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Real Estate Investments
6 Months Ended
Jun. 30, 2020
Real Estate Investments  
Real Estate Investments

2.

Real Estate Investments

Assisted living communities, independent living communities, memory care communities and combinations thereof are included in the assisted living property classification (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. Our 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 2.5%;
(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.

Our leases that contain fixed annual rental escalations and/or have annual rental escalations that are contingent upon changes in the Consumer Price Index, are generally recognized on a straight-line basis over the minimum lease period. Certain leases have annual rental escalations that are contingent upon changes in the gross operating revenues of the property. This revenue is not recognized until the appropriate contingencies have been resolved.

The following table summarizes our investments in owned properties at June 30, 2020 (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

$

880,343

60.9

107

6,164

$

142.82

Skilled Nursing

543,825

37.6

%

50

6,283

212

$

83.73

Under Development (2)

10,163

0.7

Other (3)

11,360

0.8

1

118

Total

$

1,445,691

100.0

158

6,401

6,376

(1)We own properties in 27 states that are leased to 29 different operators.

(2)Represents a 90-bed SNF development project located in Missouri.

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

Future minimum base rents receivable under the remaining non-cancelable terms of operating leases excluding the effects of straight-line rent receivable, amortization of lease incentives and renewal options are as follows (in thousands):

    

 Cash

 

Rent (1)

 

2020

$

68,001

2021

 

141,369

2022

 

128,751

2023

 

129,931

2024

 

126,406

Thereafter

 

623,574

(1)Represents contractual cash rent, except for Anthem Memory Care (“Anthem”) lease which is based on projected cash to be received as agreed upon with the operator.

An affiliate of Senior Lifestyle Corporation (“Senior Lifestyle”) operates 23 properties under a master lease with a combination of independent living, assisted living and memory care units. Senior Lifestyle was provided deferral of partial rent in April 2020. However, Senior Lifestyle failed to pay full rent for May and June of 2020. Contractual rent for the quarter ended June 30, 2020, was $4,560,000 of which we collected $1,805,000. The remaining outstanding accounts receivable balance of $2,755,000 is covered by a letter of credit and security deposit totaling $3,608,000. In July 2020, we received $1,081,000 of their contractual rent of $1,520,000. In accordance with ASC 842, we evaluated the collectibility of receiving substantially all of our lease payments from the Senior Lifestyle master lease through maturity and determined that we did not have the level of certainty required by the standard. Accordingly, we wrote-off a total $17,742,000 of straight-line rent receivable and lease incentives related to this master lease. As a result, we placed Senior Lifestyle on a cash basis effective July 2020. We are evaluating our options for the portfolio.

Anthem operates 11 memory care communities under a master lease and was placed in default in 2017 resulting from Anthem’s partial payment of its minimum rent. However, we did not enforce our rights and remedies pertaining to the event of default, under the stipulation that Anthem achieves sufficient performance and pays agreed upon rent. We currently anticipate that Anthem will pay $9,900,000 of annual cash rent during 2020. However, COVID-19 may adversely impact Anthem’s

operating cash flow and ability to pay rent. In accordance with ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Anthem and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as of January 1, 2019, as required by the ASC 842 transition guidance. Anthem is current on rent payments through July 2020.

Preferred Care, Inc. (“Preferred Care”) and affiliated entities filed for Chapter 11 bankruptcy in 2017 as a result of a multi-million-dollar judgment in a lawsuit in Kentucky against Preferred Care and certain affiliated entities. Preferred Care leased 24 properties (“Properties”) under two master leases from us and the Preferred Care operating entities that sublease those Properties did not file for bankruptcy. In accordance with ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Preferred Care and determined it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as of January 1, 2019, as required by the ASC 842 transition guidance. Preferred Care did not affirm our master leases and subsequently filed for Chapter 7 bankruptcy in 2019.

During the fourth quarter of 2019, we entered into multiple contracts to sell the Properties, all of which were completed during the first quarter of 2020. The combined net proceeds from the sales, including the 2019 transactions, was approximately $77,900,000 resulting in a total gain of approximately $44,000,000. The Properties had a combined net book value of $35,600,000. The 21 properties sold in the first quarter of 2020, which included 2,411 beds in Arizona, Colorado, Iowa, Kansas and Texas, were sold through multiple transactions and generated net proceeds of approximately $72,100,000. These 21 properties had a combined net book value of $29,100,000 and resulted in total gain on sale of $44,043,000 which was recorded as Gain on sale of real estate, net in the consolidated statements of income and comprehensive income.

