NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
We, the management of National Health Investors, Inc., (“NHI” or the “Company”) believe that the unaudited condensed consolidated financial statements of which these notes are an integral part include all normal, recurring adjustments that are necessary to fairly present the condensed consolidated financial position, results of operations and cash flows of NHI in all material respects. The Condensed Consolidated Balance Sheet at December 31, 2019 has been derived from the audited consolidated financial statements at that date. We assume that users of these condensed consolidated financial statements have read or have access to the audited December 31, 2019 consolidated financial statements and that the adequacy of additional disclosure needed for a fair presentation, except regarding material contingencies, may be determined in that context. Accordingly, notes and other disclosures which would substantially duplicate those contained in our most recent Annual Report on Form 10-K for the year ended December 31, 2019 have been omitted. This condensed consolidated financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons including, but not limited to, acquisitions and dispositions, changes in interest rates, rents and the timing of debt and equity financings. For a better understanding of NHI and its condensed consolidated financial statements, we recommend reading these condensed consolidated financial statements in conjunction with the audited consolidated financial statements for the year ended December 31, 2019, which are included in our 2019 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”), a copy of which is available at our web site: www.nhireit.com.
Principles of Consolidation - The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, partnerships and consolidated variable interest entities (“VIE”), if any. All intercompany transactions and balances have been eliminated in consolidation.
A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.
We apply Financial Accounting Standards Board (“FASB”) guidance for our arrangements with VIEs which requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of the VIE. In accordance with FASB guidance, management must evaluate each of the Company’s contractual relationships which creates a variable interest in other entities. If the Company has a variable interest and the entity is a VIE, then management must determine whether the Company is the primary beneficiary of the VIE. If it is determined that the Company is the primary beneficiary, NHI would consolidate the VIE. We identify the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. We perform this analysis on an ongoing basis.
If the Company has determined that an entity is not a VIE, the Company assesses the need for consolidation under all other provisions of Accounting Standards Codification (“ASC”) Topic 810 Consolidation. These provisions provide for consolidation of majority-owned entities where a majority voting interest held by the Company demonstrates control of such entities in the absence of any legal constraints.
At March 31, 2020, we held interests in seven unconsolidated VIEs, and, because we generally lack either directly or through related parties the power to direct the activities that most significantly impact their economic performance, we have concluded that NHI is not the primary beneficiary. Accordingly, we account for our transactions with these entities and their subsidiaries at either amortized cost or net realizable value for straight-line receivables.
Our VIEs are summarized below by date of initial involvement. For further discussion of the nature of the relationships, including the sources of our exposure to these VIEs, see the notes to our condensed consolidated financial statements cross-referenced below.
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Date
|
Name
|
Source of Exposure
|
Carrying Amount
|
Maximum Exposure to Loss
|
Note Reference
|
|
2012
|
Bickford Senior Living
|
Various1
|
$
|
57,024,000
|
|
$
|
60,120,000
|
|
Notes 2, 3
|
|
2014
|
Senior Living Communities
|
Notes and straight-line receivable
|
$
|
92,155,000
|
|
$
|
96,454,000
|
|
Notes 2, 3
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|
2016
|
Senior Living Management
|
Notes and straight-line receivable
|
$
|
26,940,000
|
|
$
|
26,940,000
|
|
—
|
|
2017
|
Evolve Senior Living
|
Notes
|
$
|
9,953,000
|
|
$
|
9,953,000
|
|
—
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|
2018
|
Sagewood, LCS affiliate
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Notes
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$
|
133,307,000
|
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$
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178,614,000
|
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Note 3
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2019
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41 Management, LLC
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Notes
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$
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12,133,000
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$
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15,313,000
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—
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2020
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Timber Ridge OpCo
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Various1
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$
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434,000
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$
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5,434,000
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Note 4
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1 Notes, loan commitments, straight-line rent receivables, and unamortized lease incentives
We are not obligated to provide support beyond our stated commitments to these tenants and borrowers whom we classify as VIEs, and accordingly, our maximum exposure to loss as a result of these relationships is limited to the amount of our commitments, as shown above and discussed in the notes. When the above relationships involve leases, some additional exposure to economic loss is present. Generally, additional economic loss on a lease, if any, would be limited to that resulting from a short period of arrearage and non-payment of monthly rent before we are able to take effective remedial action, as well as costs incurred in transitioning the lease to a new tenant. The potential extent of such loss will be dependent upon individual facts and circumstances, cannot be quantified, and is therefore not included in the tabulation above. Typically, the only carrying amounts involving our leases are accumulated straight-line receivables and unamortized lease incentives.
As the managing member, we consolidate two property company (“PropCo”) joint ventures, which were formed in association with our JV partners, Discovery Senior Housing Investor XXIV, LLC, (“Discovery”) and LCS Timber Ridge LLC (“LCS”) to invest in and own (1) six senior housing facilities initially comprising 596 units (“Discovery PropCo”) and (2) a 401-unit Continuing Care Retirement Community in Issaquah, Washington (“Timber Ridge PropCo”), respectively. NHI directs the activities that most significantly impact economic performance of these joint venture entities, subject to limited protective rights extended to our JV partners for specified business decisions. We consider both entities to be VIEs, based on our determination that the total equity at risk in each is insufficient to finance activities without additional subordinated financial support. Because of our control of these entities, we include their assets, liabilities, noncontrolling interests and operations in our consolidated financial statements.
Cash and Cash Equivalents and Restricted Cash - Cash equivalents consist of all highly liquid investments with an original maturity of three months or less. Restricted cash includes amounts required to be held on deposit in accordance with agency agreements governing our Fannie Mae and HUD mortgages.
The following table sets forth our cash, cash equivalents and restricted cash reported within the Company’s Condensed Consolidated Statements of Cash Flows (in thousands):
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|
|
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March 31,
2020
|
|
March 31,
2019
|
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Cash and cash equivalents
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$
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46,049
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|
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$
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5,177
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|
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Restricted cash (included in Other assets)
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33,769
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|
|
10,377
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|
|
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$
|
79,818
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|
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$
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15,554
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Topic 842 - All of our leases are accounted for as operating leases. Our leases generally have an initial leasehold term of 10 to 15 years followed by one or more 5-year tenant renewal options. The leases are “triple net” leases under which the tenant is responsible for the payment of all taxes, utilities, insurance premiums, repairs and other charges relating to the operation of the properties, including required levels of capital expenditures each year. The tenant is obligated at its expense to keep all improvements, fixtures and other components of the properties covered by “all risk” insurance in an amount equal to at least the full replacement cost thereof, and to maintain specified minimal personal injury and property damage insurance, protecting us as well as the tenant. The leases also require the tenant to indemnify and hold us harmless from all claims resulting from the use, occupancy and related activities of each property by the tenant, and to indemnify us against all costs related to any release, discovery, clean-up and removal of hazardous, including bio-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. If lease concessions become necessary, NHI has elected to account for lease concessions which do not substantially increase either our rights as lessor or the obligations of the tenant and are related to the effects of COVID-19 consistent with how those concessions would be accounted for under Topic 842 as though the enforceable rights and obligations for those concessions existed under our leases, regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the related individual lease contract.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Allowance for Credit Losses - With the adoption of Accounting Standards Update 2016-13, Financial Instruments - Credit Losses effective January 1, 2020, we estimate and record an allowance for credit losses upon origination of the loan, based on expected credit losses for the life of the loan balance and update this estimate quarterly as of the balance sheet date. We calculate the estimated credit losses on mortgages by pooling these loans into two groups – investments in existing or new mortgages and construction mortgages. Mezzanine and revolving lines of credit are evaluated at the individual loan level. We estimate the allowance for credit losses by utilizing a loss model that relies on future expected credit losses, rather than incurred losses. This loss model incorporates our historical experience and collateral values, adjusted for current conditions and our forecasts, using the probability of default and loss given default method. The loss model incorporates our historical loss data for recessionary and non-recessionary periods. Incorporated into the construction mortgage loss model is an estimate of the probability that NHI will acquire the property. Using the resulting estimate, a portion of the outstanding construction mortgage balance, which NHI currently expects will be reduced by NHI’s acquisition of the underlying property when construction is complete, is deducted from the construction mortgage balance included in the expected loss calculation. Mezzanine loans and revolving lines of credit are also based on the loss model to recognize expected future credit losses and are applied to each individual loan using borrower specific information. We also perform a qualitative assessment beyond model estimates and apply adjustments as necessary. The credit loss estimate is based on the net amortized cost balance of our mortgage and other notes receivables as of the balance sheet date.
