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Real Estate Investments

9 Months Ended

Sep. 30, 2023

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 September 30, 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	$	800,963	57.0	%	92	—	5,323	$	150.47
Skilled Nursing		592,880	42.1	%	50	6,113	236	$	93.38
Other ⁽²⁾		12,005	0.9	%	1	118	—		—
Total	$	1,405,848	100.0	%	143	6,231	5,559

(1)	We own properties in 24 states that are leased to 22 different operators.

(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 under a master lease that matures on December 31, 2023. We re-leased 10 of the 35 properties in the existing Brookdale portfolio to Brookdale under a new master lease. This new master lease includes six properties in Colorado and four in Kansas. The six-year master lease will commence on January 1, 2024. Rent in the first lease year is set at $8,000,000 escalating by approximately 2.0% annually. The lease includes a purchase option that can be exercised in 2029. We also agreed to fund $4,500,000 for capital expenditures for the first two years of the lease at an initial rate of 8.0%, escalating by approximately 2.0% annually thereafter. Subsequent to September 30, 2023, we added seven additional properties to the new Brookdale master lease commencing on January 1, 2024. One property is located in Ohio with 42 assisted living units and six are located in Texas with 235 assisted living units. These properties are currently included in the original Brookdale master lease. As a result of this amendment, Brookdale will operate 17 properties under the new master lease with the initial annual rent of $9,325,000 and the capital expenditure commitment will be $7,150,000. Additionally, the new master lease provides Brookdale with a purchase option on these seven properties. Also, subsequent to September 30, 2023, we leased six assisted living communities located in Oklahoma, with a total of 219 units, to a current LTC operator under a new master lease, expected to commence on November 1, subject to the issuance of licensure to the new operator. These properties are currently included in the original Brookdale master lease. The lease term is for three years, with one four-year extension period. Rent in the first year is set at $960,000, increasing to $984,000 in the second year and $1,150,000 in the third year. This master lease includes a purchase option that can be exercised starting in November 2027 through October 2029 if the lessee exercises its four-year extension option. Also, we entered into agreements to sell seven assisted living communities in the existing Brookdale portfolio. These properties were classified as held-for-sale as of September 30, 2023.

Additionally, during 2023, a master lease covering two skilled nursing centers that was scheduled to mature 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. Also, during 2023, a master lease covering two skilled nursing centers that was scheduled to mature in 2023 was renewed for another two years extending the maturity to December 2025. The master lease was renewed at the contractual annual cash rent of $1,005,000 increasing 2.5% per year. As amended, this master lease

provides the lessee with a purchase option available through December 31, 2024. The centers have a total of 141 beds and are located in Tennessee.

During 2023, we transitioned a portfolio of eight assisted living communities with 500 units in Illinois, Ohio and Michigan to Encore Senior Living (“Encore”). We agreed to provide assistance in the second quarter of 2023 to the former operator of this portfolio and as part of the transition, we received repayment of $1,250,000 of deferred rent which represents $934,000 of April and May 2023 deferred rent and $316,000 of unrecorded deferred rent provided in 2022. Cash rent under the new two-year lease with Encore is based on mutually agreed upon fair market rent beginning in September 2023.

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 $26,000 and $256,000 for the nine months ended September 30, 2023 and 2022, respectively, as a result of property sales and lease terminations.

We continue to take into account the current financial condition of our operators, including consideration of the pace of recovery from the impact of COVID-19, and inflation on the financial performance of our operators in our estimation of uncollectible accounts and deferred rents receivable at September 30, 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 nine months ended September 30, 2023 and 2022 (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Rental Income		2023			2022			2023			2022
Contractual cash rental income	$	29,121	⁽¹⁾	$	28,180		$	87,260	⁽¹⁾	$	83,203
Variable cash rental income		3,386	⁽²⁾		4,160	⁽²⁾		9,846	⁽²⁾		12,218	⁽²⁾
Straight-line rent		(747)	⁽³⁾		(436)			(1,635)	⁽³⁾		(963)
Adjustment for collectability of lease incentives and rental income		—			(83)	⁽⁴⁾		(26)			(256)	⁽⁵⁾
Amortization of lease incentives		(171)			(236)			(584)			(665)
Total	$	31,589		$	31,585		$	94,861		$	93,537

(1)	Increased primarily due to rental income from acquisitions and transitioned portfolios, repayment of deferred rent and annual rent escalations, partially offset by sold properties.

