NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(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 and mortgage and mezzanine financing of need-driven and discretionary senior housing and medical facility investments. We operate through two reportable segments: Real Estate Investments and Senior Housing Operating Portfolio (“SHOP”). Our Real Estate Investments segment consists of real estate investments and leases, mortgages and other notes receivable in independent living facilities (“ILF”), assisted living facilities (“ALF”), entrance-fee communities (“EFC”), senior living campuses (“SLC”), skilled nursing facilities (“SNF”) and a hospital (“HOSP”). As of March 31, 2023, we had gross investments of approximately $2.4 billion in 164 health care real estate properties located in 31 states and leased pursuant primarily to triple-net leases to 25 tenants consisting of 98 senior housing communities, 65 SNFs and one HOSP, excluding ten properties classified as assets held for sale. Our portfolio of 14 mortgages along with other notes receivable totaled $234.9 million, excluding an allowance for expected credit losses of $15.0 million, as of March 31, 2023.
Our SHOP segment is comprised of two ventures that own the operations of ILFs. As of March 31, 2023, we had gross investments of approximately $339.1 million in 15 properties with a combined 1,734 units located in eight states that are operated on behalf of the Company by independent managers pursuant to the terms of separate management agreements that commenced April 1, 2022. The third-party managers, or related parties of the managers, own equity interests in the respective ventures.
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 United States 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, 2022, included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (the “SEC”).
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company, and its wholly owned subsidiaries, joint ventures 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.
Effective April 1, 2022 and at March 31, 2023, our consolidated total assets and liabilities include two consolidated ventures comprising our SHOP activities, each formed with a separate partner - Merrill Gardens, L.L.C. (“Merrill”) and DSHI NHI Holiday LLC (the “Discovery member”), a related party of Discovery Senior Living (“Discovery”). We consider both ventures to be VIEs as the members of each, as a group, lack the characteristics of a controlling financial interest. We are deemed to be the primary beneficiary because we have the ability to control the activities that most significantly impact each VIE’s economic performance. The assets of the ventures primarily consist of real estate properties, cash and cash equivalents, and resident fees and services (accounts receivable). Their obligations primarily consist of operating expenses of the ILFs (accounts payable and accrued expenses) and capital expenditures for the properties. Aggregate assets of the consolidated SHOP ventures that can be used only to settle obligations of each respective SHOP venture primarily include approximately $259.4 million of real estate properties, net, $5.0 million of cash and cash equivalents, $2.7 million of prepaid expenses and other, and $0.4 million of accounts receivable, net. Liabilities of the consolidated SHOP ventures for which creditors do not have recourse to the general credit of the Company are not material. Reference Notes 5 and 10 for further discussion of these ventures.
We also consolidate two real estate partnerships formed with our partners, Discovery Senior Housing Investor XXIV, LLC, a related party of Discovery, and LCS Timber Ridge LLC (“LCS”), to invest in senior housing facilities. We consider both partnerships to be VIEs, as either the members, as a group, lack the characteristics of a controlling financial interest or the total equity at risk is insufficient to finance activities without additional subordinated financial support. NHI directs the activities that most significantly impact economic performance of these ventures, subject to limited protective rights extended to our partners for specified business decisions. Because of our control of these partnerships, we include their assets, liabilities, noncontrolling interests and operations in our condensed 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. Reference Note 6 for further discussion of our equity method investment.
We structured our Timber Ridge OpCo, LLC (“Timber Ridge OpCo”) investment to be compliant with the provisions of the REIT Investment Diversification Empowerment Act of 2007 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.
At March 31, 2023, we held interests in nine 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.
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).
| | | | | | | | | | | | | | | | | |
| Date | Name | Source of Exposure | Carrying Amount | Maximum Exposure to Loss | Note Reference |
| 2014 | Senior Living Communities | Notes and straight-line receivable | $ | 91,523 | | $ | 94,023 | | Notes 3, 4 |
| 2016 | Senior Living Management | Notes | $ | 24,500 | | $ | 24,500 | | — |
| 2018 | Bickford Senior Living | Notes and funding commitment | $ | 17,156 | | $ | 30,125 | | Notes 3, 4 |
| 2019 | Encore Senior Living | Various1 | $ | 44,780 | | $ | 55,726 | | Notes 3, 4 |
| 2020 | Timber Ridge OpCo | Various2 | $ | 3,287 | | $ | 8,287 | | Notes 6, 7 |
| 2020 | Watermark Retirement | Notes and straight-line receivable | $ | 7,580 | | $ | 11,104 | | — |
| 2021 | Montecito Medical Real Estate | Notes and funding commitment | $ | 20,383 | | $ | 50,128 | | Note 4 |
| 2021 | Vizion Health | Notes and straight-line receivable | $ | 19,330 | | $ | 21,330 | | — |
| 2021 | Navion Senior Solutions | Various3 | $ | 9,351 | | $ | 13,926 | | — |
1 Notes, straight-line rent receivables, and lease receivables
2 Loan commitment, equity method investment, straight-line rent receivables and unamortized lease incentive
3 Notes, loan commitments, straight-line rent receivables, and unamortized lease incentive
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 non-payment of 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 or borrowers 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 or borrowers into our condensed consolidated financial statements.
Noncontrolling Interests
Contingently redeemable noncontrolling interests are recorded at their initial carrying amounts upon issuance and are subsequently adjusted to reflect their share of gains or losses and distributions attributable to the noncontrolling interests. In periods where they are or will become probable of redemption, an adjustment to the redemption value of the noncontrolling interests is also recognized through “Capital in excess of par value” on the Company’s Consolidated Balance Sheets and included in our computation of earnings per share. As of March 31, 2023, the Merrill SHOP venture noncontrolling interest was classified in mezzanine equity, as discussed further in Note 10.
We consolidate the real estate partnerships formed with Discovery in June 2019 and LCS in January 2020, both of which invest in senior housing facilities. The noncontrolling interests associated with these two consolidated real estate partnerships and our Discovery member SHOP venture were classified in equity as of March 31, 2023.
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 mortgages).
The following table sets forth our “Cash and cash equivalents and restricted cash” reported within the Company’s Condensed Consolidated Statements of Cash Flows ($ in thousands):
| | | | | | | | | | | |
| March 31,
2023 | | March 31,
2022 |
| Beginning of period: | | | |
| Cash and cash equivalents | $ | 19,291 | | | $ | 37,412 | |
| Restricted cash (included in Other assets, net) | 2,225 | | | 2,073 | |
| Cash, cash equivalents, and restricted cash | $ | 21,516 | | | $ | 39,485 | |
| End of period: | | | |
| Cash and cash equivalents | $ | 13,875 | | | $ | 36,121 | |
| Restricted cash (included in Other assets, net) | 1,652 | | | 3,807 | |
| Cash, cash equivalents, and restricted cash | $ | 15,527 | | | $ | 39,928 | |
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 may 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.
