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Mortgage and Other Notes Receivable
 12 Months Ended
Dec. 31, 2022
Mortgage and Other Notes Receivable [Abstract]  
Mortgage and Other Notes Receivable Mortgage and Other Notes Receivable
At December 31, 2022, our investments in mortgage notes receivable totaling $164.6 million secured by real estate and other assets of the borrower (e.g., UCC liens on personal property) related to 17 facilities and other notes receivable totaled $83.9 million, substantially all of which are guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner. At December 31, 2021, our investments in mortgage notes receivable totaled $230.9 million and other notes receivable totaled $74.2 million. These balances exclude a credit loss reserve of $15.3 million and $5.2 million at December 31, 2022 and 2021, respectively.

During the fourth quarter of 2022, we designated a mortgage note receivable of $10.0 million and a mezzanine loan of $14.5 million with affiliates of one operator/borrower as non-performing. This operator/borrower is also one of the tenants converted to cash basis of accounting for its master leases discussed in Note 3. Interest income recognized, representing cash received, from these non-performing loans was $1.4 million, $1.9 million and $2.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. All other loans were on accrual status as of December 31, 2022. All of our notes were on full accrual status at December 31, 2021.

2022 Mortgage and Other Notes Receivable

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 $14.2 million as of December 31, 2022.

Capital Funding Group

In November 2022, we funded a $42.5 million senior loan to refinance a portfolio of five skilled nursing facilities located in Texas. The loan was made to affiliates of Capital Funding Group and the properties are leased by subsidiaries of The Ensign Group. The five-year loan agreement has an annual interest rate of 7.25% and two one-year extensions.

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 year ended December 31, 2022, we funded $8.2 million on three real estate investments. As of December 31, 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 year ended December 31, 2022 and 2021, we received interest of $1.8 million and $0.2 million, respectively. For the year ended December 31, 2022, we received principal of $0.3 million.

The loan agreement was modified in April 2022 for two subsequent real estate investments to accrue interest at an annual rate of 7.5% 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.
2021 Mortgage and Other Notes Receivable

Montecito Medical Real Estate

In April 2021, the Company entered into the $50.0 million mezzanine loan and security agreement with Montecito Medical Real Estate discussed above.

Vizion Health - Brookhaven

In May 2021, we provided a $20.0 million, five year loan to Vizion Health-Brookhaven, LLC to finance the acquisition of healthcare operations, including the real and personal property of a behavioral hospital we acquired as discussed in Note 3. The loan requires monthly principal and interest payments and bears an initial annual interest rate of 8.5% with fixed annual escalators of 2.5% that began June 1, 2022. Initial principal loan repayments are equal to 90% of the excess cash flow with a monthly minimum as defined in the agreement. Principal repayments are reduced to 50% of the excess cash flow once the outstanding loan balance is reduced below $15.0 million. The loan balance as of December 31, 2022 was $18.8 million.

Navion Senior Solutions

In May 2021, we provided a ten-year corporate loan to Navion for $3.6 million. The loan requires interest-only payments at an annual interest rate of 8% until June 1, 2024, and gives us first option to provide permanent development financing for a future project.

Bickford

As part of the sale of six properties to Bickford in the second quarter of 2021 discussed in Note 3, we executed a $13.0 million second mortgage as a component of the purchase price consideration. The loan is secured by a security interest in the portfolio that is subordinate only to the first mortgage on the portfolio held by a third party. This second mortgage note receivable bears interest at a 10% annual rate and matures in April 2026. Interest income was $1.3 million and $0.9 million for the years ended December 31, 2022 and 2021, respectively.

Given the size of the Company financing provided relative to the purchase price, its subordination to the first mortgage outstanding and the ongoing negative impact of the COVID-19 pandemic and increasing cost on Bickford’s operating results, we did not include this note receivable in the determination of the gain to be recognized upon sale of the portfolio in accordance with the provisions of ASC 610-20, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets. Therefore, this note receivable is not reflected in “Mortgage and other notes receivable, net” in the Consolidated Balance Sheet as of December 31, 2022 or 2021. We will re-evaluate the collectability of this note receivable each reporting period and recognize the note receivable and related deferred gain at such time the note receivable is considered probable of collection in accordance with ASC 610-20.

Other Activity

Bickford Senior Living

As of December 31, 2022, we had two fully funded construction loans to Bickford totaling $28.9 million. 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 these 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.

Life Care Services - Sagewood

In December 2018, we entered into an agreement to lend LCS-Westminster Partnership IV LLP (“LCS-WP IV”), an affiliate of LCS, the manager of the facility, up to $180.0 million. The loan took the form of two notes under a master credit agreement. During the year ended December 31, 2021, LCS-WP IV repaid the fully drawn Note B principal balance of $61.2 million. As a result, we recognized the remaining Note B commitment fee of $0.4 million in “Interest income and other” during the year ended December 31, 2021.
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 receivable payoff” on the Consolidated Statement of Income for the year ended December 31, 2022. Interest income was $5.2 million, $10.2 million and $11.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Senior Living Communities

We provided a $20.0 million revolving line of credit whose borrowings are to be used primarily to finance construction projects within the Senior Living portfolio, including building additional units, and general working capital needs. During the year ended December 31, 2022, the revolving line of credit was amended to reset the interest rate to 8.0% per annum effective in November 2022, and reduce the availability to $15.0 million on January 1, 2025. The revolver matures in December 2029 at the time of lease maturity. The outstanding balance under the facility at December 31, 2022 and 2021, was $15.8 million and $9.6 million, respectively.

In June 2019, we provided a mortgage loan of $32.7 million to Senior Living for the acquisition of a 248-unit continuing care retirement community in Columbia, South Carolina. The financing 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, September 30, 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. The tables below present outstanding note balances as of December 31, 2022 at amortized cost.

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 December 31, 2022, is presented below for the amortized cost, net by year of origination of ($ in thousands):
20222021202020192018PriorTotal
Mortgages
more than 1.5x$14,033 $— $36,524 $32,700 $— $4,028 $87,285 
between 1.0x and 1.5x— — — — 14,700 — 14,700 
less than 1.0x42,294 — 3,874 6,423 — — 52,591 
56,327 — 40,398 39,123 14,700 4,028 154,576 
Mezzanine
more than 1.5x— 18,776 — — — — 18,776 
between 1.0x and 1.5x— 23,969 — — — 8,835 32,804 
— 42,745 — — — 8,835 51,580 
Non-performing
less than 1.0x— — — — — 24,500 24,500 
— — — — — 24,500 24,500 
Revolver
more than 1.5x1,976 
between 1.0x and 1.5x15,847 
17,823 
Credit loss reserve(15,338)
$233,141 

Due to the continuing challenges in financial markets, due in part to the COVID-19 pandemic, and the potential impact on the collectability of our mortgages and other notes receivable, we forecasted a 20% increase in the probability of a default and a 20% increase in the amount of loss from a default on all loans, other than those designated as non-performing, resulting in an effective adjustment of 44%. The methodology for estimating the reserves for non-performing loans incorporates current conditions and forecasts of future economic conditions of these loans, including qualitative factors, which may differ from conditions existing in the historical period.

The allowance for expected credit losses is presented in the following table for the year ended December 31, 2022 ($ in thousands):
Balance at January 1, 2022$5,210 
Provision for expected credit losses10,628 
Write-off(500)
Balance at December 31, 2022$15,338