NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
We, the management of National Health Investors, Inc., (“NHI” or the “Company”) believe that the unaudited condensed consolidated financial statements of which these notes are an integral part include all normal, recurring adjustments that are necessary to fairly present the condensed consolidated financial position, results of operations and cash flows of NHI in all material respects. The Condensed Consolidated Balance Sheet at December 31, 2018 has been derived from the audited consolidated financial statements at that date. We assume that users of these condensed consolidated financial statements have read or have access to the audited December 31, 2018 consolidated financial statements and that the adequacy of additional disclosure needed for a fair presentation, except regarding material contingencies, may be determined in that context. Accordingly, notes and other disclosures which would substantially duplicate those contained in our most recent Annual Report on Form 10-K for the year ended December 31, 2018 have been omitted. This condensed consolidated financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons including, but not limited to, acquisitions and dispositions, changes in interest rates, rents and the timing of debt and equity financings. For a better understanding of NHI and its condensed consolidated financial statements, we recommend reading these condensed consolidated financial statements in conjunction with the audited consolidated financial statements for the year ended December 31, 2018, which are included in our 2018 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”), a copy of which is available at our web site: www.nhireit.com.
Principles of Consolidation - The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, joint ventures, partnerships and consolidated variable interest entities (“VIE”), if any. All intercompany transactions and balances have been eliminated in consolidation.
A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.
We apply Financial Accounting Standards Board (“FASB”) guidance for our arrangements with VIEs which requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of the VIE. In accordance with FASB guidance, management must evaluate each of the Company’s contractual relationships which creates a variable interest in other entities. If the Company has a variable interest and the entity is a VIE, then management must determine whether the Company is the primary beneficiary of the VIE. If it is determined that the Company is the primary beneficiary, NHI would consolidate the VIE. We identify the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. We perform this analysis on an ongoing basis.
If the Company has determined that an entity is not a VIE, the Company assesses the need for consolidation under all other provisions of Accounting Standards Codification (“ASC”) Topic 810 Consolidation. These provisions provide for consolidation of majority-owned entities where a majority voting interest held by the Company demonstrates control of such entities in the absence of any legal constraints.
At September 30, 2019, we held interests in seven unconsolidated VIEs, and, because we generally lack either directly or through related parties any material input in the activities that most significantly impact their economic performance, we have concluded that NHI is not the primary beneficiary. Accordingly, we account for our transactions with these entities and their subsidiaries at either amortized cost or net realizable value for straight-line receivables.
Our VIEs are summarized below by date of initial involvement. For further discussion of the nature of the relationships, including the sources of our exposure to these VIEs, see the notes to our condensed consolidated financial statements cross-referenced below.
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Date
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Name
|
Source of Exposure
|
Carrying Amount
|
Maximum Exposure to Loss
|
Note Reference
|
|
2012
|
Bickford Senior Living
|
Various1
|
$
|
60,133,000
|
|
$
|
69,665,000
|
|
Notes 2, 3
|
|
2014
|
Senior Living Communities
|
Notes and straight-line receivable
|
$
|
83,814,000
|
|
$
|
94,059,000
|
|
Notes 2, 3
|
|
2015
|
Timber Ridge, LCS affiliate
|
Notes receivable
|
$
|
59,156,000
|
|
$
|
59,808,000
|
|
Note 3
|
|
2016
|
Senior Living Management
|
Notes and straight-line receivable
|
$
|
26,796,000
|
|
$
|
26,796,000
|
|
Note 3
|
|
2017
|
Evolve Senior Living
|
Note receivable
|
$
|
9,943,000
|
|
$
|
9,943,000
|
|
—
|
|
2018
|
Sagewood, LCS affiliate
|
Notes receivable
|
$
|
107,890,000
|
|
$
|
178,498,000
|
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Note 3
|
|
2019
|
41 Management, LLC
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Notes receivable
|
$
|
3,223,000
|
|
$
|
10,800,000
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Note 3
|
1 Notes, straight-line rent receivables, and unamortized lease incentives
We are not obligated to provide support beyond our stated commitments to these tenants and borrowers whom we classify as VIEs, and accordingly, our maximum exposure to loss as a result of these relationships is limited to the amount of our commitments, as shown above and discussed in the notes. When the above relationships involve leases, some additional exposure to economic loss is present. Generally, additional economic loss on a lease, if any, would be limited to that resulting from a short period of arrearage and non-payment of monthly rent before we are able to take effective remedial action, as well as costs incurred in transitioning the lease to a new tenant. The potential extent of such loss will be dependent upon individual facts and circumstances, cannot be quantified, and is therefore not included in the tabulation above. Typically, the only carrying amounts involving our leases are accumulated straight-line receivables and unamortized lease incentives. For VIE relationships listed above without a note reference, refer to our financial statements included in our most recent Annual Report on Form 10-K for the year ended December 31, 2018.
Cash and Cash Equivalents and Restricted Cash - Cash equivalents consist of all highly liquid investments with an original maturity of three months or less. Restricted cash includes amounts required to be held on deposit in accordance with agency agreements governing our Fannie Mae and HUD mortgages.
The following table sets forth our cash, cash equivalents and restricted cash reported within the Company’s Condensed Consolidated Statements of Cash Flows (in thousands):
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September 30,
2019
|
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September 30,
2018
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|
Cash and cash equivalents
|
$
|
5,882
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|
|
$
|
2,638
|
|
|
Restricted cash (included in Other assets)
|
10,399
|
|
|
5,326
|
|
|
|
$
|
16,281
|
|
|
$
|
7,964
|
|
Leases - Operating leases entered into during 2019 are accounted for under the guidance of ASC Topic 842, Leases. Our leases generally have an initial leasehold term of 10 to 15 years followed by one or more 5-year tenant renewal options. The leases are “triple net leases” under which the tenant is responsible for the payment of all taxes, utilities, insurance premiums, repairs and other charges relating to the operation of the properties, including required levels of capital expenditures each year. The tenant is obligated at its expense to keep all improvements, fixtures and other components of the properties covered by “all risk” insurance in an amount equal to at least the full replacement cost thereof, and to maintain specified minimal personal injury and property damage insurance, protecting us as well as the tenant. The leases also require the tenant to indemnify and hold us harmless from all claims resulting from the use, occupancy and related activities of each property by the tenant, and to indemnify us against all costs related to any release, discovery, clean-up and removal of hazardous substances or materials, or other environmental responsibility with respect to each facility. These provisions, along with a growing senior demographic and the historical propensity for real estate to hold its value, collectively constitute much of the means by which the risk associated with the residual value of our properties is mitigated. While we do not incorporate residual value guarantees, the above lease provisions and considerations inform our expectation of realizable value from our properties upon the expiration of their lease terms. The residual value of our real estate under lease is still subject to various market, asset, and tenant-specific risks and characteristics. As the classification of our leases is dependent on the fair value of estimated cash flows at lease commencement, management’s projected residual values represent significant assumptions in our accounting for operating leases. Similarly, the exercise of options is also subject to these same risks, making a tenant’s lease term another significant variable in a lease’s cash flows.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Earnings Per Share - The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assumes the exercise of stock options using the treasury stock method, to the extent dilutive. Diluted earnings per share also incorporate the potential dilutive impact of our convertible senior notes. We apply the treasury stock method to our convertible debt instruments, the effect of which is that conversion will not be assumed for purposes of computing diluted earnings per share unless the average share price for the period exceeds the conversion price per share.
Reclassifications - We have reclassified certain balances where necessary to conform the presentation of prior periods to the current period. These reclassifications had no effect on previously reported net income.
New Accounting Pronouncements - For a review of recent accounting pronouncements pertinent to our operations and management’s judgment as to the impact that the eventual adoption of these pronouncements will have on our financial position and results of operations, see Note 10.
NOTE 2. REAL ESTATE
As of September 30, 2019, we owned 222 health care real estate properties located in 34 states and consisting of 145 senior housing communities (“SHO”), 72 skilled nursing facilities, 3 hospitals and 2 medical office buildings. Our senior housing communities include assisted living facilities, senior living campuses, independent living facilities, and entrance-fee communities. These investments (excluding our corporate office of $2,508,000) consisted of properties with an original cost of approximately $3,057,775,000 rented under triple-net leases to 31 lessees.
