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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________

Commission File Number 001-10822
National Health Investors Inc
(Exact name of registrant as specified in its charter)
Maryland   62-1470956
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
222 Robert Rose Drive  
Murfreesboro Tennessee 37129
(Address of principal executive offices)   (Zip Code)

(615) 890-9100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value NHI New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were 44,729,157 shares of common stock outstanding of the registrant as of November 2, 2020.
1

Table of Contents


2
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

September 30,
2020 		December 31, 2019
(unaudited)
Assets:
Real estate properties:
Land $ 220,423  $ 213,617 
Buildings and improvements 3,041,613  2,836,673 
Construction in progress 2,528  24,556 
3,264,564  3,074,846 
Less accumulated depreciation (576,605) (514,453)
Real estate properties, net 2,687,959  2,560,393 
Mortgage and other notes receivable, net of credit loss reserve of $4,907 and $—
287,282  340,143 
Cash and cash equivalents 42,198  5,215 
Straight-line rent receivable 92,418  86,044 
Assets held for sale, net —  18,420 
Other assets 29,416  32,020 
Total Assets $ 3,139,273  $ 3,042,235 
Liabilities and Stockholders’ Equity:
Debt $ 1,528,968  $ 1,440,465 
Accounts payable and accrued expenses 32,144  26,313 
Dividends payable 49,314  46,817 
Lease deposit liabilities 10,638  10,638 
Deferred income 14,207  19,750 
Total Liabilities 1,635,271  1,543,983 
Commitments and Contingencies
National Health Investors, Inc. Stockholders' Equity:
Common stock, $0.01 par value; 100,000,000 and 60,000,000 shares authorized;
44,729,157 and 44,587,486 shares issued and outstanding, respectively 447  446 
Capital in excess of par value 1,510,804  1,505,948 
Cumulative dividends in excess of net income (9,337) (5,331)
Accumulated other comprehensive loss (8,865) (3,432)
Total National Health Investors, Inc. Stockholders' Equity 1,493,049  1,497,631 
Noncontrolling interests 10,953  621 
Total Equity 1,504,002  1,498,252 
Total Liabilities and Stockholders’ Equity $ 3,139,273  $ 3,042,235 

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. The Condensed Consolidated Balance Sheet at December 31, 2019 was derived from the audited consolidated financial statements at that date.
3
NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)

Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(unaudited) (unaudited)
Revenues:
Rental income $ 77,821  $ 75,247  $ 232,266  $ 218,777 
Interest income and other 6,480  6,435  19,306  17,109 
84,301  81,682  251,572  235,886 
Expenses:
Depreciation 20,836  19,695  62,126  57,206 
Interest 12,892  14,661  40,589  41,925 
Legal 241  40  826  409 
Franchise, excise and other taxes 164  121  553  1,441 
General and administrative 2,785  2,802  10,127  9,787 
Taxes and insurance on leased properties 4,187  1,608  7,190  4,205 
Loan and realty (gains) losses (193) —  1,002  2,500 
40,912  38,927  122,413  117,473 
Loss from equity method investment (728) —  (2,018) — 
Gains on sales of real estate —  —  21,007  — 
Net income 42,661  42,755  148,148  118,413 
Less: net (income) loss attributable to noncontrolling interests (66) 3  (162) 4 
Net income attributable to common stockholders $ 42,595  $ 42,758  $ 147,986  $ 118,417 
Weighted average common shares outstanding:
Basic 44,661,650  43,505,332  44,641,748  43,187,847 
Diluted 44,662,403  43,861,089  44,643,514  43,494,714 
Earnings per common share:
Net income attributable to common stockholders - basic $ 0.95  $ 0.98  $ 3.31  $ 2.74 
Net income attributable to common stockholders - diluted $ 0.95  $ 0.97  $ 3.31  $ 2.72 


The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
4
NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(unaudited) (unaudited)
Net income $ 42,661  $ 42,755  $ 148,148  $ 118,413 
Other comprehensive income (loss):
Decrease (increase) in fair value of cash flow hedges 92  (960) (9,966) (5,077)
Reclassification for amounts recognized as interest expense 1,778  (390) 4,533  (1,031)
Total other comprehensive income (loss) 1,870  (1,350) (5,433) (6,108)
Comprehensive income 44,531  41,405  142,715  112,305 
Comprehensive (income) loss attributable to noncontrolling interest (66) 3  (162) 4 
Comprehensive income attributable to common stockholders $ 44,465  $ 41,408  $ 142,553  $ 112,309 


The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
5
NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
  Nine Months Ended
September 30,
  2020 2019
(unaudited)
Cash flows from operating activities:    
Net income $ 148,148  $ 118,413 
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation 62,126  57,206 
Amortization of debt issuance costs, debt discounts and prepaids 3,775  3,664 
Amortization of commitment fees and note receivable discounts (581) (365)
Amortization of lease incentives 735  607 
Straight-line rent income (15,481) (16,255)
Non-cash interest income on mortgage and other notes receivable (2,865) (1,509)
Gains on sales of real estate (21,007) — 
Loss from equity method investment 2,018  — 
Loan and realty losses 1,002  2,500 
Payment of lease incentives (498) (3,100)
Non-cash stock-based compensation 2,772  2,955 
Changes in operating assets and liabilities:  
Other assets (835) 2,059 
Accounts payable and accrued expenses (2,513) 1,757 
Deferred income (269) 16,877 
Net cash provided by operating activities 176,527  184,809 
Cash flows from investing activities:    
Investments in mortgage and other notes receivable (41,715) (83,946)
Collections of mortgage and other notes receivable 33,895  2,566 
Investments in real estate (102,712) (209,227)
Investments in real estate development (158) — 
Investments in renovations of existing real estate (11,113) (14,295)
Equity method investment (875) — 
Proceeds from sale of real estate 39,260  — 
Net cash used in investing activities (83,418) (304,902)
Cash flows from financing activities:    
Proceeds from revolving credit facility 145,000  332,000 
Payments on revolving credit facility (157,000) (166,000)
Borrowings on term loan 100,000  — 
Payments on term loans (917) (886)
Debt issuance costs (1,039) (126)
Distributions to noncontrolling interests (537) — 
Proceeds from noncontrolling interests 13  631 
Taxes remitted on employee stock awards (2,705) (1,374)
Proceeds from issuance of common shares, net 4,791  95,802 
Dividends paid to stockholders (145,270) (133,585)
Net cash (used in) provided by financing activities (57,664) 126,462 
Increase in cash and cash equivalents and restricted cash 35,445  6,369 
Cash and cash equivalents and restricted cash, beginning of period 15,669  9,912 
Cash and cash equivalents and restricted cash, end of period $ 51,114  $ 16,281 


The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
6
NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)

Nine Months Ended
September 30,
2020 2019
(unaudited)
Supplemental disclosure of cash flow information:
Interest paid, net of amounts capitalized $ 33,174  $ 39,355 
Supplemental disclosure of non-cash investing and financing activities:
Real estate acquired in exchange for straight-line rent receivable $ —  $ 38,000 
Real estate acquired in exchange for mortgage notes receivable $ 63,220  $ 14,035 
Noncash portion of noncontrolling interest conveyed in acquisition $ 10,778  $ — 
Increase in mortgage note receivable from sale of real estate $ 4,000  $ — 
Change in other assets related to investments in real estate $ 348  $ 176 
Change in accounts payable related to investments in real estate construction $ (1,744) $ (1,981)
Change in accounts payable related to investments in real estate acquisition $ —  $ 1,178 
Change in accounts payable related to renovations of existing real estate $ 355  $ — 
Change in accounts payable related to distributions to noncontrolling interests $ 85  $ — 


The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
7
NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands, except share and per share amounts)

Common Stock Capital in Excess of Par Value Cumulative Net Income in Excess (Deficit) of Dividends Accumulated Other Comprehensive Income (Loss) Total National Health Investors, Inc. Stockholders’ Equity Noncontrolling Interests Total Equity
Shares Amount
Balances at December 31, 2019 44,587,486  $ 446  $ 1,505,948  $ (5,331) $ (3,432) $ 1,497,631  $ 621  $ 1,498,252 
Cumulative effect of change in accounting principle —  —  —  (4,225) —  (4,225) —  (4,225)
Noncontrolling interest conveyed in acquisition —  —  —  —  —  —  10,791  10,791 
Noncontrolling interest distribution —  —  —  —  —  —  (398) (398)
Total comprehensive income —  —  —  105,391  (7,303) 98,088  96  98,184 
Equity issuance costs —  —  (291) —  —  (291) —  (291)
Taxes remitted on employee stock awards —  —  (2,705) —  —  (2,705) —  (2,705)
Shares issued on stock options exercised 62,516  1  (2) —  —  (1) —  (1)
Stock-based compensation —  —  2,315  —  —  2,315  —  2,315 
Dividends declared, $2.205 per common share —  —  —  (98,453) —  (98,453) —  (98,453)
Activity for the six months ended June 30, 2020 62,516  1  (683) 2,713  (7,303) (5,272) 10,489  5,217 
Noncontrolling interest distribution —  —  —  —  —  —  (223) (223)
Total comprehensive income —  —  —  42,595  1,870  44,465  66  44,531 
Equity issuance costs —  —  (12) —  —  (12) —  (12)
Issuance of common stock, net 79,155  —  5,094  —  —  5,094  —  5,094 
Stock-based compensation —  —  457  —  —  457  —  457 
Dividends declared, $1.1025 per common share —  —  —  (49,314) —  (49,314) —  (49,314)
Activity for the three months ended September 30, 2020 79,155  —  5,539  (6,719) 1,870  690  (157) 533 
Balances at September 30, 2020 44,729,157  $ 447  $ 1,510,804  $ (9,337) $ (8,865) $ 1,493,049  $ 10,953  $ 1,504,002 


The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.












8
NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands, except share and per share amounts)

Common Stock Capital in Excess of Par Value Cumulative Net Income in Excess (Deficit) of Dividends Accumulated Other Comprehensive Income (Loss) Total National Health Investors Stockholders’ Equity Noncontrolling Interest Total Equity
Shares Amount
Balances at December 31, 2018 42,700,411  $ 427  $ 1,369,919  $ 18,068  $ 1,299  $ 1,389,713  $ —  $ 1,389,713 
Noncontrolling interest conveyed in acquisition —  —  —  —  —  —  642  642 
Total comprehensive income —  —  —  75,659  (4,758) 70,901  (1) 70,900 
Issuance of common stock, net 618,654  6  47,848  —  —  47,854  —  47,854 
Taxes remitted on employee stock awards —  —  (1,016) —  —  (1,016) —  (1,016)
Shares issued on stock options exercised 37,953  1  (1) —  —  —  —  — 
Stock-based compensation —  —  2,478  —  —  2,478  —  2,478 
Dividends declared, $2.10 per common share —  —  —  (90,885) —  (90,885) —  (90,885)
Activity for the six months ended June 30, 2019 656,607  7  49,309  (15,226) (4,758) 29,332  641  29,973 
Noncontrolling interest conveyed in acquisition —  —  —  —  —  —  (11) (11)
Total comprehensive income —  —  —  42,758  (1,350) 41,408  (3) 41,405 
Issuance of common stock, net 590,868  6  47,942  —  —  47,948  —  47,948 
Taxes remitted on employee stock awards —  —  (358) —  —  (358) —  (358)
Shares issued on stock options exercised 8,352  —  —  —  —  —  —  — 
Stock-based compensation —  —  477  —  —  477  —  477 
Dividends declared, $1.05 per common share —  —  —  (46,154) —  (46,154) —  (46,154)
Activity for the three months ended September 30, 2019 599,220  6  48,061  (3,396) (1,350) 43,321  (14) 43,307 
Balances at September 30, 2019 43,956,238  $ 440  $ 1,467,289  $ (554) $ (4,809) $ 1,462,366  $ 627  $ 1,462,993 



The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
9
NATIONAL HEALTH INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited)

Note 1. Organization and Nature of Business

National Health Investors, Inc. (“NHI” or “the Company”), established in 1991 as a Maryland corporation, is a self-managed real estate investment trust (“REIT”) that invests in need-driven and discretionary senior housing and other healthcare-related real estate properties located throughout the United States. As of September 30, 2020, we had investments of $3,261,886,000 (excluding our corporate office of $2,678,000) in 228 health care real estate properties located in 34 states and leased pursuant primarily to triple-net leases to 34 lessees consisting of 151 senior housing communities (“SHO”), 72 skilled nursing facilities, 3 hospitals and 2 medical office buildings. Our portfolio of 15 mortgages and other notes receivable totaled $292,189,000, excluding an allowance for expected credit losses of $4,907,000, as of September 30, 2020.

Note 2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements. In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation. Interim results of operations are not necessarily indicative of the results that may be achieved for a full year. The condensed consolidated financial statements and related notes do not include all information and footnotes required by GAAP for annual reports. These interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2019, included in our 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and subsidiaries in which we have a controlling interest. We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if the Company is deemed to be the primary beneficiary of such entities. All material intercompany transactions and balances are eliminated in consolidation.

At September 30, 2020, we held interests in eight unconsolidated VIEs, and, because we 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, excluding Timber Ridge OpCo which is accounted for under the equity method.

NHI’s VIEs are summarized below by date of initial involvement. For further discussion of the nature of the relationships, including the sources of exposure to these VIEs, see the notes to our condensed consolidated financial statements cross-referenced below.
Date Name Source of Exposure Carrying Amount Maximum Exposure to Loss Note Reference
2012 Bickford Senior Living
Various1
$ 61,834,000  $ 75,275,000  Notes 3, 4
2014 Senior Living Communities Notes and straight-line receivable $ 75,546,000  $ 81,375,000  Notes 3, 4
2016 Senior Living Management Notes and straight-line receivable $ 26,953,000  $ 26,953,000  —
2017 Evolve Senior Living Notes $ 9,963,000  $ 9,963,000  —
2018 Sagewood, LCS affiliate Notes $ 151,236,000  $ 178,780,000  Note 4
2019 41 Management, LLC Notes and straight-line receivable $ 9,220,000  $ 11,488,000  Note 7
2020 Timber Ridge OpCo
Various2
$ (1,142,000) $ 3,858,000  Notes 3, 5
2020 Watermark Retirement Notes and straight-line receivable $ 3,888,000  $ 8,888,000  Note 7
1 Notes, loan commitments, straight-line rent receivables, and unamortized lease incentives
2 Loan commitment, equity method investment and straight-line rent receivables
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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. Economic loss on a lease, above what is presented in the table above, 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, and is therefore not included in the tabulation above.

We consolidate two real estate partnerships formed with our partners, Discovery Senior Housing Investor XXIV, LLC, (“Discovery”) and LCS Timber Ridge LLC (“LCS”), to invest in senior housing facilities. As of and for the nine months ended September 30, 2020, our non-controlling interests relate to these partnerships with Discovery and LCS.

We use the equity method of accounting when we own an interest in an entity whereby we can exert significant influence over but cannot control the entity’s operations. We discontinue equity method accounting if our investment in an entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.

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 or subject to an agreement (e.g. with a qualified intermediary subject to an Internal Revenue Code §1031 exchange agreement or in accordance with agency agreements governing our Fannie Mae and U.S. Department of Housing and Urban Development (“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):
September 30,
2020 		September 30,
2019
Cash and cash equivalents $ 42,198  $ 5,882 
Restricted cash (included in Other assets) 8,916  10,399 
$ 51,114  $ 16,281 

New Accounting Pronouncements

For information about significant accounting policies, refer to the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2019 included in the Company’s 2019 Annual Report on Form 10-K filed with the SEC. During the nine months ended September 30, 2020, there were no material changes to these policies except as noted below.

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 over the term of the loan 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, adjusted for current conditions and our forecasts, using the probability of default and loss given default method. 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 we currently expect will be reduced by our 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 materially from our current estimates. Write-offs are deducted from the allowance for credit losses when we judge the principal to be uncollectable.

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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 dividends in excess of net income. Upon adoption, we also recorded a $325,000 liability for estimated credit losses pertaining to unfunded loan commitments as a cumulative dividends in excess of net income. The corresponding credit loss liability is included in the financial statement caption Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets.

In March 2020, the Financial Accounting Standards Board (“FASB”) 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 first quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future London Inter-bank Offered Rate (”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. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

In April 2020, the FASB issued a question-and-answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the coronavirus pandemic (“COVID-19”). The Lease Modification Q&A clarifies that entities may elect not to evaluate whether lease-related relief provided to mitigate the economic effects of COVID-19 is a lease modification under ASC 842. Instead, an entity that elects not to evaluate whether a concession directly related to COVID-19, which does not substantially increase either its rights as lessor or the obligations of the tenant, is a modification can elect whether to apply the modification guidance. Such election being applied consistently to leases with similar characteristics and similar circumstances. During the third quarter, the Company provided $2,654,000 in lease concessions as a result of COVID-19, as discussed in more detail in Note 7. NHI has elected not to apply the modification guidance under ASC 842 and has accounted for the related concessions as variable lease payments, recorded as rental income when received.

