tenant will have an option to
require us to finance certain capital expenditures up to an aggregate of 20% of
our initial investment in such property, subject to a corresponding rent
increase at the time of funding. For our other triple-net master leases, subject
to approval by us, the tenants may request capital expenditure funding that
would generally be subject to a corresponding rent increase at the time of
funding and which are subject to tenant compliance with the conditions to our
approval and funding of their requests. As of September 30, 2021, we had
committed to fund certain capital improvements at certain triple-net leased
facilities totaling $11.7 million, of which $10.4 million is subject to rent
increase at the time of funding. We expect the majority of the funding of these
commitments to be completed over the next one to two years.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements included in Item 1 of this
Quarterly Report on Form 10-Q have been prepared in accordance with accounting
principles generally accepted in the United States ("GAAP") for interim
financial information set forth in the Accounting Standards Codification, as
published by the Financial Accounting Standards Board. GAAP requires us to make
estimates and assumptions regarding future events that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. We base these estimates on
our experience and assumptions we believe to be reasonable under the
circumstances. However, if our judgment or interpretation of the facts and
circumstances relating to various transactions or other matters had been
different, we may have applied a different accounting treatment, resulting in a
different presentation of our financial statements. We periodically reevaluate
our estimates and assumptions, and in the event they prove to be different from
actual results, we make adjustments in subsequent periods to reflect more
current estimates and assumptions about matters that are inherently uncertain.
Please refer to "Critical Accounting Policies and Estimates" in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of our Annual Report on Form 10-K for the year ended
December 31, 2020, filed with the SEC on February 10, 2021, for further
information regarding the critical accounting policies that affect our more
significant estimates and judgments used in the preparation of our condensed
consolidated financial statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q. There have been no material changes in such critical
accounting policies during the nine months ended September 30, 2021.

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