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). Historically, we had a property classification identified as range of care communities (or ROC) which consisted of properties providing skilled nursing and any combination of assisted living, independent living and/or memory care services. Since we only have seven ROC remaining and given that these properties derive materially all of their revenue from skilled nursing services, we elected to reclassify them into the SNF property classification.

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 June 30, 2017 (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	$	742,518	54.8	%	103	—	5,772	$	128.64
Skilled Nursing(2)		579,757	42.8	%	76	9,276	274	$	60.71
Under Development(3)		21,878	1.6	%	—	—	—		—
Other(4)		10,216	0.8	%	1	118	—		—
Totals	$	1,354,369	100.0	%	180	9,394	6,046

⁽¹⁾

We own properties in 27 states that are leased to 28 different operators.

⁽²⁾

Includes seven SNFs with ALF units.

⁽³⁾

Represents three development projects consisting of two MC with a total of 132 units and a 143-bed SNF.

⁽⁴⁾

Includes three parcels of land held-for-use, and one behavioral health care hospital. The behavioral health care hospital has two licensed skilled nursing beds and 116 acute care licensed hospital beds which represents an investment of $78.39 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.

During the three months ended June 30, 2017, we entered into agreements to transition two assisted living communities to a different operator in our portfolio, contingent upon licensure by the new operator, which is anticipated to occur in the third quarter of 2017. Additionally, we purchased a newly constructed 60-unit memory care community in Ohio for $15,650,000, as discussed below, and added it to a master lease with the same operator who is taking over the management of the two assisted living communities already mentioned. Based on the timing of the transition and funds held in escrow, we estimate a potential write-off of straight-line rent receivable ranging from $0 to $383,000. Annual rental income under the lease being terminated related to the two communities being transitioned was $2,401,000 and annual rental income under the master lease prior to the addition of all three properties was approximately $3,829,000, which will increase to $6,272,000 after the additions.

Additionally, during the three months ended June 30, 2017, we issued a default notice on a master lease covering 11 memory care communities, two of which are under development. We are currently negotiating the transition of two of the operational properties to another operator in our portfolio. Accordingly, as of June 30, 2017, we wrote off $1,880,000 of straight-line rent and other receivables related to these two properties. Regarding the remaining properties, we are currently in negotiations with the operator and are exploring our options which may include transitioning some or all of the properties to another operator and/or a possible sale of some or all of the properties. Subsequent to June 30, 2017, the rents paid by this operator will be recorded on a cash basis. Annual rental income under the master lease is approximately $11,721,000 and at June 30, 2017, the net book value of the properties was $111,582,000. We had $8,608,000 in straight-line rent receivable and $6,577,000 in other assets on the balance sheet at June 30, 2017.

Acquisitions and Developments: The following table summarizes our acquisitions for the six months ended June 30, 2017 (dollar amounts in thousands):

Total

Number

Purchase

Transaction

Acquisition

Type of Property

Price

Costs(1)

Costs

Properties

Beds/Units

Assisted Living(2)

54,463

277

54,740

240

⁽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 may include costs related to the prior year due to timing and terminated transactions.

⁽²⁾

We acquired a 107-unit assisted living community and a 73-unit memory care community for an aggregate purchase price of $38,813. Additionally, we acquired a 60-unit memory care community for $15,650.

The following table summarizes our acquisitions for the six months ended June 30, 2016 (dollar amounts in thousands):


					Total		Number	Number
	Purchase		Transaction		Acquisition		of	of
Type of Property	Price		Costs(1)		Costs		Properties	Beds/Units
Skilled Nursing(2)	$	16,000	$	45	$	16,045	1	126
Assisted Living(3)		53,550		346		53,896	4	270
Totals	$	69,550	$	391	$	69,941	5	396

⁽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 related to the prior year due to timing and terminated transactions.

⁽²⁾

We acquired a newly constructed 126-bed skilled nursing center in Texas.

⁽³⁾

We acquired a newly constructed memory care community in Kentucky for $14,250 including a $2,000 holdback, a newly constructed assisted living and memory care community in Georgia for $14,300 and two memory care communities in Kansas for an aggregate purchase price of $25,000.

During the six months ended June 30, 2017 and 2016 the following in development and improvement projects (in thousands):


	Six months ended June 30, 2017				Six months ended June 30, 2016
	Development		Improvements		Development		Improvements
Assisted Living Communities	$	7,198	$	839	$	26,331	$	1,293
Skilled Nursing Centers		1,957		1,356		-		2,794
	$	9,155	$	2,195	$	26,331	$	4,087

During the six months ended June 30, 2017, we sold four assisted living communities with a carrying value of $8,726,000 for an aggregate price of $14,250,000. These properties are located in Indiana and Iowa with a total of 175 units. As a result of this sale, we recognized a net gain on sale of $5,054,000.

During the six months ended June 30, 2016, we sold a 48-unit assisted living community located in Florida with a carrying value of $1,750,000 for $1,750,000 and two skilled nursing centers in Texas with a carrying value of $4,923,000 for an aggregate price of $6,750,000. As a result of these sales, we recognized a net gain on sale of $1,802,000.

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at June 30, 2017 (dollar amounts in thousands):

Number of

Investment

Gross

SNF

per

Type of Property

Investments

Loans

Properties(1)

Beds

Bed/Unit

Skilled Nursing

222,604

2,796

79.62

⁽¹⁾

We have investments in properties located in two states that include mortgages to two operators.

At June 30, 2017, the mortgage loans had interest rates ranging from 9.4% to 11.2% and maturities ranging from 2019 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.

The following table summarizes our mortgage loan activity for the six months ended June 30, 2017 and 2016 (in thousands):


	2017		2016
Origination/Funding	$	7,829	$	17,128
Pay-offs		16,665		645
Scheduled principal payments received		674		953