NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
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 a medical office building. As of September 30, 2021, we had investments of approximately $3.0 billion in 208 health care real estate properties located in 34 states and leased pursuant primarily to triple-net leases to 33 lessees consisting of 133 senior housing communities (“SHO”), 72 skilled nursing facilities, two hospitals and one medical office building, excluding three properties classified to assets held for sale. Our portfolio of 14 mortgages along with other notes receivable totaled $289.7 million, excluding an allowance for expected credit losses of $5.1 million, as of September 30, 2021.
Note 2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements. In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation. Interim results of operations are not necessarily indicative of the results that may be achieved for a full year. The condensed consolidated financial statements and related notes do not include all information and footnotes required by GAAP for annual reports. These interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2020, included in our 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and subsidiaries in which we have a controlling interest. We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if the Company is deemed to be the primary beneficiary of such entities. All material intercompany transactions and balances are eliminated in consolidation.
At September 30, 2021, we held interests in ten 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 rent receivables, excluding our investment accounted for under the equity method discussed in Note 5.
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 exposure to these VIEs, see the notes to our condensed consolidated financial statements cross-referenced below ($ in thousands).
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Date
|
Name
|
Source of Exposure
|
Carrying Amount
|
Maximum Exposure to Loss
|
Note Reference
|
|
2012
|
Bickford Senior Living
|
Various1
|
$
|
67,000
|
|
$
|
88,000
|
|
Notes 3, 4
|
|
2014
|
Senior Living Communities
|
Notes and straight-line receivable
|
$
|
83,000
|
|
$
|
93,000
|
|
Notes 3, 4
|
|
2016
|
Senior Living Management
|
Notes and straight-line receivable
|
$
|
27,000
|
|
$
|
27,000
|
|
—
|
|
2018
|
Sagewood, LCS affiliate
|
Notes
|
$
|
109,000
|
|
$
|
109,000
|
|
Note 4
|
|
2019
|
41 Management, LLC
|
Notes and straight-line receivable
|
$
|
25,000
|
|
$
|
34,000
|
|
—
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|
2020
|
Timber Ridge OpCo, LLC
|
Various2
|
$
|
(5,000)
|
|
$
|
5,000
|
|
Note 5
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|
2020
|
Watermark Retirement
|
Notes and straight-line receivable
|
$
|
9,000
|
|
$
|
10,000
|
|
—
|
|
2021
|
Montecito Medical Real Estate
|
Notes and funding commitment
|
$
|
2,000
|
|
$
|
50,000
|
|
Note 4
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|
2021
|
Vizion Health
|
Notes and straight-line receivable
|
$
|
20,000
|
|
$
|
22,000
|
|
Notes 3, 4
|
|
2021
|
Navion Senior Solutions
|
Notes and straight-line receivable
|
$
|
7,000
|
|
$
|
14,000
|
|
Notes 3, 4
|
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, in excess of what is presented in the table above, if any, would be limited to that resulting from any 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 properties and might be required to consolidate the financial position and results of operations of the tenants 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 three and nine months ended September 30, 2021 and 2020, our noncontrolling interests relate to these partnerships with Discovery and LCS.
We use the equity method of accounting when we own an interest in an entity whereby we can exert significant influence over but cannot control the entity’s operations. We discontinue equity method accounting if our investment in an entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.
Cash and Cash Equivalents and Restricted Cash
Cash equivalents consist of all highly liquid investments with an original maturity of three months or less. Restricted cash includes amounts required to be held on deposit or subject to an agreement (e.g., with a qualified intermediary subject to an Internal Revenue Code §1031 exchange agreement or in accordance with agency agreements governing our mortgages).
The following table sets forth our “Cash, cash equivalents and restricted cash” reported within the Company’s Condensed Consolidated Statements of Cash Flows ($ in thousands):
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|
|
September 30,
2021
|
|
September 30,
2020
|
|
Cash and cash equivalents
|
$
|
48,393
|
|
|
$
|
42,198
|
|
|
Restricted cash (included in Other assets)
|
1,802
|
|
|
8,916
|
|
|
|
$
|
50,195
|
|
|
$
|
51,114
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|
Assets Held for Sale
We consider properties to be assets held for sale when (1) management commits to a plan to sell the property; (2) it is unlikely that the disposal plan will be significantly modified or discontinued; (3) the property is available for immediate sale in its present condition; (4) actions required to complete the sale of the property have been initiated; (5) sale of the property is probable and we anticipate the completed sale will occur within one year; and (6) the property is actively being marketed for sale at a price that is
reasonable given our estimate of current market value. Upon designation of a property as an asset held for sale, we record the property’s value at the lower of its carrying value or its estimated fair value, less estimated transaction costs. Depreciation and amortization of the property are discontinued.
Real Estate Investment Impairment
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 estimated fair value of the property.
During the three and nine months ended September 30, 2021, we recognized impairment charges on five real estate properties of approximately $22.5 million included in “Loan and realty losses (gains)” in our Condensed Consolidated Statement of Income for the nine months ended September 30, 2021. Reference Note 3 for more discussion.
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. 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.
On July 30, 2021, Atria Senior Living acquired the management services of the legacy Holiday Retirement (“Holiday”) portfolio who is the tenant for 17 independent living facilities leased pursuant to a master lease. We have not received any contractual rent due under the master lease since this transaction. Accordingly, we have placed the tenant on cash basis. Rent due but uncollected and unrecognized for August and September 2021 totaled $4.8 million.
Accounting for Lease Modifications related to Coronavirus Disease 2019
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 (“COVID-19”) pandemic. The Lease Modification Q&A clarifies that entities may elect not to evaluate whether lease-related relief provided to mitigate the economic effects of the COVID-19 pandemic is a lease modification under Accounting Standard Codification (“ASC”) 842, Leases (“ASC 842”). Instead, an entity that elects not to evaluate whether a concession directly related to the COVID-19 pandemic, which does not substantially increase either its rights as lessor or the obligations of the tenant, is a lease modification can decide whether or not to apply the modification guidance. An entity should apply the election consistently to leases with similar characteristics and similar circumstances. NHI has elected not to apply the modification guidance under ASC 842 and has accounted for qualified rent concessions as variable lease payments when applicable, recorded as rental income when received. During the three and nine months ended September 30, 2021, we provided $5.8 million and $19.9 million, respectively, in lease concessions as a result of the COVID-19 pandemic, as discussed in more detail in Note 7.
