INVESTMENT IN REAL ESTATE PROPERTIES

3 Months Ended

Mar. 31, 2023

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

As of March 31, 2023


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	258	28,334	$	3,212,202	$	(518,215)	$	2,693,987
Senior Housing - Leased	47	3,600	592,119		(101,303)		490,816
Senior Housing - Managed	59	5,973	1,245,066		(227,844)		1,017,222
Behavioral Health	17	965	474,079		(61,487)		412,592
Specialty Hospitals and Other	15	392	225,443		(43,392)		182,051
	396	39,264	5,748,909		(952,241)		4,796,668
Corporate Level			923		(550)		373
			$	5,749,832	$	(952,791)	$	4,797,041

As of December 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	264	29,136	$	3,385,221	$	(492,495)	$	2,892,726
Senior Housing - Leased	47	3,550	590,694		(97,716)		492,978
Senior Housing - Managed	59	5,942	1,205,283		(222,089)		983,194
Behavioral Health	17	965	465,143		(58,481)		406,662
Specialty Hospitals and Other	15	392	225,443		(42,038)		183,405
	402	39,985	5,871,784		(912,819)		4,958,965
Corporate Level			904		(526)		378
			$	5,872,688	$	(913,345)	$	4,959,343


	March 31, 2023		December 31, 2022
Building and improvements	$	4,945,404	$	5,034,470
Furniture and equipment	236,032		262,644
Land improvements	9,499		7,085
Land	558,897		568,489
Total real estate at cost	5,749,832		5,872,688
Accumulated depreciation	(952,791)		(913,345)
Total real estate investments, net	$	4,797,041	$	4,959,343

Operating Leases

As of March 31, 2023, the substantial majority of the Company’s real estate properties (excluding 59 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, 2023, 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 consolidated balance sheets and totaled $14.0 million and $13.1 million as of March 31, 2023 and December 31, 2022, respectively, and letters of credit deposited with the Company totaled approximately $59 million and $57 million as of March 31, 2023 and December 31, 2022, respectively. In addition, the Company’s tenants have deposited with the Company $13.6 million and $13.3 million as of March 31, 2023 and December 31,

2022, 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 $3.8 million and $5.1 million during the three months ended March 31, 2023 and 2022, 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.

During the third quarter of 2022, the Company concluded that its leases with North American Health Care, Inc. (“North American”) should no longer be accounted for on an accrual basis and wrote off $15.6 million of straight-line rent receivable balances related to these leases. The facilities were transitioned to the Ensign Group or Avamere, as applicable, effective February 1, 2023.

For the three months ended March 31, 2023, no tenant relationship represented 10% or more of the Company’s total revenues.

As of March 31, 2023, 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, 2023	$	279,989
2024	380,057
2025	375,286
2026	360,133
2027	337,235
Thereafter	1,535,962
	$	3,268,662

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 $0.5 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively.

Capital and Other Expenditures

As of March 31, 2023, the Company’s aggregate commitment for future capital and other expenditures associated with facilities leased under triple-net operating leases was approximately $65 million. These commitments are principally for improvements to its facilities.

Investment in Unconsolidated Joint Ventures

The following is a summary of the Company’s investment in unconsolidated joint ventures (dollars in thousands):


	Property Type	Number of Properties as of March 31, 2023	Ownership as of March 31, 2023 (1)		Book Value
					March 31, 2023		December 31, 2022
Sienna Joint Venture	Senior Housing - Managed	12	50	%	$	119,824	$	120,269
Marlin Spring Joint Venture	Senior Housing - Managed	4	85	%	19,578		14,693

					$	139,402	$	134,962

(1) These investments are not consolidated because the Company does not control, through voting rights or other means, the joint ventures.

During the three months ended March 31, 2023, the Company’s joint venture with Marlin Spring (the “Marlin Spring Joint Venture”) completed the acquisition of one additional senior housing community that is being managed by a third-party property manager. The gross investment in the additional acquisition was CAD $30.0 million, excluding acquisition costs. In addition, the Marlin Spring Joint Venture assumed and financed an aggregate CAD $23.6 million of debt associated with the additional acquisition.

During the fourth quarter of 2022, due to the confluence of labor shortages, increased labor costs, elevated interest rates and a slower than anticipated recovery in the operating performance of the underlying facilities, the Company concluded that the estimated fair value of its investment in its joint venture with affiliates of TPG Real Estate, the real estate platform of TPG (the “Enlivant Joint Venture”) had declined to zero based on updated future cash flow analyses. This decline was deemed to be other-than-temporary, and the Company recorded an impairment charge totaling $57.8 million during the three months ended December 31, 2022.

The Company has not guaranteed any obligations of and is not committed to provide any support to the Enlivant Joint Venture. The Company has discontinued applying the equity method of accounting to the Enlivant Joint Venture, in which it has a 49% equity interest, and will resume application if, during the period in which application of the equity method of accounting has been discontinued, the Company’s share of unrecognized net income exceeds its share of unrecognized net losses.

Net Investment in Sales-Type Lease

As of December 31, 2022, the Company had a $25.5 million net investment in one skilled nursing/transitional care facility leased to a tenant under a sales-type lease, as the tenant is obligated to purchase the property at the end of the lease term. During the three months ended March 31, 2023, the tenant purchased the skilled nursing/transitional care facility for net proceeds of $25.5 million as obligated under the terms of the lease.