CareTrust REIT Annual Report 2016

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Form 10-K (Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2016or¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number 001-36181 CareTrust REIT, Inc.(Exact name of registrant as specified in its charter) Maryland46-3999490(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.)905 Calle Amanecer, Suite 300, San Clemente, CA92673(Address of principal executive offices)(Zip Code)Registrant’s telephone number, including area code (949) 542-3130Securities registered pursuant to Section 12(b) of the Act:Title of each className of each exchange on which registered Common Stock (par value $0.01 per share)The NASDAQ Stock Market LLC(NASDAQ Global Select Market)Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate 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 preceding12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted 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 andpost such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):Large accelerated filerx Accelerated fileroNon-accelerated filero(Do not check if a smaller reporting company)Smaller reporting companyoIndicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act.) Yes ¨ No xState the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was lastsold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $784.7 million.As of February 3, 2017 there were 66,216,905 shares of the registrant’s common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the definitive Proxy Statement for the registrant’s 2017 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within120 days after the end of fiscal year 2016, are incorporated by reference into Part III of this Report. Table of ContentsTABLE OF CONTENTS PART IItem 1.Business5Item 1A.Risk Factors15Item 1B.Unresolved Staff Comments33Item 2.Properties33Item 3.Legal Proceedings33Item 4.Mine Safety Disclosures34PART IIItem 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities34Item 6.Selected Financial Data37Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations38Item 7A.Quantitative and Qualitative Disclosures About Market Risk49Item 8.Financial Statements and Supplementary Data49Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosures49Item 9A.Controls and Procedures50Item 9B.Other Information52PART IIIItem 10.Directors, Executive Officers and Corporate Governance52Item 11.Executive Compensation52Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters52Item 13.Certain Relationships and Related Transactions, and Director Independence52Item 14.Principal Accountant Fees and Services52PART IVItem 15.Exhibits, Financial Statements and Financial Statement Schedules52Item 16.Form 10-K Summary552Table of ContentsEXPLANATORY NOTEThis report represents the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for CareTrust REIT, Inc. (together with itsconsolidated subsidiaries, “CareTrust REIT” or the “Company”). CareTrust REIT is a self-administered, publicly-traded real estate investment trust ("REIT")engaged in the ownership, acquisition and leasing of seniors housing and healthcare-related properties. CareTrust REIT was formed on October 29, 2013 as awholly owned subsidiary of The Ensign Group, Inc. (“Ensign”) with the intent to hold substantially all of Ensign's real estate business. On June 1, 2014,Ensign completed the separation of its real estate business into a new separate and independent publicly traded company by distributing all of theoutstanding shares of common stock of CareTrust REIT to Ensign stockholders on a pro rata basis (the “Spin-Off”). Ensign stockholders received one share ofCareTrust REIT common stock for each share of Ensign common stock held at the close of business on May 22, 2014, the record date for the Spin-Off. TheSpin-Off was effective from and after June 1, 2014, with shares of CareTrust REIT common stock distributed by Ensign on June 2, 2014.The Company had minimal activity prior to the Spin-Off. The consolidated and combined financial statements included in this report reflect, for allperiods presented, the historical financial position, results of operations and cash flows of (i) the skilled nursing, assisted living and independent livingfacilities that Ensign contributed to the Company immediately prior to the Spin-Off, (ii) the operations of the three independent living facilities that theCompany operated immediately following the Spin-Off, and (iii) the new investments that the Company has made after the Spin-Off. “Ensign Properties” isthe predecessor of the Company, and its historical financial statements, for the periods prior to the Spin-Off, have been prepared on a “carve-out” basis fromEnsign’s consolidated financial statements using the historical results of operations, cash flows, assets and liabilities attributable to such skilled nursing,assisted living and independent living facilities, and include allocations of income, expenses, assets and liabilities from Ensign. These allocations reflectsignificant assumptions. Although management of the Company believes such assumptions are reasonable, the consolidated and combined financialstatements do not fully reflect what the Company’s financial position, results of operations and cash flows would have been had it been a stand-alonecompany during the periods presented. As a result, historical financial information is not necessarily indicative of the Company’s future results of operations,financial position and cash flows.The Company files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the“SEC”). These reports and other information filed by the Company may be read and copied at the Public Reference Room of the SEC, 100 F Street N.E.,Washington, D.C. 20549. Information about the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains aninternet site that contains reports, and other information about issuers, like the Company, which file electronically with the SEC. The address of that site ishttp://www.sec.gov. The Company makes available its reports on Form 10-K, 10-Q, and 8-K (as well as all amendments to these reports), and otherinformation, free of charge, at the Investor Relations section of its website at www.caretrustreit.com. The information found on, or otherwise accessiblethrough, the Company’s website is not incorporated by reference into, nor does it form a part of, this report or any other document that we file with the SEC.STATEMENT REGARDING FORWARD-LOOKING STATEMENTSCertain 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 similarexpressions, or the negative of these terms, are intended to identify such forward-looking statements. These statements are based on management’s currentexpectations 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 thatour expectations will be attained. Factors which could have a material adverse effect on our operations and future prospects or which could cause actualresults to differ materially from our expectations include, but are not limited to: (i) the ability to achieve some or all of the benefits that we expect to achievefrom the completed Spin-Off; (ii) the ability and willingness of our tenants to meet and/or perform their obligations under the triple-net leases we haveentered into with them and the ability and willingness of Ensign to meet and/or perform its other contractual arrangements that it entered into with us inconnection with the Spin-Off and any of its 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 laws, rules and regulations in the operation of the properties we lease to them; (iv) the ability and willingness ofour tenants, including Ensign, to renew their leases with us upon their3Table of Contentsexpiration, 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,and obligations, including indemnification obligations, we may incur in connection with the replacement of an existing tenant; (v) the availability of and theability to identify suitable acquisition opportunities and the ability to acquire and lease the respective properties on favorable terms; (vi) the ability togenerate sufficient cash flows to service our outstanding indebtedness; (vii) access to debt and equity capital markets; (viii) fluctuating interest rates; (ix) theability to retain our key management personnel; (x) the ability to maintain our status as a REIT; (xi) changes in the U.S. tax law and other state, federal orlocal laws, whether or not specific to REITs; (xii) other risks inherent in the real estate business, including potential liability relating to environmentalmatters and illiquidity of real estate investments; and (xiii) any additional factors included in this report, including in the section entitled “Risk Factors” inItem 1A of this report, as such risk factors may be amended, supplemented or superseded from time to time by other reports we file with the SEC, includingsubsequent Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.Forward-looking statements speak only as of the date of this report. Except in the normal course of our public disclosure obligations, we expresslydisclaim any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or anychange in events, conditions or circumstances on which any statement is based.TENANT INFORMATIONThis Annual Report on Form 10-K includes information regarding certain of our tenants that lease properties from us, some of which are not subject toSEC reporting requirements. Ensign is subject to the reporting requirements of the SEC and is required to file with the SEC annual reports containing auditedfinancial information and quarterly reports containing unaudited financial information. You are encouraged to review Ensign’s publicly available filings,which can be found at the SEC’s website at www.sec.gov.The information related to our tenants contained or referred to in this Annual Report on Form 10-K was provided to us by such tenants or, in the case ofEnsign, derived from SEC filings made by Ensign or other publicly available information. We have not verified this information through an independentinvestigation or otherwise. We have no reason to believe that this information is inaccurate in any material respect, but we cannot provide any assurance ofits accuracy. We are providing this data for informational purposes only.4Table of ContentsPART IAll references in this report to “CareTrust REIT,” the “Company,” “we,” “us” or “our” mean CareTrust REIT, Inc. together with its consolidatedsubsidiaries. Unless the context suggests otherwise, references to “CareTrust REIT, Inc.” mean the parent company without its subsidiaries.ITEM 1.BusinessOur CompanyCareTrust REIT is a self-administered, publicly-traded REIT engaged in the ownership, acquisition, development and leasing of seniors housing andhealthcare-related properties. CareTrust REIT was formed on October 29, 2013, as a wholly owned subsidiary of Ensign with the intent to hold substantiallyall of Ensign's real estate business. On June 1, 2014, Ensign completed the separation of its real estate business into a separate and independent publiclytraded company by distributing all of the outstanding shares of common stock of the Company to Ensign stockholders on a pro rata basis. The Spin-Off waseffective from and after June 1, 2014, with shares of our common stock distributed to Ensign stockholders on June 2, 2014. As of December 31, 2016,CareTrust REIT’s real estate portfolio consisted of 154 skilled nursing facilities (“SNFs”), SNF Campuses, assisted living facilities (“ALFs”) and independentliving facilities (“ILFs”). Of these properties, 93 are leased to Ensign on a triple-net basis under multiple long-term leases (each, an “Ensign Master Lease”and, collectively, the “Ensign Master Leases”) that have cross default provisions and are all guaranteed by Ensign, 16 are leased to affiliates of Pristine SeniorLiving ("Pristine") under a long-term, triple-net master lease (the "Pristine Master Lease") that is guaranteed by Pristine and its sole principal, and 42properties are leased to 14 other tenants on a triple-net basis. We also own and operate three ILFs. As of December 31, 2016, the 93 facilities leased to Ensignhad a total of 9,916 beds and units and are located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Texas, Utah and Washington; the 16facilities leased to affiliates of Pristine had a total of 1,488 beds and units and are located in Ohio; and the 42 remaining leased properties had a total of 3,515beds and units and are located in California, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Maryland, Michigan, Minnesota, North Carolina, Texas,Virginia, Washington and Wisconsin. The three ILFs that we own and operate had a total of 264 units and are located in Texas and Utah. As of December 31,2016, the Company also had three other real estate investments consisting of $13.9 million of preferred equity investments.From January 1, 2016 through February 3, 2017, we acquired 35 properties, comprising 15 ALFs, 17 SNFs and 3 SNF Campuses, for approximately$309.5 million inclusive of estimated transaction costs. During this period, we also completed two preferred equity investments totaling $4.7 million.We generate revenues primarily by leasing healthcare-related properties to healthcare operators in triple-net lease arrangements, under which the tenantis solely responsible for the costs related to the property (including property taxes, insurance, and maintenance and repair costs). We conduct and manage ourbusiness as one operating segment for internal reporting and internal decision making purposes. We expect to grow our portfolio by pursuing opportunitiesto acquire additional properties that will be leased to a diverse group of local, regional and national healthcare providers, which may include Ensign, as wellas senior housing operators and related businesses. We also anticipate diversifying our portfolio over time, including by acquiring properties in differentgeographic markets, and in different asset classes.We elected to be taxed as a REIT for U.S. federal income tax purposes beginning with our taxable year ended December 31, 2014. We believe that wehave been organized and have operated, and we intend to continue to operate, in a manner to qualify for taxation as a REIT. We operate through an umbrellapartnership, commonly referred to as an UPREIT structure, in which substantially all of our properties and assets are held through CTR Partnership, L.P. (the“Operating Partnership”). The Operating Partnership is managed by CareTrust REIT’s wholly owned subsidiary, CareTrust GP, LLC, which is the sole generalpartner of the Operating Partnership. To maintain REIT status, we must meet a number of organizational and operational requirements, including arequirement that we annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paiddeduction and excluding any net capital gains.Our IndustryWe operate as a REIT that invests in income-producing healthcare-related properties. We expect to grow our portfolio by pursuing opportunities toacquire additional properties that will be leased to a diverse group of local, regional and national healthcare providers, which may include Ensign, as well assenior housing operators and related businesses. We also anticipate diversifying our portfolio over time, including by acquiring properties in differentgeographic markets and in different asset classes. Our portfolio primarily consists of SNFs, SNF Campuses, ALFs and ILFs.5Table of ContentsThe skilled nursing industry has evolved to meet the growing demand for post-acute and custodial healthcare services generated by an agingpopulation, increasing life expectancies and the trend toward shifting of patient care to lower cost settings. The skilled nursing industry has evolved in recentyears, which we believe has led to a number of favorable improvements in the industry, as described below:•Shift of Patient Care to Lower Cost Alternatives. The growth of the senior population in the United States continues to increase healthcare costs.In response, federal and state governments have adopted cost-containment measures that encourage the treatment of patients in more cost-effective settings such as SNFs, for which the staffing requirements and associated costs are often significantly lower than acute care hospitals,inpatient rehabilitation facilities and other post-acute care settings. As a result, SNFs are generally serving a larger population of higher-acuitypatients than in the past.•Significant Acquisition and Consolidation Opportunities. The skilled nursing industry is large and highly fragmented, characterizedpredominantly by numerous local and regional providers. We believe this fragmentation provides significant acquisition and consolidationopportunities for us.•Widening Supply and Demand Imbalance. The number of SNFs has declined modestly over the past several years. According to the AmericanHealth Care Association, the nursing home industry was comprised of approximately 15,700 facilities as of December 2015, as compared withover 16,700 facilities as of December 2000. We expect that the supply and demand balance in the skilled nursing industry will continue toimprove due to the shift of patient care to lower cost settings, an aging population and increasing life expectancies.•Increased Demand Driven by Aging Populations and Increased Life Expectancy. As life expectancy continues to increase in the United Statesand seniors account for a higher percentage of the total U.S. population, we believe the overall demand for skilled nursing services will increase.At present, the primary market demographic for skilled nursing services is individuals age 75 and older. According to the 2012 U.S. Census, therewere over 41.5 million people in the United States in 2012 that were over 65 years old. The 2012 U.S. Census estimates this group is one of thefastest growing segments of the United States population and is expected to more than double between 2000 and 2030. According to the Centersfor Medicare & Medicaid Services, nursing home expenditures are projected to grow from approximately $156 billion in 2014 to approximately$274 billion in 2024, representing a compounded annual growth rate of 5.3%. We believe that these trends will support an increasing demand forskilled nursing services, which in turn will likely support an increasing demand for our properties.Portfolio SummaryWe have a geographically diverse portfolio of properties, consisting of the following types:•Skilled Nursing Facilities. SNFs are licensed healthcare facilities that provide restorative, rehabilitative and nursing care for people not requiringthe more extensive and sophisticated treatment available at acute care hospitals. Treatment programs include physical, occupational, speech,respiratory and other therapies, including sub-acute clinical protocols such as wound care and intravenous drug treatment. Charges for theseservices are generally paid from a combination of government reimbursement and private sources. As of December 31, 2016, our portfolioincluded 119 SNFs, 16 of which include assisted or independent living operations which we refer to as SNF Campuses.•Assisted Living Facilities. ALFs are licensed healthcare facilities that provide personal care services, support and housing for those who needhelp with activities of daily living, such as bathing, eating and dressing, yet require limited medical care. The programs and services may includetransportation, social activities, exercise and fitness programs, beauty or barber shop access, hobby and craft activities, community excursions,meals in a dining room setting and other activities sought by residents. These facilities are often in apartment-like buildings with privateresidences ranging from single rooms to large apartments. Certain ALFs may offer higher levels of personal assistance for residents requiringmemory care as a result of Alzheimer’s disease or other forms of dementia. Levels of personal assistance are based in part on local regulations. Asof December 31, 2016, our portfolio included 31 ALFs, some of which also contain independent living units.•Independent Living Facilities. ILFs, also known as retirement communities or senior apartments, are not healthcare facilities. The facilitiestypically consist of entirely self-contained apartments, complete with their own kitchens, baths and individual living spaces, as well as parkingfor tenant vehicles. They are most often rented unfurnished, and generally can be personalized by the tenants, typically an individual or a coupleover the age of 55. These facilities offer various services and amenities such as laundry, housekeeping, dining options/meal plans, exercise andwellness programs, transportation, social, cultural and recreational activities, on-site security and emergency response programs. As ofDecember 31, 2016, our portfolio of four ILFs includes one that is operated by Ensign and three that are operated by us.6Table of ContentsOur portfolio of SNFs, ALFs and ILFs is broadly diversified by geographic location throughout the United States, with concentrations in Texas,California, and Ohio. Our properties are grouped into four categories: (1) SNFs - these are properties that are comprised exclusively of SNFs; (2) SkilledNursing Campuses - these are properties that include a combination of SNFs and ALFs or ILFs or both; (3) ALFs and ILFs - these are properties that includeALFs or ILFs, or a combination of the two; and (4) ILFs operated by CareTrust REIT - these are ILFs operated by subsidiaries of CareTrust REIT, unlike theother properties, which are leased to third-party operators.Significant Master LeasesWe have leased 93 of our properties to subsidiaries of Ensign pursuant to the Ensign Master Leases, which consist of eight triple-net leases, each withits own pool of properties, that have varying maturities and diversity in both property type and geography. The Ensign Master Leases provide for initial termsin excess of ten years with staggered expiration dates and no purchase options. At the option of Ensign, each Ensign Master Lease may be extended for up toeither two or three five year renewal terms beyond the initial term and, if elected, the renewal will be effective for all of the leased property then subject to theEnsign Master Lease. The rent is a fixed component that was initially set near the time of the Spin-Off. The annual revenues from the Ensign Master Leaseswere $56.0 million during each of the first two years of the Ensign Master Leases. As of December 31, 2016, the annualized revenues from the Ensign MasterLeases were $56.5 million. The Ensign Master Leases are guaranteed by Ensign.We have leased 16 of our properties to subsidiaries of Pristine pursuant to the Pristine Master Lease which consists of a triple-net master lease originallyentered into effective as of October 1, 2015, and which has an initial term of 15 years, two five year renewal options and no purchase options. As of December31, 2016, the annualized revenues from the Pristine Master Lease were $18.6 million and are escalated annually by an amount equal to the product of (1) thelesser of the percentage change in the Consumer Price Index (but not less than zero) or 3.0%, and (2) the prior year’s rent. The Pristine Master Lease isguaranteed by Pristine and its sole principal.Because we lease most of our properties to Ensign and Pristine, these two tenants are the primary source of our revenues, and their financial conditionand ability and willingness to (i) satisfy their obligations under their master leases and (ii) renew those leases upon expiration of the initial base terms thereofsignificantly impacts our revenues and our ability to service our indebtedness and to make distributions to our stockholders. There can be no assurance thatthese tenants have sufficient assets, income and access to financing to enable them to satisfy their obligations under the master leases, and any inability orunwillingness on their part to do so would have a material adverse effect on our business, financial condition, results of operations and liquidity, on ourability to service our indebtedness and other obligations and on our ability to pay dividends to our stockholders, as required for us to qualify, and maintainour status, as a REIT. We also cannot assure you that these tenants will elect to renew their lease arrangements with us upon expiration of the initial baseterms or any renewal terms thereof or, if such leases are not renewed, that we can reposition the affected properties on the same or better terms. See “RiskFactors - Risks Related to Our Business - We are dependent on Ensign, Pristine and other healthcare operators to make payments to us under leases, and anevent that materially and adversely affects their business, financial position or results of operations could materially and adversely affect our business,financial position or results of operations.”We monitor the creditworthiness of our tenants by evaluating the ability of the tenants to meet their lease obligations to us based on the tenants’financial performance, including the evaluation of any guarantees of tenant lease obligations. The primary basis for our evaluation of the credit quality of ourtenants (and more specifically the tenants’ ability to pay their rent obligations to us) is the tenants’ lease coverage ratios. These coverage ratios include (i)earnings before interest, income taxes, depreciation, amortization and rent (“EBITDAR”) to rent coverage, and (ii) earnings before interest, income taxes,depreciation, amortization, rent and management fees (“EBITDARM”) to rent coverage. We utilize a standardized 5% management fee when we calculatelease coverage ratios. We obtain various financial and operational information from our tenants each month and review this information in conjunction withthe above-described coverage metrics to determine trends and the operational and financial impact of the environment in the industry (including the impactof government reimbursement) and the management of the tenant’s operations. These metrics help us identify potential areas of concern relative to ourtenants’ credit quality and ultimately the tenants’ ability to generate sufficient liquidity to meet its obligations, including its obligation to continue to paythe rent due to us.Properties by Type:The following table displays the geographic distribution of our facilities by property type and the related number of beds and units available foroccupancy by asset class, as of December 31, 2016. The number of beds or units that are operational may be less than the official licensed capacity.7Table of Contents Total(1) SNFs SNF Campuses ALFsand ILFs(1)State PropertiesBeds/Units FacilitiesBeds CampusesBeds/Units FacilitiesBeds/UnitsTX 313,709 242,950 2311 5448CA 222,443 161,673 3495 3275OH 161,488 12945 4543 ——IA 15945 13774 2171 ——UT 121,259 9911 1221 2127AZ 101,327 7799 1262 2266ID 10646 6475 169 3102WA 8738 7636 —— 1102CO 6633 4380 —— 2253NE 5366 3220 2146 ——MI 4189 —— —— 4189FL 3291 —— —— 3291NV 3304 192 —— 2212VA 2218 —— —— 2218NC 2100 —— —— 2100GA 1105 1105 —— ——MD 1120 —— —— 1120MN 130 —— —— 130IN 1162 —— —— 1162WI 1110 —— —— 1110Total 15415,183 1039,960 162,218 353,005 (1) ALFs and ILFs include ALFs or ILFs, or a combination of the two, operated by our tenants and three ILFs operated by us.Occupancy by Property Type:The following table displays occupancy by property type for each of the years ended December 31, 2016, 2015 and 2014. Percentage occupancy in thebelow table is computed by dividing the average daily number of beds occupied by the total number of beds available for use during the periods indicated(beds of acquired facilities are included in the computation following the date of acquisition only). Year Ended December 31,Property Type201620152014Facilities Leased to Tenants: (1) SNFs78%77%75% SNF Campuses77%76%75% ALFs and ILFs85%85%85%Facilities Operated by CareTrust REIT: ILFs76%76%82% (1)Financial data were derived solely from information provided by our tenants without independent verification by us. The leased facility financial performance data is presentedone quarter in arrears.Property Type - Rental Income:The following tables display the annual rental income and total beds/units for each property type leased to third-party tenants for the years endedDecember 31, 2016 and 2015.8Table of Contents For the Year Ended December 31, 2016Property TypeRental Income(in thousands)Percentof Total Total Beds/Units SNFs$64,96370%9,960SNF Campuses14,58416%2,218ALFs and ILFs13,57914%2,741Total$93,126100%14,919 For the Year Ended December 31, 2015Property TypeRental Income(in thousands)Percentof Total Total Beds/Units SNFs$48,99874%8,782SNF Campuses8,09012%1,831ALFs and ILFs8,89114%1,531Total$65,979100%12,144Geographic Concentration - Rental Income:The following table displays the geographic distribution of annual rental income for properties leased to third-party tenants for the years endedDecember 31, 2016 and 2015. For the Year EndedDecember 31, 2016 For the Year EndedDecember 31, 2015State Rental Income(in thousands)Percentof Total Rental Income(in thousands)Percentof Total OH$18,13520% $4,2566%CA17,03718% 15,38423%TX15,18316% 14,05721%AZ8,6799% 8,63313%UT5,7706% 5,7389%IA4,9095% 1,6052%WA4,8035% 4,2826%ID4,4145% 3,8276%CO3,9714% 3,8196%FL1,6382% 5111%MI1,5932% ——NE1,3341% 1,3282%VA1,1291% 5621%NV9881% 9832%GA7991% 4001%NC6851% ——IN6491% ——MN5951% 5941%WI4441% ——MD371—% ——Total$93,126100% $65,979100% ILFs Operated by CareTrust REIT:The following table displays the geographic distribution of ILFs operated by CareTrust REIT and the related number of operational units available foroccupancy as of December 31, 2016. The following table also displays the average monthly revenue per occupied unit for the years ended December 31,2016 and 2015.9Table of Contents For the Year EndedDecember 31, 2016For the Year EndedDecember 31, 2015StateFacilities UnitsAverage MonthlyRevenue PerOccupied Unit(1)Average MonthlyRevenue PerOccupied Unit(1)TX2207$1,196$1,176UT1571,3411,309Total32641,2361,213 (1)Average monthly revenue per occupied unit is equivalent to average effective rent per unit, as we do not offer tenants free rent or other concessions.We view our ownership and operation of the three ILFs as complementary to our real estate business. Our goal is to provide enhanced focus on theiroperations to improve their financial and operating performance. The three ILFs that we own and operate as of December 31, 2016 are:•Lakeland Hills Independent Living, located in Dallas, Texas, with 168 units;•The Cottages at Golden Acres, located in Dallas, Texas, with 39 units; and•The Apartments at St. Joseph Villa, located in Salt Lake City, Utah, with 57 units.Investment and Financing PoliciesOur investment objectives are to increase cash flow, provide quarterly cash dividends, maximize the value of our properties and acquire properties withcash flow growth potential. We intend to invest primarily in SNFs and seniors housing, including ALFs and ILFs, as well as medical office buildings, long-term acute care hospitals and inpatient rehabilitation facilities. Our properties are located in 20 states and we intend to continue to acquire properties in otherstates throughout the United States. Although our portfolio currently consists primarily of owned real property, future investments may include firstmortgages, mezzanine debt and other securities issued by, or joint ventures with, REITs or other entities that own real estate consistent with our investmentobjectives.Our Competitive StrengthsWe believe that our ability to acquire, integrate and improve facilities is a direct result of the following key competitive strengths:Geographically Diverse Property Portfolio. Our properties are located in 20 different states, with concentrations in Texas, California and Ohio. Theproperties in any one state do not account for more than 24% of our total beds and units as of December 31, 2016. We believe this geographic diversificationwill limit the effect of changes in any one market on our overall performance.Long-Term, Triple-Net Lease Structure. All of our properties (except for the three ILFs that we own and operate) are leased to our tenants under long-term, triple-net leases, pursuant to which the operators are responsible for all facility maintenance and repair, insurance required in connection with the leasedproperties and the business conducted on the leased properties, taxes levied on or with respect to the leased properties and all utilities and other servicesnecessary or appropriate for the leased properties and the business conducted on the leased properties.Financially Secure Primary Tenant. Ensign is an established provider of healthcare services with strong financial performance and accounted for 58%of our 2016 revenues, exclusive of tenant reimbursements. Ensign is subject to the reporting requirements of the SEC and is required to file with the SECannual reports containing audited financial information and quarterly reports containing unaudited financial information. Ensign’s publicly available filingscan be found at the SEC’s website at www.sec.gov.Ability to Identify Talented Operators. As a result of our management team’s operating experience and network of relationships and insight, we believethat we are able to identify and pursue working relationships with qualified local, regional and national healthcare providers and seniors housing operators.We expect to continue our disciplined focus on pursuing investment opportunities, primarily with respect to stabilized assets but also some strategicinvestment in new and/or improving properties, while seeking dedicated and engaged operators who possess local market knowledge, have solid operatingrecords and emphasize quality services and outcomes. We intend to support these operators by providing strategic capital for facility acquisition, upkeep andmodernization. Our management team’s experience gives us a key competitive advantage in10Table of Contentsobjectively evaluating an operator’s financial position, care and service programs, operating efficiencies and likely business prospects.Experienced Management Team. Gregory K. Stapley, our President and Chief Executive Officer, has extensive experience in the real estate andhealthcare industries. Mr. Stapley has more than 30 years of experience in the acquisition, development and disposition of real estate including healthcarefacilities and office, retail and industrial properties, including nearly 15 years at Ensign where he was instrumental in assembling the portfolio that we nowlease back to Ensign. Our Chief Financial Officer, William M. Wagner, has more than 25 years of accounting and finance experience, primarily in real estate,including 12 years of experience working extensively for REITs. Most notably he worked for both Nationwide Health Properties, Inc., a healthcare REIT, andSunstone Hotel Investors, Inc., a lodging REIT, serving as Senior Vice President and Chief Accounting Officer of each company. David M. Sedgwick, ourVice President of Operations, is a licensed nursing home administrator with more than 12 years of experience in skilled nursing operations, includingturnaround operations, and trained over 100 Ensign nursing home administrators while he was Ensign’s Chief Human Capital Officer. Our executives haveyears of public company experience, including experience accessing both debt and equity capital markets to fund growth and maintain a flexible capitalstructure.Flexible UPREIT Structure. We operate through an umbrella partnership, commonly referred to as an UPREIT structure, in which substantially all ofour properties and assets are held through the Operating Partnership. Conducting business through the Operating Partnership will allow us flexibility in themanner in which we structure the acquisition of properties. In particular, an UPREIT structure enables us to acquire additional properties from sellers inexchange for limited partnership units, which provides property owners the opportunity to defer the tax consequences that would otherwise arise from a saleof their real properties and other assets to us. As a result, this structure allows us to acquire assets in a more efficient manner and may allow us to acquire assetsthat the owner would otherwise be unwilling to sell because of tax considerations.Business StrategiesOur primary goal is to create long-term stockholder value through the payment of consistent cash dividends and the growth of our asset base. Toachieve this goal, we intend to pursue a business strategy focused on opportunistic acquisitions and property diversification. We also intend to furtherdevelop our relationships with tenants and healthcare providers with a goal to progressively expand the mixture of tenants managing and operating ourproperties.The key components of our business strategies include:Diversify Asset Portfolio. We diversify through the acquisition of new and existing facilities from third parties and the expansion and upgrade ofcurrent facilities and strategically investing in new developments with options to acquire the developments at stabilization. We employ what we believe tobe a disciplined, opportunistic acquisition strategy with a focus on the acquisition of skilled nursing, assisted living and independent living facilities, as wellas medical office buildings, long-term acute care hospitals and inpatient rehabilitation facilities. As we acquire additional properties, we expect to furtherdiversify by geography, asset class and tenant within the healthcare and healthcare-related sectors.Maintain Balance Sheet Strength and Liquidity. We maintain a capital structure that provides the resources and flexibility to support the growth of ourbusiness. We intend to maintain a mix of credit facility debt, mortgage debt and unsecured debt which, together with our anticipated ability to completefuture equity financings, we expect will fund the growth of our property portfolio.Develop New Tenant Relationships. We cultivate new relationships with tenants and healthcare providers in order to expand the mix of tenantsoperating our properties and, in doing so, to reduce our dependence on Ensign. We expect that this objective will be achieved over time as part of our overallstrategy to acquire new properties and further diversify our portfolio of healthcare properties.Provide Capital to Underserved Operators. We believe there is a significant opportunity to be a capital source to healthcare operators, through theacquisition and leasing of healthcare properties to them that are consistent with our investment and financing strategy at appropriate risk-adjusted rates ofreturn, which, due to size and other considerations, are not a focus for larger healthcare REITs. We pursue acquisitions and strategic opportunities that meetour investing and financing strategy and that are attractively priced, including funding development of properties through preferred equity or constructionloans and thereafter entering into sale and leaseback arrangements with such developers as well as other secured term financing and mezzanine lending. Weutilize our management team’s operating experience, network of relationships and industry insight to identify both large and small quality operators in needof capital funding for future growth. In appropriate11Table of Contentscircumstances, we may negotiate with operators to acquire individual healthcare properties from those operators and then lease those properties back to theoperators pursuant to long-term triple-net leases.Fund Strategic Capital Improvements. We support operators by providing capital to them for a variety of purposes, including capital expenditures andfacility modernization. We expect to structure these investments as either lease amendments that produce additional rents or as loans that are repaid byoperators during the applicable lease term.Pursue Strategic Development Opportunities. We work with operators and developers to identify strategic development opportunities. Theseopportunities may involve replacing or renovating facilities that may have become less competitive. We also identify new development opportunities thatpresent attractive risk-adjusted returns. We may provide funding to the developer of a property in conjunction with entering into a sale leaseback transactionor an option to enter into a sale leaseback transaction for the property.CompetitionWe compete for real property investments with other REITs, investment companies, private equity and hedge fund investors, sovereign funds, pensionfunds, healthcare operators, lenders and other institutional investors. Some of these competitors are significantly larger and have greater financial resourcesand lower costs of capital than us. Increased competition will make it more challenging to identify and successfully capitalize on acquisition opportunitiesthat meet our investment objectives. Our ability to compete is also impacted by national and local economic trends, availability of investment alternatives,availability and cost of capital, construction and renovation costs, existing laws and regulations, new legislation and population trends.In addition, revenues from our properties are dependent on the ability of our tenants and operators to compete with other healthcare operators.Healthcare operators compete on a local and regional basis for residents and patients and their ability to successfully attract and retain residents and patientsdepends on key factors such as the number of facilities in the local market, the types of services available, the quality of care, reputation, age and appearanceof each facility and the cost of care in each locality. Private, federal and state payment programs and the effect of other laws and regulations may also have asignificant impact on the ability of our tenants and operators to compete successfully for residents and patients at the properties.EmployeesWe employ approximately 50 employees (including our executive officers), none of whom is subject to a collective bargaining agreement.Government Regulation, Licensing and EnforcementOverviewAs operators of healthcare facilities, Ensign, Pristine and other tenants of our healthcare properties are typically subject to extensive and complexfederal, state and local healthcare laws and regulations relating to fraud and abuse practices, government reimbursement, licensure and certificate of need andsimilar laws governing the operation of healthcare facilities, and we expect that the healthcare industry, in general, will continue to face increased regulationand pressure in the areas of fraud, waste and abuse, cost control, healthcare management and provision of services, among others. These regulations are wide-ranging and can subject our tenants to civil, criminal and administrative sanctions. Affected tenants may find it increasingly difficult to comply with thiscomplex and evolving regulatory environment because of a relative lack of guidance in many areas as certain of our healthcare properties are subject tooversight from several government agencies and the laws may vary from one jurisdiction to another. Changes in laws and regulations and reimbursementenforcement activity and regulatory non-compliance by our tenants could have a significant effect on their operations and financial condition, which in turnmay adversely affect us, as detailed below and set forth under “Risk Factors - Risks Related to Our Business.”The following is a discussion of certain laws and regulations generally applicable to operators of our healthcare facilities and, in certain cases, to us.Fraud and Abuse EnforcementThere are various extremely complex federal and state laws and regulations governing healthcare providers’ relationships and arrangements andprohibiting fraudulent and abusive practices by such providers. These laws include, but are not limited to, (i) federal and state false claims acts, which, amongother things, prohibit providers from filing false claims or making false12Table of Contentsstatements to receive payment from Medicare, Medicaid or other federal or state healthcare programs, (ii) federal and state anti-kickback and fee-splittingstatutes, including the Medicare and Medicaid anti-kickback statute, which prohibit the payment or receipt of remuneration to induce referrals orrecommendations of healthcare items or services, (iii) federal and state physician self-referral laws (commonly referred to as the “Stark Law”), which generallyprohibit referrals by physicians to entities with which the physician or an immediate family member has a financial relationship, (iv) the federal CivilMonetary Penalties Law, which prohibits, among other things, the knowing presentation of a false or fraudulent claim for certain healthcare services and(v) federal and state privacy laws, including the privacy and security rules contained in the Health Insurance Portability and Accountability Act of 1996,which provide for the privacy and security of personal health information. Violations of healthcare fraud and abuse laws carry civil, criminal andadministrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and Medicaid reimbursement and potentialexclusion from Medicare, Medicaid or other federal or state healthcare programs. These laws are enforced by a variety of federal, state and local agencies andcan also be enforced by private litigants through, among other things, federal and state false claims acts, which allow private litigants to bring qui tam or“whistleblower” actions. Ensign and our other tenants are (and many of our future tenants are expected to be) subject to these laws, and some of them may inthe future become the subject of governmental enforcement actions if they fail to comply with applicable laws.ReimbursementSources of revenue for Ensign, Pristine and our other tenants include (and for our future tenants is expected to include), among other sources,governmental healthcare programs, such as the federal Medicare program and state Medicaid programs, and non-governmental payors, such as insurancecarriers and health maintenance organizations. As federal and state governments focus on healthcare reform initiatives, and as the federal government andmany states face significant budget deficits, efforts to reduce costs by these payors will likely continue, which may result in reduced or slower growth inreimbursement for certain services provided by Ensign and some of our other tenants.Healthcare Licensure and Certificate of NeedOur healthcare facilities are subject to extensive federal, state and local licensure, certification and inspection laws and regulations. In addition, variouslicenses and permits are required to dispense narcotics, operate pharmacies, handle radioactive materials and operate equipment. Many states require certainhealthcare providers to obtain a certificate of need, which requires prior approval for the construction, expansion and closure of certain healthcare facilities.The approval process related to state certificate of need laws may impact some of our tenants’ abilities to expand or change their businesses.Americans with Disabilities Act (the “ADA”)Although most of our properties are not required to comply with the ADA because of certain “grandfather” provisions in the law, some of our propertiesmust comply with the ADA and similar state or local laws to the extent that such properties are “public accommodations,” as defined in those statutes. Theselaws may require removal of barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable.Under our triple-net lease structure, our tenants would generally be responsible for additional costs that may be required to make our facilities ADA-compliant. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants.Environmental MattersA wide variety of federal, state and local environmental and occupational health and safety laws and regulations affect healthcare facility operations.These complex federal and state statutes, and their enforcement, involve a myriad of regulations, many of which involve strict liability on the part of thepotential offender. Some of these federal and state statutes may directly impact us. Under various federal, state and local environmental laws, ordinances andregulations, an owner of real property, such as us, may be liable for the costs of removal or remediation of hazardous or toxic substances at, under or disposedof in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including government fines and damages forinjuries to persons and adjacent property). The cost of any required remediation, removal, fines or personal or property damages and the owner’s liabilitytherefore could exceed or impair the value of the property and/or the assets of the owner. In addition, the presence of such substances, or the failure toproperly dispose of or remediate such substances, may adversely affect the owner’s ability to sell or rent such property or to borrow using such property ascollateral which, in turn, could reduce our revenues. See “Risk Factors - Risks Related to Our Business - Environmental compliance costs and liabilitiesassociated with real estate properties owned by us may materially impair the value of those investments.”13Table of ContentsCompliance ProcessAs an operator of healthcare facilities, Ensign has a program to help it comply with various requirements of federal and private healthcare programs. InOctober 2013, Ensign entered into a corporate integrity agreement (the “CIA”) with the Office of the Inspector General of the U.S. Department of Health andHuman Services. The CIA requires, among other things, that Ensign and its subsidiaries maintain a corporate compliance program to help comply withvarious requirements of federal and private healthcare programs. Although we are no longer a subsidiary of Ensign, we are subject to certain continuingobligations under Ensign’s compliance program, including certain training in Medicare and Medicaid laws for our employees, as required by the CIA.REIT QualificationWe elected to be taxed as a REIT for U.S. federal income tax purposes beginning with our taxable year ended December 31, 2014. Our qualification as aREIT will depend upon our ability to meet, on a continuing basis, various complex requirements under the Internal Revenue Code of 1986, as amended (the“Code”), relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels to our stockholdersand the concentration of ownership of our capital stock. We believe that we are organized in conformity with the requirements for qualification and taxationas a REIT under the Code and that our manner of operation has and will enable us to meet the requirements for qualification and taxation as a REIT.The Operating PartnershipWe own substantially all of our assets and properties and conduct our operations through the Operating Partnership. We believe that conductingbusiness through the Operating Partnership provides flexibility with respect to the manner in which we structure the acquisition of properties. In particular, anUPREIT structure enables us to acquire additional properties from sellers in tax deferred transactions. In these transactions, the seller would typicallycontribute its assets to the Operating Partnership in exchange for units of limited partnership interest in the Operating Partnership (“OP Units”). Holders of OPUnits will have the right, after a 12-month holding period, to require the Operating Partnership to redeem any or all of such OP Units for cash based upon thefair market value of an equivalent number of shares of CareTrust REIT’s common stock at the time of the redemption. Alternatively, we may elect to acquirethose OP Units in exchange for shares of our common stock on a one-for-one basis. The number of shares of common stock used to determine the redemptionvalue of OP Units, and the number of shares issuable in exchange for OP Units, is subject to adjustment in the event of stock splits, stock dividends,distributions of warrants or stock rights, specified extraordinary distributions and similar events. The Operating Partnership is managed by our wholly ownedsubsidiary, CareTrust GP, LLC, which is the sole general partner of the Operating Partnership and owns one percent of its outstanding partnership interests. Asof December 31, 2016, CareTrust REIT is the only limited partner of the Operating Partnership, owning 99% of its outstanding partnership interests, and wehave not issued OP Units to any other party.The benefits of our UPREIT structure include the following:•Access to capital. We believe the UPREIT structure provides us with access to capital for refinancing and growth. Because an UPREIT structureincludes a partnership as well as a corporation, we can access the markets through the Operating Partnership issuing equity or debt as well as thecorporation issuing capital stock or debt securities. Sources of capital include possible future issuances of debt or equity through public offeringsor private placements.