Mortgage And Other Notes Receivable

6 Months Ended

Jun. 30, 2016

Financing Receivable, Net [Abstract]

Mortgage Notes Receivable

MORTGAGE AND OTHER NOTES RECEIVABLE

At June 30, 2016, we had net investments in mortgage notes receivable with a net carrying value of $128,984,000, secured by real estate and UCC liens on the personal property of 8 facilities, and other notes receivable with a carrying value of $31,078,000, guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner. No allowance for doubtful accounts was considered necessary at June 30, 2016 or December 31, 2015.

Timber Ridge

In February 2015, we entered into an agreement to lend up to $154,500,000 to LCS-Westminster Partnership III LLP (“LCS-WP”), an affiliate of Life Care Services (“LCS”) . The loan agreement conveys a mortgage interest and will facilitate the construction of Phase II of Timber Ridge at Talus (“Timber Ridge”), a Type-A Continuing Care Retirement Community in Issaquah, WA managed by LCS.

The loan takes the form of two notes under a master credit agreement. The senior note (“Note A”) totals $60,000,000 at a 6.75% interest rate with 10 basis-point escalators after year three, and has a term of 10 years. We have funded $28,000,000 of Note A as of June 30, 2016. We anticipate fully funding Note A by December 31, 2016. Note A is interest-only and is locked to prepayment for three years. After year three, the prepayment penalty starts at 5% and declines 1% per year. The second note (“Note B”) is a construction loan for up to $94,500,000 at an annual interest rate of 8% and a 5 year maturity. We anticipate funding Note B through December 2016 and expect substantial repayment with new resident entrance fees upon the opening of Phase II. The total amount funded on Note B was $85,872,000 as of June 30, 2016.

NHI has a purchase option on the entire Timber Ridge property for the greater of fair market value or $115,000,000 during a purchase option window of 120 days that will contingently open in year five or upon earlier stabilization of the development, as defined. The current basis of our investment in Timber Ridge loans, net of unamortized commitment fees, is $112,692,000, but we are obligated to complete the funding of both Notes A and B of up to $154,500,000 which represents the maximum exposure to loss of NHI due to our relationship with Timber Ridge. Because we neither control the entity, nor have any role in its day-to-day management, we account for our investment in LCS-WP at amortized cost.

Senior Living Communities

In connection with the acquisition in December 2014 of the properties leased to Senior Living, we provided a $15,000,000 revolving line of credit to Senior Living, the maturity of which mirrors the 15-year term of the master lease. Borrowings are used to finance construction projects within the Senior Living portfolio, including building additional units. Up to $5,000,000 of the facility may be used to meet general working capital needs. Amounts outstanding under the facility, $12,467,000 at June 30, 2016, bear interest at an annual rate equal to the 10-year U.S. Treasury rate, 1.49% at June 30, 2016, plus 6%.

In March 2016, we extended mezzanine loans of $12,000,000 and $2,000,000 to affiliates of Senior Living, to partially fund construction of a 186-unit senior living campus on Daniel Island in South Carolina. The loans bear interest payable monthly at a 10% annual rate and mature in March 2021. The loans have a total balance of $2,109,000 at June 30, 2016.

Our loans to Senior Living, and its subsidiaries represent a variable interest as does our lease, which is considered to be analogous to a financing arrangement. Senior Living is structured to limit liability for potential claims for damages and is appropriately capitalized for that purpose. Accordingly, NHI holds guarantees that reach to the underlying ownership interests. Because we neither control Senior Living, nor have any role in its day-to-day management, we have no material input into activities that most significantly impact the entity’s economic performance, and we account for our transactions with Senior Living and its subsidiaries at amortized cost. We are not obligated to provide support beyond our stated commitments to Senior Living, and accordingly the maximum extent of our exposure to loss is limited to our investment in the facilities and the amount of our commitments, as discussed above.

Sycamore

As discussed in Note 2, on June 1, 2016, two notes receivable from Sycamore having an aggregate principal and accrued interest balance of $9,753,000 were retired as part of an asset acquisition.

As of June 30, 2016, our direct support of Sycamore is limited to our guarantee on a $3,930,000 letter of credit established for their benefit. We are not obligated to extend support to Sycamore beyond our guarantee; and, accordingly, our commitment embodied in this guarantee represents our maximum exposure to loss. Because we do not control Sycamore, nor do we have any role in the day-to-day management, we account for our guarantee at fair value.