5. Real Estate Investments

Owned Properties. The following table summarizes our investment in owned properties at December 31, 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 (2)	Units (2)	Bed/Unit
Assisted Living	$	571,562	47.7	%	96	—	5,187	$	110.19
Skilled Nursing		522,123	43.6	%	70	8,655	—	$	60.33
Range of Care		43,907	3.7	%	7	634	274	$	48.36
Under Development(3)		41,608	3.5	%	—	—	—		—
Other(4)		19,486	1.5	%	2	118	—		—
Totals	$	1,198,686	100.0	%	175	9,407	5,461

⁽¹⁾

We have investments in 28 states leased to 29 different operators.

⁽²⁾

See Item 2. Properties for discussion of bed/unit count.

⁽³⁾

Includes seven development projects, consisting of five MC communities with a total of 320 units, one 108-unit ILF community and an 89-unit combination ALF and MC community.

⁽⁴⁾

Includes one school, three parcels of land held‑for‑use and one behavioral health care hospital. The behavioral health care hospital has 2 skilled nursing beds and 116 medical hospital beds which represents a $78.39 investment per bed.

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.

During the year ended December 31, 2015, we received $134,000 of contingent rental income. We received no contingent rental income for the years ended December 31, 2014 and 2013.

Acquisitions and Developments. The following table summarizes our investments for the twelve months ended December 31, 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)	$	36,946	$	87	$	37,033	3	360
Assisted Living(4)		156,097		590		156,687	11	951
Other(5)		9,250		42		9,292	1	118
Land(6)		16,333		352		16,685	—	—
Totals	$	218,626	$	1,071	$	219,697	15	1,429

⁽¹⁾

As part of our acquisitions, we may commit to provide contingent payments to our sellers or lessees, upon properties achieving certain rent coverage ratios. Typically, when the contingent payments are funded, cash rent will increase by the amount funded multiplied by a rate stipulated in the agreement. If it is deemed probable at acquisition, the contingent payment is recorded as a liability at estimated fair value calculated using a discounted cash flow analysis and is accreted to the settlement amount at the estimated payment date. If the contingent payment is an earn-out provided to the seller, the estimated fair value is capitalized to the property’s basis. If the contingent payment is provided to the lessee, the estimated fair value is recorded as a lease incentive included in the prepaid and other assets line item in our consolidated balance sheet and is amortized as a yield adjustment over the life of the lease.

⁽²⁾

Represents cost associated with our acquisitions; however, depending on the accounting treatment of our acquisitions, transaction costs may be capitalized to the properties’ basis ($161) and, for our land purchases with forward development commitments, transaction costs are capitalized as part of construction in progress ($331). Additionally, transaction costs in the table above may differ from the acquisition costs line item in our consolidated statement of income ($614) as a result of transaction costs from prior year’s acquisitions ($35).

⁽³⁾

We purchased a property in Wisconsin 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 incentive that will amortize as a yield adjustment over the life of the lease term. Also, we acquired two skilled nursing centers in Texas totaling 254 beds for an aggregate purchase price of $23,000.

⁽⁴⁾

Includes acquisition of a newly constructed 60-unit MC community for $14,250 including a $2,000 working capital reserve which was 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. Also includes acquisition of a portfolio comprised of 10 independent, assisted living and memory care communities for $142,000 and we agreed to provide the lessee an incentive 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.

⁽⁵⁾

We purchased a behavioral health care hospital in Nevada comprised of 116 medical hospital beds and 2 skilled nursing beds for $9,300. Also, as part of the agreement, we agreed to provide up to $3,000 for approved capital improvements.

⁽⁶⁾

We acquired five parcels of land and entered into development commitments up to an aggregate total of $70,298, including the land purchases, for the development of three MC communities totaling 198 units, a 108-unit IL community and an 89-unit combination AL and MC community. We also purchased a parcel of land we previously leased pursuant to a ground lease. Additionally, we acquired land and existing improvements on a 56-unit MC community and entered a development commitment up to a total of $13,524, including the land purchase, to complete the development of the MC community.

As discussed above, during the twelve months ended December 31, 2015, we acquired a portfolio of 10 independent, assisted living and memory care communities totaling 891 units for $142,000,000 in a business combination. The unaudited pro forma revenue and net income of the combined entity is provided below as if the acquisition date had been January 1, 2014 (in thousands except per share amounts):


	2015		2014
Revenue	$	143,414	$	130,488
Net income	$	74,567	$	76,060
Basic earnings per common share:	$	2.01	$	2.09
Diluted earnings per common share:	$	1.98	$	2.06

Subsequent to December 31, 2015, we purchased a newly constructed 126-bed skilled nursing center in Texas for $16,000,000.

During the twelve months ended December 31, 2015, we sold a 112-bed skilled nursing center located in Texas for $1,600,000, resulting in net sales proceed of $1,537,000 and a net gain on sale of $586,000. Subsequent to December 31, 2015, we entered into a contingent purchase and sale agreement to sell a 36-unit closed assisted living community in Oregon for $1,500,000. Simultaneously with the sale, we will enter into a mortgage loan agreement to provide up to $1,000,000 to the buyer. Accordingly, we expect to record a deferred gain on sale in the amount of approximately $120,000.

