NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
Note 1. Organization and Nature of Business
National Health Investors, Inc. (“NHI,” “the Company,” “we,” “us” or “our”), 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 lease, mortgage and other note investments in independent living facilities, assisted living facilities, entrance-fee communities, senior living campuses, skilled nursing facilities, hospitals and medical office buildings. As of December 31, 2020, we had investments of $3,262,381,000 (excluding our corporate office of $2,689,000) 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 14 mortgages along with other notes receivable totaled $297,373,000, excluding an allowance for expected credit losses of $4,946,000, as of December 31, 2020. Units, beds and square footage disclosures in these consolidated financial statements are unaudited.
Note 2. Basis of Presentation and Significant Accounting Policies
Principles of Consolidation - The 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.
A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.
We apply Financial Accounting Standards Board (“FASB”) guidance for our arrangements with VIEs which requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of the VIE. In accordance with FASB guidance, management must evaluate each of the Company’s contractual relationships which creates a variable interest in other entities. If the Company has a variable interest and the entity is a VIE, then management must determine whether the Company is the primary beneficiary of the VIE. If it is determined that the Company is the primary beneficiary, NHI would consolidate the VIE. We identify the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. We perform this analysis on an ongoing basis.
If the Company has determined that an entity is not a VIE, the Company assesses the need for consolidation under all other provisions of Accounting Standards Codification (“ASC”) Topic 810 Consolidation. These provisions provide for consolidation of majority-owned entities where a majority voting interest held by the Company demonstrates control of such entities in the absence of any legal constraints.
At December 31, 2020, we held interests in seven 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 the Company 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, LLC (“Timber Ridge OpCo”) which is accounted for under the equity method. See Note 5 for a discussion of Timber Ridge OpCo.
The Company’s unconsolidated VIEs are summarized below by date of initial involvement. For further discussion of the nature of the relationships, including the sources of our exposure to these VIEs, see the notes to our consolidated financial statements cross-referenced below.
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Date
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Name
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Source of Exposure
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Carrying Amount
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Maximum Exposure to Loss
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Note Reference
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2012
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Bickford Senior Living
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Various1
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$
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63,304,000
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$
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75,738,000
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Notes 3,4
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2014
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Senior Living Communities
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Notes and straight-line receivable
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$
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82,691,000
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$
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83,410,000
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Notes 3,4
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2016
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Senior Living Management
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Notes and straight-line receivable
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$
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26,912,000
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$
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26,912,000
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—
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2018
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Sagewood, LCS affiliate
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Notes
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$
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158,814,000
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$
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178,862,000
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Note 4
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2019
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41 Management, LLC
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Notes and straight-line receivable
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$
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13,328,000
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$
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33,572,000
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Note 4
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2020
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Timber Ridge OpCo
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Various2
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$
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(2,250,000)
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$
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2,750,000
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Notes 3,5
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2020
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Watermark Retirement
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Notes and straight-line receivable
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$
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4,145,000
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$
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9,145,000
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Note 4
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1 Notes, loan commitments, straight-line rent receivables, and unamortized lease incentives
2 Loan commitment, equity method investment and straight-line rent receivables
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 would be dependent upon individual facts and circumstances, and is therefore not included in the table above.
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.
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 year ended December 31, 2020, our non-controlling interests relate to these partnerships with Discovery and LCS. NHI directs the activities that most significantly impact economic performance of these joint venture entities, subject to limited protective rights extended to our JV partners for specified business decisions. We consider both entities to be VIEs, based on our determination that the total equity at risk in each is insufficient to finance activities without additional subordinated financial support. Because of our control of these entities, we include their assets, liabilities, noncontrolling interests and operations in our consolidated financial statements.
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.
We structured our Timber Ridge OpCo investment to be compliant with the provisions of RIDEA which permits us to receive rent payments through a triple-net lease between a property company and an operating company and allows us to receive distributions from the operating company to a taxable REIT subsidiary (“TRS”). Our TRS holds our equity interests in unconsolidated operating companies thus providing an organizational structure that allows the TRS to engage in a broad range of activities and share in revenues that are otherwise non-qualifying income under the REIT gross income tests.
Noncontrolling Interests - As mentioned above, we consolidate real estate partnerships formed with Discovery Senior Housing Investor XXIV, LLC in June 2019 and LCS Timber Ridge LLC in January 2020, both of which invest in senior housing facilities. The noncontrolling interests reflected in the consolidated financial statements relate to these partnerships from the date of inception of these arrangements.
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Earnings Per Share - The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assume the exercise of stock options using the treasury stock method, to the extent dilutive. Diluted earnings per share also incorporate the potential dilutive impact of our 3.25% convertible senior notes due 2021. We apply the treasury stock method to our convertible debt instruments, the effect of
which is that conversion will not be assumed for purposes of computing diluted earnings per share unless the average share price of our common stock for the period exceeds the conversion price per share.
Fair Value Measurements - Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy is required to prioritize the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair value are as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
If the fair value measurement is based on inputs from different levels of the hierarchy, the level within which the entire fair value measurement falls is the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. When an event or circumstance alters our assessment of the observability and thus the appropriate classification of an input to a fair value measurement which we deem to be significant to the fair value measurement as a whole, we will transfer that fair value measurement to the appropriate level within the fair value hierarchy.
Real Estate Properties - Real estate properties are recorded at cost or, if acquired through business combination, at fair value, including the fair value of contingent consideration, if any. Cost or fair value at the time of acquisition is allocated among land, buildings, improvements, personal property and lease and other intangibles. For properties acquired in transactions accounted for as asset purchases, the purchase price, which includes transaction costs, is allocated based on the relative fair values of the assets acquired. Cost includes the amount of contingent consideration, if any, deemed to be probable at the acquisition date. Contingent consideration is deemed to be probable to the extent that a significant reversal in amounts recognized is not likely to occur when the uncertainty associated with the contingent consideration is subsequently resolved. Cost also includes capitalized interest during construction periods. We use the straight-line method of depreciation for buildings over their estimated useful lives of 40 years, and improvements over their estimated useful lives ranging to 25 years. For contingent consideration arising from business combinations, the liability is adjusted to estimated fair value at each reporting date through earnings.
We evaluate the recoverability of the carrying amount of our real estate properties on a property-by-property basis. We review our properties for recoverability when events or circumstances, including significant physical changes in the property, significant adverse changes in general economic conditions and significant 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 amount of that property. If recognition of an impairment charge is necessary, it is measured as the amount by which the carrying amount of the property exceeds the fair value of the property.
Leases - Leases entered into or modified since 2019 are accounted for under the guidance of ASC Topic 842, Leases. All of our leases are classified as operating leases and generally have an initial leasehold term of 10 to 15 years followed by one or more 5-year tenant renewal options. The leases are “triple net leases” under which the tenant is responsible for the payment of all taxes, utilities, insurance premiums, repairs and other charges relating to the operation of the properties, including required levels of capital expenditures each year. The tenant is obligated at its expense to keep all improvements, fixtures and other components of the properties covered by “all risk” insurance in an amount equal to at least the full replacement cost thereof, and to maintain specified minimal personal injury and property damage insurance. The leases also require the tenant to indemnify and hold us harmless from all claims resulting from the use, occupancy and related activities of each property by the tenant, and to indemnify us against all costs related to any release, discovery, clean-up and removal of hazardous substances or materials, or other environmental responsibility with respect to each facility. While we do not incorporate residual value guarantees, the above lease provisions and considerations impact our expectation of realizable value from our properties upon
the expiration of their lease terms. The residual value of our real estate under lease is still subject to various market, asset, and tenant-specific risks and characteristics. As the classification of our leases is dependent on the fair value of estimated cash flows at lease commencement, management’s projected residual values represent significant assumptions in our accounting for operating leases. Similarly, the exercise of renewal options is also subject to these same risks, making a tenant’s lease term another significant variable in a lease’s cash flows. Initial direct costs that are incremental to entering into a lease are capitalized in accordance with the provisions of Topic 842.
Mortgage and Other Notes Receivable - Effective January 1, 2020, we estimate an allowance for credit losses upon origination of a loan, based on expected credit losses over the term of the loan and update this estimate each reporting period. 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.
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 Section 1031 exchange agreement or in accordance with agency agreements governing our Fannie Mae mortgages and Housing and Urban Development (“HUD”) mortgages).
The following table sets forth our “Cash, cash equivalents and restricted cash” reported within the Company’s Consolidated Statements of Cash Flows ( $ in thousands):
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As of December 31,
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2020
|
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2019
|
|
|
Cash and cash equivalents
|
$
|
43,344
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|
|
$
|
5,215
|
|
|
|
Restricted cash (included in Other assets)
|
2,999
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|
|
10,454
|
|
|
|
|
$
|
46,343
|
|
|
$
|
15,669
|
|
|
|
Concentration of Credit Risks - Our credit risks primarily relate to cash and cash equivalents and investments in mortgage and other notes receivable. Cash and cash equivalents are primarily held in bank accounts and overnight investments. We maintain our bank deposit accounts with large financial institutions in amounts that often exceed federally insured limits. We have not experienced any losses in such accounts. Our mortgages and other notes receivable consist primarily of secured loans on facilities.
