Loans Receivable

The following table summarizes the Company’s loans receivable (in thousands):



	December 31,
	2017								2016
	Real Estate Secured		Other Secured			Total			Real Estate Secured		Other Secured			Total
Mezzanine⁽¹⁾⁽²⁾	$	—	$	269,299		$	269,299		$	—	$	615,188		$	615,188
Other⁽³⁾	188,418		—			188,418			195,946		—			195,946
Unamortized discounts, fees and costs⁽¹⁾	—		(596		)	(596		)	413		(3,593		)	(3,180		)
Allowance for loan losses	—		(143,795		)	(143,795		)	—		—			—
	$	188,418	$	124,908		$	313,326		$	196,359	$	611,595		$	807,954

_______________________________________


(1)	At December 31, 2016, included £282 million ($348 million) outstanding and £2 million ($3 million) of associated unamortized discounts, fees and costs both related to the HC-One Facility, which paid off in June 2017.

(2)

At December 31, 2017, the Company had £2 million ($3 million) remaining under its commitments to fund development projects and capital expenditures under its development projects in the United Kingdom ("U.K."). In December 2017, the Company entered into a participating debt financing arrangement to fund a $115 million senior living development project, which remained unfunded at December 31, 2017.


(3)	At December 31, 2017 and 2016, included £123 million ($167 million) and £113 million ($140 million), respectively, outstanding primarily related to Maria Mallaband loans.

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



	Carrying Amount		Percentage of Loan Portfolio	Internal Ratings
Investment Type	Carrying Amount		Percentage of Loan Portfolio	Performing Loans		Watch List Loans		Workout Loans⁽¹⁾
Real estate secured	$	188,418	60	$	188,418	$	—	$	—
Other secured	124,908		40	19,908		—		105,000
	$	313,326	100	$	208,326	$	—	$	105,000

_______________________________________


(1)	See Tandem Health Care Loan discussion below for additional information.

Real Estate Secured Loans

The following table summarizes the Company’s loans receivable secured by real estate at December 31, 2017 (dollars in thousands):



Final Maturity Date	Number of Loans	Payment Terms	Principal Amount⁽¹⁾		Carrying Amount
2018	1	monthly interest-only payments, accrues interest at 8.0% and secured by a senior housing facility in Pennsylvania	$	21,458	$	21,597
2021	2	aggregate monthly interest-only payments, accrues interest at 8.0% and 9.75% and secured by two senior housing facility in the U.K.	22,706		24,001
2023	1	monthly interest-only payments, accrues interest at 7.22% and secured by seven senior housing facilities in the U.K.	142,820		142,820
	4		$	186,984	$	188,418

_______________________________________


(1)	Represents future contractual principal payments to be received on loans receivable secured by real estate.

During the year ended December 31, 2017, the Company recognized $13 million in interest income related to loans secured by real estate.

In March 2017, the Company sold its investment in Four Seasons Health Care’s (“Four Seasons”) senior secured term loan at par plus accrued interest for £29 million ($35 million).

Other Secured Loans

HC-One Facility

In November 2014, the Company was the lead investor in the financing for Formation Capital and Safanad’s acquisition of NHP, a company that owned nursing and residential care homes in the U.K. principally operated by HC-One and provided a loan facility (the “HC-One Facility”). In April 2015, the Company converted £174 million of the HC-One Facility into a sale-leaseback transaction for 36 nursing and residential care homes located throughout the U.K. Through the year ended December 31, 2015, the Company received paydowns of £34 million ($52 million). On June 30, 2017, the Company received £283 million ($367 million) from the repayment of its HC-One mezzanine loan.

Tandem Health Care Loan

From July 2012 through May 2015, the Company funded, in aggregate, $257 million under a collateralized mezzanine loan facility (the “Mezzanine Loan”) to certain affiliates of Tandem Health Care (together with its affiliates, “Tandem”). The Mezzanine Loan matures in October 2018 and carries a weighted average interest rate of 11.5%. The fair value of the collateral supporting the Mezzanine Loan had included the value of an in-the-money purchase option (the “Purchase Option”) that is a term of a lease between Tandem and a lessor, which provided Tandem the right to buy the nine Leasehold Properties (as defined below) for a total of $82 million by January 4, 2018 (the “Purchase Option Expiration Date”).

In addition to the Mezzanine Loan outstanding to the Company, Tandem has outstanding to other lenders a $257 million syndicated senior loan (the “Senior Loan”) that matures in July 2018. Tandem owns and operates 32 post-acute/skilled nursing facilities, in addition to operating nine leasehold interests (the “Leasehold Properties”), which, in total, represents 4,766 beds (collectively, the “Tandem Portfolio”) located primarily throughout Florida, Pennsylvania and Virginia. Tandem leases the entire Tandem Portfolio to certain affiliates of Consulate Health Care (together with its affiliates, “Consulate”) under a master lease.