Calculation of the allowance for credit losses involves significant judgement. It is possible that actual credit losses will differ from our current estimates. Write-offs are deducted from the allowance for credit losses when we judge the principal to be uncollectible.
Earnings Per Share - The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assumes the exercise of stock options using the treasury stock method, to the extent dilutive. Diluted earnings per share also incorporate the potential dilutive impact of our convertible senior notes. We apply the treasury stock method to our convertible debt instruments, the effect of which is that conversion will not be assumed for purposes of computing diluted earnings per share unless the average share price for the period exceeds the conversion price per share.
Reclassifications - We have reclassified certain balances where necessary to conform the presentation of prior periods to the current period. These reclassifications had no effect on previously reported net income.
New Accounting Pronouncements - For a review of recent accounting pronouncements pertinent to our operations and management’s judgment as to the impact that the eventual adoption of these pronouncements will have on our financial position and results of operations, see Note 10.
NOTE 2. REAL ESTATE
As of March 31, 2020, we owned 225 health care real estate properties located in 34 states and consisting of 148 senior housing communities (“SHO”), 72 skilled nursing facilities, 3 hospitals and 2 medical office buildings. Our senior housing communities include assisted living facilities, senior living campuses, independent living facilities, and entrance-fee communities. These investments (excluding our corporate office of $2,532,000) consisted of properties with an original cost of approximately $3,225,600,000 rented under triple-net leases to 33 lessees.
During the three months ended March 31, 2020, we made the following real estate investments and related commitments as described below ($ in thousands):
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Operator
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Date
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Properties
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Asset Class
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Amount
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Bickford Senior Living
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January 2020
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1
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SHO
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15,100
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Life Care Services
|
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January 2020
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1
|
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SHO
|
|
134,892
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|
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$
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149,992
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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 and included the full payment 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.
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 (Note 4). 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 NHI debt having a carrying value of $59,350,000. To fund the transaction, NHI provided an additional loan of $21,650,000, leaving total debt in the joint venture 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, NHI-LCS JV I, LLC (“Timber Ridge PropCo”), and we provided initial capitalization totaling $875,000 for the newly formed operating company, Timber Ridge OpCo, LLC (“Timber Ridge OpCo”). LCS paid $10,778,000 for its 20% equity stake in Timber Ridge PropCo and provided $2,625,000 in initial capitalization of the operations in return for a 75% equity participation in Timber Ridge OpCo.
The lease between Timber Ridge PropCo and Timber Ridge 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 to NHI and our lease participation in the Timber Ridge PropCo, as detailed above, NHI is entitled to $8,216,000 in the first twelve months plus 25% of the remaining Timber Ridge OpCo cash flow. Including the cash contributions of $3,500,000 by NHI and LCS to fund Timber Ridge OpCo working capital, the total enterprise capitalization was $138,392,000 for the Timber Ridge OpCo and Timber Ridge PropCo entities, as discussed above, of which NHI’s contribution of $124,989,000 was allocated to our interest in the tangible assets of Timber Ridge PropCo with no material fair value allocated to Timber Ridge OpCo beyond our working capital infusion. The lease between Timber Ridge PropCo and Timber Ridge OpCo includes an “earn out” provision whereby Timber Ridge OpCo could become eligible for a payment of $10,000,000 based on the attainment of certain operating metrics.
Certain major business decisions at Timber Ridge PropCo and Timber Ridge OpCo are to be board-managed with NHI and LCS each holding equal voting rights. At Timber Ridge PropCo, major business decisions subject to board management are restricted to areas involving LCS’s protective interests, therefore leaving control with NHI. Because of our control of ordinary-course-of-business activities in Timber Ridge PropCo under the variable interest entity model and the restriction of participation in its management to their protective interests on the part of LCS, we include the assets, liabilities, noncontrolling interest and operations of Timber Ridge PropCo in our consolidated financial statements.
NHI recorded the acquisition of Timber Ridge PropCo as follows ($ in thousands):
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Land
|
$
|
4,370
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|
|
Building and improvements
|
127,209
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|
|
Furniture, fixtures and equipment
|
3,313
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|
|
|
$
|
134,892
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|
As a result of LCS’s 75% share in profits, retention of operations oversight, control over all ordinary-course-of business matters, and equal voting rights in major decisions, our participating influence at Timber Ridge OpCo does not amount to control of the entity. See Note 4 for a discussion of the resultant accounting for Timber Ridge OpCo.
Major Tenants
Bickford
As of March 31, 2020, our Bickford Senior Living (“Bickford”) lease portfolio consists of the following ($ in thousands):
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|
Lease Expiration
|
|
|
|
|
|
|
June 2023
|
September 2024
|
May 2031
|
April 2033
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Total
|
|
Number of Properties
|
13
|
|
10
|
|
20
|
|
5
|
|
48
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|
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2020 Contractual Rent
|
$
|
11,812
|
|
$
|
9,343
|
|
$
|
24,193
|
|
$
|
5,072
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|
$
|
50,420
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2020 Straight Line Rent
|
14
|
|
339
|
|
2,671
|
|
745
|
|
3,769
|
|
|
2020 Lease Incentive Amortization
|
—
|
|
—
|
|
(775)
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|
—
|
|
(775)
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|
|
|
$
|
11,826
|
|
$
|
9,682
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|
$
|
26,089
|
|
$
|
5,817
|
|
$
|
53,414
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|
Of our total revenues, $13,018,000 (16%) and $12,810,000 (17%) were recognized as rental income from Bickford, excluding income from properties recently sold or no longer leased to Bickford, for the three months ended March 31, 2020 and 2019, including $767,000 and $1,327,000 in straight-line rent income, respectively.
Senior Living Communities
As of March 31, 2020, we leased 10 retirement communities totaling 2,068 units to Senior Living Communities, LLC (“Senior Living”). The 15-year master lease, which began in December 2014, contains two renewal options of five years each and provides for an annual escalator of 3% effective January 1, 2019.
Of our total revenues, $11,938,000 (14%) and $11,532,000 (15%) in rental income were derived from Senior Living for the three months ended March 31, 2020 and 2019, including $1,068,000 and $1,058,000 in straight-line rent income, respectively.
