NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The Company - National Health Investors, Inc. (“NHI”), established in 1991 as a Maryland corporation, is a self-managed real estate investment trust (“REIT”) specializing in sale-leaseback, joint-venture, mortgage and mezzanine financing of need-driven and discretionary senior housing and medical investments. Our portfolio consists of lease, mortgage and other note investments in independent living facilities, assisted living facilities, entrance-fee communities, senior living campuses, skilled nursing facilities, specialty hospitals and medical office buildings. Other investments include joint ventures structured to comply with the provisions of the REIT Investment Diversification Empowerment Act of 2007 (“RIDEA”) through which we invest in facility operations managed by independent third-parties. We fund our real estate investments primarily through: (1) operating cash flow, (2) debt offerings, including bank lines of credit and term debt, both unsecured and secured, and (3) the sale of equity securities. Units, beds and square footage disclosures in these consolidated financial statements are unaudited.
Principles of Consolidation - The accompanying 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. Net income is adjusted by the portion of net income (loss) attributable to noncontrolling interests.
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 December 31, 2019, we held interests in seven unconsolidated VIEs, and, because we generally lack either directly or through related parties any material input or control in the activities that most significantly impact their economic performance, we have concluded that NHI is not the primary beneficiary. 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 consolidated financial statements cross-referenced below.
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Date
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Name
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Source of Exposure
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Carrying Amount
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Maximum Exposure to Loss
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Note Reference
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2012
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Bickford Senior Living
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Various1
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$
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63,939,000
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$
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69,523,000
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Notes 2, 3
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2014
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Senior Living Communities
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Notes and straight-line receivable
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$
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85,440,000
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$
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95,267,000
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Notes 2, 3
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2015
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Timber Ridge, LCS affiliate
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Notes receivable
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$
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59,166,000
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$
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59,816,000
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Note 3
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2016
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Senior Living Management
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Notes and straight-line receivable
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$
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26,825,000
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$
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26,825,000
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—
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2017
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Evolve Senior Living
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Note receivable
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$
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9,948,000
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$
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9,948,000
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—
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2018
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Sagewood, LCS affiliate
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Notes receivable
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$
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121,809,000
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$
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178,531,000
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Note 3
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2019
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41 Management, LLC
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Notes receivable
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$
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10,469,000
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$
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15,355,000
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Note 3
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1 Notes, straight-line rent receivables & unamortized lease incentives
We are not obligated to provide support beyond our stated commitments to these tenants and borrowers whom we identify 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.
We structure our operating company joint venture to be compliant with the provisions of RIDEA which permits NHI to receive rent payments through a triple-net lease between a property company and an operating company and allows NHI to receive distributions from the operating company to a taxable REIT subsidiary (“TRS”). Our TRS holds NHI’s equity interests in unconsolidated operating companies thus providing an organizational structure that allows the TRS to engage in a broad range of activities and share in revenues that are otherwise non-qualifying income under the REIT gross income tests.
Noncontrolling Interest - As of December 31, 2019, and for the year then ended, our non-controlling interest relates to our property company joint venture with Discovery Senior Living. During the years ended December 31, 2018 and December 31, 2017, there were no noncontrolling interests.
Use of Estimates - The preparation of consolidated 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 assume 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 3.25% convertible senior notes due 2021. 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 of our common stock for the period exceeds the conversion price per share.
Fair Value Measurements - Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy is required to prioritize the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair value are as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
If the fair value measurement is based on inputs from different levels of the hierarchy, the level within which the entire fair value measurement falls is the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. When an event or circumstance alters our assessment of the observability and thus the appropriate classification of an input to a fair value measurement which we deem to be significant to the fair value measurement as a whole, we will transfer that fair value measurement to the appropriate level within the fair value hierarchy.
Real Estate Properties - Real estate properties are recorded at cost or, if acquired through business combination, at fair value, including the fair value of contingent consideration, if any. Cost or fair value at the time of acquisition is allocated among land, buildings, improvements, personal property and lease and other intangibles. For properties acquired in transactions accounted for as asset purchases, the purchase price, which includes transaction costs, is allocated based on the relative fair values of the assets acquired. Cost includes the amount of contingent consideration, if any, deemed to be probable at the acquisition date. Contingent consideration is deemed to be probable to the extent that a significant reversal in amounts recognized is not likely to occur when the uncertainty associated with the contingent consideration is subsequently resolved. Cost also includes capitalized interest during construction periods. We use the straight-line method of depreciation for buildings over their estimated useful lives of 40 years, and improvements over their estimated useful lives ranging to 25 years. For contingent consideration arising from business combinations, the liability is adjusted to estimated fair value at each reporting date through earnings. For contingent consideration arising from asset acquisitions, the liability is adjusted to the amount considered probable each reporting period, with changes reflected as an adjustment to the basis of the related assets.
We evaluate the recoverability of the carrying amount of our real estate properties on a property-by-property basis. We review our properties for recoverability when events or circumstances, including significant physical changes in the property, significant adverse changes in general economic conditions and significant deteriorations of the underlying cash flows of the property, indicate that the carrying amount of the property may not be recoverable. The need to recognize an impairment charge is based on estimated undiscounted future cash flows from a property compared to the carrying amount of that property. If recognition of an impairment charge is necessary, it is measured as the amount by which the carrying amount of the property exceeds the fair value of the property.
Leases - 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. 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.
Mortgage and Other Notes Receivable - Each quarter, we evaluate the carrying amount of our notes receivable on an instrument-by-instrument basis for recoverability when events or circumstances, including the non-receipt of contractual principal and interest payments, significant deteriorations of the financial condition of the borrower and significant adverse changes in general economic conditions, indicate that the carrying amount of the note receivable may not be recoverable. If a note receivable becomes more than 30 days delinquent as to contractual principal or interest payments, the loan is classified as non-performing, and thereafter we recognize all amounts due when received. If necessary, an impairment is measured as the amount by which the carrying amount exceeds the discounted cash flows expected to be received under the note receivable or, if foreclosure is probable, the fair value of the collateral securing the note receivable.
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 provides a reconciliation of cash, cash equivalents and restricted cash reported within the Company’s Consolidated Balance Sheets with the same amounts shown on the Company’s Consolidated Statements of Cash Flows (in thousands):
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As of December 31,
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2019
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2018
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Cash and cash equivalents
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$
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5,215
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$
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4,659
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Restricted cash
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10,454
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|
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5,253
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|
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$
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15,669
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|
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$
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9,912
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Concentration of Credit Risks - Our credit risks primarily relate to cash and cash equivalents and investments in mortgage and other notes receivable. Cash and cash equivalents are primarily held in bank accounts and overnight investments. We maintain our bank deposit accounts with large financial institutions in amounts that often exceed federally-insured limits. We have not experienced any losses in such accounts. Our mortgages and other notes receivable consist primarily of secured loans on facilities.
Our financial instruments, principally our investments in notes receivable, are subject to the possibility of loss of the carrying values as a result of the failure of other parties to perform according to their contractual obligations which may make the instruments less valuable. We obtain collateral in the form of mortgage liens and other protective rights for notes receivable and continually monitor these rights in order to reduce such possibilities of loss. We evaluate the need to provide for reserves for potential losses on our financial instruments based on management’s periodic review of our portfolio on an instrument-by-instrument basis.
