NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(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. We operate through two reportable segments: Real Estate Investments and Senior Housing Operating Portfolio (“SHOP”). Our Real Estate Investments segment consists of lease, mortgage and other note investments in independent living facilities, assisted living facilities, entrance-fee communities, senior living campuses, skilled nursing facilities and a hospital. As of June 30, 2022, we had investments of approximately $2.4 billion in 168 health care real estate properties located in 33 states and leased pursuant primarily to triple-net leases to 25 lessees consisting of 102 senior housing communities (“SHO”), 65 skilled nursing facilities and one hospital, excluding 13 properties classified as assets held for sale. Our portfolio of 13 mortgages along with other notes receivable totaled $209.5 million, excluding an allowance for expected credit losses of $5.2 million, as of June 30, 2022. Our SHOP segment is comprised of two ventures that own the operations of independent living facilities (“ILF”). As of June 30, 2022, we had investments of approximately $335.5 million in 15 properties with a combined 1,731 units located in eight states that are operated on behalf of the Company by two independent managers pursuant to the terms of separate management agreements that commenced April 1, 2022. The third-party managers, or related affiliates 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 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, 2021, included in our 2021 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, 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 June 30, 2022, our consolidated total assets and liabilities include two consolidated ventures comprising our SHOP activities formed with two separate partners - Merrill Gardens, L.L.C. (“Merrill”) and DSHI NHI Holiday LLC, a controlled affiliate of Discovery Senior Living. We consider both ventures to be VIEs as either the members, as a group, lack the characteristics of a controlling financial interest or there are disproportionate voting rights but substantially all of the activities are performed on behalf of the Company. 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. As of and for the three months ended June 30, 2022, our redeemable noncontrolling interests relate to these ventures. Assets of the consolidated SHOP ventures that can be used only to settle obligations of each respective SHOP venture include namely $262.2 million of real estate properties, net, and $11.6 million of cash and cash equivalents. Liabilities of the consolidated SHOP ventures for which creditors do not have recourse to the general credit of the Company are not material. Reference Notes 5 and 9 for further discussion of these new ventures.
We also consolidate two real estate partnerships formed with our partners, Discovery Senior Housing Investor XXIV, LLC,
and LCS Timber Ridge LLC, to invest in senior housing facilities. We consider both partnerships ventures to be VIEs, based on our determination that the total equity at risk in each is insufficient to finance activities without additional subordinated financial support. NHI directs the activities that most significantly impact economic performance of these ventures, subject to limited protective rights extended to our JV partners for specified business decisions. Because of our control of these ventures, we include their assets, liabilities, noncontrolling interests and operations in our consolidated financial statements.
At June 30, 2022, we held interests in nine unconsolidated VIEs, and, because we lack either directly or through related parties the power to direct the activities that most significantly impact their economic performance, we have concluded that the Company is not the primary beneficiary. Accordingly, we account for our transactions with these entities and their subsidiaries at either amortized cost or net realizable value for straight-line rent receivables, excluding our investment accounted for under the equity method.
The Company’s unconsolidated VIEs are summarized below by date of initial involvement. For further discussion of the nature of the relationships, including the sources of exposure to these VIEs, see the notes to our condensed consolidated financial statements cross-referenced below ($ in thousands).
| | | | | | | | | | | | | | | | | |
| Date | Name | Source of Exposure | Carrying Amount | Maximum Exposure to Loss | Note Reference |
| 2012 | Bickford Senior Living | Notes and funding commitment | $ | 45,138 | | $ | 60,187 | | Notes 3, 4 |
| 2014 | Senior Living Communities | Notes and straight-line receivable | $ | 87,851 | | $ | 94,188 | | Notes 3, 4 |
| 2016 | Senior Living Management | Notes and straight-line receivable | $ | 26,724 | | $ | 26,724 | | — |
| 2019 | Encore Senior Living | Notes and straight-line receivable | $ | 28,353 | | $ | 52,729 | | Notes 3, 4 |
| 2020 | Timber Ridge OpCo, LLC | Various2 | $ | (5,000) | | $ | 5,000 | | Note 6 |
| 2020 | Watermark Retirement | Notes and straight-line receivable | $ | 8,740 | | $ | 10,517 | | — |
| 2021 | Montecito Medical Real Estate | Notes and funding commitment | $ | 20,255 | | $ | 50,000 | | Note 4 |
| 2021 | Vizion Health | Notes and straight-line receivable | $ | 20,340 | | $ | 22,724 | | — |
| 2021 | Navion Senior Solutions1 | Various1 | $ | 7,871 | | $ | 13,911 | | — |
1 Notes, loan commitments, straight-line rents receivables, and unamortized lease incentives
2 Loan commitment, equity method investment and straight-line rents 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 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.
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 June 30, 2022, these noncontrolling interests were classified as mezzanine equity, as discussed further in Note 9.
Additionally, we consolidate two real estate partnerships formed with our partners, Discovery Senior Housing Investor XXIV, LLC and LCS Timber Ridge LLC, to invest in senior housing facilities. As of June 30, 2022 and December 31, 2021, these
noncontrolling interests are classified in equity.
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 and cash equivalents and restricted cash” reported within the Company’s Condensed Consolidated Statements of Cash Flows ($ in thousands):
| | | | | | | | | | | |
| June 30,
2022 | | June 30,
2021 |
| Cash and cash equivalents | $ | 43,435 | | | $ | 32,544 | |
| Restricted cash (included in Other assets, net) | 2,625 | | | 2,181 | |
| $ | 46,060 | | | $ | 34,725 | |
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.
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 and 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 exceeds the estimated fair value of the long-lived asset.
During the three and six months ended June 30, 2022, we recognized impairment charges of approximately $4.1 million and $28.7 million, respectively, included in “Loan and realty 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. 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.
During the second quarter of 2022, we placed Bickford Senior Living (“Bickford”) on the cash basis of revenue recognition for lease purposes. We recorded write offs of $18.1 million of straight-line rents receivable and $7.1 million of lease incentives related to our Bickford master lease agreements during the three and six months ended June 30, 2022. Reference Note 3 for further discussion.
Resident Fees and Services - Resident fee revenue associated with our SHOP activities is recorded when services are rendered and includes resident room and care charges, community fees and other resident charges. Residency agreements are generally
short term (30 days to one year), with resident fees billed monthly in advance. Revenue for certain related services is recognized as services are provided and billed monthly in arrears.
