6. Real Estate Investments

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

Owned Properties. The following table summarizes our investment in owned properties at December 31, 2014 (dollar amounts in thousands):


								Average
			Percentage		Number	Number of		Investment
	Gross		of		of	SNF	ALF	per
Type of Property	Investments		Investments		Properties(1)	Beds	Units	Bed/Unit
Skilled Nursing	$	482,036	50.8	%	68	8,407	—	$	57.34
Assisted Living		401,517	42.3	%	84	—	4,176	$	96.15
Range of Care		43,907	4.6	%	7	634	274	$	48.36
Under Development(2)		11,495	1.2	%	—	—	—		—
Other(3)		10,883	1.1	%	1	—	—		—
Totals	$	949,838	100.0	%	160	9,041	4,450

⁽¹⁾

We have investments in 26 states leased to 30 different operators.

⁽²⁾

Includes two MC developments with a total of 126 units.

⁽³⁾

Includes a school 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 annual 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 revenues in excess of base amounts or

(iv)

specific dollar increases.

We received no contingent rent income for the years ended December 31, 2014 and 2013. Contingent rent income for the year ended December 31, 2012 was not significant in relation to contractual base rent income.

During the year ended December 31, 2014, we acquired a 48-unit assisted living property located in Colorado for $9,800,000 and recorded $130,000 in transaction costs. The property was added to an existing master lease at an incremental initial cash yield of 6.5% and we provided the lessee with contingent earn-out payments as a lease inducement. The contingent earn-out agreement requires us to pay two earn-out payments totaling up to $4,000,000 upon the property achieving a sustainable stipulated rent coverage ratio. We estimated the fair value of the contingent earn-out payments using a discounted cash flow analysis and recorded the estimated fair value of $3,240,000 as a lease inducement which is amortized as a yield adjustment over the life of the lease and a contingent earn-out liability which is accreted to the settlement amount as of the estimated payment date. See Note 11. Commitments and Contingencies for further discussion on the accounting treatment of the contingent earn-out liability.

During 2014, we purchased a parcel of land held-for-use in Michigan for $450,000. Additionally, we purchased a vacant parcel of land in Illinois for $1,400,000 under a development pipeline agreement whereby we have the opportunity to finance any senior housing development project or acquisition originated by an operator. The land under the development pipeline agreement was added to an existing master lease and we entered into development commitments in an amount not to exceed $12,248,000, including the land purchase, to fund the construction of a 66-unit memory care property. See below for our total development, redevelopment, renovation and expansion project commitments.

In February 2015, we funded $7,195,000 under a $12,179,000 development commitment to purchase the land and existing improvements and then complete the related development of a 56-unit memory care property currently under construction in Texas. In conjunction with this commitment, we entered into a master lease agreement for an initial term of 15 years with three 5-year renewal options at an initial cash yield of 8.75% escalating annually thereafter by the lessor of (i) a calculation based on the Consumer Price Index or (ii) 2.25%. The master lease provides for our payment of a lease inducement of up to $1,589,000, which will be amortized as a yield adjustment over the lease term, with up to 25% of the fee to be disbursed shortly after closing and the balance following the issuance of a certificate of occupancy and receipt of any other regulatory approval required for the operation of the 56-unit memory care property. The master lease also gives us a right to provide similar financing for certain future development opportunities.

Additionally, in February 2015, we elected to exercise our right to provide financing for one such opportunity, adding to the master lease a parcel of land purchased in South Carolina for $2,490,000 coupled with our commitment to provide the operator with up to $16,535,000, including the land purchase for the development of an 89-unit combination assisted living and memory care property. In conjunction with this new development commitment, the master lease provided for an additional $2,363,000 lease inducement payment, which will be amortized as a yield adjustment over the lease term, with up to 25% of the fee to be disbursed shortly after closing and the balance following the issuance of a certificate of occupancy and receipt of any other regulatory approval required for the operation of the 89-unit combination assisted living and memory care property.

During the twelve months ended December 31, 2014, we sold 16 assisted living properties with a total of 615 units to an affiliate of Enlivant. The sales price for the 16 properties was $26,465,000, resulting in net sales proceeds of $25,702,000. As a result, we recorded a gain of $3,819,000. As part of this agreement, we consented to the closure of an assisted living property with a net book value of $935,000 and we are exploring sale and lease options for this property. See Note 3. Major Operators for further discussions of the transactions relating to the properties formerly co-leased to affiliates of Extendicare, Inc. and Enlivant. During 2014, we also sold two assisted living properties located in Florida and Georgia with a total of 133 units, a school located in Minnesota, and a closed skilled nursing property for a combined sales price of $8,100,000, resulting in net sales proceeds of $7,891,000, and net gain on sale of $1,140,000.

