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Real Estate | 3 Months Ended
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Mar. 31, 2019
Real Estate [Abstract] |
Real Estate Disclosure [Text Block] | REAL ESTATE As of March 31, 2019, we owned 220 health care real estate properties located in 33 states and consisting of 143 senior housing communities (“SHO”), 72 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 $2,471,000) consisted of properties with an original cost of approximately $2,900,846,000 rented under triple-net leases to 30 lessees. During the three months ended March 31, 2019, we made the following real estate investments and commitments as described below ($ in thousands):
Operator |  | Date |  | Properties |  | Asset Class |  | Amount
Wingate Healthcare |  | January 2019 |  | 1 |  | SHO |  | $ | 52,200 |
Holiday Retirement |  | January 2019 |  | 1 |  | SHO |  | 38,000 |
|  |  |  |  |  |  |  | $ | 90,200 |
Wingate On January 15, 2019, we acquired a 267-unit senior living campus in Massachusetts for a purchase price of $50,300,000, including closing costs of $300,000. The facility is being leased to Wingate Healthcare, Inc. (“Wingate”) for a term of 10 years, with three five-year renewal options, at an initial lease rate of 7.5% plus annual fixed escalators. We have committed to the additional funding of up to $1,900,000 in capital improvements, and the lease provides for incentive payments up to $5,000,000 to become available beginning in 2020 upon the attainment of certain operating metrics. NHI will have a right of first offer on two additional Wingate-operated facilities. We accounted for the transaction as an asset purchase. Major Tenants Holiday In November 2018, we entered into a lease amendment and guaranty release (“the Agreement”) with an affiliate of Holiday Retirement (“Holiday”). Among other provisions, the Agreement decreased base rent beginning in 2019 from $39,000,000 to $31,500,000, extended the term of the original lease through 2035, and increased required minimum capital expenditure per unit. As consideration for amending provisions included in the original 2013 lease, Holiday agreed to pay NHI $55,125,000 in cash or real estate and forfeit $10,637,000 of their original $21,275,000 security deposit. On January 31, 2019, we acquired a senior housing facility in Vero Beach, Florida from Holiday consisting of 157 independent living and 71 assisted living units in exchange for $38,000,000 toward the $55,125,000 receivable arising from the lease amendment, discussed above. The property was added to the master lease at a 6.71% lease rate. Under the restructured master lease, annual lease escalators ranging from 2% to 3%, based on portfolio revenue growth, will go into effect on November 1, 2020. Holiday settled the remaining commitment to NHI with cash of $17,125,000 at closing. Acquisition of the property and collection of residual cash flowed through our accounts as adjustments to lease receivables and resulted in the change of our straight-line receivable from Holiday at the beginning of the year into a straight-line payable, which is included in the accompanying Condensed Consolidated Balance Sheets as “deferred income” at March 31, 2019. As of March 31, 2019, we leased 26 independent living facilities to Holiday. Of our total revenues, $9,930,000 (13%) and $10,954,000 (15%) were derived from Holiday for the three months ended March 31, 2019 and 2018, respectively, including $1,630,000 and $1,530,000 in straight-line rent income, respectively. Our tenant operates the facilities pursuant to a management agreement with a Holiday-affiliated manager. Bickford As of March 31, 2019, our Bickford Senior Living (“Bickford”) lease portfolio consists of the following ($ in thousands):
| Lease Expiration |
| June 2023 | September 2027 | May 2031 | April 2033 | Total
Number of Properties | 13 |  | 4 |  | 28 |  | 5 |  | 50 |
2019 Contractual Rent | $ | 11,468 |  | $ | 1,576 |  | $ | 30,765 |  | $ | 4,826 |  | $ | 48,635 |
2019 Straight Line Rent | 358 |  | 195 |  | 3,937 |  | 843 |  | 5,333 |
| $ | 11,826 |  | $ | 1,771 |  | $ | 34,702 |  | $ | 5,669 |  | $ | 53,968 |