Accounting for Lease Modifications related to the Coronavirus Pandemic
In April 2020, the FASB issued a question-and-answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the coronavirus (“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. We have elected not to apply the modification guidance under ASC 842 and have accounted for qualified rent concessions as variable lease payments when applicable, and recorded as rental income when received. During the three and six months ended June 30, 2022, we provided $2.9 million and $10.7 million lease concessions, respectively, directly related to the COVID-19 pandemic, as discussed in more detail in Note 8.
Income Tax
We intend at all times to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. 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 at least 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 taxable REIT subsidiaries (TRSs). TRSs are subject to federal, state, and local income taxes. Accordingly, a provision for income taxes has been made in the consolidated financial statements. A failure to qualify under the applicable REIT qualification rules and regulations would have a material adverse impact on our financial position, results of operations and cash flows.
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 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 two independent managers pursuant to the terms of separate management agreements that commenced April 1, 2022. Reference Notes 5 and 14 for additional information.
Note 3. Investment Activity
Asset Acquisition
On April 29, 2022, we acquired a 53-unit assisted living facility located in Oshkosh, Wisconsin, from Encore Senior Living. The acquisition price was $13.3 million and included the full payment of an outstanding construction note receivable to us of $9.1 million, including interest. We have agreed to pay up to $0.8 million in additional cash consideration pending the results of an ongoing property tax appeal. As of June 30, 2022, no amount of this consideration is expected to be paid. We added the facility to an existing master lease for a term of 15 years at an initial lease rate of 7.25%, with an annual escalator of 2.5%.
Asset Dispositions
During the three and six months ended June 30, 2022, we completed the following real estate property dispositions within our Real Estate Investments reportable segment as described below ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operator | | Date | | Properties | | Asset Class | | Net Proceeds | | Net Real Estate Investment | | Gain/(Impairment)2 |
| Hospital Corporation of America | | Q1 2022 | | 1 | | MOB | | $ | 4,868 | | | $ | 1,904 | | | $ | 2,964 | |
Vitality Senior Living1 | | Q1 2022 | | 1 | | SLC | | 8,302 | | | 8,285 | | | 17 | |
Holiday1 | | Q2 2022 | | 1 | | ILF | | 2,990 | | | 3,020 | | | (30) | |
Chancellor Senior Living1 | | Q2 2022 | | 2 | | ALF | | 7,305 | | | 7,357 | | | (52) | |
Bickford1 | | Q2 2022 | | 3 | | ALF | | 25,959 | | | 28,268 | | | (2,309) | |
| Comfort Care | | Q2 2022 | | 4 | | ALF | | 40,000 | | | 38,445 | | | 1,556 | |
| Helix Healthcare | | Q2 2022 | | 1 | | HOSP | | 19,500 | | | 10,535 | | | 8,965 | |
| | | | | | | | $ | 108,924 | | | $ | 97,814 | | | $ | 11,111 | |
| | | | | | | | | | | | |
1 Total impairment charges recognized on these properties were $41.7 million, of which $4.8 million were recognized in the six months ended June 30, 2022.
2 Impairments are included in “Loan and realty losses” in Condensed Consolidated Statements of Income for the three and six months ended June 30, 2022.
Holiday Retirement
In April 2022, we sold an independent living facility located in Washington for approximately $3.2 million in cash consideration, and incurred $0.3 million of transaction costs. The property was previously classified as assets held for sale on the Condensed Consolidated Balance Sheet. Total prior impairment charges recognized on this property totaled $0.9 million.
Chancellor Senior Living
In April 2022, we sold two assisted living facilities located in Texas for approximately $7.8 million in cash consideration, and incurred $0.5 million of transaction costs. The properties were previously classified as assets held for sale on the Condensed Consolidated Balance Sheet. Total prior impairment charges recognized on these properties totaled $7.7 million.
Bickford
In May 2022, we sold three assisted living facilities located in Kansas and Missouri for approximately $26.4 million in cash consideration and $2.4 million in contingent consideration, and incurred $0.4 million of transaction costs. The properties were previously classified as assets held for sale on the Condensed Consolidated Balance Sheet. Total impairment charges recognized in “Loan and realty losses” in the Consolidated Statements of Income on these properties totaled $22.2 million, of which $2.3 million and $4.6 million was recognized for the three and six months ended June 30, 2022, respectively. The contingent consideration represents cash placed in escrow that will 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. After the twelve-month period, any remaining funds not distributed will be paid to the Company. We have assessed that it was not probable that any of the escrowed funds would be received by the Company. To the extent this assessment changes, or funds are ultimately received, we will recognize the amount as a gain on the sale of real estate.
Comfort Care
In May 2022, we sold four assisted living facilities located in Michigan for approximately $40.0 million in cash consideration, resulting in a gain of approximately $1.6 million. The properties were previously classified as assets held for sale on the Condensed Consolidated Balance Sheet. Rental income was $0.5 million and $1.2 million for the three and six months ended June 30, 2022, respectively, and $0.8 million and $1.6 million for the three and six months ended June 30, 2021, respectively. Prior pandemic-related rent deferrals of $0.8 million that were accounted for as variable lease payments were forgiven as a result of the sale.
Helix Healthcare
In June 2022, we sold a hospital located in California, pursuant to a purchase option, for approximately $19.5 million in cash consideration, resulting in a gain of approximately $9.0 million. The property was previously classified as assets held for sale on the Condensed Consolidated Balance Sheet. Rental income was $0.5 million and $1.0 million the three and six months ended June 30, 2022 and June 30, 2021, respectively.
Assets Held for Sale and Long-Lived Assets
At June 30, 2022, 13 properties in our Real Estate Investments reportable segment, with an aggregate net real estate balance of $56.7 million, were classified as assets held for sale on our Condensed Consolidated Balance Sheet as of June 30, 2022, including four properties that were transferred into assets held for sale during the second quarter of 2022. Rental income associated with the 13 properties was $1.0 million for both the three and six months ended June 30, 2022 and $1.6 million and $3.4 million for the three and six months ended June 30, 2021, respectively.
During the three and six months ended June 30, 2022, we recorded impairment charges of $4.1 million and $28.7 million respectively, related to our Real Estate Investments reportable segment. The impairment charges are included in “Loan and realty 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).
Third Quarter 2022 Dispositions
Discovery
In July 2022, we sold an assisted living facility located in Indiana for approximately $8.5 million in cash consideration, and incurred $0.3 million of transaction costs. The property was classified in assets held for sale on the Condensed Consolidated Balance Sheet as of June 30, 2022. Prior impairment charges recognized on the property totaled $8.4 million.