Note 3. Real Estate Properties and Investments

During the nine months ended September 30, 2020, we made the following real estate investments and related commitments ($ in thousands):

Operator Date Properties Asset Class Land Improvements Total
Bickford Senior Living Q1 1 SHO $ 1,588  $ 13,512  $ 15,100 
Life Care Services Q1 1 SHO 4,370  130,522  134,892 
Autumn Trace Q2 2 SHO 344  13,906  14,250 
The Courtyard at Bellevue Q3 1 SHO 504  11,796  12,300 
$ 6,806  $ 169,736  $ 176,542 

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 we acquired an 80% equity interest in a property company, NHI-LCS JV I, LLC (“Timber Ridge PropCo”), which owns a 401-unit Continuing Care Retirement Community (“CCRC”) located in Issaquah, Washington comprising 330 independent living units, 26 assisted living/memory care units and 45 skilled nursing beds. The same transaction conveyed to NHI a 25% equity interest in the newly formed operating company, Timber Ridge OpCo, LLC (“Timber Ridge OpCo”).

Total consideration for NHI’s interests in the combined venture was $124,989,000, comprised of the $59,350,000 remaining balance of a mortgage note initially funded in 2015, an additional loan of $21,650,000, and cash of $43,114,000 to Timber Ridge PropCo and $875,000 to Timber Ridge OpCo. Total debt due from Timber Ridge PropCo of $81,000,000, bears interest to NHI at
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5.75%. LCS paid $10,778,000 for its 20% equity stake in Timber Ridge PropCo and provided $2,625,000 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, we will receive approximately $8,216,000 in the first twelve months plus 25% of the remaining Timber Ridge OpCo cash flow. NHI’s contribution 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 initial investment. 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. See Note 5 for a discussion of Timber Ridge OpCo.

Autumn Trace

On May 1, 2020, we completed a purchase leaseback to acquire 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 five years each. NHI was also granted a purchase option on a newly opened Indiana facility.

The Courtyard at Bellevue

On September 30, 2020, we acquired a 43-unit assisted living and memory care facility located in Bellevue, Wisconsin from 41 Management. The acquisition price was $12,300,000 and included the full payment of an outstanding mortgage loan of $3,870,000, plus accrued interest. The property is leased to an affiliate of 41 Management pursuant to a 15-year master lease that has an initial lease rate of 7.5% with fixed annual escalators of 2.5% and offers two optional extensions of five years each.

Tenant Concentration

The following table contains information regarding tenant concentration in our portfolio, based on the percentage of revenues for the nine months ended September 30, 2020 and 2019, related to tenants or affiliates of tenants, that exceed 10% of total revenue ($ in thousands):
as of September 30, 2020
Revenues1
Number of Real Notes Nine Months Ended September 30,
Properties Estate Receivable 2020 2019
Bickford Senior Living 48 $ 534,376  $ 33,458  $ 39,142  16% $ 39,356  17%
Senior Living Communities 10 573,631  38,870  38,972  15% 36,914  16%
Holiday Retirement 26 531,378  —  30,529  12% 30,283  13%
National HealthCare Corporation (NHC) 42 171,297  —  28,362  11% 28,670  12%
All others 1,451,204  219,861  114,567  100,663 
$ 3,261,886  $ 292,189  $ 251,572  $ 235,886 
1 includes interest income on notes receivable

At September 30, 2020, the one state in which we had an investment concentration of 10% or more was South Carolina (10.3%).

Two of our board members, including our chairman, are also members of NHC’s board of directors.

Purchase Options

Certain of our leases contain purchase options allowing tenants to acquire the leased properties. At September 30, 2020, we had a net investment of $11,712,000 in two real estate properties which are subject to exercisable tenant purchase options. Tenant
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purchase options on 12 properties in which we had an aggregate net investment of $122,982,000 at September 30, 2020, become exercisable between 2021 and 2028.

Rental income from leased properties with tenant purchase options either currently exercisable or exercisable in the future was $4,703,000 and $13,418,000 for the three and nine months ended September 30, 2020 and $4,547,000 and $13,763,000 for the three and nine months ended September 30, 2019, respectively. We cannot reasonably estimate at this time the probability that these purchase options will be exercised in the future. Consideration to be received from the exercise of any tenant purchase option is expected to exceed our net investment in the leased property or properties.

Other Portfolio Activity

Tenant Transitioning

Nine properties were transitioned during 2019 to five new tenants following a period of non-compliance by the former operator. Two leases with the new tenants for six of these properties specify periods during which rental income is based on operating income, net of management fees. We recognized rental income from these nine properties of $930,000 and $3,741,000 for the three and nine months ended September 30, 2020, respectively and $1,103,000 and $2,310,000 for the three and nine months ended September 30, 2019, respectively.

In the future, NHI may be deemed the primary beneficiary of the operations if the tenants do not have adequate liquidity to accept the risks and rewards as the tenant and operator of the stabilizing properties and might be required to consolidate the statements of financial position and results of operations of the operators 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, Brookdale Senior Living, 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 and recognized a gain of $20,752,000. For the three and nine months ended September 30, 2020 we recognized $— and $229,000, respectively and $1,062,000 and $3,187,000 for the three and nine months ended September 30, 2019, respectively, of rental income from this 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 the first quarter of 2019, we recorded an adjustment to write off straight-line rent receivables of $124,000 and recognized an impairment loss of $2,500,000, included in loan and realty (gains) losses on the Condensed Consolidated Statements of Income to write down the properties to their estimated net realizable value upon classification of these properties as held-for-sale.

Future Minimum Base Rent

Future minimum base rents due under the remaining non-cancelable terms of operating leases in place as of September 30, 2020, are as follows (in thousands):

Remainder of 2020 $ 70,818 
2021 281,516 
2022 285,924 
2023 282,072 
2024 274,544 
2025 267,944 
Thereafter 1,398,860 
$ 2,861,678 

We assess the collectability of lease payments to be received from our tenants, which includes receivables, consisting primarily of straight-line rents receivable, based on several factors, including payment history, the financial strength of the tenant
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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 recognize lease payments on a cash basis and de-recognize all rent receivable assets, including the straight-line rent receivable asset 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 Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Lease payments based on fixed escalators, net of deferrals $ 67,342  $ 66,671  $ 205,444  $ 194,706 
Lease payments based on variable escalators 1,386  1,248  4,151  3,611 
Straight-line rent income 5,086  5,720  15,481  16,255 
Escrow funds received from tenants 4,007  1,608  7,190  4,205 
Rental income $ 77,821  $ 75,247  $ 232,266  $ 218,777 


Note 4. Mortgage and Other Notes Receivable

At September 30, 2020, we had investments in mortgage notes receivable secured by real estate and other assets of the borrower (e.g., UCC liens on personal property) related to 15 facilities and other notes receivable guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner with an aggregate carrying value of $287,282,000, net of an allowance of $4,907,000. All our notes were on full accrual basis at September 30, 2020.

Credit Loss Reserve

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, June 30, 2020, 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 three levels: (i) over 1.5x, (ii) between 1.0x and 1.5x, (iii) 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 September 30, 2020, we did not have any construction loans that we considered underperforming.

We consider the guidance in ASC 310-20 when determining whether a modification, extension or renewal constitutes a current period origination. The tables below present outstanding note balances as of September 30, 2020 at amortized cost based on the credit quality indicator as of June 30, 2020, net by year of origination ($ in thousands):

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2020 2019 2018 2017 2016 Prior Total
Mortgages
more than 1.5x $ 1,553  $ 8,453  $ 179,141  $ —  $ —  $ 6,894  $ 196,041 
between 1.0x and 1.5x —  —  —  —  10,000  —  10,000 
below 1.0x 4,000  39,123  —  9,963  —  —  53,086 
No coverage available —  —  —  —  —  —  — 
5,553  47,576  179,141  9,963  10,000  6,894  259,127 
Mezzanine
more than 1.5x —  —  —  —  —  —  — 
between 1.0x and 1.5x —  —  —  —  14,479  —  14,479 
below 1.0x —  —  —  —  —  11,663  11,663 
No coverage available —  750  —  —  —  —  750 
—  750  —  —  14,479  11,663  26,892 
Revolver
more than 1.5x — 
between 1.0x and 1.5x 6,170 
below 1.0x — 
6,170 
Credit loss reserve (4,907)
$ 287,282 

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 resulting in an effective adjustment of 44%. The COVID-19 adjustments resulted in a $1,700,000 increase in the credit loss reserve during the first quarter of 2020. Excluding the effects of the COVID-19 adjustment, our provision for expected credit losses decreased by $693,000 since our adoption of the credit loss guidance on January 1, 2020, 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 nine months ended September 30, 2020 ($ in thousands):

Beginning balance January 1, 2020 (upon adoption of ASU 2016-13) $ 3,900 
Provision for expected credit losses 1,007 
Balance September 30, 2020 $ 4,907 

Bickford

At September 30, 2020, our construction loans to Bickford are summarized in the following table ($ in thousands):

Commencement Rate Maturity Commitment Drawn Location
January 2018 9% 5 years $ 14,000  $ (13,687) Virginia
July 2018 9% 5 years 14,700  (14,218) Michigan
June 2020 9% 5 years 14,200  (1,553) Virginia
$ 42,900  $ (29,458)

On June 30, 2020, we entered into a $14,200,000 construction loan agreement with Bickford to develop a 64-unit assisted living facility.

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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 incentives based on the achievement of predetermined operational milestones and, if funded, will increase NHI's future purchase price and eventual NHI lease payment.

Our loans to Bickford represent a variable interest and Bickford is considered a VIE. 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 3) which was increased to $81,000,000 as part of the transaction. 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 5 for more information about our equity-method investment in Timber Ridge OpCo.

Life Care Services - Sagewood

In December 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. As discussed more fully in Note 2, 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 $91,256,000 of Note A as of September 30, 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 $61,200,000 as of September 30, 2020.

Senior Living Communities

We provided a $12,000,000 revolving line of credit whose borrowings are to be used primarily to finance construction projects within the Senior Living portfolio, including building additional units. No more than $10,000,000 may be used to meet general working capital needs. Beginning January 1, 2022, availability under the revolver reduces to $7,000,000 with the limit for general working capital needs reduced to $5,000,000. The revolver matures in December 2029 at the time of lease maturity. At September 30, 2020, the $6,170,000 outstanding under the facility bears interest at 6.69% per annum, the prevailing 10-year U.S. Treasury rate plus 6%.

On July 31, 2020, Senior Living Communities repaid two fully drawn mezzanine loans of $12,000,000 and $2,000,000, respectively. The purpose of the mezzanine loans were to partially fund construction of a 186-unit senior living campus on Daniel Island in South Carolina, which opened in April 2018. The loans bore interest, payable monthly, at a 10% annual rate.

Our loans to Senior Living and its subsidiaries totaling $38,870,000, 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 2, we have concluded that we are not the primary beneficiary of Senior Living.

Note 5. Equity Method Investment

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
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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.

Timber Ridge 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. Beginning in 2008, early residents of Timber Ridge executed loans to the then owner/operators backed by liens and entered 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 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. Timber Ridge 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 Timber Ridge PropCo.

With the periodic settlement of some of the outstanding resident loans in the course of normal entrance-fee community operations by Timber Ridge OpCo, the balance owing on the Deed and Indenture at the date of our acquisition on January 31, 2020 was $20,063,000 and was further reduced to $17,530,000 at September 30, 2020. By terms of the resident loan assumption agreement, during the term of the lease (7 years with two renewal options), Timber Ridge OpCo is to indemnify Timber Ridge PropCo for any repayment by Timber Ridge PropCo of these liabilities under the guarantee. NHI estimates that no material outflow of cash will result from Timber Ridge 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 September 30, 2020.

Timber Ridge OpCo meets the criteria to be considered a VIE. 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 and nine months ended September 30, 2020 was $728,000 and $2,018,000. 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. As of September 30, 2020, we have recognized our share of Timber Ridge OpCo’s operating losses in excess of our initial investment. These cumulative losses in excess of our basis of $1,143,000 are included in accounts payable and accrued expenses in our Condensed Consolidated Balance Sheets. Our commitments are currently limited to an additional $5,000,000 under a revolving credit facility.

Note 6. Debt

Debt consists of the following ($ in thousands):
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September 30,
2020 		December 31,
2019
Revolving credit facility - unsecured $ 288,000  $ 300,000 
Bank term loans - unsecured 650,000  550,000 
Private placement term loans - unsecured 400,000  400,000 
HUD mortgage loans - secured, non-recourse 41,542  42,138 
Fannie Mae term loans - secured, non-recourse 95,444  95,706 
Convertible senior notes - unsecured 60,000  59,697 
Unamortized loan costs (6,018) (7,076)
$ 1,528,968  $ 1,440,465 

The HUD loans are presented in the table above net of discounts of $1,179,000 and $1,238,000 as of September 30, 2020 and December 31, 2019, respectively.

Repayment of HUD mortgage loans

As of September 30, 2020, the Company had HUD mortgage loans secured by ten properties leased to Bickford with a net book value of $47,862,000. Nine of the mortgage notes required monthly payments of principal and interest from 4.3% to 4.4% (inclusive of mortgage insurance premiums) with original maturities in August and October 2049. One additional HUD mortgage loan assumed in 2014 at a discount, required monthly payments of principal and interest of 2.9% (inclusive of mortgage insurance premium) with an original maturity in October 2047. On October 30, and November 2, 2020, the Company repaid all ten HUD mortgage loans with a combined balance of $42,629,000, plus accrued interest of $157,000 and a prepayment fee of $1,619,000.

Aggregate principal maturities of debt as of September 30, 2020 are as follows (in thousands):

Remainder of 2020 $ 91 
2021 448,371 
2022 250,389 
2023 475,407 
2024 75,425 
2025 143,761 
Thereafter 100,000 
1,493,444 
Less: unamortized loan costs (6,018)
HUD mortgages 41,542 
$ 1,528,968 

Unsecured revolving credit facility and bank term loans

Our unsecured bank credit facility consists of three term loans –$100,000,000 maturing in July 2021, $250,000,000 maturing in August 2022 and $300,000,000 maturing in September 2023 - and a $550,000,000 revolving credit facility that matures in August 2021 with a one year extension option available after payment of a 10 basis point extension fee. We have swap agreements to fix the interest rates on $340,000,000 of term loans and $60,000,000 of our revolving credit facility that expire in December 2021, when LIBOR is scheduled for discontinuation.

We entered into the $100,000,000 term loan in July 2020, which bears interest at 30-day LIBOR (with a 50 basis point floor) plus 185 basis points, based on our current leverage ratios. The term loan provides us with the option to extend the maturity by one year subject to the payment of a 20 basis point extension fee. The proceeds from this loan were used to reduce the outstanding balance on our revolving credit facility. The Company incurred approximately $1,039,000 of deferred financing cost associated with this loan.

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 basis points and a blended 140 basis
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points, respectively. At September 30, 2020 and December 31, 2019, 30-day LIBOR was 15 basis points and 176 basis points, respectively. Through June 2020, the Company utilized $610,000,000 in interest rate swaps, designated as cash flow hedges, to fix the variable interest rate on the amounts outstanding on our term loans and revolving credit facility, at which time $210,000,000 of these hedges expired. As of September 30, 2020, we had $538,000,000 of outstanding variable rate debt exposed to interest rate risk through December 2021, at which time our remaining hedges expire. Our swaps and the financial instruments to which they relate are described in the table below, under the caption “Interest Rate Swap Agreements.”

At September 30, 2020, we had $262,000,000 available to draw on the revolving portion of our credit facility, subject to usual and customary covenants. Among other stipulations, the unsecured credit facility agreement requires that we maintain certain financial ratios within limits set by our creditors. At September 30, 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

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.

Fannie Mae term loans

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 4.6%, and has a remaining balance of $17,360,000 at September 30, 2020. All together, these notes are secured by facilities having a net book value of $131,024,000 at September 30, 2020.

Convertible senior notes

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. Therefore, we use the treasury stock method to account for potential dilution in the calculation of earnings per diluted share.

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
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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 September 30, 2020, our $60,000,000 of senior unsecured convertible notes were convertible at a rate of 14.88 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $67.21 per share for a total of 892,716 shares on the remaining $60,000,000 of senior unsecured convertible notes. For the three and nine months ended September 30, 2020, there was no dilution resulting from the conversion option within our convertible debt. If our current share price increases above the adjusted $67.21 conversion price, dilution may become attributable to the conversion feature. At September 30, 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 $400,000,000 of our bank loans. In June 2020, there were $210,000,000 notional amount of swaps that matured. During the next year, approximately $7,100,000 of losses, which are included in accumulated other comprehensive loss, are projected to be reclassified into earnings.

