NOTE 3. REAL ESTATE

The following table summarizes our real estate properties by type of facility and by state as of December 31, 2011 and 2010, excluding assets held for sale (dollar amounts in thousands):

2011					Buildings,
	Number				Improvements &
	of				Construction in		Accumulated
Facility Type and State	Facilities		Land		Progress		Depreciation
Skilled Nursing:
Alabama	2	$	95	$	5,164	$	(3,663)
Arizona	1		453		6,678		(2,738)
Florida	10		6,996		99,746		(27,781)
Georgia	1		52		865		(865)
Idaho	1		122		2,491		(1,032)
Kentucky	2		231		2,182		(1,785)
Missouri	5		1,165		23,068		(16,078)
South Carolina	4		872		15,241		(9,192)
Tennessee	20		1,835		41,297		(30,172)
Texas	8		6,604		104,224		(4,364)
Virginia	1		176		2,511		(1,764)
Total Skilled Nursing	55		18,601		303,467		(99,434)

Assisted Living:
Arizona	4		1,757		13,947		(4,416)
Florida	6		7,557		28,352		(10,914)
Georgia	1		572		4,849		(45)
Illinois	1		403		4,532		(256)
Indiana	1		546		4,583		(184)
Iowa	2		430		5,940		(257)
Louisiana	4		1,875		13,125		(278)
Michigan	4		1,490		21,825		(1,248)
Minnesota	4		3,675		17,725		(973)
New Jersey	1		4,229		13,030		(5,933)
Pennsylvania	1		439		3,960		(627)
South Carolina	1		344		2,971		(937)
Tennessee	3		871		7,245		(2,276)
Total Assisted Living	33		24,188		142,084		(28,344)

Medical Office Buildings:
Florida	1		165		3,349		(1,984)
Texas	1		631		6,342		(3,839)
Total Medical Office Buildings	2		796		9,691		(5,823)

Independent Living:
Idaho	1		243		4,182		(1,709)
Missouri	1		344		3,181		(2,119)
Tennessee	2		64		5,644		(3,332)
Total Independent Living	4		651		13,007		(7,160)

Hospital:
California	1		4,180		8,320		(562)
Kentucky	1		540		10,163		(5,279)
Tennessee (under construction)	1		-		4,983		-
Total Hospital	3		4,720		23,466		(5,841)
Total continuing operations properties	97		48,956		491,715		(146,602)
Corporate office			158		664		(96)
		$	49,114	$	492,379	$	(146,698)
2010					Buildings,
	Number				Improvements &
	of				Construction in		Accumulated
Facility Type and State	Facilities		Land		Progress		Depreciation
Skilled Nursing:
Alabama	2	$	95	$	5,165	$	(3,584)
Arizona	1		453		6,678		(2,571)
Florida	10		6,996		99,747		(25,230)
Georgia	1		52		865		(865)
Idaho	1		122		2,491		(966)
Kentucky	2		231		2,182		(1,714)
Missouri	5		1,165		23,070		(15,377)
South Carolina	4		872		15,241		(8,818)
Tennessee	20		1,835		41,297		(29,143)
Texas	4		2,110		53,440		(2,438)
Virginia	1		176		2,510		(1,693)
Total Skilled Nursing	51		14,107		252,686		(92,399)

Assisted Living:
Arizona	4		1,757		13,622		(4,057)
Florida	7		7,877		31,019		(10,901)
Illinois	1		403		4,532		(133)
Indiana	1		546		4,583		(61)
Iowa	2		430		5,940		(86)
Michigan	4		1,490		21,825		(649)
Minnesota	4		3,675		17,725		(437)
New Jersey	1		4,229		13,030		(5,614)
Pennsylvania	1		439		3,960		(528)
South Carolina	1		344		2,877		(860)
Tennessee	3		871		7,061		(2,092)
Total Assisted Living	29		22,061		126,174		(25,418)

Medical Office Buildings:
Florida	1		165		3,349		(1,907)
Texas	1		631		6,341		(3,669)
Total Medical Office Buildings	2		796		9,690		(5,576)

Independent Living:
Idaho	1		243		4,182		(1,598)
Missouri	1		344		3,181		(2,052)
Tennessee	2		64		5,644		(3,183)
Total Independent Living	4		651		13,007		(6,833)

Hospitals:
California	1		4,180		8,320		(255)
Kentucky	1		540		10,163		(4,997)
Total Hospitals	2		4,720		18,483		(5,252)
Total continuing operations properties	88		42,335		420,040		(135,478)
Corporate office			158		664		(65)
		$	42,493	$	420,704	$	(135,543)

Acquisitions and New Leases of Real Estate

In May 2011, we completed a $15,000,000 purchase of four assisted living facilities totaling 183 units in Louisiana. The facilities, which have an average age of 13 years, are being leased to an affiliate of Selah Management Group over 15 years at an initial lease rate of 8.5% per year plus annual fixed escalators.

