Real Estate Investments

12 Months Ended

Dec. 31, 2011

Real Estate Investments.

Real Estate Investments

6. Real Estate Investments

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at December 31, 2011 (dollar amounts in thousands):

						(Unaudited)
										Number of
Type of Property	Gross Investments		Percentage of Investments			Number of Loans		Number of Properties(1)		SNF Beds		ALF Units		Investment per Bed/Unit
Assisted Living	$	22,776		42.2	%		9		14		—		424	$	53.72
Skilled Nursing		28,132		52.1	%		20		21		2,326		—	$	12.09
Other Senior Housing(2)		3,094		5.7	%		1		1		99		74	$	17.88
Totals	$	54,002		100.0	%		30		36		2,425		498

(1)

We have investments in 12 states that include mortgages to 14 different operators.

(2)

Other senior housing properties consist of independent living properties and properties providing any combination of skilled nursing, assisted living and/or independent living services.

        At December 31, 2011, the mortgage loans had interest rates ranging from 9.95% to 14.63% and maturities ranging from 2012 to 2019. In addition, the loans contain certain guarantees, provide for certain facility fees and generally have 25-year amortization schedules. The majority of the mortgage loans provide for annual increases in the interest rate based upon a specified increase of 10 to 25 basis points. At December 31, 2011 and 2010, the carrying values of the mortgage loans were $53,081,000 and $59,026,000, respectively. Scheduled principal payments on mortgage loans are $5,013,000; $17,673,000; $9,327,000; $4,477,000; $2,424,000; and $15,088,000 in 2012, 2013, 2014, 2015, 2016 and thereafter, respectively.

        During the year ended December 31, 2011, we received $3,136,000 in regularly scheduled principal payments and we received $2,831,000 plus accrued interest related to the payoff of four mortgage loans secured by one assisted living property and seven skilled nursing properties.

        During the year ended December 31, 2010, we received $3,904,000 plus accrued interest related to the payoff of five mortgage loans secured by five skilled nursing properties. We invested $72,000 in a mortgage loan for capital improvements and $1,622,000 in a mortgage loan secured by a skilled nursing property to finance an expansion of the property and extend the loan maturity for an additional five years. We received $4,499,000 in regularly scheduled principal payments

        Also, during the year ended December 31, 2010, we recorded a $1,235,000 provision for doubtful accounts charge for two mortgage loans (one secured by a private school property in Minnesota and one secured by land in Oklahoma). We acquired the school property via deed-in-lieu of foreclosure as a result of the borrower filing for Chapter 7 bankruptcy. During 2011, we leased the school to a non-for-profit corporation providing therapeutic support and intensive home, school and center-based behavioral therapy for children, youth and families affected by Autism Spectrum Disorders.

        During the year ended December 31, 2009, we received $3,716,000 plus accrued interest related to the payoff of three mortgage loans secured by three skilled nursing properties. Additionally, we invested $221,000 under one mortgage loan for capital improvements. We received $4,127,000 in regularly scheduled principal payments.

Owned Properties. The following table summarizes our investment in owned properties at December 31, 2011 (dollar amounts in thousands):

								Number of
Type of Property	Gross Investments		Percentage of Investments			Number of Properties(1)		SNF Beds		ALF Units		ILF Units		Investment per Bed/Unit
Assisted Living	$	285,981		39.4	%		88		—		3,941		—	$	72.57
Skilled Nursing		361,326		49.9	%		68		8,021		—		—	$	45.05
Other Senior Housing(2)		64,638		8.9	%		13		814		256		423	$	43.29
Schools		12,192		1.7	%		2		—		—		—		N/A
Under Development(3)		894		0.1	%		—		—		—		—		N/A
Totals	$	725,031		100.0	%		171		8,835		4,197		423

(1)

We have investments in 25 states leased to 30 different operators.

(2)

Other senior housing properties consist of independent living properties and properties providing any combination of skilled nursing, assisted living and/or independent living services.

(3)

During 2011, we acquired a vacant parcel of land in Texas and entered into a commitment to fund the construction of a skilled nursing property with 120 beds which will replace an existing 90-bed skilled nursing property.