Note 3. Real Estate Properties and Investments
During the nine months ended September 30, 2021, we completed the following real estate acquisitions as described below ($ in thousands):
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|
|
Operator
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|
Date
|
|
Properties
|
|
Asset Class
|
|
Land
|
|
Building and Improvements
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|
Total
|
|
Vizion Health
|
|
Q2 2021
|
|
1
|
|
HOSP
|
|
$
|
1,470
|
|
|
$
|
38,780
|
|
|
$
|
40,250
|
|
|
Navion Senior Solutions
|
|
Q2 2021
|
|
1
|
|
SHO
|
|
531
|
|
|
6,069
|
|
|
6,600
|
|
|
|
|
|
|
|
|
|
|
$
|
2,001
|
|
|
$
|
44,849
|
|
|
$
|
46,850
|
|
Vizion Health
In May 2021, we acquired a 64-bed specialty behavioral hospital located in Oklahoma for a total purchase price of $40.3 million, including $0.3 million in closing costs, and concurrently leased the hospital to an affiliate of Vizion Health. The 15-year master lease, which includes two five-year extension options, has an initial lease rate of 8.5% with fixed annual escalators of 2.5%. We have committed to additional funding of capital improvements for the hospital of up to $2.0 million which will be added to the lease base as funded. At September 30, 2021, no funds have been drawn.
Navion Senior Solutions
In June 2021, we acquired a 48-unit assisted living and memory care community in Tennessee for a purchase price of $6.6 million, including closing costs of $0.1 million. The community was added to an existing master lease with Navion Senior Solutions (“Navion”) whose term was reset for 12 years, has a lease rate of 7.5% with fixed annual escalators of 2.5% and offers two optional extensions of five years each.
Asset Dispositions
During the nine months ended September 30, 2021, we completed the following real estate dispositions as described below ($ in thousands):
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|
|
|
|
|
|
|
Operator
|
|
Date
|
|
Properties
|
|
Asset Class
|
|
Net Proceeds
|
|
Net Real Estate Investment
|
|
Other1
|
|
Gain/(Impairment)2
|
|
Bickford
|
|
Q2 2021
|
|
6
|
|
SHO
|
|
$
|
39,924
|
|
|
$
|
34,485
|
|
|
$
|
1,871
|
|
$
|
3,568
|
|
$
|
3,568
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|
|
Community Health Systems
|
|
Q2 2021
|
|
1
|
|
MOB
|
|
3,887
|
|
|
946
|
|
|
62
|
|
|
2,879
|
|
|
TrustPoint Hospital
|
|
Q3 2021
|
|
1
|
|
HOSP
|
|
31,215
|
|
|
21,018
|
|
|
1,562
|
|
|
8,635
|
|
|
Holiday
|
|
Q3 2021
|
|
8
|
|
SHO
|
|
114,133
|
|
|
113,611
|
|
|
(1,360)
|
|
|
1,882
|
|
|
Quorum Health
|
|
Q3 2021
|
|
1
|
|
HOSP
|
|
8,314
|
|
|
9,568
|
|
|
—
|
|
|
(1,254)
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|
|
Senior Living Management
|
|
Q3 2021
|
|
1
|
|
SHO
|
|
12,847
|
|
|
3,212
|
|
|
210
|
|
|
9,425
|
|
|
Holiday
|
|
Q3 2021
|
|
1
|
|
SHO
|
|
5,666
|
|
|
10,388
|
|
|
(81)
|
|
|
(4,641)
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|
|
|
|
|
|
|
|
|
|
$
|
215,986
|
|
|
$
|
193,228
|
|
|
$
|
2,264
|
|
|
$
|
20,494
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|
|
|
|
|
|
|
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|
|
|
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|
1 includes straight-line rent and deferred lease intangibles
2 impairment charges are included in “Loan and realty losses (gains)” in our Condensed Consolidated Income Statement as of September 30, 2021
Bickford
During the second quarter of 2021, we sold to affiliates of Bickford a portfolio of six properties that were being leased to Bickford for a purchase price of $52.9 million. We received approximately $39.9 million in cash consideration upon sale and originated a second mortgage note receivable for the remaining purchase price of $13.0 million. A gain was not recognized related to the $13.0 million second mortgage note receivable, which is discussed in more detail in Note 4. We recorded a gain upon completion of this transaction totaling approximately $3.6 million representing the excess of the $39.9 million cash consideration received over the net book value of the assets sold of $34.5 million and the write off of straight-line rents receivable of approximately $1.9 million. Rental income from this portfolio was $1.6 million and $4.5 million for the nine months ended September 30, 2021 and 2020, respectively.
Upon completion of the sale, Bickford satisfied the terms of our prior agreement that contingently waived $2.1 million in rental income for the third quarter of 2020. These properties were part of our ongoing negotiations for the sale to Bickford of nine properties being leased to Bickford. We continue to explore our options for the remaining three properties, which could include a sale to a third party, re-tenanting, or retaining the existing lease with Bickford. Reference Note 7 for discussion of additional contingent consideration associated with this disposition that was not included in the transaction price at the time of closing.
Community Health Systems
During the second quarter of 2021, we sold a medical office building located in Florida for approximately $4.3 million in cash consideration, and incurred $0.4 million of transaction costs, resulting in a gain of approximately $2.9 million. Revenue for this property was $0.1 million and $0.3 million for the nine months ended September 30, 2021 and 2020, respectively.
TrustPoint Hospital
In July 2021, we sold a behavioral hospital located in Tennessee for cash consideration of $31.2 million and recorded a gain of approximately $8.6 million. Rental income was $0.1 million and $1.4 million, for the three and nine months ended September 30, 2021, respectively, and $0.7 million and $2.0 million for the three and nine months ended September 30, 2020, respectively.
Holiday
In August 2021, we sold a portfolio of eight properties that was leased to Holiday with an aggregate net book value of $113.6 million for total cash consideration of $115.0 million, and incurred transaction costs of $0.9 million, and recognized a gain of approximately $1.9 million associated with this transaction. Rental income was $0.9 million and $5.9 million, for the three and nine months ended September 30, 2021, respectively, and $2.5 million and $7.5 million for the three and nine months ended September 30, 2020, respectively.
In September 2021, we sold a property that was leased to Holiday located in Indiana with a net book value of $10.4 million for total cash consideration of $5.8 million, incurred transactions costs of $0.1 million, and recognized an impairment of approximately $4.6 million associated with this transaction. Rental income was $0.1 million and $0.4 million, for the three and nine months ended September 30, 2021, respectively and $0.2 million and $0.5 million for the three and nine months ended September 30, 2020, respectively.
