Significant Accounting Policies

9 Months Ended

Sep. 30, 2020

Note 2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements. In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation. Interim results of operations are not necessarily indicative of the results that may be achieved for a full year. The condensed consolidated financial statements and related notes do not include all information and footnotes required by GAAP for annual reports. These interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2019, included in our 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and subsidiaries in which we have a controlling interest. We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if the Company is deemed to be the primary beneficiary of such entities. All material intercompany transactions and balances are eliminated in consolidation.

At September 30, 2020, we held interests in eight unconsolidated VIEs, and, because we lack either directly or through related parties the power to direct the activities that most significantly impact their economic performance, we have concluded that NHI is not the primary beneficiary. Accordingly, we account for our transactions with these entities and their subsidiaries at either amortized cost or net realizable value for straight-line receivables, excluding Timber Ridge OpCo which is accounted for under the equity method.

NHI’s VIEs are summarized below by date of initial involvement. For further discussion of the nature of the relationships, including the sources of exposure to these VIEs, see the notes to our condensed consolidated financial statements cross-referenced below.


Date	Name	Source of Exposure	Carrying Amount		Maximum Exposure to Loss		Note Reference
2012	Bickford Senior Living	Various1	$	61,834,000	$	75,275,000	Notes 3, 4
2014	Senior Living Communities	Notes and straight-line receivable	$	75,546,000	$	81,375,000	Notes 3, 4
2016	Senior Living Management	Notes and straight-line receivable	$	26,953,000	$	26,953,000	—
2017	Evolve Senior Living	Notes	$	9,963,000	$	9,963,000	—
2018	Sagewood, LCS affiliate	Notes	$	151,236,000	$	178,780,000	Note 4
2019	41 Management, LLC	Notes and straight-line receivable	$	9,220,000	$	11,488,000	Note 7
2020	Timber Ridge OpCo	Various2	$	(1,142,000)	$	3,858,000	Notes 3, 5
2020	Watermark Retirement	Notes and straight-line receivable	$	3,888,000	$	8,888,000	Note 7

1 Notes, loan commitments, straight-line rent receivables, and unamortized lease incentives

2 Loan commitment, equity method investment and straight-line rent receivables

We are not obligated to provide support beyond our stated commitments to these tenants and borrowers whom we classify as VIEs, and accordingly, our maximum exposure to loss as a result of these relationships is limited to the amount of our commitments, as shown above and discussed in the notes. Economic loss on a lease, above what is presented in the table above, if any, would be limited to that resulting from a short period of arrearage and non-payment of monthly rent before we are able to take effective remedial action, as well as costs incurred in transitioning the lease to a new tenant. The potential extent of such loss will be dependent upon individual facts and circumstances, and is therefore not included in the tabulation above.

We consolidate two real estate partnerships formed with our partners, Discovery Senior Housing Investor XXIV, LLC, (“Discovery”) and LCS Timber Ridge LLC (“LCS”), to invest in senior housing facilities. As of and for the nine months ended September 30, 2020, our non-controlling interests relate to these partnerships with Discovery and LCS.

We use the equity method of accounting when we own an interest in an entity whereby we can exert significant influence over but cannot control the entity’s operations. We discontinue equity method accounting if our investment in an entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.

Cash and Cash Equivalents and Restricted Cash

Cash equivalents consist of all highly liquid investments with an original maturity of three months or less. Restricted cash includes amounts required to be held on deposit or subject to an agreement (e.g. with a qualified intermediary subject to an Internal Revenue Code §1031 exchange agreement or in accordance with agency agreements governing our Fannie Mae and U.S. Department of Housing and Urban Development (“HUD”) mortgages).

The following table sets forth our cash, cash equivalents and restricted cash reported within the Company’s Condensed Consolidated Statements of Cash Flows ($ in thousands):


	September 30, 2020		September 30, 2019
Cash and cash equivalents	$	42,198	$	5,882
Restricted cash (included in Other assets)	8,916		10,399
	$	51,114	$	16,281

New Accounting Pronouncements

For information about significant accounting policies, refer to the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2019 included in the Company’s 2019 Annual Report on Form 10-K filed with the SEC. During the nine months ended September 30, 2020, there were no material changes to these policies except as noted below.

With the adoption of Accounting Standards Update 2016-13, Financial Instruments - Credit Losses effective January 1, 2020, we estimate and record an allowance for credit losses upon origination of the loan, based on expected credit losses over the term of the loan and update this estimate quarterly as of the balance sheet date. We calculate the estimated credit losses on mortgages by pooling these loans into two groups – investments in existing or new mortgages and construction mortgages. Mezzanine and revolving lines of credit are evaluated at the individual loan level. We estimate the allowance for credit losses by utilizing a loss model that relies on future expected credit losses, rather than incurred losses. This loss model incorporates our historical experience, adjusted for current conditions and our forecasts, using the probability of default and loss given default method. Incorporated into the construction mortgage loss model is an estimate of the probability that NHI will acquire the property. Using the resulting estimate, a portion of the outstanding construction mortgage balance which we currently expect will be reduced by our acquisition of the underlying property when construction is complete, is deducted from the construction mortgage balance included in the expected loss calculation. Mezzanine loans and revolving lines of credit are also based on the loss model to recognize expected future credit losses and are applied to each individual loan using borrower specific information. We also perform a qualitative assessment beyond model estimates and apply adjustments as necessary. The credit loss estimate is based on the net amortized cost balance of our mortgage and other notes receivables as of the balance sheet date.

Calculation of the allowance for credit losses involves significant judgement. It is possible that actual credit losses will differ materially from our current estimates. Write-offs are deducted from the allowance for credit losses when we judge the principal to be uncollectable.

Upon adoption, we recorded an allowance for expected credit losses of $3,900,000 that is reflected as an adjustment to Mortgage and other notes receivable, net, in the Condensed Consolidated Balance Sheets and recorded a corresponding cumulative-effect adjustment to cumulative dividends in excess of net income. Upon adoption, we also recorded a $325,000 liability for estimated credit losses pertaining to unfunded loan commitments as a cumulative dividends in excess of net income. The corresponding credit loss liability is included in the financial statement caption Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future London Inter-bank Offered Rate (”LIBOR”) indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

In April 2020, the FASB issued a question-and-answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the coronavirus pandemic (“COVID-19”). The Lease Modification Q&A clarifies that entities may elect not to evaluate whether lease-related relief provided to mitigate the economic effects of COVID-19 is a lease modification under ASC 842. Instead, an entity that elects not to evaluate whether a concession directly related to COVID-19, which does not substantially increase either its rights as lessor or the obligations of the tenant, is a modification can elect whether to apply the modification guidance. Such election being applied consistently to leases with similar characteristics and similar circumstances. During the third quarter, the Company provided $2,654,000 in lease concessions as a result of COVID-19, as discussed in more detail in Note 7. NHI has elected not to apply the modification guidance under ASC 842 and has accounted for the related concessions as variable lease payments, recorded as rental income when received.