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. If a property subsequently no longer meets the criteria to be classified as held for
sale, it is reclassified as held and used and measured at the lower of i) its original carrying amount before the asset was classified as held for sale, adjusted for any depreciation expense not recognized while it was classified as held for sale, and ii) its fair value.
Impairment of Long-Lived Assets
We evaluate the recoverability of the carrying amount of our long-lived assets when events or circumstances, including significant physical changes, significant adverse changes in general economic conditions or significant deterioration of the underlying cash flows of the long-lived assets, indicate that the carrying amount of the long-lived assets may not be recoverable. The need to recognize an impairment charge is based on estimated undiscounted future cash flows compared to the carrying amount. 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 long-lived asset.
During the three months ended March 31, 2023 and 2022, we recognized impairment charges of approximately $0.3 million and $24.6 million, respectively, included in “Loan and realty (gains) losses” in our Condensed Consolidated Statements of Income. Reference Note 3 for more discussion.
Revenue Recognition
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 tenant over a base year or base quarter. We recognize contingent rent annually or quarterly based on the actual revenues of the tenant 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.
The Company reviews its operating lease receivables for collectability 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 collectability 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.
As of March 31, 2023, we had three tenants, including Bickford Senior Living (“Bickford”) on the cash basis of revenue recognition for their lease arrangements. Reference Note 3 for further discussion.
Resident Fees and Services - Resident fee revenue associated with our SHOP activities is recognized as the related performance obligations are satisfied and includes resident room charges, community fees and other resident charges.
Residency agreements are generally short term (30 days to one year), and entitle the resident to certain room and care services for a monthly fee billed in advance. Revenue for certain related services is billed monthly in arrears. The Company has elected the lessor practical expedient within Accounting Standards Codification (“ASC”) 842, Leases, not to separate the lease and nonlease components within our resident agreements as the timing and pattern of transfer to the resident are the same. The Company has determined that the nonlease component is the predominant component within the contract and will recognize revenue under ASC 606, Revenue Recognition from Contracts with Customers.
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 and a borrower’s current financial condition indicates a probability it cannot pay its current contractual amounts. A non-performing loan is returned to accrual status at such time as the loan becomes contractually current and management believes all future principal and interest will be received according to the contractual loan terms. As of March 31, 2023, we have a mortgage note receivable and a mezzanine loan totaling an aggregate of $24.5 million with affiliates of one operator/borrower designated as non-performing.
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 (the “Internal Revenue Code”). Accordingly, we will generally not be subject to U.S. federal income tax, provided that we continue to qualify as a REIT and make distributions to stockholders equal to or in excess of 90% our taxable income. Certain activities that we undertake may be conducted by entities that have elected to be treated as TRSs. TRSs are subject to federal, state, and local income taxes. Accordingly, a provision for income taxes has been made in the condensed 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.
Segments
We operate our business through two reportable segments: Real Estate Investments and SHOP. In our Real Estate Investments segment, we invest in (i) senior housing and healthcare real estate and lease those properties to healthcare operating companies under primarily triple-net leases that obligate tenants to pay all property-related expenses and (ii) mortgage and other notes receivable throughout the United States. Our SHOP segment is comprised of the operations of 15 ILFs located throughout the United States that are operated on behalf of the Company by independent managers pursuant to the terms of separate management agreements. Reference Notes 5 and 15 for additional information.
Reclassifications
In prior years, the Company presented "Cumulative dividends in excess of net income" as a single line item on the Consolidated Balance Sheets and Consolidated Statements of Equity. Beginning January 1, 2023, the Company separated this line item into two components, "Retained earnings" and "Cumulative dividends," and reclassified prior year information to conform to the current period presentation.
Note 3. Investment Activity
Asset Acquisitions
Since January 1, 2023, we have completed the following real estate investments ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operator | | Date | | Properties | | Asset Class | | Land | | Building and Improvements | | Total |
| Silverado Senior Living | | Q1 2023 | | 2 | | ALF | | $ | 3,894 | | | $ | 33,599 | | | $ | 37,493 | |
| Bickford | | Q1 2023 | | 1 | | ALF | | 1,746 | | | 15,542 | | | 17,288 | |
| | | | | | | | $ | 5,640 | | | $ | 49,141 | | | $ | 54,781 | |
In February 2023, we acquired two memory care communities operated by Silverado Senior Living for approximately $37.5 million. The newly developed properties opened in 2022 and include a 60-unit community in Summerlin, Nevada and a 60-unit community in Frederick, Maryland. They are leased pursuant to 20-year leases with a first-year lease rate of 7.5% and annual escalators of 2.0%.
In February 2023, we also acquired a 64-unit assisted living and memory care community in Chesapeake, Virginia from Bickford. The acquisition price was $17.3 million, including the satisfaction of an outstanding construction note receivable of $14.2 million including interest, cash consideration of $0.5 million and approximately $0.1 million in closing costs. The acquisition price also included a reduction of $2.5 million in Bickford’s outstanding pandemic-related deferrals that has been recognized in “Rental income.” We added the community to an existing master lease with Bickford at an initial rate of 8.0%.
Asset Dispositions
During the three months ended March 31, 2023, we completed the following dispositions of real estate properties within our Real Estate Investments portfolio as described below ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operator | | Date | | Properties1 | | Asset Class | | Net Proceeds | | Net Real Estate Investment | | Gain | | Impairment2 |
BAKA Enterprises, LLC3 | | Q1 2023 | | 1 | | ALF | | $ | 7,478 | | | $ | 7,505 | | | $ | — | | | $ | (27) | |
| Bickford Senior Living | | Q1 2023 | | 1 | | ALF | | 2,553 | | | 1,421 | | | 1,132 | | | — | |
| | | | | | | | $ | 10,031 | | | $ | 8,926 | | | $ | 1,132 | | | $ | (27) | |
| | | | | | | | | | | | | | |
1 Assets were previously classified as “Assets held for sale” in the Consolidated Balance Sheet at December 31, 2022.
2 Impairments are included in “Loan and realty (gains) losses” in the Condensed Consolidated Statement of Income for the three months ended March 31, 2023.
