10-Q 1 nhi-3312018x10q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

(Mark One)
[ x ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________

Commission File Number 001-10822
National Health Investors, Inc.
(Exact name of registrant as specified in its charter)

Maryland |  | 62-1470956
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
222 Robert Rose Drive, Murfreesboro, Tennessee |  | 37129
(Address of principal executive offices) |  | (Zip Code)

(615) 890-9100
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes [ x ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ x ] |  | Accelerated filer [ ]
Non-accelerated filer [ ] |  | Smaller reporting company [ ]
(Do not check if a smaller reporting company) |  | Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ x ]
There were 41,532,154 shares of common stock outstanding of the registrant as of May 4, 2018.

Table of Contents

| Page
Part I. Financial Information |
Item 1. Financial Statements | 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. | 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk. | 43
Item 4. Controls and Procedures. | 44
Part II. Other Information |
Item 1. Legal Proceedings | 45
Item 1A. Risk Factors | 45
Item 6. Exhibits | 46
Signatures | 47

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

| March 31, 2018 |  | December 31, 2017
| (unaudited) |  |
Assets: |  |  |
Real estate properties: |  |  |
Land | $ | 192,953 |  |  | $ | 191,623 |
Buildings and improvements | 2,485,951 |  |  | 2,471,602 |
Construction in progress | 4,781 |  |  | 2,678 |
| 2,683,685 |  |  | 2,665,903 |
Less accumulated depreciation | (397,538 | ) |  | (380,202 | )
Real estate properties, net | 2,286,147 |  |  | 2,285,701 |
Mortgage and other notes receivable, net | 145,845 |  |  | 141,486 |
Cash and cash equivalents | 3,230 |  |  | 3,063 |
Straight-line rent receivable | 102,046 |  |  | 97,359 |
Other assets | 22,160 |  |  | 18,212 |
Total Assets | $ | 2,559,428 |  |  | $ | 2,545,821 |
Liabilities and Equity: |  |  |
Debt | $ | 1,160,226 |  |  | $ | 1,145,497 |
Accounts payable and accrued expenses | 16,514 |  |  | 17,476 |
Dividends payable | 41,532 |  |  | 39,456 |
Lease deposit liabilities | 21,275 |  |  | 21,275 |
Total Liabilities | 1,239,547 |  |  | 1,223,704 |
Commitments and Contingencies |  |  |
Stockholders' Equity: |  |  |
Common stock, $.01 par value; 60,000,000 shares authorized; |  |  |
41,532,154 shares issued and outstanding | 415 |  |  | 415 |
Capital in excess of par value | 1,288,861 |  |  | 1,289,919 |
Cumulative net income in excess of dividends | 29,270 |  |  | 32,605 |
Accumulated other comprehensive income (loss) | 1,335 |  |  | (822 | )
Total Stockholders' Equity | 1,319,881 |  |  | 1,322,117 |
Total Liabilities and Equity | $ | 2,559,428 |  |  | $ | 2,545,821 |

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. The Condensed Consolidated Balance Sheet at December 31, 2017 was derived from the audited consolidated financial statements at that date.
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NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)

| Three Months Ended
| March 31,
| 2018 |  | 2017
| (unaudited)
Revenues: |  |  |
Rental income | $ | 69,253 |  |  | $ | 63,127 |
Interest income from mortgage and other notes | 3,460 |  |  | 3,089 |
Investment income and other | 33 |  |  | 162 |
| 72,746 |  |  | 66,378 |
Expenses: |  |  |
Depreciation | 17,335 |  |  | 16,144 |
Interest, including amortization of debt discount and issuance costs | 11,614 |  |  | 11,661 |
Legal | 111 |  |  | 56 |
Franchise, excise and other taxes | 346 |  |  | 267 |
General and administrative | 4,170 |  |  | 4,108 |
| 33,576 |  |  | 32,236 |
Income before investment and other gains and losses | 39,170 |  |  | 34,142 |
Loss on convertible note retirement | (738 | ) |  | — |
Investment and other gains | — |  |  | 10,088 |
Net income | $ | 38,432 |  |  | $ | 44,230 |
Weighted average common shares outstanding: |  |  |
Basic | 41,532,154 |  |  | 39,953,804 |
Diluted | 41,576,876 |  |  | 40,108,762 |
Earnings per common share: |  |  |
Net income per common share - basic | $ | .93 |  |  | $ | 1.11 |
Net income per common share - diluted | $ | .92 |  |  | $ | 1.10 |

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
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NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

| Three Months Ended
| March 31,
| 2018 |  | 2017
| (unaudited)
Net income | $ | 38,432 |  |  | $ | 44,230 |
Other comprehensive income (loss): |  |  |
Change in unrealized gains on securities | — |  |  | (26 | )
Reclassification for amounts recognized in investment and other gains | — |  |  | (10,038 | )
Increase in fair value of cash flow hedge | 1,646 |  |  | 465 |
Reclassification for amounts recognized as interest expense | 276 |  |  | 789 |
Total other comprehensive income (loss) | 1,922 |  |  | (8,810 | )
Comprehensive income | 40,354 |  |  | 35,420 |

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
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NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

| Three Months Ended
| March 31,
| 2018 |  | 2017
| (unaudited)
Cash flows from operating activities: |  |  |
Net income | $ | 38,432 |  |  | $ | 44,230 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Depreciation | 17,335 |  |  | 16,144 |
Amortization | 1,069 |  |  | 1,337 |
Straight-line rental income | (5,962 | ) |  | (5,755 | )
Non-cash interest income on construction loans | (436 | ) |  | (271 | )
Gain on sale of real estate | — |  |  | (50 | )
Loss on convertible note retirement | 738 |  |  | — |
Gain on sale of marketable securities | — |  |  | (10,038 | )
Non-cash stock-based compensation | 1,425 |  |  | 1,523 |
Amortization of commitment fees and note receivable discounts | (552 | ) |  | (104 | )
Amortization of lease incentives | 63 |  |  | 10 |
Change in operating assets and liabilities: |  |  |
Other assets | (4,245 | ) |  | (657 | )
Accounts payable, accrued expenses and other liabilities | 641 |  |  | 2,306 |
Net cash provided by operating activities | 48,508 |  |  | 48,675 |
Cash flows from investing activities: |  |  |
Investments in mortgage and other notes receivable | (5,905 | ) |  | (28,338 | )
Collections of mortgage and other notes receivable | 2,535 |  |  | 12,109 |
Investments in real estate | (14,404 | ) |  | (118,011 | )
Investments in real estate development | — |  |  | (3,842 | )
Investments in renovations of existing real estate | (1,812 | ) |  | (994 | )
Proceeds from disposition of real estate properties | — |  |  | 450 |
Proceeds from sale of marketable securities | — |  |  | 18,182 |
Net cash used in investing activities | (19,586 | ) |  | (120,444 | )
Cash flows from financing activities: |  |  |
Proceeds from revolving credit facilities | 56,000 |  |  | 112,000 |
Payments on revolving credit facilities | (15,000 | ) |  | (83,000 | )
Payments on term loans | (285 | ) |  | (196 | )
Taxes remitted in relation to employee stock options exercised | — |  |  | (116 | )
Proceeds from issuance of common shares, net | — |  |  | 79,797 |
Offering costs | (56 | ) |  | — |
Convertible bond redemption | (29,958 | ) |  | — |
Dividends paid to stockholders | (39,456 | ) |  | (35,863 | )
Net cash (used in) provided by financing activities | (28,755 | ) |  | 72,622 |
Increase in cash and cash equivalents | 167 |  |  | 853 |
Cash and cash equivalents, beginning of period | 3,063 |  |  | 4,832 |
Cash and cash equivalents, end of period | $ | 3,230 |  |  | $ | 5,685 |

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
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NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)

| Three Months Ended
| March 31,
| 2018 |  | 2017
| (unaudited)
Supplemental disclosure of cash flow information: |  |  |
Interest paid, net of amounts capitalized | $ | 9,904 |  |  | $ | 9,164 |
Supplemental disclosure of non-cash investing and financing activities: |  |  |
Change in accounts payable related to investments in real estate construction | $ | 290 |  |  | $ | 824 |
Tenant investment in leased asset | $ | 1,275 |  |  | $ | 1,250 |

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
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NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(unaudited, in thousands except share and per share amounts)

| Common Stock |  | Capital in Excess of Par Value |  | Cumulative Net Income in Excess of Dividends |  | Accumulated Other Comprehensive Income (Loss) |  | Total Equity
| Shares |  | Amount |  |  |  |
Balances at December 31, 2017 | 41,532,154 |  |  | $ | 415 |  |  | $ | 1,289,919 |  |  | $ | 32,605 |  |  | $ | (822 | ) |  | $ | 1,322,117 |
Cumulative effect of change in accounting principle | — |  |  | — |  |  | — |  |  | (235 | ) |  | 235 |  |  | — |
Total comprehensive income | — |  |  | — |  |  | — |  |  | 38,432 |  |  | 1,922 |  |  | 40,354 |
Equity component in redemption of convertible notes | — |  |  | — |  |  | (2,427 | ) |  | — |  |  | — |  |  | (2,427 | )
Equity offering costs | — |  |  | — |  |  | (56 | ) |  | — |  |  | — |  |  | (56 | )
Non-cash stock-based compensation | — |  |  | — |  |  | 1,425 |  |  | — |  |  | — |  |  | 1,425 |
Dividends declared, $1.00 per common share | — |  |  | — |  |  | — |  |  | (41,532 | ) |  | — |  |  | (41,532 | )
Balances at March 31, 2018 | 41,532,154 |  |  | $ | 415 |  |  | $ | 1,288,861 |  |  | $ | 29,270 |  |  | $ | 1,335 |  |  | $ | 1,319,881 |

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
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NATIONAL HEALTH INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
We, the management of National Health Investors, Inc., (“NHI” or the “Company”) believe that the unaudited condensed consolidated financial statements of which these notes are an integral part include all normal, recurring adjustments that are necessary to fairly present the condensed consolidated financial position, results of operations and cash flows of NHI in all material respects. The Condensed Consolidated Balance Sheet at December 31, 2017 has been derived from the audited consolidated financial statements at that date. We assume that users of these condensed consolidated financial statements have read or have access to the audited December 31, 2017 consolidated financial statements and that the adequacy of additional disclosure needed for a fair presentation, except regarding material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate those contained in our most recent Annual Report on Form 10-K for the year ended December 31, 2017 have been omitted. This condensed consolidated financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons including, but not limited to, acquisitions and dispositions, changes in interest rates, rents and the timing of debt and equity financings. For a better understanding of NHI and its condensed consolidated financial statements, we recommend reading these condensed consolidated financial statements in conjunction with the audited consolidated financial statements for the year ended December 31, 2017, which are included in our 2017 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, a copy of which is available at our web site: www.nhireit.com.
Principles of Consolidation - The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, joint ventures, partnerships and consolidated variable interest entities (“VIE”), if any. All intercompany transactions and balances have been eliminated in consolidation. Net income is reduced by the portion of net income attributable to noncontrolling interests, if any.
A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.
We apply Financial Accounting Standards Board (“FASB”) guidance for our arrangements with VIEs which requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of the VIE. In accordance with FASB guidance, management must evaluate each of the Company’s contractual relationships which creates a variable interest in other entities. If the Company has a variable interest and the entity is a VIE, then management must determine whether the Company is the primary beneficiary of the VIE. If it is determined that the Company is the primary beneficiary, NHI consolidates the VIE. We identify the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. We perform this analysis on an ongoing basis.
At March 31, 2018, we held an interest in eight unconsolidated VIEs and, because we generally lack either directly or through related parties any material input in the activities that most significantly impact their economic performance, we have concluded that NHI is not the primary beneficiary. Accordingly, we account for our transactions with these entities and their subsidiaries at amortized cost.
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Our VIEs are summarized below by date of initial involvement. For further discussion of the nature of the relationships, including the sources of our exposure to these VIEs, see the notes to our condensed consolidated financial statements cross-referenced below.

Date | Name | Source of Exposure | Carrying Amount | Maximum Exposure to Loss | Note Reference
2012 | Bickford | Various 1 | $ | 33,528,000 |  | $ | 55,360,000 |  | Notes 2, 3
2014 | Senior Living Communities | Notes and straight-line receivable | $ | 39,106,000 |  | $ | 53,377,000 |  | Notes 2, 3
2014 | Life Care Services affiliate | Notes receivable | $ | 54,693,000 |  | $ | 59,754,000 |  | Note 3
2015 | East Lake Capital Mgmt. | Straight-line receivable | $ | 3,531,000 |  | $ | 3,531,000 |  |
2016 | The Ensign Group developer | N/A | $ | — |  | $ | — |  | Note 2
2016 | Senior Living Management | Notes and straight-line receivable | $ | 26,315,000 |  | $ | 26,315,000 |  | Note 3
2017 | Navion Senior Solutions | Straight-line receivable | $ | 355,000 |  | $ | 355,000 |  |
2017 | Evolve Senior Living | Note receivable | $ | 9,913,000 |  | $ | 9,913,000 |  |

1 Notes, straight-line rent receivables, and unamortized lease incentives
We are not obligated to provide support beyond our stated commitments to these tenants and borrowers whom we classify as VIEs, and accordingly our maximum exposure to loss as a result of these relationships is limited to the amount of our commitments, as shown above and discussed in the notes. When the above relationships involve leases, some additional exposure to economic loss is present. Generally, additional economic loss on a lease, if any, would be limited to that resulting from a short period of arrearage and non-payment of monthly rent before we are able to take effective remedial action, as well as costs incurred in transitioning the lease. The potential extent of such loss will be dependent upon individual facts and circumstances, cannot be quantified, and is therefore not included in the tabulation above. Typically, the only carrying amounts involving our leases are accumulated straight-line receivables. For VIE relationships listed above without a note reference, please refer to our most recent Annual Report on Form 10-K for the year ended December 31, 2017.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Earnings Per Share - The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assumes the exercise of stock options using the treasury stock method, to the extent dilutive. Diluted earnings per share also incorporate the potential dilutive impact of our convertible senior notes. We apply the treasury stock method to our convertible debt instruments, the effect of which is that conversion will not be assumed for purposes of computing diluted earnings per share unless the average share price for the period exceeds the conversion price per share.
Reclassifications - We have reclassified certain balances where necessary to conform the presentation of prior periods to the current period. These reclassifications had no effect on previously reported net income.
New Accounting Pronouncements - For a review of recent accounting pronouncements pertinent to our operations and management’s judgment as to the impact that the eventual adoption of these pronouncements will have on our financial position and results of operations, see Note 11.
NOTE 2. REAL ESTATE
As of March 31, 2018, we owned 210 health care real estate properties located in 32 states and consisting of 136 senior housing communities (“SHO”), 69 skilled nursing facilities (“SNF”), 3 hospitals and 2 medical office buildings. Our senior housing communities include assisted living facilities, senior living campuses, independent living facilities, and entrance-fee communities. These investments (excluding our corporate office of $1,298,000) consisted of properties with an original cost of approximately $2,682,387,000 rented under triple-net leases to 27 lessees.
Ensign
On January 12, 2018, NHI acquired from a developer a 121-bed skilled nursing facility in Waxahachie, Texas for a cash investment of $14,404,000 plus $1,275,000 contributed by the lessee, The Ensign Group (“Ensign”). The facility is included under our existing master lease with Ensign for the remaining lease term of 13 years plus renewal options. The initial lease rate is set at 8.2% subject to annual escalators based on prevailing inflation rates. The acquisition was accounted for as an asset purchase.
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With the acquisition of the Waxahachie property, NHI has a continuing commitment to purchase from the developer two new skilled nursing facilities in Texas for approximately $28,000,000 which are newly developed, leased to Legend Healthcare (“Legend”) and subleased to Ensign. The fixed-price nature of the commitment creates a variable interest for NHI in the developer, whom NHI considers to lack sufficient equity to finance its operations without recourse to additional subordinated debt. The presence of these conditions causes the developer to be considered a VIE.
Major Tenants
Bickford
As of March 31, 2018 our Bickford Senior Living (“Bickford”) portfolio consists of leases with lease expiration dates as follows (in thousands):

| Lease Expiration |
| Sept / Oct 2019 | June 2023 | Sept 2027 | May 2031 | Total
Number of Properties | 10 |  | 13 |  | 4 |  | 20 |  | 47 |
2018 Annual Contractual Rent | $ | 9,264 |  | $ | 11,133 |  | $ | 1,515 |  | $ | 20,030 |  | $ | 41,942 |
Straight Line Rent Adjustment | (617 | ) | 588 |  | 221 |  | 3,813 |  | 4,005 |
Total Revenues | $ | 8,647 |  | $ | 11,721 |  | $ | 1,736 |  | $ | 23,843 |  | $ | 45,947 |

