REAL ESTATE

As of March 31, 2018, we owned 210 health care real estate properties located in 32 states and consisting of 136 senior housing communities (“SHO”), 69 skilled nursing facilities (“SNF”), 3 hospitals and 2 medical office buildings. Our senior housing communities include assisted living facilities, senior living campuses, independent living facilities, and entrance-fee communities. These investments (excluding our corporate office of $1,298,000) consisted of properties with an original cost of approximately $2,682,387,000 rented under triple-net leases to 27 lessees.

Ensign

On January 12, 2018, NHI acquired from a developer a 121-bed skilled nursing facility in Waxahachie, Texas for a cash investment of $14,404,000 plus $1,275,000 contributed by the lessee, The Ensign Group (“Ensign”). The facility is included under our existing master lease with Ensign for the remaining lease term of 13 years plus renewal options. The initial lease rate is set at 8.2% subject to annual escalators based on prevailing inflation rates. The acquisition was accounted for as an asset purchase.

With the acquisition of the Waxahachie property, NHI has a continuing commitment to purchase from the developer two new skilled nursing facilities in Texas for approximately $28,000,000 which are newly developed, leased to Legend Healthcare (“Legend”) and subleased to Ensign. The fixed-price nature of the commitment creates a variable interest for NHI in the developer, whom NHI considers to lack sufficient equity to finance its operations without recourse to additional subordinated debt. The presence of these conditions causes the developer to be considered a VIE.

Major Tenants

Bickford

As of March 31, 2018 our Bickford Senior Living (“Bickford”) portfolio consists of leases with lease expiration dates as follows (in thousands):



	Lease Expiration
	Sept / Oct 2019			June 2023		Sept 2027		May 2031		Total
Number of Properties	10			13		4		20		47
2018 Annual Contractual Rent	$	9,264		$	11,133	$	1,515	$	20,030	$	41,942
Straight Line Rent Adjustment	(617		)	588		221		3,813		4,005
Total Revenues	$	8,647		$	11,721	$	1,736	$	23,843	$	45,947

Of our total revenues, $11,445,000 (16%) and $9,373,000 (14%) were recognized as rental income from Bickford for the three months ended March 31, 2018 and 2017, including $1,169,000 and $910,000 in straight-line rent income, respectively.

Senior Living Communities

As of March 31, 2018, we leased nine retirement communities totaling 1,970 units to Senior Living Communities, LLC (“Senior Living”). The 15-year master lease, which began in December 2014, contains two 5-year renewal options and provides for an annual escalator of 4% effective January 1, 2018 and 3% thereafter.

Of our total revenues, $11,449,000 (16%) and $11,431,000 (17%) in rental income were derived from Senior Living for the three months ended March 31, 2018 and 2017, respectively, including $1,359,000 and $1,746,000 in straight-line rent income.

Holiday

As of March 31, 2018, we leased 25 independent living facilities to an affiliate of Holiday Retirement (“Holiday”). The 17-year master lease, which began in December 2013, currently provides for a minimum escalator of 3.5% through the end of the lease term.

Of our total revenues, $10,954,000 (15%) and $10,954,000 (17%) were derived from Holiday for the three months ended March 31, 2018 and 2017, including $1,530,000 and $1,849,000 in straight-line rent income, respectively. Our tenant operates the facilities pursuant to a management agreement with a Holiday-affiliated manager.

NHC

As of March 31, 2018, 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 acquired from a third party.

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 1991 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 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
	March 31,
	2018		2017
Current year	$	853	$	782
Prior year final certification¹	285		194
Total percentage rent income	$	1,138	$	976

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, $9,674,000 (13%) and $9,513,000 (14%) were derived from NHC for the three months ended March 31, 2018 and 2017, respectively.

The chairman of our board of directors is also a director on NHC’s board of directors. As of March 31, 2018, NHC owned 1,630,462 shares of our common stock.

Tenant Non-Compliance

In October 2017, we issued a letter of forbearance to one of our tenants for a default on our lease terms involving lease coverage and arrearages to certain vendors. Lease revenues from the tenant and its affiliates comprise less than 4% of our rental income, and the related straight-line rent receivable was approximately $3,773,000 at March 31, 2018. The tenant has maintained its status as current on all rent payments to NHI, and we have made no rent concessions. We continue to work with the tenant to resolve their defaults.

The defaults mentioned above typically give rise to considerations regarding the impairment or recoverability of the related assets, and we give additional attention to the nature of the default’s underlying causes. At this time, our assessment of likely undiscounted cash flows reveals no basis for an impairment charge on the underlying real estate.