INVESTMENT IN REAL ESTATE PROPERTIES

9 Months Ended

Sep. 30, 2020

Real Estate Investments, Net [Abstract]

The Company’s real estate properties held for investment consisted of the following (dollars in thousands):

As of September 30, 2020


Property Type	Number of Properties	Number of Beds/Units	Total Real Estate at Cost		Accumulated Depreciation		Total Real Estate Investments, Net
Skilled Nursing/Transitional Care	287	32,019	$	3,642,653	$	(360,742)	$	3,281,911
Senior Housing - Leased	64	4,242	707,379		(83,105)		624,274
Senior Housing - Managed	47	4,924	931,655		(134,056)		797,599
Specialty Hospitals and Other	27	1,193	663,982		(61,909)		602,073
	425	42,378	5,945,669		(639,812)		5,305,857
Corporate Level			817		(402)		415
			$	5,946,486	$	(640,214)	$	5,306,272

As of December 31, 2019


Property Type	Number of Properties	Number of Beds/Units	Total Real Estate at Cost		Accumulated Depreciation		Total Real Estate Investments, Net
Skilled Nursing/Transitional Care	296	33,290	$	3,701,666	$	(306,565)	$	3,395,101
Senior Housing - Leased	62	3,820	630,688		(72,278)		558,410
Senior Housing - Managed	46	4,809	907,771		(112,893)		794,878
Specialty Hospitals and Other	25	1,193	639,721		(47,124)		592,597
	429	43,112	5,879,846		(538,860)		5,340,986
Corporate Level			737		(353)		384
			$	5,880,583	$	(539,213)	$	5,341,370


	September 30, 2020		December 31, 2019
Building and improvements	$	5,107,022	$	5,042,435
Furniture and equipment	243,265		239,229
Land improvements	1,917		1,534
Land	594,282		597,385
	5,946,486		5,880,583
Accumulated depreciation	(640,214)		(539,213)
	$	5,306,272	$	5,341,370

Operating Leases

As of September 30, 2020, the substantial majority of the Company’s real estate properties (excluding 47 Senior Housing - Managed communities) were leased under triple-net operating leases with expirations ranging from less than one year to 15 years. As of September 30, 2020, the leases had a weighted-average remaining term of eight years. The leases generally include

provisions to extend the lease terms and other negotiated terms and conditions. The Company, through its subsidiaries, retains substantially all of the risks and benefits of ownership of the real estate assets leased to the tenants. The Company may receive additional security under these operating leases in the form of letters of credit and security deposits from the lessee or guarantees from the parent of the lessee. Security deposits received in cash related to tenant leases are included in accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheets and totaled $11.7 million and $10.5 million as of September 30, 2020 and December 31, 2019, respectively, and letters of credit deposited with the Company totaled approximately $86 million and $83 million as of September 30, 2020 and December 31, 2019, respectively. In addition, the Company’s tenants have deposited with the Company $15.4 million and $14.3 million as of September 30, 2020 and December 31, 2019, respectively, for future real estate taxes, insurance expenditures and tenant improvements related to the Company’s properties and their operations, and these amounts are included in accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheets.

Lessor costs that are paid by the lessor and reimbursed by the lessee are included in the measurement of variable lease revenue and the associated expense. As a result, the Company recognized variable lease revenue and the associated expense of $5.0 million and $15.7 million during the three and nine months ended September 30, 2020, respectively, and $4.0 million and $13.0 million during the three and nine months ended September 30, 2019, respectively.

The Company monitors the creditworthiness of its tenants by reviewing credit ratings (if available) and evaluating the ability of the tenants to meet their lease obligations to the Company based on the tenants’ financial performance, including the evaluation of any parent guarantees (or the guarantees of other related parties) of tenant lease obligations. As formal credit ratings may not be available for most of the Company’s tenants, the primary basis for the Company’s evaluation of the credit quality of its tenants (and more specifically the tenant’s ability to pay their rent obligations to the Company) is the tenant’s lease coverage ratio or the parent’s fixed charge coverage ratio for those entities with a parent guarantee. These coverage ratios include earnings before interest, taxes, depreciation, amortization and rent (“EBITDAR”) to rent and earnings before interest, taxes, depreciation, amortization, rent and management fees (“EBITDARM”) to rent at the lease level and consolidated EBITDAR to total fixed charges at the parent guarantor level when such a guarantee exists. The Company obtains various financial and operational information from its tenants each month and reviews this information in conjunction with the above-described coverage metrics to identify financial and operational trends, evaluate the impact of the industry’s operational and financial environment (including the impact of government reimbursement), and evaluate the management of the tenant’s operations. These metrics help the Company identify potential areas of concern relative to its tenants’ credit quality and ultimately the tenant’s ability to generate sufficient liquidity to meet its obligations, including its obligation to continue to pay the rent due to the Company.

