REAL ESTATE

As of September 30, 2015, we owned 179 health care real estate properties located in 31 states and consisting of 112 senior housing communities, 62 skilled nursing facilities, 3 hospitals and 2 medical office buildings. Our senior housing properties include assisted living facilities, senior living campuses, independent living facilities, and entrance-fee communities. These investments (excluding assets classified as held for sale, pre-development costs of $375,000 and our corporate office of $910,000) consisted of properties with an original cost of approximately $2,087,337,000, rented under triple-net leases to 26 lessees.

Chancellor

On August 31, 2015, we acquired a 29-unit memory care facility in Portland, Oregon, for $6,772,000 in cash inclusive of closing costs of approximately $97,000. We leased the facility to Chancellor Health Care for 15 years with renewal options at an initial lease rate of 7.75% plus annual escalators. Because the facility was owner-occupied, the acquisition was accounted for as an asset purchase.

Brook Retirement Communities

On August 31, 2015, we acquired a 42-unit independent living and assisted living community in Roscommon, Michigan, for $6,000,000 in cash plus closing costs of $49,000. We leased the facility to The Brook Retirement Communities of Roscommon, Inc., for 10 years with renewal options at an initial lease rate of 7.5% plus annual escalators. Because the facility was owner-occupied, the acquisition was accounted for as an asset purchase.

East Lake

On July 1, 2015, we acquired two senior living campuses in Nashville and Indianapolis and one assisted living/memory care facility in Charlotte for $66,900,000 in cash. We leased the facilities to an affiliate of East Lake Capital Management (“East Lake”) for an initial term of 10 years, plus renewal options. The lease calls for an annual payment of $4,683,000 in the first year with fixed annual escalators of 3.5% through year four and 3.0% thereafter. In conjunction with the lease, East Lake acquired a purchase option on the properties as a whole, exercisable beginning in year six of the lease for approximately $81,000,000 and thereafter subject to escalation on a basis consistent with rental escalations and other funding in place. In connection with the lease, we have committed to invest an additional $400,000 for specified capital improvements. The investment will be added to the basis on which the lease amount is calculated. In addition, we have committed to a lessee earn out of $8,000,000 contingent on reaching and maintaining certain metrics and a contingent earn out of $750,000 payable to the seller upon East Lake reaching certain metrics. At acquisition, we estimated the seller contingent earnout payment to be probable and, accordingly, have reflected that amount in our Condensed Consolidated Balance Sheet at September 30, 2015. Contingent payments earned will be an addition to the lease base when funded. Pending final valuation, we have apportioned our cost of the East Lake facilities at approximately 6% for land and land improvements and 94% for buildings and equipment.

The East Lake Facilities were owner-occupied at acquisition, and accordingly we accounted for the transaction as an asset purchase. Because we neither control East Lake nor have any role in its day-to-day management, we have no material input into activities that most significantly impact the entities’ economic performance, and we account for our transactions with East Lake at amortized cost. We are not obligated to provide further support to East Lake, and accordingly the maximum extent of our exposure to loss is limited to our investment in the facilities.

Holiday

As of September 30, 2015, we leased 25 independent living facilities to NH Master Tenant, LLC, an affiliate of Holiday Retirement ("Holiday"). The master lease term of 17 years began in December 2013 and provides for 2015 cash rent of $33,351,000 plus annual escalators of 4.5% in 2016 and 2017 and a minimum of 3.5% each year thereafter.

Of our total revenues, $10,954,000 (19%) and $10,954,000 (25%) were derived from Holiday for the three months ended September 30, 2015 and 2014, including $2,616,000 and $2,975,000 in straight-line rent, respectively. For the nine months ended September 30, 2015 and 2014, of our total revenues, $32,863,000 (19%) and $32,863,000 (25%) were derived from Holiday including $7,849,000 and $8,926,000 in straight-line rent, respectively. NH Master Tenant, LLC continues to operate the facilities pursuant to a management agreement with a Holiday-affiliated manager.

Bickford

As of September 30, 2015, we owned an 85% equity interest and Sycamore Street, LLC ("Sycamore"), an affiliate of Bickford Senior Living ("Bickford"), owned a 15% equity interest in our consolidated subsidiary ("PropCo") which owns 32 assisted living/memory care facilities plus 5 facilities in pre-development and development. The facilities are leased to an operating company, ("OpCo"), in which we retain a non-controlling 85% ownership interest. The facilities are managed by Bickford. Our joint venture is structured to comply with the provisions of RIDEA.