In September 2011, we completed a $5,400,000 purchase of a 60-unit assisted living facility in Greensboro, Georgia. The facility, which was built in 1998, is being leased to Senior Living Management for an initial term of 9 years at an initial lease rate of 8.5% plus annual fixed escalators.

Also in September 2011, we entered into a $21,500,000 development and lease transaction with affiliates of Polaris Hospital Company to develop a 60-bed general acute care hospital in Murfreesboro, Tennessee that will provide acute psychiatric and in-patient rehabilitation services. Construction commenced in October 2011 and the hospital is expected to open in the fourth quarter of 2012. Once the facility is open, the lease rate of 10% will be calculated on NHI's total invested amount with annual fixed escalators beginning in the second year. The initial lease term is for 15 years. At December 31, 2011, our investment in land and pre-construction costs was $4,983,000 and is shown as construction in progress in the Consolidated Balance Sheet.

On October 31, 2011, we completed the purchase of four skilled nursing facilities located in Texas for a purchase price of $55,278,000, including contingent consideration of $5,478,000. The facilities have an average age of two years with a total of 498 beds that are operated by affiliates of our current tenant Legend Healthcare, LLC ("Legend"). Legend is eligible for an additional contingent payment of $5,478,000 related to the transaction if they attain certain performance metrics over the next two years, which is probable. The four facilities are being leased to Legend for an initial term of 15 years at an initial lease rate of 9% on our invested amount, plus fixed escalators. Because Legend was a current lessee of three of the facilities, we accounted for this portion of the acquisition valued at $39,530,000 using the acquisition method as prescribed by Accounting Standards Codification Topic, Business Combinations. As part of this transaction, we recognized all identifiable tangible assets at fair value at the date of acquisition (there were no identifiable intangible assets or liabilities assumed) and attributed $2,694,000 of the purchase price to fair value of the land and $36,836,000 to the fair value of building and improvements. The fourth facility, valued at $15,748,000, was accounted for as an asset purchase.

The revenue and net income for the three facilities acquired from Legend have been recorded since the date of acquisition and are included in our Consolidated Statements of Income for the year ended December 31, 2011, and the unaudited pro forma revenue and net income of the combined entity had the acquisition date been January 1, 2010, are as follows (in thousands):


	Revenue		Net Income
Actual from October 31, 2011 – December 31, 2011	$	644	$	440

Combined pro forma from January 1, 2011 – December 31, 2011	$	86,764	$	83,969

Combined pro forma from January 1, 2010 – December 31, 2010	$	81,912	$	72,076

On February 1, 2010, we completed the purchase of six Florida skilled nursing facilities, consisting of 780 beds or 228,600 square feet, from Care Foundation of America, Inc. ("CFA") for $67,000,000. The facilities are leased to affiliates of Health Services Management, Inc. ("HSM"), pursuant to a lease that commenced October 1, 2009, for $6,200,000 annually in aggregate rent, plus 3% annual escalators beginning October 1, 2011. The leases expire in 2014 and the tenant has a 3-year optional renewal term. We account for acquired businesses using the acquisition method as prescribed by Accounting Standards Codification Topic 805, Business Combinations. The facilities were previously part of our mortgage loan portfolio for 16 years. The purchase resulted in the dismissal of pending litigation with CFA, as described in Note 9. We funded the purchase with the full satisfaction of $23,300,000 in principal and interest on a mortgage note due from CFA, $29,700,000 in cash deposits and $14,000,000 in advances from our revolving credit facility. As part of this transaction, we recognized all identifiable tangible assets at fair value at the date of acquisition (there were no identifiable intangible assets or liabilities assumed) and attributed $4,690,000 of the purchase price to fair value of the land and $62,310,000 to the fair value of building and improvements. Certain costs related to this business combination totaled $490,000 and have been recorded as general and administrative expenses in our Consolidated Statement of Income for the year ended December 31, 2010.