Our financial instruments, principally our investments in notes receivable, are subject to the possibility of loss of the carrying values as a result of the failure of other parties to perform according to their contractual obligations which may make the instruments less valuable. We obtain collateral in the form of mortgage liens and other protective rights for notes receivable and continually monitor these rights in order to reduce such possibilities of loss. We evaluate the need to provide for reserves for potential losses on our financial instruments based on management’s periodic review of our portfolio on an instrument-by-instrument basis.
Deferred Loan Costs - Costs incurred to acquire debt are capitalized and amortized by the straight-line method, which approximates the effective-interest method, over the term of the related debt.
Deferred Income - Deferred income primarily includes non-refundable commitment fees received by us, which are amortized into income over the expected period of the related loan or lease. In the event that our financing commitment to a potential borrower or lessee expires, the related commitment fees are recognized into income immediately. Commitment fees may be charged based on the terms of the lease agreements and the creditworthiness of the parties.
Rental Income - Our leases generally provide for rent escalators throughout the term of the lease. Base rental income is recognized using the straight-line method over the term of the lease to the extent that lease payments are considered collectible and the lease provides for specific contractual escalators. Under certain leases, we receive additional contingent rent, which is calculated on the increase in revenues of the lessee over a base year or base quarter. We recognize contingent rent annually or quarterly based on the actual revenues of the lessee once the target threshold has been achieved. Lease payments that depend on a factor directly related to future use of the property, such as an increase in annual revenues over a base year, are considered to be contingent rentals and are excluded from the schedule of minimum lease payments.
If rental income calculated on a straight-line basis exceeds the cash rent due under a lease, the difference is recorded as an increase to straight-line rent receivable in the Consolidated Balance Sheets and an increase in rental income in the Consolidated Statements of Income. If rental income on a straight-line basis is calculated to be less than cash received, there is a decrease in the same accounts.
Property operating expenses that are reimbursed by our operators are recorded as Rental income upon adoption of Topic 842 in 2019. Accordingly, we record a corresponding Taxes and insurance on leased properties expense in the Consolidated Statements of Income. Rental income related to reimbursement of property operating expenses for the years ended December 2020 and 2019, are $9,653,000 and $5,798,000, respectively.
Rental income is reduced for the non-cash amortization of payments made upon the eventual settlement of commitments and contingencies originally identified and recorded as lease inducements. We record lease inducements to the extent that it is probable that a significant reversal of amounts recognized will not occur when the uncertainty associated with the contingent consideration is subsequently resolved.
The Company reviews its operating lease receivables for collectibility on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in which the tenant operates and economic conditions in the area where the property is located. In the event that collectibility with respect to any tenant is not probable, a direct write-off of the receivable is made as an adjustment to rental income and any future rental revenue is recognized only when the tenant makes a rental payment.
Interest Income from Mortgage and Other Notes Receivable - Interest income is recognized based on the interest rates and principal amounts outstanding on the notes receivable. We identify a mortgage loan as non-performing if a required payment is not received within 30 days of the date it is due. Our policy related to mortgage interest income on non-performing mortgage loans is to recognize mortgage interest income in the period when the cash is received. As of December 31, 2020, we did not identified any of our mortgages as non-performing.
Derivatives - In the normal course of business, we are subject to risk from adverse fluctuations in interest rates. We have chosen to manage this risk through the use of derivative financial instruments, primarily interest rate swaps. Counterparties to these contracts are major financial institutions. We are exposed to credit loss in the event of nonperformance by these counterparties. We do not use derivative instruments for trading or speculative purposes. Our objective in managing exposure to market risk is to limit the impact on cash flows relating to the change in market interest rates on our variable rate debt.
To qualify for hedge accounting, our interest rate swaps must effectively reduce the risk exposure that they are designed to hedge. In addition, at inception of a qualifying cash flow hedging relationship, the underlying transaction or transactions must be, and be expected to remain, probable of occurring in accordance with our related assertions. All of our hedges are cash flow hedges.
We recognize all derivative instruments, including embedded derivatives required to be bifurcated, as assets or liabilities at their fair value in the Consolidated Balance Sheets. Changes in the fair value of derivative instruments that are not designated as hedges or that do not meet the criteria of hedge accounting are recognized in earnings. For derivatives designated in qualifying cash flow hedging relationships, the change in fair value of the effective portion of the derivatives is recognized in accumulated other comprehensive income (loss), whereas the change in fair value of any ineffective portion is recognized in earnings. Gains and losses are reclassified from accumulated other comprehensive income (loss) into earnings once the underlying hedged transaction is recognized in earnings.
Federal Income Taxes - We intend at all times to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. Aside from such income taxes which may be applicable to the taxable income in the TRS, we will not be subject to U.S. federal income tax, provided that we continue to qualify as a REIT and make distributions to stockholders at least equal to or in excess of 90% our taxable income. Accordingly, no provision for federal income taxes has been made in
the consolidated financial statements. A failure to qualify under the applicable REIT qualification rules and regulations would have a material adverse impact on our financial position, results of operations and cash flows.
Earnings and profits, which determine the taxability of dividends to stockholders, differ from net income reported for financial reporting purposes due primarily to differences in the basis of assets, estimated useful lives used to compute depreciation expense, gains on sales of real estate, non-cash compensation expense and recognition of commitment fees.
Our tax returns filed for years beginning in 2017 are subject to examination by taxing authorities. We classify interest and penalties related to uncertain tax positions, if any, in our Consolidated Statements of Income as a component of income tax expense.
Segment Disclosures - We are in the business of owning and financing health care properties. We are managed as one segment for internal purposes and for internal decision making.
New Accounting Pronouncements
Financial Instruments - Credit Losses - With the adoption of Accounting Standards Update 2016-13, Financial Instruments - Credit Losses effective January 1, 2020, we estimate and record an allowance for credit losses upon origination of the loan, based on expected credit losses over the term of the loan and update this estimate each reporting period. 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 uncollectible.
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 of credit loss reserve” in the 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 reserve for estimated credit losses pertaining to unfunded loan commitments as an adjustment to “Cumulative dividends in excess of net income”. The corresponding credit loss liability is included in the financial statement line item “Accounts payable and accrued expenses” in the Consolidated Balance Sheets.
FASB Lease Modifications Related to Effects of the COVID-19 Pandemic - 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 2020, the Company provided $6,922,000 in lease concessions as a result of COVID-19, as discussed in more detail in Note 8. 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.
Reference Rate Reform - In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.
Leases - On January 1, 2019, we adopted ASU 2016-02, Leases, which has been codified under ASC Topic 842, using the effective date method provided in Topic 842 and elected the practical expedients available for implementation under the standard. As such, our reporting in the consolidated financial statements for comparative periods prior to the adoption of Topic 842 will continue to be in accordance with prior guidance. The adoption of Topic 842 had no material impact on our financial statements.
Note 3. Real Estate Properties and Investments
2020 Acquisitions and New Leases of Real Estate
During the year ended December 31, 2020, we completed the following real estate acquisitions as described below ($ in thousands):
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Operator
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Date
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Properties
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Asset Class
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Land
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Improvements
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Total
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Bickford Senior Living
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Q1 2020
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1
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SHO
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$
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1,588
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$
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13,512
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$
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15,100
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Life Care Services
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Q1 2020
|
|
1
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SHO
|
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4,370
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|
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130,522
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|
|
134,892
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Autumn Trace
|
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Q2 2020
|
|
2
|
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SHO
|
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344
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13,906
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14,250
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41 Management
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Q3 2020
|
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1
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SHO
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504
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11,796
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|
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12,300
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$
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6,806
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$
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169,736
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$
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176,542
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Bickford - Shelby, MI
On January 27, 2020, we acquired a 60-unit assisted living/memory care facility located in Shelby, Michigan, from Bickford. The acquisition price was $15,100,000 and included the full payment of an outstanding construction note receivable to us 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 .
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, which is eliminated upon consolidation, bears interest to NHI at 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. 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 PropCo.
Autumn Trace
On May 1, 2020, we acquired two senior housing facilities each with 44 assisted living units for a total purchase price of $14,250,000, including $150,000 in closing costs. The facilities are located in Indiana and are leased to Autumn Trace Senior Communities, which is a new operator relationship for NHI. The 15-year master lease has an initial lease rate of 7.25% with
fixed annual escalators of 2.25% and offers two optional extensions of 5 years each. NHI was also granted a purchase option on a newly opened Indiana facility.
41 Management
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 $3,870,000, plus accrued interest. The property is leased to an affiliate of 41 Management pursuant to a 15-year master lease that has an initial lease rate of 7.5% with fixed annual escalators of 2.5% and offers two optional extensions of five years each.
