On January 27, 2020, we acquired a 60-unit assisted living/memory care facility located in Shelby, Michigan, from Bickford. The acquisition price was $15,100,000 and included the full payment of an outstanding construction note receivable of $14,091,000, including interest. We added the facility to an existing master lease for a term of twelve years at an initial lease rate of 8%, with CPI escalators subject to a floor and ceiling.

On January 31, 2020, in a joint venture transaction, we acquired an 80% interest in a 401-unit Continuing Care Retirement Community (CCRC) comprising 330 independent living units, 26 assisted living/memory care units and 45 skilled nursing beds. Additionally, the transaction conveyed to NHI a 25% interest in the operations of the community (Note 4). The transaction arose as the culmination of a relationship beginning in 2015 in which NHI provided LCS Timber Ridge, LLC, (“LCS”), and its JV partner, Westminster-LCS, LLC, (“Westminster”), with a senior mortgage loan on the Timber Ridge campus in the Seattle area. Proceeds of the loan were used to facilitate expansion of the community to 401 units. By terms of the 2015 agreement, NHI acquired a fair-value purchase option on the property.

Consideration given for NHI’s interest in the joint venture was $124,989,000 and included assignment from the divesting owners of NHI debt having a carrying value of $59,350,000. To fund the transaction, NHI provided an additional loan of $21,650,000, leaving total debt in the joint venture of $81,000,000, bearing interest to NHI at 5.75%. Further, NHI paid $43,114,000 for an 80% equity stake in the property company, NHI-LCS JV I, LLC (“Timber Ridge PropCo”), and we provided initial capitalization totaling $875,000 for the newly formed operating company, Timber Ridge OpCo, LLC (“Timber Ridge OpCo”). LCS paid $10,778,000 for its 20% equity stake in Timber Ridge PropCo and provided $2,625,000 in initial capitalization of the operations in return for a 75% equity participation in Timber Ridge OpCo.

The lease between Timber Ridge PropCo and Timber Ridge OpCo carries a rate of 6.75% for an initial term of seven years plus renewal options and has a CPI-based lease escalator, subject to floor and ceiling. Including interest payments on debt to NHI and our lease participation in the Timber Ridge PropCo, as detailed above, NHI is entitled to $8,216,000 in the first twelve months plus 25% of the remaining Timber Ridge OpCo cash flow. Including the cash contributions of $3,500,000 by NHI and LCS to fund Timber Ridge OpCo working capital, the total enterprise capitalization was $138,392,000 for the Timber Ridge OpCo and Timber Ridge PropCo entities, as discussed above, of which NHI’s contribution of $124,989,000 was allocated to our interest in the tangible assets of Timber Ridge PropCo with no material fair value allocated to Timber Ridge OpCo beyond our working capital infusion. The lease between Timber Ridge PropCo and Timber Ridge OpCo includes an “earn out” provision whereby Timber Ridge OpCo could become eligible for a payment of $10,000,000 based on the attainment of certain operating metrics.

Certain major business decisions at Timber Ridge PropCo and Timber Ridge OpCo are to be board-managed with NHI and LCS each holding equal voting rights. At Timber Ridge PropCo, major business decisions subject to board management are restricted to areas involving LCS’s protective interests, therefore leaving control with NHI. Because of our control of ordinary-course-of-business activities in Timber Ridge PropCo under the variable interest entity model and the restriction of participation in its management to their protective interests on the part of LCS, we include the assets, liabilities, noncontrolling interest and operations of Timber Ridge PropCo in our consolidated financial statements.

As a result of LCS’s 75% share in profits, retention of operations oversight, control over all ordinary-course-of business matters, and equal voting rights in major decisions, our participating influence at Timber Ridge OpCo does not amount to control of the entity. See Note 4 for a discussion of the resultant accounting for Timber Ridge OpCo.


