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Real Estate Investments

6 Months Ended

Jun. 30, 2023

2.	Real Estate Investments

Assisted living communities, independent living communities, memory care communities and combinations thereof are included in the assisted living property classification (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. Our owned properties are leased pursuant to non-cancelable operating leases. 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 majority of our leases contain provisions for specified annual increases over the rents of the prior year.

The following table summarizes our investments in owned properties at June 30, 2023 (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	$	817,781	57.5	%	97	—	5,570	$	146.82
Skilled Nursing		591,474	41.6	%	50	6,113	236	$	93.16
Other ⁽²⁾		12,005	0.9	%	1	118	—		—
Total	$	1,421,260	100.0	%	148	6,231	5,806

(1)	We own properties in 26 states that are leased to 22 different operators.

(2)	Includes three parcels of land held-for-use, and one behavioral health care hospital.

Many of our existing leases contain renewal options that, if exercised, could result in the amount of rent payable upon renewal being greater or less than that currently being paid. During 2023, Brookdale Senior Living Communities, Inc. (“Brookdale”) elected not to exercise its renewal option. Accordingly, the master lease expires in December 2023. Additionally, during 2023, a master lease covering two skilled nursing centers that was scheduled to mature in 2023 was renewed at the contractual rate for another five years extending the maturity to November 2028. The centers have a total of 216 beds and are located in Florida. Also, during 2023, a master lease covering two skilled nursing centers that was scheduled to mature in 2023 was renewed for another two years extending the maturity to December 2025. The master lease was renewed at the contractual annual cash rent of $1,005,000 increasing 2.5% per year. As amended, this master lease provides the lessee with a purchase option available through December 31, 2024. The centers have a total of 141 beds and are located in Tennessee.

During the second quarter of 2023, we transitioned a portfolio of eight assisted living communities with 500 units in Illinois, Ohio and Michigan to Encore Senior Living (“Encore”). We agreed to provide assistance in the second quarter of 2023 to the former operator of this portfolio and as part of the transition, we received repayment of $1,250,000 of deferred rent which represents $934,000 of April and May 2023 deferred rent and $316,000 of unrecorded deferred rent provided in 2022. Cash rent under the new two-year lease with Encore is based on mutually agreed upon fair market rent beginning in September 2023.

We monitor the collectability of our receivable balances, including deferred rent receivable balances, on an ongoing basis. We write-off uncollectible operator receivable balances, including straight- line rent receivable and lease incentives balances, as a reduction to rental income in the period such balances are no longer probable of being collected. Therefore, recognition of rental income is limited to the lesser of the amount of cash collected or rental income reflected on a “straight-line” basis for those customer receivable balances deemed uncollectible. We wrote-off straight-line rent receivable and lease incentives balances of $26,000 and $173,000 for the six months ended June 30, 2023 and 2022, respectively, as a result of property sales and lease terminations.

We continue to take into account the current financial condition of our operators, including consideration of the impact of COVID-19, in our estimation of uncollectible accounts and deferred rents receivable at June 30, 2023. We are closely monitoring the collectability of such rents and will adjust future estimations as appropriate as further information becomes known.

The following table summarizes components of our rental income for the six months ended June 30, 2023 and 2022 (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
Rental Income		2023			2022			2023			2022
Contractual cash rental income	$	29,014	⁽¹⁾	$	28,108	⁽¹⁾	$	58,139	⁽¹⁾	$	55,023	⁽¹⁾
Variable cash rental income		3,176	⁽²⁾		4,019	⁽²⁾		6,460	⁽²⁾		8,058	⁽²⁾
Straight-line rent		(423)			(293)			(888)			(527)
Adjustment for collectability of lease incentives and rental income		(26)			—			(26)			(173)	⁽³⁾
Amortization of lease incentives		(204)			(206)			(413)			(429)
Total	$	31,537		$	31,628		$	63,272		$	61,952

(1)	Increased primarily due to rental income from acquisitions, transitioned portfolios, completed development projects and annual rent escalations, partially offset by sold properties.