NHC
As of March 31, 2020, we leased 42 facilities under two master leases to National HealthCare Corporation (“NHC”), a publicly-held company. The facilities leased to NHC consist of three independent living facilities and 39 skilled nursing facilities (4 of which are subleased to other parties for whom the lease payments are guaranteed to us by NHC). These facilities are leased to NHC under the terms of an amended master lease agreement originally dated October 17, 1991 (“the 1991 lease”) that includes our 35 legacy properties and a master lease agreement dated August 30, 2013 (“the 2013 lease”) that includes 7 skilled nursing facilities acquired in 2013.
The 1991 lease expiration is December 31, 2026. There are two additional renewal options of five years, each at fair rental value as negotiated between the parties. Under the terms of the 1991 lease, the base annual rental is $30,750,000 and rent escalates by 4% of the increase, if any, in each facility’s revenue over a 2007 base year. The 2013 lease provides for a base annual rental of $3,450,000 and has a lease expiration of August 2028. Under the terms of the 2013 lease, rent escalates 4% of the increase, if any, in each facility’s revenue over the 2014 base year. For both the 1991 lease and the 2013 lease, we refer to this additional rent component as “percentage rent.” During the last three years of the 2013 lease, NHC will have the option to purchase the facilities for $49,000,000.
The following table summarizes the percentage rent income from NHC (in thousands):
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Three Months Ended
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|
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March 31,
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|
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|
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2020
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2019
|
|
|
|
Current year
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|
|
|
|
|
$
|
926
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|
|
$
|
877
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Prior year final certification1
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|
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|
|
(14)
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|
|
334
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|
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|
|
Total percentage rent income
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|
|
$
|
912
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|
|
$
|
1,211
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|
1 For purposes of the percentage rent calculation described in the master lease agreement, NHC’s annual revenue by facility for a given year is certified to NHI by March 31st of the following year.
Of our total revenues, $9,448,000 (11%) and $9,748,000 (13%) in rental income were derived from NHC for the three months ended March 31, 2020 and 2019, respectively.
The chairman of our board of directors is also a director on NHC’s board of directors. As of March 31, 2020, NHC owned 1,630,642 shares of our common stock.
Holiday
As of March 31, 2020, we leased 26 independent living facilities to Holiday Retirement (“Holiday”). Of our total revenues, $10,176,000 (12%) and $9,930,000 (13%) were derived from Holiday for the three months ended March 31, 2020 and 2019, including $1,664,000 and $1,630,000 in straight-line rent income, respectively. Our tenant operates the facilities pursuant to a management agreement with a Holiday-affiliated manager.
Purchase Options
Certain of our operators hold purchase options allowing them to acquire properties they currently lease from NHI. For options open or coming open in the near future, we are engaged in preliminary negotiations to continue as lessor or in some other capacity.
A summary of these tenant options is presented below ($ in thousands):
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Asset
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Number of
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Lease
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1st Option
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Option
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Contractual
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Type
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Properties
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Expiration
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Open Year
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Basis
|
Rent
|
|
MOB
|
1
|
February 2025
|
Open
|
i
|
$
|
308
|
|
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HOSP
|
1
|
March 2025
|
Open
|
ii
|
$
|
1,957
|
|
|
HOSP
|
1
|
September 2027
|
2021
|
iv
|
$
|
2,760
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|
|
SHO
|
2
|
May 2031
|
2021
|
iv
|
$
|
5,063
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|
|
HOSP
|
1
|
June 2022
|
2022
|
i
|
$
|
3,502
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|
|
SNF
|
7
|
August 2028
|
2025
|
iii
|
$
|
3,485
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|
|
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.
Other Portfolio Activity
Tenant Bankruptcy
On April 7, 2020, Quorum Health Corporation (“Quorum”), the operator of our Kentucky River Acute Care Hospital in Jackson, Kentucky, filed for protection under Chapter 11 of the US Bankruptcy Code. Although we do not foresee the immediate cessation of payment under the lease and Quorum is current on all rent payments as of March 31, 2019, we cannot continue to assess collection of all lease payments from Quorum as probable. Accordingly, rental income for the quarter ended March 31, 2020 reflects a reduction of approximately $380,000 related to the elimination of straight-line rent associated with this lease. Recognition of lease revenue will be limited to the cash received.
NHI records impairment losses on long-lived assets used in operations when events and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. During 2020, events and circumstances indicated that our investment of $10,184,000 representing the Kentucky River acute care hospital leased from us by Quorum might be impaired. However, our estimate of undiscounted cash flows indicated that such carrying amounts were expected to be recovered. Nonetheless, it is reasonably possible that the estimate of undiscounted cash flows may change in the near term resulting in the need to write down those assets to fair value. Our estimate of cash flows might change because of recurring losses being reported by Quorum and prevailing uncertainty about the future of rural hospitals in the United States.
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 three operators, Senior Living, Discovery, and Vitality MC TN, LLC (“Vitality”). For the three months ended March 31, 2020 and 2019, we recognized $625,000 and $77,000, respectively, in rental income from the three former Regency buildings.
In April 2019, Chancellor Health Care leased the five former LaSalle buildings. Our lease agreement with Chancellor provides for NHI to receive 100% of net operating cash flow generated by the facilities, after management fees, pending stabilization of the operations of the facility. For the three months ended March 31, 2020 and 2019, we recognized $587,000 and $0, respectively, in rental income from the five former LaSalle buildings.
In February 2019, we transitioned a non-performing single-property lease in Wisconsin from Landmark to BAKA Enterprises. Under terms of the new lease, NHI receives 95% of net operating cash flow, after management fees, as generated by the facilities. In November 2019, pursuant to the agreement annual rent was reset to $720,000, subject to scheduled increases. The agreement provides for a term of 8 years, with renewal options. For the three months ended March 31, 2020 and 2019, we recognized $343,000 and $625,000 in rental income, respectively, from the former Landmark property.
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.
Asset Dispositions
In September 2019, we classified a portfolio of eight assisted living properties located in Arizona (4), Tennessee (3) and South Carolina (1) as held for sale, after the current tenant expressed an intention to exercise its purchase option on the properties. The purchase option called for the parties to split any appreciation on an equal 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 recognition of the $20,752,000 gain from this disposition, we have engaged a qualified intermediary to effect a like-kind exchange under §1031 of the Internal Revenue Code. For the three months ended March 31, 2020 and 2019, we recognized $229,000 and $1,062,000, respectively, of rental income from this eight property portfolio.
On February 21, 2020, we disposed of two assisted living properties previously classified as held-for-sale in exchange for a term note of $4,000,000 from the buyer, Bickford. The note, which is due February 2025 and bears interest at 7%, will begin amortizing on a twenty-five-year basis in January 2021. In January 2019 we classified these properties as held-for-sale, recorded an adjustment to write off straight-line rent receivables of $124,000 and recognized an impairment loss of $2,500,000 to write down the properties to their estimated net realizable value.
