2.Real Estate Investments

Assisted living communities, independent living communities, memory care communities and combinations thereof are included in the assisted living property classification (or collectively ALF). Range of care communities (or ROC) property classification 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 March 31, 2016 (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	$	582,362	47.4	%	96	—	5,205	$	111.89
Skilled Nursing		540,240	43.9	%	71	8,781	—	$	61.52
Range of Care		43,907	3.6	%	7	634	274	$	48.36
Under Development(2)		43,761	3.6	%	—	—	—		—
Other(3)		19,486	1.5	%	2	118	—		—
Totals	$	1,229,756	100.0	%	176	9,533	5,479

⁽¹⁾

We own properties in 28 states that are leased to 29 different operators.

⁽²⁾

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

⁽³⁾

Includes one school, three parcels of land held-for-use, and one behavioral health care hospital. The behavioral health care hospital has two 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 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: The following table summarizes our investment for the three months ended March 31, 2016 (dollar amounts in thousands):

Total

Number

Purchase

Transaction

Acquisition

Type of Property

Price

Costs(1)

Costs

Properties

Beds/Units

Skilled Nursing(2)

16,000

16,040

126

⁽¹⁾

Represents cost associated with our acquisition; 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 included in the general and administrative expenses line item in our consolidated statements of income ($90) due to the timing and recognition of costs associated with pending, completed and terminated transactions.

⁽²⁾

We acquired a newly constructed 126-bed skilled nursing center in Texas. The property was added to an existing master lease agreement at an incremental rate of 8.5%.

Subsequent to March 31, 2016, we purchased two memory care communities in Kansas totaling 120 units for an aggregate purchase price of $25,000,000. Simultaneously with the acquisition, the properties were added to an existing master lease agreement at an initial cash yield of 8.0%. Also, we agreed to pay up to $550,000 and $750,000 for lease inducement and capital improvements, respectively.

Additionally, we acquired a 60-unit memory care community in Kentucky for $14,250,000 and agreed to provide a contingent lease incentive of up to $300,000 upon satisfaction of certain coverage thresholds. The property was added to an existing master lease agreement at an initial incremental yield of 8.0%.

A summary of our funding for development and improvement projects for the three months ended March 31, 2016 and 2015 is as follows (in thousands):


	Three months ended March 31, 2016				Three months ended March 31, 2015
			Expansion,				Expansion,
			Renovation and				Renovation and
	Development		Improvements		Development		Improvements
Assisted Living Communities	$	13,439	$	1,135	$	3,278	$	3,093
Skilled Nursing Centers		—		2,118		1,763		1,835
	$	13,439	$	3,253	$	5,041	$	4,928

The following table summarizes the development project completed during the three months ended March 31, 2016 and total amounts funded under the development project (dollar amounts in thousands):

Number

Type of

Type of Project

Properties

Property

Beds/Units

State

Total Funding

Development

ALF

Illinois

11,808

Our construction in progress (or CIP) activity during the three months ended March 31, 2016 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	12/31/2015		Funded(1)		Interest		out of CIP		3/31/2016
Skilled nursing	$	1,252	$	2,117	$	—	$	(13)	$	3,356
Assisted living		30,713		13,409		686		(10,352)		34,456
Total	$	31,965	$	15,526	$	686	$	(10,365)	$	37,812

⁽¹⁾

Excludes $1,165 of funding directly capitalized into building.

During the three months ended March 31, 2016, we sold a 48-unit assisted living community located in Florida for $1,750,000 which was previously written down to its estimated sale price in the fourth quarter of 2015.

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at March 31, 2016 (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	$	210,423	93.4	%	13	28	3,676	—	$	57.24
Assisted Living		13,667	6.1	%	3	8	—	270	$	50.62
Other(3)		1,209	0.5	%	1	—	—	—		—
Totals	$	225,299	100.0	%	17	36	3,676	270

⁽¹⁾

We have investments in properties located in eight 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 March 31, 2016, 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 the three months ended March 31, 2016 and 2015, we received $513,000 and $2,285,000, respectively, plus accrued interest related to the payoff of three mortgage loans secured by two skilled nursing centers and a range of care community. During the three months ended March 31, 2016 and 2015, we received $502,000 and $501,000, respectively, in regularly scheduled principal payments.

A summary of our mortgage loan funding for the three months ended March 31, 2016 and 2015 is as follows (in thousands):


	Three months ended March 31,
	2016 Funding		2015 Funding
Skilled Nursing Centers	$	6,599	$	11,358

Subsequent to March 31, 2016, we originated a $12,250,000 mortgage loan secured by a first lien mortgage encumbering two skilled nursing centers in Michigan totaling 216 beds. We funded $7,750,000 at closing, with a commitment to fund $4,500,000 for approved capital improvement projects. The loan has an initial term of 4 years and bears interest at 9.41%.

During the quarter ended March 31, 2015, we purchased and equipped a 106-bed skilled nursing center in Wisconsin for a total of $13,946,000 by exercising our purchase option under a $10,600,000 mortgage and construction loan. 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.