Of our total revenues, $13,244,000 (17%) and $11,445,000 (16%) were recognized as rental income from Bickford for the three months ended March 31, 2019 and 2018, including $1,371,000 and $1,169,000 in straight-line rent income, respectively. Senior Living Communities As of March 31, 2019, we leased 11 retirement communities totaling 2,216 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 3% effective January 1, 2019. Of our total revenues, $11,532,000 (15%) and $11,449,000 (16%) in rental income were derived from Senior Living for the three months ended March 31, 2019 and 2018, respectively, including $1,058,000 and $1,359,000 in straight-line rent income, respectively. NHC As of March 31, 2019, we leased 42 facilities under two master leases to National HealthCare Corporation (“NHC”), a publicly-held company. 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 legacy properties and a master lease agreement dated August 30, 2013 (“the 2013 lease”) which includes 7 skilled nursing facilities acquired in 2013. The 1991 lease expiration is December 31, 2026. There are two additional 5-year renewal options, each at fair rental value 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 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,
| 2019 |  | 2018
Current year | $ | 877 |  |  | $ | 853 |
Prior year final certification 1 | 334 |  |  | 285 |
Total percentage rent income | $ | 1,211 |  |  | $ | 1,138 |
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, $9,748,000 (13%) and $9,674,000 (13%) in rental income were derived from NHC for the three months ended March 31, 2019 and 2018, respectively. The chairman of our board of directors is also a director on NHC’s board of directors. As of March 31, 2019, NHC owned 1,630,462 shares of our common stock. Purchase Options Certain of our operators hold purchase options allowing them to acquire properties they currently lease from NHI. For options open or coming open in the near future, we are engaged in preliminary negotiations to continue as lessor or in some other capacity. A summary of these tenant options is presented below ($ in thousands):
Asset | Number of | Lease | 1st Option | Option | Contractual
Type | Properties | Expiration | Open Year | Basis | Rent
MOB | 1 | February 2025 | Open | i | $ | 302 |
SHO | 4 | September 2027 | Open | iv | $ | 1,560 |
HOSP | 1 | September 2027 | 2020 | ii | $ | 2,673 |
SHO | 8 | December 2024 | 2020 | ii | $ | 6,027 |
HOSP | 1 | March 2025 | 2020 | iv | $ | 1,900 |
SHO | 2 | May 2031 | 2021 | iv | $ | 4,892 |
HOSP | 1 | June 2022 | 2022 | i | $ | 3,460 |
SNF | 7 | August 2028 | 2025 | iii | $ | 3,732 |
SNF | 1 | September 2028 | 2028 | iii | $ | 463 |
Tenant purchase options generally give the lessee an option to purchase the underlying property for consideration determined by i) greater of fixed base price or fair market value; ii) a fixed base price plus a specified share in any appreciation; iii) fixed base price; or iv) a fixed capitalization rate on lease revenue. Other Portfolio Activity Tenant Transition As of March 31, 2019, we continued to transition three lease portfolios to new operators as a result of non-compliance with our lease terms. The properties consist of three former Regency buildings, five former LaSalle Autumn Leaves properties and a property formerly leased to Landmark. To expedite stabilization of the facilities, NHI has committed to specified income-generating capital expenditures for the re-branding and refurbishment of certain of these properties. While the transition is now underway, during the first quarter of 2019, some agreements concerning the transition were informal in nature. Background of the tenant relationships is described in the financial statements included in Form 10-K for the year ended December 31, 2018. In June 2018, East Lake Capital Management LLC (“East Lake”) and certain related entities, including SH Regency Leasing, LLC (for three assisted living facilities in Tennessee, Indiana and North Carolina referred to as “Regency”), filed suit against NHI in Texas seeking injunctive and declaratory relief and unspecified monetary damages. We countered with motions calling for the immediate appointment of a receiver and for pre-judgment possession. Resulting from these claims and counterclaims, on December 6, 2018, the plaintiff parties entered into an agreement resulting in Regency vacating the facilities in December 2018. NHI arranged with experienced third-party operators to operate the three buildings. Until operations become stabilized or more formal long-term lease agreements are entered into, NHI is to receive 95% of operating cash flow, after management fees, generated by the Tennessee facility, and 100% of operating cash flow from a similar arrangement for the Indiana facility. The Charlotte facility remains closed while undergoing significant upgrades which are expected to be completed in June 2019. NHI has committed $3,100,000 toward these upgrades as well as anticipated facility operating losses. Another of our tenants, The LaSalle Group (“LaSalle”), has been in default on its rent payments since