Tenant Concentration
The following table contains information regarding tenant concentration, excluding $2.6 million for our corporate office, $335.5 million for SHOP, and a credit loss reserve of $5.2 million, based on the percentage of revenues for the six months ended June 30, 2022 and 2021, related to tenants or affiliates of tenants, that exceed 10% of total revenue ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| as of June 30, 2022 | | Revenues1 | |
| Asset | | Real | | Notes | | Six Months Ended June 30, | |
| Class | | Estate2 | | Receivable | | 2022 | | | 2021 | |
| | | | | | | | | | | |
| Senior Living Communities | EFC | | $ | 573,631 | | | $ | 46,364 | | | $ | 25,549 | | 19% | | $ | 25,420 | | 16% |
| National HealthCare Corporation (“NHC”) | SNF | | 171,530 | | | — | | | 18,597 | | 14% | | 18,844 | | 12% |
Holiday Retirement (“Holiday”)3 | ILF | | — | | | — | | | 16,680 | | 13% | | 19,188 | | 12% |
Bickford Senior Living4 | ALF | | 412,304 | | | 44,850 | | | N/A | N/A | | 16,893 | | 11% |
| All others, net | Various | | 1,370,360 | | | 118,277 | | | 53,214 | | 41% | | 70,533 | | 46% |
| Escrow funds received from tenants | | | | | | | | | | | |
| for property operating expenses | Various | | — | | | — | | | 5,195 | | 4% | | 4,337 | | 3% |
| | | $ | 2,527,825 | | | $ | 209,491 | | | 119,235 | | | | 155,215 | | |
Resident fees and services5 | | | | | | | 11,992 | | 9% | | — | | —% |
| | | | | | | $ | 131,227 | | | | $ | 155,215 | | |
| | | | | | | | | | | |
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 for the six months ended June 30, 2022 include an $8.8 million lease deposit recognized in the first quarter of 2022 and $6.9 million in escrow cash received in the second quarter of 2022. Reference Note 8 for more discussion.
4 Below 10% for the six months ended June 30, 2022, as such revenues are included in All others, net.
5 There is no tenant concentration in resident fees and services because these agreements are with individual residents.
At June 30, 2022, the two states in which we had an investment concentration of 10% or more were South Carolina (12.0%) and Texas (12.3%).
Two of our board members, including our chairman, are also members of NHC’s board of directors.
Senior Living Communities
As of June 30, 2022, we leased ten retirement communities to Senior Living Communities, LLC (“Senior Living”). We recognized straight-line rent revenue of $0.2 million and $1.2 million from Senior Living for the three and six months ended June 30, 2022 and 2021, respectively.
Holiday Transition
On April 1, 2022, we disposed of one property classified in assets held for sale and transitioned one assisted living community in Florida to our existing real estate partnership with Discovery Senior Living. The transitioned property was added to the partnership’s in-place master lease. In addition, we terminated the master lease and transitioned the remaining 15 independent living facilities into two separate partnership ventures that own the underlying independent living operations and in which NHI has majority interests. Reference Note 5 for more discussion of the ventures.
Bickford Senior Living
As of June 30, 2022, we leased 37 facilities, excluding one facility classified as assets held for sale, under four leases to Bickford. Revenues from Bickford reflect the impact of pandemic-related rent concessions of approximately $5.5 million for the six months ended June 30, 2022 and $6.5 million and $10.3 million for the three and six months ended June 30, 2021, respectively.
During the second quarter of 2022, we wrote off approximately $18.1 million of straight-line rents receivable and $7.1 million of lease incentives, that were included in “Other assets” on the Condensed Consolidated Balance Sheet, to rental income upon converting Bickford to the cash basis of accounting. These write offs were the result of a change in our evaluation of collectability of future rent payments due under its four master lease agreements 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.
In addition to the three properties sold that are discussed above, we completed various restructuring activities in the Bickford leased property portfolio during the first and second quarters of 2022. In March 2022, we transferred one assisted living facility located in Pennsylvania from the Bickford portfolio to a new operator that is leased pursuant to a ten-year triple net lease and wrote off approximately $0.7 million in a straight-line rent receivable, reducing rental income. In the second quarter of 2022, we restructured and amended, three of Bickford’s master lease agreements covering 26 properties and reached agreement on the repayment terms of the $26.0 million in outstanding pandemic-related deferrals. Significant terms of these agreements are as follows:
• Extends the maturity dates of the modified leases to 2033 and 2035. The remaining master lease agreement covering 11 properties with an original maturity in 2023 was previously extended to 2028.
• Reduces the combined rent for the portfolio to approximately $28.3 million per year through April 1, 2024, subject to a nominal annual increase, at which time the rent will be reset to a fair market value, not less than 8.0% of our initial gross investment.
• Requires monthly payments beginning October 1, 2022 through December 31, 2024 based on a percentage of Bickford’s monthly revenues exceeding an established threshold. The deferrals may be reduced by up to $6.0 million upon Bickford achieving certain performance targets and the sale or transition of certain properties to new operators.
Tenant Purchase Options
Certain of our leases contain purchase options allowing tenants to acquire the leased properties. At June 30, 2022, we had tenant purchase options on 10 properties with an aggregate net investment of $90.6 million that will become exercisable between 2025 and 2028. Rental income from these properties with tenant purchase options was $2.7 million and $5.3 million for the three and six months ended June 30, 2022 respectively, and $2.6 million and $5.3 million for the three and six months ended June 30, 2021, respectively.
We cannot reasonably estimate at this time the probability that any other purchase options will be exercised in the future. Consideration to be received from the exercise of any tenant purchase option is expected to exceed our net investment in the leased property or properties.
