ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis is based primarily on the consolidated financial statements of National Health Investors, Inc. for the periods presented and should be read together with the notes thereto contained in this Annual Report on Form 10-K. Other important factors are identified in “Item 1. Business” and “Item 1A. Risk Factors” above. This section of this Annual Report on Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
National Health Investors, Inc., established in 1991 as a Maryland corporation, is a self-managed REIT specializing in sale-leaseback, joint-venture,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 SHOP. Our portfolioReal Estate Investments segment consists of lease, mortgagereal estate investments and leases, mortgages and other note investmentsnotes receivables in independent living facilities, assisted living facilities, entrance-fee communities, senior living campuses, skilled nursing facilities, specialty hospitals and medical office buildings. Other investments have included marketable securitiesILFs, ALFs, EFCs, SLCs, SNFs and a joint venture structured to comply with the provisions of the REIT Investment Diversification Empowerment Act of 2007 (“RIDEA”) through which we invested in facility operations managed by an independent third-party.HOSP. We have fundedfund our real estate investments primarily through: (1) operating cash flow, (2) debt offerings, including bank lines of credit and term debt, both unsecured and secured, and (3) the sale of equity securities. Our SHOP segment is comprised of two ventures that own the operations of 15 ILFs that provide residential living and other services for residents located throughout the United 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.
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| | | | | | | | | | | | | | | | | | |
Real Estate Properties | Properties |
| | Beds/Sq. Ft.* |
| | Revenue | | % | | Investment |
| Senior Housing - Need-Driven | | | | | | | | | |
| | Assisted Living | 86 |
| | 4,192 |
| | $ | 70,663 |
| | 25.4 | % | | $ | 765,479 |
|
| | Senior Living Campus | 10 |
| | 1,323 |
| | 16,371 |
| | 5.9 | % | | 162,022 |
|
| | Total Senior Housing - Need-Driven | 96 |
| | 5,515 |
| | 87,034 |
| | 31.3 | % | | 927,501 |
|
| Senior Housing - Discretionary | | | | | | | | | |
| | Independent Living | 30 |
| | 3,412 |
| | 46,268 |
| | 16.7 | % | | 547,436 |
|
| | Entrance-Fee Communities | 10 |
| | 2,363 |
| | 50,447 |
| | 18.1 | % | | 599,171 |
|
| | Total Senior Housing - Discretionary | 40 |
| | 5,775 |
| | 96,715 |
| | 34.8 | % | | 1,146,607 |
|
| | Total Senior Housing | 136 |
| | 11,290 |
| | 183,749 |
| | 66.1 | % | | 2,074,108 |
|
| Medical Facilities | | | | | | | | | |
| | Skilled Nursing Facilities | 68 |
| | 8,813 |
| | 72,608 |
| | 26.1 | % | | 524,040 |
|
| | Hospitals | 3 |
| | 181 |
| | 7,797 |
| | 2.8 | % | | 55,971 |
|
| | Medical Office Buildings | 2 |
| | 88,517 |
| * | 973 |
| | 0.3 | % | | 10,486 |
|
| | Total Medical Facilities | 73 |
| | | | 81,378 |
| | 29.2 | % | | 590,497 |
|
| | Total Real Estate Properties | 209 |
| | | | $ | 265,127 |
| | 95.3 | % | | $ | 2,664,605 |
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| | | | | | | | | | | |
Mortgage and Other Notes Receivable | | | | | | | | | |
| Senior Housing - Need-Driven | 4 |
| | 252 |
| | $ | 1,937 |
| | 0.7 | % | | $ | 35,466 |
|
| Senior Housing - Discretionary | 1 |
| | 400 |
| | 5,119 |
| | 1.8 | % | | 54,805 |
|
| Medical Facilities | 4 |
| | 270 |
| | 1,820 |
| | 0.7 | % | | 7,839 |
|
| Other Notes Receivable | — |
| | — |
| | 4,258 |
| | 1.5 | % | | 43,376 |
|
| | Total Mortgage and Other Notes Receivable | 9 |
| | 922 |
| | 13,134 |
| | 4.7 | % | | 141,486 |
|
| | Total Portfolio | 218 |
| | | | $ | 278,261 |
| | 100.0 | % | | $ | 2,806,091 |
|
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Portfolio Summary | Properties |
| | Beds/Sq. Ft.* |
| | Revenue | | % | | Investment |