•Growth. The UPREIT structure allows stockholders, through their ownership of common stock, and the limited partners, through their ownershipof OP Units, an opportunity to participate in future investments we may make in additional properties.•Tax deferral. The UPREIT structure provides property owners who transfer their real properties to the Operating Partnership in exchange for OPUnits the opportunity to defer the tax consequences that otherwise would arise from a sale of their real properties and other assets to us or to athird party. As a result, this structure allows us to acquire assets in a more efficient manner and may allow us to acquire assets that the ownerwould otherwise be unwilling to sell because of tax considerations.InsuranceWe maintain, or require in our leases, including the Ensign Master Leases and the Pristine Master Lease, that our tenants maintain all applicable lines ofinsurance on our properties and their operations. The amount and scope of insurance coverage provided by our policies and the policies maintained by ourtenants is customary for similarly situated companies in our industry. However, we cannot assure you that our tenants will maintain the required insurancecoverages, and the failure by any14Table of Contentsof them to do so could have a material adverse effect on us. We also cannot assure you that we will continue to require the same levels of insurance coverageunder our leases, including the Ensign Master Leases and the Pristine Master Lease, that such insurance will be available at a reasonable cost in the future orthat the insurance coverage provided will fully cover all losses on our properties upon the occurrence of a catastrophic event, nor can we assure you of thefuture financial viability of the insurers.ITEM 1A.Risk FactorsRisks Related to Our BusinessWe are dependent on Ensign, Pristine and other healthcare operators to make payments to us under leases, and an event that materially and adverselyaffects their business, financial position or results of operations could materially and adversely affect our business, financial position or results ofoperations.Following the acquisitions on February 1, 2017, Ensign represents $56.5 million or 50%, and Pristine represents $18.6 million or 17%, of our revenues,exclusive of tenant reimbursements, on an annualized run-rate basis. Additionally, because each master lease is a triple-net lease, we depend on our tenants topay all insurance, taxes, utilities and maintenance and repair expenses in connection with these leased properties and to indemnify, defend and hold usharmless from and against various claims, litigation and liabilities arising in connection with their business. There can be no assurance that Ensign, Pristineor our other tenants will have sufficient assets, income and access to financing to enable them to satisfy their payment or indemnification obligations undertheir leases with us. In addition, any failure by a tenant to effectively conduct its operations or to maintain and improve our properties could adversely affectits business reputation and its ability to attract and retain residents in our properties. The inability or unwillingness of Ensign or Pristine to meet their rentobligations under their leases could materially adversely affect our business, financial position or results of operations, including our ability to pay dividendsto our stockholders as required to maintain our status as a REIT. The inability of Ensign or Pristine to satisfy their other obligations under their leases, such asthe payment of insurance, taxes and utilities, could materially and adversely affect the condition of the leased properties as well as their business, financialposition and results of operations. For these reasons, if Ensign or Pristine were to experience a material and adverse effect on their businesses, financialposition or results of operations, our business, financial position or results of operations could also be materially and adversely affected.Due to our dependence on rental payments from Ensign and Pristine as our primary source of revenues, we may be limited in our ability to enforce ourrights under, or to terminate, their leases. Failure by Ensign or Pristine to comply with the terms of their leases or to comply with federal and state healthcarelaws and regulations to which the leased properties are subject could require us to find another lessee for such leased property and there could be a decreasein or cessation of rental payments. In such event, we may be unable to locate a suitable lessee at similar rental rates or at all, which would have the effect ofreducing our rental revenues.The impact of healthcare reform legislation on us and our tenants cannot accurately be predicted.Ensign, Pristine and other healthcare operators to which we lease properties are dependent on the healthcare industry and may be susceptible to therisks associated with healthcare reform. Because all of our properties are used as healthcare properties, we are impacted by the risks associated with healthcarereform. Legislative proposals are introduced or proposed in Congress and in some state legislatures each year that would effect major changes in thehealthcare system, either nationally or at the state level. We cannot accurately predict whether any future legislative proposals will be adopted or, if adopted,what effect, if any, these proposals would have on our tenants and, thus, our business.In March 2010, President Obama signed the Affordable Care Act into law. The passage of the Affordable Care Act has resulted in comprehensive reformlegislation that has expanded healthcare coverage to millions of uninsured people and provided for significant changes to the U.S. healthcare system overseveral years. The Affordable Care Act includes a large number of health-related provisions, including expanding Medicaid eligibility, requiring mostindividuals to have health insurance, establishing new regulations on health plans, establishing health insurance exchanges, and modifying certain paymentsystems to encourage more cost-effective care and a reduction of inefficiencies and waste (e.g., the implementation of a voluntary bundled payment programand the creation of accountable care organizations), including through new tools to address fraud and abuse. To help fund this expansion, the AffordableCare Act outlines certain reductions in Medicare reimbursements for various healthcare providers, including long-term acute care hospitals and SNFs, as wellas certain other changes to Medicare payment methodologies. This comprehensive healthcare legislation provides for extensive future rulemaking byregulatory authorities, and also may be altered or amended. While we can anticipate that some of the rulemaking that will be promulgated by regulatoryauthorities will affect our tenants and the manner in which they are reimbursed by the federal healthcare programs, we cannot accurately predict today theimpact of those regulations on our tenants and, thus, on our business.15Table of ContentsThe Supreme Court’s 2014 decision to uphold the constitutionality of the individual mandate while striking down the provisions linking federalfunding of state Medicaid programs with a federally mandated expansion of those programs, which effectively made Medicaid expansion voluntary, leavingeach state free to opt in or out, has not reduced the uncertain impact that the Affordable Care Act will have on healthcare delivery systems. However, giventhe results of the November 2016 presidential election, the future of the Affordable Care Act is uncertain and at this juncture there will be a period ofuncertainty regarding the Affordable Care Act’s repeal, modification or replacement, any of which would have long term financial impact on the delivery ofand payment for healthcare.Other legislative changes have been proposed and adopted since the Affordable Care Act was enacted, which also may impact our business. Forinstance, on April 1, 2014, the President signed the Protecting Access to Medicare Act of 2014, which, among other things, requires the Centers forMedicare & Medicaid Services (“CMS”) to measure, track, and publish readmission rates of SNFs by 2017 and implement a value-based purchasing programfor SNFs (the “SNF VBP Program”) by October 1, 2018. The SNF VBP Program will increase Medicare reimbursement rates for SNFs that achieve certainlevels of quality performance measures to be developed by CMS, relative to other facilities. The value-based payments authorized by the SNF VBP Programwill be funded by reducing Medicare payment for all SNFs by 2% and redistributing up to 70% of those funds to high-performing SNFs. However, there is noassurance that payments made by CMS as a result of the SNF VBP Program will be sufficient to cover a facility’s costs. If Medicare reimbursement providedto our healthcare tenants is reduced under the SNF VBP Program, that reduction may have an adverse impact on the ability of our tenants to meet theirobligations to us.Additionally, on November 16, 2015, CMS issued the final rule for a new mandatory Comprehensive Care for Joint Replacement (“CJR”) modelfocusing on coordinated, patient-centered care. Under this model, the hospital in which the hip or knee replacement takes place is accountable for the costsand quality of care from the time of the surgery through 90 days after, or an “episode” of care. This model initially covered 67 geographic areas throughoutthe country and most hospitals in those regions are required to participate. Following the implementation of the CJR program, the Medicare revenues of ourSNF-operating tenants related to lower extremity joint replacement hospital discharges could be increased or decreased in those geographic areas identifiedby CMS for mandatory participation in the bundled payment program. If Medicare reimbursement provided to our healthcare tenants is reduced under theCJR model, that reduction may have an adverse impact on the ability of our tenants to meet their obligations to us.However, the fate of the SNF VBP Program and CJR model are uncertain since the Affordable Care Act may be repealed, modified or replaced.Tenants that fail to comply with the requirements of, or changes to, governmental reimbursement programs, such as Medicare or Medicaid, may cease tooperate or be unable to meet their financial and other contractual obligations to us.Ensign, Pristine and other healthcare operators to which we lease properties are subject to complex federal, state and local laws and regulations relatingto governmental healthcare reimbursement programs. See “Business - Government Regulation, Licensing and Enforcement - Overview.” As a result, Ensign,Pristine and other tenants are subject to the following risks, among others:•statutory and regulatory changes;•retroactive rate adjustments;•recovery of program overpayments or set-offs;•administrative rulings;•policy interpretations;•payment or other delays by fiscal intermediaries or carriers;•government funding restrictions (at a program level or with respect to specific facilities); and•interruption or delays in payments due to any ongoing governmental investigations and audits.Healthcare reimbursement will likely continue to be a significant focus for federal and state authorities in their efforts to control costs. We cannot makeany assessment as to the ultimate timing or the effect that any future legislative reforms may have on our tenants’ costs of doing business and on the amountof reimbursement by government and other third-party payors. More generally, and because of the dynamic nature of the legislative and regulatoryenvironment for health care products and services, and in light of existing federal budgetary concerns, we cannot predict the impact that broad-based, far-reaching legislative or regulatory changes could have on the U.S. economy, our business or that of our operators and tenants. The failure of Ensign, Pristine orany of our operators and other tenants to comply with these laws, requirements and regulations could materially and adversely affect their ability to meettheir financial and contractual obligations to us.16Table of ContentsFinally, government investigations and enforcement actions brought against the health care industry have increased dramatically over the past severalyears and are expected to continue. Some of these enforcement actions represent novel legal theories and expansions in the application of the False ClaimsAct.The False Claims Act provides that any person who “knowingly presents, or causes to be presented” a “false or fraudulent claim for payment orapproval” to the U.S. government, or its agents and contractors, is liable for a civil penalty ranging from $5,500 to $11,000 per claim, plus three times theamount of damages sustained by the government. Under the False Claims Act’s so-called “reverse false claims,” liability also could arise for “using” a falserecord or statement to “conceal,” “avoid” or “decrease” an “obligation” (which can include the retention of an overpayment) “to pay or transmit money orproperty to the Government.” The False Claims Act also empowers and provides incentives to private citizens (commonly referred to as qui tam relator orwhistleblower) to file suit on the government’s behalf. The qui tam relator’s share of the recovery can be between 15% and 25% in cases in which thegovernment intervenes, and 25% to 30% in cases in which the government does not intervene. Notably, the Affordable Care Act and the Health Care andEducation Reconciliation Act of 2010 (collectively, the “Affordable Care Act”) amended certain jurisdictional bars to the False Claims Act, effectivelynarrowing the “public disclosure bar” (which generally requires that a whistleblower suit not be based on publicly disclosed information) and expanding the“original source” exception (which generally permits a whistleblower suit based on publicly disclosed information if the whistleblower is the original sourceof that publicly disclosed information), thus potentially broadening the field of potential whistleblowers.Medicare requires that extensive financial information be reported on a periodic basis and in a specific format or content. These requirements arenumerous, technical and complex and may not be fully understood or implemented by billing or reporting personnel. With respect to certain types ofrequired information, the False Claims Act may be violated by mere negligence or recklessness in the submission of information to the government evenwithout any intent to defraud. New billing systems, new medical procedures and procedures for which there is not clear guidance may all result in liability.The costs for an operator of a health care property associated with both defending such enforcement actions and the undertakings in settling theseactions can be substantial and could have a material adverse effect on the ability of an operator to meet its obligations to us.Tenants that fail to structure their facility contractual relationships in light of anti-kickback statutes and self-referral laws expose themselves tosignificant risk that could result in their inability to meet their financial and other contractual obligations to us.In addition to reimbursement, operators of healthcare facilities must exercise extreme care in structuring their contractual relationships with vendors,physicians and other healthcare providers who provide goods and services to healthcare facilities, in particular, the anti-kickback statutes and self-referrallaws, noted below.Federal “Fraud and Abuse” Laws and Regulations. The Medicare and Medicaid anti-fraud and abuse amendments to the Social Security Act (the“Anti-Kickback Law”) make it a felony, subject to certain exceptions, to engage in illegal remuneration arrangements with vendors, physicians and otherhealth care providers for the referral of Medicare beneficiaries or Medicaid recipients. When a violation occurs, the government may proceed criminally orcivilly. If the government proceeds criminally, a violation is a felony and may result in imprisonment for up to five years, fines of up to $25,000 andmandatory exclusion from participation in all federal health care programs. If the government proceeds civilly, it may impose a civil monetary penalty of$50,000 per violation and an assessment of not more than three times the total amount of remuneration involved, and it may exclude the parties fromparticipation in all federal health care programs. Many states have enacted similar laws to, and in some cases broader than the Anti-Kickback Law. Exclusionfrom these programs would have a material adverse effect on the operations and financial condition of Ensign, Pristine or any of our other healthcareoperators.The scope of prohibited payments in the Anti-Kickback Law is broad. The U. S. Department of Health and Human Services has published regulationswhich describe certain “safe harbor” arrangements that will not be deemed to constitute violations of the Anti-Kickback Law. An arrangement that fitssquarely into a safe harbor is immune from prosecution under the Anti-Kickback Statute. The safe harbors described in the regulations are narrow and do notcover a wide range of economic relationships which many SNFs, physicians and other health care providers consider to be legitimate business arrangementsnot prohibited by the statute. Because the regulations describe safe harbors and do not purport to describe comprehensively all lawful or unlawful economicarrangements or other relationships between health care providers and referral sources, health care providers having these arrangements or relationships maybe required to alter them in order to ensure compliance with the Anti-Kickback Law.17Table of ContentsRestrictions on Referrals. The federal physician self-referral law and its implementing regulations (commonly referred to as “Stark Law”) prohibitsproviders of “designated health services” from billing Medicare or Medicaid if the patient is referred by a physician (or his/her immediate family member)with a financial relationship with the entity, unless an exception applies. “Designated health services” include clinical laboratory services; physical therapyservices; occupational therapy services; radiology services, including magnetic resonance imaging, computerized axial tomography scans, and ultrasoundservices; radiation therapy services and supplies; durable medical equipment and services; parenteral and enteral nutrients, equipment and supplies;prosthetics, orthotics, and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospitalservices. The Stark Law also prohibits the furnishing entity from submitting a claim for reimbursement or otherwise billing Medicare or any other person orentity for improperly referred designated health services.An entity that submits a claim for reimbursement in violation of the Stark Law must refund any amounts collected and may be: (1) subject to a civilpenalty of up to $15,000 for each self-referred service; and (2) excluded from participation in federal health care programs. In addition, a physician or entitythat has participated in a “scheme” to circumvent the operation of the Stark Law is subject to a civil penalty of up to $100,000 and possible exclusion fromparticipation in federal health care programs.CMS has established a voluntary self-disclosure program under which health care facilities and other entities may report Stark violations and seek areduction in potential refund obligations. However, the program is relatively new and therefore it is difficult to determine at this time whether it will providesignificant monetary relief to health care facilities that discover inadvertent Stark Law violations.The costs of an operator of a health care property for any non-compliance with the Anti-Kickback Law and Stark Laws can be substantial and couldhave a material adverse effect on the ability of an operator to meet its obligations to us.Tenants that fail to adhere to HIPAA and the HITECH Act’s privacy and security requirements expose themselves to significant risk that could result intheir inability to meet their financial and other contractual obligations to us.Potentially significant legal exposure exists for healthcare operators under state and federal laws which govern the use and disclosure of confidentialpatient health information and patients’ rights to access and amend their own health information. The Administrative Simplification Requirements of theHealth Insurance Portability and Accountability Act of 1996 (“HIPAA”) established national standards to facilitate the electronic exchange of ProtectedHealth Information (“PHI”) and to maintain the privacy and security of the PHI. These standards have a major effect on healthcare providers which transmitPHI in electronic form in connection with HIPAA standard transactions (e.g., health care claims). In particular, HIPAA established standards governing: (1)electronic transactions and code sets; (2) privacy; (3) security; and (4) national identifiers. Failure of our operators to comply could result in criminal andcivil penalties, which could have a material adverse effect on the ability of our tenants to meet their obligations to us.Title XIII of the Affordable Care Act, otherwise known as the Health Information Technology for Economic and Clinical Health Act (the “HITECHAct”), provides for an investment of almost $20 billion in public monies for the development of a nationwide health information technology (“HIT”)infrastructure. The HIT infrastructure is intended to improve health care quality, reduce costs and facilitate access to certain information. The HITECH Actalso expands the scope and application of the administrative simplification provisions of HIPAA, and its implementing regulations, (i) imposing a writtennotice obligation upon covered entities for security breaches involving “unsecured” PHI, (ii) expanding the scope of a provider’s electronic health recorddisclosure tracking obligations, (iii) substantially limiting the ability of health care providers to sell PHI without patient authorization, (iv) increasingpenalties for violations, and (v) providing for enforcement of violations by state attorneys general. While the effects of the HITECH Act cannot be predictedat this time, the obligations imposed thereunder could have a material adverse effect on the financial condition of our operators, which could have a materialadverse effect on the ability of our tenants to meet their obligations to us.Tenants that fail to comply with federal, state and local licensure, certification and inspection laws and regulations may cease to operate our healthcarefacilities or be unable to meet their financial and other contractual obligations to us.The healthcare operators to which we lease properties are subject to extensive federal, state, local and industry-related licensure, certification andinspection laws, regulations and standards. Our tenants’ failure to comply with any of these laws, regulations or standards could result in loss or restriction oflicense, loss of accreditation, denial of reimbursement, imposition of fines, suspension or decertification from federal and state healthcare programs, or closureof the facility. For example, operations at our properties may require a license, registration, certificate of need, provider agreement or certification. Failure ofany tenant to obtain, or the loss or restrictions on any required license, registration, certificate of need, provider agreement or18Table of Contentscertification would prevent a facility from operating in the manner intended by such tenant. Additionally, failure of our tenants to generally comply withapplicable laws and regulations could adversely affect facilities owned by us, result in adverse publicity and loss of reputation, and therefore could materiallyand adversely affect us. See “Business - Government Regulation, Licensing and Enforcement - Healthcare Licensure and Certificate of Need.”Our tenants depend on reimbursement from government and other third-party payors; reimbursement rates from such payors may be reduced, which couldcause our tenants’ revenues to decline and could affect their ability to meet their obligations to us.The federal government and a number of states are currently managing budget deficits, which may put pressure on Congress and the states to decreasereimbursement rates for our tenants, with the goal of decreasing state expenditures under Medicaid programs. The need to control Medicaid expenditures maybe exacerbated by the potential for increased enrollment in Medicaid due to unemployment and declines in family incomes. These potential reductions couldbe compounded by the potential for federal cost-cutting efforts that could lead to reductions in reimbursement to our tenants under both the Medicaid andMedicare programs. Potential reductions in Medicaid and Medicare reimbursement to our tenants could reduce the revenues of our tenants and their ability tomeet their obligations to us.The bankruptcy, insolvency or financial deterioration of our tenants could delay or prevent our ability to collect unpaid rents or require us to find newtenants.We receive substantially all of our income as rent payments under leases of our properties. We have no control over the success or failure of our tenants’businesses and, at any time, any of our tenants may experience a downturn in its business that may weaken its financial condition. As a result, our tenantsmay fail to make rent payments when due or declare bankruptcy.Any tenant failures to make rent payments when due or tenant bankruptcies could result in the termination of the tenant’s lease and could have amaterial adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders (which couldadversely affect our ability to raise capital or service our indebtedness). This risk is magnified in situations where we lease multiple properties to a singletenant, such as Ensign and Pristine, as a multiple property tenant failure could reduce or eliminate rental revenue from multiple properties.If tenants are unable to comply with the terms of the leases, we may be forced to modify the leases in ways that are unfavorable to us. Alternatively, thefailure of a tenant to perform under a lease could require us to declare a default, repossess the property, find a suitable replacement tenant, hire third-partymanagers to operate the property or sell the property. There is no assurance that we would be able to lease a property on substantially equivalent or betterterms than the prior lease, or at all, find another qualified tenant, successfully reposition the property for other uses or sell the property on terms that arefavorable to us. It may be more difficult to find a replacement tenant for a healthcare property than it would be to find a replacement tenant for a generalcommercial property due to the specialized nature of the business. Even if we are able to find a suitable replacement tenant for a property, transfers ofoperations of healthcare facilities are subject to regulatory approvals not required for transfers of other types of commercial operations, resulting in delays inreceiving reimbursement, or a potential loss of a facility’s reimbursement for a period of time, which may affect our ability to successfully transition aproperty.If any lease expires or is terminated, we could be responsible for all of the operating expenses for that property until it is re-leased or sold. If weexperience a significant number of un-leased properties, our operating expenses could increase significantly. Any significant increase in our operating costsmay have a material adverse effect on our business, financial condition and results of operations, and our ability to make distributions to our stockholders.If one or more of our tenants files for bankruptcy relief, the U.S. Bankruptcy Code provides that a debtor has the option to assume or reject theunexpired lease within a certain period of time. Any bankruptcy filing by or relating to one of our tenants could bar all efforts by us to collect pre-bankruptcydebts from that tenant or seize its property. A tenant bankruptcy could also delay our efforts to collect past due balances under the leases and couldultimately preclude collection of all or a portion of these sums. It is possible that we may recover substantially less than the full value of any unsecuredclaims we hold, if any, which may have a material adverse effect on our business, financial condition and results of operations, and our ability to makedistributions to our stockholders. Furthermore, dealing with a tenant’s bankruptcy or other default may divert management’s attention and cause us to incursubstantial legal and other costs.19Table of ContentsThe geographic concentration of some of our facilities could leave us vulnerable to an economic downturn, regulatory changes or acts of nature in thoseareas.Our properties are located in 20 different states, with concentrations in Texas, California and Ohio. The properties in these three states accounted forapproximately 24%, 16% and 10%, respectively, of the total beds and units in our portfolio, as of December 31, 2016 and approximately 16%, 18% and 20%,respectively, of our rental income for the year ended December 31, 2016. As a result of this concentration, the conditions of local economies and real estatemarkets, changes in governmental rules, regulations and reimbursement rates or criteria, changes in demographics, state funding, acts of nature and otherfactors that may result in a decrease in demand and/or reimbursement for skilled nursing services in these states could have a disproportionately adverseeffect on our tenants’ revenue, costs and results of operations, which may affect their ability to meet their obligations to us.Our facilities located in Texas are especially susceptible to natural disasters such as hurricanes, tornadoes and flooding, and our facilities located inCalifornia are particularly susceptible to natural disasters such as fires, earthquakes and mudslides. These acts of nature may cause disruption to our tenants,their employees and our facilities, which could have an adverse impact on our tenants’ patients and businesses. In order to provide care for their patients, ourtenants are dependent on consistent and reliable delivery of food, pharmaceuticals, utilities and other goods to our facilities, and the availability ofemployees to provide services at the facilities. If the delivery of goods or the ability of employees to reach our facilities were interrupted in any materialrespect due to a natural disaster or other reasons, it would have a significant impact on our facilities and our tenants’ businesses at those facilities.Furthermore, the impact, or impending threat, of a natural disaster may require that our tenants evacuate one or more facilities, which would be costly andwould involve risks, including potentially fatal risks, for their patients. The impact of disasters and similar events is inherently uncertain. Such events couldharm our tenants’ patients and employees, severely damage or destroy one or more of our facilities, harm our tenants’ business, reputation and financialperformance, or otherwise cause our tenants’ businesses to suffer in ways that we currently cannot predict.We pursue acquisitions of additional properties and seek other strategic opportunities in the ordinary course of our business, which may result in the use ofa significant amount of management resources or significant costs, and we may not fully realize the potential benefits of such transactions.We pursue acquisitions of additional properties and seek acquisitions and other strategic opportunities in the ordinary course of our business.Accordingly, we are often engaged in evaluating potential transactions and other strategic alternatives. In addition, from time to time, we engage indiscussions that may result in one or more transactions. Although there is uncertainty that any of these discussions will result in definitive agreements or thecompletion of any transaction, we may devote a significant amount of our management resources to such a transaction, which could negatively impact ouroperations. We may incur significant costs in connection with seeking acquisitions or other strategic opportunities regardless of whether the transaction iscompleted and in combining our operations if such a transaction is completed. In the event that we consummate an acquisition or strategic alternative in thefuture, there is no assurance that we would fully realize the potential benefits of such a transaction.Additionally, we have preferred equity interests in a limited number of joint ventures. Our use of joint ventures may be subject to risks that may not bepresent with other ownership methods. Our joint ventures may involve property development, which presents additional risks that could render adevelopment project less profitable or not profitable at all and, under certain circumstances, may prevent completion of development activities onceundertaken.We operate in a highly competitive industry and face competition from other REITs, investment companies, private equity and hedge fund investors,sovereign funds, healthcare operators, lenders and other investors, some of whom are significantly larger and have greater resources and lower costs of capital.Increased competition will make it more challenging to identify and successfully capitalize on acquisition opportunities that meet our investment objectives.If we cannot identify and purchase a sufficient quantity of suitable properties at favorable prices or if we are unable to finance acquisitions on commerciallyfavorable terms, our business, financial position or results of operations could be materially and adversely affected. Additionally, the fact that we mustdistribute 90% of our REIT taxable income in order to maintain our qualification as a REIT may limit our ability to rely upon rental payments from ourleased properties or subsequently acquired properties in order to finance acquisitions. As a result, if debt or equity financing is not available on acceptableterms, further acquisitions might be limited or curtailed. Transactions involving properties we might seek to acquire entail risks associated with real estateinvestments generally, including that the investment’s performance will fail to meet expectations or that the tenant, operator or manager will underperform.20Table of ContentsRequired regulatory approvals can delay or prohibit transfers of our healthcare properties, which could result in periods in which we are unable to receiverent for such properties.Our tenants which operate SNFs and other healthcare facilities must be licensed under applicable state law and, depending upon the type of facility,certified or approved as providers under the Medicare and/or Medicaid programs. Prior to the transfer of the operations of such healthcare properties tosuccessor operators, the new operator generally must become licensed under state law and, in certain states, receive change of ownership approvals undercertificate of need laws (which provide for a certification that the state has made a determination that a need exists for the beds located on the property) and, ifapplicable, file for a Medicare and Medicaid change of ownership (commonly referred to as a CHOW). If an existing lease is terminated or expires and a newtenant is found, then any delays in the new tenant receiving regulatory approvals from the applicable federal, state or local government agencies, or theinability to receive such approvals, may prolong the period during which we are unable to collect the applicable rent.We may be required to incur substantial renovation costs to make certain that our healthcare properties are suitable for other operators and tenants.Healthcare facilities are typically highly customized and may not be easily adapted to non-healthcare-related uses. The improvements generallyrequired to conform a property to healthcare use, such as upgrading electrical, gas and plumbing infrastructure and security, are costly and at times tenant-specific. A new or replacement tenant to operate one or more of our healthcare facilities may require different features in a property, depending on thattenant’s particular operations. If a current tenant is unable to pay rent and vacates a property, we may incur substantial expenditures to modify a propertybefore we are able to secure another tenant. Also, if the property needs to be renovated to accommodate multiple tenants, we may incur substantialexpenditures before we are able to release the space. In addition, approvals of local authorities for such modifications and/or renovations may be necessary,resulting in delays in transitioning a facility to a new tenant. These expenditures or renovations could materially and adversely affect our business, financialcondition or results of operations.We may not be able to sell properties when we desire because real estate investments are relatively illiquid, which could materially and adversely affectour business, financial position or results of operations.Real estate investments generally cannot be sold quickly. We may not be able to vary our portfolio promptly in response to changes in the real estatemarket. A downturn in the real estate market could materially and adversely affect the value of our properties and our ability to sell such properties foracceptable prices or on other acceptable terms. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a propertyor portfolio of properties. These factors and any others that would impede our ability to respond to adverse changes in the performance of our propertiescould materially and adversely affect our business, financial position or results of operations.An increase in market interest rates could increase our interest costs on existing and future debt and could adversely affect our stock price.If interest rates increase, so could our interest costs for any new debt and our variable rate debt obligations under our unsecured revolving credit facilityand unsecured term loan (the “Credit Facility”). This increased cost could make the financing of any acquisition more costly, as well as lower our currentperiod earnings. Rising interest rates could limit our ability to refinance existing debt when it matures or cause us to pay higher interest rates uponrefinancing. In addition, an increase in interest rates could decrease the access third parties have to credit, thereby decreasing the amount they are willing topay for our assets and consequently limiting our ability to reposition our portfolio promptly in response to changes in economic or other conditions. Further,the dividend yield on our common stock, as a percentage of the price of such common stock, will influence the price of such common stock. Thus, an increasein market interest rates may lead prospective purchasers of our common stock to expect a higher dividend yield, which could adversely affect the marketprice of our common stock.If we lose our key management personnel, we may not be able to successfully manage our business and achieve our objectives.Our success depends in large part upon the leadership and performance of our executive management team, particularly Gregory K. Stapley and otherkey employees. If we lose the services of Mr. Stapley or any of our other key employees, we may not be able to successfully manage our business or achieveour business objectives.21Table of ContentsWe or our tenants may experience uninsured or underinsured losses, which could result in a significant loss of the capital we have invested in a property,decrease anticipated future revenues or cause us to incur unanticipated expense.Our lease agreements with operators (including the Ensign Master Leases and the Pristine Master Lease) require that the tenant maintain comprehensiveliability and hazard insurance, and we maintain customary insurance for the ILFs that we own and operate. However, there are certain types of losses(including, but not limited to, losses arising from environmental conditions or of a catastrophic nature, such as earthquakes, hurricanes and floods) that maybe uninsurable or not economically insurable. Insurance coverage may not be sufficient to pay the full current market value or current replacement cost of aloss. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it infeasible to use insuranceproceeds to replace the property after such property has been damaged or destroyed. Under such circumstances, the insurance proceeds received might not beadequate to restore the economic position with respect to such property.If one of our properties experiences a loss that is uninsured or that exceeds policy coverage limits, we could lose the capital invested in the damagedproperty as well as the anticipated future cash flows from the property. If the damaged property is subject to recourse indebtedness, we could continue to beliable for the indebtedness even if the property is irreparably damaged.In addition, even if damage to our properties is covered by insurance, a disruption of business caused by a casualty event may result in loss of revenuefor our tenants or us. Any business interruption insurance may not fully compensate them or us for such loss of revenue. If one of our tenants experiences sucha loss, it may be unable to satisfy its payment obligations to us under its lease with us.Environmental compliance costs and liabilities associated with real estate properties owned by us may materially impair the value of those investments.Under various federal, state and local laws, ordinances and regulations, as a current or previous owner of real estate, we may be required to investigateand clean up certain hazardous or toxic substances or petroleum released at a property, and may be held liable to a governmental entity or to third parties forproperty damage and for investigation and cleanup costs incurred by the third parties in connection with the contamination. In addition, some environmentallaws create a lien on the contaminated site in favor of the government for damages and the costs it incurs in connection with the contamination. Neither wenor our tenants carry environmental insurance on our properties. Although we generally require our tenants, as operators of our healthcare properties, toindemnify us for environmental liabilities they cause, such liabilities could exceed the financial ability of the tenant to indemnify us or the value of thecontaminated property. The presence of contamination or the failure to remediate contamination may materially adversely affect our ability to sell or leasethe real estate or to borrow using the real estate as collateral. As the owner of a site, we may also be held liable to third parties for damages and injuriesresulting from environmental contamination emanating from the site. Although we will be generally indemnified by our tenants for contamination caused bythem, these indemnities may not adequately cover all environmental costs. We may also experience environmental liabilities arising from conditions notknown to us.If the Spin-Off were to fail to qualify as a tax-free transaction for U.S. federal income tax purposes, Ensign and CareTrust could be subject to significanttax liabilities and, in certain circumstances, we could be required to indemnify Ensign for material taxes pursuant to indemnification obligations underthe Tax Matters Agreement that we entered into with Ensign.Ensign has received from the Internal Revenue Service (the “IRS”) a private letter ruling (the “IRS Ruling”), which provides substantially to the effectthat, on the basis of certain facts presented and representations and assumptions set forth in the request submitted to the IRS, the Spin-Off will qualify as tax-free under Sections 368(a)(1)(D) and 355 of the Code. The IRS Ruling does not address certain requirements for tax-free treatment of the Spin-Off underSection 355 of the Code, and Ensign received a tax opinion from its tax advisors, substantially to the effect that, with respect to such requirements on whichthe IRS will not rule, such requirements have been satisfied. The IRS Ruling, and the tax opinion that Ensign received from its tax advisors, rely on, amongother things, certain facts, representations, assumptions and undertakings, including those relating to the past and future conduct of our and Ensign’sbusinesses, and the IRS Ruling and the tax opinion would not be valid if such facts, representations, assumptions and undertakings were incorrect in anymaterial respect. Notwithstanding the IRS Ruling and the tax opinion, the IRS could determine the Spin-Off should be treated as a taxable transaction for U.S.federal income tax purposes if it determines any of the facts, representations, assumptions or undertakings that were included in the request for the IRS Rulingare false or have been violated or if it disagrees with the conclusions in the opinions that are not covered by the IRS Ruling.22Table of ContentsIf the Spin-Off ultimately is determined to be taxable, Ensign would recognize taxable gain in an amount equal to the excess, if any, of the fair marketvalue of the shares of our common stock held by Ensign on the distribution date over Ensign’s tax basis in such shares. Such taxable gain and resulting taxliability would be substantial.In addition, under the terms of the Tax Matters Agreement that we entered into with Ensign (the “Tax Matters Agreement”), we generally areresponsible for any taxes imposed on Ensign that arise from the failure of the Spin-Off to qualify as tax-free for U.S. federal income tax purposes, within themeaning of Sections 368(a)(1)(D) and 355 of the Code, to the extent such failure to qualify is attributable to certain actions, events or transactions relating toour stock, assets or business, or a breach of the relevant representations or any covenants made by us in the Tax Matters Agreement, the materials submitted tothe IRS in connection with the request for the IRS Ruling or the representation letter provided in connection with the tax opinion relating to the Spin-Off.Our indemnification obligations to Ensign and its subsidiaries, officers and directors are not limited by any maximum amount. If we are required to indemnifyEnsign under the circumstance set forth in the Tax Matters Agreement, we may be subject to substantial tax liabilities.We may not be able to engage in desirable strategic transactions and equity issuances because of certain restrictions relating to requirements for tax-freedistributions for U.S. federal income tax purposes. In addition, we could be liable for adverse tax consequences resulting from engaging in significantstrategic or capital-raising transactions.Our ability to engage in significant strategic transactions and equity issuances may be limited or restricted in order to preserve, for U.S. federal incometax purposes, the tax-free nature of the Spin-Off.Even if the Spin-Off otherwise qualifies for tax-free treatment under Sections 368(a)(1)(D) and 355 of the Code, it may result in corporate level taxablegain to Ensign under Section 355(e) of the Code if 50% or more, by vote or value, of shares of our stock or Ensign’s stock are acquired or issued as part of aplan or series of related transactions that includes the Spin-Off. The process for determining whether an acquisition or issuance triggering these provisions hasoccurred is complex, inherently factual and subject to interpretation of the facts and circumstances of a particular case. Any acquisitions or issuances of ourstock or Ensign stock within a two-year period after the Spin-Off generally are presumed to be part of such a plan, although we or Ensign, as applicable, maybe able to rebut that presumption.Under the Tax Matters Agreement that we entered into with Ensign, we also are generally responsible for any taxes imposed on Ensign that arise fromthe failure of the Spin-Off to qualify as tax-free for U.S. federal income tax purposes, within the meaning of Sections 368(a)(1)(D) and 355 of the Code, to theextent such failure to qualify is attributable to actions, events or transactions relating to our stock, assets or business, or a breach of the relevantrepresentations or any covenants made by us in the Tax Matters Agreement, the materials submitted to the IRS in connection with the request for the IRSRuling or the representation letter provided to counsel in connection with the tax opinion.Our agreements with Ensign may not reflect terms that would have resulted from arm’s-length negotiations with unaffiliated third parties.The agreements related to the Spin-Off, including the Separation and Distribution Agreement, the Ensign Master Leases, the Opportunities Agreement,the Tax Matters Agreement, the Transition Services Agreement and the Employee Matters Agreement we entered into with Ensign, were negotiated in thecontext of the Spin-Off while we were still a wholly owned subsidiary of Ensign. As a result, although those agreements are intended to reflect arm’s-lengthterms, they may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties. Conversely, certain agreementsrelated to the Spin-Off may include terms that are more favorable than those that would have resulted from arm’s-length negotiations among unaffiliated thirdparties. Following expiration of those agreements, we may have to enter into new agreements with unaffiliated third parties, and such agreements may includeterms that are less favorable to us. The terms of the agreements negotiated in the context of the Spin-Off concern, among other things, divisions andallocations of assets and liabilities and rights and obligations, between Ensign and us.The ownership by our chief executive officer, Gregory K. Stapley, of shares of Ensign common stock may create, or may create the appearance of, conflictsof interest.Because of his former position with Ensign, our chief executive officer, Gregory K. Stapley, owns shares of Ensign common stock. Mr. Stapley alsoowns shares of our common stock. His individual holdings of shares of our common stock and Ensign common stock may be significant compared to hisrespective total assets. These equity interests may create, or appear to create, conflicts of interest when he is faced with decisions that may not benefit or affectCareTrust REIT and Ensign in the same manner.23Table of ContentsOur potential indemnification liabilities pursuant to the Separation and Distribution Agreement could materially and adversely affect us.The Separation and Distribution Agreement between us and Ensign includes, among other things, provisions governing the relationship between usand Ensign after the Spin-Off. Among other things, the Separation and Distribution Agreement provides for indemnification obligations designed to make usfinancially responsible for substantially all liabilities that may exist relating to or arising out of our business. If we are required to indemnify Ensign underthe circumstances set forth in the Separation and Distribution Agreement, we may be subject to substantial liabilities.In