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Investment Activity | 6 Months Ended
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Jun. 30, 2024
Real Estate [Abstract] |
Investment Activity | Investment Activity Asset Acquisitions In June 2024, we acquired a 110-unit ALF located in Sussex, Wisconsin, from Encore Senior Living (“Encore”). The acquisition price was $32.1 million, including $0.1 million in closing costs, and the cancellation of an outstanding construction note receivable held by us of $22.2 million including interest. We added the facility to an existing master lease with Encore for a term of 15 years at an initial lease rate of 8.25%, and annual escalators of 2.21%. Of the total purchase price $1.3 million was allocated to land and $30.8 million was allocated to buildings and improvements. Asset Dispositions During the three and six months ended June 30, 2024, we completed the sale of two ALFs located in Louisiana, previously leased to one of our tenants on cash basis of accounting for revenue recognition, for net cash proceeds of $4.7 million, resulting in a gain of approximately $1.4 million. Tenant Concentration The following table contains information regarding concentration in our Real Estate Investments portfolio of tenants or affiliates of tenants that exceed 10% of total revenues as of and for the six months ended June 30, 2024 and 2023, excluding $2.6 million for our corporate office, a credit loss reserve of $15.9 million and $351.1 million in real estate assets in the SHOP segment ($ in thousands):
| As of June 30, 2024 |  | Revenues 1 |
| Asset Class |  | Gross Real Estate 2 |  | Notes Receivable |  | Six Months Ended June 30, |
|  |  |  | 2024 |  |  |  | 2023 |
Senior Living Communities, LLC (“Senior Living”) | EFC |  | $ | 573,631 |  |  | $ | 45,375 |  |  | $ | 26,406 |  |  | 16% |  | $ | 25,658 |  | 16%
National HealthCare Corporation (“NHC”) | SNF |  | 133,770 |  |  | — |  |  | 20,836 |  |  | 13% |  | 18,983 |  | 12%
Bickford | ALF |  | 426,798 |  |  | 16,697 |  |  | 20,691 |  |  | 12% |  | 19,977 |  | 12%
All others, net | Various |  | 1,339,754 |  |  | 194,699 |  |  | 66,369 |  |  | 40% |  | 66,323 |  | 41%
Escrow funds received from tenants |  |  |  |  |  |  |  |  |  |  |  |
for property operating expenses | Various |  | — |  |  | — |  |  | 5,535 |  |  | 3% |  | 5,830 |  | 4%
|  |  | $ | 2,473,953 |  |  | $ | 256,771 |  |  | 139,837 |  |  |  |  | 136,771 |  |
Resident fees and services 3 |  |  |  |  |  |  | 26,645 |  |  | 16% |  | 23,493 |  | 15%
|  |  |  |  |  |  | $ | 166,482 |  |  |  |  | $ | 160,264 |  |
1 Includes interest income on notes receivable and rental income from properties classified as assets held for sale. 2 Amounts include any properties classified as held for sale. 3 There is no tenant concentration in “Resident fees and services” because these agreements are with individual residents. At June 30, 2024, the two states in which we had an investment concentration of 10% or more were South Carolina (12.0%) and Texas (10.6%). Senior Living As of June 30, 2024, we leased ten retirement communities to Senior Living. In the second quarter of 2024, two of the leases were amended to extend the maturity dates by two years and to provide up to $10.0 million of capital improvements on various properties, none of which was funded as of June 30, 2024. Rental revenue will increase at a lease rate of 8.5% applied to the amount expended. We recognized straight-line rent revenue of $(0.5) million and $(0.6) million from Senior Living for the six months ended June 30, 2024 and 2023, respectively. NHC As of June 30, 2024, we leased three ILFs and 32 SNFs to NHC, a publicly held company, under a master lease (four of which were subleased to other parties for whom the lease payments were guaranteed to us by NHC). Straight-line rent revenue of $0.1 million and $(0.6) million was recognized from NHC for the six months ended June 30, 2024 and 2023, respectively. NHC Percentage Rent - Under the terms of our master lease agreement with NHC, rent escalates by 4% of the increase, if any, in each of the facility’s revenue over a base year and is referred to as “percentage rent.” The following table summarizes the percentage rent income from NHC ($ in thousands):
|  | Six Months Ended June 30,
|  | 2024 |  | 2023
Current year |  | $ | 2,759 |  |  | $ | 1,931 |
Prior year final certification 1 |  | 1,656 |  |  | 630 |
Total percentage rent income |  | $ | 4,415 |  |  | $ | 2,561 |