Of our total revenues, $11,445,000 (16%) and $9,373,000 (14%) were recognized as rental income from Bickford for the three months ended March 31, 2018 and 2017, including $1,169,000 and $910,000 in straight-line rent income, respectively.
Senior Living Communities
As of March 31, 2018, we leased nine retirement communities totaling 1,970 units to Senior Living Communities, LLC (“Senior Living”). The 15-year master lease, which began in December 2014, contains two 5-year renewal options and provides for an annual escalator of 4% effective January 1, 2018 and 3% thereafter.
Of our total revenues, $11,449,000 (16%) and $11,431,000 (17%) in rental income were derived from Senior Living for the three months ended March 31, 2018 and 2017, respectively, including $1,359,000 and $1,746,000 in straight-line rent income.
Holiday
As of March 31, 2018, we leased 25 independent living facilities to an affiliate of Holiday Retirement (“Holiday”). The 17-year master lease, which began in December 2013, currently provides for a minimum escalator of 3.5% through the end of the lease term.
Of our total revenues, $10,954,000 (15%) and $10,954,000 (17%) were derived from Holiday for the three months ended March 31, 2018 and 2017, including $1,530,000 and $1,849,000 in straight-line rent income, respectively. Our tenant operates the facilities pursuant to a management agreement with a Holiday-affiliated manager.
NHC
As of March 31, 2018, we leased 42 facilities under two master leases to National HealthCare Corporation (“NHC”), a publicly-held company and the lessee of our legacy properties. The facilities leased to NHC consist of 3 independent living facilities and 39 skilled nursing facilities (4 of which are subleased to other parties for whom the lease payments are guaranteed to us by NHC). These facilities are leased to NHC under the terms of an amended master lease agreement originally dated October 17, 1991 (“the 1991 lease”) which includes our 35 remaining legacy properties and a master lease agreement dated August 30, 2013 (“the 2013 lease”) which includes 7 skilled nursing facilities acquired from a third party.
The 1991 lease has been amended to extend the lease expiration to December 31, 2026. There are two additional 5-year renewal options, each at fair rental value of such leased property as negotiated between the parties and determined without including the value attributable to any improvements to the leased property voluntarily made by NHC at its expense. Under the terms of the 1991 lease, the base annual rental is $30,750,000 and rent escalates by 4% of the increase, if any, in each facility’s revenue over a 2007 base year. The 2013 lease provides for a base annual rental of $3,450,000 and has a lease expiration of August 2028. Under the terms of the 2013 lease, rent escalates 4% of the increase, if any, in each facility’s revenue over the 2014
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base year. For both the 1991 lease and the 2013 lease, we refer to this additional rent component as “percentage rent.” During the last three years of the 2013 lease, NHC will have the option to purchase the facilities for $49,000,000.
The following table summarizes the percentage rent income from NHC (in thousands):

| Three Months Ended
| March 31,
| 2018 |  | 2017
Current year | $ | 853 |  |  | $ | 782 |
Prior year final certification 1 | 285 |  |  | 194 |
Total percentage rent income | $ | 1,138 |  |  | $ | 976 |

1 For purposes of the percentage rent calculation described in the master lease agreement, NHC’s annual revenue by facility for a given year is certified to NHI by March 31st of the following year.
Of our total revenues, $9,674,000 (13%) and $9,513,000 (14%) were derived from NHC for the three months ended March 31, 2018 and 2017, respectively.
The chairman of our board of directors is also a director on NHC’s board of directors. As of March 31, 2018, NHC owned 1,630,462 shares of our common stock.
Tenant Non-Compliance
In October 2017, we issued a letter of forbearance to one of our tenants for a default on our lease terms involving lease coverage and arrearages to certain vendors. Lease revenues from the tenant and its affiliates comprise less than 4% of our rental income, and the related straight-line rent receivable was approximately $3,773,000 at March 31, 2018. The tenant has maintained its status as current on all rent payments to NHI, and we have made no rent concessions. We continue to work with the tenant to resolve their defaults.
The defaults mentioned above typically give rise to considerations regarding the impairment or recoverability of the related assets, and we give additional attention to the nature of the default’s underlying causes. At this time, our assessment of likely undiscounted cash flows reveals no basis for an impairment charge on the underlying real estate.
NOTE 3. MORTGAGE AND OTHER NOTES RECEIVABLE
At March 31, 2018, we had net investments in mortgage notes receivable with a carrying value of $102,536,000, secured by real estate and UCC liens on the personal property of 10 facilities, and other notes receivable with a carrying value of $43,309,000, guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner. No allowance for doubtful accounts was considered necessary at March 31, 2018 or December 31, 2017.
Bickford
At March 31, 2018, our construction loans to Bickford are summarized as follows:

Commencement |  | Rate |  | Maturity |  | Commitment |  | Drawn |  | Location
July 2016 |  | 9% |  | 5 years |  | $ | 14,000,000 |  |  | $ | (12,754,000 | ) |  | Illinois
January 2017 |  | 9% |  | 5 years |  | 14,000,000 |  |  | (5,672,000 | ) |  | Michigan
January 2018 |  | 9% |  | 5 years |  | 14,000,000 |  |  | (1,742,000 | ) |  | Virginia
|  |  |  |  |  | $ | 42,000,000 |  |  | $ | (20,168,000 | ) |  |

The promissory notes are secured by first mortgage liens on substantially all real and personal property as well as a pledge of any and all leases or agreements which may grant a right of use to the subject property. Usual and customary covenants extend to the agreements, including the borrower’s obligation for payment of insurance and taxes. NHI has a purchase option on the properties at stabilization, whereby annual rent will be set with a floor of 9.55%, based on NHI’s total investment, plus fixed annual escalators. On these and future loan development projects, Bickford as the borrower is entitled to up to $2,000,000 per project in incentive loan draws based upon the achievement of predetermined operational milestones, the funding of which will increase the principal amount, NHI's future purchase price under option and, upon exercise, eventual lease payment to NHI.
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Our loans to Bickford represent a variable interest as do our leases, which are considered analogous to financing arrangements. Bickford is structured to limit liability for potential claims for damages, is capitalized to achieve that purpose and is considered a VIE.
Timber Ridge
In February 2015, we entered into an agreement to lend up to $154,500,000 to LCS-Westminster Partnership III LLP (“LCS-WP”), an affiliate of Life Care Services (“LCS”). The loan agreement conveys a mortgage interest and facilitated the construction of Phase II of Timber Ridge at Talus (“Timber Ridge”), a Type-A Continuing Care Retirement Community in Issaquah, WA managed by LCS. Our loan to LCS-WP represents a variable interest. As an affiliate of a larger company, LCS-WP is structured to limit liability for potential damage claims, is capitalized to achieve that purpose and is considered a VIE.
The loan took the form of two notes under a master credit agreement. The senior note (“Note A”) totals $60,000,000 at a 6.75% interest rate with 10 basis-point escalators after year three, and has a term of 10 years. We have funded $54,939,000 of Note A as of March 31, 2018. Note A is interest-only and is locked to prepayment for three years. After year three in February 2018, the prepayment penalty starts at 5% and declines 1% per year. Note B was a construction loan for up to $94,500,000 at an annual interest rate of 8% and a five-year maturity and was fully drawn during 2016. We began receiving repayment with new resident entrance fees upon the opening of Phase II during the fourth quarter of 2016. The balance remaining on Note B at December 31, 2017, of $1,953,000 was repaid during the first quarter of 2018, resulting in the recognition of $515,000 in unamortized commitment fees.
NHI has an option to purchase the entire Timber Ridge property for the greater of fair market value or $115,000,000 during a window of 120 days that will contingently open in year five or upon earlier stabilization of the development, as defined in our agreements.
Senior Living Communities
In connection with the acquisition in December 2014 of the properties leased to Senior Living, we provided a $15,000,000 revolving line of credit, the maturity of which mirrors the 15-year term of the master lease. Borrowings are used to finance construction projects within the Senior Living portfolio, including building additional units. Up to $5,000,000 of the facility may be used to meet general working capital needs. Amounts outstanding under the facility, $729,000 at March 31, 2018, bear interest at an annual rate equal to the prevailing 10-year U.S. Treasury rate, 2.74% at March 31, 2018, plus 6%.
NHI has two mezzanine loans totaling $14,000,000 to affiliates of Senior Living, whose purpose was to partially fund construction of a 186-unit senior living campus on Daniel Island in South Carolina. The loans bear interest payable monthly at a 10% annual rate and mature in March 2021. The lending arrangement provides NHI with a purchase option on the development upon its meeting certain operational metrics. The community opened in the first quarter of 2018. The option is to remain open during the term of the loans, plus any extensions.
Our loans to Senior Living and its subsidiaries represent a variable interest as does our lease, which is considered to be analogous to a financing arrangement. Senior Living is structured to limit liability for potential damage claims, is appropriately capitalized for that purpose and is considered a VIE.
Senior Living Management
On August 3, 2016, we entered into an agreement to furnish to our current tenant, Senior Living Management, Inc. (“SLM”), through its affiliates, loans of up to $24,500,000 to facilitate SLM’s acquisition of five senior housing facilities that it currently operates. The loans consist of two notes under a master credit agreement, include both a mortgage and a corporate loan, and bear interest at 8.25% with terms of five years, plus optional one and two-year extensions. NHI has a right of first refusal if SLM elects to sell the facilities. The loans were fully funded as of March 31, 2018.
Our loans to SLM represent a variable interest as do our leases, which are analogous to financing arrangements. SLM is structured to limit liability for potential damage claims, is capitalized for that purpose and is considered a VIE.
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NOTE 4. OTHER ASSETS
Other assets consist of the following (in thousands):

| March 31, 2018 |  | December 31, 2017
Accounts receivable and other assets | $ | 8,963 |  |  | $ | 5,187 |
Regulatory escrows | 8,208 |  |  | 8,208 |
Reserves for replacement, insurance and tax escrows | 4,989 |  |  | 4,817 |
| $ | 22,160 |  |  | $ | 18,212 |

Reserves for replacement, insurance and tax escrows include amounts required to be held on deposit in accordance with regulatory agreements governing our Fannie Mae and HUD mortgages.
NOTE 5. DEBT
Debt consists of the following (in thousands):

| March 31, 2018 |  | December 31, 2017
Convertible senior notes - unsecured (net of discount of $1,959 and $2,637) | $ | 118,041 |  |  | $ | 144,938 |
Revolving credit facility - unsecured | 262,000 |  |  | 221,000 |
Bank term loan - unsecured | 250,000 |  |  | 250,000 |
Private placement term loans - unsecured | 400,000 |  |  | 400,000 |
HUD mortgage loans (net of discount of $1,381 and $1,402) | 43,463 |  |  | 43,645 |
Fannie Mae term loans - secured, non-recourse | 96,285 |  |  | 96,367 |
Unamortized loan costs | (9,563 | ) |  | (10,453 | )
| $ | 1,160,226 |  |  | $ | 1,145,497 |

Aggregate principal maturities of debt as of March 31, 2018 for each of the next five years and thereafter are as follows (in thousands):

Twelve months ended March 31, |
2018 | $ | 1,155 |
2019 | 1,196 |
2020 | 1,244 |
2021 | 121,291 |
2022 | 638,340 |
Thereafter | 409,903 |
| 1,173,129 |
Less: discount | (3,340 | )
Less: unamortized loan costs | (9,563 | )
| $ | 1,160,226 |

As amended in August 2017, our unsecured $800,000,000 credit facility, originally scheduled to mature in June 2020, consolidated our three bank term loans into a single $250,000,000 term loan and provided for an extension of the maturity of the term loan and the $550,000,000 revolving credit facility to August 2022. The amended facility calls for floating interest on the term loan and revolver to be initially set at 30-day LIBOR plus 130 and 115 bps, respectively, based on current leverage metrics. Additional significant amendments to the facility included the refinement of the collateral pool, imposition of a 0% floor LIBOR base, movement from the payment of unused commitment fees to a facility fee of 20 basis points and the composition of creditors participating in our loan syndication. The employment of interest rate swaps to fix LIBOR on our bank term debt leaves only our revolving credit facility exposed to variable rate risk. Our swaps and the financial instruments to which they relate are described in the table below, under the caption “Interest Rate Swap Agreements.”
At March 31, 2018, we had $288,000,000 available to draw on the revolving portion of our credit facility. The unsecured credit facility agreement requires that we maintain certain financial ratios within limits set by our creditors. To date, these ratios, which are calculated quarterly, have been within the limits required by the credit facility agreements.
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Pinnacle Bank is a participating member of our banking group. A member of NHI’s board of directors and chairman of our audit committee is also the chairman of Pinnacle Financial Partners, Inc., the holding company for Pinnacle Bank. NHI’s local banking transactions are conducted primarily through Pinnacle Bank.
Also in August 2017, we amended our private placement term loan agreements to largely conform those agreements with the amendment to our bank credit facility as noted above. The composition of these loans is summarized below (in thousands):

Amount |  | Inception |  | Maturity |  | Fixed Rate
$ | 125,000 |  |  | January 2015 |  | January 2023 |  | 3.99%
50,000 |  |  | November 2015 |  | November 2023 |  | 3.99%
75,000 |  |  | September 2016 |  | September 2024 |  | 3.93%
50,000 |  |  | November 2015 |  | November 2025 |  | 4.33%
100,000 |  |  | January 2015 |  | January 2027 |  | 4.51%
$ | 400,000 |  |  |  |  |  |  |

In connection with our November 2017 acquisition of a facility in Tulsa, we assumed a Fannie Mae mortgage loan with remaining balance of $18,311,000. The mortgage amortizes through 2025 when a balloon payment will be due, is subject to prepayment penalties until 2024, and bears interest at a nominal rate of 4.6% with a remaining balance of $18,201,000 at March 31, 2018.
In March 2015 we obtained $78,084,000 in Fannie Mae financing. The term debt financing consists of interest-only payments at an annual rate of 3.79% and a 10-year maturity. The mortgages are non-recourse and secured by thirteen properties leased to Bickford. These notes together with the Fannie Mae debt assumed in connection with the 2017 Tulsa acquisition, mentioned above, are secured by facilities having a net book value of $141,189,000 at March 31, 2018.
In March 2014 we issued $200,000,000 of 3.25% senior unsecured convertible notes due April 2021 (the “Notes”) with interest payable April 1st and October 1st of each year. The Notes were convertible at an initial conversion rate of 13.93 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $71.81 per share for a total of approximately 2,785,200 underlying shares. The conversion rate is subsequently adjusted upon each occurrence of certain events, as defined in the indenture governing the Notes, including the payment of dividends at a rate exceeding that prevailing in 2014. The conversion option was accounted for as an “optional net-share settlement conversion feature,” meaning that upon conversion, NHI’s conversion obligation may be satisfied, at our option, in cash, shares of common stock or a combination of cash and shares of common stock. Because we have the ability and intent to settle the convertible securities in cash upon exercise, we use the treasury stock method to account for potential dilution.
The embedded conversion options (1) do not require net cash settlement, (2) are not conventionally convertible but can be classified in stockholders’ equity under Accounting Standards Codification (“ASC”) 815-40, and (3) are considered indexed to NHI’s own stock. Therefore, the conversion feature satisfies the conditions to qualify for an exception to the derivative liability rules, and the Notes are split into debt and equity components. The carrying value of the debt component was based upon the estimated fair value at the time of issuance of a similar debt instrument without the conversion feature and was approximately $192,238,000 at issuance. The difference between the contractual principal on the debt and the value allocated to the debt of $7,762,000 was recorded as the equity component and represented the estimated value of the conversion feature of the instrument. The excess of the contractual principal amount of the debt over the estimated fair value of the debt component, the original issue discount, is being amortized to interest expense using the effective interest method over the estimated term of the Notes. The effective interest rate used to amortize the debt discount and the liability component of the debt issue costs is approximately 3.9% based on our estimated non-convertible borrowing rate at the date the Notes were issued. The total cost of issuing the Notes was $6,063,000, of which $275,000 was allocated to the equity component and $5,788,000 was allocated to the debt component and subject to amortization over the estimated term of the notes.
We have undertaken targeted open-market repurchases of certain of the convertible notes, whose carrying amount at December 31, 2017, net of issue costs, discount and previous retirements was $144,938,000. Payments of cash negotiated in the transactions were dependent on prevailing market conditions, our liquidity requirements, contractual restrictions, individual circumstances of the selling parties and other factors. The amount of notes repurchased and retired during the three months ended March 31, 2018, net of unamortized original issue discount and associated issuance costs, was $26,821,000. Recognition of losses on the note retirements for the three months ended March 31, 2018, was $738,000, calculated as the excess of cash paid over the carrying value of that portion of the notes accounted for as debt. For the retirement of that portion of the outlay allocated to the fair value of the conversion feature, $2,427,000 was charged to additional paid-in capital during the three months ended March 31, 2018. The remaining unamortized balance of issuance costs at March 31, 2018, was $1,300,000.
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As of March 31, 2018, the outstanding balance of our 3.25% senior unsecured convertible notes was $120,000,000. As adjusted for terms of the indenture, the Notes are convertible at a rate of 14.28 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $70.01 per share for a total of 1,714,100 remaining underlying shares. As of March 31, 2018, the value of the convertible debt, computed as if the debt were immediately eligible for conversion, was exceeded by its face amount. For the three months ended March 31, 2018, the effect of the conversion option on our per-share calculations is also anti-dilutive, since the conversion price exceeded our average stock price. If NHI’s current share price increases above the adjusted $70.01 conversion price, dilution will be attributable to the conversion feature.
Our HUD mortgage loans are secured by ten Bickford-operated properties having a net book value of $52,156,000 at March 31, 2018. Nine mortgage notes require monthly payments of principal and interest from 4.3% to 4.4% (inclusive of mortgage insurance premium) and mature in August and October 2049. One additional HUD mortgage loan assumed in 2014 requires monthly payments of principal and interest of 2.9% (inclusive of mortgage insurance premium) and matures in October 2047.
The following table summarizes interest expense (in thousands):

| Three Months Ended
| March 31,
| 2018 |  | 2017
Interest expense on debt at contractual rates | $ | 10,527 |  |  | $ | 10,033 |
Losses reclassified from accumulated other |  |  |
comprehensive income into interest expense | 276 |  |  | 789 |
Capitalized interest | (24 | ) |  | (67 | )
Amortization of debt issuance costs and debt discount | 835 |  |  | 906 |
Total interest expense | $ | 11,614 |  |  | $ | 11,661 |