3 Total impairment charges previously recognized on this property were $7.8 million.
Assets Held for Sale and Long-Lived Assets
The following is a summary of our assets held for sale ($ in thousands):
| | | | | | | | | | | | | | |
| | As of | | As of |
| | March 31, 2023 | | December 31, 2022 |
| Number of properties | | 10 | | 13 |
| Real estate, net | | $26,670 | | $43,302 |
| | | | |
Rental income associated with assets held for sale totaled $1.5 million and $1.0 million for the three months ended March 31, 2023 and 2022, respectively. During the first quarter of 2023, one property in our Real Estate Investments portfolio was classified as held for sale with a net real estate balance of $5.0 million and two properties, previously classified as held for sale with an aggregate net real estate balance of $12.3 million, were reclassified as held for use.
During the three months ended March 31, 2023, we recorded impairment charges of approximately $0.3 million on three properties which were sold or classified as held for sale related to our Real Estate Investments portfolio. The impairment charges are included in “Loan and realty (gains) losses” in the Condensed Consolidated Statements of Income.
We reduce the carrying value of impaired properties to their estimated fair value or, with respect to the properties classified as held for sale, to estimated fair value less costs to sell. To estimate the fair values of the properties, we utilized a market approach which considered binding agreements for sales (Level 1 inputs), non-binding offers to purchase from unrelated third parties and/or broker quotes of estimated values (Level 3 inputs), and/or independent third-party valuations (Level 1 and 3 inputs).
Second Quarter 2023 Dispositions
During the second quarter of 2023, we sold three ALFs located in Oregon in two transactions for approximately $5.7 million in cash consideration, net of transaction costs and $0.6 million of seller financing on one of the transactions. The properties were classified in assets held for sale on the Condensed Consolidated Balance Sheet as of March 31, 2023 with an aggregate book value of $5.9 million. Prior impairment charges recognized on the properties totaled $3.7 million.
Tenant Concentration
The following table contains information regarding concentration in our Real Estate Investments portfolio for tenants or affiliates of tenants, that exceed 10% of total revenues for the three months ended March 31, 2023 and 2022, excluding $2.6 million for our corporate office, a credit loss reserve of $15.0 million and $339.1 million in assets for the SHOP segment ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| as of March 31, 2023 | | Revenues1 | |
| Asset | | Gross Real | | Notes | | Three Months Ended March 31, | |
| Class | | Estate2 | | Receivable | | 2023 | | | | 2022 | |
| | | | | | | | | | | | |
| Senior Living Communities, LLC (“Senior Living”) | EFC | | $ | 573,631 | | | $ | 50,200 | | | $ | 12,833 | | | 16% | | $ | 12,751 | | 18% |
| National HealthCare Corporation (“NHC”) | SNF | | 133,770 | | | — | | | 9,807 | | | 12% | | 9,189 | | 13% |
| Bickford | ALF | | 430,217 | | | 16,921 | | | 11,162 | | | 14% | | 7,038 | | 10% |
Holiday Retirement3 | ILF | | — | | | — | | | N/A | | N/A | | 9,797 | | 14% |
| All others, net | Various | | 1,311,316 | | | 167,785 | | | 34,267 | | | 41% | | 29,514 | | 41% |
| Escrow funds received from tenants | | | | | | | | | | | | |
| for property operating expenses | Various | | — | | | — | | | 2,619 | | | 3% | | 3,038 | | 4% |
| | | $ | 2,448,934 | | | $ | 234,906 | | | 70,688 | | | | | 71,327 | | |
Resident fees and services4 | | | | | | | 11,700 | | | 14% | | N/A | —% |
| | | | | | | $ | 82,388 | | | | | $ | 71,327 | | |
| | | | | | | | | | | | |
1 Includes interest income on notes receivable and rental income from properties classified as held for sale.
2 Amounts include any properties classified as held for sale.
3 Revenues include a lease deposit recognized as rental income in the three months ended March 31, 2022.
4 There is no tenant concentration in resident fees and services because these agreements are with individual residents.
At March 31, 2023, the two states in which we had an investment concentration of 10% or more were South Carolina (11.8%) and Texas (10.5%).
Senior Living
As of March 31, 2023, we leased ten retirement communities to Senior Living. We recognized straight-line rent revenue of $(0.3) million and $0.1 million from Senior Living for the three months ended March 31, 2023 and 2022, respectively.
NHC Percentage Rent
Under the terms of our lease with NHC, rent escalates by 4% of the increase, if any, in each of the facility’s revenue over a base year and is referred to as percentage rent. The following table summarizes the percentage rent income from NHC ($ in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| Current year | | | | | $ | 965 | | | $ | 843 | |
Prior year final certification1 | | | | | 630 | | | (206) | |
| Total percentage rent income | | | | | $ | 1,595 | | | $ | 637 | |
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.
Bickford Senior Living
As of March 31, 2023, we leased 39 facilities under four leases to Bickford. During the three months ended March 31, 2023, we did not provide any lease concessions to Bickford. Revenues from Bickford for the three months ended March 31, 2022, reflect the impact of pandemic-related rent concessions of approximately $5.5 million.
During the first quarter of 2023, Bickford repaid $0.2 million of its outstanding pandemic-related deferrals in addition to the reduction in deferrals of $2.5 million in connection with the acquisition of the ALF located in Chesapeake, Virginia. As of March 31, 2023, Bickford’s outstanding pandemic-related deferrals were $20.1 million.
Cash Basis Operators
We placed Bickford on cash basis of revenue recognition during the second quarter of 2022, based upon information we obtained from Bickford regarding its financial condition that raised substantial doubt as to its ability to continue as a going concern. Cash rent received from Bickford for the three months ended March 31, 2023 was $7.8 million, which excludes $2.5 million of rental income related to the reduction of pandemic-related rent deferrals in connection with the acquisition of the ALF located in Chesapeake, Virginia discussed above.
We placed two additional operators on the cash basis of accounting for their leases during 2022. Rental income associated with these tenants totaled $4.0 million for the three months ended March 31, 2023.
Tenant Purchase Options
Certain of our leases contain purchase options allowing tenants to acquire the leased properties. At March 31, 2023, we had tenant purchase options on three properties with an aggregate net investment of $59.7 million that will become exercisable between 2027 and 2028. Rental income from these properties with tenant purchase options was $1.8 million and $1.7 million for the three months ended March 31, 2023 and 2022, respectively.
We cannot reasonably estimate at this time the probability that any purchase options will be exercised in the future. Consideration to be received from the exercise of any tenant purchase option is expected to exceed our net investment in the leased property or properties.
