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Real Estate Investments | 3 Months Ended
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Mar. 31, 2023
Real Estate Investments |
Real Estate Investments |
2. | Real Estate Investments
Assisted living communities, independent living communities, memory care communities and combinations thereof are included in the assisted living property classification (collectively “ALF”). Any reference to the number of properties or facilities, number of units, number of beds, number of operators 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. Our owned properties are leased pursuant to non-cancelable operating leases. 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 majority of our leases contain provisions for specified annual increases over the rents of the prior year. The following table summarizes our investments in owned properties at March 31, 2023 (dollar amounts in thousands):
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Average |
​ | ​ | ​ | ​ | ​ | Percentage | ​ | Number | ​ | Number of | ​ | Investment |
​ | ​ | Gross | ​ | of | ​ | of | ​ | SNF | ​ | ALF | ​ | per |
Type of Property | ​ | Investment | ​ | Investment | ​ | Properties (1) | ​ | Beds | ​ | Units | ​ | Bed/Unit |
Assisted Living | ​ | $ | 785,912 | ​ | 56.5 | % | 98 | ​ | — | ​ | 5,437 | ​ | $ | 144.55 | ​
Skilled Nursing | ​ | ​ | 591,305 | ​ | 42.6 | % | 50 | ​ | 6,113 | ​ | 236 | ​ | $ | 93.13 | ​
Other (2) | ​ | ​ | 12,005 | ​ | 0.9 | % | 1 | ​ | 118 | ​ | — | ​ | ​ | — | ​
Total | ​ | $ | 1,389,222 | ​ | 100.0 | % | 149 | ​ | 6,231 | ​ | 5,673 | ​ | ​ | ​ | ​
(1) | We own properties in 26 states that are leased to 23 different operators.
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(2) | Includes three parcels of land held-for-use, and one behavioral health care hospital.
Many of our existing leases contain renewal options that, if exercised, could result in the amount of rent payable upon renewal being greater or less than that currently being paid. During 2023, Brookdale Senior Living Communities, Inc. (“Brookdale”) elected not to exercise its renewal option. Accordingly, the master lease expires in December 2023. Additionally, during 2023, a master lease covering two skilled nursing centers that matured in 2023 was renewed at the contractual rate for another five years extending the maturity to November 2028. The centers have a total of 216 beds and are located in Florida. We monitor the collectability of our receivable balances, including deferred rent receivable balances, on an ongoing basis. We write-off uncollectible operator receivable balances, including straight- line rent receivable and lease incentives balances, as a reduction to rental income in the period such balances are no longer probable of being collected. Therefore, recognition of rental income is limited to the lesser of the amount of cash collected or rental income reflected on a “straight-line” basis for those customer receivable balances deemed uncollectible. We wrote-off straight-line rent receivable and lease incentives balances of $144,000 and $173,000 for the three months ended March 31, 2023 and 2022, respectively, as a result of property sales and lease terminations. We continue to take into the current financial condition of our operators, including consideration of the impact of COVID-19, in our estimation of uncollectible accounts and deferred rents receivable at March 31 2023. We are closely monitoring the collectability of such rents and will adjust future estimations as appropriate as further information becomes known. The following table summarizes components of our rental income for the three months ended March 31, 2023 and 2022 (in thousands):
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | March 31, | ​
Rental Income | ​ | ​ | 2023 | ​ | ​ | 2022 | ​
Contractual cash rental income | ​ | $ | 29,125 | (1) | $ | 26,915 | (1)
Variable cash rental income | ​ | ​ | 3,284 | (2) | ​ | 4,039 | (2)
Straight-line rent | ​ | ​ | (465) | (3) | ​ | (234) | (3)
Adjustment for collectability of lease incentives and rental income | ​ | ​ | — | ​ | ​ | (173) | (4)
Amortization of lease incentives | ​ | ​ | (209) | ​ | ​ | (223) | ​
Total | ​ | $ | 31,735 | ​ | $ | 30,324 | ​
(1) | Increased primarily due to transitioned portfolios, rental income from acquisitions during the second quarter of 2022, completed development projects and annual rent escalations, partially offset by sold properties.