During the nine months ended September 30, 2019, we made the following real estate investments and related commitments as described below ($ in thousands):
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Operator
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Date
|
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Properties
|
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Asset Class
|
|
Amount
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|
Wingate Healthcare
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|
January 2019
|
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1
|
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SHO
|
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$
|
52,200
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Holiday Retirement
|
|
January 2019
|
|
1
|
|
SHO
|
|
38,000
|
|
|
Comfort Care Senior Living
|
|
April 2019
|
|
1
|
|
SHO
|
|
10,800
|
|
|
Comfort Care Senior Living
|
|
May 2019
|
|
1
|
|
SHO
|
|
13,500
|
|
|
Discovery Senior Living (PropCo Joint Venture)
|
|
May 2019
|
|
6
|
|
SHO
|
|
127,917
|
|
|
Capella Living Solutions
|
|
July 2019
|
|
1
|
|
SHO
|
|
7,600
|
|
|
Bickford Senior Living
|
|
September 2019
|
|
1
|
|
SHO
|
|
15,100
|
|
|
|
|
|
|
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|
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$
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265,117
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Wingate
On January 15, 2019, we acquired a 267-unit senior living campus in Massachusetts for a purchase price of $50,300,000, including closing costs of $300,000. The facility is being leased to Wingate Healthcare, Inc. (“Wingate”) for a term of 10 years, with three renewal options of five years each, at an initial lease rate of 7.5% plus annual fixed escalators. We have committed to the additional funding of up to $1,900,000 in capital improvements, and the lease provides for incentive payments up to $5,000,000 to become available beginning in 2020 upon the attainment of certain operating metrics. NHI has a right of first offer on two additional Wingate-operated facilities. We accounted for the transaction as an asset purchase.
Comfort Care
On April 30, 2019, we acquired a newly-constructed 60-unit assisted living facility in Shelby, Michigan which has 14 memory care units under construction. The total commitment of $10,800,000 includes $9,282,000 funded at closing with the remaining amount to be funded as construction progresses. On May 20, 2019, we acquired a property in Brighton, Michigan, consisting of 73 assisted living/memory care units. The purchase price for the Brighton acquisition was $13,500,000, inclusive of closing costs. We leased the properties to Comfort Care Senior Living (“Comfort Care”), under leases which provide for initial lease rate of 7.75%, with annual fixed escalators beginning in year three over the term of ten years plus two renewal options of five years each. The leases each include a $3,000,000 earnout incentive which will be added to the respective lease base if funded. We accounted for the acquisitions as asset purchases.
Discovery
On May 31, 2019, we invested $25,028,000 in cash for a 97.5% equity interest in a consolidated subsidiary ("Discovery PropCo"), which simultaneously acquired from a third party six senior housing facilities comprising 145 independent-living units, 356 assisted-living units and 95 memory-care units, for a total of 596 units. Discovery Senior Housing Investor XXIV, LLC, (“Discovery”) contributed $631,000 for its non-controlling 2.5% equity interest. We invested an additional $102,258,000 as a preferred equity contribution, for a total NHI investment of $127,286,000. The additional equity contribution of $102,258,000 carries a preference in liquidation as well as in the distribution of operating cash flow. After the completion of all transaction accounting during the quarter ended September 30, 2019, minor adjustments were made to reconcile the partnership equity interests. Total cash of $127,917,000 invested in Discovery PropCo included approximately $1,067,000 in closing costs.
The facilities were leased by Discovery PropCo to Discovery for a term of ten years with two renewal periods of five years each at an initial lease rate of 6.5% with fixed annual escalators through the fifth year of the initial lease term followed by CPI-based escalators, subject to floor and ceiling, thereafter. Discovery is eligible, beginning in 2023, for up to $4,000,000 of lease inducement payments upon meeting specified performance metrics. Inducement payments funded under the agreement will be added to the lease base. Additionally, PropCo has committed to Discovery for funding up to $2,000,000 toward the purchase of condominium units located at one of the facilities. The total purchase price for the properties acquired, as discussed above, was allocated to the tangible assets based upon their relative fair values consisting of $6,301,000 to the land and $121,616,000 to the buildings and improvements. We accounted for the transaction as an asset purchase.
As the managing member, NHI manages Discovery Propco, subject to certain consent rights of Discovery for significant business decisions. Because of our control of Discovery PropCo, we include its assets, liabilities, noncontrolling interest and operations in our condensed consolidated financial statements.
Cappella Living Solutions
On July 23, 2019, we acquired a 51-unit assisted living facility in Pueblo, Colorado for $7,600,000 including $100,000 of closing costs. We leased the facility to Christian Living Services, Inc., d/b/a Cappella Living Solutions, for a term of 15 years at an initial lease rate of 7.25%, with CPI escalators subject to a floor and ceiling. We accounted for this transaction as an asset purchase.
Major Tenants
Holiday
In November 2018, we entered into a lease amendment and guaranty release (“the Agreement”) with an affiliate of Holiday Retirement (“Holiday”). Among other provisions, the Agreement decreased base rent beginning in 2019 from $39,000,000 to $31,500,000, extended the term of the original lease through 2035, and increased required minimum capital expenditure per unit. As consideration for amending provisions included in the original 2013 lease, Holiday agreed to pay NHI $55,125,000 in cash or real estate and forfeit $10,637,000 of their original $21,275,000 security deposit.
On January 31, 2019, we acquired a senior housing facility in Vero Beach, Florida from Holiday consisting of 157 independent living and 71 assisted living units in exchange for $38,000,000 toward the $55,125,000 receivable arising from the lease amendment, discussed above. The property was added to the master lease at a 6.71% lease rate. Under the restructured master lease, annual lease escalators ranging from 2% to 3%, based on portfolio revenue growth, will go into effect on November 1, 2020. Holiday settled the remaining commitment to NHI with a cash payment of $17,125,000 at closing. Acquisition of the property and collection of residual cash flowed through our accounts as adjustments to lease receivables and resulted in the change of our straight-line receivable from Holiday at the beginning of the year into a straight-line payable, which is included in the accompanying Condensed Consolidated Balance Sheets as “deferred income” at September 30, 2019.
As of September 30, 2019, we leased 26 independent living facilities to Holiday. Of our total revenues, $10,176,000 (12%) and $10,954,000 (15%) were derived from Holiday for the three months ended September 30, 2019 and 2018, including $1,664,000 and $1,530,000 in straight-line rent income, respectively. Of our total revenues, $30,283,000 (13%) and $32,863,000 (15%) were derived from Holiday for the nine months ended September 30, 2019 and 2018, including $4,958,000 and $4,591,000 in straight-line rent income, respectively. Our tenant operates the facilities pursuant to a management agreement with a Holiday-affiliated manager.
Bickford
As of September 30, 2019, our Bickford Senior Living (“Bickford”) lease portfolio consists of the following ($ in thousands):
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Lease Expiration
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|
|
June 2023
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September 2024
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September 2027
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May 2031
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April 2033
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Total
|
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Number of Properties
|
13
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|
10
|
|
4
|
|
19
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5
|
|
51
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|
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2019 Contractual Rent
|
$
|
11,468
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|
$
|
9,542
|
|
$
|
1,576
|
|
$
|
12,203
|
|
$
|
4,918
|
|
$
|
39,707
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|
|
2019 Straight Line Rent
|
358
|
|
670
|
|
195
|
|
1,695
|
|
860
|
|
3,778
|
|
|
|
$
|
11,826
|
|
$
|
10,212
|
|
$
|
1,771
|
|
$
|
13,898
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|
$
|
5,778
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|
$
|
43,485
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|
On September 1, 2019, NHI amended a master lease, which matures in May 2031 and covers 14 Bickford properties, to change the annual escalator from a fixed percentage to a CPI-based escalator with a floor of 2% and a ceiling of 3%.
On September 10, 2019, we acquired a 60-unit assisted living/memory care facility located in Gurnee, Illinois, from Bickford. The acquisition price was $15,100,000, including $100,000 in closing costs, and the cancellation of an outstanding construction note receivable of $14,035,000, including interest. The $965,000 difference was funded into an agreed-upon escrow. We leased the building for a term of twelve years at an initial lease rate of 8%, with CPI escalators subject to a floor and ceiling. We accounted for the transaction as an asset purchase.
Of our total revenues, $13,285,000 (16%) and $12,937,000 (17%) were recognized as rental income from Bickford for the three months ended September 30, 2019 and 2018, including $1,117,000 and $1,169,000 in straight-line rent income, respectively. Of our total revenues, $39,796,000 (17%) and $36,792,000 (17%) were recognized as rental income from Bickford for the nine months ended September 30, 2019 and 2018, including $3,812,000 and $3,541,000 in straight-line rent income, respectively.
Effective October 1, 2019, NHI and Bickford amended the master lease covering ten Bickford properties secured by HUD financing to reduce the annual rent by $466,000. Included in the amendment, NHI agreed to change the annual escalator from a fixed percentage to CPI-based subject to a floor and ceiling.
Senior Living Communities
As of September 30, 2019, we leased 10 retirement communities totaling 2,068 units to Senior Living Communities, LLC (“Senior Living”). The 15-year master lease, which began in December 2014, contains two renewal options of five years each and provides for an annual escalator of 3% effective January 1, 2019.
