2.Real Estate Investments

Assisted living properties, independent living properties, memory care properties and combinations thereof are included in the assisted living property type (or collectively ALF). 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 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, 2015 (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
Assisted Living	$	573,693	49.7	%	96	—	5,187	$	110.60
Skilled Nursing		500,161	43.3	%	69	8,513	—	$	58.75
Range of Care		43,907	3.8	%	7	634	274	$	48.36
Under Development(2)		26,675	2.3	%	—	—	—		—
Other(3)		10,213	0.9	%	1	—	—		—
Totals	$	1,154,649	100.0	%	173	9,147	5,461

(1)

We own properties in 27 states that are leased to 30 different operators.

(2)

Represents six development projects consisting of four MC properties with a total of 254 units, a 108-unit independent living property and an 89-unit combination ALF and MC property.

(3)

Represents one school property and three 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.

Acquisitions and Development. During the three months ended September 30, 2015, we completed the acquisition of a portfolio of 10 independent, assisted living and memory care properties totaling 891 units. Nine of the properties are located in Wisconsin and one is located in Illinois. The aggregate purchase price paid at closing was $142,000,000. Simultaneously upon closing, we entered into a 15-year triple‐net master lease agreement with an existing operator at an initial cash yield of 6.5% escalating by 25 basis points upon each of the first and second anniversaries and annually thereafter by 2.75%. The master lease agreement includes a commitment up to $10,000,000 to the lessee, upon the portfolio achieving a sustainable stipulated rent coverage ratio, and when funded, cash rent will increase by the amount funded multiplied by the lease rate in effect at the time.

Additionally, during the three months ended September 30, 2015, we acquired a newly constructed 60-unit memory care property located in Florida for $14,250,000 including a $2,000,000 working capital reserve which is recorded similarly to an earn‐out and valued using a discounted cash flow analysis. The estimated fair value of the working capital reserve was $1,847,000 which will be accreted up to the settlement amount as of the estimated payment date. Concurrently with the purchase, we entered into a lease agreement at an initial cash yield of 8.0% escalating annually by 2.5%. The lease agreement includes a commitment to the lessee that we will fund a contingent earn-out payment up to $300,000, upon the property achieving a sustainable stipulated rent coverage ratio. When the working capital reserve and earn-out payments are funded, cash rent will increase by the amounts funded multiplied by the lease rate in effect at the time.

During the third quarter of 2015, we purchased a parcel of land in California for $2,022,000 and entered into a development commitment to construct and equip a 66-unit memory care property. Our total commitment for the project is $12,606,000 including the land purchase. Simultaneously with the acquisition, we added this property to a master lease agreement with an existing operator at an initial cash yield of 9.0%. Also, we acquired a parcel of land in Oregon, which we previously leased pursuant to a ground lease. The purchase price was $500,000 and the ground lease was terminated as of the closing.

During the nine months ended September 30, 2015, we purchased and equipped a 106-bed skilled nursing property for a total of $13,946,000 by exercising our purchase option under a $10,600,000 mortgage and construction loan. Additionally, we purchased five parcels of land (including the acquired parcel of land in California and excluding the purchase of parcel of land in Oregon discussed above) to build and equip assisted living facilities totaling 385 units.

The following table summarizes our investments for the nine months ended September 30, 2015 (dollar amounts in thousands):


					Total		Number	Number
	Purchase		Transaction		Acquisition		of	of
Type of Property	Price(1)		Costs(2)		Costs		Properties	Beds/Units
Skilled Nursing(3)	$	13,946	$	—	$	13,946	1	106
Assisted Living(4)		156,097		325		156,422	11	951
Land(5)		13,533		97		13,630	—	—
Totals	$	183,576	$	422	$	183,998	12	1,057

(1)

Represents cost associated with our acquisitions; however, depending on the accounting treatment of our acquisitions, transaction costs may be capitalized to the properties’ basis and, for our land purchases with forward development commitments, transaction costs are capitalized as part of construction in progress. Additionally, transaction costs in the table above may differ from the acquisition costs line item in our consolidated statement of income as a result of transaction costs from prior year’s acquisitions.

(2)

We purchased the property by exercising our purchase option under a $10,600 mortgage and construction loan and equipped the property for $3,346. 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 lease inducement and will amortize as a yield adjustment over the life of the lease term. See Mortgage Loans below for further discussion of the loan agreement.

(3)

We acquired a newly constructed 60-unit MC property for $14,250 including a $2,000 working capital reserve which is recorded similarly to an earn-out and valued at $1,847 using a discounted cash flow analysis. As a result, our basis in the property was recorded at $14,132 which includes capitalized transaction costs. Additionally, we agreed to provide the lessee an earn-out up to $300 upon the property achieving a sustainable stipulated rent coverage ratio. When the working capital reserve and earn-out payments are funded, cash rent will increase by the amounts funded multiplied by the lease rate in effect at the time. We also acquired a portfolio comprised of 10 independent, assisted living and memory care properties for $142,000 and agreed to provide the lessee an earn-out up to $10,000, upon the portfolio achieving a sustainable stipulated rent coverage ratio, which will increase cash rent by the amount funded multiplied by the lease rate in effect at the time.

(4)

We acquired parcels of land and entered into four development commitments up to a total of $55,529, including the land purchases, for the development of two MC properties totaling 132 units, a 108-unit IL property and an 89-unit combination AL and MC property. Additionally, we acquired land and existing improvements on a 56-unit MC property and entered a development commitment up to a total of $12,182, including the land purchase, to complete the development of the MC property. Also, we purchased a parcel of land we previously leased pursuant to a ground lease.