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(2) | The variable rental income for the three months ended March 31, 2023, includes reimbursement of real estate taxes by our lessees of $3,284. The variable rental income for the three months ended March 31, 2022, includes reimbursement of real estate taxes by our lessees of $3,982 and contingent rental income of $57. Decreased primarily due to property tax reassessment and sold properties partially offset by the 2022 second quarter acquisition.
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(3) | Primarily due to normal amortization.
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(4) | Represents a lease incentive balance write-off related to a closed property and subsequent lease termination.
​ Some of our lease agreements provide purchase options allowing the lessees to purchase the properties they currently lease from us. The following table summarizes information about purchase options included in our lease agreements (dollar amounts in thousands): ​
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​ | ​ | Type | ​ | Number | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | of | ​ | of | ​ | ​ | Gross | ​ | ​ | Carrying | ​ | Option | ​
State | ​ | Property | ​ | Properties | ​ | ​ | Investments | ​ | ​ | Value | ​ | Window | ​
California | ​ | ALF/MC | ​ | 2 | ​ | $ | 38,895 | ​ | $ | 33,483 | ​ | 2023-2029 | ​
Florida | ​ | MC | ​ | 1 | ​ | ​ | 15,201 | ​ | ​ | 12,386 | ​ | 2029 | ​
Florida | ​ | SNF | ​ | 3 | ​ | ​ | 76,756 | ​ | ​ | 76,756 | ​ | 2025-2027 | (1)
Nebraska | ​ | ALF | ​ | 3 | ​ | ​ | 7,633 | ​ | ​ | 2,889 | ​ | TBD | (2)
North Carolina | ​ | ALF/MC | ​ | 11 | ​ | ​ | 121,321 | ​ | ​ | 121,321 | ​ | 2025-2028 | (3)
Ohio | ​ | MC | ​ | 1 | ​ | ​ | 16,160 | ​ | ​ | 13,816 | ​ | 2024-2025 | ​
South Carolina | ​ | ALF/MC | ​ | 1 | ​ | ​ | 11,680 | ​ | ​ | 8,908 | ​ | 2029 | ​
Texas | ​ | SNF | ​ | 4 | ​ | ​ | 51,837 | ​ | ​ | 50,518 | ​ | 2027-2029 | (4)
Total | ​ | ​ | ​ | ​ | ​ | $ | 339,483 | ​ | $ | 320,077 | ​ | ​ | ​
(1) | During 2022, we entered into a joint venture (“JV”) to purchase three skilled nursing centers with a total of 299 beds. The JV leased the properties under a 10-year master lease. For more information regarding this transaction see Financing Receivables below.
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(2) | Subject to the properties achieving certain coverage ratios.
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(3) | During 2023, we entered into a JV that purchased 11 ALFs and MCs with a total of 523 units and leased the communities under a 10-year master lease. The master lease provides the operator with the option to buy up to 50% of the properties at the beginning of the third lease year, and the remaining properties at the beginning of the fourth lease year through the end of the sixth lease year, with an exit IRR of 9.00% on any portion of the properties being purchased. For more information regarding this transaction see Financing Receivables below.
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(4) | During 2022, we purchased four skilled nursing centers and leased these properties under a 10-year lease with an existing operator. The lease allows the operator to elect either an earn-out payment or purchase option. If neither option is elected within the timeframe defined in the lease, both elections are terminated. For more information regarding the earn-out see Note 8. Commitments and Contingencies.
Impairment Charges. In conjunction with the planned sale of a 70-unit assisted living community located in Florida, we recorded a $434,000 impairment loss during the three months ended March 31, 2023 and a $1,222,000 impairment loss during the fourth quarter of 2022. Subsequent to March 31, 2023, the community was sold for $4,850,000. As of March 31, 2023, the community was classified as held-for-sale. Properties Held -for-Sale. The following summarizes our held-for-sale properties as of March 31, 2023 (dollar amounts in thousands):
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​ | ​ | Type | ​ | Number | ​ | Number | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | of | ​ | of | ​ | of | ​ | ​ | Gross | ​ | ​ | Accumulated | ​
State | ​ | Property | ​ | Properties | ​ | Beds/units | ​ | ​ | Investment | ​ | ​ | Depreciation | ​
FL | ​ | ALF | ​ | 1 | ​ | 70 | ​ | $ | 7,163 | (1) | $ | 3,088 | ​
(1) | Represents our gross investment after $1,656 of impairment losses.
