XML 36 R23.htm IDEA: XBRL DOCUMENT

Basis of Presentation and Significant Accounting Policies (Policy)

6 Months Ended

Jun. 30, 2022

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, 2021, included in our 2021 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, joint ventures 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.

Effective April 1, 2022 and at June 30, 2022, our consolidated total assets and liabilities include two consolidated ventures comprising our SHOP activities formed with two separate partners - Merrill Gardens, L.L.C. (“Merrill”) and DSHI NHI Holiday LLC, a controlled affiliate of Discovery Senior Living. We consider both ventures to be VIEs as either the members, as a group, lack the characteristics of a controlling financial interest or there are disproportionate voting rights but substantially all of the activities are performed on behalf of the Company. We are deemed to be the primary beneficiary because we have the ability to control the activities that most significantly impact each VIE’s economic performance. The assets of the ventures primarily consist of real estate properties, cash and cash equivalents, and resident fees and services (accounts receivable). Their obligations primarily consist of operating expenses of the ILFs (accounts payable and accrued expenses) and capital expenditures for the properties. As of and for the three months ended June 30, 2022, our redeemable noncontrolling interests relate to these ventures. Assets of the consolidated SHOP ventures that can be used only to settle obligations of each respective SHOP venture include namely $262.2 million of real estate properties, net, and $11.6 million of cash and cash equivalents. Liabilities of the consolidated SHOP ventures for which creditors do not have recourse to the general credit of the Company are not material. Reference Notes 5 and 9 for further discussion of these new ventures.

We also consolidate two real estate partnerships formed with our partners, Discovery Senior Housing Investor XXIV, LLC,

and LCS Timber Ridge LLC, to invest in senior housing facilities. We consider both partnerships ventures to be VIEs, based on our determination that the total equity at risk in each is insufficient to finance activities without additional subordinated financial support. NHI directs the activities that most significantly impact economic performance of these ventures, subject to limited protective rights extended to our JV partners for specified business decisions. Because of our control of these ventures, we include their assets, liabilities, noncontrolling interests and operations in our consolidated financial statements.

At June 30, 2022, we held interests in nine 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 the Company 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 rent receivables, excluding our investment accounted for under the equity method.

The Company’s unconsolidated 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 ($ in thousands).


Date	Name	Source of Exposure	Carrying Amount		Maximum Exposure to Loss		Note Reference
2012	Bickford Senior Living	Notes and funding commitment	$	45,138	$	60,187	Notes 3, 4
2014	Senior Living Communities	Notes and straight-line receivable	$	87,851	$	94,188	Notes 3, 4
2016	Senior Living Management	Notes and straight-line receivable	$	26,724	$	26,724	—
2019	Encore Senior Living	Notes and straight-line receivable	$	28,353	$	52,729	Notes 3, 4
2020	Timber Ridge OpCo, LLC	Various2	$	(5,000)	$	5,000	Note 6
2020	Watermark Retirement	Notes and straight-line receivable	$	8,740	$	10,517	—
2021	Montecito Medical Real Estate	Notes and funding commitment	$	20,255	$	50,000	Note 4
2021	Vizion Health	Notes and straight-line receivable	$	20,340	$	22,724	—
2021	Navion Senior Solutions1	Various1	$	7,871	$	13,911	—

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

2 Loan commitment, equity method investment and straight-line rents 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, in excess of what is presented in the table above, if any, would be limited to that resulting from any 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 would be dependent upon individual facts and circumstances, and is therefore not included in the table above.

In the future, NHI may be deemed the primary beneficiary of the operations if the tenants do not have adequate liquidity to accept the risks and rewards as the tenant and operator of the properties and might be required to consolidate the financial position and results of operations of the tenants into our consolidated financial statements.

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. Reference Note 6 for further discussion of our equity method investment.

Noncontrolling Interests

Contingently redeemable noncontrolling interests are recorded at their initial carrying amounts upon issuance and are subsequently adjusted to reflect their share of gains or losses and distributions attributable to the noncontrolling interests. In periods where they are or will become probable of redemption, an adjustment to the redemption value of the noncontrolling interests is also recognized through Capital in excess of par value on the Company’s Consolidated Balance Sheets and included in our computation of earnings per share. As of June 30, 2022, these noncontrolling interests were classified as mezzanine equity, as discussed further in Note 9.

Additionally, we consolidate two real estate partnerships formed with our partners, Discovery Senior Housing Investor XXIV, LLC and LCS Timber Ridge LLC, to invest in senior housing facilities. As of June 30, 2022 and December 31, 2021, these

noncontrolling interests are classified in equity.

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 mortgages).