Senior Care Centers, LLC and affiliates and subsidiaries (“Senior Care”) filed for Chapter 11 bankruptcy as a result of lease terminations from certain landlords and on-going operational challenges in December 2018. Senior Care did not pay us December 2018 rent and accordingly, in December 2018, we placed Senior Care on a cash basis. In accordance with ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of the straight-line rent receivable and lease incentive balance related to Senior Care and determined it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as of January 1, 2019, as required by the ASC 842 transition guidance. During 2019, we received a court ordered reimbursement from Senior Care for the December 2018 unpaid rent, late fees and legal costs totaling $1,596,000. In March 2020, Senior Care emerged from bankruptcy and affirmed our master lease. Senior Care is current on all its rent, real estate property tax escrow and maintenance deposits. Senior Care is current on rent payments through July 2020.

Subsequent to June 30, 2020, we consolidated our four leases with Brookdale Senior Living Communities, Inc (“Brookdale”) into one master lease and extended the term by one year to December 31, 2021. The master lease provides three renewal options consisting of a four-year renewal option, a five-year renewal option and a 10-year renewal option. The notice period for the first renewal option is January 1, 2021 to April 30, 2021. The economic terms of rent remain the same as the consolidated rent terms under the previous four separate lease agreements.

The following table summarizes components of our rental income for the three and six months ended June 30, 2020 and 2019 (in thousands):

Three Months Ended

Six Months Ended

June 30, 

June 30,

Rental Income

2020

2019

2020

2019

Base cash rental income

$

33,336

$

33,019

$

66,351

$

66,933

Variable cash rental income

4,155

(1)

4,077

(1)

8,437

(1)

8,562

(1)

Straight-line rent

634

1,275

1,473

2,513

Change in straight-line rent receivable and lease incentives due to collectibility

(17,742)

(2)

(17,742)

(2)

(1,926)

Amortization of lease incentives

(108)

(94)

(209)

(181)

Total

$

20,275

$

38,277

$

58,310

$

75,901

(1)The variable rental income for the three and six months ended June 30, 2020, includes contingent rental income of $44 and $104, respectively, and reimbursement of real estate taxes by our lessees of $4,111 and $8,333, respectively. The variable rental income for the three and six months ended June 30, 2019 includes contingent rental income of $167 and $317, respectively, and reimbursement of real estate taxes by our lessees of $3,910 and $8,245, respectively.

(2)During the second quarter of 2020, Senior Lifestyle Corporation (“Senior Lifestyle”) failed to pay full rent for May and June 2020. In accordance with ASC 842, we evaluated the collectibility of receiving substantially all of our lease payments from the Senior Lifestyle master lease through maturity and determined that we did not have the level of certainty required by the standard. Accordingly, we wrote-off $17,557 of Senior Lifestyle’s straight-line rent receivable and $185 of Senior Lifestyle’s lease incentives related to this master lease.

Some of our lease agreements provide purchase options allowing the lessees to purchase the properties they currently lease from us. The following table summarizes information about purchase options included in our lease agreements (dollar amount in thousands):

Type

Number

of

of

Gross

Carrying

Option

State

Property

Properties

Investments

Value

Window

California

ALF/MC

2

$

38,895

$

36,072

2024-2029

California

ALF

2

30,372

17,082

2021-TBD

(1)

Florida

MC

1

14,340

12,720

2028-2029

Kentucky and Ohio

MC

2

30,152

27,509

2028-2029

Texas

MC

2

25,265

24,025

2025-2027

South Carolina

ALF/MC

1

11,680

10,503

2028-2029

Total

$

150,704

$

127,911

(1)The option window ending date will be either 24 months or 48 months after the option window commences, based on certain contingencies.

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, and on March 13, 2020, the United States declared a national emergency with regard to COVID-19. As required by ASC 842, we assess the collectibility of our lease payments through maturity on a quarterly basis. At June 30, 2020, in conjunction with the rising levels of uncertainty related to the adverse effects of COVID-19, we assessed the probability of collecting substantially all of our lease payments through maturity and concluded that we did not have sufficient information available to evaluate the impact of COVID-19 on the collectibility of our lease payments. The extent to which COVID-19 could impact our operators and the collectibility of our future lease payments will depend on the future developments including the financial impact significance and the duration of the pandemic. We will continue to evaluate the collectibility of our lease payments through maturity on a quarterly basis, including the financial impact of COVID-19. If we determine that we do not have the level of collectibility certainty required by ASC 842 related to certain operators, all or a portion of our straight-

line rent receivable and other lease receivables will be written-off. In recognition of the unique conditions affecting our operators, we have agreed to rent deferrals for certain operators totaling $930,000, approximately 2% of contractual rent, for April through June 2020. Additionally, we granted deferred rent of $80,000 for July 2020. Through July 2020, we have received $347,000 of deferred rent payments. The remaining $663,000 balance of deferred rent is due to LTC over the next 24 months or upon the operators’ receipt of government funds from the U.S. Coronavirus Aid, Relief, and Economic Security ACT (the “CARES Act”).