2019 Acquisitions and New Leases of Real Estate
During the year ended December 31, 2019, we completed the following real estate acquisitions and commitments as described below ($ in thousands):
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Operator
|
|
Date
|
|
Properties
|
|
Asset Class
|
|
Land
|
|
Improvements
|
|
Amount
|
Wingate Healthcare
|
|
Q1 2019
|
|
1
|
|
SHO
|
|
$
|
5,500
|
|
|
$
|
46,700
|
|
|
$
|
52,200
|
|
Holiday Retirement
|
|
Q1 2019
|
|
1
|
|
SHO
|
|
550
|
|
|
37,450
|
|
|
38,000
|
|
Comfort Care Senior Living
|
|
Q2 2019
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|
1
|
|
SHO
|
|
570
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|
|
10,230
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|
|
10,800
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|
Comfort Care Senior Living
|
|
Q2 2019
|
|
1
|
|
SHO
|
|
410
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|
|
13,090
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|
|
13,500
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|
Discovery Senior Living
|
|
Q2 2019
|
|
6
|
|
SHO
|
|
6,301
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|
|
121,616
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|
|
127,917
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|
Cappella Living Solutions
|
|
Q3 2019
|
|
1
|
|
SHO
|
|
169
|
|
|
7,431
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|
|
7,600
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|
Bickford Senior Living
|
|
Q3 2019
|
|
1
|
|
SHO
|
|
1,244
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|
|
13,856
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|
|
15,100
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|
41 Management
|
|
Q4 2019
|
|
1
|
|
SHO
|
|
515
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|
|
8,825
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|
|
9,340
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|
|
|
|
|
|
|
|
|
$
|
15,259
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|
|
$
|
259,198
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|
|
$
|
274,457
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|
Wingate
In January 2019, we acquired a 267-unit senior living campus in Massachusetts for a purchase price of $50,300,000, including closing costs of $300,000. The facility is being leased to Wingate Healthcare, Inc. (“Wingate”) for a term of 10 years, with three renewal options of 5 years each, at an initial lease rate of 7.5% plus annual fixed escalators. We have committed to the additional funding of up to $1,900,000 in capital improvements, of which $1,808,000 has been funded at December 31, 2020. The lease also provides for incentive payments up to $5,000,000 that became available beginning in 2020 upon the attainment of certain operating metrics. NHI has a right of first offer on two additional Wingate operated facilities.
Holiday
In January 2019, we acquired a senior housing facility in Vero Beach, Florida from Holiday consisting of 157 independent living and 71 assisted living units in exchange for $38,000,000 toward the $55,125,000 receivable arising from the lease amendment, discussed below in Major Tenants. The property was added to the master lease at a 6.71% lease rate. Under the restructured master lease, annual lease escalators ranging from 2% to 3%, based on portfolio revenue growth, went into effect on November 1, 2020. Holiday settled the remaining commitment to NHI with cash of $17,125,000 at closing. Receipt of the Vero Beach property and collection of the remaining commitment in cash was recognized as adjustments to the outstanding Holiday lease receivable. This resulted in a change of our straight-line receivable from Holiday at the beginning of 2019 into a straight-line payable, which is included in the accompanying Consolidated Balance Sheets as “Deferred income”.
Comfort Care Senior Living
In April 2019, we acquired a newly-constructed 60-unit assisted living facility in Shelby, Michigan which has 14 memory care units. The total commitment of $10,800,000 includes $9,560,000 funded at closing with the remaining amount to be funded once certain post closing and construction requirements are met. On May 20, 2019, we acquired a property in Brighton, Michigan, consisting of 73 assisted living/memory care units. The purchase price for the Brighton acquisition was $13,500,000, inclusive of closing costs. We leased the properties to Comfort Care Senior Living (“Comfort Care”), under leases which provide for initial lease rate of 7.75%, with annual fixed escalators beginning in year three over the term of 10 years plus two renewal options of 5 years each. The leases each include a $3,000,000 earnout incentive which will be added to the respective lease base if funded.
Discovery
In May 2019, we contributed $25,028,000 in cash for a 97.5% equity interest in a consolidated subsidiary ("Discovery PropCo"), which simultaneously acquired from a third party six senior housing facilities comprising 145 independent-living units, 356 assisted-living units and 95 memory-care units, for a total of 596 units. Discovery Senior Housing Investor XXIV, LLC, contributed $631,000 for its non-controlling 2.5% equity interest. We invested an additional $102,258,000 as a preferred equity contribution, for a total NHI investment of $127,286,000. The additional equity contribution of $102,258,000 carries a preference in liquidation as well as in the distribution of operating cash flow. Total cash of $127,917,000 invested in Discovery PropCo included approximately $1,067,000 in closing costs.
The facilities were leased by Discovery PropCo to an affiliate of Discovery for a term of 10 years with two renewal periods of five years at an initial lease rate of 6.5% with fixed annual escalators through the fifth year of the initial lease term followed by CPI-based escalators, subject to floor and ceiling, thereafter.
Discovery is eligible, beginning in 2023, for up to $4,000,000 of lease inducement payments upon meeting specified performance metrics. Inducement payments funded under the agreement will be added to the lease base. Additionally, 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, $968,000 of which was funded as of December 31, 2020.
Cappella Living Solutions
In July 2019, we acquired a 51-unit assisted living facility in Pueblo, Colorado for $7,600,000 including $100,000 of closing costs. We leased the facility to Christian Living Services, Inc., d/b/a Cappella Living Solutions, for a term of 15 years at an initial lease rate of 7.25%, with CPI escalators subject to floor and ceiling.
Bickford Senior Living
In September 2019, we acquired a 60-unit assisted living/memory care facility located in Gurnee, Illinois, from Bickford. The acquisition price was $15,100,000, including $100,000 in closing costs, and the cancellation of an outstanding construction note receivable of $14,035,000, including interest. We leased the building for a term of twelve years at an initial lease rate of 8%, with CPI escalators subject to a floor and ceiling.
41 Management
We transitioned four Minnesota properties on October 1, 2019, from Bickford Senior Living to 41 Management. The transitioned properties are under a master lease which calls for total first-year rent of $906,000 and includes our commitment to make available up to $400,000 in targeted improvements. The lease term of 15 years has two renewal options of five years each and an initial rate of 7%. Under the master lease, escalators are fixed at 2.5%, and the lease is secured by corporate and personal guarantees. On December 27, 2019, for a cash purchase price of $9,340,000, including closing costs of $140,000, we acquired a 48 unit assisted living and memory care facility in the St. Paul, Minnesota area. The St. Paul facility was added to the master lease.
Major Tenants
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as of December 31, 2020
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Revenues1
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|
Asset
|
|
Real
|
|
Notes
|
|
Year Ended December 31,
|
|
Class
|
|
Estate
|
|
Receivable
|
|
2020
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|
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2019
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|
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2018
|
|
|
|
|
|
|
|
|
|
|
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|
Senior Living Communities
|
EFC
|
|
$
|
573,631
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|
|
$
|
43,980
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|
|
$
|
50,734
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15%
|
|
$
|
48,450
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15%
|
|
$
|
45,868
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15%
|
Bickford Senior Living
|
ALF
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|
534,376
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|
|
34,466
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|
|
49,451
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15%
|
|
56,210
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|
17%
|
|
52,293
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18%
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Holiday Retirement
|
ILF
|
|
531,378
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|
|
—
|
|
|
40,705
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12%
|
|
40,459
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13%
|
|
43,311
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|
15%
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National HealthCare Corporation
|
SNF
|
|
171,235
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|
|
—
|
|
|
37,820
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|
11%
|
|
38,131
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|
12%
|
|
37,843
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|
13%
|
All others
|
Various
|
|
1,451,761
|
|
|
218,927
|
|
|
144,448
|
|
44%
|
|
129,033
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|
41%
|
|
115,297
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|
39%
|
Escrow funds received from tenants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for property operating expenses
|
Various
|
|
—
|
|
|
—
|
|
|
9,653
|
|
3%
|
|
5,798
|
|
2%
|
|
—
|
|
—%
|
|
|
|
$
|
3,262,381
|
|
|
$
|
297,373
|
|
|
$
|
332,811
|
|
|
|
$
|
318,081
|
|
|
|
$294,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 includes interest income on notes receivable
The amounts in the table above are reflected with disposals being reclassified into the All others category.
At December 31, 2020 the one state in which we had an investment concentration of 10% or more was South Carolina, (10.3%). At December 31, 2019, the two states in which we had an investment concentration of 10% or more were South Carolina (10.9%) and Texas (10.5%).
Senior Living Communities
As of December 31, 2020, we leased 10 retirement communities totaling 2,068 units to Senior Living Communities, LLC (“Senior Living”). The 15-year master lease, which began in December 2014, contains two renewal options of five years each and provides for an annual escalator of 3% effective January 1, 2019. Straight-line rent of $4,271,000, $4,934,000 and $5,436,000 was recognized from the Senior Living Communities lease for the years ended December 31, 2020, 2019 and 2018, respectively.
Bickford Senior Living
As of December 31, 2020, we leased 48 facilities under five master leases to Bickford Senior Living. Lease maturity dates range from 2023 through 2033. Straight-line rent of $2,764,000, $4,531,000 and $5,028,000 was recognized from the Bickford leases for the years ended December 31, 2020, 2019 and 2018, respectively. As discussed more fully in Note 8, we granted lease concessions to Bickford in 2020 as a result of the COVID-19 pandemic.