Future Minimum Lease Payments
Presented in the following table are future minimum lease payments, as of March 31, 2020, to be received by us under our operating leases, as determined under ASC 842 (in thousands):
|
|
|
|
|
|
|
|
Twelve months ended March 31, 2020
|
|
|
2021
|
$
|
277,788
|
|
|
2022
|
277,910
|
|
|
2023
|
283,430
|
|
|
2024
|
275,699
|
|
|
2025
|
268,238
|
|
|
Thereafter
|
1,542,215
|
|
|
|
$
|
2,925,280
|
|
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 lease payments, 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 revenue recognized as a result of fixed and variable lease escalators (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Lease payments based on fixed escalators
|
|
|
|
|
$
|
68,433
|
|
|
$
|
63,467
|
|
|
Lease payments based on variable escalators
|
|
|
|
|
1,364
|
|
|
1,168
|
|
|
Straight-line rent income
|
|
|
|
|
5,177
|
|
|
5,228
|
|
|
Escrow funds received from tenants
|
|
|
|
|
1,553
|
|
|
1,090
|
|
|
Rental income
|
|
|
|
|
$
|
76,527
|
|
|
$
|
70,953
|
|
NOTE 3. MORTGAGE AND OTHER NOTES RECEIVABLE
On January 1, 2020, we adopted ASU 2016-13, Financial Instruments – Credit Losses, as discussed in Note 10. Upon adoption, we recorded an allowance for expected credit losses of $3,900,000 that is reflected as an adjustment to Mortgage and other notes receivable, net, in the Condensed Consolidated Balance Sheets and recorded a corresponding cumulative-effect adjustment to cumulative net income in excess (deficit) of dividends. Upon adoption, we also recorded a $325,000 liability for estimated credit losses pertaining to unfunded loan commitments as a cumulative-effect adjustment to cumulative net income in excess (deficit) of dividends. The corresponding credit loss liability is included in the financial statement caption Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets.
Our principal measures of credit quality, except for construction mortgages, are debt service coverage for amortizing loans and interest or fixed charge coverage for non-amortizing loans collectively, (“Coverage”). A Coverage ratio provides a measure of the borrower’s ability to make scheduled principal and interest payments. The Coverage ratios presented in the following table have been calculated utilizing the most recent date for which data is available, December 31, 2019, using EBITDARM (earnings before interest, taxes, depreciation, amortization, rent and management fees) and the requisite debt service, interest service or fixed charges, as defined in the applicable loan agreement. We categorize Coverage into four levels: (i) over 2.0x, (ii) between 1.5x and 2.0x, (iii) between 1.0x and 1.5x, (iv) less than 1.0x. We update the calculation of coverage on a quarterly basis. Coverage is not a meaningful credit quality indicator for construction mortgages as either these developments are not generating any operating income, or they have insufficient operating income as occupancy levels necessary to stabilize the properties have not yet been achieved. We measure credit quality for these mortgages by considering the construction and stabilization timeline and the financial condition of the borrower as well as economic and market conditions. As of March 31, 2020, we did not have any construction loans that we considered underperforming. The tables below present outstanding note balances as of March 31, 2020 at amortized cost excluding two note balances totaling approximately $4,019,000 for which a Coverage ratio is not available.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Mortgage1
|
Mezzanine
|
Revolver
|
Total
|
|
Coverage Ratio
|
|
|
|
|
|
more than 2.0x
|
$
|
74,989
|
|
$
|
—
|
|
$
|
—
|
|
$
|
74,989
|
|
|
between 1.5x and 2.0x
|
1,307
|
|
—
|
|
—
|
|
1,307
|
|
|
between 1.0x and 1.5x
|
12,259
|
|
14,466
|
|
10,701
|
|
37,426
|
|
|
below 1.0x
|
53,045
|
|
26,070
|
|
—
|
|
79,115
|
|
|
Total
|
$
|
141,600
|
|
$
|
40,536
|
|
$
|
10,701
|
|
$
|
192,837
|
|
|
|
|
|
|
|
1 Excludes $94,964,000 in construction mortgage receivables related to developments expected to be acquired at stabilization
We consider the guidance in ASC 310-20 when determining whether a modification, extension or renewal constitutes a current period origination. The credit quality indicator as of December 31, 2019, is presented below for the amortized cost, net by year of origination ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
2017
|
2016
|
Prior
|
Total
|
|
Mortgages
|
|
|
|
|
|
|
|
|
more than 2.0x
|
$
|
—
|
|
$
|
—
|
|
$
|
67,906
|
|
$
|
—
|
|
$
|
—
|
|
$
|
7,083
|
|
$
|
74,989
|
|
|
between 1.5x and 2.0x
|
—
|
|
—
|
|
1,307
|
|
—
|
|
—
|
|
—
|
|
1,307
|
|
|
between 1.0x and 1.5x
|
—
|
|
2,259
|
|
—
|
|
—
|
|
10,000
|
|
—
|
|
12,259
|
|
|
below 1.0x
|
4,000
|
|
39,092
|
|
—
|
|
9,953
|
|
—
|
|
—
|
|
53,045
|
|
|
Total
|
$
|
4,000
|
|
$
|
41,351
|
|
$
|
69,213
|
|
$
|
9,953
|
|
$
|
10,000
|
|
$
|
7,083
|
|
$
|
141,600
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine
|
|
|
|
|
|
|
|
|
more than 2.0x
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
between 1.5x and 2.0x
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
between 1.0x and 1.5x
|
—
|
|
—
|
|
—
|
|
—
|
|
14,466
|
|
—
|
|
14,466
|
|
|
below 1.0x
|
—
|
|
—
|
|
—
|
|
—
|
|
26,070
|
|
—
|
|
26,070
|
|
|
Total
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
40,536
|
|
$
|
—
|
|
$
|
40,536
|
|
|
|
|
|
|
|
|
|
|
|
Revolver
|
|
|
|
|
|
|
|
|
more than 2.0x
|
|
|
|
|
|
|
$
|
—
|
|
|
between 1.5x and 2.0x
|
|
|
|
|
|
|
—
|
|
|
between 1.0x and 1.5x
|
|
|
|
|
|
|
10,701
|
|
|
below 1.0x
|
|
|
|
|
|
|
—
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,701
|
|
Due to the economic uncertainty created by COVID-19 and the potential impact on the collectability of our mortgages and other notes receivable, we are forecasting a 20% increase in the probability of a default and a 20% increase in the amount of loss from a default during the next six months, resulting in an effective adjustment of 44%. Our estimate reverts to our historical loss experience for the remaining term. The COVID-19 adjustments resulted in a $1,700,000 increase in the credit loss reserve during the first quarter. Excluding the effects of the COVID-19 adjustment, our provision for expected credit losses decreased by $100,000 due primarily to a decrease in the balance of our construction mortgage receivables and the resulting reduction in our historical probability of default experience for our acquisition and construction mortgage pool.
The allowance for expected credit losses for our commercial loans is presented in the following table for the quarter ended March 31, 2020 ($ in thousands):
|
|
|
|
|
|
|
|
Beginning balance January 1, 2020 (upon adoption of ASU 2016-13)
|
$
|
3,900
|
|
|
Provision for expected credit losses
|
1,600
|
|
|
|
|
|
|
|
Balance March 31, 2020
|
$
|
5,500
|
|
At March 31, 2020, we had net investments in mortgage notes receivable with a carrying value of $240,443,000, secured by real estate and UCC liens on the personal property of 15 facilities, and other notes receivable with a carrying value of $51,377,000, guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner. All our notes were on full accrual basis at March 31, 2020.