Future Minimum Base Rent
Future minimum lease payments to be received by us under our operating leases at June 30, 2022, are as follows ($ in thousands):
| | | | | |
| Remainder of 2022 | $ | 169,619 | |
| 2023 | 222,412 | |
| 2024 | 211,973 | |
| 2025 | 208,559 | |
| 2026 | 211,604 | |
| 2027 | 173,915 | |
| Thereafter | 619,332 | |
| $ | 1,817,414 | |
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 | | Six Months Ended |
| June 30, | | June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Lease payments based on fixed escalators, net of deferrals | $ | 58,648 | | | $ | 61,394 | | | $ | 118,115 | | | $ | 128,982 | |
| Lease payments based on variable escalators | 1,258 | | | 894 | | | 2,486 | | | 1,913 | |
| Straight-line rent income | (14,915) | | | 4,150 | | | (13,836) | | | 8,391 | |
| Escrow funds received from tenants for property operating expenses | 2,157 | | | 2,175 | | | 5,195 | | | 4,337 | |
| Amortization of lease incentives | (7,166) | | | (262) | | | (7,419) | | | (522) | |
| Rental income | $ | 39,982 | | | $ | 68,351 | | | $ | 104,541 | | | $ | 143,101 | |
Note 4. Mortgage and Other Notes Receivable
At June 30, 2022, our investments in mortgage notes receivable totaled $124.2 million secured by real estate and other assets of the borrower (e.g., UCC liens on personal property) related to 13 facilities and other notes receivable totaling $85.3 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 $5.2 million at June 30, 2022. All our notes were on full accrual basis at June 30, 2022.
Mortgage and Other Notes Receivable
Life-Care Services - Sagewood
In the second quarter of 2022, we received repayment of a $111.3 million mortgage note receivable along with all accrued interest and a prepayment fee of $1.1 million which is reflected in “Gain on note payoff” on the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2022. Interest income was $3.1 million and $5.2 million for the three and six months ended June 30, 2022, respectively, and $2.5 million and $5.7 million, for the three and six months ended June 30, 2021, respectively.
Encore Senior Living
In January 2022, we entered into an agreement to fund a $28.5 million development loan with Encore Senior Living to construct a 108-unit assisted living and memory care community in Fitchburg, Wisconsin. The four-year loan agreement has an annual interest rate of 8.5% and two one-year extensions. We have a purchase option on the property once it has stabilized. The total amount funded on the note was $5.2 million as of June 30, 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. During the second quarter of 2022, we funded $4.5 million on two real estate investments. The loan agreement was modified in the second quarter so that these two real estate investments 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 loan agreement bear interest at an annual rate of 9.5% and accrue an additional 2.5% in Deferred Interest. 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. As of June 30, 2022, 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 the three and six months ended June 30, 2022, we received interest of $0.5 million and $0.9 million, respectively. For the six months ended June 30, 2022, we received principal of $0.3 million.
Bickford construction and mortgage loans
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 and $0.7 million, respectively, for the three and six months ended June 30, 2022. We did not include this note receivable in the determination of the gain to be 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 June 30, 2022 and December 31, 2021.
As of June 30, 2022, we had two fully funded construction loans of $28.7 million and one $14.2 million construction loan with $12.2 million funded to Bickford. 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 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.
We also have a mortgage loan of $4.0 million to Bickford due February 2025, bearing interest at 7%, that amortizes on a twenty-five-year basis.
Senior Living Communities
We 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, 2023, availability under the revolver reduces to $15.0 million. The revolver matures in December 2029 at the time of lease maturity. At June 30, 2022, the $13.7 million outstanding under the facility bears interest at 8.98% 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 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 $38.3 million, subject to adjustment for market conditions.
Credit Loss Reserve
Our principal measures of credit quality, except for construction mortgages, are debt service coverage for amortizing loans and interest or fixed charge coverage for non-amortizing loans, collectively referred to as “Coverage”. A Coverage ratio provides a measure of the borrower’s ability to make scheduled principal and interest payments. The Coverage ratios presented in the
following table have been calculated utilizing the most recent date for which data is available, March 31, 2022, using EBITDARM (earnings before interest, taxes, depreciation, amortization, rent and management fees) and the requisite debt service, interest service or fixed charges, as defined in the applicable loan agreement. We categorize Coverage into three levels: (i) more than 1.5x, (ii) between 1.0x and 1.5x, and (iii) less than 1.0x. We update the calculation of Coverage on a quarterly basis. Coverage is not a meaningful credit quality indicator for construction mortgages as either these developments are not generating any operating income, or they have insufficient operating income as occupancy levels necessary to stabilize the properties have not yet been achieved. We measure credit quality for these mortgages by considering the construction and stabilization timeline and the financial condition of the borrower as well as economic and market conditions. As of June 30, 2022, we did not have any construction loans that we considered underperforming.
We consider the guidance in ASC 310-20 when determining whether a modification, extension or renewal constitutes a current period origination. The credit quality indicator as of June 30, 2022, is presented below for the amortized cost, net by year of origination of ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Total |
| Mortgages | | | | | | | |
| more than 1.5x | $ | 4,965 | | $ | — | | $ | 33,364 | | $ | — | | $ | 28,700 | | $ | 4,183 | | $ | 71,212 | |
| between 1.0x and 1.5x | — | | — | | — | | 32,700 | | — | | — | | 32,700 | |
| less than 1.0x | — | | — | | 3,906 | | 6,422 | | — | | 10,000 | | 20,328 | |
| | | | | | | |
| 4,965 | | — | | 37,270 | | 39,122 | | 28,700 | | 14,183 | | 124,240 | |
| Mezzanine | | | | | | | |
| more than 1.5x | — | | 23,189 | | — | | — | | — | | 9,511 | | 32,700 | |
| between 1.0x and 1.5x | — | | 20,415 | | — | | — | | — | | — | | 20,415 | |
| less than 1.0x | — | | — | | — | | — | | — | | 14,500 | | 14,500 | |
| No coverage available | — | | — | | — | | 750 | | — | | — | | 750 | |
| — | | 43,604 | | — | | 750 | | — | | 24,011 | | 68,365 | |
| Revolver | | | | | | | |
| more than 1.5x | | | | | | | 3,223 | |
| between 1.0x and 1.5x | | | | | | | 13,663 | |
| less than 1.0x | | | | | | | — | |
| | | | | | | 16,886 | |
| | | | | Credit loss reserve | (5,214) | |
| | | | | | | $ | 204,277 | |
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 six months ended June 30, 2022 ($ in thousands):
| | | | | |
| Beginning balance January 1, 2022 | $ | 5,210 | |
| Provision for expected credit losses | 4 | |
| |
| |
| Balance June 30, 2022 | $ | 5,214 | |
Note 5. Senior Housing Operating Portfolio Formation Activities
Concurrently with the settlement of the outstanding litigation with Welltower discussed more fully in Note 8, we terminated the master lease with a Welltower-controlled subsidiary for the legacy Holiday properties effective April 1, 2022 and transitioned the operations of 15 ILFs from the Welltower-controlled tenant into two new ventures. 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 are 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 June 30, 2022, the annual fixed preferred return was approximately $10.2 million. Additionally, the managers, or affiliates of the managers, own common equity interests in their respective ventures. Given certain provisions of the operating agreements, including provisions related to a Company change in control, the noncontrolling interests associated with the ventures were determined to be contingently redeemable, as discussed further in Note 9. Each venture is discussed in more detail below.
