2. Real Estate Investments

Assisted living properties, independent living properties, memory care properties, and combinations thereof are included in the assisted living property type. Range of care properties (or ROC) property type consists of properties providing skilled nursing and any combination of assisted living, independent living and/or memory care services.

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.

Owned Properties. The following table summarizes our investments in owned properties at September 30, 2013 (dollar amounts in thousands):

			Number	Number of		Investment
Type of Property	Gross Investments	Percentage of Investments	of Properties (1)	SNF Beds	ALF Units	per Bed/Unit
Skilled Nursing	$443,757	48.7%	67	8,188	—	$54.20
Assisted Living	390,105	42.8%	97	—	4,562	$85.51
Range of Care	43,907	4.8%	8	634	274	$48.36
Under Development (2)	20,883	2.3%	—	—	—	—
Schools	12,444	1.4%	2	—	—	—
Totals	$911,096	100.0%	174	8,822	4,836

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(1) We have investments in 26 states leased to 33 different operators.

(2) Includes two MC developments with a total of 108 units, two combination ALF and MC developments with a total of 158 units, and a SNF development with 143 beds.

All of our owned properties are leased to our operators pursuant to non-cancelable operating leases generally with an initial term of 10 to 15 years. Each lease is a triple net lease covering one or more properties which requires the operator/lessee to pay all costs necessary in the operations of the facilities. Many of the leases contain renewal options. 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, 2013, we entered into development commitments totaling $19,553,000 with an existing operator to fund the purchase of land and construction of two free-standing memory care properties in Colorado, one with 60-units and the other with 48-units. In conjunction with such commitments, we closed on two parcels of land for an aggregate purchase price of $2,050,000 which were simultaneously added to the existing master lease agreement with the operator. Rent at an initial annual rate of 9.25% will commence upon the respective project’s completion date (but in no event later than December 31, 2014) and be calculated based on the land purchase price and construction costs funded for each property plus 9.0% compounded on the land purchase price and each amount funded under the commitments.

In October 2013, we entered into a pipeline agreement with this same operator whereby we have the opportunity to finance any senior housing development projects or acquisitions originated by the operator through May 2018 (unless earlier terminated as provided for therein) with provisions limiting, among other things, to five the number of development projects the operator may have under construction at any time. Any such projects or opportunities financed by us pursuant to the agreement will be added to the parties’ master lease with the then remaining term extended by 10 years at initial lease rates estimated to range from 9.0% to 10.5% with annual escalations of 2.5%.

During the three months ended September 30, 2013, our operator of a master lease exercised its option to purchase six skilled nursing properties located in Ohio with a total of 230 beds for an all cash purchase price of $11,000,000. As a result, we recorded a $2,619,000 gain on sale. Also, during the nine months ended September 30, 2013, we sold a 47-bed skilled nursing property in Colorado for $1,000 and recognized a $1,014,000 loss on sale.

During the three months ended September 30, 2013, we completed the construction of a 60-unit memory care property in Colorado. The new memory care property opened in July 2013. During the nine months ended September 30, 2013, we funded the remaining $4,373,000 of the $9,925,000 development commitment for the new property.

During the nine months ended September 30, 2013, we completed the construction of a 120-bed skilled nursing property in Texas. This new property replaces a skilled nursing property in our existing portfolio. All the residents were relocated from the old property to the new property. The operator is responsible for marketing and selling the old property. During the nine months ended September 30, 2013, we funded the remaining $5,066,000 of the $9,094,000 development commitment for the new property.

In October 2013, we purchased four parcels of land in Michigan for $1,163,000. In November 2013, we purchased a 120-bed skilled nursing property in Florida for $14,402,000. The property was included in a master lease at an incremental initial cash yield of 8.75%. The operator currently leases four properties with a total of 596 beds/units from us. The new master lease will contain all five properties with a total of 716 beds/units and have a GAAP yield of 10.7%. The initial lease term is 10 years with two 5-year renewal options and annual rent escalations of 2.2%.

As of September 30, 2013, we have a commitment to provide, under certain conditions, up to $5,000,000 per year through December 2014 to an existing operator for expansion of the 37 properties they lease from us. The estimated yield of this commitment is 9.5% plus the positive difference, if any, between the average yields on the U.S. Treasury 10-year note for the five days prior to funding, minus 420 basis points. As of September 30, 2013, no funds have been requested under this commitment.

The following table summarizes our investment commitments as of September 30, 2013, excluding the $5,000,000 per year commitment, and year to date funding on our ongoing development, redevelopment, renovation and expansion projects (excludes capitalized interest, dollar amounts in thousands):

Type of Property	Investment Commitment	2013 Funding (2)		Commitment Funded	Remaining Commitment	Number of Properties	Number of Beds/Units
Skilled Nursing	$ 29,650	$ 4,212		$ 9,748	$19,902	6	640
Assisted Living (1)	50,538	9,904		12,545	37,993	6	402
Totals	$80,188	$14,116	(3)	$22,293	$57,895	12	1,042

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(1) Includes the development of two memory care properties for a total of $19,553 and two assisted living and memory care combination properties for a total of $16,385, and the expansion of two assisted living properties for a total $14,600.