connection with the Spin-Off, Ensign agreed to indemnify us for certain liabilities. However, there can be no assurance that these indemnities will besufficient to insure us against the full amount of such liabilities, or that Ensign’s ability to satisfy its indemnification obligation will not be impaired in thefuture.Pursuant to the Separation and Distribution Agreement, the Tax Matters Agreement and other agreements we entered into in connection with the Spin-Off, Ensign agreed to indemnify us for certain liabilities. However, third parties could seek to hold us responsible for any of the liabilities that Ensign agreedto retain pursuant to these agreements, and there can be no assurance that Ensign will be able to fully satisfy its indemnification obligations under theseagreements. Moreover, even if we ultimately succeed in recovering from Ensign any amounts for which we are held liable, we may be temporarily required tobear these losses while seeking recovery from Ensign.The Spin-Off may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws.The Spin-Off and related transactions, including the special dividend paid on December 10, 2014 (the “Special Dividend”), are subject to review undervarious state and federal fraudulent conveyance laws. Under U.S. federal bankruptcy law and comparable provisions of state fraudulent transfer orconveyance laws, which vary from state to state, the Spin-Off or any of the related transactions could be voided as a fraudulent transfer or conveyance ifEnsign (a) distributed property with the intent of hindering, delaying or defrauding creditors or (b) received less than reasonably equivalent value or fairconsideration in return for such distribution, and one of the following is also true at the time thereof: (1) Ensign was insolvent or rendered insolvent by reasonof the Spin-Off or any related transaction, (2) the Spin-Off or any related transaction left Ensign with an unreasonably small amount of capital or assets tocarry on the business, or (3) Ensign intended to, or believed that, it would incur debts beyond its ability to pay as they mature.As a general matter, value is given under U.S. law for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or avalid antecedent debt is secured or satisfied. A debtor will generally not be considered to have received value under U.S. law in connection with adistribution to its stockholders.We cannot be certain as to the standards a U.S. court would use to determine whether or not Ensign was insolvent at the relevant time. In general,however, a U.S. court would deem an entity insolvent if: (1) the sum of its debts, including contingent and unliquidated liabilities, was greater than the valueof its assets, at a fair valuation; (2) the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability onits existing debts, including contingent liabilities, as they become absolute and mature; or (3) it could not pay its debts as they became due.If a U.S. court were to find that the Spin-Off was a fraudulent transfer or conveyance, a court could void the Spin-Off, require stockholders to return toEnsign some or all of the shares of common stock distributed in the Spin-Off or require stockholders to pay as money damages an equivalent of the value ofthe shares of common stock at the time of the Spin-Off. If a U.S. court were to find that the Special Dividend was a fraudulent transfer or conveyance, a courtcould void the Special Dividend, require stockholders to return to us some or all of the Special Dividend or require stockholders to pay as money damages anequivalent of the value of the Special Dividend. Moreover, stockholders could be required to return any dividends previously paid by us. With respect to anytransfers from Ensign to us, if any such transfer was found to be a fraudulent transfer, a court could void the transaction or Ensign could be awarded monetarydamages for the difference between the consideration received by Ensign and the fair market value of the transferred property at the time of the Spin-Off.We are subject to certain continuing operational obligations pursuant to Ensign’s 2013 Corporate Integrity Agreement.As part of compliance with various requirements of federal and private healthcare programs, Ensign and its subsidiaries are required to maintain acorporate compliance program pursuant to a corporate integrity agreement (“CIA”) that Ensign entered into in October 2013 with the Office of the InspectorGeneral of the U.S. Department of Health and Human Services. Although we are no longer a subsidiary of Ensign, we are subject to certain continuingoperational obligations as part of Ensign’s compliance program pursuant to the CIA, including certain training in Medicare and Medicaid laws for our24Table of Contentsemployees. Failure to timely comply with the applicable terms of the CIA could result in substantial civil or criminal penalties, which could adversely affectour financial condition and results of operations.We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harmour business.We rely on information technology networks and systems, including the internet, to process, transmit and store electronic information, and to manageor support a variety of business processes, including financial transactions and records, and maintaining personal identifying information and tenant andlease data. We purchase some of our information technology from vendors, on whom our systems depend. We rely on commercially available systems,software, tools and monitoring to provide security for the processing, transmission and storage of confidential tenant and customer data, includingindividually identifiable information relating to financial accounts. Although we have taken steps to protect the security of our information systems and thedata maintained in those systems, it is possible that our safety and security measures will not prevent the systems’ improper functioning or damage, or theimproper access or disclosure of personally identifiable information such as in the event of cyber-attacks. Security breaches, including physical or electronicbreak-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidentialinformation. The risk of security breaches has generally increased as the number, intensity and sophistication of attacks have increased. In some cases, it maybe difficult to anticipate or immediately detect such incidents and the damage they cause. Any failure to maintain proper function, security and availabilityof our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have amaterially adverse effect on our business, financial condition and results of operations.Our assets may be subject to impairment charges.At each reporting period, we evaluate our real estate investments and other assets for impairment indicators. The judgment regarding the existence ofimpairment indicators is based on factors such as market conditions, operator performance and legal structure. If we determine that a significant impairmenthas occurred, we are required to make an adjustment to the net carrying value of the asset, which could have a material adverse effect on our results ofoperations in the period in which the write-off occurs.We have now, and may have in the future, exposure to contingent rent escalators We receive revenue primarily by leasing our assets under leases that are long-term triple-net leases in which the rental rate is generally fixed withannual rent escalations, subject to certain limitations. Almost all of our leases contain escalators contingent on changes in the Consumer Price Index, subjectto maximum fixed percentages. If the Consumer Price Index does not increase, our revenues may not increase.Risks Related to Our Status as a REITIf we do not qualify to be taxed as a REIT, or fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation andcould face a substantial tax liability, which could adversely affect our ability to raise capital or service our indebtedness.We currently operate, and intend to continue to operate, in a manner that will allow us to continue to qualify to be taxed as a REIT for U.S. federalincome tax purposes. We elected to be taxed as a REIT for U.S. federal income tax purposes beginning with our taxable year ended December 31, 2014. Wereceived an opinion of our counsel with respect to our qualification as a REIT in connection with the Spin-Off. Investors should be aware, however, thatopinions of advisors are not binding on the IRS or any court. The opinion of our counsel represents only the view of our counsel based on its review andanalysis of existing law and on certain representations as to factual matters and covenants made by us, including representations relating to the values of ourassets and the sources of our income. The opinion is expressed as of the date issued. Our counsel has no obligation to advise us or the holders of any of oursecurities of any subsequent change in the matters stated, represented or assumed or of any subsequent change in applicable law. Furthermore, both thevalidity of the opinion of our counsel and our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution,stockholder ownership and other requirements on a continuing basis, the results of which will not be monitored by our counsel. Our ability to satisfy the assettests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, andfor which we will not obtain independent appraisals.If we were to fail to qualify to be taxed as a REIT in any taxable year, we would be subject to U.S. federal income tax, including any applicablealternative minimum tax, on our taxable income at regular corporate rates, and dividends paid to our25Table of Contentsstockholders would not be deductible by us in computing our taxable income. Any resulting corporate liability could be substantial and would reduce theamount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of our common stock. Unless we wereentitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following theyear in which we failed to qualify to be taxed as a REIT, which could adversely affect our financial condition and results of operations.Qualifying as a REIT involves highly technical and complex provisions of the Code.Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrativeauthorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT will depend on oursatisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, our abilityto satisfy the requirements to qualify to be taxed as a REIT may depend in part on the actions of third parties over which we have no control or only limitedinfluence.Legislative or other actions affecting REITs could have a negative effect on us.The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and theU.S. Department of the Treasury (the “Treasury”). Changes to the tax laws or interpretations thereof, with or without retroactive application, could materiallyand adversely affect our investors or us. We cannot predict how changes in the tax laws, including any tax reform called for by the new presidentialadministration, might affect our investors or us. New legislation, Treasury regulations, administrative interpretations or court decisions could significantlyand negatively affect our ability to qualify to be taxed as a REIT or the U.S. federal income tax consequences to our investors and us of such qualification.We could fail to qualify to be taxed as a REIT if income we receive from our tenants is not treated as qualifying income.Under applicable provisions of the Code, we will not be treated as a REIT unless we satisfy various requirements, including requirements relating to thesources of our gross income. Rents received or accrued by us from our tenants will not be treated as qualifying rent for purposes of these requirements if theleases are not respected as true leases for U.S. federal income tax purposes and are instead treated as service contracts, joint ventures or some other type ofarrangement. If the leases are not respected as true leases for U.S. federal income tax purposes, we will likely fail to qualify to be taxed as a REIT.In addition, subject to certain exceptions, rents received or accrued by us from our tenants will not be treated as qualifying rent for purposes of theserequirements if we or a beneficial or constructive owner of 10% or more of our stock beneficially or constructively owns 10% or more of the total combinedvoting power of all classes of stock entitled to vote or 10% or more of the total value of all classes of stock. CareTrust REIT’s charter provides for restrictionson ownership and transfer of CareTrust REIT’s shares of stock, including restrictions on such ownership or transfer that would cause the rents received oraccrued by us from our tenants to be treated as non-qualifying rent for purposes of the REIT gross income requirements. Nevertheless, there can be noassurance that such restrictions will be effective in ensuring that rents received or accrued by us from our tenants will not be treated as qualifying rent forpurposes of REIT qualification requirements.Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.The maximum U.S. federal income tax rate applicable to income from “qualified dividends” payable by U.S. corporations to U.S. stockholders that areindividuals, trusts and estates is currently 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates. Although these rulesdo not adversely affect the taxation of REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who areindividuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations thatpay dividends, which could adversely affect the value of the stock of REITs, including our stock.REIT distribution requirements could adversely affect our ability to execute our business plan.We generally must distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction andexcluding any net capital gains, in order for us to qualify to be taxed as a REIT (assuming that certain other requirements are also satisfied) so that U.S.federal corporate income tax does not apply to earnings that we distribute. To the extent that we satisfy this distribution requirement and qualify for taxationas a REIT but distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any netcapital gains, we will be subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4%nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less26Table of Contentsthan a minimum amount specified under U.S. federal income tax laws. We intend to make distributions to our stockholders to comply with the REITrequirements of the Code.Our funds from operations are generated primarily by rents paid under the Ensign Master Leases and the Pristine Master Lease. From time to time, wemay generate taxable income greater than our cash flow as a result of differences in timing between the recognition of taxable income and the actual receiptof cash or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments. If we do not have other fundsavailable in these situations, we could be required to borrow funds on unfavorable terms, sell assets at disadvantageous prices or distribute amounts thatwould otherwise be invested in future acquisitions in order to make distributions sufficient to enable us to pay out enough of our taxable income to satisfythe REIT distribution requirement and to avoid being subject to corporate income tax and the 4% excise tax in a particular year. These alternatives couldincrease our costs or reduce our equity.Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state, and local taxes on our income and assets, includingtaxes on any undistributed income and state or local income, property and transfer taxes. For example, we may hold some of our assets or conduct certain ofour activities through one or more taxable REIT subsidiaries (each, a “TRS”) or other subsidiary corporations that will be subject to U.S. federal, state, andlocal corporate-level income taxes as regular C corporations. In addition, we may incur a 100% excise tax on transactions with a TRS if they are notconducted on an arm’s-length basis. Any of these taxes would decrease cash available for distribution to our stockholders.Complying with REIT requirements may cause us to forgo otherwise attractive acquisition opportunities or liquidate otherwise attractive investments.To qualify to be taxed as a REIT for U.S. federal income tax purposes, we must ensure that, at the end of each calendar quarter, at least 75% of the valueof our assets consists of cash, cash items, government securities and “real estate assets” (as defined in the Code). The remainder of our investments (other thangovernment securities, qualified real estate assets and securities issued by a TRS) generally cannot include more than 10% of the outstanding votingsecurities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of thevalue of our total assets (other than government securities, qualified real estate assets and securities issued by a TRS) can consist of the securities of any oneissuer, and no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total assets can be represented by securities ofone or more TRSs. Further, for taxable years beginning after December 31, 2015, no more than 25% of the value of our total assets may be represented by"nonqualified publicly offered REIT debt instruments" (as defined in the Code). If we fail to comply with these requirements at the end of any calendarquarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing ourREIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate or forgo otherwise attractive investments. Theseactions could have the effect of reducing our income and amounts available for distribution to our stockholders.In addition to the asset tests set forth above, to qualify to be taxed as a REIT we must continually satisfy tests concerning, among other things, thesources of our income, the amounts we distribute to our stockholders and the ownership of our stock. We may be unable to pursue investments that would beotherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. Thus, compliance withthe REIT requirements may hinder our ability to make certain attractive investments.Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.The REIT provisions of the Code substantially limit our ability to hedge our assets and liabilities. Income from certain hedging transactions that wemay enter into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets does not constitute“gross income” for purposes of the 75% or 95% gross income tests that apply to REITs, provided that certain identification requirements are met. For taxableyears beginning after December 31, 2015, income from new transactions entered into to hedge the income or loss from prior hedging transactions, where theindebtedness or property which was the subject of the prior hedging transaction was extinguished or disposed of, will not constitute gross income forpurposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions or fail to properly identify suchtransaction as a hedge, the income is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, wemay be required to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedgingactivities because the TRS may be subject to tax on gains or expose us to greater risks associated with changes in interest rates27Table of Contentsthan we would otherwise want to bear. In addition, losses in the TRS will generally not provide any tax benefit, except that such losses could theoretically becarried back or forward against past or future taxable income in the TRS.Even if we qualify to be taxed as a REIT, we could be subject to tax on any unrealized net built-in gains in our assets held before electing to be treated as aREIT.We own appreciated assets that were held by a C corporation and were acquired by us in a transaction in which the adjusted tax basis of the assets in ourhands was determined by reference to the adjusted basis of the assets in the hands of the C corporation. If we dispose of any such appreciated assets during thefive-year period following our qualification as a REIT, we will be subject to tax at the highest corporate tax rates on any gain from such assets to the extent ofthe excess of the fair market value of the assets on the date that we became a REIT over the adjusted tax basis of such assets on such date, which are referred toas built-in gains. We would be subject to this tax liability even if we qualify and maintain our status as a REIT. Any recognized built-in gain will retain itscharacter as ordinary income or capital gain and will be taken into account in determining REIT taxable income and our distribution requirement. Any tax onthe recognized built-in gain will reduce REIT taxable income. We may choose not to sell in a taxable transaction appreciated assets we might otherwise sellduring the five-year period in which the built-in gain tax applies in order to avoid the built-in gain tax. However, there can be no assurances that such ataxable transaction will not occur. If we sell such assets in a taxable transaction, the amount of corporate tax that we will pay will vary depending on theactual amount of net built-in gain or loss present in those assets as of the time we became a REIT. The amount of tax could be significant.Uncertainties relating to CareTrust REIT’s estimate of its “earnings and profits” attributable to C-corporation taxable years may have an adverse effecton our distributable cash flow.In order to qualify as a REIT, a REIT cannot have at the end of any REIT taxable year any undistributed earnings and profits (“E&P”) that areattributable to a C-corporation taxable year. A REIT that has non-REIT accumulated earnings and profits has until the close of its first full tax year as a REITto distribute such earnings and profits. Failure to meet this requirement would result in CareTrust REIT’s disqualification as a REIT. In connection with theCompany’s intention to qualify as a real estate investment trust, on October 17, 2014, the Company’s board of directors declared the Special Dividend todistribute the amount of accumulated E&P allocated to the Company as a result of the Spin-Off. The amount of the Special Dividend was $132.0 million, orapproximately $5.88 per common share. It was paid on December 10, 2014, to stockholders of record as of October 31, 2014, in a combination of both cashand stock. The cash portion totaled $33.0 million and the stock portion totaled $99.0 million. The Company issued 8,974,249 shares of common stock inconnection with the stock portion of the Special Dividend.The determination of non-REIT earnings and profits is complicated and depends upon facts with respect to which CareTrust REIT may have had lessthan complete information or the application of the law governing earnings and profits, which is subject to differing interpretations, or both. Consequently,there are substantial uncertainties relating to the estimate of CareTrust REIT’s non-REIT earnings and profits, and we cannot be assured that the earnings andprofits distribution requirement has been met. These uncertainties include the possibility that the IRS could upon audit, as discussed above, increase thetaxable income of CareTrust REIT, which would increase the non-REIT earnings and profits of CareTrust REIT. There can be no assurances that we havesatisfied the requirement.Risks Related to Our Capital StructureWe have substantial indebtedness and we have the ability to incur significant additional indebtedness.We have approximately $455.0 million of indebtedness, consisting of $260.0 million representing our 5.875% Senior Notes due 2021 (the “Notes”), a$100.0 million unsecured term loan and a $95.0 million unsecured revolving loan outstanding on our Credit Facility (as defined below), all as of December31, 2016. We also had $205.0 million available capacity to borrow under the Credit Facility. Our high level of indebtedness may have the followingimportant consequences to us. For example, it could:•require us to dedicate a substantial portion of our cash flow from operations to make principal and interest payments on our indebtedness, therebyreducing our cash flow available to fund working capital, dividends, capital expenditures and other general corporate purposes;•require us to maintain certain debt coverage and other financial ratios at specified levels, thereby reducing our financial flexibility;28Table of Contents•make it more difficult for us to satisfy our financial obligations, including the Notes and borrowings under the Credit Facility;•increase our vulnerability to general adverse economic and industry conditions or a downturn in our business;•expose us to increases in interest rates for our variable rate debt;•limit, along with the financial and other restrictive covenants in our indebtedness, our ability to borrow additional funds on favorable terms or at allto expand our business or ease liquidity constraints;•limit our ability to refinance all or a portion of our indebtedness on or before maturity on the same or more favorable terms or at all;•limit our flexibility in planning for, or reacting to, changes in our business and our industry;•place us at a competitive disadvantage relative to competitors that have less indebtedness;•require us to dispose of one or more of our properties at disadvantageous prices in order to service our indebtedness or to raise funds to pay suchindebtedness at maturity; and•result in an event of default if we fail to satisfy our obligations under the Notes or our other debt or fail to comply with the financial and otherrestrictive covenants contained in the indenture governing the Notes or the Credit Facility, which event of default could result in all of our debtbecoming immediately due and payable and could permit certain of our lenders to foreclose on our assets securing such debt.In addition, the Credit Facility and the indenture governing the Notes permit us to incur substantial additional debt, including secured debt. If we incuradditional debt, the related risks described above could intensify.We may be unable to service our indebtedness.Our ability to make scheduled payments on and to refinance our indebtedness depends on and is subject to our future financial and operatingperformance, which in turn is affected by general and regional economic, financial, competitive, business and other factors beyond our control, including theavailability of financing in the international banking and capital markets. Our business may fail to generate sufficient cash flow from operations or futureborrowings may be unavailable to us under the Credit Facility or from other sources in an amount sufficient to enable us to service our debt, to refinance ourdebt or to fund our other liquidity needs. If we are unable to meet our debt obligations or to fund our other liquidity needs, we will need to restructure orrefinance all or a portion of our debt. We may be unable to refinance any of our debt on commercially reasonable terms or at all. If we were unable to makepayments or refinance our debt or obtain new financing under these circumstances, we would have to consider other options, such as asset sales, equityissuances and/or negotiations with our lenders to restructure the applicable debt. The Credit Facility and the indenture governing the Notes restrict, andmarket or business conditions may limit, our ability to take some or all of these actions. Any restructuring or refinancing of our indebtedness could be athigher interest rates and may require us to comply with more onerous covenants that could further restrict our business operations. In addition, the CreditFacility and the indenture governing the Notes permit us to incur additional debt, including secured debt, subject to the satisfaction of certain conditions.We rely on our subsidiaries for our operating funds.We conduct our operations through subsidiaries and depend on our subsidiaries for the funds necessary to operate and repay our debt obligations. Eachof our subsidiaries is a distinct legal entity and has no obligation, contingent or otherwise, to transfer funds to us. In addition, the ability of our subsidiaries totransfer funds to us could be restricted by the terms of subsequent financings.Covenants in our debt agreements restrict our activities and could adversely affect our business.Our debt agreements contain various covenants that limit our ability and the ability of our subsidiaries to engage in various transactions including, asapplicable:•incurring or guaranteeing additional secured and unsecured debt;29Table of Contents•creating liens on our assets;•paying dividends or making other distributions on, redeeming or repurchasing capital stock;•making investments or other restricted payments;•entering into transactions with affiliates;•issuing stock of or interests in subsidiaries;•engaging in non-healthcare related business activities;•creating restrictions on the ability of our subsidiaries to pay dividends or other amounts to us; •selling assets;•effecting a consolidation or merger or selling all or substantially all of our assets;•making acquisitions; and•amending certain material agreements, including material leases and debt agreements.These covenants limit our operational flexibility and could prevent us from taking advantage of business opportunities as they arise, growing ourbusiness or competing effectively. The 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 tooperating income ratio, a maximum secured debt to asset value ratio and a maximum secured recourse debt to asset value ratio. We are also required tomaintain total unencumbered assets of at least 150% of our unsecured indebtedness under the indenture. Our ability to meet these requirements may beaffected by events beyond our control, and we may not meet these requirements. We may be unable to maintain compliance with these covenants and, if wefail to do so, we may be unable to obtain waivers from the lenders or amend the covenants.Risks Related To Our Common StockOur charter restricts the ownership and transfer of our outstanding stock, which may have the effect of delaying, deferring or preventing a transaction orchange of control of our company.In order for us to qualify to be taxed as a REIT, not more than 50% in value of our outstanding shares of stock may be owned, beneficially orconstructively, by five or fewer individuals at any time during the last half of each taxable year after our first taxable year as a REIT. Additionally, at least100 persons must beneficially own our stock during at least 335 days of a taxable year (other than our first taxable year as a REIT). Our charter, with certainexceptions, authorizes our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Our charter alsoprovides that, unless exempted by the board of directors, no person may own more than 9.8% in value or in number of shares, whichever is more restrictive, ofthe outstanding shares of our common stock, or more than 9.8% in value of the outstanding shares of all classes or series of our stock. The constructiveownership rules are complex and may cause shares of stock owned directly or constructively by a group of related individuals or entities to be constructivelyowned by one individual or entity. These ownership limits could delay or prevent a transaction or a change in control of us that might involve a premiumprice for shares of our stock or otherwise be in the best interests of our stockholders. The acquisition of less than 9.8% of our outstanding stock by anindividual or entity could cause that individual or entity to own constructively in excess of 9.8% in value of our outstanding stock, and thus violate ourcharter’s ownership limit. Our charter also prohibits any person from owning shares of our stock that would result in our being “closely held” underSection 856(h) of the Code or otherwise cause us to fail to qualify to be taxed as a REIT. In addition, our charter provides that (i) no person shall beneficiallyor constructively own shares of stock to the extent such beneficial or constructive ownership of stock would result in us failing to qualify as a “domesticallycontrolled qualified investment entity” within the meaning of Section 897(h) of the Code, and (ii) no person shall beneficially or constructively own sharesof stock to the extent such beneficial or constructive ownership would cause us to own, beneficially or constructively, more than a 9.9% interest (as set forthin Section 856(d)(2)(B) of the Code) in a tenant of our real property. Any attempt to own or transfer shares of our stock in violation of these restrictions mayresult in the transfer being automatically void.30Table of ContentsMaryland law and provisions in our charter and bylaws may delay or prevent takeover attempts by third parties and therefore inhibit our stockholdersfrom realizing a premium on their stock.Our charter and bylaws and Maryland law contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids and toencourage prospective acquirors to negotiate with our board of directors rather than to attempt a hostile takeover. Our charter and bylaws, among otherthings, (1) contain transfer and ownership restrictions on the percentage by number and value of outstanding shares of our stock that may be owned oracquired by any stockholder; (2) provide that stockholders are not allowed to act by non-unanimous written consent; (3) permit the board of directors,without further action of the stockholders, to amend the charter to increase or decrease the aggregate number of authorized shares or the number of shares ofany class or series that we have the authority to issue; (4) permit the board of directors to classify or reclassify any unissued shares of common or preferredstock and set the preferences, rights and other terms of the classified or reclassified shares; (5) permit only the board of directors to amend the bylaws;(6) establish certain advance notice procedures for stockholder proposals, and provide procedures for the nomination of candidates for our board of directors;(7) provide that special meetings of stockholders may only be called by the Company or upon written request of stockholders entitled to be at the meeting;(8) provide that a director may only be removed by stockholders for cause and upon the vote of two-thirds of the outstanding shares of common stock;(9) provide for supermajority approval requirements for amending or repealing certain provisions in our charter; and (10) provide for a classified board ofdirectors of three separate classes with staggered terms. In addition, specific anti-takeover provisions of the Maryland General Corporation Law (“MGCL”)could make it more difficult for a third party to attempt a hostile takeover. These provisions include:•“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder”(defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after themost recent date on which the stockholder becomes an interested stockholder, and thereafter impose special appraisal rights and special stockholdervoting requirements on these combinations; and•“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlledby the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “controlshare acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to theextent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding allinterested shares.We believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiatewith our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended tomake us immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delayor prevent an acquisition that our board of directors determines is not in our best interests. These provisions may also prevent or discourage attempts toremove and replace incumbent directors.The market price and trading volume of our common stock may fluctuate.The market price of our common stock may fluctuate, depending upon many factors, some of which may be beyond our control, including, but notlimited to:•a shift in our investor base;•our quarterly or annual earnings, or those of other comparable companies;•actual or anticipated fluctuations in our operating results;•our ability to obtain financing as needed;•changes in laws and regulations affecting our business;•changes in accounting standards, policies, guidance, interpretations or principles;•announcements by us or our competitors of significant investments, acquisitions or dispositions;31Table of Contents•the failure of securities analysts to cover our common stock;•changes in earnings estimates by securities analysts or our ability to meet those estimates;•the operating performance and stock price of other comparable companies;•overall market fluctuations; and•general economic conditions and other external factors.Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broadmarket fluctuations may adversely affect the trading price of our common stock, which may impair our ability to raise additional capital.Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could materially andadversely affect our business and the market price of our common stock.Under the Sarbanes-Oxley Act, we must maintain effective disclosure controls and procedures and internal control over financial reporting, whichrequire significant resources and management oversight. Internal control over financial reporting is complex and may be revised over time to adapt tochanges in our business, or changes in applicable accounting rules. We cannot assure you that our internal control over financial reporting will be effective inthe future or that a material weakness will not be discovered with respect to a prior period for which we had previously believed that internal controls wereeffective. Matters impacting our internal controls may cause us to be unable to report our financial data on a timely basis, or may cause us to restatepreviously issued financial data, and thereby subject us to adverse regulatory consequences, including sanctions or investigations by the SEC, or violationsof applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and thereliability of our financial statements. Confidence in the reliability of our financial statements is also likely to suffer if we or our independent registeredpublic accounting firm reports a material weakness in our internal control over financial reporting. This could materially adversely affect us by, for example,leading to a decline in the market price for our common stock and impairing our ability to raise capital.Additionally, as we are no longer an emerging growth company, as defined by the JOBS Act, our independent registered public accounting firm isrequired pursuant to Section 404(b) of the Sarbanes-Oxley Act to attest to the effectiveness of our internal control over financial reporting on an annual basis.If we cannot maintain effective disclosure controls and procedures or internal control over financial reporting, or our independent registered publicaccounting firm cannot provide an unqualified attestation report on the effectiveness of our internal control over financial reporting, investor confidence and,in turn, the market price of our common stock could decline.We cannot assure you of our ability to pay dividends in the future.We expect to make quarterly dividend payments in cash with the annual dividend amount no less than 90% of our REIT taxable income on an annualbasis, determined without regard to the dividends paid deduction and excluding any net capital gains. Our ability to pay dividends may be adversely affectedby a number of factors, including the risk factors described in this annual report. Dividends are authorized by our board of directors and declared by us basedupon a number of factors, including actual results of operations, restrictions under Maryland law or applicable debt covenants, our financial condition, ourtaxable income, the annual distribution requirements under the REIT provisions of the Code, our operating expenses and other factors our directors deemrelevant. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash dividends or year-to-year increasesin cash dividends in the future.Furthermore, while we are required to pay dividends in order to maintain our REIT status (as described above under “Risks Related to Our Status as aREIT - REIT distribution requirements could adversely affect our ability to execute our business plan”), we may elect not to maintain our REIT status, inwhich case we would no longer be required to pay such dividends. Moreover, even if we do elect to maintain our REIT status, after completing variousprocedural steps, we may elect to comply with the applicable distribution requirements by distributing, under certain circumstances, a portion of the requiredamount in the form of shares of our common stock in lieu of cash. If we elect not to maintain our REIT status or to satisfy any required distributions in sharesof common stock in lieu of cash, such action could negatively affect our business and financial condition as well as the market price of our common stock.No assurance can be given that we will pay any dividends on shares of our common stock in the future.32Table of ContentsWe may issue preferred stock with terms that could dilute the voting power or reduce the value of our common stock.While we have no specific plan to issue preferred stock, our charter authorizes us to issue, without the approval of our stockholders, one or more classesor series of preferred stock having such designations, powers, privileges, preferences, including preferences over our common stock respecting dividends anddistributions, terms of redemption and relative participation, optional or other rights, if any, of the shares of each such series of preferred stock and anyqualifications, limitations or restrictions thereof, as our board of directors may determine. The terms of one or more classes or series of preferred stock coulddilute the voting power or reduce the value of our common stock. For example, the repurchase or redemption rights or liquidation preferences we couldassign to holders of preferred stock could affect the residual value of the common stock.ERISA may restrict investments by plans in our common stock.A plan fiduciary considering an investment in our common stock should consider, among other things, whether such an investment is consistent withthe fiduciary obligations under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), including whether such investment mightconstitute or give rise to a prohibited transaction under ERISA, the Code or any substantially similar federal, state or local law and, if so, whether anexemption from such prohibited transaction rules is available.ITEM 1B.Unresolved Staff CommentsNone.ITEM 2. PropertiesOur headquarters are located in San Clemente, California. We lease our corporate office from an unaffiliated third party.Except for the three ILFs that we own and operate, all of our properties are leased under long-term, triple-net leases. The following table displays theexpiration of the annualized rental revenues under our lease agreements as of December 31, 2016 by year and total investment (dollars in thousands) and, ineach case, without giving effect to any renewal options:Lease Maturity Percent of Total Percent ofYearInvestmentInvestmentRentTotal Rent2019$34,3503.3%$3,0822.9%202670,2726.7%7,3446.9%202755,9295.4%5,5985.3%202879,9147.6%7,6147.2%202989,5488.6%7,3736.9%2030307,59329.4%29,33227.5%2031281,82027.0%26,37424.8%203261,1055.8%8,7368.2%203364,4916.2%10,99010.3%Total$1,045,022100.0%$106,443100.0%The information set forth under “Portfolio Summary” in Item 1 of this Annual Report on Form 10-K is incorporated by reference herein.ITEM 3.Legal ProceedingsThe Company and its subsidiaries are and may become from time to time a party to various claims and lawsuits arising in the ordinary course ofbusiness, which are not individually or in the aggregate anticipated to be material. Claims and lawsuits may include matters involving general or professionalliability asserted against our tenants, which are the responsibility of our tenants and for which we are entitled to be indemnified by our tenants under theinsurance and indemnification provisions in the applicable leases. 33Table of ContentsPursuant to the Separation and Distribution Agreement we entered into in connection with the Spin-Off (the “Separation and Distribution Agreement”),we assumed any liability arising from or relating to legal proceedings involving the assets owned by us and agreed to indemnify Ensign (and its subsidiaries,directors, officers, employees and agents and certain other related parties) against any losses arising from or relating to such legal proceedings. In addition,pursuant to the Separation and Distribution Agreement, Ensign has agreed to indemnify us (including our subsidiaries, directors, officers, employees andagents and certain other related parties) for any liability arising from or relating to legal proceedings involving Ensign’s healthcare business prior to the Spin-Off, and, pursuant to the Ensign Master Leases, Ensign or its subsidiaries have agreed to indemnify us for any liability arising from operations at the realproperty leased from us. Ensign is currently a party to various legal actions and administrative proceedings, including various claims arising in the ordinarycourse of its healthcare business, which are subject to the indemnities provided by Ensign to us. While these actions and proceedings are not believed byEnsign to be material, individually or in the aggregate, the ultimate outcome of these matters cannot be predicted. The resolution of any such legalproceedings, either individually or in the aggregate, could have a material adverse effect on Ensign’s business, financial position or results of operations,which, in turn, could have a material adverse effect on our business, financial position or results of operations if Ensign or its subsidiaries are unable to meettheir indemnification obligations.ITEM 4.Mine Safety DisclosuresNone.PART IIITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity SecuritiesCommon EquityOur common stock is listed on the NASDAQ Global Select Market. Set forth below for the fiscal quarters indicated are the reported high and low salesprices per share of our common stock on the NASDAQ Global Select Market. Dividends HighLow Declared2015 First Quarter$14.93$11.12 $0.16Second Quarter$14.35$11.87 $0.16Third Quarter$13.93$10.40 $0.16Fourth Quarter*$11.98$10.21 $0.162016 First Quarter$12.75$9.12 $0.17Second Quarter$13.98$12.44 $0.17Third Quarter$15.88$13.73 $0.17Fourth Quarter**$15.67$12.70 $0.17* We paid this dividend on January 15, 2016 to stockholders of record on December 31, 2015.** We paid this dividend on January 13, 2017 to stockholders of record on December 31, 2016.At February 3, 2017, we had approximately 154 stockholders of record.To maintain REIT status, we are required each year to distribute to stockholders at least 90% of our annual REIT taxable income after certainadjustments. All distributions will be made by us at the discretion of our board of directors and will depend on our financial position, results of operations,cash flows, capital requirements, debt covenants (which include limits on distributions by us), applicable law, and other factors as our board of directorsdeems relevant. For example, while the Notes and our Credit Facility permit us to declare and pay any dividend or make any distribution that is necessary tomaintain our REIT status, those distributions are subject to certain financial tests under the indenture governing the Notes, and therefore, the amount of cashdistributions we can make to our stockholders may be limited.Distributions with respect to our common stock can be characterized for federal income tax purposes as taxable ordinary dividends, nondividenddistributions or a combination thereof. Following is the characterization of our annual cash dividends on common stock:34Table of Contents Year Ended December 31,Common Stock2016 2015Ordinary dividend$0.5767 $0.4573Non-dividend distributions0.1033 0.1827 $0.6800 $0.6400Issuer Purchases of Equity SecuritiesWe did not repurchase any shares of our common stock during the three months ended December 31, 2016.35Table of ContentsStock Price Performance GraphThe graph below compares the cumulative total return of our common stock, the S&P 500 Index, the S&P 500 REIT Index, the RMS (MSCI U.S. REITTotal Return Index) and the SNL U.S. REIT Healthcare Index for the period from June 1, 2014 to December 31, 2016. Total cumulative return is based on a$100 investment in CareTrust REIT common stock and in each of the indices on June 1, 2014 and assumes quarterly reinvestment of dividends beforeconsideration of income taxes. Stockholder returns over the indicated periods should not be considered indicative of future stock prices or stockholderreturns. COMPARISON OF CUMULATIVE TOTAL RETURNAMONG S&P 500, S&P 500 REIT INDEX, RMS, SNL US REIT HEALTHCARE AND CARETRUST REIT, INC.RATE OF RETURN TREND COMPARISONJUNE 1, 2014 - DECEMBER 31, 2016(JUNE 1, 2014 = 100)Stock Price Performance Graph Total ReturnThe stock performance graph shall not be deemed soliciting material or to be filed with the SEC or subject to Regulation 14A or 14C under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”) or to the liabilities of Section 18 of the Exchange Act, nor shall it be incorporated byreference into any past or future filing under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically request that it be treated assoliciting material or specifically incorporate it by reference into a filing under the Securities Act of 1933 or the Exchange Act.36Table of ContentsITEM 6.Selected Financial DataThe following table sets forth selected financial data and other data for our company on a historical basis. The following data should be read inconjunction with our audited consolidated and combined financial statements and notes thereto and Management’s Discussion and Analysis of FinancialCondition and Results of Operations included elsewhere herein. Our historical operating results may not be comparable to our future operating results. Thecomparability of the selected financial data presented below is significantly affected by our acquisitions and new investments in 2016, 2015, 2014, 2013 and2012. