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Real Estate Investments, Net

12 Months Ended

Dec. 31, 2019

REAL ESTATE INVESTMENTS, NET

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



	December 31, 2019			December 31, 2018
Land	$	204,154		$	166,948
Buildings and improvements	1,400,927			1,201,209
Integral equipment, furniture and fixtures	93,005			87,623
Identified intangible assets	1,650			2,382
Real estate investments	1,699,736			1,458,162
Accumulated depreciation and amortization	(285,536		)	(241,925		)
Real estate investments, net	$	1,414,200		$	1,216,237

As of December 31, 2019, 85 of the Company’s 217 facilities were leased to subsidiaries of Ensign on a triple-net basis under multiple long-term leases (each, an “Ensign Master Lease” and, collectively, 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 December 31, 2019, annualized revenues from the Ensign Master Leases were $53.4 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). 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 Lease Amendments for additional information.

As of December 31, 2019, 15 of the Company facilities were leased to subsidiaries of Priority Management Group (“PMG”) on a triple-net basis under one long-term lease (the “PMG Master Lease”). The PMG Master Lease commenced on December 1, 2016, and provides an initial term of fifteen years, with two five-year renewal options. As of December 31, 2019, annualized revenues from the PMG Master Lease were $27.4 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. In addition to rent, the subsidiaries of PMG that are tenants under the PMG Master Lease are solely responsible for the costs related to the leased properties (including property taxes, insurance, and maintenance and repair costs).

As of December 31, 2019, 116 of the Company’s 217 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.

As of December 31, 2019, the Company has one independent living facility that the Company owns and operates.

As of December 31, 2019, the Company’s total future minimum rental revenues for all of its tenants, excluding operating expense reimbursements, were (dollars in thousands):



Year	Amount
2020	$	168,394
2021	169,175
2022	169,272
2023	168,968
2024	169,069
Thereafter	1,144,102
	$	1,988,980

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 Year Ended December 31, 2019
Rental Income
Contractual rent due⁽¹⁾	$	166,056
Straight-line rent	1,385
Adjustment for collectibility of rental income⁽²⁾	(11,774		)
Total	$	155,667


(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 rental income comprised of $7.8 million of unpaid contractual rent, $3.5 million of straight-line rent and $0.5 million of property tax reimbursements during the year ended December 31, 2019. If lease payments are subsequently deemed probable of collection, the Company increases rental income accordingly.

Recent Real Estate Acquisitions

The following table summarizes the Company’s acquisitions for the year ended December 31, 2019 (dollar amounts in thousands):



Type of Property	Purchase Price⁽¹⁾		Initial Annual Cash Rent⁽²⁾		Number of Properties	Number of Beds/Units⁽³⁾
Skilled nursing	$	254,760	$	22,909	17	2,099
Multi-service campuses	59,344		5,203		4	762
Assisted living	12,596		1,031		1	96
Total	$	326,700	$	29,143	22	2,957


(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.

The following table summarizes the Company’s acquisitions for the year ended December 31, 2018 (dollar amounts in thousands):



Type of Property	Purchase Price⁽¹⁾			Initial Annual Cash Rent		Number of Properties		Number of Beds/Units⁽²⁾
Skilled nursing	$	85,814		$	7,715	10		926
Multi-service campuses	27,520		⁽³⁾	2,240		2		177
Assisted living	—			—		—		—
Total	$	113,334		$	9,955	$	12	1,103


(1)	Purchase price includes capitalized acquisition costs.


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


(3)	The Company has committed to fund approximately $1.4 million in revenue-producing capital expenditures over the next 24 months based on the in-place lease yield, which is included in the purchase price.

