REAL ESTATE

As of September 30, 2014, we owned 163 health care real estate properties located in 30 states and consisting of 94 senior housing communities, 64 skilled nursing facilities, 3 hospitals and 2 medical office buildings. Our senior housing properties include assisted living facilities, independent living facilities, and senior living campuses. These investments (excluding our corporate office of $899,000) consisted of properties with an original cost of approximately $1,492,241,000, rented under triple-net leases to 24 lessees.

Chancellor

On September 30, 2014, we completed a $5,650,000 acquisition of a 25-unit assisted living facility in Milwaukie, Oregon and leased the facility to Chancellor Health Care, LLC ("Chancellor") for an initial term of 15 years with two ten-year renewal options. The initial lease rate is 8.0% with fixed annual escalators. Because the facility was owner-occupied, we accounted for the acquisition as an asset purchase.

In June 2014 we acquired a 56-unit assisted living/memory care facility in Sacramento, California for $11,500,000 and leased the facility to Chancellor for an initial term of 15 years, plus renewal options. The initial lease rate is 8.0% with fixed annual escalators. Because the facility was owner-occupied, we accounted for the acquisition as an asset purchase.

Prestige

In March 2014 we completed a $40,115,000 purchase of 3 skilled nursing facilities in Oregon totaling 196 beds and a 105-unit assisted living facility in Idaho from Prestige Senior Living ("Prestige"). We have a commitment to fund contingent earn-out payments up to a maximum of $6,390,000 based on the achievement of certain financial metrics as measured periodically through December 31, 2015. Because the facilities were owner-occupied, we accounted for the acquisition as an asset purchase. At acquisition, we estimated probable contingent payments of $3,000,000 to be likely and have, accordingly, reflected that amount in the Condensed Consolidated Balance Sheet. Contingent payments earned will be an addition to the lease base when funded.

We have leased the 4 facilities to Prestige with a 15-year term at an initial rate of 8.4% plus fixed annual escalators. In addition, at two of the Oregon facilities we have committed to invest $2,000,000 for capital improvements which are expected to be completed by June 30, 2015. This investment will be added to the basis on which the lease amount is calculated.

Holiday

In December 2013 we acquired 25 independent living facilities from Holiday Acquisition Holdings LLC (“Holiday”), an affiliate of Holiday Retirement. We have leased this portfolio to NH Master Tenant, LLC, a subsidiary of Holiday. Our tenant continues to operate the facilities pursuant to a management agreement with a Holiday-affiliated manager. The master lease term of 17 years began in December 2013 and provides for initial base rent of $31,915,000 plus annual escalators of 4.5% in the first 3 years and a minimum of 3.5% each year thereafter.

Of our total revenue from continuing operations, $10,954,000 (25%) and $32,863,000 (25%) were derived from Holiday for the three and nine months ended September 30, 2014, respectively. Lease revenue from Holiday for the three and nine months ended September 30, 2014 includes straight-line rent of $2,975,000 and $8,926,000, respectively.

NHC

As of September 30, 2014, we leased 42 health care facilities under two master leases to National HealthCare Corporation (“NHC”), a publicly-held company and the lessee of our legacy properties. The facilities leased to NHC consist of 3 independent living facilities and 39 skilled nursing facilities (4 of which are subleased to other parties for whom the lease payments are guaranteed to us by NHC). These facilities are leased to NHC under the terms of an amended master lease agreement originally dated October 17, 1991 ("the 1991 lease") which includes our 35 remaining legacy properties and a master lease agreement dated August 30, 2013 ("the 2013 lease") which includes 7 skilled nursing facilities acquired from ElderTrust of Florida, Inc. on August 31, 2013.

The 1991 lease has been amended to extend the lease expiration to December 31, 2026. There are two additional 5-year renewal options, each at fair rental value of such leased property as negotiated between the parties and determined without including the value attributable to any improvements to the leased property voluntarily made by NHC at its expense. Under the terms of the lease, the base annual rental is $30,750,000 and rent escalates by 4% of the increase, if any, in each facility's revenue over a 2007 base year. The 2013 lease provides for a base annual rental of $3,450,000 and has a lease expiration of August 2028. Under the terms of the lease, rent escalates 4% of the increase in each facility's revenue over the 2014 base year. For both the 1991 lease and the 2013 lease, we refer to this additional rent component as “percentage rent.” During the last three years of the 2013 lease, NHC will have the option to purchase the facilities for $49,000,000.

The following table summarizes the percentage rent income from NHC (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Current year	$	573	$	570	$	1,719	$	1,706
Prior year final certification¹	—		—		15		746
Total percentage rent income	$	573	$	570	$	1,734	$	2,452

¹For purposes of the percentage rent calculation described in the master lease Agreement, NHC’s annual revenue by facility for a given year is certified to NHI by March 31st of the following year.

Of our total revenue from continuing operations, $9,109,000 (20%) and $8,503,000 (28%) were derived from NHC for the three months ended September 30, 2014 and 2013, respectively, and $27,337,000 (21%) and $25,650,000 (30%) for the nine months ended September 30, 2014 and 2013, respectively.

Bickford

As of September 30, 2014, we owned an 85% equity interest and an affiliate of Bickford Senior Living ("Bickford") owned a 15% equity interest in our consolidated subsidiary ("PropCo") which owned 29 assisted living/memory care facilities and also had 1 facility in the final stage of construction which is expected to open in November 2014. The facilities are leased to an operating company, ("OpCo"), in which we also retain an 85/15 ownership interest with an affiliate of Bickford, who controls the entity. This joint venture is structured to comply with the provisions of RIDEA.

For the same-store portfolio of 27 properties, the contractual rent from OpCo to PropCo for 2014 is $19,254,000. We include in our same-store comparison only those facilities which have completed initial lease-up. OpCo is continuing the lease-up of 3 assisted living facilities, 2 of which opened in the fourth quarter of 2013, and the third expected to open in November 2014. Under the terms of the current development lease agreement, PropCo receives rent from OpCo on the total amount of development costs, including land, which totaled $22,546,000 at September 30, 2014. Once the facilities stabilize, an annual rental amount will be determined between the parties. Rent income received from the development projects was $983,000 for the nine months ended September 30, 2014. NHI has an exclusive right to Bickford's future acquisitions, development projects and refinancing transactions.

Of our total revenues from continuing operations, $5,324,000 (12%) and $5,209,000 (17%) were recognized as rental income from Bickford for the three months ended September 30, 2014 and 2013, respectively, and $15,789,000 (12%) and $9,383,000 (11%) for the nine months ended September 30, 2014 and 2013, respectively.

In June 2013 PropCo acquired 14 properties from Care Investment Trust in a transaction we accounted for as a business combination ("the Care acquisition"). The unaudited pro forma revenue, net income and net income available to common stockholders of the combined entity are provided below as if the acquisition date had been January 1, 2012 (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Revenue	$	44,478	$	30,849	$	131,774	$	90,253
Net income	$	25,776	$	43,068	$	75,265	$	79,915
Net income available to common stockholders	$	25,504	$	42,759	$	74,366	$	79,124
Basic earnings per common share	$	.77	$	1.53	$	2.25	$	2.84
Diluted earnings per common share	$	.77	$	1.53	$	2.25	$	2.84

Supplemental pro forma information above includes revenues from the Care lease with OpCo, recognized on a straight-line basis, depreciation, and appropriate interest costs.

Our revenue from continuing operations includes $2,588,000 and $7,765,000 from the 14 Care properties for the three months and nine months ended September 30, 2014, respectively. Our net income includes $389,000 and $1,196,000 for the three months and nine months ended September 30, 2014, respectively.