Interest Rate Swap Agreements
Our existing interest rate swap agreements will collectively continue through June 2020 to hedge against fluctuations in variable interest rates applicable to our $250,000,000 bank term loan. With the amendment to our credit facility in August 2017, discussed above, the introduction to the bank term loan of a LIBOR floor not present in the hedges resulted in hedge inefficiency of $353,000, which we credited to interest expense in 2017. To better reflect earnings, on January 1, 2018 we adopted ASU 2017-12 Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, as discussed in Note 11. Upon the adoption of the new standard, we reversed cumulative ineffectiveness, resulting in a retroactive net charge to retained earnings and a credit to accumulated other comprehensive income of $235,000 as of January 1, 2018.
During the next twelve months, approximately $775,000 of losses, which are included as a component of accumulated other comprehensive income, are projected to be reclassified into earnings. As of March 31, 2018, we employ the following interest rate swap contracts to mitigate our interest rate risk on the $250,000,000 term loan (dollars in thousands):

Date Entered |  | Maturity Date |  | Fixed Rate |  | Rate Index |  | Notional Amount |  | Fair Value
May 2012 |  | April 2019 |  | 2.84% |  | 1-month LIBOR |  | $ | 40,000 |  |  | $ | 266 |
June 2013 |  | June 2020 |  | 3.41% |  | 1-month LIBOR |  | $ | 80,000 |  |  | $ | 459 |
March 2014 |  | June 2020 |  | 3.46% |  | 1-month LIBOR |  | $ | 130,000 |  |  | $ | 607 |

If the fair value of the hedge is an asset, we include it in our Condensed Consolidated Balance Sheets among other assets, and, if a liability, as a component of accrued expenses. See Note 10 for fair value disclosures about our interest rate swap agreements. Net asset/(liability) balances for our hedges included as components of consolidated other comprehensive income on March 31, 2018 and December 31, 2017 were $1,332,000 and $(588,000), respectively.
NOTE 6. COMMITMENTS AND CONTINGENCIES
In the normal course of business, we enter into a variety of commitments, typical of which are those for the funding of revolving credit arrangements, construction and mezzanine loans to our operators to conduct expansions and acquisitions for their own account, and commitments for the funding of construction for expansion or renovation to our existing properties under lease. In our leasing operations we offer to our tenants and to sellers of newly-acquired properties a variety of inducements which originate contractually as contingencies but which may become commitments upon the satisfaction of the contingent event. Contingent payments earned will be included in the respective lease bases when funded. The tables below summarize our existing, known commitments and contingencies according to the nature of their impact on our leasehold or loan portfolios.
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| Asset Class |  | Type |  | Total |  | Funded |  | Remaining
Loan Commitments: |  |  |  |  |  |  |  |  |
Life Care Services Note A | SHO |  | Construction |  | $ | 60,000,000 |  |  | $ | (54,939,000 | ) |  | $ | 5,061,000 |
Bickford Senior Living | SHO |  | Construction |  | 42,000,000 |  |  | (20,168,000 | ) |  | 21,832,000 |
Senior Living Communities | SHO |  | Revolving Credit |  | 15,000,000 |  |  | (729,000 | ) |  | 14,271,000 |
|  |  |  |  | $ | 117,000,000 |  |  | $ | (75,836,000 | ) |  | $ | 41,164,000 |

See Note 3 for full details of our loan commitments. As provided above, loans funded do not include the effects of discounts or commitment fees. We expect to fully fund the Life Care Services Note A during 2018. Funding of the promissory note commitments to Bickford is expected to transpire monthly throughout 2018.

| Asset Class |  | Type |  | Total |  | Funded |  | Remaining
Development Commitments: |  |  |  |  |  |  |  |  |
Legend/The Ensign Group | SNF |  | Purchase |  | $ | 56,000,000 |  |  | $ | (28,000,000 | ) |  | $ | 28,000,000 |
East Lake/Watermark Retirement | SHO |  | Renovation |  | 10,000,000 |  |  | (5,900,000 | ) |  | 4,100,000 |
Santé Partners | SHO |  | Renovation |  | 3,500,000 |  |  | (2,621,000 | ) |  | 879,000 |
Bickford Senior Living | SHO |  | Renovation |  | 2,400,000 |  |  | (1,647,000 | ) |  | 753,000 |
East Lake Capital Management | SHO |  | Renovation |  | 400,000 |  |  | — |  |  | 400,000 |
Senior Living Communities | SHO |  | Renovation |  | 6,830,000 |  |  | (1,424,000 | ) |  | 5,406,000 |
Discovery Senior Living | SHO |  | Renovation |  | 500,000 |  |  | — |  |  | 500,000 |
Woodland Village | SHO |  | Renovation |  | 7,450,000 |  |  | (1,709,000 | ) |  | 5,741,000 |
Chancellor Health Care | SHO |  | Construction |  | 650,000 |  |  | (62,000 | ) |  | 588,000 |
Navion Senior Solutions | SHO |  | Construction |  | 650,000 |  |  | — |  |  | 650,000 |
|  |  |  |  | $ | 88,380,000 |  |  | $ | (41,363,000 | ) |  | $ | 47,017,000 |

As discussed in Note 2 and shown above, we remain obligated to purchase, from a developer, two new skilled nursing facilities in Texas for $28,000,000 which are leased to Legend and subleased to Ensign.

| Asset Class |  | Type |  | Total |  | Funded |  | Remaining
Contingencies: |  |  |  |  |  |  |  |  |
Bickford Senior Living | SHO |  | Lease Inducement |  | $ | 10,000,000 |  |  | $ | (3,250,000 | ) |  | $ | 6,750,000 |
Bickford Senior Living | SHO |  | Incentive Draws |  | 6,000,000 |  |  | (250,000 | ) |  | $ | 5,750,000 |
East Lake Capital Management | SHO |  | Lease Inducement |  | 8,000,000 |  |  | — |  |  | 8,000,000 |
Navion Senior Solutions | SHO |  | Lease Inducement |  | 4,850,000 |  |  | — |  |  | 4,850,000 |
Prestige Care | SHO |  | Lease Inducement |  | 1,000,000 |  |  | — |  |  | 1,000,000 |
The LaSalle Group | SHO |  | Lease Inducement |  | 5,000,000 |  |  | — |  |  | 5,000,000 |
|  |  |  |  | $ | 34,850,000 |  |  | $ | (3,500,000 | ) |  | $ | 31,350,000 |

Contingent payments related to the five Bickford development properties constructed in 2016 and 2017 include a licensure incentive of $250,000 per property and a three-tiered operator incentive schedule paying up to an additional $1,750,000, based on the attainment of certain performance metrics. As funded, these payments are added to the lease base and amortized against rental income.
For a discussion of incentive loan draws available to Bickford related to the development of its properties in Illinois, Michigan and Virginia, see Note 3.
In connection with our July 2015 lease to East Lake of three senior housing properties, NHI has committed to certain lease inducement payments of $8,000,000 contingent on reaching and maintaining certain metrics. The inducements have been assessed as not probable of payment, and we have not recorded them on our balance sheets as of March 31, 2018. We are unaware of circumstances that would change our initial assessment as to the contingent lease incentives. Not included in the above table is a seller earnout of $750,000, which is recorded on our condensed consolidated balance sheets within accounts payable and accrued expenses.
Litigation
Our facilities are subject to claims and suits in the ordinary course of business. Our lessees and borrowers have indemnified, and are obligated to continue to indemnify us, against all liabilities arising from the operation of the facilities, and are further
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obligated to indemnify us against environmental or title problems affecting the real estate underlying such facilities. While there may be lawsuits pending against certain of the owners and/or lessees of the facilities, management believes that the ultimate resolution of all such pending proceedings will have no material adverse effect on our financial condition, results of operations or cash flows.
NOTE 7. INVESTMENT AND OTHER GAINS
The following table summarizes our investment and other gains (in thousands):

| Three Months Ended
| March 31,
| 2018 |  | 2017
Gains on sale of real estate | $ | — |  |  | $ | 50 |
Gains on sales of marketable securities | — |  |  | 10,038 |
| $ | — |  |  | $ | 10,088 |

In January and February 2017, we recognized gains of $10,038,000 on sales totaling $11,718,000 of marketable securities with a carrying value $11,745,000 and an adjusted cost of $1,680,000 at December 31, 2016. Total proceeds of $18,182,000 from marketable securities for 2017 included settlements occurring in 2017 of $6,464,000 that resulted from sales in December 2016.
NOTE 8. STOCK-BASED COMPENSATION
We recognize stock-based compensation for all stock options granted over the requisite service period using the fair value of these grants as estimated at the date of grant using the Black-Scholes pricing model, and all restricted stock granted over the requisite service period using the market value of our publicly-traded common stock on the date of grant.
Stock-Based Compensation Plans
The Compensation Committee of the Board of Directors (“the Committee”) has the authority to select the participants to be granted options; to designate whether the option granted is an incentive stock option (“ISO”), a non-qualified option, or a stock appreciation right; to establish the number of shares of common stock that may be issued upon exercise of the option; to establish the vesting provision for any award; and to establish the term any award may be outstanding. The exercise price of any ISO’s granted will not be less than 100% of the fair market value of the shares of common stock on the date granted, and the term of an ISO may not be more than ten years. The exercise price of any non-qualified options granted will not be less than 100% of the fair market value of the shares of common stock on the date granted unless so determined by the Committee.
In May 2012, our stockholders approved the 2012 Stock Incentive Plan (“the 2012 Plan”) pursuant to which 1,500,000 shares of our common stock were made available to grant as stock-based payments to employees, officers, directors or consultants. Through a vote of our shareholders on May 7, 2015, we increased the maximum number of shares under the plan from 1,500,000 shares to 3,000,000 shares; increased the automatic annual grant to non-employee directors from 15,000 shares to 20,000 shares; and limited the Company’s ability to re-issue shares under the Plan. Through a second amendment approved on May 4, 2018, our shareholders voted to increase the maximum number of shares under the plan to 3,500,000 and to increase the automatic annual grant to non-employee directors to 25,000. The individual restricted stock and option grant awards vest over periods up to five years. The term of the options under the 2012 Plan is up to ten years from the date of grant.
As of March 31, 2018, there were 391,668 shares available for future grants under the 2012 Plan.
In May 2005, our stockholders approved the NHI 2005 Stock Option Plan (“the 2005 Plan”) pursuant to which 1,500,000 shares of our common stock were made available to grant as stock-based payments to employees, officers, directors or consultants. The 2005 Plan has expired and no additional shares may be granted under the 2005 Plan. The individual restricted stock and option grant awards vest over periods up to ten years. The term of the options outstanding under the 2005 Plan is up to ten years from the date of grant.
Compensation expense is recognized only for the awards that ultimately vest. Accordingly, forfeitures that were not expected will result in the reversal of previously recorded compensation expense. The compensation expense reported for the three months ended March 31, 2018 and 2017 was $1,425,000 and $1,523,000, respectively, and is included in general and administrative expense in the Condensed Consolidated Statements of Income.
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At March 31, 2018, we had, net of expected forfeitures, $1,707,000 of unrecognized compensation cost related to unvested stock options which is expected to be expensed over the following periods: 2018 - $1,105,000, 2019 - $542,000 and 2020 - $60,000.
The weighted average fair value per share of options granted during the three months ended March 31, 2018 and 2017 was $4.49 and $5.75, respectively. The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

| 2018 |  | 2017
Dividend yield | 6.5% |  | 5.3%
Expected volatility | 19.4% |  | 19.8%
Expected lives | 3.3 years |  | 2.9 years
Risk-free interest rate | 2.39% |  | 1.49%

The following table summarizes our outstanding stock options:

| Three Months Ended
| March 31,
| 2018 |  | 2017
Options outstanding January 1, | 859,182 |  |  | 541,679 |
Options granted under 2012 Plan | 560,000 |  |  | 485,000 |
Options exercised under 2012 Plan | — |  |  | (25,833 | )
Options forfeited under 2012 Plan | (15,000 | ) |  | (6,668 | )
Options exercised under 2005 Plan | — |  |  | (15,000 | )
Options outstanding, March 31, | 1,404,182 |  |  | 979,178 |
Exercisable at March 31, | 949,160 |  |  | 585,827 |

NOTE 9. EARNINGS AND DIVIDENDS PER COMMON SHARE
The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assume the exercise of stock options and the conversion of our convertible debt using the treasury stock method, to the extent dilutive. If our average stock price for the period increases over the conversion price of our convertible debt, the conversion feature will be considered dilutive.
The following table summarizes the average number of common shares and the net income used in the calculation of basic and diluted earnings per common share (in thousands, except share and per share amounts):

| Three Months Ended
| March 31,
| 2018 |  | 2017
Net income | $ | 38,432 |  |  | $ | 44,230 |
BASIC: |  |  |
Weighted average common shares outstanding | 41,532,154 |  |  | 39,953,804 |
DILUTED: |  |  |
Weighted average common shares outstanding | 41,532,154 |  |  | 39,953,804 |
Stock options | 44,722 |  |  | 56,910 |
Convertible subordinated debentures | — |  |  | 98,048 |
Average dilutive common shares outstanding | 41,576,876 |  |  | 40,108,762 |
Net income per common share - basic | $ | .93 |  |  | $ | 1.11 |
Net income per common share - diluted | $ | .92 |  |  | $ | 1.10 |
Incremental shares excluded since anti-dilutive: |  |  |
Net share effect of stock options and convertible debt with an exercise or conversion price in excess of the average market price for our common shares | 118,639 |  |  | 19,851 |
Regular dividends declared per common share | $ | 1.00 |  |  | $ | .95 |