(2)

The variable rental income for the three and nine months ended September 30, 2023 and the three and nine months ended September 30, 2022, primarily includes reimbursement of real estate taxes of our lessees. Decreased primarily due to property tax reassessment and sold properties partially offset by acquisitions.

(3)	Decreased primarily due to deferred rent repayment and normal amortization.

(4)	Represents lease incentive balances write-off related to two properties that were transitioned to another operator in our portfolio.

(5)	Represents a lease incentive balance write-off related to a closed property and subsequent lease termination and (4) above.

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):


	Type	Number
	of	of		Gross		Net Book	Option
State	Property	Properties		Investments		Value	Window
California	ALF/MC	2	$	38,895	$	33,013	2023-2029
Florida	MC	1		7,680		4,681	2029	⁽¹⁾
Florida	SNF	3		76,712		76,712	2025-2027	⁽²⁾
North Carolina	ALF/MC	11		121,321		121,321	2025-2028	⁽³⁾
Ohio	MC	1		16,161		13,598	2024-2025
Ohio	ILF/ALF/MC	1		54,714		53,990	2025-2027
South Carolina	ALF/MC	1		11,680		8,619	2029
Tennessee	SNF	2		5,275		2,298	2023-2024
Texas	SNF	4		52,426		50,438	2027-2029	⁽⁴⁾
Total			$	384,864	$	364,670

(1)	During 2023, we recorded an impairment loss of $7,522. See Impairment Loss below for more information.

(2)	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.

(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 9.0% on any portion of the properties being purchased. For more information regarding this transaction see Financing Receivables below.

(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 Loss. 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. During the second quarter of 2023, the community was sold for $4,850,000. Additionally, during 2023, we performed a recoverability analysis on the carrying value of two assisted living communities that we are negotiating to sell and concluded that their carrying value may not be recoverable through future undiscounted cash flows. Accordingly, we recorded an aggregate impairment loss of $12,076,000 during the second quarter of 2023. As of September 30, 2023, we do not believe these communities meet the criteria to be classified as held-for-sale.

Properties Held -for-Sale. The following summarizes our held-for-sale properties as of September 30, 2023 (dollar amounts in thousands):


	Type	Number	Number
	of	of	of		Gross		Accumulated
State	Property	Properties	Beds/units		Investment		Depreciation
FL	ALF	4	176	$	12,215	$	7,213
SC	ALF	3	128		8,823		4,377
		7	304	$	21,038	$	11,590

Acquisitions. The following table summarizes our acquisitions for the nine months ended September 30, 2023 and 2022 (dollar amounts in thousands):


		Cash					Non-						Number	Number
		Paid at		Assumed			Controlling	Transaction			Assets		of	of
Year	Type of Property	Acquisition		Liabilities			Interest	Costs			Acquired		Properties	Beds/Units
2023	ALF ⁽¹⁾	$	43,759	$	9,767	$	9,133	$	363	$	63,022	⁽²⁾	1	242

2022	SNF⁽³⁾	$	51,815	$	—	$	—	$	—	$	51,815		4	339

(1)

We entered into a $54,134 Joint Venture (“JV”) and contributed $45,000 into the JV that purchased an ILF/ALF/MC in Ohio. Under the JV agreement, the seller, our JV partner, has the option to purchase the campus between the third and fourth lease years for LTC’s allocation of the JV investment plus an IRR of 9.75%. The campus was leased to Encore Senior Living (“Encore”) under a 10-year term with an initial yield of 8.25% on LTC’s allocation of the JV investment. LTC committed to fund $2,100 of lease incentives under the Encore lease of which $1,004 has been funded.

(2)	Includes $8,309 tax abatement intangible included in the Prepaid expenses and other assets line item in our Consolidated Balance Sheets.

(3)

The properties are located in Texas and are leased to an affiliate of an existing operator under a 10-year lease with two 5-year renewal options. Additionally, the lease provides either an earn-out payment or purchase option but not both. If neither option is elected within the timeframe defined in the lease, both elections are terminated. The earn-out payment is available, contingent on achieving certain thresholds per the lease, beginning at the end of the second lease year through the end of the fifth lease year. The purchase option is available beginning in the sixth lease year through the end of the seventh lease year. The initial cash yield is 8% for the first year, increasing to 8.25% for the second year, then increases annually by 2.0% to 4.0% based on the change in the Medicare Market Basket Rate. In connection with the transaction, we provided the lessee a 10-year working capital loan for up to $2,000 at 8% for first year, increasing to 8.25% for the second year, then increasing annually with the lease rate. During 2023, the working capital loan was fully repaid. Accordingly, the working capital commitment has been terminated.