Of our total revenues, $11,924,000 (15%) and $11,469,000 (15%) in rental income were derived from Senior Living for the three months ended September 30, 2019 and 2018, including $1,404,000 and $1,359,000 in straight-line rent income, respectively. Of our total revenues, $35,001,000 (15%) and $34,374,000 (16%) in rental income were derived from Senior Living for the nine months ended September 30, 2019 and 2018, including $3,519,000 and $4,076,000 in straight-line rent income, respectively.
NHC
As of September 30, 2019, we leased 42 facilities under two master leases to National HealthCare Corporation (“NHC”), a publicly-held company. The facilities leased to NHC consist of three independent living facilities and 39 skilled nursing facilities (4 of which are subleased to other parties for whom the lease payments are guaranteed to us by NHC). These facilities are leased to NHC under the terms of an amended master lease agreement originally dated October 17, 1991 (“the 1991 lease”) that includes our 35 legacy properties and a master lease agreement dated August 30, 2013 (“the 2013 lease”) that includes 7 skilled nursing facilities acquired in 2013.
The 1991 lease expiration is December 31, 2026. There are two additional renewal options of five years, each at fair rental value as negotiated between the parties. Under the terms of the 1991 lease, the base annual rental is $30,750,000 and rent escalates by 4% of the increase, if any, in each facility’s revenue over a 2007 base year. The 2013 lease provides for a base annual rental of $3,450,000 and has a lease expiration of August 2028. Under the terms of the 2013 lease, rent escalates 4% of the increase, if any, in each facility’s revenue over the 2014 base year. For both the 1991 lease and the 2013 lease, we refer to this additional rent component as “percentage rent.” During the last three years of the 2013 lease, NHC will have the option to purchase the facilities for $49,000,000.
The following table summarizes the percentage rent income from NHC (in thousands):
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|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Current year
|
$
|
924
|
|
|
$
|
853
|
|
|
$
|
2,726
|
|
|
$
|
2,558
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|
|
Prior year final certification1
|
—
|
|
|
—
|
|
|
334
|
|
|
285
|
|
|
Total percentage rent income
|
$
|
924
|
|
|
$
|
853
|
|
|
$
|
3,060
|
|
|
$
|
2,843
|
|
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.
Of our total revenues, $9,461,000 (12%) and $9,389,000 (13%) in rental income were derived from NHC for the three months ended September 30, 2019 and 2018, respectively. Of our total revenues, $28,670,000 (12%) and $28,453,000 (13%) in rental income were derived from NHC for the nine months ended September 30, 2019 and 2018, respectively.
The chairman of our board of directors is also a director on NHC’s board of directors. As of September 30, 2019, NHC owned 1,630,462 shares of our common stock.
Other Portfolio Activity
Tenant Transitioning
41 Management
As part of a geographical realignment by Bickford, we transitioned four Minnesota properties on October 1, 2019, to 41 Management. The lease calls for first-year rent of $906,000 and a term of 15 years with two renewal options of five years each. Annual escalators are fixed at 2.5%. Bickford has agreed to fund a monthly lease termination fee through December 2020, totaling $734,000.
Other
As of September 30, 2019, we had completed the contractual transition of three lease portfolios to new tenants following a period of non-compliance by the former operators, background for which is provided in the audited financial statements included in our 2018 Annual Report on Form 10-K. The portfolios consist of three former SH-Regency Leasing, LLC (“Regency”) buildings, five former LaSalle Group (“LaSalle”) buildings and one facility formerly leased to Landmark Senior Living (“Landmark”). To expedite stabilization of the facilities, we committed to specified income-generating capital expenditures for the re-branding and refurbishment of certain of these properties. The new leases each specify initial periods during which rental income to NHI shall be based on net operating income (“NOI”), after deduction of management fees. Following the initial periods, each lease converts to a structured payment based on a fair-value calculation.
The former Regency buildings have been leased to three operators, Senior Living, Discovery, and Vitality MC TN, LLC (“Vitality”). Of our total revenues, $515,000 and $1,367,000 (2%) in rental income were derived from the three former Regency buildings for the three months ended September 30, 2019 and 2018, respectively. Of our total revenues, $660,000 and $4,100,000 (3%) in rental income were derived from the three former Regency buildings for the nine months ended September 30, 2019 and 2018, respectively.
Effective July 1, 2019 we transitioned an Indiana, independent living/assisted living facility to Discovery in conjunction with our other properties in transition. The triple-net lease matures in June 2024 with two renewal options of five years each. Rent is initially based on net operating income. Beginning in 2022, rent is to reset to the greater of $1,400,000 or fair value as provided by formula. For the duration of the lease, the rent, as reset, is subject to a 2.5% escalator. Concurrent with Discovery’s entrance into the lease, NHI provided a working capital loan for amounts up to $750,000 at an interest rate of 6.5% and a $900,000 capital improvement commitment to fund improvements to the facility. The loan extends during the term of the lease.
On April 16, 2019, Chancellor Health Care leased the five former LaSalle buildings. Our lease agreement with Chancellor provides for NHI to receive 100% of net operating cash flow generated by the facilities, after management fees, pending
stabilization of the operations of the facility. During the first quarter of 2019, we also commenced litigation for the recovery of certain funds owed by LaSalle under the lease and against the principal executive, personally, under the guaranty agreement. Of our total revenues, $437,000 and $1,317,000 (2%) in rental income were derived from the five former LaSalle buildings for the three months ended September 30, 2019 and 2018, respectively. Of our total revenues, $725,000 and $3,950,000 (3%) in rental income were derived from the five former LaSalle buildings for the nine months ended September 30, 2019 and 2018, respectively.
At December 31, 2018, we had a single-property lease in Wisconsin with Landmark that was non-performing. In February 2019, we transitioned the lease to BAKA Enterprises, temporarily acting under a management agreement with Landmark. Under terms of the new lease, NHI receives 95% of net operating cash flow, after management fees, as generated by the facilities. Upon the establishment of an operational baseline, beginning in year two, the agreement calls for a rent reset to fair value. The agreement provides for a term of 8 years, with renewal options. Of our total revenues, $150,000 and $247,000 were derived from the former Landmark property for the three months ended September 30, 2019 and 2018, respectively. Of our total revenues, $925,000 (0%) and $1,041,000 (1%) were derived from the former Landmark property for the nine months ended September 30, 2019 and 2018, respectively, including $625,000 received during 2019 as a settlement payment.
As we seek to stabilize the operations of these facilities, if our resulting tenants or operating partners do not have adequate liquidity to accept the risks and rewards of a tenant-lessee, NHI might be deemed the primary beneficiary of the operations and might be required to consolidate those statements of financial position and results of operations of the managers or operating partners into our consolidated financial statements.
Assets Held For Sale
In September 2019, we classified a portfolio of eight assisted living properties located in Arizona (4), Tennessee (3) and South Carolina (1) as held for sale, after the current tenant expressed an intention to exercise its purchase option on the properties. The purchase option provides for an even split of the excess of fair value over NHI's acquisition costs. Based on preliminary discussions, we expect the eventual selling price to exceed the portfolio’s current carrying value. Of our total revenues, $1,062,000 (1.3%) and $3,187,000 (1.4%) in rental income were derived from this eight property portfolio for the three and nine months ended September 30, 2019, respectively. We expect the transaction to be finalized during the first quarter of 2020.
We have identified two assisted living properties for disposal and have begun active marketing of the properties. The buildings are smaller than are typical of our portfolio and are no longer considered to be an appropriate investment for NHI. In January 2019 we ceased recording depreciation on the properties, and we booked an adjustment to lease revenues to write off the associated $124,000 in straight-line receivables. We recognized an impairment loss of $2,500,000 to write down the properties to their estimated net realizable value and have classified the assets as held for sale on the Condensed Consolidated Balance Sheet at September 30, 2019.
Purchase Options
Certain of our operators hold purchase options allowing them to acquire properties they currently lease from NHI. For options open or coming open in the near future, we are engaged in preliminary negotiations to continue as lessor or in some other capacity.
