NOTE 3 - PROPERTIES

Leased Property

Our leased real estate properties, represented by 719 SNFs, 116 ALFs, 14 specialty facilities and one medical office building at December 31, 2018, are leased under provisions of single or master operating leases with initial terms typically ranging from 5 to 15 years, plus renewal options. Also see Note 4 – Direct Financing Leases for information regarding additional properties accounted for as direct financing leases. Substantially all of the single leases and master leases provide for minimum annual rentals that are typically subject to annual increases. Under the terms of the leases, the lessee is responsible for all maintenance, repairs, taxes and insurance on the leased properties.

A summary of our investment in leased real estate properties is as follows:


	December 31,
	2018		2017
	(in thousands)
Buildings	$	6,056,820	$	6,098,119
Land		786,174		795,874
Furniture, fixtures and equipment		447,610		440,737
Site improvements		250,917		227,150
Construction in progress		204,889		94,080
Total real estate investments		7,746,410		7,655,960
Less accumulated depreciation		(1,562,619)		(1,376,828)
Real estate investments - net	$	6,183,791	$	6,279,132

For the years ended December 31, 2018, 2017 and 2016, we capitalized $11.1 million, $8.0 million and $6.6 million, respectively, of interest to our projects under development.

The future minimum estimated contractual rents due for the remainder of the initial terms of the operating leases are as follows at December 31, 2018:


	(in thousands)
2019	$	680,627
2020		698,719
2021		716,426
2022		715,427
2023		703,167
Thereafter		4,026,317
Total	$	7,540,683

The following tables summarize the significant transactions that occurred in 2018.

2018 Acquisitions and Other


	Number of			Total					Building & Site		Furniture		Initial
	Facilities		Country/	Investment(4)			Land		Improvements		& Fixtures		Annual
Period	SNF	ALF/ILF	State	(in millions)									Cash Yield(3)
Q1	—	1	UK	$	4.0	(1)	$	0.9	$	2.9	$	0.2	8.50	%
Q1	—	1	UK		5.7	(2)		1.4		4.1		0.2	8.50	%
Q1	1	—	PA		7.4			1.6		5.4		0.4	9.50	%
Q1	1	—	VA		13.2			2.4		10.5		0.3	9.50	%
Q2	5	—	TX		22.8			0.5		20.4		1.9	9.50	%
Q4	3	1	PA		35.1			4.1		29.2		1.8	9.50	%
Q4	1	—	IN		8.3			1.7		6.0		0.6	9.50	%
Q4	1	—	OH		9.2			0.8		7.9		0.5	9.50	%
Total	12	3		$	105.7		$	13.4	$	86.4	$	5.9

(1)

We recorded a non-cash deferred tax liability of approximately $0.4 million in connection with this acquisition.

(2)

We recorded a non-cash deferred tax liability of approximately $0.2 million in connection with this acquisition.

(3)

The cash yield is based on the purchase price.

(4)

All of the aforementioned acquisitions were accounted for as asset acquisitions.

During 2018, we acquired two parcels of land (not reflected in the table above) for approximately $3.5 million with the intent of building new facilities for our existing operators.

During 2018, we transitioned 21 SNFs and one ALF subject to direct financing leases (not reflected in the table above) with a net carrying value of approximately $184.5 million from an existing operator to five other existing operators subject to single or master operating leases with an initial annual cash yield of approximately 9%. We recorded approximately $184.5 million of real estate investments consisting of land ($11.2 million), building and site improvements ($159.1 million) and furniture and fixtures ($14.2 million) in partial satisfaction of the direct financing lease. In connection with these transitions, we provided the new operators with working capital loans with a maximum borrowing capacity of $45.7 million, commitments to fund capital improvements up to $10.6 million and indemnities with a maximum funding of $7.4 million. Claims against these indemnities must occur within 18 months to 36 months of the transition date. These indemnities were provided to the new operators upon transition and would be utilized in the event that the prior operator does not perform under their transition agreements. The Company does not expect to fund a material amount under these indemnity agreements.