(2)

The variable rental income for the three and six months ended June 30, 2023, includes reimbursement of real estate taxes by our lessees of $3,176 and $6,460, respectively. The variable rental income for the three and six months ended June 30, 2022, includes reimbursement of real estate taxes by our lessees of $4,019 and $8,001, respectively. The variable rental income for the six months ended June 30, 2022 also includes contingent rental income of $57. Decreased primarily due to property tax reassessment and sold properties partially offset by the acquisitions.

(3)	Represents a lease incentive balance write-off related to a closed property and subsequent lease termination.

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 amounts in thousands):


	Type	Number
	of	of		Gross		Carrying	Option
State	Property	Properties		Investments		Value	Window
California	ALF/MC	2	$	38,895	$	33,248	2023-2029
Florida	MC	1		7,680		4,750	2029	⁽¹⁾
Florida	SNF	3		76,734		76,734	2025-2027	⁽²⁾
Nebraska	ALF	3		7,633		2,834	TBD	⁽³⁾
North Carolina	ALF/MC	11		121,321		121,321	2025-2028	⁽⁴⁾
Ohio	MC	1		16,161		13,708	2024-2025
Ohio	ILF/ALF/MC	1		54,437		54,256	2025-2027
South Carolina	ALF/MC	1		11,680		8,764	2029
Tennessee	SNF	2		5,275		2,333	2023-2024
Texas	SNF	4		51,837		50,188	2027-2029	⁽⁵⁾
Total			$	391,653	$	368,136

(1)	During the second quarter of 2023, we recorded an impairment loss of $7,522 during the second quarter of 2023.. See Impairment Loss below for more information.

(2)	During 2022, we entered into a joint venture (“JV”) to purchase three skilled nursing centers with a total of 299 beds. The JV leased the properties under a 10-year master lease. For more information regarding this transaction see Financing Receivables below.

(3)	Subject to the properties achieving certain coverage ratios.

(4)

During 2023, we entered into a JV that purchased 11 ALFs and MCs with a total of 523 units and leased the communities under a 10-year master lease. The master lease provides the operator with the option to buy up to 50% of the properties at the beginning of the third lease year, and the remaining properties at the beginning of the fourth lease year through the end of the sixth lease year, with an exit IRR of 9.00% on any portion of the properties being purchased. For more information regarding this transaction see Financing Receivables below.

(5)

During 2022, we purchased four skilled nursing centers and leased these properties under a 10-year lease with an existing operator. The lease allows the operator to elect either an earn-out payment or purchase option. If neither option is elected within the timeframe defined in the lease, both elections are terminated. For more information regarding the earn-out see Note 8. Commitments and Contingencies.

Impairment Loss. In conjunction with the planned sale of a 70-unit assisted living community located in Florida, we recorded a $434,000 impairment loss during the three months ended March 31, 2023 and a $1,222,000 impairment loss during the fourth quarter of 2022. During the second quarter of 2023, the community was sold for $4,850,000. Additionally, during the second quarter of 2023, we performed a recoverability analysis on the carrying value of two assisted living communities that we are negotiating to sell and concluded that their carrying value may not be recoverable through future undiscounted cash flows. Accordingly, we recorded an aggregate impairment loss of $12,076,000 during the second quarter of 2023. As of June 30, 2023, we do not believe these communities meet the criteria to be classified as held-for-sale.