A summary of these tenant options, excluding properties classified as held for sale, is presented below ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
Number of
|
Lease
|
1st Option
|
Option
|
Contractual
|
|
Type
|
Properties
|
Expiration
|
Open Year
|
Basis
|
Rent
|
|
MOB
|
1
|
February 2025
|
Open
|
i
|
$
|
306
|
|
|
HOSP
|
1
|
September 2027
|
2020
|
ii
|
$
|
2,713
|
|
|
HOSP
|
1
|
March 2025
|
2020
|
iv
|
$
|
1,957
|
|
|
SHO
|
2
|
May 2031
|
2021
|
iv
|
$
|
5,063
|
|
|
HOSP
|
1
|
June 2022
|
2022
|
i
|
$
|
3,502
|
|
|
SNF
|
7
|
August 2028
|
2025
|
iii
|
$
|
3,671
|
|
|
SNF
|
1
|
September 2028
|
2028
|
iii
|
$
|
463
|
|
Tenant purchase options generally give the lessee an option to purchase the underlying property for consideration determined by i) greater of fixed base price or fair market value; ii) a fixed base price plus a specified share in any appreciation; iii) fixed base price; or iv) a fixed capitalization rate on lease revenue.
Future Minimum Lease Payments
With the adoption of Accounting Standards Codification (“ASC”) Topic 842, Leases, as discussed in Note 10, our minimum lease payments are now determined under guidance different from that required as of December 31, 2018, when we were subject to ASC Topic 840 Leases. Presented in the following table are future minimum lease payments, as of September 30, 2019, to be received by us under our operating leases, as determined under ASC 842 (in thousands):
|
|
|
|
|
|
|
|
Twelve months ended September 30, 2019
|
|
|
2020
|
$
|
270,629
|
|
|
2021
|
271,169
|
|
|
2022
|
274,491
|
|
|
2023
|
272,498
|
|
|
2024
|
264,457
|
|
|
Thereafter
|
1,608,080
|
|
|
|
$
|
2,961,324
|
|
We assess the collectibility of our lease receivables, consisting primarily of straight-line rents receivable, based on several factors, including payment history, the financial strength of the tenant and any guarantors, historical operations and operating trends of the property, and current economic conditions. If our evaluation of these factors indicates it is not probable that we will be able to collect substantially all of the receivable, we de-recognize all rent receivable assets, including the straight-line rent receivable asset and record as a reduction in rental revenue.
Variable Lease Payments
Most of our existing leases contain annual escalators in rent payments. For financial statement purposes, rental income is recognized on a straight-line basis over the term of the lease where the lease contains fixed escalators. Some of our leases contain escalators that are determined annually based on a variable index or other factor that is indeterminable at the inception of the lease. The table below indicates the amount of lease revenue recognized during the three and nine months ended September 30, 2019 as a result of fixed and variable lease escalators (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Lease payments based on fixed escalators
|
$
|
67,172
|
|
|
$
|
64,884
|
|
|
$
|
196,411
|
|
|
$
|
190,267
|
|
|
Lease payments based on variable escalators
|
747
|
|
|
1,085
|
|
|
1,906
|
|
|
3,026
|
|
|
Straight-line rent income
|
5,720
|
|
|
5,719
|
|
|
16,255
|
|
|
17,516
|
|
|
Escrow funds received from tenants
|
1,608
|
|
|
—
|
|
|
4,205
|
|
|
—
|
|
|
Rental income
|
$
|
75,247
|
|
|
$
|
71,688
|
|
|
$
|
218,777
|
|
|
$
|
210,809
|
|
NOTE 3. MORTGAGE AND OTHER NOTES RECEIVABLE
At September 30, 2019, we had net investments in mortgage notes receivable with a carrying value of $269,718,000, secured by real estate and UCC liens on the personal property of 14 facilities, and other notes receivable with a carrying value of $45,598,000, guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner. All our notes receivable were on full accrual basis and no allowance for doubtful accounts was considered necessary at September 30, 2019 or December 31, 2018.
Discovery
On August 30, 2019, NHI extended a senior mortgage loan of $6,423,000 at 7% annual interest to affiliates of Discovery to acquire a senior housing facility in Indiana for which Discovery PropCo, will have the option to purchase at stabilization. The facility consists of 52 assisted living units and 22 memory care units.
41 Management
On June 14, 2019, we committed to providing first mortgage financing to 41 Management, LLC (d/b/a as Matthews Senior Living) for up to $10,800,000 to fund the construction of a 51-unit assisted living facility in Wisconsin. The loan carries an interest rate of 8.50% for its term of five years, subject to two renewals of one year each. The agreement includes a purchase option, which is to open upon stabilization of the facility. Additional security on the loan includes personal and corporate guarantees and the funding of a $2,400,000 working capital escrow. The total amount funded on the note was $3,324,000 as of September 30, 2019.
Our loan to 41 Management represents a variable interest. 41 Management is structured to limit liability for potential claims for damages, is capitalized to achieve that purpose and is considered a VIE within the definition set forth in Note 1. As discussed more fully in Note 1, we have concluded that we are not the primary beneficiary.
Senior Living Communities
On June 25, 2019, we provided a mortgage loan of $32,700,000 to Senior Living for the acquisition of a 248-unit continuing care retirement community in Columbia, South Carolina. The financing is for a term of five years with two one year extensions and carries an interest rate of 7.25%. Additionally, the loan conveys to NHI a purchase option at a stated minimum price of $38,250,000, subject to adjustment for market conditions.
In connection with the acquisition in December 2014 of properties leased to Senior Living, we provided a $15,000,000 revolving line of credit, the maturity of which mirrors the 15-year term of the master lease. Borrowings are used to finance construction projects within the Senior Living portfolio, including building additional units. Up to $5,000,000 of the facility may be used to meet general working capital needs. Amounts outstanding under the facility, $4,755,000 at September 30, 2019, bear interest at an annual rate equal to the prevailing 10-year U.S. Treasury rate, 1.68% at September 30, 2019, plus 6%.
NHI has two mezzanine loans of up to $12,000,000 and $2,000,000, respectively, to affiliates of Senior Living, whose purpose was to partially fund construction of a 186-unit senior living campus on Daniel Island in South Carolina, which opened in April 2018. The loans bear interest payable monthly at a 10% annual rate and mature in March 2021. The loans were fully drawn at September 30, 2019, and provided NHI with a fixed capitalization rate purchase option on the development upon its meeting certain operational metrics. The option is to remain open during the term of the loans, plus any extensions.
Our loans to Senior Living and its subsidiaries represent a variable interest. Senior Living is structured to limit liability for potential claims for damages, is appropriately capitalized for that purpose and is considered a VIE. As discussed more fully in Note 1, we have concluded that we are not the primary beneficiary.
Bickford
At September 30, 2019, our construction loans to Bickford are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commencement
|
|
Rate
|
|
Maturity
|
|
Commitment
|
|
Drawn
|
|
Location
|
|
January 2017
|
|
9%
|
|
5 years
|
|
14,000,000
|
|
|
(14,000,000
|
)
|
|
Michigan
|
|
January 2018
|
|
9%
|
|
5 years
|
|
14,000,000
|
|
|
(10,493,000
|
)
|
|
Virginia
|
|
July 2018
|
|
9%
|
|
5 years
|
|
14,700,000
|
|
|
(8,675,000
|
)
|
|
Michigan
|
|
|
|
|
|
|
|
$
|
42,700,000
|
|
|
$
|
(33,168,000
|
)
|
|
|
The construction loans are secured by first mortgage liens on substantially all real and personal property as well as a pledge of any and all leases or agreements which may grant a right of use to the property. Usual and customary covenants extend to the agreements, including the borrower’s obligation for payment of insurance and taxes. NHI has a fair market value purchase option on the properties at stabilization of the underlying operations. On these development projects, Bickford as borrower is entitled to up to $2,000,000 per project in incentive loan draws based on the achievement of predetermined operational milestones and, if funded, will increase the principal amount and NHI's future purchase price and eventual NHI lease payment.
As discussed in Note 2, on September 10, 2019, we acquired the Illinois location constructed by Bickford for $15,100,000. In the exchange we cancelled Bickford’s outstanding debt, including interest, on the property of $14,035,000.
Our loans to Bickford represent a variable interest. Bickford is structured to limit liability for potential claims for damages, is capitalized to achieve that purpose and is considered a VIE within the definition set forth in Note 1. As discussed more fully in Note 1, we have concluded that we are not the primary beneficiary.
Life Care Services - Sagewood
On December 21, 2018, we entered into an agreement to lend LCS-Westminster Partnership IV LLP (“LCS-WP IV”), an affiliate of Life Care Services (“LCS”), the manager of the facility, up to $180,000,000. The loan agreement conveys a mortgage interest and will facilitate the construction of Phase II of Sagewood, a Type-A Continuing Care Retirement Community in Scottsdale, AZ. As an affiliate of a larger company, LCS-WP IV is structured to limit liability for potential damage claims, is capitalized to achieve that purpose and is considered a VIE within the definition set forth in Note 1. As discussed more fully in Note 1, we have concluded that we are not the primary beneficiary.