As of September 30, 2020, we employed 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 Swap Rate Rate Index Notional Amount Fair Value (Liability)
March 2019 December 2021 2.22% 1-month LIBOR $ 100,000  $ (2,597)
March 2019 December 2021 2.21% 1-month LIBOR $ 100,000  $ (2,613)
June 2019 December 2021 1.61% 1-month LIBOR $ 150,000  $ (2,736)
June 2019 December 2021 1.63% 1-month LIBOR $ 50,000  $ (920)

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 11 for fair value disclosures about our interest rate swap agreements. Net liability balances for our hedges included as components of accounts payable and accrued expenses on September 30, 2020 and December 31, 2019, were $8,866,000 and $3,433,000, respectively.

The following table summarizes interest expense ($ in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Interest expense on debt at contractual rates $ 10,129  $ 14,308  $ 33,701  $ 40,736 
(Gains) losses reclassified from accumulated other
comprehensive income (loss) into interest expense 1,778  (390) 4,533  (1,031)
Capitalized interest (9) (161) (169) (476)
Amortization of debt issuance costs, debt discount and other 994  904  2,524  2,696 
Total interest expense $ 12,892  $ 14,661  $ 40,589  $ 41,925 

Note 7. 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 September 30, 2020 according to the nature of their impact on our leasehold or loan portfolios. ($ in thousands)
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Asset Class Type Total Funded Remaining
Loan Commitments:
LCS Sagewood Note A SHO Construction $ 118,800  $ (91,256) $ 27,544 
LCS Sagewood Note B SHO Construction 61,200  (61,200) — 
Bickford Senior Living SHO Construction 42,900  (29,458) 13,442 
Senior Living Communities SHO Revolving Credit 12,000  (6,170) 5,830 
41 Management SHO Construction 10,800  (8,532) 2,268 
Timber Ridge OpCo SHO Working Capital 5,000  —  5,000 
Watermark Retirement SHO Working Capital 5,000  —  5,000 
Discovery Senior Living SHO Working Capital 750  (750) — 
$ 256,450  $ (197,366) $ 59,084 

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. On June 12, 2020, we provided a $5,000,000 loan commitment to Watermark Retirement to provide working capital liquidity in connection with the renewal of an existing lease on two continuing care retirement communities.

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 4.

The liability for expected credit losses on our unfunded loans is presented in the following table for the nine months ended September 30, 2020 ($ in thousands):

Beginning balance January 1, 2020 (upon adoption of ASU 2016-13) $ 325 
Benefit to expected credit losses (5)
Balance at September 30, 2020 $ 320 


Asset Class Type Total Funded Remaining
Development Commitments:
Ignite Medical Resorts SNF Construction $ 25,350  $ (24,313) $ 1,037 
Woodland Village SHO Renovation 7,515  (7,425) 90 
Senior Living Communities SHO Renovation 9,930  (9,763) 167 
Wingate Healthcare SHO Renovation 1,900  (1,532) 368 
Discovery Senior Living SHO Renovation 900  (697) 203 
Navion Senior Solutions SHO Construction 650  —  650 
41 Management SHO Renovation 400  —  400 
  Watermark Retirement SHO Renovation 6,500  (3,000) 3,500 
$ 53,145  $ (46,730) $ 6,415 

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 September 30, 2020, we have funded $968,000 toward this commitment.

As of September 30, 2020, we had $31,850,000 of contingent lease inducement commitments in six lease agreements which are generally based on the performance of facility operations and may or may not be met by the tenant. At September 30, 2020, we had funded $500,000 toward these commitments.

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COVID-19 Pandemic Contingencies

The World Health Organization declared COVID-19 a pandemic on March 11, 2020. The continually evolving pandemic has resulted in a widespread health crisis adversely affecting governments, businesses, and financial markets. In response to the COVID-19 pandemic, many state, local and federal agencies instituted various health and safety measures including temporary closures of many businesses, “shelter in place” orders, and social distancing guidelines that remain in place to some degree. The COVID-19 pandemic and related health and safety measures have created a significant strain on the operations of many of our tenants, operators and borrowers.

We have granted rent concessions to two tenants as a result of the COVID-19 pandemic. Effective July 1, 2020, we agreed to defer $2,100,000 in rent due for the third quarter of 2020 from Bickford with half of the deferral placed in escrow.

We have agreed to defer or abate portions of rents for the remainder of 2020 with another tenant that would also grant the tenant the option to defer a portion of rents related to the first quarter of 2021. The COVID-19 related deferrals and abatement granted for lease payments were $534,000 and $20,000, respectively, for the third quarter and $538,000 and $30,000, respectively for the fourth quarter. The optional deferred amount for the first quarter of 2021 is $447,000. Any deferred rent payments will accrue interest from the date of the deferral until paid in full. All amounts deferred are due no later than December 31, 2022. Initial interest is 8% through December 31, 2021, at which time the rate increases to 9%.

We have elected not to apply the modification guidance under ASC 842 and have decided to account for the related concessions as variable lease payments, recorded as rental income when received. We will evaluate any rent deferral requests as a result of the COVID-19 pandemic on a tenant-by-tenant basis. The extent of future concessions we make as a result of the COVID-19 pandemic, which could have a material impact on our future operating results, cannot be reasonably or reliably projected by us at this time.

We have evaluated the impacts of COVID-19 on our operations thus far and incorporated COVID-19 information, where possible, into our assessments of liquidity, asset impairments, and collectability of amounts due from tenants and borrowers as of September 30, 2020. The extent of the impact of COVID-19 on our financial condition, results of operations and cash flows, in the near term, will depend on future developments which are highly uncertain and cannot be predicted at this time. We will continue to monitor for any material or adverse effects resulting from the COVID-19 pandemic.

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.

Note 8. Equity and Dividends

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.

At-the-Market (ATM) Equity Program

In March 2020 the Company entered into a new ATM equity offering sales agreement pursuant to which the Company may sell, from time to time, up to an aggregate sales price of $500,000,000 of the Company’s common shares through the ATM equity
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program. Upon entering into the new agreement, the Company terminated its previously existing ATM equity program, dated February 22, 2017. During the three months and nine months ended September 30, 2020, we issued 79,155 common shares through the ATM program with an average price of $65.35, resulting in net proceeds of approximately $4,791,000.

Dividends

The following table summarizes dividends declared by the Board of Directors or paid during the nine months ended September 30, 2020 and 2019:
Nine Months Ended September 30, 2020
Date of Declaration Date of Record Date Paid/Payable Quarterly Dividend
November 7, 2019 December 31, 2019 January 31, 2020 $1.05
February 19, 2020 March 30, 2020 May 8, 2020 $1.1025
June 15, 2020 June 30, 2020 August 7, 2020 $1.1025
September 14, 2020 September 30, 2020 November 6, 2020 $1.1025

Nine Months Ended September 30, 2019
Date of Declaration Date of Record Date Paid/Payable Quarterly Dividend
December 17, 2018 December 28, 2018 January 31, 2019 $1.00
February 19, 2019 March 29, 2019 May 10, 2019 $1.05
May 7, 2019 June 28, 2019 August 9, 2019 $1.05
August 8, 2019 September 30, 2019 November 8, 2019 $1.05

Note 9. Stock-Based Compensation

We have two incentive plans – the 2012 Stock Incentive Plan (“2012 Plan”) and the 2019 Stock Incentive Plan (“2019” Plan”). As of September 30, 2020, shares available for future grants totaled 2,730,169. Stock options granted during 2020 under the 2012 Plan totaled 319,669. No shares remain available for issuance under the 2012 Plan. The following is a summary of stock-based compensation expense, net of forfeitures, included in General and administrative expenses in the Condensed Consolidated Statements of Income ($ in thousands):

Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Non-cash stock-based compensation expense $ 457  $ 477  $ 2,772  $ 2,955 

The weighted average fair value of options granted during the nine months ended September 30, 2020 and 2019 was $5.57 and $6.17 per option, 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:

2020 2019
Dividend yield 5.1% 5.5%
Expected volatility 17.1% 18.6%
Expected lives 2.9 years 2.9 years
Risk-free interest rate 1.30% 2.50%

The following table summarizes our outstanding stock options:

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Weighted Average
Number Weighted Average Remaining
of Shares Exercise Price Contractual Life (Years)
Options outstanding January 1, 2019 920,346  $69.24
Options granted 602,000  $79.96
Options exercised (431,993) $70.55
Options outstanding, September 30, 2019 1,090,353  $74.63
Exercisable at September 30, 2019 599,834  $74.34
Options outstanding January 1, 2020 1,004,014  $74.35
Options granted 592,000  $90.32
Options exercised (512,509) $72.98
Options forfeited (10,500) $88.73
Options outstanding, September 30, 2020 1,073,005  $83.68 3.70
Exercisable at September 30, 2020 601,994  $81.09 3.40

At September 30, 2020, the aggregate intrinsic value of stock options outstanding and exercisable was $49,000 and $16,000, respectively. The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2020 and 2019 was $8,118,000 or $15.84 per share and $5,066,000 or $11.73 per share, respectively.

As of September 30, 2020, unrecognized compensation expense totaling $1,246,000 associated with unvested stock options is expected to be recognized over the following periods: remainder of 2020 - $458,000, 2021 - $706,000 and 2022 - $82,000.

Note 10. Earnings 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 Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net income attributable to common stockholders $ 42,595  $ 42,758  $ 147,986  $ 118,417 
BASIC:
Weighted average common shares outstanding 44,661,650  43,505,332  44,641,748  43,187,847 
DILUTED:
Weighted average common shares outstanding 44,661,650  43,505,332  44,641,748  43,187,847 
Stock options 753  79,933  1,766  73,924 
Convertible subordinated debentures —  275,824  —  232,943 
Weighted average dilutive common shares outstanding 44,662,403  43,861,089  44,643,514  43,494,714 
Net income attributable to common stockholders - basic $ 0.95  $ 0.98  $ 3.31  $ 2.74 
Net income attributable to common stockholders - diluted $ 0.95  $ 0.97  $ 3.31  $ 2.72 
Incremental anti-dilutive shares excluded:
Net share effect of stock options with an exercise price in excess of the average market price for our common shares 410,012  7,858  427,180  11,200 
Regular dividends declared per common share $ 1.1025  $ 1.05  $ 3.3075  $ 3.15 

Note 11. Fair Value of Financial Instruments

Our financial assets and liabilities measured at fair value (based on the hierarchy of the three levels of inputs described in Note 1 to the consolidated financial statements contained in our most recent Annual Report on Form 10-K) on a recurring basis include derivative financial instruments. 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):
Fair Value Measurement
Balance Sheet Classification September 30,
2020 		December 31, 2019
Level 2
Interest rate swap liability Accounts payable and accrued expenses $ 8,866  $ 3,434 

Carrying amounts and fair values of financial instruments that are not carried at fair value at September 30, 2020 and December 31, 2019 in the Condensed Consolidated Balance Sheets are as follows ($ in thousands):
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Carrying Amount Fair Value Measurement
September 30, 2020 December 31, 2019 September 30, 2020 December 31, 2019
Level 2
Variable rate debt $ 934,339  $ 845,744  $ 938,000  $ 850,000 
Fixed rate debt $ 594,629  $ 594,721  $ 633,141  $ 602,926 
Level 3
Mortgage and other notes receivable $ 287,282  $ 340,143  $ 319,418  $ 347,543 

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 September 30, 2020 and December 31, 2019, due to the predominance of floating interest rates, which generally reflect market conditions.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

References throughout this document to NHI or the Company include National Health Investors, Inc., and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words “we”, “our”, “ours” and “us” refer only to National Health Investors, Inc. and its consolidated subsidiaries and not any other person. Unless the context indicates otherwise, references herein to “the Company” include all of our consolidated subsidiaries.

This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission, as well as information included in oral statements made, or to be made, by our senior management contain certain “forward-looking” statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations, cash flows, funds from operations, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, and similar statements including, without limitation, those containing words such as “may,” “will,” “believes,” “anticipates,” “expects,” “intends,” “estimates,” “plans,” and other similar expressions, are forward-looking statements.

Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements as a result of factors including, but not limited to, the following:

*    Actual or perceived risks associated with public health epidemics or outbreaks, such as the Coronavirus (COVID-19), has had and is expected to continue to have a material adverse effect on our business and results of operations;

*    We depend on the operating success of our tenants and borrowers for collection of our lease and note payments;

*    We depend on the success of property development and construction activities, which may fail to achieve the operating results we expect;

*    We are exposed to the risk that our tenants and borrowers may become subject to bankruptcy or insolvency proceedings;

*    Certain tenants in our portfolio account for a significant percentage of the rent we expect to generate from our portfolio, and the failure of any of these tenants to meet their obligations to us could materially and adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders;

*    We are exposed to the risk that the illiquidity of real estate investments could impede our ability to respond to adverse changes in the performance of our properties;

*    We are exposed to risks related to governmental regulations and payors, principally Medicare and Medicaid, and the effect that lower reimbursement rates would have on our tenants’ and borrowers’ business;

*    Legislative, regulatory, or administrative changes could adversely affect us or our security holders;

*    We are exposed to the risk that the cash flows of our tenants and borrowers would be adversely affected by increased liability claims and liability insurance costs;

*    We are exposed to risks associated with our investments in unconsolidated entities, including our lack of sole decision-making authority and our reliance on the financial condition of other interests;

*    We are subject to additional risks related to healthcare operations associated with our investments in unconsolidated entities, which could have a material adverse effect on our results of operations;

*    We are exposed to risks related to environmental laws and the costs associated with liabilities related to hazardous substances;

*    We are exposed to the risk that we may not be fully indemnified by our lessees and borrowers against future litigation;

*    We depend on the success of our future acquisitions and investments;
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*    We depend on our ability to reinvest cash in real estate investments in a timely manner and on acceptable terms;

*    We may need to refinance existing debt or incur additional debt in the future, which may not be available on terms acceptable to us;

*    We have covenants related to our indebtedness which impose certain operational limitations and a breach of those covenants could materially adversely affect our financial condition and results of operations;

*    When interest rates increase, our common stock may decline in price;

*    We depend on revenues derived mainly from fixed rate investments in real estate assets, while a portion of our debt used to finance those investments bears interest at variable rates;

*    We are subject to risks related to changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, which may adversely affect interest rates on our current or future indebtedness and may otherwise adversely affect our financial condition and result of operations;

*    We are exposed to the risk that our assets may be subject to impairment charges;

*    We depend on the ability to continue to qualify for taxation as a Real Estate Investment Trust;

*    Complying with REIT requirements may cause us to forego otherwise attractive acquisition opportunities or liquidate otherwise attractive investments, which could materially hinder our performance;

*    We are subject to risks associated with our joint venture investment with Life Care Services for Timber Ridge, an Entrance Fee CCRC, associated with Type A benefits offered to the residents of the joint venture's Entrance Fee community and related accounting requirements;

*    We have ownership limits in our charter with respect to our common stock and other classes of capital stock which may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or might otherwise be in the best interests of our stockholders;

*    We are subject to certain provisions of Maryland law and our charter and bylaws that could hinder, delay or prevent a change in control transaction, even if the transaction involves a premium price for our common stock or our stockholders believe such transaction to be otherwise in their best interests; and

*    If our efforts to maintain the privacy and security of Company information are not successful, we could incur substantial costs and reputational damage, and could become subject to litigation and enforcement actions.

See the notes to the annual audited consolidated financial statements in our most recent Annual Report on Form 10-K for the year ended December 31, 2019, and “Business” and “Risk Factors” under Item 1 and Item 1A therein for a further discussion of these and of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. See also an update to the “Risk Factors” under item 1A in this Form 10-Q. You should carefully consider these risks before making any investment decisions in the Company. These risks and uncertainties are not the only ones facing the Company. There may be additional risks that we do not presently know of and or that we currently deem immaterial. If any of the risks actually occur, our business, financial condition, results of operations, or cash flows could be materially and adversely affected. In that case, the trading price of our shares of stock could decline and you may lose part or all of your investment. Given these risks and uncertainties, we can give no assurance that these forward-looking statements will, in fact, occur and, therefore, caution investors not to place undue reliance on them.

Executive Overview

National Health Investors, Inc., established in 1991 as a Maryland corporation, is a self-managed real estate investment trust (“REIT”) specializing in sale-leaseback, joint-venture, mortgage and mezzanine financing of need-driven and discretionary senior housing and medical facility investments. Our portfolio consists of real estate investments in independent living facilities, assisted living facilities, entrance-fee communities, senior living campuses, skilled nursing facilities, specialty hospitals and
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medical office buildings. We fund our real estate investments primarily through: (1) operating cash flow, (2) debt offerings, including bank lines of credit and term debt, both unsecured and secured, and (3) the sale of equity securities.