        Owned properties are leased pursuant to non-cancelable operating leases generally with an initial term of 10 to 15 years. Each lease is a triple net lease which requires the lessee to pay all taxes, insurance, maintenance and repairs, capital and non-capital expenditures and other costs necessary in the operations of the facilities. Many of the leases contain renewal options and one contains limited period options that permit the operator to purchase the property. The leases provide for fixed minimum base rent during the initial and renewal periods. The majority of our leases contain provisions for specified annual increases over the rents of the prior year that are generally computed in one of four ways depending on specific provisions of each lease:

• (i)

  a specified annual increase over the prior year's rent, generally between 2.0% and 3.0%;
  
  

  (ii)

  a calculation based on the Consumer Price Index;
  
  

  (iii)

  as a percentage of facility net patient revenues in excess of base amounts or
  
  

  (iv)

  specific dollar increases.

        Contingent rent income for the years ended December 31, 2011, 2010 and 2009 was not significant in relation to contractual base rent income.

        The following table summarizes our acquisitions during 2011 (dollar amounts in thousands):

							(Unaudited)
									Number of
Type of Property	Purchase Price		Transaction Costs		Total Acquisition Costs		Number of Properties		SNF Beds		ALF Units		ILF Units
Skilled Nursing(2)(3)(4)(5)	$	93,841	$	330	$	94,171		7		1,016		—		—
Other Senior Housing(1)(6)		11,450		34		11,484		2		118		40		53
Land(2)		844		11		855		—		—		—		—
Totals	$	106,135	$	375	$	106,510		9		1,134		40		53

(1)

Other senior housing properties consist of independent living properties and properties providing any combination of skilled nursing, assisted living and/or independent living services.

(2)

We acquired a 196-bed skilled nursing property and a vacant parcel of land in Texas for a purchase price of $15,500 and $844, respectively. Simultaneous with the purchases, we entered into a commitment, in an amount not to exceed $8,250, to fund the construction of a 120-bed skilled nursing property on the acquired parcel of land which will replace a 90-bed skilled nursing property in our existing portfolio. Upon completion of the construction, the lessee intends to relocate the residents to the newly constructed property. These properties are leased to an operator within our existing portfolio pursuant to a 10-year master lease agreement at a GAAP yield of 11.0%. The master lease contains annual escalations of 2.5% and has two 5-year renewal options.

(3)

We purchased a 140-bed skilled nursing property located in Texas for an aggregate purchase price of $10,000. Simultaneous with the purchase, we added the property to an existing master lease with a third party operator at an incremental GAAP yield of 10.5%.

(4)

We purchased four skilled nursing properties with 524-beds in Texas for $50,841 which consists of $41,000 in cash at closing with the remainder in the form of contingent earn-out payments. The contingent earn-out payment arrangements require us to pay two earn-out payments totalling up to $11,000 upon the properties achieving a sustainable stipulated rent coverage ratio. During 2011, we paid $4,000 related to the first contingent earn-out payment. We estimated the fair value of the contingent earn-out payments using a discounted cash flow analysis.

(5)

We purchased a 156-bed skilled nursing property located in California for $17,500 and entered into a 12-year lease with an unrelated third party. The lease has a GAAP yield of 10.3%, contains annual escalations of 2.0% and has two 10-year renewal options.

(6)

We purchased two senior housing properties located in South Carolina with 118 skilled nursing beds, 40 assisted living units and 53 independent living units for $11,450. The lease has a GAAP yield of 10.1%, contains annual escalations of 2.5% and has three 5-year renewal options.

        The following unaudited pro forma consolidated results of operations for the years ended December 31, 2011 and 2010 assume that the 2011 acquisitions of the above properties were completed as of January 1, 2010 as shown below (in thousands):

	For the year ended December 31,
	2011		2010
Revenues	$	91,916	$	86,257
Net Income	$	53,636	$	52,590

        Pro forma data may not be indicative of the results that would have been obtained had the acquisition actually occurred as of January 1, 2010, nor does it intend to be a projection of future results.

        Also, during the year ended December 31, 2011, we invested $3,144,000 at an average yield of 9.7% under agreements to expand and renovate 11 properties operated by seven different operators and we invested $42,000 in capital improvements to existing properties under various lease agreements whose rental rates already reflected this investment. See Note 11. Commitments and Contingencies for further discussion about our commitment agreements.