The loan takes the form of two notes under a master credit agreement. The senior note (“Note A”) totals $118,800,000 at a 7.25% interest rate with 10 basis-point annual escalators after three years and has a term of 10 years. We have funded $77,340,000 of Note A as of September 30, 2019. Note A is interest-only and is locked to prepayment until January 2021. After 2020, the prepayment penalty starts at 2% and declines to 1% in 2022. The second note (“Note B”) is a construction loan for up to $61,200,000 at an annual interest rate of 8.5% and carries a maturity of five years. The total amount funded on Note B was $32,052,000 as of September 30, 2019.
Life Care Services - Timber Ridge
In February 2015, we entered into an agreement with LCS-Westminster Partnership III LLP (“LCS-WP III”), an affiliate of LCS, the manager of the facility, to lend up to $154,500,000. The loan agreement conveys a mortgage interest and facilitated the construction of Phase II of Timber Ridge at Talus (“Timber Ridge”), a Type-A continuing care retirement community in Issaquah, Washington. Our loan to LCS-WP III represents a variable interest. As an affiliate of a larger company, LCS-WP III is structured to limit liability for potential damage claims, is capitalized to achieve that purpose and is considered a VIE within the definition set forth in Note 1.
The loan took the form of two notes under a master credit agreement. The senior note (“Note A”) totals $60,000,000 at an initial rate of 6.75% (currently 6.95%) with 10 basis-point escalators after three years and has a term of 10 years. We have funded $59,349,000 of Note A as of September 30, 2019. Note A is interest-only and is locked to prepayment for three years. Beginning in February 2018, the prepayment penalty started at 5% and will decline 1% annually for five years. Note B was a construction loan for up to $94,500,000, with the remaining outstanding balance being fully repaid during the first quarter of 2018.
NHI has an option to purchase the entire Timber Ridge property for the greater of a mutually agreed-upon fair market value or $115,000,000 during an option window that opened in February 2019.
Senior Living Management
In August 2016, we entered into an agreement to furnish to our current tenant, Senior Living Management, Inc. (“SLM”), through its affiliates, loans of up to $24,500,000 to facilitate SLM’s acquisition of five senior housing facilities that it currently operates. The loans consist of two notes under a master credit agreement, include both a mortgage and a corporate loan, and bear interest at 8.25% with terms of five years, plus optional extensions of one year and two years. NHI has a right of first refusal if SLM elects to sell the facilities. The loans were fully funded as of September 30, 2019.
Our loans to SLM represent a variable interest. SLM is structured to limit liability for potential damage claims, is capitalized for that purpose and is considered a VIE. As discussed more fully in Note 1, we have concluded that we are not the primary beneficiary.
NOTE 4. OTHER ASSETS
Other assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
Accounts receivable and other assets
|
$
|
3,104
|
|
|
$
|
6,381
|
|
|
Regulatory escrows
|
8,208
|
|
|
8,208
|
|
|
Unamortized lease incentive payments
|
9,948
|
|
|
7,456
|
|
|
Restricted cash
|
10,399
|
|
|
5,253
|
|
|
|
$
|
31,659
|
|
|
$
|
27,298
|
|
Restricted cash consists of reserves for replacement, insurance and tax escrows required to be held on deposit in accordance with regulatory agreements governing our Fannie Mae and HUD mortgages.
NOTE 5. DEBT
Debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
Revolving credit facility - unsecured
|
$
|
250,000
|
|
|
$
|
84,000
|
|
|
Bank term loans - unsecured
|
550,000
|
|
|
550,000
|
|
|
Private placement term loans - unsecured
|
400,000
|
|
|
400,000
|
|
|
HUD mortgage loans (net of discount of $1,258 and $1,320)
|
42,333
|
|
|
42,906
|
|
|
Fannie Mae term loans - secured, non-recourse
|
95,793
|
|
|
96,044
|
|
|
Convertible senior notes - unsecured (net of discount of $807 and $1,391)
|
119,193
|
|
|
118,609
|
|
|
Unamortized loan costs
|
(7,959
|
)
|
|
(9,884
|
)
|
|
|
$
|
1,449,360
|
|
|
$
|
1,281,675
|
|
Aggregate principal maturities of debt as of September 30, 2019, and for each of the next five years and thereafter are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2020
|
$
|
1,219
|
|
|
2021
|
121,267
|
|
|
2022
|
501,315
|
|
|
2023
|
426,366
|
|
|
2024
|
51,416
|
|
|
Thereafter
|
357,801
|
|
|
|
1,459,384
|
|
|
Less: discount
|
(2,065
|
)
|
|
Less: unamortized loan costs
|
(7,959
|
)
|
|
|
$
|
1,449,360
|
|
Revolving credit facility and bank term loans - unsecured
Our unsecured bank credit facility consists of $250,000,000 and $300,000,000 term loans and a $550,000,000 revolving credit facility. The $250,000,000 term loan and $550,000,000 revolving facility mature in August 2022, and the $300,000,000 term loan matures in September 2023. On March 22, 2019 and June 28, 2019, we entered into swap agreements to fix the interest rates on $340,000,000 of term loans and $60,000,000 of our revolving credit facility through December 2021, when LIBOR is scheduled for discontinuation.
The revolving facility fee is currently 20 basis points per annum, and based on our current leverage ratios, the facility presently provides for floating interest on the revolver and the term loans at 30-day LIBOR plus 120 bps and a blended 132 bps, respectively. At September 30, 2019 and December 31, 2018, 30-day LIBOR was 202 and 250 bps, respectively. Within the facility, the employment of interest rate swaps for a portion of our fixed term debt leaves only $190,000,000 of our revolving credit facility exposed to interest rate risk through June 2020, when our $80,000,000 and $130,000,000 swaps expire. Our swaps and the financial instruments to which they relate are described in the table below, under the caption “Interest Rate Swap Agreements.”
At September 30, 2019, we had $300,000,000 available to draw on the revolving portion of our credit facility, subject to usual and customary covenants. Among other stipulations, the unsecured credit facility agreement requires that we maintain certain financial ratios within limits set by our creditors. At September 30, 2019, we were in compliance with these ratios.
Pinnacle Bank is a participating member of our banking group. A member of NHI’s board of directors and chairman of our audit committee is also the chairman of Pinnacle Financial Partners, Inc., the holding company for Pinnacle Bank. NHI’s local banking transactions are conducted primarily through Pinnacle Bank.
Private placement term loans - unsecured
Our unsecured private placement term loans, payable interest-only, are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Inception
|
|
Maturity
|
|
Fixed Rate
|
|
|
|
|
|
|
|
|
|
$
|
125,000
|
|
|
January 2015
|
|
January 2023
|
|
3.99%
|
|
50,000
|
|
|
November 2015
|
|
November 2023
|
|
3.99%
|
|
75,000
|
|
|
September 2016
|
|
September 2024
|
|
3.93%
|
|
50,000
|
|
|
November 2015
|
|
November 2025
|
|
4.33%
|
|
100,000
|
|
|
January 2015
|
|
January 2027
|
|
4.51%
|
|
$
|
400,000
|
|
|
|
|
|
|
|
Except for specific debt-coverage ratios, covenants pertaining to the private placement term loans are generally conformed with those governing our credit facility. As discussed more fully at Note 11, we have elected to issue public credit ratings from Fitch Ratings and S&P Global Ratings. Our unsecured private placement term loan agreements include a rate increase provision that is effective if any rating agency lowers our credit rating on our senior unsecured debt below investment grade and our compliance leverage increases to 50% or more.
HUD mortgage loans
Our HUD mortgage loans are secured by ten properties leased to Bickford and having a net book value of $49,577,000 at September 30, 2019. Nine mortgage notes require monthly payments of principal and interest from 4.3% to 4.4% (inclusive of mortgage insurance premium) and mature in August and October 2049. One additional HUD mortgage loan assumed in 2014, at a discount, requires monthly payments of principal and interest of 2.9% (inclusive of mortgage insurance premium) and matures in October 2047. The loan has an outstanding principal balance of $8,546,000 and a carrying value of $7,288,000, which approximates fair value.
Fannie Mae term loans - secured, non-recourse
In March 2015 we obtained $78,084,000 in Fannie Mae financing. The term debt financing consists of interest-only payments at an annual rate of 3.79% and a 10-year maturity. The mortgages are non-recourse and secured by thirteen properties leased to Bickford. In a December 2017 acquisition, we assumed additional Fannie Mae debt that amortizes through 2025 when a balloon payment will be due, is subject to prepayment penalties until 2024, bears interest at a nominal rate of 4.60%, and has remaining balance of $17,709,000 at September 30, 2019. All together, these notes are secured by facilities having a net book value of $135,267,000 at September 30, 2019.