Quorum Health
In September 2021, we sold an acute care hospital located in Kentucky for cash consideration of $9.0 million, incurred $0.7 million of transaction costs, and recorded an impairment charge of approximately $1.3 million. Rental income was $0.7 million and $2.5 million, for the three and nine months ended September 30, 2021, respectively, and $0.9 million and $2.3 million, for the three and nine months ended September 30, 2020, respectively.
Senior Living Management
On September 30 2021, we sold a senior living community located in Florida for cash consideration of $14.0 million that was received October 1, 2021, incurred transaction costs of $1.2 million and recorded a gain of approximately $9.4 million. Rental income was $0.3 million and $0.8 million, for the three and nine months ended September 30, 2021, respectively, and $0.3 million and $1.0 million for the three and nine months ended September 30, 2020, respectively. The consideration receivable for the sale is included in “Other assets” in our Condensed Consolidated Balance Sheet as of September 30, 2021.
Assets Held for Sale and Impairment of Real Estate
During the third quarter of 2021, we reclassified three transition properties to assets held for sale on our Condensed Consolidated Balance Sheet as of September 30, 2021 and recorded impairment charges of approximately $16.6 million to reduce their net book values to estimated fair values less estimated transaction costs. Two of the properties are located in Texas and one property is located in Tennessee. Rental income for these properties was based on operating income, net of management fees, and did not generate significant revenues for either the nine months ended September 30, 2021 or the nine months ended September 30, 2020.
As discussed above, we recognized real estate impairment charges of approximately $5.9 million during the three and nine months ended September 30, 2021, related to the disposition of one Holiday property located in Indiana and an acute care hospital located in Kentucky.
Tenant Concentration
The following table contains information regarding tenant concentration in our portfolio, excluding $2.6 million for our corporate office and a credit loss reserve balance of $5.1 million, based on the percentage of revenues for the nine months ended September 30, 2021 and 2020, related to tenants or affiliates of tenants, that exceed 10% of total revenue ($ in thousands):
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as of September 30, 2021
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|
Revenues1
|
|
|
|
Asset
|
Number of
|
|
Real
|
|
Notes
|
|
Nine Months Ended September 30,
|
|
|
|
Class
|
Properties
|
|
Estate
|
|
Receivable
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Living Communities
|
EFC
|
10
|
|
$
|
573,631
|
|
|
$
|
42,609
|
|
|
$
|
38,094
|
|
17%
|
|
$
|
38,972
|
|
15%
|
|
National HealthCare Corporation (NHC)
|
SNF
|
42
|
|
171,188
|
|
|
—
|
|
|
28,290
|
|
12%
|
|
28,362
|
|
11%
|
|
Bickford Senior Living
|
ALF
|
42
|
|
490,308
|
|
|
38,751
|
|
|
26,224
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|
11%
|
|
39,142
|
|
16%
|
|
Holiday
|
ILF
|
17
|
|
377,735
|
|
|
—
|
|
|
22,811
|
|
10%
|
|
30,529
|
|
12%
|
|
All others, net2
|
Various
|
|
|
1,406,251
|
|
|
208,387
|
|
|
106,110
|
|
46%
|
|
107,377
|
|
43%
|
|
Escrow funds received from tenants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for property operating expenses
|
Various
|
|
|
—
|
|
|
—
|
|
|
7,519
|
|
4%
|
|
7,190
|
|
3%
|
|
|
|
|
|
$
|
3,019,113
|
|
|
$
|
289,747
|
|
|
$
|
229,048
|
|
|
|
$
|
251,572
|
|
|
|
|
|
|
|
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|
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|
|
|
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|
|
1 includes interest income on notes receivable
2 includes prior period amounts for disposals or transitioned to new operators
At September 30, 2021, the two states in which we had an investment concentration of 10% or more were South Carolina (11.1%) and Texas (10.1%).
Two of our board members, including our chairman, are also members of NHC’s board of directors.
Tenant Purchase Options
Certain of our leases contain purchase options allowing tenants to acquire the leased properties. At September 30, 2021, we had a net investment of $18.8 million in five real estate properties which are subject to exercisable tenant purchase options. Tenant purchase options on 10 properties in which we had an aggregate net investment of $90.5 million at September 30, 2021, become exercisable between 2025 and 2028. Rental income from all leased properties with tenant purchase options was $3.4 million and $10.3 million for the three and nine months ended September 30, 2021, respectively, and $3.4 million and $10.0 million for the three and nine months ended September 30, 2020, respectively.
In June 2021, we received notification of a tenant’s intention to acquire, pursuant to a purchase option, a hospital located in California. The purchase option calls for a minimum purchase price of $15.0 million with any appreciation above $15.0 million to be split evenly between the parties. The net investment at September 30, 2021 was $9.5 million. Rental income was $0.5 million and $1.4 million, for both the three and nine months ended September 30, 2021 and 2020, respectively. The transaction will close no earlier than one year after the receipt of the notice of exercise.
We cannot reasonably estimate at this time the probability that any other 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.
Tenant Transitioning
Nine properties were transitioned during 2019 to five new tenants following a period of non-compliance by the former operators. We recognized rental income from these nine properties of $0.7 million and $2.4 million for the three and nine months ended September 30, 2021, respectively, and $0.9 million and $3.7 million for the three and nine months ended September 30, 2020, respectively. Three of the properties were reclassified to assets held for sale on our Condensed Consolidated Balance Sheet as of September 30, 2021, as noted above.
Future Minimum Base Rent
Future minimum lease payments to be received by us under our operating leases at September 30, 2021, are as follows ($ in thousands):
|
|
|
|
|
|
|
|
Remainder of 2021
|
$
|
68,151
|
|
|
2022
|
271,682
|
|
|
2023
|
267,619
|
|
|
2024
|
263,266
|
|
|
2025
|
264,666
|
|
|
2026
|
268,736
|
|
|
Thereafter
|
1,102,245
|
|
|
|
$
|
2,506,365
|
|
Variable Lease Payments
Most of our existing leases contain annual escalators in rent payments. For financial statement purposes, rental income is recognized on a straight-line basis over the term of the lease where the lease contains fixed escalators. Some of our leases contain escalators that are determined annually based on a variable index or other factor that is indeterminable at the inception of the lease. The table below indicates the revenue recognized as a result of fixed and variable lease escalators ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Lease payments based on fixed escalators, net of deferrals
|
$
|
59,027
|
|
|
$
|
67,592
|
|
|
$
|
188,008
|
|
|
$
|
206,179
|
|
|
Lease payments based on variable escalators
|
1,288
|
|
|
1,386
|
|
|
3,201
|
|
|
4,151
|
|
|
Straight-line rent income
|
3,798
|
|
|
5,086
|
|
|
12,189
|
|
|
15,481
|
|
|
Escrow funds received from tenants for property operating expenses
|
3,182
|
|
|
4,007
|
|
|
7,519
|
|
|
7,190
|
|
|
Amortization of lease incentives
|
(252)
|
|
|
(250)
|
|
|
(774)
|
|
|
(735)
|
|
|
Rental income
|
$
|
67,043
|
|
|
$
|
77,821
|
|
|
$
|
210,143
|
|
|
$
|
232,266
|
|
Note 4. Mortgage and Other Notes Receivable
At September 30, 2021, our investments in mortgage notes receivable totaled $224.2 million 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 $65.6 million substantially all of which are guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner. These balances exclude a credit loss reserve of $5.1 million at September 30, 2021. All our notes were on full accrual basis at September 30, 2021.
