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Mortgage And Other Notes Receivable
 3 Months Ended
Mar. 31, 2022
Mortgage and Other Notes Receivable [Abstract]  
Mortgage Notes Receivable Mortgage and Other Notes Receivable
At March 31, 2022, our investments in mortgage notes receivable totaled $239.7 million secured by real estate and other assets of the borrower (e.g., UCC liens on personal property) related to 15 facilities and other notes receivable totaled $81.8 million substantially all of which are guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner. These balances exclude a credit loss reserve of $5.1 million at March 31, 2022. All our notes were on full accrual basis at March 31, 2022.

Mortgage and Other Notes Receivable

Encore Senior Living

In January 2022, we entered into an agreement to fund a $28.5 million development loan with Encore Senior Living to construct a 108-unit assisted living and memory care community in Fitchburg, Wisconsin. The four-year loan agreement has an annual interest rate of 8.5% and two one-year extensions. We have a purchase option on the property once it has stabilized. The total amount funded on the note was $4.2 million as of March 31, 2022.

Montecito Medical Real Estate

At March 31, 2022, we had an outstanding $50.0 million mezzanine loan and security agreement with Montecito Medical Real Estate for a fund that invests in medical real estate, including medical office buildings, throughout the United States. During the first quarter of 2022, we funded $3.7 million on one real estate investment. Borrowings under the loan agreement bear interest at an annual rate of 9.5% and accrue an additional 2.5% in interest to be paid upon certain future events including repayments, sales of fund investments, and refinancings. Funds drawn in accordance with this agreement are required to be repaid on a per-investment basis five years from deployment of the funds for the applicable investment and includes two one-year extensions. As of March 31, 2022, we have funded $15.8 million of our commitment that was used to acquire seven medical office buildings for
a combined purchase price of approximately $73.6 million. In the first quarter of 2022, we received principal and interest of $0.3 million and $0.4 million, respectively.

Bickford construction and mortgage loans

As part of the June 2021 sale of six properties to Bickford, we executed a $13.0 million second mortgage as a component of the purchase price consideration. This second mortgage note receivable bears interest at a 10% annual rate and matures in April 2026. Interest income was $0.3 million for the three months ended March 31, 2022.

Given the size of the Company financing provided relative to the purchase price, its subordination to the first mortgage outstanding and the ongoing negative impact of the COVID-19 pandemic on Bickford’s operating results, we did not include this note receivable in the determination of the gain to be recognized upon sale of the portfolio. Therefore, this note receivable is not reflected in “Mortgage and other notes receivable, net” in the Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021.

As of March 31, 2022, we had two fully funded construction loans of $28.7 million and one $14.2 million construction loan with $10.3 million funded to Bickford. The construction loans 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 property. Usual and customary covenants extend to the agreements, including the borrower’s obligation for payment of insurance and taxes. NHI has a fair market value purchase option on the properties at stabilization of the underlying operations. On certain development projects, Bickford, as borrower, is entitled to up to $2.0 million per project in incentives based on the achievement of predetermined operational milestones and, if funded, will increase NHI's future purchase price and eventual NHI lease payment.

We also have a mortgage loan of $4.0 million to Bickford due February 2025, bearing interest at 7%, that amortizes on a twenty-five-year basis.

Senior Living Communities

We provided a $20.0 million revolving line of credit to Senior Living Communities (“Senior Living”) whose borrowings under the revolver are to be used for working capital needs and to finance construction projects within its portfolio, including building additional units. Beginning January 1, 2023, availability under the revolver reduces to $15.0 million. The revolver matures in December 2029 at the time of lease maturity. At March 31, 2022, the $14.3 million outstanding under the facility bears interest at 8.32% per annum, the prevailing 10-year U.S. Treasury rate plus 6%.

The Company also has a mortgage loan of $32.7 million with Senior Living originated in July 2019 for the acquisition of a 248-unit continuing care retirement community (“CCRC”) in Columbia, South Carolina. The mortgage loan is for a term of five years with two one year extensions and carries an interest rate of 7.25%. Additionally, the loan conveys to NHI a purchase option at a stated minimum price of $38.3 million, subject to adjustment for market conditions.

Credit Loss Reserve

Our principal measures of credit quality, except for construction mortgages, are debt service coverage for amortizing loans and interest or fixed charge coverage for non-amortizing loans collectively (“Coverage”). A Coverage ratio provides a measure of the borrower’s ability to make scheduled principal and interest payments. The Coverage ratios presented in the following table have been calculated utilizing the most recent date for which data is available, December 31, 2021, using EBITDARM (earnings before interest, taxes, depreciation, amortization, rent and management fees) and the requisite debt service, interest service or fixed charges, as defined in the applicable loan agreement. We categorize Coverage into three levels: (i) more than 1.5x, (ii) between 1.0x and 1.5x, and (iii) less than 1.0x. We update the calculation of coverage on a quarterly basis. Coverage is not a meaningful credit quality indicator for construction mortgages as either these developments are not generating any operating income, or they have insufficient operating income as occupancy levels necessary to stabilize the properties have not yet been achieved. We measure credit quality for these mortgages by considering the construction and stabilization timeline and the financial condition of the borrower as well as economic and market conditions. As of March 31, 2022, we did not have any construction loans that we considered underperforming. The tables below present outstanding note balances as of March 31, 2022 at amortized cost.

We consider the guidance in ASC 310-20 when determining whether a modification, extension or renewal constitutes a current period origination. The credit quality indicator as of March 31, 2022, is presented below for the amortized cost, net by year of origination of ($ in thousands):
20222021202020192018PriorTotal
Mortgages
more than 1.5x$3,991 $— $29,929 $9,024 $139,462 $4,257 $186,663 
between 1.0x and 1.5x— — — 32,700 — — 32,700 
less than 1.0x— — 3,927 6,423 — 10,000 20,350 
3,991 — 33,856 48,147 139,462 14,257 239,713 
Mezzanine
more than 1.5x— 23,237 — — — 9,836 33,073 
between 1.0x and 1.5x— 15,925 — — — — 15,925 
less than 1.0x— — — — — 14,500 14,500 
No coverage available— — — 750 — — 750 
— 39,162 — 750 — 24,336 64,248 
Revolver
more than 1.5x— 
between 1.0x and 1.5x17,563 
less than 1.0x— 
17,563 
Credit loss reserve(5,134)
$316,390 

Due to the economic uncertainty created by the COVID-19 pandemic and the potential impact on the collectability of our mortgages and other notes receivable, we forecasted at the beginning of the pandemic a 20% increase in the probability of a default and a 20% increase in the amount of loss from a default resulting in an effective adjustment of 44%.

The allowance for expected credit losses is presented in the following table for the three months ended March 31, 2022 ($ in thousands):
Beginning balance January 1, 2022$5,210 
Provision for expected credit losses(76)
Balance March 31, 2022$5,134