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Investment Activity | 9 Months Ended
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Sep. 30, 2022
Real Estate [Abstract] |
Investment Activity | Investment Activity Asset Acquisition In the second quarter of 2022, we acquired a 53-unit assisted living facility located in Oshkosh, Wisconsin, from Encore Senior Living. The acquisition price was $13.3 million and included the full payment of an outstanding construction note receivable to us of $9.1 million, including interest. We have agreed to pay up to $0.8 million in additional cash consideration pending the results of an ongoing property tax appeal. As of September 30, 2022, no amount of this consideration is expected to be paid. We added the facility to an existing master lease for a term of 15 years at an initial lease rate of 7.25%, with an annual escalator of 2.5%. Asset Dispositions During the nine months ended September 30, 2022, we completed the following real estate property dispositions within our Real Estate Investments reportable segment as described below ($ in thousands):
Operator |  | Date |  | Properties |  | Asset Class |  | Net Proceeds |  | Net Real Estate Investment |  | Gain |  | Impairment 1
Hospital Corporation of America |  | Q1 2022 |  | 1 |  | MOB |  | $ | 4,868 |  |  | $ | 1,904 |  |  | $ | 2,964 |  |  | $ | — |
Vitality Senior Living 2 |  | Q1 2022 |  | 1 |  | SLC |  | 8,302 |  |  | 8,285 |  |  | 17 |  |  | — |
Holiday Retirement (“Holiday”)2 |  | Q2 2022 |  | 1 |  | ILF |  | 2,990 |  |  | 3,020 |  |  | — |  |  | 30 |
Chancellor Senior Living 2 |  | Q2 2022 |  | 2 |  | ALF |  | 7,305 |  |  | 7,357 |  |  | — |  |  | 52 |
Bickford 2 |  | Q2 2022 |  | 3 |  | ALF |  | 25,959 |  |  | 28,268 |  |  | — |  |  | 2,309 |
Comfort Care |  | Q2 2022 |  | 4 |  | ALF |  | 40,000 |  |  | 38,445 |  |  | 1,556 |  |  | — |
Helix Healthcare |  | Q2 2022 |  | 1 |  | HOSP |  | 19,500 |  |  | 10,535 |  |  | 8,965 |  |  | — |
Discovery Senior Living 2 |  | Q3 2022 |  | 2 |  | ALF/SLC |  | 16,379 |  |  | 15,159 |  |  | 1,220 |  |  | — |
National HealthCare Corporation (“NHC”) |  | Q3 2022 |  | 7 |  | SNF |  | 43,686 |  |  | 30,066 |  |  | 13,620 |  |  | — |
|  |  |  |  |  |  |  | $ | 168,989 |  |  | $ | 143,039 |  |  | $ | 28,342 |  |  | $ | 2,391 |
1 Impairments are included in “Loan and realty losses” in Condensed Consolidated Statements of Income for the nine months ended September 30, 2022. 2 Total impairment charges recognized on these properties were $65.4 million, of which $28.5 million were recognized in the nine months ended September 30, 2022. The disposal transactions for the three Bickford properties in the second quarter of 2022 included $2.4 million in contingent consideration representing cash placed in escrow that will be returned to the buyers to the extent the sold properties generate negative monthly cash flows over the twelve months following from the dates of sale. After the twelve-month period, any remaining funds not distributed will be paid to the Company. We have assessed that it was not probable that any of the escrowed funds would be received by the Company. To the extent this assessment changes, or funds are ultimately received, we will recognize the amount as a gain on the sale of real estate. Discovery In the third quarter of 2022, we sold an assisted living facility in Indiana and a senior living campus in Florida for approximately $16.9 million in cash consideration, and incurred $0.5 million of transaction costs, resulting in an approximate gain of $1.2 million. The properties were classified as assets held for sale on the Condensed Consolidated Balance Sheet for the quarter ended June 30, 2022. Prior impairment charges recognized on the properties totaled $23.7 million. NHC On September 1, 2022, we sold a portfolio of seven skilled nursing facilities in New Hampshire and Massachusetts for approximately $44.4 million in net cash consideration, and incurred $0.7 million of transaction costs. These properties were leased to NHC pursuant to a master lease agreement dated August 30, 2013 with an original maturity date of August 31, 2028 that was terminated upon completion of the sale. The properties were classified as assets held for sale on the Condensed Consolidated Balance Sheet for the quarter ended June 30, 2022. Rental income was $0.6 million and $2.4 million for the three and nine months ended September 30, 2022, respectively, and $0.9 million and $2.8 million for the three and nine months ended September 30, 2021, respectively. In connection with the sale of this portfolio, we amended the master lease for 35 facilities dated October 17, 1991 by and between NHI and NHC/OP, L.P., an affiliate of NHC that is discussed below in “Tenant Concentration.” Assets Held for Sale and Long-Lived Assets At September 30, 2022, ten properties in our Real Estate Investments reportable segment, with an aggregate net real