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, 2014 (dollar amounts in thousands):

			Number	Number of		Average Investment
Type of Property	Gross Investments	Percentage of Investments	of Properties (1)	SNF Beds	ALF Units	per Bed/Unit
Skilled Nursing	$ 460,197	47.6%	68	8,264	—	$ 55.69
Assisted Living	414,930	43.0%	97	—	4,620	$ 89.81
Range of Care	43,906	4.6%	8	634	274	$ 48.35
Under Development (2)	36,096	3.7%	—	—	—	—
Other (3)	10,883	1.1%	1	—	—	—
Totals	$ 966,012	100.0%	174	8,898	4,894

⁽¹⁾

We own properties in 26 states that are leased to 30 different operators.

⁽²⁾

Includes two MC developments with a total of 108 units, a combination ALF and MC development with 80 units, and a SNF development with 143 beds.

⁽³⁾

Includes one school property and five parcels of land held-for-use.

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. 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, 2014, we purchased a parcel of land in Michigan for $450,000. During the nine months ended September 30, 2014, we sold two assisted living properties located in Florida and Georgia with a total of 133 units and one school property located in Minnesota for a combined sales price of $7,850,000, resulting in net sales proceeds of $7,707,000, and a net gain on sale of $1,140,000. During the nine months ended September 30, 2013, we purchased two parcels of land in Colorado for $2,050,000 as part of development commitments to construct two free-standing memory care properties totaling $19,553,000. During the nine months ended September 30, 2013, we sold six skilled nursing properties located in Ohio and a skilled nursing property in Colorado with a total of 277 beds for $11,001,000. As a result, we recorded a net gain on sale of $1,605,000.

During the nine months ended September 30, 2014, we funded $6,192,000 on a $9,931,000 development commitment to construct a 60-unit memory care property located in Colorado. Construction was completed and the property was opened in August 2014. Additionally, during the three months ended September 30, 2014, we completed the expansion of a 50-unit assisted living property in Colorado. During the nine months ended September 30, 2014, we funded $6,102,000 of the $6,600,000 commitment.

In October 2014, we purchased a parcel of land in Illinois for $1,400,000 and entered into a development commitment to construct a 66-unit free-standing memory care property. The commitment totals $12,248,000, including the land, and was made pursuant to a pipeline agreement and master lease with an existing operator. Rent, at an initial annual rate of 9.30%, will commence upon completion of construction (but no later than December 31, 2016) and be calculated based on the land purchase price and construction costs funded.

Additionally, in October 2014, we entered into an agreement to consent to the closure of one assisted living property and sell 16 assisted living properties currently leased under master leases with affiliates of Extendicare, Inc. and Enlivant. The sales price for the 16 properties is $26,465,000 and we expect to record a gain on sale of approximately $3,909,000 in the fourth quarter of 2014. The net book value of the property we have consented to close is $954,000 and we are exploring sale and lease options for this property. See Note 7. Major Operators for further discussion.

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, 2014, no funds have been requested under this commitment and it is highly unlikely any funds will be expended based on the lease termination date.

Excluding the $5,000,000 per year commitment above, the following table summarizes our investment commitments as of September 30, 2014 and year-to-date funding on our open development, redevelopment, renovation, and expansion projects (excludes capitalized interest, dollar amounts in thousands):

Type of Property	Investment Commitment	2014 Funding (2)	Commitment Funded	Remaining Commitment	Number of Properties	Number of Beds/Units
Skilled Nursing	$ 26,200	$ 6,727	$ 18,056	$ 8,144	4	404
Assisted Living (1)	34,125	16,210	23,530	10,595	5	274
Totals	$ 60,325	$22,937(3)	$41,586(4)	$18,739(3)	9	678

⁽¹⁾

Includes the development of two MC properties for a total commitment of $20,325 and one ALF/MC property for a total commitment of $5,800. Also, includes two expired commitments for the expansion of two ALFs for a total of $8,000. We anticipate extending the maturities on these two expansion commitments.

⁽²⁾

Excludes funding for completed developments of $869.

⁽³⁾

In October 2014, we funded $4,485 under investment commitments. Accordingly, we have a remaining commitment of $14,254.

⁽⁴⁾

Includes land purchase and completed projects with remaining commitment funding and excludes capitalized interest.

Our construction in progress (or CIP) activity during the nine months ended September 30, 2014 for our development, redevelopment, renovation, and expansion projects is as follows (dollar amounts in thousands):

Properties	Projects	CIP Balance at 12/31/13	Funded(1)	Capitalized Interest	Conversions out of CIP	CIP Balance at 9/30/14
Development projects:
Assisted living	5	$ 6,334	$ 17,763	$ 578	$ (8,531)	$ 16,144
Skilled nursing	1	5,893	5,608	438	—	11,939
Subtotal	6	12,227	23,371	1,016	(8,531)	28,083
Redevelopment, renovation and expansion projects:
Assisted living	3	8	10,741	200	(6,191)	4,758
Skilled nursing	5	2,433	1,124	—	(1,433)	2,124
Subtotal	8	2,441	11,865	200	(7,624)	6,882
Total	14	$ 14,668	$ 35,236	$ 1,216	$ (16,155)	$34,965(2)

⁽¹⁾

Excludes $864 of capital improvement commitment funding on a completed project which was capitalized directly into building.

⁽²⁾

Excludes completed projects.

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at September 30, 2014 (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)	$ 155,672	90.0%	16	33	3,919	—	$ 39.72
Assisted Living	14,992	8.6%	4	9	—	311	$ 48.21
Range of Care	2,387	1.4%	1	1	99	74	$ 13.80
Totals	$ 173,051	100.0%	21	43	4,018	385

⁽¹⁾

We have investments in properties located in 10 states that include mortgages to 13 different operators.

⁽²⁾

Includes a mortgage and construction loan secured by a closed skilled nursing property and a newly constructed 106-bed replacement property. In October 2014, the closed skilled nursing property was sold by the borrower and released as collateral per the terms of the mortgage and construction loan.

At September 30, 2014, the mortgage loans had interest rates ranging from 7.1% to 13.9% and maturities ranging from 2014 to 2043. In addition, some loans contain certain guarantees, provide for certain facility fees and generally have 20-year to 30-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, 2014 and 2013, we received $1,609,000 and $1,429,000, respectively, in regularly scheduled principal payments.

During the three months ended September 30, 2014, we originated a $3,027,000 mortgage loan secured by a 100-unit independent living property in Arizona. The loan is for a term of five years and bears interest at 7.0%, escalating 0.25% annually. During the nine months ended September 30, 2014, we funded $1,512,000 under a $12,000,000 capital improvement commitment to an existing borrower and $10,487,000 remains under this commitment at September 30, 2014. Additionally, during the nine months ended September 30, 2014 and 2013, we funded $3,010,000 and $2,816,000, respectively, under a $10,600,000 mortgage and construction loan. This mortgage and construction loan has been fully funded with no remaining commitments and was secured by a skilled nursing property and a newly constructed 106-bed replacement skilled nursing property. Upon completion of construction, the residents of the old skilled nursing property were relocated to the newly constructed 106-bed replacement skilled nursing property and the old skilled nursing property was simultaneously closed. In October 2014, the closed skilled nursing property was sold by the borrower and released as collateral per the terms of the mortgage and construction loan.