Real Estate Investments

6 Months Ended

Jun. 30, 2011

Real Estate Investments.

Real Estate Investments

2. Real Estate Investments

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at June 30, 2011 (in thousands):

			Percentage			Number	Number of		Investment
Type of Property	Gross Investments		of Investments		Number of Loans	of Properties (1)	SNF Beds	ALF Units	per Bed/Unit
Skilled Nursing	$	30,166	53.5	%	22	24	2,727	—	$	11.06
Assisted Living	22,989		40.8	%	9	14	—	424	54.22
Other Senior Housing (2)	3,200		5.7	%	1	1	99	74	18.50
Totals	$	56,355	100.0	%	32	39	2,826	498

(1)We have investments in 12 states that include mortgages to 15 different operators.

(2)Other senior housing consists of independent living properties and properties providing any combination of skilled nursing, assisted living and/or independent living services.

At June 30, 2011, the mortgage loans had interest rates ranging from 9.8% to 14.3% and maturities ranging from 2011 to 2019.  In addition, some loans contain certain guarantees, provide for certain facility fees and generally have 20-year to 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.

During the six months ended June 30, 2011, we received $1,712,000 in regularly scheduled principal payments and we received $1,908,000 plus accrued interest related to the payoff of two mortgage loans secured by one assisted living property and four skilled nursing properties.  Subsequent to June 30, 2011, we received $649,000 plus accrued interest related to the payoff of a mortgage loan secured by a skilled nursing property located in Oklahoma.

During the six months ended June 30, 2010, we invested $72,000 under one mortgage loan for capital improvements and we received $1,957,000 in regularly scheduled principal payments.  During the six months ended June 30, 2010, we recorded an $852,000 provision for doubtful accounts related to a mortgage loan secured by a school property located in Minnesota. On April 20, 2010, the borrower of the school property ceased operations.  Subsequently, the borrower filing for Chapter 7 bankruptcy and we acquired the school property via deed-in-lieu of foreclosure.  During the six months ended June 30, 2011, we leased this property to a third party school operator under a 15-month lease for $19,100 per month.  Therefore, we reclassified this property from held-for-sale to held-for-use.

Owned Properties. The following table summarizes our investments in owned properties at June 30, 2011 (in thousands):

					Number	Number of			Investment
Type of Property	Gross Investments		Percentage of Investments		of Properties (1)	SNF Beds	ALF Units	ILF Units	per Bed/Unit
Skilled Nursing	$	318,029	46.8	%	65	7,529	—	—	$	42.24
Assisted Living	285,796		42.0	%	88	—	3,941	—	72.52
Other Senior Housing (2)	63,811		9.4	%	13	814	256	423	42.74
School	12,170		1.8	%	2	—	—	—	—
Totals	$	679,806	100.0	%	168	8,343	4,197	423

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

(2)Other senior housing consists of independent living properties and properties providing any combination of skilled nursing, assisted living and/or independent living services.

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 a limited period option that permits 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 percentage 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.

During the six months ended June 30, 2011, we acquired two senior housing properties located in South Carolina with 118 licensed beds, 40 assisted living units and 53 independent living units for $11,450,000.  These properties were leased to a third party operator under a 10-year lease with three 5-year renewal options.  Also during the six months ended June 30, 2011, we purchased four skilled nursing properties with 524-beds in Texas for $50,841,000 which consists of $41,000,000 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 $11,000,000 upon the properties achieving a sustainable stipulated rent coverage ratio. We estimated the fair value of the contingent earn-out payments using a discounted cash flow analysis.  This fair value measurement is based on significant input not observable in the market and thus represents a Level 3 measurement.  These properties were leased to a third party operator under a 15-year lease with two five-year renewal options. During the six months ended June 30, 2011, we incurred and expensed $127,000 in transaction costs relating to these acquisitions.  At the time of acquisition, we preliminarily estimated the allocation of the assets acquired based upon historical valuations of similar acquisitions and the facts and circumstances available at the time. We will determine the final value of the identifiable assets as soon as information is available, but not more than 12 months from the date of acquisition. We are also in the process of completing the final allocation of assets for our fourth quarter 2010 acquisitions.

Also during the six months ended June 30, 2011, we invested $1,791,000 at an average yield of 9.8%, under agreements to expand and renovate six existing properties operated by three different operators.  We also invested $13,000 in capital improvements to one existing property under a lease agreement whose rental rates already reflected this investment.

During the six months ended June 30, 2011, we classified a 140-unit independent living property located in Texas that we acquired via foreclosure from Sunwest in 2008 as held-for-sale. We are actively marketing to sell this property. This reclassification was made in accordance with accounting guidance which requires that the financial results of properties meeting certain criteria be reported on a separate line item called “discontinued operations.”

Subsequent to June, 30, 2011, we purchased a 140-bed skilled nursing property located in Texas for an aggregate purchase price of $10,000,000.  Simultaneous with the purchase, we added the property to an existing master lease with an unrelated third-party operator at an incremental GAAP yield of 10.5%.

During the six months ended June 30, 2010, we acquired four properties comprised of 513 skilled nursing beds, 47 assisted living units, and 46 independent living units, for $38,850,000 and incurred and expensed $88,000 in transaction costs.  Also during the six months ended June 30, 2010, we invested $890,000 at an average yield of 10.0%, under agreements to expand and renovate eight existing properties operated by six different operators.  We also invested $1,016,000 in capital improvements to existing properties under various lease agreements whose rental rates already reflected this investment.

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 review of our consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board.