2.Real Estate Investments

Assisted living properties, independent living properties, memory care properties, and combinations thereof are included in the assisted living property type. Range of care properties (or ROC) property type consists of properties providing skilled nursing and any combination of assisted living, independent living and/or memory care services.

Any reference to the number of properties, number of units, number of beds, and yield on investments in real estate are unaudited and outside the scope of our independent registered public accounting firm’s review of our consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board.

Owned Properties. The following table summarizes our investments in owned properties at March 31, 2015 (dollar amounts in thousands):


								Average
			Percentage		Number	Number of		Investment
	Gross		of		of	SNF	ALF	per
Type of Property	Investments		Investments		Properties(1)	Beds	Units	Bed/Unit
Skilled Nursing	$	499,580	50.8	%	69	8,513	—	$	58.68
Assisted Living		416,079	42.3	%	85	—	4,236	$	98.22
Range of Care		43,907	4.5	%	7	634	274	$	48.36
Under Development(2)		13,136	1.3	%	—	—	—		—
Other(3)		10,883	1.1	%	1	—	—		—
Totals	$	983,585	100.0	%	162	9,147	4,510

(1)

We own properties in 27 states that are leased to 29 different operators.

(2)

Includes two MC developments with a total of 122 units and a combination ALF and MC development with 89 units.

(3)

Includes one school property and five parcels of land held-for-use.

Owned properties are leased pursuant to non-cancelable operating leases generally with an initial term of 10 to 15 years. Each lease is a triple net lease which requires the lessee to pay all taxes, insurance, maintenance and repairs, capital and non-capital expenditures and other costs necessary in the operations of the facilities. Many of the leases contain renewal options. The leases provide for fixed minimum base rent during the initial and renewal periods. The majority of our leases contain provisions for specified annual increases over the rents of the prior year that are generally computed in one of four ways depending on specific provisions of each lease:

(i)

a specified percentage increase over the prior year’s rent, generally between 2.0% and 3.0%;

(ii)

a calculation based on the Consumer Price Index;

(iii)

as a percentage of facility net patient revenues in excess of base amounts; or

(iv)

specific dollar increases.

During the three months ended March 31, 2015, we funded $7,195,000 under a $12,182,000 development commitment to purchase the land and existing improvements and then complete the related development of a 56-unit memory care property currently under construction in Texas. In conjunction with this commitment, we entered into a master lease agreement for an initial term of 15 years with three 5-year renewal options at an initial cash yield of 8.75%. The master lease provides for our payment of a lease inducement of up to $1,589,000. Also, the master lease gives us a right to provide similar financing for certain future development opportunities.

During the three months ended March 31, 2015, we elected to exercise our right to provide financing for one such opportunity, adding to the master lease a parcel of land purchased in South Carolina for $2,490,000 as part of our commitment to provide the operator with up to $16,535,000, including the land purchase, for the development of an 89-unit combination assisted living and memory care property. In conjunction with this new development commitment, the master lease provides for an additional $2,363,000 lease inducement payment. See Note 7. Commitments and Contingencies for further discussion of the lease inducement commitments.

During the quarter ended March 31, 2015, we purchased and equipped a 106-bed skilled nursing property in Wisconsin for a total of $13,946,000 by exercising our purchase option under a $10,600,000 mortgage and construction loan. The property was added to an existing master lease at a lease rate equivalent to the interest rate in effect on the loan at the time the purchase option was exercised. Additionally, we paid the lessee a $1,054,000 lease inducement which will be amortized as a yield adjustment over the life of the lease term. See Mortgage Loans below for further discussion of the loan agreement.

The following table summarizes our completed development and improvement projects and amounts funded during the three months ended March 31, 2015 (dollar amounts in thousands):


	Number		Number
	of	Type of	of
Type of Project	Properties	Property	Beds/Units	State	2015 Funding			Total Funding
Development	1	ALF	60	Colorado	$	1,360		$	10,541	(1)
Renovation	1	SNF	121	California		1,481			1,481
Renovation	2	SNF	141	Tennessee		40			2,200
	4		322		$	2,881	(2)	$	14,222

(1)

Completed a MC property in February 2015.

(2)

Excludes $5,692 of funding on projects that were completed during 2014.

The following table summarizes our investment commitments as of March 31, 2015, and amounts funded under these projects (excludes capitalized interest, dollar amounts in thousands):


									Number	Number
	Investment		2015		Commitment		Remaining		of	of
Type of Property	Commitment		Funding(2)		Funded		Commitment		Properties	Beds/Units
Skilled Nursing	$	6,600	$	25	$	25	$	6,575	3	510
Assisted Living(1)		45,765		11,056		13,144		32,621	27	1,240
Totals	$	52,365	$	11,081	$	13,169	$	39,196	30	1,750

(1)

Includes the development of two MC properties for a total commitment of $24,430 and one ALF/MC property for a total commitment of $16,535. Also, includes three commitments for renovation projects on 24 ALFs totaling $4,800.