Improvements. During the three months ended March 31, 2023 and 2022, we invested the following in improvements projects (in thousands):
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Three Months Ended March 31, | ​
Type of Property | ​ | ​ | 2023 | ​ | ​ | ​ | 2022 | ​
Assisted Living Communities | ​ | $ | 1,548 | ​ | ​ | $ | 694 | ​
Skilled Nursing Centers | ​ | ​ | 973 | ​ | ​ | ​ | 177 | ​
Other | ​ | ​ | 87 | ​ | ​ | ​ | 197 | ​
Total | ​ | $ | 2,608 | ​ | ​ | $ | 1,068 | ​
​ Properties Sold. During the three months ended March 31, 2023 and 2022, we recorded a gain on sale of $15,373,000 and $102,000, respectively. The following table summarizes property sales during the three months ended March 31, 2023 and 2022 (dollar amounts in thousands): ​
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​ | ​ | ​ | ​ | Type | ​ | Number | ​ | Number | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | of | ​ | of | ​ | of | ​ | ​ | Sales | ​ | ​ | Carrying | ​ | ​ | Net | ​
Year | ​ | State | ​ | Properties | ​ | Properties | ​ | Beds/Units | ​ | ​ | Price | ​ | ​ | Value | ​ | ​ | Gain (2) | ​
2023 (1) | ​ | Kentucky | ​ | ALF | ​ | 1 | ​ | 60 | ​ | $ | 11,000 | ​ | $ | 10,710 | ​ | $ | 72 | ​
​ | ​ | New Mexico | ​ | SNF | ​ | 2 | ​ | 235 | ​ | ​ | 21,250 | ​ | ​ | 5,379 | ​ | ​ | 15,301 | ​
Total 2023 | ​ | ​ | ​ | ​ | ​ | 3 | ​ | 295 | ​ | $ | 32,250 | ​ | $ | 16,089 | ​ | $ | 15,373 | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
2022 | ​ | n/a | ​ | n/a | ​ | — | ​ | — | ​ | $ | — | ​ | $ | — | ​ | $ | 102 | (3)
(
(1) | Subsequent to March 31, 2023, we sold a 70-unit assisted living community located in Florida for $4,850.
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(2) | Calculation of net gain includes cost of sales and write-off of straight-line receivable and lease incentives, when applicable.
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(3) | We recognized additional gain due to the reassessment adjustment of the holdbacks related to properties sold during 2019 and 2020, under the expected value model per ASC Topic 606, Contracts with Customers (“ASC 606”).
Financing Receivables. As part of our acquisitions, we may from time to time, invest in sale and leaseback transactions. In accordance with ASC Topic 842, Leases (“ACS 842”), we are required to determine whether the sale and leaseback transaction qualifies as a sale. ASC 842 clarifies that an option for the seller-lessee to repurchase a real estate asset would generally preclude accounting for the transfer of the asset as a sale. Therefore, a sale and leaseback transaction of real estate that includes a seller-lessee repurchase option is accounted for as a failed sale and leaseback transaction. As a result, the purchased assets of a failed sale and leaseback transaction would be presented as Financing receivables on our Consolidated Balance Sheets and the rental revenue from these properties is recorded as Interest income from financing receivables on our Consolidated Statements of Income. Furthermore, upon expiration of the purchase option if the purchase option remains unexercised by the seller-lessee, the purchased assets will be reclassified from Financing receivables to Real property investments on our Consolidated Balance Sheets. During 2023, we entered into a $121,321,000 JV with an affiliate of an existing operator and contributed $117,490,000 into the JV that purchased 11 assisted living and memory care communities from an affiliate of our JV partner. The JV leased the communities back to an