Net Investment in Direct Financing Leases

12 Months Ended

Dec. 31, 2016

Net Investment in Direct Financing Leases

Net Investment in Direct Financing Leases

NOTE 6. Net Investment in Direct Financing Leases

The components of net investment in DFLs consisted of the following (dollars in thousands):


	December 31,
	2016		2015
Minimum lease payments receivable	$	1,108,237	$	1,155,215
Estimated residual values		539,656		535,161
Less unearned income		(895,304)		(939,683)
Net investment in direct financing leases	$	752,589	$	750,693
Properties subject to direct financing leases		30		30

Certain DFLs contain provisions that allow the tenants to elect to purchase the properties during or at the end of the lease terms for the aggregate initial investment amount plus adjustments, if any, as defined in the lease agreements. Certain leases also permit the Company to require the tenants to purchase the properties at the end of the lease terms.

The following table summarizes future minimum lease payments contractually due under DFLs at December 31, 2016 (in thousands):


Year	Amount
2017	$	91,770
2018		66,121
2019		67,526
2020		62,234
2021		62,641
Thereafter		757,945
	$	1,108,237

Direct Financing Lease Internal Ratings

The following table summarizes the Company’s internal ratings for net investment in DFLs at December 31, 2016 (dollars in thousands):


	Carrying		Percentage of	Internal Ratings
Segment	Amount		DFL Portfolio	Performing DFLs		Watch List DFLs		Workout DFLs
SH NNN	$	628,698	84	$	267,897	$	360,801	$	—
Other		123,891	16		123,891		—		—
	$	752,589	100	$	391,788	$	360,801	$	—

Beginning September 30, 2013, the Company placed a 14 property senior housing DFL (the “DFL Portfolio”) on nonaccrual status and classified the DFL Portfolio on “Watch List” status. The Company determined that the collection of all rental payments was and continues to be no longer reasonably assured; therefore, rental revenue for the DFL Portfolio has been recognized on a cash basis. The Company re-assessed the DFL Portfolio for impairment on December 31, 2016 and determined that the DFL Portfolio was not impaired based on its belief that: (i) it was not probable that it will not collect all of the rental payments under the terms of the lease; and (ii) the fair value of the underlying collateral exceeded the DFL Portfolio’s carrying amount. The fair value of the DFL Portfolio was estimated based on a discounted cash flow model, the inputs to which are considered to be a Level 3 measurement within the fair value hierarchy. Inputs to this valuation model include real estate capitalization rates, industry growth rates and operating margins, some of which influence the Company’s expectation of future cash flows from the DFL Portfolio and, accordingly, the fair value of its investment. During the years ended December 31, 2016, 2015 and 2014, the Company recognized DFL income of $13 million, $15 million and $19 million, respectively, and received cash payments of $18 million, $20 million and $24 million, respectively, from the DFL Portfolio. The carrying value of the DFL Portfolio was $361 million and $366 million at December 31, 2016 and 2015, respectively.