(2) Excludes year 2013 funding for completed development of a 60-unit memory care property for $4,373, completed redevelopment of a skilled nursing property for $5,066, and $260 of capital improvement on three completed projects with no remaining commitments. It also includes $6 funded under the commitment as marketing expense and $2,050 of land acquired for development.

(3) In October 2013, we funded $3,054 under investment commitments.

During the nine months ended September 30, 2012, 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 the master lease did not change as a result of this sale. Additionally, during the nine months ended September 30, 2012, we invested $2,612,000 under agreements to expand and renovate six existing properties and to construct a skilled nursing property and a memory care property. The following table summarizes our acquisitions during nine months ended September 30, 2012 (dollar amounts in thousands, unaudited):

			Total	Number	Number
Type of Property	Purchase Price	Transaction Costs	Acquisition Costs	of Properties	of Beds
Skilled Nursing (1)	$79,100	$246	$79,346	4	522
Land(2)	1,882	120	2,002	—	—
Totals	$80,982	$366	$81,348	4	522

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(1) Includes two skilled nursing properties with a total of 234 beds located in Texas. These properties were purchased separately for a total purchase price of $25,100. Simultaneous with these purchases, we added these properties to an existing master lease with a third party operator at an incremental GAAP yield of 10.7%. Also, includes two 144-bed skilled nursing properties located in Ohio purchased for an aggregate purchase price of $54,000. Simultaneous with the purchase, we leased the properties to an unrelated third-party operator at a GAAP yield of 10.1%.

(2) We purchased a vacant parcel of land in Colorado for $1,882. Simultaneous with the purchase, we entered into a lease agreement and development commitment in an amount of $9,925 to fund the construction of a 60-unit memory care property. During the nine months ended September 30, 2013, we completed the construction of this property, as previously discussed.

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at September 30, 2013 (dollar amounts 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 (2)	$26,251	63.9%	15	17	1,861	—	$14.11
Assisted Living	12,158	29.6%	3	8	—	211	$57.62
Range of Care	2,670	6.5%	1	1	99	74	$15.43
Totals	$41,079	100.0%	19	26	1,960	285

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(1) We have investments in 8 states that include mortgages to 11 different operators.

(2) Includes a mortgage and construction loan secured by a currently operating skilled nursing property and parcel of land upon which a 106-bed replacement property is being constructed. The agreement gives us the right to purchase the replacement facility for $13,500 during an 18 month period beginning on the first anniversary of the issuance of the certificate of occupancy.

At September 30, 2013, the mortgage loans had interest rates ranging from 7.0% to 13.6% and maturities ranging from 2014 to 2022. 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, 2013, we funded $2,816,000 under a $10,600,000 mortgage and construction loan and we have a remaining commitment of $5,165,000. During the nine months ended September 30, 2013 and 2012, we received $1,429,000 and $2,010,000, respectively, in regularly scheduled principal payments. During the nine months ended September 30, 2012, we received $2,846,000 plus accrued interest related to the early payoff of three mortgage loans secured by three skilled nursing properties.

In October 2013, we funded a $124,387,000 mortgage loan with a third-party operator secured by 15 properties with a total of 2,092 skilled nursing beds in Michigan. The loan is for a term of 30 years and bears interest at 9.53% for five years, escalating annually thereafter by 2.25%. Payments are interest-only for three years, after which the borrower will make interest payments along with annual principal payments of $1,000,000. The loan agreement provides for additional forward commitments of $12,000,000 for capital improvements at 9.41% for the first twelve months. Beginning in the thirteenth month, the interest will be the greater of 7.25% plus the positive difference, if any, between the average yields on the U.S. Treasury 10-year note for the twenty days prior to funding or 9.0% with annual escalations of 2.25%. The loan agreement also provides, under certain conditions and based on certain operating metrics and valuation thresholds achieved and sustained within the first twelve years of the term, for additional loan proceeds of up to $40,000,000 with such proceeds limited to $10,000,000 per twelve months. The term for the additional loan proceeds will be at the greater of 7.25% plus the positive difference, if any, between the average yields on the U.S. Treasury 10-year note for the twenty days prior to funding or 9.0% with annual escalations of 2.25%.

The borrower has a one-time option between the third and twelfth years to prepay up to 50% of the then outstanding loan balance without penalty. Exclusively for the purposes of this option, the properties collateralizing the loan have been separated by us into two pools of assets. If and when the option is exercised, we will identify which of the two pools we will release for prepayment and removal from portfolio of properties securing the loan. If the prepayment option is exercised and timely concluded, the borrower forfeits its opportunity to access any additional loan proceeds. Additionally, under certain circumstances, including a change in regulatory environment, we have the option to purchase the properties.