Montecito Medical Real Estate
In April 2021, the Company entered into a $50.0 million mezzanine loan and security agreement with Montecito Medical Real Estate for a new fund that will invest in medical real estate, including medical office buildings, throughout the United States. Amounts under the loan agreement will be funded as real estate investments are identified for acquisition. Borrowings under the loan agreement will bear interest at an annual rate of 9.5% and accrue an additional 2.5% in interest to be paid upon certain future events including repayments, sales of fund investments, and refinancings. Funds drawn in accordance with this agreement are required to be repaid on a per-investment basis five years from deployment of the funds for the applicable investment and includes two one-year extensions. At September 30, 2021, we had funded $2.1 million of our commitment that was used to acquire two medical office buildings for a combined purchase price of approximately $11.1 million.
Vizion Health - Brookhaven
In May 2021, we provided a $20.0 million, five-year loan to Vizion Health-Brookhaven, LLC to finance the acquisition of healthcare operations, including the real and personal property of a behavioral hospital we acquired in May 2021 discussed in Note 3. The loan requires monthly principal and interest payments and bears an initial annual interest rate of 8.5% with fixed annual escalators of 2.5% beginning June 1, 2022. Initial principal loan repayments are equal to 90% of the excess cash flow as defined in the agreement. Principal repayments are reduced to 50% of the excess cash flow once the outstanding loan balance is reduced below $15.0 million.
Bickford
As part of the sale of six properties to Bickford discussed in Note 3, we executed a $13.0 million second mortgage as a component of the purchase price consideration. The loan is secured by a security interest in the portfolio that is subordinate only to the first mortgage on the portfolio held by a third party. This second mortgage note receivable bears interest at a 10% annual rate and matures in April 2026. Commencing in January 2022, payments of principal and interest are required based on a 15-year amortization schedule. In addition, the interest rate will be reset to 8% if Bickford prepays approximately $5.3 million in principal prior to December 31, 2022. Interest income was $0.3 million and $0.6 million, for the three and nine months ended September 30, 2021.
Given the size of the Company financing provided relative to the purchase price, its subordination to the first mortgage outstanding and the ongoing negative impact of the COVID-19 pandemic on Bickford’s operating results, we did not include this note receivable in the determination of the gain to be recognized upon sale of the portfolio in accordance with the provisions of ASC 610-20, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets. Therefore, this note receivable is not reflected in “Mortgage and other notes receivable, net” in the Condensed Consolidated Balance Sheet as of September 30, 2021. We will re-evaluate the collectability of this note receivable each reporting period and recognize the note receivable and related deferred gain at such time the note receivable is considered probable of collection in accordance with ASC 610-20.
Navion Senior Solutions
In May 2021, we provided a ten-year corporate loan to Navion for $3.6 million. The loan requires interest-only payments at an annual interest rate of 8% until June 1, 2024, and gives us first option to provide permanent development financing for a future project.
Life Care Services - Sagewood
During the three and nine months ended September 30, 2021, LCS-Westminster Partnership IV LLP, an affiliate of LCS, repaid the remaining principal of $9.8 million and $61.2 million on its second note of two notes under a master credit agreement (“Note B”). As a result, we recognized the remaining Note B commitment fee of $0.4 million in “Interest income and other” during the third quarter of 2021. The balance on its first note (“Note A”) was $109.2 million as of September 30, 2021.
Credit Loss Reserve
Our principal measures of credit quality, except for construction mortgages, are debt service coverage for amortizing loans and interest or fixed charge coverage for non-amortizing loans collectively (“Coverage”). A Coverage ratio provides a measure of the borrower’s ability to make scheduled principal and interest payments. The Coverage ratios presented in the following table have been calculated utilizing the most recent date for which data is available, June 30, 2021, using EBITDARM (earnings before interest, taxes, depreciation, amortization, rent and management fees) and the requisite debt service, interest service or fixed charges, as defined in the applicable loan agreement. We categorize Coverage into three levels: (i) more than 1.5x, (ii) between 1.0x and 1.5x, and (iii) less than 1.0x. We update the calculation of coverage on a quarterly basis. Coverage is not a meaningful credit quality indicator for construction mortgages as either these developments are not generating any operating income, or they have insufficient operating income as occupancy levels necessary to stabilize the properties have not yet been achieved. We measure credit quality for these mortgages by considering the construction and stabilization timeline and the financial condition of the borrower as well as economic and market conditions. As of September 30, 2021, we did not have any construction loans that we considered underperforming. The tables below present outstanding note balances as of September 30, 2021 at amortized cost.
