2.Real Estate Investments

Assisted living communities, independent living communities, memory care communities and combinations thereof are included in the assisted living property classification (or collectively ALF).

Any reference to the number of properties or facilities, number of units, number of beds, number of operators and yield on investments in real estate are unaudited and outside the scope of our independent registered public accounting firm’s review of our consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board.

Owned Properties. The following table summarizes our investments in owned properties at September 30, 2018 (dollar amounts in thousands):


								Average
			Percentage		Number	Number of		Investment
	Gross		of		of	SNF	ALF	per
Type of Property	Investment		Investment		Properties (1)	Beds	Units	Bed/Unit
Assisted Living	$	802,484	56.8	%	103	—	5,885	$	136.36
Skilled Nursing		569,141	40.2	%	73	8,919	261	$	62.00
Under Development (2)		31,602	2.2	%	—	—	—		—
Other (3)		11,040	0.8	%	1	118	—		—
Total	$	1,414,267	100.0	%	177	9,037	6,146

⁽¹⁾

We own properties in 28 states that are leased to 29 different operators.

⁽²⁾

Represents three development projects, consisting of a 143-bed SNF in Kentucky, a 78-unit ALF/MC located in Oregon and a 110-unit ILF/ALF/MC in Wisconsin.

⁽³⁾

Includes three parcels of land held-for-use, and one behavioral health care hospital.

Owned properties are leased pursuant to non-cancelable operating leases generally with an initial term of 10 to 15 years. Each lease is a triple net lease which requires the lessee to pay all taxes, insurance, maintenance and repairs, capital and non-capital expenditures and other costs necessary in the operations of the facilities. Many of the leases contain renewal options. The leases provide for fixed minimum base rent during the initial and renewal periods. The majority of our leases contain provisions for specified annual increases over the rents of the prior year that are generally computed in one of four ways depending on specific provisions of each lease:

(i)

a specified percentage increase over the prior year’s rent, generally between 2.0% and 3.0%;

(ii)

a calculation based on the Consumer Price Index;

(iii)

as a percentage of facility net patient revenues in excess of base amounts; or

(iv)

specific dollar increases.

Acquisitions and Developments: The following table summarizes our acquisitions for the nine months ended September 30, 2018 and 2017 (dollar amounts in thousands):


						Total		Number	Number
		Purchase		Transaction		Acquisition		of	of
Year	Type of Property	Price		Costs (1)		Costs		Properties	Beds/Units
2018	Assisted Living (2) (3)	$	39,600	$	65	$	39,665	3	177
	Land (3)		695		48		743	—	—
Total		$	40,295	$	113	$	40,408	3	177

2017	Assisted Living (4)	$	54,463	$	341	$	54,804	3	240
Total		$	54,463	$	341	$	54,804	3	240

⁽¹⁾

Represents cost associated with our acquisitions; however, upon adoption of ASU 2017-01, our acquisitions meet the definition of an asset acquisition resulting in capitalization of transaction costs to the properties’ basis. For our land purchases with forward development commitments, transaction costs are capitalized as part of construction in progress. Transaction costs per our consolidated statements of income and comprehensive income represents current and prior year transaction costs due to timing and terminated transactions.

⁽²⁾

We acquired two MC in Texas.

⁽³⁾

We entered into a joint venture (“JV”) to develop, purchase and own senior housing properties. During the second quarter of 2018, the JV purchased land for the development of a 78-unit ALF/MC in Oregon for a total anticipated project cost of $18,108. The non-controlling partner contributed $1,081 of cash and we committed to fund the remaining $17,027 project cost. During the third quarter of 2018, in a sale-leaseback transaction, the JV purchased an existing operational 89-unit ILF adjacent to the 78-unit ALF/MC we are developing for $14,400. The non-controlling partner contributed $2,857 of equity and we contributed $11,543 in cash. Upon completion of the development project, our combined economic interest in the JV will be approximately 88%. We account for the JV on a consolidated basis. See Note 7. Equity for further discussion related to our partnerships and non-controlling interests.

⁽⁴⁾

We acquired an ALF and a MC in California. Additionally, we acquired a MC in Ohio.