Convertible senior notes - unsecured
In March 2014 we issued $200,000,000 of 3.25% senior unsecured convertible notes due April 2021 (the “Notes”) with interest payable April 1st and October 1st of each year. The Notes were convertible at an initial rate of 13.93 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $71.81 per share for a total of approximately 2,785,200 underlying shares. The conversion rate is subsequently adjusted upon each occurrence of certain events, as defined in the indenture governing the Notes, including the payment of dividends at a rate exceeding that prevailing in 2014. The conversion option was accounted for as an “optional net-share settlement conversion feature,” meaning that upon conversion, NHI’s conversion obligation may be satisfied, at our option, in cash, shares of common stock or a combination of cash and shares of common stock. Because we have the ability and intent to settle the convertible securities in cash upon exercise, we use the treasury stock method to account for potential dilution.
As of September 30, 2019, our senior unsecured convertible notes were convertible at a rate of 14.57 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $68.63 per share for a total of 1,748,616 shares on the remaining $120,000,000 of senior unsecured convertible notes. For the three months ended September 30, 2019, dilution resulting from the conversion option within our convertible debt is 275,824 shares. If NHI’s current share price increases above the adjusted $68.63 conversion price, further dilution will be attributable to the conversion feature. On September 30, 2019, the
value of the convertible debt, computed as if the debt were immediately eligible for conversion, exceeded its face amount by $24,068,000.
Interest Rate Swap Agreements
Our existing interest rate swap agreements will collectively continue through December 2021 to hedge against fluctuations in variable interest rates applicable to $610,000,000 ($400,000,000 after June 2020) of our bank loans. During the next year, approximately $2,217,000 of gains, which are included in accumulated other comprehensive income (loss), are projected to be reclassified into earnings.
As of September 30, 2019, we employ the following interest rate swap contracts to mitigate our interest rate risk on our bank term and revolver loans described above (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Entered
|
|
Maturity Date
|
|
Fixed Rate
|
|
Rate Index
|
|
Notional Amount
|
|
Fair Value (Liability)
|
|
June 2013
|
|
June 2020
|
|
3.46%
|
|
1-month LIBOR
|
|
$
|
80,000,000
|
|
|
$
|
(238
|
)
|
|
March 2014
|
|
June 2020
|
|
3.51%
|
|
1-month LIBOR
|
|
$
|
130,000,000
|
|
|
$
|
(431
|
)
|
|
March 2019
|
|
December 2021
|
|
3.51%
|
|
1-month LIBOR
|
|
$
|
100,000,000
|
|
|
$
|
(1,691
|
)
|
|
March 2019
|
|
December 2021
|
|
3.52%
|
|
1-month LIBOR
|
|
$
|
100,000,000
|
|
|
$
|
(1,720
|
)
|
|
June 2019
|
|
December 2021
|
|
2.89%
|
|
1-month LIBOR
|
|
$
|
150,000,000
|
|
|
$
|
(538
|
)
|
|
June 2019
|
|
December 2021
|
|
2.93%
|
|
1-month LIBOR
|
|
$
|
50,000,000
|
|
|
$
|
(193
|
)
|
If the fair value of the hedge is an asset, we include it in our Condensed Consolidated Balance Sheets among other assets, and, if a liability, as a component of accounts payable and accrued expenses. See Note 9 for fair value disclosures about our interest rate swap agreements. Net asset (liability) balances for our hedges included as components of consolidated other comprehensive income on September 30, 2019 and December 31, 2018 were $(4,810,000) and $1,297,000, respectively.
The following table summarizes interest expense (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Interest expense on debt at contractual rates
|
$
|
14,308
|
|
|
$
|
11,637
|
|
|
$
|
40,736
|
|
|
$
|
33,579
|
|
|
Losses reclassified from accumulated other
|
|
|
|
|
|
|
|
|
comprehensive income (loss) into interest expense
|
(390
|
)
|
|
(27
|
)
|
|
(1,031
|
)
|
|
326
|
|
|
Capitalized interest
|
(161
|
)
|
|
(50
|
)
|
|
(476
|
)
|
|
(123
|
)
|
|
Amortization of debt issuance costs and debt discount
|
904
|
|
|
814
|
|
|
2,696
|
|
|
2,425
|
|
|
Total interest expense
|
$
|
14,661
|
|
|
$
|
12,374
|
|
|
$
|
41,925
|
|
|
$
|
36,207
|
|
NOTE 6. COMMITMENTS AND CONTINGENCIES
In the normal course of business, we enter into a variety of commitments, typically consisting of funding of revolving credit arrangements, construction and mezzanine loans to our operators to conduct expansions and acquisitions for their own account, and commitments for the funding of construction for expansion or renovation to our existing properties under lease. In our leasing operations, we offer to our tenants and to sellers of newly-acquired properties a variety of inducements which originate contractually as contingencies but which may become commitments upon the satisfaction of the contingent event. Contingent payments earned will be included in the respective lease bases when funded. The tables below summarize our existing, known commitments and contingencies as of September 30, 2019 according to the nature of their impact on our leasehold or loan portfolios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class
|
|
Type
|
|
Total
|
|
Funded
|
|
Remaining
|
|
Loan Commitments:
|
|
|
|
|
|
|
|
|
|
|
LCS Sagewood Note A
|
SHO
|
|
Construction
|
|
$
|
118,800,000
|
|
|
$
|
(77,340,000
|
)
|
|
$
|
41,460,000
|
|
|
LCS Sagewood Note B
|
SHO
|
|
Construction
|
|
61,200,000
|
|
|
(32,052,000
|
)
|
|
29,148,000
|
|
|
LCS Timber Ridge Note A
|
SHO
|
|
Construction
|
|
60,000,000
|
|
|
(59,349,000
|
)
|
|
651,000
|
|
|
Bickford Senior Living
|
SHO
|
|
Construction
|
|
42,700,000
|
|
|
(33,168,000
|
)
|
|
9,532,000
|
|
|
Senior Living Communities
|
SHO
|
|
Revolving Credit
|
|
15,000,000
|
|
|
(4,755,000
|
)
|
|
10,245,000
|
|
|
41 Management
|
SHO
|
|
Construction
|
|
10,800,000
|
|
|
(3,324,000
|
)
|
|
7,476,000
|
|
|
Discovery Senior Living
|
SHO
|
|
Working Capital
|
|
750,000
|
|
|
—
|
|
|
750,000
|
|
|
|
|
|
|
|
$
|
309,250,000
|
|
|
$
|
(209,988,000
|
)
|
|
$
|
99,262,000
|
|
See Note 3 to our condensed consolidated financial statements for full details of our loan commitments. As provided above, loans funded do not include the effects of discounts or commitment fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class
|
|
Type
|
|
Total
|
|
Funded
|
|
Remaining
|
|
Development Commitments:
|
|
|
|
|
|
|
|
|
|
|
Ignite Medical Resorts
|
SNF
|
|
Construction
|
|
$
|
25,350,000
|
|
|
$
|
(13,255,000
|
)
|
|
$
|
12,095,000
|
|
|
Woodland Village
|
SHO
|
|
Renovation
|
|
7,450,000
|
|
|
(7,374,000
|
)
|
|
76,000
|
|
|
Senior Living Communities
|
SHO
|
|
Renovation
|
|
6,830,000
|
|
|
(6,004,000
|
)
|
|
826,000
|
|
|
Senior Living Communities
|
SHO
|
|
Renovation
|
|
3,100,000
|
|
|
(2,000,000
|
)
|
|
1,100,000
|
|
|
Wingate Healthcare
|
SHO
|
|
Renovation
|
|
1,900,000
|
|
|
(212,000
|
)
|
|
1,688,000
|
|
|
Discovery Senior Living
|
SHO
|
|
Renovation
|
|
1,400,000
|
|
|
—
|
|
|
1,400,000
|
|
|
Navion Senior Solutions
|
SHO
|
|
Construction
|
|
650,000
|
|
|
—
|
|
|
650,000
|
|
|
|
|
|
|
|
$
|
46,680,000
|
|
|
$
|
(28,845,000
|
)
|
|
$
|
17,835,000
|
|
In addition to the commitments listed above, Discovery PropCo has committed to Discovery for funding up to $2,000,000 toward the purchase of condominium units located at one of the facilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class
|
|
Type
|
|
Total
|
|
Funded
|
|
Remaining
|
|
Contingencies:
|
|
|
|
|
|
|
|
|
|
|
Bickford Senior Living
|
SHO
|
|
Lease Inducement
|
|
$
|
10,000,000
|
|
|
$
|
(10,000,000
|
)
|
|
$
|
—
|
|
|
Bickford Senior Living
|
SHO
|
|
Incentive Loan Draws
|
|
6,000,000
|
|
|
—
|
|
|
6,000,000
|
|
|
Comfort Care Senior Living
|
SHO
|
|
Lease Inducement
|
|
6,000,000
|
|
|
—
|
|
|
6,000,000
|
|
|
Wingate Healthcare
|
SHO
|
|
Lease Inducement
|
|
5,000,000
|
|
|
—
|
|
|
5,000,000
|
|
|
Navion Senior Solutions
|
SHO
|
|
Lease Inducement
|
|
4,850,000
|
|
|
(500,000
|
)
|
|
4,350,000
|
|
|
Discovery Senior Living
|
SHO
|
|
Lease Inducement
|
|
4,000,000
|
|
|
—
|
|
|
4,000,000
|
|
|
Ignite Medical Resorts
|
SNF
|
|
Lease Inducement
|
|
2,000,000
|
|
|
—
|
|
|
2,000,000
|
|
|
|
|
|
|
|
$
|
37,850,000
|
|
|
$
|
(10,500,000
|
)
|
|
$
|
27,350,000
|
|
Contingent lease inducement payments of $10,000,000 related primarily to the five Bickford development properties constructed in 2016 and 2017 which included a licensure incentive of $250,000 per property and a three-tiered operator incentive schedule paying up to an additional $1,750,000, based on the attainment of certain performance metrics. Upon funding, these payments were added to the lease base and are being amortized against rental income. On exercise of our purchase options for additional Bickford development properties, under the 2016 agreement governing the unwind of our joint venture with Bickford, unfunded loan incentives convert to lease inducements on a dollar-for-dollar basis.