During the twelve months ended December 31, 2014, we completed the following development and improvement projects (dollar amounts in thousands):


	Number		Number
	of	Type of	of
Type of Project	Properties	Property	Beds/Units	State	2014 Funding			Total Funding
Development	1	ALF	60	Colorado	$	6,351		$	9,689	(1)
Development	1	ALF	80	Texas		2,300			5,691	(2)
Development	1	SNF	143	Kentucky		10,579			20,904	(3)
Development	1	ALF	48	Colorado		7,257			8,744	(4)
Expansion/Renovation	1	ALF	72	Colorado		6,371			6,376
Expansion/Renovation	2	ALF	123	Colorado		5,091			5,095
Improvements	1	SNF	120	Florida		500			500
Improvements	2	SNF	235	New Mexico		319			1,746
	10		881		$	38,768	(5)	$	58,745	(5)

⁽¹⁾

Completed a memory care property in August 2014. The total funded amount includes acquired land of $1,200.

⁽²⁾

Completed a memory care property in October 2014. The total funded amount includes acquired land of $1,000.

⁽³⁾

Completed in October 2014 and total funded amount includes acquired land of $2,050.

⁽⁴⁾

Completed a memory care property in December 2014. The total funded amount includes acquired land of $850.

⁽⁵⁾

In 2014, we funded $500 to purchase Texas Medicaid bed rights for a 122-bed skilled nursing property under an existing lease. Additionally, during 2014, we funded the final commitment balance of $551 on a newly developed 77-unit assisted living property in Kansas which opened in 2013. In January 2015, we funded an additional $4,711 under these completed projects.

The following table summarizes our investment commitments as of December 31, 2014 and amounts funded on our open development and improvement projects (excludes capitalized interest, dollar amounts in thousands):


											Number	Number
	Investment		2014			Commitment		Remaining			of	of
Type of Property	Commitment		Funding(2)			Funded		Commitment			Properties	Beds/Units
Skilled Nursing	$	2,200	$	1,156		$	2,161	$	39		2	141
Assisted Living(1)		27,751		8,831			11,268		16,483		26	1,194
Totals	$	29,951	$	9,987	(3)	$	13,429	$	16,522	(3)	28	1,335

⁽¹⁾

Includes the development of a 66-unit memory care property for a commitment of $12,248, as previously discussed, a 60-unit memory care property for a total commitment of $10,703 and the improvement of 24 assisted living properties for a total investment commitment of $4,800.

⁽²⁾

Excludes funding for completed development and improvement projects discussed above and includes $1,400 of land acquired for the development of a 66-unit memory care property, as previously discussed, and the reclass of a pre‑development loan with a balance of $304. See Note 7. Notes Receivable for further discussion of the pre‑development loans.

⁽³⁾

In January 2015, we funded $731 under investment commitments. Accordingly, we have a remaining commitment of $15,791. Additionally, in January 2015, we amended an existing master lease with an operator to provide a commitment not to exceed $600 for the purpose of making capital improvements at a 196-skilled nursing property in Texas. Upon the capital improvement deadline of June 30, 2015 or final funding of the capital improvement commitment, the minimum rent will increase by the product of 9% and the total capital improvement funded.

Our construction in progress (or CIP) activity during the year ended December 31, 2014 for our development, redevelopment, renovation, and expansion projects is as follows (dollar amounts in thousands):


		CIP								CIP
		Balance at				Capitalized		Conversions		Balance at
Properties	Projects	12/31/2013		Funded(1)		Interest		out of CIP		12/31/2014
Development projects:
Assisted living	6	$	6,334	$	23,149	$	769	$	(21,581)	$	8,671
Skilled nursing	1		5,893		10,579		505		(16,977)		—
Subtotal	7		12,227		33,728		1,274		(38,558)		8,671
Redevelopment, renovation and expansion projects:
Assisted living	3		8		11,463		232		(11,703)		—
Skilled nursing	5		2,433		1,661		—		(4,094)		—
Subtotal	8		2,441		13,124		232		(15,797)		—
Total	15	$	14,668	$	46,852	$	1,506	$	(54,355)	$	8,671

⁽¹⁾

Excludes $1,554 of capital improvement commitment funding which was capitalized directly into building and improvements and includes the reclass of a pre‑development loan with a total balance of $304 See Note 7. Notes Receivable for further discussion of pre‑development loans.