Deferred Loan Costs - Costs incurred to acquire debt are capitalized and amortized by the straight-line method, which approximates the effective-interest method, over the term of the related debt.
Deferred Income - Deferred income primarily includes non-refundable commitment fees received by us, which are amortized into income over the expected period of the related loan or lease. In the event that our financing commitment to a potential borrower or lessee expires, the related commitment fees are recognized into income immediately. Commitment fees may be charged based on the terms of the lease agreements and the creditworthiness of the parties.
Rental Income - Base rental income is recognized using the straight-line method over the term of the lease to the extent that lease payments are considered collectible. Under certain leases, we receive additional contingent rent, which is calculated on the increase in revenues of the lessee over a base year or base quarter. We recognize contingent rent annually or quarterly based on the actual revenues of the lessee once the target threshold has been achieved. Lease payments that depend on a factor directly related to future use of the property, such as an increase in annual revenues over a base year, are considered to be contingent rentals and are excluded from the schedule of minimum lease payments.
If rental income calculated on a straight-line basis exceeds the cash rent due under a lease, the difference is recorded as an increase to straight-line rent receivable in the Consolidated Balance Sheets and an increase in rental income in the Consolidated Statements of Income. If rental income on a straight-line basis is calculated to be less than cash received, there is a decrease in the same accounts.
Rental income is reduced for the non-cash amortization of payments made upon the eventual settlement of commitments and contingencies originally identified and recorded as lease inducements. We record lease inducements to the extent that it is probable that a significant reversal of amounts recognized will not occur when the uncertainty associated with the contingent consideration is subsequently resolved.
We identify a lease as non-performing if a required payment is not received within 30 days of the date it is due. Rental income on non-performing leased real estate properties is recognized in the period when the related cash is received.
Interest Income from Mortgage and Other Notes Receivable - Interest income is recognized based on the interest rates and principal amounts outstanding on the notes receivable. We identify a mortgage loan as non-performing if a required payment is not received within 30 days of the date it is due. Our policy related to mortgage interest income on non-performing mortgage loans is to recognize mortgage interest income in the period when the cash is received. As of December 31, 2019, we had not identified any of our mortgages as non-performing.
Derivatives - In the normal course of business, we are subject to risk from adverse fluctuations in interest rates. We have chosen to manage this risk through the use of derivative financial instruments, primarily interest rate swaps. Counterparties to these contracts are major financial institutions. We are exposed to credit loss in the event of nonperformance by these counterparties. We do not use derivative instruments for trading or speculative purposes. Our objective in managing exposure to market risk is to limit the impact on cash flows relating to the change in market interest rates on our variable rate debt.
To qualify for hedge accounting, our interest rate swaps must effectively reduce the risk exposure that they are designed to hedge. In addition, at inception of a qualifying cash flow hedging relationship, the underlying transaction or transactions must be, and be expected to remain, probable of occurring in accordance with our related assertions. All of our hedges are cash flow hedges.
We recognize all derivative instruments, including embedded derivatives required to be bifurcated, as assets or liabilities at their fair value in the Consolidated Balance Sheets. Changes in the fair value of derivative instruments that are not designated as hedges or that do not meet the criteria of hedge accounting are recognized in earnings. For derivatives designated in qualifying cash flow hedging relationships, the change in fair value of the effective portion of the derivatives is recognized in accumulated other comprehensive income (loss), whereas the change in fair value of the ineffective portion is recognized in earnings. Gains and losses are reclassified from accumulated other comprehensive income (loss) into earnings once the underlying hedged transaction is recognized in earnings.
Federal Income Taxes - We intend at all times to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. Aside from such income taxes which may be applicable to the taxable income in the TRS, we will not be subject to U.S. federal income tax, provided that we continue to qualify as a REIT and make distributions to stockholders at least equal to or in excess of 90% our taxable income. Accordingly, no provision for federal income taxes has been made in the consolidated financial statements. A failure to qualify under the applicable REIT qualification rules and regulations would have a material adverse impact on our financial position, results of operations and cash flows.
Earnings and profits, which determine the taxability of dividends to stockholders, differ from net income reported for financial reporting purposes due primarily to differences in the basis of assets, estimated useful lives used to compute depreciation expense, gains on sales of real estate, non-cash compensation expense and recognition of commitment fees.
Our tax returns filed for years beginning in 2016 are subject to examination by taxing authorities. We classify interest and penalties related to uncertain tax positions, if any, in our Consolidated Statements of Income as a component of income tax expense.
Segment Disclosures - We are in the business of owning and financing health care properties. We are managed as one segment, rather than multiple segments, for internal purposes and for internal decision making.
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 operation, see Note 14.
NOTE 2. REAL ESTATE
As of December 31, 2019, we owned 223 health care real estate properties located in 34 states and consisting of 146 senior housing communities, 72 skilled nursing facilities, 3 hospitals and 2 medical office buildings. Our senior housing properties include assisted living facilities, senior living campuses, independent living facilities, and entrance-fee communities. These investments (excluding our corporate office of $2,519,000) consisted of properties with an original cost of approximately $3,072,327,000, rented under triple-net leases to 32 lessees.
Acquisitions and New Leases of Real Estate
During the year ended December 31, 2019, we announced the following real estate investments and commitments as described below (dollars in thousands):
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Operator
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Date
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Properties
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Asset Class
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Amount
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Wingate Healthcare
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January 2019
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1
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SHO
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$
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52,200
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Holiday Retirement
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January 2019
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1
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SHO
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38,000
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Comfort Care Senior Living
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April 2019
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1
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SHO
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10,800
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Comfort Care Senior Living
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May 2019
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1
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SHO
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13,500
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Discovery Senior Living
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May 2019
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6
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SHO
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127,917
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Cappella Living Solutions
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July 2019
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1
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SHO
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7,600
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Bickford Senior Living
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September 2019
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1
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SHO
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15,100
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41 Management
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December 2019
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1
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SHO
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9,340
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$
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274,457
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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 ten 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 currently undergoing stabilization. The total commitment of $10,800,000 includes $9,560,000 funded at closing with the remaining amount to be funded once certain post closing and construction requirements are met. 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 contributed $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. 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 an affiliate of Discovery for a term of ten years with two renewal periods of five years 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, $497,000 of which has been funded as a result of transactions in November 2019. 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 directs the activities of Discovery PropCo that most significantly impact economic performance, subject to limited protective rights of Discovery for significant business decisions. We consider Discovery PropCo a VIE, based on our determination that the total equity at risk is insufficient to finance activities without additional subordinated financial support. Because of our control of Discovery PropCo, we consolidate its assets, liabilities, noncontrolling interest and operations in our 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 floor and ceiling. We accounted for this transaction as an asset purchase.
41 Management
We transitioned four Minnesota properties on October 1, 2019, from Bickford Senior Living to 41 Management. The transitioned properties are under a master lease which calls for total first-year rent of $906,000 and includes our commitment to make available up to $400,000 in targeted improvements. The lease term of 15 years has 2 renewal options of five years each and an initial rate of 7%. Under the master lease, escalators are fixed at 2.5%, and the lease is secured by corporate and personal guarantees. On December 27, 2019, for a cash purchase price of $9,340,000, including closing costs of $140,000, we acquired a 48 unit assisted living and memory care facility in the St. Paul, Minnesota area. The St. Paul facility was added to the existing master lease described above. We accounted for the St. Paul 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, improved the credit position of the tenant 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 cash of $17,125,000 at closing. Receipt of the Vero Beach property and collection of the remaining commitment in cash was recognized as adjustments to the outstanding Holiday lease receivable 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 Consolidated Balance Sheet at December 31, 2019 as “deferred income.”