Portfolio

As of September 30, 2020, we had investments in real estate and mortgage and other notes receivable involving 243 facilities located in 34 states. These investments involve 162 senior housing properties, 76 skilled nursing facilities, 3 hospitals, 2 medical office buildings and other notes receivable. These investments (excluding our corporate office of $2,678,000) consisted of properties with an original cost of approximately $3,261,886,000, rented under, primarily, triple-net leases to 34 lessees, and $292,189,000 aggregate net carrying value of mortgage and other notes receivable, excluding an allowance for expected credit losses of $4,907,000, due from 11 borrowers.

We classify all of the properties in our portfolio as either senior housing or medical properties. Because our leases represent different underlying revenue sources and result in differing risk profiles, we further classify our senior housing communities as either need-driven (assisted living and memory care communities and senior living campuses) or discretionary (independent living and entrance-fee communities.)

Senior Housing – Need-Driven includes assisted living and memory care communities (“ALF”) and senior living campuses (“SLC”) which primarily attract private payment for services from residents who require assistance with activities of daily living. Need-driven properties are subject to regulatory oversight.

Senior Housing – Discretionary includes independent living (“ILF”) and entrance-fee communities (“EFC”) which primarily attract private payment for services from residents who are making the lifestyle choice of living in an age-restricted multi-family community that offers social programs, meals, housekeeping and in some cases access to healthcare services. Discretionary properties are subject to limited regulatory oversight. There is a correlation between demand for this type of community and the strength of the housing market.

Medical Facilities within our portfolio receive payment primarily from Medicare, Medicaid and health insurance. These properties include skilled nursing facilities (“SNF”), medical office buildings (“MOB”) and hospitals that attract patients who have a need for acute or complex medical attention, preventative medicine, or rehabilitation services. Medical properties are subject to state and federal regulatory oversight and, in the case of hospitals, Joint Commission accreditation.
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The following tables summarize our investments in real estate and mortgage and other notes receivable as of and for the nine months ended September 30, 2020 ($ in thousands):

Properties Beds/Sq. Ft.* Revenue % Investment
Real Estate Properties
Senior Housing - Need-Driven
Assisted Living 94  5,131  $ 59,343  23.6  % $ 950,510 
Senior Living Campus 14  1,976  18,042  7.2  % 307,082 
Total Senior Housing - Need-Driven 108  7,107  77,385  30.8  % 1,257,592 
Senior Housing - Discretionary
Independent Living 32  3,703  35,305  14.0  % 599,321 
Entrance-Fee Communities 11  2,707  45,022  17.9  % 742,985 
Total Senior Housing - Discretionary 43  6,410  80,327  31.9  % 1,342,306 
Total Senior Housing 151  13,517  157,712  62.7  % 2,599,898 
Medical Facilities
Skilled Nursing Facilities 72  9,433  60,891  24.2  % 595,531 
Hospitals 3  207  5,701  2.3  % 55,971 
Medical Office Buildings 2  88,517  * 500  0.2  % 10,486 
Total Medical Facilities 77  67,092  26.7  % 661,988 
Total Real Estate Properties 228  224,804  89.4  % $ 3,261,886 
Income from properties sold 272 
Escrow Funds Received From Tenants 7,190 
Total Rental Income 232,266 
Mortgage and Other Notes Receivable
Senior Housing - Need-Driven 9  495  4,081  1.7  % $ 68,297 
Senior Housing - Discretionary 2  714  10,102  4.0  % 183,936 
Medical Facilities 4  270  474  0.2  % 6,894 
Other Notes Receivable —  —  3,252  1.3  % 33,062 
Total Mortgage and Other Notes Receivable 15  1,479  17,909  7.2  % $ 292,189 
Income from notes paid off 1,038 
Other Income 359 
Total Revenue $ 251,572 

Portfolio Summary Properties Revenue % Investment
Real Estate Properties 228  $ 224,804  92.6  % $ 3,261,886 
Mortgage and Other Notes Receivable 15  17,909  7.4  % 292,189 
Total Portfolio 243  $ 242,713  100.0  % $ 3,554,075 
Portfolio by Operator Type
Public 66  $ 52,501  21.7  % $ 511,293 
National Chain (Privately Owned) 28  45,251  18.6  % 817,506 
Regional 136  138,618  57.1  % 2,096,845 
Small 13  6,343  2.6  % 128,431 
Total Portfolio 243  $ 242,713  100.0  % $ 3,554,075 


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For the nine months ended September 30, 2020, operators of facilities which provided more than 3% of our total revenues were (in alphabetical order): Bickford Senior Living; Chancellor Health Care; Discovery Senior Living; The Ensign Group; Health Services Management; Holiday Retirement; Life Care Services; National HealthCare Corporation; Senior Living Communities; and Senior Living Management. In the aggregate these operators provided 80.8% of our total revenue for nine months ended September 30, 2020.

As of September 30, 2020, our average effective annualized rental income was $8,718 per bed for SNFs, $11,788 per unit for SLCs, $14,121 per unit for ALFs, $12,701 per unit for ILFs, $22,694 per unit for EFCs, $39,319 per bed for hospitals, and $8 per square foot for MOBs.

Substantially all of our revenues and sources of cash flows from operations are from rents from operating leases and interest earned on mortgages and notes receivable. Revenues from these investments represent a primary source of liquidity to fund our distributions to stockholders and depend upon the performance of the operators. Operating difficulties experienced by our operators could have a material adverse effect on the ability of our operators to meet their financial and other contractual obligations to us, as well as on our results of operations. We monitor operator performance through periodic reviews of operating results for each facility, covenant compliance and property inspections, among other activities.

COVID-19 Pandemic

The World Health Organization declared coronavirus disease 2019 (“COVID-19”) a pandemic on March 11, 2020. The continually evolving pandemic has resulted in a widespread health crisis adversely affecting governments, businesses, and financial markets. In response to the COVID-19 pandemic, many state, local and federal agencies instituted various health and safety measures including temporary closures of many businesses, “shelter in place” orders, and social distancing guidelines that remain in place to some degree. The COVID-19 pandemic and related health and safety measures have created a significant strain on the operations of many of the Company’s tenants, operators and borrowers.

The federal government passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act into law in March 2020 that provides economic assistance and other forms of relief from the financial hardships caused by the pandemic. Funds have been distributed by various government agencies including the US Department of Treasury and the Department of Health and Human Services (“HHS”) which oversees the distributions to healthcare providers who participate in various government reimbursement programs (e.g., Medicare). This federal government assistance has mitigated to some extent the negative financial impact of the pandemic for certain of our tenants and operators who are eligible.

Revenues for the operators of our properties are significantly impacted by occupancy. Building occupancy rates have been and may continue to be adversely affected by the COVID-19 pandemic if it continues to cause sustained negative trends such as early resident move-outs, delays in admitting new residents, or other collateral events such as a weakening in the housing market, a typical funding source for our senior housing operators’ customers. In addition, actions our operators take to address outbreaks could materially increase their operating costs, including costs related to enhanced health and safety precautions among other measures. 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.

We collected approximately 96.2% of contractual rents due for the third quarter ended September 30, 2020 and approximately 97.8% of contractual rents due for October 2020. We granted rent concessions to two tenants during the third quarter of 2020 as a result of the COVID-19 pandemic. We agreed to defer $2,100,000 in rent due for the third quarter of 2020 from Bickford with half of the deferral placed in escrow. We continue our negotiations with Bickford for the sale of nine properties which are currently leased to Bickford and have a gross book value of approximately $76,658,000 as of September 30, 2020. The deferred rent will be forgiven contingent upon Bickford’s ability to close on the acquisition of these properties. Rental income from this portfolio was $6,514,000 (net of $182,000 of the deferral mentioned above) and $7,151,000 for the nine months ended September 30, 2020 and 2019, respectively, including straight-line rental income of $217,000 and $568,000, respectively.

Subsequent to the end of the third quarter, we began discussions with Bickford regarding additional rent deferrals for the fourth quarter of 2020 and first quarter of 2021 as a result of the ongoing impact from the pandemic. As currently discussed, these additional deferrals may include $3,000,000 for November 2020 and optional deferrals of up to $750,000 for each of December 2020 and January 2021. The additional deferrals in discussion are expected to bear interest at 8% per annum with repayments over 12 months beginning in June 2021.

We have agreed to defer or abate portions of rents for the remainder of 2020 with another tenant that would also grant the tenant the option to defer a portion of rents related to the first quarter of 2021. The COVID-19 related deferrals and abatement granted for lease payments were $534,000 and $20,000, respectively, for the third quarter and $538,000 and $30,000,
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respectively, for the fourth quarter. The optional deferred amount for the first quarter of 2021 is $447,000. Any deferred rent payments will accrue interest from the date of the deferral until paid in full. All amounts deferred are due no later than December 31, 2022. Initial interest is 8% through December 31, 2021, at which time the rate increases to 9%.

We have elected not to apply the modification guidance under ASC 842 and have decided to account for the related concessions as variable lease payments, recorded as rental income when received. We will evaluate any rent deferral requests as a result of the COVID-19 pandemic on a tenant-by-tenant basis. The extent of future concessions we make as a result of the COVID-19 pandemic, which could have a material impact on our future operating results, cannot be reasonably or reliably projected by us at this time.

Moody's Investors Services (“Moody's”) announced on November 5, 2020 that it assigned an investment grade issuer credit rating and a senior unsecured debt rating of ‘Baa3’ with a “Negative” outlook to the Company. Fitch Ratings (“Fitch”) reaffirmed its BBB- and “Stable” outlook on the Company on September 30, 2020 and S&P Global Ratings (“S&P Global”) also currently maintains a BBB- and “Stable” outlook on the Company. In July 2020, we entered into a new one-year $100 million term loan bearing interest at a rate of 30-day LIBOR (with a 0.50% floor) plus 1.85% with a syndicate of banks. We have the right to extend the maturity by an additional year, subject to the payment of a 20 basis point extension fee. We had approximately $38,150,000 in unrestricted cash and cash equivalents on hand and $252,000,000 in availability under our unsecured revolving credit facility as of October 31, 2020. We believe this liquidity positions us to manage through the negative effects of the COVID-19 pandemic. Any reduction in outlook or downgrade in our credit ratings from the rating agencies could impact our costs of borrowings. However, we believe we continue to have access to additional debt sources and maintain availability under our at-the-market (“ATM”) equity issuance program and shelf registration statement to fund our future obligations, although no assurances can be made.

See “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q for further information regarding the risks presented by the COVID-19 pandemic.

Critical Accounting Policies

See our most recent Annual Report on Form 10-K for a discussion of critical accounting policies including those concerning revenue recognition, our status as a REIT, principles of consolidation, evaluation of impairments and allocation of property acquisition costs.

With the adoption of ASU 2016-13 beginning January 1, 2020, and the onset of COVID-19 in the United States, we have revised our discussion of estimates and valuations and impairments to include specific reference to additional judgments required under the new standard and evolving economic conditions, as follows:

Estimates

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These accounting principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. If actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations, liquidity and/or financial condition.

We consider an accounting estimate or assumption critical if:

1.the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and
2.the impact of the estimates and assumptions on financial condition or operating performance is material.

Valuations and Impairments

Our tenants and borrowers who operate SNFs derive their revenues primarily from Medicare, Medicaid and other government programs. Amounts paid under these government programs are subject to legislative and government budget constraints. From time to time, there may be material changes in government reimbursement. In the past, SNFs have experienced material reductions in government reimbursement.

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The long-term health care industry has experienced significant professional liability claims which have resulted in an increase in the cost of insurance to cover potential claims. In previous years, these factors have combined to cause a number of bankruptcy filings, bankruptcy court rulings and court judgments affecting our lessees and borrowers. In prior years, we have determined that impairment of certain of our loan investments had occurred as a result of these events. The frequency and breadth of bankruptcies may intensify as a result of macro-economic conditions.

We evaluate the recoverability of the carrying values of our properties on a property-by-property basis. We review our properties for recoverability when events or circumstances, including significant physical changes in the property, significant adverse changes in general economic conditions and significant deterioration of the underlying cash flows of the property, indicate that the carrying amount of the property may not be recoverable. The need to recognize an impairment charge is based on estimated undiscounted future cash flows from a property compared to the carrying value of that property. If recognition of an impairment charge is necessary, it is measured as the amount by which the carrying amount of the property exceeds the fair value of the property.

Lease accounting standards require that, for purposes of lease classification, we assess whether the lease, by its terms, transfers substantially all of the fair value of the asset under lease. This consideration will drive accounting for the alternative classifications among either operating, sales, or direct financing types of leases. For classification purposes, we distinguish cash flows that follow under terms of the lease from those that will derive, subsequent to the lease, from the ultimate disposition or re-deployment of the asset. From this segregation of the sources of cash flow, we are able to establish whether the lease is, in essence, a sale or financing in its having transferred substantially all of the fair value of the leased asset. Accordingly, management’s projected residual values represent significant assumptions in our accounting for leases.

While we do not incorporate residual value guarantees in our lease provisions, the contractual structure of other provisions provides a basis for expectations of realizable value from our properties, upon expiration of their lease terms. We additionally consider historical, demographic and market trends in developing our estimates. For each new lease, we discount our estimate of unguaranteed residual value and include this amount along with the stream of lease payments (also discounted) called for in the lease. We assess the stream of lease payments and the value deriving from eventual return of our property to establish whether the lease payments themselves comprise a return of substantially all of the fair value of the property under lease. We do not use a “bright line” in considering what constitutes “substantially all of the fair value,” but we undertake heightened vigilance in our assessment when the lease payments approach 90% of the composition of all future cash flows expected from the asset.

For our mortgage and other notes receivable, we evaluate the estimated collectability of contractual loan payments amid general economic conditions on the basis of a like-kind pooling of our loans. We estimate credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. In developing our expectation of losses, we will consider financial assets that share similar risk characteristics such as rate, age, type, location and adequacy of collateral on a collective basis. Other note investments which do not share common features will continue to be evaluated on an instrument-by-instrument basis.

The determination of fair value and whether a shortfall in operating revenues or the existence of operating losses is indicative of a loss in value that is other than temporary involves significant judgment. Our estimates consider all available evidence including, as appropriate, the present value of the expected future cash flows discounted at market rates, general economic conditions and trends, the duration of the fair value deficiency, and any other relevant factors. When an economic downturn whose duration is expected to span a year or more is encountered, such as the potential impact of the COVID-19 pandemic, we consider projections about the length and impetus of an expected economic recovery before we conclude that evidence of impairment is likely to be other than temporary. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results.

While we believe that the carrying amounts of our properties are recoverable and our notes receivable and other investments are realizable, it is possible that future events could require us to make significant adjustments or revisions to these estimates.

Investment Highlights

Since January 1, 2020, we have made or announced the following investments and related commitments ($ in thousands):
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Date Properties Asset Class Amount
Lease Investments
Bickford Senior Living January 2020 1 SHO $ 15,100 
Life Care Services January 2020 1 SHO 134,892 
Autumn Trace May 2020 2 SHO 14,250 
The Courtyard at Bellevue September 2020 1 SHO 12,300 
Note Investments
Timber Ridge OpCo line of credit January 2020 1 SHO 5,000 
Bickford Senior Living mortgage note January 2020 1 SHO 4,000 
Bickford Senior Living construction loan June 2020 1 SHO 14,200 
Watermark Retirement line of credit June 2020 2 SHO 5,000 
$ 204,742 

Bickford

On January 27, 2020, we acquired a 60-unit assisted living/memory care facility located in Shelby, Michigan, from Bickford. The acquisition price was $15,100,000, including $100,000 in closing costs, and the cancellation of an outstanding construction note receivable of $14,091,000, including interest. We added the facility to an existing master lease for a term of twelve years at an initial lease rate of 8%, with CPI escalators subject to a floor and ceiling.

On June 30, 2020, we entered into a $14,200,000 construction loan agreement with Bickford to construct a 64-unit assisted living facility in Virginia, of which $1,553,000 was funded.

Life Care Services

On January 31, 2020 we acquired an 80% equity interest in a property company, NHI-LCS JV I, LLC (“Timber Ridge PropCo”), which owns a 401-unit Continuing Care Retirement Community (“CCRC”) located in Issaquah, Washington comprising 330 independent living units, 26 assisted living/memory care units and 45 skilled nursing beds. The same transaction conveyed to NHI a 25% equity interest in the newly formed operating company, Timber Ridge OpCo, LLC (“Timber Ridge OpCo”).