We consider the guidance in ASC 310-20 when determining whether a modification, extension or renewal constitutes a current period origination. The credit quality indicator as of September 30, 2021, is presented below for the amortized cost, net by year of origination of ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
2020
|
2019
|
2018
|
2017
|
Prior
|
Total
|
|
Mortgages
|
|
|
|
|
|
|
|
|
more than 1.5x
|
$
|
—
|
|
$
|
20,382
|
|
$
|
9,013
|
|
$
|
28,700
|
|
$
|
—
|
|
$
|
4,402
|
|
$
|
62,497
|
|
|
between 1.0x and 1.5x
|
—
|
|
—
|
|
—
|
|
108,606
|
|
—
|
|
—
|
|
108,606
|
|
|
less than 1.0x
|
—
|
|
3,960
|
|
39,123
|
|
—
|
|
—
|
|
10,000
|
|
53,083
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
24,342
|
|
48,136
|
|
$
|
137,306
|
|
—
|
|
14,402
|
|
224,186
|
|
|
Mezzanine
|
|
|
|
|
|
|
|
|
more than 1.5x
|
3,566
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,566
|
|
|
between 1.0x and 1.5x
|
22,233
|
|
—
|
|
—
|
|
—
|
|
—
|
|
10,472
|
|
32,705
|
|
|
less than 1.0x
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
14,500
|
|
14,500
|
|
|
No coverage available
|
—
|
|
—
|
|
750
|
|
—
|
|
—
|
|
—
|
|
750
|
|
|
|
25,799
|
|
—
|
|
750
|
|
—
|
|
—
|
|
24,972
|
|
51,521
|
|
|
Revolver
|
|
|
|
|
|
|
|
|
more than 1.5x
|
|
|
|
|
|
|
4,131
|
|
|
between 1.0x and 1.5x
|
|
|
|
|
|
|
9,909
|
|
|
less than 1.0x
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
14,040
|
|
|
|
|
|
|
|
Credit loss reserve
|
(5,139)
|
|
|
|
|
|
|
|
|
|
$
|
284,608
|
|
Due to the economic uncertainty created by the COVID-19 pandemic and the potential impact on the collectability of our mortgages and other notes receivable, we forecasted at the beginning of the pandemic 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 is presented in the following table for the nine months ended September 30, 2021 ($ in thousands):
|
|
|
|
|
|
|
|
Beginning balance January 1, 2021
|
$
|
4,946
|
|
|
Provision for expected credit losses
|
193
|
|
|
|
|
|
|
|
|
Balance September 30, 2021
|
$
|
5,139
|
|
Bickford Construction Loans
As of September 30, 2021, we had commitments of $42.9 million in three construction loans to Bickford. At September 30, 2021, we had funded $34.8 million toward these commitments. 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 $2.0 million 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.
Senior Living Communities
On March 30, 2021, we amended the revolving line of credit agreement with Senior Living Communities (“Senior Living”) to increase availability from $15.0 million to $20.0 million. Borrowings by Senior Living under the revolver are to be used for working capital needs and to finance construction projects within its portfolio, including building additional units. Beginning January 1, 2023, availability under the revolver reduces to $15.0 million. The revolver matures in December 2029 at the time of lease maturity. At September 30, 2021, the $9.9 million outstanding under the facility bears interest at 7.52% per annum, the prevailing 10-year U.S. Treasury rate plus 6%.
The Company also has a mortgage loan of $32.7 million with Senior Living originated in July 2019 for the acquisition of a 248-unit continuing care retirement community (“CCRC”) in Columbia, South Carolina. The mortgage loan 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 $38.3 million, subject to adjustment for market conditions.
Note 5. Equity Method Investment
Our initial $0.9 million investment in the operating company, Timber Ridge OpCo, held by our Taxable REIT Subsidiary (“TRS”) arose in conjunction with the acquisition of a CCRC from LCS-Westminster Partnership III, LLP, in January 2020. 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”). Accordingly, the TRS holds our 25% equity interest in Timber Ridge OpCo, 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 test. As part of our investment, we provided Timber Ridge OpCo a revolving credit facility of up to $5.0 million of which no funds have been drawn.
We account for our investment in Timber Ridge OpCo under the equity method since 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. Our equity share in the losses of Timber Ridge OpCo during the nine months ended September 30, 2021 and 2020, was $2.3 million and $2.0 million, respectively. During the nine months ended September 30, 2021, we received $0.5 million in cash distributions from Timber Ridge OpCo.
Under the equity method, we decrease the carrying value of our investment for losses in the entity and distributions to NHI for cumulative amounts up to and including our basis plus any commitments to fund operations. Our commitments are currently limited to the additional $5.0 million under the revolving credit facility. As of September 30, 2021, we have recognized our share of Timber Ridge OpCo’s operating losses in excess of our initial investment. These cumulative losses of $5.0 million in excess of our original basis are included in “Accounts payable and accrued expenses” in our Condensed Consolidated Balance Sheet as of September 30, 2021. Excess unrecognized equity method losses were $0.3 million as of September 30, 2021.
The Timber Ridge property is subject to early resident mortgages secured by a Deed of Trust and Indenture of Trust (the “Deed and Indenture”). As part of our acquisition, Timber Ridge PropCo acquired the Timber Ridge property and a subordination agreement was entered into 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. In addition, 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 and resident loan assumption agreements, a liability was not recorded for the resident loan obligation upon acquisition and as of September 30, 2021. The balance secured by the Deed and Indenture was $15.5 million at September 30, 2021.
Note 6. Debt
Debt consists of the following ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
December 31,
2020
|
|
Revolving credit facility - unsecured
|
$
|
—
|
|
|
$
|
298,000
|
|
|
Bank term loans - unsecured
|
400,000
|
|
|
650,000
|
|
|
Senior notes - unsecured, net of discount of $3,002
|
396,998
|
|
|
—
|
|
|
Private placement term loans - unsecured
|
400,000
|
|
|
400,000
|
|
|
Fannie Mae term loans - secured, non-recourse
|
95,077
|
|
|
95,354
|
|
|
Convertible senior notes - unsecured
|
—
|
|
|
60,000
|
|
|
Unamortized loan costs
|
(6,788)
|
|
|
(4,069)
|
|
|
|
$
|
1,285,287
|
|
|
$
|
1,499,285
|
|
Aggregate principal maturities of debt as of September 30, 2021 are as follows ($ in thousands):
|
|
|
|
|
|
|
|
Remainder of 2021
|
$
|
95
|
|
|
2022
|
100,389
|
|
|
2023
|
475,408
|
|
|
2024
|
75,425
|
|
|
2025
|
143,761
|
|
|
2026
|
—
|
|
|
Thereafter
|
496,997
|
|
|
|
1,292,075
|
|
|
Less: unamortized loan costs
|
(6,788)
|
|
|
|
$
|
1,285,287
|
|
Convertible senior notes
On April 1, 2021, our 3.25% senior unsecured convertible notes (the “Convertible Notes”) matured. The Company paid $67.1 million, including accrued interest of $1.0 million and a $6.1 million conversion premium, to retire the Convertible Notes. The conversion premium was recorded as a reduction of “Capital in excess of par value” in our Condensed Consolidated Balance Sheet as of September 30, 2021.