As of December 31, 2019, we leased 26 independent living facilities to Holiday, including the Vero Beach property mentioned above. The master lease, which matures in 2035, provides for annual lease escalators beginning November 1, 2020. Of our total revenues, $40,459,000 (13%), $43,311,000 (15%) and $43,817,000 (16%) were derived from Holiday for the years ended December 31, 2019, 2018 and 2017, respectively, including $6,621,000, $5,616,000 and $7,397,000 in straight-line rent income, respectively. Our tenant operates the facilities pursuant to a management agreement with a Holiday-affiliated manager.
Senior Living Communities
As of December 31, 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, $46,927,000 (15%), $45,868,000 (16%) and $45,735,000 (16%) in rental income were derived from Senior Living for the years ended December 31, 2019, 2018 and 2017, respectively, including $4,934,000, $5,436,000 and $6,984,000 in straight-line rent.
NHC
We lease 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”) which includes our 35 legacy properties and a master lease agreement dated August 30, 2013 (“the 2013 lease”) which 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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|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Current year
|
$
|
3,650
|
|
|
$
|
3,411
|
|
|
$
|
3,127
|
|
|
Prior year final certification1
|
334
|
|
|
285
|
|
|
194
|
|
|
Total percentage rent income
|
$
|
3,984
|
|
|
$
|
3,696
|
|
|
$
|
3,321
|
|
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, $38,131,000 (12%), $37,843,000 (13%) and $37,467,000 (13%) in rental income were derived from NHC for the years ended December 31, 2019, 2018 and 2017, respectively.
The chairman of our board of directors is also a director on NHC’s board of directors. As of December 31, 2019, NHC owned 1,630,642 shares of our common stock.
Bickford
As of December 31, 2019, our Bickford Senior Living (“Bickford”) lease portfolio consists of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Expiration
|
|
|
|
June 2023
|
September 2024
|
May 2031
|
April 2033
|
Total
|
|
Number of Properties
|
13
|
|
10
|
|
19
|
|
5
|
|
47
|
|
|
2019 Contractual Rent
|
$
|
11,468
|
|
$
|
9,442
|
|
$
|
21,838
|
|
$
|
4,918
|
|
$
|
47,666
|
|
|
2019 Straight Line Rent
|
358
|
|
467
|
|
2,903
|
|
860
|
|
4,588
|
|
|
2019 Lease Incentive Amortization
|
—
|
|
—
|
|
(724
|
)
|
—
|
|
(724
|
)
|
|
|
$
|
11,826
|
|
$
|
9,909
|
|
$
|
24,017
|
|
$
|
5,778
|
|
$
|
51,530
|
|
On September 10, 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%. A four-building portfolio in Minnesota that had been held by Bickford through September 30, 2019, transitioned to 41 Management, LLC, on October 1, 2019. Also, as of October 1, 2019, a master lease covering nine buildings subject to HUD mortgages was modified to reflect a decrease in monthly rent and provide for CPI-based escalators.
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. 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, $52,570,000 (17%), $50,093,000 (17%) and $41,606,000 (15%) were recognized as rental income from Bickford for the years ended December 31, 2019, 2018 and 2017, respectively, including $4,651,000, $5,028,000 and $5,102,000 in straight-line rent income, respectively.
Other Portfolio Activity
Tenant Transitioning
We have completed the contractual transition of three lease portfolios to new tenants following a period of non-compliance by the former operators. The portfolios consist of three former SH-Regency Leasing, LLC (“Regency”) buildings, five former LaSalle Group 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 3 operators, Senior Living Communities, Discovery, and Vitality MC TN, LLC (“Vitality”). Of our total revenues, $1,277,000 (0.4%), $5,103,000 (1.7%) and $5,466,000 (2.0%) in rental income were derived from the three former Regency buildings for the years ended December 31, 2019, 2018 and 2017, 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 five-year options to extend. Rent is initially based on net operating income. Beginning in 2022, rent is to reset to the greater of $1,400,000 or a market rate 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 Group 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 Group under the lease and against the principal executive personally under the guaranty agreement. Of our total revenues, $1,162,000 (0.4%), $4,455,000 (1.5%) and $4,184,000 (1.5%) in rental income were derived from the five former LaSalle Group buildings for the years ended December 31, 2019, 2018 and 2017, respectively.
In February 2019, we transitioned a non-performing single-property lease in Wisconsin with Landmark to BAKA Enterprises, temporarily acting under a management agreement with Landmark. Under the terms of a short-term agreement, NHI received 95% of net operating cash flow, after management fees, as generated by the facilities. We have entered into a new lease with an initial term of 8 years and a fixed payment schedule through October 2022. In November 2022, the lease indicates a reset of rent to fair market rental value as agreed with the tenant. Of our total revenues, $1,204,000 (0.4%), $1,085,000 (0.4%) and $1,957,000 (0.7%) were derived from the former Landmark property for the years ended December 31, 2019, 2018 and 2017 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. Of our total revenues, $4,250,000 (1.3%), $4,250,000 (1.4%) and $4,250,000 (1.5%) in rental income were derived from this eight property portfolio for the years ended December 31, 2019, 2018 and 2017 respectively. The purchase option called for the parties to split any appreciation on a 50/50 basis above $37,520,000. During the first quarter of 2020, NHI and the tenant agreed to a fair valuation of $41,000,000 for the properties, and, accordingly, on January 22, 2020, we disposed of the properties at the agreed price of $39,260,000. With the expectation of deferring gain recognition from this disposition, we have engaged a qualified intermediary to effect a like-kind exchange under §1031 of the Internal Revenue Code.
We have identified two assisted living properties for disposal and began active marketing of the properties. The buildings are smaller than are typical of our portfolio. 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 in 2019 to write down the properties to their estimated net realizable value.
Tenant 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 (dollars 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
|
March 2025
|
2020
|
iv
|
$
|
1,957
|
|
|
HOSP
|
1
|
September 2027
|
2021
|
ii
|
$
|
2,760
|
|
|
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
|
$
|
472
|
|
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 14, 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 December 31, 2019, to be received by us under our operating leases, as determined under ASC 842 (in thousands):
|
|
|
|
|
|
|
|
Twelve months ended December 31, 2019
|
|
|
2020
|
$
|
266,320
|
|
|
2021
|
267,871
|
|
|
2022
|
271,528
|
|
|
2023
|
265,584
|
|
|
2024
|
257,726
|
|
|
Thereafter
|
1,569,556
|
|
|
|
$
|
2,898,585
|
|
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 as a result of fixed and variable lease escalators (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Lease payments based on fixed escalators
|
$
|
260,488
|
|
|
$
|
253,528
|
|
|
$
|
235,343
|
|
|
Lease payments based on variable escalators
|
4,967
|
|
|
4,111
|
|
|
3,617
|
|
|
Straight-line rent income
|
22,084
|
|
|
22,787
|
|
|
26,090
|
|
|
Escrow funds received from tenants
|
5,798
|
|
|
—
|
|
|
—
|
|
|
Amortization of lease incentives
|
845
|
|
|
387
|
|
|
119
|
|
|
Rental income
|
$
|
294,182
|
|
|
$
|
280,813
|
|
|
$
|
265,169
|
|
NOTE 3. MORTGAGE AND OTHER NOTES RECEIVABLE
At December 31, 2019, we had investments in mortgage notes receivable with a carrying value of $294,120,000 secured by real estate and UCC liens on the personal property of 15 facilities and other notes receivable with a carrying value of $46,023,000 guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner. At December 31, 2018, we had investments in mortgage notes receivable with a carrying value of $202,877,000 and other notes receivable with a carrying value of $43,234,000. No allowance for credit losses was considered necessary at December 31, 2019 or 2018.