Total consideration for NHI’s interests in the combined venture was $124,989,000, comprised of the $59,350,000 remaining balance of a mortgage note initially funded in 2015, an additional loan of $21,650,000, and cash of $43,114,000 to Timber Ridge PropCo and $875,000 to Timber Ridge OpCo. Total debt due from Timber Ridge PropCo of $81,000,000, bears interest to NHI at 5.75%. LCS Timber Ridge LLC (“LCS”) paid $10,778,000 for its 20% equity stake in Timber Ridge PropCo and provided $2,625,000 for a 75% equity participation in Timber Ridge OpCo. 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. No amounts have been drawn as of September 30, 2020.

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, we expect to receive $8,216,000 in the first twelve months plus 25% of the remaining Timber Ridge OpCo cash flow. NHI’s contribution 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 initial investment. 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.

Our investment in Timber Ridge OpCo was structured, to be compliant with the provisions of the REIT Investment Diversification and Empowerment Act of 2007 ("RIDEA") which permits us to receive rent payments through a triple-net lease between Timber Ridge PropCo and Timber Ridge OpCo and is designed to give us 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.

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Timber Ridge 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.

We report our investment in Timber Ridge OpCo under the equity method of accounting. Our equity share in the losses of Timber Ridge OpCo during the three months and nine months ended September 30, 2020 was $728,000 and $2,018,000, respectively, and was recorded as a reduction in our carrying value of Timber Ridge OpCo. As of September 30, 2020, we have recognized our share of Timber Ridge OpCo’s operating losses in excess of our initial investment. These cumulative losses in excess of our basis of $1,143,000 are included in accounts payable and accrued expenses in our Condensed Consolidated Balance Sheets.

Autumn Trace

On May 1, 2020, we completed a purchase leaseback to acquire 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.

Watermark Retirement

On June 12, 2020, we provided a $5,000,000 loan commitment to Watermark Retirement to provide working capital liquidity in connection with the renewal of an existing lease on two continuing care retirement communities. No amounts have been drawn as of September 30, 2020.

The Courtyard at Bellevue

On September 30, 2020, we acquired a 43-unit assisted living and memory care facility located in Bellevue, Wisconsin from 41 Management. The acquisition price was $12,300,000 and included the full payment of an outstanding mortgage loan of $3,870,000, plus accrued interest. The property is leased to an affiliate of 41 Management pursuant to a 15-year master lease that has an initial lease rate of 7.5% with fixed annual escalators of 2.5% and offers two optional extensions of five years each.

Senior Living Communities

On July 31, 2020, Senior Living Communities repaid two fully drawn mezzanine loans of $12,000,000 and $2,000,000, respectively. The purpose of the mezzanine loans were to partially fund construction of a 186-unit senior living campus on Daniel Island in South Carolina, which opened in April 2018. The loans bore interest, payable monthly, at a 10% annual rate.

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, Brookdale Senior Living, expressed an intention to exercise its purchase option on the properties. The purchase option called for the parties to split evenly any appreciation 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. For the nine months ended September 30, 2020 and 2019, we recognized $229,000 and $3,187,000, respectively, of rental income from this 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 the first quarter of 2019, we classified these properties as held-for-sale, recorded an adjustment to lease revenues to write off the associated $124,000 in straight-line receivables and recognized an impairment loss of $2,500,000 to write down the properties to their estimated net realizable value.

Other

Our leases are typically structured as “triple net leases” on single-tenant properties having an initial leasehold term of 10 to 15 years with one or more five-year renewal options. As such, there may be reporting periods in which we experience few, if any,
36
lease renewals or expirations. During the nine months ended September 30, 2020, we did not have any significant renewing or expiring leases.

Certain of our leases contain purchase options allowing tenants to acquire the leased properties. At September 30, 2020, we had a net investment of $11,712,000 in two real estate properties which are subject to exercisable tenant purchase options. Tenant purchase options on 12 properties in which we had an aggregate net investment of $122,982,000 at September 30, 2020, become exercisable between 2021 and 2028.

Rental income from leased properties with tenant purchase options either currently exercisable or exercisable in the future was $13,418,000 and $13,763,000 for the nine months ended September 30, 2020 and 2019, respectively. We cannot reasonably estimate at this time the probability that these purchase options will be exercised in the future. Consideration to be received from the exercise of any tenant purchase option is expected to exceed our net investment in the leased property or properties.

We adjust rental income for the amortization of lease inducements paid to our tenants. Current outstanding commitments and contingencies are listed under our discussion of liquidity and capital resources. Amortization of these payments against revenues was $735,000 and $607,000 for the nine months ended September 30, 2020 and 2019, respectively.

Tenant Concentration

As discussed in Note 3 to the condensed consolidated financial statements, we have four lessees (including their affiliated entities, which are the legal tenants) from whom we individually derive at least 10% of our rental income as follows ($ in thousands):

Rental Income
Investment Nine Months Ended September 30, Lease
Asset Class Amount 2020 2019 Renewal
Bickford Senior Living ALF $ 534,376  $ 37,142  17% $ 38,494  18% Various
Senior Living Communities EFC 573,631  35,788  16% 35,001  16% 2029
Holiday Retirement ILF 531,378  30,529  14% 30,283  14% 2035
National HealthCare Corporation SNF 171,297  28,362  13% 28,670  13% 2026
All others Various 1,451,204  93,255  40% 82,124  39% Various
$ 3,261,886  $ 225,076  $ 214,572 

The table above, for the nine months ended September 30, 2020 and 2019, excludes $7,190,000 and $4,205,000, respectively, for certain property operating expenses (e.g. property tax and insurance) received from our tenants through escrow reimbursement. Straight-line rent of $4,992,000 and $4,958,000 was recognized from the Holiday lease for the nine months ended September 30, 2020 and 2019, respectively. Straight-line rent of $3,203,000 and $3,519,000 was recognized from the Senior Living Communities lease for the nine months ended September 30, 2020 and 2019, respectively. Straight-line rent of $2,111,000 and $3,680,000 was recognized from the Bickford leases for the nine months ended September 30, 2020 and 2019, respectively. For NHC, rent escalations are based on a percentage increase in revenue over a base year and do not give rise to non-cash, straight-line rental income. The amounts in the table above are reflected with prior period amounts for properties transitioned to new operators or disposed being reclassified into the All others category.

For the nine months ended September 30, 2020, approximately 24% of our revenue was derived from operators of our skilled nursing facilities who receive a significant portion of their revenue from governmental payors, primarily Medicare and Medicaid. Such revenues are subject annually to statutory and regulatory changes and in recent years have been reduced due to federal and state budgetary pressures.

The following table summarizes the average portfolio occupancy for Senior Living Communities, Bickford and Holiday for the periods indicated, excluding development properties in operation less than 24 months, notes receivable, and properties transitioned to new operators or disposed.

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Properties 3Q19 4Q19 1Q20 2Q20 3Q20 September 2020
Senior Living Communities 9 80.3% 80.4% 80.3% 79.1% 79.0% 78.9%
Bickford 47 86.0% 86.3% 85.2% 82.5% 81.7% 81.8%
Holiday 26 87.6% 87.0% 87.3% 83.5% 79.6% 78.5%

Tenant Monitoring

Our operators report to us the results of their operations on a periodic basis, which we in turn subject to further analysis as a means of monitoring potential concerns within our portfolio. We have identified EBITDARM (earnings before interest, taxes, depreciation, amortization, rent and management fees) as a primary performance measure for our tenants, based on results they have reported to us. We believe EBITDARM is useful in our most fundamental analyses, as it is a property-level measure of our operators’ success, by eliminating the effects of the operator’s method of acquiring the use of its assets (interest and rent), its non-cash expenses (depreciation and amortization), expenses that are dependent on its level of success (income taxes), and also excluding the effect of the operator’s payment of its management fees, as typically those fees are contractually subordinate to our lease payment. For operators of our entrance-fee communities, our calculation of EBITDARM includes other cash flow adjustments typical of the industry which may include, but are not limited to, net cash flows from entrance fees; amortization of deferred entrance fees; adjustments for tenant rent obligations, depreciation and amortization; and management fee true-ups. The eliminations and adjustments reflect covenants in our leases and provide a comparable basis for assessing our various relationships.

We believe that EBITDARM is a useful way to analyze the cash potential of a group of assets. From EBITDARM we calculate a coverage ratio (EBITDARM/Cash Rent), measuring the ability of the operator to meet its monthly obligation. In addition to EBITDARM and the coverage ratio, we rely on a careful balance sheet analysis and other analytical procedures to help us identify potential areas of concern relative to our operators’ ability to generate sufficient liquidity to meet their obligations, including their obligation to continue to pay the amount due to us. Typical among our operators is a varying lag in reporting to us the results of their operations. Across our portfolio, however, our operators report their results, typically within either 30 or 45 days and at the latest, within 90 days of month’s end. For computational purposes, we exclude development and lease-up properties that have been in operation less than 24 months and selected immaterial properties identified in 2019 as available for sale and subsequently sold in the first quarter of 2020. For stabilized acquisitions in the portfolio less than 24 months and renewing leases with changes in scheduled rent, we include pro forma cash rent. Same-store portfolio coverage excludes properties that have transitioned operators in the past 24 months.

The results of our coverage ratio analysis are presented below on a trailing twelve-month basis, as of June 30, 2020 and 2019 (the most recent periods available):

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Total Portfolio
By asset type SHO SNF HOSP MOB TOTAL
Properties 135 74 3 2 214
2Q19 1.20x 2.76x 1.83x 6.39x 1.68x
2Q20 1.13x 2.89x 2.31x 6.48x 1.69x
Market served Need Driven Need Driven excl. Bickford Discretionary Discretionary excl. SLC & Holiday Medical Medical excl. NHC
Properties 96 49 39 4 79 37
2Q19 1.12x 1.16x 1.27x 1.94x 2.70x 1.86x
2Q20 1.10x 1.13x 1.17x 1.43x 2.86x 2.15x
Major tenants
NHC1
SLC Bickford Holiday
Properties 42 9 47 26
2Q19 3.79x 1.10x 1.08x 1.20x
2Q20 3.81x 1.06x 1.06x 1.18x
Same-Store Portfolio
By asset type SHO SNF HOSP MOB Total
Properties 127 74 2 2 205
2Q19 1.20x 2.76x 1.48x 6.39x 1.68x
2Q20 1.13x 2.89x 1.62x 6.48x 1.67x
Market served Need Driven Need Driven excl. Bickford Discretionary Discretionary excl. SLC & Holiday Medical Medical excl. NHC
Properties 89 42 38 3 78 36
2Q19 1.12x 1.17x 1.28x 1.98x 2.70x 1.82x
2Q20 1.09x 1.12x 1.17x 1.48x 2.84x 2.07x
Major tenants
NHC1
SLC Bickford Holiday
Properties 42 9 47 26
2Q19 3.79x 1.10x 1.08x 1.20x
2Q20 3.81x 1.06x 1.06x 1.18x
1 NHC based on corporate-level FCCR and includes 3 independent living facilities

These results include any amounts received and recognized by the operators from the HHS CARES Act Provider Relief Fund but do not include any funds received under the Paycheck Protection Program. Our operators may not consistently account for any pandemic relief funds received which can impact comparability among operators and across periods.

Fluctuations in portfolio coverage are a result of market and economic trends, local market competition, and regulatory factors as well as the operational success of our tenants. We use the results of individual leases to inform our decision making with respect to specific tenants, but trends described above by property type and operator bear analysis. Our senior housing portfolio shows a decline brought about primarily by a softening in occupancy and lower net entrance-fees within particular markets, as well as rising wage pressures. Additionally, the COVID-19 pandemic in the U.S. has further softened coverage for these operators as well as across our portfolio. For many of the affected operators, as is typical of our portfolio in general, NHI has security deposits in place and/or corporate guarantees should actual cash rental shortfalls eventually materialize. In certain instances, our operators may increase their security deposits with us in an amount equal to the coverage shortfall, and, upon
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subsequent compliance with the required lease coverage ratio, the operator would then be entitled to a full refund. The sufficiency of credit enhancements (e.g. tenant deposits and guarantees) as a protection against economic downturn will be a focus as the economic effects of the pandemic continue. The metrics presented in the tables above give no effect to the presence of these security deposits. Each MOB’s coverage is driven by the underlying performance of its on-campus hospital as the tenant or guarantor under the lease. As a result, it is typical for MOB operations to have large fluctuations in coverage resulting from hospital operations.

Other Portfolio Activity

Tenant Transitioning

Nine properties were transitioned during 2019 to five new tenants following a period of non-compliance by the former operators. Two leases with the new tenants for six of these properties specify periods during which rental income is based on operating income, net of management fees. We recognized rental income from these nine properties of $930,000 and $3,741,000 for the three and nine months ended September 30, 2020, respectively and $1,103,000 and $2,310,000 for the three and nine months ended September 30, 2019, respectively.

The following table summarizes the transition properties during the nine months ended September 30, 2020:

Occupancy1
Facility Name (New Tenant) Units State September 2019 December 2019 March 2020 June 2020 September 2020
Discovery Commons of College Park 148 IN 16.2% 15.5% 16.0% 14.2% 13.8%
The Charlotte (SLC) 99 NC 12.8% 20.8% 28.5% 34.8% 38.9%
Maybelle Carter (Vitality) 135 TN 78.5% 80.1% 82.2% 77.3% 76.8%
Chancellor TX-IL portfolio 196 IL/TX 66.0% 65.9% 67.1% 57.2% 54.4%
Beaver Dam Assisted Living (BAKA) 120 WI 68.3% 66.9% 68.3% 61.7% 61.8%
698 50.7% 51.7% 53.9% 49.6% 49.2%
1 Monthly Average

Real Estate and Mortgage Write-downs

In addition to the impact of the COVID-19 pandemic, our borrowers and tenants experience periods of significant financial pressures and difficulties similar to those encountered by other health care providers. Governments at both the federal and state levels have enacted legislation to lower, or at least slow, the growth in payments to health care providers. Furthermore, the cost of professional liability insurance has increased significantly during this same period.

Our condensed consolidated financial statements for the three and nine months ended September 30, 2020 do not reflect any significant impairment of our long-lived assets as a result of the COVID-19 pandemic or other factors. We have no significant intangible assets currently recorded on our balance sheet that would require assessment for impairment.

In July 2020, Quorum Health Corporation (“Quorum”) completed a Chapter 11 bankruptcy restructuring. As a result, NHI wrote off straight-line rent receivable under the lease of $380,000 in the first quarter of 2020 and began recognizing revenues under the lease as cash is received. Quorum continues to operate the hospital while timely paying its rent under the lease, which totaled $2,637,000 for the nine months ended September 30, 2020.

Effective January 1, 2020, we adopted ASU 2016-13, Financial Instruments – Credit Losses, which broadened the information we must consider in developing our expected credit loss estimates to include forecasted economic information in addition to our historical experience. We have established a reserve for estimated credit losses of $4,907,000 and a liability of $320,000 for estimated credit losses on unfunded loan commitments as of September 30, 2020. We evaluate the reserves for estimated credit losses on a quarterly basis and make adjustments based on current circumstances as considered necessary.

