Net Investment in Direct Financing Leases

3 Months Ended

Mar. 31, 2017

Net Investment in Direct Financing Leases

Net Investment in Direct Financing Leases

NOTE 5.  Net Investment in Direct Financing Leases

Net investment in DFLs consisted of the following (dollars in thousands):

	March 31,		December 31,
	2017		2016
Minimum lease payments receivable	$	1,095,233	$	1,108,237
Estimated residual values		500,368		539,656
Less unearned income		(883,061)		(895,304)
Net investment in direct financing leases	$	712,540	$	752,589
Properties subject to direct financing leases		29		30

Certain DFLs contain provisions that allow the tenants to elect to purchase the properties during or at the end of the lease terms for the aggregate initial investment amount plus adjustments, if any, as defined in the lease agreements. Certain leases also permit the Company to require the tenants to purchase the properties at the end of the lease terms.

In March 2017, the Company sold a hospital in Palm Beach Gardens, Florida for $43 million to the current tenant.

Direct Financing Lease Internal Ratings

The following table summarizes the Company’s internal ratings for DFLs at March 31, 2017 (dollars in thousands):

	Carrying		Percentage of	Internal Ratings
Segment	Amount		DFL Portfolio	Performing DFLs		Watch List DFLs		Workout DFLs
SH NNN	$	627,936	88	$	268,350	$	359,586	$	—
Other non-reportable segments		84,604	12		84,604		—		—
	$	712,540	100	$	352,954	$	359,586	$	—

Beginning September 30, 2013, the Company placed a 14 property senior housing triple-net DFL (the “DFL Watchlist Portfolio”) on nonaccrual status and “Watch List” status. The Company determined that the collection of all rental payments was and continues to be no longer reasonably assured; therefore, rental revenue for the DFL Watchlist Portfolio has been recognized on a cash basis.

During both the three months ended March 31, 2017 and 2016, the Company recognized DFL income of $3 million and received cash payments of $4 million from the DFL Watchlist Portfolio. The carrying value of the DFL Watchlist Portfolio was $360 million and $361 million at March 31, 2017 and December 31, 2016, respectively.