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”The selected historical financial data set forth below reflects, for the relevant periods presented, as applicable, the historical financial position, results ofoperations and cash flows of (i) the skilled nursing, assisted living and independent living facilities that Ensign contributed to CareTrust REIT immediatelyprior to June 1, 2014, the effective date of the Spin-Off, (ii) the operations of the three independent living facilities that CareTrust REIT operated immediatelyfollowing the Spin-Off, and (iii) the new investments and financings that the Company has made after the Spin-Off. “Ensign Properties” is the predecessor ofthe Company, and its historical financial statements have been prepared on a “carve-out” basis from Ensign’s consolidated financial statements using thehistorical results of operations, cash flows, assets and liabilities attributable to such skilled nursing, assisted living and independent living facilities, andinclude allocations of income, expenses, assets and liabilities from Ensign. These allocations reflect significant assumptions. Although CareTrust REIT’smanagement believes such assumptions are reasonable, the historical financial statements do not fully reflect what CareTrust REIT’s financial position,results of operations and cash flows would have been had it been a stand-alone company during the periods presented prior to the Spin-Off. As of or For the Year Ended December 31, 20162015201420132012 (dollars in thousands, except per share amounts)Income statement data: Total revenues$104,679$74,951$58,897$48,796$42,063Income (loss) before provision for income taxes29,35310,034(8,143)(272)232Net income (loss)29,35310,034(8,143)(395)110Income (loss) before provision for income taxes per share0.520.26(0.36)(0.01)0.01Net income (loss) per share0.520.26(0.36)(0.02)—Balance sheet data: Total assets$925,358$673,166$475,140$428,515$397,049Senior unsecured notes payable, net255,294254,229253,165——Senior unsecured term loan, net99,422————Unsecured revolving credit facility95,00045,000———Secured mortgage indebtedness, net—94,67697,608113,740117,089Senior secured term loan, net———64,91568,674Senior secured revolving credit facility———78,70120,000Total equity452,430262,288113,462162,689184,548Other financial data: Dividends declared per common share$0.68$0.64$6.01$—$—FFO(1)61,48334,10914,85323,02321,213FAD(1)65,11837,83116,55923,74021,933(1)We believe that net income, as defined by U.S. generally accepted accounting principles (“GAAP”), is the most appropriate earnings measure. We alsobelieve that Funds From Operations (“FFO”), as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), and FundsAvailable for Distribution (“FAD”) are important non-GAAP supplemental measures of operating performance for a REIT. FFO is defined as net income(loss) computed in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate related depreciation and amortizationand impairment charges. FAD is defined as FFO excluding noncash income and expenses such as amortization of stock-based compensation,amortization of deferred financing costs and the effect of straight-line rent. We believe that the use of FFO and FAD, combined with the required GAAPpresentations, improves the understanding37Table of Contentsof operating results of REITs among investors and makes comparisons of operating results among such companies more meaningful. We consider FFOand FAD to be useful measures for reviewing comparative operating and financial performance because, by excluding gains or losses from real estatedispositions, impairment charges and real estate depreciation and amortization, and, for FAD, by excluding noncash income and expenses such asamortization of stock-based compensation, amortization of deferred financing costs, and the effect of straight line rent, FFO and FAD can help investorscompare our operating performance between periods and to other REITs. However, our computation of FFO and FAD may not be comparable to FFOand FAD reported by other REITs that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREITdefinition or define FAD differently than we do. Further, FFO and FAD do not represent cash flows from operations or net income as defined by GAAPand should not be considered an alternative to those measures in evaluating our liquidity or operating performance.The following table reconciles our calculations of FFO and FAD for the five years ended December 31, 2016, 2015, 2014, 2013 and 2012 to netincome, the most directly comparable financial measure according to GAAP, for the same periods: For the Year Ended December 31, 20162015201420132012 (dollars in thousands)Net income (loss)$29,353$10,034$(8,143)$(395)$110Real estate related depreciation and amortization31,86524,07522,99623,41821,103Loss on sale of real estate265————FFO61,48334,10914,85323,02321,213Amortization of deferred financing costs2,2392,2001,552699705Amortization of stock-based compensation1,5461,5221541815Straight-line rental income(150)————FAD$65,118$37,831$16,559$23,740$21,933ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe discussion below contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from thoseanticipated in these forward-looking statements as a result of various factors, including those which are discussed in the section titled “Risk Factors.” Alsosee “Statement Regarding Forward-Looking Statements” preceding Part I.The following discussion and analysis should be read in conjunction with the “Selected Financial Data” above and our accompanying consolidatedand combined financial statements and the notes thereto.Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:•Overview•Recent Transactions•Results of Operations•Liquidity and Capital Resources•Obligations and Commitments•Capital Expenditures•Critical Accounting Policies•Impact of Inflation•Off-Balance Sheet ArrangementsOverviewCareTrust REIT is a self-administered, publicly-traded REIT engaged in the ownership, acquisition and leasing of seniors housing and healthcare-related properties. CareTrust REIT was formed on October 29, 2013, as a wholly owned subsidiary of Ensign with the intent to hold substantially all ofEnsign's real estate business. On June 1, 2014, Ensign completed the separation of its real estate business into a separate and independent publicly tradedcompany by distributing all the outstanding shares of common stock of the Company to Ensign stockholders on a pro rata basis. The Spin-Off was effectivefrom and after38Table of ContentsJune 1, 2014, with shares of our common stock distributed to Ensign stockholders on June 2, 2014. As of December 31, 2016, CareTrust REIT’s real estateportfolio consisted of 154 SNFs, SNF Campuses, ALFs and ILFs of which 93 properties are leased to Ensign on a triple-net basis under the Ensign MasterLeases, 16 properties are leased to affiliates of Pristine under the Pristine Master Lease that is guaranteed by Pristine and its sole principal, and the remaining42 properties are leased to 14 other tenants on a triple-net basis. We also own and operate three ILFs. As of December 31, 2016, the 93 facilities leased toEnsign had a total of 9,916 beds and units and are located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Texas, Utah and Washington; the16 facilities leased to affiliates of Pristine had a total of 1,488 beds and units and are located in Ohio; and the 42 remaining leased properties had a total of3,515 beds and units and are located in California, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Maryland, Michigan, Minnesota, North Carolina, Texas,Virginia, Washington and Wisconsin. The three ILFs that we own and operate had a total of 264 units and are located in Texas and Utah. As of December 31,2016, the Company also had three other real estate investments, consisting of $13.9 million of preferred equity investments.We are a separate and independent publicly traded, self-administered, self-managed REIT primarily engaged in the ownership, acquisition and leasingof healthcare-related properties. We generate revenues primarily by leasing healthcare-related properties to healthcare operators in triple-net leasearrangements, under which the tenant is solely responsible for the costs related to the property (including property taxes, insurance, and maintenance andrepair costs). We conduct and manage our business as one operating segment for internal reporting and internal decision making purposes. We expect to growour portfolio by pursuing opportunities to acquire additional properties that will be leased to a diverse group of local, regional and national healthcareproviders, 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.We elected to be taxed as a REIT for U.S. federal income tax purposes beginning with our taxable year ended December 31, 2014. We believe that wehave been organized and have operated, and we intend to continue to operate, in a manner to qualify for taxation as a REIT. We operate through an umbrellapartnership, commonly referred to as an UPREIT structure, in which substantially all of our properties and assets are held through our Operating Partnership,CTR Partnership, L.P. The Operating Partnership is managed by CareTrust REIT’s wholly owned subsidiary, CareTrust GP, LLC, which is the sole generalpartner of the Operating Partnership. To maintain REIT status, we must meet a number of organizational and operational requirements, including arequirement that we annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paiddeduction and excluding any net capital gains.Recent TransactionsOfferings of Common StockOn March 28, 2016, we completed an underwritten public offering of 9.78 million newly issued shares of our common stock pursuant to an effectiveregistration statement. We received net proceeds of $105.8 million from the offering, after giving effect to the issuance and sale of all 9.78 million shares ofcommon stock (which included 1.28 million shares sold to the underwriters upon exercise of their option to purchase additional shares), at a price to thepublic of $11.35 per share.On November 18, 2016, we completed an underwritten public offering of 6.33 million newly issued shares of our common stock pursuant to aneffective registration statement. We received net proceeds of $80.9 million from the offering, after giving effect to the issuance and sale of all 6.33 millionshares of common stock (which included 0.83 million shares sold to the underwriters upon exercise of their option to purchase additional shares), at a price tothe public of $13.35 per share.At-The-Market Offering of Common StockDuring 2016, we entered into an equity distribution agreement to issue and sell, from time to time, up to $125.0 million in aggregate offering priceof our common stock through an "at-the-market" equity offering program (the "ATM Program"). From January 1, 2016 through February 3, 2017, theCompany sold approximately 2.0 million shares of common stock at an average price of $15.39 per share for $30.7 million in gross proceeds. At February3, 2017, we had $94.7 million available for future issuances under the ATM Program.Unsecured Revolving Credit Facility and Term LoanSee “- Liquidity and Capital Resources” below for a description of the Company’s unsecured credit facility, which theCompany entered into in August 2015 and amended in February 2016. We used approximately $95.0 million of proceeds from the $100.0 million non-amortizing unsecured term loan funded in February 2016 to pay off and terminate our secured mortgage indebtedness with General Electric CapitalCorporation (the "GECC Loan").39Table of ContentsRecent AcquisitionsFrom January 1, 2016 through February 3, 2017, we acquired 35 properties, comprising 15 ALFs, 17 SNFs and 3 SNF Campuses, for approximately$309.5 million inclusive of estimated transaction costs. During this period, we also completed two preferred equity investments totaling $4.7 million. SeeNote 3, Real Estate Investments, Net, and Note 4, Other Real Estate Investments in the Notes to Consolidated and Combined Financial Statements foradditional information.Recent DispositionIn December 2016, we sold one non-operating skilled nursing facility in Texas for $2.9 million, resulting in net sales proceeds of $2.9 million and aloss on sale of real estate of $0.3 million. The sold facility was previously subject to one of the Ensign Master Leases, and the master rent thereunderremained unchanged after the sale.Results of OperationsBasis of PresentationPrior to the Spin-Off, the combined financial statements were prepared on a stand-alone basis and were derived from the accounting records of Ensign(which are not included in this report). These statements reflect the combined historical financial condition and results of operations of the carve-out businessof the entities that own the SNFs, ALFs and ILFs that we own, and the operations of the three ILFs that we operate, in accordance with GAAP. Subsequent tothe Spin-Off, the financial statements were prepared on a consolidated basis as the entities that own the properties are now wholly owned subsidiaries of theCompany. All intercompany transactions and accounts have been eliminated.Operating ResultsOur primary business consists of acquiring, financing and owning real property to be leased to third party tenants in the healthcare sector. Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 Year Ended December 31, Increase(Decrease) PercentageDifference 2016 2015 (dollars in thousands)Revenues: Rental income$93,126 $65,979 $27,147 41 %Tenant reimbursements7,846 5,497 2,349 43 %Independent living facilities2,970 2,510 460 18 %Interest and other income737 965 (228) (24)%Expenses: Depreciation and amortization31,965 24,133 7,832 32 %Interest expense23,199 25,256 (2,057) (8)%Property taxes7,846 5,497 2,349 43 %Acquisition costs205 — 205 *Independent living facilities2,549 2,376 173 7 %General and administrative9,297 7,655 1,642 21 %* Not meaningfulRental income. Rental income was $93.1 million for the year ended December 31, 2016 compared to $66.0 million for the year ended December 31,2015. The $27.1 million increase in rental income is due primarily to $26.9 million from new investments made after January 1, 2015, and $0.3 million fromincreases in rental rates on existing tenants.Independent living facilities. Revenues from our three ILFs that we own and operate were $3.0 million for the year ended December 31, 2016 comparedto $2.5 million for the year ended December 31, 2015. The $0.5 million increase was due primarily to more units being available for lease and rented in 2016.Expenses were $2.5 million for the year ended December40Table of Contents31, 2016 compared to $2.4 million for the year ended December 31, 2015. The $0.1 million increase was due to higher costs associated with the incrementalnewly leased units.Interest and other income. Interest and other income decreased $0.2 million for the year ended December 31, 2016 to $0.7 million compared to $1.0million for the year ended December 31, 2015. The net decrease was due to the cessation of accruing interest on one preferred equity investment slightlyoffset by two new preferred equity investments that closed during the three months ended September 30, 2016.Depreciation and amortization. Depreciation and amortization expense increased $7.8 million, or 32%, for the year ended December 31, 2016 to $32.0million compared to $24.1 million for the year ended December 31, 2015. The $7.8 million increase was primarily due to new investments made after January1, 2015.Interest expense. Interest expense decreased $2.1 million, or 8%, for the year ended December 31, 2016 to $23.2 million compared to $25.3 million forthe year ended December 31, 2015. The decrease was due primarily to lower interest expense of $4.9 million resulting from the pay off of the GECC Loanwith the unsecured term loan, a $1.2 million write-off of deferred financing fees associated with the payoff and termination of our senior secured revolvingcredit facility and $0.7 million related to our former secured revolving credit facility, partially offset by an increase in interest expense of $2.3 million fromour unsecured term loan, $1.4 million from greater borrowings under our unsecured revolving credit facility, $0.8 million related to amortization of deferredfinancing fees and a $0.3 million write-off of deferred financing fees associated with the payoff and termination of the GECC Loan.General and administrative expense. General and administrative expense increased $1.6 million for the year ended December 31, 2016 to $9.3 millioncompared to $7.7 million for the year ended December 31, 2015. The $1.6 million increase is primarily related to higher cash wages including increasedstaffing of $0.9 million, higher professional fees of $0.4 million and higher state and local taxes of $0.4 million.Year Ended December 31, 2015 Compared to Year Ended December 31, 2014 Year Ended December 31, Increase(Decrease) PercentageDifference 2015 2014 (dollars in thousands)Revenues: Rental income$65,979 $51,367 $14,612 28 %Tenant reimbursements5,497 4,956 541 11 %Independent living facilities2,510 2,519 (9) — %Interest and other income965 55 910 1,655 %Expenses: Depreciation and amortization24,133 23,000 1,133 5 %Interest expense25,256 21,622 3,634 17 %Loss on extinguishment of debt— 4,067 (4,067) (100)%Property taxes5,497 4,956 541 11 %Acquisition costs— 47 (47) (100)%Independent living facilities2,376 2,243 133 6 %General and administrative7,655 11,105 (3,450) (31)%Rental income. Rental income was $66.0 million for the year ended December 31, 2015 compared to $51.4 million for the year ended December 31,2014. The $14.6 million increase in rental income is due primarily to $4.8 million of new incremental rent in place after the Spin-Off and $9.8 million fromnew investments made after October 1, 2014.Independent living facilities. Revenues from our three ILFs that we own and operate were $2.5 million for the year ended December 31, 2015 comparedto $2.5 million for the year ended December 31, 2014. Occupancy and average monthly rates stayed constant. Expenses were $2.4 million for the year endedDecember 31, 2015 compared to $2.2 million for the year ended December 31, 2014. The $0.1 million increase was due to higher costs associated withoperating the facilities.41Table of ContentsInterest and other income. Interest and other income increased $0.9 million for the year ended December 31, 2015 to $1.0 million compared to $0.1million for the year ended December 31, 2014. The increase was due to the preferred equity investment made in December 2014.Depreciation and amortization. Depreciation and amortization expense increased $1.1 million or 5% for the year ended December 31, 2015 to $24.1million compared to $23.0 million for the year ended December 31, 2014. The $1.1 million increase was primarily due to new investments made after October1, 2014 offset by certain assets which were not transferred to the Company in connection with the Spin-Off.Interest expense. Interest expense increased $3.6 million or 17% for the year ended December 31, 2015 to $25.3 million compared to $21.6 million forthe year ended December 31, 2014. The increase was due to higher net borrowings after the Spin-Off and a $1.2 million write-off of deferred financing feesassociated with the payoff and termination of our senior secured revolving credit facility, offset by a $1.7 million loss on the settlement of an interest rateswap in 2014.General and administrative expense. General and administrative expense decreased $3.5 million for the year ended December 31, 2015 to $7.7 millioncompared to $11.1 million for the year ended December 31, 2014. The $3.5 million decrease is primarily related to decreases in legal and other costs relatedto the Spin-Off, offset by higher wages and amortization of stock-based compensation.Liquidity and Capital ResourcesTo qualify as a REIT for federal income tax purposes, we are required to distribute at least 90% of our REIT taxable income, determined without regardto the dividends paid deduction and excluding any net capital gains, to our stockholders on an annual basis. Accordingly, we intend to make, but are notcontractually bound to make, regular quarterly dividends to common stockholders from cash flow from operating activities. All such dividends are at thediscretion of our board of directors. During the year ended December 31, 2016, we issued 16.11 million shares of our common stock for net proceeds of $186.7 million and refinanced ourCredit Agreement (as defined below), including entering into a new $100.0 million term loan and using approximately $95.0 million of the proceeds to payoff and terminate our then-existing mortgage notes payable. As of December 31, 2016, there was $95.0 million outstanding under the Credit Facility. SeeNote 7, Debt, and Note 8, Equity, in the Notes to Consolidated and Combined Financial Statements for additional information. We believe that our availablecash, expected operating cash flows and the availability under our Credit Facility will provide sufficient funds for our operations, anticipated scheduled debtservice payments and dividend requirements for at least the next twelve months.On May 13, 2016, we commenced the ATM Program. Pursuant to the ATM Program, sales of shares of our common stock, if any, will be made throughthe sales agents acting as agent and, subject to certain conditions, may be made through the sales agents acting as principal, and will be made by means ofordinary brokers’ transactions on the NASDAQ Global Select Market or otherwise at market prices prevailing at the time of sale, at prices related to prevailingmarket prices or at negotiated prices. Prior to July 1, 2016, we had not sold any common stock under the ATM Program. During the year ended December 31,2016, we sold 0.9 million shares of our common stock under the ATM Program at an average price of $15.31 per share resulting in gross proceeds of $14.1million, before $0.2 million of commissions paid to the sales agents. As of December 31, 2016, we had $111.1 million available for future issuances under theATM Program.We intend to invest in additional healthcare properties as suitable opportunities arise and adequate sources of financing are available. We expect thatfuture investments in 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 Credit Facility, future borrowings or the proceeds from sales of shares of ourcommon 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 inconnection with acquisitions and refinancings of existing mortgage loans.We have filed a shelf registration statement with the SEC that expires in January 2019, which will allow us to offer and sell shares of common stock,preferred stock, and warrants through underwriters, dealers or agents or directly to purchasers, on a continuous or delayed basis, in amounts, at prices and onterms 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 incuradditional 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 areacceptable to us or at all.42Table of ContentsCash FlowsThe following table presents selected data from our consolidated and combined statements of cash flows for the years presented: Year Ended December 31, 2016 2015 2014 (dollars in thousands)Net cash provided by operating activities$64,431 $40,254 $21,906Net cash used in investing activities(284,642) (234,649) (53,596)Net cash provided by financing activities216,244 180,542 56,115Net (decrease) increase in cash and cash equivalents(3,967) (13,853) 24,425Cash and cash equivalents at beginning of period11,467 25,320 895Cash and cash equivalents at end of period$7,500 $11,467 $25,320Year Ended December 31, 2016 Compared to Year Ended December 31, 2015Net cash provided by operating activities for the year ended December 31, 2016 was $64.4 million compared to $40.3 million for the year endedDecember 31, 2015, an increase of $24.2 million. The increase was primarily due to an increase in net income of $19.3 million and noncash income andexpenses of $7.4 million partially offset by a $2.5 million change in operating assets and liabilities.Net cash used in investing activities for the year ended December 31, 2016 was $284.6 million compared to $234.6 million for the yearended December 31, 2015, an increase of $50.0 million. The increase was primarily due to greater investments in real estate, preferred equity investments andimprovements to our real estate partially offset by greater net proceeds from the disposition of real estate, lower purchases of furniture, fixtures and equipmentand lower escrow deposits in connection with acquisitions.Net cash provided by financing activities for the year ended December 31, 2016 was $216.2 million compared to $180.5 million for the year endedDecember 31, 2015, an increase of $35.7 million. This increase was primarily due to greater net proceeds of $37.4 million from our offerings of common stockin 2016, $13.2 million in greater net debt issuances, and $1.0 million in lower deferred financing fees partially offset by $15.5 million in higher dividendspaid and $0.4 million in higher net settlements of restricted stock.Year Ended December 31, 2015 Compared to Year Ended December 31, 2014Net cash provided by operating activities for the year ended December 31, 2015 was $40.3 million compared to $21.9 million for the year endedDecember 31, 2014, an increase of $18.3 million. The increase was primarily due to net income in 2015 compared to a net loss in 2014 totaling $17.9million, including noncash charges, and a net increase in operating assets and liabilities of $0.4 million.Net cash used in investing activities for the year ended December 31, 2015 was $234.6 million compared to $53.6 million for the yearended December 31, 2014, an increase of $181.1 million. The increase was primarily due to greater investments in real estate in 2015 compared to 2014 offsetby lesser purchases of furniture, fixtures and equipment in 2015 compared to 2014 and no preferred equity investments made in 2015.Net cash provided by financing activities for the year ended December 31, 2015 was $180.5 million compared to $56.1 million for the year endedDecember 31, 2014, an increase of $124.4 million. This increase was primarily due to net proceeds of $163.0 million from our offering of common stock,$184.3 million in lower payments on debt, $11.2 million in lower dividends paid, and $11.1 million in lower deferred financing fees, offset by lower netborrowings in 2015 of $240.7 million and no net contributions from Ensign in 2015.IndebtednessSenior Unsecured NotesOn May 30, 2014, the Operating Partnership, and its wholly owned subsidiary, CareTrust Capital Corp. (together with the Operating Partnership,the “Issuers”), completed a private offering of $260.0 million aggregate principal amount of43Table of Contents5.875% Senior Notes due 2021 (the “Notes”). The Notes were issued at par, resulting in gross proceeds of $260.0 million and net proceeds of approximately$253.0 million after deducting underwriting fees and other offering expenses. We transferred approximately $220.8 million of the net proceeds of the offeringof the Notes to Ensign, and used the remaining net proceeds of the offering to pay the cash portion of the Special Dividend. The Notes mature on June 1,2021 and bear interest at a rate of 5.875% per year. Interest on the Notes is payable on June 1 and December 1 of each year, beginning on December 1, 2014.The Issuers subsequently exchanged the Notes for substantially identical notes registered under the Securities Act of 1933.The Issuers may redeem the Notes any time before June 1, 2017 at a redemption price of 100% of the principal amount of the Notes redeemedplus accrued and unpaid interest on the Notes, if any, to, but not including, the redemption date, plus a “make whole” premium described in the indenturegoverning the Notes and, at any time on or after June 1, 2017, at the redemption prices set forth in the indenture. At any time on or before June 1, 2017, up to35% of the aggregate principal amount of the Notes may be redeemed with the net proceeds of certain equity offerings if at least 65% of the originally issuedaggregate principal amount of the Notes remains outstanding. If certain changes of control of CareTrust REIT occur, holders of the Notes will have the rightto 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 repurchasedate.The obligations under the Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by CareTrust REIT andcertain of CareTrust REIT’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, including if the subsidiary guarantor is sold or sells all orsubstantially all of its assets, the subsidiary guarantor is designated “unrestricted” for covenant purposes under the indenture, the subsidiary guarantor’sguarantee of other indebtedness which resulted in the creation of the guarantee of the Notes is terminated or released, or the requirements for legal defeasanceor covenant defeasance or to discharge the indenture have been satisfied. See Note 13, Summarized Condensed Consolidating Information.The indenture contains covenants limiting the ability of CareTrust REIT and its restricted subsidiaries to: incur or guarantee additionalindebtedness; incur or guarantee secured indebtedness; pay dividends or distributions on, or redeem or repurchase, capital stock; make certain investments orother restricted payments; sell assets; enter into transactions with affiliates; merge or consolidate or sell all or substantially all of their assets; and createrestrictions on the ability of the Issuers and their restricted subsidiaries to pay dividends or other amounts to the Issuers. The indenture also requires CareTrustREIT and its restricted subsidiaries to maintain a specified ratio of unencumbered assets to unsecured indebtedness. These covenants are subject to a numberof important and significant limitations, qualifications and exceptions. The indenture also contains customary events of default.As of December 31, 2016, we were in compliance with all applicable financial covenants under the indenture.Unsecured Revolving Credit Facility and Term LoanOn August 5, 2015, the Company, CareTrust GP, LLC, the Operating Partnership, as the borrower, and certain of its wholly owned subsidiaries enteredinto a credit and guaranty agreement with KeyBank National Association, as administrative agent, an issuing bank and swingline lender, and the lendersparty thereto (the “Credit Agreement”). The Credit Agreement initially provided for an unsecured asset-based revolving credit facility (the “RevolvingFacility”) with commitments in an aggregate principal amount of $300.0 million from a syndicate of banks and other financial institutions, and an accordionfeature that allows the Operating Partnership to increase the borrowing availability by up to an additional $200.0 million. A portion of the proceeds of theRevolving Facility were used to pay off and terminate the Company’s existing secured asset-based revolving credit facility under a credit agreement datedMay 30, 2014, with SunTrust Bank, as administrative agent, and the lenders party thereto.On February 1, 2016, the Company, CareTrust GP, LLC, the Operating Partnership, as the borrower, and certain of its wholly owned subsidiaries enteredinto the First Amendment (the “Amendment”) to the Credit Agreement. Pursuant to the Amendment, (i) commitments in respect of the Credit Facility (asdefined below) were increased by $100.0 million to $400.0 million total, (ii) a new $100.0 million non-amortizing unsecured term loan (the “Term Loan”and, together with the Revolving Facility, the "Credit Facility") was funded and (iii) the uncommitted incremental facility was increased by $50.0 million to$250.0 million. Approximately $95.0 million of the proceeds of the Term Loan were used to pay off and terminate the GECC Loan (the "GECCRefinancing"). See "General Electric Capital Corporation Loan" below.As of December 31, 2016, there was $95.0 million outstanding under the Revolving Facility.44Table of ContentsThe Credit Agreement has a maturity date of August 5, 2019, and includes two six-month extension options. The Term Loan, which matures onFebruary 1, 2023, may 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.The Credit Agreement initially provided that, subject to customary conditions, including obtaining lender commitments and pro forma compliancewith financial maintenance covenants under the Credit Agreement, the Operating Partnership may seek to increase the aggregate principal amount of therevolving commitments and/or establish one or more new tranches of incremental revolving or term loans under the Credit Facility in an aggregate amountnot to exceed $200.0 million. Pursuant to the Amendment, the uncommitted incremental facility was increased by $50.0 million to $250.0 million effectiveFebruary 1, 2016. The Company does not currently have any commitments for such increased loans.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 from0.75% to 1.40% per annum or applicable LIBOR plus a margin ranging from 1.75% to 2.40% per annum based on the debt to asset value ratio of theCompany and its subsidiaries (subject to decrease at the Company’s election if the Company obtains certain specified investment grade ratings on its seniorlong term unsecured debt). Pursuant to the Amendment, the interest rates applicable to the Term Loan are, at the Company’s option, equal to a base rate plus amargin ranging from 0.95% to 1.60% per annum or applicable LIBOR plus a margin ranging from 1.95% to 2.60% per annum based on the debt to asset valueratio of the Company and its subsidiaries (subject to decrease at the Company's election if the Company obtains certain specified investment grade ratings onits senior long term unsecured debt).In addition, the Company pays a commitment fee on the unused portion of the commitments under the Revolving Facility of 0.15% or 0.25% perannum, based upon usage of the Revolving Facility (unless the Company obtains certain specified investment grade ratings on its senior long term unsecureddebt and elects to decrease the applicable margin as described above, in which case the Company will pay a facility fee on the revolving commitmentsranging from 0.125% to 0.30% per annum based upon the credit ratings of its senior long term unsecured debt).The Credit Facility is guaranteed, jointly and severally, by the Company and its wholly owned subsidiaries that are party to the Credit Agreement(other than the Operating Partnership). The 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 Credit Agreement requires theCompany to comply with financial maintenance covenants to be tested quarterly, consisting of a maximum debt to asset value ratio, a minimum fixed chargecoverage ratio, a minimum tangible net worth, a maximum cash distributions to operating income ratio, a maximum secured debt to asset value ratio and amaximum secured recourse debt to asset value ratio. The Credit Agreement also contains certain customary events of default, including that the Company isrequired to operate in conformity with the requirements for qualification and taxation as a REIT.As of December 31, 2016, the Company was in compliance with all applicable financial covenants under the Credit Agreement.General Electric Capital Corporation LoanTen of our properties were subject to secured mortgage indebtedness under the GECC Loan, which we assumed in connection with the Spin-Off. As ofFebruary 1, 2016, in connection with the Amendment, the GECC Loan was paid off and terminated as part of the GECC Refinancing.45Table of ContentsObligations and CommitmentsThe following table summarizes our contractual obligations and commitments at December 31, 2016 (in thousands): Payments Due by Period Total Lessthan1 Year 1 Yearto Lessthan3 Years 3 Yearsto Lessthan5 Years Morethan5 yearsSenior unsecured notes payable (1)$328,738 $15,275 $30,550 $282,913 $—Senior unsecured term loan (2)117,406 2,859 5,718 5,726 103,103Unsecured revolving credit facility (3)103,544 3,297 100,247 — —Operating lease431 133 279 19 —Total$550,119 $21,564 $136,794 $288,658 $103,103(1)Amounts include interest payments of $68.7 million.(2)Amounts include interest payments of $17.4 million.(3)The unsecured revolving credit facility includes payments related to the unused credit facility fee due on the amount of unused borrowings and assumesprincipal outstanding and interest rates in effect as of December 31, 2016.Capital ExpendituresWe anticipate incurring average annual capital expenditures of $400 to $500 per unit in connection with the operations of our three ILFs. Capitalexpenditures for each property leased under triple-net leases are generally the responsibility of the tenant, except that, for the Ensign Master Leases, thetenant 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.Critical Accounting PoliciesBasis of Presentation. The accompanying consolidated and combined financial statements of the Company reflect, for all periods presented, thehistorical financial position, results of operations and cash flows of (i) the SNFs, SNF Campuses, ALFs and ILFs that Ensign contributed to us immediatelyprior to the Spin-Off, (ii) the operations of the three ILFs that we operated immediately following the Spin-Off, and (iii) the new investments that we havemade after the Spin-Off. Our financial statements, prior to the Spin-Off, have been prepared on a “carve-out” basis from Ensign’s consolidated financialstatements using the historical results of operations, cash flows, assets and liabilities attributable to such SNFs, SNF Campuses, ALFs and ILFs.The combined statements of operations, prior to the Spin-Off, reflect allocations of general corporate expenses from Ensign including, but not limitedto, executive management, finance, legal, information technology, human resources, employee benefits administration, treasury, risk management,procurement, and other shared services. See Note 6, Related Party Transactions.However, the consolidated and combined financial statements herein do not necessarily reflect what our financial position, results of operations or cashflows would have been if the Company had been a stand-alone company during the pre-Spin-Off periods presented. As a result, historical financialinformation is not necessarily indicative of our future results of operations, financial position or cash flows.Estimates and Assumptions. The preparation of financial statements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenue and expenses during the reporting periods. Management believes that the assumptions and estimates used in preparationof the underlying consolidated and combined financial statements are reasonable. Actual results, however, could differ from those estimates and assumptions.Real Estate Depreciation and Amortization. Real estate costs related to the acquisition and improvement of properties are capitalized and amortizedover the expected useful life of the asset on a straight-line basis. Repair and maintenance costs are charged to expense as incurred and significantreplacements and betterments are capitalized. Repair and maintenance costs include all costs that do not extend the useful life of the real estate asset. Weconsider the period of future benefit of an asset to determine its appropriate useful life. Expenditures for tenant improvements are capitalized and amortizedover the shorter of46Table of Contentsthe tenant’s lease term or expected useful life. We anticipate the estimated useful lives of our assets by class to be generally as follows: Buildings25-40 yearsBuilding improvements10-25 yearsTenant improvementsShorter of lease term or expected useful lifeIntegral equipment, furniture and fixtures5 yearsIdentified intangible assetsShorter of lease term or expected useful lifeReal Estate Acquisition Valuation. In accordance with Accounting Standards Codification ("ASC") 805, Business Combinations, we record theacquisition of income-producing real estate as a business combination. If the acquisition does not meet the definition of a business, we record the acquisitionas an asset acquisition. Under both methods, all assets acquired and liabilities assumed are measured at their acquisition date fair values. For transactions thatare business combinations, acquisition costs are expensed as incurred and restructuring costs that do not meet the definition of a liability at the acquisitiondate are expensed in periods subsequent to the acquisition date. For transactions that are an asset acquisition, acquisition costs are capitalized as incurred.We assess the acquisition date fair values of all tangible assets, identifiable intangibles and assumed liabilities using methods similar to those used byindependent appraisers, generally utilizing a discounted cash flow analysis that applies appropriate discount and/or capitalization rates and available marketinformation. Estimates of future cash flows are based on a number of factors, including historical operating results, known and anticipated trends, and marketand economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it were vacant.Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require us to make significant assumptions to estimatemarket lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years theproperty will be held for investment. The use of inappropriate assumptions would result in an incorrect valuation of our acquired tangible assets, identifiableintangibles and assumed liabilities, which would impact the amount of our net income.As part of our asset acquisitions, we may commit to provide contingent payments to a seller or lessee (e.g., an earn-out payable upon the applicableproperty achieving certain financial metrics). Typically, when the contingent payments are funded, cash rent is increased by the amount funded multiplied bya 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 thelife of the lease.Impairment of Long-Lived Assets. At each reporting period, management evaluates our real estate investments for impairment indicators, including theevaluation of our assets’ useful lives. Management also assesses the carrying value of our real estate investments whenever events or changes incircumstances indicate that the carrying amount of the assets may not be recoverable. The judgment regarding the existence of impairment indicators is basedon factors such as, but not limited to, market conditions, operator performance and legal structure. If indicators of impairment are present, managementevaluates the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying facilities. Provisions forimpairment losses related to long-lived assets are recognized when expected future undiscounted cash flows are determined to be less than the carryingvalues 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. Allimpairments 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 we decide to sell real estate properties, we evaluate the recoverability of the carrying amounts of the assets. If the evaluation indicates that thecarrying 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 itscurrent use as well as other alternative uses, and involves significant judgment. Our estimates of cash flows and fair values of the properties are based oncurrent market conditions and reflect 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. Our ability to accurately estimate future cash flows and47Table of Contentsestimate and allocate fair values impacts the timing and recognition of impairments. While we believe our assumptions are reasonable, changes in theseassumptions may have a material impact on financial results.Other Real Estate Investments. Preferred equity investments are accounted for at unpaid principal balance, plus accrued return, net of reserves. Werecognize return income on a quarterly basis based on the outstanding investment including any accrued and unpaid return, to the extent there is outsidecontributed equity or cumulative earnings from operations. As the preferred member of the joint venture, we are not entitled to share in the joint venture’searnings or losses. Rather, we are entitled to receive a preferred return, which is deferred if the cash flow of the joint venture is insufficient to pay all of theaccrued preferred return. The unpaid accrued preferred return is added to the balance of the preferred equity investment up to the estimated economicoutcome assuming a hypothetical liquidation of the book value of the joint venture. Any unpaid accrued preferred return, whether recorded or unrecorded byus, will be repaid upon redemption or as available cash flow is distributed from the joint venture.At each reporting period, we evaluate each of our investments for indicators of impairment. An investment is impaired when, based on currentinformation and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. A reserve is establishedfor the excess of the carrying value of the investment over its fair value.Deferred Financing Costs. External costs incurred from placement of our debt are capitalized and amortized on a straight-line basis over the terms ofthe related borrowings, which approximates the effective interest method. For our senior unsecured notes payable, senior unsecured term loan and ourmortgage notes payable, deferred financing costs are netted against the outstanding debt amounts on the balance sheet. For our Credit Facility, deferredfinancing costs are included in assets on our balance sheet.Revenue Recognition. We recognize rental revenue, including rental abatements, lease incentives and contractual fixed increases attributable tooperating 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 reasonably assured. Tenant recoveries related to the reimbursement of real estate taxes, insurance,repairs and maintenance, and other operating expenses are recognized as revenue in the period the expenses are incurred and presented gross if we are theprimary obligor and, with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and bear theassociated credit risk. For the years ended December 31, 2016, 2015 and 2014, such tenant reimbursement revenues consist of real estate taxes. Contingentrevenue, if any, is not recognized until all possible contingencies have been eliminated.We evaluate the collectability of rents and other receivables on a regular basis based on factors including, among others, payment history, theoperations, the asset type and current economic conditions. If our evaluation of these factors indicates we may not recover the full value of the receivable, weprovide a reserve against the portion of the receivable that we estimate may not be recovered. This analysis requires us to determine whether there are factorsindicating a receivable may not be fully collectible and to estimate the amount of the receivable that may not be collected. We did not reserve anyreceivables as of December 31, 2016 and 2015.Income Taxes. Our operations have historically been included in Ensign’s U.S. federal and state income tax returns and all income taxes have beenpaid by Ensign. Income tax expense and other income tax related information contained in these consolidated and combined financial statements arepresented on a separate tax return basis as if we filed our own tax returns. Management believes that the assumptions and estimates used to determine thesetax amounts are reasonable. However, the consolidated and combined financial statements herein may not necessarily reflect our income tax expense or taxpayments in the future, or what our tax amounts would have been if we had been a stand-alone company during the periods presented.We elected to be taxed as a REIT under the Code, and have operated as such beginning with our taxable year ended December 31, 2014. To qualify as aREIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxableincome to our stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal netincome as calculated in accordance with GAAP). As a REIT, we generally will not be subject to federal income tax to the extent we distribute qualifyingdividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regularcorporate 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 yearsfollowing the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions.In connection with our intention to qualify as a REIT in 2014, on October 17, 2014, our board of directors declared a special dividend of $132.0million, or approximately $5.88 per common share, which represented the amount of accumulated earnings and profits, or “E&P,” allocated to us as a result ofthe Spin-Off. The Special Dividend was intended to purge us of48Table of Contentsaccumulated E&P attributable to the period prior to our first taxable year as a REIT. The Special Dividend was paid on December 10, 2014, to stockholders ofrecord as of October 31, 2014, in a combination of both cash and stock. The cash portion totaled $33.0 million and the stock portion totaled $99.0 million.We issued 8,974,249 shares of common stock in connection with the stock portion of the Special Dividend.Stock-Based Compensation. We account for share-based awards in accordance with ASC Topic 718, Compensation - Stock Compensation (“ASC718”). ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. ASC 718 requires allentities to apply a fair value-based measurement method in accounting for share-based payment transactions with employees except for equity instrumentsheld by employee share ownership plans.See Note 2, “Summary of Significant Accounting Policies” in the Notes to the Consolidated and Combined Financial Statements for informationconcerning recently issued accounting standards.Impact of InflationOur rental income in future years will be impacted by changes in inflation. Almost all of our triple-net lease agreements, including the Ensign MasterLeases, provide for an annual rent escalator based on the percentage change in the Consumer Price Index (but not less than zero), subject to maximum fixedpercentages.Off-Balance Sheet ArrangementsNone.ITEM 7A.Quantitative and Qualitative Disclosures About Market RiskOur primary market risk exposure is interest rate risk with respect to our variable rate indebtedness.Our Credit Agreement provides for revolving commitments in an aggregate principal amount of $400.0 million from a syndicate of banks and otherfinancial institutions. As of December 31, 2016, we had $95.0 million of outstanding borrowings under the Revolving Facility. The interest rates per annumapplicable to loans under the Revolving Facility are, at the Company’s option, equal to either a base rate plus a margin ranging from 0.75% to 1.40% perannum or applicable LIBOR plus a margin ranging from 1.75% to 2.40% per annum, based on the debt to asset value ratio of the Operating Partnership andits subsidiaries (subject to decrease at the Company's election if the Company obtains certain specified investment grade ratings on its senior long termunsecured debt). Pursuant to the Amendment, the interest rates applicable to the Term Loan are, at the Company’s option, equal to a base rate plus a marginranging from 0.95% to 1.60% per annum or applicable LIBOR plus a margin ranging from 1.95% to 2.60% per annum based on the debt to asset value ratioof the Company and its subsidiaries (subject to decrease at the Company's election if the Company obtains certain specified investment grade ratings on itssenior long term unsecured debt). As of December 31, 2016, we had a $100.0 million Term Loan outstanding.An increase in interest rates could make the financing of any acquisition by us more costly as well as increase the costs of our variable rate debtobligations. Rising interest rates could also limit our ability to refinance our debt when it matures or cause us to pay higher interest rates upon refinancingand increase interest expense on refinanced indebtedness. Assuming a 100 basis point increase in the interest rates related to our variable rate debt, andassuming no change in our outstanding debt balance as described above, interest expense would have increased $2.0 million for the year ended December 31,2016.We may, in the future, manage, or hedge, interest rate risks related to our borrowings by means of interest rate swap agreements. However, the REITprovisions of the Code substantially limit our ability to hedge our assets and liabilities. See “Risk Factors - Risks Related to Our Status as a REIT -Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.” As of December 31, 2016, we had noswap agreements to hedge our interest rate risks. We also expect to manage our exposure to interest rate risk by maintaining a mix of fixed and variable ratesfor our indebtedness.ITEM 8. Financial Statements and Supplementary DataSee the Index to Consolidated and Combined Financial Statements on page F-1 of this report.ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosuresNone.49Table of ContentsITEM 9A.Controls and ProceduresDisclosure Controls and ProceduresWe maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed toensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the timeperiods specified in the SEC’s rules and regulations and that such information is accumulated and communicated to management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.As of December 31, 2016, we carried out an evaluation, under the supervision and with the participation of management, including our Chief ExecutiveOfficer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2016.Management’s Annual Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) of the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;(ii) provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and ourdirectors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets thatcould have a material effect on the financial statements.Our management evaluated the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on this evaluation, our management concludedthat our internal control over financial reporting was effective as of December 31, 2016.Changes in Internal Control over Financial ReportingThere has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the ExchangeAct) that occurred during the quarter ended December 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal controlover financial reporting.Attestation Report of the Independent Registered Public Accounting FirmThe effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by Ernst & Young LLP, an independentregistered public accounting firm, as stated in their report which is included herein.50Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have audited CareTrust REIT Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). CareTrustREIT Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Ourresponsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testingand evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.In our opinion, CareTrust REIT Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based onthe COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetsof CareTrust REIT, Inc., as of December 31, 2016 and 2015, and the related consolidated and combined statements of operations, comprehensive income(loss), equity, and cash flows for each of the three years in the period ended December 31, 2016 of CareTrust REIT Inc. and our report dated February 7, 2017expressed an unqualified opinion thereon./s/ ERNST & YOUNG LLPIrvine, CaliforniaFebruary 7, 201751Table of ContentsITEM 9B.Other InformationNone.PART IIIITEM 10.Directors, Executive Officers and Corporate GovernanceThe information required under Item 10 is incorporated herein by reference to our definitive proxy statement to be filed with the SEC within 120 daysafter the end of our fiscal year ended December 31, 2016 in connection with our 2017 Annual Meeting of Stockholders.Code of Conduct and EthicsWe have adopted a code of business conduct and ethics that applies to all employees, including employees of our subsidiaries, as well as each memberof our Board of Directors. The code of business conduct and ethics is available at our website at www.caretrustreit.com under the Investors-CorporateGovernance section. We intend to satisfy any disclosure requirement under applicable rules of the Securities and Exchange Commission or NASDAQ StockMarket regarding an amendment to, or waiver from, a provision of this code of business conduct and ethics by posting such information on our website, at theaddress specified above.ITEM 11.Executive CompensationThe information required under Item 11 is incorporated herein by reference to our definitive proxy statement to be filed with the SEC within 120 daysafter the end of our fiscal year ended December 31, 2016 in connection with our 2017 Annual Meeting of Stockholders.ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required under Item 12 is incorporated herein by reference to our definitive proxy statement to be filed with the SEC within 120 daysafter the end of our fiscal year ended December 31, 2016 in connection with our 2017 Annual Meeting of Stockholders.ITEM 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required under Item 13 is incorporated herein by reference to our definitive proxy statement to be filed with the SEC within 120 daysafter the end of our fiscal year ended December 31, 2016 in connection with our 2017 Annual Meeting of Stockholders.ITEM 14.Principal Accountant Fees and ServicesThe information required under Item 14 is incorporated herein by reference to our definitive proxy statement to be filed with the SEC within 120 daysafter the end of our fiscal year ended December 31, 2016 in connection with our 2017 Annual Meeting of Stockholders.PART IVITEM 15.Exhibits, Financial Statements and Financial Statement Schedules(a)(1)Financial Statements See Index to Consolidated and Combined Financial Statements on page F-1 of this report. (a)(2)Financial Statement Schedules Schedule III: Real Estate Assets and Accumulated Depreciation Note: All other schedules have been omitted because the required information is presented in the financial statements and the relatednotes or because the schedules are not applicable. (a)(3)Exhibits 52Table of Contents2.1Separation and Distribution Agreement, dated as of May 23, 2014, by and between The Ensign Group, Inc. and CareTrust REIT, Inc.(incorporated by reference to Exhibit 2.1 to CareTrust REIT, Inc.’s Current Report on Form 8-K, filed on June 5, 2014). 2.2Purchase and Sale Agreement and Joint Escrow Instructions, dated May 13, 2015, by and among CTR Partnership, L.P. and theentities party thereto as sellers (incorporated by reference to Exhibit 10.1 to CareTrust REIT, Inc.’s Current Report on Form 8-K, filedon August 10, 2015). 2.3First Amendment to Purchase and Sale Agreement and Joint Escrow Instructions, dated as of July 30, 2015, by and among CTRPartnership, L.P. and the entities party thereto as sellers (incorporated by reference to Exhibit 10.2 to CareTrust REIT, Inc.’s CurrentReport on Form 8-K, filed on August 10, 2015). 2.4Purchase and Sale Agreement entered into as of September 29, 2016 by and among Senior Care Resources, Inc., SCC Partners, Inc.,Royse City NH Realty, Ltd., BP NH Realty, Ltd., Decatur NH Realty, Ltd., Lakeside NH Realty, Ltd., and CTR Partnership, L.P.(incorporated by reference to Exhibit 2.1 to CareTrust REIT, Inc.’s Current Report on Form 8-K, filed on December 2, 2016). 2.5First Amendment to Purchase and Sale Agreement entered into as of November 15, 2016 by and among Senior Care Resources, Inc.,SCC Partners, Inc., Royse City NH Realty, Ltd., BP NH Realty, Ltd., Decatur NH Realty, Ltd., Lakeside NH Realty, Ltd., and CTRPartnership, L.P. (incorporated by reference to Exhibit 2.2 to CareTrust REIT, Inc.’s Current Report on Form 8-K, filed on December 2,2016). 3.1Articles of Amendment and Restatement of CareTrust REIT, Inc. (incorporated by reference to Exhibit 3.1 to CareTrust REIT, Inc.’sRegistration Statement on Form 10, filed on May 13, 2014). 3.2Amended and Restated Bylaws of CareTrust REIT, Inc. (incorporated by reference to Exhibit 3.2 to CareTrust REIT, Inc.’sRegistration Statement on Form 10, filed on May 13, 2014). 4.1Indenture, dated as of May 30, 2014, among CTR Partnership, L.P. and CareTrust Capital Corp., as Issuers, the guarantors namedtherein, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to CareTrust REIT, Inc.’sCurrent Report on Form 8-K, filed on June 5, 2014). 4.2Form of 2021 Note (included in Exhibit 4.1 above). 4.3Specimen Stock Certificate of CareTrust REIT, Inc. (incorporated by reference to Exhibit 4.1 to CareTrust REIT, Inc.’s RegistrationStatement on Form 10, filed on April 15, 2014). 10.1Form of Master Lease by and among certain subsidiaries of The Ensign Group, Inc. and certain subsidiaries of CareTrust REIT, Inc.(incorporated by reference to Exhibit 10.1 to CareTrust REIT, Inc.’s Current Report on Form 8-K, filed on June 5, 2014). 10.2Form of Guaranty of Master Lease by The Ensign Group, Inc. in favor of certain subsidiaries of CareTrust REIT, Inc., as landlordsunder the Ensign Master Leases (incorporated by reference to Exhibit 10.2 to CareTrust REIT, Inc.’s Current Report on Form 8-K,filed on June 5, 2014). 10.3Master Lease, dated as of July 30, 2015, by and among CTR Partnership, L.P. and the entities party thereto as tenants (incorporated byreference to Exhibit 10.3 to CareTrust REIT, Inc.’s Current Report on Form 8-K, filed on August 10, 2015). *10.4First Amendment to Master Lease, dated as of September 30, 2015, by and among CTR Partnership, L.P. and the entities party theretoas tenants. *10.5Second Amendment to Master Lease, dated as of March 7, 2016, by and among CTR Partnership, L.P. and the entities party thereto astenants. 10.6Guaranty of Master Lease, dated as of July 30, 2015, by Pristine Senior Living, LLC, Christopher T. Cook, and Stephen Ryan in favorof CTR Partnership, L.P. (incorporated by reference to Exhibit 10.4 to CareTrust REIT, Inc.’s Current Report on Form 8-K, filed onAugust 10, 2015). *10.7First Amendment to Guaranty of Master Lease, dated November 15, 2016, by and among Pristine Senior Living, LLC and ChristopherT. Cook in favor of CTR Partnership, L.P. 10.8Nomination Agreement, dated as of July 30, 2015, by and among CTR Partnership, L.P., Pristine Senior Living of Mansfield, LLC andPristine Senior Living of Fremont, LLC. (incorporated by reference to Exhibit 10.5 to CareTrust REIT, Inc.’s Current Report on Form8-K, filed on August 10, 2015). 53Table of Contents10.9Opportunities Agreement, dated as of May 30, 2014, by and between The Ensign Group, Inc. and CareTrust REIT, Inc. (incorporatedby reference to Exhibit 10.3 to CareTrust REIT, Inc.’s Current Report on Form 8-K, filed on June 5, 2014). 10.10Transition Services Agreement, dated as of May 30, 2014, by and between The Ensign Group, Inc. and CareTrust REIT, Inc.(incorporated by reference to Exhibit 10.4 to CareTrust REIT, Inc.’s Current Report on Form 8-K, filed on June 5, 2014). 10.11Tax Matters Agreement, dated as of May 30, 2014, by and between The Ensign Group, Inc. and CareTrust REIT, Inc. (incorporated byreference to Exhibit 10.5 to CareTrust REIT, Inc.’s Current Report on Form 8-K, filed on June 5, 2014). 10.12Employee Matters Agreement, dated as of May 30, 2014, by and between The Ensign Group, Inc. and CareTrust REIT, Inc.(incorporated by reference to Exhibit 10.6 to CareTrust REIT, Inc.’s Current Report on Form 8-K, filed on June 5, 2014). 10.13Contribution Agreement, dated as of May 30, 2014, by and among CTR Partnership L.P., CareTrust GP, LLC, CareTrust REIT, Inc.and The Ensign Group, Inc. (incorporated by reference to Exhibit 10.7 to CareTrust REIT, Inc.’s Current Report on Form 8-K, filed onJune 5, 2014). 10.14Credit and Guaranty Agreement, dated August 5, 2015, by and among CareTrust REIT, Inc., CareTrust GP, LLC, CTR Partnership,L.P., certain of its wholly owned subsidiaries, KeyBank National Association and the lenders party thereto (incorporated by referenceto Exhibit 10.1 to CareTrust REIT, Inc.’s Current Report on Form 8-K, filed on August 6, 2015). 10.15First Amendment to Credit and Guaranty Agreement, dated February 1, 2016, by and among CareTrust REIT, Inc., CTR Partnership,L.P., the other guarantors therein and KeyBank National Association, as administrative agent, and the other lenders party thereto(which includes as Annex A thereto an amended and restatement of the Credit and Guaranty Agreement) (incorporated by reference toExhibit 10.1 to CareTrust REIT, Inc.’s Current Report on Form 8-K, filed on February 4, 2016). 10.16Amended and Restated Partnership Agreement of CTR Partnership, L.P. (incorporated by reference to Exhibit 3.4 to CareTrust REIT,Inc.’s Registration Statement on Form S-4, filed on August 28, 2014). 10.17Form of Indemnification Agreement between CareTrust REIT, Inc. and its directors and officers (incorporated by reference to Exhibit10.11 to CareTrust REIT, Inc.’s Current Report on Form 8-K, filed on June 5, 2014). +10.18Incentive Award Plan (incorporated by reference to Exhibit 10.9 to CareTrust REIT, Inc.’s Registration Statement on Form 10, filedon May 13, 2014). +10.19Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.15 to CareTrust REIT, Inc.’s Annual Report on Form 10-K, filed on February 11, 2015). +10.20Form of Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.16 to CareTrust REIT, Inc.’s Annual Report onForm 10-K, filed on February 11, 2015). *21.1List of Subsidiaries of CareTrust REIT, Inc. *23.1Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. *31.1Certification of Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Actof 2002. *31.2Certification of Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Actof 2002. **32.1Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002. *101.INSXBRL Instance Document *101.SCHXBRL Taxonomy Extension Schema Document *101.CALXBRL Taxonomy Extension Calculation Linkbase Document *101.DEFXBRL Taxonomy Extension Definition Linkbase Document *101.LABXBRL Taxonomy Extension Label Linkbase Document *101.PREXBRL Taxonomy Extension Presentation Linkbase Document 54Table of Contents*Filed herewith.**Furnished herewith.+Management contract or compensatory plan or arrangement.ITEM 16. Form 10-K Summary.None.55Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. CARETRUST REIT, INC. By:/S/ GREGORY K. STAPLEY Gregory K. Stapley President and Chief Executive Officer Dated: February 7, 2017Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.Name Title Date /s/ GREGORY K. STAPLEY Director, President and Chief Executive Officer(Principal Executive Officer) February 7, 2017Gregory K. Stapley /s/ WILLIAM M. WAGNER Chief Financial Officer and Treasurer (PrincipalFinancial Officer and Principal Accounting Officer) February 7, 2017William M. Wagner /s/ ALLEN C. BARBIERI Director February 7, 2017Allen C. Barbieri /s/ JON D. KLINE Director February 7, 2017Jon D. Kline /s/ DAVID G. LINDAHL Director February 7, 2017David G. Lindahl 56Table of ContentsINDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm with respect to CareTrust REIT, Inc.F-2Consolidated Balance Sheets as of December 31, 2016 and 2015F-3Consolidated and Combined Statements of Operations for the years ended December 31, 2016, 2015 and 2014F-4Consolidated and Combined Statements of Comprehensive Income (Loss) for the years ended December 31, 2016, 2015 and 2014F-5Consolidated and Combined Statements of Equity for the years ended December 31, 2016, 2015 and 2014F-6Consolidated and Combined Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014F-7Notes to Consolidated and Combined Financial StatementsF-8 Schedule III: Real Estate Assets and Accumulated DepreciationF-35F-1Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders ofCareTrust REIT, Inc.We have audited the accompanying consolidated balance sheets of CareTrust REIT, Inc. (the “Company”), as of December 31, 2016 and 2015, and therelated consolidated and combined statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the periodended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2), Schedule III - Real Estate andAccumulated Depreciation. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of CareTrust REIT, Inc. as of December 31,2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, inconformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule,when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CareTrust REIT Inc.'s internalcontrol over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 7, 2017 expressed an unqualified opinion thereon./s/ ERNST & YOUNG LLPIrvine, CaliforniaFebruary 7, 2017F-2Table of ContentsCARETRUST REIT, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share amounts) December 31, 2016 2015Assets: Real estate investments, net$893,918 $645,614Other real estate investments13,872 8,477Cash and cash equivalents7,500 11,467Accounts receivable5,896 2,342Prepaid expenses and other assets1,369 2,083Deferred financing costs, net2,803 3,183Total assets$925,358 $673,166Liabilities and Equity: Senior unsecured notes payable, net$255,294 $254,229Senior unsecured term loan, net99,422 —Unsecured revolving credit facility95,000 45,000Mortgage notes payable, net— 94,676Accounts payable and accrued liabilities12,137 9,269Dividends payable11,075 7,704Total liabilities472,928 410,878Commitments and contingencies (Note 11) Equity: Preferred stock, $0.01 par value; 100,000,000 shares authorized, no shares issued and outstanding as ofDecember 31, 2016 and 2015— —Common stock, $0.01 par value; 500,000,000 shares authorized, 64,816,350 and 47,664,742 shares issuedand outstanding as of December 31, 2016 and 2015, respectively648 477Additional paid-in capital611,475 410,217Cumulative distributions in excess of earnings(159,693) (148,406)Total equity452,430 262,288Total liabilities and equity$925,358 $673,166See accompanying notes to consolidated and combined financial statements.F-3Table of ContentsCARETRUST REIT, INC.CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS(in thousands, except per share amounts) Year Ended December 31, 2016 2015 2014Revenues: Rental income (related party rental income of $0, $16,308 and $32,667 for theyear ended December 31, 2016, 2015 and 2014, respectively – Note 6)$93,126 $65,979 $51,367Tenant reimbursements (related party tenant reimbursements of $0, $1,406and $2,842 for the year ended December 31, 2016, 2015 and 2014,respectively – Note 6)7,846 5,497 4,956Independent living facilities2,970 2,510 2,519Interest and other income737 965 55Total revenues104,679 74,951 58,897Expenses: Depreciation and amortization31,965 24,133 23,000Interest expense23,199 25,256 21,622Loss on extinguishment of debt— — 4,067Property taxes7,846 5,497 4,956Acquisition costs205 — 47Independent living facilities2,549 2,376 2,243General and administrative9,2977,655 11,105Total expenses75,061 64,917 67,040Other income (expense): Loss on sale of real estate(265) — —Net income (loss)$29,353 $10,034 $(8,143)Earnings (loss) per common share: Basic$0.52 $0.26 $(0.36)Diluted$0.52 $0.26 $(0.36)Weighted-average number of common shares: Basic56,030 37,380 22,788Diluted56,030 37,380 22,788See accompanying notes to consolidated and combined financial statements.F-4Table of ContentsCARETRUST REIT, INC.CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(in thousands) Year Ended December 31, 2016 2015 2014Net income (loss)$29,353 $10,034 $(8,143)Other comprehensive income: Unrealized gain on interest rate swap— — 167Reclassification adjustment on interest rate swap— — 1,661Comprehensive income (loss)$29,353 $10,034 $(6,315)See accompanying notes to consolidated and combined financial statements.F-5Table of ContentsCARETRUST REIT, INC.CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY(in thousands, except share and per share amounts) Common Stock AdditionalPaid-inCapital CumulativeDistributionsin Excessof Earnings InvestedEquity AccumulatedOtherComprehensiveIncome (Loss) TotalEquityShares Amount Balance at December 31, 20131,000 $— $— $— $164,517 $(1,828) $162,689Net capital contribution from Ensign— — — — 4,356 — 4,356Unrealized gain on interest rate swap— — — — — 167 167Reclassification adjustment on interestrate swap— — — — — 1,661 1,661Net capital distribution to Ensign— — — — (10,475) — (10,475)Reclassification of invested equity tocommon stock and additional paid-incapital in conjunction with the Spin-Off (Note 1)22,227,358 222 146,980 — (147,202) — —Vesting of restricted common stock48,550 1 (1) — — — —Amortization of stock-basedcompensation— — 154 — — — 154Special dividend at $5.88 per share8,974,249 90 98,908 (131,999) — — (33,001)Common dividend at $0.125 per share— — — (3,946) — — (3,946)Net income (loss)— — — 3,053 (11,196) — (8,143)Balance at December 31, 201431,251,157 313 246,041 (132,892) — — 113,462Issuance of common stock, net16,330,000 163 162,800 — — — 162,963Vesting of restricted common stock,net of shares withheld for employeetaxes83,585 1 (146) — — — (145)Amortization of stock-basedcompensation— — 1,522 — — — 1,522Common dividends ($0.64 per share)— — — (25,548) — — (25,548)Net income— — — 10,034 — — 10,034Balance at December 31, 201547,664,742 477 410,217 (148,406) — — 262,288Issuance of common stock, net17,023,824 170 200,228 — — — 200,398Vesting of restricted common stock,net of shares withheld for employeetaxes127,784 1 (516) — — — (515)Amortization of stock-basedcompensation— — 1,546 — — — 1,546Common dividends ($0.68 per share)— — — (40,640) — — (40,640)Net income— — — 29,353 — — 29,353Balance at December 31, 201664,816,350 $648 $611,475 $(159,693) $— $— $452,430 See accompanying notes to consolidated and combined financial statements.F-6Table of ContentsCARETRUST REIT, INC.CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31, 2016 2015 2014Cash flows from operating activities: Net income (loss)$29,353 $10,034 (8,143)Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization (including a below-market ground lease)31,980 24,133 23,000Amortization of deferred financing costs and debt discount2,239 2,200 1,603Write-off of deferred financing costs326 1,208 —Amortization of stock-based compensation1,546 1,522 154Straight-line rental income(150) — —Noncash interest income(737) (945) (32)Loss on extinguishment of debt— — 1,998Loss on settlement of interest rate swap— — 1,661Loss on sale of real estate265 — —Change in operating assets and liabilities: Accounts receivable(3,404) (2,326) 4Accounts receivable due from related party— 2,275 (2,275)Prepaid expenses and other assets84 (86) 445Interest rate swap— — (1,661)Accounts payable and accrued liabilities2,929 2,239 5,152Net cash provided by operating activities64,431 40,254 21,906Cash flows from investing activities: Acquisitions of real estate(281,228) (232,466) (25,742)Improvements to real estate(762) (187) (579)Purchases of equipment, furniture and fixtures(151) (276) (19,275)Preferred equity investments(4,656) — (7,500)Escrow deposits for acquisition of real estate(700) (1,750) (500)Net proceeds from the sale of real estate2,855 30 —Net cash used in investing activities(284,642) (234,649) (53,596)Cash flows from financing activities: Proceeds from the issuance of common stock, net200,402 162,963 —Proceeds from the issuance of senior unsecured notes payable— — 260,000Proceeds from the issuance of senior unsecured term loan100,000 — —Borrowings under unsecured revolving credit facility255,000 45,000 —Payments on unsecured revolving credit facility(205,000) — —Borrowings under senior secured revolving credit facility— 35,000 10,000Repayments of borrowings under senior secured revolving credit facility— (35,000) (88,701)Proceeds from the issuance of mortgage notes payable— — 50,676Payments on the mortgage notes payable(95,022) (3,183) (68,155)Payments on senior secured term loan— — (65,624)Payments of deferred financing costs(1,352) (2,303) (13,436)Net-settle adjustment on restricted stock(515) (145) —Dividends paid on common stock(37,269) (21,790) (33,001)Net contribution from Ensign (Note 6)— — 4,356Net cash provided by financing activities216,244 180,542 56,115Net (decrease) increase in cash and cash equivalents(3,967) (13,853) 24,425Cash and cash equivalents, beginning of period11,467 25,320 895Cash and cash equivalents, end of period$7,500 $11,467 25,320Supplemental disclosures of cash flow information: Interest paid$21,238 $21,687 $17,243Income taxes paid$— $— $104Supplemental schedule of noncash operating, investing and financing activities: Increase in dividends payable$3,371 $3,758 $3,946Application of escrow deposit to acquisition of real estate$1,250 $500 $—Distributions paid to common stockholders through common stock issuances$— $— $98,998Holdback of purchase price to acquire real estate$— $— $300Operating assets and liabilities that were not transferred to CareTrust$— $— $1,042Equipment, furniture and fixtures that were not transferred to CareTrust$— $— $(11,684)Net capital distribution to Ensign$— $— $10,475See accompanying notes to consolidated and combined financial statements.F-7Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS1. ORGANIZATIONSeparation from Ensign—Prior to June 1, 2014, CareTrust REIT, Inc. (“CareTrust REIT” or the “Company”) was a wholly owned subsidiary ofThe Ensign Group, Inc. (“Ensign”). On June 1, 2014, Ensign completed the separation of its healthcare business and its real estate business into two separateand independent publicly traded companies through the distribution of all of the outstanding shares of common stock of CareTrust REIT to Ensignstockholders on a pro rata basis (the “Spin-Off”). Ensign stockholders received one share of CareTrust REIT common stock for each share of Ensign commonstock held at the close of business on May 22, 2014, the record date for the Spin-Off. The Spin-Off was effective from and after June 1, 2014, with shares ofCareTrust REIT common stock distributed by Ensign on June 2, 2014. The Company was formed on October 29, 2013 and had minimal activity prior to theSpin-Off.Prior to the Spin-Off, the Company and Ensign entered into a Separation and Distribution Agreement, setting forth the mechanics of the Spin-Off,certain organizational matters and other ongoing obligations of the Company and Ensign. The Company and Ensign or their respective subsidiaries, asapplicable, also entered into a number of other agreements to govern the relationship between Ensign and the Company after the Spin-Off, including eightlong-term leases (the “Ensign Master Leases”), under which Ensign leases 93 healthcare facilities on a triple-net basis.In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 505-60, Equity—Spinoffsand Reverse Spinoffs, the accounting for the separation of the Company follows its legal form, with Ensign as the legal and accounting spinnor and theCompany as the legal and accounting spinnee, due to the relative significance of Ensign’s healthcare business, the relative fair values of the respectivecompanies, the retention of all senior management (except Mr. Gregory K. Stapley) by Ensign, and other relevant indicators. The assets and liabilitiescontributed to the Company from Ensign, or incurred in connection with the Spin-Off in the case of certain debt, were as follows (dollars in thousands): Real estate investments, net$421,846Cash78,731Accounts receivable and prepaid assets and other current assets1,900Deferred financing costs, net11,088Debt(359,512)Other liabilities(6,838)Net contribution$147,215Description of Business—The Company’s primary business consists of acquiring, financing and owning real property to be leased to third-partytenants in the healthcare sector. As of December 31, 2016, the Company leased to independent operators, 151 skilled nursing, assisted living andindependent living facilities which had a total of 14,919 beds and units located in Arizona, California, Colorado, Florida, Georgia, Idaho, Indiana, Iowa,Maryland, Michigan, Minnesota, Nebraska, Nevada, North Carolina, Ohio, Texas, Utah, Virginia, Washington and Wisconsin. The Company also owns andoperates three independent living facilities which have a total of 264 units located in Texas and Utah. As of December 31, 2016, the Company also had threeother real estate investments consisting of $13.9 million of preferred equity investments. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of Presentation—The accompanying consolidated and combined financial statements of the Company reflect, for all periods presented, thehistorical financial position, results of operations and cash flows of (i) the net-leased skilled nursing, assisted living and independent living facilities; (ii) theoperations of the three independent living facilities that the Company owns and operates; and (iii) the preferred equity investments. For the periods prior tothe Spin-Off, the Company’s financial statements have been prepared on a “carve-out” basis from Ensign’s consolidated financial statements using thehistorical results of operations, cash flows, assets and liabilities attributable to such skilled nursing, assisted living and independent living facilities (the“Ensign Properties”).For the periods prior to the Spin-Off, the combined statements of operations reflect allocations of general corporate expenses from Ensignincluding, but not limited to, executive management, finance, legal, information technology, humanF-8Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSresources, employee benefits administration, treasury, risk management, procurement, and other shared services. See further discussion in Note 6, RelatedParty Transactions.The consolidated and combined financial statements for the periods prior to June 1, 2014, do not necessarily reflect what the Company’sfinancial position, results of operations or cash flows would have been if the Company had been a stand-alone company during those periods presented. Thehistorical financial information prior to June 1, 2014, is not necessarily indicative of the Company’s future results of operations, financial position or cashflows.The accompanying consolidated and combined financial statements of the Company were prepared in accordance with accounting principlesgenerally accepted in the United States (“GAAP”) and reflect the financial position, results of operations and cash flows for the Company. All intercompanytransactions and account balances within the Company have been eliminated.Estimates and Assumptions—The preparation of financial statements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenue and expenses during the reporting periods. Management believes that the assumptions and estimates used in preparationof the underlying consolidated and combined financial statements are reasonable. Actual results, however, could differ from those estimates and assumptions.Reclassifications—Certain amounts in the Company’s consolidated and combined financial statements for prior periods have been reclassified toconform to the current period presentation. These reclassifications have not changed the results of operations of prior periods.Real Estate Depreciation and Amortization—Real estate costs related to the acquisition and improvement of properties are capitalized andamortized over the expected useful life of the asset on a straight-line basis. Repair and maintenance costs are charged to expense as incurred and significantreplacements and betterments are capitalized. Repair and maintenance costs include all costs that do not extend the useful life of the real estate asset. TheCompany considers the period of future benefit of an asset to determine its appropriate useful life. Expenditures for tenant improvements are capitalized andamortized over the shorter of the tenant’s lease term or expected useful life. The Company anticipates the estimated useful lives of its assets by class to begenerally as follows: Building 25-40 yearsBuilding improvements 10-25 yearsTenant improvements Shorter of lease term or expected useful lifeIntegral equipment, furniture and fixtures 5 yearsIdentified intangible assets Shorter of lease term or expected useful life Real Estate Acquisition Valuation— In accordance with ASC 805, Business Combinations, the Company records the acquisition of income-producing real estate as a business combination. If the acquisition does not meet the definition of a business, the Company records the acquisition as an assetacquisition. Under both methods, all assets acquired and liabilities assumed are measured at their acquisition date fair values. For transactions that arebusiness combinations, acquisition costs are expensed as incurred and restructuring costs that do not meet the definition of a liability at the acquisition dateare expensed in periods subsequent to the acquisition date. For transactions that are asset acquisitions, acquisition costs are capitalized as incurred.The Company assesses the acquisition date fair values of all tangible assets, identifiable intangibles and assumed liabilities using methodssimilar to those used by independent appraisers, generally utilizing a discounted cash flow analysis that applies appropriate discount and/or capitalizationrates and available market information. Estimates of future cash flows are based on a number of factors, including historical operating results, known andanticipated trends, and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if itwere vacant.Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require the Company to make significantassumptions to estimate market lease rates, property-operating expenses, carrying costs duringF-9Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSlease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriateassumptions would result in an incorrect valuation of the Company’s acquired tangible assets, identifiable intangibles and assumed liabilities, which wouldimpact the amount of the Company’s net income.As part of the Company's asset acquisitions, the Company may commit to provide contingent payments to a seller or lessee (e.g., an earn-outpayable upon the applicable property achieving certain financial metrics). Typically, when the contingent payments are funded, cash rent is increased by theamount funded multiplied by a rate stipulated in the agreement. Generally, if the contingent payment is an earn-out provided to the seller, the payment iscapitalized 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 isamortized 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 impairmentindicators, including the evaluation of the useful lives of the Company's assets. Management also assesses the carrying value of the Company’s real estateinvestments whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The judgment regarding theexistence of impairment indicators is based on factors such as, but not limited to, market conditions, operator performance and legal structure. If indicators ofimpairment are present, management evaluates the carrying value of the related real estate investments in relation to the future undiscounted cash flows of theunderlying facilities. Provisions for impairment losses related to long-lived assets are recognized when expected future undiscounted cash flows aredetermined 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 ofcarrying 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 valueassigned 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 evaluationindicates 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 inits current use as well as other alternative uses, and involves significant judgment. The Company’s estimates of cash flows and fair values of the properties arebased on current market conditions and consider matters such as rental rates and occupancies for comparable properties, recent sales data for comparableproperties, and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. The Company’s ability to accuratelyestimate future cash flows and estimate and allocate fair values impacts the timing and recognition of impairments. While the Company believes itsassumptions are reasonable, changes in these assumptions may have a material impact on financial results.Other Real Estate Investments — Preferred equity investments are accounted for at unpaid principal balance, plus accrued return, net of reserves.The Company recognizes return income on a quarterly basis based on the outstanding investment including any accrued and unpaid return, to the extentthere is outside contributed equity or cumulative earnings from operations. As the preferred member of the joint venture, the Company is not entitled to sharein the joint venture’s earnings or losses. Rather, the Company is entitled to receive a preferred return, which is deferred if the cash flow of the joint venture isinsufficient to pay all of the accrued preferred return. The unpaid accrued preferred return is added to the balance of the preferred equity investment up to theestimated economic outcome assuming a hypothetical liquidation of the book value of the joint venture. Any unpaid accrued preferred return, whetherrecorded or unrecorded by us, will be repaid upon redemption or as available cash flow is distributed from the joint venture.The Company evaluates at each reporting period each of its other real estate investments for indicators of impairment. An investment is impairedwhen, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existingcontractual terms. A reserve is established for the excess of the carrying value of the investment over its fair value. Cash and Cash Equivalents—Cash and cash equivalents consist of bank term deposits and money market funds with original maturities of 3months or less at time of purchase and therefore approximate fair value. The fair value of these investments is determined based on “Level 1” inputs, whichconsist of unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets. The Company places itscash and short-term investments with high credit quality financial institutions.F-10Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSThe Company’s cash and cash equivalents balance periodically exceeds federally insurable limits. The Company monitors the cash balances inits operating accounts and adjusts the cash balances as appropriate; however, these cash balances could be impacted if the underlying financial institutionsfail or are subject to other adverse conditions in the financial markets. To date, the Company has experienced no loss or lack of access to cash in its operatingaccounts.Deferred Financing Costs—External costs incurred from placement of our debt are capitalized and amortized on a straight-line basis over theterms of the related borrowings, which approximates the effective interest method. For senior unsecured notes payable, senior unsecured term loan andmortgage notes payable, deferred financing costs are netted against the outstanding debt amounts on the balance sheet. For the unsecured revolving creditfacility, deferred financing costs are included in assets on the Company's balance sheet. Amortization of deferred financing costs is classified as interestexpense in the consolidated and combined statements of operations. Accumulated amortization of deferred financing costs was $4.2 million and $3.3 millionat December 31, 2016 and December 31, 2015, respectively.When financings are terminated, unamortized deferred financing costs, as well as charges incurred for the termination, are expensed at the timethe termination is made. Gains and losses from the extinguishment of debt are presented within income from continuing operations in the consolidated andcombined statements of operations.Revenue Recognition —The Company recognizes rental revenue, including rental abatements, lease incentives and contractual fixed increasesattributable to operating leases, if any, from tenants under lease arrangements with minimum fixed and determinable increases on a straight-line basis over thenon-cancellable term of the related leases when collectability is reasonably assured. Tenant recoveries related to the reimbursement of real estate taxes,insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period the expenses are incurred and presented gross if theCompany is the primary obligor and, with respect to purchasing goods and services from third-party suppliers, has discretion in selecting the supplier andbears the associated credit risk. For the years ended December 31, 2016, 2015 and 2014, such tenant reimbursement revenues consist of real estate taxes.Contingent revenue, if any, is not recognized until all possible contingencies have been eliminated.The Company evaluates the collectability of rents and other receivables on a regular basis based on factors including, among others, paymenthistory, the operations, the asset type and current economic conditions. If the Company's evaluation of these factors indicates it may not recover the fullvalue of the receivable, the Company provides a reserve against the portion of the receivable that it estimates may not be recovered. This analysis requires theCompany to determine whether there are factors indicating a receivable may not be fully collectible and to estimate the amount of the receivable that maynot be collected. The Company did not reserve any receivables as of December 31, 2016 or December 31, 2015.Income Taxes—The Company’s operations prior to the Spin-Off were historically included in Ensign’s U.S. federal and state income tax returnsand all income taxes for periods prior to the Spin-Off were paid by Ensign. Income tax expense and other income tax related information contained in theseconsolidated and combined financial statements are presented on a separate tax return basis as if the Company filed its own tax returns for all periods.Management believes that the assumptions and estimates used to determine these tax amounts are reasonable. However, the consolidated and combinedfinancial statements herein may not necessarily reflect the Company’s income tax expense or tax payments in the future, or what its tax amounts would havebeen if the Company had been a stand-alone company prior to the Spin-Off.The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), beginning with its taxableyear ended December 31, 2014. The Company believes it has been organized and has operated, and the Company intends to continue to operate, in a mannerto 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 (which is computed without regard tothe dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, theCompany generally will not be subject to federal income tax to the extent it distributes qualifying dividends to its stockholders. If the Company fails toqualify 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 willnot 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 islost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. In connection with the Company’s intention to qualify as a real estate investment trust in 2014, on October 17, 2014, the Company’s board ofdirectors declared a special dividend (the “Special Dividend”) of $132.0 million, orF-11Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSapproximately $5.88 per common share, which represents the amount of accumulated earnings and profits, or “E&P,” allocated to the Company as a result ofthe Spin-Off. The Special Dividend was intended to purge the Company of accumulated E&P attributable to the period prior to the Company’s first taxableyear as a REIT. The Special Dividend was paid on December 10, 2014, to stockholders of record on October 31, 2014, in a combination of both cash andstock. The cash portion totaled $33.0 million and the stock portion totaled $99.0 million. The Company issued 8,974,249 shares of common stock inconnection with the stock portion of the Special Dividend.Derivatives and Hedging Activities—The Company evaluates variable and fixed interest rate risk exposure on a routine basis and to the extentthe Company believes that it is appropriate, it will offset most of its variable rate risk exposure by entering into interest rate swap agreements. It is theCompany’s policy to only utilize derivative instruments for hedging purposes (i.e., not for speculation). The Company formally designates its interest rateswap agreements as hedges and documents all relationships between hedging instruments and hedged items. The Company formally assesses effectiveness ofits hedging relationships, both at the hedge inception and on an ongoing basis, then measures and records ineffectiveness. The Company would discontinuehedge accounting prospectively (i) if it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item,(ii) when the derivative expires or is sold, terminated or exercised, (iii) if it is no longer probable that the forecasted transaction will occur, or (iv) ifmanagement determines that designation of the derivative as a hedge instrument is no longer appropriate.Effective May 30, 2014, the Company de-designated its interest rate swap contract that historically qualified for cash flow hedge accounting.This was due to the termination of the interest rate swap agreement related to the early retirement of the senior secured credit facility in place prior to theSpin-Off. As a result, the loss previously recorded in accumulated other comprehensive loss related to the interest rate swap was recognized in interestexpense in the consolidated and combined statements of operations during the year ended December 31, 2014. There was no outstanding interest rate swapcontract as of December 31, 2016.Stock-Based Compensation—The Company accounts for share-based payment awards in accordance with ASC Topic 718, Compensation – StockCompensation (“ASC 718”). ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financialstatements. ASC 718 requires all entities to apply a fair value-based measurement method in accounting for share-based payment transactions with directors,officers and employees except for equity instruments held by employee share ownership plans. Net income (loss) reflects stock-based compensation expenseof $1.5 million, $1.5 million and $0.2 million for the years ended December 31, 2016, 2015 and 2014, respectively.Concentration of Credit Risk—The Company is subject to concentrations of credit risk consisting primarily of operating leases on its ownedproperties. See Note 12, Concentration of Risk, for a discussion of major operator concentration.Segment Disclosures —The FASB accounting guidance regarding disclosures about segments of an enterprise and related information establishesstandards for the manner in which public business enterprises report information about operating segments. The Company has one reportable segmentconsisting of investments in healthcare-related real estate assets.Earnings (Loss) Per Share—The Company calculates earnings (loss) per share (“EPS”) in accordance with ASC 260, Earnings Per Share. BasicEPS is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period.Diluted EPS reflects the additional dilution for all potentially-dilutive securities. Basic and diluted EPS for the year ended December 31, 2014 wasretroactively restated for the number of basic and diluted shares outstanding immediately following the Spin-Off.Beds, Units, Occupancy and Other Measures—Beds, units, occupancy and other non-financial measures used to describe real estate investmentsincluded in these Notes to the Consolidated and Combined Financial Statements are presented on an unaudited basis.Recently Issued Accounting Standards—In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue fromContracts with Customers (Topic 606) (“ASU No. 2014-09”). ASU No. 2014-09 requires an entity to recognize the revenue to depict the transfer of promisedgoods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods andservices. ASU No. 2014-09 supersedes the revenue requirements in Revenue Recognition (Topic 605) and most industry-specific guidance throughout theIndustry Topics of the Codification. ASU No. 2014-09 does not apply to lease contracts within the scope of Leases (Topic 840). In August 2015, the FASBissued ASU No. 2015-14, which deferred the effective date of its new revenue recognition standard byF-12Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSone year. The standard will be effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company iscurrently assessing the impact of adopting ASU No. 2014-09 but does not believe it will have a material effect on the Company’s consolidated financialstatements when adopted.In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10) (“ASU No. 2016-01”). ASU No. 2016-01updates guidance related to recognition and measurement of financial assets and financial liabilities. ASU No. 2016-01 requires all equity investments to bemeasured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting orthose that result in consolidation of the investee). The amendments in ASU No. 2016-01 also require an entity to present separately in other comprehensiveincome the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has electedto measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in ASU No. 2016-01eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financialinstruments measured at amortized cost on the balance sheet for public business entities. ASU No. 2016-01 is effective for fiscal years and interim periodswithin those years beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact this guidance willhave on its consolidated financial statements when adopted.In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02") that sets out the principles for the recognition,measurement, presentation, and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU 2016-02 requires lessees to apply a dualapproach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of theleased 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. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today.ASU 2016-02 is expected to result in the recognition of a right-to-use asset and related liability to account for the Company's future obligations for which theit is lessee. As of December 31, 2016, the remaining contractual payments under the Company's lease agreements aggregated $0.4 million. Additionally, ASU2016-02 will require that lessees and lessors capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. Under ASU2016-02, allocated payroll costs and other costs that are incurred regardless of whether the lease is obtained will no longer be capitalized as initial directcosts and instead will be expensed as incurred. Lessors will continue to account for leases using an approach that is substantially equivalent to existingguidance for sales-type leases, direct financing leases, and operating leases. ASU 2016-02 is effective for reporting periods beginning after December 15,2018, with early adoption permitted. The standard permits the use of either the retrospective or modified retrospective transition method. The Companycontinues to assess the potential effect that the adoption of ASU 2016-02 will have on the Company's consolidated financial statements.In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based PaymentAccounting ("ASU No. 2016-09"), that simplifies several aspects of employee share-based payment accounting, including the accounting for forfeitures. ASU2016-09 allows an entity to make an accounting policy election either to continue to estimate the total number of awards that are expected to vest (currentmethod) or to account for forfeitures when they occur. This entity-wide accounting policy election only applies to service conditions; for performanceconditions, the entity continues to assess the probability that such conditions will be achieved. If an entity elects to account for forfeitures when they occur,all nonforfeitable dividends paid on share-based payment awards are initially charged to retained earnings and reclassified to compensation cost only whenforfeitures of the underlying awards occur. Under current guidance, nonforfeitable dividends paid on share-based payment awards that are not expected tovest are recognized as additional compensation cost. An entity must also disclose its policy election for forfeitures. The ASU is effective for reporting periodsbeginning after December 15, 2016, with early adoption permitted. If adopted, the ASU should be applied on a modified retrospective basis as a cumulative-effect adjustment to retained earnings as of the date of adoption. The Company does not expect the adoption of ASU No. 2016-09 will have a material effecton the Company's consolidated financial statements.In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) ("ASU 2016-13") that changes theimpairment model for most financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses asrequired currently by the other-than-temporary impairment model. ASU 2016-13 will apply to most financial assets measured at amortized cost and certainother instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases, and off-balance-sheet creditexposures (e.g., loan commitments). ASU 2016-13 is effective for reporting periods beginning after December 15, 2019, with early adoptionF-13Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSpermitted, and will be applied as a cumulative adjustment to retained earnings as of the effective date. The Company is currently assessing the potentialeffect the adoption of ASU 2016-13 will have on the Company's consolidated financial statements.In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments("ASU 2016-15"), which provided guidance on certain specific cash flow issues, including, but not limited to, debt prepayment or extinguishment costs,contingent consideration payments made after a business combination and distributions received from equity method investees. ASU 2016-15 is effective forperiods beginning after December 15, 2017, with early adoption permitted and shall be applied retrospectively where practicable. The Company is in theprocess of evaluating the impact the adoption will have on its consolidated financial statements.In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) ("ASU 2016-18") that will require companies toinclude restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period totalamounts shown on the statement of cash flows. ASU 2016-18 will require a disclosure of a reconciliation between the statement of financial position and thestatement of cash flows when the statement of financial position includes more than one line item for cash, cash equivalents, restricted cash, and restrictedcash equivalents. Entities with material restricted cash and restricted cash equivalents balances will be required to disclose the nature of the restrictions. ASU2016-18 is effective for reporting periods beginning after December 15, 2017, with early adoption permitted, and will be applied retrospectively to allperiods presented. As of December 31, 2016 and 2015, the Company did not have any restricted cash. The Company is in the process of evaluating theimpact the adoption will have on its consolidated financial statements.In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) ("ASU 2017-01") that clarifies the framework fordetermining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determiningwhether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions beingaccounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted foras asset acquisitions. This update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with earlyadoption permitted for transactions that have not been reported in previously issued (or available to be issued) financial statements and shall be applied on aprospective basis. The Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business becausesubstantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangibleassets) or because the acquisition does not include a substantive process in the form of an acquired workforce or an acquired contract that cannot be replacedwithout significant cost, effort or delay.3. REAL ESTATE INVESTMENTS, NETThe following tables summarize the Company's investment in owned properties at December 31, 2016, and December 31, 2015 (dollars inthousands): December 31,2016 December 31,2015Land$110,648 $91,311Buildings and improvements875,567 627,453Integral equipment, furniture and fixtures64,120 54,388Identified intangible assets1,914 —Real estate investments1,052,249 773,152Accumulated depreciation(158,331) (127,538)Real estate investments, net$893,918 $645,614As of December 31, 2016, 93 of the Company’s 154 facilities were leased to subsidiaries of Ensign under the Ensign Master Leases whichcommenced on June 1, 2014. The obligations under the Ensign Master Leases are guaranteed by Ensign. A default by any subsidiary of Ensign with regard toany facility leased pursuant to an Ensign Master Lease will result in a default under all of the Ensign Master Leases. As of December 31, 2016, annualizedrevenues from the Ensign Master Leases were $56.5 million and are escalated annually by an amount equal to the product of (1) the lesser of the percentageF-14Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSchange 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 thatare tenants under the Ensign Master Leases are solely responsible for the costs related to the leased properties (including property taxes, insurance, andmaintenance and repair costs).As of December 31, 2016, 16 of the Company’s 154 facilities were leased to affiliates of Pristine Senior Living, LLC ("Pristine") under a long-term, triple-net master lease (the “Pristine Master Lease”), which commenced on October 1, 2015. As of December 31, 2016, the annualized revenues from thePristine Master Lease were $18.6 million and are escalated annually by an amount equal to the product of (1) the lesser of the percentage change in the CPI(but not less than zero) or 3.0%, and (2) the prior year’s rent. The Pristine Master Lease is guaranteed by Pristine and its sole principal.As of December 31, 2016, 42 of the Company's 154 facilities were leased to various other operators under triple-net leases. All of these leasescontain 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 December 31, 2016 are the independent living facilities that the Company owns and operates.The Company has only two identified intangible assets which relate to a below-market ground lease and three acquired operating leases. Theground lease has a remaining term of 81 years.As of December 31, 2016, total future minimum rental revenues for the Company's tenants were (dollars in thousands): YearAmount2017$106,6282018106,8082019104,9032020103,5772021103,577Thereafter889,367 $1,414,860 Recent Real Estate AcquisitionsThe following recent real estate acquisitions were accounted for as asset acquisitions:New Haven Assisted Living of San Angelo, LLCIn February 2016, the Company acquired New Haven of San Angelo, a 30-unit assisted living and memory care facility located in San Angelo,Texas, for $4.9 million, which includes capitalized acquisition costs. In connection with the acquisition, the Company entered into a triple-net master leasewith New Haven Assisted Living of San Angelo, LLC. The lease carries an initial term of 12.5 years with two five-year renewal options and CPI-based rentescalators. Annual cash rent is $0.4 million under the lease.Trillium Healthcare Group, LLCIn February 2016, the Company acquired a nine facility 518-bed skilled nursing portfolio in Iowa for $32.7 million, which includes capitalizedacquisition costs. In connection with the acquisition, the Company amended its existing triple-net master lease with certain wholly owned subsidiaries ofTrillium Healthcare Group, LLC. The amended lease carries a remaining term of 15 years with two five-year renewal options and CPI-based rent escalators.The base rent under the amended master lease increased by $3.2 million per year following this acquisition. Additionally, in March 2016, the Companyacquired Cedar Falls Health Care Center, an 82-bed skilled nursing facility located in Cedar Falls, Iowa, for $5.0 million, which includes capitalizedacquisition costs. In connection with the acquisition, the Company further amended the triple-net master lease. Annual cash rent increases by $0.5 millionunder the amended lease.F-15Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSPriority Life Care, LLCIn March 2016, the Company acquired three assisted living facilities consisting of 336 units located in Baltimore, Maryland, Fort Wayne,Indiana and West Allis, Wisconsin, for $21.2 million, which includes capitalized acquisition costs. In connection with the acquisition, the Company enteredinto a triple-net master lease with certain wholly owned subsidiaries of Priority Life Care, LLC. The lease carries an initial term of 15 years with two five-yearrenewal options and CPI-based rent escalators. Annual cash rent is $1.8 million under the lease.Better Senior Living Consulting, LLCIn March 2016, the Company acquired Lamplight Inn of Fort Myers, a 74-unit assisted living facility located in Fort Myers, Florida, for $5.7million, which includes capitalized acquisition costs. In connection with the acquisition, the Company amended its triple-net master lease with certainwholly owned subsidiaries of Better Senior Living Consulting, LLC. The amended lease carries a remaining term of 14 years with two five-year renewaloptions and CPI-based rent escalators. Annual cash rent increases by $0.5 million under the amended lease.Pristine Senior Living, LLCIn April 2016, the Company acquired Victory Park Nursing Home, a 55-bed skilled nursing facility, and Victoria Retirement Community, askilled nursing and assisted living campus with 90 skilled nursing beds and 69 assisted living beds, both located in Cincinnati, Ohio, for $14.7 million,which includes capitalized acquisition costs. In connection with the acquisition, the Company amended the Pristine Master Lease. Annual cash rent increasesby $1.4 million under the amended lease.Cascadia Healthcare, LLCIn May 2016, the Company acquired Shaw Mountain at Cascadia, a 98-bed skilled nursing facility located in Boise, Idaho, for $8.9 million,which includes capitalized acquisition costs. In connection with the acquisition, the Company entered into a triple-net master lease with a wholly ownedsubsidiary of Cascadia Healthcare, LLC. The lease carries an initial term of 15 years with three five-year renewal options and CPI-based rent escalators.Annual cash rent is $0.9 million under the lease.Twenty/20 Management, Inc.In May 2016, the Company acquired English Meadows Elks' Home, a 175-unit independent and assisted living campus located in Bedford,Virginia, for $10.1 million which includes capitalized acquisition costs. In connection with the acquisition, the Company amended its triple-net master leasewith an affiliate of Twenty/20 Management, Inc. Annual cash rent increases by $0.9 million under the amended lease.Premier Senior Living, LLCIn May 2016, the Company acquired Croatan Village, a 46-unit assisted living and memory care facility located in New Bern, North Carolina,and Countryside Village, a 21-unit memory care facility located in Pikeville, North Carolina, for $11.8 million, which includes capitalized acquisition costs.In connection with the acquisition, the Company entered into a triple-net master lease with certain wholly owned subsidiaries of Premier Senior Living, LLC.The lease carries an initial term of 15 years with two five-year renewal options and CPI-based rent escalators. The Company anticipates initial annual leaserevenues of $1.0 million following this acquisition. Additionally, in June 2016, the Company acquired a four facility 188-bed assisted living and memorycare portfolio located in Michigan for $30.7 million, which includes capitalized acquisition costs. In connection with the acquisition, the Company amendedthe master lease. Annual cash rent increases by $2.5 million under the amended lease.West Harbor Healthcare, LLCF-16Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSIn August 2016, the Company acquired The Oaks at Petaluma, a 59-bed skilled nursing facility located in Petaluma, California, for $6.8 million,which includes capitalized acquisition costs. In connection with the acquisition, the Company entered into a triple-net master lease with an affiliate of WestHarbor Healthcare, LLC. The lease carries an initial term of 15 years with two five-year renewal options and CPI-based rent escalators. Annual cash rent is$0.7 million under the lease.Priority Management Group, LLCIn December 2016, the Company acquired three skilled nursing facilities and one skilled nursing campus in the greater Dallas-Fort Worth area for$95.9 million, which includes capitalized acquisition costs. In connection with the acquisition, the Company entered into a triple-net master lease withaffiliates of Priority Management Group, LLC. The lease carries an initial term of 15 years with two five-year renewal options and CPI-based rent escalators.Annual cash rent is $8.6 million under the lease.The following recent real estate acquisitions were accounted for as business combinations:Covenant Care, LLCIn August 2016, the Company acquired one skilled nursing, one skilled nursing campus and one assisted living property located in California,for $34.3 million. For the three separate transactions, approximately $0.2 million of transaction costs were expensed. The three properties are triple-net leasedto affiliates of Covenant Care, LLC under three leases. Contractual annual cash revenues are $3.1 million following these acquisitions. The leases expire in2019 and have two five-year renewal options, and have CPI-based rent escalators (with a 3% floor).4. OTHER REAL ESTATE INVESTMENTSIn December 2014, the Company completed a $7.5 million preferred equity investment with Signature Senior Living, LLC and MilestoneRetirement Communities. The preferred equity investment yields 12.0% calculated on a quarterly basis on the outstanding carrying value of the investment.The investment is being used to develop Signature Senior Living at Arvada, a planned 134-unit upscale assisted living and memory care community inArvada, Colorado constructed on a five-acre site. In connection with its investment, CareTrust REIT obtained an option to purchase the Arvada developmentat a fixed-formula price upon stabilization, with an initial lease yield of at least 8.0%. The project was completed in the second quarter of 2016 and beganlease-up in the third quarter of 2016.In July 2016, the Company completed a $2.2 million preferred equity investment with an affiliate of Cascadia Development, LLC. The preferredequity investment yields a return equal to at least 12% calculated on a quarterly basis on the outstanding carrying value of the investment. The investmentwill be used to develop a 99-bed skilled nursing facility in Nampa, Idaho. In connection with its investment, CareTrust REIT obtained an option to purchasethe development at a fixed-formula price upon stabilization, with an initial lease yield of at least 9.0%. The project is expected to be completed by October2017.In September 2016, the Company completed a $2.3 million preferred equity investment with an affiliate of Cascadia Development, LLC. Thepreferred equity investment yields a return equal to at least 12% calculated on a quarterly basis on the outstanding carrying value of the investment. Theinvestment will be used to develop a 99-bed skilled nursing facility in Boise, Idaho. In connection with its investment, CareTrust REIT obtained an option topurchase the development at a fixed-formula price upon stabilization, with an initial lease yield of at least 9.0%. The project is expected to be completed byearly 2018.During the years ended December 31, 2016, 2015 and 2014, the Company recognized $0.7 million, $0.9 million and $32,000 of interest incomeand these unpaid amounts were added to the outstanding carrying values of these preferred equity investments.5. FAIR VALUE MEASUREMENTSUnder GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company isrequired to measure other financial instruments and balances at fair value on a non-recurring basisF-17Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS(e.g., impairment of long-lived assets). Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exitprice) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.The GAAP fair value framework uses a 3-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories: •Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;•Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active,and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and•Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair valuemeasurement and unobservable.Financial Instruments: Considerable judgment is necessary to estimate the fair value of financial instruments. The estimates of fair valuepresented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. A summary of the facevalues, carrying amounts and fair values of the Company’s financial instruments as of December 31, 2016 and December 31, 2015 using Level 2 inputs, forthe senior unsecured notes payable, and Level 3 inputs, for all other financial instruments, is as follows (dollars in thousands): December 31, 2016 December 31, 2015 FaceValue CarryingAmount FairValue FaceValue CarryingAmount FairValueFinancial assets: Preferred equity investments$12,031 $13,872 $14,289 $7,500 $8,477 $8,477Financial liabilities: Senior unsecured notes payable$260,000 $255,294 $265,850 $260,000 $254,229 $263,575Mortgage notes payable$— $— $— $95,022 $94,676 $97,067Cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities: These balances approximate their fair values dueto the short-term nature of these instruments.Preferred equity investments: The carrying amounts were accounted for at the unpaid principal balance, plus accrued return, net of reserves,assuming a hypothetical liquidation of the book values of the joint ventures. The fair values of the preferred equity investments were estimated using aninternal valuation model that considered the expected future cash flows of the investment, the underlying collateral value and other credit enhancements.Senior unsecured notes payable: The fair value of the senior unsecured notes payable was determined using third-party quotes derived fromorderly trades.Unsecured revolving credit facility and senior unsecured term loan: The fair values approximate their carrying values as the interest rates arevariable and approximate prevailing market interest rates for similar debt arrangements.Mortgage notes payable: The fair value of the Company’s notes payable was estimated using a discounted cash flow analysis based onmanagement’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type ofcollateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an activemarket for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identicalliability when traded as an asset or quoted prices for similar liabilities when traded as assets or (ii) another valuation technique that is consistent with theprinciples of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs. 6. RELATED PARTY TRANSACTIONSAllocation of corporate expenses—For the year ended December 31, 2014, the consolidated and combined statements of operations of theCompany include Ensign revenues and expenses that are specifically identifiable or otherwise attributable to the Company. The specific identificationmethodology was utilized for all of the items on the statements ofF-18Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSoperations excluding general corporate expenses. For the periods prior to the Spin-Off, Ensign Properties’ operations were fully integrated with Ensign,including executive management, finance, treasury, corporate income tax, human resources, legal services and other shared services. These costs wereallocated to the Company on a systematic basis utilizing a direct usage basis when identifiable, with the remainder allocated on time study, or percentage ofthe total revenues. The primary allocation method was a time study based on time devoted to Ensign Properties’ activities.Allocated expenses for these general and administrative services of $7.4 million for the year ended December 31, 2014 are reflected in generaland administrative expense, in addition to direct expenses which are included in total expenses. There was no allocation for the years ended December 31,2016 and 2015. The Company’s financial statements may not be indicative of future performance and do not necessarily reflect what the results of operations,financial position and cash flows would have been had the Company operated as an independent, publicly-traded company during the year endedDecember 31, 2014.Rental income from Ensign—The Company derives a majority of its rental income through operating lease agreements with Ensign. Ensign is aholding company with no direct operating assets, employees or revenue. All of Ensign’s operations are conducted by separate independent subsidiaries, eachof which has its own management, employees and assets. See Note 12, Concentration of Risk, for a discussion of major operator concentration.Christopher R. Christensen, one of the Company’s directors from June 1, 2014 through April 15, 2015, serves as the chief executive officer ofEnsign as well as a member of Ensign’s board of directors. As such, all rental income and tenant reimbursements earned related to the Ensign Master Leasesduring Mr. Christensen's tenure on the Board of Directors of the Company were considered related party in nature. For the years ended December 31, 2015and 2014, the Company recognized $16.3 million and $32.7 million in rental income, respectively, from Ensign while Mr. Christensen sat on the Board ofDirectors of the Company as well as $1.4 million and $2.8 million of tenant reimbursements, respectively. After April 15, 2015, the effective date of Mr.Christensen's resignation from the Company's board of directors, rental income and tenant reimbursements related to the Ensign Master Leases, and anyrelated accounts receivable, are not considered earned or due from a related party.Centralized cash management system—Prior to the Spin-Off, the Company participated in Ensign’s centralized cash management system. Inconjunction therewith, the intercompany transactions between the Company and Ensign had been considered to be effectively settled in cash in thesefinancial statements. The net effect of the settlement of these intercompany transactions, in addition to cash transfers to and from Ensign, are reflected in “Netcontribution from Ensign” on the consolidated and combined statements of cash flows. The “Net contribution from Ensign” was $4.4 million for the yearended December 31, 2014.7. DEBTThe following table summarizes the balance of the Company's indebtedness as of December 31, 2016 and 2015 (in thousands): December 31, 2016 December 31, 2015 PrincipalDeferredCarrying PrincipalDeferredCarrying AmountLoan FeesValue AmountLoan FeesValueSenior unsecured notes payable$260,000$(4,706)$255,294 $260,000$(5,771)$254,229Senior unsecured term loan100,000(578)99,422 ———Unsecured revolving credit facility95,000—95,000 45,000—45,000Mortgage notes payable——— 95,022(346)94,676 $455,000$(5,284)$449,716 $400,022$(6,117)$393,905Senior Unsecured Notes PayableOn May 30, 2014, the Company’s wholly owned subsidiary, CTR Partnership, L.P. (the “Operating Partnership”), and its wholly ownedsubsidiary, CareTrust Capital Corp. (together with the Operating Partnership, the “Issuers”), completed a private offering of $260.0 million aggregateprincipal amount of 5.875% Senior Notes due 2021 (the “Notes”). The Notes were issued at par, resulting in gross proceeds of $260.0 million and netproceeds of approximately $253.0 million after deducting underwriting fees and other offering expenses. The Company's transferred approximately $220.8million of the net proceeds ofF-19Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSthe offering of the Notes to Ensign, and used the remaining portion of the net proceeds of the offering to pay the cash portion of the Special Dividend. TheNotes mature on June 1, 2021 and bear interest at a rate of 5.875% per year. Interest on the Notes is payable on June 1 and December 1 of each year,beginning on December 1, 2014. The Issuers subsequently exchanged the Notes for substantially identical notes registered under the Securities Act of 1933.The Issuers may redeem the Notes any time prior to June 1, 2017 at a redemption price of 100% of the principal amount of the Notes redeemedplus accrued and unpaid interest on the Notes, if any, to, but not including, the redemption date, plus a “make whole” premium described in the indenturegoverning the Notes (the "Indenture") and, at any time on or after June 1, 2017, at the redemption prices set forth in the Indenture. In addition, at any time onor prior to June 1, 2017, up to 35% of the aggregate principal amount of the Notes may be redeemed with the net proceeds of certain equity offerings if atleast 65% of the originally issued aggregate principal amount of the Notes remains outstanding. If certain changes of control of the Company occur, holdersof 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 andcertain 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, including if the subsidiary guarantor is sold or sells all orsubstantially all of its assets, the subsidiary guarantor is designated “unrestricted” for covenant purposes under the Indenture, the subsidiary guarantor’sguarantee of other indebtedness which resulted in the creation of the guarantee of the Notes is terminated or released, or the requirements for legal defeasanceor covenant defeasance or to discharge the Indenture have been satisfied. See Note 13, Summarized Condensed Consolidating and Combining Information.The Indenture contains covenants limiting the ability of the Company and its restricted subsidiaries to: incur or guarantee additionalindebtedness; incur or guarantee secured indebtedness; pay dividends or distributions on, or redeem or repurchase, capital stock; make certain investments orother restricted payments; sell assets; enter into transactions with affiliates; merge or consolidate or sell all or substantially all of their assets; and createrestrictions on the ability of the Issuers and their restricted subsidiaries to pay dividends or other amounts to the Issuers. The Indenture also requires theCompany and its restricted subsidiaries to maintain a specified ratio of unencumbered assets to unsecured indebtedness. These covenants are subject to anumber of important and significant limitations, qualifications and exceptions. The indenture also contains customary events of default.As of December 31, 2016, the Company was in compliance with all applicable financial covenants under the indenture.Unsecured Revolving Credit Facility and Term LoanOn August 5, 2015, the Company, CareTrust GP, LLC, the Operating Partnership, as the borrower, and certain of its wholly owned subsidiariesentered into a credit and guaranty agreement with KeyBank National Association, as administrative agent, an issuing bank and swingline lender, and thelenders party thereto (the “Credit Agreement”). The Credit Agreement initially provided for an unsecured asset-based revolving credit facility (the“Revolving Facility”) with commitments in an aggregate principal amount of $300.0 million from a syndicate of banks and other financial institutions. Aportion of the proceeds of the Credit Agreement were used to pay off and terminate the Company’s existing secured asset-based revolving credit facilityunder a credit agreement dated May 30, 2014, with SunTrust Bank, as administrative agent, and the lenders party thereto (the "SunTrust Refinancing"). OnFebruary 1, 2016, the Company entered into the First Amendment (the “Amendment”) to the Credit Agreement. Pursuant to the Amendment, (i) commitmentsin respect of the Credit Agreement were increased by $100.0 million to $400.0 million, (ii) a new $100.0 million non-amortizing unsecured term loan (the“Term Loan” and together with the Revolving Facility, the "Credit Facility") was funded, and (iii) the uncommitted incremental facility was increased by$50.0 million to $250.0 million. The Revolving Facility continues to mature on August 5, 2019, subject to two, six-month extension options. The TermLoan, which matures on February 1, 2023, may be prepaid at any time subject to a 2% premium in the first year after issuance and a 1% premium in thesecond year after issuance. Approximately $95.0 million of the proceeds of the Term Loan were used to pay off and terminate the Company’s existing securedmortgage indebtedness under the Fifth Amended and Restated Loan Agreement, dated May 30, 2014 (the “GECC Loan”), with General Electric CapitalCorporation, as agent and lender, and the other lenders party thereto (the “Refinancing”). The Company expects to use borrowings under the RevolvingFacility for working capital purposes, to fund acquisitions and for general corporate purposes.As of December 31, 2016, there was $95.0 million outstanding under the Revolving Facility.F-20Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSThe interest rates applicable to loans under the Revolving Facility are, at the Company’s option, equal to either a base rate plus a margin rangingfrom 0.75% to 1.40% per annum or applicable LIBOR plus a margin ranging from 1.75% to 2.40% per annum based on the debt to asset value ratio of theCompany and its subsidiaries (subject to decrease at the Company’s election if the Company obtains certain specified investment grade ratings on its seniorunsecured notes payable). In addition, the Company pays a commitment fee on the unused portion of the commitments under the Revolving Facility of0.15% or 0.25% per annum, based upon usage of the Revolving Facility (unless the Company obtains certain specified investment grade ratings on its seniorunsecured notes payable and elects to decrease the applicable margin as described above, in which case the Company will pay a facility fee on the revolvingcommitments ranging from 0.125% to 0.30% per annum based upon the credit ratings of its senior unsecured notes payable).The interest rates applicable to the Term Loan are, at the Company’s option, equal to either a base rate plus a margin ranging from 0.95% to1.60% per annum or applicable LIBOR plus a margin ranging from 1.95% to 2.60% per annum based on the debt to asset value ratio of the Company and itssubsidiaries (subject to decrease at the Company’s election if the Company obtains certain specified investment grade ratings on its senior long termunsecured debt).The Revolving Facility and Term Loan are guaranteed, jointly and severally, by the Company and its wholly owned subsidiaries that are party tothe Credit Agreement (other than the Operating Partnership). The Credit Agreement contains customary covenants that, among other things, restrict, subjectto certain exceptions, the ability of the Company and its subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engagein acquisitions, mergers or consolidations, amend certain material agreements and pay certain dividends and other restricted payments. The Credit Agreementrequires the Company to comply with financial maintenance covenants to be tested quarterly, consisting of a maximum debt to asset value ratio, a minimumfixed charge coverage ratio, a minimum tangible net worth, a maximum cash distributions to operating income ratio, a maximum secured debt to asset valueratio and a maximum secured recourse debt to asset value ratio. The Credit Agreement also contains certain customary events of default, including that theCompany is required to operate in conformity with the requirements for qualification and taxation as a REIT.As of December 31, 2016, the Company was in compliance with all applicable financial covenants under the Credit Agreement.Senior Secured Revolving Credit FacilityOn May 30, 2014, the Operating Partnership entered into a credit and guaranty agreement (the “Secured Credit Agreement”), which governed theCompany's senior secured revolving credit facility (the “Secured Credit Facility”) with several banks and other financial institutions and lenders (the“Lenders”) and SunTrust Bank, in its capacity as administrative agent for the Lenders, as an issuing bank and swingline lender. The Secured CreditAgreement provided for a borrowing capacity of $150.0 million and included an accordion feature that allowed the Operating Partnership to increase theborrowing availability by up to an additional $75.0 million, subject to terms and conditions. The Secured Credit Facility was secured by mortgages oncertain of the real properties owned by the Company’s subsidiaries and the amount available to be borrowed under the Secured Credit Agreement was basedon a borrowing base calculation relating to the mortgaged properties, determined according to, among other factors, the mortgageability cash flow as suchterm is defined in the Secured Credit Agreement. The Secured Credit Facility was also secured by certain personal property of the Company’s subsidiariesthat have provided mortgages, the Company’s interests in the Operating Partnership and the Company’s and its subsidiaries’ equity interests in theCompany’s subsidiaries that have guaranteed the Operating Partnership’s obligations under the Secured Credit Agreement. The Secured Credit Agreementwas paid off and terminated as a part of the SunTrust Refinancing.GECC LoanTen of the Company's properties were subject to secured mortgage indebtedness which it assumed in connection with the Spin-Off. On February1, 2016, the GECC Loan was paid off in conjunction with the Refinancing.Interest ExpenseDuring the years ended December 31, 2016, 2015 and 2014, the Company incurred $23.2 million, $25.3 million and $21.6 million of interestexpense, respectively. Included in interest expense for the year ended December 31, 2016 was $2.2 million of amortization of deferred financing fees and a$0.3 million write-off of deferred financing fees associated with the Refinancing. Included in interest expense for the year ended December 31, 2015 was $2.2million of amortization of deferred financing fees and a $1.2 million write-off of deferred financing fees associated with the SunTrust Refinancing. IncludedinF-21Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSinterest expense for the year ended December 31, 2014 was $1.6 million of amortization of deferred financing fees, $0.1 million of amortization of debtdiscount and a $1.7 million loss on settlement of interest rate swap. As of December 31, 2016 and December 31, 2015, the Company’s interest payable was$1.3 million and $1.9 million, respectively.Schedule of Debt MaturitiesAs of December 31, 2016, the Company's debt maturities were (dollars in thousands): YearAmount2017$—2018—201995,0002020—2021260,000Thereafter100,000 $455,0008. EQUITYCommon StockOfferings of Common Stock - On August 18, 2015, the Company completed an underwritten public offering of 16.33 million newly issued sharesof its common stock pursuant to an effective registration statement. The Company received net proceeds of $163.0 million from the offering, after givingeffect to the issuance and sale of all 16.33 million shares of common stock (which included 2.13 million shares sold to the underwriters upon exercise of theiroption to purchase additional shares), at a price to the public of $10.50 per share.On March 28, 2016, the Company completed an underwritten public offering of 9.78 million newly issued shares of its common stock pursuantto an effective registration statement. The Company received net proceeds of $105.8 million from the offering, after giving effect to the issuance and sale ofall 9.78 million shares of common stock (which included 1.28 million shares sold to the underwriters upon exercise of their option to purchase additionalshares), at a price to the public of $11.35 per share.On November 18, 2016, the Company completed an underwritten public offering of 6.33 million newly issued shares of its common stockpursuant to an effective registration statement. The Company received net proceeds of $80.9 million from the offering, after giving effect to the issuance andsale of all 6.33 million shares of common stock (which included 0.83 million shares sold to the underwriters upon exercise of their option to purchaseadditional shares), at a price to the public of $13.35 per share.At-The-Market Offering of Common Stock - During 2016, the Company entered into an equity distribution agreement to issue and sell, from timeto time, up to $125.0 million in aggregate offering price of its common stock through an "at-the-market" equity offering program (the "ATM Program"). Forthe year ended December 31, 2016, the Company sold 0.9 million shares of common stock at an average price of $15.31 per share for $14.1 million in grossproceeds. As of December 31, 2016, the Company had $111.1 million remaining availability under the ATM program.Special Dividend - In connection with the Company’s intention to qualify as a real estate investment trust in 2014, on October 17, 2014, theCompany’s board of directors declared the Special Dividend of $132.0 million, or approximately $5.88 per common share, which represents the amount ofaccumulated E&P allocated to the Company as a result of the Spin-Off. The Special Dividend was paid on December 10, 2014, to stockholders of record as ofOctober 31, 2014, in a combination of both cash and stock. The cash portion totaled $33.0 million and the stock portion totaled $99.0 million. The Companyissued 8,974,249 shares of common stock in connection with the stock portion of the Special Dividend.Dividends on Common Stock — During the fourth quarter of 2014, the board of directors declared a quarterly cash dividend of $0.125 per share ofcommon stock, payable on January 15, 2015 to common stockholders of record as of December 31, 2014.During the first quarter of 2015, the board of directors declared a quarterly cash dividend of $0.16 per share of common stock, payable onApril 15, 2015 to common stockholders of record as of March 31, 2015. During the second quarterF-22Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSof 2015, the board of directors declared a quarterly cash dividend of $0.16 per share of common stock, payable on July 15, 2015 to common stockholders ofrecord as of June 30, 2015. During the third quarter of 2015, the board of directors declared a quarterly cash dividend of $0.16 per share of common stock,payable on October 15, 2015 to common stockholders of record as of September 30, 2015. During the fourth quarter of 2015, the board of directors declared aquarterly cash dividend of $0.16 per share of common stock, payable on January 15, 2016 to common stockholders of record as of December 31, 2015.During the first quarter of 2016, the board of directors declared a quarterly cash dividend of $0.17 per share of common stock, payable onApril 15, 2016 to common stockholders of record as of March 31, 2016. During the second quarter of 2016, the board of directors declared a quarterly cashdividend of $0.17 per share of common stock, payable on July 15, 2016 to common stockholders of record as of June 30, 2016. During the third quarter of2016, the board of directors declared a quarterly cash dividend of $0.17 per share of common stock, payable on October 14, 2016 to common stockholders ofrecord as of September 30, 2016. During the fourth quarter of 2016, the board of directors declared a quarterly cash dividend of $0.17 per share of commonstock, payable on January 13, 2017 to common stockholders of record as of December 31, 2016.9. STOCK-BASED COMPENSATIONAll stock-based awards are subject to the terms of the CareTrust REIT, Inc. and CTR Partnership, L.P. Incentive Award Plan (the “Plan”). The Planprovides for the granting of stock-based compensation, including stock options, restricted stock, performance awards, restricted stock units and otherincentive awards to officers, employees and directors in connection with their employment with or services provided to the Company.The following table summarizes restricted stock award activity for the years ended December 31, 2016 and 2015: SharesWeighted AverageShare PriceUnvested balance at December 31, 2014155,040$12.23Granted272,30012.70Vested(32,643)12.23Unvested balance at December 31, 2015394,69712.56Granted20,77013.13Vested(121,899)12.60Forfeited(7,500)10.87Unvested balance at December 31, 2016286,068$12.63The Company recognized $1.5 million, $1.5 million and $0.2 million of compensation expense associated with all grants for the years endedDecember 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, there was $2.4 million of unamortized stock-based compensation expenserelated to these unvested awards and the weighted-average remaining vesting period of such awards was 2.3 years. In connection with the Spin-Off, employees of Ensign who had unvested shares of restricted stock were given one share of CareTrust REITunvested restricted stock totaling 207,580 shares at the Spin-Off. These restricted shares are subject to a time vesting provision only and the Company doesnot recognize any stock compensation expense associated with these awards. During the year ended December 31, 2016, 46,650 shares vested or wereforfeited. At December 31, 2016, there were 42,180 unvested restricted stock awards outstanding.In May 2016, the Compensation Committee of the Company's board of directors granted 20,770 shares of restricted stock to members of theboard of directors. Each share had a fair market value on the date of grant of $13.13 per share, based on the market price of the Company's common stock onthat date, with the shares vesting over one year.10. EARNINGS PER COMMON SHAREThe following table presents the calculation of basic and diluted EPS for the Company’s common stock for the years ended December 31, 2016, 2015and 2014, and reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common sharesoutstanding used in the calculation of diluted EPS for the years ended December 31, 2016, 2015 and 2014 (amounts in thousands, except per share amounts): F-23Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS Year Ended December 31, 2016 2015 2014Numerator: Net income (loss)$29,353 $10,034 $(8,143)Less: Net income allocated to participating securities(260) (286) —Numerator for basic and diluted earnings (loss) available to common stockholders$29,093 $9,748 $(8,143)Denominator: Weighted-average basic common shares outstanding56,030 37,380 22,788Weighted-average diluted common shares outstanding56,030 37,380 22,788 Earnings (loss) per common share, basic$0.52 $0.26 $(0.36)Earnings (loss) per common share, diluted$0.52 $0.26 $(0.36)The Company’s unvested restricted shares associated with its incentive award plan and unvested restricted shares issued to employees of Ensign at theSpin-Off have been excluded from the above calculation of earnings (loss) per share for the years ended December 31, 2016, 2015 and 2014, as theirinclusion would have been anti-dilutive.11. COMMITMENTS AND CONTINGENCIESU.S. Government Settlement—In October 2013, Ensign completed and executed a settlement agreement (the “Settlement Agreement”) with theU.S. Department of Justice (“DOJ”). This settlement agreement fully and finally resolved a DOJ investigation of Ensign related primarily to claims submittedto the Medicare program for rehabilitation services provided at skilled nursing facilities in California and certain ancillary claims. Pursuant to the SettlementAgreement, Ensign made a single lump-sum remittance to the government in the amount of $48.0 million in October 2013. Ensign denied engaging in anyillegal conduct and agreed to the settlement amount without any admission of wrongdoing in order to resolve the allegations and avoid the uncertainty andexpense of protracted litigation.In connection with the settlement and effective as of October 1, 2013, Ensign entered into a five-year corporate integrity agreement with theOffice of Inspector General-HHS (the “CIA”). The CIA acknowledges the existence of Ensign’s current compliance program, and requires that Ensigncontinue during the term of the CIA to maintain a compliance program designed to promote compliance with the statutes, regulations, and written directivesof Medicare, Medicaid, and all other Federal health care programs. Ensign is also required to maintain several elements of its existing program during theterm of the CIA, including maintaining a compliance officer, a compliance committee of the board of directors, and a code of conduct. The CIA requires thatEnsign conduct certain additional compliance-related activities during the term of the CIA, including various training and monitoring procedures, andmaintaining a disciplinary process for compliance obligations. Participation in federal healthcare programs by Ensign is not affected by the Settlement Agreement or the CIA. In the event of an uncuredmaterial breach of the CIA, Ensign could be excluded from participation in federal healthcare programs and/or subject to prosecution. The Company issubject to certain continuing operational obligations as part of Ensign’s compliance program pursuant to the CIA, but otherwise has no liability related to theDOJ investigation.Legal Matters—The Company and its subsidiaries are and may become from time to time a party to various claims and lawsuits arising in theordinary course of business, which are not individually or in the aggregate anticipated to have a material adverse effect on the Company's results ofoperations, financial condition or cash flows. Claims and lawsuits may include matters involving general or professional liability asserted against our tenants,which are the responsibility of our tenants and for which the Company is entitled to be indemnified by its tenants under the insurance and indemnificationprovisions in the applicable leases.12. CONCENTRATION OF RISKMajor operator concentration – The Company has one major tenant, Ensign, from which the Company derived the majority of its overallrevenue during the years ended December 31, 2016, 2015 and 2014. As of December 31, 2016, Ensign leased 93 skilled nursing, assisted living andindependent living facilities which had a total of 9,916 beds and units 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.Additionally, on October 1,F-24Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS2015, the Company acquired the Liberty Healthcare Portfolio, a 14 facility skilled nursing and assisted living portfolio in Ohio, for $176.5 million inclusiveof transaction costs. The Company has now leased 16 facilities to subsidiaries of Pristine pursuant to the Pristine Master Lease entered into effective as ofOctober 1, 2015, which has an initial term of 15 years, two five year renewal options and no purchase options. As of December 31, 2016, the annualizedrevenues from the Pristine Master Lease are $18.6 million and are escalated annually by an amount equal to the product of (1) the lesser of the percentagechange in the Consumer Price Index (but not less than zero) or 3.0%, and (2) the prior year’s rent. The Pristine Master Lease is guaranteed by Pristine and itssole principal.Ensign’s financial statements can be found at Ensign’s website http://www.ensigngroup.net.13. SUMMARIZED CONDENSED CONSOLIDATING AND COMBINING INFORMATIONThe 5.875% Senior Notes due 2021 issued by the Issuers on May 30, 2014 are jointly and severally, fully and unconditionally, guaranteed byCareTrust REIT, Inc., as the parent guarantor (the “Parent Guarantor”), and certain 100% 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 customarycircumstances, 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 ofthe guarantee of the Notes is terminated or released, or the requirements for legal defeasance or covenant defeasance or to discharge the Indenture have beensatisfied.