Subsequent to September 30, 2015, we purchased a parcel of land in Illinois for $2,800,000 and entered into a development commitment up to $14,769,000 (including the land purchase) to construct a 66-unit memory care facility. Also, subsequent to September 30, 2015, we purchased a behavioral health care hospital in Nevada for $9,250,000.

During the nine months ended September 30, 2015, we funded $20,652,000 on our completed and on-going development and improvement projects, including the final funding on a 60-unit memory care property in Colorado for an aggregate cost of $10,703,000, including the land purchase. The following table summarizes our on-going investment commitments as of September 30, 2015, and amounts funded exclusively under these projects (excludes capitalized interest, dollar amounts in thousands):


				Total			Number	Number
	Investment		Commitment		Remaining		of	of
Type of Property	Commitment		Funded		Commitment		Properties	Beds/Units
Skilled Nursing(1)	$	6,000	$	17	$	5,983	2	314
Assisted Living(2)		84,758		26,465		58,293	36	2,097
Totals	$	90,758	$	26,482	$	64,276	38	2,411

(1)

Includes two commitments for renovation and expansion projects.

(2)

Includes the development of an IL property for $14,500, four MC properties for a total of $48,923 and one ALF/MC property for $16,535. Also, includes three commitments for renovation projects on 30 ALFs totaling $4,800.

Our construction in progress (or CIP) activity during the nine months ended September 30, 2015 for our development, redevelopment, renovation, and expansion projects is as follows (dollar amounts in thousands):


	CIP								CIP
	Balance at				Capitalized		Conversions		Balance at
Type of Property	12/31/2014		Funded(1)		Interest		out of CIP		9/30/2015
Skilled nursing	$	—	$	414	$	—	$	(397)	$	17
Assisted living		8,671		19,297		481		(9,871)		18,578
Total	$	8,671	$	19,711	$	481	$	(10,268)	$	18,595

(1)

Excludes $7,972 of funding directly capitalized into building and includes the previously discussed acquisition of the existing improvements of a 56-unit MC property for $6,315 and pre-development loan reclass totaling $716.

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.

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at September 30, 2015 (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	$	192,810	93.4	%	14	28	3,621	—	$	53.25
Assisted Living		13,731	6.6	%	3	8	—	270	$	50.86
Totals	$	206,541	100.0	%	17	36	3,621	270

(1)

We have investments in properties located in 7 states that include mortgages to 10 different operators.

At September 30, 2015, the mortgage loans had interest rates ranging from 7.3% to 13.8% and maturities ranging from 2016 to 2045. 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, 2015, we received $2,487,000 plus accrued interest related to the payoff of two mortgage loans secured by a range of care property located in California and a skilled nursing property located in Texas. During the nine months ended September 30, 2015 and 2014, we received $1,794,000 and $1,609,000, respectively, in regularly scheduled principal payments.

During the nine months ended September 30, 2015, we amended an existing mortgage loan secured by a 100-unit independent living property in Arizona to provide up to $490,000 of additional proceeds for capital improvements. Also, during the nine months ended September 30, 2015, we funded $230,000 under this amended mortgage loan and have a remaining commitment of $260,000.

During 2013, we funded the initial amount of $124,387,000 under a mortgage loan with a third‑party borrower secured by 15 skilled nursing properties with a total of 2,058 beds in Michigan. The loan agreement provided for additional commitments of $12,000,000 for capital improvements and up to $40,000,000 of additional proceeds, for a total loan commitment of up to $176,387,000. During the nine months ended September 30, 2015, we funded the $40,000,000 of additional proceeds. During the nine months ended September 30, 2015 and 2014, we funded $3,697,000 and $1,512,000, respectively, under the $12,000,000 capital improvement commitment with $4,965,000 remaining as of September 30, 2015.

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. During the nine months ended September 30, 2015, we amended this mortgage loan to provide up to an additional $20,000,000 in loan proceeds for the expansion 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). As a result, our remaining commitment under the aggregate $32,000,000 capital improvement commitment was $24,965,000 at September 30, 2015. Also, we conveyed, to the borrower, two parcels of land held-for-use adjacent to these properties to facilitate the projects. The estimated fair value of these parcels of $670,000, based upon third-party appraisals, was added to the outstanding mortgage loan receivable. As partial consideration for the increased commitment and associated conveyance, the borrower forfeited their prepayment option.

Additionally, during the nine months ended September 30, 2015, we originated an $11,000,000 mortgage loan with the same borrower, 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 for the initial three years. Additionally, we have the option to purchase the property under certain circumstances, including a change in regulatory provisions.

Subsequent to September 30, 2015, we originated a $20,000,000, 30-year term mortgage loan, funding $9,500,000 at closing, with a commitment to fund $10,500,000.

The following table summarizes our additional loan commitments as of September 30, 2015, and amounts funded under these mortgage loans (dollar amounts in thousands):


	Additional								Number	Number
	Loan		2015		Commitment		Remaining		of	of
Type of Property	Commitment		Funding		Funded		Commitment		Properties	Beds/Units
Skilled Nursing	$	33,500	$	3,697	$	7,035	$	26,465	16	2,215
Assisted Living		490		230		230		260	1	100
Totals	$	33,990	$	3,927	$	7,265	$	26,725	17	2,315

During the nine months ended September 30, 2014, we funded the remaining $3,010,000 balance on a $10,600,000 mortgage and construction loan to develop a new 106-bed skilled nursing property in Wisconsin to replace an old existing skilled nursing property. Upon completion of construction and relocation of the residents from the old property to the replacement property in 2014, the old property was sold and released as collateral. During the nine months ended September 30, 2015, we purchased and equipped the replacement property for a total of $13,946,000 by exercising our right under the agreement including applying amounts otherwise due to us under the underlying loan as a closing adjustment. See Owned Properties above for further discussion of the property purchase.