We believe that the carrying amounts of our real estate properties are recoverable and that mortgage and other notes receivable are realizable and supported by the value of the underlying collateral. However, it is possible that future events could require us to make significant adjustments to these carrying amounts.
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Results of Operations

The significant items affecting revenues and expenses are described below (in thousands):

Three Months Ended
September 30, Period Change
2020 2019 $ %
Revenues:
Rental income
CCRC leased to Timber Ridge OpCo $ 2,276  $ —  $ 2,276  NM
SNF leased to Ignite Team Partners 549  —  549  NM
ALFs leased to 41 Management 530  —  530  NM
EFCs leased to Senior Living Communities 10,857  10,520  337  3.2  %
ALFs leased to Bickford Senior Living 10,407  11,778  (1,371) (11.6) %
SHOs leased to Chancellor Health Care 2,051  2,441  (390) (16.0) %
SHOs leased to Discovery Senior Living 2,521  2,958  (437) (14.8) %
Other new and existing leases 39,537  38,638  899  2.3  %
Current year disposals —  1,584  (1,584) NM
68,728  67,919  809  1.2  %
Straight-line rent adjustments, new and existing leases 5,086  5,720  (634) (11.1) %
Escrow funds received from tenants for taxes and insurance 4,007  1,608  2,399  NM
Total Rental Income 77,821  75,247  2,574  3.4  %
Interest income and other
Life Care Services mortgages and construction loans 2,972  2,074  898  43.3  %
Bickford construction loans 739  384  355  92.4  %
41 Management mortgage loan 185  54  131  NM
Senior Living Communities mortgage and other notes 908  1,029  (121) (11.8) %
Current year note payoffs 143  1,623  (1,480) (91.2) %
Other new and existing mortgages and notes 1,296  1,239  57  4.6  %
Total Interest Income from Mortgage and Other Notes 6,243  6,403  (160) (2.5) %
Other income 237  32  205  NM
Total Revenues 84,301  81,682  2,619  3.2  %
Expenses:
Depreciation
CCRC leased to Timber Ridge OpCo 937  —  937  NM
ALFs leased to 41 Management 168  —  168  NM
SNF leased to Ignite Team Partners 152  —  152  NM
SHOs leased to Senior Living Communities 3,853  3,743  110  2.9  %
ALFs leased to Autumn Trace Communities 105  —  105  NM
Other new and existing assets 15,621  15,952  (331) (2.1) %
Total Depreciation 20,836  19,695  1,141  5.8  %
Interest 12,892  14,661  (1,769) (12.1) %
Payroll and related compensation expenses 1,527  1,451  76  5.2  %
Loan and realty gains (193) —  (193) NM
Taxes and insurance on leased properties 4,187  1,608  2,579  NM
Other expenses 1,663  1,512  151  10.0  %
Total Expenses 40,912  38,927  1,985  5.1  %
Loss from equity method investment (728) —  (728) NM
Net income 42,661  42,755  (94) (0.2) %
Less: net (income) loss attributable to noncontrolling interest (66) 3  (69) NM
Net income attributable to common stockholders $ 42,595  $ 42,758  $ (163) (0.4) %
NM - not meaningful

41
Financial highlights of the quarter ended September 30, 2020, compared to the same quarter of 2019 were as follows:

•Rental income received from our tenants increased by $809,000, or 1.2%, primarily due to $3,692,000 of additional rental income from new investments funded since September 2019. Rent concessions granted to tenants in third quarter 2020 totaling $2,654,000 as a result of the COVID-19 pandemic, partially offset the increase in rental income. Escrow funds received from tenants totaling $4,007,000 were used to pay certain property operating expenses (e.g. taxes and insurance), which is typical of triple net leases.

•Interest income from mortgage and other notes decreased $160,000, or (2.5)%, primarily due to Senior Living Communities
Daniel Island and other current year note pay offs.

•Depreciation expense increased $1,141,000 primarily due to new real estate investments completed since September 2019.

•Interest expense decreased $1,769,000 primarily as a result of $210,000,000 notional amount of fixed rate swaps that matured.

•As part of our current period assessment of expected credit losses, we recorded a $193,000 decrease in our credit loss reserve which is included in loan and realty (gains) losses in our Condensed Consolidated Statements of Income.

•The following table summarizes our stabilizing real estate recently transitioned to new tenants ($ in thousands):

Three Months Ended
September 30, Period Change
2020 2019 $ %
Revenues:
Rental income
SHOs leased to Chancellor Health Care $ —  $ 437  $ (437) NM
SHO leased to Senior Living Communities 38  366  (328) (89.6) %
SHO leased to Discovery Senior Living 19  189  (170) (89.9) %
SLC leased to Vitality Senior Living 66  (40) 106  NM
ALF leased to BAKA Enterprises 210  150  60  40.0  %
Straight-line rent adjustments 584  —  584  NM
Total Rental Income 917  1,102  (185) NM
Expenses:
Depreciation
SHOs leased to Chancellor Health Care 406  406  —  —  %
SHO leased to Senior Living Communities 153  132  21  15.9  %
SHO leased to Discovery Senior Living 171  171  —  —  %
SLC leased to Vitality Senior Living 158  154  4  2.6  %
ALF leased to BAKA Enterprises 135  145  (10) (6.9) %
Total Depreciation 1,023  1,008  15  1.5  %
Legal (6) 52  (58) NM
Franchise, excise and other taxes —  17  (17) NM
1,017  1,077  (60) (5.6) %
Net income (loss) $ (100) $ 25  $ (125) NM

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The significant items affecting revenues and expenses are described below (in thousands):
Nine Months Ended
September 30, Period Change
2020 2019 $ %
Revenues:
Rental income
CCRC leased to Timber Ridge OpCo $ 6,070  $ —  $ 6,070  NM
SHOs leased to Discovery Senior Living 8,551  5,399  3,152  58.4  %
ALFs leased to 41 Management 1,354  —  1,354  NM
EFCs leased to Senior Living Communities 32,585  31,482  1,103  3.5  %
SNF leased to Ignite Team Partners 892  —  892  NM
ALFs leased to Comfort Care Senior Living 2,323  1,612  711  44.1  %
ALFs leased to Autumn Trace Communities 430  —  430  NM
ALF’s leased to Bickford Senior Living 35,031  35,984  (953) (2.6) %
Other new and existing leases 122,359  120,258  2,101  1.7  %
Current year disposals —  3,582  (3,582) NM
209,595  198,317  11,278  5.7  %
Straight-line rent adjustments, new and existing leases 15,481  16,255  (774) (4.8) %
Escrow funds received from tenants for taxes and insurance 7,190  4,205  2,985  71.0  %
Total Rental Income 232,266  218,777  13,489  6.2  %
Interest income and other
Senior Living Communities mortgage and other notes 3,184  1,913  1,271  66.4  %
Bickford construction loans 2,000  862  1,138  NM
41 Management mortgage and construction loans 510  62  448  NM
Bickford construction loan payoffs —  1,791  (1,791) NM
Life Care Services mortgages and construction loans 8,324  8,732  (408) NM
Other existing mortgages and notes 4,929  3,609  1,320  36.6  %
Total Interest Income from Mortgage and Other Notes 18,947  16,969  1,978  11.7  %
Other income 359  140  219  NM
Total Revenues 251,572  235,886  15,686  6.6  %
Expenses:
Depreciation
CCRC leased to Timber Ridge OpCo 2,499  —  2,499  NM
SHOs leased to Discovery Senior Living 4,151  2,646  1,505  NM
ALFs leased to 41 Management 505  —  505  NM
EFCs leased to Senior Living Communities 11,558  11,163  395  3.5  %
Other new and existing assets 43,413  43,397  16  —  %
Total Depreciation 62,126  57,206  4,920  8.6  %
Interest 40,589  41,925  (1,336) (3.2) %
Payroll and related compensation expenses 4,512  4,050  462  11.4  %
Non-cash stock-based compensation expense 2,772  2,955  (183) (6.2) %
Loan and realty losses 1,002  2,500  (1,498) (59.9) %
Taxes and insurance on leased properties 7,190  4,205  2,985  71.0  %
Other expenses 4,222  4,632  (410) (8.9) %
Total Expenses 122,413  117,473  4,940  4.2  %
Loss from equity method investment (2,018) —  (2,018) NM
Gains on sales of real estate 21,007  —  21,007  NM
Net income 148,148  118,413  29,735  25.1  %
Less: net (income) loss attributable to noncontrolling interest (162) 4  (166) NM
Net income attributable to common stockholders $ 147,986  $ 118,417  $ 29,569  25.0  %
NM - not meaningful

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Financial highlights of the nine months ended September 30, 2020, compared to the same period in 2019 were as follows:

•Rental income received from our tenants increased $11,278,000, or 5.7%, primarily as a result of new investments funded since September 2019, net of rent concessions granted in third quarter 2020 totaling $2,654,000. Included in rental income were funds received from tenants totaling $7,190,000 used to pay certain property operating expenses (e.g. property taxes and insurance), which is typical of triple net leases.
•Interest income from mortgage and other notes increased $1,978,000, primarily due to interest income received on loans to Senior Living Communities, Bickford Senior Living and 41 Management.

•Depreciation expense increased $4,920,000 primarily due to new real estate investments completed since September 2019.

•Interest expense decreased $1,336,000 primarily as a result of $210,000,000 notional amount of fixed rate swaps that matured.

•Payroll and related compensation expenses increased $462,000 due primarily to several new employees added during the first half of 2020.

•As part of our assessment of expected credit losses, we recorded a $1,002,000 increase in our credit loss reserve for the nine months ended September 30, 2020, which is included in loan and realty (gains) losses in our Condensed Consolidated Statements of Income. Loan and realty losses of $2,500,000 represent a write-down recognized in 2019 related to two facilities classified as held for sale and subsequently sold in the first quarter of 2020.

•The following table summarizes our real estate under lease to transitioning tenants ($ in thousands):

Nine Months Ended
September 30, Period Change
2020 2019 $ %
Revenues:
Rental income
SHOs leased to Chancellor Health Care $ 862  $ 725  $ 137  18.9  %
SHO leased to Senior Living Communities 129  366  (237) (64.8) %
SHO leased to Discovery Senior Living 50  —  50  NM
SLC leased to Vitality Senior Living 251  105  146  NM
ALF leased to BAKA Enterprises1
540  925  (385) (41.6) %
Straight-line rent adjustments 1,908  —  1,908  NM
Total Revenues 3,740  2,121  1,619  NM
Expenses:
Depreciation
SHOs leased to Chancellor Health Care 1,217  1,217  —  —  %
SHO leased to Senior Living Communities 459  375  84  22.4  %
SHO leased to Discovery Senior Living 513  513  —  —  %
SLC leased to Vitality Senior Living 472  462  10  2.2  %
ALF leased to BAKA Enterprises 404  436  (32) (7.3) %
Total Depreciation 3,065  3,003  62  2.1  %
Legal (16) 181  (197) NM
Franchise, excise and other taxes —  845  (845) NM
3,049  4,029  (980) (24.3) %
Net income (loss) $ 691  $ (1,908) $ 2,599  NM
1 includes $625,000 received during 2019 as a settlement payment

44
Liquidity and Capital Resources

At September 30, 2020, we had $262,000,000 available to draw on our revolving credit facility, $42,198,000 in unrestricted cash and cash equivalents, and the potential to access capital through the issuance of common stock under the Company’s $500,000,000 ATM equity program. In addition, the Company maintains an effective automatic shelf registration statement through which capital could be raised via the issuance of debt and or equity securities.

In July, 2020, we entered into a new one-year $100,000,000 term loan bearing interest at a rate of 30-day LIBOR (with a 50 basis point floor) plus 185 basis points, based on our current leverage ratios. We have the right to extend the maturity by an additional year subject to the payment of a 20 basis point extension fee. The proceeds from this loan were used to repay amounts outstanding on the unsecured revolving credit facility.

During the three and nine months ended September 30, 2020, we issued 79,155 common shares through the ATM program with an average price of $65.35, resulting in net proceeds of approximately $4,791,000 initially used to pay down our revolving credit facility. We intend to use the proceeds from any further activity under the ATM program for general corporate purposes, which may include future acquisitions and repayment of indebtedness, including borrowings under our credit facility.

On October 30 and November 2, 2020, the Company repaid ten HUD mortgage loans with a combined balance of $42,629,000, plus accrued interest of $157,000 and a prepayment fee of $1,619,000. The HUD mortgage loans were secured by ten properties leased to Bickford with a net book value of $47,862,000. Nine of the mortgage notes required monthly payments of principal and interest from 4.3% to 4.4% (inclusive of mortgage insurance premiums) with maturities in August and October 2049. One additional HUD mortgage loan assumed in 2014 at a discount, required monthly payments of principal and interest of 2.9% (inclusive of mortgage insurance premium) and matured in October 2047.

Sources and Uses of Funds

Our primary sources of cash include rent payments, principal and interest payments on mortgage and other notes receivable, proceeds from the sales of real property, net proceeds from offerings of equity securities and borrowings from our term loans and revolving credit facility. Our primary uses of cash include debt service payments (both principal and interest), new investments in real estate and notes receivable, dividend distributions to our stockholders and general corporate overhead.

These sources and uses of cash are reflected in our Condensed Consolidated Statements of Cash Flows as summarized below ($ in thousands):
Nine Months Ended September 30, One Year Change
2020 2019 $ %
Cash and cash equivalents and restricted cash, January 1 $ 15,669  $ 9,912  $ 5,757  58.1  %
Net cash provided by operating activities 176,527  184,809  (8,282) (4.5) %
Net cash used in investing activities (83,418) (304,902) 221,484  (72.6) %
Net cash (used in) provided by financing activities (57,664) 126,462  (184,126) NM
Cash and cash equivalents and restricted cash, September 30 $ 51,114  $ 16,281  $ 34,833  NM

Operating Activities – Net cash provided by operating activities for the nine months ended September 30, 2020 was favorably impacted by new real estate investments in 2019 and 2020, an increase in lease payment collections arising from escalators on existing leases and previously funded lease incentives.

Investing Activities – Net cash used in investing activities for the nine months ended September 30, 2020 was comprised primarily of $155,698,000 of investments in real estate and notes, and was offset by the collection of principal on mortgage and other notes receivable of $33,895,000 and $39,260,000 in proceeds from the disposition of real estate.

Financing Activities – Net cash (used in) provided by financing activities for the nine months ended September 30, 2020 compared to the same period in 2019 is primarily the result of a $78,000,000 decrease in net borrowings, inclusive of a new $100,000,000 term loan, a $91,011,000 decrease in proceeds from issuance of common shares and dividend payments which increased $11,685,000 over the same period in 2019.




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Debt Obligations

Reference Note 6 to the condensed consolidated financial statements for additional information about our outstanding indebtedness. Also, reference “Item 3. Quantitative and Qualitative Disclosures About Market Risk” for more details on our indebtedness and the impact of interest rate risk.

Unsecured Bank Credit Facility - Our bank credit facility derives from the Credit Agreement dated as of August 3, 2017 (the “2017 Agreement”), and two Term Loan Agreements dated as of September 17, 2018 (the “2018 Agreement”) and July 9, 2020 (the “2020 Agreement”). Together these agreements establish our unsecured $1,200,000,000 bank credit facility, which consists of three term loans –$100,000,000 maturing in July 2021, $250,000,000 maturing in August 2022 and $300,000,000 maturing in September 2023 - and a $550,000,000 revolving credit facility that matures in August 2021 with a one year extension option available after payment of a 10 basis point extension fee. We have swap agreements to fix the interest rates on $340,000,000 of term loans and $60,000,000 of our revolving credit facility that expire in 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 140 bps, respectively. At September 30, 2020 and December 31, 2019, 30-day LIBOR was 15 and 176 bps, respectively. Through June 2020, the Company utilized $610,000,000 in interest rate swaps, designated as cash flow hedges, to fix the variable interest rate on the amounts outstanding on our term loans and revolving credit facility. On June 29 and 30, 2020, $80,000,000 and $130,000,000 of these hedges expired. As of September 30, 2020, we had $538,000,000 of outstanding variable rate debt exposed to interest rate risk through December 2021, at which time our remaining hedges expire. Our swaps and the financial instruments to which they relate are described in the table below, under the caption “Interest Rate Swap Agreements.” The current interest spreads and facility fee reflect our leverage-ratio compliance based on the applicable margin for LIBOR loans, measuring debt to “Total Asset Value,” at Level 3 in the Interest Rate Schedule provided below in summary format:

Interest Rate Schedule
LIBOR Margin
Level Leverage Ratio Revolver $300m Term Loan $250m Term Loan $100m Term Loan Facility Fee
1 < 0.35 1.10% 1.20% 1.25% 1.75% 0.15%
2 ≥ 0.35 & < 0.40 1.15% 1.25% 1.30% 1.80% 0.20%
3 ≥ 0.40 & < 0.45 1.20% 1.30% 1.35% 1.85% 0.20%
4 ≥ 0.45 & < 0.50 1.25% 1.40% 1.45% 1.95% 0.25%

Beyond the applicable ratios detailed above, increasing levels of leverage (not shown) will subject our debt to defined increases in interest rates and fees.

The 2017 Agreement requires that we calculate specified financial statement metrics and meet or exceed a variety of financial ratios, which are usual and customary in nature. These ratios are calculated quarterly and as of September 30, 2020, were within required limits. The calculation of our leverage ratio involves intermediate determinations of our “total indebtedness” and of our “total asset value,” as defined. As discussed below in connection with our leverage-based LIBOR Margin schedule, under provisions of which we are given credit for collateral based on cash rental revenue (capitalized at standard rates based on asset class), if we experience significant declines in rent collections, we could shift to Level 4 or beyond, resulting in significant additional interest expense.

Aside from a more favorable rate, the 2020 and 2018 Agreements generally calls for the same covenants and financial statement metrics required for compliance with terms of the 2017 Agreement. Although we are currently eligible under the term loan agreements to transact in our unsecured bank credit facilities at the respective scheduled rates represented by Level 3, the movement of our leverage ratio into Level 4 at current levels of debt would result in additional annual interest charges of $1,069,000, assuming an average revolver balance of approximately $288,000,000. Further movement of our leverage ratio beyond levels currently contemplated by management would be subject to escalating increases in interest. If, in addition to changes in the leverage ratio, certain qualitative indicators of our risk profile were to materially change, further interest-rate escalations may result.