Bickford
At March 31, 2020, our construction loans to Bickford are summarized as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commencement
|
|
Rate
|
|
Maturity
|
|
Commitment
|
|
Drawn
|
|
Location
|
|
January 2018
|
|
9%
|
|
5 years
|
|
14,000
|
|
|
(13,077)
|
|
|
Virginia
|
|
July 2018
|
|
9%
|
|
5 years
|
|
14,700
|
|
|
(12,526)
|
|
|
Michigan
|
|
|
|
|
|
|
|
$
|
28,700
|
|
|
$
|
(25,603)
|
|
|
|
The construction loans are secured by first mortgage liens on substantially all real and personal property as well as a pledge of any and all leases or agreements which may grant a right of use to the property. Usual and customary covenants extend to the agreements, including the borrower’s obligation for payment of insurance and taxes. NHI has a fair market value purchase option on the properties at stabilization of the underlying operations. On these development projects, Bickford as borrower is entitled to up to $2,000,000 per project in incentive loan draws based on the achievement of predetermined operational milestones and, if funded, will increase the principal amount and NHI's future purchase price and eventual NHI lease payment.
Our loans to Bickford represent a variable interest. Bickford is structured to limit liability for potential claims for damages, is capitalized to achieve that purpose and is considered a VIE within the definition set forth in Note 1. As discussed more fully in Note 1, we have concluded that we are not the primary beneficiary.
Life Care Services - Timber Ridge
In February 2015, we entered into a loan agreement in which the proceeds were used to fund the construction of Phase II of Timber Ridge at Talus, a Type-A continuing care retirement community in Issaquah, Washington. The outstanding balance due from LCS-Westminster Partnership III LLP (“LCS-WP III”), an affiliate of LCS and the manager of the facility, was $59,350,000 as of January 31, 2020, when we acquired the property and Timber Ridge PropCo assumed the debt (see Note 2). To provide working capital in support of the CCRC’s entry-fee model, NHI agreed to supply a revolving line of credit permitting draws up to a maximum of $5,000,000. See Note 4 for more information about our equity-method investment in Timber Ridge OpCo.
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 LCS, the manager of the facility, up to $180,000,000. The loan agreement conveys a mortgage interest and will facilitate the construction of Phase II of Sagewood, a Type-A Continuing Care Retirement Community in Scottsdale, AZ. As an affiliate of a larger company, LCS-WP IV is structured to limit liability for potential damage claims, is capitalized to achieve that purpose and is considered a VIE within the definition set forth in Note 1. As discussed more fully in Note 1, we have concluded that we are not the primary beneficiary.
The loan conveys a mortgage interest in 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 March 31, 2020. 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 $57,353,000 as of March 31, 2020.
Senior Living Communities
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, $10,701,000 at March 31, 2020, bear interest at an annual rate equal to the prevailing 10-year U.S. Treasury rate, 0.70% at March 31, 2020, 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 March 31, 2020, 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. EQUITY METHOD INVESTMENT AND OTHER ASSETS
Equity Method Investment
As discussed in Note 2, our investment in the operating company, Timber Ridge OpCo, held by our Taxable REIT Subsidiary (“TRS”) and recorded in the initial amount of $875,000, arose in conjunction with the acquisition of a CCRC from LCS-WP III. We structured our arrangement with our JV partner, LCS Timber Ridge LLC, to be compliant with the provisions of the REIT Investment Diversification and Empowerment Act of 2007 ("RIDEA") which permits NHI to receive rent payments through a triple-net lease between Timber Ridge PropCo, the property company, and Timber Ridge OpCo and is designed to give NHI the opportunity to capture additional value on the improving performance of the operating company through distributions from the TRS. Accordingly, the TRS holds our 25% equity interest in Timber Ridge OpCo in order to provide an organizational structure that will allow the TRS to engage in a broad range of activities and share in cash-flows that would otherwise be non-qualifying income under the REIT gross income tests.
OpCo’s activities are managed through an "eligible independent contractor" subject to the oversight of Timber Ridge OpCo’s board. This organizational structure meets the requirements of Internal Revenue Code regulations for TRS entities. LCS is the managing member of Timber Ridge OpCo, although we have retained specific non-controlling rights. As a result of LCS’s retention of operations oversight and control over all day-to-day business matters, our participating influence at Timber Ridge OpCo does not amount to control of the entity.
As part of our acquisition of the Timber Ridge property in January 2020, we accepted the property subject to trust liens previously granted to residents of Timber Ridge. In keeping with the business model of entrance fee communities, early residents of Timber Ridge executed loans to the then owner/operators backed by liens in a form consistent with legal requirements of the State of Washington at the time. In 2008 the owner/operator from whom we acquired the Timber Ridge property satisfied the state legal requirements by entering into a Deed of Trust and Indenture of Trust (the “Deed and Indenture”) for the benefit of the trustee (now Wilmington Trust, N.A., “Trustee”) on behalf of all residents who made mortgage loans to the owner/operator in accordance with a resident agreement. The Deed and Indenture granted a security interest in the Timber Ridge property to secure the loans made by the early residents of the property. Subsequent to these early transactions, the laws of the State of Washington were changed so that it was no longer mandatory that a repayment obligation with respect to loans made to an entrance fee community be secured by the property under a deed and indenture, and the practice was discontinued at Timber Ridge.
Our entry into the Timber Ridge joint venture involved the separation of the existing owner/operator configuration into property and operating companies. Accomplishing the split required the allocation of assets and liabilities of the previously unified entity. PropCo acquired the Timber Ridge Property, subject to the resident mortgages secured by the Deed and Indenture. Accordingly, the remaining outstanding “old” loans made by the residents are still secured by a security interest in the Timber Ridge Property. The trustee for all of the residents who made “old” loans in accordance with the resident agreements, entered into
a subordination agreement concurrent with our acquisition, pursuant to which the Trustee acknowledged and confirmed that the security interests created under the Deed and Indenture were subordinate to any security interests granted in connection with the loan made by NHI to PropCo.
With the periodic settlement of some of the outstanding resident loans in the course of normal entrance-fee community operations, the balance owing on the Deed and Indenture at the date of our acquisition on January 31, 2020 had been reduced to $20,063,000 and was further reduced to $18,974,000 at March 31, 2020. By terms of the resident loan assumption agreement, during the term of the lease (7 years with two renewal options), OpCo is to indemnify PropCo for any repayment by PropCo of these liabilities under the guarantee. NHI estimates that no material outflow of cash will result from PropCo’s secondary obligation as guarantor under the resident mortgages. Accordingly, no liability was recorded on NHI’s books for the guarantee obligation upon acquisition and as of March 31, 2020.
OpCo meets the criteria to be considered a variable interest entity based on ASC Topic 810, Consolidation. However, we are not the primary beneficiary of Timber Ridge OpCo as our participating rights do not give us the power to direct the activities that most significantly impact Timber Ridge OpCo’s economic performance. As a result, we report our investment in Timber Ridge OpCo under the equity method of accounting as prescribed by ASC Topic 970, Real Estate - General, Subtopic 323-30 Equity Method and Joint Ventures. Our equity share in the losses of Timber Ridge OpCo during the three months ended March 31, 2020 was $442,000. Under the equity method, we decrease the carrying value of our investment for losses in the entity and distributions to NHI for cumulative amounts up to and including our basis plus any commitments to fund operations. Our commitments are currently limited to an additional $5,000,000 under a revolving credit facility and our guarantee, discussed above. Under the equity method, we will not write down the asset below zero. The investment is increased for any share of income attributed to NHI.