During the three months ended September 30, 2020, the auditors for Genesis Healthcare, Inc. (“Genesis”) and subsidiaries of Signature Healthcare (“Signature”) that lease facilities from the Company each expressed substantial doubt over the respective abilities of Genesis and Signature to continue as a going concern. Accordingly, the Company concluded that its leases with Genesis and Signature should no longer be accounted for on an accrual basis and wrote off $14.3 million of non-cash rent receivable balances and lease intangibles related to these leases.

For the three and nine months ended September 30, 2020, no tenant relationship represented 10% or more of the Company’s total revenues.

As of September 30, 2020, the future minimum rental payments from the Company’s properties held for investment under non-cancelable operating leases were as follows and may materially differ from actual future rental payments received (in thousands):


October 1 through December 31, 2020	$	106,516
2021	431,202
2022	412,395
2023	402,083
2024	402,936
Thereafter	1,923,827
	$	3,678,959

Senior Housing - Managed Communities

The Company’s Senior Housing - Managed communities offer residents certain ancillary services that are not contemplated in the lease with each resident (i.e., housekeeping, laundry, guest meals, etc.). These services are provided and paid for in addition to the standard services included in each resident lease (i.e., room and board, standard meals, etc.). The

Company bills residents for ancillary services one month in arrears and recognizes revenue as the services are provided, as the Company has no continuing performance obligation related to those services. Resident fees and services include ancillary service revenue of $0.3 million and $0.7 million for the three and nine months ended September 30, 2020, respectively, and $0.2 million and $0.5 million for the three and nine months ended September 30, 2019, respectively.

Investment in Unconsolidated Joint Venture

The Company has a 49% equity interest in the Enlivant Joint Venture with affiliates of Enlivant and TPG Real Estate, the real estate platform of TPG, that owns senior housing communities managed by Enlivant. During the nine months ended September 30, 2020, the Enlivant Joint Venture sold 12 senior housing communities for aggregate gross proceeds of $18.2 million, and the Company recorded an aggregate net loss on sale of real estate related to unconsolidated joint venture of $3.3 million. As of September 30, 2020, the Enlivant Joint Venture owned 158 senior housing communities, and the book value of the Company’s investment in the Enlivant Joint Venture was $293.8 million.

Net Investment in Direct Financing Lease

As of September 30, 2020, the Company had a $24.1 million net investment in one skilled nursing/transitional care facility leased to an operator under a direct financing lease, as the tenant is obligated to purchase the property at the end of the lease term. The net investment in direct financing lease is recorded in accounts receivable, prepaid expenses and other assets, net on the accompanying condensed consolidated balance sheets and represents the present value of total rental payments of $2.8 million, plus the estimated purchase price of $24.8 million, less the unearned lease income of $3.3 million and allowance for credit losses of $0.2 million as of September 30, 2020. Unearned lease income represents the excess of the minimum lease payments and residual value over the cost of the investment. Unearned lease income is deferred and amortized to income over the lease term to provide a constant yield when collectability of the lease payments is reasonably assured. Income from the Company’s net investment in direct financing lease was $0.7 million and $2.0 million for the three and nine months ended September 30, 2020, respectively, and $0.7 million and $2.0 million for the three and nine months ended September 30, 2019, respectively, and is reflected in interest and other income on the accompanying condensed consolidated statements of income. Upon adoption of Topic 326 on January 1, 2020 and as of the adoption date, the Company recorded a $0.2 million reduction in equity and increase to its allowance for credit losses due to the cumulative effect of the changes contemplated by Topic 326. During the three and nine months ended September 30, 2020, the Company reduced its allowance for credit losses by $1,000 and $38,000, respectively. Future minimum lease payments contractually due under the direct financing lease at September 30, 2020 were as follows: $0.6 million for the remainder of 2020, $2.3 million for 2021 and $0.1 million for 2022.