We remain in compliance with all debt covenants under the unsecured bank credit facility and other debt agreements.

Convertible Senior Notes - As of September 30, 2020, our $60,000,000 of senior unsecured convertible notes were convertible at a rate of 14.88 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $67.21
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per share for a total of 892,716 shares on the remaining $60,000,000 of senior unsecured convertible notes. For the three and nine months ended September 30, 2020, there was no dilution resulting from the conversion option within our convertible debt. If NHI’s current share price increases above the adjusted $67.21 conversion price, dilution may become attributable to the conversion feature. At September 30, 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.

Effective October 1, 2020, the conversion feature is generally available to noteholders. The notes are “optional net-share settlement” instruments, allowing NHI the option to settle the principal amount of the indebtedness in cash and common stock for any excess. The amounts and timing of conversions will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors.

Debt Maturities - Reference Note 6 to the condensed consolidated financial statements for more information on our debt maturities.

Credit Ratings - Moody's Investors Services (“Moody's”) announced on November 5, 2020 that it assigned an investment grade issuer credit rating and a senior unsecured debt rating of ‘Baa3’ with a “Negative” outlook to the Company. Both Fitch and S&P Global announced in November 2019 a public issuer credit rating of BBB- with an outlook of “Stable”. Fitch confirmed its rating most recently on September 30, 2020. Our unsecured bank credit facility includes an option to shift from the leverage-based LIBOR margin schedule in the table above to a ratings-based LIBOR margin schedule. Shifting to a ratings-based LIBOR margin schedule potentially reduces volatility of our interest cost during periods of time when our leverage may fluctuate modestly. Our decision to move to a ratings-based margin schedule will be based on several factors including the relative cost of the ratings-based versus leverage-based margin schedules and our desire to have a more stable interest cost if our leverage modestly changes as compared to the existing leverage-based margin schedule. Our unsecured private placement term loan agreements include a rate increase provision that is effective if any rating agency lowers our credit rating below investment grade and our compliance leverage increases to 50% or more.

Reference Rate Reform - LIBOR is scheduled for discontinuation by December 2021. In the United States, the Alternative Reference Rates Committee, a group convened by the Federal Reserve Board and the Federal Reserve Bank of New York has identified the Secured Overnight Financing Rate as its preferred alternative rate for USD LIBOR. The Company continues to monitor the establishment of a new replacement index with the assistance of its banking advisors. We may choose not to hedge any more of our LIBOR positions for the relatively short duration remaining during which LIBOR may be referenced.

If a suitable replacement to LIBOR is not identified, bank facilities provide for rate alternatives which have historically been disadvantageous. Upon the discontinuation of LIBOR, the imposition of a new index rate may materially change interest expense and the credit spread, relative to that determined under the Company’s original pricing structure. However, with a public issuer credit rating and our shelf registration statement filed in March 2020, the Company is positioned to access the public bond market, which would reduce the Company’s exposure to LIBOR-based financial instruments.

Debt Metrics - We believe that our fixed charge coverage ratio, which is the ratio of Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, including amounts in discontinued operations, excluding real estate asset impairments and gains on dispositions) to fixed charges (interest expense at contractual rates net of capitalized interest and principal payments on debt), and the ratio of consolidated net debt to Adjusted EBITDA are meaningful measures of our ability to service our debt. We use these two measures as a useful basis to compare the strength of our balance sheet with those in our peer group. We also believe our balance sheet strength gives us a competitive advantage when accessing debt markets.

We calculate our fixed charge coverage ratio as approximately 5.9x for the nine months ended September 30, 2020 (see our discussion under the heading Adjusted EBITDA including a reconciliation to our net income). Giving effect to our acquisitions and financings on an annualized basis, our consolidated net debt to Annualized Adjusted EBITDA ratio is approximately 4.8x for the three months ended September 30, 2020 (in thousands):


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Consolidated Total Debt $ 1,528,968 
Less: cash and cash equivalents (42,198)
Consolidated Net Debt $ 1,486,770 
Adjusted EBITDA $ 77,012 
Annualizing Adjustment 231,036 
$ 308,048 
Consolidated Net Debt to Annualized Adjusted EBITDA 4.8x

Interest Rate Swap Agreements

To mitigate our exposure to interest rate risk, we have in place the following interest rate swap contracts in place to hedge against floating rates on our bank term loans and a portion of our revolving credit facility as of September 30, 2020 ($ in thousands):

Date Entered Maturity Date Fixed Rate Rate Index Notional Amount Fair Value (Liability)
March 2019 December 2021 2.22% 1-month LIBOR $ 100,000  $ (2,597)
March 2019 December 2021 2.21% 1-month LIBOR $ 100,000  $ (2,613)
June 2019 December 2021 1.61% 1-month LIBOR $ 150,000  $ (2,736)
June 2019 December 2021 1.63% 1-month LIBOR $ 50,000  $ (920)

For instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative has been reported as a component of other comprehensive income (loss), and reclassified into earnings in the same period, or periods, during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness have been recognized in earnings.

Equity

At September 30, 2020 we had 44,729,157 shares of common stock outstanding with a market value of $2,695,817,000. Equity on our Condensed Consolidated Balance Sheet totaled $1,504,002,000.

Dividends - We manage our business with a goal of increasing the regular annual dividends paid to stockholders. Our Board of Directors approves a regular quarterly dividend which is reflective of expected taxable income on a recurring basis. Taxable income is determined in accordance with the Internal Revenue Code and differs from net income for financial statements purposes determined in accordance with U.S. generally accepted accounting principles. Our goal of increasing annual dividends requires a careful balance between identification of high-quality lease and mortgage assets in which to invest and the cost of our capital with which to fund such investments. We consider the competing interests of short and long-term debt (interest rates, maturities and other terms) versus the higher cost of new equity. We accept some level of risk associated with leveraging our investments. We intend to continue to make new investments that meet our underwriting criteria and where the spreads over our cost of capital will generate sufficient returns to our stockholders.

We intend to comply with REIT dividend requirements that we distribute at least 90% of our annual taxable income for the year ending December 31, 2020 and thereafter. Historically, the Company has distributed at least 100% of annual taxable income. Dividends declared for the fourth quarter of each fiscal year are paid by the end of the following January and are, with some exceptions, treated for tax purposes as having been paid in the fiscal year just ended as provided in IRS Code Sec. 857(b)(8).

The following table summarizes dividends declared by the Board of Directors or paid during the nine months ended September 30, 2020 and 2019:
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Nine Months Ended September 30, 2020
Date of Declaration Date of Record Date Paid/Payable Quarterly Dividend
November 7, 2019 December 31, 2019 January 31, 2020 $1.05
February 19, 2020 March 30, 2020 May 8, 2020 $1.1025
June 15, 2020 June 30, 2020 August 7, 2020 $1.1025
September 14, 2020 September 30, 2020 November 6, 2020 $1.1025

Nine Months Ended September 30, 2019
Date of Declaration Date of Record Date Paid/Payable Quarterly Dividend
December 17, 2018 December 28, 2018 January 31, 2019 $1.00
February 19, 2019 March 29, 2019 May 10, 2019 $1.05
May 7, 2019 June 28, 2019 August 9, 2019 $1.05
August 8, 2019 September 30, 2019 November 8, 2019 $1.05

At-the-Market (ATM) Equity Program - We maintain an ATM program which allows us to sell our common stock directly into the market. In March 2020 the Company entered into a new ATM equity offering sales agreement pursuant to which the Company may sell, from time to time, up to an aggregate sales price of $500,000,000 of the Company’s common shares through the ATM equity program. The Company terminated its previously existing ATM equity program, dated February 22, 2017, upon entering into the new agreement. During the third quarter, we issued 79,155 common shares through the ATM program with an average price of $65.35, resulting in net proceeds of approximately $4,791,000. During 2019, we issued 1,209,522 shares under the February 22, 2017 program, with an average price of $80.58 per share, generating net proceeds of approximately $95,774,000.

Shelf Registration Statement - In March 2020, the Company filed an automatic shelf registration statement with the Securities and Exchange Commission that allows the Company to offer and sell to the public an unspecified amount of common stock, preferred stock, debt securities, warrants and or units at prices and on terms to be announced when and if such securities are offered. The details of any future offerings, along with the use of proceeds from any securities offered, will be described in a prospectus supplement or other offering materials, at the time of offering.

Off Balance Sheet Arrangements

As part of the Timber Ridge transaction in January 2020, we acquired the property subject to trust liens previously granted to residents of Timber Ridge. Beginning in 2008, the initial residents of Timber Ridge executed loans to the then owner/operators which were backed by 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 the residents who made 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 residents of the property. Subsequent to these early transactions, the repayment obligation with respect to “new” loans made to the owner/operator was no longer secured by the Timber Ridge property under the Deed and Indenture.

Our entry into the Timber Ridge transaction 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. Timber Ridge 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 Timber Ridge PropCo.

With the periodic settlement of some of the outstanding resident loans in the normal course of entrance-fee community operations, the balance secured by the Deed and Indenture at the date of our acquisition on January 31, 2020, was $20,063,000 and was further reduced to $17,530,000 at September 30, 2020. By terms of the resident loan assumption agreement, during the term of the lease (7 years with two renewal options), Timber Ridge OpCo is to indemnify Timber Ridge PropCo for any repayment by Timber Ridge PropCo of these liabilities under the guarantee. NHI expects that no eventual outflow of cash will result from Timber Ridge 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 September 30, 2020.

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As described in Note 2 to the condensed consolidated financial statements, our leases, mortgages and other notes receivable with certain unconsolidated entities represent variable interests in those enterprises. However, because we do not control these entities, nor do we have any role in their day-to-day management, we are not their primary beneficiary and therefore do not consolidate their financial statements. Except as discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, under Contractual Obligations and Contingent Liabilities, we have no further material obligations arising from our transactions with these entities, and we believe our maximum exposure to loss at September 30, 2020, due to this involvement would be limited to our contractual commitments and contingent liabilities and the amount of our current investments with them, as detailed further in Notes 2, 3, 4, 5 and 7 to the condensed consolidated financial statements. As of September 30, 2020, we furnished no direct support to any of these entities.

In March 2014, we issued convertible notes, which have a carrying amount of $60,000,000 as of September 30, 2020, with the conversion feature intended to broaden the Company’s credit profile and as a means to obtain a more favorable coupon rate. For this feature we calculate the dilutive effect using market prices prevailing over the reporting period. Because the dilution calculation is market-driven, and per share guidance we provide is based on diluted amounts, the theoretical effects of the conversion feature result in per share unpredictability.

Additional disclosure requirements also give widely ranging results depending on market price variability. The notes will be freely convertible in the last six months of their contractual life, beginning October 1, 2020; however, generally accepted accounting principles require us to periodically report the amount by which the notes’ convertible value exceeds their principal amount, without regard to the current availability of the conversion feature. Further, the mechanics of the calculation require the use of an end-of-period stock price, so that the face amount of the convertible debt exceeded its value on conversion at September 30, 2020, whereas the use of another price point would give a different result.

The conversion feature may also become actionable if the market price of NHI’s common stock should, for 20 of 30 consecutive trading days within a calendar quarter, sustain a level in excess of 130% of the adjusted conversion price, or $87.37 per share, down from $93.55 per share, initially. The notes are “optional net-share settlement” instruments, meaning that NHI has the option to settle the principal amount of the indebtedness in cash, with possible dilutive share issuances for any excess. 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 valuing the debt component first, with any remainder allocated to the conversion feature. Amounts expended to settle the notes will be recognized first as a settlement of the notes at par and then will be recognized in income to the extent the portion allocated to the debt instrument differs from par value. The remainder of the allocation, if any, will be treated as settlement of equity and adjusted through our paid in capital account.

Contractual Obligations and Contingent Liabilities

For our contractual obligations as of December 31, 2019, see our Management’s Discussion and Analysis contained in our Form 10-K for the year ended December 31, 2019.

Commitments and Contingencies

The following tables summarize information as of September 30, 2020 related to our outstanding commitments and contingencies which are more fully described in the notes to the condensed consolidated financial statements ($ in thousands).

Asset Class Type Total Funded Remaining
Loan Commitments:
LCS Sagewood Note A SHO Construction $ 118,800  $ (91,256) $ 27,544 
LCS Sagewood Note B SHO Construction 61,200  (61,200) — 
Bickford Senior Living SHO Construction 42,900  (29,458) 13,442 
Senior Living Communities SHO Revolving Credit 12,000  (6,170) 5,830 
41 Management SHO Construction 10,800  (8,532) 2,268 
Timber Ridge OpCo SHO Working Capital 5,000  —  5,000 
Watermark Retirement SHO Working Capital 5,000  —  5,000 
Discovery Senior Living SHO Working Capital 750  (750) — 
$ 256,450  $ (197,366) $ 59,084 
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See Note 4 to our condensed consolidated financial statements for further details of our loan commitments. As provided above, loans funded do not include the effects of discounts or commitment fees.

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 4 to the condensed consolidated financial statements. The liability for expected credit losses on our unfunded loans was $320,000 as of September 30, 2020.

Asset Class Type Total Funded Remaining
Development Commitments:
Ignite Medical Resorts SNF Construction $ 25,350  $ (24,313) $ 1,037 
Woodland Village SHO Renovation 7,515  (7,425) 90 
Senior Living Communities SHO Renovation 9,930  (9,763) 167 
Wingate Healthcare SHO Renovation 1,900  (1,532) 368 
Discovery Senior Living SHO Renovation 900  (697) 203 
Navion Senior Solutions SHO Construction 650  —  650 
41 Management SHO Renovation 400  —  400 
  Watermark Retirement SHO Renovation 6,500  (3,000) 3,500 
$ 53,145  $ (46,730) $ 6,415 

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, of which $968,000 has been funded as of September 30, 2020.

Asset Class Total Funded Remaining
Contingencies (Lease Inducements):
Timber Ridge OpCo SHO $ 10,000  $ —  $ 10,000 
Comfort Care Senior Living SHO 6,000  —  6,000 
Wingate Healthcare SHO 5,000  —  5,000 
Navion Senior Solutions SHO 4,850  (500) 4,350 
Discovery Senior Living SHO 4,000  —  4,000 
Ignite Medical Resorts SNF 2,000  —  2,000 
$ 31,850  $ (500) $ 31,350 

Litigation

Our facilities are subject to claims and suits in the ordinary course of business. Our lessees and borrowers have indemnified, and are obligated to continue to indemnify us, against all liabilities arising from the operation of the facilities, and are further obligated to indemnify us against environmental or title problems affecting the real estate underlying such facilities. While there may be lawsuits pending against certain of the owners and/or lessees of the facilities, management believes that the ultimate resolution of all such pending proceedings will have no material adverse effect on our financial condition, results of operations or cash flows.

In June 2018, East Lake Capital Management LLC and certain related entities, including Regency (for three assisted living facilities in Tennessee, Indiana and North Carolina), filed suit against NHI in Texas seeking injunctive and declaratory relief and unspecified monetary damages. NHI responded with counterclaims and filed motions requesting the immediate appointment of a receiver and for pre-judgment possession. Resulting from these claims and counterclaims, on December 6, 2018, the parties entered into an agreement resulting in Regency vacating the facilities in December 2018. Litigation is ongoing.



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FFO, AFFO & FAD

These supplemental operating performance measures may not be comparable to similarly titled measures used by other REITs. Consequently, our Funds From Operations (“FFO”), Normalized FFO, Normalized Adjusted Funds From Operations (“AFFO”) and Normalized Funds Available for Distribution (“FAD”) may not provide a meaningful measure of our performance as compared to that of other REITs. Since other REITs may not use our definition of these operating performance measures, caution should be exercised when comparing our FFO, Normalized FFO, Normalized AFFO and Normalized FAD to that of other REITs. These financial performance measures do not represent cash generated from operating activities in accordance with generally accepted accounting principles (“GAAP”) (these measures do not include changes in operating assets and liabilities) and therefore should not be considered an alternative to net earnings as an indication of operating performance, or to net cash flow from operating activities as determined by GAAP as a measure of liquidity, and are not necessarily indicative of cash available to fund cash needs.

Funds From Operations - FFO

Our FFO per diluted common share for the nine months ended September 30, 2020 increased $0.13 (3.2%) over the same period in 2019 due primarily to the impact of new investments completed since September 2019. FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) and applied by us, is net income (computed in accordance with GAAP), excluding gains (or losses) from sales of real estate property, impairments of real estate, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures, if any. The Company’s computation of FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or have a different interpretation of the current NAREIT definition from that of the Company; therefore, caution should be exercised when comparing our Company’s FFO to that of other REITs. Diluted FFO assumes the exercise of stock options and other potentially dilutive securities.

