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Mortgage And Other Notes Receivable
 6 Months Ended
Jun. 30, 2020
Mortgage and Other Notes Receivable [Abstract]  
Mortgage Notes Receivable Mortgage and Other Notes Receivable
At June 30, 2020, we had investments in mortgage notes receivable secured by real estate and other assets of the borrower (e.g. UCC liens on personal property) related to 16 facilities and other notes receivable guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner with an aggregate carrying value of $300,130,000, net of an allowance of $5,189,000. All our notes were on full accrual basis at June 30, 2020.

Credit Loss Reserve

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, March 31, 2020, 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 three levels: (i) over 1.5x, (ii) between 1.0x and 1.5x, (iii) 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 June 30, 2020, we did not have any construction loans that we considered underperforming. The tables below present outstanding note balances as of June 30, 2020 at amortized cost.
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 March 31, 2020, is presented below for the amortized cost, net by year of origination ($ in thousands):

20202019201820172016PriorTotal
Mortgages
more than 1.5x$1,471  $8,268  $169,859  $—  $—  $6,989  $186,587  
between 1.0x and 1.5x—  3,854  —  —  10,000  —  13,854  
below 1.0x4,000  39,123  —  9,958  —  —  53,081  
No coverage available—  —  —  —  —  —  —  
5,471  51,245  169,859  9,958  10,000  6,989  253,522  
Mezzanine
more than 1.5x—  —  —  —  —  —  —  
between 1.0x and 1.5x—  —  —  —  14,472  —  14,472  
below 1.0x—  —  —  —  13,979  11,875  25,854  
No coverage available—  475  —  —  —  —  475  
—  475  —  —  28,451  11,875  40,801  
Revolver
more than 1.5x—  
between 1.0x and 1.5x10,996  
below 1.0x—  
10,996  
Credit loss reserve(5,189) 
$300,130  

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 resulting in an effective adjustment of 44%. The COVID-19 adjustments resulted in a $1,700,000 increase in the credit loss reserve during the first quarter of 2020. Excluding the effects of the COVID-19 adjustment, our provision for expected credit losses decreased by $411,000 since our adoption of the credit loss guidance on January 1, 2020, 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 six months ended June 30, 2020 ($ in thousands):

Beginning balance January 1, 2020 (upon adoption of ASU 2016-13)$3,900  
Provision for expected credit losses1,289  
Balance June 30, 2020$5,189  

Bickford

At June 30, 2020, our construction loans to Bickford are summarized in the following table ($ in thousands):

CommencementRateMaturityCommitmentDrawnLocation
January 20189%5 years$14,000  $(13,377) Virginia
July 20189%5 years14,700  (13,896) Michigan
June 20209%5 years14,200  (1,471) Virginia
$42,900  $(28,744) 
On June 30, 2020, we entered into a $14,200,000 construction loan agreement with Bickford to construct a 64-unit assisted living facility.

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 incentives based on the achievement of predetermined operational milestones and, if funded, will increase NHI's future purchase price and eventual NHI lease payment.

Our loans to Bickford represent a variable interest and Bickford is considered a VIE. 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 3) which was increased to $81,000,000 as part of the transaction. 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 5 for more information about our equity-method investment in Timber Ridge OpCo.

Life Care Services - Sagewood

In December 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. As discussed more fully in Note 2, 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 $82,689,000 of Note A as of June 30, 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 $61,200,000 as of June 30, 2020.

Senior Living Communities

In December 2014, we provided a 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 and may also be used to meet general working capital needs. The facility was amended in December 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 in December 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. At June 30, 2020, the $10,996,000 outstanding under the facility bears interest at 6.66% per annum, the prevailing 10-year U.S. Treasury rate plus 6%.

NHI had 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 bore interest, payable monthly, at a 10% annual rate. The fully drawn loan balances including accrued interest were paid in full on July 31, 2020.

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 2, we have concluded that we are not the primary beneficiary of Senior Living.