Subsequent to December 31, 2015, we entered into a contingent purchase and sale agreement to sell a 48-unit assisted living community in Florida for $1,750,000. We performed a recoverability analysis on the property as of December 31, 2015 using probability-weighted cash flows giving consideration to are-leasing scenario (in which the property would continue to be held-and-used) and a sale scenario (in which the property is sold pursuant to the contingent purchase and sale agreement) and determined that a portion of carrying value of the property was not recoverable. Accordingly, we recorded an impairment charge of $2,250,000 to write the property down to its estimated sale price at December 31, 2015.

During the twelve months ended December 31, 2015, we completed the following development, expansion and improvement projects (dollar amounts in thousands):


	Number		Number
	of	Type of	of
Type of Project	Properties	Property	Beds/Units	State	2015 Funding		Total Funding
Development	1	ALF	60	Colorado	$	1,522	$	10,703	(1)
Improvements	1	SNF	121	California		1,481		1,481
Improvements	1	SNF	196	Texas		522		522
Improvements	2	SNF	141	Tennessee		39		2,200
	5		518		$	3,564	$	14,906

⁽¹⁾

The total funded amount includes acquired land of $1,425.

The following table summarizes our investment commitments as of December 31, 2015 and amounts funded on our open development and improvement 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)	$	6,500	$	1,253	$	5,247	4	568
Assisted Living(2)		101,150		41,138		60,012	37	2,163
Other (3)		3,000		—		3,000	1	118
Totals	$	110,650	$	42,391	$	68,259	42	2,849

⁽¹⁾

Includes three commitments for renovation and expansion projects.

⁽²⁾

Includes the development of an IL community for $14,500, five MC communities for a total of $65,034 and one ALF/MC community for $16,535. Also, includes three commitments for renovation projects on 30 ALFs totaling $5,080.

⁽³⁾

Includes a commitment for renovation of a behavioral health care hospital.

Our construction in progress (or CIP) activity during the year ended December 31, 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		12/31/2015
Skilled nursing	$	—	$	1,649	$	—	$	(397)	$	1,252
Assisted living		8,671		31,116		827		(9,901)		30,713
Total	$	8,671	$	32,765	$	827	$	(10,298)	$	31,965

⁽¹⁾

Excludes $8,048 of funding which was capitalized directly into building and includes the acquisition of the existing improvements of a 56-unit MC community for $6,315 and the reclass of three pre‑development loans with a total balance of $1,035 See Note 7. Notes Receivable for further discussion of pre‑development loans.

The following table summarizes our acquisitions during 2014 (dollar amounts in thousands):


					Total		Number	Number
	Purchase		Transaction		Acquisition		of	of
Type of Property	Price		Costs		Costs		Properties	Beds/Units
Assisted Living(1)	$	9,800	$	21	$	9,821	1	48
Land(2)		1,850		—		1,850	—	—
Totals	$	11,650	$	21	$	11,671	1	48

⁽¹⁾

An assisted living community located in Colorado which was added to a master lease at an incremental initial cash yield of 6.5%.

⁽²⁾

We purchased a vacant parcel of land held-for-use in Michigan. Additionally, we purchased a vacant parcel of land in Illinois for $1,400 under a pipeline agreement whereby we have the opportunity to finance any senior housing development project or acquisition originated by an operator. The land was added to an existing master lease and we entered into development commitments in an amount up to $12,248 to fund the construction of a 66-unit memory care community.

During the twelve months ended December 31, 2014, we sold 16 assisted living communities with a total of 615 units. 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. During 2014, we also sold two assisted living communities located in Florida and Georgia with a total of 133 units, a school located in Minnesota, and a closed skilled nursing center 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	(1)
Development	1	SNF	143	Kentucky		10,579		20,904	(1)
Development	1	ALF	48	Colorado		7,257		8,744	(1)
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	$	58,745

⁽¹⁾

The total funded amount includes acquired land.

The following table summarizes our acquisitions for the twelve months ended December 31, 2013 (dollar amounts in thousands):


					Total		Number	Number
	Purchase		Transaction		Acquisition		of	of
Type of Property	Price		Costs		Costs		Properties	Beds/Units
Skilled Nursing(1)	$	14,402	$	58	$	14,460	1	130
Land(2)		4,638		—		4,638	—	—
Totals	$	19,040	$	58	$	19,098	1	130

⁽¹⁾

A skilled nursing center located in Florida which was added to a master lease at an incremental initial cash yield of 8.75%.

⁽²⁾

We purchased three vacant parcels of land in Colorado for a total of $3,475 under a pipeline agreement whereby we have the opportunity to finance any senior housing development project or acquisition originated by an operator through May 2018 (unless earlier terminated as provided for therein). The land was added to an existing master lease and we entered into development commitments in an amount not to exceed $30,256 to fund the construction of three memory care communities, two with 60 units and the other with 48 units. We also purchased four parcels of land held-for-use in Michigan for $1,163.