In September 2019, NHI amended a master lease, which matures in May 2031 and covers 14 Bickford properties, to change the annual escalator from a fixed percentage to a CPI-based escalator with a floor of 2% and a ceiling of 3%. A four-building portfolio in Minnesota that had been held by Bickford through September 30, 2019, transitioned to 41 Management, LLC, on October 1, 2019. Also, as of October 1, 2019, a master lease covering nine buildings subject to HUD mortgages was modified to reflect a decrease in monthly rent and provide for CPI-based escalators. As discussed more fully in Note 7, the Company repaid ten HUD mortgage loans on October 30, and November 2, 2020.
Holiday
As of December 31, 2020, we leased 26 independent living facilities to Holiday. The master lease, which matures in 2035, was amended in November 2018 and provides for annual lease escalators beginning November 1, 2020, with a floor of 2% and a ceiling of 3%. Straight-line rent of $6,542,000, $6,621,000, and $5,616,000 was recognized from the Holiday lease for the years ended December 31, 2020, 2019 and 2018, respectively. Our tenant operates the facilities pursuant to a management agreement with a Holiday-affiliated manager.
NHC
The facilities leased to NHC, a publicly held company, are under two master leases and consist of three independent living facilities and 39 skilled nursing facilities (four of which are subleased to other parties for whom the lease payments are guaranteed to us by NHC). These facilities are leased to NHC under the terms of an amended master lease agreement originally dated October 17, 1991 (“the 1991 lease”), which includes our 35 legacy properties and a master lease agreement dated August 30, 2013 (“the 2013 lease”), which includes seven skilled nursing facilities acquired in 2013.
The 1991 lease expiration is December 31, 2026. There are two additional 5-year renewal options, each at fair rental value as negotiated between the parties and determined without including the value attributable to any improvements to the leased property voluntarily made by NHC at its expense. Under the terms of the 1991 lease, the base annual rental is $30,750,000 and rent escalates by 4% of the increase, if any, in each facility’s revenue over a 2007 base year. The 2013 lease provides for a base annual rental of $3,450,000 and has a lease expiration of August 2028. Under the terms of the 2013 lease, rent escalates 4% of any increase in each facility’s revenue over the 2014 base year. For both the 1991 lease and the 2013 lease, we refer to this additional rent component as “percentage rent.” During the last three years of the 2013 lease, NHC will have the option to purchase the facilities for $49,000,000.
The following table summarizes the percentage rent income from NHC ($ in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Current year
|
|
|
|
|
$
|
3,687
|
|
|
$
|
3,650
|
|
|
$
|
3,411
|
|
Prior year final certification1
|
|
|
|
|
(14)
|
|
|
334
|
|
|
285
|
|
Total percentage rent income
|
|
|
|
|
$
|
3,673
|
|
|
$
|
3,984
|
|
|
$
|
3,696
|
|
1 For purposes of the percentage rent calculation described in the master lease agreement, NHC’s annual revenue by facility for a given year is certified to NHI by March 31st of the following year.
Two of our board members, including our chairman, are also members of NHC’s board of directors. As of December 31, 2020, NHC owned 1,630,642 shares of our common stock.
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 for years ended December 31, 2020 and 2019 of $4,593,000 and $3,643,000, respectively.
Asset Dispositions
On January 22, 2020, we sold a portfolio of eight assisted living properties located in Arizona (4), Tennessee (3) and South Carolina (1) to Brookdale Senior Living for cash consideration of $39,260,000 pursuant to the exercise of its option to purchase the properties. These properties were classified in assets held for sale on the Consolidated Balance Sheet as of December 31, 2019. We recorded a gain of $20,752,000 from the sale. We recognized rental income from this portfolio of $229,000 for the year ended December 31, 2020 and $4,250,000 for both of the years ended December 31, 2019 and 2018.
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 Consolidated Statements of Income to write down the properties to their estimated net realizable value upon classification of these properties as held-for-sale.
Purchase Options
Certain of our leases contain purchase options allowing tenants to acquire the leased properties. At December 31, 2020, we had a net investment of $40,420,000 in six real estate properties which are subject to exercisable tenant purchase options.
Tenant purchase options on 11 properties in which we had an aggregate net investment of $100,871,000 at December 31, 2020, become exercisable between 2022 and 2028.
Rental income from leased properties with tenant purchase options either currently exercisable or exercisable in the future was $19,319,000, $19,473,000 and $19,194,000 for the years ended December 31, 2020, 2019 and 2018, 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.
In January 2021, the company received notification of a tenant’s intention to exercise its purchase option on a behavioral hospital located in Tennessee in July 2021 for approximately $26,375,000. The aggregate net investment at December 31, 2020 was $21,239,000. Rental income for years ended December 31, 2020, 2019 and 2018 were $2,733,000, $2,730,000, and $2,730,000, respectively.
Future Minimum Lease Payments
Future minimum lease payments to be received by us under our operating leases at December 31, 2020 are as follows ($ in thousands):
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|
|
|
|
|
Year Ending December 31,
|
|
2021
|
$
|
299,904
|
|
2022
|
286,000
|
|
2023
|
282,285
|
|
2024
|
275,742
|
|
2025
|
272,208
|
|
Thereafter
|
1,432,609
|
|
|
$
|
2,848,748
|
|
We assess the collectibility 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 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 and record as a reduction in rental revenue.
Variable Lease Payments
Most of our existing leases contain annual escalators in rent payments. For financial statement purposes, rental income is recognized on a straight-line basis over the term of the lease where the lease contains fixed escalators. Some of our leases contain escalators that are determined annually based on a variable index or other factor that is indeterminable at the inception of the lease. The table below indicates the revenue recognized as a result of fixed and variable lease escalators ($ in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Lease payments based on fixed escalators, net of deferrals
|
|
|
|
|
$
|
272,630
|
|
|
$
|
262,178
|
|
|
$
|
254,302
|
|
Lease payments based on variable escalators
|
|
|
|
|
5,501
|
|
|
4,967
|
|
|
4,111
|
|
Straight-line rent income
|
|
|
|
|
20,411
|
|
|
22,084
|
|
|
22,787
|
|
Escrow funds received from tenants for property operating expenses
|
|
|
|
|
9,653
|
|
|
5,798
|
|
|
—
|
|
Amortization of lease incentives
|
|
|
|
|
(987)
|
|
|
(845)
|
|
|
(387)
|
|
Rental income
|
|
|
|
|
$
|
307,208
|
|
|
$
|
294,182
|
|
|
$
|
280,813
|
|
Note 4. Mortgage and Other Notes Receivable
At December 31, 2020, our investments in mortgage notes receivable totaled $259,491,000 secured by real estate and other assets of the borrower (e.g., UCC liens on personal property) related to 14 facilities and other notes receivable totaled $37,883,000 guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner. At
December 31, 2019, our investments in mortgage notes receivable totaled $294,120,000 and other notes receivable totaled $46,023,000. The mortgage and other notes receivable balances, indicated above, exclude a credit loss reserve of $4,946,000 and $— at December 31, 2020 and 2019, respectively.
2020 Mortgage and Other Notes Receivable
During the year ended December 31, 2020 we made the following note receivable investments and commitments as described below ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operator
|
|
Date
|
|
Properties
|
|
Asset Class
|
|
Amount
|
|
Funded
|
|
Remaining
|
Note Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Timber Ridge OpCo (See Note 5)
|
|
Q1 2020
|
|
1
|
|
SHO
|
|
$
|
5,000
|
|
|
$
|
—
|
|
|
$
|
5,000
|
|
Bickford Senior Living (See Note 3)
|
|
Q1 2020
|
|
2
|
|
SHO
|
|
4,000
|
|
|
(4,000)
|
|
|
—
|
|
Bickford Senior Living
|
|
Q2 2020
|
|
1
|
|
SHO
|
|
14,200
|
|
|
(1,918)
|
|
|
12,282
|
|
Watermark Retirement
|
|
Q2 2020
|
|
2
|
|
SHO
|
|
5,000
|
|
|
—
|
|
|
5,000
|
|
41 Management
|
|
Q4 2020
|
|
1
|
|
SHO
|
|
22,200
|
|
|
(4,040)
|
|
|
18,160
|
|
|
|
|
|
|
|
|
|
$
|
50,400
|
|
|
$
|
(9,958)
|
|
|
$
|
40,442
|
|
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 December 31, 2020.
41 Management
On November 24, 2020, we committed to providing first mortgage financing to 41 Management, LLC for up to $22,200,000 to construct, a 110-unit independent living, assisted living and memory care community in Sussex, Wisconsin. The approximate four year loan has an annual interest rate of 8.5% and two one year extensions. The agreement includes a purchase option, effective upon stabilization of the facility. Additional security on the loan includes personal and corporate guarantees and the funding of a $4,900,000 working capital escrow. The total amount funded on the note was $4,040,000 as of December 31, 2020.