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NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial assets and liabilities measured at fair value (based on the hierarchy of the three levels of inputs described in Note 1 to the consolidated financial statements contained in our most recent Annual Report on Form 10-K) on a recurring basis have included marketable securities, derivative financial instruments and contingent consideration arrangements. Derivative financial instruments include our interest rate swap agreements. Contingent consideration arrangements relate to certain provisions of recent real estate purchase agreements involving business combinations.
Derivative financial instruments. Derivative financial instruments are valued in the market using discounted cash flow techniques. These techniques incorporate Level 1 and Level 2 inputs. The market inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation model for interest rate swaps are observable in active markets and are classified as Level 2 in the hierarchy.
Contingent consideration. Contingent consideration arrangements are classified as Level 3 and are valued using unobservable inputs about the nature of the contingent arrangement and the counter-party to the arrangement, as well as our assumptions about the probability of full settlement of the contingency.
Assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):

|  |  | Fair Value Measurement
| Balance Sheet Classification |  | March 31, 2018 |  | December 31, 2017
Level 2 |  |  |  |  |
Interest rate swap asset | Other assets |  | $ | 1,332 |  |  | $ | 159 |
Interest rate swap liability | Accounts payable and accrued expenses |  | $ | — |  |  | $ | 747 |

Carrying values and fair values of financial instruments that are not carried at fair value at March 31, 2018 and December 31, 2017 in the Condensed Consolidated Balance Sheets are as follows (in thousands):

| Carrying Amount |  | Fair Value Measurement
| 2018 |  | 2017 |  | 2018 |  | 2017
Level 2 |  |  |  |  |  |  |
Variable rate debt | $ | 506,991 |  |  | $ | 465,642 |  |  | $ | 512,000 |  |  | $ | 471,000 |
Fixed rate debt | $ | 653,235 |  |  | $ | 679,855 |  |  | $ | 642,700 |  |  | $ | 679,385 |
Level 3 |  |  |  |  |  |  |
Mortgage and other notes receivable | $ | 145,845 |  |  | $ | 141,486 |  |  | $ | 142,962 |  |  | $ | 140,049 |

Fixed rate debt. Fixed rate debt is classified as Level 2 and its value is based on quoted prices for similar instruments or calculated utilizing model derived valuations in which significant inputs are observable in active markets.
Mortgage and other notes receivable. The fair value of mortgage and other notes receivable is based on credit risk and discount rates that are not observable in the marketplace and therefore represents a Level 3 measurement.
Carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature. The fair value of our borrowings under our revolving credit facility and other variable rate debt are reasonably estimated at their notional amounts at March 31, 2018 and December 31, 2017, due to the predominance of floating interest rates, which generally reflect market conditions.
NOTE 11. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014 the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 provides a principles-based approach for a broad range of revenue generating transactions, including the sale of real estate, which will generally require more estimates, judgment and disclosures than under current guidance. In August 2015 the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09. ASU 2014-09 is now effective for public entities for annual periods beginning after December 15, 2017, including interim periods therein.
The Company adopted this standard using the modified retrospective method on January 1, 2018. The ASU provides for revenues from leases to continue to follow the guidance in Topics 840 and 842 (when adopted) and provides for loans to follow established guidance in Topic 310. Because this ASU specifically excludes these areas of our operations from its scope, there was no impact to our accounting for lease revenue and interest income resulting from the ASU. Additionally, the other significant types
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of contracts in which we periodically engage, sales of real estate to customers, typically never remain executory across points in time. Because all performance obligations from these contracts can therefore be expected to continue to fall within a single period, the timing of our revenue recognition from future sales of real estate is not expected to be affected by the ASU. A number of practical expedients are available in applying the recognition and measurement principles within the standard, including those permitting the aggregation of contract revenues and costs with components of interest income or amortization expense whose period of aggregation, within parameters, is not considered to be of significant duration for separate treatment. We realized no significant revenues in 2017 or 2018 within the scope of ASU 2014-09, and, accordingly, adoption of the ASU did not have a material impact on the timing and measurement of the Company’s income.
In February 2016 the FASB issued ASU 2016-02, Leases, which has been codified under Topic 842. Public companies will be required to apply ASU 2016-02 for all accounting periods beginning after December 15, 2018. Early adoption is permitted. All leases with lease terms greater than one year are subject to ASU 2016-02, including leases in place as of the adoption date. The principal difference between Topic 842 and previous guidance is that, for lessees, lease assets and lease liabilities arising from operating leases will be recognized in the balance sheet. While, the accounting applied by a lessor is largely unchanged from that applied under previous GAAP, significant changes to lessor accounting have been made to align i) certain lessor and lessee accounting guidance, and ii) key aspects of the lessor accounting model with the revenue recognition guidance in Topic 606, Revenue from Contracts with Customers, which we adopted January 1, 2018. Under Topic 842 provisions promulgated to conform with Topic 606, the presence of a lessee purchase option can result in recording as a financing a transaction that would otherwise meet the requirements for lease accounting under previous guidance. As a result, NHI may explore different structures to continue to apply lease accounting rather than record a financing similar to a long-term note. The accounting treatment for sale-leaseback transactions will mirror the current guidance for lessees which may result in a financing transaction. Upon adoption the Company anticipates grossing up rental income for property taxes and insurance, currently paid by tenants.
The Company will continue to evaluate the impact of Topic 842 on our consolidated financial statements. Consistent with present standards, upon the adoption of ASU 2016-02, NHI will continue to account for lease revenue on a straight-line basis for most leases. Also consistent with NHI’s current practice, under ASU 2016-02 only initial direct costs that are incremental to the lessor will be capitalized. We have made significant progress in evaluating the extent to which adopting the provisions of ASU 2016-02 in 2019 will affect NHI.
In June 2016 the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 will require more timely recognition of credit losses associated with financial assets. While current GAAP includes multiple credit impairment objectives for instruments, the previous objectives generally delayed recognition of the full amount of credit losses until the loss was probable of occurring. The amendments in ASU 2016-13, whose scope is asset-based and not restricted to financial institutions, eliminate the probable initial recognition threshold in current GAAP and, instead, reflect an entity’s current estimate of all expected credit losses. Previously, when credit losses were measured under GAAP, we generally only considered past events and current conditions in measuring the incurred loss. The amendments in ASU 2016-13 broaden the information that we must consider in developing our expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss that will be more useful to users of the financial statements. ASU 2016-13 is effective for public entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Because we are likely to continue to invest in loans and generate receivables, adoption of ASU 2016-13 in 2020 will have some effect on our accounting for these investments, though the nature of those effects will depend on the composition of our loan portfolio at that time; accordingly, we are in the initial stages of evaluating the extent of the effects, if any, that adopting the provisions of ASU 2016-13 in 2020 will have on NHI.
In November 2016 the FASB issued ASU 2016-18, Restricted Cash. ASU 2016-18 will require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents, generally by requiring the inclusion of restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU do not provide a definition of restricted cash or restricted cash equivalents. ASU 2016-18 is effective for public entities for fiscal years beginning after December 15, 2017, including interim periods. The adoption of ASU 2016-18 did not have a material effect on our consolidated financial statements.
In January 2017 the FASB issued ASU 2017-01, Clarifying the Definition of a Business. ASU 2017-01 narrowed the definition of a business in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business-inputs, processes, and outputs. Currently the definition of outputs contributes to broad interpretations of the definition of a business. Additionally, the standard provides that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. For purposes of this test, land and buildings can be combined along with the intangible assets for any in-place leases. For most of NHI’s acquisitions of investment property, this screen would be met
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and, therefore, not meet the definition of a business. ASU 2017-01 became effective for public entities for fiscal years beginning after December 15, 2017, including interim periods. Early application of this standard is generally allowed for acquisitions acquired after the standard was issued but before the acquisition has been reflected in financial statements. We adopted the provisions of ASU 2017-01 in the first quarter of 2017. The adoption of ASU 2017-01 did not have a material effect on our consolidated financial statements. Our acquisitions in 2018 and 2017 were accounted for as asset purchases.
In August 2017 the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, which is available for early adoption in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities.
On January 1, 2018, we adopted ASU 2017-12 Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, among whose provisions is a change in the timing and income statement line item for ineffectiveness related to cash flow hedges. The transition method is a modified retrospective approach that will require the Company to recognize the cumulative effect of initially applying the ASU as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that we adopt the update. The primary provision in the ASU requiring an adjustment to our beginning consolidated retained earnings is the change in timing and income statement line item for ineffectiveness related to cash flow hedges. As a result of the transition guidance provided in the ASU, as of January 1, 2018, cumulative ineffectiveness as adjusted for any prior off-market cashflow hedges was reclassified out of beginning retained earnings and into accumulated other comprehensive income. With the adoption of the ASU, the Company has achieved a better alignment of the Company’s financial reporting for hedging activities with the economic objectives of those activities.
NOTE 12. SUBSEQUENT EVENT
Bickford
On April 30, 2018, we acquired an assisted living/memory-care portfolio comprised of five facilities totaling 320 units in Ohio and Pennsylvania. The purchase price was $69,750,000, inclusive of $500,000 in closing costs and $1,750,000 in specified capital improvements, which will be added to the lease base upon funding. We included this portfolio in a new master lease with Bickford which provides for a lease rate of 6.85%, with annual fixed escalators over a term of 15 years plus renewal options, subject to a fair market value rent reset feature available to NHI between years three and five. We accounted for the acquisition as an asset purchase.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
References throughout this document to NHI or the Company include National Health Investors, Inc., and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words “we”, “our”, “ours” and “us” refer only to National Health Investors, Inc. and its consolidated subsidiaries and not any other person. Unless the context indicates otherwise, references herein to “the Company” include all of our consolidated subsidiaries.
This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission, as well as information included in oral statements made, or to be made, by our senior management contain certain “forward-looking” statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations, cash flows, funds from operations, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, and similar statements including, without limitation, those containing words such as “may,” “will,” “believes,” “anticipates,” “expects,” “intends,” “estimates,” “plans,” and other similar expressions, are forward-looking statements.
Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements as a result of factors including, but not limited to, the following:

* | We depend on the operating success of our tenants and borrowers for collection of our lease and note payments;

* | We depend on the success of property development and construction activities, which may fail to achieve the operating results we expect;

* | We are exposed to the risk that our tenants and borrowers may become subject to bankruptcy or insolvency proceedings;

* | We are exposed to risks related to governmental regulations and payors, principally Medicare and Medicaid, and the effect that lower reimbursement rates would have on our tenants’ and borrowers’ business;

* | Legislative, regulatory, or administrative changes could adversely affect us or our security holders.

* | We are exposed to the risk that the cash flows of our tenants and borrowers would be adversely affected by increased liability claims and liability insurance costs;

* | We are exposed to risks related to environmental laws and the costs associated with liabilities related to hazardous substances;

* | We are exposed to the risk that we may not be fully indemnified by our lessees and borrowers against future litigation;

* | We depend on the success of our future acquisitions and investments;

* | We depend on our ability to reinvest cash in real estate investments in a timely manner and on acceptable terms;

* | We may need to refinance existing debt or incur additional debt in the future, which may not be available on terms acceptable to us;

* | We have covenants related to our indebtedness which impose certain operational limitations and a breach of those covenants could materially adversely affect our financial condition and results of operations;

* | We are exposed to the risk that the illiquidity of real estate investments could impede our ability to respond to adverse changes in the performance of our properties;

* | When interest rates increase, our common stock may decline in price;

* | Certain tenants in our portfolio account for a significant percentage of the rent we expect to generate from our portfolio, and the failure of any of these tenants to meet their obligations to us could materially and adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

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* | We depend on revenues derived mainly from fixed rate investments in real estate assets, while a portion of our debt capital used to finance those investments bear interest at variable rates. This circumstance creates interest rate risk to the Company;

* | We are exposed to the risk that our assets may be subject to impairment charges;

* | We depend on the ability to continue to qualify for taxation as a real estate investment trust;

* | We have ownership limits in our charter with respect to our common stock and other classes of capital stock which may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or might otherwise be in the best interests of our stockholders;

* | We are subject to certain provisions of Maryland law and our charter and bylaws that could hinder, delay or prevent a change in control transaction, even if the transaction involves a premium price for our common stock or our stockholders believe such transaction to be otherwise in their best interests.

* | If our efforts to maintain the privacy and security of Company information are not successful, we could incur substantial costs and reputational damage, and could become subject to litigation and enforcement actions.

See the notes to the annual audited consolidated financial statements in our most recent Annual Report on Form 10-K for the year ended December 31, 2017, and “Business” and “Risk Factors” under Item 1 and Item 1A therein for a further discussion of these and of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. You should carefully consider these risks before making any investment decisions in the Company. These risks and uncertainties are not the only ones facing the Company. There may be additional risks that we do not presently know of and/or that we currently deem immaterial. If any of the risks actually occur, our business, financial condition, results of operations, or cash flows could be materially adversely affected. In that case, the trading price of our shares of stock could decline and you may lose part or all of your investment. Given these risks and uncertainties, we can give no assurance that these forward-looking statements will, in fact, occur and, therefore, caution investors not to place undue reliance on them.
Executive Overview
National Health Investors, Inc., established in 1991 as a Maryland corporation, is a self-managed real estate investment trust (“REIT”) specializing in sale-leaseback, joint-venture, mortgage and mezzanine financing of need-driven and discretionary senior housing and medical facility investments. Our portfolio consists of real estate investments in independent living facilities, assisted living facilities, entrance-fee communities, senior living campuses, skilled nursing facilities, specialty hospitals and medical office buildings. We fund our real estate investments primarily through: (1) operating cash flow, (2) debt offerings, including bank lines of credit and term debt, both unsecured and secured, and (3) the sale of equity securities.
Portfolio
As of March 31, 2018, we had investments in real estate and mortgage and other notes receivable involving 220 facilities located in 32 states. These investments involve 142 senior housing properties, 73 skilled nursing facilities, 3 hospitals, 2 medical office buildings and other notes receivable. These investments (excluding our corporate office of $1,298,000) consisted of properties with an original cost of approximately $2,682,387,000, rented under triple-net leases to 27 lessees, and $145,845,000 aggregate net carrying value of mortgage and other notes receivable due from 11 borrowers.
Our investments in real estate are located within the United States and our investments in mortgage loans are secured by real estate located within the United States. We are managed as one unit for internal reporting and decision making. Therefore, our reporting reflects our financial position and operations as a single segment.
We classify all of the properties in our portfolio as either senior housing or medical properties. Because our leases represent different underlying revenue sources and result in differing risk profiles, we further classify our senior housing communities as either need-driven (assisted living and memory care communities and senior living campuses) or discretionary (independent living and entrance-fee communities.)
Senior Housing – Need-Driven includes assisted living and memory care communities (“ALF”) and senior living campuses (“SLC”) which primarily attract private payment for services from residents who require assistance with activities of daily living. Need-driven properties are subject to regulatory oversight.
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Senior Housing – Discretionary includes independent living (“ILF”) and entrance-fee communities (“EFC”) which primarily attract private payment for services from residents who are making the lifestyle choice of living in an age-restricted multi-family community that offers social programs, meals, housekeeping and in some cases access to healthcare services. Discretionary properties are subject to limited regulatory oversight. There is a correlation between demand for this type of community and the strength of the housing market.
Medical Facilities within our portfolio receive payment primarily from Medicare, Medicaid and health insurance. These properties include skilled nursing facilities (“SNF”), medical office buildings (“MOB”) and hospitals that attract patients who have a need for acute or complex medical attention, preventative medicine, or rehabilitation services. Medical properties are subject to state and federal regulatory oversight and, in the case of hospitals, Joint Commission accreditation.
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The following tables summarize our investments in real estate and mortgage and other notes receivable as of March 31, 2018 (dollars in thousands):