Unsecured revolving credit facility and bank term loans
Our unsecured bank credit facility consists of two term loans - $100.0 million maturing in August 2022 and $300.0 million maturing in September 2023 - and a $550.0 million revolving credit facility that was initially scheduled to mature in August 2021. In April 2021, the Company elected to exercise the extension option on the revolving credit facility available after payment of a 10 basis point extension fee totaling $0.6 million, extending the maturity of the revolver to August 2022. Some combination of cash on hand, proceeds from recent and planned asset sales and operating cash flows is expected to be used to pay off the $100.0 million term loan at its maturity in August 2022. We also plan to execute a multiple year extension of our revolving credit facility prior to the August 2022 maturity date at an amount at least equal to the current $550.0 million capacity. We have swap agreements to fix the interest rates on $400.0 million of term loans that expire in December 2021.
In January 2021, we repaid a $100.0 million term loan that was entered into July 2020 with the net proceeds from the 2031 Senior Notes offering discussed below. The term loan bore interest at a rate of 30-day LIBOR (with a 50 basis point floor) plus 185 basis points (“bps”), based on our current leverage ratios. Upon repayment, the Company expensed approximately $0.5 million of deferred financing cost associated with this loan which is included in “Loss on early retirement of debt” in our Condensed Consolidated Statement of Income for the nine months ended September 30, 2021.
The revolving facility fee is currently 25 bps per annum and based on our current credit ratings, the facility presently provides for floating interest on the revolver and the term loans at 30-day LIBOR plus 120 bps and a blended 128 bps, respectively. At September 30, 2021 and December 31, 2020, 30-day LIBOR was 8 bps and 14 bps, respectively.
At September 30, 2021, we had $550.0 million available to draw on the revolving portion of our credit facility, subject to usual and customary covenants. Among other stipulations, the unsecured credit facility agreement requires that we maintain certain financial ratios within limits set by our creditors. At September 30, 2021, 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.
Senior Notes 2031
On January 26, 2021, we issued $400.0 million 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 $392.3 million. We used the net proceeds from the 2031 Senior Notes offering to repay our $100.0 million term loan that was entered into in July 2020 and reduce borrowings outstanding under our revolving credit facility.
The 2031 Senior Notes are subject to affirmative and negative covenants, including financial covenants. As of September 30, 2021, we were in compliance with all affirmative and negative covenants, including financial covenants for our 2031 Senior Notes borrowings.
Private placement term loans
Our unsecured private placement term loans, payable interest-only, are summarized below ($ 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.
Fannie Mae term loans
In March 2015, we obtained $78.1 million in Fannie Mae financing. The term-debt financing consists of interest-only payments at an annual rate of 3.79% and a 10-year maturity. The mortgages are non-recourse and secured by thirteen properties leased to Bickford. In a December 2017 acquisition, we assumed additional Fannie Mae debt that amortizes through 2025 when a balloon payment will be due, is subject to prepayment penalties until 2024, bears interest at a nominal rate of 4.6%, and has a remaining balance of $17.0 million at September 30, 2021. Collectively, these notes are secured by facilities having a net book value of $127.0 million at September 30, 2021.
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 $400.0 million of our bank loans. During the remainder of 2021, approximately $1.8 million of losses, which are included in “Accumulated other comprehensive loss” in our Condensed Consolidated Balance Sheets, are projected to be reclassified into earnings.
As of September 30, 2021, we employed the following interest rate swap contracts to mitigate our interest rate risk on our bank term and revolver loans described above ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Entered
|
|
Maturity Date
|
|
Swap Rate
|
|
Rate Index
|
|
Notional Amount
|
|
Fair Value (Liability)
|
|
March 2019
|
|
December 2021
|
|
2.22%
|
|
1-month LIBOR
|
|
$
|
100,000
|
|
|
$
|
(533)
|
|
|
March 2019
|
|
December 2021
|
|
2.21%
|
|
1-month LIBOR
|
|
$
|
100,000
|
|
|
$
|
(537)
|
|
|
June 2019
|
|
December 2021
|
|
1.61%
|
|
1-month LIBOR
|
|
$
|
150,000
|
|
|
$
|
(567)
|
|
|
June 2019
|
|
December 2021
|
|
1.63%
|
|
1-month LIBOR
|
|
$
|
50,000
|
|
|
$
|
(191)
|
|
If the fair value of the hedge is an asset, we include it in our Condensed Consolidated Balance Sheets in the line item “Other assets”, and, if a liability, as a component of “Accounts payable and accrued expenses”. See Note 11 for fair value disclosures about our interest rate swap agreements. Net liability balances for our hedges included as components of “Accounts payable and accrued expenses” on September 30, 2021 and December 31, 2020, were $1.8 million and $7.1 million, respectively.
The following table summarizes interest expense ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Interest expense on debt at contractual rates
|
$
|
10,234
|
|
|
$
|
10,129
|
|
|
$
|
31,055
|
|
|
$
|
33,701
|
|
|
Losses reclassified from accumulated other
|
|
|
|
|
|
|
|
|
comprehensive income into interest expense
|
1,851
|
|
|
1,778
|
|
|
5,449
|
|
|
4,533
|
|
|
Capitalized interest
|
(6)
|
|
|
(9)
|
|
|
(40)
|
|
|
(169)
|
|
|
Amortization of debt issuance costs, debt discount and other
|
636
|
|
|
994
|
|
|
2,064
|
|
|
2,524
|
|
|
Total interest expense
|
$
|
12,715
|
|
|
$
|
12,892
|
|
|
$
|
38,528
|
|
|
$
|
40,589
|
|
Note 7. Commitments, Contingencies and Uncertainties
In the normal course of business, we enter into a variety of commitments, typically consisting of funding of revolving credit arrangements, construction and mezzanine loans to our operators to conduct expansions and acquisitions for their own account, and commitments for the funding of construction for expansion or renovation to our existing properties under lease. In our leasing operations, we offer to our tenants and to sellers of newly acquired properties a variety of inducements which originate contractually as contingencies but which may become commitments upon the satisfaction of the contingent event. Contingent payments earned will be included in the respective lease bases when funded.
As of September 30, 2021, we had working capital, construction and mezzanine loan commitments to seven operators for $274.7 million, of which we had funded $183.6 million toward these commitments.
As of September 30, 2021, we had $31.3 million of development commitments for construction and renovation for ten properties of which we had funded $21.6 million toward these commitments. In addition to these commitments, Discovery PropCo, discussed more fully in Note 2 to the condensed consolidated financial statements, has committed to funding up to $2.0 million for the purchase of condominium units located at one of the facilities of which $1.0 million had been funded.