During the quarter ended June 30, 2017, as a result of multiple events of default under Tandem’s master lease with Consulate and operational struggles of Consulate, the Company concluded that it was probable that it would be unable to collect all interest and principal payments, including default interest payments, according to the contractual terms of the Mezzanine Loan. As such, as part of its quarterly review process, the Company recorded an impairment charge and related allowance of $57 million during the three months ended June 30, 2017, reducing the carrying value to $200 million. The decline in fair value was driven by a variety of factors, including recent operating results of the underlying real estate assets, as well as market and industry data, that reflect a declining trend in admissions and a continuing shift away from higher-rate Medicare plans in the post-acute/skilled nursing sector. The calculation of the fair value was primarily based on an income approach and relies on forecasted EBITDAR and market data, including, but not limited to, sales price per unit/bed, rent coverage ratios, and real estate capitalization rates. All valuation inputs are considered to be Level 2 measurements within the fair value hierarchy.

Additionally, on July 31, 2017, subsequent to its second quarter 2017 quarterly review process and the aforementioned impairment, the Company entered into a binding agreement (the “Repurchase Agreement”) with the borrowers to provide an option to repay the Mezzanine Loan at a discounted value of $197 million (the “Repayment Value”) by October 25, 2017, which date was subsequently extended to December 31, 2017 (the “Agreement Maturity Date”). As a result of entering into the Repurchase Agreement, the Company recorded an additional impairment charge and related allowance of $3 million during the quarter ended September 30, 2017 to write down the carrying value of the Mezzanine Loan to the Repayment Value and assigned the loan an internal rating of Workout. As part of the Repurchase Agreement, Tandem posted, in aggregate, $8 million of non-refundable deposits (the “Deposits”), which the Company would be entitled to retain (without any credit against the Mezzanine Loan) if Tandem failed to make interest payments on the $257 million par value of the Mezzanine Loan through the repayment date or the Agreement Maturity Date, as applicable, adjusted for any principal payments received.

Consulate is facing operational and financial challenges and has failed to fully pay its contractual rent to Tandem since April 1, 2017. Tandem, which relies on contractual rent payments in order to service its interest payments to the Company under the Mezzanine Loan, failed to make its monthly interest payment thereunder on November 10, 2017. On November 17, 2017, the Company declared an event of default under the Mezzanine Loan and, as a result, the Repurchase Agreement became null and void and the Deposits were forfeited to the Company. Tandem also failed to make its December 2017, January 2018 and February 2018 interest payments to the Company. Tandem remains current on its interest payments under the Senior Loan.

Despite the Repurchase Agreement having terminated as a result of the event of default, Tandem nonetheless informed the Company that it was continuing to attempt to recapitalize so that it would be in a position to repay the Repayment Value (less the forfeited Deposits) on or prior to the Agreement Maturity Date, should the Company be willing to do so at that time. For example, during the second half of 2017, Tandem sold assets and used proceeds to pay down the Senior Loan. Despite ongoing efforts to recapitalize, Tandem was unable to: (i) repay the Mezzanine Loan at the Repayment Value prior to the Agreement Maturity Date and (ii) close on the Purchase Option by the Purchase Option Expiration Date. The Deposits were applied to reduce the Company’s recorded carrying value of the Mezzanine Loan to $189 million.

As a result of the aforementioned events that occurred during the fourth quarter of 2017 and first quarter of 2018 (during the Company's fourth quarter 2017 financial statement close process), the Company concluded that the Mezzanine Loan was impaired and recorded an impairment charge and related allowance of $84 million, reducing the carrying value of the loan to $105 million as of December 31, 2017. Aggregate impairments on the Mezzanine Loan for the year ended December 31, 2017 were $144 million.

The decline in expected recoverable value of the Mezzanine Loan was primarily driven by the Company’s conclusion that the collateral supporting the Mezzanine Loan may no longer be the sole source in recovering the Company’s investment. The Company is actively evaluating and pursuing multiple alternatives, including, but not limited to: (i) selling all or a portion of the Mezzanine Loan to a third party or (ii) foreclosing on the underlying collateral. As a result, the Company utilized a discounted cash flow model to determine expected recoverability of the Mezzanine Loan. Additionally, a variety of factors further impacted the impairment analysis completed during the Company’s fourth quarter 2017 financial statement close process including recent operating results of the underlying real estate assets, as well as market and industry data, that reflect a declining trend in admissions and a continuing shift away from higher-rate Medicare plans in the post-acute/skilled nursing sector. The calculation relies on: (i) forecasted EBITDAR and market data, including, but not limited to, sales price per unit/bed, rent coverage ratios, and real estate capitalization rates and (ii) recent bids for a sale of the Mezzanine Loan received on February 8, 2018, which incorporate market participant required rates of return and expected hold periods.

Beginning in the first quarter of 2017, the Company elected to recognize interest income on a cash basis. During the years ended December 31, 2017, 2016 and 2015, the Company recognized interest income of $23 million, $31 million and $29 million, respectively, and received cash payments of $25 million, $30 million and $29 million, respectively, from Tandem. The carrying value of the Mezzanine Loan was $105 million and $256 million at December 31, 2017 and 2016, respectively.