During the year ended December 31, 2019, we announced the following note receivable investments and commitments as described below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operator
|
|
Date
|
|
Properties
|
|
Asset Class
|
|
Amount
|
|
Note Investments
|
|
|
|
|
|
|
|
|
|
Senior Living Communities
|
|
June 2019
|
|
1
|
|
SHO
|
|
32,700
|
|
|
41 Management
|
|
June 2019
|
|
1
|
|
SHO
|
|
10,800
|
|
|
Discovery Senior Living
|
|
July 2019
|
|
1
|
|
SHO
|
|
750
|
|
|
Discovery Senior Living
|
|
August 2019
|
|
1
|
|
SHO
|
|
6,423
|
|
|
41 Management
|
|
December 2019
|
|
1
|
|
SHO
|
|
3,870
|
|
|
|
|
|
|
|
|
|
|
$
|
54,543
|
|
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. As discussed earlier in Note 2, effective July 1, 2019, NHI provided an additional working capital loan for amounts up to $750,000 at an interest rate of 6.5%.
41 Management
On June 14, 2019, we committed to providing first mortgage financing to 41 Management, LLC 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 effective 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 $6,045,000 as of December 31, 2019.
On December 20, 2019, we extended a second mortgage loan of $3,870,000 to 41 Management to refinance the subordinated debt on a newly constructed 48-unit assisted living/memory care facility in Wisconsin. The loan provides for interest of 13% and a one year maturity plus two six-month renewal terms at the option of the borrower. The loan is secured by corporate and personal guarantees. Upon stabilization, NHI has the option to purchase the facility at fair market value based on a metric-driven formula.
Our loans to and receivables from 41 Management represent variable interests. 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 of 41 Management.
Bickford
At December 31, 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
|
|
|
(11,804,000
|
)
|
|
Virginia
|
|
July 2018
|
|
9%
|
|
5 years
|
|
14,700,000
|
|
|
(11,312,000
|
)
|
|
Michigan
|
|
|
|
|
|
|
|
$
|
42,700,000
|
|
|
$
|
(37,116,000
|
)
|
|
|
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 exercise of our purchase option on these development projects, Bickford as borrower may receive up to $2,000,000 per project based on the achievement of predetermined operational milestones and, if funded, will increase NHI's future purchase price.
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 due, 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 of Bickford Senior Living.
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 of LCS-WP IV.
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 December 31, 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 $45,938,000 as of December 31, 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 $59,350,000 of Note A as of December 31, 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.
As discussed more fully at Note 15, on January 31, 2020 we entered into a joint venture transaction with LCS to create Timber Ridge PropCo which acquired the Timber Ridge property.
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 December 2014, 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 primarily to finance construction projects within the Senior Living portfolio, including building additional units. The facility, which may also be used to meet general working capital needs, was amended as of December 10, 2019, to reduce availability to $12,000,000 with a further reduction in capacity to $7,000,000 beginning January 1, 2022 through lease maturity in December 2029. Also effective December 10, 2019, a sub-limit on the availability of funding for working capital needs was established at $10,000,000 for this loan, extending through January 1, 2022, at which time the limit is to be reduced to $5,000,000. Amounts outstanding under the facility, $5,174,000 at December 31, 2019, bear interest at an annual rate equal to the prevailing 10-year U.S. Treasury rate, 1.92% at December 31, 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 December 31, 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 of Senior Living.
NOTE 4. OTHER ASSETS
Our other assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
Accounts receivable and prepaid expenses
|
$
|
3,212
|
|
|
$
|
6,381
|
|
|
Unamortized lease incentive payments
|
10,146
|
|
|
7,456
|
|
|
Regulatory escrows
|
8,208
|
|
|
8,208
|
|
|
Restricted cash
|
10,454
|
|
|
5,253
|
|
|
|
$
|
32,020
|
|
|
$
|
27,298
|
|
Regulatory escrows include mandated deposits in connection with our entrance fee communities in Connecticut. Restricted cash includes amounts required to be held on deposit in accordance with agency agreements governing our Fannie Mae and HUD mortgages.
NOTE 5. DEBT
Debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
Revolving credit facility - unsecured
|
$
|
300,000
|
|
|
$
|
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 $1,238 and $1,320)
|
42,138
|
|
|
42,906
|
|
|
Fannie Mae term loans - secured, non-recourse
|
95,706
|
|
|
96,044
|
|
|
Convertible senior notes - unsecured (net of discount of $303 and $1,391)
|
59,697
|
|
|
118,609
|
|
|
Unamortized loan costs
|
(7,076
|
)
|
|
(9,884
|
)
|
|
|
$
|
1,440,465
|
|
|
$
|
1,281,675
|
|
Aggregate principal maturities of debt as of December 31, 2019 for each of the next five years and thereafter are as follows (in thousands):
|
|
|
|
|
|
|
|
For The Year Ended December 31,
|
|
|
2020
|
$
|
1,230
|
|
|
2021
|
61,279
|
|
|
2022
|
551,328
|
|
|
2023
|
476,379
|
|
|
2024
|
76,429
|
|
|
Thereafter
|
282,437
|
|
|
|
1,449,082
|
|
|
Less: discount
|
(1,541
|
)
|
|
Less: unamortized loan costs
|
(7,076
|
)
|
|
|
$
|
1,440,465
|
|
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 December 31, 2019 and December 31, 2018, 30-day LIBOR was 176 and 252 bps, respectively. Within the facility, the employment of interest rate swaps on our debt leaves only $240,000,000 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 December 31, 2019, we had $250,000,000 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 December 31, 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. 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 10 properties leased to Bickford and having a net book value of $49,147,000 at December 31, 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 $8,492,000 and a carrying value of $7,254,000, 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 $17,622,000 at December 31, 2019. All together, these notes are secured by facilities having a net book value of $134,192,000 at December 31, 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.
During the years ended December 31, 2019 and 2018, we undertook targeted open-market repurchases of certain of these convertible notes. Payments of cash negotiated in the transactions were dependent on prevailing market conditions, our liquidity requirements, contractual restrictions, individual circumstances of the selling parties and other factors. Beginning in December 2019, through the issuance of common stock and cash in retirement of $60,000,000 of our convertible notes, we funded our Timber Ridge acquisition, which closed January 2020. Settlement of the notes requires management to allocate the consideration we ultimately pay between the debt component and the equity conversion feature as though they were separate instruments. The allocation is effected by recording the fair value of the debt component first, with any remainder allocated to the conversion feature. Amounts expended to settle the notes are recognized first as a settlement of the notes at our carrying value and then are recognized in income to the extent the portion allocated to the debt instrument differs from carrying value. The remainder of the allocation, if any, is treated as settlement of equity and adjusted through our capital in excess of par account.