Our loans to and receivables from 41 Management represent variable interests. 41 Management is structured to limit liability for potential claims for damages, is capitalized to achieve that purpose and is considered a VIE within the definition set forth in Note 2. As discussed more fully in Note 2, we have concluded that we are not the primary beneficiary of 41 Management
2019 Mortgage and Other Notes Receivable
During the year ended December 31, 2019 we made the following note receivable investments and commitments as described below ($ in thousands):
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Operator
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Date
|
|
Properties
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Asset Class
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Amount
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Funded
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Remaining
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Note Investments
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|
|
|
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|
Senior Living Communities
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|
Q2 2019
|
|
1
|
|
SHO
|
|
$
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32,700
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|
|
$
|
(32,700)
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|
|
$
|
—
|
|
41 Management
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|
Q2 2019
|
|
1
|
|
SHO
|
|
10,800
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|
|
(8,717)
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|
|
2,083
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|
Discovery Senior Living
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Q3 2019
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1
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SHO
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|
750
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|
|
(750)
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|
|
—
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|
Discovery Senior Living
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Q3 2019
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1
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SHO
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6,423
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(6,423)
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|
|
—
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|
41 Management
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Q4 2019
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1
|
|
SHO
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3,870
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(3,870)
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|
|
—
|
|
|
|
|
|
|
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|
|
$
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54,543
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|
|
$
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(52,460)
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|
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$
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2,083
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|
41 Management
In June 2019, we committed to providing first mortgage financing to 41 Management, LLC for up to $10,800,000 to fund the construction of a 51-unit assisted living facility in Wisconsin. The loan carries an interest rate of 8.50% for its term of five years, subject to two renewals of one year each. The agreement includes a purchase option, which is effective upon stabilization of the facility. Additional security on the loan includes personal and corporate guarantees and the funding of a $2,400,000 working capital escrow. The total amount funded on the note was $8,717,000 as of December 31, 2020.
In December 2019, the Company extended a second mortgage loan of $3,870,000 to 41 Management to refinance the subordinated debt on a newly constructed 48-unit assisted living/memory care facility in Bellevue, Wisconsin. The loan was subsequently paid in full when we acquired the property in September 2020. See Note 3 for more details regarding the acquisition.
Discovery
In August 2019, NHI extended a senior mortgage loan of $6,423,000 at 7% annual interest to affiliates of Discovery to acquire a senior housing facility in Indiana for which Discovery PropCo, will have the option to purchase at stabilization. The facility consists of 52 assisted living units and 22 memory care units. NHI provided an additional working capital loan for amounts up to $750,000 at an interest rate of 6.5%, which was fully funded in 2020.
Other Activity
Bickford Senior Living
At December 31, 2020, our construction loans to Bickford Senior Living are summarized as follows ($ in thousands):
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Commencement
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Rate
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Maturity
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Commitment
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Drawn
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Location
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January 2018
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9%
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5 years
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14,000
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(14,000)
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|
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Virginia
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July 2018
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9%
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5 years
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|
14,700
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|
(14,548)
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Michigan
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June 2020
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9%
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5 years
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14,200
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(1,918)
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Virginia
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|
|
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$
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42,900
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|
$
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(30,466)
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|
On June 30, 2020, we entered into a $14,200,000 construction loan agreement with Bickford to develop a 64-unit assisted living facility.
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 - 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.
The loan takes the form of two notes under a master credit agreement. The senior note (“Note A”) totals $118,800,000 at a 7.25% interest rate with 10 basis-point annual escalators after three years and has a term of 10 years. We have funded $98,752,000 and $77,340,000 of Note A as of December 31, 2020 and 2019, respectively. 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 and $45,938,000 as of December 31, 2020 and 2019, respectively. As an affiliate of a larger company, LCS-WP IV is structured to limit liability for potential damage claims, is capitalized to achieve that purpose and is considered a VIE within the definition set forth in Note 2. As discussed more fully in Note 2, we have concluded that we are not the primary beneficiary of LCS-WP IV.
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. 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. Because of our control of Timber Ridge PropCo, we consolidate its assets, liabilities, noncontrolling interest and operations in our consolidated financial statements. See Note 5 for more information about our equity-method investment in Timber Ridge OpCo.
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. The outstanding balance under the facility at December 31, 2020 and 2019, was $11,280,000 and $5,174,000, respectively and bears interest at 6.93% 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. The loans bore interest, payable monthly, at a 10% annual rate.
In June 2019, we provided a mortgage loan of $32,700,000 to Senior Living for the acquisition of a 248-unit continuing care retirement community in Columbia, South Carolina. The financing is for a term of five years with two one year extensions and carries an interest rate of 7.25%. Additionally, the loan conveys to NHI a purchase option at a stated minimum price of $38,250,000, subject to adjustment for market conditions.
Our loans to Senior Living and its subsidiaries totaling $43,980,000, 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.
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, September 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) more than 1.5x, (ii) between 1.0x and 1.5x, (iii) below 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 December 31, 2020, we did not have any construction loans that we considered underperforming. The tables below present outstanding note balances as of December 31, 2020 at amortized cost.
We consider the guidance in ASC 310-20 when determining whether a modification, extension or renewal constitutes a current period origination. The credit quality indicator as of September 30, 2020, is presented below for the amortized cost, net by year of origination ($ in thousands):
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2020
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2019
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2018
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2017
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2016
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Prior
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Total
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Mortgages
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|
|
|
|
|
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|
more than 1.5x
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$
|
5,755
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$
|
8,643
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|
$
|
187,362
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|
$
|
—
|
|
$
|
—
|
|
$
|
4,608
|
|
$
|
206,368
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|
between 1.0x and 1.5x
|
—
|
|
—
|
|
—
|
|
—
|
|
10,000
|
|
—
|
|
10,000
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|
below 1.0x
|
4,000
|
|
39,123
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|
—
|
|
—
|
|
—
|
|
—
|
|
43,123
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|
No coverage available
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—
|
|
—
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|
—
|
|
—
|
|
—
|
|
—
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|
—
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|
|
9,755
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|
47,766
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|
187,362
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|
—
|
|
10,000
|
|
4,608
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|
259,491
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|
Mezzanine
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|
|
|
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|
more than 1.5x
|
—
|
|
—
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|
—
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—
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|
—
|
|
—
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|
—
|
|
between 1.0x and 1.5x
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
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|
below 1.0x
|
—
|
|
—
|
|
—
|
|
—
|
|
14,485
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|
11,367
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|
25,852
|
|
No coverage available
|
—
|
|
750
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|
—
|
|
—
|
|
—
|
|
—
|
|
750
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|
|
—
|
|
750
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|
—
|
|
—
|
|
14,485
|
|
11,367
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|
26,602
|
|
Revolver
|
|
|
|
|
|
|
|
more than 1.5x
|
|
|
|
|
|
|
—
|
|
between 1.0x and 1.5x
|
|
|
|
|
|
|
11,280
|
|
below 1.0x
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
11,280
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|
|
|
|
|
|
Credit loss reserve
|
(4,946)
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|
|
|
|
|
|
|
|
$
|
292,427
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|
Due to the economic uncertainty created by COVID-19 and the potential impact on the collectibility 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 allowance for expected credit losses for our commercial loans is presented in the following table for the year ended December 31, 2020 ($ in thousands):
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|
|
|
|
|
Beginning balance January 1, 2020 (upon adoption of ASU 2016-13)
|
$
|
3,900
|
|
Additions for expected credit losses
|
1,639
|
|
|
|
|
|
Deduction for expected credit losses
|
(593)
|
|
Balance December 31, 2020
|
$
|
4,946
|
|
Note 5. Equity Method Investment
As discussed in Note 2, our investment in the operating company, Timber Ridge OpCo, held by our TRS and recorded in the initial amount of $875,000, arose in conjunction with the acquisition of a CCRC from LCS-Westminster Partnership III, LLP. We structured our arrangement with our JV partner, LCS Timber Ridge LLC, to be compliant with the provisions of the REIT Investment Diversification and Empowerment Act of 2007 ("RIDEA") which permits the TRS to engage in 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 normal course of entrance-fee operations, the balance secured by the Deed and Indenture at the date of our acquisition on January 31, 2020, had been reduced to $20,063,000 and was further reduced to $17,155,300 at December 31, 2020. By terms of the resident loan assumption agreement, during the term of the lease (seven 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. As a result of the subordination agreement mentioned above and Timber Ridge OpCo’s indemnity guarantee, a liability was not recorded for the resident loan obligation upon acquisition and as of December 31, 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 year ended December 31, 2020 was $3,126,000. 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 December 31, 2020, we have recognized our share of Timber Ridge OpCo’s operating losses in excess of our initial investment. These cumulative losses of $2,250,000 in excess of our original basis are included in “Accounts payable and accrued expenses” in our Consolidated Balance Sheets. Our commitments are currently limited to an additional $5,000,000 under a revolving credit facility.
