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Mortgage And Other Notes Receivable
 6 Months Ended
Jun. 30, 2022
Mortgage and Other Notes Receivable [Abstract]  
Mortgage and Other Notes Receivable Mortgage and Other Notes Receivable
At June 30, 2022, our investments in mortgage notes receivable totaled $124.2 million secured by real estate and other assets of the borrower (e.g., UCC liens on personal property) related to 13 facilities and other notes receivable totaling $85.3 million, substantially all of which are guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner. These balances exclude a credit loss reserve of $5.2 million at June 30, 2022. All our notes were on full accrual basis at June 30, 2022.

Mortgage and Other Notes Receivable

Life-Care Services - Sagewood

In the second quarter of 2022, we received repayment of a $111.3 million mortgage note receivable along with all accrued interest and a prepayment fee of $1.1 million which is reflected in “Gain on note payoff” on the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2022. Interest income was $3.1 million and $5.2 million for the three and six months ended June 30, 2022, respectively, and $2.5 million and $5.7 million, for the three and six months ended June 30, 2021, respectively.


Encore Senior Living
In January 2022, we entered into an agreement to fund a $28.5 million development loan with Encore Senior Living to construct a 108-unit assisted living and memory care community in Fitchburg, Wisconsin. The four-year loan agreement has an annual interest rate of 8.5% and two one-year extensions. We have a purchase option on the property once it has stabilized. The total amount funded on the note was $5.2 million as of June 30, 2022.

Montecito Medical Real Estate

We have a $50.0 million mezzanine loan and security agreement with Montecito Medical Real Estate for a fund that invests in medical real estate, including medical office buildings, throughout the United States. During the second quarter of 2022, we funded $4.5 million on two real estate investments. The loan agreement was modified in the second quarter so that these two real estate investments accrue interest at an annual rate of 7.5% that is paid monthly in arrears and 4.5% per year in interest to be paid upon certain future events including repayments, sales of fund investments, and refinancings (the “Deferred Interest”). Prior borrowings under the loan agreement bear interest at an annual rate of 9.5% and accrue an additional 2.5% in Deferred Interest. Funds drawn in accordance with this agreement are required to be repaid on a per-investment basis five years from deployment of the funds for the applicable investment and includes two one-year extensions. As of June 30, 2022, we have funded $20.3 million of our commitment that was used to acquire nine medical office buildings for a combined purchase price of approximately $86.7 million. For the three and six months ended June 30, 2022, we received interest of $0.5 million and $0.9 million, respectively. For the six months ended June 30, 2022, we received principal of $0.3 million.
Bickford construction and mortgage loans

As part of the June 2021 sale of six properties to Bickford, we executed a $13.0 million second mortgage as a component of the purchase price consideration. This second mortgage note receivable bears interest at a 10% annual rate and matures in April 2026. Interest income was $0.3 million and $0.7 million, respectively, for the three and six months ended June 30, 2022. We did not include this note receivable in the determination of the gain to be recognized upon sale of the portfolio. Therefore, this note receivable is not reflected in “Mortgage and other notes receivable, net” in the Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021.

As of June 30, 2022, we had two fully funded construction loans of $28.7 million and one $14.2 million construction loan with $12.2 million funded to Bickford. The construction loans are secured by first mortgage liens on substantially all real and personal property as well as a pledge of any and all leases or agreements which may grant a right of use to the property. Usual and customary covenants extend to the agreements, including the borrower’s obligation for payment of insurance and taxes. NHI has a fair market value purchase option on the properties at stabilization of the underlying operations. On certain development projects, Bickford, as borrower, is entitled to up to $2.0 million per project in incentives based on the achievement of predetermined operational milestones and, if funded, will increase NHI's future purchase price and eventual NHI lease payment.

We also have a mortgage loan of $4.0 million to Bickford due February 2025, bearing interest at 7%, that amortizes on a twenty-five-year basis.

Senior Living Communities

We provided a $20.0 million revolving line of credit to Senior Living whose borrowings under the revolver are to be used for working capital needs and to finance construction projects within its portfolio, including building additional units. Beginning January 1, 2023, availability under the revolver reduces to $15.0 million. The revolver matures in December 2029 at the time of lease maturity. At June 30, 2022, the $13.7 million outstanding under the facility bears interest at 8.98% per annum, the prevailing 10-year U.S. Treasury rate plus 6%.

The Company also has a mortgage loan of $32.7 million with Senior Living that originated in July 2019 for the acquisition of a 248-unit continuing care retirement community (“CCRC”) in Columbia, South Carolina. The mortgage loan is for a term of five years with two one-year extensions and carries an interest rate of 7.25%. Additionally, the loan conveys to NHI a purchase option at a stated minimum price of $38.3 million, subject to adjustment for market conditions.

Credit Loss Reserve

Our principal measures of credit quality, except for construction mortgages, are debt service coverage for amortizing loans and interest or fixed charge coverage for non-amortizing loans, collectively referred to as “Coverage”. A Coverage ratio provides a measure of the borrower’s ability to make scheduled principal and interest payments. The Coverage ratios presented in the
following table have been calculated utilizing the most recent date for which data is available, March 31, 2022, using EBITDARM (earnings before interest, taxes, depreciation, amortization, rent and management fees) and the requisite debt service, interest service or fixed charges, as defined in the applicable loan agreement. We categorize Coverage into three levels: (i) more than 1.5x, (ii) between 1.0x and 1.5x, and (iii) less than 1.0x. We update the calculation of Coverage on a quarterly basis. Coverage is not a meaningful credit quality indicator for construction mortgages as either these developments are not generating any operating income, or they have insufficient operating income as occupancy levels necessary to stabilize the properties have not yet been achieved. We measure credit quality for these mortgages by considering the construction and stabilization timeline and the financial condition of the borrower as well as economic and market conditions. As of June 30, 2022, we did not have any construction loans that we considered underperforming.

We consider the guidance in ASC 310-20 when determining whether a modification, extension or renewal constitutes a current period origination. The credit quality indicator as of June 30, 2022, is presented below for the amortized cost, net by year of origination of ($ in thousands):

20222021202020192018PriorTotal
Mortgages
more than 1.5x$4,965 $— $33,364 $— $28,700 $4,183 $71,212 
between 1.0x and 1.5x— — — 32,700 — — 32,700 
less than 1.0x— — 3,906 6,422 — 10,000 20,328 
4,965 — 37,270 39,122 28,700 14,183 124,240 
Mezzanine
more than 1.5x— 23,189 — — — 9,511 32,700 
between 1.0x and 1.5x— 20,415 — — — — 20,415 
less than 1.0x— — — — — 14,500 14,500 
No coverage available— — — 750 — — 750 
— 43,604 — 750 — 24,011 68,365 
Revolver
more than 1.5x3,223 
between 1.0x and 1.5x13,663 
less than 1.0x— 
16,886 
Credit loss reserve(5,214)
$204,277 

Due to the economic uncertainty created by the COVID-19 pandemic and the potential impact on the collectability of our mortgages and other notes receivable, we forecasted at the beginning of the pandemic a 20% increase in the probability of a default and a 20% increase in the amount of loss from a default resulting in an effective adjustment of 44%.

The allowance for expected credit losses is presented in the following table for the six months ended June 30, 2022 ($ in thousands):
Beginning balance January 1, 2022$5,210 
Provision for expected credit losses4 
Balance June 30, 2022$5,214