During the nine months ended September 30, 2018 and 2017, we invested the following in development and improvement projects (in thousands):


	Nine months ended September 30, 2018				Nine months ended September 30, 2017
Type of Property	Developments		Improvements		Developments			Improvements
Assisted Living Communities	$	19,251	$	1,131	$	10,366	$	951
Skilled Nursing Centers		6,466		500		3,573		1,357
Other		—		432		—		—
Total	$	25,717	$	2,063	$	13,939	$	2,308

Completed Developments. The following table summarizes our completed developments during the nine months ended September 30, 2018 (dollar amounts in thousands):


	Number	Type	Number
	of	of	of			Total
Type of Project	Properties	Property	Beds/Units	State	Investment
Development	1	MC	66	Illinois	$	13,974

Properties held-for-sale. The following table summarizes our properties held-for-sale as of September 30, 2018 (dollar amounts in thousands):


	Type	Number					Number
	of	of		Gross		Accumulated	of
State	Property	Properties		Investment		Depreciation	Beds/units
Florida (1)	SNF	1	$	2,497	$	971	60
Texas	ILF	1		5,746		1,916	140
Totals		2	$	8,243	$	2,887	200

⁽¹⁾

Subsequent to September 30, 2018, we sold this 60-bed SNF for $5,000 and will recognize a gain of approximately $3,400.

Properties sold. The following table summarizes property sales during the nine months ended September 30, 2018 and 2017(dollar amounts in thousands):


		Type		Number	Number
		of		of	of		Sales		Carrying		Net
Year	State	Properties		Properties	Beds		Price		Value		Gain
2018	Alabama	SNF		2	285	$	17,525	$	3,272	$	14,253
	Kansas	ALF	(1)	—	—		350		346		—
	Ohio and Pennsylvania	ALF		6	320		67,500		16,352		48,445
Total 2018				8	605	$	85,375	$	19,970	$	62,698

2017	Indiana and Iowa	ALF		4	175	$	14,250	$	8,726	$	5,054
Total 2017				4	175	$	14,250	$	8,726	$	5,054

⁽¹⁾

We sold land adjacent to an existing ALF community in Kansas.

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at September 30, 2018 (dollar amounts in thousands):


				Type	Percentage		Number of			Investment
		Gross		of	of				SNF	per
Interest Rate (1)	Maturity	Investment		Property	Investment		Loans (2)	Properties (3)	Beds	Bed/Unit
9.5%	2043	$	186,495	SNF	76.1	%	1	15	2,029	$	91.91
9.2%	2045		33,028	SNF	13.5	%	1	4	501	$	65.92
9.4%	2045		14,797	SNF	6.0	%	1	1	157	$	94.25
9.5%	2020		10,733	SNF	4.4	%	1	2	205	$	52.36
Total		$	245,053		100.0	%	4	22	2,892	$	84.73

⁽¹⁾

The majority of the mortgage loans provide for annual increases in the interest rate based upon a specified increase of 2.25%.

⁽²⁾

Some loans contain certain guarantees, provide for certain facility fees and the majority of the mortgage loans have a 30-year term.

⁽³⁾

We have investments in properties located in one state that includes mortgages to one operator.

The following table summarizes our mortgage loan activity for the nine months ended September 30, 2018 and 2017 (in thousands):


	Nine months ended September 30,
	2018			2017
Originations and funding under mortgage loans receivable	$	20,530	(1)	$	9,333
Pay-offs received		(1,086)			(16,665)
Scheduled principal payments received		(550)			(686)
Net increase (decrease) in mortgage loans receivable	$	18,894		$	(8,018)

⁽¹⁾

During 2018, we funded an additional $7,400 under an existing mortgage loan for the purchase of a 112-bed skilled nursing center in Michigan. The incremental funding bears interest at 8.7%, fixed for five years, and escalating by 2.25% thereafter. Also, we funded additional loan proceeds of $7,125 under an existing mortgage loan for the purchase of a 126-bed skilled nursing center in Michigan. This incremental funding bears interest at 9.41%, fixed for five years, and escalating by 2.25% thereafter.