Real Estate Investments

9 Months Ended

Sep. 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 September 30, 2011 (in thousands):

									Average
			Percentage			Number	Number of		Investment
	Gross		of		Number	of	SNF	ALF	per
Type of Property	Investments		Investments		of Loans	Properties (1)	Beds	Units	Bed/Unit
Skilled Nursing	$	28,955	52.7	%	21	23	2,566	—	$	11.28
Assisted Living	22,884		41.6	%	9	14	—	424	53.97
Other Senior Housing (2)	3,148		5.7	%	1	1	99	74	18.20
Totals	$	54,987	100.0	%	31	38	2,665	498

(1)We have investments in 12 states that include mortgages to 14 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 September 30, 2011, the mortgage loans had interest rates ranging from 10.0% to 14.6% and maturities ranging from 2012 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 nine months ended September 30, 2011, we received $2,429,000 in regularly scheduled principal payments and we received $2,557,000 plus accrued interest related to the payoff of three mortgage loans secured by one assisted living property and five skilled nursing properties.

During the nine months ended September 30, 2010, we invested $1,622,000, before closing fees, in a mortgage loan secured by a skilled nursing property located in Missouri to finance an expansion of the property and extend the loan maturity for an additional five years to January 2018.  Additionally, during the nine months ended September 30, 2010, we invested $72,000 under one mortgage loan for capital improvements and we received $2,989,000 in regularly scheduled principal payments.  During the nine months ended September 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 nine months ended September 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 September 30, 2011 (in thousands):

									Average
					Number	Number of			Investment
	Gross		Percentage of		of	SNF	ALF	ILF	per
Type of Property	Investments		Investments		Properties (1)	Beds	Units	Units	Bed/Unit
Skilled Nursing	$	328,316	47.6	%	66	7,669	—	—	$	42.81
Assisted Living	285,796		41.4	%	88	—	3,941	—	72.52
Other Senior Housing (2)	64,154		9.2	%	13	814	256	423	42.97
School	12,192		1.8	%	2	—	—	—	—
Totals	$	690,458	100.0	%	169	8,483	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 three months ended September 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 a third party operator at an incremental GAAP yield of 10.5%. During the nine months ended September 30, 2011, we acquired the previously disclosed 140-bed skilled nursing property located in Texas, two senior housing properties located in South Carolina with 118 skilled nursing beds, 40 assisted living units and 53 independent living units for $11,450,000, and 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. During the three months ended September 30, 2011, we paid $4,000,000 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.  This fair value measurement is based on significant input not observable in the market and thus represents a Level 3 measurement.

Subsequent to September 30, 2011, we acquired a 196-bed skilled nursing property in Texas for a purchase price of $15,500,000.  Additionally, we purchased a vacant parcel of land in Texas for a purchase price of $844,000 and entered into a commitment, in an amount not to exceed $8,250,000, to fund the construction of a skilled nursing property with 120 beds. This new property will replace a 90-bed skilled nursing property in our existing portfolio.  Upon completion of the construction, we intend to sell the existing 90-bed skilled nursing property and 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.

Also subsequent to September 30, 2011, we purchased a 156-bed skilled nursing property located in California for $17,500,000 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.

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 in the process of completing the final allocation of assets for our 2011 acquisition of four skilled nursing properties with 524 beds in Texas described above.

Also during the nine months ended September 30, 2011, we invested $2,421,000 at an average yield of 9.9%, under agreements to expand and renovate nine existing properties operated by five different operators.  We also invested $35,000 in capital improvements to two existing property under two lease agreements whose rental rates already reflected this investment.

During the nine months ended September 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.”

During the nine months ended September 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.  Also during the nine months ended September 30, 2010, we invested $2,140,000 at an average yield of 9.7%, under agreements to expand and renovate 11 existing properties operated by seven different operators.  We also invested $1,120,000 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.