Properties Held -for-Sale. The following summarizes our held-for-sale properties as of June 30, 2023 (dollar amounts in thousands):


	Type	Number	Number
	of	of	of		Gross		Accumulated
State	Property	Properties	Beds/units		Investment		Depreciation
PA	ALF	2	130	$	9,744	$	3,691
		2	130	$	9,744	$	3,691

Acquisitions. The following table summarizes our acquisitions for the six months ended June 30, 2023 and 2022 (dollar amounts in thousands):


		Cash				Non-						Number	Number
		Paid at	Assumed			Controlling	Transaction			Assets		of	of
Year	Type of Property	Acquisition	Liabilities			Interest	Costs			Acquired		Properties	Beds/Units
2023	ALF ⁽¹⁾	43,759	$	9,767	$	9,133	$	363	$	63,022	⁽²⁾	1	242

2022	SNF⁽³⁾	51,815	$	—	$	—	$	—	$	51,815		4	339

(1)

We entered into a $54,134 Joint Venture (“JV”) and contributed $45,000 into the JV that purchased an ILF/ALF/MC in Ohio. Under the JV agreement, the seller, our JV partner, has the option to purchase the campus between the third and fourth lease years for LTC’s allocation of the JV investment plus an IRR of 9.75%. The campus was leased to Encore Senior Living (“Encore”) under a 10-year term with an initial yield of 8.25% on LTC’s allocation of the JV investment. LTC committed to fund $2,100 of lease incentives under the Encore lease. Rent is expected to be approximately $3,900 per year.

(2)	Includes $8,585 tax abatement intangible included in the Prepaid expenses and other assets line item in our Consolidated Balance Sheets.

(3)

The properties are located in Texas and are leased to an affiliate of an existing operator under a 10-year lease with two 5-year renewal options. Additionally, the lease provides either an earn-out payment or purchase option but not both. If neither option is elected within the timeframe defined in the lease, both elections are terminated. The earn-out payment is available, contingent on achieving certain thresholds per the lease, beginning at the end of the second lease year through the end of the fifth lease year. The purchase option is available beginning in the sixth lease year through the end of the seventh lease year. The initial cash yield is 8% for the first year, increasing to 8.25% for the second year, then increases annually by 2.0% to 4.0% based on the change in the Medicare Market Basket Rate. In connection with the transaction, we provided the lessee a 10-year working capital loan for up to $2,000, of which $1,867 has been funded, at 8% for first year, increasing to 8.25% for the second year, then increasing annually with the lease rate.

Improvements. During the six months ended June 30, 2023 and 2022, we invested the following in improvements projects (in thousands):


	Six Months Ended June 30,
Type of Property		2023		2022
Assisted Living Communities	$	2,000	$	1,964
Skilled Nursing Centers		1,143		620
Other		87		321
Total	$	3,230	$	2,905

Properties Sold. During the three and six months ended June 30, 2023, we recorded a gain on sale of $302,000 and $15,675,000, respectively. During the three and six months ended June 30, 2022, we recorded a gain on sale of $38,094,000 and $38,196,000, respectively. The following table summarizes property sales during the six months ended June 30, 2023 and 2022 (dollar amounts in thousands):


		Type	Number	Number
		of	of	of		Sales		Carrying		Net
Year	State	Properties	Properties	Beds/Units		Price		Value		Gain ⁽¹⁾
2023	Florida	ALF	1	70	$	4,850	$	4,082	$	65
	Kentucky	ALF	1	60		11,000		10,710		57
	New Jersey	ALF	1	39		2,000		1,552		266
	New Mexico	SNF	2	235		21,250		5,379		15,287
Total 2023			5	404	$	39,100	$	21,723	$	15,675

2022	California	ALF	2	232	$	43,715	$	17,832	$	25,867
	California	SNF	1	121		13,250		1,846		10,849
	Virginia	ALF	1	74		16,895		15,549		1,336	⁽²⁾
	n/a	n/a	—	—		—		—		144	⁽³⁾
Total 2022			4	427	$	73,860	$	35,227	$	38,196

(

(1)	Calculation of net gain includes cost of sales and write-off of straight-line receivable and lease incentives, when applicable.

(2)	In connection with this sale, the former operator paid us a lease termination fee of $1,181 which is not included in the gain on sale.