Litigation
Our facilities are subject to claims and suits in the ordinary course of business. Our lessees and borrowers have indemnified, and are obligated to continue to indemnify us, against all liabilities arising from the operation of the facilities, and are further obligated to indemnify us against environmental or title problems affecting the real estate underlying such facilities. While there may be lawsuits pending against certain of the owners and/or lessees of the facilities, management believes that the ultimate resolution of all such pending proceedings will have no material adverse effect on our financial condition, results of operations or cash flows.
In June 2018, East Lake Capital Management LLC and certain related entities, including Regency (for three assisted living facilities in Tennessee, Indiana and North Carolina), filed suit against NHI in Texas seeking injunctive and declaratory relief and unspecified monetary damages. We countered with motions calling for the immediate appointment of a receiver and for pre-judgment possession. Resulting from these claims and counterclaims, on December 6, 2018, the plaintiff parties entered into an agreement resulting in Regency vacating the facilities in December 2018. Litigation is ongoing.
LaSalle defaulted on its rent payment in November 2018. We transitioned the properties to a new operator and on April 16, 2019, we placed the five buildings with a new tenant under similar arrangements to those in place over the former Regency buildings, with NHI to receive operating cash flow, after management fees, generated by the facilities pending stabilization. We also commenced litigation for the recovery of certain funds owed under the lease and against the principal executive, Mitch Warren personally, under a guaranty agreement. In the meantime, Autumn Leaves, the manager, has declared bankruptcy under Chapter 11. The litigation is ongoing.
NOTE 7. STOCK-BASED COMPENSATION
We recognize stock-based compensation for all stock options granted over the requisite service period using the fair value of these grants as estimated at the date of grant using the Black-Scholes pricing model. All restricted stock granted (if any) is recognized over the requisite service period using the market value of our publicly-traded common stock on the date of grant.
Stock-Based Compensation Plans
The Compensation Committee of the Board of Directors (“the Committee”) has the authority to select the participants to be granted options; to designate whether the option granted is an incentive stock option (“ISO”), a non-qualified option, or a stock appreciation right; to establish the number of shares of common stock that may be issued upon exercise of the option; to establish the vesting provision for any award; and to establish the term any award may be outstanding. The exercise price of any ISO’s granted will not be less than 100% of the fair market value of the shares of common stock on the date granted, and the term of an ISO may not be more than ten years. The exercise price of any non-qualified options granted will not be less than 100% of the fair market value of the shares of common stock on the date granted unless so determined by the Committee.
In May 2012, our stockholders approved the 2012 Stock Incentive Plan (“the 2012 Plan”) pursuant to which 1,500,000 shares of our common stock were made available to grant as stock-based payments to employees, officers, directors or consultants. Through a vote of our shareholders on May 7, 2015, we increased the maximum number of shares under the plan from 1,500,000 shares to 3,000,000 shares; increased the automatic annual grant to non-employee directors from 15,000 shares to 20,000 shares; and limited the Company’s ability to re-issue shares under the Plan. Through a second amendment approved on May 4, 2018, our shareholders voted to increase the maximum number of shares under the plan to 3,500,000 and to increase the automatic annual grant to non-employee directors to 25,000. The individual restricted stock and option grant awards may vest over periods up to five years. The term of the options under the 2012 Plan is up to ten years from the date of grant. As of September 30, 2019, there were 319,669 shares available for future grants under the 2012 Plan.
On May 3, 2019, our stockholders approved the 2019 Stock Incentive Plan (“the 2019 Plan”) pursuant to which 3,000,000 shares of our common stock were made available to grant as stock-based payments to employees, officers, directors or consultants. The individual option grant awards may vest over periods up to five years. The term of the options under the 2019 Plan is up to ten years from the date of grant.
Compensation expense is only recognized for the awards that ultimately vest. Accordingly, pre-vesting forfeitures that were not expected will result in the reversal of previously recorded compensation expense. Non-cash compensation expense reported for the three months ended September 30, 2019 and 2018 was $477,000 and $337,000, respectively and is included in general and administrative expense in the Condensed Consolidated Statements of Income. Non-cash compensation expense reported for the nine months ended September 30, 2019 and 2018 was $2,955,000 and $2,131,000, respectively and is included in general and administrative expense in the Condensed Consolidated Statements of Income.
At September 30, 2019, we had, net of expected forfeitures, $1,345,000 of unrecognized compensation cost related to unvested stock options which is expected to be expensed over the following periods: 2019 - $477,000, 2020 - $776,000 and 2021 - $92,000.
The weighted average fair value per share of options granted during the nine months ended September 30, 2019 and 2018 was $6.17 and $4.49, respectively. The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Dividend yield
|
5.5%
|
|
6.5%
|
|
Expected volatility
|
18.6%
|
|
19.4%
|
|
Expected lives
|
2.9 years
|
|
2.9 years
|
|
Risk-free interest rate
|
2.50%
|
|
2.39%
|
The following table summarizes our outstanding stock options:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
Options outstanding January 1,
|
920,346
|
|
|
859,182
|
|
|
Options granted under 2012 Plan
|
602,000
|
|
|
560,000
|
|
|
Options exercised under 2012 Plan
|
(431,993
|
)
|
|
(241,669
|
)
|
|
Options forfeited under 2012 Plan
|
—
|
|
|
(30,001
|
)
|
|
Options exercised under 2005 Plan
|
—
|
|
|
(6,668
|
)
|
|
Options outstanding, September 30,
|
1,090,353
|
|
|
1,140,844
|
|
|
|
|
|
|
|
Exercisable at September 30,
|
599,834
|
|
|
697,490
|
|
NOTE 8. EARNINGS AND DIVIDENDS PER COMMON SHARE
The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assume the exercise of stock options and the conversion of our convertible debt using the treasury stock method, to the extent dilutive. If our average stock price for the period increases over the conversion price of our convertible debt, the conversion feature will be considered dilutive.
The following table summarizes the average number of common shares and the net income used in the calculation of basic and diluted earnings per common share (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net income attributable to common stockholders
|
$
|
42,758
|
|
|
$
|
40,979
|
|
|
$
|
118,417
|
|
|
$
|
117,251
|
|
|
|
|
|
|
|
|
|
|
|
BASIC:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
43,505,332
|
|
|
42,187,077
|
|
|
43,187,847
|
|
|
41,808,017
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
43,505,332
|
|
|
42,187,077
|
|
|
43,187,847
|
|
|
41,808,017
|
|
|
Stock options
|
79,933
|
|
|
98,269
|
|
|
73,924
|
|
|
66,917
|
|
|
Convertible subordinated debentures
|
275,824
|
|
|
149,153
|
|
|
232,943
|
|
|
57,802
|
|
|
Weighted average dilutive common shares outstanding
|
43,861,089
|
|
|
42,434,499
|
|
|
43,494,714
|
|
|
41,932,736
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders - basic
|
$
|
.98
|
|
|
$
|
.97
|
|
|
$
|
2.74
|
|
|
$
|
2.80
|
|
|
Net income attributable to common stockholders - diluted
|
$
|
.97
|
|
|
$
|
.97
|
|
|
$
|
2.72
|
|
|
$
|
2.80
|
|
|
|
|
|
|
|
|
|
|
|
Incremental anti-dilutive shares excluded:
|
|
|
|
|
|
|
|
|
Net share effect of stock options with an exercise price in excess of the average market price for our common shares
|
7,858
|
|
|
615
|
|
|
11,200
|
|
|
31,616
|
|
|
|
|
|
|
|
|
|
|
|
Regular dividends declared per common share
|
$
|
1.05
|
|
|
$
|
1.00
|
|
|
$
|
3.15
|
|
|
$
|
3.00
|
|
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial assets and liabilities measured at fair value (based on the hierarchy of the three levels of inputs described in Note 1 to the consolidated financial statements contained in our most recent Annual Report on Form 10-K) on a recurring basis have included marketable securities, derivative financial instruments and contingent consideration arrangements. Derivative financial instruments include our interest rate swap agreements.