During the twelve months ended December 31, 2013 we acquired a 130-bed skilled nursing property located in Florida for $14,402,000 and recorded $58,000 in transaction costs. In addition, we purchased four parcels of land held-for-use in Michigan for $1,163,000 and three vacant parcels of land in Colorado for a total of $3,475,000 and we entered into development commitments in an amount not to exceed $30,256,000 to fund the construction of three memory care properties.

During the year ended December 31, 2013, one of our lessees exercised its option to purchase six skilled nursing properties with a total of 230 beds located in Ohio for an all cash purchase price of $11,000,000. As a result, we recorded a $2,619,000 gain on sale. Also, during 2013, we sold a 47‑bed skilled nursing property in Colorado for $1,000 and recognized a loss of $1,014,000 on the sale.

During the twelve months ended December 31, 2013, we completed the following construction projects (dollar amounts in thousands):


		Number
Completed		of
Date	Type of Property	Beds/Units	State	2013 Funding		Total Funding

Jul 2013	Assisted Living(1)	60	Colorado	$	4,316	$	9,850
Jul 2013	Skilled Nursing(2)	120	Texas		5,065		8,635
Oct 2013	Assisted Living	77	Kansas		8,081		9,675	(3)
	Totals	257		$	17,462	$	28,160

⁽¹⁾

Represents a memory care property. The funded amount includes acquired land of $1,882.

⁽²⁾

This new property replaces a skilled nursing property in our existing portfolio. The old skilled nursing property was closed upon completion of the replacement property and subsequently sold in 2014, as previously discussed.

⁽³⁾

The funded amount includes acquired land of $730. In 2014, we funded an additional $551 and completed this commitment.

The following table summarizes our acquisitions during 2012 (dollar amounts in thousands):


					Total		Number	Number
	Purchase		Transaction		Acquisition		of	of
Type of Property	Price		Costs		Costs		Properties	Beds/Units
Skilled Nursing(1)	$	79,100	$	275	$	79,375	4	522
Assisted Living(2)		81,987		285		82,272	5	266
Land(3)		5,663		207		5,870	—	—
Totals	$	166,750	$	767	$	167,517	9	788

⁽¹⁾

Includes two skilled nursing properties with a total of 234 beds located in Texas and two skilled nursing properties with a total of 288 beds located in Ohio.

⁽²⁾

Includes two properties with a total of 100 units located in Colorado and three properties with a total of 166 units located in New Jersey.

⁽³⁾

We purchased four vacant parcels of land in the following states: Colorado, Kansas Kentucky and Texas. Simultaneous with the purchase, we entered into lease agreements and development commitments in an amount not to exceed $49,702 to fund the construction of a memory care property with 60 units and two assisted living properties with a total of 158 units and one skilled nursing property with 143 beds. These construction projects were subsequently completed in 2014 and 2013.

During the year ended December 31, 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 this master lease did not change as a result of this sale. During 2013 and 2012, we funded $13,135,000 and $11,089,000, respectively, on open development and improvement projects. See table above for funding on completed development and improvement projects.

Depreciation expense on buildings and improvements, including properties classified as held‑for‑sale, was $25,424,000, $24,568,000, and $22,002,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

Future minimum base rents receivable under the remaining non‑cancelable terms of operating leases including the re-leasing of the 20 assisted living properties formerly co-leased to affiliates of Extendicare and Enlivant, as previously discussed in Note 3. Major Operators, and excluding the effects of straight‑line rent and renewal options are as follows (in thousands):


	Annual Cash
	Rent
2015	$	98,150
2016		102,113
2017		101,009
2018		97,955
2019		92,658
Thereafter		445,768

Set forth in the table below are the components of the income from discontinued operations (in thousands):


	For the year ended
	December 31,
	2014		2013		2012
Rental income	$	—	$	1,123	$	1,551
Total revenues		—		1,123		1,551
Depreciation and amortization		—		(317)		(540)
General and administrative expenses		—		(1)		(6)
Total expenses		—		(318)		(546)
Income from discontinued operations	$	—	$	805	$	1,005

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at December 31, 2014 (dollar amounts in thousands):


			Percentage		Number	Number	Number of		Investment
	Gross		of		of	of	SNF	ALF	per
Type of Property	Investments		Investments		Loans	Properties(1)	Beds	Units	Bed/Unit
Skilled Nursing(2)	$	151,016	90.3	%	15	29	3,650	—	$	41.37
Assisted Living		14,003	8.3	%	3	8	—	270	$	51.86
Range of Care		2,310	1.4	%	1	1	99	74	$	13.35
Totals	$	167,329	100.0	%	19	38	3,749	344

⁽¹⁾

We have investments in 9 states that include mortgages to 12 different operators.