Future Minimum Base Rent
Future minimum lease payments to be received by us under our operating leases at March 31, 2023, are as follows ($ in thousands):
| | | | | |
| Remainder of 2023 | $ | 171,434 | |
| 2024 | 239,886 | |
| 2025 | 243,414 | |
| 2026 | 250,071 | |
| 2027 | 208,445 | |
| 2028 | 202,028 | |
| Thereafter | 663,295 | |
| $ | 1,978,573 | |
Variable Lease Payments
Most of our existing leases contain annual escalators in rent payments. Some of our leases contain escalators that are determined annually based on a variable index or other factors that are indeterminable at the inception of the lease. The table below indicates the revenue recognized as a result of fixed and variable lease escalators ($ in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2023 | | 2022 | | | | |
| Lease payments based on fixed escalators, net of deferrals | $ | 58,937 | | | $ | 59,508 | | | | | |
| Lease payments based on variable escalators | 1,945 | | | 1,186 | | | | | |
| Straight-line rent income, net of write-offs | 2,097 | | | 1,079 | | | | | |
| Escrow funds received from tenants for property operating expenses | 2,619 | | | 3,038 | | | | | |
| Amortization of lease incentives | (299) | | | (252) | | | | | |
| Rental income | $ | 65,299 | | | $ | 64,559 | | | | | |
Note 4. Mortgage and Other Notes Receivable
At March 31, 2023, our investments in mortgage notes receivable totaled $150.8 million secured by real estate and other assets of the borrowers (e.g., Uniform Commercial Code liens on personal property) related to 14 facilities and in other notes receivable totaled $84.1 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 $15.0 million at March 31, 2023. We have a mortgage note receivable of $10.0 million and a mezzanine loan of $14.5 million with affiliates of one operator/borrower designated as non-performing at March 31, 2023 and December 31, 2022. This operator/borrower is also one of the tenants converted to cash basis of accounting. Interest income recognized, representing cash received, from these non-performing loans was $0.4 million for both the three months ended March 31, 2023 and 2022. All other loans were on full accrual basis at March 31, 2023 and December 31, 2022.
Montecito Medical Real Estate
We have a $50.0 million mezzanine loan and security agreement with Montecito Medical Real Estate for a fund that invests in medical real estate, including medical office buildings, throughout the United States. As of March 31, 2023, we have funded $20.3 million of our commitment that was used to acquire nine medical office buildings for a combined purchase price of approximately $86.7 million. For each of the three months ended March 31, 2023 and 2022, we received interest of $0.4 million.
The mezzanine loan and security agreement was modified in April 2022, so that the two real estate investments funded in the second quarter of 2022 accrue interest at an annual rate of 7.5% that is paid monthly in arrears and 4.5% per year in interest to be paid upon certain future events including repayments, sales of fund investments, and refinancings (the “Deferred Interest”). Prior borrowings under the mezzanine loan and security agreement bear interest at an annual rate of 9.5% and accrue an additional 2.5% in Deferred Interest. The Deferred Interest will be recognized as interest income upon receipt. 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.
Bickford Construction and Mortgage Loans
As of March 31, 2023, we had one fully funded construction loan of $14.7 million. The construction loan is secured by a first mortgage lien on substantially all of the related 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 agreement, including the borrower’s obligation for payment of insurance and taxes. NHI has a fair market value purchase option on the property upon stabilization of the underlying operations. On certain 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.
As part of the June 2021 sale of six properties to Bickford, we executed a $13.0 million second mortgage as a component of the purchase price consideration. This second mortgage note receivable bears interest at a 10% annual rate and matures in April 2026. Interest income was $0.3 million for both the three months ended March 31, 2023 and 2022. We did not include this note receivable in the determination of the gain recognized upon sale of the portfolio. Therefore, this note receivable is not reflected in “Mortgage and other notes receivable, net” in the Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022. During the three months ended March 31, 2023, Bickford repaid $0.1 million of principal on this note receivable which is reflected in “Gains on sale of real estate, net” in the Condensed Consolidated Statement of Income.
Senior Living
We have provided a $20.0 million revolving line of credit to Senior Living whose borrowings 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, 2025, availability under the revolver will reduce to $15.0 million. The revolver matures in December 2029 at the time of lease maturity. At March 31, 2023, the $17.5 million outstanding under the facility bears interest at 8.0% per annum.
The Company also has a mortgage loan of $32.7 million with Senior Living that 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 $38.3 million, subject to adjustment for market conditions.
Credit Loss Reserve
Our principal measures of credit quality, except for construction mortgages, are debt service coverage for amortizing loans and interest or fixed charge coverage for non-amortizing loans, collectively referred to as “Coverage.” A Coverage ratio provides a measure of the borrower’s ability to make scheduled principal and interest payments. The Coverage ratios presented in the table below have been calculated utilizing the most recent date for which data is available, December 31, 2022, using EBITDARM (earnings before interest, taxes, depreciation, amortization, rent and management fees) and the requisite debt service, interest service or fixed charges, as defined in the applicable loan agreement. We categorize Coverage into three levels: (i) more than 1.5x, (ii) between 1.0x and 1.5x, and (iii) less than 1.0x. We update the calculation of Coverage on a quarterly basis. Coverage is not a meaningful credit quality indicator for construction mortgages as either these developments are not generating any operating income, or they have insufficient operating income as occupancy levels necessary to stabilize the properties have not yet been achieved. We measure credit quality for these mortgages by considering the construction and stabilization timeline and the financial condition of the borrower as well as economic and market conditions.
We consider the guidance in ASC 310-20 when determining whether a modification, extension or renewal constitutes a current period origination. The credit quality indicator as of March 31, 2023, is presented below for the amortized cost, net by year of origination ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total |
| Mortgages | | | | | | | |
| more than 1.5x | $ | — | | $ | 59,779 | | $ | — | | $ | 22,249 | | $ | 32,700 | | $ | 2,746 | | $ | 117,474 | |
| between 1.0x and 1.5x | — | | — | | — | | — | | — | | 14,700 | | 14,700 | |
| less than 1.0x | — | | — | | — | | 2,221 | | 6,423 | | — | | 8,644 | |
| | | | | | | |
| — | | 59,779 | | — | | 24,470 | | 39,123 | | 17,446 | | 140,818 | |
| Mezzanine | | | | | | | |
| more than 1.5x | — | | — | | 18,170 | | — | | — | | — | | 18,170 | |
| between 1.0x and 1.5x | — | | — | | 23,960 | | — | | — | | — | | 23,960 | |
| less than 1.0x | — | | — | | — | | — | | — | | 8,482 | | 8,482 | |
| | | | | | | |
| — | | — | | 42,130 | | — | | — | | 8,482 | | 50,612 | |
| Non-performing | | | | | | | |
| | | | | | | |
| | | | | | | |
| less than 1.0x | — | | — | | — | | — | | — | | 24,500 | | 24,500 | |
| — | | — | | — | | — | | — | | 24,500 | | 24,500 | |
| Revolver | | | | | | | |
| more than 1.5x | | | | | | | 1,476 | |
| between 1.0x and 1.5x | | | | | | | 17,500 | |
| | | | | | | |
| | | | | | | 18,976 | |
| | | | | Credit loss reserve | (14,964) | |
| | | | | | | $ | 219,942 | |
Due to the continuing challenges in financial markets and the potential impact on the collectability of our mortgages and other notes receivable, we forecasted a 20% increase in the probability of a default and a 20% increase in the amount of loss from a default on all loans, other than those designated as non-performing, resulting in an effective adjustment of 44%. The methodology
for estimating the reserves for non-performing loans incorporates current conditions and forecasts of future economic conditions of these loans, including qualitative factors, which may differ from conditions existing in the historical period.