Merrill Gardens 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 additional contingent distributions to the partners 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.
Discovery Managed Portfolio
We transferred nine ILFs located in Arkansas, Georgia, Ohio, Oklahoma, New Jersey, and South Carolina into a consolidated venture with DSHI NHI Holiday LLC (the “Discovery member”), a controlled affiliate of Discovery. The Discovery member contributed $1.1 million in cash for its common equity interest in the venture. The operating agreement includes additional contingent distributions to the partners based on the attainment of certain yields on investment calculated on an annual basis.
The properties are managed by separate controlled affiliates 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 agreement entitles the managers to a base management fee of 5% of net revenue.
Note 6. Equity Method Investment
Our initial $0.9 million investment in the operating company, Timber Ridge OpCo, held by our 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 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 commitments to fund operations. Our commitments are currently limited to the additional $5.0 million under the revolving credit facility. As of June 30, 2022, 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 Sheets as of June 30, 2022 and December 31, 2021. Excess unrecognized equity method losses for the three and six months ended June 30, 2022 were $0.9 million and $1.6 million, respectively. Cumulative unrecognized losses were $2.6 million through June 30, 2022. We recognized gains of approximately $0.3 million and $0.6 million, representing cash distributions received for the three and six months ended June 30, 2022, and losses of approximately $0.9 million and $1.7 million related to our investment in Timber Ridge OpCo for the three and six months ended June 30, 2021, respectively.
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, no liability has been recorded as of June 30, 2022. The balance secured by the Deed and Indenture was $15.2 million at June 30, 2022.
Note 7. Debt
Debt consists of the following ($ in thousands):
| | | | | | | | | | | |
| June 30,
2022 | | December 31,
2021 |
| Revolving credit facility - unsecured | $ | — | | | $ | — | |
| Bank term loans - unsecured | 240,000 | | | 375,000 | |
Senior notes - unsecured, net of discount of $2,760 and $2,921 | 397,240 | | | 397,079 | |
| Private placement term loans - unsecured | 400,000 | | | 400,000 | |
| Fannie Mae term loans - secured, non-recourse | 76,845 | | | 77,038 | |
| | | |
| Unamortized loan costs | (9,590) | | | (6,234) | |
| $ | 1,104,495 | | | $ | 1,242,883 | |
Aggregate principal maturities of debt as of June 30, 2022 are as follows ($ in thousands):
| | | | | |
| Remainder of 2022 | $ | 196 | |
| 2023 | 415,408 | |
| 2024 | 75,425 | |
| 2025 | 125,816 | |
| 2026 | — | |
| 2027 | 100,000 | |
| Thereafter | 400,000 | |
| 1,116,845 | |
| Less: discount | (2,760) | |
| Less: unamortized loan costs | (9,590) | |
| $ | 1,104,495 | |
Unsecured revolving credit facility and bank term loans
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 either (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 incurred $4.5 million of deferred costs in connection with the 2022 Credit Agreement which are included as a component of “Debt” on the Condensed Consolidated Balance Sheet as of June 30, 2022.
Concurrently with the execution of the 2022 Credit Agreement, we amended our $300.0 million term loan (“2018 Term Loan”) maturing in September 2023. The amendment modifies the existing covenants to align with provisions in the 2022 Credit Agreement and to accrue interest on borrowings based on SOFR (plus a credit spread adjustment) that were previously based on LIBOR, with no change to the existing applicable interest rate margins. We may also elect for the 2018 Term Loan to accrue
interest at a base rate plus the applicable margin. During the second quarter of 2022, we repaid $60.0 million of the 2018 Term Loan.
In March 2022, we repaid a $75.0 million term loan maturing August 2022 with proceeds from the revolving credit facility. 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, we expensed approximately $0.2 million of unamortized loan costs associated with this loan which is included in “Loss on early retirement of debt” in our Condensed Consolidated Statement of Income for the six months ended June 30, 2022.
The revolving facility fee was 25 bps per annum during the first quarter of 2022 and based on our current credit ratings, the facility provided for floating interest on the revolver and the term loans at SOFR CME Term Option 1 Month Loan plus 105 bps. At June 30, 2022, the SOFR CME Term Option one month was 179 bps.
At June 30, 2022, we had $700.0 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 June 30, 2022, 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
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”). We used a portion of the net proceeds from the 2031 Senior Notes offering to repay a $100.0 million term loan and recognized a loss on early retirement of debt of $0.5 million for the three and six months ended June 30, 2021, representing the unamortized loan costs expensed upon early repayment of the term loan.
The 2031 Senior Notes are subject to affirmative and negative covenants, including financial covenants. As of June 30, 2022, we were in compliance with all affirmative and negative covenants, including financial covenants for our 2031 Senior Notes borrowings.
Private Placement Term Loans
Our unsecured private placement term loans, payable interest-only, are summarized below ($ 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 | | | | | | | |
Covenants pertaining to the private placement term loans are generally conformed with those governing our credit facility, except for specific debt-coverage ratios that are more restrictive. 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
As of June 30, 2022, we had $60.1 million Fannie Mae term-debt financing, originating March 2015, consisting of interest-only payments at an annual rate of 3.79% and 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 $16.7 million at June 30, 2022. Collectively, these notes are secured by facilities having a net book value of $106.1 million at June 30, 2022.
Interest Expense and Rate Swap Agreements
The following table summarizes interest expense ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Interest expense on debt at contractual rates | $ | 10,262 | | | $ | 10,368 | | | $ | 19,819 | | | $ | 20,821 | |
| Losses reclassified from accumulated other | | | | | | | |
| comprehensive income into interest expense | — | | | 1,820 | | | — | | | 3,598 | |
| Capitalized interest | (9) | | | (17) | | | (10) | | | (34) | |
| Amortization of debt issuance costs, debt discount and other | 609 | | | 669 | | | 1,251 | | | 1,428 | |
| Total interest expense | $ | 10,862 | | | $ | 12,840 | | | $ | 21,060 | | | $ | 25,813 | |
On December 31, 2021, our $400.0 million interest rate swap agreements matured that were in place to hedge against fluctuations in variable interest rates applicable to our bank loans.