affiliate of the seller under a 10-year master lease, with two five-year renewal options. The contractual initial cash yield of 7.25% increases to 7.5% in year three then escalates thereafter based on CPI subject to a floor of 2.0% and a ceiling of 4.0%. Additionally, the JV provided the seller-lessee with a purchase option to buy up to 50% of the properties at the beginning of the third lease year and the remaining properties at the beginning of the fourth lease year through the end of the sixth lease year, with an exit Internal Rate of Return (“IRR”) of 9.0%. During the three months ended March 31, 2023, we recognized $2,345,000 of Interest income from financing receivables and upon origination we recorded $1,213,000 Provision for credit losses equal to 1% of the loan balance related to this investment. During 2022, we entered into a JV and contributed $61,661,000 into the JV that purchased three skilled nursing centers located in Florida for $75,825,000. The JV leased the centers back to an affiliate of the seller under a 10-year master lease, with two five-year renewal options and provided the seller-lessee with a purchase option, exercisable at the beginning of the fourth year through the end of the fifth year. During the three months ended March 31, 2023, we recognized $1,406,000 of Interest income from financing receivables related to this investment. Mortgage Loans. The following table sets forth information regarding our investments in mortgage loans secured by first mortgages at March 31, 2023 (dollar amounts in thousands):
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​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Type | ​ | Percentage | ​ | Number of | ​ | Investment
​ | ​ | ​ | ​ | ​ | ​ | Gross | ​ | of | ​ | of | ​ | ​ | ​ | ​ | ​ | SNF | ​ | ALF | ​ | per
Interest Rate | ​ | Maturity | ​ | State | ​ | Investment | ​ | Property | ​ | Investment | ​ | Loans (1) | ​ | Properties (2) | ​ | Beds | ​ | Units | ​ | Bed/Unit
7.5% | ​ | 2023 | ​ | MO | ​ | $ | 1,886 | ​ | OTH | ​ | 0.4 | % | 1 | ​ | — | (3) | — | ​ | — | ​ | $ | n/a
7.5% | ​ | 2024 | ​ | LA | ​ | ​ | 29,346 | ​ | SNF | ​ | 6.4 | % | 1 | ​ | 1 | ​ | 189 | ​ | — | ​ | $ | 155.27
7.5% | ​ | 2024 | ​ | GA | ​ | ​ | 51,111 | (4) | ALF | ​ | 11.2 | % | 1 | ​ | 1 | ​ | — | ​ | 203 | ​ | $ | 251.78
7.8% | ​ | 2025 | ​ | FL | ​ | ​ | 15,260 | ​ | ALF | ​ | 3.4 | % | 1 | ​ | 1 | ​ | — | ​ | 68 | ​ | $ | 224.41
7.3% | ​ | 2025 | ​ | NC | ​ | ​ | 10,750 | (4) | ALF | ​ | 2.4 | % | 1 | ​ | 1 | ​ | — | ​ | 45 | ​ | $ | 238.89
7.3% (5) | ​ | 2025 | ​ | NC/SC | ​ | ​ | 56,855 | ​ | ALF | ​ | 12.4 | % | 1 | ​ | 13 | ​ | — | ​ | 523 | ​ | $ | 108.71
7.3% (5) | ​ | 2026 | ​ | NC | ​ | ​ | 33,598 | ​ | ALF | ​ | 7.3 | % | 1 | ​ | 4 | ​ | — | ​ | 217 | ​ | $ | 154.83
7.3% (5) | ​ | 2026 | ​ | NC | ​ | ​ | 812 | ​ | OTH | ​ | 0.2 | % | 1 | ​ | — | (6) | — | ​ | — | ​ | $ | —
10.6% (7) | ​ | 2043 | ​ | MI | ​ | ​ | 184,349 | ​ | SNF | ​ | 40.3 | % | 1 | ​ | 15 | ​ | 1,875 | ​ | — | ​ | $ | 98.32
9.6% (7) | ​ | 2045 | ​ | MI | ​ | ​ | 38,957 | ​ | SNF | ​ | 8.5 | % | 1 | ​ | 4 | ​ | 480 |  | — | ​ | $ | 81.16
9.8% (7) | ​ | 2045 | ​ | MI | ​ |  | 19,750 | ​ | SNF | ​ | 4.3 | % | 1 | ​ | 2 | ​ | 201 |  | — | ​ | $ | 98.26
10.3% (7) | ​ | 2045 | ​ | MI | ​ | ​ | 14,850 | ​ | SNF | ​ | 3.2 | % | 1 | ​ | 1 | ​ | 146 | ​ | — | ​ | $ | 101.71
Total | ​ | ​ | ​ | ​ | ​ | $ | 457,524 | ​ | ​ | ​ | 100.0 | % | 12 | ​ | 43 | ​ | 2,891 |  | 1,056 | ​ | $ | 115.92
(1) | Some loans contain certain guarantees and provide for certain facility fees.
