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Real Estate Investments

3 Months Ended

Mar. 31, 2024

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, 2024 (dollar amounts in thousands):


								Average
			Percentage		Number	Number of		Investment
	Gross		of		of	SNF	ALF	per
Type of Property	Investment		Investment		Properties ⁽¹⁾	Beds ⁽²⁾	Units ⁽²⁾	Bed/Unit
Assisted Living	$	733,901	54.6	%	76	—	4,421	$	166.00
Skilled Nursing		597,015	44.5	%	50	6,113	236	$	94.03
Other ⁽³⁾		12,005	0.9	%	1	118	—		—
Total	$	1,342,921	100.0	%	127	6,231	4,657

(1)	We own properties in 23 states that are leased to 23 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 matured on December 31, 2023. The 35- property assisted living portfolio was apportioned as follows (dollar amounts in thousands):


		Type	Number		Number		First
Lease		of	of		of		Year		Lease
Commencement	State	Property	Properties		Units		Rent		Term
November 2023	OK	ALF	5	⁽¹⁾	184	$	960		Three years
January 2024	CO, KS, OH, TX	ALF	17	⁽²⁾	738		9,325		Six years
January 2024	NC	ALF	5	⁽³⁾	210		3,300		Six years
			27		1,132	$	13,585

		Type	Number		Number
		of	of		of		Sales		Net
Year sold	State	Property	Properties		Units		Price		Proceeds ⁽⁴⁾
2023	FL	ALF	4		176	$	18,750	$	14,310	⁽⁵⁾
2023	OK	ALF	1		37		800		769
2023	SC	ALF	3		128		8,409		8,153
		ALF	8		341	$	27,959	$	23,232

Total			35		1,473

(1)

These communities were transitioned to an existing LTC operator. The new 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. Rent increases to $984 in the second year, and $1,150 in the third year.

(2)

These communities were re-leased to Brookdale under a new master lease. Rent escalates by approximately 2.0% annually. The new master lease includes a purchase option that can be exercised in 2029. We also agreed to fund $7,200 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.

(3)	These communities were transitioned to an operator new to us. Rent escalates by approximately 3.0% annually.

(4)	Net of transaction costs and seller financing, if any.

(5)	We provided seller financing collateralized by two of the Florida properties, with a total of 92 units. The $4,000 seller-financed mortgage loan has a two-year term, with a one-year extension, at an interest rate of 8.75%.

During the three months ended March 31, 2024, a master lease covering 11 skilled nursing centers, that was scheduled to mature in January 2024, was renewed for seven months extending the maturity to August 2024. The master lease was renewed at the current annualized rent of $8,000,000, or $4,667,000 for seven months in 2024. The centers have a total of 1,444 beds and are located in Texas. Subsequent to March 31, 2024, we executed a term sheet with the operator, to amend the master lease extending the term through December 2028. Annual rent will increase by $1,000,000 to $9,000,000 for 2024. Rent will increase to $9,500,000 for 2025, and $10,000,000 for 2026, escalating 3.3% annually thereafter. The amended master lease provides the operator with two five-year renewal options. As a condition of the amendment, the operator will repay $11,900,000 on its $13,531,000 working capital note during the second quarter of 2024. Upon the repayment, the remaining balance of the working capital note will be interest-free and repaid in installments through 2028.

Additionally, subsequent to March 31, 2024, another operator exercised its renewal option under its master lease for five years, from March 2025 through February 2030. Annual cash and GAAP rent for 2024 are $8,004,000 and $7,049,000, respectively escalating 2.5% annually. The master lease covers 666

beds across four skilled nursing centers, three in Texas and one in Wisconsin, and a behavioral health care hospital in Nevada.

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 $191,000 and $144,000 for the three months ended March 31, 2024 and 2023, 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 impact of COVID-19, in our estimation of uncollectible accounts at March 31, 2024. 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, 2024 and 2023 (in thousands):


	Three Months Ended
	March 31,
Rental Income		2024			2023
Contractual cash rental income	$	30,951	⁽¹⁾	$	29,125	⁽¹⁾
Variable cash rental income		3,381	⁽²⁾		3,284	⁽²⁾
Straight-line rent		(550)			(465)
Amortization of lease incentives		(233)			(209)
Total	$	33,549		$	31,735

(1)	Increased primarily due to $2,377 repayment of rent credit in connection with the sale of our interest in a consolidated joint venture (“JV), rental income from 2023 acquisitions and annual rent escalations, partially offset by property sales and transitioned portfolios.

(2)	The variable rental income for the three months ended March 31, 2024, and 2023 includes reimbursement of real estate taxes by our lessees.