On July 31, 2015, our subsidiary, PropCo, acquired a 92 unit assisted living/memory care facility located in Lancaster, Ohio for $21,000,000 in cash. The facility was leased under terms structured to comply with provisions of RIDEA, to the operating company, OpCo, of which we retain an 85/15 ownership interest with Bickford, as discussed in Note 3. Because the facility was owner-occupied, the acquisition was accounted for as an asset purchase.

In February 2015 the joint venture announced it would develop five senior housing facilities in Illinois and Virginia. Each community will be managed by Bickford and will consist of 60 private-pay assisted living and memory care units. Construction started in mid-2015, with openings planned beginning in late 2016. The total estimated project cost is $55,000,000. During the third quarter of 2015, we purchased land for three of the five planned assisted living facilities. Total capitalized costs related to these properties as of September 30, 2015, including land purchases, were $8,123,000. We have accumulated an additional $375,000 in pre-development costs for the remaining two sites.

As of September 30, 2015, the annual contractual rent from OpCo to PropCo is $23,853,000, plus fixed annual escalators. NHI has an exclusive right to Bickford's future acquisitions, development projects and refinancing transactions. Of our total revenues, $6,150,000 (11%) and $5,324,000 (12%) were recognized as rental income from Bickford for the three months ended September 30, 2015 and 2014, and $17,844,000 (10%) and $15,789,000 (12%) for the nine months ended September 30, 2015 and 2014, respectively.

NHC

As of September 30, 2015, we leased 42 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 in New England.

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 2013 lease, rent escalates 4% of the increase, if any, in each facility's revenue over a 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,
	2015		2014		2015		2014
Current year	$	596	$	573	$	1,788	$	1,719
Prior year final certification¹	—		—		94		15
Total percentage rent income	$	596	$	573	$	1,882	$	1,734

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 revenues, $9,133,000 (16%) and $9,109,000 (20%) were derived from NHC for the three months ended September 30, 2015 and 2014, respectively, and $27,492,000 (16%) and $27,337,000 (21%) for the nine months ended September 30, 2015 and 2014, respectively.

Senior Living Communities

Beginning in December 2014 we leased eight retirement communities with 1,671 units to Senior Living Communities, LLC (“Senior Living”). The 15-year master lease contains two 5-year renewal options and provides for initial cash rent of $31,000,000, plus annual escalators of 4% in years two through four and 3% thereafter.

For the eight Senior Living properties acquired by us in December 2014 in a transaction accounted for as a business combination, the unaudited pro forma revenue, net income and net income available to common stockholders of the combined entity for the three and nine months ended September 30, 2014 is provided below as if the acquisition date had been January 1, 2013 (in thousands except per share amounts):



	Three Months Ended September 30,		Nine Months Ended September 30,
	2014		2014
Revenue	$	54,335	$	161,342
Net income	$	30,067	$	88,667
Net income available to common stockholders	$	29,801	$	87,795
Earnings per common share - basic	$	0.79	$	2.34
Earnings per common share - diluted	$	0.79	$	2.34

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

Of our total revenues for the three and nine months ended September 30, 2015, we recorded $9,855,000 (17%) and $29,566,000 (17%), respectively, in lease revenue from Senior Living, of which $2,105,000 and $6,316,000 respectively, represented straight-line rent. Net earnings from this acquisition were $4,549,000 and $13,715,000 for the same periods.

Disposition of Assets

On September 30, 2015, we sold for $9,593,000 two properties with a carrying value of $8,467,000 and recognized a gain on the disposition of $1,126,000. The properties represented the last two skilled nursing facilities of a disposal group that was originally under contract and classified during 2011 and 2012 as held-for-sale. As previously disclosed, the sale for the disposal group as a whole, being subject to certain conditions precedent as to financing, did not occur. NHI then proceeded to dispose of three of the properties in December 2013, the first of the group having been sold in 2011. On completion of these disposals to our tenant, Fundamental, a monthly rental of $250,000 was attached to the two remaining skilled nursing facilities through the end of the original lease term, February 2016, the properties having an average age in excess of 40 years. With the impending cessation of the lease, the two properties were aggressively marketed for immediate sale under conditions less favorable than those prevailing in 2011.

Assets Held for Sale

In August 2015 we committed to a plan to sell a skilled nursing facility in Idaho. We have reached agreement with our tenant on a sales price of $3,000,000 for the property, which has a carrying value of $1,346,000. We recorded lease income from the property for the three and nine months ended September 30, 2015 of $80,000 and $241,000, respectively, and for the three and nine months ended September 30, 2014 lease income was $78,000 and $235,000, respectively. The Idaho property does not meet the accounting criteria to be reported as a discontinued operation as its disposal will not result in a strategic shift that would have a major effect on our operations or financial results.