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(2) | Our mortgage loans are secured by properties located in seven states with six borrowers.
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(3) | Represents a mortgage loan secured by a parcel of land for the future development of a 91-bed post-acute SNF.
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(4) | We originated a $10,750 mortgage loan secured by a 45-unit MC located in North Carolina. The loan carries a two-year term with an interest-only rate of 7.25% and an IRR of 9.0%. Additionally, we invested $51,111 in an existing mortgage loan secured by a 203-unit ILF, ALF and MC located in Georgia by acquiring a participating interest owned by existing lenders for $42,251 in addition to converting our $7,461 mezzanine loan in the property into a participating interest in the mortgage loan. The mortgage loan matures in October 2024 and our investment is at an initial rate of 7.5% with an IRR of 7.75%. We recorded $1,380 of additional interest income in connection with the effective prepayment of the mezzanine loan in the first quarter of 2023.
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(5) | Represents the initial rate with an IRR of 8%.
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(6) | Represents a mortgage loan secured by a parcel of land in North Carolina held for future development of a seniors housing community.
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(7) | Mortgage loans provide for 2.25% annual increases in the interest rate.
The following table summarizes our mortgage loan activity for the three months ended March 31, 2023 and 2022 (in thousands):
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Three Months Ended March 31,
​ | ​ | 2023 | ​ | ​ | 2022 | ​
Originations and funding under mortgage loans receivable | ​ | $ | 62,844 | (1) | ​ | $ | 1,026 | ​
Application of interest reserve | ​ | ​ | 1,149 | ​ | ​ | ​ | 1,223 | ​
Scheduled principal payments received | ​ | ​ | (125) | ​ | ​ | ​ | (125) | ​
Mortgage loan premium amortization | ​ | ​ | (2) | ​ | ​ | ​ | (2) | ​
Provision for loan loss reserve | ​ | ​ | (639) | ​ | ​ | ​ | (21) | ​
Net increase in mortgage loans receivable | ​ | $ | 63,227 | ​ | ​ | $ | 2,101 | ​
(1) | We originated a $10,750 mortgage loan secured by a 45-unit MC located in North Carolina. The loan carries a two-year term with an interest-only rate of 7.25% and an IRR of 9.0%. Additionally, we invested $51,111 in an existing mortgage loan secured by a 203-unit ILF, ALF and MC located in Georgia by acquiring a participating interest owned by existing lenders for $42,251 in addition to converting our $7,461 mezzanine loan in the property into a participating interest in the mortgage loan. The mortgage loan matures in October 2024 and our investment is at an initial rate of 7.5% with an IRR of 7.75%. We recorded $1,380 of additional interest income in connection with the effective prepayment of the mezzanine loan in the first quarter of 2023.
We apply ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) and the “expected loss” model to estimate our loan losses on our mortgage loans and notes receivable. In determining the expected losses on these receivables, we utilize the probability of default and discounted cash flow methods. Further, we stress-test the results to reflect the impact of unknown adverse future events including recessions. As of March 31, 2023, the accrued interest receivable of $48,079,000 was not included in the measurement of expected credit losses on the financing receivables, mortgage loans receivable and notes receivable (see Note 4. Notes Receivable). We elected not to measure an allowance for expected credit losses on the related accrued interest receivable using the expected credit loss standard. Rather, we have elected to write-off accrued interest receivable by reversing interest income and/or recognizing credit loss expense as incurred. We review the collectability of the accrued interest receivable quarterly as part of our review of the financing receivables, mortgage loans receivable or notes receivables including the performance of the underlying collateral and net worth of the borrower. For the three months ended March 31, 2023 and 2022, the Company did not write-off any accrued interest receivable.

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- Definition The entire disclosure for real estate owned (as defined). Generally, the largest component of real estate owned by lenders is assets taken in settlement of troubled loans through surrender or foreclosure. Real estate investments, real estate loans that qualify as investments in real estate, and premises that are no longer used in operations may also be included in real estate owned. + References Reference 1: http://www.xbrl.org/2009/role/commonPracticeRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 10 -Section 45 -Paragraph 3 -URI https://asc.fasb.org/extlink&oid=124259787&loc=d3e4437-111522 + Details
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