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 ⁽¹⁾		Value	Window
California	ALF/MC	2	$	38,895	$	32,542	2023-2029
Colorado/Kansas/Ohio/Texas	ALF/MC	17		58,723		26,089	2029	⁽²⁾
Florida	SNF	3		76,669		76,669	2025-2027
Georgia/South Carolina	ALF/MC	2		31,433		24,682	2027
North Carolina	ALF/MC	11		121,321		121,321	2025-2028	⁽³⁾
North Carolina	ALF	5		14,404		6,844	2029	⁽⁴⁾
Ohio	MC	1		16,161		13,378	2024-2025
Ohio	ILF/ALF/MC	1		54,758		52,946	2025-2027
Oklahoma	ALF/MC	5		11,221		4,332	2027-2029	⁽⁵⁾
Tennessee	SNF	2		5,275		2,227	2023-2024
Texas	SNF	4		52,726		50,036	2027-2029	⁽⁶⁾
Total			$	481,586	$	411,066

(1)	Gross investments include previously recorded impairment losses, if any.

(2)	During 2023, we released 17 ALFs with a total of 738 units to Brookdale under a new six-year master lease. The new master lease commenced in January 2024 and includes a purchase option that can be exercised in 2029. See above for more information.

(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 2023, we transferred five ALFs with a total of 210 units from Brookdale to an operator new to us. The new master lease commenced in January 2024 and includes a purchase option that can be exercised in 2029. See above for more information.

(5)

During 2023, we transferred five ALFs in Oklahoma with a total of 184 units from Brookdale to an existing operator. The new master lease commenced in November 2023 and includes a purchase option that can be exercised starting in November 2027 through October 2029 if the lessee exercises its four-year extension option. See above for more information.

(6)

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.

Properties Held -for-Sale. The following summarizes our held-for-sale properties as of March 31, 2024 and December 31, 2023 (dollar amounts in thousands):

Type

Number

Gross

Accumulated

State

Property

Properties

Beds/units

Investment

Depreciation

At March 31, 2024

ALF

⁽¹⁾

n/a

⁽¹⁾

3,162

2,773

At December 31, 2023

ALF

⁽²⁾

110

22,007

3,616

(1)	These closed properties were sold subsequent to March 31, 2024.

(2)	This community was sold during the three months ended March 31, 2024.

Acquisitions. During the three months ended March 31, 2024, we acquired a parcel of land in Kansas adjacent to an existing community operated by Brookdale for a total cost of $315,000. Rent was increased by 8% of our total cost of the investment. During the three months ended March 31, 2023, we did not have any acquisitions.

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 March 31, 2024 and December 31, 2023 (in thousands):


	March 31, 2024								December 31, 2023
					Accumulated								Accumulated
Assets		Cost			Amortization			Net		Cost			Amortization			Net
In-place leases	$	11,155	⁽¹⁾	$	(6,218)	⁽²⁾	$	4,937	$	11,348	⁽¹⁾	$	(6,109)	⁽²⁾	$	5,239
Tax abatement intangible	$	8,309	⁽³⁾	$	(578)	⁽³⁾	$	7,731	$	8,309	⁽³⁾	$	(405)	⁽³⁾	$	7,904

(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. During the three months ended March 31, 2024 and 2023, we invested in the following capital improvement projects (in thousands):


	Three Months Ended March 31,
Type of Property	2024		2023
Assisted Living Communities	$	1,133	$	1,548
Skilled Nursing Centers		196		973
Other		—		87
Total	$	1,329	$	2,608

Properties Sold. During the three months ended March 31, 2024 and 2023, we recorded a gain on sale of $3,251,000 and $15,373,000, respectively. The following table summarizes property sales during the three months ended March 31, 2024 and 2023 (dollar amounts in thousands):


		Type	Number	Number
		of	of	of		Sales			Carrying		Net
Year	State	Properties	Properties	Beds/Units		Price			Value		(Loss) Gain ⁽¹⁾
2024	Florida	ALF	1	60	$	4,500		$	4,579	$	(319)
	Texas	ALF	5	208		1,600			1,282		(356)
	Wisconsin	ALF	1	110		20,193	⁽²⁾		16,195		3,986
	n/a	n/a	—	—		—			—		(60)	⁽³⁾
Total			7	378	$	26,293		$	22,056	$	3,251

2023	Kentucky	ALF	1	60	$	11,000		$	10,710	$	72
	New Mexico	SNF	2	235		21,250			5,379		15,301
Total			3	295	$	32,250		$	16,089	$	15,373

(

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

(2)	Represents the price to sell our portion of interest in a JV, net of the JV partner’s $2,305 contributions in the joint venture.