A roll-forward for 2019 of our convertible note balances, including the effect of year-to-date amortization, net of issuance costs, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
Exchange
|
Amortization
|
December 31,
2019
|
|
Face amount
|
$
|
120,000
|
|
$
|
(60,000
|
)
|
$
|
—
|
|
$
|
60,000
|
|
|
Discount
|
(1,391
|
)
|
$
|
328
|
|
$
|
760
|
|
(303
|
)
|
|
Unamortized loan costs
|
(910
|
)
|
$
|
210
|
|
$
|
505
|
|
(195
|
)
|
|
Carrying value
|
$
|
117,699
|
|
|
|
$
|
59,502
|
|
Total consideration given in the exchange of $73,102,000 included the issuance of 626,397 shares of NHI common stock with a fair value of $51,002,000 and cash disbursed of $22,100,000.
Total consideration given in the exchange was allocated as $60,285,000 to the note retirement with the remaining expenditure of $12,816,000 allocated to retirement of the equity feature of the notes. A loss of $823,000 for the year ended December 31, 2019, resulted from the excess allocation of cash expenditures over the book value of the notes retired, net of discount and issuance costs.
As of December 31, 2019, our $60,000,000 of senior unsecured convertible notes were convertible at a rate of 14.62 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $68.39 per share for a total of 877,356 remaining underlying shares. For the year ended December 31, 2019, dilution resulting from the conversion option within our convertible debt is 210,224 shares. If NHI’s current share price increases above the adjusted $68.39 conversion price, further dilution will be attributable to the conversion feature. On December 31, 2019, the value of the convertible debt, computed as if the debt were immediately eligible for conversion, exceeded its face amount by $11,487,000.
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 $1,710,000 of gains, which are included in accumulated other comprehensive income (loss), are projected to be reclassified into earnings.
As of December 31, 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
|
|
|
$
|
(177
|
)
|
|
March 2014
|
|
June 2020
|
|
3.51%
|
|
1-month LIBOR
|
|
$
|
130,000
|
|
|
$
|
(316
|
)
|
|
March 2019
|
|
December 2021
|
|
3.51%
|
|
1-month LIBOR
|
|
$
|
100,000
|
|
|
$
|
(1,318
|
)
|
|
March 2019
|
|
December 2021
|
|
3.52%
|
|
1-month LIBOR
|
|
$
|
100,000
|
|
|
$
|
(1,344
|
)
|
|
June 2019
|
|
December 2021
|
|
2.89%
|
|
1-month LIBOR
|
|
$
|
150,000
|
|
|
$
|
(200
|
)
|
|
June 2019
|
|
December 2021
|
|
2.93%
|
|
1-month LIBOR
|
|
$
|
50,000
|
|
|
$
|
(79
|
)
|
If the fair value of the hedge is an asset, we include it in our Consolidated Balance Sheets among other assets, and, if a liability, as a component of accounts payable and accrued expenses. See Note 11 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 (loss) on December 31, 2019 and December 31, 2018 were $(3,434,000) and $1,297,000, respectively.
The following table summarizes interest expense (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Interest expense on debt at contractual rates
|
$
|
53,923
|
|
|
$
|
45,789
|
|
|
$
|
40,385
|
|
|
Losses reclassified from accumulated other
|
|
|
|
|
|
|
comprehensive income (loss) into interest expense
|
(791
|
)
|
|
164
|
|
|
2,627
|
|
|
Ineffective portion of cash flow hedges
|
—
|
|
|
—
|
|
|
(353
|
)
|
|
Capitalized interest
|
(399
|
)
|
|
(212
|
)
|
|
(510
|
)
|
|
Charges taken on amending bank credit facility
|
—
|
|
|
—
|
|
|
583
|
|
|
Amortization of debt issuance costs and debt discount
|
3,566
|
|
|
3,314
|
|
|
3,592
|
|
|
Total interest expense
|
56,299
|
|
|
49,055
|
|
|
46,324
|
|
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 December 31, 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
|
|
|
(45,938,000
|
)
|
|
15,262,000
|
|
|
LCS Timber Ridge Note A
|
SHO
|
|
Construction
|
|
60,000,000
|
|
|
(59,350,000
|
)
|
|
650,000
|
|
|
Bickford Senior Living
|
SHO
|
|
Construction
|
|
28,700,000
|
|
|
(23,116,000
|
)
|
|
5,584,000
|
|
|
Senior Living Communities
|
SHO
|
|
Revolving Credit
|
|
12,000,000
|
|
|
(5,174,000
|
)
|
|
6,826,000
|
|
|
41 Management
|
SHO
|
|
Construction
|
|
10,800,000
|
|
|
(6,045,000
|
)
|
|
4,755,000
|
|
|
Discovery Senior Living
|
SHO
|
|
Working Capital
|
|
750,000
|
|
|
(175,000
|
)
|
|
575,000
|
|
|
|
|
|
|
|
$
|
292,250,000
|
|
|
$
|
(217,138,000
|
)
|
|
$
|
75,112,000
|
|
See Note 3 to our 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
|
|
|
$
|
(16,903,000
|
)
|
|
$
|
8,447,000
|
|
|
Woodland Village
|
SHO
|
|
Construction
|
|
7,515,000
|
|
|
(7,425,000
|
)
|
|
90,000
|
|
|
Senior Living Communities
|
SHO
|
|
Renovation
|
|
9,930,000
|
|
|
(9,067,000
|
)
|
|
863,000
|
|
|
Wingate Healthcare
|
SHO
|
|
Renovation
|
|
1,900,000
|
|
|
(357,000
|
)
|
|
1,543,000
|
|
|
Discovery Senior Living
|
SHO
|
|
Renovation
|
|
900,000
|
|
|
—
|
|
|
900,000
|
|
|
Navion Senior Solutions
|
SHO
|
|
Construction
|
|
650,000
|
|
|
—
|
|
|
650,000
|
|
|
41 Management
|
SHO
|
|
Renovation
|
|
400,000
|
|
|
—
|
|
|
400,000
|
|
|
|
|
|
|
|
$
|
46,645,000
|
|
|
$
|
(33,752,000
|
)
|
|
$
|
12,893,000
|
|
In addition to the commitments listed above, Discovery PropCo has committed to Discovery for funding up to $2,000,000 for the purchase of condominium units located at one of the facilities. As of December 31, 2019, $497,000 has been funded toward the commitment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class
|
|
Type
|
|
Total
|
|
Funded
|
|
Remaining
|
|
Contingencies:
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
$
|
21,850,000
|
|
|
$
|
(500,000
|
)
|
|
$
|
21,350,000
|
|
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. NHI responded with counterclaims and filed motions requesting the immediate appointment of a receiver and for pre-judgment possession. Resulting from these claims and counterclaims, on December 6, 2018, the parties entered into an agreement resulting in Regency vacating the facilities in December 2018. Litigation is ongoing.