(3)	We recognized additional gain due to the reassessment adjustment of the holdbacks related to properties sold during 2019 and 2020, under the expected value model per ASC Topic 606, Contracts with Customers (“ASC 606”).

Financing Receivables. As part of our acquisitions, we may from time to time, invest in sale and leaseback transactions. In accordance with ASC Topic 842, Leases (“ACS 842”), we are required to determine whether the sale and leaseback transaction qualifies as a sale. ASC 842 clarifies that an option for the seller-lessee to repurchase a real estate asset would generally preclude accounting for the transfer of the asset as a sale. Therefore, a sale and leaseback transaction of real estate that includes a seller-lessee repurchase option is accounted for as a failed sale and leaseback transaction. As a result, the purchased assets of a failed sale and leaseback transaction would be presented as Financing receivables on our Consolidated Balance Sheets and the rental revenue from these properties is recorded as Interest income from financing receivables on our Consolidated Statements of Income. Furthermore, upon expiration of the purchase option if the purchase option remains unexercised by the seller-lessee, the purchased assets will be reclassified from Financing receivables to Real property investments on our Consolidated Balance Sheets.

During 2023, we entered into a $121,321,000 JV with an affiliate of an existing operator and contributed $117,490,000 into the JV that purchased 11 assisted living and memory care communities from an affiliate of our JV partner. The JV leased the communities back to an affiliate of the seller under

a 10-year master lease, with two five-year renewal options. The contractual initial cash yield of 7.25% increases to 7.5% in year three then escalates thereafter based on CPI subject to a floor of 2.0% and a ceiling of 4.0%. Additionally, the JV provided the seller-lessee with a purchase option to buy up to 50% of the properties at the beginning of the third lease year and the remaining properties at the beginning of the fourth lease year through the end of the sixth lease year, with an exit Internal Rate of Return (“IRR”) of 9.0%. During the three and six months ended June 30, 2023, we recognized $2,426,000 and $4,772,000, respectively of Interest income from financing receivables and upon origination we recorded $1,213,000 Provision for credit losses equal to 1% of the loan balance related to this investment.

During 2022, we entered into a JV and contributed $61,661,000 into the JV that purchased three skilled nursing centers located in Florida for $75,825,000. The JV leased the centers back to an affiliate of the seller under a 10-year master lease, with two five-year renewal options and provided the seller-lessee with a purchase option, exercisable at the beginning of the fourth year through the end of the fifth year. During the three and six months ended June 30, 2023, we recognized $1,405,000 and $2,810,000, respectively of Interest income from financing receivables related to this investment.

Mortgage Loans. The following table sets forth information regarding our investments in mortgage loans secured by first mortgages at June 30, 2023 (dollar amounts in thousands):


						Type	Percentage		Number of					Investment
			Gross			of	of					SNF	ALF	per
Interest Rate	Maturity	State	Investment			Property	Investment		Loans ⁽¹⁾	Properties ⁽²⁾		Beds	Units	Bed/Unit
7.5%	2024	MO	$	1,961		OTH	0.4	%	1	—	⁽³⁾	—	—	$	n/a
7.5%	2024	LA		29,346		SNF	6.2	%	1	1		189	—	$	155.27
7.5%	2024	GA		51,111	⁽⁴⁾	ALF	10.7	%	1	1		—	203	$	251.78
7.8%	2025	FL		16,525		ALF	3.5	%	1	1		—	68	$	243.01
7.3%	2025	NC		10,750	⁽⁴⁾	ALF	2.3	%	1	1		—	45	$	238.89
7.3% ⁽⁵⁾	2025	NC/SC		56,855		ALF	11.9	%	1	13		—	523	$	108.71
7.3% ⁽⁵⁾	2026	NC		34,043		ALF	7.1	%	1	4		—	217	$	156.88
7.3% ⁽⁵⁾	2026	NC		826		OTH	0.2	%	1	—	⁽⁶⁾	—	—	$	—
8.8%	2028	IL		16,500	⁽⁷⁾	SNF	3.5	%	1	1		150	—	$	110.00
10.6% ⁽⁸⁾	2043	MI		184,222		SNF	38.6	%	1	15		1,875	—	$	98.25
9.6% ⁽⁸⁾	2045	MI		40,000		SNF	8.4	%	1	4		480	—	$	83.33
10.1%	2045	MI		19,750		SNF	4.1	%	1	2		201	—	$	98.26
10.3% ⁽⁸⁾	2045	MI		14,850		SNF	3.1	%	1	1		146	—	$	101.71
Total			$	476,739			100.0	%	13	44		3,041	1,056	$	116.36