| Real Estate Properties | 209 |
| | | | $ | 265,127 |
| | 95.3 | % | | $ | 2,664,605 |
|
| Mortgage and Other Notes Receivable | 9 |
| | | | 13,134 |
| | 4.7 | % | | 141,486 |
|
| | Total Portfolio | 218 |
| | | | $ | 278,261 |
| | 100.0 | % | | $ | 2,806,091 |
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Summary of Facilities by Type | | | | | | | | | |
| Senior Housing - Need-Driven | | | | | | | | | |
| | Assisted Living | 90 |
| | 4,444 |
| | $ | 72,600 |
| | 26.1 | % | | $ | 800,945 |
|
| | Senior Living Campus | 10 |
| | 1,323 |
| | 16,371 |
| | 5.9 | % | | 162,022 |
|
| | Total Senior Housing - Need-Driven | 100 |
| | 5,767 |
| | 88,971 |
| | 32.0 | % | | 962,967 |
|
| Senior Housing - Discretionary | | | | | | | | | |
| | Entrance-Fee Communities | 11 |
| | 2,763 |
| | 55,565 |
| | 20.0 | % | | 653,976 |
|
| | Independent Living | 30 |
| | 3,412 |
| | 46,268 |
| | 16.6 | % | | 547,436 |
|
| | Total Senior Housing - Discretionary | 41 |
| | 6,175 |
| | 101,833 |
| | 36.6 | % | | 1,201,412 |
|
| | Total Senior Housing | 141 |
| | 11,942 |
| | 190,804 |
| | 68.6 | % | | 2,164,379 |
|
| Medical Facilities | | | | | | | | | |
| | Skilled Nursing Facilities | 72 |
| | 9,083 |
| | 74,429 |
| | 26.8 | % | | 531,878 |
|
| | Hospitals | 3 |
| | 181 |
| | 7,797 |
| | 2.8 | % | | 55,971 |
|
| | Medical Office Buildings | 2 |
| | 88,517 |
| * | 973 |
| | 0.3 | % | | 10,487 |
|
| | Total Medical | 77 |
| | | | 83,199 |
| | 29.9 | % | | 598,336 |
|
| Other Notes Receivable | — |
| | | | 4,258 |
| | 1.5 | % | | 43,376 |
|
| | Total Portfolio | 218 |
| | | | $ | 278,261 |
| | 100.0 | % | | $ | 2,806,091 |
|
| | | | | | | | | | | |
Portfolio by Operator Type | | | | | | | | | |
| Public | 70 |
| | | | $ | 68,504 |
| | 24.7 | % | | $ | 484,277 |
|
| National Chain (Privately-Owned) | 28 |
| | | | 46,949 |
| | 17.0 | % | | 531,047 |
|
| Regional | 115 |
| | | | 157,045 |
| | 56.8 | % | | 1,756,867 |
|
| Small | 5 |
| | | | 4,052 |
| | 1.5 | % | | 33,900 |
|
| | Total Portfolio | 218 |
| | | | $ | 276,550 |
| | 100.0 | % | | $ | 2,806,091 |
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For the year ended December 31, 2017,2023, operators of facilities in our tenantsReal Estate Investments portfolio who provided 3% or more than 3%and collectively 61% of our total revenues were (parent company, in alphabetical order): Bickford, Discovery; Encore Senior Living; Chancellor Health Care, East Lake Capital Management; The Ensign Group; Health Services Management; Holiday Retirement; National HealthCare Corporation;LCS; NHC; Senior Living; and Senior Living Communities.The Ensign Group.
As of December 31, 2017,2023, our average effective annualized rental incomeNOI for the lease properties in our Real Estate Investments segment was $8,242$9,473 per bed for SNFs, $17,031$14,840 per unit for SLCs, $15,747 per unit for ALFs, $14,345$8,566 per unit for ILFs, $21,349$20,553 per unit for EFCs, $43,079and $63,899 per bed for hospitals,the HOSP. As of December 31, 2023, our average effective annualized NOI for the SHOP segment was $6,665 per unit.
COVID-19 Pandemic
During 2022 and $11 per square foot2021, we granted various rent concessions to tenants whose operations were adversely affected by the COVID-19 pandemic. When applicable, we elected not to apply the modification guidance under Accounting Standards Codification (“ASC”) Topic 842, Leases and accounted for MOBs.the related concessions as variable lease payments until those leases were subsequently modified under ASC Topic 842. Rent deferrals accounted for as variable lease payments, reducing rental income, granted for the years ended December 31, 2022 and 2021 totaled approximately $9.3 million and $26.4 million, respectively. Of these totals, Bickford accounted for $4.0 million and $18.3 million for the years ended December 31, 2022 and 2021, respectively. There were no pandemic-related rent concessions granted during the year ended December 31, 2023.
