Real Estate Investments, Net

9 Months Ended

Sep. 30, 2019

REAL ESTATE INVESTMENTS, NET

The following table summarizes the Company’s investment in owned properties as of September 30, 2019 and December 31, 2018 (dollars in thousands):



	September 30, 2019			December 31, 2018
Land	$	198,028		$	166,948
Buildings and improvements	1,385,223			1,201,209
Integral equipment, furniture and fixtures	92,588			87,623
Identified intangible assets	1,400			2,382
Real estate investments	1,677,239			1,458,162
Accumulated depreciation and amortization	(273,215		)	(241,925		)
Real estate investments, net	$	1,404,024		$	1,216,237

As of September 30, 2019, 93 of the Company’s 214 facilities were leased to subsidiaries of Ensign under eight master leases (the “Ensign Master Leases”) which commenced on June 1, 2014. The obligations under the Ensign Master Leases are guaranteed by Ensign. A default by any subsidiary of Ensign with regard to any facility leased pursuant to an Ensign Master Lease will result in a default under all of the Ensign Master Leases. As of September 30, 2019, annualized rental revenues from the Ensign Master Leases were $61.0 million and are escalated annually by an amount equal to the product of (1) the lesser of the percentage change 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 that are tenants under the Ensign Master Leases are solely responsible for the costs related to the leased properties (including property taxes, insurance, and maintenance and repair costs).

As of September 30, 2019, 118 of the Company’s 214 facilities were leased to various other operators under triple-net leases. All of these leases contain 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 September 30, 2019 are the independent living facilities that the Company owns and operates.

On October 1, 2019, Ensign completed its previously announced separation of its home health and hospice operations and substantially all of its senior living operations into a separate independent publicly traded company through the distribution of shares of common stock of The Pennant Group, Inc. (“Pennant” and, such separation, the “Pennant Spin”). See Note 13, Subsequent Events for additional information regarding the Company’s facilities leased to subsidiaries of Ensign subsequent to the Pennant Spin.

As of September 30, 2019, the Company’s total future minimum rental revenues for all of its tenants, excluding operating expense reimbursements, were (dollars in thousands):



Year	Amount
2019 (three months)	$	42,132
2020	169,209
2021	170,221
2022	170,587
2023	170,807
2024	170,952
Thereafter	1,111,769
	$	2,005,677

As of December 31, 2018, the Company’s total future minimum rental revenues for all of its tenants, excluding operating expense reimbursements, were (dollars in thousands):



Year	Amount
2019	$	146,010
2020	146,560
2021	147,132
2022	147,719
2023	148,169
Thereafter	1,055,012
	$	1,790,602

The following table summarizes components of the Company’s rental income (dollars in thousands):



	For the Three Months Ended September 30,			For the Nine Months Ended September 30,
	2019
Rental Income
Contractual rent due⁽¹⁾	$	43,109		$	124,642
Straight-line rent	546			1,483
Adjustment for collectibility of rental income⁽²⁾	(12,078		)	(12,078		)
Total	$	31,577		$	114,047


(1)	Initial cash rent including operating expense reimbursements adjusted for rental escalators and increases due to landlord funded capital improvements.

(2)

In accordance with the new lease ASUs, the Company evaluated the collectibility of lease payments through maturity and determined that it was not probable that the Company would collect substantially all of the contractual obligations from five operators through maturity. As such, the Company reversed $7.8 million of contractual rent, $3.5 million of straight-line rent and $0.8 million of property taxes during the three months ended September 30, 2019. If lease payments are subsequently deemed probable of collection, the Company increases rental income for such recoveries.

Recent Real Estate Acquisitions

The following table summarizes the Company’s acquisitions for the nine months ended September 30, 2019 (dollars in thousands):



Type of Property	Purchase Price⁽¹⁾		Initial Annual Cash Rent⁽²⁾		Number of Properties	Number of Beds/Units⁽³⁾
Skilled nursing	$	246,099	$	22,129	16	2,029
Multi-service campuses	45,176		4,088		3	542
Assisted living	12,596		1,031		1	96
Total	$	303,871	$	27,248	20	2,667

(1) Purchase price includes capitalized acquisition costs.

(2) Initial annual cash rent excludes ground lease income.

(3) The number of beds/units includes operating beds at acquisition date.

Lease Amendments

Trillium Lease Termination and New Master Lease. On July 15, 2019, the Company terminated its existing master lease (the “Original Trillium Lease”) with affiliates of Trillium Healthcare Group, LLC (“Trillium”), which covered ten properties in Iowa, seven properties in Ohio and one property in Georgia. On August 16, 2019, the Company entered into a new master lease (the “New Trillium Lease”) with Trillium’s Iowa and Georgia affiliates covering the ten properties in Iowa and the one property in Georgia. The Company recorded an adjustment to reduce rental income for accounts and other receivables by approximately $3.8 million in the three months ended September 30, 2019.

On September 1, 2019, four of the seven skilled nursing Ohio properties operated by Trillium under the Original Trillium Lease were transferred to affiliates of Providence Group, Inc. (“Providence”). In connection with the transfer, the Company amended its triple-net master lease with Providence. The amended lease has a remaining initial term of approximately 13 years, with two five-year renewal options and CPI-based rent escalators. Annual cash rent under the amended lease increased by approximately $2.1 million.

Impairment of Real Estate Investments and Assets Held for Sale

On September 1, 2019, the Company sold three of the seven skilled nursing Ohio properties operated by Trillium under the Original Trillium Lease for a purchase price of $28.0 million. During the three months ended September 30, 2019 and prior to the disposition, the Company recorded an impairment expense of approximately $7.8 million. In connection with the sale, the Company provided affiliates of CommuniCare Family of Companies (“CommuniCare”), the purchaser of the three Ohio properties, with a mortgage loan secured by the three Ohio properties for approximately $26.5 million. See Note 4, Other Real Estate Investments for additional information.

As of September 30, 2019, the Company met the criteria to classify six skilled nursing facilities operated by affiliates of Metron Integrated Health Systems (“Metron”) as held for sale, which resulted in an impairment expense of approximately $8.8 million to reduce the carrying value to fair value less costs to sell the properties. The assets held for sale of $34.6 million are primarily comprised of real estate assets.

The fair value of the assets impaired during the three months ended September 30, 2019 was based on contractual sales prices, which are considered to be Level 2 measurements within the fair value hierarchy.