The allowance for expected credit losses is presented in the following table for the three months ended March 31, 2023 ($ in thousands):
| | | | | |
| Beginning balance at January 1, 2023 | $ | 15,338 | |
| Provision for expected credit losses | (374) | |
| |
| |
| Balance at March 31, 2023 | $ | 14,964 | |
Note 5. Senior Housing Operating Portfolio Formation Activities
Effective April 1, 2022 we transitioned the operations of 15 ILFs previously leased pursuant to a triple-net lease into two new ventures comprising our SHOP activities. These new ventures, consolidated by the Company, are structured to comply with REIT requirements and utilize the TRS for activities that would otherwise be non-qualifying for REIT purposes. The properties in each venture are operated by a property manager in exchange for a management fee. The equity structure of these ventures is comprised of 65% and 35% preferred and common equity interests, respectively. The Company owns 100% of the preferred equity interests in these ventures and an aggregate blended common equity interest of 89%. As of March 31, 2023, the annual fixed preferred return was approximately $10.2 million. Additionally, the managers, or related parties of the managers, own common equity interests in their respective ventures. Each venture is discussed in more detail below.
Merrill Managed Portfolio
We transferred six ILFs located in California and Washington into a consolidated venture with Merrill. Merrill contributed $10.6 million in cash for its common equity interest in the venture. The operating agreement includes contingent distributions to the members based on the attainment of certain yields on investment calculated on an annual basis.
The properties are managed by Merrill pursuant to a management agreement with an initial term through March 2032 that automatically renews on a year-to-year basis thereafter unless terminated by either party with notice. The management agreement entitles Merrill to a base management fee of 5% of net revenue and a real estate services fee of 5% of real estate costs incurred during any calendar year that exceed $1,000 times the number of units at each facility. Given certain provisions of the operating agreement, including provisions related to a Company change in control, the noncontrolling interest associated with the venture was determined to be contingently redeemable, as discussed further in Note 10. At March 31, 2023, the Merrill SHOP venture noncontrolling interest was classified in mezzanine equity, as discussed further in Note 10.
Discovery Managed Portfolio
We transferred nine ILFs located in Arkansas, Georgia, Ohio, Oklahoma, New Jersey, and South Carolina into a consolidated venture with the Discovery member, a related party of Discovery. The Discovery member contributed $1.1 million in cash for its common equity interest in the venture. The operating agreement includes contingent distributions to the members based on the attainment of certain yields on investment calculated on an annual basis. The noncontrolling interest is included in “Equity” on the Condensed Consolidated Balance Sheet as of March 31, 2023 and December 31, 2022.
The properties are managed by separate related parties of Discovery pursuant to management agreements with an initial term through March 2032 that automatically renews on a year-to-year basis thereafter unless terminated by either party with notice. The management agreements entitle the managers to a base management fee of 5% of net revenue.
Note 6. Equity Method Investment
Concurrently with the acquisition of a CCRC from LCS-Westminster Partnership III, LLP in January 2020, we invested $0.9 million in the operating company, Timber Ridge OpCo, representing a 25% equity interest. This investment is held by our TRS to be compliant with the provisions of the REIT Investment Diversification and Empowerment Act of 2007. 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 and 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 guaranteed or implied commitments to fund operations. In February 2023, we received $2.5 million from Timber Ridge Opco
representing the Company’s proportionate share of the lease incentive earned, as discussed in Note 7, based on its equity interest in the entity. Our guaranteed and implied commitments are currently limited to the additional $5.0 million under the revolving credit facility and the $2.5 million lease incentive distribution received. As of March 31, 2023, 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 and the $2.5 million lease incentive distribution received are included in “Accounts payable and accrued expenses” in our Condensed Consolidated Balance Sheet as of March 31, 2023. Excess unrecognized equity method losses for both the three months ended March 31, 2023 and 2022 were $0.6 million. Cumulative unrecognized losses were $6.5 million through March 31, 2023. We recognized gains of approximately $0.3 million related to our investment in Timber Ridge OpCo for the three months ended March 31, 2022.
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, NHI-LCS JV I, LLC (“Timber Ridge PropCo”) acquired the Timber Ridge CCRC 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, no liability has been recorded as of March 31, 2023. The balance secured by the Deed and Indenture was $13.2 million at March 31, 2023.
Note 7. Other Assets
Other assets, net consist of the following ($ in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
SHOP accounts receivable, net of allowance of $566 and $375, and other | $ | 1,212 | | | $ | 1,341 | |
| Real estate investments accounts receivable and prepaid expenses | 6,805 | | | 3,621 | |
| Lease incentive payments, net | 12,891 | | | 3,190 | |
| Regulatory escrows | 6,208 | | | 6,208 | |
| Restricted cash | 1,652 | | | 2,225 | |
| $ | 28,768 | | | $ | 16,585 | |
In February 2023, Timber Ridge PropCo, the consolidated senior housing partnership with LCS that owns the Timber Ridge CCRC, paid a $10.0 million lease incentive earned by Timber Ridge OpCo. The lease incentive is being amortized on a straight-line basis through the remaining initial lease term ending January 2027.
