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 September 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	$	743,015	54.6	%	103	—	5,772	$	128.73
Skilled Nursing(2)		579,758	42.6	%	76	9,276	274	$	60.71
Under Development(3)		26,597	2.0	%	—	—	—		—
Other(4)		10,216	0.8	%	1	118	—		—
Totals	$	1,359,586	100.0	%	180	9,394	6,046

⁽¹⁾

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

⁽²⁾

Includes seven communities previously classified as ROC 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.

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 nine months ended September 30, 2017, we purchased a newly constructed 60-unit memory care community in Ohio for $15,650,000, as discussed below, and transitioned two memory care communities in our portfolio to a different operator. These three communities were added to a master lease with the same operator who took over the management of the two memory care communities previously mentioned. Annual rental income under the amended and restated master lease is approximately $6,400,000.

During the nine months ended September 30, 2017, we issued a notice of default on the master lease covering two properties under development and nine additional operational memory care communities resulting from lessee’s partial payment of minimum rent. We are currently negotiating the transition of two of the operational properties to another operator in our portfolio. Additionally, we wrote off $1,880,000 of straight-line rent and other receivables related to these two properties. Subsequent to September 30, 2017, we entered into a forbearance agreement with our lessee whereby we have agreed not to pursue enforcement of our rights and remedies pertaining to known events of default under the master lease and our guarantees through December 31, 2017, with the stipulation that the lessee pay $400,000 per month toward their obligations of the master lease through December 31, 2017.

Acquisitions and Developments: The following table summarizes our acquisitions for the nine months ended September 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

341

54,804

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, we expense transaction 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.

Subsequent to September 30, 2017, we acquired a newly constructed 73-unit assisted living and memory care community in Missouri for $16,555,000. The property was added to an existing master lease agreement at an initial cash yield of 7%.

The following table summarizes our acquisitions for the nine months ended September 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		411		53,961	4	250
Land(4)		5,425		63		5,488	—	—
Totals	$	74,975	$	519	$	75,494	5	376

⁽¹⁾

⁽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.

⁽⁴⁾

We acquired a parcel of land and improvements and entered into a development commitment of up to $24,325, including the land and bed rights purchase, for the development of a 143-bed skilled nursing center in Kentucky.

During the nine months ended September 30, 2017 and 2016, we invested the following in development and improvement projects (in thousands):


	Nine months ended September 30, 2017				Nine months ended September 30, 2016
	Development		Improvements		Development		Improvements
Assisted Living Communities	$	10,366	$	951	$	35,623	$	2,134
Skilled Nursing Centers		3,573		1,357		-		3,432
	$	13,939	$	2,308	$	35,623	$	5,566

During the nine months ended September 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 nine months ended September 30, 2016, we sold two assisted living communities located in Florida and two skilled nursing centers in Texas with an aggregate carrying value of $9,791,000 for an aggregate price of $13,600,000. As a result of these sales, we recognized a net gain on sale of $3,775,000. Also, we sold a school in New Jersey for $3,850,000 with a carrying value of $3,997,000 and recorded a loss on sale of $193,000.

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

Number of

Investment

Gross

SNF

per

Type of Property

Investments

Loans

Properties(1)

Beds

Bed/Unit

Skilled Nursing

224,095

2,764

81.08

⁽¹⁾

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

At September 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 nine months ended September 30, 2017 and 2016 (in thousands):


	Nine months ended September 30,
	2017		2016
	Origination/Funding		Origination/Funding
Originations and fundings under mortgage loans receivable	$	9,333	$	19,113
Pay-offs received		(16,665)		(746)
Scheduled principal payments received		(686)		(1,371)
Net (decrease) increase in mortgage loans receivable	$	(8,018)	$	16,996