Intangible Assets. We make estimates as part of our allocation of the purchase price of acquisitions to various components of acquisition based upon the fair value of each component. In determining fair value, we use current appraisals or other third-party opinions of value. The most significant components of our allocations are typically the allocation of fair value to land and buildings, and for certain of our acquisitions, in-place leases and other intangible assets. In the case of the value of in-place leases, we make the best estimates based on the evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during the hypothetical expected lease-up periods, market conditions and costs to execute similar leases. The following is a summary of the carrying amount of intangible assets as of September 30, 2023 (in thousands):


	September 30, 2023								December 31,2022
					Accumulated								Accumulated
Assets		Cost			Amortization			Net		Cost			Amortization			Net
In-place leases	$	11,348	⁽¹⁾	$	(5,886)	⁽²⁾	$	5,462	$	9,474	⁽¹⁾	$	(5,362)	⁽²⁾	$	4,112
Tax abatement intangible		8,309	⁽³⁾		(231)	⁽³⁾		8,078		—	⁽³⁾		—	⁽³⁾		—

(1)	Included in the Buildings and improvements line item in our Consolidated Balance Sheets.

(2)	Included in the Accumulated depreciation and amortization line item in our Consolidated Balance Sheets.

(3)	Included in the Prepaid expenses and other assets line item in our Consolidated Balance Sheets.

Improvements and Developments. During the nine months ended September 30, 2023 and 2022, we invested in the following (in thousands):


		Nine Months Ended September 30,
Type of Property		2023				2022
	Developments		Improvements		Developments		Improvements
Assisted Living Communities	$	—	$	2,418	$	105	$	3,015
Skilled Nursing Centers		—		2,548		—		981
Other		—		87		—		559
Total	$	—	$	5,053	$	105	$	4,555

Properties Sold. During the three and nine months ended September 30, 2023, we recorded a gain on sale of $4,870,000 and $20,545,000, respectively. During the three and nine months ended September 30, 2022, we recorded a loss on sale of $387,000 and a gain on sale of $37,809,000, respectively. The following table summarizes property sales during the nine months ended September 30, 2023 and 2022 (dollar amounts in thousands):


		Type	Number	Number
		of	of	of		Sales		Carrying		Net
Year	State	Properties	Properties	Beds/Units		Price		Value		Gain (Loss)⁽¹⁾
2023	Florida	ALF	1	70	$	4,850	$	4,082	$	65
	Kentucky	ALF	1	60		11,000		10,720		57
	New Jersey	ALF	1	39		2,000		1,552		266
	New Mexico	SNF	2	235		21,250		5,523		15,287
	Nebraska	ALF	3	117		2,984		2,934		—
	Pennsylvania	ALF	2	130		11,128		6,054		4,870
Total 2023			10	651	$	53,212	$	30,865	$	20,545

2022	California	ALF	2	232	$	43,715	$	17,832	$	25,867
	California	SNF	1	121		13,250		1,846		10,846
	Texas	SNF	1	—		485		697		(434)
	Virginia	ALF	1	74		16,895		15,549		1,344	⁽²⁾
	n/a	n/a	—	—		—		—		186	⁽³⁾
Total 2022			5	427	$	74,345	$	35,924	$	37,809

(

(1)	Calculation of net gain includes cost of sales and write-off of straight-line receivable and lease incentives, when applicable.

(2)	In connection with this sale, the former operator paid us a lease termination fee of $1,181 which is not included in the gain on sale.

(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 and nine months ended September 30, 2023, we recognized $2,427,000 and $7,198,000, respectively of Interest income from financing receivables and upon origination we recorded

$1,213,000 Provision for credit losses equal to 1% of the financing receivable 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 and nine months ended September 30, 2023, we recognized $1,405,000 and $4,215,000, respectively 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 September 30, 2023 (dollar amounts in thousands):