(3)	We recognized additional loss due to additional incurred costs related to properties sold during 2023.

Financing Receivables. During 2023 and 2022, we entered into two joint ventures and contributed into the JVs for the purchase of properties through sale and leaseback transactions. Concurrently, each of these JVs leased the purchased properties back to an affiliate of the seller and provided the seller-lessee with purchase options. We determined that each of these sale and leaseback transactions meet the accounting criteria to be presented as Financing receivables on our Consolidated Balance Sheets and recorded the rental revenue from these properties as Interest income from financing receivables on our Consolidated Statements of Income.

The following tables provide information regarding our investments in financing receivables (dollar amounts in thousands):


		Type	Number	Number
Investment		of	of	of		Gross		LTC
Year	State	Properties	Properties	Beds/Units		Investments		Contributions
2023	NC	ALF/MC	11	523	$	121,321	$	117,490
2022	FL	SNF	3	299		76,669		62,344
			14	822	$	197,990	$	179,834


		Type	Initial		Interest Income from Financing Receivables
Lease		of	Contractual		Three Months Ended March 31,
Maturity		Properties	Cash Yield			2024		2023
2033	⁽¹⁾	ALF/MC	7.25	%	$	2,426	$	2,345
2032	⁽²⁾	SNF	7.25	%		1,404		1,406
					$	3,830	$	3,751

(1)

The JV leased these 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%. 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%.

(2)	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.

Mortgage Loans. The following table sets forth information regarding our investments in mortgage loans secured by first mortgages at March 31, 2024 (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	$	2,013	OTH	0.4	%	1	—	⁽³⁾	—	—	$	n/a
7.5%	2024	LA		29,346	SNF	6.0	%	1	1		189	—	$	155.27
7.5%	2024	GA		51,111	ALF	10.5	%	1	1		—	203	$	251.78
8.8%	2025	FL		4,000	ALF	0.8	%	1	2		—	92	$	43.48
7.8%	2025	FL		16,706	ALF	3.5	%	1	1		—	112	$	149.16
7.3%	2025	NC		10,750	ALF	2.2	%	1	1		—	45	$	238.89
7.3% ⁽⁴⁾	2025	NC/SC		58,519	ALF	12.1	%	1	13		—	523	$	111.89
7.3% ⁽⁴⁾	2026	NC		34,043	ALF	7.0	%	1	4		—	217	$	156.88
7.3% ⁽⁴⁾	2026	NC		826	OTH	0.2	%	1	—	⁽⁵⁾	—	—	$	n/a
8.8% ⁽⁶⁾	2026	MI		2,940	UDP	0.6	%	1	—	⁽⁶⁾	—	—	$	n/a
8.8%	2028	IL		16,500	SNF	3.4	%	1	1		150	—	$	110.00
10.8% ⁽⁷⁾	2043	MI		183,966	SNF	37.9	%	1	15		1,875	—	$	98.12
9.8% ⁽⁷⁾	2045	MI		39,850	SNF	8.2	%	1	4		480	—	$	83.02
10.1% ⁽⁷⁾	2045	MI		19,700	SNF	4.1	%	1	2		201	—	$	98.01
10.5% ⁽⁷⁾	2045	MI		14,825	SNF	3.1	%	1	1		146	—	$	101.54
Total			$	485,095		100.0	%	15	46		3,041	1,192	$	114.60

(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 nine borrowers.

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

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

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

(6)

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 initially funded the construction. In 2024, once all of the borrower’s equity was drawn, we began funding the commitment. Our remaining commitment is $16,600. The interest-only 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.

(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, 2024 and 2023 (in thousands):


	Three Months Ended March 31,
	2024			2023
Originations and funding under mortgage loans receivable	$	3,128	⁽¹⁾	$	62,844	⁽²⁾
Application of interest reserve		14			1,149
Scheduled principal payments received		(125)			(125)
Mortgage loan premium amortization		(2)			(2)
Provision for loan loss reserve		(31)			(639)
Net increase in mortgage loans receivable	$	2,984		$	63,227

(1)	We funded the following:

(a)

$2,940 under a $19,500 mortgage loan commitment for the construction of an 85-unit ALF and MC in Michigan. The borrower contributed $12,100 of equity upon origination in July 2023, which was used to initially fund the construction. Our remaining commitment is $16,600. The interest-only 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; and

(b)

$188 of additional funding under other mortgage loan receivables.

(2)	We originated and funded 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; and

(c)

$983 of additional funding under other mortgage loans receivable.