Note 8. 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 June 30, 2022, we had working capital, construction and mezzanine loan commitments to five operators for $144.9 million, of which we had funded $75.7 million toward these commitments.
As of June 30, 2022, we had $34.0 million of development commitments for construction and renovation for eleven properties of which we had funded $24.0 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 June 30, 2022, no amount of this consideration is expected to be paid as discussed in Note 3. Discovery PropCo 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 June30, 2022.
As of June 30, 2022, we had $28.6 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 June 30, 2022, we had funded $1.5 million toward these commitments.
As provided above, loans funded do not include the effects of discounts or commitment fees.
The credit loss liability for unfunded loan commitments is estimated using the same methodology as for our funded mortgage and other notes receivable based on the estimated amount that we expect to fund. We applied the same COVID-19 pandemic adjustments as discussed in Note 4.
The liability for expected credit losses on our unfunded loans reflected in “Accounts payable and accrued expenses” on the Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 is presented in the following table for the six months ended June 30, 2022 ($ in thousands):
| | | | | |
| Beginning balance January 1, 2022 | $ | 955 | |
| Provision for expected credit losses | (127) | |
| Balance at June 30, 2022 | $ | 828 | |
COVID-19 Pandemic Contingencies
Since the World Health Organization declared COVID-19 a pandemic on March 11, 2020, the continually evolving pandemic has resulted in a widespread health crisis adversely affecting governments, businesses, and financial markets. 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.
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.
As of June 30, 2022, aggregate pandemic-related rent concessions granted to tenants that have been accounted for as variable lease payments totaled approximately $44.0 million, net of cumulative repayments of $0.3 million and excluding any interest accrued. Of this total, net rent deferrals that are contractually agreed to be repaid are $38.0 million. During the three and six months ended June 30, 2022, we granted pandemic-related rent deferrals of $2.9 million to three tenants and $9.2 million to seven tenants, respectively. In addition, we granted rent abatements in the first quarter of 2022 to Bickford of approximately $1.5 million. Repayments of rent deferrals during the three and six months ended June 30, 2022 totaled $0.1 million and $0.2 million, respectively.
We anticipate that some tenants may need additional rent deferrals to assist them with the ongoing impact of the pandemic. The timing and amount of any additional deferrals cannot yet be determined.
Rent deferrals granted for the three and six months ended June 30, 2021 totaled approximately $9.9 million and $14.1 million, respectively, of which Bickford accounted for approximately $6.5 million and $10.3 million, respectively.
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. In addition, such claims may include, among other things professional liability and general liability claims, as well as regulatory proceedings related to our SHOP segment where we are the holder of the applicable healthcare license. While there may be lawsuits pending against us and 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.
Welltower, Inc.
In June 2021, Welltower announced that it would acquire certain assets from the senior housing portfolio of Holiday, a privately held senior living management company, that included 17 senior living facilities governed by a master lease originally executed between a Holiday subsidiary and NHI in 2013. We received no rent due under the master lease from the tenant for these facilities since this change in tenant ownership occurred in late July 2021.
On December 20, 2021, NHI and its subsidiaries NHI-REIT of Next House, LLC, Myrtle Beach Retirement Resident LLC, and Voorhees Retirement Residence LLC filed suit against Welltower, Inc., Welltower Victory II TRS LLC, and Well Churchill Leasehold Owner LLC (collectively the "Defendants") in the Delaware Court of Chancery (Case No. 2021-1097-MTZ). In the litigation, we contended that the Defendants repeatedly failed to honor their legal obligations to NHI. In particular, we asserted that the Defendants acquired assets from a third party, Holiday, that included leases to NHI senior living facilities and fraudulently induced NHI to consent to the assignment of the leases, and then immediately failed to pay rent or provide a promised security agreement that was intended to secure against their default, all as part of an effort to pressure NHI to agree to new conditions outside the assignment agreement or force a sale of the properties to the Defendants. The lawsuit further asserted that the Defendants owed unpaid contractual rent.
In connection with a memorandum of understanding between the parties dated March 4, 2022, NHI applied the remaining approximately $8.8 million lease deposit to past due rents in the first quarter of 2022. Also, as provided by the memorandum of understanding, Welltower transferred approximately $6.9 million to an escrow account to be released upon satisfactory transition
of the facility operations and mutual dismissal of the lawsuit. NHI and certain of its subsidiaries entered into a settlement agreement dated March 31, 2022 with Defendants formalizing the terms to settle the lawsuit.
NHI and certain of its subsidiaries terminated the master lease with Well Churchill Leasehold Owner, LLC as successor in interest to NHI Master Tenant LLC, effective April 1, 2022, upon completion of the transition of the properties subject to the master lease, as follows: (i) one property was sold to a third party, (ii) one property was transitioned to an existing operator relationship and leased pursuant to an existing master lease, and (iii) the remaining 15 properties were transitioned into two new SHOP partnership ventures. See Note 5 for more information on these new ventures.
Also effective April 1, 2022, the parties agreed to dismiss the lawsuit and mutually release all claims related to or arising out of the litigation and the $6.9 million in escrowed funds were released to NHI and recognized as rental income during the three months ended June 30, 2022. We recognized approximately $0.7 million as a “Loss on operations transfer, net” on the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2022. This net loss represents the amount of net working capital deficit assumed by NHI in connection with the transfer of operations following the termination of the master lease. The net working capital assumed by NHI on April 1, 2022 was comprised primarily of facility furniture, fixtures and equipment, net resident accounts receivable, accounts payable and other accrued liabilities.
Note 9. Redeemable Noncontrolling Interests
Interests held by Merrill and DSHI NHI Holiday LLC, a controlled affiliate of Discovery, in the SHOP ventures are noncontrolling interests. Certain provisions within the operating agreements of the ventures provide the noncontrolling interest holders with put rights upon certain contingent events that are not solely within the control of the Company. Therefore, these noncontrolling interests were determined to be contingently redeemable and are presented as “Redeemable noncontrolling interests” in the mezzanine section between Total liabilities and Stockholders equity on our Condensed Consolidated Balance Sheet at June 30, 2022.
At inception, the Company recorded noncontrolling interests of $11.7 million, representing the initial carrying amount of the noncontrolling interest holders’ ownership interests in the ventures. The redeemable noncontrolling interests are not currently redeemable and we concluded a contingent redemption event is not probable to occur as of June 30, 2022. Consequently, the noncontrolling interests will not be subsequently remeasured to its redemption amount until such contingency event and the related redemption are probable to occur. We will continue to reflect the attribution of gains or losses to the redeemable noncontrolling interests each quarter.