Our equity method investment and other assets consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
|
Accounts receivable and prepaid expenses
|
$
|
3,635
|
|
|
$
|
3,212
|
|
|
|
|
Unamortized lease incentive payments
|
10,565
|
|
|
10,146
|
|
|
|
|
Regulatory escrows
|
8,208
|
|
|
8,208
|
|
|
|
|
Restricted cash
|
33,769
|
|
|
10,454
|
|
|
|
|
Equity method investment
|
433
|
|
|
—
|
|
|
|
|
|
$
|
56,610
|
|
|
$
|
32,020
|
|
|
|
Regulatory escrows include mandated deposits in connection with our entrance fee communities in Connecticut. Restricted cash includes amounts required to be held on deposit with a qualified intermediary subject to an IRC §1031 exchange agreement or in accordance with agency agreements governing our Fannie Mae and HUD mortgages.
NOTE 5. DEBT
Debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
|
Revolving credit facility - unsecured
|
$
|
408,000
|
|
|
$
|
300,000
|
|
|
Bank term loans - unsecured
|
550,000
|
|
|
550,000
|
|
|
Private placement term loans - unsecured
|
400,000
|
|
|
400,000
|
|
|
HUD mortgage loans (net of discount of $1,218 and $1,238)
|
41,942
|
|
|
42,138
|
|
|
Fannie Mae term loans - secured, non-recourse
|
95,618
|
|
|
95,706
|
|
|
Convertible senior notes - unsecured (net of discount of $203 and $303)
|
59,797
|
|
|
59,697
|
|
|
Unamortized loan costs
|
(6,453)
|
|
|
(7,076)
|
|
|
|
$
|
1,548,904
|
|
|
$
|
1,440,465
|
|
Aggregate principal maturities of debt as of March 31, 2020 are as follows (in thousands):
|
|
|
|
|
|
|
|
For the year ended March 31,
|
|
|
2021
|
$
|
1,244
|
|
|
2022
|
61,291
|
|
|
2023
|
784,340
|
|
|
2024
|
351,389
|
|
|
2025
|
154,529
|
|
|
Thereafter
|
203,985
|
|
|
|
1,556,778
|
|
|
Less: discount
|
(1,421)
|
|
|
Less: unamortized loan costs
|
(6,453)
|
|
|
|
$
|
1,548,904
|
|
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 March 31, 2020 and December 31, 2019, 30-day LIBOR was 99 and 176 bps, respectively. Within the facility, the employment of interest rate swaps for a portion of our fixed term debt leaves only $348,000,000 drawn on 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 March 31, 2020, we had $142,000,000 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 March 31, 2020, 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 ten properties leased to Bickford and having a net book value of $48,717,000 at March 31, 2020. 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. These nine HUD mortgage loans are subject to prepayment penalty until the third quarter of 2024. 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. As of March 31, 2020, the loan has an outstanding principal balance of $8,439,000 and a carrying value of $7,221,000, 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 $17,534,000 at March 31, 2020. All together, these notes are secured by facilities having a net book value of $133,117,000 at March 31, 2020.
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 2019, 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. In December 2019, through the issuance of common stock and cash we retired $60,000,000 of our convertible notes. 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.
As of March 31, 2020, our $60,000,000 of senior unsecured convertible notes were convertible at a rate of 14.71 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $67.97 per share for a total of 882,792 shares on the remaining $60,000,000 of senior unsecured convertible notes. For the three months ended March 31, 2020, there was no dilution resulting from the conversion option within our convertible debt. If NHI’s current share price increases above the adjusted $67.97 conversion price, dilution may become attributable to the conversion feature. At March 31, 2020, the face amount of the convertible debt exceeded its value on conversion, when value on conversion was computed as if the debt were immediately eligible to convert.
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 $7,060,000 of losses, which are included in accumulated other comprehensive loss, are projected to be reclassified into earnings.
As of March 31, 2020, we employ the following interest rate swap contracts to mitigate our interest rate risk on our bank term and revolver loans described above ($ 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
|
|
|
$
|
(280)
|
|
|
March 2014
|
|
June 2020
|
|
3.51%
|
|
1-month LIBOR
|
|
$
|
130,000
|
|
|
$
|
(464)
|
|
|
March 2019
|
|
December 2021
|
|
3.51%
|
|
1-month LIBOR
|
|
$
|
100,000
|
|
|
$
|
(3,380)
|
|
|
March 2019
|
|
December 2021
|
|
3.52%
|
|
1-month LIBOR
|
|
$
|
100,000
|
|
|
$
|
(3,403)
|
|
|
June 2019
|
|
December 2021
|
|
2.89%
|
|
1-month LIBOR
|
|
$
|
150,000
|
|
|
$
|
(3,447)
|
|
|
June 2019
|
|
December 2021
|
|
2.93%
|
|
1-month LIBOR
|
|
$
|
50,000
|
|
|
$
|
(1,160)
|
|
If the fair value of the hedge is an asset, we include it in our Condensed Consolidated Balance Sheets among other assets, and, if a liability, as a component of accounts payable and accrued expenses. See Note 9 for fair value disclosures about our interest rate swap agreements. Net liability balances for our hedges included as components of consolidated accumulated other comprehensive loss on March 31, 2020 and December 31, 2019, were $(12,134,000) and $(3,433,000), respectively.
The following table summarizes interest expense (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Interest expense on debt at contractual rates
|
|
|
|
|
$
|
13,003
|
|
|
$
|
13,074
|
|
|
Losses reclassified from accumulated other
|
|
|
|
|
|
|
|
|
comprehensive income (loss) into interest expense
|
|
|
|
|
492
|
|
|
(292)
|
|
|
Capitalized interest
|
|
|
|
|
(98)
|
|
|
(157)
|
|
|
Amortization of debt issuance costs and debt discount
|
|
|
|
|
743
|
|
|
893
|
|
|
Total interest expense
|
|
|
|
|
$
|
14,140
|
|
|
$
|
13,518
|
|
NOTE 6. COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES
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 March 31, 2020 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
|
|
|
(57,353,000)
|
|
|
3,847,000
|
|
|
Bickford Senior Living
|
SHO
|
|
Construction
|
|
28,700,000
|
|
|
(25,603,000)
|
|
|
3,097,000
|
|
|
Senior Living Communities
|
SHO
|
|
Revolving Credit
|
|
12,000,000
|
|
|
(10,701,000)
|
|
|
1,299,000
|
|
|
41 Management
|
SHO
|
|
Construction
|
|
10,800,000
|
|
|
(7,620,000)
|
|
|
3,180,000
|
|
|
Timber Ridge OpCo
|
SHO
|
|
Working Capital
|
|
5,000,000
|
|
|
—
|
|
|
5,000,000
|
|
|
Discovery Senior Living
|
SHO
|
|
Working Capital
|
|
750,000
|
|
|
(175,000)
|
|
|
575,000
|
|
|
|
|
|
|
|
$
|
237,250,000
|
|
|
$
|
(178,792,000)
|
|
|
$
|
58,458,000
|
|
As provided above, loans funded do not include the effects of discounts or commitment fees. Our loans and loan commitments to 41 Management, LLC (“41 Management”) represent a variable interest. 41 Management is structured to limit liability for potential claims for damages, is capitalized to achieve that purpose and is considered a VIE within the definition set forth in Note 1.
The credit loss liability for unfunded loan commitments is estimated using the same methodology as for our funded mortgage and other notes receivable based on the estimated amount that we expect to fund. We applied the same COVID-19 adjustments as discussed in Note 3 to our loss model as of March 31, 2020. The effect of the COVID-19 factors in our loss model resulted in a $100,000 increase in the credit loss liability for unfunded commitments during the first quarter. Excluding the effects of the COVID-19 adjustment, our provision for expected credit loss liability decreased by $75,000 due principally to a reduction in the unfunded commitments and the resulting reduction in our historical probability of default experience for our acquisition and construction mortgage pool.