2017 Acquisitions and Other


	Number of			Total					Building & Site		Furniture		Initial
	Facilities		Country/	Investment(4)			Land		Improvements		& Fixtures		Annual
Period	SNF	ALF/ILF	State	(in millions)									Cash Yield (2)
Q1	—	1	VA	$	7.6		$	0.5	$	6.8	$	0.3	7.50	%
Q2	1	—	NC		8.6			0.7		7.3		0.6	9.50	%
Q2	—	18	UK		124.2	(1)		34.1		85.1		5.0	8.50	%
Q3	—	1	TX		2.3			0.7		1.5		0.1	9.25	%
Q3	15	—	IN		211.0			18.0		180.2		12.8	9.50	%
Q3	9	—	TX		19.0	(3)		1.7		15.5		1.8	18.60	%
Q4	6	—	TX		40.0			1.0		35.1		3.9	9.25	%
Total	31	20		$	412.7		$	56.7	$	331.5	$	24.5

(1)

We recorded a non-cash deferred tax liability and acquisition costs of approximately $8.2 million and $1.2 million, respectively, in connection with this acquisition.

(2)

The cash yield is based on the purchase price.

(3)

In July 2017, we transitioned nine SNFs formerly subject to a direct financing lease to another operator. As a result of terminating the direct financing lease, we wrote down the facilities to our original cost basis and recorded an impairment on the direct financing lease of approximately $1.8 million. See Note 4 – Direct Financing Leases for additional information.

(4)

All of the aforementioned acquisitions were accounted for as asset acquisitions.

During 2017, we acquired three parcels of land (not reflected in the table above) for approximately $6.7 million with the intent of building new facilities for existing operators.

2016 Acquisitions and Other


	Number of			Total					Building & Site		Furniture		Initial
	Facilities		Country/	Investment(6)			Land		Improvements		& Fixtures		Annual
Period	SNF	ALF/ILF	State	(in millions)									Cash Yield (7)
Q1	—	1	UK	$	8.3		$	1.4	$	6.7	$	0.2	7.00	%
Q1	—	1	UK		6.1			0.6		5.3		0.2	7.00	%
Q1	10	—	OH, VA, MI		169.0	(2)		10.5		152.5		6.0	8.50	%
Q1	—	2	GA		20.2			0.8		18.3		1.1	7.50	%
Q1	3	—	MD		25.0			2.5		19.9		2.6	8.50	%
Q1	21	—	VA, NC		212.5			19.3		181.1		12.1	8.50	%
Q2	—	10	UK		111.9	(3)		24.8		83.9		3.2	7.00	%
Q2	—	3	TX		66.0	(4)		5.8		58.6		1.6	6.80	%
Q2	3	—	CO, MO		31.8			3.1		26.2		2.5	9.00	%
Q3	—	1	FL		4.3			2.3		1.8		0.2	8.00	%
Q3	—	1	GA		2.5			0.2		2.1		0.2	8.00	%
Q3	—	1	FL		16.5			1.8		14.3		0.4	8.00	%
Q3	1	—	SC		10.1			2.7		6.5		0.9	9.00	%
Q3	1	—	OH		9.0	(5)		—		8.6		0.4	9.00	%
Q3	31	—	FL, KY,TN		329.6	(1)		24.6		290.8		14.2	9.00	%
Total	70	20		$	1,022.8		$	100.4	$	876.6	$	45.8

(1)

Our investment includes a purchase option buyout obligation with a fair value of approximately $29.6 million. We also acquired a term loan with a fair value of approximately $37.0 million which is recorded in other investments on our Consolidated Balance Sheets. In August 2017, the purchase option was terminated and the operator used the proceeds to repay certain other investments, refer to Note – 6 Other Investments for details.

(2)

Acquired from a related party. Refer to Note – 2 Summary of Significant Accounting Policies - Related Party Transactions.

(3)

We also recorded a deferred tax asset of approximately $1.9 million in connection with the acquisition.

(4)

We paid $63.0 million in cash at closing to acquire the facilities. We paid an additional $1.5 million in April 2017 and the remaining $1.5 million in April 2018. The additional consideration paid was contractually determined and not contingent on other factors.

(5)

We paid approximately $3.5 million in cash to acquire the facility. The remainder of the purchase price (approximately $5.5 million) was funded with the redemption of an other investment note.

(6)

All of the aforementioned acquisitions were accounted for as business combinations.

(7)

The cash yield is based on the purchase price.

During 2016, we acquired five parcels of land (not reflected in the table above) for approximately $8.3 million with the intent of building new facilities for existing operators.