(1)	Some loans contain certain guarantees and provide for certain facility fees.

(2)	Our mortgage loans are secured by properties located in eight states with seven borrowers.

(3)	Represents a mortgage loan secured by a parcel of land for the future development of a 91-bed post-acute SNF.

(4)

We originated a $10,750 mortgage loan secured by a 45-unit MC located in North Carolina. The loan carries a two-year term with an interest-only rate of 7.25% and an IRR of 9.0%. Additionally, we invested $51,111 in an existing mortgage loan secured by a 203-unit ILF, ALF and MC located in Georgia by acquiring a participating interest owned by existing lenders for $42,251 in addition to converting our $7,461 mezzanine loan in the property into a participating interest in the mortgage loan. The mortgage loan matures in October 2024 and our investment is at an initial rate of 7.5% with an IRR of 7.75%. We recorded $1,380 of additional interest income in connection with the effective prepayment of the mezzanine loan in the first quarter of 2023.

(5)	Represents the initial rate with an IRR of 8%.

(6)	Represents a mortgage loan secured by a parcel of land in North Carolina held for future development of a seniors housing community.

(7)	We originated a $16,500 senior loan for the purchase of a 150-bed SNF in Illinois. The mortgage loan matures in June 2028 and our investment is at an interest rate of 8.75%.

(8)	Mortgage loans provide for 2.25% annual increases in the interest rate.

The following table summarizes our mortgage loan activity for the six months ended June 30, 2023 and 2022 (in thousands):


	Six Months Ended June 30,
	2023			2022
Originations and funding under mortgage loans receivable	$	81,727	⁽¹⁾	$	33,910	⁽²⁾
Application of interest reserve		1,609			2,451
Scheduled principal payments received		(251)			(625)
Mortgage loan premium amortization		(4)			(3)
Provision for loan loss reserve		(831)			(358)
Net increase in mortgage loans receivable	$	82,250		$	35,375

(1)

(2)

We originated two senior mortgage loans, secured by four ALFs operated by an existing operator, as well as a land parcel in North Carolina. The communities have a combined total of 217 units, with an average age of less than four years. The land parcel is approximately 7.6 acres adjacent to one of the ALFs and is being held for the future development of a seniors housing community. The mortgage loans have a four-year term, an interest rate of 7.25% and an IRR of 8%.

We apply ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) and the “expected loss” model to estimate our loan losses on our mortgage loans and notes receivable. In determining the expected losses on these receivables, we utilize the probability of default and discounted cash flow methods. Further, we stress-test the results to reflect the impact of unknown adverse future events including recessions.

As of June 30, 2023, the accrued interest receivable of $50,593,000 was not included in the measurement of expected credit losses on the financing receivables, mortgage loans receivable and notes receivable (see Note 4. Notes Receivable). We elected not to measure an allowance for expected credit losses on the related accrued interest receivable using the expected credit loss standard. Rather, we have elected to write-off accrued interest receivable by reversing interest income and/or recognizing credit loss expense as incurred. We review the collectability of the accrued interest receivable quarterly as part of our review of the financing receivables, mortgage loans receivable or notes receivables including the performance of the underlying collateral and net worth of the borrower. For the six months ended June 30, 2023 and 2022, we did not write-off any accrued interest receivable.