The revenue and net income for the six facilities acquired from CFA have been recorded since the date of acquisition and are included in our Consolidated Statements of Income for the years ended December 31, 2011 and 2010, and the unaudited pro forma revenue and net income of the combined entity had the acquisition date been January 1, 2010, or January 1, 2009, are as follows (in thousands).


	Revenue		Net Income
Actual from February 1, 2010 – December 31, 2010	$	5,907	$	4,479

Combined pro forma from January 1, 2010 – December 31, 2010	$	78,933	$	69,828

Combined pro forma from January 1, 2009 – December 31, 2009	$	69,601	$	69,115

In March 2010, we completed a $12,500,000 purchase/leaseback transaction involving a 66-bed acute psychiatric hospital known as Alvarado Parkway Behavioral Institute in La Mesa, California. At the closing of this transaction, $11,500,000 was funded and $1,000,000 was withheld until such time as a $1,000,000 bank letter of credit is obtained by the seller. This facility is leased to Helix Healthcare for a term of 15 years at an initial lease payment of $1,500,000 plus annual fixed escalators.

In March 2010, we completed a $21,400,000 purchase/leaseback transaction involving four assisted living and memory care facilities totaling 126 units in Minnesota. The facilities, which are two to six years old, are leased to Suite Living Senior Specialty Services for a term of 15 years at an initial lease payment of $2,140,000 plus annual fixed escalators.

In June 2010, we completed an $11,500,000 purchase/leaseback transaction with Bickford Senior Living and its affiliates ("Bickford") involving two assisted living facilities in Iowa and one in Indiana. The assisted living communities, two of which were built in 1998 and one in 2005, total 102 units. The three facilities are leased to Bickford over 15 years at an initial lease amount of $1,035,000 plus annual fixed escalators. The purchase of the three facilities brings the master lease with Bickford to a total of eight facilities.

In December 2010, we completed a $10,150,000 purchase/leaseback transaction with Senior Living Management involving three assisted living facilities totaling 108 units in Florida. The three facilities, which are ten years old and attract private payment for services, are being leased to Senior Living Management for 15 years at an initial lease rate of $1,015,000 plus annual fixed escalators.

Planned or Completed Dispositions of Certain Real Estate

We have reclassified the results of operations of facilities sold or held for sale as discontinued operations for all periods presented in our Consolidated Statements of Income.

We have entered into an agreement with our current lessee, Fundamental, to sell six (five remaining) skilled nursing facilities in Texas. The planned sale of these facilities meets the accounting criteria as being held for sale and is expected to close when long-term HUD financing is arranged by Fundamental. In January 2011, the first of these six facilities having a carrying value of $4,038,000 was sold for total cash proceeds of $4,500,000. As of December 31, 2011, the carrying value of $29,381,000 represented the lesser of the remaining five facilities' net book value or estimated fair value less cost to sell.

In August 2011, we completed the sale of a 60-unit assisted living facility located in Daytona Beach, Florida with a carrying value of $2,152,000 to the current tenant for cash proceeds of $3,200,000. We deferred recognition of the tax gain on the sale of this facility by utilizing the like-kind exchange rules under Section 1031 of the Internal Revenue Code.

In June 2010, we completed a sale of two skilled nursing facilities in Texas to the current lessee Legend Healthcare and affiliates ("Legend") for $6,247,000 in cash. NHI deferred recognition of the tax gain on the sale of these facilities by utilizing the like-kind exchange rules under Section 1031 of the Internal Revenue Code. The net gain on the sale of these facilities was $2,004,000 for financial statement purposes.

In December 2010, we agreed to the terms of sale with the current tenant of two medical office buildings. These facilities met the accounting criteria as being held for sale as of December 31, 2010. At December 31, 2010, the carrying value of $3,433,000 represented the lesser of the properties' net book value or estimated fair value less cost to sell. The sale transaction was completed in February 2011 with receipt of cash proceeds of $5,271,000.

The summary of operating results of all facilities classified as discontinued operations is shown in Note 15.

Future Minimum Lease Payments

At December 31, 2011, the future minimum lease payments (excluding percentage rent) to be received by us under our operating leases with our tenants are as follows (in thousands):

2012	$	78,847
2013		73,139
2014		70,416
2015		66,083
2016		66,022
Thereafter		450,236

	$	804,743