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. Two of the members of our Board of Directors, including our chairman, are also members of NHC’s board of directors. Bickford As of June 30, 2024, we leased 39 facilities, including one property reclassified to assets held for sale in the second quarter of 2024, to Bickford under four leases. In 2022, we converted Bickford to the cash basis of revenue recognition based upon information obtained from Bickford regarding its financial condition that raised substantial doubt as to its ability to continue as a going concern. Effective April 1, 2024, the combined rent for the Bickford leased portfolio was reset to $34.5 million per year with nominal increases through April 1, 2026, at which time the rent will be reset to a fair market value based on the Consumer Price Index (“CPI”). Base rent will escalate annually thereafter based on either a fixed percentage or CPI subject to a floor of 2% and a ceiling of 3%. As part of the lease amendments, we agreed to fund up to $8.0 million of capital improvements on various properties, of which less than $0.1 million was funded as of June 30, 2024. Rental revenue will increase at a lease rate of 8.0% applied to the amount expended. During the three and six months ended June 30, 2024, Bickford repaid $1.3 million and $2.8 million, respectively, of its outstanding pandemic-related rent deferrals. During the three and six months ended June 30, 2023, Bickford repaid $0.4 million and $0.6 million, respectively, of its outstanding pandemic-related rent deferrals, in addition to the reduction in rent deferrals of $2.5 million recognized in connection with the acquisition of an ALF located in Chesapeake, Virginia from Bickford through a note receivable conversion. As of June 30, 2024, Bickford’s outstanding pandemic-related rent deferrals were $15.2 million. Assets Held for Sale and Impairments of Long-Lived Assets The following is a summary of our assets held for sale in our Real Estate Investments portfolio ($ in thousands):
|  | As of |  | As of
|  | June 30, 2024 |  | December 31, 2023
Number of facilities |  | 2 |  | 1
Real estate, net |  | $5,669 |  | $5,004
Rental income associated with assets he ld for sale as of June 30, 2024 totaled $0.5 million and $0.9 million for the three and six months ended June 30, 2024, respectively, and $0.4 million and $1.0 million for the three and six months ended June 30, 2023, respectively. During the three and six months ended June 30, 2024, we recorded impairment charges of approximately $0.7 million on one property reclassified to assets held for sale in the second quarter of 2024 in our Real Estate Investments segment. During the three and six months ended June 30, 2023, we recorded impairment charges of approximately $0.1 million on two properties and approximately $0.5 million on three properties, respectively, in our Real Estate Investments segment. The impairment charges were determined in connection with the preparation of the financial statements for the applicable quarterly period and are included in “Loan and realty losses (gains)” in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2024 and 2023. We reduce the carrying value of impaired properties to their estimated fair value or, with respect to the properties classified as assets 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). In March 2024, we executed a purchase and sale agreement with a tenant to acquire its leased SLC for a purchase price of $38.5 million, subject to the tenant’s ability to secure financing for the purchase. The purchase and sale agreement expires in December 2024. Until the tenant provides notification that it has obtained financing, the property continues to be classified as held and used and leased pursuant to the existing triple-net lease that generates approximately $2.8 million in annual rent and expires in July 2027. The property had a net investment of $19.4 million as of June 30, 2024. Cash Basis Operators We have three tenants on the cash basis of accounting for revenue recognition for their leasing arrangements based on our assessment of each tenant’s ability to satisfy its contractual obligations. Cash rents received from these tenants for the three and six months ended June 30, 2024 and 2023 were as follows ($ in thousands):
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2024 |  | 2023 |  | 2024 |  | 2023
Bickford 1 | $ | 9,946 |  |  | $ | 8,119 |  |  | $ | 19,310 |  |  | $ | 15,927 |