The following table presents the change in Redeemable noncontrolling interests for the three months ended June 30, 2022 ($ in thousands):
| | | | | |
| Three Months Ended |
| June 30, 2022 |
| Balance at March 31, | $ | — | |
| Initial carrying amount | 11,738 | |
| Net loss | (227) | |
| Distributions | (24) | |
| Balance at June 30, | $ | 11,487 | |
Note 10. Equity and Dividends
Share Repurchase Plan
On April 15, 2022, the Company’s Board of Directors approved a stock repurchase plan (the “2022 Repurchase Plan”) for up to $240.0 million of the Company’s common stock. The plan is effective for a period of one year. 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 and shall be made in accordance with all applicable laws and regulations in effect. The timing and number of shares repurchased will depend on a variety of factors, including price, general market and economic conditions, alternative investment opportunities and other corporate considerations.
During the three and six months ended June 30, 2022, we repurchased through open market transactions 1,196,175 shares of our common stock for an average price of $58.52 per share, including commissions. All shares received were constructively retired upon receipt, and the excess of the purchase price over the par value per share was recorded to “Cumulative dividends in excess of net income” in the Condensed Consolidated Balance Sheet.
As of June 30, 2022, we had approximately $170.4 million remaining under the 2022 Repurchase Plan.
Dividends
The following table summarizes dividends declared by the Board of Directors or paid during the six months ended June 30, 2022 and 2021:
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| Six Months Ended June 30, 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 |
| May 6, 2022 | | June 30, 2022 | | August 5, 2022 | | $0.90 |
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| Six Months Ended June 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 |
On August 5, 2022, the Board of Directors declared a $0.90 per share dividend to common stockholders of record on September 30, 2022, payable on November 4, 2022.
Note 11. Share-Based Compensation
The Company’s outstanding stock incentive awards have been granted under two incentive plans – the 2012 Stock Incentive Plan (“2012 Plan”) and the 2019 Stock Incentive Plan (“2019 Plan”). During the six months ended June 30, 2022, we granted options to purchase 718,000 shares of common stock under the 2019 Plan. As of June 30, 2022, shares available for future grants totaled 1,422,336 under the 2019 Plan. The following is a summary of share-based compensation expense, net of any forfeitures, included in “General and administrative expenses” in the Condensed Consolidated Statements of Income ($ in thousands):
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| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Non-cash share-based compensation expense | $ | 1,428 | | | $ | 992 | | | $ | 6,511 | | | $ | 6,438 | |
The weighted average fair value of options granted during the six months ended June 30, 2022 and 2021 was $11.92 and $14.54 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:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Dividend yield | 7.0% | | 6.7% |
| Expected volatility | 49.3% | | 48.1% |
| Expected lives | 2.9 years | | 2.9 years |
| Risk-free interest rate | 1.75% | | 0.33% |
The following table summarizes our outstanding stock options:
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| | | | | Weighted Average | | |
| Number | | Weighted Average | | Remaining | | |
| of Shares | | Exercise Price | | Contractual Life (Years) | | |
| Options outstanding, January 1, 2021 | 1,033,838 | | | $83.54 | | | | |
| Options granted | 652,000 | | | $69.20 | | | | |
| Options exercised | (20,000) | | | $60.52 | | | | |
| | | | | | | |
| Options outstanding, June 30, 2021 | 1,665,838 | | | $78.20 | | | | |
| | | | | | | |
| Exercisable at June 30, 2021 | 1,183,324 | | | $79.25 | | | | |
| | | | | | | |
| Options outstanding, January 1, 2022 | 1,652,505 | | | $78.10 | | | | |
| Options granted | 718,000 | | | $53.62 | | | | |
| Options exercised | (10,000) | | | $53.41 | | | | |
| Options forfeited | (23,000) | | | $62.33 | | | | |
| Options expired | (74,498) | | | $77.93 | | | | |
| Options outstanding, June 30, 2022 | 2,263,007 | | | $70.63 | | 3.57 | | |
| | | | | | | |
| Exercisable at June 30, 2022 | 1,726,987 | | | $74.18 | | 3.27 | | |
At June 30, 2022, the aggregate intrinsic value of stock options outstanding and exercisable was $4.9 million and $2.4 million, respectively. The aggregate intrinsic value of stock options exercised during the six months ended June 30, 2022 and 2021 was $4.94 per share or less than $0.1 million; and $9.27 per share or $0.2 million, respectively.
As of June 30, 2022, unrecognized compensation expense totaling $3.8 million associated with unvested stock options is expected to be recognized over the following periods: remainder of 2022 - $2.1 million, 2023 - $1.5 million and 2024 - $0.2 million.
Note 12. Earnings Per Common Share
The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assume the exercise of stock options and the conversion of our convertible debt prior to its retirement using the treasury stock method, to the extent dilutive. Dilution resulting from the conversion option within our convertible debt that was repaid in April 2021 was determined by computing an average of incremental shares included in the three months ended March 31, 2021 diluted EPS computation.
The following table summarizes the average number of common shares and the net income used in the calculation of basic and diluted earnings per common share ($ in thousands, except share and per share amounts):
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| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net income attributable to common stockholders | $ | 21,673 | | | $ | 39,183 | | | $ | 30,073 | | | $ | 74,513 | |
| | | | | | | |
| BASIC: | | | | | | | |
| Weighted average common shares outstanding | 45,708,238 | | | 45,850,599 | | | 45,779,433 | | | 45,577,843 | |
| | | | | | | |
| DILUTED: | | | | | | | |
| Weighted average common shares outstanding | 45,708,238 | | | 45,850,599 | | | 45,779,433 | | | 45,577,843 | |
| Stock options | 10,300 | | | 7,475 | | | 5,338 | | | 9,174 | |
| Convertible senior notes | — | | | — | | | — | | | 20,907 | |
| Weighted average dilutive common shares outstanding | 45,718,538 | | | 45,858,074 | | | 45,784,771 | | | 45,607,924 | |
| | | | | | | |
| Net income attributable to common stockholders - basic | $ | 0.47 | | | $ | 0.85 | | | $ | 0.66 | | | $ | 1.63 | |
| Net income attributable to common stockholders - diluted | $ | 0.47 | | | $ | 0.85 | | | $ | 0.66 | | | $ | 1.63 | |
| | | | | | | |
| 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 | 503,862 | | | 290,998 | | | 488,187 | | | 248,223 | |
| | | | | | | |
| Regular dividends declared per common share | $ | 0.90 | | | $ | 0.90 | | | $ | 1.80 | | | $ | 2.0025 | |
Note 13. Fair Value of Financial Instruments
Carrying amounts and fair values of financial instruments that are not carried at fair value at June 30, 2022 and December 31, 2021 in the Condensed Consolidated Balance Sheets are as follows ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Carrying Amount | | Fair Value Measurement |
| June 30, 2022 | | December 31, 2021 | | June 30, 2022 | | December 31, 2021 |
| Level 2 | | | | | | | |
| Variable rate debt | $ | 235,021 | | | $ | 373,682 | | | $ | 240,000 | | | $ | 375,000 | |
| Fixed rate debt | $ | 869,474 | | | $ | 869,201 | | | $ | 802,456 | | | $ | 858,124 | |
| | | | | | | |
| Level 3 | | | | | | | |
| Mortgage and other notes receivable, net | $ | 204,277 | | | $ | 299,952 | | | $ | 203,856 | | | $ | 314,821 | |
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 June 30, 2022 and December 31, 2021, due to the predominance of floating interest rates, which generally reflect market conditions.