Note 8. Debt
Debt consists of the following ($ in thousands):
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| Revolving credit facility - unsecured | $ | 215,000 | | | $ | 42,000 | |
| Bank term loan - unsecured | 220,000 | | | 240,000 | |
2031 Senior notes - unsecured, net of discount of $2,519 and $2,600 | 397,481 | | | 397,400 | |
| Private placement notes - unsecured | 275,000 | | | 400,000 | |
| Fannie Mae term loans - secured, non-recourse | 76,546 | | | 76,649 | |
| | | |
| Unamortized loan costs | (8,013) | | | (8,538) | |
| $ | 1,176,014 | | | $ | 1,147,511 | |
Aggregate principal maturities of debt as of March 31, 2023 are as follows ($ in thousands):
| | | | | |
| Remainder of 2023 | $ | 270,305 | |
| 2024 | 75,425 | |
| 2025 | 125,816 | |
| 2026 | 215,000 | |
| 2027 | 100,000 | |
| 2028 | — | |
| Thereafter | 400,000 | |
| 1,186,546 | |
| Less: discount | (2,519) | |
| Less: unamortized loan costs | (8,013) | |
| $ | 1,176,014 | |
Unsecured revolving credit facility and bank term loan
On March 31, 2022, we entered into a new unsecured revolving credit agreement (the “2022 Credit Agreement”) providing us with a $700.0 million unsecured revolving credit facility, replacing our previous $550.0 million unsecured revolver. The 2022 Credit Agreement matures in March 2026, but may be extended at our option, subject to the satisfaction of certain conditions, for two additional six-month periods. Borrowings under the 2022 Credit Agreement bear interest, at our election, at one of the following (i) Term Secured Overnight Financing Rate (“SOFR”) (plus a credit spread adjustment) plus a margin ranging from 0.725% to 1.40%, (ii) Daily SOFR (plus a credit spread adjustment) plus a margin ranging from 0.725% to 1.40% or (iii) the base rate plus a margin ranging from 0.00% to 0.40%. In each election, the actual margin is determined according to our credit ratings. The base rate means, for any day, a fluctuating rate per annum equal to the highest of (i) the agent’s prime rate, (ii) the federal funds rate on such day plus 0.50% or (iii) the adjusted Term SOFR for a one-month tenor in effect on such day plus 1.0%. In addition, the 2022 Credit Agreement requires a facility fee equal to 0.125% to 0.30%, based on our rating.
We have a $220.0 million term loan, maturing in September 2023 (“2023 Term Loan”) whose covenants align with provisions in the 2022 Credit Agreement and to accrue interest on borrowings based on SOFR (plus a credit spread adjustment). We may also elect for the 2023 Term Loan to accrue interest at a base rate plus the applicable margin. During the three months ended March 31, 2023, we repaid $20.0 million of the 2023 Term Loan.
The revolving facility fee was 25 bps per annum and based on our current credit ratings, the facility presently provides for floating interest on the revolving credit facility and the 2023 Term Loan at SOFR CME Term Option one-month loan (plus a 10 bps spread adjustment) plus 105 bps and a blended 125 bps, respectively. At March 31, 2023, the SOFR CME Term Option one-month was 480 bps.
At March 31, 2023, we had $485.0 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 March 31, 2023, 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 chairperson of the Audit Committee of the Board of Directors 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.
2031 Senior Notes
In January 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. The 2031 Senior Notes are subject to affirmative and negative covenants, including financial covenants. As of March 31, 2023, we were in compliance with all affirmative and negative covenants, including financial covenants for our 2031 Senior Notes borrowings.
Private Placement Notes
In January 2023, we repaid the $125.0 million of the private placement notes due January 2023 primarily with proceeds from the revolving credit facility.
Our remaining unsecured private placement notes as of March 31, 2023, payable interest-only, are summarized below ($ in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Amount | | Inception | | Maturity | | Fixed Rate |
| $ | 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% |
| $ | 275,000 | | | | | | | |
Covenants pertaining to the private placement notes are generally conformed with those governing our credit facility, except for specific debt-coverage ratios that are more restrictive. Our unsecured private placement notes 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
As of March 31, 2023, we had $60.1 million in Fannie Mae term-debt financing, that originated in March 2015, requiring interest-only payments at an annual rate of 3.79% with a 10-year maturity. The mortgages are non-recourse and secured by eleven 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 $16.4 million at March 31, 2023. Collectively, these notes are secured by facilities having a net book value of $103.5 million at March 31, 2023.
Interest Expense
The following table summarizes interest expense ($ in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2023 | | 2022 | | | | |
| Interest expense on debt at contractual rates | $ | 13,440 | | | $ | 9,558 | | | | | |
| Capitalized interest | (19) | | | (2) | | | | | |
| Amortization of debt issuance costs, debt discount and other | 606 | | | 642 | | | | | |
| Total interest expense | $ | 14,027 | | | $ | 10,198 | | | | | |
Note 9. Commitments, Contingencies and Uncertainties
In the normal course of business, we enter into a variety of commitments, typically consisting of funding 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 that 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 March 31, 2023, we had working capital, construction and mezzanine loan commitments to six operators or borrowers for an aggregate of $145.4 million, of which we had funded $93.7 million toward these commitments. As provided above, loans funded do not include the effects of discounts or commitment fees.
As of March 31, 2023, we had $23.2 million of development commitments for construction and renovation for seven properties of which we had funded $17.1 million toward these commitments. In addition to these commitments, we have agreed to pay up to $0.8 million in additional cash consideration pending the results of an ongoing property tax appeal related to a property acquired in the second quarter of 2022. As of March 31, 2023, no amount of this consideration is expected to be paid. One of our consolidated real estate partnerships, NHI REIT of DSL PropCo, LLC, has committed to fund up to $2.0 million toward the purchase of condominium units located at one of the facilities of which $1.0 million had been funded as of March 31, 2023.
As of March 31, 2023, we had an aggregate of $15.9 million remaining contingent lease inducement commitments in six lease agreements which are generally based on the performance of facility operations and may or may not be met by the tenant. In the three months ended March 31, 2023, we funded $10.0 million to Timber Ridge OpCo based upon the achievement of all performance conditions as discussed in Note 7.
The credit loss liability for unfunded loan commitments is estimated using the same methodology as for our funded mortgage and other notes receivable based on the estimated amount that we expect to fund. We applied the same market adjustments as discussed in Note 4.
The liability for expected credit losses on our unfunded loans is reflected in “Accounts payable and accrued expenses” on the Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 is presented in the following table for the three months ended March 31, 2023 ($ in thousands):
| | | | | |
| Beginning balance January 1, 2023 | $ | 683 | |
| Provision for expected credit losses | (382) | |
| Balance at March 31, 2023 | $ | 301 | |
The disposal transactions for three Bickford properties in the second quarter of 2022 included $2.4 million in contingent consideration representing cash placed in escrow be returned to the buyers to the extent the sold properties generate negative monthly cash flows over the twelve months following from the dates of sale. As of March 31, 2023, all the escrowed funds were used to fund negative cash flows for the properties.
COVID-19 Pandemic Contingencies
Repayments and other reductions of rent deferrals recognized in “Rental income” during the three months ended March 31, 2023 were $2.8 million, including the $2.5 million reduction in pandemic-related rent deferrals in connection with the acquisition of the ALF located in Chesapeake, Virginia discussed in Note 3. As of March 31, 2023, aggregate pandemic-related rent concessions granted to tenants that have been accounted for as variable lease payments totaled approximately $30.1 million, net of cumulative repayments and other reductions of $6.5 million and excluding any interest accrued.