estate balance of $32.6 million, were classified as assets held for sale on our Condensed Consolidated Balance Sheet, including six properties that were transferred into assets held for sale during the third quarter of 2022. Rental income associated with the ten properties was $1.1 million and $2.0 million for the three and nine months ended September 30, 2022, respectively, and $1.2 million and $3.5 million for the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2022, we recorded impairment charges of $9.5 million and $38.3 million, respectively, including $5.7 million on two properties held in use, related to our Real Estate Investments reportable segment. The impairment charges are included in “Loan and realty losses” in the Condensed Consolidated Statements of Income. We reduce the carrying value of impaired properties to their estimated fair value or, with respect to the properties classified as held for sale, to estimated fair value less costs to sell. To estimate the fair values of the properties, we utilized a market approach which considered binding agreements for sales (Level 1 inputs), non-binding offers to purchase from unrelated third parties and/or broker quotes of estimated values (Level 3 inputs), and/or independent third-party valuations (Level 1 and 3 inputs). Tenant Concentration The following table contains information regarding tenant concentration, excluding $2.6 million for our corporate office, $336.6 million for SHOP, and a credit loss reserve of $6.9 million, based on the percentage of revenues for the nine months ended September 30, 2022 and 2021, related to tenants or affiliates of tenants, that exceed 10% of total revenues ($ in thousands):
| as of September 30, 2022 |  | Revenues 1 |
| Asset |  | Gross Real |  | Notes |  | Nine Months Ended September 30, |
| Class |  | Estate 2 |  | Receivable |  | 2022 |  |  | 2021 |
Senior Living Communities | EFC |  | $ | 573,631 |  |  | $ | 46,669 |  |  | $ | 38,325 |  | 18% |  | $ | 38,094 |  | 17%
NHC | SNF |  | 133,770 |  |  | — |  |  | 27,875 |  | 13% |  | 28,290 |  | 12%
Bickford 3 | ALF |  | 412,304 |  |  | 46,422 |  |  | N/A | N/A |  | 26,224 |  | 11%
Holiday 3 | ILF |  | — |  |  | — |  |  | N/A | N/A |  | 22,811 |  | 10%
All others, net | Various |  | 1,313,238 |  |  | 121,018 |  |  | 109,766 |  | 53% |  | 106,110 |  | 46%
Escrow funds from tenants |  |  |  |  |  |  |  |  |  |  |
for property operating expenses | Various |  | — |  |  | — |  |  | 7,553 |  | 4% |  | 7,519 |  | 4%
|  |  | $ | 2,432,943 |  |  | $ | 214,109 |  |  | 183,519 |  |  |  | 229,048 |  |
Resident fees and services 4 |  |  |  |  |  |  | 24,005 |  | 12% |  | — |  | —%
|  |  |  |  |  |  | $ | 207,524 |  |  |  | $ | 229,048 |  |
1 Includes interest income on notes receivable and rental income from properties classified as held for sale. 2 Amounts include any properties classified as held for sale. 3 Below 10% for the nine months ended September 30, 2022. Therefore, revenues are included in All others, net. 4 There is no tenant concentration in resident fees and services because these agreements are with individual residents. At September 30, 2022, the two states in which we had an investment concentration of 10% or more were South Carolina (12.1%) and Texas (11.1%). Senior Living Communities As of September 30, 2022, we leased ten retirement communities to Senior Living Communities, LLC (“Senior Living”). We recognized straight-line rent revenue of $0.1 million and $0.3 million from Senior Living for the three and nine months ended September 30, 2022, respectively, and $0.7 million and $1.8 million for the three and nine months ended September 30, 2021, respectively. NHC Effective September 1, 2022, we amended the master lease dated October 17, 1991, as previously amended by and between NHI and NHC/OP, L.P., an affiliate of NHC, for 35 facilities. This amendment was executed concurrently with the sale of a portfolio of seven skilled nursing facilities as described above and increases the annual base rent due each year through the expiration of the master lease on December 31, 2026. The annual base rent prior to the amendment was $30.8 million and was increased to $34.3 million for the year ended December 31, 2022, with credit given for rent paid in 2022 related to the sold portfolio. In addition to the base rent, NHC will continue to pay any additional rent and percentage rent as required by the master lease. Two of our board members, including our chairman, are also members of NHC’s board of directors. Bickford Senior Living As of September 30, 2022, we leased 36 facilities, excluding two facilities classified as assets held for sale, under four leases to Bickford. Revenues from Bickford reflect the impact of pandemic-related rent concessions of approximately $5.5 million for the nine months ended September 30, 2022 and $3.5 million and $13.8 million for the three and nine months ended September 30, 