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Mortgage And Other Notes Receivable
 9 Months Ended
Sep. 30, 2023
Mortgage and Other Notes Receivable [Abstract]  
Mortgage and Other Notes Receivable Mortgage and Other Notes ReceivableAt September 30, 2023, our investments in mortgage notes receivable totaled $159.4 million secured by real estate and other assets of the borrowers (e.g., Uniform Commercial Code liens on personal property) related to 14 facilities and in other notes receivable totaled $99.4 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 $15.8 million at September 30, 2023. Our loans designated as non-performing as of September 30, 2023 and December 31, 2022 include a mortgage note receivable of $10.0 million and a mezzanine loan of $14.5 million with affiliates of one operator/borrower. This operator/borrower is also one of the tenants on the cash basis of accounting for its leases. During the third quarter of 2023, we designated
as non-performing a mortgage note receivable of $2.1 million due from Bickford. Interest income recognized, representing cash received, from these non-performing loans was $0.5 million and $1.4 million, respectively for the three and nine months ended September 30, 2023. Interest income recognized for the three and nine months ended September 30, 2022 was $0.5 million and $1.4 million, respectively. All other loans were on full accrual basis at September 30, 2023 and December 31, 2022.

Capital Funding Group, Inc. Loan Extension

On September 21, 2023, we amended a mezzanine loan with Capital Funding Group, Inc. Pursuant to the terms of the agreement, the loan increased from its balance at June 30, 2023 of $8.1 million to $25.0 million. The interest rate on the loan was increased to 10% and the maturity was extended to December 31, 2028.

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. As of September 30, 2023, 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 both the three and nine months ended September 30, 2023 and 2022, we recognized interest income of $0.5 million and $1.4 million, respectively.

The mezzanine loan and security agreement was modified in April 2022, such that the two real estate investments funded in the second quarter of 2022 accrue interest at an annual rate of 7.5% that is paid monthly in arrears plus an additional annual rate of 4.5% to be paid upon certain future events including repayments, sales of fund investments, and refinancings (the “Deferred Interest”). Prior borrowings under the mezzanine loan and security agreement bear interest at an annual rate of 9.5% and accrue an additional 2.5% in Deferred Interest. The Deferred Interest will be recognized as interest income upon receipt. 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, subject to two one-year extensions.
Bickford Construction and Mortgage Loans

As of September 30, 2023, we had one fully funded construction loan of $14.7 million to Bickford. The construction loan is secured by a first mortgage lien on substantially all of the related 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 agreement, including the borrower’s obligation for payment of insurance and taxes. NHI has a fair market value purchase option on the property upon stabilization of the underlying operations. On certain development projects, Bickford 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 lease payments to NHI.

At September 30, 2023, we hold a $12.7 million second mortgage as a component of the purchase price consideration in connection with the sale of six properties to Bickford in 2021. This second mortgage note receivable bears interest at a 10% annual rate and matures in April 2026. Interest income was $0.3 million and $1.0 million for the three and nine months ended September 30, 2023, respectively and $0.3 million and $1.0 million for the three and nine months ended September 30, 2022, respectively, related to the second mortgage. We did not include this note receivable in the determination of the gain 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 September 30, 2023 and December 31, 2022. During the three and nine months ended September 30, 2023, Bickford repaid $0.1 million and $0.3 million of principal, respectively, on this note receivable which is reflected in “Gains on sale of real estate, net” in the Condensed Consolidated Statements of Income.

As noted previously, we designated a mortgage note receivable of $2.1 million due from Bickford as non-performing during the third quarter of 2023.

Senior Living

We have 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, 2025, availability under the revolver will reduce to $15.0 million. The revolver matures in December 2029 at the time of lease maturity. At September 30, 2023, the $16.3 million outstanding under the revolver bears interest at 8.0% per annum.
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 table below have been calculated utilizing the most recent date for which data is available, June 30, 2023, 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.

We consider the guidance in ASC 310-20, Receivables - Nonrefundable Fees and Other Costs, when determining whether a modification, extension or renewal constitutes a current period origination. The credit quality indicator as of September 30, 2023, is presented below for the amortized cost, net by year of origination ($ in thousands):

20232022202120202019PriorTotal
Mortgages
more than 1.5x$— $68,463 $— $22,307 $— $2,641 $93,411 
between 1.0x and 1.5x— — — — 32,700 14,700 47,400 
less than 1.0x— — — — 6,423 — 6,423 
— 68,463 — 22,307 39,123 17,341 147,234 
Mezzanine
more than 1.5x496 — 16,526 — — — 17,022 
between 1.0x and 1.5x216 — 23,943 — — — 24,159 
less than 1.0x— — — — — 25,000 25,000 
712 — 40,469 — — 25,000 66,181 
Non-performing
  less than 1.0x— — — 2,127 — 24,500 26,627 
— — — 2,127 — 24,500 26,627 
Revolver
between 1.0x and 1.5x18,726 
18,726 
Credit loss reserve(15,808)
$242,960 

Due to the continuing challenges in financial markets 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 the sufficiency of the underlying collateral and the 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 nine months ended September 30, 2023 ($ in thousands):
Beginning balance at January 1, 2023$15,338 
Provision for expected credit losses470 
Balance at September 30, 2023
$15,808