Note 14. Segment Reporting
We evaluate our business and make resource allocations on our two operating segments: Real Estate Investments and SHOP. Our Real Estate Investments includes lease, mortgage and other note investments in independent living facilities, assisted living facilities, entrance-fee communities, senior living campuses, skilled nursing facilities and a hospital. Under the Real Estate Investment segment, we invest in seniors 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 property. SHOP includes multi-tenant independent living facilities. The SHOP properties and related operations are controlled by the Company and are operated by property managers in exchange for a management fee (reference Note 5).
We formed the SHOP segment effective April 1, 2022 upon termination of the triple-net lease for the legacy Holiday portfolio at which time the operations and properties of 15 ILFs were transferred into two separate ventures, as discussed further in Notes 5 and 8. 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 new SHOP segment. There is no impact to prior year’s presentation.
Our chief operating decision maker evaluates performance based upon segment 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 and six months ended June 30, 2022. Capital expenditures for the six months ended June 30, 2022 were approximately $7.0 million for the Real Estate Investments segment and $0.7 million for the SHOP segment.
Non-segment revenue consists mainly of other income. Non-segment assets consist of corporate assets including cash, deferred loan expenses and corporate offices and equipment among others. Non-property specific revenues and expenses are not allocated to individual segments in determining NOI.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The results of operations for all acquisitions described in Notes 3 and 4 are included in our consolidated results of operations from the acquisition dates and are components of the appropriate segments.
Summary information for the reportable segments during the three and six months ended June 30, 2022 is as follows ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended June 30, 2022: | Real Estate Investment | | SHOP | | Non-segment/Corporate | | Total |
| Rental income | $ | 39,982 | | | $ | — | | | $ | — | | | $ | 39,982 | |
| Resident fees and services | — | | | 11,992 | | | — | | | 11,992 | |
| Interest income and other | 7,825 | | | — | | | 100 | | | 7,925 | |
| Total revenues | 47,807 | | | 11,992 | | | 100 | | | 59,899 | |
| Senior housing operating expenses | — | | | 9,113 | | | — | | | 9,113 | |
| Taxes and insurance on leased properties | 2,157 | | | — | | | — | | | 2,157 | |
| NOI | 45,650 | | | 2,879 | | | 100 | | | 48,629 | |
| Depreciation | 15,638 | | | 2,116 | | | 18 | | | 17,772 | |
| Interest | 771 | | | — | | | 10,091 | | | 10,862 | |
| Legal | — | | | — | | | 339 | | | 339 | |
| Franchise, excise and other taxes | — | | | — | | | 225 | | | 225 | |
| General and administrative | — | | | — | | | 5,049 | | | 5,049 | |
| Loan and realty losses | 4,094 | | | — | | | — | | | 4,094 | |
| Gains on sales of real estate, net | (10,521) | | | — | | | — | | | (10,521) | |
| Loss on operations transfer, net | 729 | | | — | | | — | | | 729 | |
| Gain on note payoff | (1,113) | | | — | | | — | | | (1,113) | |
| | | | | | | |
| Gains from equity method investment | (273) | | | — | | | — | | | (273) | |
| Net Income | $ | 36,325 | | | $ | 763 | | | $ | (15,622) | | | $ | 21,466 | |
| | | | | | | |
| Total assets | $ | 2,277,599 | | | $ | 277,155 | | | $ | 32,537 | | | $ | 2,587,291 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the six months ended June 30, 2022: | Real Estate Investment | | SHOP | | Non-segment/Corporate | | Total |
| Rental income | $ | 104,541 | | | $ | — | | | $ | — | | | $ | 104,541 | |
| Resident fees and services | — | | | 11,992 | | | — | | | 11,992 | |
| Interest income and other | 14,542 | | | — | | | 152 | | | 14,694 | |
| Total revenues | 119,083 | | | 11,992 | | | 152 | | | 131,227 | |
| Senior housing operating expenses | — | | | 9,113 | | | — | | | 9,113 | |
| Taxes and insurance on leased properties | 5,195 | | | — | | | — | | | 5,195 | |
| NOI | 113,888 | | | 2,879 | | | 152 | | | 116,919 | |
| Depreciation | 33,892 | | | 2,116 | | | 36 | | | 36,044 | |
| Interest | 1,534 | | | — | | | 19,526 | | | 21,060 | |
| Legal | — | | | — | | | 2,166 | | | 2,166 | |
| Franchise, excise and other taxes | — | | | — | | | 469 | | | 469 | |
| General and administrative | — | | | — | | | 13,150 | | | 13,150 | |
| Loan and realty losses | 28,622 | | | — | | | — | | | 28,622 | |
| Gains on sales of real estate, net | (13,502) | | | — | | | — | | | (13,502) | |
| Loss on operations transfer, net | 729 | | | — | | | — | | | 729 | |
| Gain on note payoff | (1,113) | | | — | | | — | | | (1,113) | |
| Loss on early retirement of debt | — | | | — | | | 151 | | | 151 | |
| Gains from equity method investment | (569) | | | — | | | — | | | (569) | |
| Net Income | $ | 64,295 | | | $ | 763 | | | $ | (35,346) | | | $ | 29,712 | |
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