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Mortgage And Other Notes Receivable
 3 Months Ended
Mar. 31, 2020
Mortgage and Other Notes Receivable [Abstract]  
Mortgage Notes Receivable MORTGAGE AND OTHER NOTES RECEIVABLE
On January 1, 2020, we adopted ASU 2016-13, Financial Instruments – Credit Losses, as discussed in Note 10. Upon adoption, we recorded an allowance for expected credit losses of $3,900,000 that is reflected as an adjustment to Mortgage and other notes receivable, net, in the Condensed Consolidated Balance Sheets and recorded a corresponding cumulative-effect adjustment to cumulative net income in excess (deficit) of dividends. Upon adoption, we also recorded a $325,000 liability for estimated credit losses pertaining to unfunded loan commitments as a cumulative-effect adjustment to cumulative net income in excess (deficit) of dividends. The corresponding credit loss liability is included in the financial statement caption Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets.

Our principal measures of credit quality, except for construction mortgages, are debt service coverage for amortizing loans and interest or fixed charge coverage for non-amortizing loans collectively, (“Coverage”). A Coverage ratio provides a measure of the borrower’s ability to make scheduled principal and interest payments. The Coverage ratios presented in the following table have been calculated utilizing the most recent date for which data is available, December 31, 2019, using EBITDARM (earnings before interest, taxes, depreciation, amortization, rent and management fees) and the requisite debt service, interest service or fixed charges, as defined in the applicable loan agreement. We categorize Coverage into four levels: (i) over 2.0x, (ii) between 1.5x and 2.0x, (iii) between 1.0x and 1.5x, (iv) less than 1.0x. We update the calculation of coverage on a quarterly basis. Coverage is not a meaningful credit quality indicator for construction mortgages as either these developments are not generating any operating income, or they have insufficient operating income as occupancy levels necessary to stabilize the properties have not yet been achieved. We measure credit quality for these mortgages by considering the construction and stabilization timeline and the financial condition of the borrower as well as economic and market conditions. As of March 31, 2020, we did not have any construction loans that we considered underperforming. The tables below present outstanding note balances as of March 31, 2020 at amortized cost excluding two note balances totaling approximately $4,019,000 for which a Coverage ratio is not available.
($ in thousands)
Mortgage1
MezzanineRevolverTotal
Coverage Ratio
more than 2.0x$74,989  $—  $—  $74,989  
between 1.5x and 2.0x1,307  —  —  1,307  
between 1.0x and 1.5x12,259  14,466  10,701  37,426  
below 1.0x53,045  26,070  —  79,115  
Total$141,600  $40,536  $10,701  $192,837  
1 Excludes $94,964,000 in construction mortgage receivables related to developments expected to be acquired at stabilization

We consider the guidance in ASC 310-20 when determining whether a modification, extension or renewal constitutes a current period origination. The credit quality indicator as of December 31, 2019, is presented below for the amortized cost, net by year of origination ($ in thousands):

20202019201820172016PriorTotal
Mortgages
more than 2.0x$—  $—  $67,906  $—  $—  $7,083  $74,989  
between 1.5x and 2.0x—  —  1,307  —  —  —  1,307  
between 1.0x and 1.5x—  2,259  —  —  10,000  —  12,259  
below 1.0x4,000  39,092  —  9,953  —  —  53,045  
Total$4,000  $41,351  $69,213  $9,953  $10,000  $7,083  $141,600  
Mezzanine
more than 2.0x$—  $—  $—  $—  $—  $—  $—  
between 1.5x and 2.0x—  —  —  —  —  —  —  
between 1.0x and 1.5x—  —  —  —  14,466  —  14,466  
below 1.0x—  —  —  —  26,070  —  26,070  
Total$—  $—  $—  $—  $40,536  $—  $40,536  
Revolver
more than 2.0x$—  
between 1.5x and 2.0x—  
between 1.0x and 1.5x10,701  
below 1.0x—  
Total$10,701  

Due to the economic uncertainty created by COVID-19 and the potential impact on the collectability of our mortgages and other notes receivable, we are forecasting a 20% increase in the probability of a default and a 20% increase in the amount of loss from a default during the next six months, resulting in an effective adjustment of 44%. Our estimate reverts to our historical loss experience for the remaining term. The COVID-19 adjustments resulted in a $1,700,000 increase in the credit loss reserve during the first quarter. Excluding the effects of the COVID-19 adjustment, our provision for expected credit losses decreased by $100,000 due primarily to a decrease in the balance of our construction mortgage receivables and the resulting reduction in our historical probability of default experience for our acquisition and construction mortgage pool.
The allowance for expected credit losses for our commercial loans is presented in the following table for the quarter ended March 31, 2020 ($ in thousands):

Beginning balance January 1, 2020 (upon adoption of ASU 2016-13)$3,900  
Provision for expected credit losses1,600
Balance March 31, 2020$5,500  

At March 31, 2020, we had net investments in mortgage notes receivable with a carrying value of $240,443,000, secured by real estate and UCC liens on the personal property of 15 facilities, and other notes receivable with a carrying value of $51,377,000, guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner. All our notes were on full accrual basis at March 31, 2020.