Rent concessions granted for the three months ended March 31, 2022 totaled approximately $7.8 million, of which Bickford accounted for approximately $5.5 million.
Note 10. Redeemable Noncontrolling Interest
The interest held by Merrill in its SHOP venture was classified as a “Redeemable noncontrolling interest” in the mezzanine section between “Total liabilities” and “Stockholders’ equity” on our Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022. Certain provisions within the operating agreement of the Merrill venture provide Merrill with put rights upon certain contingent events that are not solely within the control of the Company. Therefore, Merrill’s noncontrolling interest was determined to be contingently redeemable. The redeemable noncontrolling interest is not currently redeemable and we concluded a contingent redemption event is not probable to occur as of March 31, 2023. Consequently, the noncontrolling interest will not be subsequently remeasured to its redemption amount until such contingent event and the related redemption are probable to occur. We will continue to reflect the attribution of gains or losses to the redeemable noncontrolling interest each period.
The following table presents the change in “Redeemable noncontrolling interest” for the three months ended March 31, 2023 ($ in thousands):
| | | | | |
| Three Months Ended |
| March 31, 2023 |
| Balance at January 1, | $ | 9,825 | |
| Net loss | (305) | |
| |
| Balance at March 31, | $ | 9,520 | |
Note 11. Equity and Dividends
Share Repurchase Plan
On February 17, 2023, our Board of Directors authorized a revised stock repurchase program (the “Revised Repurchase Plan”) pursuant to which we may purchase up to $160.0 million in shares of our issued and outstanding common stock, par value $0.01 per share. The Revised Repurchase Plan is effective for a period of one year and does not require us to repurchase any specific number of shares. The Revised Repurchase Plan may be suspended or discontinued at any time. Shares may be repurchased from time-to-time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with the terms of Rule 10b-18 of the Securities Exchange Act of 1934 as amended (the “Exchange Act”) and shall be made in accordance with all applicable laws and regulations in effect. The timing and number of shares repurchased, if any, will depend on a variety of factors, including price, general market and economic conditions, alternative investment opportunities and other corporate considerations.
During the three months ended March 31, 2023, no common stock was repurchased. During 2022, cumulative repurchases through open market transactions were 2,468,354 shares of common stock for approximately $151.6 million. All shares received were constructively retired upon receipt, and reflected as a reduction to “Retained earnings” in the Condensed Consolidated Balance Sheet as of December 31, 2022.
In March 2023, we renewed our automatic “shelf” registration statement on Form S-3 and concurrently entered into a new equity distribution agreement whereby we can sell up to $500.0 million in common stock under an at-the-market (“ATM”) equity program. We incurred approximately $0.5 million in costs for these programs which was paid during the second quarter of 2023. Upon expiration of the prior registration statement and ATM equity program, approximately $0.3 million in equity issuance costs was reclassified from “Other Assets” into “Capital in Excess of Par Value” on the Condensed Consolidated Balance Sheet.
Dividends
The following table summarizes dividends declared by the Board of Directors or paid during the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Date of Declaration | | Date of Record | | Date Paid/Payable | | Quarterly Dividend |
| November 6, 2022 | | December 30, 2022 | | January 27, 2023 | | $0.90 |
| February 17, 2023 | | March 31, 2023 | | May 5, 2023 | | $0.90 |
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Date of Declaration | | Date of Record | | Date Paid/Payable | | Quarterly Dividend |
| November 5, 2021 | | December 31, 2021 | | January 31, 2022 | | $0.90 |
| February 16, 2022 | | March 31, 2022 | | May 6, 2022 | | $0.90 |
On May 5, 2023, the Board of Directors declared a $0.90 per share dividend to common stockholders of record on June 30, 2023, payable on August 4, 2023.
Note 12. Share-Based Compensation
The Company’s outstanding stock incentive awards have been granted under two incentive plans – the 2012 Stock Incentive Plan (“2012 Plan”) and the 2019 Stock Incentive Plan (“2019 Plan”). During the three months ended March 31, 2023, we granted options to purchase 385,500 shares of common stock under the 2019 Plan. The following is a summary of share-based compensation expense, net of any forfeitures, included in “General and administrative expenses” in the Condensed Consolidated Statements of Income ($ in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2023 | | 2022 | | | | |
| Non-cash share-based compensation expense | $ | 2,105 | | | $ | 5,083 | | | | | |
The weighted average fair value of options granted during the three months ended March 31, 2023 and 2022 was $10.56 and $11.81 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:
| | | | | | | | | | | |
| 2023 | | 2022 |
| Dividend yield | 7.0% | | 7.1% |
| Expected volatility | 39.7% | | 49.2% |
| Expected lives | 2.9 years | | 2.9 years |
| Risk-free interest rate | 4.65% | | 1.72% |
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, 2022 | 1,652,505 | | | $78.10 | | | | |
| Options granted | 693,000 | | | $53.41 | | | | |
| Options exercised | (7,500) | | | $53.41 | | | | |
| Options forfeited | (23,000) | | | $62.33 | | | | |
| Options expired | (74,498) | | | $77.93 | | | | |
| Options outstanding, March 31, 2022 | 2,240,507 | | | $70.71 | | | | |
| | | | | | | |
| Exercisable at March 31, 2022 | 1,719,487 | | | $74.34 | | | | |
| | | | | | | |
| Options outstanding, January 1, 2023 | 2,216,175 | | | $70.97 | | | | |
| Options granted | 385,500 | | | $54.73 | | | | |
| | | | | | | |
| Options forfeited | (25,000) | | | $74.67 | | | | |
| Options expired | (60,002) | | | $64.33 | | | | |
| Options outstanding, March 31, 2023 | 2,516,673 | | | $68.61 | | 2.97 | | |
| | | | | | | |
| Exercisable at March 31, 2023 | 2,132,828 | | | $71.21 | | 2.70 | | |
At March 31, 2023, there was no intrinsic value of stock options outstanding and exercisable. The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2022 was $4.94 per share or less than $0.1 million.
As of March 31, 2023, unrecognized compensation expense totaling $3.5 million associated with unvested stock options is expected to be recognized over the following periods: remainder of 2023 - $2.3 million, 2024 - $1.1 million and 2025 - $0.1 million.