The liability for expected credit losses on our unfunded loans is presented in the following table for the quarter ended March 31, 2020 ($ in thousands):
|
|
|
|
|
|
|
|
Beginning balance January 1, 2020 (upon adoption of ASU 2016-13)
|
$
|
325
|
|
|
Benefit to expected credit losses
|
(25)
|
|
|
|
|
|
|
|
|
Balance March 31, 2020
|
$
|
300
|
|
During the quarter ended March 31, 2020, we made one $5,000,000 mezzanine loan commitment to fund the borrowers working capital needs and at March 31, 2020, this commitment was unfunded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class
|
|
Type
|
|
Total
|
|
Funded
|
|
Remaining
|
|
Development Commitments:
|
|
|
|
|
|
|
|
|
|
|
Ignite Medical Resorts
|
SNF
|
|
Construction
|
|
$
|
25,350,000
|
|
|
$
|
(19,252,000)
|
|
|
$
|
6,098,000
|
|
|
Woodland Village
|
SHO
|
|
Renovation
|
|
7,515,000
|
|
|
(7,425,000)
|
|
|
90,000
|
|
|
Senior Living Communities
|
SHO
|
|
Renovation
|
|
6,830,000
|
|
|
(6,830,000)
|
|
|
—
|
|
|
Senior Living Communities
|
SHO
|
|
Renovation
|
|
3,100,000
|
|
|
(2,435,000)
|
|
|
665,000
|
|
|
Wingate Healthcare
|
SHO
|
|
Renovation
|
|
1,900,000
|
|
|
(508,000)
|
|
|
1,392,000
|
|
|
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
|
|
|
$
|
(36,450,000)
|
|
|
$
|
10,195,000
|
|
In addition to the commitments listed above, Discovery PropCo has committed to Discovery for funding up to $2,000,000 toward the purchase of condominium units located at one of the facilities. As of March 31, 2020, we have funded $968,000 toward this commitment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class
|
|
Type
|
|
Total
|
|
Funded
|
|
Remaining
|
|
Contingencies:
|
|
|
|
|
|
|
|
|
|
|
Timber Ridge OpCo
|
SHO
|
|
Earn Out Payments
|
|
$
|
10,000,000
|
|
|
$
|
—
|
|
|
$
|
10,000,000
|
|
|
Comfort Care Senior Living
|
SHO
|
|
Lease Inducement
|
|
6,000,000
|
|
|
—
|
|
|
6,000,000
|
|
|
Wingate Healthcare
|
SHO
|
|
Lease Inducement
|
|
5,000,000
|
|
|
—
|
|
|
5,000,000
|
|
|
Navion Senior Solutions
|
SHO
|
|
Lease Inducement
|
|
4,850,000
|
|
|
(500,000)
|
|
|
4,350,000
|
|
|
Discovery Senior Living
|
SHO
|
|
Lease Inducement
|
|
4,000,000
|
|
|
—
|
|
|
4,000,000
|
|
|
Ignite Medical Resorts
|
SNF
|
|
Lease Inducement
|
|
2,000,000
|
|
|
—
|
|
|
2,000,000
|
|
|
|
|
|
|
|
$
|
31,850,000
|
|
|
$
|
(500,000)
|
|
|
$
|
31,350,000
|
|
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 direct 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 and all schedule payments have been received through March 31, 2020.
Material Uncertainties
While the ultimate duration and lasting impact of the Coronavirus (COVID-19) remain to be established, there are conclusions about its likely effects on our business and operations that can reasonably be inferred, at least about the near-term effects of the pandemic. Revenues for the operators of our properties are significantly impacted by occupancy. Building occupancy rates have been adversely affected by the public health outbreak represented by COVID-19. The Centers for Disease Control has reported that the COVID-19 mortality rate increases with age. The occupancy at our properties could significantly decrease if COVID-19 results in early resident move-outs, delays in onboarding new residents, or causes collateral events such as a weakening in the housing market, a typical funding source for our operators’ customers. A decrease in occupancy or increase in costs could have a material adverse effect on the ability of our operators to meet their financial and other contractual obligations to us, including the payment of rent, as well as on our results of operations.
Tenants leasing properties from us have experienced some degree of increased costs combined with reduced revenues to an extent similar to that experienced by other providers of senior care and housing throughout the country. Upon presentation of proof of hardship, we expect that we will grant concessions going forward, the extent of which will depend in part on relief granted to our tenants under federal programs such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act whereby a significant portion of our tenants' hardship will be defrayed. Because of the wide-ranging interplay of circumstances yet to be determined, a projection of any forthcoming concessions during the remainder of 2020 and beyond cannot be reasonably estimated. If lease concessions related to the effects of COVID-19 become necessary, we will account for them consistent with how those concessions would be accounted for under Topic 842 as though the enforceable rights and obligations for those concessions existed under our leases, regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the related individual lease contract. The extent of future concessions we make in remediation of severe tenant hardship will be dependent on economic and cultural trends that cannot be reasonably and reliably projected by us at this time. The extent to which COVID-19 could impact our business and results of operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence. We continue to evaluate the impact of various forms of governmental assistance that may become available to the Company or its tenants, including the CARES Act. While we are not able to estimate the impact of the COVID-19 pandemic at this time, the pandemic could materially affect our future results of operations and financial condition, including recording impairments, lease modifications and credit losses associated with notes receivable in future periods.
NOTE 7. STOCK -BASED COMPENSATION
We recognize stock-based compensation for all stock options granted over the requisite service period using the fair value of these grants as estimated at the date of grant using the Black-Scholes pricing model. All restricted stock granted (if any) is recognized over the requisite service period using the market value of our publicly traded common stock on the date of grant.
Stock-Based Compensation Plans
The Compensation Committee of the Board of Directors (“the Committee”) has the authority to select the participants to be granted options; to designate whether the option granted is an incentive stock option (“ISO”), a non-qualified option, or a stock appreciation right; to establish the number of shares of common stock that may be issued upon exercise of the option; to establish the vesting provision for any award; and to establish the term any award may be outstanding. The exercise price of any ISO’s
granted will not be less than 100% of the fair market value of the shares of common stock on the date granted, and the term of an ISO may not be more than ten years. The exercise price of any non-qualified options granted will not be less than 100% of the fair market value of the shares of common stock on the date granted unless so determined by the Committee.
In May 2012, our stockholders approved the 2012 Stock Incentive Plan (“the 2012 Plan”) pursuant to which 3,500,000 shares of our common stock, as amended from time to time, were made available to grant as stock-based payments to employees, officers, directors or consultants. The individual option grant awards may vest over periods up to five years. The term of the options under the 2012 Plan is up to ten years from the date of grant. During the first quarter of 2020, we granted the remaining 319,669 awards available under the 2012 Plan.
On May 3, 2019, our stockholders approved the 2019 Stock Incentive Plan (“the 2019 Plan”) pursuant to which 3,000,000 shares of our common stock were made available to grant as stock-based payments to employees, officers, directors or consultants. The individual option grant awards may vest over periods up to five years. The term of the options under the 2019 Plan is up to ten years from the date of grant. As of March 31, 2020, there were 2,735,169 shares available for future grants under the 2019 Plan.