	Lease Expiration
	June 2023		September 2024		May 2031		April 2033		Total
Number of Properties	13		10		20		5		48
2020 Contractual Rent	$	11,812	$	9,343	$	24,193	$	5,072	$	50,420
2020 Straight Line Rent	14		339		2,671		745		3,769
2020 Lease Incentive Amortization	—		—		(775)		—		(775)
	$	11,826	$	9,682	$	26,089	$	5,817	$	53,414

Of our total revenues, $13,018,000 (16%) and $12,810,000 (17%) were recognized as rental income from Bickford, excluding income from properties recently sold or no longer leased to Bickford, for the three months ended March 31, 2020 and 2019, including $767,000 and $1,327,000 in straight-line rent income, respectively.

As of March 31, 2020, we leased 10 retirement communities totaling 2,068 units to Senior Living Communities, LLC (“Senior Living”). The 15-year master lease, which began in December 2014, contains two renewal options of five years each and provides for an annual escalator of 3% effective January 1, 2019.

Of our total revenues, $11,938,000 (14%) and $11,532,000 (15%) in rental income were derived from Senior Living for the three months ended March 31, 2020 and 2019, including $1,068,000 and $1,058,000 in straight-line rent income, respectively.

As of March 31, 2020, we leased 42 facilities under two master leases to National HealthCare Corporation (“NHC”), a publicly-held company. The facilities leased to NHC consist of three 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”) that includes our 35 legacy properties and a master lease agreement dated August 30, 2013 (“the 2013 lease”) that includes 7 skilled nursing facilities acquired in 2013.

The 1991 lease expiration is December 31, 2026. There are two additional renewal options of five years, each at fair rental value as negotiated between the parties. 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.

As of March 31, 2020, we leased 26 independent living facilities to Holiday Retirement (“Holiday”). Of our total revenues, $10,176,000 (12%) and $9,930,000 (13%) were derived from Holiday for the three months ended March 31, 2020 and 2019, including $1,664,000 and $1,630,000 in straight-line rent income, respectively. Our tenant operates the facilities pursuant to a management agreement with a Holiday-affiliated manager.

Certain of our operators hold purchase options allowing them to acquire properties they currently lease from NHI. For options open or coming open in the near future, we are engaged in preliminary negotiations to continue as lessor or in some other capacity.


Asset	Number of	Lease	1st Option	Option	Contractual
Type	Properties	Expiration	Open Year	Basis	Rent
MOB	1	February 2025	Open	i	$	308
HOSP	1	March 2025	Open	ii	$	1,957
HOSP	1	September 2027	2021	iv	$	2,760
SHO	2	May 2031	2021	iv	$	5,063
HOSP	1	June 2022	2022	i	$	3,502
SNF	7	August 2028	2025	iii	$	3,485
SNF	1	September 2028	2028	iii	$	472

Tenant purchase options generally give the lessee an option to purchase the underlying property for consideration determined by i) greater of fixed base price or fair market value; ii) a fixed base price plus a specified share in any appreciation; iii) fixed base price; or iv) a fixed capitalization rate on lease revenue.

On April 7, 2020, Quorum Health Corporation (“Quorum”), the operator of our Kentucky River Acute Care Hospital in Jackson, Kentucky, filed for protection under Chapter 11 of the US Bankruptcy Code. Although we do not foresee the immediate cessation of payment under the lease and Quorum is current on all rent payments as of March 31, 2019, we cannot continue to assess collection of all lease payments from Quorum as probable. Accordingly, rental income for the quarter ended March 31, 2020 reflects a reduction of approximately $380,000 related to the elimination of straight-line rent associated with this lease. Recognition of lease revenue will be limited to the cash received.

NHI records impairment losses on long-lived assets used in operations when events and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. During 2020, events and circumstances indicated that our investment of $10,184,000 representing the Kentucky River acute care hospital leased from us by Quorum might be impaired. However, our estimate of undiscounted cash flows indicated that such carrying amounts were expected to be recovered. Nonetheless, it is reasonably possible that the estimate of undiscounted cash flows may change in the near term resulting in the need to write down those assets to fair value. Our estimate of cash flows might change because of recurring losses being reported by Quorum and prevailing uncertainty about the future of rural hospitals in the United States.