As of September 30, 2021, we had $33.9 million of contingent lease inducement commitments in seven lease agreements which are generally based on the performance of facility operations and may or may not be met by the tenant. At September 30, 2021, we had funded $1.5 million toward these commitments of which $1.0 million was funded during the nine months ended September 30, 2021.
As provided above, loans funded do not include the effects of discounts or commitment fees.
The credit loss liability for unfunded loan commitments is estimated using the same methodology as for our funded mortgage and other notes receivable based on the estimated amount that we expect to fund. We applied the same COVID-19 pandemic adjustments as discussed in Note 4.
The liability for expected credit losses on our unfunded loans is presented in the following table for the nine months ended September 30, 2021 ($ in thousands):
|
|
|
|
|
|
|
|
Beginning balance January 1, 2021
|
$
|
270
|
|
|
Provision for expected credit losses
|
941
|
|
|
Balance at September 30, 2021
|
$
|
1,211
|
|
Bickford Contingent Note Arrangement
Related to the sale of six properties to Bickford discussed further in Note 3, we reached an agreement with Bickford in the third quarter of 2021 whereby Bickford would owe us up to $4.5 million under a contingent note arrangement. We have the one-time option to determine fair market value of the portfolio between May 1, 2023 and April 30, 2026, at which time the amount owed under the contingent note arrangement, if any, will be determined as the lesser of (i) the difference between the fair market value of the portfolio and $52.1 million, which amount represents the purchase consideration for the portfolio of $52.9 million less $0.8 million in mortgage debt repayment fees previously paid by us associated with this portfolio, and (ii) $4.5 million. Any amount due on the contingent note arrangement will accrue interest at an annual rate of 10% and will be due in five years from the determination date.
COVID-19 Pandemic Contingencies
Since the World Health Organization declared coronavirus disease 2019 a pandemic on March 11, 2020, the continually evolving pandemic has resulted in a widespread health crisis adversely affecting governments, businesses, and financial markets. The COVID-19 pandemic and related health and safety measures continue to impact the operations of many of the Company’s tenants, operators and borrowers. The federal government has provided economic assistance and other forms of assistance which mitigated to some extent the negative financial impact of the pandemic for certain of our tenants and operators who are eligible.
Revenues for the operators of our properties continue to be significantly impacted by occupancy. Building occupancy rates have been and may continue to be adversely affected by the COVID-19 pandemic if it continues to cause sustained negative trends such as early resident move-outs, delays in admitting new residents, or other collateral events. In addition, our operators may experience a material increase in their operating costs, including costs related to enhanced health and safety precautions among other measures. A decrease in occupancy or increase in costs could have a material adverse effect on the ability of our operators to meet their financial and other contractual obligations to us, including the payment of rent, as well as on our results of operations.
Since the pandemic began, our rent concessions activity is as shown in the following table ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
|
|
|
December 31, 2020
|
|
September 30, 2021
|
|
September 30, 2021
|
|
Cumulative Totals
|
|
|
Deferrals
|
Abatements
|
|
Deferrals
|
Collections
|
|
Deferrals
|
Collections
|
|
Deferrals
|
Abatements
|
Collections
|
|
Bickford
|
$
|
3,750
|
|
$
|
2,100
|
|
|
$
|
3,500
|
|
$
|
—
|
|
|
$
|
13,750
|
|
$
|
—
|
|
|
$
|
17,500
|
|
$
|
2,100
|
|
$
|
—
|
|
|
Holiday
|
—
|
|
—
|
|
|
600
|
|
—
|
|
|
1,800
|
|
—
|
|
|
1,800
|
|
—
|
|
—
|
|
|
All Others
|
1,232
|
|
50
|
|
|
1,675
|
|
44
|
|
|
4,323
|
|
44
|
|
|
5,555
|
|
50
|
|
44
|
|
|
|
$
|
4,982
|
|
$
|
2,150
|
|
|
$
|
5,775
|
|
$
|
44
|
|
|
$
|
19,873
|
|
$
|
44
|
|
|
$
|
24,855
|
|
$
|
2,150
|
|
$
|
44
|
|
The majority of the deferred amounts noted in the table above accrue interest starting at 8% per annum from the date of the deferral until paid in full under the terms of each tenant’s deferral agreement.
In addition to the concessions noted above, we have agreed with Bickford to defer $4.5 million in contractual rent due for the fourth quarter of 2021 and expect to grant up to $4.0 million in deferrals in the first quarter of 2022. We have also reached agreement with two other tenants regarding additional rent deferrals of approximately $0.5 million for the fourth quarter of 2021. We agreed with Holiday to utilize $0.6 million of the lease deposit towards July 2021 contractual rent. The balance of the lease deposit at September 30, 2021 was $8.8 million. Reference Note 2 for discussion of additional Holiday contractual rent activity.
When applicable, we have accounted for rent concessions as variable lease payments, recorded as rental income when received, in accordance with the FASB's Lease Modification Q&A. Reference Note 2 for further discussion. 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 direct material adverse effect on our financial condition, results of operations or cash flows.
In June 2018, East Lake Capital Management LLC and certain related entities, including Regency (for three assisted living facilities in Tennessee, Indiana and North Carolina) (“East Lake”), 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. On September 22, 2021, all parties entered into an agreement whereby NHI is entitled to receive $0.4 million, due in the fourth quarter of 2021, to settle all claims for this matter. We will recognize the settlement amount as other income when it is received. In addition, we had approximately $0.3 million in liabilities recorded related to the facilities subject to the litigation that was reversed and recognized in “Interest and other income” during the third quarter of 2021.
Note 8. Equity and Dividends
At-the-Market (ATM) Equity Program
During the nine months ended September 30, 2021, we sold 661,951 common shares through the ATM program with an average price of $73.62, resulting in net proceeds of approximately $47.9 million. We intend to use the proceeds from any further activity under the ATM program for general corporate purposes, which may include future acquisitions and repayment of indebtedness, including borrowings under our credit facility.
Dividends
The following table summarizes dividends declared by the Board of Directors or paid during the nine months ended September 30, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2021
|
|
Date of Declaration
|
|
Date of Record
|
|
Date Paid/Payable
|
|
Quarterly Dividend
|
|
December 15, 2020
|
|
December 31, 2020
|
|
January 29, 2021
|
|
$1.1025
|
|
March 12, 2021
|
|
March 31, 2021
|
|
May 7, 2021
|
|
$1.1025
|
|
June 3, 2021
|
|
June 30, 2021
|
|
August 6, 2021
|
|
$0.90
|
|
August 6, 2021
|
|
September 30, 2021
|
|
November 5, 2021
|
|
$0.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020
|
|
Date of Declaration
|
|
Date of Record
|
|
Date Paid/Payable
|
|
Quarterly Dividend
|
|
November 7, 2019
|
|
December 31, 2019
|
|
January 31, 2020
|
|
$1.05
|
|
February 19, 2020
|
|
March 31, 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
|
On November 5, 2021, the Board of Directors declared a $0.90 per share dividend to common stockholders of record on December 31, 2021, payable on January 31, 2022.