The LaSalle Group defaulted on its rent payment in November 2018. We transitioned the properties to a new operator on April 16, 2019, 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 personally, under a guaranty agreement. The LaSalle Group, the former operator of the properties, has declared bankruptcy under Chapter 11. In December 2019, we reached an agreement with TLG Family Management and Mitchell Warren, who, without making any admissions under a joint-liability settlement, have agreed to pay to NHI $2,850,000 over a five-year period, consisting of scheduled payments of varying amounts in full settlement of agreed judgments under manager and personal guarantees. We received the first installment of $60,000 December 2019.
NOTE 7. INVESTMENT AND OTHER GAINS
The following table summarizes our investment and other gains (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Gains on sales of marketable securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,038
|
|
|
Gain on sale of real estate
|
—
|
|
|
—
|
|
|
50
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,088
|
|
During the year ended December 31, 2017 we recognized gains on sales of marketable securities which were reclassified from accumulated other comprehensive income.
NOTE 8. SHARE-BASED COMPENSATION
We recognize share-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 over the requisite service period using the market value of our publicly-traded common stock on the date of grant.
Share-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 share-based payments to employees, officers, directors or consultants. Through a vote of our shareholders in May 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 10 years from the date of grant. As of December 31, 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 share-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. As of December 31, 2019, there were 3,000,000 shares available for future grants under the 2019 Plan.
Compensation expense is recognized only for the awards that ultimately vest. Accordingly, forfeitures that were not expected may result in the reversal of previously recorded compensation expense. We consider the historical employee turnover rate in our estimate of the number of stock option forfeitures. Our compensation expense reported for the years ended December 31, 2019, 2018 and 2017 was $3,646,000, $2,490,000 and $2,612,000, respectively, and is included in general and administrative expense in the Consolidated Statements of Income.
Determining Fair Value of Option Awards
The fair value of each option award was estimated on the grant date using the Black-Scholes option valuation model with the weighted average assumptions indicated in the following table. Each grant is valued as a single award with an expected term based upon expected employee and termination behavior. Compensation cost is recognized on the graded vesting method over the requisite service period for each separately vesting tranche of the award as though the award were, in substance, multiple awards. The expected volatility is derived using daily historical data for periods preceding the date of grant. The risk-free interest rate is
the approximate yield on the United States Treasury Strips having a life equal to the expected option life on the date of grant. The expected life is an estimate of the number of years an option will be held before it is exercised.
Stock Options
The weighted average fair value per share of options granted was $6.30, $4.49 and $5.76 for 2019, 2018 and 2017, respectively.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Dividend yield
|
5.5%
|
|
6.5%
|
|
5.3%
|
|
Expected volatility
|
18.2%
|
|
19.4%
|
|
19.8%
|
|
Expected lives
|
2.7 years
|
|
2.9 years
|
|
2.9 years
|
|
Risk-free interest rate
|
2.39%
|
|
2.39%
|
|
1.49%
|
Stock Option Activity
The following tables summarize our outstanding stock options, after giving effect to modifications of 83,334 options in November 2019 as, in substance, the forfeiture of old and issuance of new options concurrent with an employee’s retirement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
Number
|
|
|
Weighted Average
|
|
Remaining
|
|
Aggregate
|
|
|
of Shares
|
|
|
Exercise Price
|
|
Contractual Life (Years)
|
|
Intrinsic Value
|
|
Outstanding December 31, 2016
|
541,679
|
|
|
$65.84
|
|
|
|
|
|
Options granted under 2012 Plan
|
495,000
|
|
|
$74.90
|
|
|
|
|
|
Options granted under 2005 Plan
|
—
|
|
|
$0.00
|
|
|
|
|
|
Options exercised under 2005 Plan
|
(15,000
|
)
|
|
$47.52
|
|
|
|
|
|
Options exercised under 2012 Plan
|
(155,829
|
)
|
|
$65.73
|
|
|
|
|
|
Options canceled under 2012 Plan
|
(6,668
|
)
|
|
$60.52
|
|
|
|
|
|
Outstanding December 31, 2017
|
859,182
|
|
|
$70.11
|
|
|
|
|
|
Options granted under 2012 Plan
|
560,000
|
|
|
$64.33
|
|
|
|
|
|
Options granted under 2005 Plan
|
—
|
|
|
$0.00
|
|
|
|
|
|
Options exercised under 2005 Plan
|
(6,668
|
)
|
|
$72.11
|
|
|
|
|
|
Options exercised under 2012 Plan
|
(462,167
|
)
|
|
$65.03
|
|
|
|
|
|
Options canceled under 2012 Plan
|
(30,001
|
)
|
|
$66.73
|
|
|
|
|
|
Outstanding December 31, 2018
|
920,346
|
|
|
$69.24
|
|
|
|
|
|
Options granted under 2012 Plan
|
685,334
|
|
|
$79.08
|
|
|
|
|
|
Options exercised under 2012 Plan
|
(501,664
|
)
|
|
$71.52
|
|
|
|
|
|
Options forfeited under 2012 Plan
|
(100,002
|
)
|
|
$73.89
|
|
|
|
|
|
Options forfeited under 2005 Plan
|
—
|
|
|
$0.00
|
|
|
|
|
|
Options outstanding, December 31, 2019
|
1,004,014
|
|
|
$74.35
|
|
3.24
|
|
$
|
7,157,000
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
530,163
|
|
|
$73.93
|
|
2.91
|
|
$
|
4,001,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Grant
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
Date
|
|
of Shares
|
|
|
Price
|
|
|
Life in Years
|
|
2/20/2015
|
|
20,000
|
|
|
$
|
72.11
|
|
|
0.14
|
|
2/22/2016
|
|
20,000
|
|
|
$
|
60.52
|
|
|
1.15
|
|
2/22/2017
|
|
121,669
|
|
|
$
|
74.78
|
|
|
2.15
|
|
2/20/2018
|
|
246,177
|
|
|
$
|
64.33
|
|
|
3.14
|
|
2/21/2019
|
|
512,834
|
|
|
$
|
79.96
|
|
|
4.15
|
|
11/7/2019
|
|
83,334
|
|
|
$
|
72.67
|
|
|
0.85
|
|
Options outstanding, December 31, 2019
|
|
1,004,014
|
|
|
|
|
|
The weighted average remaining contractual life of all options outstanding at December 31, 2019 is 3.24 years. Including outstanding stock options, our stockholders have authorized an additional 4,323,683 shares of common stock that may be issued under the share-based payments plans.
The following table summarizes our outstanding non-vested stock options:
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
Non-vested December 31, 2018
|
443,354
|
|
|
$4.87
|
|
Options granted under 2012 Plan
|
685,334
|
|
|
$6.11
|
|
Options vested under 2012 Plan
|
(554,835
|
)
|
|
$5.62
|
|
Non-vested options forfeited under 2012 Plan
|
(100,002
|
)
|
|
$5.56
|
|
Non-vested December 31, 2019
|
473,851
|
|
|
$5.64
|
At December 31, 2019, we had, net of expected forfeitures, $780,000 of unrecognized compensation cost related to unvested stock options which is expected to be expensed over the following periods: 2020 - $698,000 and 2021 - $82,000 share-based compensation is included in general and administrative expense in the Consolidated Statements of Income.