Lease Amendments

Pennant Spin. 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 Pennant. As a result of the Pennant Spin, as of October 1, 2019, the Company amended the Ensign Master Leases to lease 85 facilities to subsidiaries of Ensign, which have a total of 8,908 operational beds, and entered into a new triple-net master lease with subsidiaries of Pennant (the “Pennant Master Lease”) to lease 11 facilities, which have a total of 1,151 operational beds. The contractual initial annual cash rent under the Pennant Master Lease is approximately $7.8 million. The Pennant Master Lease carries an initial term of 15 years, with two five-year renewal options and CPI-based rent escalators. The contractual annual cash rent under the amended Ensign Master Leases was reduced by approximately $7.8 million. Ensign continues to guarantee obligations under the Ensign Master Leases and the Pennant Master Lease. If Pennant achieves a specified portfolio coverage and continuously maintains it for a specified period, Ensign’s obligations under the guaranty with respect to the Pennant Master Lease would be released.

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 recognized under the Original Trillium Lease for unpaid contractual rent, straight-line rent and property tax reimbursements 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.

Trio Lease Amendment. On November 4, 2019, the Company amended its existing master lease with affiliates of Trio Healthcare, Inc. (“Trio”), which covered seven facilities based in Dayton, Ohio. The amended lease has a remaining initial term of approximately 13 years, with two five-year renewal options and CPI-based rent escalators. The annual base rent due under the amended lease with Trio is approximately $4.7 million and provides for payment of percentage rent if Trio achieves certain increases in portfolio revenue.

Pristine Lease Termination. On February 27, 2018, the Company announced that it entered into a Lease Termination Agreement (the “LTA”) with Pristine for its nine remaining properties, with a target completion date of April 30, 2018. Under the LTA, Pristine agreed to continue to operate the facilities until possession could be surrendered, and the operations therein transitioned, to operator(s) designated by the Company. Among other things, Pristine also agreed to amend certain pending agreements to sell the rights to certain Ohio Medicaid beds (the “Bed Sales Agreements”) and cooperate with the Company to turn over any claim or control it might have had with respect to the sale process and the proceeds thereof, if any, to the Company. The transactions were timely completed, and on May 1, 2018, Trio took over operations in the seven facilities based primarily in the Dayton, Ohio area under a new 15-year master lease, while Hillstone Healthcare, Inc. (“Hillstone”) assumed the operation of the two facilities in Willard and Toledo, Ohio under a new 12-year master lease. In addition, amendments to the Bed Sales Agreements were subsequently executed, confirming the Company as the sole seller of the bed rights and the sole recipient of any proceeds therefrom. The aggregate annual base rent due under the new master leases with Trio and Hillstone is approximately $10.0 million, subject to CPI-based or fixed escalators.

Under the LTA, the Company agreed, upon Pristine’s full performance of the terms thereof, to terminate Pristine’s master lease and all future obligations of the tenant thereunder; however, under the terms of the master lease the Company’s security interest in Pristine’s accounts receivable has survived any such termination. Such security interest was subject to the prior lien and security interest of Pristine’s working capital lender, Capital One, National Association (“CONA”), with whom the Company has an existing intercreditor agreement that defines the relative rights and responsibilities of CONA and with its respect to the loan and lease collateral represented by Pristine’s accounts receivable and the Company’s respective security interests therein.

Impairment of Real Estate Investments, Asset Sales 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, Net 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. As of December 31, 2019, the properties continued to be held for sale and the carrying value of $34.6 million is primarily comprised of real estate assets. In February 2020, the six skilled nursing facilities were sold. See Note 14, Subsequent Events, for further detail.

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

During the year ended December 31, 2019, the Company sold one of its owned and operated independent living facilities consisting of 38 units located in Texas with an aggregate carrying value of $1.7 million for net proceeds of $3.3 million. In connection with the sale, the Company recognized a gain of $1.6 million.

During the year ended December 31, 2018, the Company sold three assisted living facilities consisting of 102 units located in Idaho with an aggregate carrying value of $10.9 million for an aggregate price of $13.0 million. In connection with the sale, the Company recognized a gain of $2.1 million.