For the year ended December 31, 2016, we recognized rental revenue of approximately $58.1 million and expensed approximately $9.6 million of acquisition related costs in connection with the aforementioned acquisitions. No goodwill was recorded in connection with these acquisitions.

Asset Sales, Impairments and Other

During the fourth quarter of 2018, we sold 14 facilities (nine previously held for sale at September 30, 2018) subject to operating leases for approximately $63.2 million in net proceeds recognizing a gain on sale of approximately $15.5 million. In addition, we recorded impairments on real estate properties of approximately $3.2 million on three facilities (two were subsequently reclassified to held for sale).

In 2018, we sold 78 facilities (22 previously held for sale at December 31, 2017) subject to operating leases for approximately $309.6 million in net proceeds recognizing a gain on sale of approximately $24.8 million. In addition, we recorded impairments on real estate properties of approximately $35.0 million on 35 facilities. Our impairments were offset by $5.2 million of insurance proceeds received related to a facility destroyed in November 2017. The total net recorded investment in these properties after impairments (excluding facilities sold during the year) was approximately $14.8 million as of December 31, 2018, with approximately $1.0 million related to properties classified as held for sale.

Of the 78 facilities sold during 2018, we sold 12 SNFs on June 1, 2018 secured by HUD mortgages to subsidiaries of an existing operator. The Company sold the 12 SNF facilities with carrying values of approximately $62 million for approximately $78 million which consisted of $25 million of cash consideration and their assumption of approximately $53 million of our HUD mortgages. See Note 13 – Borrowing Arrangements for additional details. Simultaneously, subsidiaries of the operator assumed our HUD restricted cash accounts, deposits and escrows. The Company recorded a gain on sale of approximately $11 million after approximately $5 million of closing and other transaction related costs. In connection with this sale, we provided a principal of an existing operator an unsecured loan of approximately $39.7 million.

During the fourth quarter of 2017, we sold 32 facilities (two previously held for sale at September 30, 2017) subject to operating leases for approximately $188.0 million in net proceeds recognizing a gain on sale of approximately $46.4 million. In addition, we recorded impairments on real estate properties of approximately $63.5 million on 32 facilities (two were subsequently reclassified to held for sale). Of the $63.5 million impairment on real estate properties, $12.6 million related to one facility that was destroyed in a fire.

In 2017, we sold 52 facilities (14 previously held for sale at December 31, 2016) subject to operating leases for approximately $257.8 million in net proceeds recognizing a gain on sale of approximately $53.9 million. In addition, we recorded impairments on real estate properties of approximately $99.1 million on 37 facilities including approximately $2.6 million of capitalized costs associated with the termination of construction projects with two of our operators. The total net recorded investment in these properties after impairments and excluding facilities previously sold was approximately $125.1 million as of December 31, 2017, with approximately $7.7 million related to properties classified as held for sale.

Of the 52 facilities sold in 2017, the sale of ten of these facilities did not initially qualify for sale accounting under the full accrual method. The ten SNFs with a carrying value of approximately $23.2 million were sold to a third-party for approximately $43.3 million, resulting in a total gain of approximately $17.5 million after $2.6 million of closing costs. In connection with this sale, we provided the buyer a $10.0 million loan which was recorded in other investments on our Consolidated Balance Sheets. We recognized a net gain of approximately $7.5 million in 2017. Upon our adoption of ASU 2014-09 on January 1, 2018, we recognized $10.0 million of deferred gain related to this sale through opening equity on January 1, 2018.

In 2016, we sold 38 SNFs (three previously held for sale at December 31, 2015) subject to operating leases for total cash proceeds of approximately $169.6 million, generating a gain on sale of approximately $50.2 million. We also recorded impairments on real estate properties of approximately $58.7 million on 29 facilities.

The 2018, 2017 and 2016 recorded impairments were primarily the result of decisions to exit certain non-strategic facilities and/or operators. We reduced the net book value of the impaired facilities to their estimated fair values or, with respect to the facilities reclassified to held for sale, to their estimated fair value less costs to sell. To estimate the fair value of the facilities, we utilized a market approach which considered binding sale agreements (a Level 1 input) and/or Level 3 inputs which generally consist of non-binding offers from unrelated third parties See also Note 4 – Direct Financing Leases and Note 9 – Assets Held For Sale for more details.