During the year ended December 31, 2013, one of our lessees exercised its option to purchase six skilled nursing centers 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 center 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		Number
	of	Type of	of
Type of Project	Properties	Property	Beds/Units	State	2013 Funding			Total Funding
Development	1	ALF(1)	60	Colorado	$	4,316		$	9,850
Development	1	SNF(2)	120	Texas		5,065			8,635
Development	1	ALF	77	Kansas		8,081			9,675	(3)
	3		257		$	17,462	(2)	$	28,160

⁽¹⁾

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

⁽²⁾

This new property replaces a skilled nursing center in our existing portfolio.

⁽³⁾

The funded amount includes acquired land of $730.

Depreciation expense on buildings and improvements, including properties classified as held‑for‑sale, was $29,329,000, $25,424,000, and $24,568,000 for the years ended December 31, 2015, 2014 and 2013, respectively.

Future minimum base rents receivable under the remaining non‑cancelable terms of operating leases including the skilled nursing center acquired subsequent to December 31, 2015, and excluding the effects of straight‑line rent, amortization of lease inducement and renewal options are as follows (in thousands):


	Annual Cash
	Rent
2016	$	118,326
2017		121,084
2018		121,191
2019		115,333
2020		116,981
Thereafter		642,408

Set forth in the table below are the components of the income from discontinued operations for the year ended December 31, 2013 (in thousands):


	2013
Rental income	$	1,123
Total revenues		1,123
Depreciation and amortization		(317)
General and administrative expenses		(1)
Total expenses		(318)
Income from discontinued operations	$	805

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at December 31, 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(2)	Units(2)	Bed/Unit
Skilled Nursing	$	204,742	93.2	%	15	30	3,894	—	$	52.58
Assisted Living		13,768	6.3	%	3	8	—	270	$	50.99
Other(3)		1,209	0.5	%	1	—	—	—		n.a
Totals	$	219,719	100.0	%	19	38	3,894	270

⁽¹⁾

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

⁽²⁾

See Item 2. Properties for discussion of bed/unit count.

⁽³⁾

Includes a parcel of land secured under a short-term mortgage loan.

At December 31, 2015, the mortgage loans had interest rates ranging from 7.3% to 13.9% 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 2013, we funded the initial amount of $124,387,000 under a mortgage loan with a third‑party borrower, secured by 15 skilled nursing centers 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 the year ended December 31, 2015, we funded the $40,000,000 of additional proceeds. During the years ending December 31, 2015 and 2014 we funded $6,259,000 and $3,337,000, respectively, under the $12,000,000 capital improvement commitment with $2,403,000 remaining as of December 31, 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. 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). As a result, our remaining commitment under the aggregate $32,000,000 capital improvement commitment was $22,403,000 at December 31, 2015. Also, we conveyed, to 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 recorded as a mortgage loan premium and will be amortized as a yield adjustment over the life of the lease. As partial consideration for the increased commitment and associated conveyance, the borrower forfeited their prepayment option.

During the year ended December 31, 2015, we originated an $11,000,000 mortgage loan with the same borrower, initially 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 center in Michigan. Also, we originated another $20,000,000 mortgage loan with the same operator, initially funding $9,500,000 with a commitment to fund an additional $10,500,000, of which, we funded $5,500,000 subsequent to December 31, 2015. This loan is secured by a first lien mortgage encumbering two skilled nursing centers in Michigan totaling 273 beds. These mortgage loans bear interest at 9.41% for five years, escalating annually thereafter by 2.25% and have a 30-year term with interest-only payments for the initial three years. We have the option to purchase these properties under certain circumstances, including a change in regulatory environment.

Furthermore, during the three months ended December 31, 2015, we originated a short-term loan in the amount of $1,208,000 to an existing operator. The loan is secured by a first lien mortgage encumbering a vacant parcel of land in Virginia and bears interest at 9%. Interest at the rate of 3% is payable at the beginning of each month commencing January 1, 2016, and interest at the rate of 6% shall accrue and is payable at the maturity date, February 28, 2016.

The following table summarizes our additional loan commitments as of December 31, 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	$	52,000	$	6,565	$	9,903	$	42,097	18	2,488
Assisted Living		490		360		360		130	1	100
Totals	$	52,490	$	6,925	$	10,263	$	42,227	19	2,588

During the twelve months ended December 30, 2015, we amended an existing mortgage loan secured by a 100-unit independent living community in Arizona to provide up to $490,000 of additional proceeds for capital improvements. Also, during the twelve months ended December 31, 2015, we funded $360,000 under this amended mortgage loan and have a remaining commitment of $130,000.

At December 31, 2015 and 2014 the carrying values of the mortgage loans were $217,529,000 and $165,656,000, respectively. Scheduled principal payments on mortgage loan receivables are as follows (in thousands):


	Scheduled
	Principal
2016	$	8,653
2017		7,214
2018		8,383
2019		5,092
2020		1,065
Thereafter		189,312
Total	$	219,719

During the twelve months ended December 31, 2015, 2014 and 2013, we received $2,321,000, $2,159,000, and $1,933,000, respectively in regularly scheduled principal payments. During 2015, we received $2,487,000 plus accrued interest related to the early payoff of two mortgage loans secured by a range of care community located in California and a skilled nursing center in Texas.