Our normalized FFO per diluted common share for the nine months ended September 30, 2020 increased $0.14 (3.4%) over the same period in 2019 due primarily to the impact of new investments completed since September 2019. Normalized FFO excludes from FFO certain items which, due to their infrequent or unpredictable nature, may create some difficulty in comparing FFO for the current period to similar prior periods, and may include, but are not limited to, impairment of non-real estate assets, gains and losses attributable to the acquisition and disposition of assets and liabilities, and recoveries of previous write-downs.

FFO and normalized FFO are important supplemental measures of operating performance for a REIT. Because the historical cost accounting convention used for real estate assets requires depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen and fallen with market conditions, presentations of operating results for a REIT that uses historical cost accounting for depreciation could be less informative, and should be supplemented with a measure such as FFO. The term FFO was designed by the REIT industry to address this issue.

Adjusted Funds From Operations - AFFO

Our normalized AFFO per diluted common share for the nine months ended September 30, 2020 increased $0.19 (5.0%) over the same period in 2019 due primarily to the impact of new investments completed since September 2019. In addition to the adjustments included in the calculation of normalized FFO, normalized AFFO excludes the impact of any straight-line rent revenue, amortization of the original issue discount on our convertible senior notes and amortization of debt issuance costs.

Normalized AFFO is an important supplemental measure of operating performance for a REIT. GAAP requires a lessor to recognize contractual lease payments into income on a straight-line basis over the expected term of the lease. This straight-line adjustment has the effect of reporting lease income that is significantly more or less than the contractual cash flows received pursuant to the terms of the lease agreement. GAAP also requires the original issue discount of our convertible senior notes and debt issuance costs to be amortized as non-cash adjustments to earnings. We also adjust Normalized AFFO for the net change in our allowance for expected credit losses as well as certain non-cash items related to our equity method investments such as straight-line lease expense and amortization of purchase accounting adjustments. Normalized AFFO is useful to our investors as it reflects the growth inherent in the contractual lease payments of our real estate portfolio.

Funds Available for Distribution - FAD

Our normalized FAD for the nine months ended September 30, 2020 increased $12,634,000 (7.5%) over the same period in 2019 due primarily to the impact of new investments completed since September 2019. In addition to the adjustments included in the calculation of normalized AFFO, normalized FAD excludes the impact of non-cash stock based compensation. We also adjust
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Normalized FAD for items related to our equity method investments such as capital expenditures and the net change in non-refundable entrance fees. Normalized FAD is an important supplemental measure of liquidity for a REIT as a useful indicator of the ability to distribute dividends to stockholders.

The following table reconciles net income, the most directly comparable GAAP metric, to FFO, Normalized FFO, Normalized AFFO and Normalized FAD and is presented for both basic and diluted weighted average common shares ($ in thousands, except share and per share amounts):

Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net income attributable to common stockholders $ 42,595  $ 42,758  $ 147,986  $ 118,417 
Elimination of certain non-cash items in net income:
Depreciation 20,836  19,695  62,126  57,206 
Depreciation related to noncontrolling interests (210) (22) (567) (30)
Gain on sale of real estate —  —  (21,007) — 
Impairment of real estate —  —  —  2,500 
NAREIT FFO attributable to common stockholders 63,221  62,431  188,538  178,093 
Non-cash write-off of straight-line rent receivable —  —  380  — 
Normalized FFO attributable to common stockholders 63,221  62,431  188,918  178,093 
Straight-line lease revenue, net (5,086) (5,720) (15,861) (16,255)
Straight-line lease revenue, net, related to noncontrolling interests 29  6  81  8 
Amortization of lease incentives 250  224  735  607 
Amortization of original issue discount 102  197  303  584 
Amortization of debt issuance costs 871  708  2,156  2,112 
Equity method investment adjustments, net 568  —  617  — 
Note receivable credit loss expense (193) —  1,002  — 
Normalized AFFO attributable to common stockholders 59,762  57,846  177,951  165,149 
Equity method investment capital expenditure (105) —  (315) — 
Equity method investment non-refundable fees received 156  —  330  — 
Non-cash stock-based compensation 457  477  2,772  2,955 
Normalized FAD attributable to common stockholders $ 60,270  $ 58,323  $ 180,738  $ 168,104 
BASIC
Weighted average common shares outstanding 44,661,650  43,505,332  44,641,748  43,187,847 
NAREIT FFO attributable to common stockholders per share $ 1.42  $ 1.44  $ 4.22  $ 4.12 
Normalized FFO attributable to common stockholders per share $ 1.42  $ 1.44  $ 4.23  $ 4.12 
Normalized AFFO attributable to common stockholders per share $ 1.34  $ 1.33  $ 3.99  $ 3.82 
DILUTED
Weighted average common shares outstanding 44,662,403  43,861,089  44,643,514  43,494,714 
NAREIT FFO attributable to common stockholders per share $ 1.42  $ 1.42  $ 4.22  $ 4.09 
Normalized FFO attributable to common stockholders per share $ 1.42  $ 1.42  $ 4.23  $ 4.09 
Normalized AFFO attributable to common stockholders per share $ 1.34  $ 1.32  $ 3.99  $ 3.80 

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Adjusted EBITDA

We consider Adjusted EBITDA to be an important supplemental measure because it provides information which we use to evaluate our performance and serves as an indication of our ability to service debt. We define Adjusted EBITDA as consolidated earnings before interest, taxes, depreciation and amortization, excluding real estate asset impairments and gains on dispositions and certain items which, due to their infrequent or unpredictable nature, may create some difficulty in comparing Adjusted EBITDA for the current period to similar prior periods. These items include, but are not limited to, impairment of non-real estate assets, gains and losses attributable to the acquisition and disposition of assets and liabilities, and recoveries of previous write-downs. Adjusted EBITDA also includes our proportionate share of unconsolidated equity method investments presented on a similar basis. Since others may not use our definition of Adjusted EBITDA, caution should be exercised when comparing our Adjusted EBITDA to that of other companies. EBITDA reflects GAAP interest expense, which excludes amounts capitalized during the period.

The following table reconciles net income, the most directly comparable GAAP metric, to Adjusted EBITDA ($ in thousands):

Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net income $ 42,661  $ 42,755  $ 148,148  $ 118,413 
Interest expense 12,892  14,661  40,589  41,925 
Franchise, excise and other taxes 164  121  553  1,441 
Depreciation 20,836  19,695  62,126  57,206 
NHI’s share of EBITDA adjustments for unconsolidated entities 652  —  652  — 
Gain on sale of real estate —  —  (21,007) — 
Impairment of real estate —  —  —  2,500 
Non-cash write-off of straight-line rent receivable —  —  380  — 
Note receivable credit loss expense (193) —  1,002  — 
Adjusted EBITDA $ 77,012  $ 77,232  $ 232,443  $ 221,485 
Interest expense at contractual rates $ 10,129  $ 14,308  $ 33,701  $ 40,736 
Interest rate swap payments, net 1,778  (410) 4,555  (1,006)
Principal payments 308  590  917  886 
Fixed Charges $ 12,215  $ 14,488  $ 39,173  $ 40,616 
Fixed Charge Coverage 6.3x 5.3x 5.9x 5.5x

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

At September 30, 2020, we were exposed to market risks related to fluctuations in interest rates on approximately $538,000,000 of variable-rate indebtedness (excludes $400,000,000 of variable-rate debt that has been hedged through interest-rate swap contracts) and on our mortgage and other notes receivable. The unused portion ($262,000,000 at September 30, 2020) of our revolving credit facility, should it be drawn upon, is subject to variable rates.

Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt and loans receivable unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. Conversely, changes in interest rates on variable rate debt and investments would change our future earnings and cash flows, but not significantly affect the fair value of those instruments. Assuming a 50 basis-point increase or decrease in the interest rate related to variable-rate debt, and assuming no change in the outstanding balance as of September 30, 2020, net interest expense would increase or decrease annually by approximately $2,690,000 or $0.06 per common share on a diluted basis.

We use derivative financial instruments in the normal course of business to mitigate interest rate risk. We do not use derivative financial instruments for speculative purposes. Derivatives are included in the Condensed Consolidated Balance Sheets at their fair value. We may engage in hedging strategies to manage our exposure to market risks in the future, depending on an analysis of the interest rate environment and the costs and risks of such strategies.

The following table sets forth certain information with respect to our debt ($ in thousands):

September 30, 2020 December 31, 2019
Balance1
% of total
Rate3
Balance1
% of total
Rate3
Fixed rate:
Convertible senior notes $ 60,000  3.9  % 3.25  % $ 60,000  4.1  % 3.25  %
Private placement term loans 400,000  26.0  % 4.15  % 400,000  27.6  % 4.15  %
Bank term loans - unsecured 340,000  22.1  % 3.27  % 550,000  38.0  % 3.36  %
HUD mortgage loans2
42,721  2.8  % 4.04  % 43,376  3.0  % 4.04  %
Fannie Mae term loans 95,444  6.2  % 3.94  % 95,706  6.6  % 3.94  %
Revolving credit facility - unsecured 60,000  3.9  % 2.81  % 60,000  4.1  % 2.81  %
Variable rate:
Bank term loans - unsecured 310,000  20.3  % 1.77  % —  —  % —  %
Revolving credit facility - unsecured 228,000  14.8  % 1.35  % 240,000  16.6  % 2.96  %
$ 1,536,165  100.0  % 2.96  % $ 1,449,082  100.0  % 3.54  %
1 Differs from carrying amount due to unamortized discounts and loan costs.
2 Includes 10 HUD mortgages; rate is a weighted average inclusive of a mortgage insurance premium; paid off subsequent to September 30, 2020.
3 Total is weighted average rate

The unsecured term loans in the table above reflect the effect of $400,000,000 notional amount interest rate swaps with maturities in December 2021 that effectively convert variable rate debt to fixed rate debt. These loans bear interest at LIBOR plus a spread, currently a blended 102 basis points, based on our Leverage-Based Applicable Margin, as defined.

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To highlight the sensitivity of our convertible senior notes and secured mortgage debt to changes in interest rates, the following summary shows the effects on fair value (“FV”) assuming a parallel shift of 50 basis points (“bps”) in market interest rates for a contract with similar maturities as of September 30, 2020 ($ in thousands):

Balance
Fair Value1
FV reflecting change in interest rates
Fixed rate: -50 bps +50 bps
Private placement term loans - unsecured $ 400,000  $ 421,412  $ 429,421  $ 413,585 
Convertible senior notes 60,000  60,637  60,813  60,463 
Fannie Mae loans 95,444  99,202  101,296  97,154 
HUD mortgage loans 42,721  51,890  55,545  48,555 
1 The change in fair value of our fixed rate debt was due primarily to the overall change in interest rates.

At September 30, 2020, the fair value of our mortgage and other notes receivable, discounted for estimated changes in the risk-free rate, was approximately $319,418,000. A 50 basis-point increase in market rates would decrease the estimated fair value of our mortgage and other loans by approximately $9,581,000, while a 50 basis point decrease in such rates would increase their estimated fair value by approximately $1,645,000.

Item 4. Controls and Procedures.

Evaluation of Disclosure Control and Procedures. As of September 30, 2020, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of management’s disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) to ensure information required to be disclosed in our filings under the Securities and Exchange Act of 1934, is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms; and (ii) accumulated and communicated to our management, including our CEO and our CFO, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving desired control objectives, and management is necessarily required to apply its judgment when evaluating the cost-benefit relationship of potential controls and procedures. Based upon the evaluation, the CEO and CFO concluded that the design and operation of these disclosure controls and procedures were effective as of September 30, 2020.

There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting identified in management’s evaluation during the nine months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Our health care 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 our facilities, management believes that the ultimate resolution of all such pending proceedings will have no material adverse effect on our financial condition, results of operations or cash flows.

In June 2018, East Lake Capital Management LLC and certain related entities, including Regency (for three assisted living facilities in Tennessee, Indiana and North Carolina), filed suit against NHI in Texas seeking injunctive and declaratory relief and unspecified monetary damages. NHI responded with counterclaims and filed motions requesting the immediate appointment of a receiver and for pre-judgment possession. Resulting from these claims and counterclaims, on December 6, 2018, the parties entered into an agreement resulting in Regency vacating the facilities in December 2018. Litigation is ongoing.

Item 1A. Risk Factors.

During the nine months ended September 30, 2020, other than as noted below, there were no material changes to the risk factors that were disclosed in Item 1A of National Health Investors, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2019.

To reflect the outbreak of COVID-19 and its actual and potential impact on public health and our business, we have added the following risk factor not previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019:

Actual or perceived risks associated with public health epidemics or outbreaks, such as the Coronavirus (COVID-19), has had and is expected to continue to have a material adverse effect on our business and results of operations.

The Coronavirus (COVID-19) has had a negative impact and is expected to continue to have a negative impact on the business and results of operations of the operators of our properties and on the Company. Revenues for the operators of our properties are significantly impacted by occupancy. Building occupancy rates have been and will likely continue to be adversely affected by COVID-19. It has been reported that COVID-19 appears most dangerous for seniors, and the mortality rate increases with age. The occupancy at our properties could significantly decrease if COVID-19 or other public health outbreak results in early resident move-outs, our operators delay accepting new residents due to quarantines or otherwise, or potential occupants determine to postpone moving to a senior housing facility. A decrease in occupancy or increase in costs is likely to 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. In addition, actions our operators take to address COVID-19 are expected to materially increase their operating costs, including costs related to enhanced health and safety precautions among other measures, which 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. The federal, state and local governments have implemented or announced assistance programs in connection with COVID-19 that have benefited or in the future may benefit certain of our operators, but such government assistance may be insufficient to offset the downturn in business of our operators. In some cases, we may have to write-off unpaid rental payments, incur lease accounting charges due to the uncollectibility of rental payments and/or restructure our operators’ long-term rent obligations and may not be able to do so on terms that are as favorable to us as those currently in place. Furthermore, infections at our facilities could lead to material increases in litigation costs for which our operators, or possibly we, may be liable.

COVID-19 has also caused, and is likely to continue to cause, severe economic, market and other disruptions worldwide. We cannot assure you that conditions in the bank lending, capital and other financial markets will not continue to deteriorate as a result of the pandemic, or that our access to capital and other sources of funding will not become constrained, which could adversely affect the availability and terms of future borrowings, renewals or refinancings. Such future constraints could increase our borrowing costs, which would make it more difficult or expensive to obtain additional financing or refinance existing obligations and commitments.

The impact of COVID-19 on our results of operations, liquidity and financial condition could adversely affect our ability to pay dividends at expected levels or at all. All dividends are made at the discretion of our Board of Directors in accordance with Maryland law and depend on our earnings, our financial condition, debt and equity capital available to us, our expectation of our
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future capital requirements and operating performance, restrictive covenants in our financial and other contractual arrangements, maintenance of our REIT qualification, restrictions under Maryland law and other factors as our Board of Directors may deem relevant from time to time. Our Board of Directors will continue to assess our dividend rate on an ongoing basis, as COVID-19 and related market conditions and our financial position continue to evolve.

If these developments continue or increase in severity, such developments are likely to have a material adverse effect on our business and results of operations. 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, including the duration and scope of the outbreak, new information that may emerge concerning the severity of COVID-19 and the actions taken to contain COVID-19 or treat its impact, among others.
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Item 6. Exhibits.

Exhibit No. Description
3.1 Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Form S-11 Registration Statement No. 33-41863, filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T)
3.2
Amendment to Articles of Incorporation (incorporated by reference to Exhibit A to the Company’s Definitive Proxy Statement filed March 21, 2009)
3.3
Amendment to Articles of Incorporation approved by shareholders on May 2, 2014 (incorporated by reference to Exhibit 3.3 to the Company’s Form 10-Q filed August 4, 2014)
3.4
Restated Bylaws (incorporated by reference to Exhibit 3.3 to the Company’s Form 10-K filed February 15, 2013)
3.5
Amendment No. 1 to Restated Bylaws dated February 14, 2014 (incorporated by reference to Exhibit 3.3 to the Company’s Form 10-K filed February 14, 2014)
3.6
Amendment to Articles of Incorporation approved by shareholders on May 6, 2020 (incorporated by reference to Exhibit 3.6 to the Company’s Form 10-Q filed August 10, 2020)
4.1
Form of Common Stock Certificate (incorporated by reference to Exhibit 39 to Form S-11 Registration Statement No. 33-41863, filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T)
4.2
4.3
31.1
31.2
32
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  NATIONAL HEALTH INVESTORS, INC.
  (Registrant)
 
 
Date: November 9, 2020 /s/ D. Eric Mendelsohn
  D. Eric Mendelsohn
  President and Chief Executive Officer
  (duly authorized officer)
 
 
 
Date: November 9, 2020 /s/ John L. Spaid
  John L. Spaid
  Chief Financial Officer
  (Principal Financial Officer)

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