November 2018. With no rent payment forthcoming in the first quarter of 2019, we began the process to transition to a new tenant, and on April 16, 2019, we placed the five buildings with a new tenant with NHI to receive 100% of operating cash flow, after management fees, generated by the facilities pending stabilization of the operations of the facility. We also commenced litigation for the recovery of certain funds owed under the lease and against the principal executive personally under the guaranty agreement At December 31, 2018, we had a single-property lease in Wisconsin with Landmark Senior Living (”Landmark”) that was non-performing. For the three months ended March 31, 2019, we recorded $625,000 in lease income for amounts collected during the period. In February 2019, we transitioned the lease to BAKA Enterprises, (“BAKA”), temporarily acting under a management agreement with Landmark. Under terms of the new lease, after regulatory approval, NHI will receive 95% of operating cash flow, after management fees, as generated by the facilities. Upon the establishment of an operational baseline, beginning in year two, the agreement calls for a rent reset to fair value. The agreement provides for a term of 8 years, subject to renewal. As we seek to stabilize the operations of these facilities, if our resulting tenants or operating partners do not have adequate liquidity to accept the risks and rewards of a tenant-lessee, NHI might be deemed the primary beneficiary of the operations and might be required to consolidate those statements of financial position and results of operations of the managers or operating partners into our consolidated financial statements. Of our total revenue, $702,000 (1%) and $3,172,000 (4%) in lease revenues were derived from the above properties for the three months ended March 31, 2019 and 2018, respectively. Assets Held For Sale During the three months ended March 31, 2019, we identified two assisted living properties for disposal and began active marketing of the properties. The buildings are smaller than are typical of our portfolio and are no longer considered to be an appropriate investment for NHI. In January we ceased recording depreciation on the properties, and we booked an adjustment to lease revenues to write off the associated $124,000 in straight-line receivables. We recognized an impairment loss of $2,500,000 to write down the properties to their estimated net realizable value of $3,745,000 and have classified the assets as available for sale on the Condensed Consolidated Balance Sheet at March 31, 2019. Future Minimum Lease Payments With the adoption of Accounting Standards Codification (“ASC”) Topic 842, Leases, as discussed in Note 10, our minimum lease payments are now determined under guidance different from that required as of December 31, 2018, when we were subject to ASC Topic 840 Leases. Presented in the following table are future minimum lease payments, as of March 31, 2019, to be received by us under our operating leases, as determined under ASC 842 (in thousands):
| March 31, 2019
2019 | $ | 192,261 |
2020 | 256,991 |
2021 | 257,610 |
2022 | 259,674 |
2023 | 253,653 |
Thereafter | 1,719,019 |
| $ | 2,939,208 |
We assess the collectibility of our lease receivables, including deferred rents receivable, based on several factors, including payment history, the financial strength of the tenant and any guarantors, historical operations and operating trends of the property, and current economic conditions. If our evaluation of these factors indicates it is not probable that we will be to recover substantially all of the receivable, we de-recognize the deferred rent receivable asset and record as a reduction in rental revenue.

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- Definition The entire disclosure for certain real estate investment financial statements, real estate investment trust operating support agreements, real estate owned, retail land sales, time share transactions, as well as other real estate related disclosures. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 970 -URI http://asc.fasb.org/topic&trid=2156125 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 978 -URI http://asc.fasb.org/topic&trid=2134977 Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 976 -URI http://asc.fasb.org/topic&trid=2134846 Reference 4: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 974 -URI http://asc.fasb.org/topic&trid=2156429 Reference 5: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 972 -URI http://asc.fasb.org/topic&trid=2134617 + Details
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