2021, respectively. During the three months ended September 30, 2022, we did not provide any lease concessions to Bickford. In the second quarter of 2022, we wrote off approximately $18.1 million of straight-line rents receivable and $7.1 million of lease incentives, that were included in “Other assets, net” on the Condensed Consolidated Balance Sheet, to rental income upon converting Bickford to the cash basis of accounting. These write offs were the result of a change in our evaluation of collectability of future rent payments due under its four master lease agreements based upon information we obtained from Bickford regarding its financial condition that raised substantial doubt as to its ability to continue as a going concern. Cash rent received from Bickford for the three and nine months ended September 30, 2022 was $7.1 million and $17.0 million, respectively. In addition to the three properties sold that are included in the asset dispositions table above, we completed various restructuring activities in the Bickford leased property portfolio during the first and second quarters of 2022. In March 2022, we transferred one assisted living facility located in Pennsylvania from the Bickford portfolio to a new operator that is leased pursuant to a ten-year triple net lease and wrote off approximately $0.7 million in a straight-line rent receivable, reducing rental income. In the second quarter of 2022, we restructured and amended three of Bickford’s master lease agreements covering 27 properties and reached agreement on the repayment terms of the $26.0 million in outstanding pandemic-related deferrals. Significant terms of these agreements are as follows: • Extends the maturity dates of the modified leases to 2033 and 2035. The remaining master lease agreement covering 11 properties with an original maturity in 2023 was previously extended to 2028. • Reduces the combined rent for the portfolio to approximately $28.3 million per year through April 1, 2024, subject to a nominal annual increase, at which time the rent will be reset to a fair market value, not less than 8.0% of our initial gross investment. • Requires monthly payments beginning October 2022 through December 2024 based on a percentage of Bickford’s monthly revenues exceeding an established threshold. The deferrals may be reduced by up to $6.0 million upon Bickford achieving certain performance targets and the sale or transition of certain properties to new operators. Tenant Purchase Options Certain of our leases contain purchase options allowing tenants to acquire the leased properties. At September 30, 2022, we had tenant purchase options on three properties with an aggregate net investment of $60.1 million that will become exercisable between 2027 and 2028. Rental income from these properties with tenant purchase options was $1.8 million and $5.3 million for the three and nine months ended September 30, 2022, respectively, and $1.7 million and $5.1 million for the three and nine months ended September 30, 2021, respectively. We cannot reasonably estimate at this time the probability that any purchase options will be exercised in the future. Consideration to be received from the exercise of any tenant purchase option is expected to exceed our net investment in the leased property or properties. Future Minimum Base Rent Future minimum lease payments to be received by us under our operating leases at September 30, 2022, are as follows ($ in thousands):
Remainder of 2022 | $ | 47,241 |
2023 | 183,792 |
2024 | 183,825 |
2025 | 186,425 |
2026 | 189,282 |
2027 | 149,849 |
Thereafter | 599,001 |
| $ | 1,539,415 |
Variable Lease Payments 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 where the lease contains fixed escalators. Some of our leases contain escalators that are determined annually based on a variable index or other factors that is indeterminable at the inception of the lease. The table below indicates the revenue recognized as a result of fixed and variable lease escalators ($ in thousands):
| Three Months Ended |  | Nine Months Ended
| September 30, |  | September 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Lease payments based on fixed escalators, net of deferrals | $ | 53,394 |  |  | $ | 59,027 |  |  | $ | 172,767 |  |  | $ | 188,008 |
Lease payments based on variable escalators | 1,224 |  |  | 1,288 |  |  | 2,452 |  |  | 3,201 |
Straight-line rent income | 2,476 |  |  | 3,798 |  |  | (11,360) |  |  | 12,189 |
Escrow funds received from tenants for property operating expenses | 2,358 |  |  | 3,182 |  |  | 7,553 |  |  | 7,519 |
Amortization and write-off of lease incentives | (58) |  |  | (252) |  |  | (7,477) |  |  | (774) |
Rental income | $ | 59,394 |  |  | $ | 67,043 |  |  | $ | 163,935 |  |  | $ | 210,143 |

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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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