        In January 2012, we entered into an agreement to sell a 140-bed skilled nursing property located in Texas for $1,248,000. This property is leased under a master lease and the economic terms of this master lease will not change as a result of this sale. This sale is scheduled to close on February 29, 2012 and will result in a $16,000 gain recognized in 2012.

        During the year ended December 31, 2010, we sold a 195-bed skilled nursing property located in Virginia to the lessee under a purchase option for $4,935,000. As a result, we received net cash proceeds of $4,864,000 and recognized a gain net of selling expenses of $310,000.

        The following table summarizes our acquisitions during 2010 (dollar amounts in thousands):

									(Unaudited)
											Number of
Type of Property	Purchase Price			Transaction Costs			Total Acquisition Costs		Number of Properties		SNF Beds		ALF Units		ILF Units
Assisted Living	$	26,900		$	210	(3)	$	27,110		4		—		241		—
Skilled Nursing		54,011	(2)		140			54,151		5		668		—		—
Other Senior Housing(1)		13,339			—	(4)		13,339		1		137		46		47
Totals	$	94,250		$	350		$	94,600		10		805		287		47

(1)

Other senior housing properties consist of independent living properties and properties providing any combination of skilled nursing, assisted living and/or independent living services.

(2)

We purchased a 166-skilled nursing property in Texas and leased the property to a third party operator, who previously operated the property under a lease with the seller. We paid this operator $125 as a lease inducement which is amortized as a yield adjustment over the life of the lease.

(3)

We purchased four assisted living properties with a total of 241 units for $26,900 and incurred $210 in transaction costs. Included in the transaction costs is a $106 charge which represents half of the seller's prepayment penalty on its loan

(4)

We purchased the other senior housing property along with a 90-bed skilled nursing property for $22,000 and incurred $7 in transaction costs. The transaction costs for this acquisition are included in the skilled nursing property transaction costs above. These properties were leased to a third party operator under a 12-year master lease with two 10-year renewal options and the annualized rental income is $2,420 (unaudited) which is included in the annualized rental income for skilled nursing properties above. We do not allocate rental income among properties in a master lease.

        Also, during the year ended December 31, 2010, we invested $4,593,000 at an average yield of 9.7% under agreements to expand and renovate 11 properties operated by seven different operators and we invested $1,231,000 in capital improvements to existing properties under various lease agreements whose rental rates already reflected this investment.

        During the year ended December 31, 2009, we acquired three assisted living properties with a total of 192 units for $13,000,000 and incurred $181,000 in transaction costs. We also invested $3,170,000 at an average yield of 10.6% under agreements to expand and renovate eight properties operated by six different operators and we invested $633,000 in capital improvements to existing properties under various lease agreements whose rental rates already reflected this investment.

        Depreciation expense on buildings and improvements, including properties classified as held-for-sale, was $19,487,000, $16,016,000, and $14,705,000 for the years ended December 31, 2011, 2010 and 2009.

        Future minimum base rents receivable under the remaining non-cancelable terms of operating leases excluding the effects of straight-line rent and extension options are: $81,021,000; $81,344,000; $81,774,000; $68,533,000; $68,106,000 and $343,828,000 for the years ending December 31, 2012, 2013, 2014, 2015, 2016 and thereafter.

        Set forth in the table below are the components of the loss from discontinued operations (in thousands):

	For the year ended December 31,
	2011			2010			2009
Rental income	$	—		$	1,005		$	1,097
Interest and other income		5			5			3
Total revenues		5			1,010			1,100
Depreciation and amortization		(108	)		(392	)		(502	)
Provisions for doubtful accounts		—			(601	)		(579	)
Operating and other expenses		(127	)		(134	)		(132	)
Total expenses		(235	)		(1,127	)		(1,213	)
Loss from discontinued operations	$	(230	)	$	(117	)	$	(113	)

        Any reference to the number of properties, number of schools, number of units, number of beds, and yield on investments in real estate are unaudited and outside the scope of our independent registered public accounting firm's audit of our consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board.