All others 2 | 5,142 |  |  | 2,318 |  |  | 7,544 |  |  | 6,516 |
Total rental income from cash basis operators | $ | 15,088 |  |  | $ | 10,437 |  |  | $ | 26,854 |  |  | $ | 22,443 |
1 Excludes $2.5 million of rental income related to the reduction of pandemic-related rent deferrals recognized in connection with the acquisition of an ALF from Bickford in the first quarter of 2023. 2 In the second quarter of 2024, we received a $2.5 million lump sum payment from an operator for partial repayment of pandemic-related rent deferrals. Tenant Transition In June 2024, we transitioned a leased SNF located in Wisconsin to a new operator. The new lease contains a purchase option to acquire the property at the end of the initial lease term in 2031 or during the renewal period at a fixed minimum internal rate of return on our investment. In the first quarter of 2024, we wrote off to “Rental income” the straight-line rent receivable of approximately $0.8 million associated with the terminated lease. Tenant Purchase Options Certain of our leases contain purchase options allowing tenants to acquire the leased properties at a fixed base price plus a specified share in any appreciation, fixed base price, or a fixed minimum internal rate of return on our investment. At June 30, 2024, tenants had purchase options on four properties with an aggregate net investment of $78.5 million that will become exercisable between 2027 and 2031. Rental income from these properties with tenant purchase options was $2.0 million and $3.8 million for the three and six months ended June 30, 2024, respectively. Rental income from these properties with tenant purchase options was $1.8 million and $3.6 million for three and six months ended June 30, 2023, respectively. We cannot reasonably estimate at this time the probability that any purchase options will be exercised in the future. Consideration to be received from the exercise of any tenant purchase option is expected to exceed our net investment in the leased property or properties. Future Minimum Base Rent Future minimum lease payments to be received by us under our operating leases at June 30, 2024, were as follows ($ in thousands):
Remainder of 2024 | $ | 118,344 |
2025 | 239,272 |
2026 | 245,826 |
2027 | 198,986 |
2028 | 193,384 |
2029 | 176,362 |
Thereafter | 677,813 |
| $ | 1,849,987 |
Variable Lease Payments Most of our leases contain annual escalators in rent payments. Some of our leases contain escalators that are determined annually based on a variable index or other factors that are indeterminable at the inception of the lease. The table below indicates the rental income recognized as a result of fixed and variable lease escalators ($ in thousands):
| Three Months Ended |  | Six Months Ended
| June 30, |  | June 30,
| 2024 |  | 2023 |  | 2024 |  | 2023
Lease payments based on fixed escalators | $ | 60,110 |  |  | $ | 53,538 |  |  | $ | 116,702 |  |  | $ | 112,827 |
Lease payments based on variable escalators | 2,358 |  |  | 2,103 |  |  | 6,251 |  |  | 3,696 |
Straight-line rent, net of write-offs | 1,213 |  |  | 2,875 |  |  | 905 |  |  | 4,972 |
Escrow funds received from tenants for property operating expenses | 2,802 |  |  | 3,212 |  |  | 5,535 |  |  | 5,830 |
Amortization of lease incentives | (723) |  |  | (776) |  |  | (1,446) |  |  | (1,075) |
Rental income | $ | 65,760 |  |  | $ | 60,952 |  |  | $ | 127,947 |  |  | $ | 126,250 |

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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://www.xbrl.org/2003/role/disclosureRef -Topic 974 -SubTopic 720 -Name Accounting Standards Codification -Section 50 -Paragraph 1 -Publisher FASB -URI https://asc.fasb.org/1943274/2147477728/974-720-50-1 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 976 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/976/tableOfContent Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 978 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/978/tableOfContent Reference 4: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 970 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/970/tableOfContent Reference 5: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 972 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/972/tableOfContent Reference 6: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 974 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/974/tableOfContent + Details
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