Real Estate Investments

6 Months Ended

Jun. 30, 2012

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, 2012 (dollar amounts 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	$24,712	49.2%	18	19	2,112	—	$11.70
Assisted Living	22,553	44.9%	9	14	—	424	53.19
Other Senior Housing (2)	2,981	5.9%	1	1	99	74	17.23
Totals	$50,246	100.0%	28	34	2,211	498

(1)We have investments in 12 states that include mortgages to 12 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, 2012, the mortgage loans had interest rates ranging from 10.0% to 14.2% 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 three months ended June 30, 2012, we received $671,000 in regularly scheduled principal payments and $2,363,000 plus accrued interest related to the early payoff of two mortgage loans secured by two skilled nursing properties. During the six months ended June 30, 2012, we received $1,389,000 in regularly scheduled principal payments. In August 2012, we received $493,000 plus accrued interest related to the early payoff of a mortgage loan secured by a skilled nursing property with 118 beds located in Texas. 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.

Owned Properties. The following table summarizes our investments in owned properties at June 30, 2012 (dollar amounts in thousands):

				Number of			Average
			Number				Investment
	Gross	Percentage of	of	SNF	ALF	ILF	per
Type of Property	Investments	Investments	Properties (1)	Beds	Units	Units	Bed/Unit
Skilled Nursing	$377,381	50.8%	68	8,025	—	—	$47.03
Assisted Living	285,981	38.5%	88	—	3,941	—	72.57
Other Senior Housing (2)	64,704	8.7%	13	814	256	423	43.34
School	12,236	1.6%	2	—	—	—	N/A
Under Development (3)	2,995	0.4%	—	—	—	—	N/A
Totals	$743,297	100.0%	171	8,839	4,197	423

(1)We have investments in 25 states leased to 31 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.

(3)We have two properties under development: 120-bed skilled nursing property in Texas which will replace an existing 90-bed skilled nursing property we own and 60-unit free-standing memory care property in Colorado.

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 June 30, 2012, we purchased a vacant parcel of land in Colorado for $1,882,000. Simultaneous with the purchase, we entered into a lease agreement and development commitment in an amount not to exceed $7,935,000 to fund the construction of a 60-unit free-standing memory care property.  Rent under the lease will begin upon the earlier of project completion or the improvement deadline of August 1, 2013.  Initial rent at the rate of 9.25% will be calculated based on the land purchase price and construction costs funded plus 9.0% compounded on each advance under the commitment from the disbursement date until the earlier of project completion or the improvement deadline.  The lease has an 11-year initial term, four 5-year renewal options and annual escalations of 2.5%.

During the six months ended June 30, 2012, we acquired a 144-bed skilled nursing property located in Texas for an aggregate purchase price of $18,600,000.  Simultaneous with the purchase, we added the property to an existing master lease with a third party operator at an incremental GAAP yield of 10.7%. Additionally, we sold a 140-bed skilled nursing property located in Texas for $1,248,000 and recognized a gain, net of selling expenses, of $16,000. This property was leased under a master lease and the economic terms of this master lease did not change as a result of this sale.

Also during the six months ended June 30, 2012, we invested $519,000 at an average yield of 9.1%, under agreements to expand and renovate four existing properties with two operators and to construct two properties with two different operators.  We also invested $142,000 in capital improvements to two existing properties under two lease agreements whose rental rates already reflected these investments. See Note 7.Commitments and Contingencies for further discussion.

In July 2012, we acquired a 90-bed skilled nursing property located in Texas for an aggregate purchase price of $6,500,000.  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 10.7%. Also, in July 2012, we acquired two 144-bed skilled nursing properties located in Ohio for an aggregate purchase price of $54,000,000.  Simultaneous with the purchase, we leased the properties to an unrelated third-party operator at a GAAP yield of 10.1%. The initial term of the lease is 15 years with two 5-year renewal options and annual rent escalations of the lesser of i) 2.25% for the first seven years and 2.50% for the remainder of the term or ii) a calculation based on the consumer price index.

During the six months ended June 30, 2011, we acquired 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.  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. During the third quarter of 2011, we paid $4,000,000 related to the first contingent earn-out payment. We estimated the fair value of the contingent earn-out payment 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.

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.

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.