Bickford

At March 31, 2020, our construction loans to Bickford are summarized as follows ($ in thousands):

CommencementRateMaturityCommitmentDrawnLocation
January 20189%5 years14,000  (13,077) Virginia
July 20189%5 years14,700  (12,526) Michigan
$28,700  $(25,603) 

The construction loans are secured by first mortgage liens on substantially all real and personal property as well as a pledge of any and all leases or agreements which may grant a right of use to the property. Usual and customary covenants extend to the agreements, including the borrower’s obligation for payment of insurance and taxes. NHI has a fair market value purchase option on the properties at stabilization of the underlying operations. On these development projects, Bickford as borrower is entitled to up to $2,000,000 per project in incentive loan draws based on the achievement of predetermined operational milestones and, if funded, will increase the principal amount and NHI's future purchase price and eventual NHI lease payment.

Our loans to Bickford represent a variable interest. Bickford is structured to limit liability for potential claims for damages, is capitalized to achieve that purpose and is considered a VIE within the definition set forth in Note 1. As discussed more fully in Note 1, we have concluded that we are not the primary beneficiary.

Life Care Services - Timber Ridge

In February 2015, we entered into a loan agreement in which the proceeds were used to fund the construction of Phase II of Timber Ridge at Talus, a Type-A continuing care retirement community in Issaquah, Washington. The outstanding balance due from LCS-Westminster Partnership III LLP (“LCS-WP III”), an affiliate of LCS and the manager of the facility, was $59,350,000 as of January 31, 2020, when we acquired the property and Timber Ridge PropCo assumed the debt (see Note 2). To provide working capital in support of the CCRC’s entry-fee model, NHI agreed to supply a revolving line of credit permitting draws up to a maximum of $5,000,000. See Note 4 for more information about our equity-method investment in Timber Ridge OpCo.

Life Care Services - Sagewood

On December 21, 2018, we entered into an agreement to lend LCS-Westminster Partnership IV LLP (“LCS-WP IV”), an affiliate of LCS, the manager of the facility, up to $180,000,000. The loan agreement conveys a mortgage interest and will facilitate the construction of Phase II of Sagewood, a Type-A Continuing Care Retirement Community in Scottsdale, AZ. As an affiliate of a larger company, LCS-WP IV is structured to limit liability for potential damage claims, is capitalized to achieve that purpose and is considered a VIE within the definition set forth in Note 1. As discussed more fully in Note 1, we have concluded that we are not the primary beneficiary.

The loan conveys a mortgage interest in the form of two notes under a master credit agreement. The senior note (“Note A”) totals $118,800,000 at a 7.25% interest rate with 10 basis-point annual escalators after three years and has a term of 10 years. We have funded $77,340,000 of Note A as of March 31, 2020. Note A is interest-only and is locked to prepayment until January 2021. After 2020, the prepayment penalty starts at 2% and declines to 1% in 2022. The second note (“Note B”) is a construction loan for up to $61,200,000 at an annual interest rate of 8.5% and carries a maturity of five years. The total amount funded on Note B was $57,353,000 as of March 31, 2020.
Senior Living Communities

In December 2014, we provided a $15,000,000 revolving line of credit, the maturity of which mirrors the 15-year term of the master lease. Borrowings are used primarily to finance construction projects within the Senior Living portfolio, including building additional units. The facility, which may also be used to meet general working capital needs, was amended as of December 10, 2019, to reduce availability to $12,000,000 with a further reduction in capacity to $7,000,000 beginning January 1, 2022 through lease maturity in December 2029. Also effective December 10, 2019, a sub-limit on the availability of funding for working capital needs was established at $10,000,000 for this loan, extending through January 1, 2022, at which time the limit is to be reduced to $5,000,000. Amounts outstanding under the facility, $10,701,000 at March 31, 2020, bear interest at an annual rate equal to the prevailing 10-year U.S. Treasury rate, 0.70% at March 31, 2020, plus 6%.

NHI has two mezzanine loans of up to $12,000,000 and $2,000,000, respectively, to affiliates of Senior Living, whose purpose was to partially fund construction of a 186-unit senior living campus on Daniel Island in South Carolina, which opened in April 2018. The loans bear interest payable monthly at a 10% annual rate and mature in March 2021. The loans were fully drawn at March 31, 2020, and provided NHI with a fixed capitalization rate purchase option on the development upon its meeting certain operational metrics. The option is to remain open during the term of the loans, plus any extensions.

Our loans to Senior Living and its subsidiaries represent a variable interest. Senior Living is structured to limit liability for potential claims for damages, is appropriately capitalized for that purpose and is considered a VIE. As discussed more fully in Note 1, we have concluded that we are not the primary beneficiary of Senior Living.