⁽²⁾

In January 2015, we received $2,285 plus accrued interest for the payoff of a mortgage loan secured by one range of care property.

At December 31, 2014, the mortgage loans had interest rates ranging from 7.0% to 13.7% and maturities ranging from 2015 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 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 twelve months ended December 31, 2014, 2013 and 2012, we funded $3,010,000, $4,971,000, and $2,619,000 respectively, under a $10,600,000 mortgage and construction loan. Subsequent to these investments, the mortgage and construction loan was fully funded. This mortgage and construction loan was secured by a skilled nursing property and a newly constructed 106-bed replacement skilled nursing property. Upon completion of the 106-bed replacement skilled nursing property, the residents of the old skilled nursing property were relocated to the new skilled nursing property and the old skilled nursing property was closed. During 2014, the old skilled nursing property was sold by the borrower and released as collateral. In February 2015, we purchased and equipped the replacement property for a total of $13,946,000 by exercising our right under the agreement. The property was added to an existing master lease at a lease rate equivalent to the interest rate in effect on the loan at the time the purchase option was exercised. Additionally, we paid the lessee a $1,054,000 lease inducement which will be amortized as a yield adjustment over the life of the lease term.

During 2013, we funded the initial amount of $124,387,000 under a mortgage loan with a third‑party operator, Prestige, secured by 15 skilled nursing properties with a total of 2,058 beds in Michigan. The loan agreement provides for additional commitments of $12,000,000 for capital improvements and, under certain conditions and based on certain operating metrics and valuation thresholds achieved and sustained within the initial twelve years of the term, up to $40,000,000 of additional proceeds, for a total loan commitment of up to $176,387,000. During 2014, we funded $3,337,000 under the $12,000,000 capital improvement commitment with $8,663,000 remaining as of December 31, 2014. In January 2015, we funded an additional $770,000 under the $12,000,000 capital improvement commitment, with a corresponding reduction in the remaining commitment balance to $7,893,000.

In addition, this mortgage loan provided the borrower a one‑time option to prepay up to 50% of the then outstanding loan balance without penalty. In January 2015, we amended this mortgage loan to provide up to an additional $20,000,000 in loan proceeds for the redevelopment of two properties securing the loan (increasing the total capital improvement commitment to $32,000,000 and the total loan commitment to $196,387,000) and agreed to convey, to Prestige, two parcels of land held-for-use adjacent to these properties to facilitate the projects. As partial consideration for the increased commitment and associated conveyance, the borrower forfeited their prepayment option. As a result of the forfeiture of the prepayment option, we expect to record $1,296,000 of effective interest during 2015.

Additionally, in January 2015, we originated an $11,000,000 mortgage loan with Prestige concurrently funding $9,500,000 with a commitment to fund the balance for approved capital improvement projects. The loan is secured by a 157-bed skilled nursing property in Michigan and bears interest at 9.41% for five years, escalating annually thereafter by 2.25%. The term is 30 years with interest-only payments. After the thirteenth month of the commencement date, the interest rate on newly advanced amounts on the mortgage and construction loan will equal the greater of (i) 7.25% plus the positive difference, if any, between the average yield on the U.S. Treasury 10-year note for the twenty days prior to funding or (ii) 9.0% with annual escalations of 2.25%. Additionally, we have the option to purchase the property under certain circumstances, including a change in regulatory environment.

During 2012, we originated a $5,100,000 two‑year interest‑only bridge loan. The loan is secured by a 70‑unit assisted living property in Pennsylvania and bears interest at 7.0% increasing annually by 1.5%. During 2014, we extended this loan for an additional two years.

At December 31, 2014 and 2013 the carrying values of the mortgage loans were $165,656,000 and $165,444,000, respectively. Scheduled principal payments on mortgage loan receivables are as follows (in thousands):


	Scheduled
	Principal
2015	$	4,642
2016		7,527
2017		7,308
2018		8,425
2019		5,137
Thereafter		134,290
Total	$	167,329

During the twelve months ended December 31, 2014, 2013 and 2012, we received $2,159,000, $1,933,000, and $2,572,000, respectively in regularly scheduled principal payments. During 2014, we received $6,996,000 plus accrued interest related to the early payoff of two mortgage loans secured by three skilled nursing properties and one assisted living property. In January 2015, we received $2,285,000 plus accrued interest for the payoff of a mortgage loan secured by one range of care property. During 2012, we received $19,061,000 plus accrued interest related to the early payoff of eleven mortgage loans secured by four skilled nursing properties and seven assisted living properties.