The intrinsic value of the total options exercised for the years ended December 31, 2019, 2018 and 2017 was $5,659,000 or $11.28 per share; $6,105,000 or $13.02 per share, and $2,314,000 or $13.55 per share, respectively.
NOTE 9. 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 vesting of restricted shares using the treasury stock method, to the extent dilutive. Dilution resulting from the conversion option within our convertible debt is determined by computing an average of incremental shares included in each quarterly diluted EPS computation. If NHI’s current share price increases above the adjusted conversion price, further dilution will be attributable to the conversion feature.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Net income attributable to common stockholders
|
$
|
160,456
|
|
|
$
|
154,333
|
|
|
$
|
159,365
|
|
|
|
|
|
|
|
|
|
BASIC:
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
43,417,828
|
|
|
41,943,873
|
|
|
40,894,219
|
|
|
|
|
|
|
|
|
|
DILUTED:
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
43,417,828
|
|
|
41,943,873
|
|
|
40,894,219
|
|
|
Stock options and restricted shares
|
75,196
|
|
|
67,735
|
|
|
67,703
|
|
|
Convertible senior notes - unsecured
|
210,224
|
|
|
80,123
|
|
|
189,531
|
|
|
Average dilutive common shares outstanding
|
43,703,248
|
|
|
42,091,731
|
|
|
41,151,453
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders - basic
|
$
|
3.70
|
|
|
$
|
3.68
|
|
|
$
|
3.90
|
|
|
Net income attributable to common stockholders - diluted
|
$
|
3.67
|
|
|
$
|
3.67
|
|
|
$
|
3.87
|
|
|
|
|
|
|
|
|
|
Net share effect of anti-dilutive stock options
|
4,678
|
|
|
518
|
|
|
573
|
|
|
|
|
|
|
|
|
|
Regular dividends declared per common share
|
$
|
4.20
|
|
|
$
|
4.00
|
|
|
$
|
3.80
|
|
NOTE 10. INCOME TAXES
Beginning with our inception in 1991, we have elected to be taxed as a REIT under the Internal Revenue Code (the “Code”). For the years ended December 31, 2019, 2018, and 2017, respectively, we have recorded state income tax expense of $142,000, $138,000 and $124,000 related to a Texas franchise tax that has attributes of an income tax. State income taxes are combined in franchise, excise and other taxes in our Consolidated Statements of Income.
Dividend payments to common stockholders for the last three years are characterized for tax purposes as follows on a per share basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
2019
|
|
2018
|
|
2017
|
|
Ordinary income
|
$
|
4.20000
|
|
|
$
|
3.33730
|
|
|
$
|
2.93054
|
|
|
Capital gain
|
—
|
|
|
—
|
|
|
0.20643
|
|
|
Return of capital
|
—
|
|
|
0.66270
|
|
|
0.66303
|
|
|
Dividends paid per common share
|
$
|
4.20
|
|
|
$
|
4.00
|
|
|
$
|
3.80
|
|
During the years 2012 through 2016, we participated in the operations of a joint venture, structured as a taxable REIT subsidiary (“TRS”) under provisions of the Code. In regard to that TRS, upon the dissolution of the underlying joint venture, we carry a deferred tax asset, which is fully reserved through a valuation allowance, of $273,000 as of December 31, 2019. See Note 15 for a discussion of Timber Ridge OpCo which will also be held in our TRS.
We made state income tax payments of $112,000, $124,000,and $170,000 for the years ended December 31, 2019, 2018, and 2017, respectively.
NOTE 11. 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 on a recurring basis have included marketable securities, derivative financial instruments and contingent consideration arrangements. Marketable securities have consisted of common stock of other healthcare REITs. Derivative financial instruments include our interest rate swap agreements. Contingent consideration arrangements relate to certain provisions of recent real estate purchase agreements involving property acquisitions.
Derivative financial instruments. Derivative financial instruments are valued in the market using discounted cash flow techniques. These techniques incorporate primarily 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
|
|
December 31,
2019
|
|
December 31,
2018
|
|
Level 2
|
|
|
|
|
|
|
Interest rate swap asset
|
Other assets
|
|
$
|
—
|
|
|
$
|
1,297
|
|
|
Interest rate swap liability
|
Accounts payable and accrued expenses
|
|
$
|
3,433
|
|
|
$
|
—
|
|
Carrying values and fair values of financial instruments that are not carried at fair value at December 31, 2019 and 2018 in the Consolidated Balance Sheets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
Fair Value Measurement
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Level 2
|
|
|
|
|
|
|
|
|
Variable rate debt
|
$
|
845,744
|
|
|
$
|
628,010
|
|
|
$
|
850,000
|
|
|
$
|
634,000
|
|
|
Fixed rate debt
|
$
|
594,721
|
|
|
$
|
653,665
|
|
|
$
|
602,926
|
|
|
$
|
644,745
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
Mortgage and other notes receivable
|
$
|
340,143
|
|
|
$
|
246,111
|
|
|
$
|
347,543
|
|
|
$
|
244,206
|
|
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.
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.
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 credit facility are reasonably estimated at their contractual value at December 31, 2019 and 2018, due to the predominance of floating interest rates, which generally reflect market conditions.
NOTE 12. LIMITS ON COMMON STOCK OWNERSHIP (UNAUDITED)
The Company’s charter contains certain provisions which are designed to ensure that the Company’s status as a REIT is protected for federal income tax purposes. One of the provisions ensures that any transfer (of shares) which would cause NHI to be beneficially owned by fewer than 100 persons or would cause NHI to be “closely-held” under the Internal Revenue Code would be void which, subject to certain exceptions, result in no stockholder being allowed to own, either directly or indirectly pursuant to certain tax attribution rules, more than 9.9% of the Company’s common stock with the exception of prior agreements in 1991 which were confirmed in writing in 2008 with the Company’s founders Dr. Carl E. Adams and Jennie Mae Adams and their lineal descendants. Based on these agreements, the ownership limit for all other stockholders is approximately 7.5%. If a stockholder’s stock ownership exceeds the limit, then such shares over the limit become Excess Stock within the meaning in the Company’s charter whose rights to vote and receive dividends in certain situations. Our charter gives our Board of Directors broad powers to prohibit and rescind any attempted transfer in violation of the ownership limits. In addition, W. Andrew Adams’ Excepted Holder Agreement also provides that he will not own shares of stock in any tenant of the Company if such ownership would cause the Company to constructively own more than a 9.9% interest in such tenant. The purpose of these provisions is to protect the Company’s status as a REIT for tax purposes.