Note 9. Stock-Based Compensation
The Company’s outstanding stock incentive awards have been granted under two incentive plans – the 2012 Stock Incentive Plan (“2012 Plan”) and the 2019 Stock Incentive Plan (“2019 Plan”). During the first quarter of 2021, we granted stock options under the 2019 Plan of 639,500 and the remaining 12,500 awards available under the 2012 Plan. As of September 30, 2021, shares available for future grants totaled 2,117,336 all under the 2019 plan. The following is a summary of stock-based compensation expense, net of any forfeitures, included in “General and administrative expenses” in the Condensed Consolidated Statements of Income ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Non-cash stock-based compensation expense
|
$
|
989
|
|
|
$
|
457
|
|
|
$
|
7,427
|
|
|
$
|
2,772
|
|
The weighted average fair value of options granted during the nine months ended September 30, 2021 and 2020 was $14.54 and $5.54 per option, respectively. The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Dividend yield
|
6.7%
|
|
5.1%
|
|
Expected volatility
|
48.1%
|
|
17.1%
|
|
Expected lives
|
2.9 years
|
|
2.9 years
|
|
Risk-free interest rate
|
0.33%
|
|
1.30%
|
The following table summarizes our outstanding stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
Number
|
|
Weighted Average
|
|
Remaining
|
|
|
|
|
of Shares
|
|
Exercise Price
|
|
Contractual Life (Years)
|
|
|
|
Options outstanding, January 1, 2020
|
1,004,014
|
|
|
$74.35
|
|
|
|
|
|
Options granted
|
592,000
|
|
|
$90.32
|
|
|
|
|
|
Options exercised
|
(512,509)
|
|
|
$72.98
|
|
|
|
|
|
Options forfeited
|
(10,500)
|
|
|
$88.73
|
|
|
|
|
|
Options outstanding, September 30, 2020
|
1,073,005
|
|
|
$83.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2020
|
601,994
|
|
|
$81.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, January 1, 2021
|
1,033,838
|
|
|
$83.54
|
|
|
|
|
|
Options granted
|
652,000
|
|
|
$69.20
|
|
|
|
|
|
Options exercised
|
(20,000)
|
|
|
$60.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, September 30, 2021
|
1,665,838
|
|
|
$78.20
|
|
3.37
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2021
|
1,183,324
|
|
|
$79.25
|
|
3.08
|
|
|
At September 30, 2021, the stock options outstanding and exercisable had no intrinsic value. The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2021 and 2020 was $0.2 million or $9.27 per share and $8.1 million or $15.84 per share, respectively.
As of September 30, 2021, unrecognized compensation expense totaling $2.8 million associated with unvested stock options is expected to be recognized over the following periods: remainder of 2021 - $1.0 million, 2022 - $1.6 million and 2023 - $0.2 million.
Note 10. Earnings Per Common Share
The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assume the exercise of stock options and the conversion of our convertible debt prior to its retirement using the treasury stock method, to the extent dilutive. Dilution resulting from the conversion option within our convertible debt was determined by computing an average of incremental shares included in each diluted EPS computation.
The following table summarizes the average number of common shares and the net income used in the calculation of basic and diluted earnings per common share ($ in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Net income attributable to common stockholders
|
$
|
30,814
|
|
|
$
|
42,595
|
|
|
$
|
105,327
|
|
|
$
|
147,986
|
|
|
|
|
|
|
|
|
|
|
|
BASIC:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
45,850,599
|
|
|
44,661,650
|
|
|
45,668,762
|
|
|
44,641,748
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
45,850,599
|
|
|
44,661,650
|
|
|
45,668,762
|
|
|
44,641,748
|
|
|
Stock options
|
825
|
|
|
753
|
|
|
6,391
|
|
|
1,766
|
|
|
Convertible senior notes
|
—
|
|
|
—
|
|
|
13,938
|
|
|
—
|
|
|
Weighted average dilutive common shares outstanding
|
45,851,424
|
|
|
44,662,403
|
|
|
45,689,091
|
|
|
44,643,514
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders - basic
|
$
|
0.67
|
|
|
$
|
0.95
|
|
|
$
|
2.31
|
|
|
$
|
3.31
|
|
|
Net income attributable to common stockholders - diluted
|
$
|
0.67
|
|
|
$
|
0.95
|
|
|
$
|
2.31
|
|
|
$
|
3.31
|
|
|
|
|
|
|
|
|
|
|
|
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
|
505,459
|
|
|
410,012
|
|
|
308,313
|
|
|
427,180
|
|
|
|
|
|
|
|
|
|
|
|
Regular dividends declared per common share
|
$
|
0.90
|
|
|
$
|
1.1025
|
|
|
$
|
2.9025
|
|
|
$
|
3.3075
|
|
Note 11. Fair Value of Financial Instruments
Our financial assets and liabilities measured at fair value 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
|
|
September 30,
2021
|
|
December 31, 2020
|
|
Level 2
|
|
|
|
|
|
|
Interest rate swap liability
|
Accounts payable and accrued expenses
|
|
$
|
1,828
|
|
|
$
|
7,150
|
|
Carrying amounts and fair values of financial instruments that are not carried at fair value at September 30, 2021 and December 31, 2020 in the Condensed Consolidated Balance Sheets are as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
Fair Value Measurement
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Level 2
|
|
|
|
|
|
|
|
|
Variable rate debt
|
$
|
398,311
|
|
|
$
|
945,078
|
|
|
$
|
400,000
|
|
|
$
|
948,000
|
|
|
Fixed rate debt
|
$
|
886,976
|
|
|
$
|
554,207
|
|
|
$
|
876,917
|
|
|
$
|
575,292
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
Mortgage and other notes receivable, net
|
$
|
284,608
|
|
|
$
|
292,427
|
|
|
$
|
301,053
|
|
|
$
|
321,021
|
|
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 values of our borrowings under our revolving credit facility and other variable rate debt are reasonably estimated at their notional amounts at September 30, 2021 and December 31, 2020, due to the predominance of floating interest rates, which generally reflect market conditions.