Real Estate Properties | Properties |  |  | Beds/Sq. Ft.* |  |  | Revenue |  | % |  | Investment
| Senior Housing - Need-Driven |  |  |  |  |  |  |  |  |
|  | Assisted Living | 86 |  |  | 4,192 |  |  | $ | 18,750 |  |  | 25.8 | % |  | $ | 766,180 |
|  | Senior Living Campus | 10 |  |  | 1,323 |  |  | 4,242 |  |  | 5.8 | % |  | 162,139 |
|  | Total Senior Housing - Need-Driven | 96 |  |  | 5,515 |  |  | 22,992 |  |  | 31.6 | % |  | 928,319 |
| Senior Housing - Discretionary |  |  |  |  |  |  |  |  |
|  | Independent Living | 30 |  |  | 3,412 |  |  | 12,266 |  |  | 16.9 | % |  | 548,384 |
|  | Entrance-Fee Communities | 10 |  |  | 2,363 |  |  | 12,699 |  |  | 17.5 | % |  | 599,508 |
|  | Total Senior Housing - Discretionary | 40 |  |  | 5,775 |  |  | 24,965 |  |  | 34.4 | % |  | 1,147,892 |
|  | Total Senior Housing | 136 |  |  | 11,290 |  |  | 47,957 |  |  | 66.0 | % |  | 2,076,211 |
| Medical Facilities |  |  |  |  |  |  |  |  |
|  | Skilled Nursing Facilities | 69 |  |  | 8,934 |  |  | 19,131 |  |  | 26.3 | % |  | 539,719 |
|  | Hospitals | 3 |  |  | 181 |  |  | 1,998 |  |  | 2.7 | % |  | 55,971 |
|  | Medical Office Buildings | 2 |  |  | 88,517 |  | * | 167 |  |  | 0.2 | % |  | 10,486 |
|  | Total Medical Facilities | 74 |  |  |  |  | 21,296 |  |  | 29.2 | % |  | 606,176 |
|  | Total Real Estate Properties | 210 |  |  |  |  | $ | 69,253 |  |  | 95.2 | % |  | $ | 2,682,387 |
Mortgage and Other Notes Receivable |  |  |  |  |  |  |  |  |
| Senior Housing - Need-Driven | 5 |  |  | 312 |  |  | $ | 836 |  |  | 1.2 | % |  | $ | 40,081 |
| Senior Housing - Discretionary | 1 |  |  | 400 |  |  | 1,438 |  |  | 2.0 | % |  | 54,693 |
| Medical Facilities | 4 |  |  | 270 |  |  | 175 |  |  | 0.2 | % |  | 7,762 |
| Other Notes Receivable | — |  |  | — |  |  | 1,011 |  |  | 1.4 | % |  | 43,309 |
|  | Total Mortgage and Other Notes Receivable | 10 |  |  | 982 |  |  | 3,460 |  |  | 4.8 | % |  | 145,845 |
|  | Total Portfolio | 220 |  |  |  |  | $ | 72,713 |  |  | 100.0 | % |  | $ | 2,828,232 |

Portfolio Summary | Properties |  |  | Beds/Sq. Ft.* |  |  | Revenue |  | % |  | Investment
| Real Estate Properties | 210 |  |  |  |  | $ | 69,253 |  |  | 95.1 | % |  | $ | 2,682,387 |
| Mortgage and Other Notes Receivable | 10 |  |  |  |  | 3,460 |  |  | 4.9 | % |  | 145,845 |
|  | Total Portfolio | 220 |  |  |  |  | $ | 72,713 |  |  | 100.0 | % |  | $ | 2,828,232 |
Summary of Facilities by Type |  |  |  |  |  |  |  |  |
| Senior Housing - Need-Driven |  |  |  |  |  |  |  |  |
|  | Assisted Living | 91 |  |  | 4,504 |  |  | $ | 19,587 |  |  | 26.9 | % |  | $ | 806,261 |
|  | Senior Living Campus | 10 |  |  | 1,323 |  |  | 4,242 |  |  | 5.8 | % |  | 162,139 |
|  | Total Senior Housing - Need-Driven | 101 |  |  | 5,827 |  |  | 23,829 |  |  | 32.7 | % |  | 968,400 |
| Senior Housing - Discretionary |  |  |  |  |  |  |  |  |
|  | Entrance-Fee Communities | 11 |  |  | 2,763 |  |  | 14,136 |  |  | 19.5 | % |  | 654,201 |
|  | Independent Living | 30 |  |  | 3,412 |  |  | 12,266 |  |  | 16.9 | % |  | 548,384 |
|  | Total Senior Housing - Discretionary | 41 |  |  | 6,175 |  |  | 26,402 |  |  | 36.4 | % |  | 1,202,585 |
|  | Total Senior Housing | 142 |  |  | 12,002 |  |  | 50,231 |  |  | 69.1 | % |  | 2,170,985 |
| Medical Facilities |  |  |  |  |  |  |  |  |
|  | Skilled Nursing Facilities | 73 |  |  | 9,204 |  |  | 19,306 |  |  | 26.6 | % |  | 547,480 |
|  | Hospitals | 3 |  |  | 181 |  |  | 1,998 |  |  | 2.7 | % |  | 55,971 |
|  | Medical Office Buildings | 2 |  |  | 88,517 |  | * | 167 |  |  | 0.2 | % |  | 10,487 |
|  | Total Medical | 78 |  |  |  |  | 21,471 |  |  | 29.5 | % |  | 613,938 |
| Other | — |  |  |  |  | 1,011 |  |  | 1.4 | % |  | 43,309 |
|  | Total Portfolio | 220 |  |  |  |  | $ | 72,713 |  |  | 100.0 | % |  | $ | 2,828,232 |
Portfolio by Operator Type |  |  |  |  |  |  |  |  |
| Public | 71 |  |  |  |  | $ | 17,856 |  |  | 24.6 | % |  | $ | 499,956 |
| National Chain (Privately-Owned) | 27 |  |  |  |  | 11,654 |  |  | 16.0 | % |  | 521,139 |
| Regional | 116 |  |  |  |  | 42,099 |  |  | 57.9 | % |  | 1,763,323 |
| Small | 6 |  |  |  |  | 1,104 |  |  | 1.5 | % |  | 43,814 |
|  | Total Portfolio | 220 |  |  |  |  | $ | 72,713 |  |  | 100.0 | % |  | $ | 2,828,232 |

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For the three months ended March 31, 2018, operators of facilities which provided more than 3% of our total revenues were (in alphabetical order): Bickford Senior Living; Chancellor Health Care; The Ensign Group; Health Services Management; Holiday Retirement; National HealthCare Corp; and Senior Living Communities.
As of March 31, 2018, our average effective annualized rental income was $8,599 per bed for skilled nursing facilities, $12,825 per unit for senior living campuses, $17,892 per unit for assisted living facilities, $14,380 per unit for independent living facilities, $21,496 per unit for entrance-fee communities, $44,150 per bed for hospitals, and $8 per square foot for medical office buildings.
Areas of Focus
We are evaluating and will potentially make additional investments during the remainder of 2018 while we continue to monitor and improve our existing properties. We seek tenants who will become mission-oriented partners in relationships where our business goals are aligned. This approach fuels steady, and thus, enduring growth for those partners and for NHI. Within the context of our growth model, we rely on a cost-effective access to debt and equity capital to finance acquisitions that will drive our earnings. There is significant competition for healthcare assets from other REITs, both public and private, and from private equity sources. Large-scale portfolios continue to command premium pricing, due to the continued abundance of private and foreign buyers seeking to invest in healthcare real estate. This combination of circumstances places a premium on our ability to execute acquisitions and negotiate leases that will generate meaningful earnings growth for our shareholders. We emphasize growth with our existing tenants and borrowers as a way to insulate us from other competition.
With lower capitalization rates for existing healthcare facilities, there has been increased interest in constructing new facilities in hopes of generating better returns on invested capital. Using our relationship-driven model, we continue to look for opportunities to support new and existing tenants and borrowers with the capital needed to expand existing facilities and to initiate ground-up development of new facilities. We concentrate our efforts in those markets where there is both a demonstrated demand for a particular product type and where we perceive we have a competitive advantage. The projects we agree to finance have attractive upside potential and are expected to provide above-average returns to our shareholders to mitigate the risks inherent with property development and construction.
Following three 25 basis point increases in 2017, the Federal Open Market Committee of the Federal Reserve announced an increase in its benchmark federal funds rate by 25 basis points on March 21, 2018. At the same time, the Committee held steady in its projection of two more rate increases in 2018 but raised its projection from two to three hikes in 2019 as inflation is expected to pick up. The anticipation of past and further increases in the federal funds rate in 2018 and beyond has been a primary source of much volatility in REIT equity markets. As a result, there will be pressure on the spread between our cost of capital and the returns we earn. We expect that pressure to be partially mitigated by market forces that would tend to result in higher capitalization rates for healthcare assets and higher lease rates indicative of historical levels. Our cost of capital has increased over the past year as we transition some of our short term revolving borrowings into debt instruments with longer maturities and fixed interest rates. Managing long-term risk involves trade-offs with the competing alternative goal of maximizing short-term profitability. Our intention is to strike an appropriate balance between these competing interests within the context of our investor profile. As interest rates rise, our share price may decline as investors adjust prices to reflect a dividend yield that is sufficiently in excess of a risk free rate.
For the three months ended March 31, 2018, approximately 27% of our revenue from continuing operations was derived from operators of our skilled nursing facilities that receive a significant portion of their revenue from governmental payors, primarily Medicare and Medicaid. Such revenues are subject annually to statutory and regulatory changes and in recent years have been reduced due to federal and state budgetary pressures. Over the past five years, we have selectively diversified our portfolio by directing a significant portion of our investments into properties which rely primarily on private pay sources (assisted living and memory care facilities, senior living campuses, independent living facilities and entrance-fee communities) rather than on Medicare and Medicaid reimbursement. We will occasionally acquire skilled nursing facilities in good physical condition with a proven operator and strong local market fundamentals, because diversification implies a periodic rebalancing, but our recent investment focus has been on acquiring need-driven and discretionary senior housing assets.
Considering individual tenant lease revenue as a percentage of total revenue, an affiliate of Holiday Retirement is our largest independent living tenant, Bickford Senior Living is our largest assisted living tenant, National HealthCare Corporation is our largest skilled nursing tenant and Senior Living Communities is our largest entrance-fee community tenant. Our shift toward private payor facilities, as well as our expansion into the discretionary senior housing market, has further resulted in a portfolio whose current composition is relatively balanced between medical facilities, need-driven and discretionary senior housing.
We manage our business with a goal of (a) increasing normalized Adjusted Funds From Operations (“AFFO”) by at least 5% per share annually, and (b) increasing the regular annual dividends paid to shareholders by at least 5% per share. Our Board of
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Directors approves a regular quarterly dividend which is reflective of expected taxable income on a recurring basis. Infrequent and non-recurring transactions that generate additional taxable income have been distributed to shareholders in the form of special dividends. Taxable income is determined in accordance with the Internal Revenue Code and differs from net income for financial statements purposes determined in accordance with U.S. generally accepted accounting principles. Our goal of increasing annual dividends requires a careful balance between identification of high-quality lease and mortgage assets in which to invest and the cost of our capital with which to fund such investments. We consider the competing features of short and long-term debt (interest rates, maturities and other terms) versus the higher cost of new equity. We accept some level of risk associated with leveraging our investments. We intend to continue to make new investments that meet our underwriting criteria and where the spreads over our cost of capital will generate sufficient returns to our shareholders.
Our projected dividends for the current year and actual dividends for the last two years are as follows:

2018 1 |  | 2017 |  | 2016
$ | 4.00 |  |  | $ | 3.80 |  |  | $ | 3.60 |

1 Based on $1.00 per common share for the first quarter of 2018, annualized
Our ability to effectively leverage our assets helps provide a reliable path for continued investments in healthcare real estate; however, compared with many in our peer group, we continue to maintain a relatively low-leverage balance sheet. We believe that our fixed charge coverage ratio, which is the ratio of Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, excluding real estate asset impairments and gains on dispositions) to fixed charges (interest and principal payments on debt at contractual rates, net of capitalized interest), and the ratio of consolidated net debt to Adjusted EBITDA are meaningful measures of our ability to service our debt. We use these two measures as a useful basis to compare the strength of our balance sheet with our peers. We also believe this strength gives us a competitive advantage when accessing debt markets.
We calculate our fixed charge coverage ratio as approximately 6.3x for the three months ended March 31, 2018 (see our discussion of Adjusted EBITDA and a reconciliation to our net income on page 41). On an annualized basis, our consolidated net debt to Adjusted EBITDA ratio is approximately 4.3x for the three months ended March 31, 2018 (in thousands):

Consolidated Total Debt | $ | 1,160,226 |
Less: cash and cash equivalents | (3,230 | )
Consolidated Net Debt | $ | 1,156,996 |
Adjusted EBITDA | $ | 67,950 |
Annualizing Adjustment | 203,850 |
| $ | 271,800 |
Consolidated Net Debt to Annualized Adjusted EBITDA | 4.3 | x

According to the Administration on Aging (“AoA”) of the US Department of Health and Human Services, in 2014, the latest year for which data is available, 46.2 million people (or 14.5% of the population) were age 65 or older in the United States. Census estimates showed that, by 2040, those 65 or older are expected to comprise 21.7% of the population.
Census estimates show that close to half of Americans currently age 65 will reach age 84 or older. As noted by Transgenerationalaging.org, “The fastest-growing segment of the total population is the oldest old - those 80 and over. Their growth rate is twice that of those 65 and over and almost 4 times that for the total population. In the United States, this group now represents 10% of the older population and will more than triple from 5.7 million in 2010 to over 19 million by 2050.” If the growth rate holds steady, from 5.7 million in 2010, the “oldest old” will comprise close to 12 million in the US by 2030.
Per the AoA, in 2013 the median value of homes owned by older persons was $150,000 (with a median purchase price of $63,900) compared to a median home value of $160,000 for all homeowners. Of the 26.8 million households headed by older persons in 2013, 81% were homeowners, about 65% of whom owned their homes free and clear. Home ownership provides the elderly with the freedom to choose their lifestyles.
Equipped with the basics of financial security, many will be economically able to enter the market for senior housing. These strong demographic trends provide the context for continued growth in senior housing in 2018 and the years ahead. We plan to fund any new real estate and mortgage investments during the remainder of 2018 using our liquid assets and debt financing. Should
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the weight of additional debt resulting from new acquisitions suggest the need to rebalance our capital structure, we would then expect to access the capital markets through an at-the-market (“ATM”) or other equity offering. Our disciplined investment strategy implemented through measured increments of debt and equity sets the stage for annual dividend growth, continued low leverage, a portfolio of diversified, high-quality assets, and business relationships with experienced operators whom we make our priority, continue to be the key drivers of our business plan.
Critical Accounting Policies
See our most recent Annual Report on Form 10-K for a discussion of critical accounting policies including those concerning revenue recognition, our status as a REIT, principles of consolidation, evaluation of impairments and allocation of property acquisition costs.
Significant Operators
As discussed in Note 2 to the condensed consolidated financial statements, we have four operators from whom we individually derive at least 10% of our rental income as follows (dollars in thousands):

|  |  |  |  | Rental Income |  |  |
|  |  | Investment |  | Three Months Ended March 31, |  |  | Lease
| Asset Class |  | Amount |  | 2018 |  |  | 2017 |  |  | Renewal
Holiday Retirement | ILF |  | $ | 493,378 |  |  | $ | 10,954 |  | 16% |  | $ | 10,954 |  | 17% |  | 2031
Senior Living Communities | EFC |  | 547,716 |  |  | 11,449 |  | 17% |  | 11,431 |  | 18% |  | 2029
National HealthCare Corporation | SNF |  | 171,297 |  |  | 9,674 |  | 14% |  | 9,513 |  | 15% |  | 2026
Bickford Senior Living | ALF |  | 460,945 |  |  | 11,445 |  | 17% |  | 9,373 |  | 15% |  | Various
All others | Various |  | 1,009,051 |  |  | 25,731 |  | 36% |  | 21,856 |  | 35% |  | Various
|  |  | $ | 2,682,387 |  |  | $ | 69,253 |  |  |  | $ | 63,127 |  |  |  |