Note 6. Other Assets
Our other assets consist of the following ($ in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
Accounts receivable and prepaid expenses
|
$
|
2,594
|
|
|
$
|
3,212
|
|
|
|
Lease incentive payments, net
|
9,782
|
|
|
10,146
|
|
|
|
Regulatory escrows
|
6,208
|
|
|
8,208
|
|
|
|
Restricted cash
|
2,999
|
|
|
10,454
|
|
|
|
|
$
|
21,583
|
|
|
$
|
32,020
|
|
|
|
Note 7. Debt
Debt consist of the following ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020
|
|
December 31, 2019
|
Revolving credit facility - unsecured
|
$
|
298,000
|
|
|
$
|
300,000
|
|
Bank term loans - unsecured
|
650,000
|
|
|
550,000
|
|
Private placement term loans - unsecured
|
400,000
|
|
|
400,000
|
|
HUD mortgage loans (net of discount of $ - and $1,238)
|
—
|
|
|
42,138
|
|
Fannie Mae term loans - secured, non-recourse
|
95,354
|
|
|
95,706
|
|
Convertible senior notes - unsecured (net of discount of $- and $303)
|
60,000
|
|
|
59,697
|
|
Unamortized loan costs
|
(4,069)
|
|
|
(7,076)
|
|
|
$
|
1,499,285
|
|
|
$
|
1,440,465
|
|
Aggregate principal maturities of debt as of December 31, 2020 for each of the next five years and thereafter are included in the table below. These maturities do not include the impact of any debt incurred or repaid subsequent to December 31, 2020 ($ in thousands):
|
|
|
|
|
|
For The Year Ending December 31,
|
|
2021
|
$
|
458,371
|
|
2022
|
250,389
|
|
2023
|
475,408
|
|
2024
|
75,425
|
|
2025
|
143,761
|
|
Thereafter
|
100,000
|
|
|
1,503,354
|
|
|
|
Less: unamortized loan costs
|
(4,069)
|
|
|
$
|
1,499,285
|
|
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 term loan was subsequently repaid in January 2021 with the proceeds from the issuance of the Senior Notes due 2031 discussed below.
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 132 basis points, respectively, excluding the $100,000,000 term loan repaid in January 2021. At December 31, 2020 and December 31, 2019, 30-day LIBOR was 14 and 176 basis points, respectively.
At December 31, 2020, we had $252,000,000 available to draw on the revolving portion of our credit facility, subject to usual and customary covenants. Among other stipulations, the unsecured credit facility agreement requires that we maintain certain financial ratios within limits set by our creditors. At December 31, 2020, we were in compliance with these ratios.
Pinnacle Bank is a participating member of our banking group. A member of NHI’s Board of Directors and chairman of our audit committee is also the chairman of Pinnacle Financial Partners, Inc., the holding company for Pinnacle Bank. NHI’s local banking transactions are conducted primarily through Pinnacle Bank.
Private placement term loans
Our unsecured private placement term loans, payable interest-only, are summarized below ($ 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 and net worth minimums, 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.
Repayment of HUD mortgage loans
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. The payoff included a prepayment fee of $1,619,000 and the recognition of the unamortized discount and deferred financing cost of $1,172,000 and $1,133,000, respectively, which are reflected in the line item “Loss on early retirement of debt” in our Consolidated Statements of Income. The HUD mortgage loans were secured by ten properties leased to Bickford with a net book value of $47,436,000. 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.
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 4.60%, and has remaining balance of $17,270,000 at December 31, 2020. All together, these notes are secured by facilities having a net book value of $130,006,000 at December 31, 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 the remaining $120,000,000 of convertible notes outstanding at that time. Settlement of the notes requires management to allocate the consideration we ultimately pay between the debt component and the equity conversion feature as though they were separate instruments. The allocation is effected by recording the fair value of the debt component first, with any remainder allocated to the conversion feature. Amounts expended to settle the notes are recognized first as a settlement of the notes at our carrying value and then are recognized in income to the extent the portion allocated to the debt instrument differs from carrying value. The remainder of the allocation, if any, is treated as settlement of equity and adjusted through our capital in excess of par account.
Total consideration given in the exchange of $73,102,000 included the issuance of 626,397 shares of NHI common stock with a fair value of $51,002,000 and cash disbursed of $22,100,000. The consideration was allocated as $60,285,000 to the note retirement with the remaining expenditure of $12,816,000 allocated to retirement of the equity feature of the notes. A loss of $823,000 for the year ended December 31, 2019, resulted from the excess allocation of cash expenditures over the book value of the notes retired, net of discount and issuance costs.
As of December 31, 2020, our $60,000,000 of senior unsecured convertible notes were convertible at a rate of 14.95 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $66.89 per share for a total of 896,994 shares on the remaining $60,000,000 of senior unsecured convertible notes. For the year ended December 31, 2020, there was no dilution resulting from the conversion option within our convertible debt. If our current share price increases above the adjusted $66.89 conversion price, dilution may be attributable to the conversion feature. At December 31, 2020, the value of the convertible debt, computed as if the debt were immediately eligible for conversion, exceeded its face value amount by $2,045,000.
Senior Notes due 2031
On January 26, 2021, we issued $400,000,000 aggregate principal amount of 3.00% senior notes that mature on February 1, 2031 and pay interest semi-annually (the “2031 Senior Notes”). The 2031 Senior Notes were sold at an issue price of 99.196% of face value before the underwriters’ discount. Our net proceeds from the 2031 Senior Notes offering, after deducting underwriting discounts and expenses, were approximately $392,431,000. We used the net proceeds from the 2031 Senior Notes offering to repay our 2020 Term Loan and reduce borrowings outstanding under our Revolving Credit Facility.
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 $7,149,000 of losses, which are included in accumulated other comprehensive loss, are projected to be reclassified into earnings.
As of December 31, 2020, we employ the following interest rate swap contracts to mitigate our interest rate risk on our bank term and revolver loans described above ($ in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Entered
|
|
Maturity Date
|
|
Swap Rate
|
|
Rate Index
|
|
Notional Amount
|
|
Fair Value (Liability)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2019
|
|
December 2021
|
|
2.22%
|
|
1-month LIBOR
|
|
$
|
100,000
|
|
|
$
|
(2,092)
|
|
March 2019
|
|
December 2021
|
|
2.21%
|
|
1-month LIBOR
|
|
$
|
100,000
|
|
|
$
|
(2,105)
|
|
June 2019
|
|
December 2021
|
|
1.61%
|
|
1-month LIBOR
|
|
$
|
150,000
|
|
|
$
|
(2,210)
|
|
June 2019
|
|
December 2021
|
|
1.63%
|
|
1-month LIBOR
|
|
$
|
50,000
|
|
|
$
|
(743)
|
|
If the fair value of the hedge is an asset, we include it in our Consolidated Balance Sheets in the line item “Other assets”, and, if a liability, as a component of “Accounts payable and accrued expenses”. See Note 12 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 December 31, 2020 and 2019 were $7,150,000 and $3,433,000, respectively.
The following table summarizes interest expense ($ in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Interest expense on debt at contractual rates
|
$
|
43,458
|
|
|
$
|
53,923
|
|
|
$
|
45,789
|
|
(Gains) losses reclassified from accumulated other
|
|
|
|
|
|
comprehensive income (loss) into interest expense
|
6,330
|
|
|
(791)
|
|
|
164
|
|
|
|
|
|
|
|
Capitalized interest
|
(254)
|
|
|
(399)
|
|
|
(212)
|
|
|
|
|
|
|
|
Amortization of debt issuance costs, debt discount and other
|
3,348
|
|
|
3,566
|
|
|
3,314
|
|
Total interest expense
|
52,882
|
|
|
56,299
|
|
|
49,055
|
|
Note 8. 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 classified below as loan commitments, and commitments for the funding of construction for expansion or renovation to our existing properties under lease classified below as development commitments. In our leasing operations, we offer to our tenants and to sellers of newly acquired properties a variety of inducements which originate contractually as contingencies but which may become commitments upon the satisfaction of the contingent event. Contingent payments earned will be included in the respective lease bases when funded. The tables below summarize our existing, known commitments and contingencies as of December 31, 2020 according to the nature of their impact on our leasehold or loan portfolios ($ in thousands):
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class
|
|
Type
|
|
Total
|
|
Funded
|
|
Remaining
|
Loan Commitments:
|
|
|
|
|
|
|
|
|
|
LCS Sagewood Note A
|
SHO
|
|
Construction
|
|
$
|
118,800
|
|
|
$
|
(98,752)
|
|
|
$
|
20,048
|
|
LCS Sagewood Note B
|
SHO
|
|
Construction
|
|
61,200
|
|
|
(61,200)
|
|
|
—
|
|
Bickford Senior Living
|
SHO
|
|
Construction
|
|
42,900
|
|
|
(30,466)
|
|
|
12,434
|
|
41 Management
|
SHO
|
|
Construction
|
|
22,200
|
|
|
(4,040)
|
|
|
18,160
|
|
Senior Living Communities
|
SHO
|
|
Revolving Credit
|
|
12,000
|
|
|
(11,280)
|
|
|
720
|
|
41 Management
|
SHO
|
|
Construction
|
|
10,800
|
|
|
(8,717)
|
|
|
2,083
|
|
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)
|
|
|
—
|
|
|
|
|
|
|
$
|
278,650
|
|
|
$
|
(215,205)
|
|
|
$
|
63,445
|
|
See Note 4 to our consolidated financial statements for full details of our loan commitments. As provided above, loans funded do not include the effects of discounts or commitment fees.
