Loans Receivable

The following table summarizes the Company’s loans receivable (in thousands):



	June 30, 2017								December 31, 2016
	Real Estate Secured		Other Secured			Total			Real Estate Secured		Other Secured			Total
Mezzanine⁽¹⁾	$	—	$	274,799		$	274,799		$	—	$	615,188		$	615,188
Other⁽²⁾	176,186		—			176,186			195,946		—			195,946
Unamortized discounts, fees and costs⁽¹⁾	—		(728		)	(728		)	413		(3,593		)	(3,180		)
Allowance for loan losses	—		(56,682		)	(56,682		)	—		—			—
	$	176,186	$	217,389		$	393,575		$	196,359	$	611,595		$	807,954

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(1)	At December 31, 2016, included £282 million ($348 million) outstanding and £2 million ($3 million) of associated unamortized discounts, fees and costs, both related to the HC-One Facility.


(2)	At June 30, 2017, included £119 million ($154 million) outstanding primarily related to Maria Mallaband loans.

Loans Receivable Internal Ratings

The following table summarizes the Company’s internal ratings for loans receivable at June 30, 2017 (dollars in thousands):



	Carrying Amount		Percentage of Loan Portfolio	Internal Ratings
Investment Type	Carrying Amount		Percentage of Loan Portfolio	Performing Loans		Watch List Loans		Workout Loans
Real estate secured	$	176,186	45%	$	176,186	$	—	$	—
Other secured	217,389		55	17,389		200,000		—
	$	393,575	100%	$	193,575	$	200,000	$	—

Real Estate Secured Loans

Four Seasons Health Care. In March 2017, the Company sold its investment in Four Seasons Health Care’s (“Four Seasons”) senior secured term loan at par plus accrued interest for £29 million ($35 million).

Other Secured Loans

HC-One Facility. On June 30, 2017, the Company received £283 million ($367 million) from the repayment of its HC-One mezzanine loan.

Tandem Health Care Loan. On July 31, 2012, the Company closed a mezzanine loan facility to lend up to $205 million to Tandem Health Care (“Tandem”), as part of the recapitalization of a post-acute/skilled nursing portfolio (the “Tandem Portfolio”). The Company funded $100 million (the “First Tranche”) at closing and funded an additional $102 million (the “Second Tranche”) in June 2013. In May 2015, the Company increased and extended the mezzanine loan facility with Tandem to: (i) fund $50 million (the “Third Tranche”) and $5 million (the “Fourth Tranche”), which proceeds were used to repay a portion of Tandem’s existing senior and mortgage debt, respectively; (ii) extend its maturity to October 2018; and (iii) extend the prepayment penalty period through January 2017. The tranches (collectively, the “Tandem Mezzanine Loan”) bear interest at fixed annual rates of 12%, 14%, 6% and 6% per annum for the First, Second, Third and Fourth Tranches, respectively. The blended rate for the Tandem Mezzanine Loan is 11.5% per year.

Tandem leases the entire Tandem Portfolio to Consulate Health Care (“Consulate”) under a master lease (the “Tandem and Consulate Lease”). At June 30, 2017, as a result of the Tandem Portfolio’s operating performance, there are outstanding events of default under the Tandem and Consulate Lease (“Events of Default”) due to: (i) Consulate’s failure to meet certain financial covenants under the Tandem and Consulate Lease and (ii) events of default under Consulate’s working capital facility, which, through a cross-default provision, are Events of Default. Starting in April 2017, Consulate failed to pay the full amount of its rent under the Tandem and Consulate Lease which triggered another Event of Default. Through cross-default provisions, these Events of Default are also events of default under the Tandem Mezzanine Loan and Tandem’s senior mortgage debt (each, a “Loan Event of Default”). The Tandem Mezzanine Loan requires Tandem to pay default interest at a rate of 16.5% per year, during periods in which there is an outstanding Loan Event of Default. Tandem did not pay the additional 5% default interest rate spread above the 11.5% and, therefore created a monetary event of default under the Tandem Mezzanine Loan.

Although Tandem continues to remain current on its non-default interest payment obligations under the Tandem Mezzanine Loan, the Company believes that it is probable it will be unable to collect all interest and principal payments, including default interest payments, according to the contractual terms of the Tandem Mezzanine Loan. As the Tandem Mezzanine Loan is deemed collateral-dependent and the carrying amount of the Tandem Mezzanine Loan exceeded the fair value of the underlying collateral at June 30, 2017, as part of its quarterly review process, the Company recorded an impairment charge and related allowance of $57 million during the three months ended June 30, 2017, reducing the carrying value to $200 million, which approximates the fair value of the collateral as of June 30, 2017. The decline in fair value of the collateral was driven by a variety of factors, including recent operating results of the underlying real estate assets, as well as market and industry data, that reflect a declining trend in admissions and a continuing shift away from higher-rate Medicare plans in the post-acute/skilled nursing sector. The calculation of the fair value of the collateral was primarily based on an income approach technique and relies on forecasted EBITDAR (defined as earnings before interest, taxes, depreciation and amortization, and rent) and market data, including, but not limited to, sales price per unit/bed, rent coverage ratios, and real estate capitalization rates. All valuation inputs are considered to be Level 2 measurements within the fair value hierarchy.

Beginning in the first quarter of 2017, the Company elected to recognize interest income on a cash basis. During both the three months ended June 30, 2017 and 2016, the Company recognized interest income and received cash payments of $7 million from Tandem. During both the six months ended June 30, 2017 and 2016, the Company recognized interest income and received cash payments of $14 million from Tandem.

The Company entered into a forbearance agreement with Tandem on May 1, 2017, pursuant to which it agreed to forbear from exercising remedies, including waiving default interest, with respect to the above-described Loan Events of Default under the Tandem Mezzanine Loan until June 30, 2017, which was subsequently extended to July 31, 2017 with certain modifications.

On July 31, 2017, subsequent to its quarterly review process and the aforementioned impairment, the Company entered into a binding agreement (“Agreement”) with the borrowers to repay the Tandem Mezzanine Loan at a discounted value of $197 million (the “Repayment Value”). Upon execution of the Agreement, the borrowers posted a $2 million non-refundable deposit and secured the right to repay the Tandem Mezzanine Loan by October 25, 2017 (at the Repayment Value). A second non-refundable deposit of $2 million is required to be posted by August 31, 2017. The borrowers also retain the option to extend the term of the Agreement to December 31, 2017 upon satisfaction of one of the following requirements: (i) posting of an additional $4 million non-refundable deposit, (ii) providing evidence of a commitment letter(s) for financing to satisfy the full Repayment Value, which is subject to the Company’s approval and may be granted or withheld in the Company’s sole discretion, or (iii) paying down the principal balance of the Tandem Mezzanine Loan by at least $50 million. The borrowers are obligated to continue making interest payments based on the $257 million par value of the Tandem Mezzanine Loan through the repayment date, adjusted for any principal payments received from Tandem. As part of the Agreement, the Company agreed to forbear from exercising remedies, including waiving default interest, with respect to the above-described Loan Events of Default under the Tandem Mezzanine Loan, through December 31, 2017.

During the third quarter of 2017, the Company expects to record an additional $3 million impairment charge to write down the carrying value of the Tandem Mezzanine Loan to the Repayment Value and assign the Tandem Mezzanine Loan an internal rating of Workout. The repayment of the Tandem Mezzanine Loan is subject to customary closing conditions and may not occur within the anticipated timeframe or at all.