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


	June 30, 2022		June 30, 2021
Cash and cash equivalents	$	43,435	$	32,544
Restricted cash (included in Other assets, net)	2,625		2,181
	$	46,060	$	34,725

Assets Held for Sale

Assets Held for SaleWe consider properties to be assets held for sale when (1) management commits to a plan to sell the property; (2) it is unlikely that the disposal plan will be significantly modified or discontinued; (3) the property is available for immediate sale in its present condition; (4) actions required to complete the sale of the property have been initiated; (5) sale of the property is probable and we anticipate the completed sale will occur within one year; and (6) the property is actively being marketed for sale at a price that is reasonable given our estimate of current market value. Upon designation of a property as an asset held for sale, we record the property’s value at the lower of its carrying value or its estimated fair value, less estimated transaction costs. Depreciation and amortization of the property are discontinued.

Impairment of Long-Lived Assets

We evaluate the recoverability of the carrying amount of our long-lived assets when events or circumstances, including significant physical changes, significant adverse changes in general economic conditions and significant deterioration of the underlying cash flows of the long-lived assets, indicate that the carrying amount of the long-lived assets may not be recoverable. The need to recognize an impairment charge is based on estimated undiscounted future cash flows compared to the carrying amount. If recognition of an impairment charge is necessary, it is measured as the amount by which the carrying amount exceeds the estimated fair value of the long-lived asset.

During the three and six months ended June 30, 2022, we recognized impairment charges of approximately $4.1 million and $28.7 million, respectively, included in “Loan and realty losses” in our Condensed Consolidated Statements of Income. Reference Note 3 for more discussion.

Revenue Recognition

Rental Income - Our leases generally provide for rent escalators throughout the term of the lease. Base rental income is recognized using the straight-line method over the term of the lease to the extent that lease payments are considered collectible and the lease provides for specific contractual escalators. The Company reviews its operating lease receivables for collectibility on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in which the tenant operates and economic conditions in the area where the property is located. In the event that collectibility with respect to any tenant is not probable, a direct write-off of the receivable is made as an adjustment to rental income and any future rental revenue is recognized only when the tenant makes a rental payment.

During the second quarter of 2022, we placed Bickford Senior Living (“Bickford”) on the cash basis of revenue recognition for lease purposes. We recorded write offs of $18.1 million of straight-line rents receivable and $7.1 million of lease incentives related to our Bickford master lease agreements during the three and six months ended June 30, 2022. Reference Note 3 for further discussion.

Resident Fees and Services - Resident fee revenue associated with our SHOP activities is recorded when services are rendered and includes resident room and care charges, community fees and other resident charges. Residency agreements are generally

short term (30 days to one year), with resident fees billed monthly in advance. Revenue for certain related services is recognized as services are provided and billed monthly in arrears.

Accounting for Lease Modifications related to the Coronavirus Pandemic

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 (“COVID-19”) pandemic. The Lease Modification Q&A clarifies that entities may elect not to evaluate whether lease-related relief provided to mitigate the economic effects of the COVID-19 pandemic is a lease modification under Accounting Standard Codification (“ASC”) 842, Leases (“ASC 842”). Instead, an entity that elects not to evaluate whether a concession directly related to the COVID-19 pandemic, which does not substantially increase either its rights as lessor or the obligations of the tenant, is a lease modification can decide whether or not to apply the modification guidance. An entity should apply the election consistently to leases with similar characteristics and similar circumstances. We have elected not to apply the modification guidance under ASC 842 and have accounted for qualified rent concessions as variable lease payments when applicable, and recorded as rental income when received. During the three and six months ended June 30, 2022, we provided $2.9 million and $10.7 million lease concessions, respectively, directly related to the COVID-19 pandemic, as discussed in more detail in Note 8.

Income Tax

We intend at all times to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. Accordingly, we will generally not be subject to U.S. federal income tax, provided that we continue to qualify as a REIT and make distributions to stockholders at least equal to or in excess of 90% our taxable income. Certain activities that we undertake may be conducted by entities that have elected to be treated as taxable REIT subsidiaries (TRSs). TRSs are subject to federal, state, and local income taxes. Accordingly, a provision for income taxes has been made in the consolidated financial statements. A failure to qualify under the applicable REIT qualification rules and regulations would have a material adverse impact on our financial position, results of operations and cash flows.

Segments

We operate our business through two reportable segments: Real Estate Investments and SHOP. In our Real Estate Investments segment, we invest in i) senior housing and healthcare real estate and lease those properties to healthcare operating companies under triple-net leases that obligate tenants to pay all property-related expenses and ii) mortgage and other notes receivable throughout the United States. Our SHOP segment is comprised of the operations of 15 ILFs located throughout the United States that are operated on behalf of the Company by two independent managers pursuant to the terms of separate management agreements that commenced April 1, 2022. Reference Notes 5 and 14 for additional information.