(2)

Excludes funding for completed development and improvement projects discussed above. Includes $7,195 of land and improvements acquired for the development of a 56-unit MC property and $2,490 of land acquired for the development of an 89-unit ALF/MC property, as previously discussed.

Our construction in progress (or CIP) activity during the three months ended March 31, 2015 for our development, redevelopment, renovation, and expansion projects is as follows (dollar amounts in thousands):


	CIP								CIP
	Balance at				Capitalized		Conversions		Balance at
Properties	12/31/2014		Funded(1)		Interest		out of CIP		3/31/2015
Development projects:
Assisted living	$	8,671	$	8,961	$	147	$	(9,413)	$	8,366
Subtotal		8,671		8,961		147		(9,413)		8,366
Redevelopment, renovation and expansion projects:
Skilled nursing		—		25		—		—		25
Subtotal		—		25		—		—		25
Total	$	8,671	$	8,986	$	147	$	(9,413)	$	8,391

(1)

Excludes $7,298 of funding on development and renovations projects which was capitalized directly into building and includes the acquisition of the existing improvements of the 56-unit MC property for $6,315, as previously discussed.

Mortgage Loans. The following table summarizes our investments in mortgage loans secured by first mortgages at March 31, 2015 (dollar amounts in thousands):


			Percentage		Number	Number	Number of		Investment
	Gross		of		of	of	SNF	ALF	per
Type of Property	Investments		Investments		Loans	Properties(1)	Beds	Units	Bed/Unit
Skilled Nursing	$	151,352	91.6	%	15	29	3,701	—	$	40.89
Assisted Living		13,948	8.4	%	3	8	—	270	$	51.66
Totals	$	165,300	100.0	%	18	37	3,701	270

(1)

We have investments in properties located in 7 states that include mortgages to 10 different operators.

At March 31, 2015, the mortgage loans had interest rates ranging from 7.1% to 13.9% and maturities ranging from 2016 to 2045. In addition, some loans contain certain guarantees, provide for certain facility fees and generally have 20-year to 30-year amortization schedules. The majority of the mortgage loans provide for annual increases in the interest rate based upon a specified increase of 10 to 25 basis points. During the three months ended March 31, 2015, we received $2,285,000 plus accrued interest related to the payoff of a mortgage loan secured by a range of care property located in California. During the three months ended March 31, 2015 and 2014, we received $501,000 and $519,000, respectively, in regularly scheduled principal payments.

During 2013, we funded the initial amount of $124,387,000 under a mortgage loan with a third‑party borrower secured by 15 skilled nursing properties with a total of 2,058 beds in Michigan. The loan agreement provides for additional commitments of $12,000,000 for capital improvements and up to $40,000,000 of additional proceeds, for a total loan commitment of up to $176,387,000. See Note 7. Commitments and Contingencies for further discussion of the additional $40,000,000 loan commitment. During the three months ended March 31, 2015, we funded $1,858,000 under the $12,000,000 capital improvement commitment with $6,804,000 remaining as of March 31, 2015.

In addition, this mortgage loan provided the borrower a one‑time option to prepay up to 50% of the then outstanding loan balance without penalty. During the three months ended March 31, 2015, we amended this mortgage loan to provide up to an additional $20,000,000 in loan proceeds for the expansion of two properties securing the loan (increasing the total capital improvement commitment to $32,000,000 and the total loan commitment to $196,387,000) and agreed to convey, to the borrower, two parcels of land held-for-use adjacent to these properties to facilitate the projects. As partial consideration for the increased commitment and associated conveyance, the borrower forfeited their prepayment option.

Additionally, during the quarter ended March 31, 2015, we originated an $11,000,000 mortgage loan with the borrower concurrently funding $9,500,000 with a commitment to fund the balance for approved capital improvement projects. The loan is secured by a 157-bed skilled nursing property in Michigan and bears interest at 9.41% for five years, escalating annually thereafter by 2.25%. The term is 30 years with interest-only payments for the initial three years. Additionally, we have the option to purchase the property under certain circumstances, including a change in regulatory environment.

We had a $10,600,000 mortgage and construction loan that afforded the borrower to develop a new 106-bed skilled nursing property in Wisconsin to replace an old existing skilled nursing property. Upon completion of construction and relocation of the residents from the old property to the replacement property in 2014, the old property was sold and released as collateral. During the three months ended March 31, 2015, we purchased and equipped the replacement property for a total of $13,946,000 by exercising our right under the agreement including applying amounts otherwise due to us under the underlying loan as a closing adjustment. See Owned Properties above for further discussion of the property purchase.