Derivative financial instruments. Derivative financial instruments are valued in the market using discounted cash flow techniques. These techniques incorporate Level 1 and Level 2 inputs. The market inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation model for interest rate swaps are observable in active markets and are classified as Level 2 in the hierarchy.
Assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement
|
|
|
Balance Sheet Classification
|
|
September 30,
2019
|
|
December 31,
2018
|
|
Level 2
|
|
|
|
|
|
|
Interest rate swap asset
|
Other assets
|
|
$
|
—
|
|
|
$
|
1,297
|
|
|
Interest rate swap liability
|
Accounts payable and accrued expenses
|
|
$
|
4,810
|
|
|
$
|
—
|
|
Carrying amounts and fair values of financial instruments that are not carried at fair value at September 30, 2019 and December 31, 2018 in the Condensed Consolidated Balance Sheets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
Fair Value Measurement
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Level 2
|
|
|
|
|
|
|
|
|
Variable rate debt
|
$
|
795,276
|
|
|
$
|
628,010
|
|
|
$
|
800,000
|
|
|
$
|
634,000
|
|
|
Fixed rate debt
|
$
|
654,084
|
|
|
$
|
653,665
|
|
|
$
|
674,713
|
|
|
$
|
644,745
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
Mortgage and other notes receivable
|
$
|
315,316
|
|
|
$
|
246,111
|
|
|
$
|
324,156
|
|
|
$
|
244,206
|
|
Fixed rate debt. Fixed rate debt is classified as Level 2 and its value is based on quoted prices for similar instruments or calculated utilizing model derived valuations in which significant inputs are observable in active markets.
Mortgage and other notes receivable. The fair value of mortgage and other notes receivable is based on credit risk and discount rates that are not observable in the marketplace and therefore represents a Level 3 measurement.
Carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature. The fair value of our borrowings under our revolving credit facility and other variable rate debt are reasonably estimated at their notional amounts at September 30, 2019 and December 31, 2018, due to the predominance of floating interest rates, which generally reflect market conditions.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016 the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases, which has been codified under ASC Topic 842. In July and December 2018 the FASB updated the pending Topic 842 with ASU 2018-11, Leases - Targeted Improvements, and ASU 2018-20, Narrow-Scope Improvements for Lessors, respectively. ASU 2018-11 provides a simplified transition method under which we applied the new leases standard as of the adoption date and recognized a cumulative-effect adjustment, as appropriate, to the opening balance of retained earnings in the period of adoption. Consequently, our reporting for the comparative prior periods presented in the financial statements in which we adopted the new leases standard will continue to be in accordance with prior GAAP (Topic 840, Leases).
ASU 2018-20 was issued to address implementation issues related to Topic 842. We adopted Topic 842 on January 1, 2019 (the “application date”), and, effective with our adoption, we elected the package of practical expedients allowing, among other provisions, for transition with no reassessment of the lease classification for any expired or existing leases. Further, we elected the available practical expedient under ASU 2018-11 that allows us to make an accounting policy election and assess whether a
contract is predominantly lease or service-based and recognize the entire contract under the relevant accounting guidance. No cumulative effect adjustment to retained earnings was necessary, based on our analysis.
The Narrow-Scope Improvements for Lessors under ASU 2018-20 requires NHI to exclude from variable payments, and therefore revenue, our costs paid by our tenants directly to third parties. Some of our leases require property tax and insurance costs be covered by our tenants through escrow reimbursement. We serve as the administrative agent for these escrow transactions and ASU 2018-20 requires the associated revenue and expense to be included in our consolidated financial statements. We have included $1,608,000 and $4,205,000 of reimbursements within revenue and in expenses in our Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2019, respectively, under the captions “Rental income“ and “Property taxes and insurance on leased properties,” respectively.
The principal difference between Topic 842 and previous guidance is that, for lessees, lease assets and lease liabilities arising from operating leases will be recognized in the balance sheet. While the accounting applied by a lessor is largely unchanged from that applied under previous GAAP, changes have been made to align i) certain lessor and lessee accounting guidance, and ii) key aspects of the lessor accounting model with the revenue recognition guidance in Topic 606, Revenue from Contracts with Customers, which we adopted January 1, 2018. Under Topic 842 and unlike prior GAAP, a buyer-lessor in a sale-leaseback transaction will be required to apply the sale and leaseback guidance to determine whether the transaction qualifies as a sale. Topic 842 includes provisions which generally conform with Topic 606, and the presence of a seller-lessee repurchase option on real estate in a sale and leaseback transaction will result in recording the transaction as a financing that would otherwise meet the lease accounting requirements for buyer-lessors under previous guidance. Going forward under Topic 842, for us as lessor, existing sale-leaseback or other leases that undergo modifications may trigger reconsideration of continued accounting for the lease.
NHI has largely ceased inclusion of purchase options in new sale-leaseback transactions, and there were no material effects from the change in sale-leaseback guidance as it relates to repurchase options.
In April 2018, we entered into a ground lease as lessee in connection with our acquisition of certain real estate assets. In accordance with transition elections allowed under Topic 842, discussed above, we have continued to account for the lease as an operating lease. Upon adoption of the standard, as lessee we recognized a right-of-use asset and a lease liability at the adoption date. No cumulative effect adjustment to retained earnings was required to effect a net balance sheet adjustment resulting in an additional operating lease liability and right-of-use asset approximating $1,176,000, as a result of our adoption of Topic 842, which were included in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2019 among “Accounts payable and accrued expenses” and “Real estate properties, net,” respectively.
Consistent with present standards, upon the adoption of Topic 842, NHI continues to account for lease revenue on a straight-line basis for most leases. Under Topic 842 only initial direct costs that are incremental to the lessor are capitalized, a standard consistent with NHI’s prior practice. Under provisions of ASU 2018-20, discussed above, we continue to exclude from variable payments lessor costs paid by our lessees directly to third parties, as consistent with our prior practice.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 will require more timely recognition of credit losses associated with financial assets. While current GAAP includes multiple credit impairment objectives for instruments, the previous objectives generally delayed recognition of the full amount of credit losses until the loss was probable of occurring. The amendments in ASU 2016-13, whose scope is asset-based and not restricted to financial institutions, eliminate the probable initial recognition threshold in current GAAP and, instead, reflect an entity’s current estimate of all expected credit losses. Currently, when credit losses were measured under GAAP, we generally only considered past events and current conditions in measuring the incurred loss. The amendments in ASU 2016-13 broaden the information that we must consider in developing our expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss that will be more useful to users of the financial statements. ASU 2016-13 is effective for public entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, aligns the transition requirements and clarifies that operating lease receivables are excluded from the scope of ASU 2016-13. Instead, impairment of operating lease receivables is to be accounted for under ASC 842. Because we are likely to continue to invest in loans and generate related notes receivable, adoption of ASU 2016-13 in 2020 will have an effect on our accounting for our loan investments, though the nature of those effects will depend on the composition of our loan portfolio at that time; accordingly, we are in the initial stages of evaluating the extent of the effects that adopting the provisions of ASU 2016-13 in 2020 will have on NHI.
NOTE 11. SUBSEQUENT EVENTS
In November 2015, Fitch Ratings issued to us a private monitored credit rating of BBB- with a ‘Stable’ rating outlook. In December 2018 and again on October 31, 2019, Fitch Ratings affirmed their BBB- rating and ‘Stable’ rating outlook. NHI has elected to make this rating public and to that effect, on November 4, 2019, Fitch Ratings announced a public issuer credit rating of BBB- with an outlook of ‘Stable.’ On the same day, S&P Global Ratings announced our public issuer credit rating of BBB- with an outlook of ‘Stable.’ The ratings from both agencies were provided on NHI as an issuer as well as on our senior unsecured debt. Our unsecured bank credit facility discussed more fully at Note 5, includes an option to shift from a leverage-based LIBOR margin schedule to a ratings-based LIBOR margin schedule.