Areas of FocusCritical Accounting Estimates
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These accounting principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we reconsider and evaluate our estimates and assumptions. Management has discussed the development and selection of its critical accounting policies and estimates with the Audit Committee of the Board of Directors.
We base our estimates on historical experience, current trends and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are evaluating and will potentially make additional investments in 2018 while we continue to monitor and improve our existing properties. We seek tenants who will become mission-oriented partners in relationships where our business goals are aligned. This approach aims to fuel steady, and thus, enduring growth for those partners and for NHI. Within the context of our growth model, we rely on a cost-effective access to debt and equity capital to finance acquisitions that will drive our earnings. There is significant competition for healthcare assetsnot readily apparent from other REITs, both public and private, andsources. Actual results could differ from private equity sources. Large-scale portfolios continue to command premium pricing,those estimates.
We consider an accounting estimate or assumption critical if:
1.the nature of the estimates or assumptions is material due to the continued abundancelevels of privatesubjectivity and foreign buyers seekingjudgment necessary to investaccount for highly uncertain matters or the susceptibility of such matters to change; and
2.the impact of the estimates and assumptions on financial condition or operating performance is material.
If actual experience differs from the assumptions and other considerations used in healthcare real estate. This combination of circumstances placesestimating amounts reflected in our consolidated financial statements, the resulting changes could have a premiummaterial adverse effect on our abilityconsolidated results of operations, liquidity and/or financial condition.
Our significant accounting policies are discussed in Note 2 to execute acquisitionsour consolidated financial statements in this Annual Report on Form 10-K. We believe the accounting estimates listed below are the most critical to fully understanding and negotiate leases that will generate meaningful earnings growth forevaluating our shareholders. We emphasize growth withfinancial results, and require our existing tenantsmost difficult, subjective or complex judgments.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and borrowers as a way to insulate us from other competition.
With lower capitalization rates for existing healthcare facilities, there has been increased interestsubsidiaries in constructing new facilities in hopes of generating better returns on invested capital. Using our relationship-driven model, we continue to look for opportunities to support new and existing tenants and borrowers with the capital needed to expand existing facilities and to initiate ground-up development of new facilities. We concentrate our efforts in those markets where there is both a demonstrated demand for a particular product type and where we perceivewhich we have a competitive advantage. The projects we agreecontrolling interest. We also consolidate certain entities, known as variable interest entities (“VIEs”), when control of such entities can be achieved through means other than voting rights if the Company is deemed to be the primary beneficiary of such entities. We make judgments about which entities are VIEs based on an assessment of whether (i) the total equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support, (ii) as a group, the holders of the equity investment at risk do not have attractive upside potentiala controlling financial interest, or (iii) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are expected to provide above-average returnsconducted on behalf of, an investor that has disproportionately few voting rights. Additionally, we make judgments with respect to our shareholderslevel of influence or control of an entity and whether we are the primary beneficiary of a VIE. These considerations include, but are not limited to, mitigateour power to direct the risks inherent with property development and construction.
The Federal Open Market Committeeactivities that most significantly impact the entity's economic performance, the obligation to absorb losses or the right to receive benefits of the Federal Reserve announced an increaseVIE that could be significant to the
entity, and our ability and the rights of other investors to participate in its benchmark federal funds rate by 25 basis pointspolicy making decisions, replace the manager and/or liquidate the entity. Our ability to correctly determine the primary beneficiary of a VIE at inception of our involvement impacts the presentation of these entities in our consolidated financial statements.
Real Estate Properties
Real property we develop is recorded at cost, including the capitalization of interest during construction. The cost of real property investments we acquire is allocated to net tangible and identifiable intangible assets and liabilities based on March 15, 2017,their relative fair values. We make estimates as part of our allocation of the purchase price of acquisitions to the various components of the acquisition based upon the fair value of each component. For properties acquired in transactions accounted for as asset purchases, the purchase price, which includes transaction costs, is allocated based on June 14, 2017,the relative fair values of the assets and liabilities acquired. Cost includes the amount of contingent consideration, if any, deemed to be probable at the acquisition date. Contingent consideration is deemed to be probable to the extent that a significant reversal in amounts recognized is not likely to occur when the uncertainty associated with the contingent consideration is subsequently resolved. The most significant components of our allocations are typically the allocation of fair value to land, equipment, buildings and other improvements, and intangible assets and liabilities, if any. Our estimates of the values of these components will affect the amount of depreciation and amortization we record over the estimated useful life of the property acquired or the remaining lease term. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on December 13, 2017. The anticipation of past and further increases in the federal funds rate in 2018 has beenour financial results. We do not believe there is a primary source of much volatility in REIT equity markets. As a result,reasonable likelihood that there will be pressurea material change in the future estimates or assumptions we use for real estate allocation.
