INVESTMENT IN REAL ESTATE PROPERTIES

3 Months Ended

Mar. 31, 2022

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

As of March 31, 2022


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	279	30,920	$	3,623,501	$	(499,510)	$	3,123,991
Senior Housing - Leased	59	4,072	718,178		(108,364)		609,814
Senior Housing - Managed	50	5,266	1,043,235		(183,148)		860,087
Behavioral Health	13	795	418,625		(44,309)		374,316
Specialty Hospitals and Other	15	392	225,443		(37,977)		187,466
	416	41,445	6,028,982		(873,308)		5,155,674
Corporate Level			873		(487)		386
			$	6,029,855	$	(873,795)	$	5,156,060

As of December 31, 2021


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	279	30,920	$	3,617,359	$	(474,534)	$	3,142,825
Senior Housing - Leased	60	4,099	720,581		(104,046)		616,535
Senior Housing - Managed	49	5,140	1,012,398		(174,098)		838,300
Behavioral Health	13	795	417,659		(41,556)		376,103
Specialty Hospitals and Other	15	392	225,348		(36,623)		188,725
	416	41,346	5,993,345		(830,857)		5,162,488
Corporate Level			863		(467)		396
			$	5,994,208	$	(831,324)	$	5,162,884


	March 31, 2022		December 31, 2021
Building and improvements	$	5,175,057	$	5,145,096
Furniture and equipment	265,312		262,969
Land improvements	4,003		4,295
Land	585,483		581,848
Total real estate at cost	6,029,855		5,994,208
Accumulated depreciation	(873,795)		(831,324)
Total real estate investments, net	$	5,156,060	$	5,162,884

Operating Leases

As of March 31, 2022, the substantial majority of the Company’s real estate properties (excluding 50 Senior Housing - Managed communities) were leased under triple-net operating leases with expirations ranging from less than one year to 20 years. As of March 31, 2022, the leases had a weighted-average remaining term of seven 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 consolidated balance sheets and totaled $11.2 million and $28.6 million as of March 31, 2022 and December 31, 2021, respectively, and letters of credit deposited with the Company totaled approximately $82 million and $63 million as of March 31, 2022 and December 31, 2021, respectively. In addition, the Company’s tenants have deposited with the Company $16.7 million and $16.8 million as of March 31, 2022 and December 31, 2021, 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 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 $5.1 million and $4.8 million during the three months ended March 31, 2022 and 2021, respectively.

The Company monitors the creditworthiness of its tenants by evaluating the ability of the tenants to meet their lease obligations to the Company based on the tenants’ financial performance, including, as applicable and appropriate, the evaluation of any parent guarantees (or the guarantees of other related parties) of such lease obligations. 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 as supplemented by 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 the majority of 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.

The Avamere Family of Companies (“Avamere”) leases 27 facilities from the Company and has been impacted by census declines, labor cost increases and cash flow constraints as a result of the COVID-19 pandemic. In 2021, the Company concluded that its lease with Avamere should no longer be accounted for on an accrual basis and used Avamere’s $11.9 million letter of credit to fund rent. In 2022, Avamere’s lease was amended to, among other things, reduce Avamere’s annual base rent to $30.7 million from $44.1 million effective February 1, 2022.

For the three months ended March 31, 2022, no tenant relationship represented 10% or more of the Company’s total revenues.

As of March 31, 2022, 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):


April 1 through December 31, 2022	$	305,189
2023	394,427
2024	394,817
2025	387,304
2026	370,067
Thereafter	1,410,722
	$	3,262,526

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 for each of the three months ended March 31, 2022 and 2021.

Investment in Unconsolidated Joint Venture

The Company has a 49% equity interest in a joint venture (the “Enlivant Joint Venture”) with affiliates of TPG Real Estate, the real estate platform of TPG. TPG also owns Enlivant, the senior housing management platform that manages the portfolio owned by the Enlivant Joint Venture. As of March 31, 2022, the Enlivant Joint Venture owned 158 senior housing communities.

During the second quarter of 2021, the Company re-evaluated its plans with respect to the Enlivant Joint Venture and determined that it intends to eventually exit its 49% stake. The Company revisited its estimate of the fair value of its investment in the Enlivant Joint Venture and concluded that the carrying value exceeded the estimated fair value of the investment and deemed the decline to be other-than-temporary. This resulted in the Company recording an impairment charge totaling $164.1 million during the three months ended June 30, 2021.

As of March 31, 2022, the book value of the Company’s investment in the Enlivant Joint Venture was $93.9 million which includes an unamortized basis difference of $291.8 million. The unamortized basis difference is related to the difference between the amount the Company purchased its interest in the Enlivant Joint Venture for and the historical cost basis of the assets. The Company’s book value of the Enlivant Joint Venture is presented net of the debt at the joint venture level.

The ongoing operating performance of the Enlivant Joint Venture, as well as whether TPG is able to secure a buyer on favorable terms or at all, will impact the ultimate amounts realized from the Enlivant Joint Venture and may require the Company to recognize an additional impairment charge in the future with respect to this investment. Accordingly, the amount ultimately realized by the Company for its investment in the Enlivant Joint Venture could materially differ from its estimated fair value as reflected in the consolidated balance sheets as of March 31, 2022.

Net Investment in Sales-Type Lease

As of March 31, 2022, the Company had a $25.3 million net investment in one skilled nursing/transitional care facility leased to an operator under a sales-type lease, as the tenant is obligated to purchase the property at the end of the lease term. The net investment in sales-type lease is recorded in accounts receivable, prepaid expenses and other assets, net on the accompanying consolidated balance sheets and represents the present value of total rental payments of $2.5 million, plus the estimated purchase price of $25.6 million, less the unearned lease income of $2.6 million and allowance for credit losses of $0.2 million as of March 31, 2022. 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 sales-type lease was $0.6 million for each of the three months ended March 31, 2022 and 2021, and is reflected in interest and other income on the accompanying consolidated statements of income. During the three months ended March 31, 2022 and 2021, the Company reduced its allowance for credit losses by $32,000 and increased its allowance for credit losses by $0.1 million, respectively. During the three months ended March 31, 2021, the Company was required to recognize a $1.0 million gain on sale of real estate prior to the sale to the tenant as a result of a lease modification and reassessing the classification of the lease and determining it should be accounted for as a sales-type lease. Future minimum lease payments contractually due under the sales-type lease at March 31, 2022 were as follows: $1.8 million for the remainder of 2022 and $0.8 million for 2023.