Straight-line rent of $1,530,000 and $1,849,000 was recognized from the Holiday lease for the three months ended March 31, 2018 and 2017, respectively. Straight-line rent of $1,359,000 and $1,746,000 was recognized from the Senior Living lease for the three months ended March 31, 2018 and 2017, respectively. Straight-line rent of $1,169,000 and $910,000 was recognized from the Bickford leases for the three months ended March 31, 2018 and 2017, respectively. For NHC, rent escalations are based on a percentage increase in revenue over a base year and do not give rise to non-cash, straight-line rental income.
Our operators report to us the results of their operations, which we in turn subject to further analysis as a means of monitoring potential concerns within our portfolio. In our most fundamental analyses, we will typically compute EBITDARM, a property level measure of our operators’ success, by eliminating the effects of the operator’s method of acquiring the use of its assets (interest and rent), its non-cash expenses (depreciation and amortization), expenses that are dependent on its level of success (income taxes), and also excluding the effect of the operator’s payment of its management fees, as those fees are contractually subordinate to our lease payment. For operators of our EFCs, our covenants stipulate that EBITDARM reference other cash flow adjustments typical of the industry which may include but are not limited to net cash flows from entrance fees; amortization of deferred entrance fees; adjustments for tenant rent obligations, depreciation and amortization; and management fee true-ups. The eliminations and adjustments provide a comparable basis for assessing our various relationships.
EBITDARM attempts to tell a story in shorthand of the cash potential of a group of assets - for NHI this would be a senior housing community or a portfolio of communities. Social and other non-quantifiable benefits are disregarded. We rely on these, a careful balance sheet analysis, and other analytical procedures to guide us in making decisions and in managing our assets - our primary function as a REIT - from which flow the expected rewards of real estate ownership.
Typical among our operators is a varying lag in reporting to us the results of their operations. Across our portfolio, however, our operators can be counted on to have reported their results, at the latest, within ninety days of month’s end. We have identified EBITDARM as the most elemental barometer of success, based on results they have reported to us. From EBITDARM we calculate a lease coverage ratio (EBITDARM/Cash Rent), measuring the ability of the operator to meet its monthly rental obligation. For computational purposes, we exclude development and lease-up properties that have been in operation less than 24 months; for stabilized acquisitions in the portfolio less than 24 months, we include pro forma cash rent. The results by asset type are presented below on a trailing twelve-month basis, as of December 31, 2017 and 2016 (the most recent periods available):
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|  |  | 2017 |  | 2016
|  | Number of Properties | EBITDARM/ Cash Rent |  | EBITDARM/ Cash Rent
Senior Housing (SHO) |  |  |  |
| Need-Driven | 91 | 1.17x |  | 1.23x
| Discretionary | 37 | 1.29x |  | 1.32x
| Total SHO | 128 | 1.23x |  | 1.27x
Skilled Nursing | 71 | 2.52x |  | 2.58x
Hospitals | 3 | 2.08x |  | 2.36x
Medical Office | 2 | 3.85x |  | 11.66x

Fluctuations in portfolio coverage are a result of market and economic trends, local market competition, and regulatory factors as well as the operational success of our tenants. While the coverages above can be seen as informational only, and we use the results of individual leases to inform our decision making with respect to our specific tenants, overall trends bear analysis. The decline in coverages in our need-driven SHO portfolio has been driven primarily by a softening in occupancy within particular markets. For the affected operators, as is typical of our portfolio in general, NHI has significant security deposits in place and/or corporate guarantees should actual rental shortfalls eventually materialize. Changes in the operational structure of our largest skilled nursing tenant, which has incorporated into its business model an ownership strategy entailing new debt, have affected coverage from skilled nursing. Also within the skilled nursing portfolio, our newer tenants in the mix do not cover at the same rate as NHC. Additionally, we renegotiated certain SNF leases resulting in the recognition of higher rental revenues by NHI. The decline in MOB coverage in 2017 followed the devastation of Hurricane Harvey along the Texas coast.
Presented below are lease coverages from our four largest tenants during the same periods described above. Trends discussed above for our SNFs incorporate relevant information for NHC. For Bickford, strong occupancy trends outweigh any impact deriving from stabilized development properties in 2017. Holiday undertook significant operational restructuring affecting 2017 that led to a slight downturn in its trailing twelve-month coverage; however, recent three-month results indicate a significant recovery toward previous occupancy levels. Coverage remains strong within the Senior Living portfolio, where our presentation has been revised to properly account for allocated management fees not previously included in the EBITDARM calculation.

|  | 2017 |  | 2016
| Number of Properties | EBITDARM/ Cash Rent |  | EBITDARM/ Cash Rent
NHC | 42 | 3.60x |  | 3.64x
Senior Living | 9 | 1.30x |  | 1.34x
Bickford | 42 | 1.22x |  | 1.23x
Holiday | 25 | 1.16x |  | 1.19x

Investment Highlights
Since January 1, 2018, we have made or announced the following lease and note investments ($ in thousands):

|  | Date |  | Properties |  | Asset Class |  | Amount
Lease Investments |  |  |  |  |  |  |  |
The Ensign Group |  | January 2018 |  | 1 |  | SNF |  | $ | 14,404 |
Bickford Senior Living |  | April 2018 |  | 5 |  | SHO |  | 69,750 |
Note Investments |  |  |  |  |  |  |  |
Bickford Senior Living |  | January 2018 |  | 1 |  | SHO |  | 14,000 |
|  |  |  |  |  |  |  | $ | 98,154 |

The Ensign Group
On January 12, 2018, NHI acquired from a developer a 121-bed skilled nursing facility in Waxahachie, Texas for a cash investment of $14,404,000 plus $1,275,000 contributed by the lessee, Ensign. The facility is included under our existing master lease with Ensign for the remaining lease term of 13 years plus renewal options. The initial lease rate is set at 8.2% subject to annual escalators based on prevailing inflation rates. The acquisition was accounted for as an asset purchase.
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With the acquisition of the Waxahachie property, NHI has a continuing commitment to purchase, from the developer, two skilled nursing facilities in Texas for $28,000,000 which are newly developed, leased to Legend, and subleased to Ensign. The fixed-price nature of the commitment creates a variable interest for NHI in the developer, whom NHI considers to lack sufficient equity to finance its operations without recourse to additional subordinated debt. The presence of these conditions causes the developer to be considered a VIE.
Bickford
In January 2018, we finalized a new loan commitment to Bickford, funding of which during the three months ended March 31, 2018, was $1,742,000 toward a maximum of $14,000,000 for the project. The agreement conveys a mortgage interest and will facilitate construction of an assisted living facility in Virginia Beach. The construction loan bears interest at 9% and conveys a purchase option to NHI, exercisable upon stabilization, as defined. Upon exercise of the purchase option, rent will be reset based on NHI's total investment, with a floor of 9.55%.
Subsequent Event
On April 30, 2018, we acquired an assisted living/memory-care portfolio comprised of five facilities totaling 320 units in Ohio and Pennsylvania. The purchase price was $69,750,000, inclusive of $500,000 in closing costs and $1,750,000 in specified capital improvements, which will be added to the lease base upon funding. We included this portfolio in a master lease with Bickford which provides for a lease rate of 6.85%, with annual fixed escalators over a term of 15 years plus renewal options, subject to a fair market value rent reset feature available to NHI between years three and five. We accounted for the acquisition as an asset purchase.
Potential Effects of Medicare Reimbursement
Our SNF operators receive a significant portion of their revenues from governmental payors, primarily Medicare (federal) and Medicaid (states). Changes in reimbursement rates and limits on the scope of services reimbursed to skilled nursing facilities could have a material impact on the operators’ liquidity and financial condition. The Centers for Medicare and Medicaid Services (“CMS”) released a rule outlining a 1% increase in their Medicare reimbursement for fiscal year 2018 beginning on October 1, 2017. We currently estimate that our borrowers and lessees will be able to withstand this nominal Medicare increase due to their credit quality, profitability and their debt or lease coverage ratios, although no assurances can be given as to what the ultimate effect that similar Medicare increases on an annual basis would have on each of our borrowers and lessees. According to industry studies, state Medicaid funding is not expected to keep pace with inflation. Federal legislative policies have been adopted and continue to be proposed that would reduce Medicare and/or Medicaid payments to SNFs. Any near-term acquisitions of skilled nursing facilities are planned on a selective basis, with emphasis on operator quality and newer construction.
Other Portfolio Activity
Our leases are typically structured as “triple net leases” on single-tenant properties having an initial leasehold term of 10 to 15 years with one or more 5-year renewal options. As such, there may be reporting periods in which we experience few, if any, lease renewals or expirations. During the three months ended March 31, 2018, we did not have any renewing or expiring leases.
Most of our existing leases contain annual escalators in rent payments. For financial statement purposes, rental income is recognized on a straight-line basis over the term of the lease. Certain of our operators hold purchase options allowing them to acquire properties they currently lease from NHI. For options open or coming open in 2018, we are engaged in negotiations to continue as lessor or in some other capacity.
We adjust rental income for the amortization as lease inducements of payments made in the eventual settlement of commitments and contingencies. Current outstanding commitments and contingencies are listed later in Item 2 under our discussion of liquidity and capital resources. Amortization of these payments against revenues was $63,000 and $10,000 for the three months ended March 31, 2018 and 2017, respectively.
Tenant Non-Compliance
In October 2017, we issued a letter of forbearance to one of our tenants for a default on our lease terms involving coverage and liquidity ratios. Lease revenues from the tenant and its affiliates comprise less than 4% of our rental income, and the related straight-line rent receivable was approximately $3,773,000 at March 31, 2018. Through March 31, 2018, the tenant is current on its lease payments to NHI.
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We continue to work with the tenant to resolve their defaults. In the fourth quarter of 2017, we took steps to establish a more pronounced physical presence and to visit specific operational touchpoints that concentrate on the tenant’s revenue and expenditure cycles. Resulting from this work, we have identified and helped implement certain related efficiencies. The combination of monitoring and the redoubling of the operator’s efforts have helped bring about ongoing results (unaudited) that indicate some improvement in collections, operating ratios, occupancy and margins, and point the way to renewed profitability. With these developments, we are maintaining a heightened vigilance toward the performance of the portfolio. No rent concessions have been made to this tenant.
The defaults mentioned above typically give rise to considerations regarding the impairment or recoverability of the related assets, and we give additional attention to the nature of the default’s underlying causes. At this time, our assessment of likely undiscounted cash flows reveals no basis for an impairment charge on the underlying real estate.
Real Estate and Mortgage Write-downs
Our borrowers and tenants experience periods of significant financial pressures and difficulties similar to those encountered by other health care providers. Governments at both the federal and state levels have enacted legislation to lower, or at least slow, the growth in payments to health care providers. Furthermore, the cost of professional liability insurance has increased significantly during this same period. Since inception, a number of our facility operators and mortgage loan borrowers have undergone bankruptcy. Others have been forced to surrender properties to us in lieu of foreclosure or, for certain periods, have failed to make timely payments on their obligations to us.
We believe that the carrying amounts of our real estate properties are recoverable and that mortgage and other notes receivable are realizable and supported by the value of the underlying collateral. However, it is possible that future events could require us to make significant adjustments to these carrying amounts.
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Results of Operations
The significant items affecting revenues and expenses are described below (in thousands):

| Three Months Ended |  |  |  |
| March 31, |  | Period Change
| 2018 |  | 2017 |  | $ |  | %
Revenues: |  |  |  |  |  |  |
Rental income |  |  |  |  |  |  |
ALFs leased to Bickford Senior Living | $ | 10,275 |  |  | $ | 8,464 |  |  | $ | 1,811 |  |  | 21.4 | %
ALFs leased to The LaSalle Group | 1,094 |  |  | 192 |  |  | 902 |  |  | NM |
SNFs leased to Health Services Management | 2,450 |  |  | 1,851 |  |  | 599 |  |  | 32.4 | %
SNFs leased to Ensign Group | 5,103 |  |  | 4,550 |  |  | 553 |  |  | 12.2 | %
8 EFCs and 1 SLC leased to Senior Living Communities | 10,090 |  |  | 9,685 |  |  | 405 |  |  | 4.2 | %
2 ALFs and 3 SNFs leased to Prestige Senior Living | 1,416 |  |  | 1,046 |  |  | 370 |  |  | 35.4 | %
ILFs leased to an affiliate of Holiday Retirement | 9,424 |  |  | 9,105 |  |  | 319 |  |  | 3.5 | %
ALFs leased to Navion Senior Solutions | 434 |  |  | 125 |  |  | 309 |  |  | NM |
Other new and existing leases | 23,005 |  |  | 22,354 |  |  | 651 |  |  | 2.9 | %
| 63,291 |  |  | 57,372 |  |  | 5,919 |  |  | 10.3 | %
Straight-line rent adjustments, new and existing leases | 5,962 |  |  | 5,755 |  |  | 207 |  |  | 3.6 | %
Total Rental Income | 69,253 |  |  | 63,127 |  |  | 6,126 |  |  | 9.7 | %
Interest income from mortgage and other notes |  |  |  |  |  |  |
Bickford construction loans | 425 |  |  | 91 |  |  | 334 |  |  | NM |
Evolve Senior Living mortgage | 205 |  |  | — |  |  | 205 |  |  | NM |
Other existing mortgages | 2,830 |  |  | 2,998 |  |  | (168 | ) |  | (5.6 | )%
Total Interest Income from Mortgage and Other Notes | 3,460 |  |  | 3,089 |  |  | 371 |  |  | 12.0 | %
Investment income and other | 33 |  |  | 162 |  |  | (129 | ) |  | (79.6 | )%
Total Revenue | 72,746 |  |  | 66,378 |  |  | 6,368 |  |  | 9.6 | %
Expenses: |  |  |  |  |  |  |
Depreciation |  |  |  |  |  |  |
ALFs leased to The LaSalle Group | 406 |  |  | — |  |  | 406 |  |  | NM |
ALFs leased to Bickford Senior Living | 3,107 |  |  | 2,871 |  |  | 236 |  |  | 8.2 | %
1 ALF and 1 ILF leased to Discovery Senior Living | 311 |  |  | 82 |  |  | 229 |  |  | NM |
SNFs leased to Ensign Group | 1,555 |  |  | 1,357 |  |  | 198 |  |  | 14.6 | %
Other new and existing assets | 11,956 |  |  | 11,834 |  |  | 122 |  |  | 1.0 | %
Total Depreciation | 17,335 |  |  | 16,144 |  |  | 1,191 |  |  | 7.4 | %
Income before investment and other gains and losses | 11,614 |  |  | 11,661 |  |  | (47 | ) |  | (0.4 | )%
Payroll and related compensation expenses | 1,799 |  |  | 1,859 |  |  | (60 | ) |  | (3.2 | )%
Non-cash stock-based compensation expense | 1,425 |  |  | 1,523 |  |  | (98 | ) |  | (6.4 | )%
Other expenses | 1,403 |  |  | 1,049 |  |  | 354 |  |  | 33.7 | %
| 33,576 |  |  | 32,236 |  |  | 1,340 |  |  | 4.2 | %
Income before investment and other gains and losses | 39,170 |  |  | 34,142 |  |  | 5,028 |  |  | 14.7 | %
Loss on convertible note retirement | (738 | ) |  | — |  |  | (738 | ) |  | NM |
Investment and other gains | — |  |  | 10,088 |  |  | (10,088 | ) |  | NM |
Net income | 38,432 |  |  | 44,230 |  |  | (5,798 | ) |  | (13.1 | )%
NM - not meaningful |  |  |  |  |  |  |

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Financial highlights of the quarter ended March 31, 2018, compared to the same quarter of 2017 were as follows:

• | Rental income increased $6,126,000, or 9.7%, primarily as a result of new investments funded in 2017 and during the first quarter of 2018.

• | The increase in rental income included a $207,000 increase in straight-line rent adjustments. Generally accepted accounting principles require rental income to be recognized on a straight-line basis over the term of the lease to give effect to scheduled rent escalators that are determinable at lease inception. Future increases in rental income depend on our ability to make new investments which meet our underwriting criteria.

• | Interest income from mortgage and other notes increased $371,000, primarily due to interest income received on loans to Bickford Senior Living and Evolve Senior Living.

• | Depreciation expense increased $1,191,000 primarily due to new real estate investments completed during 2017.

• | Investment and other gains for the quarter ended March 31, 2017 includes $10,038,000 from the sale of marketable securities arising from the final liquidation of our position in LTC common stock.

