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).

Any reference to the number of properties or facilities, number of units, number of beds, number of operators 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, 2019 (dollar amounts in thousands):


								Average
			Percentage		Number	Number of		Investment
	Gross		of		of	SNF	ALF	per
Type of Property	Investment		Investment		Properties (1)	Beds	Units	Bed/Unit
Assisted Living	$	821,167	56.8	%	104	—	5,959	$	137.80
Skilled Nursing		587,410	40.6	%	72	8,893	261	$	64.17
Under Development (2)		25,952	1.8	%	—	—	—		—
Other (3)		11,067	0.8	%	1	118	—		—
Total	$	1,445,596	100.0	%	177	9,011	6,220

(1)

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

(2)

Represents two development projects, consisting of a 78-unit ALF/MC located in Oregon and a 110-unit ILF/ALF/MC in Wisconsin.

(3)

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 three months ended March 31, 2019, we terminated a lease agreement and transitioned two operating senior housing communities under the lease agreement to a new operator. As a result of the lease termination, we wrote-off $1,926,000 straight-line rent receivable to contra-revenue in accordance with the newly adopted ASC 842.

Future minimum base rents receivable under the remaining non-cancelable terms of operating leases excluding the effects of straight-line rent receivable, amortization of lease incentives and renewal options are as follows (in thousands):


	Annual Cash
	Rent (1)
2019	$	101,223
2020		140,189
2021		131,128
2022		121,228
2023		124,492
Thereafter		729,390

(1)

Represents contractual annual cash rent, except for four master leases which are based on agreed upon cash rents. See below for more information.

During 2017, we issued a notice of default to Anthem Memory Care (“Anthem”) resulting from Anthem’s partial payment of minimum rent. Anthem operates 11 memory care communities under a master lease. We currently estimate that Anthem will pay $7,500,000 of annual cash rent during 2019. This amount represents approximately 50% of the contractual amount due under the lease in 2019. In accordance with the newly adopted ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Anthem and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as required by the ASC 842 transition guidance.

During 2017, Preferred Care, Inc. (“Preferred Care”) and affiliated entities filed for Chapter 11 bankruptcy as a result of a multi-million-dollar judgment in a lawsuit in Kentucky against Preferred Care and certain affiliated entities. The affiliated entities named in the lawsuit operate properties in Kentucky and New Mexico. Preferred Care leases 24 properties under two master leases from us and none of the 24 properties are located in Kentucky or New Mexico. Those 24 properties are in Arizona, Colorado, Iowa, Kansas and Texas. The Preferred Care operating entities that sublease those properties did not file for bankruptcy. The court ordered deadline for affirmation or rejection of the lease has passed without action by Preferred Care, but they continue to pay rent to us in a timely manner. In accordance with the newly adopted ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Preferred Care and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as required by the ASC 842 transition guidance. We are working with Preferred Care on options for the portfolio which may include re-leasing or selling some of the properties.

On December 4, 2018, Senior Care Centers, LLC. and affiliates and subsidiaries (“Senior Care”) filed for Chapter 11 bankruptcy as a result of lease terminations from certain landlords and on-going operational challenges. Pursuant to the U.S. Bankruptcy Code, Senior Care has an initial period of 120 days from the petition date to assume or reject the lease. However, the Bankruptcy Code also provides that the court may extend this initial 120-day period for an additional 90 days. Accordingly, Senior Care has requested, and the court has approved an additional 90 days, which ends on July 2, 2019, to assume or reject the lease. As security under the lease, we hold a letter of credit in the amount of approximately $2,000,000, maintenance and repair escrows of approximately $2,200,000 and property tax escrows of approximately $1,800,000. Senior Care did not pay us December 2018 rent, but has paid us January to April 2019 rent, real estate property tax and maintenance deposits. We have previously requested a consensual termination of the lease and have requested Senior Care to reject our lease in bankruptcy. In accordance with the newly adopted ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Senior Care and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as required by the ASC 842 transition guidance. We are evaluating our options to transition or sell the properties under the lease with Senior Care.

During the three months ended March 31, 2019, we placed Thrive Senior Living, LLC. (“Thrive”) on a cash basis due to short-payment of contractual rent in November 2018 and non-payment of rent in December 2018 totaling $700,000. This rent was subsequently received in 2019. Thrive has not paid January to April 2019 rent. Subsequent to March 31, 2019, we issued a notice of default to Thrive. In accordance with the newly adopted ASC 842 lease accounting guidance, at January 1, 2019, we evaluated the collectibility of straight-line rent receivable and lease incentive balances related to Thrive and determined that it was not probable that we would collect substantially all of the contractual lease obligations through maturity. Accordingly, we wrote-off the balances to equity as required by the ASC 842 transition guidance. We are working with Thrive and exploring our options to maximize the value of these real estate assets.

Our lease structure contains fixed annual rental escalations, which are generally recognized on a straight-line basis over the minimum lease period. Certain leases have annual rental escalations that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the property.

The following table summarizes components of our rental income for the three months ended March 31, 2019 and 2018 (in thousands):


Rental Income		2019			2018
Base cash rental income	$	24,314	(1)	$	31,455
Variable cash rental income		4,485	(2)		150	(2)
Straight-line rent receivable		1,238	(3)		3,440
Adjustment for collectibility		(1,926)	(4)		—
Amortization of lease incentives		(87)			(540)
Total	$	28,024		$	34,505

(1)

Decreased due to recognition of $9,600 of cash rent received from Anthem, Preferred Care, Senior Care and Thrive as contra-expense titled Recovery of written-off straight-line rent receivable on the consolidated statements of income and comprehensive income and decreased rent from properties sold in 2018, partially offset due to increased rent from acquisitions, developments and capital improvement projects. See Note 1. General for further discussion.