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 Spin-Off and the related transactions and wasa 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 haveany business prior to the date of issuance of the Notes and the consummation of the Spin-Off related transactions.CTR Partnership, L.P. and CareTrust Capital Corp. – The Issuers, each of which is a 100% owned subsidiary of the Parent Guarantor, were formedon 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 orhave any business prior to the date of issuance of the Notes and the consummation of the Spin-Off related transactions.Subsidiary Guarantors – Each of the Subsidiary Guarantors is a 100% owned subsidiary of the Parent Guarantor. Prior to the consummation of theSpin-Off, each of the Subsidiary Guarantors was a wholly owned subsidiary of Ensign. The Ensign Properties entities consist of the Subsidiary Guarantors(other than the general partner of the Operating Partnership which was formed on May 8, 2014 in anticipation of the Spin-Off and the related transactions)and the subsidiaries of the Parent Guarantor that are not Subsidiary Guarantors or Issuers (collectively, the “Non-Guarantor Subsidiaries”).Pursuant to Rule 3-10 of Regulation S-X, the following summarized consolidating information is provided for the Parent Guarantor, the Issuers,the Subsidiary Guarantors and the Non-Guarantor Subsidiaries with respect to the Notes. This summarized financial information has been prepared from thefinancial statements of the Company and Ensign Properties and the books and records maintained by the Company and Ensign Properties. As describedabove, the Parent Guarantor and the Issuers did not conduct any operations or have any business during the periods prior to June 1, 2014.The summarized financial information may not necessarily be indicative of the results of operations or financial position had the ParentGuarantor, the Issuers, the Subsidiary Guarantors or the Non-Guarantor Subsidiaries all been in existence or operated as independent entities during therelevant period or had the Ensign Properties entities been operated as subsidiaries of the Parent Guarantor during such period.F-25Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSCONDENSED CONSOLIDATING BALANCE SHEETSDECEMBER 31, 2016(in thousands, except share and per share amounts) ParentGuarantor Issuers CombinedSubsidiaryGuarantors CombinedNon-GuarantorSubsidiaries Elimination ConsolidatedAssets: Real estate investments, net$— $527,639 $328,137 $38,142 $— $893,918Other real estate investments— — 13,872 — — 13,872Cash and cash equivalents— 7,500 — — — 7,500Accounts receivable— 3,743 2,020 133 — 5,896Prepaid expenses and other assets— 1,366 3 — — 1,369Deferred financing costs, net— 2,803 — — — 2,803Investment in subsidiaries463,505 401,328 — — (864,833) —Intercompany— — 102,273 — (102,273) —Total assets$463,505 $944,379 $446,305 $38,275 $(967,106) $925,358Liabilities and Equity: Senior unsecured notes payable, net$— $255,294 $— $— $— $255,294Senior unsecured term loan, net— 99,422 — — — 99,422Unsecured revolving credit facility— 95,000 — — — 95,000Accounts payable and accrued liabilities— 9,713 2,291 133 — 12,137Dividends payable11,075 — — — — 11,075Intercompany— 21,445 — 80,828 (102,273) —Total liabilities11,075 480,874 2,291 80,961 (102,273) 472,928Equity: Common stock, $0.01 par value; 500,000,000shares authorized, 64,816,350 shares issued andoutstanding as of December 31, 2016648 — — — — 648Additional paid-in capital611,475 429,453 374,660 (52,899) (751,214) 611,475Cumulative distributions in excess of earnings(159,693) 34,052 69,354 10,213 (113,619) (159,693)Total equity452,430 463,505 444,014 (42,686) (864,833) 452,430Total liabilities and equity$463,505 $944,379 $446,305 $38,275 $(967,106) $925,358F-26Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSCONDENSED CONSOLIDATING BALANCE SHEETSDECEMBER 31, 2015(in thousands, except share and per share amounts) ParentGuarantor Issuers CombinedSubsidiaryGuarantors CombinedNon-GuarantorSubsidiaries Elimination ConsolidatedAssets: Real estate investments, net$— $256,209 $348,454 $40,951 $— $645,614Other real estate investments— — 8,477 — — 8,477Cash and cash equivalents— 11,467 — — — 11,467Accounts receivable— 519 1,695 128 — 2,342Prepaid expenses and other assets— 2,079 4 — — 2,083Deferred financing costs, net— 3,183 — — — 3,183Investment in subsidiaries269,992 365,368 — — (635,360) —Intercompany— — 59,160 4,186 (63,346) —Total assets$269,992 $638,825 $417,790 $45,265 $(698,706) $673,166Liabilities and Equity: Senior unsecured notes payable, net$— $254,229 $— $— $— $254,229Mortgage notes payable, net— — — 94,676 — 94,676Unsecured revolving credit facility— 45,000 — — — 45,000Accounts payable and accrued liabilities— 6,258 2,433 578 — 9,269Dividends payable7,704 — — — — 7,704Intercompany— 63,346 — — (63,346) —Total liabilities7,704 368,833 2,433 95,254 (63,346) 410,878Equity: Common stock, $0.01 par value;500,000,000 shares authorized, 47,664,742shares issued and outstanding as ofDecember 31, 2015477 — — — — 477Additional paid-in capital410,217 266,929 374,660 (52,899) (588,690) 410,217Cumulative distributions in excess ofearnings(148,406) 3,063 40,697 2,910 (46,670) (148,406)Total equity262,288 269,992 415,357 (49,989) (635,360) 262,288Total liabilities and equity$269,992 $638,825 $417,790 $45,265 $(698,706) $673,166 F-27Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONSFOR THE YEAR ENDED DECEMBER 31, 2016(in thousands) ParentGuarantor Issuers CombinedSubsidiaryGuarantors CombinedNon-GuarantorSubsidiaries Elimination ConsolidatedRevenues: Rental income$— $36,855 $45,318 $10,953 $— $93,126Tenant reimbursements— 2,978 4,359 509 — 7,846Independent living facilities— — 2,970 — — 2,970Interest and other income— — 737 — — 737Total revenues— 39,833 53,384 11,462 — 104,679Expenses: Depreciation and amortization— 11,651 17,505 2,809 — 31,965Interest expense— 22,375 — 824 — 23,199Property taxes— 2,978 4,359 509 — 7,846Acquisition costs— 205 — — — 205Independent living facilities— — 2,549 — — 2,549General and administrative1,637 7,594 49 17 — 9,297Total expenses1,637 44,803 24,462 4,159 — 75,061Loss on sale of real estate— — (265) — — (265)Income in Subsidiary30,990 35,960 — — (66,950) —Net income$29,353 $30,990 $28,657 $7,303 $(66,950) $29,353F-28Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSCONDENSED CONSOLIDATING STATEMENTS OF OPERATIONSFOR THE YEAR ENDED DECEMBER 31, 2015(in thousands) ParentGuarantor Issuers CombinedSubsidiaryGuarantors CombinedNon-GuarantorSubsidiaries Elimination ConsolidatedRevenues: Rental income$— $9,979 $45,100 $10,900 $— $65,979Tenant reimbursements— 655 4,375 467 — 5,497Independent living facilities— — 2,510 — — 2,510Interest and other income— 19 946 — — 965Total revenues— 10,653 52,931 11,367 — 74,951Expenses: Depreciation and amortization— 3,165 18,007 2,961 — 24,133Interest expense— 19,616 18 5,622 — 25,256Property taxes— 655 4,375 467 — 5,497Independent living facilities— — 2,376 — — 2,376General and administrative1,171 6,360 97 27 — 7,655Total expenses1,171 29,796 24,873 9,077 — 64,917Income in Subsidiary11,205 30,348 — — (41,553) —Net income$10,034 $11,205 $28,058 $2,290 $(41,553) $10,034F-29Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSCONDENSED CONSOLIDATING AND COMBINING STATEMENTS OF OPERATIONSFOR THE YEAR ENDED DECEMBER 31, 2014(in thousands) ParentGuarantor Issuers CombinedSubsidiaryGuarantors CombinedNon-GuarantorSubsidiaries Elimination ConsolidatedRevenues: Rental income$— $139 $42,337 $8,891 $— $51,367Tenant reimbursements— 11 4,460 485 — 4,956Independent living facilities— — 2,519 — — 2,519Interest and other income— 23 32 — — 55Total revenues— 173 49,348 9,376 — 58,897Expenses: Depreciation and amortization— 34 19,577 3,389 — 23,000Interest expense— 10,425 6,315 4,882 — 21,622Loss on extinguishment of debt— — 4,067 — — 4,067Property taxes— 11 4,460 485 — 4,956Acquisition costs— — 47 — — 47Independent living facilities— — 2,243 — — 2,243General and administrative— 11,105 — — — 11,105Total expenses— 21,575 36,709 8,756 — 67,040(Loss) income in Subsidiary(8,143) 13,259 — — (5,116) —Net (loss) income(8,143) (8,143) 12,639 620 (5,116) (8,143)Other comprehensive income: Unrealized gain on interest rate swap— — 167 — — 167Reclassification adjustment on interest rateswap— — 1,661 — — 1,661Comprehensive (loss) income$(8,143) $(8,143) $14,467 $620 $(5,116) $(6,315) F-30Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSCONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSFOR THE YEAR ENDED DECEMBER 31, 2016(in thousands) ParentGuarantor Issuers CombinedSubsidiaryGuarantors CombinedNon-GuarantorSubsidiaries Elimination ConsolidatedCash flows from operating activities: Net cash (used in) provided by operatingactivities$(91) $9,253 $45,261 $10,008 $— $64,431Cash flows from investing activities: Acquisition of real estate— (281,228) — — — (281,228)Improvements to real estate— (485) (277) — — (762)Purchases of equipment, furniture, and fixtures— (81) (70) — — (151)Preferred equity investments— — (4,656) — — (4,656)Escrow deposits for acquisition of real estate— (700) — — — (700)Net proceeds from the sale of real estate— — 2,855 — — 2,855Distribution from subsidiary37,269 — — — (37,269) —Intercompany financing(199,796) (41,901) — — 241,697 —Net cash used in investing activities(162,527) (324,395) (2,148) — 204,428 (284,642)Cash flows from financing activities: Proceeds from the issuance of common stock,net200,402 — — — — 200,402Proceeds from the issuance of senior unsecuredterm loan— 100,000 — — — 100,000Borrowings under unsecured revolving creditfacility— 255,000 — — — 255,000Payments on unsecured revolving credit facility— (205,000) — — — (205,000)Payments on the mortgage notes payable— — — (95,022) — (95,022)Payments of deferred financing costs— (1,352) — — — (1,352)Net-settle adjustment on restricted stock(515) — — — — (515)Dividends paid on common stock(37,269) — — — — (37,269)Distribution to Parent— (37,269) — — 37,269 —Intercompany financing— 199,796 (43,113) 85,014 (241,697) —Net cash provided by (used in) financingactivities162,618 311,175 (43,113) (10,008) (204,428) 216,244Net decrease in cash and cash equivalents— (3,967) — — — (3,967)Cash and cash equivalents, beginning of period— 11,467 — — — 11,467Cash and cash equivalents, end of period$— $7,500 $— $— $— $7,500F-31Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSCONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSFOR THE YEAR ENDED DECEMBER 31, 2015(in thousands) ParentGuarantor Issuers CombinedSubsidiaryGuarantors CombinedNon-GuarantorSubsidiaries Elimination ConsolidatedCash flows from operating activities: Net cash (used in) provided by operatingactivities$(15) $(9,894) $44,675 $5,488 $— $40,254Cash flows from investing activities: Acquisition of real estate— (232,466) — — — (232,466)Improvements to real estate— (19) (168) — — (187)Purchases of equipment, furniture, and fixtures— (195) (81) — — (276)Escrow deposits for acquisition of real estate— (1,750) — — — (1,750)Net proceeds from the sale of real estate— — 30 — — 30Distribution from subsidiary21,790 — — — (21,790) —Intercompany financing(162,803) 46,761 — — 116,042 —Net cash used in investing activities(141,013) (187,669) (219) — 94,252 (234,649)Cash flows from financing activities: Proceeds from the issuance of common stock,net162,963 — — — — 162,963Borrowings under unsecured revolving creditfacility— 45,000 — — — 45,000Borrowings under senior secured revolvingcredit facility— 35,000 — — — 35,000Repayments of borrowings under seniorsecured revolving credit facility— (35,000) — — — (35,000)Payments on the mortgage notes payable— — (558) (2,625) — (3,183)Net-settle adjustment on restricted stock(145) — — — — (145)Payments of deferred financing costs— (2,303) — — — (2,303)Dividends paid on common stock(21,790) — — — — (21,790)Distribution to Parent— (21,790) — — 21,790 —Intercompany financing— 162,803 (43,898) (2,863) (116,042) —Net cash provided by (used in) financingactivities141,028 183,710 (44,456) (5,488) (94,252) 180,542Net decrease in cash and cash equivalents— (13,853) — — — (13,853)Cash and cash equivalents, beginning of period— 25,320 — — — 25,320Cash and cash equivalents, end of period$— $11,467 $— $— $— $11,467 F-32Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTSCONDENSED CONSOLIDATING AND COMBINING STATEMENTS OF CASH FLOWSFOR THE YEAR ENDED DECEMBER 31, 2014(in thousands) ParentGuarantor Issuers CombinedSubsidiaryGuarantors CombinedNon-GuarantorSubsidiaries Elimination ConsolidatedCash flows from operating activities: Net cash (used in) provided by operatingactivities$— $(21,185) $38,955 $4,136 $— $21,906Cash flows from investing activities: Acquisition of real estate— (25,742) — — — (25,742)Improvements to real estate— — (579) — — (579)Purchases of equipment, furniture and fixtures— (95) (14,819) (4,361) — (19,275)Preferred equity investment— — (7,500) — — (7,500)Escrow deposit for acquisition of real estate— (500) — — — (500)Distribution from subsidiary33,001 — — — (33,001) —Intercompany financing— (141,231) — — 141,231 —Net cash provided by (used in) investingactivities33,001 (167,568) (22,898) (4,361) 108,230 (53,596)Cash flows from financing activities: Proceeds from the issuance of senior unsecurednotes payable— 260,000 — — — 260,000Proceeds from the senior secured revolvingcredit facility— — 10,000 — — 10,000Proceeds from the issuance of mortgage notespayable— — — 50,676 — 50,676Payments on the senior secured revolving creditfacility— — (88,701) — — (88,701)Payments on the mortgage notes payable— — (66,905) (1,250) — (68,155)Payments on the senior secured term loan— — (65,624) — — (65,624)Payments of deferred financing costs— (12,926) — (510) — (13,436)Net contribution from Ensign— — 52,385 (48,029) — 4,356Dividends paid on common stock(33,001) — — — — (33,001)Distribution to Parent— (33,001) — — 33,001 —Intercompany financing— — 141,893 (662) (141,231) —Net cash (used in) provided by financingactivities(33,001) 214,073 (16,952) 225 (108,230) 56,115Net increase (decrease) in cash and cash equivalents— 25,320 (895) — — 24,425Cash and cash equivalents, beginning of period— — 895 — — 895Cash and cash equivalents, end of period$— $25,320 $— $— $— $25,320 F-33Table of ContentsCARETRUST REIT, INC.NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)The following table presents selected quarterly financial data for the Company. This information has been prepared on a basis consistent with that ofthe Company's audited consolidated and combined financial statements. The Company's quarterly results of operations for the periods presented are notnecessarily indicative of future results of operations. This unaudited quarterly data should be read together with the accompanying consolidated andcombined financial statements and related notes thereto (in thousands, except per share amounts): For the Year Ended December 31, 2016 FirstQuarter SecondQuarter ThirdQuarter FourthQuarterOperating data: Total revenues $23,629 $25,701 $27,106 $28,243Net income 5,502 7,631 7,832 8,388Earnings per common share, basic 0.11 0.13 0.13 0.14Earnings per common share, diluted 0.11 0.13 0.13 0.14Other data: Weighted-average number of common shares outstanding, basic 48,101 57,478 57,595 60,875Weighted-average number of common shares outstanding, diluted 48,101 57,478 57,595 60,875 For the Year Ended December 31, 2015 FirstQuarter SecondQuarter ThirdQuarter FourthQuarterOperating data: Total revenues $16,958 $17,376 $17,985 $22,632Net income 2,038 2,266 727 5,003Earnings per common share, basic 0.06 0.07 0.02 0.10Earnings per common share, diluted 0.06 0.07 0.02 0.10Other data: Weighted-average number of common shares outstanding, basic 31,257 31,278 39,125 47,660Weighted-average number of common shares outstanding, diluted 31,257 31,278 39,125 47,66015. SUBSEQUENT EVENTSThe Company evaluates subsequent events in accordance with ASC 855, Subsequent Events. The Company evaluates subsequent events up untilthe date the consolidated and combined financial statements are issued.During January 2017, the Company sold 1.1 million shares of common stock at an average price of $15.46 per share for $16.6 million in grossproceeds. At February 3, 2017, the Company had $94.7 million available for future issuances under the ATM Program.On February 1, 2017, the Company acquired Applewood of Brookfield, a 48 unit assisted living and memory care facility located in Brookfield,Wisconsin, and Applewood of New Berlin, a 40 unit assisted living and memory care facility located in New Berlin, Wisconsin, for $26.1 million, inclusiveof capitalized acquisition costs, and intends to account for this investment as an asset acquisition. In connection with the acquisition, the Company amendedits master lease with affiliates of Premier Senior Living, LLC. The Company anticipates additional initial annual lease revenues of $2.2 million following thisacquisition.F-34SCHEDULE IIIREAL ESTATE ASSETS AND ACCUMULATED DEPRECIATIONDECEMBER 31, 2016(dollars in thousands) Initial Cost to Company Gross Carrying Value Description Facility Location Encum. Land BuildingImprovs. CostsCap.SinceAcq. Land BuildingImprovs. Total (1) Accum.Depr. Const./Ren.Date Acq.DateSkilled Nursing Properties: Ensign Highland LLC Highland Manor Phoenix, AZ $— $257 $976 $926 $257 $1,902 $2,159 $944 2013 2000Meadowbrook HealthAssociates LLC Sabino Canyon Tucson, AZ — 425 3,716 1,940 425 5,656 6,081 2,211 2012 2000Terrace Holdings AZ LLC Desert Terrace Phoenix, AZ — 113 504 971 113 1,475 1,588 534 2004 2002Rillito Holdings LLC Catalina Tucson, AZ — 471 2,041 3,055 471 5,096 5,567 1,942 2013 2003Valley Health Holdings LLC North Mountain Phoenix, AZ — 629 5,154 1,519 629 6,673 7,302 2,625 2009 2004Cedar Avenue Holdings LLC Upland Upland, CA — 2,812 3,919 1,994 2,812 5,913 8,725 2,668 2011 2005Granada Investments LLC Camarillo Camarillo, CA — 3,526 2,827 1,522 3,526 4,349 7,875 1,844 2010 2005Plaza Health Holdings LLC Park Manor Walla Walla, WA — 450 5,566 1,055 450 6,621 7,071 2,804 2009 2006Mountainview CommunityCare LLC Park View Gardens Santa Rosa, CA — 931 2,612 653 931 3,265 4,196 1,600 1963 2006CM Health Holdings LLC Carmel Mountain San Diego, CA — 3,028 3,119 2,071 3,028 5,190 8,218 2,038 2012 2006Polk Health Holdings LLC Timberwood Livingston, TX — 60 4,391 1,167 60 5,558 5,618 2,272 2009 2006Snohomish Health HoldingsLLC Emerald Hills Lynnwood, WA — 741 1,663 1,998 741 3,661 4,402 1,912 2009 2006Cherry Health Holdings, Inc. Pacific Care Hoquiam, WA — 171 1,828 2,038 171 3,866 4,037 1,667 2010 2006Golfview Holdings LLC Cambridge SNF Richmond, TX — 1,105 3,110 1,067 1,105 4,177 5,282 1,594 2007 2006Tenth East Holdings LLC Arlington Hills Salt Lake City, UT — 332 2,426 2,507 332 4,933 5,265 1,913 2013 2006Trinity Mill Holdings LLC Carrollton Carrollton, TX — 664 2,294 902 664 3,196 3,860 1,622 2007 2006Cottonwood Health HoldingsLLC Holladay Salt Lake City, UT — 965 2,070 958 965 3,028 3,993 1,644 2008 2007Verde Villa Holdings LLC Lake Village Lewisville, TX — 600 1,890 470 600 2,360 2,960 1,001 2011 2007Mesquite Health HoldingsLLC Willow Bend Mesquite, TX — 470 1,715 8,661 470 10,376 10,846 4,607 2012 2007Arrow Tree Health HoldingsLLC Arbor Glen Glendora, CA — 2,165 1,105 324 2,165 1,429 3,594 719 1965 2007Fort Street Health HoldingsLLC Draper Draper, UT — 443 2,394 759 443 3,153 3,596 1,106 2008 2007Trousdale Health HoldingsLLC Brookfield Downey, CA — 1,415 1,841 1,861 1,415 3,702 5,117 1,332 2013 2007Ensign Bellflower LLC Rose Villa Bellflower, CA — 937 1,168 357 937 1,525 2,462 659 2009 2007RB Heights Health HoldingsLLC Osborn Scottsdale, AZ — 2,007 2,793 1,762 2,007 4,555 6,562 1,731 2009 2008San Corrine Health HoldingsLLC Salado Creek San Antonio, TX — 310 2,090 719 310 2,809 3,119 1,069 2005 2008F-35Temple Health HoldingsLLC Wellington Temple, TX — 529 2,207 1,163 529 3,370 3,899 1,235 2008 2008Anson Health HoldingsLLC Northern Oaks Abilene, TX — 369 3,220 1,725 369 4,945 5,314 1,687 2012 2008Willits Health HoldingsLLC Northbrook Willits, CA — 490 1,231 500 490 1,731 2,221 572 2011 2008Lufkin Health HoldingsLLC Southland Lufkin, TX — 467 4,644 782 467 5,426 5,893 1,010 1988 2009Lowell Health HoldingsLLC Littleton Littleton, CO — 217 856 1,735 217 2,591 2,808 830 2012 2009Jefferson Ralston HoldingsLLC Arvada Arvada, CO — 280 1,230 834 280 2,064 2,344 561 2012 2009Lafayette Health HoldingsLLC Julia Temple Englewood, CO — 1,607 4,222 6,195 1,607 10,417 12,024 2,966 2012 2009Hillendahl Health HoldingsLLC Golden Acres Dallas, TX — 2,133 11,977 1,421 2,133 13,398 15,531 3,115 1984 2009Price Health Holdings LLC Pinnacle Price, UT — 193 2,209 849 193 3,058 3,251 669 2012 2009Silver Lake HealthHoldings LLC Provo Provo, UT — 2,051 8,362 2,011 2,051 10,373 12,424 1,961 2011 2009Jordan Health PropertiesLLC Copper Ridge West Jordan, UT — 2,671 4,244 1,507 2,671 5,751 8,422 1,053 2013 2009Regal Road HealthHoldings LLC Sunview Youngstown, AZ — 767 4,648 729 767 5,377 6,144 1,254 2012 2009Paredes Health HoldingsLLC Alta Vista Brownsville, TX — 373 1,354 190 373 1,544 1,917 292 1969 2009Expressway HealthHoldings LLC Veranda Harlingen, TX — 90 675 430 90 1,105 1,195 258 2011 2009Rio Grande HealthHoldings LLC Grand Terrace McAllen, TX — 642 1,085 870 642 1,955 2,597 507 2012 2009Fifth East Holdings LLC Paramount Salt Lake City,UT — 345 2,464 1,065 345 3,529 3,874 841 2011 2009Emmett HealthcareHoldings LLC River's Edge Emmet, ID — 591 2,383 69 591 2,452 3,043 501 1972 2010Burley HealthcareHoldings LLC Parke View Burley, ID — 250 4,004 424 250 4,428 4,678 1,009 2011 2010Josey Ranch HealthcareHoldings LLC Heritage Gardens Carrollton, TX — 1,382 2,293 478 1,382 2,771 4,153 544 1996 2010Everglades HealthHoldings LLC Victoria Ventura Ventura, CA — 1,847 5,377 682 1,847 6,059 7,906 1,155 1990 2011Irving Health HoldingsLLC Beatrice Manor Beatrice, NE — 60 2,931 245 60 3,176 3,236 608 2011 2011Falls City Health HoldingsLLC Careage Estates of Falls City Falls City, NE — 170 2,141 82 170 2,223 2,393 386 1972 2011Gillette Park HealthHoldings LLC Careage of Cherokee Cherokee, IA — 163 1,491 12 163 1,503 1,666 333 1967 2011Gazebo Park HealthHoldings LLC Careage of Clarion Clarion, IA — 80 2,541 97 80 2,638 2,718 608 1978 2011Oleson Park HealthHoldings LLC Careage of Ft. Dodge Ft. Dodge, IA — 90 2,341 759 90 3,100 3,190 850 2012 2011Arapahoe Health HoldingsLLC Oceanview Texas City, TX — 158 4,810 759 128 5,599 5,727 1,139 2012 2011Dixie Health HoldingsLLC Hurricane Hurricane, UT — 487 1,978 98 487 2,076 2,563 296 1978 2011Memorial Health HoldingsLLC Pocatello Pocatello, ID — 537 2,138 698 537 2,836 3,373 641 2007 2011Bogardus Health HoldingsLLC Whittier East Whittier, CA — 1,425 5,307 1,079 1,425 6,386 7,811 1,395 2011 2011South Dora HealthHoldings LLC Ukiah Ukiah, CA — 297 2,087 1,621 297 3,708 4,005 1,754 2013 2011Silverada Health HoldingsLLC Rosewood Reno, NV — 1,012 3,282 103 1,012 3,385 4,397 448 1970 2011Orem Health HoldingsLLC Orem Orem, UT — 1,689 3,896 3,235 1,689 7,131 8,820 1,790 2011 2011F-36Renne Avenue HealthHoldings LLC Monte Vista Pocatello, ID — 180 2,481 966 180 3,447 3,627 619 2013 2012Stillhouse Health HoldingsLLC Stillhouse Paris, TX — 129 7,139 6 129 7,145 7,274 576 2009 2012Fig Street Health HoldingsLLC Palomar Vista Escondido, CA — 329 2,653 1,094 329 3,747 4,076 1,234 2007 2012Lowell Lake HealthHoldings LLC Owyhee Owyhee, ID — 49 1,554 29 49 1,583 1,632 162 1990 2012Queensway HealthHoldings LLC Atlantic Memorial Long Beach,CA — 999 4,237 2,331 999 6,568 7,567 2,358 2008 2012Long Beach HealthAssociates LLC Shoreline Long Beach,CA — 1,285 2,343 2,172 1,285 4,515 5,800 1,183 2013 2012Kings Court HealthHoldings LLC Richland Hills Ft. Worth, TX — 193 2,311 318 193 2,629 2,822 312 1965 201251st Avenue HealthHoldings LLC Legacy Amarillo, TX — 340 3,925 32 340 3,957 4,297 437 1970 2013Ives Health Holdings LLC San Marcos San Marcos, TX — 371 2,951 274 371 3,225 3,596 328 1972 2013Guadalupe HealthHoldings LLC The Courtyard (Victoria East) Victoria, TX — 80 2,391 15 80 2,406 2,486 204 2013 2013Queens City HealthHoldings LLC La Villa (Victoria West) Victoria, TX — 212 732 8 212 740 952 95 1960 201349th Street HealthHoldings LLC Omaha Omaha, NE — 129 2,418 24 129 2,442 2,571 300 1970 2013Willows Health HoldingsLLC Cascade Vista Redmond, WA — 1,388 2,982 202 1,388 3,184 4,572 442 1966 2013Tulalip Bay Holdings Mountain View Marysville, WA — 1,722 2,642 (980) 742 2,642 3,384 308 1989 2013CTR Partnership, L.P. Bethany Rehabilitation Center Lakewood, CO — 1,668 15,375 56 1,668 15,431 17,099 738 1989 2015CTR Partnership, L.P. Mira Vista Care Center Mount Vernon,WA — 1,601 7,425 — 1,601 7,425 9,026 325 1987 2015CTR Partnership, L.P. Shoreline Health andRehabilitation Center Shoreline, WA — 1,462 5,034 — 1,462 5,034 6,496 199 2010 2015CTR Partnership, L.P. Shamrock Nursing andRehabilitation Center Dublin GA — 251 7,855 — 251 7,855 8,106 295 2014 2015CTR Partnership, L.P. Pristine Senior Living ofBeavercreek Beavercreek,OH — 892 17,159 — 892 17,159 18,051 536 2012 2015CTR Partnership, L.P. Pristine Senior Living ofCincinnati-Delhi Cincinnati, OH — 284 11,104 — 284 11,104 11,388 347 1992 2015CTR Partnership, L.P. Pristine Senior Living ofCincinnati-Riverview Cincinnati, OH — 833 18,086 51 833 18,137 18,970 567 1967 2015CTR Partnership, L.P. Pristine Senior Living ofCincinnati-Three Rivers Cincinnati, OH — 1,091 16,151 — 1,091 16,151 17,242 505 1962 2015CTR Partnership, L.P. Pristine Senior Living ofEnglewood Englewood, OH — 1,014 18,541 57 1,014 18,598 19,612 581 2008 2015CTR Partnership, L.P. Pristine Senior Living ofPortsmouth Portsmouth, OH — 282 9,726 63 282 9,789 10,071 306 2007 2015CTR Partnership, L.P. Pristine Senior Living ofToledo Toledo, OH — 93 10,365 — 93 10,365 10,458 324 1970 2015CTR Partnership, L.P. Pristine Senior Living ofOxford Oxford, OH — 211 8,772 27 211 8,799 9,010 275 2003 2015CTR Partnership, L.P. Pristine Senior Living ofBellbrook Bellbrook, OH — 214 2,573 — 214 2,573 2,787 80 1981 2015CTR Partnership, L.P. Pristine Senior Living ofXenia Xenia, OH — 205 3,564 — 205 3,564 3,769 111 1967 2015CTR Partnership, L.P. Pristine Senior Living ofJamestown Jamestown, OH — 266 4,725 22 266 4,747 5,013 148 1974 2015CTR Partnership, L.P. Casa de Paz Sioux City, IA — 119 7,727 — 119 7,727 7,846 177 2015 2016F-37CTR Partnership, L.P. Denison Care Center Denison, IA — 96 2,784 — 96 2,784 2,880 64 2013 2016CTR Partnership, L.P. Garden View CareCenter Shenandoah, IA — 105 3,179 — 105 3,179 3,284 73 2014 2016CTR Partnership, L.P. Grandview Health CareCenter Dayton, IA — 39 1,167 — 39 1,167 1,206 27 2011 2016CTR Partnership, L.P. Grundy Care Center Grundy Center,IA — 65 1,935 — 65 1,935 2,000 44 2014 2016CTR Partnership, L.P. Iowa City Rehab andHealth Care Center Iowa City, IA — 522 5,690 — 522 5,690 6,212 130 2012 2016CTR Partnership, L.P. Lenox Care Center Lenox, IA — 31 1,915 — 31 1,915 1,946 44 2014 2016CTR Partnership, L.P. Osage Osage, IA — 126 2,255 — 126 2,255 2,381 52 2014 2016CTR Partnership, L.P. Pleasant Acres CareCenter Hull, IA — 189 2,544 — 189 2,544 2,733 58 2015 2016CTR Partnership, L.P. Cedar Falls Health CareCenter Cedar Falls, IA — 324 4,366 — 324 4,366 4,690 82 2012 2016CTR Partnership, L.P. Victory Park NursingHome Norwood, OH — 364 2,199 — 364 2,199 2,563 41 1989 2016CTR Partnership, L.P. Shaw Mountain atCascadia Boise, ID — 1,801 6,572 — 1,801 6,572 8,373 110 2015 2016CTR Partnership, L.P. The Oaks Petaluma, CA — 3,646 2,873 — 3,646 2,873 6,519 30 1982 2016CTR Partnership, L.P. Arbor Nursing Center Lodi, CA — 768 10,712 — 768 10,712 11,480 112 1984 2016CTR Partnership, L.P. Broadmoor MedicalLodge - Rockwall Rockwall, TX — 1,232 22,152 — 1,232 22,152 23,384 46 2013 2016CTR Partnership, L.P. Senior Care Health andRehabilitation –Decatur Decatur, TX — 990 24,909 — 990 24,909 25,899 52 2009 2016CTR Partnership, L.P. Royse City Health andRehabilitation Center Royse City, TX — 606 14,660 — 606 14,660 15,266 31 2009 2016 — 77,285 481,693 80,470 76,275 563,173 639,448 91,394 Skilled Nursing CampusProperties: Ensign Southland LLC Southland Care Norwalk, CA — 966 5,082 2,213 966 7,295 8,261 4,048 2011 1999Sky Holdings AZ LLC Bella Vita (Desert Sky) Glendale, AZ — 289 1,428 1,752 289 3,180 3,469 1,487 2004 2002Lemon River HoldingsLLC Plymouth Tower Riverside, CA — 494 1,159 4,853 494 6,012 6,506 2,177 2012 2009Wisteria Health HoldingsLLC Wisteria Abilene, TX — 746 9,903 290 746 10,193 10,939 1,506 2008 2011Mission CCRC LLC St. Joseph's Villa Salt Lake City,UT — 1,962 11,035 464 1,962 11,499 13,461 2,083 1994 2011Wayne Health HoldingsLLC Careage of Wayne Wayne, NE — 130 3,061 122 130 3,183 3,313 570 1978 20114th Street Health HoldingsLLC West Bend Care Center West Bend, IA — 180 3,352 — 180 3,352 3,532 574 2006 2011Big Sioux River HealthHoldings LLC Hillcrest Health Hawarden, IA — 110 3,522 75 110 3,597 3,707 572 1974 2011Prairie Health HoldingsLLC Colonial Manor ofRandolph Randolph, NE — 130 1,571 22 130 1,593 1,723 438 2011 2011Salmon River HealthHoldings LLC Discovery Care Center Salmon, ID — 168 2,496 — 168 2,496 2,664 276 2012 2012CTR Partnership, L.P. Pristine Senior Livingof Dayton-Centerville Dayton, OH — 3,912 22,458 90 3,912 22,548 26,460 705 2007 2015CTR Partnership, L.P. Pristine Senior Livingof Willard Willard, OH — 143 11,097 50 143 11,147 11,290 348 1985 2015CTR Partnership, L.P. Pristine Senior Livingof Middletown Middletown,OH — 990 7,484 67 990 7,551 8,541 236 1985 2015F-38CTR Partnership, L.P. Victoria RetirementCommunity Norwood, OH — 1,316 10,071 — 1,316 10,071 11,387 189 1991 2016CTR Partnership, L.P. Turlock Nursing andRehabilitation Center Turlock, CA — 1,258 16,526 — 1,258 16,526 17,784 172 1986 2016CTR Partnership, L.P. Senior Care Health &The Residences Bridgeport, TX — 980 27,917 — 980 27,917 28,897 58 2014 2016 — 13,774 138,162 9,998 13,774 148,160 161,934 15,439 Assisted and IndependentLiving Properties: Avenue N Holdings LLC Cambridge ALF Rosenburg, TX — 124 2,301 392 124 2,693 2,817 999 2007 2006Moenium Holdings LLC Grand Court Mesa, AZ — 1,893 5,268 1,210 1,893 6,478 8,371 2,489 1986 2007Lafayette Health HoldingsLLC Chateau Des Mons Englewood, CO — 420 1,160 189 420 1,349 1,769 273 2011 2009Expo Park Health HoldingsLLC Canterbury Gardens Aurora, CO — 570 1,692 248 570 1,940 2,510 516 1986 2010Wisteria Health HoldingsLLC Wisteria IND Abilene, TX — 244 3,241 81 244 3,322 3,566 726 2008 2011Everglades HealthHoldings LLC Lexington Ventura, CA — 1,542 4,012 113 1,542 4,125 5,667 543 1990 2011Flamingo Health HoldingsLLC Desert Springs ALF Las Vegas, NV — 908 4,767 281 908 5,048 5,956 1,457 1986 201118th Place Health HoldingsLLC Rose Court Phoenix, AZ — 1,011 2,053 490 1,011 2,543 3,554 511 1974 2011Boardwalk Health HoldingsLLC Park Place Reno, NV — 367 1,633 51 367 1,684 2,051 279 1993 2012Willows Health HoldingsLLC Cascade Plaza Redmond, WA — 2,835 3,784 395 2,835 4,179 7,014 577 2013 2013Lockwood Health HoldingsLLC Santa Maria Santa Maria, CA — 1,792 2,253 585 1,792 2,838 4,630 580 1967 2013Saratoga Health HoldingsLLC Lake Ridge Orem, UT — 444 2,265 176 444 2,441 2,885 222 1995 2013CTR Partnership, L.P. Lily & Syringa ALF Idaho Falls, ID — 70 2,674 — 70 2,674 2,744 139 1995 2014CTR Partnership, L.P. Caring Hearts Pocatello, ID — 80 3,404 — 80 3,404 3,484 178 2008 2014CTR Partnership, L.P. Turtle & Crain ALF Idaho Falls, ID — 110 5,427 — 110 5,427 5,537 282 2013 2014CTR Partnership, L.P. Prelude Cottages ofWoodbury Woodbury, MN — 430 6,714 — 430 6,714 7,144 336 2011 2014CTR Partnership, L.P. English MeadowsSenior LivingCommunity Christiansburg,VA — 250 6,114 — 250 6,114 6,364 306 2011 2014CTR Partnership, L.P. Bristol Court AssistedLiving Saint Petersburg,FL — 645 7,322 — 645 7,322 7,967 275 2010 2015CTR Partnership, L.P. Asbury Place AssistedLiving Pensacola, FL — 212 4,992 — 212 4,992 5,204 166 1997 2015CTR Partnership, L.P. New Haven AssistedLiving of San Angelo San Angelo, TX — 284 4,478 — 284 4,478 4,762 103 2012 2016CTR Partnership, L.P. Priority Life Care ofFort Wayne Fort Wayne, IN — 452 8,703 — 452 8,703 9,155 181 2015 2016CTR Partnership, L.P. Priority Life Care ofWest Allis West Allis, WI — 97 6,102 — 97 6,102 6,199 127 2013 2016CTR Partnership, L.P. Priority Life Care ofBaltimore Baltimore, MD — — 3,697 — — 3,697 3,697 77 2014 2016CTR Partnership, L.P. Fort Myers AssistedLiving Fort Myers, FL — 1,489 3,531 — 1,489 3,531 5,020 74 1980 2016CTR Partnership, L.P. English Meadows ElksHome Campus Bedford, VA — 451 9,023 — 451 9,023 9,474 150 2014 2016CTR Partnership, L.P. Croatan Village New Bern, NC — 312 6,919 — 312 6,919 7,231 115 2010 2016F-39CTR Partnership, L.P. Countryside Village Pikeville, NC — 131 4,157 — 131 4,157 4,288 69 2011 2016CTR Partnership, L.P. The Pines ofClarkston Village ofClarkston, MI — 603 9,326 — 603 9,326 9,929 136 2010 2016CTR Partnership, L.P. The Pines ofGoodrich Goodrich, MI — 241 4,112 — 241 4,112 4,353 60 2014 2016CTR Partnership, L.P. The Pines of Burton Burton, MI — 492 9,199 — 492 9,199 9,691 134 2014 2016CTR Partnership, L.P. The Pines of Lapeer Lapeer, MI — 302 5,773 — 302 5,773 6,075 84 2008 2016CTR Partnership, L.P. Arbor Place Lodi, CA — 392 3,605 — 392 3,605 3,997 38 1984 2016 — 19,193 149,701 4,211 19,193 153,912 173,105 12,202 Independent LivingProperties: Hillendahl HealthHoldings LLC Cottages at GoldenAcres Dallas, TX — 315 1,769 276 315 2,046 2,361 786 1984 2009Mission CCRC LLC St. Joseph's Villa IND Salt Lake City,UT — 411 2,312 152 411 2,464 2,875 713 1994 2011Hillview Health HoldingsLLC Lakeland Hills ALF Dallas, TX — 680 4,872 940 680 5,812 6,492 1,263 1996 2011 — 1,406 8,953 1,368 1,406 10,322 11,728 2,762 $— $111,658 $778,509 $96,047 $110,648 $875,567 $986,215 $121,797 (1) The aggregate cost of real estate for federal income tax purposes was $1.0 billion.F-40SCHEDULE IIIREAL ESTATE ASSETS AND ACCUMULATED DEPRECIATIONDECEMBER 31, 2016(dollars in thousands) Year Ended December 31,Real estate: 2016 2015 2014Balance at the beginning of theperiod $718,764 $492,486 $456,052Acquisitions 270,601 226,078 25,252Improvements 726 230 12,162Assets not transferred toCareTrust — — (980)Sales of real estate (3,876) (30) —Balance at the end of the period $986,215 $718,764 $492,486Accumulated depreciation: Balance at the beginning of theperiod $(97,667) $(78,897) $(62,572)Depreciation expense (25,001) (18,770) (16,325)Sales of real estate 871 — —Balance at the end of the period $(121,797) $(97,667) $(78,897)F-41Exhibit 10.4FIRST AMENDMENT TO MASTER LEASETHIS FIRST AMENDMENT TO MASTER LEASE (this “Amendment”) is entered into as of September 30, 2015, byand between by and between the entities listed as “Tenant” on the signature pages attached hereto (each referred to herein individuallyand collectively as “Tenant”) and CTR PARTNERSHIP, L.P., a Delaware limited partnership ("Landlord").R E C I T A L S :A. Landlord and Tenant are parties to that certain Master Lease entered into as of July 30, 2015 (the “Lease”), concerningthose certain Premises more particularly described in the Lease.B. Capitalized terms not otherwise defined herein shall have the meanings assigned to them in the Lease.C. Tenant and Landlord now desire to amend the Lease, all as hereinafter provided.A G R E E M E N T :NOW, THEREFORE, in consideration of the foregoing Recitals, the mutual covenants and agreements contained in thisAmendment, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlordand Tenant hereby agree to amend the Lease as follows:1.Base Rent. The first sentence of Section 2.1.1 of the Lease is hereby deleted in its entirely and is replaced with thefollowing: “During the Term, Tenant will pay to Landlord as base rent hereunder (the “Base Rent”), an annual amount equal toSeventeen Million Twenty-Three Thousand Dollars ($17,023,000).”2.Mansfield Lease. A new Section 2.1.3 is hereby added to the Lease as follows: “2.1.3 Landlord and Tenant agreeand acknowledge that following the Effective Date, Landlord may be obligated to pay additional amounts of purchase price under thePurchase Agreement in connection with the subsequent assumption by Tenant (or its affiliate) of the Mansfield Lease (the “MansfieldConsideration”), all on the terms and conditions set forth in the Purchase Agreement and the Nomination Agreement. Tenant furtheragrees and acknowledges that pursuant to the Nomination Agreement, Tenant (together with certain of its affiliates) has assumedLandlord’s obligations under the Purchase Agreement with respect to the facility that is the subject of the Mansfield Lease and withrespect to the Mansfield Lease itself and Tenant hereby reaffirms its obligations under the Nomination Agreement. If Landlord isobligated to pay the Mansfield Consideration under the Purchase Agreement, then effective as of the date on which Landlord pays theMansfield Consideration to the seller under the Purchase Agreement, the annual Base Rent payable by Tenant to Landlord pursuant toSection 2.1.1 shall be increased to an annual amount equal to Seventeen Million and Two Hundred Thousand Dollars ($17,200,000).”3.Insurance. Section 9.2.1 of the Lease is hereby deleted in its entirety and is replaced with the following: 1“9.2.1 All of the policies of insurance required to be maintained by Tenant under this Article IX shall (a) be written in formsatisfactory to Landlord and any Facility Mortgagee and issued by insurance companies (i)(A) with a policyholder andfinancial rating of not less than “A-“/”X” in the most recent version of Best’s Key Rating Guide or (B) a Financial StabilityRating of “A” or higher from Demotech, and (ii) authorized to do insurance business in the applicable Situs State; (b)provide that any insurance maintained by Landlord for or with respect to the Premises shall be excess and noncontributorywith Tenant’s insurance; and (c) include a waiver of all rights of subrogation and recovery against Landlord.”4.Impositions. The following is hereby added as Section 4.1.7 of the Lease:“4.1.7 The parties acknowledge that certain Impositions attributable to calendar year 2015 will be due and payable to theapplicable taxing authorities in calendar year 2016. In connection with the Landlord’s acquisition of the Facilities and theclosing to occur under the Purchase Agreement and the OTA, as of the Commencement Date Landlord or Tenant willreceive a credit from Current Operators and/or the seller of the Facilities in connection with the Impositions attributable tocalendar year 2015 but not due and payable until calendar year 2016 (said credit, the “Imposition Credit”). Tenant herebyassigns any right, title, or interest that Tenant may have in such Imposition Credit to Landlord to be held, applied and paidas provided in this Section 4.1.7. Such Imposition Credit represents an estimate of the amount of certain Impositions (basedupon 2014 tax invoices) attributable to the period from January 1, 2015 through September 30, 2015 (the “2015Impositions”). Invoices for 2015 Impositions will not be available until November 2015, at the earliest. Pursuant to thisLease, Tenant is obligated to pay all Impositions levied or charged against the Premises. Therefore, Landlord and Tenanthereby agree that Landlord will hold all amounts attributable to the Imposition Credit and Real Property Impositionspursuant to Section 4.5 of this Lease and Landlord will make available to Tenant, from time to time as 2015 Impositions aredue and payable by Tenant, a portion of the amount of 2015 Impositions at the time and in the amount and mannerprovided in Section 4.5 of this Lease with respect to Real Property Impositions. In the event the amount of 2015Impositions invoiced exceeds the Imposition Credit, then Tenant shall use its commercially reasonable efforts to enforce theprovisions of Section 7.3 of the OTA; provided, however, as otherwise set forth in this Lease, Tenant shall be solelyresponsible for paying all Impositions levied upon the Premises notwithstanding any insufficiency of the ImpositionCredit.”5.Compliance. The following is hereby added as a new Section 6.15 to the Lease:“6.15 Compliance.6.15.1 All documentation, coding, billing and collection practices of Tenant, and of any billing or collection agentacting on behalf of any Tenant, shall be in compliance with all applicable Legal Requirements and all conditions ofparticipation, conditions of payment, contracts, standards, policies, manuals, procedures and other requirements of all applicableThird Party Payor Programs. Tenant shall document, code, bill and process claims for 2reimbursement and report and refund any overpayments received from Third Party Payor Programs in compliance with allapplicable Legal Requirements and Third Party Payor Programs, including the terms of all Provider Agreements. Anyoverpayment owing to any Governmental Payor (or its authorized designee) shall be timely repaid to such Governmental Payor(or its authorized designee) in accordance with the Legal Requirements applicable to such Governmental Payor program. Nosuch overpayment shall be retained by Tenant or the Facilities in any manner that could constitute a violation of the FederalFalse Claims Act (31 U.S.C. §§ 3729-3733), or any similar state or local statute or regulation6.15.2 Tenant shall (and shall cause any Guarantor that is an entity to) operate, maintain and abide by, an effectiveCompliance Program and shall permit and fully cooperate with any Compliance Review (such cooperation shall includemaking available appropriate employees, officers, directors, agents, contractors, subcontractors and representatives of Tenantand Guarantor as Landlord or Landlord’s representatives may request to discuss Tenant’s Compliance Programs, policies andprocedures and the regulatory risks faced by Tenant and Guarantor). Tenant’s Compliance Program shall actively promotecompliance with all applicable Legal Requirements and incorporate the elements of an effective compliance plan identified inany guidance issued by the U.S. Department of Health and Human Services, Office of the Inspector General (“OIG”).6.15.3 Tenant shall maintain all patient, billing and other records that are required to be maintained by any LegalRequirements, Governmental Authority or any Third Party Payor Program. All such records shall be complete and accurate inall material respects and shall comply with, and be maintained in compliance with, all Legal Requirements and all conditions ofparticipation, conditions of payment, contracts, standards, policies, manuals, procedures and other requirements of all applicableThird Party Payor Programs.6.15.4 Tenant shall timely file all material cost reports, cost statements, documents, notices and other reports required tobe filed by any Governmental Authority or any Third Party Payor Program. All such filings shall be complete and accurate inall material respects and shall comply with all Legal Requirements and all conditions of participation, conditions of payment,contracts, standards, policies, manuals, procedures and other requirements of all applicable Third Party Payor Programs.6.15.5 Without limiting any of Landlord’s other rights under this Lease, Landlord and its representatives may enter anyportion of the Premises upon two Business Days’ prior notice to inspect any portion of the Premises for compliance with theterms of this Section 6.15 or to perform a Compliance Review; provided that no such notice shall be required in the event of anemergency or upon an Event of Default. No such entry shall unreasonably interfere with residents, patients, patient care or thebusiness conducted on the Premises. During normal business hours, Tenant shall permit Landlord and its representatives,inspectors and consultants to examine all contracts, books, documentation of compliance with Legal Requirements andfinancial and other records (wherever kept) relating to the business and Tenant’s operations at any portion of the Premises andwill provide copies of all such records to Landlord upon request. As used 3herein: (i) “Compliance Program” shall mean a corporate compliance program designed to promote compliance with, detectviolations of, and appropriately address, correct and remediate noncompliance with, applicable Legal Requirements, ThirdParty Payor Program requirements and standards of ethical conduct, and (ii) “Compliance Review” shall mean a reviewconducted by Landlord or any of its representatives, at Landlord’s cost, of the effectiveness of Tenant’s compliance plan andother compliance functions, as well as of regulatory risks faced by Tenant in connection with any Facility(ies) and the operationof the business conducted thereon.6.15.6 Notwithstanding anything in this Lease to the contrary, and in addition to the reports and information requiredunder Section 6.7 of this Lease, upon Landlord’s reasonable request from time to time, Tenant shall provide Landlord withsuch additional information in conjunction with a Compliance Review conducted by Landlord or in connection with Tenant’scompliance with the terms and conditions of this Section 6.15.”6.Indemnity. The following is hereby added to the end of Section 19.4 of the Lease: “Without limiting the generality ofthe foregoing, Tenant shall indemnify, defend, protect, save, hold harmless and reimburse Landlord for, from and against any and allcosts, expenses, damages, liabilities, attorneys’ fees, or other amounts paid by Landlord in connection with the written indemnitydelivered by Landlord of any Tenant’s obligations under any Interim Documents entered into as of the Effective Date. As used herein,“Interim Documents” shall mean any Interim Management Agreement, Interim Sublease, or any Multi-Party Agreement entered intoas of the Effective Date with respect to a Facility and by and between any Tenant (and/or its management company affiliate), on theone hand, and the outgoing operator of such Facility, on the other hand, and pursuant to which (among other things) said Tenant(and/or its management company affiliate) agrees to (i) sublease the Facility to said outgoing operator on an interim basis for temporarylicensing purposes, and/or (ii) manage the day-to-day operations of said Facility utilizing the outgoing operator’s operating license.”7.Miscellaneous.a. Effect of Amendment. Except to the extent the Lease is modified by this Amendment, the remaining terms andconditions of the Lease shall remain unmodified and in full force and effect. In the event of conflict, between the terms and conditionsof the Lease and the terms and conditions of this Amendment, the terms and conditions of this Amendment shall prevail and control.As used in the Lease, all references to “this Lease” shall mean and refer to the Lease as amended by this Amendment.b. Entire Agreement. The Lease, together with this Amendment, embodies the entire understanding between Landlordand Tenant with respect to its subject matter and can be changed only by an instrument in writing signed by Landlord and Tenant.c. Counterparts. This Amendment may be executed in one or more counterparts, including facsimile counterparts orelectronic pdf counterparts, each of which shall be deemed an original but all of which, taken together, shall constitute one in the sameAmendment. 4d. Reaffirmation of Obligations. Notwithstanding the modifications to the Lease contained herein, Tenant herebyacknowledges and reaffirms its obligations under the Lease as amended hereby and all other documents executed by Tenant inconnection therewith. Notwithstanding the modifications to the Lease contained herein, each Guarantor hereby acknowledges andreaffirms its obligations under the Guaranty and all documents executed by Guarantor in connection therewith, and further agrees thatany reference made in such Guaranty to the Lease or any terms or conditions contained therein shall mean such Lease or such terms orconditions as modified by this Amendment.(a)[Signature pages to follow] 5IN WITNESS WHEREOF, this Amendment has been executed as of the day and year first set forth above.TENANT:PRISTINE SENIOR LIVING OF BEAVERCREEK, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerPRISTINE SENIOR LIVING OF BELLBROOK, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerPRISTINE SENIOR LIVING OF CINCINNATI-DELHI, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerPRISTINE SENIOR LIVING OF CINCINNATI-RIVERVIEW, LLC, an Ohio limited liability company By:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerPRISTINE SENIOR LIVING OF CINCINNATI-THREE RIVERS, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerPRISTINE SENIOR LIVING OF DAYTON-CENTERVILLE, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerPRISTINE SENIOR LIVING OF ENGLEWOOD, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, Manager PRISTINE SENIOR LIVING OF JAMESTOWN, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerPRISTINE SENIOR LIVING OF PORTSMOUTH, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerPRISTINE SENIOR LIVING OF OXFORD, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerPRISTINE SENIOR LIVING OF MIDDLETOWN, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerPRISTINE SENIOR LIVING OF TOLEDO, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerPRISTINE SENIOR LIVING OF WILLARD, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerPRISTINE SENIOR LIVING OF XENIA, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerLANDLORD: CTR PARTNERSHIP, L.P., a Delaware limited partnershipBy:CARETRUST GP, LLC, a Delaware limited liability company Its: general partnerBy:CARETRUST REIT, INC., a Maryland corporation, its sole memberBy: /s/ Gregory K. StapleyGregory K. Stapley, President [SIGNATURES CONTINUED ON NEXT PAGE] ACKNOWLEDGED AND AGREED, REAFFIRMING OBLIGATIONS SET FORTH IN THAT CERTAIN JOINDER TOTHE LEASE, AS AMENDED HEREBY, AND THAT CERTAIN GUARANTY (AS DEFINED IN THE LEASE):GUARANTOR:/s/ Christopher T. Cook Christopher T. Cook/s/ Stephen C. Ryan Stephen C. RyanPRISTINE SENIOR LIVING, LLC, an Indiana limited liability companyBy: /s/ Christopher T. Cook Christopher T. Cook, Manager Exhibit 10.5SECOND AMENDMENT TO MASTER LEASETHIS SECOND AMENDMENT TO MASTER LEASE (this “Second Amendment”) is entered into as of March 7, 2016,by and between the entities listed as “Tenant” on the signature pages attached hereto (each referred to herein individually andcollectively as “Tenant”) and CTR PARTNERSHIP, L.P., a Delaware limited partnership ("Landlord").R E C I T A L S :A. Landlord and certain entities listed as “Tenant” on the signature pages attached hereto are parties to that certain MasterLease entered into as of July 30, 2015 (the “Original Lease”; as amended and may be further amended, modified or revised, the“Master Lease” or “Lease”), and that certain First Amendment to Master Lease entered into as of July 30, 2015 (the “FirstAmendment”), contemplating, among other things, such of Tenant leasing from Landlord certain Premises more particularly describedin the Original Lease (the “Liberty Facilities”).B. Pursuant to that certain Guaranty of Lease dated as of July 30, 2015 (the “Guaranty”), Guarantor agreed, among otherthings, to guaranty the obligations of Tenant under the Master Lease; and such guaranty obligations were reaffirmed by Guarantor inthe First Amendment.C. Landlord has entered into a purchase agreement (as may be amended, modified, or revised, the “Purchase Agreement”)which contemplates its acquisition of skilled nursing facilities described on Schedule 1 attached hereto (together, the“Victory/Victoria Facilities”).D. As more particularly set forth herein, Landlord and Tenant have agreed that the Master Lease shall be amended, amongother things, to add the Victory/Victoria Facilities to the Premises demised under the Master Lease. Capitalized terms not otherwisedefined herein shall have the meanings assigned to them in the Lease.E. Tenant and Landlord now desire to amend the Lease, all as hereinafter provided.A G R E E M E N T :NOW, THEREFORE, taking into account the foregoing Recitals, which by this reference are incorporated herein, and inconsideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt andsufficiency of which are hereby acknowledged, Landlord, Tenant and, for the specific provisions identified herein, Guarantor agree asfollows:1.Amendment Effectiveness. Landlord and Tenant have executed this Second Amendment as of the date first writtenabove (the “Second Amendment Date”) notwithstanding that Landlord does not, as of such date, own the Victory/Victoria Facilities.Landlord and Tenant intend that this Second Amendment be, and this Second Amendment shall be, effective and enforceable againstTenant immediately upon Landlord’s acquisition of the Victory/Victoria Facilities, which shall be a date subsequent to the SecondAmendment Date (the “Acquisition30212588_41Date”); provided, however, the provisions of Sections 4(d) and 4(e) below (and Sections 6.4.4 through 6.4.7, inclusive, of the MasterLease, as amended) shall apply as of the Second Amendment Date. As a condition precedent to Tenant’s obligations hereunder,Landlord shall have acquired the Victory/Victoria Facilities pursuant to the Purchase Agreement. If, however, Landlord does notacquire the Victory/Victoria Facilities, or the Purchase Agreement is terminated, this Second Amendment shall terminate and be or nofurther force or effect as to the parties hereto, and the Master Lease shall apply and be unaffected by the terms hereof.2.Addition of Victory/Victoria Facilities. The Victory/Victoria Facilities and associated Landlord Personal Propertyare hereby added to the Premises demised under the Master Lease, and each of the Victory/Victoria Facilities shall be considered a“Facility” under the Master Lease.3.Joinder of Tenant. The Tenant entities identified as “Victoria Tenant” and “Victory Tenant” on the signature pagesattached hereto hereby join the Master Lease as parties thereto, and the other Tenant entities and Landlord hereby agree and consent tothe same.4.Amendments to Master Lease. The Master Lease is hereby amended as follows:(a) Base Rent Effective as of the Acquisition Date, Base Rent shall increase from $17,023,000 to an annual amountof Eighteen Million Four Hundred Twenty-Nine Thousand One Hundred Seventy-Four Dollars ($18,429,174); the difference betweenthe two amounts shall be referred to herein as the “Increase.”(i) Notwithstanding the foregoing, at Tenant’s option, Tenant may defer payment of the Increase portion ofBase Rent for payments of Base Rent due April 1, 2016 and May 1, 2016 (the “V/V Deferred Portion”). All of suchV/V Deferred Portion shall be paid to Landlord no later than June 30, 2016; provided, however, if (A) Tenant has filedon or prior to April 15, 2016 all necessary applications and submittals to receive payment from MyCare Ohio for theVictory/Victoria Facilities, and (B) despite Tenant’s diligent, good faith efforts, payments from MyCare Ohio for theVictory/Victoria Facilities have not commenced being received by Tenant as of June 30, 2016, then Tenant may electto further defer payment of such V/V Deferred Portion until the earlier to occur of (1) September 30, 2016 or (2) thedate payments from MyCare Ohio for the Victory/Victoria Facilities commence being received by Tenant.(ii) Solely for purposes of calculating the annual increase in Base Rent under Section 2.1.1 of the Lease for theLease Year immediately following a Lease Year in which the Acquisition Date occurs, the Increase will be deemedeffective on the first day of the Lease Year in which it occurred; except that the percentage by which the Increaseincreases under such Section 2.1.1 will be prorated by the number of days in the Lease Year in which the Increaseoccurred that fall on and after the date of that increase of the total number of days in that Lease Year (and will besubject to the full increase under such Section 2.1.1 in subsequent Lease Years).(b) Impositions. The following is hereby added as Section 4.1.7(a) of the Lease:30212588_42“4.1.7(a) The parties acknowledge that certain Impositions attributable to calendar years 2015 will be due and payableto the applicable taxing authorities in calendar year 2016, and certain Impositions attributable to calendar year 2016 willbe due and payable to the applicable taxing authorities in calendar year 2017. In connection with the Landlord’sacquisition of the Victory/Victoria Facilities and the closing to occur under the Purchase Agreement and the V/V OTA,as of the V/V Acquisition Date, Landlord or Tenant will receive a credit from Current Operators and/or the seller of theVictory/Victoria Facilities in connection with the Impositions attributable to (i) calendar year 2015 but not due andpayable until calendar year 2016 and (ii) if applicable, calendar year 2016 but not due and payable until calendar year2017 (said credit, the “V/V Imposition Credit”). Tenant hereby assigns any right, title, or interest that Tenant mayhave in such V/V Imposition Credit to Landlord to be held, applied and paid as provided in this Section 4.1.7(a). SuchV/V Imposition Credit represents an estimate of the amount of certain V/V Impositions (based upon 2014 tax invoices)attributable to the period from January 1, 2015 through the V/V Acquisition Date (the “V/V Impositions”). Invoicesfor V/V Impositions will not be available until November 2015 (for 2015 V/V Impositions) and November 2016 (for2016 V/V Impositions), at the earliest. Pursuant to this Lease, Tenant is obligated to pay all Impositions levied orcharged against the Premises. Therefore, Landlord and Tenant hereby agree that Landlord will hold all amountsattributable to the V/V Imposition Credit and Real Property Impositions pursuant to Section 4.5 of this Lease andLandlord will make available to Tenant (to the extent Landlord actually receives any V/V Imposition Credit), providedTenant is not then in default of the Lease, (1) from time to time as 2015 V/V Impositions are due and payable byTenant, a portion of the V/V Imposition Credit at the time and in the amount and manner provided in Section 4.5 of thisLease with respect to Real Property Impositions and (2) from time to time as 2016 V/V Impositions are due and payableby Tenant, a portion of the V/V Imposition Credit at the time and in the amount and manner provided in Section 4.5 ofthis Lease with respect to Real Property Impositions. In the event the amount of 2015 Impositions invoiced exceeds theV/V Imposition Credit, then Tenant shall use its commercially reasonable efforts to enforce the provisions of Section7.3 of the OTA; provided, however, as otherwise set forth in this Lease, Tenant shall be solely responsible for payingall Impositions levied upon the Premises notwithstanding any insufficiency of the V/V Imposition Credit.”