						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%	2024	MO	$	1,961		OTH	0.4	%	1	—	⁽³⁾	—	—	$	n/a
7.5%	2024	LA		29,346		SNF	6.1	%	1	1		189	—	$	155.27
7.5%	2024	GA		51,111	⁽⁴⁾	ALF	10.7	%	1	1		—	203	$	251.78
7.8%	2025	FL		16,706		ALF	3.5	%	1	1		—	68	$	245.68
7.3%	2025	NC		10,750	⁽⁴⁾	ALF	2.2	%	1	1		—	45	$	238.89
7.3% ⁽⁵⁾	2025	NC/SC		58,331		ALF	12.2	%	1	13		—	523	$	111.53
7.3% ⁽⁵⁾	2026	NC		34,043		ALF	7.1	%	1	4		—	217	$	156.88
7.3% ⁽⁵⁾	2026	NC		826		OTH	0.2	%	1	—	⁽⁶⁾	—	—	$	—
8.8%	2028	IL		16,500	⁽⁷⁾	SNF	3.5	%	1	1		150	—	$	110.00
10.6% ⁽⁸⁾	2043	MI		184,220		SNF	38.5	%	1	15		1,875	—	$	98.25
9.7% ⁽⁸⁾	2045	MI		40,000		SNF	8.4	%	1	4		480	—	$	83.33
10.1%	2045	MI		19,700		SNF	4.1	%	1	2		201	—	$	98.01
10.3% ⁽⁸⁾	2045	MI		14,850		SNF	3.1	%	1	1		146	—	$	101.71
Total			$	478,344	⁽⁹⁾		100.0	%	13	44		3,041	1,056	$	116.75

(1)	Some loans contain certain guarantees and provide for certain facility fees.

(2)	Our mortgage loans are secured by properties located in eight states with seven borrowers.

(3)	Represents a mortgage loan secured by a parcel of land for the future development of a 91-bed post-acute SNF.

(4)

During the first quarter of 2023, 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.

(5)	Represents the initial rate with an IRR of 8%.

(6)	Represents a mortgage loan secured by a parcel of land in North Carolina held for future development of a seniors housing community.

(7)	During the second quarter of 2023, we originated a $16,500 senior loan for the purchase of a 150-bed SNF in Illinois. The mortgage loan matures in June 2028 and our investment is at an interest rate of 8.75%.

(8)	Mortgage loans provide for 2.25% annual increases in the interest rate.

(9)

During the third quarter of 2023, we committed to fund a $19,500 mortgage loan for the construction of an 85-unit ALF and MC in Michigan. The borrower contributed $12,100 of equity which will initially fund the construction. Once all of the borrower’s equity has been drawn, we will begin funding the commitment. The loan term is approximately three years at a rate of 8.75%, and includes two, one-year extensions, each of which is contingent on certain coverage thresholds.

The following table summarizes our mortgage loan activity for the nine months ended September 30, 2023 and 2022 (in thousands):


	Nine Months Ended September 30,
	2023			2022
Originations and funding under mortgage loans receivable	$	83,383	⁽¹⁾	$	35,234	⁽²⁾
Application of interest reserve		1,609			4,348
Scheduled principal payments received		(301)			(625)
Mortgage loan premium amortization		(5)			(4)
Provision for loan loss reserve		(847)			(389)
Net increase in mortgage loans receivable	$	83,839		$	38,564

(1)	We originated the following:

(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%;

(b)

$51,111 mortgage loan investment secured by a 203-unit ILF, ALF and MC located in Georgia. We acquired 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;

(c)

$16,500 senior loan for the purchase of a 150-bed SNF in Illinois. The mortgage loan matures in June 2028 and our investment is at an interest rate of 8.75%;

(d)

5,022 of additional funding under other mortgage loans receivable; and

(e)

$19,500 mortgage loan commitment for the construction of an 85-unit ALF and MC in Michigan. The borrower contributed $12,100 of equity which will initially fund the construction. Once all of the borrower’s equity has been drawn, we will begin funding the commitment. The loan term is approximately three years at a rate of 8.75%, and includes two, one-year extensions, each of which is contingent on certain coverage thresholds.

(2)

We originated two senior mortgage loans, secured by four ALFs operated by an existing operator, as well as a land parcel in North Carolina. The communities have a combined total of 217 units, with an average age of less than four years. The land parcel is approximately 7.6 acres adjacent to one of the ALFs and is being held for the future development of a seniors housing community. The mortgage loans have a four-year term, an interest rate of 7.25% and an IRR of 8%.

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 September 30, 2023, the accrued interest receivable of $54,605,000 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 nine months ended September 30, 2023 and 2022, we did not write-off any accrued interest receivable.