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 year ended December 31, 2020 ($ in thousands):
|
|
|
|
|
|
Beginning balance January 1, 2020 (upon adoption of ASU 2016-13)
|
$
|
325
|
|
Benefit to expected credit losses
|
(55)
|
|
Balance at December 31, 2020
|
$
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class
|
|
Type
|
|
Total
|
|
Funded
|
|
Remaining
|
Development Commitments:
|
|
|
|
|
|
|
|
|
|
Ignite Medical Resorts
|
SNF
|
|
Construction
|
|
$
|
25,350
|
|
|
$
|
(25,350)
|
|
|
$
|
—
|
|
Woodland Village
|
SHO
|
|
Construction
|
|
7,515
|
|
|
(7,425)
|
|
|
90
|
|
Senior Living Communities
|
SHO
|
|
Renovation
|
|
9,930
|
|
|
(9,763)
|
|
|
167
|
|
Wingate Healthcare
|
SHO
|
|
Renovation
|
|
1,900
|
|
|
(1,808)
|
|
|
92
|
|
Discovery Senior Living
|
SHO
|
|
Renovation
|
|
900
|
|
|
(853)
|
|
|
47
|
|
Watermark Retirement
|
SHO
|
|
Renovation
|
|
6,500
|
|
|
(3,000)
|
|
|
3,500
|
|
Other
|
SHO
|
|
Various
|
|
1,850
|
|
|
(591)
|
|
|
1,259
|
|
|
|
|
|
|
$
|
53,945
|
|
|
$
|
(48,790)
|
|
|
$
|
5,155
|
|
In addition to the commitments listed above, Discovery PropCo has committed to Discovery Senior Living for funding up to $2,000,000 toward the purchase of condominium units located at one of the facilities. As of December 31, 2020, we have funded $968,000 toward the commitment.
As of December 31, 2020, we had the following contingent lease inducements which are generally based on the performance of facility operations and may or may not be met by the tenant ($ in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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 agreed to defer rent due from Bickford Senior Living totaling $5,850,000 for 2020 and $750,000 for January 2021 as a result of the impact from the COVID-19 pandemic. Of the 2020 deferral, $2,100,000 related to the third quarter 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 December 31, 2020. The $2,100,000 of deferred rent will be forgiven contingent upon Bickford’s ability to close on the acquisition of these properties. Rental income from this portfolio was $7,878,000 (net of $182,000 of the deferral mentioned above) for the year ended December 31, 2020 and $9,383,000 and $8,859,000, for both of the years ended December 31, 2019 and 2018, respectively, including straight-line rental income of $283,000, $680,000 and $331,000, respectively.
The deferred rent for Bickford of $3,750,000 pertaining to the fourth quarter and the $750,000 pertaining to January 2021 bears interest at 8% per annum with repayments, including accrued interest, over twelve months beginning in June 2021.
We agreed to rent concessions with another tenant totaling $1,072,000 in deferrals for 2020, $50,000 in abatements for 2020, and $447,000 in deferrals related to the first quarter of 2021. Of the 2020 totals, approximately $534,000 in deferrals and $20,000 in abatements are related to the third quarter and $538,000 in deferrals and $30,000 in abatements relate to the fourth quarter. The deferred amounts accrue interest from the date of the deferral until paid in full with payments due starting in July 2021 and due no later than December 2022. In initial interest is 8% on the deferrals through December 31, 2021, at which time the rate increases to 9%.
We have accounted for these concessions as variable lease payments, recorded as rental income when received, in accordance with the FASB's Lease Modification Q&A discussed in Note 2.
In the fourth quarter of 2020, we also modified a transition property’s lease in response to the COVID-19 pandemic that extended the lease term by one year and deferred rent of $160,000. See Note 3 Other Portfolio Activity Transitioning Tenants for information regarding our transition properties.
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.
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.
Note 9. 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 program. Upon entering into the new agreement, the Company terminated its previously existing ATM equity program, dated February 22, 2017. During the year ended December 31, 2020, we issued 535,990 common shares through the ATM program with an average price of $66.30, resulting in net proceeds of approximately $34,649,000. During the year ended December 31, 2019, 1,209,522 common shares were issued for $95,774,000 in net proceeds.
Dividends
The following table summarizes dividends declared by the Board of Directors during the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
Date of Declaration
|
|
Date of Record
|
|
Date Paid/Payable
|
|
Quarterly Dividend
|
|
|
|
|
|
|
|
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
|
December 15, 2020
|
|
December 31, 2020
|
|
January 29, 2021
|
|
$1.1025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
Date of Declaration
|
|
Date of Record
|
|
Date Paid/Payable
|
|
Quarterly Dividend
|
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
|
November 7, 2019
|
|
December 31, 2019
|
|
January 31, 2020
|
|
$1.05
|
Note 10. Stock-Based Compensation
We recognize share-based compensation for all stock options granted over the requisite service period using the fair value of these grants as estimated at the date of grant using the Black-Scholes pricing model over the requisite service period using the market value of our publicly-traded common stock on the date of grant.
Share-Based Compensation Plans
The Compensation Committee of the Board of Directors (the “Committee”) has the authority to select the participants to be granted options; to designate whether the option granted is an incentive stock option (“ISO”), a non-qualified option, or a stock appreciation right; to establish the number of shares of common stock that may be issued upon exercise of the option; to establish the vesting provision for any award; and to establish the term any award may be outstanding. The exercise price of any ISO’s granted will not be less than 100% of the fair market value of the shares of common stock on the date granted and the term of an ISO may not be more than ten years. The exercise price of any non-qualified options granted will not be less than 100% of the fair market value of the shares of common stock on the date granted unless so determined by the Committee.
The Company’s outstanding stock incentive awards have been granted under two incentive plans – the 2012 Stock Incentive Plan (“2012 Plan”) and the 2019 Stock Incentive Plan (“2019” Plan”). The individual option grant awards may vest over periods up to five years. The term of the options under the 2019 Plan is up to ten years from the date of grant. As of December 31, 2020, shares available for future grants totaled 2,756,836 all under the 2019 Plan and 12,500 shares remain available for issuance under the 2012 Plan.
Compensation expense is recognized only for the awards that ultimately vest. Accordingly, forfeitures that were not expected may result in the reversal of previously recorded compensation expense. We consider the historical employee turnover rate in our estimate of the number of stock option forfeitures. The following is a summary of stock-based compensation expense, net of forfeitures, included in “General and administrative expenses” in the Consolidated Statements of Income ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
Non-cash stock-based compensation expense
|
$
|
3,061
|
|
|
$
|
3,646
|
|
|
$
|
2,490
|
|
Determining Fair Value of Option Awards
The fair value of each option award was estimated on the grant date using the Black-Scholes option valuation model with the weighted average assumptions indicated in the following table. Each grant is valued as a single award with an expected term based upon expected employee and termination behavior. Compensation cost is recognized on the graded vesting method over the requisite service period for each separately vesting tranche of the award as though the award were, in substance, multiple awards. The expected volatility is derived using daily historical data for periods preceding the date of grant. The risk-free interest rate is the approximate yield on the United States Treasury Strips having a life equal to the expected option life on the date of grant. The expected life is an estimate of the number of years an option will be held before it is exercised.
Stock Options
The weighted average fair value of options granted was $5.57, $6.30 and $4.49 for December 31, 2020, 2019 and 2018, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
Dividend yield
|
5.1%
|
|
5.5%
|
|
6.5%
|
Expected volatility
|
17.1%
|
|
18.2%
|
|
19.4%
|
Expected lives
|
2.9 years
|
|
2.7 years
|
|
2.9 years
|
Risk-free interest rate
|
1.30%
|
|
2.39%
|
|
2.39%
|
Stock Option Activity
The following tables summarize our outstanding stock options, after giving effect to modifications of 83,334 options in November 2019 as, in substance, the forfeiture of old and issuance of new options concurrent with an employee’s retirement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Number
|
|
Weighted Average
|
|
Remaining
|
|
|
of Shares
|
|
Exercise Price
|
|
Contractual Life (Years)
|
|
Outstanding December 31, 2017
|
859,182
|
|
|
$70.11
|
|
|
|
Options granted under 2012 Plan
|
560,000
|
|
|
$64.33
|
|
|
|
|
|
|
|
|
|
|
Options exercised under 2005 Plan
|
(6,668)
|
|
|
$72.11
|
|
|
|
Options exercised under 2012 Plan
|
(462,167)
|
|
|
$65.03
|
|
|
|
Options canceled under 2012 Plan
|
(30,001)
|
|
|
$66.73
|
|
|
|
Outstanding December 31, 2018
|
920,346
|
|
|
$69.24
|
|
|
|
Options granted under 2012 Plan
|
685,334
|
|
|
$79.08
|
|
|
|
Options exercised under 2012 Plan
|
(501,664)
|
|
|
$71.52
|
|
|
|
Options forfeited under 2012 Plan
|
(100,002)
|
|
|
$73.89
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2019
|
1,004,014
|
|
|
$74.35
|
|
|
|
Options granted under 2012 Plan
|
319,669
|
|
|
$90.79
|
|
|
|
Options granted under 2019 Plan
|
272,331
|
|
|
$89.76
|
|
|
|
Options exercised under 2012 Plan
|
(512,509)
|
|
|
$72.98
|
|
|
|
|
|
|
|
|
|
|
Options forfeited under 2012 Plan
|
(16,669)
|
|
|
$81.37
|
|
|
|
Options forfeited under 2019 Plan
|
(32,998)
|
|
|
$90.79
|
|
|
|
Options outstanding, December 31, 2020
|
1,033,838
|
|
|
|
|
3.39
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2020
|
601,994
|
|
|
|
|
3.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
Grant
|
|
Number
|
|
Exercise
|
|
Contractual
|
Date
|
|
of Shares
|
|
Price
|
|
Life in Years
|
2/22/2016
|
|
20,000
|
|
|
$
|
60.52
|
|
|
0.15
|
2/22/2017
|
|
55,331
|
|
|
$
|
74.78
|
|
|
1.15
|
2/20/2018
|
|
88,170
|
|
|
$
|
64.33
|
|
|
2.14
|
2/21/2019
|
|
313,504
|
|
|
$
|
79.96
|
|
|
3.14
|
2/21/2020
|
|
549,333
|
|
|
$
|
90.79
|
|
|
4.15
|
5/1/2020
|
|
7,500
|
|
|
$
|
53.76
|
|
|
4.33
|
Options outstanding, December 31, 2020
|
|
1,033,838
|
|
|
|
|
|
Including outstanding stock options, our stockholders have authorized an additional 3,803,174 shares of common stock that may be issued under the share-based payments plans.