(c) Acceptance of Premises. The first sentence of Section 5.1 of the Master Lease is hereby amended, restated,replaced and superseded to provide as follows:“(i) Tenant acknowledges receipt and delivery of possession of the Liberty Facilities and confirms that Tenant hasexamined and otherwise has knowledge of the condition of the Liberty Facilities prior to the execution and delivery ofthis Lease and has found the same to be in good order and repair, free from Hazardous Materials not in compliance withapplicable Hazardous Materials Laws and satisfactory for its purposes hereunder; and (ii) Tenant acknowledges receiptand delivery of possession of the Victory/Victoria Facilities and confirms that Tenant has examined and30212588_43otherwise has knowledge of the condition of the Victory/Victoria Facilities prior to the execution and delivery of theSecond Amendment and has found the same to be in good order and repair, free from Hazardous Materials not incompliance with applicable Hazardous Materials Laws and satisfactory for its purposes hereunder.”(d) Required Authorizations Applications. The following is hereby added as Section 6.4.4(a) of the Master Lease:“(a) On or before February 16, 2016 (or, if the outgoing operator has not filed their change of ownership notice as ofsuch date, within one (1) Business Day following the filing thereof by said outgoing operator), Tenant shall file andsubmit (or cause to be filed and submitted) all applications, petitions, and other documents (the “V/V RequiredAuthorizations Applications”) that are necessary or appropriate for it to obtain the Required Authorizations withrespect to each of the Victory/Victoria Facilities, which V/V Required Authorizations Applications shall include, butnot be limited to: (i) a Change of Operator Notice to be filed with the Ohio Department of Medicaid, (ii) an applicationfor Tenant to obtain an operating license for each such Facility from the Department of Health of the State of Ohio, (iii)applications necessary for the transfer or assignment of all Medicare Provider Agreements to Tenant, and (iv)applications necessary for the transfer or assignment of all Medicaid Provider Agreements to Tenant; provided,however, that Tenant shall have until May 1, 2016 to submit CMS form 855A with respect to each such Facility.Tenant shall continuously and diligently pursue such issuance of the Required Authorizations by June 30, 2016,including without limitation by promptly responding to all requests for information, comments and the like from anyGovernmental Authority. Concurrently with delivery or promptly after receipt (as applicable), Tenant shall provideLandlord with copies of all applications, filings, notices, and correspondence delivered to or received from anyGovernmental Authority with respect to the V/V Required Authorizations Applications, including, but not limited to,the issuance of or rejection of the application for, the Required Authorizations. Tenant shall keep Landlord advised asto the status of Tenant’s efforts to obtain the Required Authorizations and of any material developments in connectiontherewith. If Tenant does not obtain the Required Authorizations on or prior to the outside date for closing on theacquisition of the Victory/Victoria Facilities pursuant to the Purchase Agreement (or if Landlord reasonably determinesthat Tenant obtaining the Required Authorizations on or before said outside date is impossible), then Landlord mayelect to terminate this Lease with respect to the Victory/Victoria Facilities only by delivering written notice of suchelection to Tenant, in which event this Second Amendment shall terminate and be of further no force and effect, and theLease shall remain in effect as if this Second Amendment was never executed.”(e) OTA. The following is hereby added as Section 6.4.7(a) of the Master Lease:30212588_44“(a) Tenant shall, on or before March 9, 2016, use commercially reasonable efforts to enter into an OperationsTransfer Agreement (a “V/V OTA”) with Current Operator with respect to the Victory/Victoria Facilities, which shallprovide, inter alia, that the operations of the Victory/Victoria Facilities shall be transitioned to Tenant immediately aftermidnight on the V/V Acquisition Date. Tenant hereby covenants that it shall comply in all material respects with itsobligations under the V/V OTA. Tenant hereby agrees and acknowledges that if Tenant breaches the V/V OTA, thesame may result in a breach by Landlord under the Purchase Agreement and the forfeiture of Landlord’s earnest moneydeposit thereunder. As material part of the consideration for Landlord to enter into this Second Amendment, Tenanthereby agrees to, and shall, indemnify, defend, protect and hold harmless Landlord from and against any Losses thatLandlord may incur under the Purchase Agreement solely as a result of Tenant breaching its obligations under the V/VOTA. Tenant further agrees that if there is a breach or default under the V/V OTA by Current Operator and Tenantelects not to pursue its remedies against Current Operator, then Landlord may, in its sole discretion, pursue suchremedies against Current Operator as Tenant’s attorney-in-fact.”(f) Occupancy. Section 6.12.2 of the Lease is hereby deleted and replaced with the following:“6.12.2 Tenant shall maintain for each fiscal quarter an occupancy rate of at least 77.5% of the aggregate number of (a)beds In Service as of the Commencement Date, with respect to those Facilities subject to this Lease as of suchCommencement Date and (b) beds In Service as of the date additional Facilities were effectively added to this Lease,with respect to those Facilities added to this Lease subsequent to the Commencement Date.”(g) Working Capital. The following is hereby added as Section 6.12.7 of the Master Lease:“6.12.7. Tenant shall maintain working capital in such an amount reasonably satisfactory to Landlord to support (i)the day-to-day operation of the Facilities and (ii) continued licensure of the Facilities. Upon request from Landlord,Tenant shall promptly provide to Landlord written evidence of satisfaction of the requirement of the previous sentence.”(h) Indemnity. The last two (2) sentences of Section 19.4 of the Lease are hereby deleted and replaced with thefollowing: “Without limiting the generality of the foregoing, Tenant shall indemnify, defend, protect, save, hold harmless andreimburse Landlord for, from and against any and all costs, expenses, damages, liabilities, attorneys’ fees, or other amounts paid byLandlord in connection with any written indemnity delivered by Landlord of any Tenant’s obligations under any Interim Documentsentered into as of or subsequent to the Second Amendment Date. As used herein, “Interim Documents” shall mean any InterimManagement Agreement, Interim Sublease, or any Multi-Party Agreement entered into as of or30212588_45subsequent to the Second Amendment Date with respect to a Facility and by and between any Tenant (and/or its managementcompany affiliate), on the one hand, and the outgoing operator of such Facility, on the other hand, and pursuant to which (among otherthings) said Tenant (and/or its management company affiliate) agrees to (i) sublease the Facility to said outgoing operator on an interimbasis for temporary licensing purposes, and/or (ii) manage the day-to-day operations of said Facility utilizing the outgoing operator’soperating license.”(i) Notice. Article XXIII of the Lease is hereby amended by deleting Tenant’s notice address and replacing it with thefollowing:If to Tenant:c/o Pristine Senior Living, LLC1301 East Riggin RoadMuncie, Indiana 47304Attn: Christopher T. Cook, CEO(j) Victoria Outparcel. The parties hereby acknowledge and agree that certain portions of the Victoria Facility havebeen leased for retail and ancillary parking purposes (said portions of the Victoria Facility, the “Victoria Retail Store”).Notwithstanding anything to the contrary in this Amendment or the Master Lease, Tenant shall have no responsibility for the leasing,property management or any other matters pertaining to the Victoria Retail Store. Tenant agrees to cooperate with Seller to allow Sellerto process, and /or enter, and/or engage in into any (a) future lot split to cause the Victoria Retail Store to be a separate legal lot, (b)future lease of the Victoria Retail Store, (c) any future sale of the Victoria Retail Store, or (d) raze the Victoria Retail Store. Tenantshall not be entitled to any revenue generated by Seller from the Victoria Retail Store.(k) Exhibit A to the Master Lease is hereby amended by replacing or adding the following defined terms, asapplicable, as follows:“Base Rent” has the meaning set forth in Section 2.1.1, as amended by the Second Amendment.“Capital Expenditure Funds” has the meaning set forth in Section 5 of the Second Amendment.“Facility” shall mean the Facilities identified on Schedule 1, as amended by the Second Amendment,individually or collectively, as appropriate in the context.“Improvement Funds” has the meaning set forth in Section 5 of the Second Amendment.“Interim Documents” has the meaning set forth in Section 19.4 of the Lease, as amended by the SecondAmendment.30212588_46“Lease” has the meaning set forth in Recital A of the Second Amendment.“Liberty Facilities” has the meaning set forth in Recital A of the Second Amendment.“Master Lease” has the meaning set forth in Recital A of the Second Amendment.“Original Lease” has the meaning set forth in Recital A of the Second Amendment.“Purchase Agreement” has the meaning set forth in Recital C of the Second Amendment.“Request for Advance” has the meaning set forth in Section 19.4 of the Lease, as amended by the SecondAmendment.“Second Amendment Date” has the meaning set forth in Section 1 of the Second Amendment.“Tenant” has the meaning set forth in the preamble to the Second Amendment.“Victoria Facility” has the meaning set forth in Schedule 1 of the Second Amendment.“Victoria Retail Store” has the meaning set forth in Section 4(i) of the Second Amendment.“Victory Facility” has the meaning set forth in Schedule 1 of the Second Amendment.“V/V Acquisition Date” shall mean the date that Landlord acquired the Victory/Victoria Facilities.“V/V Imposition Credit” has the meaning set forth in Section 4.1.7(a) of the Lease, as set forth in the SecondAmendment.“V/V Impositions” has the meaning set forth in Section 4.1.7(a) of the Lease, as set forth in the SecondAmendment.“V/V OTA” has the meaning set forth in Section 6.4.7(a) of the Lease, as set forth in the Second Amendment.30212588_47“V/V Required Authorizations Applications” has the meaning set forth in Section 6.4.4(a) of the Lease, asset forth in the Second Amendment.“Victory/Victoria Facilities” has the meaning set forth in Recital C of the Second Amendment.(l) Exhibit B to this Second Amendment is hereby added to Exhibit B of the Master Lease, and the legal descriptionsof the Victory/Victoria Facilities shall be considered part of the legal description of the Facility and the Premises for all purposes underthe Master Lease.(m) Exhibit C to this Second Amendment is hereby added to Exhibit C of the Master Lease, and the LandlordPersonal Property for the Victory/Victoria Facilities as described thereon shall be considered part of the Landlord Personal Property forall purposes under the Master Lease.(n) Schedule 1 to this Second Amendment is hereby added to Schedule 1 of the Master Lease, and the Facilities setforth therein shall be considered Facilities for all purposes under the Master Lease.(o) Schedule 2 to this Second Amendment is hereby added to Schedule 2 of the Master Lease.(p) Schedule 3 to this Second Amendment is hereby incorporated into and made a part of the Master Lease by thisreference.5.Improvement Fund and Capital Expenditure Fund. Subject to the terms and conditions set forth herein, Landlord hasagreed to provide Tenant with up to (i) $500,000 (the “Improvement Funds”), in the aggregate, for the cost of certain capital repairsand improvements to the Victory/Victoria Facilities (which repairs are more particularly described on Schedule 3 attached hereto), and(ii) $1,000,000 (the “Capital Expenditure Funds”), in the aggregate, for the cost of certain capital repairs and improvements to theVictory/Victoria Facilities as determined by Tenant, upon the following terms and conditions:a. In connection with any Alterations for which Improvement Funds or Capital Expenditure Funds are or may berequested by Tenant, Tenant shall comply with the provisions of Section 7.4 of the Master Lease and, to the extent any suchAlterations would constitute Capital Alterations or Material Alterations, Tenant shall comply with the provisions of Section 7.5 of theMaster Lease. Prior to commencing any capital repairs or improvements for which Tenant will request disbursement of theImprovement Funds or Capital Expenditure Funds, Tenant shall provide Landlord with such written documentation as may bereasonably requested by Landlord with respect to such capital repairs or improvements, which may include, without limitation, plansand specifications, budgets, a work completion schedule, copies of all permits required in connection with such capital repairs orimprovements and the names of all contractors to be engaged by Tenant in connection therewith, together with evidence of insurancefor each (in form, substance and amount reasonably required by Landlord), and Landlord shall have a reasonable period of time not toexceed ten (10) Business Days to review and approve the same. Landlord shall not be obligated to disburse30212588_48the Improvement Funds or Capital Expenditure Funds for any capital repairs or improvements until Landlord has approved such capitalrepairs or improvements in writing, which approval: (i) with respect to the capital repairs and improvements described on Schedule 3,as such schedule may be supplemented no later than thirty (30) days following the Acquisition Date with Landlord’s reasonableapproval, may not be unreasonably withheld, conditioned or delayed, and (ii) with respect to capital repairs or improvements notdescribed on Schedule 3, may be granted, withheld or conditioned in Landlord’s sole and absolute discretion.b. Tenant shall have the right to request disbursement of the Improvement Funds or Capital Expenditure Funds, asapplicable, from time to time, but not more than once per calendar month, in increments of not less than Fifteen Thousand Dollars($15,000) unless the disbursement is the final one, in which case the full amount of such disbursement may be requested. All suchrequests shall be in writing and in the form of the request for advance contained in Schedule 3 attached hereto (“Request forAdvance”) and shall be accompanied with (i) the following supporting documentation: (A) an itemized account of expenditures to bepaid or reimbursed from the requested disbursement, certified by Tenant to be true and correct expenditures which have already beenpaid or are due and owing and for which no previous disbursement was made hereunder, and (B) copies of invoices or purchase ordersfrom each payee with an identifying reference to the applicable vendor or supplier, which invoices or purchase orders shall support thefull amount of costs contained in the requested disbursement; and (ii) mechanic’s lien waivers (conditional and unconditional, asapplicable), in form and substance reasonably satisfactory to Landlord, in connection with any repairs, renovations or improvements inexcess of Five Thousand Dollars ($5,000) for which a mechanic’s lien may be filed. Landlord shall have the right to make paymentdirectly to any or all applicable vendors or suppliers if so desired by Landlord. No failure by Landlord to insist on Tenant’s strictcompliance with the provisions of this Section 5 with respect to any request for advance or disbursement of the Improvement Funds orCapital Expenditure Funds shall constitute a waiver or modification of such provisions with respect to any future or other request foradvance or disbursement.c. Landlord shall, within twenty (20) calendar days of Tenant’s delivery of a Request for Advance and compliancewith the conditions for disbursement set forth in this Section 5, make disbursements of the requested Improvement Funds or CapitalExpenditure Funds, as applicable, to pay or reimburse Tenant for the costs of the applicable capital repairs or improvements.d. Tenant shall use commercially reasonable efforts to cause the applicable capital repairs or improvements that aredescribed on Schedule 3 attached hereto, as such schedule may be supplemented by Tenant pursuant to Section 5.a., to be completedon or prior to that date which is two (2) years after the date of Landlord’s acquisition of the Victory/Victoria Facilities (the “RepairDeadline”), and Tenant’s right to request disbursements of the Improvement Funds shall terminate on the Repair Deadline. Tenant’sright to request disbursements of the Capital Expenditure Funds shall also terminate on the Repair Deadline.e. No Event of Default or event which, with the giving of notice or the passage of time, or both, would constitute anEvent of Default (including, without limitation, the recordation of any mechanic’s or other lien against the Premises (or any portionthereof) in connection with the30212588_49capital repairs or improvements to be funded by the Improvement Funds or Capital Expenditure Funds) shall have occurred and becontinuing at the time of any request for disbursement (or the date of disbursement) of the Improvement Funds or Capital ExpenditureFunds.f. As a condition precedent to Landlord’s obligation to make any disbursement from Capital Expenditure Funds, suchdisbursement and the resulting increase in Base Rent shall not cause the Portfolio Coverage Ratio to fall below the Minimum RentCoverage Ratio. For purposes of this subsection f., “Testing Date” shall be date of disbursement of Capital Expenditure Funds andsimultaneous increase in Base Rent.g. All repairs or improvements funded with the Improvement Funds or Capital Expenditure Funds shall be completedin a good, workmanlike and lien-free manner pursuant to Plans and Specifications provided to and approved by Landlord as set forthabove, subject to change orders made in the ordinary course of a project of the size and scope of the applicable capital repair orimprovement and approved by Landlord (with respect to change orders in excess of $10,000). If any of such repairs or improvementsare completed in a manner not in substantial compliance with this Section 5 and the other applicable provisions of this Lease, Tenantshall, promptly after obtaining knowledge thereof or Landlord’s demand therefor, repair or remediate the applicable work to the extentnecessary to attain such compliance at its sole cost and expense.h. Each and every renovation or improvement funded by Landlord under this Section 5 shall immediately become apart of the Premises and shall belong to Landlord subject to the terms and conditions of this Lease.i. No disbursement of the Improvement Funds or Capital Expenditure Funds shall be used to remedy any conditionwhich constitutes a default by Tenant under the provisions of this Lease.j. The parties acknowledge that the annual amount of Base Rent payable under this Lease contemplates disbursementof the Improvement Funds. No adjustment to the amount of Base Rent shall be made as a result of any disbursement to Tenant fromImprovement Funds or as the result of the full amount of the Improvement Funds not being timely utilized by Tenant.k. Commencing on the first day of the month following the date on which Landlord disburses Capital ExpenditureFunds to fund Alterations, Base Rent shall increase by an amount equal to the amount of such Capital Expenditure Funds disbursed byLandlord for Alterations during the preceding month multiplied by the Lease Rate.6.Guaranty. The parties, including Guarantor, agree that the “Lease” referred to in the Guaranty shall mean the MasterLease, as amended, modified and revised by this Second Amendment7.Disclosures. Tenant hereby acknowledges those matters set forth on Schedule 4 attached hereto and incorporatedherein by this reference..8.Miscellaneous.30212588_410a. Effect of Amendment. Except to the extent the Lease is modified by this Amendment, the remaining terms andconditions of the Lease shall remain unmodified and in full force and effect. In the event of conflict, between the terms and conditionsof the Lease and the terms and conditions of this Amendment, the terms and conditions of this Amendment shall prevail and control.As used in the Lease, all references to “this Lease” shall mean and refer to the Lease as amended by this Amendment.b. Entire Agreement. The Lease, together with this Amendment, embodies the entire understanding between Landlordand Tenant with respect to its subject matter and can be changed only by an instrument in writing signed by Landlord and Tenant.c. Counterparts. This Amendment may be executed in one or more counterparts, including facsimile counterparts orelectronic pdf counterparts, each of which shall be deemed an original but all of which, taken together, shall constitute one in the sameAmendment.d. Reaffirmation of Obligations. Notwithstanding the modifications to the Lease contained herein, Tenant herebyacknowledges and reaffirms its obligations under the Lease as amended hereby and all other documents executed by Tenant inconnection therewith. Notwithstanding the modifications to the Lease contained herein, each Guarantor hereby acknowledges andreaffirms its obligations under the Guaranty and all documents executed by Guarantor in connection therewith, and further agrees thatany reference made in such Guaranty to the Lease or any terms or conditions contained therein shall mean such Lease or such terms orconditions as modified by this Amendment.e. No Offsets or Defenses. Through the date of this Second Amendment, and to Tenant’s and Guarantor’s knowledge,neither Tenant nor Guarantor has, nor claims, any offset, defense, claim, right of set-off or counterclaim against Landlord under, arisingout of or in connection with this Second Amendment, the Master Lease, the Guaranty, or any of the other documents or agreementsexecuted in connection therewith. In addition, Tenant and Guarantor each covenants and agrees with Landlord that if any offset,defense, claim, right of set-off or counterclaim exists of which Tenant or Guarantor has knowledge as of the date of this SecondAmendment, Tenant hereby irrevocably and expressly waives the right to assert such matter.f. Further Instruments. Each party will, whenever and as often as it shall be reasonably requested so to do by anotherparty, cause to be executed, acknowledged or delivered, any and all such further instruments and documents as may be necessary orproper, in the reasonable opinion of the requesting party, in order to carry out the intent and purpose of this Second Amendment. Uponrequest of Landlord, Tenant agrees to execute and enter into a completely amended and restated Master Lease of the Premises,restating and incorporating the terms and provisions of the Master Lease as amended to date.g. Events of Default. In addition to all other matters constituting an Event of Default under the terms of the MasterLease, the breach or default by Tenant of any term, covenant, agreement, condition, provision, representation or warranty contained inthis Second Amendment shall constitute an “Event of Default” under the Master Lease.30212588_411(a)[Signature pages to follow]30212588_412IN WITNESS WHEREOF, this Amendment has been executed as of the day and year first set forth above.TENANT:PRISTINE SENIOR LIVING OF BEAVERCREEK, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerandPRISTINE SENIOR LIVING OF BELLBROOK, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerandPRISTINE SENIOR LIVING OF CINCINNATI-DELHI, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, Manager and PRISTINE SENIOR LIVING OF CINCINNATI-RIVERVIEW, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerandPRISTINE SENIOR LIVING OF CINCINNATI-THREE RIVERS, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerandPRISTINE SENIOR LIVING OF DAYTON-CENTERVILLE, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerandPRISTINE SENIOR LIVING OF ENGLEWOOD, LLC, an Ohio limited liability company By:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, Managerand PRISTINE SENIOR LIVING OF JAMESTOWN, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerandPRISTINE SENIOR LIVING OF PORTSMOUTH, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerandPRISTINE SENIOR LIVING OF OXFORD, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerandPRISTINE SENIOR LIVING OF MIDDLETOWN, LLC, an Ohio limited liability company By:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, Managerand PRISTINE SENIOR LIVING OF TOLEDO, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerandPRISTINE SENIOR LIVING OF WILLARD, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, ManagerandPRISTINE SENIOR LIVING OF XENIA, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, Managerand “Victoria Tenant”:PRISTINE SENIOR LIVING OF NORWOOD TOWERS, LLC, an Ohio limited liability company By:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, Manager and “Victory Tenant”PRISTINE SENIOR LIVING OF HIGHLANDS, LLC, an Ohio limited liability companyBy:PRISTINE OHIO HOLDINGS, LLC, a Delaware limited liability company, Member By: /s/ Christopher T. Cook Christopher T. Cook, Manager LANDLORD:CTR PARTNERSHIP, L.P., a Delaware limited partnershipBy:CARETRUST GP, LLC, a Delaware limited liability company Its: general partnerBy:CARETRUST REIT, INC., a Maryland corporation, its sole memberBy: /s/ Gregory K. StapleyGregory K. Stapley, President [SIGNATURES CONTINUED ON NEXT PAGE] ACKNOWLEDGED AND AGREED, INCLUDING WITHOUT LIMITATION AS TO SECTIONS 6, 8(d) AND 8(e) OF THISSECOND AMENDMENT, REAFFIRMING OBLIGATIONS SET FORTH IN THAT CERTAIN JOINDER TO THE LEASE,AS AMENDED HEREBY, AND THAT CERTAIN GUARANTY (AS DEFINED IN THE LEASE):GUARANTOR:/s/ Christopher T. Cook Christopher T. Cook/s/ Stephen C. Ryan Stephen C. RyanPRISTINE SENIOR LIVING, LLC, an Indiana limited liability companyBy: /s/ Christopher T. Cook Christopher T. Cook, Manager EXHIBIT BLEGAL DESCRIPTION OF THE LAND(VICTORY/VICTORIA FACILITIES)1500 ShermanSituated in the City of Norwood, County of Hamilton, State of Ohio, described as follows:Registered LandSituated in the City of Norwood, Hamilton County, Ohio and being more particularly described asfollows:From the intersection of the north line of Sherman Avenue and the center line of Baker Avenue, measure west along said north line of Sherman Avenue 450feet to the places of beginning; thence along said north line of Sherman Avenue North 88° 28' West 213.04 feet; thence North 22° 16' West 421.74 feet to thesoutheasterly line of Reading Road; thence along said southeasterly line of Reading Road North 28° 38' East 351.41 feet; thence South 88° 28' East 223.15feet; thence South 1° 32' West 698.70 feet to the place of beginning.Being Registered Land Certificate 126026.Unregistered LandSituated in the County of Hamilton in the State of Ohio and in the City of Norwood and being all of Lots 34, 35, 36, 37, 38, 39, 33, 40, 41, 42 and 43 of theRaper Subdivision, recorded in Plat Book 22, Page 16, Hamilton County, Ohio Records.Situated in Section 4, Town 3, Fractional Range 2, City of Norwood, Hamilton County, Ohio, records and being more particularly described as follows:Commencing at a point in the North line of Sherman Avenue measuring 450.00 feet West of the centerline of Baker Avenue; thence from said point on Northline on Sherman Avenue, North 1° 32' East, 534.70 feet to the Northwest corner of Lot #33, of the Raper Subdivision, recorded in Plat Book 22, Page 16,Hamilton County, Ohio Records, and being the Real Point of Beginning;thence from said point of beginning, continuing on same line North 1° 32' East 164.00 feet to aniron pin; thence south 88° 28', East, 125.00 feet-to a point; thence South 1° 32' West 164.00 feet to apoint; thence North 88° 28' Nest, 125 feet to the point of beginning;Containing 0.471 acres of land.Being part of Lot 44 of said Raper Subdivision, and part of Block B of the partition of the Margaret McGee Estate made in Case No. 85703 in the CommonPleas Court of Hamilton County, Ohio. 1578 ShermanSituated in the City of Norwood, County of Hamilton, State of Ohio, described as follows:PARCEL 1:SITUATE IN THE CITY OF NORWOOD, HAMILTON COUNTY, OHIO, AND KNOWN, NUMBERED AND DESIGNATED AS LOTS NUMBERED 24, 25,26, 27, 28, 29, 30, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44 AND THE NORTH 25 BY 120 FEET OF LOT 23, THE SOUTH 15 BY 120 FEET OF LOT 31,AND THE WEST PART OF LOTS 45, BEING 25 BY 114 FEET IN DEPTH AS SHOWN ON THE PLAT OF RAPER SUBDIVISION RECORDED IN PLATBOOK 22, PAGE 16, HAMILTON COUNTY, OHIO, RECORDS, TOGETHER WITH A 50 FOOT STRIP OF GROUND BEING MORE PARTICULARLYDESCRIBED AS FOLLOWS:BEGINNING AT A POINT IN THE NORTH SIDE OF SHERMAN AVENUE, 125 FEET EAST OF THE WEST LINE OF SAID SUBDIVISION EXTENDEDSOUTHWARDLY; THENCE NORTH 535 FEET ALONG THE EAST LINES OF LOTS 43, 42, 41, 40, 39, 38, 37, 36, 35, 34 AND 33 TO A POINT; THENCEWEST 125 FEET TO THE WEST LINE OF SAID SUBDIVISION; THENCE NORTH 50 FEET ALONG THE WEST LINE OF SAID SUBDIVISION TO THESOUTH LINE OF LOT 44; THENCE EAST ALONG THE SOUTH LINE OF LOT 44, 175 FEET TO A POINT IN THE WEST LINE OF LOT 52; THENCESOUTH ALONG THE WEST LINES OF LOTS 52, 32, 31, 30, 29, 28, 27, 26, 25, 24 AND 23 A DISTANCE OF 585 FEET TO THE NORTH LINE OFSHERMAN AVENUE; THENCE WESTWARDLY ALONG THE NORTH LINE OF SHERMAN AVENUE 50 FEET TO THE PLACE OF BEGINNING.BEING PART OF THE SAME PREMISES CONVEYED TO THE GRANTORS BY CERTIFICATE OF TRANSFER OF REAL ESTATE RECORDED IN DEEDBOOK 3325, PAGE 473, HAMILTON COUNTY, OHIO, RECORDS.PARCEL 2:SITUATE IN NORWOOD, HAMILTON COUNTY, OHIO, AND BEING A STRIP OF LAND 5 FT. IN WIDTH BY 116.50 FT. IN DEPTH, LYING ALONG THESOUTH LINE OF LOT 52 OF RAPER'S RESUBDIVISION OF LOTS 45 AND 46 OF RAPER'S SUBDIVISION, PLAT OF THE RE-SUBDIVISION BEINGRECORDED IN PLAT BOOK 49, PAGE 63, HAMILTON COUNTY, OHIO, RECORDER'S RECORDS.PARCEL 3:SITUATE IN THE CITY OF NORWOOD, HAMILTON COUNTY, OHIO, BEING PART OF BLOCK "B" OF THE ESTATE OF MARGARET MCGEE, ASPARTITIONER IN CASE NUMBER 85703 OF THE COMMON PLANS COURT OF HAMILTON COUNTY, AS RECORDED IN VOLUME 82, PAGE 371 OFTHE RECORDS OF SAID COURT AND BOUNDED AS FOLLOWS: BEGINNING AT A POINT IN THE NORTH LINE OF SHERMAN AVENUE, ONEHUNDRED SEVENTY-FIVE (175) FEET EAST OF THE WESTERN BOUNDARY OF SAID BLOCK "B"; THENCE EASTWARDLY ALONG THE NORTHLINE OF SHERMAN AVENUE SIXTY-SEVEN (67) FEET TO A POINT; THENCE NORTHWARDLY ALONG A LINE PARALLEL TO THE WEST LINE OFSAID BLOCK "B", ONE HUNDRED TWENTY-FIVE (125) FEET TO A POINT; THENCE WESTWARDLY ALONG A LINE PARALLEL TO THE NORTHLINE OF SHERMAN AVENUE SIXTY-SEVEN (67) FEET TO A POINT; THENCE SOUTHWARDLY ALONG A LINE PARALLEL TO THE WEST LINE OFSAID BLOCK "B", ONE HUNDRED TWENTY-FIVE (125) FEET TO THE PLACE OF BEGINNING.PARCEL 4:BEING IN RAPER SUBDIVISION, SITUATE IN SECTION 4, TOWNSHIP 3, FRACTIONAL RANGE 2, MILLCREEK TOWNSHIP, IN THE CITY OFNORWOOD, HAMILTON COUNTY, OHIO, AS SAID RAPER SUBDIVISION APPEARS OF RECORD IN PLAT BOOK 22, PAGE 16 OF THE HAMILTONCOUNTY, OHIO RECORDER'S OFFICE, BEING PART OF LOT 23 OF SAID RAPER SUBDIVISION AND DESCRIBED AS FOLLOWS: BEGINNING IN THE SOUTHWESTERLY CORNER OF SAID LOT 23 AND EXTENDING THENCE EASTWARDLY ALONG THESOUTHERLY LINE OF SAID LOT 23, SIXTYSEVEN (67) FEET TO A POINT; THENCE RUNNING NORTHWARDLY PARALLEL TO THE WESTERLYBOUNDARY LINE OF SAID LOT 23, FOR A DISTANCE OF TEN (10) FEET TO A POINT; THENCE RUNNING EASTWARDLY PARALLEL WITH THESOUTHERLY BOUNDARY LINE OF SAID LOT 23 FOR A DISTANCE OF FIFTY-THREE (53) FEET TO THE EASTERLY LINE OF SAID LOT 23; THENCENORTHWARDLY ALONG THE EASTERLY BOUNDARY LINE OF SAID LOT 23 FOR A DISTANCE OF TEN (10) FEET TO A POINT; THENCEWESTWARDLY PARALLEL TO THE SOUTHERLY LINE OF SAID LOT 23 FOR A DISTANCE OF ONE HUNDRED TWENTY (120) FEET TO THEWESTERLY LINE OF SAID LOT 23; THENCE SOUTHWARDLY ALONG THE WESTERLY BOUNDARY LINE OF SAID LOT 23, TWENTY (20) FEET TOTHE PLACE OF BEGINNING.PARCEL 5:SITUATE IN THE CITY OF NORWOOD, MILLCREEK TOWNSHIP, HAMILTON COUNTY, OHIO, BEING PART OF BLOCK "B", OF THE ESTATE OFMARGARET MCGEE AS PARTITIONED IN CASE #85703, OF THE C P C OF SAID COUNTY, AS RECORDED IN VOLUME 82, PAGE 371, OF THERECORDS OF SAID COURT, AND DESCRIBED AS FOLLOWS: BEGINNING AT A POINT IN THE NORTH LINE OF SHERMAN AVENUE 282 FEETEAST OF THE POINT OF INTERSECTION OF WEST BOUNDARY LINE OF BLOCK "B" WITH THE NORTH LINE OF SHERMAN AVENUE; THENCEEASTWARDLY ALONG THE NORTH LINE OF SHERMAN AVENUE, A DISTANCE OF 40 FEET TO A POINT; THENCE NORTHWARDLY ON A LINEPARALLEL WITH THE WEST LINE OF BLOCK "B" A DISTANCE OF 125 FEET TO A POINT; THENCE WESTWARDLY ON A LINE PARALLEL TO THENORTH LINE OF SHERMAN AVENUE A DISTANCE OF 40 FEET TO A POINT; THENCE SOUTHWARDLY ON A LINE PARALLEL TO THE WEST LINEOF BLOCK "B" A DISTANCE OF 125 FEET TO THE PLACE OF BEGINNING.EXCEPTING THEREFROM THE NORTHEAST PORTION OF SAID PREMISES AS FOLLOWS:BEGINNING AT A POINT IN THE EAST LINE OF SAID PREMISES 100 FEET NORTH OF THE NORTH LINE OF SHERMAN AVENUE; THENCENORTHWARDLY ALONG THE LINE OF SAID PREMISES 25 FEET TO A POINT; THENCE WESTWARDLY ALONG THE NORTH LINE OF SAIDPREMISES 22 FEET TO A POINT IN SAID NORTH LINE; THENCE IN A SOUTHEASTERLY DIRECTION OF A DIRECT DIAGONAL LINE TO THEPLACE OF BEGINNING.ALSO A RIGHT-OF-WAY 12 FEET IN WIDTH CONVEYED TO CHESTER W. HENRY BY KATE ROPER IN DEED BOOK 1107, PAGE 307, SAID RIGHT-OF-WAY HAS SINCE BEEN LAID OUT AS A PUBLIC ALLEY IN THE RAPER SUBDIVISION, AS RECORDED IN PLAT BOOK 22, PAGE 16, HAMILTONCOUNTY, OHIO, PLAT RECORDS.BEING THE SAME PREMISES CONVEYED TO THE DECEDENT IN DEED RECORDED IN DEED BOOK 3270, PAGER 486 OF THE DEED RECORDS OFHAMILTON COUNTY, OHIO WHO WAS KNOWN AS MARY ELSIE SIMPSON AND MARY SIMPSON WHOSE ESTATE CONVEYED TO THE GRANTORHEREIN BY CERTIFICATE RECORDED IN DEED BOOK 4332, PAGE 1479.EXCEPTING FROM THE ABOVE PARCELS THE FOLLOWING TWO DESCRIPTIONS:EXCEPTION 1:SITUATED IN THE COUNTY OF HAMILTON IN THE STATE OF OHIO AND IN THE CITY OF NORWOOD AND BEING ALL OF LOTS 33, 34, 35, 36, 37,38, 39, 40, 41, 42 AND 43 OF THE RAPER SUBDIVISION, RECORDED IN PLAT BOOK 22, PAGE 16, HAMILTON COUNTY, OHIO RECORDS. EXCEPTION 2:SITUATED IN SECTION 4, TOWN 3, FRACTIONAL RANGE 2, CITY OF NORWOOD, HAMILTON COUNTY, OHIO, RECORDS AND BEING MOREPARTICULARLY DESCRIBED AS FOLLOWS:COMMENCING AT A POINT IN THE NORTH LINE OF SHERMAN AVENUE MEASURING 450.00 FEET WEST OF THE CENTERLINE OF BAKERAVENUE; THENCE FROM SAID POINT ON NORTH LINE ON SHERMAN AVENUE, NORTH 1° 32' EAST, 534.70 FEET TO THE NORTHWEST CORNEROF LOT #33, OF THE RAPER SUBDIVISION, RECORDED IN PLAT BOOK 22, PAGE 16, HAMILTON COUNTY, OHIO RECORDS, AND BEING THEREAL POINT OF BEGINNING;THENCE FROM SAID POINT OF BEGINNING, CONTINUING ON SAME LINE, NORTH 1° 32' EAST 164.00 FEET TO AN IRON PIN; THENCE SOUTH 88°28' EAST, 125.00 FEET TO A POINT; THENCE SOUTH 1° 32' WEST 164.00 FEET TO A POINT; THENCE NORTH 88° 28' WEST, 125 FEET TO THEPOINT OF BEGINNING;CONTAINING 0.471 ACRES OF LAND AND BEING SUBJECT TO ANY EASEMENT OF RECORD.BEING PART OF LOT 44 OF SAID RAPER SUBDIVISION, AND PART OF BLOCK B OF THE PARTITION OF THE MARGARET MCGEE ESTATE MADEIN CASE NO. 85703 IN THE COMMON PLEAS COURT OF HAMILTON COUNTY, OHIO.[[The legal description shown above for the Victory Facility does not meet Hamilton County Conveyancing Standards. Prior to Landlord’s acquisition of theVictory/Victoria Facilities, a new legal description will be prepared by a surveyor licensed in Ohio and approved by the County. Upon approval of such newlegal description by Hamilton County, such legal description shall automatically supersede the legal description for the Victory Facility hereinabove.]] EXHIBIT CLANDLORD PERSONAL PROPERTYAll machinery, equipment, furniture and other personal property located at or about the Victory/Victoria Facilities and used inconnection with the ownership, operation, or maintenance of either of the Victory/Victoria Facilities, together with all replacements,modifications, alterations and substitutes thereof (whether or not constituting an upgrade) but excluding the following:(a) all vehicles (including any leasehold interests therein);(b) all office supplies, medical supplies, food supplies, housekeeping supplies, laundry supplies, and inventories and suppliesphysically on hand at the Victory/Victoria Facilities;(c) all customer lists, patient files, and records related to patients (subject to patient confidentiality privileges) and all books andrecords with respect to the operation of the Victory/Victoria Facilities;(d) all employee time recording devices, proprietary software and discs used in connection with the operation of theVictory/Victoria Facilities by Tenant or any Person(s) who manages the operations of such Facilities, all employee pagers,employee manuals, training materials, policies, procedures, and materials related thereto with respect to the operation of theVictory/Victoria Facilities; and(e) all telephone numbers, brochures, pamphlets, flyers, mailers, and other promotional materials related to the marketing andadvertising of the Tenant’s business at the Victory/Victoria Facilities. SCHEDULE 1Facility NameFacility AddressPrimary IntendedUseNo. of LicensedBedsNo. of CertifiedBeds forMedicare/MedicaidBeds “InService”Victoria Retirement Community(the “Victoria Facility”)1500 Sherman Avenue, Cincinnati,OHSNF/ALF90 licensed skillednursing beds/ 69licensed assistedliving beds90 skilled nursingbeds/ 69 assistedliving beds90 skillednursing beds/ 69assisted livingbedsVictory Park Nursing Home (the“Victory Facility”)1578 Sherman Avenue, Cincinnati,OHSNF55 licensed beds5555Defined Terms“SNF”Skilled Nursing Facility“ALF”Assisted Living Facility“ILF”Independent Living Facility“ALZ”Alzheimer’s Care/Memory Care Facility SCHEDULE 2TENANT OWNERSHIP STRUCTURENameMailing AddressMembership Interest in Each ofTenantPristine Ohio Holdings, LLC1301 East Riggin RoadMuncie, Indiana 47303100% SCHEDULE 3ALTERATIONS WITH IMPROVEMENT FUNDSCapital ImprovementEstimated CostPaving and Parking$25,000Common Area Flooring$125,000Resident Room Furniture and Flooring$325,000Substructure, Exterior Walls, Roof/Chimney Repairs$25,000Total$500,000 SCHEDULE 4DISCLOSURES1. To the northeast of the Victory Facility, a portion of the asphalt drive that is used for a few unstriped parking spaces encroachesonto neighboring property. If an issue is raised in the future, Tenant shall, at its sole cost and expense, correct this encroachment issuein a manner reasonably acceptable to Landlord. By way of information only, and without any representation or warranty whatsoever,Seller has verbally stated that this encroachment and use has existed for over 30 years.2. Zoning code requires 18 parking spaces. A surveyor shows that 12 are striped. By way of information only, and without anyrepresentation or warranty whatsoever, Seller has verbally stated that the shoulder of the drive is used to park several vehicles. If anissue is raised in the future, Tenant shall, at its sole cost and expense, correct this parking matter in a manner reasonably acceptable toLandlord.3. New certificates of occupancy need to be processed with the City after the Acquisition Date. Promptly after the Acquisition Date,but in no event later than required by applicable code, Tenant will (a) file all necessary applications and supporting materials and (b)arrange all necessary inspections, prerequisite to the issuance of the new certificates of occupancy. Landlord shall reasonably cooperatewith Tenant’s efforts to obtain such certificates of occupancy. Exhibit 10.7FIRST AMENDMENT TO GUARANTY OF MASTER LEASETHIS FIRST AMENDMENT TO GUARANTY OF MASTER LEASE (this “Amendment”) is effective as ofNovember 15, 2016 (the “Effective Date”) by PRISTINE SENIOR LIVING, LLC, an Indiana limited liability company (“PSL”),and CHRISTOPHER T. COOK, an individual (“CTC”; individually or together as PSL and CTC, as the context requires,“Guarantor”), and CTR PARTNERSHIP, L.P., a Delaware limited partnership (“Landlord”).RECITALSA.Landlord, on the one hand, and those entities identified therein as “Tenant” (collectively, “Tenant”), on the otherhand, have entered into that certain Master Lease dated July 30, 2015 (as subsequently amended, the “Lease”).B.CTC, PSL and Stephen C. Ryan, an individual (“SCR”), entered into that certain Guaranty of Lease dated July 30,2015 in favor of Landlord (as the same may have been, or may hereafter be, amended, restated, reaffirmed, or otherwise modified fromtime to time, the “Guaranty”), for the purpose of guaranteeing the obligations of Tenant under the Lease.C.The parties now desire to amend the Guaranty in certain limited respects, all upon the terms and subject to theconditions set forth herein. All initially-capitalized terms used and not otherwise defined herein shall have the same meanings givensuch terms in the Guaranty.AGREEMENTNOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged,the parties agree as follows:1.Release of SCR. Notwithstanding anything in the Guaranty to the contrary, the parties hereto agree that SCR shall bereleased as a Guarantor under the Guaranty and the Joinder appended to the Master Lease for liabilities arising thereunder from andafter the Effective Date. Accordingly, from and after the Effective Date,(a) “Guarantor” shall mean PSL and CTC, jointly and severally; and(b) Section 1 of the Guaranty shall be replaced with the following:“PSL and CTC, jointly and severally, hereby absolutely and unconditionally guarantee to Landlord thefollowing (collectively, the “Guaranteed Obligations”):(a) payment in full by Tenant of all Rent (including, without limitation, Base Rent and Additional Rent)and other amounts71047 1due under the Lease in the manner and at the time prescribed in the Lease;(b) the full, complete and timely performance by Tenant of all covenants, indemnities and otherobligations under the Lease, including, without limitation, any indemnity or other obligations of Tenantthat survive the expiration or earlier termination of the Lease;(c) the accuracy and truthfulness in all material respects of all of the representations and warranties madeby Tenant under the Lease; and(d) all costs of collection or enforcement incurred by Landlord in exercising any remedies provided forin the Lease, whether at law or in equity, with respect to the matters set forth in clauses (a) through (c),inclusive, above.”2.Additional Amendments. The Guaranty is further hereby amended (effective as of the Effective Date) in thefollowing respects:(a) Section 12(a) of the Guaranty is hereby deleted in its entirety. For the avoidance of doubt, Guarantor and Landlordhereby agree that as of the Effective Date there shall be no limitations or caps on CTC’s liability under the Guaranty.(b) Section 13(h) of the Guaranty is hereby deleted in its entirety. For the avoidance of doubt, Guarantor and Landlordhereby agree that as of the Effective Date the liability of PSL and CDC shall be joint and several.(c) The Guaranty and the Joinder to the Master Lease shall be deemed further amended mutatis mutandis to the extentnecessary to give effect to any provision of this Amendment.3.Reaffirmation of Obligations. Guarantor hereby acknowledges and reaffirms its obligations under the Guaranty, asmodified by this Amendment, and all documents executed by Guarantor in connection therewith, and further agrees that from and afterthe Effective Date any reference in the Guaranty to particular terms and provisions shall be deemed to refer to those terms andprovisions as amended hereby.4.Interpretation; Governing Law. This Amendment shall be construed as a whole and in accordance with its fairmeaning. Headings are for convenience only and shall not be used in construing meaning. This Amendment shall be governed by andconstrued in accordance with the internal laws of the State of Maryland.71047 25.Further Instruments. Each party will, whenever and as often as it shall be reasonably requested to do so by theother party, cause to be executed, acknowledged or delivered, any and all such further instruments and documents as may be necessaryor proper, in the reasonable opinion of the requesting party, in order to carry out the intent and purpose of this Amendment.6.Incorporation of Recitals. The Recitals to this Amendment are incorporated herein by this reference.7.Effect of Amendment. Except as specifically amended pursuant to the terms of this Amendment, the terms andconditions of the Guaranty shall remain unmodified and in full force and effect. In the event of any inconsistencies between the termsof this Amendment and any terms of the Guaranty, the terms of this Amendment shall govern and prevail.8.Severability. If any term or provision of this Guaranty or any application thereof shall be held invalid orunenforceable, the remainder of this Guaranty and any other application of such term or provision shall not be affected thereby.9.Headings. All titles and headings to sections, articles or other subdivisions of this Guaranty are for convenience ofreference only and shall not in any way affect the meaning or construction of any provision.10.Counterparts. This Guaranty may be executed in any number of counterparts, each of which shall be a valid andbinding original, but all of which together shall constitute one and the same instrument. Executed copies hereof may be delivered bytelecopier, email or other electronic means and upon receipt will be deemed originals and binding upon the parties hereto, regardless ofwhether originals are delivered thereafter.[Signature page follows]71047 3EXECUTED as of the date first set forth above. GUARANTOR:/s/ Christopher T. Cook Christopher T. CookPRISTINE SENIOR LIVING, LLC, an Indiana limited liability companyBy: /s/ Christopher T. Cook Christopher T. Cook, ManagerLANDLORD:CTR PARTNERSHIP, L.P., a Delaware limited partnershipBy:CARETRUST GP, LLC, a Delaware limited liability company Its: general partnerBy:CARETRUST REIT, INC., a Maryland corporation, its sole memberBy: /s/ Josh McLane Name: Josh McLane Title: Secretary EXHIBIT 21.1LIST OF SUBSIDIARIES OF CARETRUST REIT, INC.*1.CareTrust GP, LLC** 51.Long Beach Health Associates LLC2.CTR Partnership, L.P.** 52.Lowell Health Holdings LLC3.CareTrust Capital Corp.** 53.Lowell Lake Health Holdings LLC4.18th Place Health Holdings LLC 54.Lufkin Health Holdings LLC5.49th Street Health Holdings LLC 55.Meadowbrook Health Associates LLC6.4th Street Holdings LLC 56.Memorial Health Holdings LLC7.51st Avenue Health Holdings LLC 57.Mesquite Health Holdings LLC8.Anson Health Holdings LLC 58.Mission CCRC LLC9.Arapahoe Health Holdings LLC 59.Moenium Holdings LLC10.Arrow Tree Health Holdings LLC 60.Mountainview Communitycare LLC11.Avenue N Holdings LLC 61.Northshore Healthcare Holdings LLC12.Big Sioux River Health Holdings LLC 62.Oleson Park Health Holdings LLC13.Boardwalk Health Holdings LLC 63.Orem Health Holdings LLC14.Bogardus Health Holdings LLC 64.Paredes Health Holdings LLC15.Burley Healthcare Holdings LLC 65.Plaza Health Holdings LLC16.Casa Linda Retirement LLC 66.Polk Health Holdings LLC17.Cedar Avenue Holdings LLC 67.Prairie Health Holdings LLC18.Cherry Health Holdings LLC 68.Price Health Holdings LLC19.CM Health Holdings LLC 69.Queen City Health Holdings LLC20.Cottonwood Health Holdings LLC 70.Queensway Health Holdings LLC21.Dallas Independence LLC 71.RB Heights Health Holdings LLC22.Dixie Health Holdings LLC 72.Regal Road Health Holdings LLC23.Emmett Healthcare Holdings LLC 73.Renee Avenue Health Holdings LLC24.Ensign Bellflower LLC 74.Rillito Holdings LLC25.Ensign Highland LLC 75.Rio Grande Health Holdings LLC26.Ensign Southland LLC 76.Salmon River Health Holdings LLC27.Everglades Health Holdings LLC 77.Salt Lake Independence LLC28.Expo Park Health Holdings LLC 78.San Corrine Health Holdings LLC29.Expressway Health Holdings LLC 79.Saratoga Health Holdings LLC30.Falls City Health Holdings LLC 80.Silver Lake Health Holdings LLC31.Fifth East Holdings LLC 81.Silverada Health Holdings LLC32.Fig Street Health Holdings LLC 82.Sky Holdings AZ LLC33.Flamingo Health Holdings LLC 83.Snohomish Health Holdings LLC34.Fort Street Health Holdings LLC 84.South Dora Health Holdings LLC35.Gazebo Park Health Holdings LLC 85.Stillhouse Health Holdings LLC36.Gillette Park Health Holdings LLC 86.Temple Health Holdings LLC37.Golfview Holdings LLC 87.Tenth East Holdings LLC38.Granada Investments LLC 88.Terrace Holdings AZ LLC39.Guadalupe Health Holdings LLC 89.Trinity Mill Holdings LLC40.Hillendahl Health Holdings LLC 90.Trousdale Health Holdings LLC41.Hillview Health Holdings LLC 91.Tulalip Bay Health Holdings LLC42.Irving Health Holdings LLC 92.Valley Health Holdings LLC43.Ives Health Holdings LLC 93.Verde Villa Holdings LLC44.Jefferson Ralston Holdings LLC 94.Wayne Health Holdings LLC45.Jordan Health Properties LLC 95.Willits Health Holdings LLC46.Josey Ranch Healthcare Holdings LLC 96.Willows Health Holdings LLC47.Kings Court Health Holdings LLC 97.Wisteria Health Holdings LLC48.Lafayette Health Holdings LLC 98.CTR Arvada Preferred, LLC**49.Lemon River Holdings LLC 99.CTR Cascadia Preferred, LLC**50.Lockwood Health Holdings LLC *Unless otherwise indicated, the jurisdiction of formation or incorporation, as applicable, of each of the subsidiaries listed herein is Nevada.**Formed or incorporated in Delaware.Exhibit 23.1Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-196634) pertaining to the Incentive Award Plan ofCareTrust REIT, Inc. and Form S-3 (No. 333-208925) of CareTrust REIT, Inc., of our reports dated February 7, 2016, with respect to the consolidated andcombined financial statements and schedule of CareTrust REIT, Inc. and the effectiveness of internal control over financial reporting of CareTrust REIT Inc.,included in this Annual Report (Form 10-K) for the year ended December 31, 2016./s/ ERNST & YOUNG LLPIrvine, CaliforniaFebruary 7, 2017Exhibit 31.1CERTIFICATIONI, Gregory K. Stapley, certify that:1. I have reviewed this Annual Report on Form 10-K of CareTrust REIT, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. By: /s/ Gregory K. Stapley Gregory K. Stapley President and Chief Executive OfficerDate: February 7, 2017Exhibit 31.2CERTIFICATIONI, William M. Wagner, certify that:1. I have reviewed this Annual Report on Form 10-K of CareTrust REIT, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. By: /s/ William M. Wagner William M. Wagner Chief Financial Officer and TreasurerDate: February 7, 2017Exhibit 32Certification of Chief Executive Officer andChief Financial Officer Pursuant to18 U.S.C. Section 1350, As Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002In connection with the Annual Report on Form 10-K of CareTrust REIT, Inc. (the “Company”) for the fiscal year ended December 31, 2016, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), Gregory K. Stapley, as President and Chief Executive Officer of the Company, andWilliam M. Wagner, as Chief Financial Officer and Treasurer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002, that to their knowledge:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Gregory K. StapleyName: Gregory K. StapleyTitle: President and Chief Executive OfficerDate: February 7, 2017 /s/ William M. WagnerName: William M. WagnerTitle: Chief Financial Officer and TreasurerDate: February 7, 2017The foregoing certification is being furnished pursuant to 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities andExchange Act of 1934, as amended, and it is not to be incorporated by reference into any filing of the Company, regardless of any general incorporationlanguage in such filing.

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