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Liquidity and Capital Resources
Sources and Uses of Funds
Our primary sources of cash include rent payments, principal and interest payments on mortgage and other notes receivable, proceeds from the sales of real property, net proceeds from offerings of equity securities and borrowings from our term loans and revolving credit facility. Our primary uses of cash include debt service payments (both principal and interest), new investments in real estate and notes, dividend distributions to our shareholders and general corporate overhead.
These sources and uses of cash are reflected in our Condensed Consolidated Statements of Cash Flows as summarized below (dollars in thousands):

| Three Months Ended March 31, |  | One Year Change
| 2018 |  | 2017 |  | $ |  | %
Cash and cash equivalents at beginning of period | $ | 3,063 |  |  | $ | 4,832 |  |  | $ | (1,769 | ) |  | (36.6 | )%
Net cash provided by operating activities | 48,508 |  |  | 48,675 |  |  | (167 | ) |  | (0.3 | )%
Net cash used in investing activities | (19,586 | ) |  | (120,444 | ) |  | 100,858 |  |  | (83.7 | )%
Net cash (used in) provided by financing activities | (28,755 | ) |  | 72,622 |  |  | (101,377 | ) |  | (139.6 | )%
Cash and cash equivalents at end of period | $ | 3,230 |  |  | $ | 5,685 |  |  | $ | (2,455 | ) |  | (43.2 | )%

Operating Activities – Net cash provided by operating activities for the three months ended March 31, 2018 was impacted by the growth of lease payment collections resulting from escalators on existing leases and new real estate investments since March 2017. The resulting quarter-over-quarter increase in cash was absorbed by our funding of lease and loan incentives in connection with the Bickford development program.
Investing Activities – Net cash used in investing activities for the three months ended March 31, 2018 was comprised primarily of $22,121,000 of investments in real estate and notes, and was partially offset by the collection of principal on mortgage and other notes receivable. Compared to the quarter ended March 31, 2017, real estate investments in 2018 reflect a lower volume of transactions. As discussed in the investment highlights section, above, we closed an acquisition for $69,750,000 in April 2018.
Financing Activities – The change in net cash related to financing activities for the three months ended March 31, 2018 compared to the same period in 2017 is primarily the result of (1) dividends paid to stockholders which increased $3,593,000 over the same period in 2017, and (2) $29,958,000 used to complete a targeted repurchase of a portion of our outstanding convertible notes. We were active in our ATM program, raising proceeds of $79,797,000 during the quarter ended March 31, 2017. In the comparable period in 2018, we did not make similar sales of common shares into the market.
Liquidity
At March 31, 2018, our liquidity was strong, with $291,230,000 available in cash and borrowing capacity on our revolving credit facility.
Our ATM program, discussed below, represents an additional source of liquidity. Traditionally, debt financing and operating and financing cash flows derived from proceeds of lease and mortgage collections, loan payoffs and the recovery of previous write-downs, have been used to satisfy our operational and investing needs and to provide a return to our shareholders. Those operational and investing needs reflect the resources necessary to maintain and cultivate our funding sources and have generally fallen into three categories: debt service, REIT operating expenses, and new real estate investments.
In August 2017, we amended our unsecured $800,000,000 credit facility, scheduled to mature in August 2020, consolidated our three bank term loans into a single $250,000,000 term loan and extended the maturity of the term loan and $550,000,000 revolving credit facility to August 2022. The amended facility calls for floating interest on the term loan and revolver to be initially set at 30-day LIBOR plus 130 and 115 bps, respectively, based on current leverage metrics. Additional significant amendments to the facility include the refinement of the collateral pool, imposition of a 0% floor LIBOR base, movement from the payment of unused commitment fees to a facility fee of 20 basis points and the composition of creditors participating in our loan syndication. The employment of interest rate swaps for our fixed term debt leaves only our revolving credit facility exposed to interest rate risk through April 2019, when our $40,000,000 swap expires. Our swaps and the financial instruments to which they relate are described in the table below, under the caption “Interest Rate Swap Agreements.”
Concurrent with the amendments to our credit facility and with the exception of specific debt-coverage ratios, covenants pertaining to our private placement term loans were generally conformed with those governing the credit facility. We generally
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accounted for these transactions and related fees as modifications of the debt. We plan to term out a portion of our revolving credit facility by borrowings of bank or private placement debt or the public issuance of unsecured bonds.
At March 31, 2018, we had $288,000,000 available to draw on the revolving portion of the credit facility. The facility fee is 20 basis points per annum. The unsecured credit facility requires that we maintain certain financial ratios within limits set by our creditors. To date, these ratios, which are calculated quarterly, have been within the limits required by the credit facility agreements.
Depending on the strength of the equity markets, we expect that borrowings on our revolving credit facility and our ATM program will allow us to continue to make real estate investments during 2018. However, we anticipate that our historically low cost of debt capital will rise in the near to mid-term, as the federal government continues its upward transitioning of the Federal funds rate. In response to the changed interest-rate environment, we may find it advisable within the coming year to acquire a public credit rating as a means of managing our interest costs.
If we become active in our ATM program in 2018, we intend to use the proceeds for general corporate purposes, which may include future acquisitions and repayment of indebtedness, including borrowings under our credit facility. Offerings under the ATM offerings are made pursuant to a prospectus dated February 22, 2017, which constitutes a part of NHI’s effective shelf registration statement that was previously filed with the Securities and Exchange Commission.
During the three months ended March 31, 2018, we undertook targeted open-market repurchases of certain of our convertible notes having a face amount of $147,575,000 at December 31, 2017. Payments of cash negotiated in the transactions were dependent on prevailing market conditions, our liquidity requirements, contractual restrictions, individual circumstances of the selling parties and other factors. The balance of notes repurchased and retired during the three months ended March 31, 2018, net of unamortized original issue discount and associated issuance costs, was $26,821,000, resulting in the recognition of losses on the note retirements for the three months ended March 31, 2018, of $738,000, calculated as the excess of cash paid over the carrying value of that portion of the notes accounted for as debt. For the retirement of that portion of the outlay allocated to the fair value of the conversion feature, $2,427,000 was charged to additional paid-in capital during the three months ended March 31, 2018.
We may continue from time to time seek to retire or purchase some of our outstanding convertible notes through cash open market purchases, privately-negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
If we modify or replace existing debt, we would incur debt issuance costs. These fees would be subject to amortization over the term of the new debt instrument and may result in the write-off of fees associated with debt which has been replaced or modified. Sustaining long-term dividend growth will require that we consider all forms of capital mentioned above, with the goal of maintaining a low-leverage balance sheet as mitigation against potential adverse changes in the business of our industry, tenants and borrowers.
We completed the liquidation of LTC Properties, Inc. (“LTC”) common stock begun in 2015 in the first quarter of 2017 with the sale of our remaining 250,000 shares, realizing net proceeds of $11,718,000 from these sales. A taxable gain of approximately $10,038,000 resulted from the 2017 sales and was adequately offset by depreciation and other deductions in the calculation of our REIT taxable income, making these proceeds available for deployment. Total proceeds of $18,182,000 from marketable securities included settlements occurring in the three months ended March 31, 2017, of $6,464,000 that resulted from sales in December 2016.
Interest Rate Swap Agreements
As of March 31, 2018, we employ the following interest rate swap contracts to hedge against fluctuations in variable interest rates applicable to the $250,000,000 term loan (dollars in thousands):

Date Entered |  | Maturity Date |  | Fixed Rate |  | Rate Index |  | Notional Amount |  | Fair Value
May 2012 |  | April 2019 |  | 2.84% |  | 1-month LIBOR |  | $ | 40,000 |  |  | $ | 266 |
June 2013 |  | June 2020 |  | 3.41% |  | 1-month LIBOR |  | $ | 80,000 |  |  | $ | 459 |
March 2014 |  | June 2020 |  | 3.46% |  | 1-month LIBOR |  | $ | 130,000 |  |  | $ | 607 |

For instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative has been reported as a component of other comprehensive income (“OCI”), and reclassified into earnings in the same period, or periods, during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge
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ineffectiveness or hedge components excluded from the assessment of effectiveness have been recognized in earnings. Hedge ineffectiveness related to our cash flow hedges, which is reported in current period earnings as interest expense, was not significant for the three months ended March 31, 2018 and 2017. With the amendment of our bank credit facility in August 2017, discussed above, the introduction to the debt instrument of a LIBOR floor not present in the hedges resulted in hedge inefficiency of approximately $353,000 arising in the second half of 2017, which we credited to interest expense.
On January 1, 2018 we adopted ASU 2017-12 Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, as discussed in the Notes to the Condensed Consolidated Financial Statements. The transition method is a modified retrospective approach that required the Company to recognize the cumulative effect of initially applying the ASU as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of 2018. The primary provision in the ASU requiring an adjustment to our beginning retained earnings is the change in timing and income statement line item for ineffectiveness related to cash flow hedges. Upon adoption of the ASU, a better alignment of the Company’s financial reporting for hedging activities with the economic objectives of those activities should result.
We intend to comply with REIT dividend requirements that we distribute at least 90% of our annual taxable income for the years ending December 2018 and thereafter. Dividends declared for the fourth quarter of each fiscal year are paid by the end of the following January and are, with some exceptions, treated for tax purposes as having been paid in the fiscal year just ended as provided in IRS Code Sec. 857(b)(8). We declare special dividends when we compute our REIT taxable income in an amount that exceeds our regular dividends for the fiscal year.
Off Balance Sheet Arrangements
We currently have no outstanding guarantees. As described in Note 1 to the condensed consolidated financial statements, our leases, mortgages and other notes receivable with certain entities represent variable interests in those enterprises. However, because we do not control these entities, nor do we have any role in their day-to-day management, we are not their primary beneficiary. Except as discussed in our Annual Report on Form 10-K for the year ended December 31, 2017, under Contractual Obligations and Contingent Liabilities, we have no further material obligations arising from our transactions with these entities, and we believe our maximum exposure to loss at March 31, 2018, due to this involvement would be limited to our contractual commitments and contingent liabilities and the amount of our current investments with them, as detailed further in in Notes 1, 2, 3 and 6 to the consolidated financial statements.
In March 2014 we issued $200,000,000 of convertible notes, the conversion feature being intended to broaden the Company’s credit profile and as a means to obtain a more favorable coupon rate. For this feature we calculate the dilutive effect using market prices prevailing over the reporting period. Because the dilution calculation is market-driven, and per share guidance we provide is based on diluted amounts, the theoretical effects of the conversion feature result in per share unpredictability.
As of March 31, 2018, the face amount of our 3.25% senior unsecured convertible notes was $120,000,000. As adjusted for terms of the indenture, the Notes are convertible at a rate of 14.28 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $70.01 per share for a total of 1,714,100 remaining underlying shares. As of March 31, 2018, the value of the convertible debt, computed as if the debt were immediately eligible for conversion, was exceeded by its face amount. For the three months ended March 31, 2018, the effect of the conversion option on our per-share earnings calculations is also anti-dilutive, since the conversion price exceeded our average stock price. If NHI’s current share price increases above the adjusted $70.01 conversion price, dilution will be attributable to the conversion feature.
The notes will be freely convertible in the last six months of their contractual life, beginning in the fourth quarter of 2020; however, generally accepted accounting principles require us to periodically report the amount by which the notes’ convertible value exceeds their principal amount, without regard to the current availability of the conversion feature. Further, the mechanics of the calculation require the use of an end-of-period stock price, so that using that amount for the remaining notes outstanding of $120,000,000 at March 31, 2018, results in the face value of the bonds exceeding the conversion amount, whereas the use of another price point could give a different result.
The conversion feature is generally available to the noteholders entering the last six months of the notes’ term but may also become actionable if the market price of NHI’s common stock should, for 20 of 30 consecutive trading days within a calendar quarter, sustain a level in excess of 130% of the adjusted conversion price, or $91.04 per share at March 31, 2018, down from $93.55 per share, initially. The notes are “optional net-share settlement” instruments, meaning that NHI has the ability and intent to settle the principal amount of the indebtedness in cash, with possible dilutive share issuances for any excess, at NHI’s option. Settlement of the notes requires management to allocate the consideration we ultimately pay between the debt component and the equity conversion feature as though they were separate instruments. The allocation is effected by valuing the debt component first,
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with any remainder allocated to the conversion feature. Amounts expended to settle the notes are recognized first as a settlement of the notes at par and then are recognized in income to the extent the portion allocated to the debt instrument differs from par value. The remainder of the allocation, if any, will be treated as settlement of equity and adjusted through our paid in capital account.
Contractual Obligations and Contingent Liabilities
For our contractual obligations as of December 31, 2017, see our Management’s Discussion and Analysis contained in our Form 10-K for the year ended December 31, 2017.
Commitments and Contingencies
The following tables summarize information as of March 31, 2018 related to our outstanding commitments and contingencies which are more fully described in the notes to the consolidated financial statements.

| Asset Class |  | Type |  | Total |  | Funded |  | Remaining
Loan Commitments: |  |  |  |  |  |  |  |  |
Life Care Services Note A | SHO |  | Construction |  | $ | 60,000,000 |  |  | $ | (54,939,000 | ) |  | $ | 5,061,000 |
Bickford Senior Living | SHO |  | Construction |  | 42,000,000 |  |  | (20,168,000 | ) |  | 21,832,000 |
Senior Living Communities | SHO |  | Revolving Credit |  | 15,000,000 |  |  | (729,000 | ) |  | 14,271,000 |
|  |  |  |  | $ | 117,000,000 |  |  | $ | (75,836,000 | ) |  | $ | 41,164,000 |

See Note 3 for full details of our loan commitments. As provided above, loans funded do not include the effects of discounts or commitment fees. We expect to fully fund the Life Care Services Note A during 2018. Funding of the promissory note commitments to Bickford is expected to transpire monthly throughout 2018.

| Asset Class |  | Type |  | Total |  | Funded |  | Remaining
Development Commitments: |  |  |  |  |  |  |  |  |
Legend/The Ensign Group | SNF |  | Purchase |  | $ | 56,000,000 |  |  | $ | (28,000,000 | ) |  | $ | 28,000,000 |
East Lake/Watermark Retirement | SHO |  | Renovation |  | 10,000,000 |  |  | (5,900,000 | ) |  | 4,100,000 |
Santé Partners | SHO |  | Renovation |  | 3,500,000 |  |  | (2,621,000 | ) |  | 879,000 |
Bickford Senior Living | SHO |  | Renovation |  | 2,400,000 |  |  | (1,647,000 | ) |  | 753,000 |
East Lake Capital Management | SHO |  | Renovation |  | 400,000 |  |  | — |  |  | 400,000 |
Senior Living Communities | SHO |  | Renovation |  | 6,830,000 |  |  | (1,424,000 | ) |  | 5,406,000 |
Discovery Senior Living | SHO |  | Renovation |  | 500,000 |  |  | — |  |  | 500,000 |
Woodland Village | SHO |  | Renovation |  | 7,450,000 |  |  | (1,709,000 | ) |  | 5,741,000 |
Chancellor Health Care | SHO |  | Construction |  | 650,000 |  |  | (62,000 | ) |  | 588,000 |
Navion Senior Solutions | SHO |  | Construction |  | 650,000 |  |  | — |  |  | 650,000 |
|  |  |  |  | $ | 88,380,000 |  |  | $ | (41,363,000 | ) |  | $ | 47,017,000 |

As discussed in Note 2, we remain obligated to purchase, from a developer, two new skilled nursing facilities in Texas for $28,000,000 which are leased to Legend and subleased to Ensign.

| Asset Class |  | Type |  | Total |  | Funded |  | Remaining
Contingencies: |  |  |  |  |  |  |  |  |
Bickford Senior Living | SHO |  | Lease Inducement |  | $ | 10,000,000 |  |  | $ | (3,250,000 | ) |  | $ | 6,750,000 |
Bickford Senior Living | SHO |  | Incentive Draws |  | 6,000,000 |  |  | (250,000 | ) |  | $ | 5,750,000 |
East Lake Capital Management | SHO |  | Lease Inducement |  | 8,000,000 |  |  | — |  |  | 8,000,000 |
Navion Senior Solutions | SHO |  | Lease Inducement |  | 4,850,000 |  |  | — |  |  | 4,850,000 |
Prestige Care | SHO |  | Lease Inducement |  | 1,000,000 |  |  | — |  |  | 1,000,000 |
The LaSalle Group | SHO |  | Lease Inducement |  | 5,000,000 |  |  | — |  |  | 5,000,000 |
|  |  |  |  | $ | 34,850,000 |  |  | $ | (3,500,000 | ) |  | $ | 31,350,000 |