Amended and Restated 2019 Stock Incentive Plan
On February 17, 2023, the Board of Directors approved an Amended and Restated 2019 Stock Incentive Plan, which was approved by the Company’s stockholders on May 5, 2023. The Amended and Restated 2019 Stock Incentive Plan increases the number of shares of common stock authorized for issuance to 6,000,000 and adds the ability of the Company to award shares of restricted stock or restricted stock units subject to such conditions and restrictions as the Company may determine. In May 2023, 21,000 shares of restricted stock were issued to the named executive officers. The restricted stock will vest over five years, with 20% vesting on each anniversary of the date of grant. Effective with this amendment, shares available for future issuance as of May 5, 2023 totaled 4,035,836.
Note 13. Earnings Per Common Share
The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assume the exercise of stock options using the treasury stock method, to the extent dilutive.
The following table summarizes the average number of common shares and the net income used in the calculation of basic and diluted earnings per common share ($ in thousands, except share and per share amounts):
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2023 | | 2022 | | | | |
| Net income attributable to common stockholders | $ | 34,484 | | | $ | 8,399 | | | | | |
| | | | | | | |
| BASIC: | | | | | | | |
| Weighted average common shares outstanding | 43,388,742 | | | 45,850,686 | | | | | |
| | | | | | | |
| DILUTED: | | | | | | | |
| Weighted average common shares outstanding | 43,388,742 | | | 45,850,686 | | | | | |
| Stock options | 2,687 | | | 375 | | | | | |
| | | | | | | |
| Weighted average dilutive common shares outstanding | 43,391,429 | | | 45,851,061 | | | | | |
| | | | | | | |
| Net income attributable to common stockholders - basic | $ | 0.79 | | | $ | 0.18 | | | | | |
| Net income attributable to common stockholders - diluted | $ | 0.79 | | | $ | 0.18 | | | | | |
| | | | | | | |
| 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 | 728,524 | | | 481,068 | | | | | |
| | | | | | | |
| Regular dividends declared per common share | $ | 0.90 | | | $ | 0.90 | | | | | |
Note 14. Fair Value of Financial Instruments
Carrying amounts and fair values of financial instruments that are not carried at fair value at March 31, 2023 and December 31, 2022 in the Condensed Consolidated Balance Sheets are as follows ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Carrying Amount | | Fair Value Measurement |
| March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 |
| Level 2 | | | | | | | |
| Variable rate debt | $ | 431,044 | | | $ | 277,699 | | | $ | 435,000 | | | $ | 282,000 | |
| Fixed rate debt | $ | 744,970 | | | $ | 869,812 | | | $ | 664,993 | | | $ | 773,994 | |
| | | | | | | |
| Level 3 | | | | | | | |
| Mortgage and other notes receivable, net | $ | 219,942 | | | $ | 233,141 | | | $ | 218,959 | | | $ | 227,611 | |
Fixed rate debt. Fixed rate debt is classified as Level 2 and its fair value is based on quoted prices for similar instruments or calculated utilizing model derived valuations in which significant inputs are observable in active markets.
Variable rate debt. Variable rate debt is classified as Level 2 and the fair values of our borrowings under our revolving credit facility and other variable rate debt are reasonably estimated at their notional amounts due to the predominance of floating interest rates, which generally reflect market conditions.
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 and are classified as Level 1.
Note 15. Segment Reporting
We evaluate our business and make resource allocations on our two operating segments: Real Estate Investments and SHOP. Our Real Estate Investments segment includes leases, mortgages and other note investments in ILFs, ALFs, EFCs, SLCs, SNFs and a HOSP. Under the Real Estate Investments segment, we invest in senior housing and health care real estate through acquisition and financing of primarily single- tenant properties. Properties acquired are primarily leased under triple-net leases, and we are not involved in the management of the properties. The SHOP segment includes multi-tenant ILFs. The SHOP properties and related operations are controlled by the Company and are operated by property managers in exchange for a management fee. See Note 5 for further discussion.
We formed the SHOP segment effective April 1, 2022 upon termination of the triple-net lease for the legacy Holiday Retirement (“Holiday”) portfolio at which time the operations and properties of 15 ILFs were transferred into two separate ventures, as discussed further in Note 5. The results associated with the prior triple-net lease structure for these properties are included in the Real Estate Investments segment and the results from operating these SHOP properties after the transition are included in our SHOP segment. There is no impact to the prior year’s presentation.
Our chief operating decision maker evaluates performance based upon segment net operating income (“NOI”). We define NOI as total revenues, less tenant reimbursements and property operating expenses. We use NOI to make decisions about resource allocations and to assess the property level performance of our properties. There were no intersegment transactions for the three months ended March 31, 2023. Capital expenditures for the three months ended March 31, 2023 were approximately $55.8 million for the Real Estate Investments segment and $1.1 million for the SHOP segment.
Non-segment revenue consists mainly of other income. Non-segment assets consist of corporate assets including cash, deferred loan expenses and corporate offices and equipment among others. Non-property specific revenues and expenses are not allocated to individual segments in determining NOI.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies discussed in Note 2. The results of operations for all acquisitions described in Note 3 are included in our consolidated results of operations from the acquisition dates and are components of the appropriate segments.
Summary information for the reportable segments during the three months ended March 31, 2023 is as follows ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended March 31, 2023: | Real Estate Investment | | SHOP | | Non-segment/Corporate | | Total |
| Rental income | $ | 65,299 | | | $ | — | | | $ | — | | | $ | 65,299 | |
| Resident fees and services | — | | | 11,700 | | | — | | | 11,700 | |
| Interest income and other | 5,308 | | | — | | | 81 | | | 5,389 | |
| Total revenues | 70,607 | | | 11,700 | | | 81 | | | 82,388 | |
| Senior housing operating expenses | — | | | 9,799 | | | — | | | 9,799 | |
| Taxes and insurance on leased properties | 2,619 | | | — | | | — | | | 2,619 | |
| NOI | 67,988 | | | 1,901 | | | 81 | | | 69,970 | |
| Depreciation | 15,376 | | | 2,227 | | | 14 | | | 17,617 | |
| Interest | 759 | | | — | | | 13,268 | | | 14,027 | |
| Legal | — | | | — | | | 122 | | | 122 | |
| Franchise, excise and other taxes | — | | | — | | | 183 | | | 183 | |
| General and administrative | — | | | — | | | 5,653 | | | 5,653 | |
| Loan and realty gains | (418) | | | — | | | — | | | (418) | |
| Gains on sales of real estate, net | (1,397) | | | — | | | — | | | (1,397) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Net income (loss) | $ | 53,668 | | | $ | (326) | | | $ | (19,159) | | | $ | 34,183 | |
| | | | | | | |
| Total assets | $ | 2,254,939 | | | $ | 270,085 | | | $ | 8,206 | | | $ | 2,533,230 | |