The following table summarizes our outstanding non-vested stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
Non-vested December 31, 2019
|
473,851
|
|
|
$5.64
|
Options granted under 2012 Plan
|
319,669
|
|
|
$5.52
|
Options granted under 2019 Plan
|
272,331
|
|
|
$5.63
|
Options vested under 2012 Plan
|
(495,675)
|
|
|
$5.42
|
Options vested under 2019 Plan
|
(88,665)
|
|
|
$5.63
|
Non-vested options forfeited under 2012 Plan
|
(16,669)
|
|
|
$6.12
|
Non-vested options forfeited under 2019 Plan
|
(32,998)
|
|
|
$5.55
|
Non-vested December 31, 2020
|
431,844
|
|
|
$5.79
|
As of December 31, 2020, unrecognized compensation expense totaling $723,000 associated with unvested stock options is expected to be recognized over the following periods: 2021 - $648,000 and 2022 - $75,000. Share-based compensation is included in “General and administrative expense” in the Consolidated Statements of Income.
At December 31, 2020, the aggregate intrinsic value of stock options outstanding and exercisable was $715,000 and $638,000, respectfully. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2020, 2019 and 2018 was $8,118,000 or $15.84 per share; $5,659,000 or $11.28 per share, and $6,105,000 or $13.02 per share, respectively.
Note 11. Earnings Per Common Share
The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assume the exercise of stock options and the conversion of our convertible debt using the treasury stock method, to the extent dilutive. Dilution resulting from the conversion option within our convertible debt is determined by computing an average of incremental shares included in each quarterly diluted EPS computation. If our average stock price for the period increases over the conversion price of our convertible debt, the conversion feature will be considered dilutive.
The following table summarizes the average number of common shares and the net income used in the calculation of basic and diluted earnings per common share ($ in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Net income attributable to common stockholders
|
$
|
185,126
|
|
|
$
|
160,456
|
|
|
$
|
154,333
|
|
|
|
|
|
|
|
BASIC:
|
|
|
|
|
|
Weighted average common shares outstanding
|
44,696,285
|
|
|
43,417,828
|
|
|
41,943,873
|
|
|
|
|
|
|
|
DILUTED:
|
|
|
|
|
|
Weighted average common shares outstanding
|
44,696,285
|
|
|
43,417,828
|
|
|
41,943,873
|
|
Stock options
|
1,719
|
|
|
75,196
|
|
|
67,735
|
|
Convertible subordinated debentures
|
—
|
|
|
210,224
|
|
|
80,123
|
|
Weighted average dilutive common shares outstanding
|
44,698,004
|
|
|
43,703,248
|
|
|
42,091,731
|
|
|
|
|
|
|
|
Net income attributable to common stockholders - basic
|
$
|
4.14
|
|
|
$
|
3.70
|
|
|
$
|
3.68
|
|
Net income attributable to common stockholders - diluted
|
$
|
4.14
|
|
|
$
|
3.67
|
|
|
$
|
3.67
|
|
|
|
|
|
|
|
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
|
390,596
|
|
|
4,678
|
|
|
518
|
|
|
|
|
|
|
|
Regular dividends declared per common share
|
$
|
4.41
|
|
|
$
|
4.20
|
|
|
$
|
4.00
|
|
Note 12. 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 2) 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.
Assets and liabilities measured at fair value on a recurring basis are as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement
|
|
Balance Sheet Classification
|
|
December 31,
2020
|
|
December 31, 2019
|
Level 2
|
|
|
|
|
|
Interest rate swap liability
|
Accounts payable and accrued expenses
|
|
$
|
(7,150)
|
|
|
$
|
(3,433)
|
|
Carrying values and fair values of financial instruments that are not carried at fair value at December 31, 2020 and December 31, 2019 in the Consolidated Balance Sheets are as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
Fair Value Measurement
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Level 2
|
|
|
|
|
|
|
|
Variable rate debt
|
$
|
945,078
|
|
|
$
|
845,744
|
|
|
$
|
948,000
|
|
|
$
|
850,000
|
|
Fixed rate debt
|
$
|
554,207
|
|
|
$
|
594,721
|
|
|
$
|
575,292
|
|
|
$
|
602,926
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
|
|
|
|
|
Mortgage and other notes receivable
|
$
|
292,427
|
|
|
$
|
340,143
|
|
|
$
|
321,021
|
|
|
$
|
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 December 31, 2020 and 2019, due to the predominance of floating interest rates, which generally reflect market conditions.
Note 13. Income Taxes
Beginning with our inception in 1991, we have elected to be taxed as a REIT under the Internal Revenue Code. For the years ended December 31, 2020, 2019, and 2018, respectively, we have recorded state income tax expense of $140,000, $142,000 and $138,000 related to a Texas franchise tax that has attributes of an income tax. Some of our leases require taxes to be reimbursed by our tenants. State income taxes are combined in “Franchise, excise and other taxes” in our Consolidated Statements of Income.
The Company has a deferred tax asset, which is fully reserved through a valuation allowance, of $930,000 and $273,000 as of December 31, 2020 and 2019, respectively, as a result of its participation in the operations of a joint venture during the years 2012 through 2016, and Timber Ridge OpCo structured as a taxable REIT subsidiary (“TRS”) under provisions of the Internal Revenue Code. See Note 5 for a discussion of Timber Ridge OpCo.
The Company made state income tax payments of $140,000, $112,000,and $124,000 for the years ended December 31, 2020, 2019, and 2018, respectively.
Dividend payments to common stockholders for the last three years are characterized for tax purposes as follows on a per share basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
Ordinary income
|
$
|
3.50398
|
|
|
$
|
4.20000
|
|
|
$
|
3.33730
|
|
Capital gain
|
0.10999
|
|
|
—
|
|
|
—
|
|
Return of capital
|
0.79603
|
|
|
—
|
|
|
0.66270
|
|
Dividends paid per common share
|
$
|
4.41
|
|
|
$
|
4.20
|
|
|
$
|
4.00
|
|
Note 14. Selected Quarterly Financial Data (UNAUDITED)
The following table sets forth selected quarterly financial data for the two most recent fiscal years ($ in thousands, except share and per share amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
Quarter Ended
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
Net revenues
|
$
|
83,076
|
|
|
$
|
84,174
|
|
|
$
|
84,301
|
|
|
$
|
81,260
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
$
|
61,023
|
|
|
$
|
44,368
|
|
|
$
|
42,595
|
|
|
$
|
37,140
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
44,613,593
|
|
|
44,650,002
|
|
|
44,661,650
|
|
|
44,859,894
|
|
Diluted
|
44,618,139
|
|
|
44,650,002
|
|
|
44,662,403
|
|
|
44,861,469
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
Net income attributable to common stockholders - basic
|
$
|
1.37
|
|
|
$
|
0.99
|
|
|
$
|
0.95
|
|
|
$
|
0.83
|
|
Net income attributable to common stockholders - diluted
|
$
|
1.37
|
|
|
$
|
0.99
|
|
|
$
|
0.95
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
Quarter Ended
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
Net revenues
|
$
|
76,107
|
|
|
$
|
78,096
|
|
|
$
|
81,682
|
|
|
$
|
82,196
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
$
|
35,679
|
|
|
$
|
39,979
|
|
|
$
|
42,758
|
|
|
$
|
42,040
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
42,825,824
|
|
|
43,232,384
|
|
|
43,505,332
|
|
|
44,107,770
|
|
Diluted
|
43,125,032
|
|
|
43,498,021
|
|
|
43,861,089
|
|
|
44,328,847
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
Net income attributable to common stockholders - basic
|
$
|
0.83
|
|
|
$
|
0.92
|
|
|
$
|
0.98
|
|
|
$
|
0.95
|
|
Net income attributable to common stockholders - diluted
|
$
|
0.83
|
|
|
$
|
0.92
|
|
|
$
|
0.97
|
|
|
$
|
0.95
|
|