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Contingent payments related to the five Bickford development properties constructed in 2016 and 2017 include a licensure incentive of $250,000 per property. Additionally, each property is subject to a three-tiered operator incentive schedule paying up to an additional $1,750,000, based on the attainment of certain performance metrics. As funded, these payments are added to the lease base and amortized against rental income.
For a discussion of incentive loan draws available to Bickford related to borrowings for the development of its properties in Illinois and Michigan, see Note 3.
In connection with our July 2015 lease to East Lake of three senior housing properties, NHI has committed to certain lease inducement payments of $8,000,000 contingent on reaching and maintaining certain metrics. The inducements have been assessed as not probable of payment, and we have not recorded them on our balance sheets as of March 31, 2018. We are unaware of circumstances that would change our initial assessment as to the contingent lease incentives. Not included in the above table is a seller earnout of $750,000, which is recorded on our consolidated balance sheets within accounts payable and accrued expenses.
Litigation
Our facilities are subject to claims and suits in the ordinary course of business. Our lessees and borrowers have indemnified, and are obligated to continue to indemnify us, against all liabilities arising from the operation of the facilities, and are further obligated to indemnify us against environmental or title problems affecting the real estate underlying such facilities. While there may be lawsuits pending against certain of the owners and/or lessees of the facilities, management believes that the ultimate resolution of all such pending proceedings will have no material adverse effect on our financial condition, results of operations or cash flows.
FFO, AFFO & FAD
These supplemental operating performance measures may not be comparable to similarly titled measures used by other REITs. Consequently, our Funds From Operations (“FFO”), Normalized FFO, Normalized Adjusted Funds From Operations (“AFFO”) and Normalized Funds Available for Distribution (“FAD”) may not provide a meaningful measure of our performance as compared to that of other REITs. Since other REITs may not use our definition of these operating performance measures, caution should be exercised when comparing our Company’s FFO, Normalized FFO, Normalized AFFO and Normalized FAD to that of other REITs. These financial performance measures do not represent cash generated from operating activities in accordance with generally accepted accounting principles (“GAAP”) (these measures do not include changes in operating assets and liabilities) and therefore should not be considered an alternative to net earnings as an indication of operating performance, or to net cash flow from operating activities as determined by GAAP as a measure of liquidity, and are not necessarily indicative of cash available to fund cash needs.
Funds From Operations - FFO
Our FFO per diluted common share for the three months ended March 31, 2018 decreased $0.16 (10.7%) over the same period in 2017. FFO decreased primarily as the result of $10,038,000 of gains recognized on the sale of marketable securities during the quarter ended March 31, 2017. FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) and applied by us, is net income (computed in accordance with GAAP), excluding gains (or losses) from sales of real estate property, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures, if any. The Company’s computation of FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or have a different interpretation of the current NAREIT definition from that of the Company; therefore, caution should be exercised when comparing our Company’s FFO to that of other REITs. Diluted FFO assumes the exercise of stock options and other potentially dilutive securities.
Our normalized FFO per diluted common share for the three months ended March 31, 2018 increased $0.10 (8.0%) over the same period in 2017. Normalized FFO increased primarily as the result of our new real estate investments since March 2017. Normalized FFO excludes from FFO certain items which, due to their infrequent or unpredictable nature, may create some difficulty in comparing FFO for the current period to similar prior periods, and may include, but are not limited to, impairment of non-real estate assets, gains and losses attributable to the acquisition and disposition of assets and liabilities, and recoveries of previous write-downs.
FFO and normalized FFO are important supplemental measures of operating performance for a REIT. Because the historical cost accounting convention used for real estate assets requires depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen and fallen with market conditions, presentations of operating results for a REIT that uses historical cost accounting for depreciation
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could be less informative, and should be supplemented with a measure such as FFO. The term FFO was designed by the REIT industry to address this issue.
Adjusted Funds From Operations - AFFO
Our normalized AFFO per diluted common share for the three months ended March 31, 2018 increased $0.09 (8.0%) over the same period in 2017 due primarily to the impact of real estate investments completed since March 2017. In addition to the adjustments included in the calculation of normalized FFO, normalized AFFO excludes the impact of any straight-line rent revenue, amortization of the original issue discount on our convertible senior notes and amortization of debt issuance costs.
Normalized AFFO is an important supplemental measure of operating performance for a REIT. GAAP requires a lessor to recognize contractual lease payments into income on a straight-line basis over the expected term of the lease. This straight-line adjustment has the effect of reporting lease income that is significantly more or less than the contractual cash flows received pursuant to the terms of the lease agreement. GAAP also requires the original issue discount of our convertible senior notes and debt issuance costs to be amortized as non-cash adjustments to earnings. Normalized AFFO is useful to our investors as it reflects the growth inherent in the contractual lease payments of our real estate portfolio.
Funds Available for Distribution - FAD
Our normalized FAD for the three months ended March 31, 2018 increased $5,382,000 (11.5%) over the same period in 2017, due primarily to the impact of real estate investments completed since March 2017. In addition to the adjustments included in the calculation of normalized AFFO, normalized FAD excludes the impact of non-cash stock based compensation. Normalized FAD is an important supplemental measure of operating performance for a REIT as a useful indicator of the ability to distribute dividends to shareholders.
The following table reconciles net income, the most directly comparable GAAP metric, to FFO, Normalized FFO, Normalized AFFO and Normalized FAD and is presented for both basic and diluted weighted average common shares (in thousands, except share and per share amounts):
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| Three Months Ended
| March 31,
| 2018 |  | 2017
Net income | $ | 38,432 |  |  | $ | 44,230 |
Elimination of certain non-cash items in net income: |  |  |
Depreciation | 17,335 |  |  | 16,144 |
Net gain on sale of real estate | — |  |  | (50 | )
NAREIT FFO | 55,767 |  |  | 60,324 |
Gain on sale of marketable securities | — |  |  | (10,038 | )
Loss on convertible note retirement | 738 |  |  | — |
Recognition of unamortized note receivable commitment fees | (515 | ) |  | — |
Normalized FFO | 55,990 |  |  | 50,286 |
Straight-line lease revenue, net | (5,962 | ) |  | (5,755 | )
Amortization of lease incentives | 63 |  |  | 10 |
Amortization of original issue discount | 221 |  |  | 293 |
Amortization of debt issuance costs | 614 |  |  | 612 |
Normalized AFFO | 50,926 |  |  | 45,446 |
Non-cash stock-based compensation | 1,425 |  |  | 1,523 |
Normalized FAD | $ | 52,351 |  |  | $ | 46,969 |
BASIC |  |  |
Weighted average common shares outstanding | 41,532,154 |  |  | 39,953,804 |
NAREIT FFO per common share | $ | 1.34 |  |  | $ | 1.51 |
Normalized FFO per common share | $ | 1.35 |  |  | $ | 1.26 |
Normalized AFFO per common share | $ | 1.23 |  |  | $ | 1.14 |
DILUTED |  |  |
Weighted average common shares outstanding | 41,576,876 |  |  | 40,108,762 |
NAREIT FFO per common share | $ | 1.34 |  |  | $ | 1.50 |
Normalized FFO per common share | $ | 1.35 |  |  | $ | 1.25 |
Normalized AFFO per common share | $ | 1.22 |  |  | $ | 1.13 |

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Adjusted EBITDA
We consider Adjusted EBITDA to be an important supplemental measure because it provides information which we use to evaluate our performance and serves as an indication of our ability to service debt. We define Adjusted EBITDA as consolidated earnings before interest, taxes, depreciation and amortization, including amounts in discontinued operations, excluding real estate asset impairments and gains on dispositions and certain items which, due to their infrequent or unpredictable nature, may create some difficulty in comparing Adjusted EBITDA for the current period to similar prior periods, and may include, but are not limited to, impairment of non-real estate assets, gains and losses attributable to the acquisition and disposition of assets and liabilities, and recoveries of previous write-downs. Since others may not use our definition of Adjusted EBITDA, caution should be exercised when comparing our Adjusted EBITDA to that of other companies.
The following table reconciles net income, the most directly comparable GAAP metric, to Adjusted EBITDA:

| Three Months Ended
| March 31,
| 2018 |  | 2017
Net income | $ | 38,432 |  |  | $ | 44,230 |
Interest expense | 11,614 |  |  | 11,661 |
Franchise, excise and other taxes | 346 |  |  | 267 |
Depreciation | 17,335 |  |  | 16,144 |
Net gain on sales of real estate | — |  |  | (50 | )
Gain on sale of marketable securities | — |  |  | (10,038 | )
Loss on convertible note retirement | 738 |  |  | — |
Recognition of unamortized note receivable commitment fees | (515 | ) |  | — |
Adjusted EBITDA | $ | 67,950 |  |  | $ | 62,214 |
Interest expense at contractual rates | $ | 10,527 |  |  | $ | 10,033 |
Principal payments | 285 |  |  | 196 |
Fixed Charges | $ | 10,812 |  |  | $ | 10,229 |
Fixed Charge Coverage | 6.3x |  | 6.1x

For all periods presented, EBITDA has been adjusted to reflect GAAP interest expense, which excludes amounts capitalized during the period.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
At March 31, 2018, we were exposed to market risks related to fluctuations in interest rates on approximately $262,000,000 of variable-rate indebtedness (excludes $250,000,000 of variable-rate debt that has been hedged through interest-rate swap contracts) and on our mortgage and other notes receivable. The unused portion ($288,000,000 at March 31, 2018) of our revolving credit facility, should it be drawn upon, is subject to variable rates.
Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt and loans receivable unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. Conversely, changes in interest rates on variable rate debt and investments would change our future earnings and cash flows, but not significantly affect the fair value of those instruments. Assuming a 50 basis point increase or decrease in the interest rate related to variable-rate debt, and assuming no change in the outstanding balance as of March 31, 2018, net interest expense would increase or decrease annually by approximately $1,310,000 or $0.03 per common share on a diluted basis.
We use derivative financial instruments in the normal course of business to mitigate interest rate risk. We do not use derivative financial instruments for speculative purposes. Derivatives are included in the Condensed Consolidated Balance Sheets at their fair value. We may engage in hedging strategies to manage our exposure to market risks in the future, depending on an analysis of the interest rate environment and the costs and risks of such strategies.
The following table sets forth certain information with respect to our debt (dollar amounts in thousands):

| March 31, 2018 |  | December 31, 2017
| Balance 1 |  | % of total |  | Rate 4 |  | Balance 1 |  | % of total |  | Rate 4
Fixed rate: |  |  |  |  |  |  |  |  |  |  |
Convertible senior notes | $ | 120,000 |  |  | 10.3 | % |  | 3.25 | % |  | $ | 147,575 |  |  | 12.7 | % |  | 3.25 | %
Unsecured term loans 2 | 650,000 |  |  | 55.4 | % |  | 3.83 | % |  | 650,000 |  |  | 56.0 | % |  | 3.83 | %
HUD mortgage loans 3 | 44,844 |  |  | 3.8 | % |  | 4.04 | % |  | 45,047 |  |  | 3.9 | % |  | 4.04 | %
Fannie Mae loans 4 | 96,285 |  |  | 8.2 | % |  | 3.94 | % |  | 96,367 |  |  | 8.3 | % |  | 3.94 | %
Variable rate: |  |  |  |  |  |  |  |  |  |  |
Unsecured revolving credit facility | 262,000 |  |  | 22.3 | % |  | 2.96 | % |  | 221,000 |  |  | 19.1 | % |  | 2.96 | %
| $ | 1,173,129 |  |  | 100.0 | % |  | 3.60 | % |  | $ | 1,159,989 |  |  | 100.0 | % |  | 3.61 | %
1 Differs from carrying amount due to unamortized discount. |  |  |  |  |  |
2 Includes six term loans in 2017 and eight in 2016; rate is a weighted average |  |  |  |  |  |
3 Includes 10 HUD mortgages; rate is a weighted average inclusive of a mortgage insurance premium |  |  |  |  |  |
4 Total is weighted average rate |  |  |  |  |  |

The unsecured term loans in the table above reflect the effect of $40,000,000, $80,000,000, and $130,000,000 notional amount interest rate swaps with maturities of April 2019, June 2020 and June 2020, respectively, that effectively converts variable rate debt to fixed rate debt. These loans bear interest at LIBOR plus a spread, currently 130 basis points, based on our Leverage-Based Applicable Margin, as defined.
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To highlight the sensitivity of our convertible senior notes and secured mortgage debt to changes in interest rates, the following summary shows the effects on fair value (“FV”) assuming a parallel shift of 50 basis points (“bps”) in market interest rates for a contract with similar maturities as of March 31, 2018 (dollar amounts in thousands):

| Balance |  | Fair Value 1 |  | FV reflecting change in interest rates
Fixed rate: |  |  |  |  | -50 bps |  | +50 bps
Private placement term loans - unsecured | $ | 400,000 |  |  | $ | 383,507 |  |  | $ | 394,581 |  |  | $ | 372,793 |
Convertible senior notes | 120,000 |  |  | 124,287 |  |  | 126,097 |  |  | 122,504 |
Fannie Mae loans | 96,285 |  |  | 90,184 |  |  | 92,982 |  |  | 87,479 |
HUD mortgage loans | 44,844 |  |  | 44,722 |  |  | 47,865 |  |  | 41,863 |
1 The change in fair value of our fixed rate debt was due primarily to the overall change in interest rates.

At March 31, 2018, the fair value of our mortgage and other notes receivable, discounted for estimated changes in the risk-free rate, was approximately $142,962,000. A 50 basis point increase in market rates would decrease the estimated fair value of our mortgage and other loans by approximately $2,835,000, while a 50 basis point decrease in such rates would increase their estimated fair value by approximately $2,916,000.
Item 4. Controls and Procedures.
Evaluation of Disclosure Control and Procedures. As of March 31, 2018, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Accounting Officer (“CAO”), of the effectiveness of the design and operation of management’s disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) to ensure information required to be disclosed in our filings under the Securities and Exchange Act of 1934, is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms; and (ii) accumulated and communicated to our management, including our CEO and our CAO, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving desired control objectives, and management is necessarily required to apply its judgment when evaluating the cost-benefit relationship of potential controls and procedures. Based upon the evaluation, the CEO and CAO concluded that the design and operation of these disclosure controls and procedures were effective as of March 31, 2018.
There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting identified in management’s evaluation during the three months ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Our health care facilities are subject to claims and suits in the ordinary course of business. Our lessees and borrowers have indemnified, and are obligated to continue to indemnify us, against all liabilities arising from the operation of the facilities, and are further obligated to indemnify us against environmental or title problems affecting the real estate underlying such facilities. While there may be lawsuits pending against certain of the owners and/or lessees of our facilities, management believes that the ultimate resolution of all such pending proceedings will have no material adverse effect on our financial condition, results of operations or cash flows.
Item 1A. Risk Factors.
During the three months ended March 31, 2018, there were no material changes to the risk factors that were disclosed in Item 1A of National Health Investors, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017, except for the addition of the risk factor that is stated as follows:
Legislative, regulatory, or administrative changes could adversely affect us or our security holders.
The tax laws or regulations governing REITs or the administrative interpretations thereof may be amended at any time. We cannot predict if or when any new or amended law, regulation, or administrative interpretation will be adopted, promulgated, or become effective, and any such change may apply retroactively. We and our security holders may be adversely affected by any new or amended law, regulation, or administrative interpretation.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted. The Tax Cuts and Jobs Act makes significant changes to the U.S. federal income tax rules related to the taxation of individuals and corporations, generally effective for taxable years beginning after December 31, 2017. In addition to reducing corporate and non-corporate tax rates, the Tax Cuts and Jobs Act eliminates and restricts various deductions and limits the ability to utilize net operating losses. Most of the changes applicable to individuals are temporary and apply only to taxable years beginning after December 31, 2017, and before January 1, 2026. The Tax Cuts and Jobs Act makes numerous large and small changes to the tax rules that do not affect REITs directly but may affect our security holders and may indirectly affect us.
Prospective investors are urged to consult with their tax advisors with respect to the status of the Tax Cuts and Jobs Act and any other regulatory or administrative developments and proposals and their potential effect on investment in our securities.
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Item 6. Exhibits.

Exhibit No. | Description
3.1 | Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Form S-11 Registration Statement No. 33-41863, filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T)
3.2 | Amendment to Articles of Incorporation
3.3 | Amendment to Articles of Incorporation approved by shareholders on May 2, 2014
3.4 | Restated Bylaws
3.5 | Amendment No. 1 to Restated Bylaws dated February 14, 2014
4.1 | Form of Common Stock Certificate (incorporated by reference to Exhibit 39 to Form S-11 Registration Statement No. 33-41863, f iled in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T)
4.2 | Indenture, dated as of March 25, 2014, between National Health Investors, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee
4.3 | First Supplemental Indenture, dated as of March 25, 2014, to the Indenture, dated as of March 25, 2014, between National Health Investors, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee
31.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 | Certification of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS | XBRL Instance Document
101.SCH | XBRL Taxonomy Extension Schema Document
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB | XBRL Taxonomy Extension Label Linkbase Document
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|  | NATIONAL HEALTH INVESTORS, INC.
|  | (Registrant)
Date: | May 7, 2018 | /s/ D. Eric Mendelsohn
|  | D. Eric Mendelsohn
|  | President and Chief Executive Officer,
Date: | May 7, 2018 | /s/ Roger R. Hopkins
|  | Roger R. Hopkins
|  | Chief Accounting Officer
|  | (Principal Financial Officer and Principal Accounting Officer)

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