Compensation expense is only recognized for the awards that ultimately vest. Accordingly, pre-vesting forfeitures that were not expected will result in the reversal of previously recorded compensation expense. Non-cash compensation expense reported for the three months ended March 31, 2020 and 2019 was $1,845,000 and $2,001,000, respectively and is included in general and administrative expense in the Condensed Consolidated Statements of Income.
At March 31, 2020, we had, net of expected forfeitures, $2,124,000 of unrecognized compensation cost related to unvested stock options which is expected to be expensed over the following periods: 2020 - $1,353,000, 2021 - $693,000 and 2022 - $78,000.
The weighted average fair value per share of options granted during the three months ended March 31, 2020 and 2019 was $5.54 and $6.17, respectively. The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
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2020
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2019
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Dividend yield
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5.1%
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5.5%
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Expected volatility
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16.8%
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18.6%
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Expected lives
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2.9 years
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2.9 years
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Risk-free interest rate
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1.31%
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2.50%
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The following table summarizes our outstanding stock options:
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Three Months Ended
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March 31,
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2020
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2019
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Options outstanding January 1,
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1,004,014
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920,346
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Options granted under 2012 Plan
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319,669
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602,000
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Options exercised under 2012 Plan
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(512,509)
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(352,830)
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Options forfeited under 2012 Plan
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(4,169)
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|
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—
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Options granted under 2019 Plan
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264,831
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—
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Options forfeited under 2019 Plan
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(3,831)
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—
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Options outstanding, March 31,
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1,068,005
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1,169,516
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Exercisable at March 31,
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600,327
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678,997
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NOTE 8. EARNINGS AND DIVIDENDS PER COMMON SHARE
The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assume the exercise of stock options and the conversion of our convertible
debt using the treasury stock method, to the extent dilutive. If our average stock price for the period increases over the conversion price of our convertible debt, the conversion feature will be considered dilutive.
The following table summarizes the average number of common shares and the net income used in the calculation of basic and diluted earnings per common share (in thousands, except share and per share amounts):
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Three Months Ended
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March 31,
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2020
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2019
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Net income attributable to common stockholders
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$
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61,023
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$
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35,679
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BASIC:
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Weighted average common shares outstanding
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44,613,593
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42,825,824
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DILUTED:
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Weighted average common shares outstanding
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44,613,593
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42,825,824
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Stock options
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4,546
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75,695
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Convertible subordinated debentures
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—
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223,513
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Weighted average dilutive common shares outstanding
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44,618,139
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43,125,032
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Net income attributable to common stockholders - basic
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$
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1.37
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$
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0.83
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Net income attributable to common stockholders - diluted
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$
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1.37
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$
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0.83
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Incremental anti-dilutive shares excluded:
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Net share effect of stock options with an exercise price in excess of the average market price for our common shares
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305,862
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17,415
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Regular dividends declared per common share
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$
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1.1025
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$
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1.05
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NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial assets and liabilities measured at fair value (based on the hierarchy of the three levels of inputs described in Note 1 to the consolidated financial statements contained in our most recent Annual Report on Form 10-K) on a recurring basis have included marketable securities, derivative financial instruments and contingent consideration arrangements. Derivative financial instruments include our interest rate swap agreements.
Derivative financial instruments. Derivative financial instruments are valued in the market using discounted cash flow techniques. These techniques incorporate Level 1 and Level 2 inputs. The market inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation model for interest rate swaps are observable in active markets and are classified as Level 2 in the hierarchy.
Liabilities measured at fair value on a recurring basis are as follows (in thousands):
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Fair Value Measurement
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Balance Sheet Classification
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March 31,
2020
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December 31, 2019
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Level 2
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Interest rate swap liability
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Accounts payable and accrued expenses
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$
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(12,134)
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$
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(3,433)
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Carrying amounts and fair values of financial instruments that are not carried at fair value at March 31, 2020 and December 31, 2019 in the Condensed Consolidated Balance Sheets are as follows (in thousands):
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Carrying Amount
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Fair Value Measurement
|
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March 31, 2020
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December 31, 2019
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|
March 31, 2020
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December 31, 2019
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Level 2
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Variable rate debt
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$
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954,213
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$
|
845,744
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$
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958,000
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$
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850,000
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Fixed rate debt
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$
|
594,691
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$
|
594,721
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$
|
637,182
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$
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602,926
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Level 3
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|
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Mortgage and other notes receivable
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$
|
291,820
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$
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340,143
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$
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314,724
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$
|
347,543
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Fixed rate debt. Fixed rate debt is classified as Level 2 and its value is based on quoted prices for similar instruments or calculated utilizing model derived valuations in which significant inputs are observable in active markets.
Mortgage and other notes receivable. The fair value of mortgage and other notes receivable is based on credit risk and discount rates that are not observable in the marketplace and therefore represents a Level 3 measurement.
Carrying amounts of cash and cash equivalents and restricted cash, accounts receivable and accounts payable approximate fair value due to their short-term nature. The fair value of our borrowings under our revolving credit facility and other variable rate debt are reasonably estimated at their notional amounts at March 31, 2020 and December 31, 2019, due to the predominance of floating interest rates, which generally reflect market conditions.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
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 ASC Topic 606, Revenue from Contracts with Customers.
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 Topic 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.
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 an immaterial 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 $1,553,000 of reimbursements within revenue and in expenses in our Consolidated Statements of Income for the three months ended March 31, 2020, under the captions “Rental income” and “Property taxes and insurance on leased properties,” respectively.
On January 1, 2020 we adopted ASU 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 (“ASU 2016-13”), which requires 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 eliminate the probable initial recognition threshold and, instead, reflect an entity’s current estimate of all expected credit losses. Prior to ASU 2016-13, 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 forecast information incorporates more timely information in the estimate of expected credit loss that will be more useful to users of the financial statements. 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. In adopting ASU 2016-13 we elected as a transition method the modified retrospective approach. As a result of the transition guidance provided in the ASU, an allowance for expected credit losses of $3,900,000 and a liability for expected credit losses of $325,000 as of January 1, 2020, was established under the new standard and was reclassified out of cumulative net income in excess of dividends.
On April 8, 2020 the FASB issued, in Q&A format, interpretations providing guidance and clarification on the effects of the COVID-19 pandemic on accounting for lease modifications and recognition of interest income following concessions, among other topics. Following FASB guidance, NHI has elected to account for lease concessions related to the effects of COVID-19 consistent with how those concessions would be accounted for under Topic 842 as though the enforceable rights and obligations for those concessions existed, regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the related individual lease contract.
On March 12, 2020, the Financial Accounting Standards Board issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the three months ended March 31, 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
NOTE 11. SUBSEQUENT EVENTS
Autumn Trace
On May 1, 2020, we acquired two senior housing facilities each with 44 assisted living units for a total purchase price of $14,250,000, including $150,000 in closing costs. The facilities are located in Indiana and are leased to Autumn Trace Senior Communities, which is a new operator relationship for NHI. The 15-year master lease has an initial lease rate of 7.25% with fixed annual escalators of 2.25% and offers two optional extensions of 5 years each. NHI was also granted a purchase option on a newly opened Indiana facility that is expected to stabilize during 2020.
Additional Common Shares Authorized
At our annual meeting on May 6, 2020, our stockholders approved an amendment to the Articles of Incorporation to increase the number of authorized common shares from 60,000,000 to 100,000,000.