We have completed the contractual transition of three lease portfolios to new tenants following a period of non-compliance by the former operators. The portfolios consist of three former SH-Regency Leasing, LLC (“Regency”) buildings, five former LaSalle Group buildings and one facility formerly leased to Landmark Senior Living (“Landmark”). To expedite stabilization of the facilities, we committed to specified income-generating capital expenditures for the re-branding and refurbishment of certain of these properties. The new leases each specify initial periods during which rental income to NHI shall be based on net operating income (“NOI”), after deduction of management fees. Following the initial periods, each lease converts to a structured payment based on a fair-value calculation.

The former Regency buildings have been leased to three operators, Senior Living, Discovery, and Vitality MC TN, LLC (“Vitality”). For the three months ended March 31, 2020 and 2019, we recognized $625,000 and $77,000, respectively, in rental income from the three former Regency buildings.

In April 2019, Chancellor Health Care leased the five former LaSalle buildings. Our lease agreement with Chancellor provides for NHI to receive 100% of net operating cash flow generated by the facilities, after management fees, pending stabilization of the operations of the facility. For the three months ended March 31, 2020 and 2019, we recognized $587,000 and $0, respectively, in rental income from the five former LaSalle buildings.

In February 2019, we transitioned a non-performing single-property lease in Wisconsin from Landmark to BAKA Enterprises. Under terms of the new lease, NHI receives 95% of net operating cash flow, after management fees, as generated by the facilities. In November 2019, pursuant to the agreement annual rent was reset to $720,000, subject to scheduled increases. The agreement provides for a term of 8 years, with renewal options. For the three months ended March 31, 2020 and 2019, we recognized $343,000 and $625,000 in rental income, respectively, from the former Landmark property.

As we seek to stabilize the operations of these facilities, if our resulting tenants or operating partners do not have adequate liquidity to accept the risks and rewards of a tenant-lessee, NHI might be deemed the primary beneficiary of the operations and might be required to consolidate those statements of financial position and results of operations of the managers or operating partners into our consolidated financial statements.

In September 2019, we classified a portfolio of eight assisted living properties located in Arizona (4), Tennessee (3) and South Carolina (1) as held for sale, after the current tenant expressed an intention to exercise its purchase option on the properties. The purchase option called for the parties to split any appreciation on an equal basis above $37,520,000. During the first quarter of 2020, NHI and the tenant agreed to a fair valuation of $41,000,000 for the properties, and, accordingly, on January 22, 2020, we disposed of the properties at the agreed price of $39,260,000. With the expectation of deferring recognition of the $20,752,000 gain from this disposition, we have engaged a qualified intermediary to effect a like-kind exchange under §1031 of the Internal Revenue Code. For the three months ended March 31, 2020 and 2019, we recognized $229,000 and $1,062,000, respectively, of rental income from this eight property portfolio.

On February 21, 2020, we disposed of two assisted living properties previously classified as held-for-sale in exchange for a term note of $4,000,000 from the buyer, Bickford. The note, which is due February 2025 and bears interest at 7%, will begin amortizing on a twenty-five-year basis in January 2021. In January 2019 we classified these properties as held-for-sale, recorded an adjustment to write off straight-line rent receivables of $124,000 and recognized an impairment loss of $2,500,000 to write down the properties to their estimated net realizable value.

We assess the collectibility of our lease receivables, consisting primarily of straight-line rents receivable, based on several factors, including payment history, the financial strength of the tenant and any guarantors, historical operations and operating trends of the property, and current economic conditions. If our evaluation of these factors indicates it is not probable that we will be able to collect substantially all of the lease payments, we de-recognize all rent receivable assets, including the straight-line rent receivable asset and record as a reduction in rental revenue.

Most of our existing leases contain annual escalators in rent payments. For financial statement purposes, rental income is recognized on a straight-line basis over the term of the lease where the lease contains fixed escalators. Some of our leases contain escalators that are determined annually based on a variable index or other factor that is indeterminable at the inception of the lease. The table below indicates the revenue recognized as a result of fixed and variable lease escalators (in thousands):


	Three Months Ended
	March 31,
	2020		2019
Lease payments based on fixed escalators	$	68,433	$	63,467
Lease payments based on variable escalators	1,364		1,168
Straight-line rent income	5,177		5,228
Escrow funds received from tenants	1,553		1,090
Rental income	$	76,527	$	70,953