(2)

The 2019 variable rental income includes $150 related to contingent rental income and $4,335 related to our real estate taxes which were reimbursed by our operators. Per the provisions of ASC 842, any lessor cost, paid by the lessor and reimbursed by the lessee, must be included as a lease payment. As discussed above, we adopted ASC 842 using a modified retrospective approach as of the adoption date of January 1, 2019. Accordingly, we are not required to report this revenue stream for periods prior to January 1, 2019.

(3)

In accordance with the newly adopted ASC 842 lease accounting guidance, we evaluated the collectibility of lease payments through maturity and determined that it was not probable that we would collect substantially all of the contractual obligations from Anthem, Thrive, Preferred Care and Senior Care leases through maturity. Decreased due to these leases are placed on cash-basis.

(4)

Represents write-off of straight-line rent receivable related to a terminated lease discussed above.

Some of our lease agreements provide purchase options allowing the lessees to purchase the properties they currently lease from us. The following table summarizes information about purchase options included in our lease agreements (dollar amount in thousands):


	Type	Number
	of	of		Gross		Carrying	Option
State	Property	Properties		Investments		Value	Window
California	ALF/MC	2	$	38,895	$	37,248	2024-2029
Kansas	MC	2		25,692		23,727	2019-2021
Texas	MC	2		25,265		24,800	2025-2027
Virginia	ALF/MC	1		16,890		16,822	2026-2029
Total			$	106,742	$	102,597

Acquisitions and Developments: The following table summarizes our acquisition for the three months ended March 31, 2019 (dollar amounts in thousands):

Total

Number

Purchase

Transaction

Acquisition

Year

Type of Property

Price

Costs (1)

Costs

Properties

Beds/Units

2019

Assisted Living (2)

16,719

171

16,890

(1)

Represents cost associated with our acquisitions; however, upon adoption of ASU 2017-01, our acquisitions meet the definition of an asset acquisition resulting in capitalization of transaction costs to the properties’ basis. For our land purchases with forward development commitments, transaction costs are capitalized as part of construction in progress. Transaction costs per our consolidated statements of income and comprehensive income represents current and prior year transaction costs due to timing and terminated transactions.

(2)

We entered into a joint venture (“JV”) to purchase an existing operational 74-unit ALF/MC community. The non-controlling partner contributed $919 of equity and we contributed $15,971 in cash. Our economic interest in the real estate JV is approximately 95%.

During the three months ended March 31, 2019 and 2018, we invested the following in development and improvement projects (in thousands):


	Three Months Ended March 31,
	2019				2018
Type of Property	Developments		Improvements		Developments			Improvements
Assisted Living Communities	$	4,507	$	256	$	6,803	$	122
Skilled Nursing Centers		2,450		—		1,788		279
Other		—		3		—		133
Total	$	6,957	$	259	$	8,591	$	534

Completed Developments. The following table summarizes our completed development during the three months ended March 31, 2019 (dollar amounts in thousands):

Number

Type

Number

Total

Type of Project

Properties

Property

Beds/Units

State

Investment

Development

SNF

143

Kentucky

22,451

Properties held-for-sale. The following table summarizes our property held-for-sale as of March 31, 2019 (dollar amounts in thousands):

Type

Number

Gross

Accumulated

State

Property

Properties

Investment

Depreciation

Beds/units

Texas

ILF

5,746

1,916

140

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at March 31, 2019 (dollar amounts in thousands):


				Type	Percentage		Number of			Investment
		Gross		of	of				SNF	per
Interest Rate (1)	Maturity	Investment		Property	Investment		Loans (2)	Properties (3)	Beds	Bed/Unit
9.7%	2043	$	186,369	SNF	75.5	%	1	15	2,029	$	91.85
9.2%	2045		34,038	SNF	13.8	%	1	4	501	$	67.94
9.4%	2045		14,950	SNF	6.1	%	1	1	157	$	95.22
9.4%	2020		11,418	SNF	4.6	%	1	2	205	$	55.70
Total		$	246,775		100.0	%	4	22	2,892	$	85.33

(1)

The majority of the mortgage loans provide for annual increases in the interest rate after a certain time period based upon a specified increase of 2.25%.

(2)

Some loans contain certain guarantees, provide for certain facility fees and the majority of the mortgage loans have a 30-year term.

(3)

The properties securing these mortgage loans are located in one state and are operated by one operator.

The following table summarizes our mortgage loan activity for the three months ended March 31, 2019 and 2018 (in thousands):


	Three Months Ended March 31,
	2019		2018
Originations and funding under mortgage loans receivable	$	1,454	$	9,610	(1)
Scheduled principal payments received		(65)		(37)
Mortgage loan (premiums)		—		(1)
Provision for loan loss reserve		(14)		(96)
Net increase in mortgage loans receivable	$	1,375	$	9,476

(1)

During 2018, we funded an additional $7,400 under an existing mortgage loan for the purchase of a 112-bed skilled nursing center in Michigan. The incremental funding bears interest at 8.7%, fixed for five years, and escalating by 2.25% thereafter.