Acquisitions and Developments: The following table summarizes our acquisitions for the six months ended June 30, 2020 and 2019 (dollar amounts in thousands):

Total

Number

Number

Purchase

Transaction

Acquisition

of

of

Year

Type of Property

Price

Costs (1)

Costs

Properties

Beds/Units

2020

Skilled Nursing (2)

$

13,500

$

81

$

13,581

 

1

140

2019

Assisted Living (3)

$

16,719

$

176

$

16,895

1

74

Land (4)

110

26

136

Total

$

16,829

$

202

$

17,031

1

74

(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 a SNF located in Texas.

(3)We entered into a joint venture (“JV”) (consolidated on our financial statements) to purchase an existing operational 74-unit ALF/MC community. The non-controlling partner contributed $919 of equity and we contributed $15,971 in cash. Our economic interest in the real estate JV is approximately 95%.

(4)We acquired a parcel of land adjacent to an existing SNF in California.

During the six months ended June 30, 2020 and 2019, we invested the following in development and improvement projects (in thousands):

2020

2019

Type of Property

Developments

Improvements

Developments

Improvements

Assisted Living Communities

$

4,487

$

3,039

$

8,520

$

893

Skilled Nursing Centers

5,861

14

4,492

Other

175

Total

$

10,348

$

3,053

$

13,012

$

1,068

Completed Developments. The following table summarizes our completed developments during the six months ended June 30, 2020 and 2019 (dollar amounts in thousands):

Number

Type

Number

of

of

of

Total

Year

Type of Project

Properties

Property

Beds/Units

State

Investment

2020

Development

1

ALF/MC

78

Oregon

(1)

$

18,443

Total

1

78

$

18,443

2019

Development

1

SNF

143

Kentucky

$

24,493

Development

1

ILF/ALF/MC

110

Wisconsin

21,872

Total

2

253

$

46,365

(1)Certificate of occupancy was received in March 2020, however, due to the COVID-19 pandemic, we have consented to delay the opening of this community to a later date to be determined.

Properties Sold. The following table summarizes property sales during the six months ended June 30, 2020 and 2019 (dollar amounts in thousands):

Type

Number

Number

of

of

of

Sales

Carrying

Net

Year

State

Properties

Properties

Beds/Units

Price

Value

Gain

2020

N/A

N/A

$

$

$

102

(1)

Arizona

SNF

1

194

12,550

2,229

10,292

Colorado

SNF

3

275

15,000

4,271

10,364

Iowa

SNF

(2)

7

544

14,500

4,886

9,005

Kansas

SNF

3

250

9,750

7,438

1,993

Texas

SNF

7

1,148

23,000

10,260

12,287

Total 2020 (3)

21

2,411

$

74,800

$

29,084

$

44,043

2019

N/A

N/A

$

$

$

500

(4)

(

(1)Gain recognized from the $90 repayment of a holdback related to a property sold during the fourth quarter of 2019 and the reassessment adjustment of $12 from the holdback under the expected value model per ASC Topic 606, Contracts with Customers (“ASC 606”).

(2)This transaction includes a holdback of $838 which is held in an interest-bearing account with an escrow holder on behalf of the buyer for potential specific losses. Using the expected value model per ASC 606, we estimated and recorded the holdback value of $471. During the six months ended June 30, 2020, we received $150 of the holdback. We reassessed the holdback under the expected value model and recorded an additional gain of $91.

(3)Properties sold within the Preferred Care portfolio.

(4)Gain recognized from the repayment of a holdback related to a portfolio of six ALFs sold during the second quarter of 2018.

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at June 30, 2020 (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

9.9%

2043

$

185,657

SNF

71.8

%

1

15

1,941

$

95.65

9.2%

2045

38,443

SNF

14.8

%

1

4

501

$

76.73

9.4%

2045

 

19,624

SNF

7.6

%

1

2

205

$

95.73

9.6%

2045

14,925

SNF

5.8

%

1

1

157

$

95.06

Total

$

258,649

100.0

%

4

22

2,804

$

92.24

(1)The majority of the mortgage loans provide for annual increases in the interest rate after a certain time period increasing by 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)The properties securing these mortgage loans are located in one state and are operated by one operator.

The following table summarizes our mortgage loan activity for the six months ended June 30, 2020 and 2019 (in thousands):

2020

2019

Originations and funding under mortgage loans receivable

$

2,557

$

9,736

Scheduled principal payments received

(565)

(565)

Mortgage loan premium amortization

(2)

(2)

Provision for loan loss reserve

(20)

(92)

Net increase in mortgage loans receivable

$

1,970

$

9,077