NOTE 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth selected quarterly financial data for the two most recent fiscal years (in thousands, except share and per share amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
Quarter Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
Net revenues
|
$
|
76,107
|
|
|
$
|
78,096
|
|
|
$
|
81,682
|
|
|
$
|
82,196
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
$
|
35,679
|
|
|
$
|
39,979
|
|
|
$
|
42,758
|
|
|
$
|
42,040
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
42,825,824
|
|
|
43,232,384
|
|
|
43,505,332
|
|
|
44,107,770
|
|
|
Diluted
|
43,125,032
|
|
|
43,498,021
|
|
|
43,861,089
|
|
|
44,328,847
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders - basic
|
$
|
.83
|
|
|
$
|
.92
|
|
|
$
|
.98
|
|
|
$
|
.95
|
|
|
Net income attributable to common stockholders - diluted
|
$
|
.83
|
|
|
$
|
.92
|
|
|
$
|
.97
|
|
|
$
|
.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
Quarter Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
Net revenues
|
$
|
72,746
|
|
|
$
|
72,956
|
|
|
$
|
74,915
|
|
|
$
|
73,995
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
$
|
38,432
|
|
|
$
|
37,839
|
|
|
$
|
40,979
|
|
|
$
|
37,083
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
41,532,154
|
|
|
41,704,819
|
|
|
42,187,077
|
|
|
42,351,443
|
|
|
Diluted
|
41,576,876
|
|
|
41,786,829
|
|
|
42,434,499
|
|
|
42,568,720
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders - basic
|
$
|
.93
|
|
|
$
|
.91
|
|
|
$
|
.97
|
|
|
$
|
.88
|
|
|
Net income attributable to common stockholders - diluted
|
$
|
.92
|
|
|
$
|
.91
|
|
|
$
|
.97
|
|
|
$
|
.87
|
|
NOTE 14. RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers using the modified retrospective method. ASU 2014-09 provides a principles-based approach for a broad range of revenue generating transactions, including the sale of real estate, and generally requires more estimates, judgment and disclosures than under previous guidance. The ASU provides for revenues from leases to continue to follow the guidance in Topics 840 and 842 and provides for loans to follow established guidance in Topic 310. Because this ASU specifically excludes these areas of our operations from its scope, there was no impact to our accounting for lease revenue and interest income resulting from the ASU. Additionally, the other significant types of contracts in which we periodically engage, sales of real estate to customers, typically never remain executory across points in time, so that nuances related to the timing of revenue recognition as mandated under Topic 606 have not impacted our results of operations or financial position. We realized no significant revenues in 2018 or 2019 within the scope of ASU 2014-09, and, accordingly, adoption of the ASU did not have a material impact on the timing and measurement of the Company’s revenues.
On January 1, 2019 we adopted Accounting Standards Update (“ASU”) 2016-02, Leases, which has been codified under ASC Topic 842. 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 as of 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. NHI has largely ceased inclusion of repurchase 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. 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, an assessment of collectibility is made at the inception of the lease and, for operating leases, if collectibility is assessed as not probable lease income is recognized as payments are received. Recognition of changes in our assessment of collectibility under 842 differs from legacy accounting in that a change in our assessment of collectibility will be recognized as an adjustment to lease income rather than as bad debt expense. Under Topic 842 only initial direct costs that are incremental to the lessor are capitalized, a standard consistent with NHI’s prior practice.
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. 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).
Initial Impact
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 initial reassessment of the lease classification for any expired or existing leases. Going forward under Topic 842, for us as lessor, subsequent modification of existing leases accounted for under previous guidance, which were brought forward under conventions allowing no reassessment on the application date of Topic 842, may trigger reconsideration of continued accounting for the lease. Upon reconsideration under Topic 842, leases previously classified under Topic 840 as operating leases may be classified as either a sales-type or direct financing lease.
Further under ASU 2018-20, 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.
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.
Variable Payments
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 $5,798,000 of reimbursements within revenue and in expenses in our Consolidated Statements of Income for the year ended December 31, 2019, under the captions “Rental income” and “Property taxes and insurance on leased properties,” respectively.
Going forward under Topic 842, for us as lessor, subsequent modification of existing sale-leaseback or other leases accounted for under previous guidance, which were brought forward under conventions allowing no reassessment the date of application of Topic 842, that undergo modifications may trigger reconsideration of continued accounting for the lease. Upon reconsideration under Topic 842, leases previously classified under Topic 840 as operating leases may be classified as either a sales-type or direct financing lease.
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. Under legacy accounting, 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 receivables, adoption of ASU 2016-13 and the clarifying ASU 2018-19 in 2020 will have some 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 evaluating the extent of the impact that adopting the provisions of ASU 2016-13 in 2020 will have on NHI. Our secured borrowings have exhibited a historically low rate of default, a circumstance upon which we largely base future expectations. Accordingly, after the establishment through a charge to retained earnings of a credit reserve expected to approximate one percent of the outstanding balance in our loan portfolio, the adoption of ASU 2016-13 is not expected to have a material effect on our financial position, results of operations or cash flows.
In August 2017 the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, which was available for early adoption in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. On January 1, 2018, we adopted ASU 2017-12, among whose provisions is a change in the timing and income statement line item for ineffectiveness related to cash flow hedges. The transition method is a modified retrospective approach that requires the Company to recognize the cumulative effect of initially applying the ASU as an adjustment to accumulated other comprehensive income (loss) with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that we adopt the update. The primary provision in the ASU requiring an adjustment to our beginning consolidated retained earnings in 2018 is the change in timing and income statement line item for ineffectiveness related to cash flow hedges.
NOTE 15. SUBSEQUENT EVENTS
Life Care Services
On January 31, 2020, in a joint venture transaction, we acquired an 80% interest in a 401-unit Continuing Care Retirement Community (CCRC) comprising 330 independent living units, 26 assisted living/memory care units and 45 skilled nursing beds. Additionally, the transaction conveyed to NHI a 25% interest in the operations of the community. The transaction arose as the culmination of a relationship beginning in 2015 in which NHI provided LCS Timber Ridge, LLC, (“LCS”), and its JV partner, Westminster-LCS, LLC, (“Westminster”), with a senior mortgage loan on the Timber Ridge campus in the Seattle area. Proceeds of the loan were used to facilitate expansion of the community to 401 units. By terms of the 2015 agreement, NHI acquired a fair-value purchase option on the property.
Consideration given for NHI’s interest in the joint venture was $124,989,000 and included assignment from the divesting owners of debt having a current carrying value of $59,350,000. To fund the transaction, NHI provided an additional loan of $21,650,000, leaving total debt in the project of $81,000,000, bearing interest to NHI at 5.75%. Further, NHI paid $43,114,000 for an 80% equity stake in the property company (“PropCo”), and we provided initial capitalization totaling $875,000 for the operating company (“OpCo”). LCS paid $10,778,000 for its 20% equity stake in PropCo and provided $2,625,000 in initial capitalization of the operations in return for a 75% equity participation in OpCo.
The lease between PropCo and OpCo carries a rate of 6.75% for an initial term of seven years plus renewal options and has a CPI-based lease escalator, subject to floor and ceiling. Including interest payments on debt funded by NHI and our lease participation in the PropCo JV, as detailed above, NHI is entitled to $8,216,000 in the first twelve months plus 25% of the remaining OpCo cash flow. The total enterprise capitalization was $138,392,000 for the OpCo and PropCo entities, as discussed above, of which $124,989,000 was allocated to our interest in the tangible assets of PropCo and equity interest in OpCo, based upon their relative fair values.
Bickford - Shelby, MI
On January 27, 2020, we acquired a 60-unit assisted living/memory care facility located in Shelby, Michigan, 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 $14,091,000, including interest. We added the facility to an existing master lease for a term of twelve years at an initial lease rate of 8%, with CPI escalators subject to a floor and ceiling.