Impairments of Real Estate Properties
We evaluate the recoverability of the carrying values of our properties on a property-by-property basis. We review each property for recoverability when events or circumstances, including significant physical changes in the property, significant adverse changes in general economic conditions, reclassification of real estate property as held for sale, or significant deterioration of the underlying cash flows of the property, indicate that the carrying amount of the property may not be recoverable. The need to recognize an impairment charge is based on estimated undiscounted future cash flows from a property compared to the carrying value of that property. Accordingly, management’s evaluation requires judgment to determine the existence of indicators of impairment and estimates of undiscounted cash flows. If recognition of an impairment charge is necessary, it is measured as the amount by which the carrying amount of the property exceeds the fair value of the property. Refer to Note 3 to our consolidated financial statements included in this Annual Report on Form 10-K for more details.
There were no material changes in the accounting methodology we use to assess impairment charges during the year ended December 31, 2023. During the year ended December 31, 2023, we recorded impairment charges of approximately $1.6 million related to four properties all within the Real Estate Investments segment.
Lease Classification
Lease accounting standards require that, for purposes of lease classification, we assess whether the lease, by its terms, transfers substantially all of the fair value of the asset under lease. This consideration will drive accounting for the alternative classifications among operating, sales-type, or direct financing types of leases. For classification purposes, we distinguish cash flows that follow under terms of the lease from those that will derive, subsequent to the lease, from the ultimate disposition or re-deployment of the asset. From this segregation of the sources of cash flow, we are able to establish whether the lease is, in essence, a sale or financing based on it having transferred substantially all of the fair value of the leased asset. Accordingly, management’s projected residual values represent significant assumptions in our accounting for leases.
While we do not incorporate residual value guarantees in our lease provisions, the contractual structure of other provisions provides a basis for expectations of realizable value from our properties, upon expiration of their lease terms. Additionally, we consider historical, demographic and market trends in developing our estimates. For each new lease, we discount our estimate of unguaranteed residual value and include this amount along with the stream of lease payments (also discounted) called for in the lease. We assess the stream of lease payments and the value deriving from eventual return of our property to establish whether the lease payments themselves comprise a return of substantially all of the fair value of the property under lease. We do not use a “bright line” in considering what constitutes “substantially all of the fair value,” but we undertake a more focused assessment when the lease payments approach 90% of the composition of all future cash flows expected from the asset.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to assess lease classifications.
Allowance for Credit Losses
For our mortgage and other notes receivable, we evaluate the estimated collectability of contractual loan payments amid general economic conditions on the spread betweenbasis of a like-kind pooling of our costloans. We estimate credit losses over the entire contractual term of capitalthe instrument from the date of initial recognition of that instrument. In developing our expectation of losses, we will consider financial assets that share similar risk characteristics such as rate, age, type, location and the returns we earn. We expect that pressureadequacy of collateral on a collective basis. Other note investments which do not share common features will continue to be partially mitigated by market forces that would tend to resultevaluated on an instrument-by-instrument basis.
The determination of fair value and whether a shortfall in higher capitalization rates for healthcare assets and higher lease ratesoperating revenues or the existence of operating losses is indicative of historical levels.a loss in value involves significant judgment. Our costestimates consider all available evidence including, as appropriate, the present value of capital has increased over the pastexpected future cash flows discounted at market rates, general economic conditions and trends, the duration of the fair value deficiency, and any other relevant factors. When an economic downturn whose duration is expected to span a year or more is encountered, such as the COVID-19 pandemic, we transition someconsider projections about an expected economic recovery before we conclude that evidence of impairment exists. While we believe that the net carrying amounts of our short term revolving borrowings into debt instruments with longer maturitiesnotes receivable and fixed interest rates. Managing long-term risk involves trade-offs withother investments are realizable, it is possible that future events could require us to make significant adjustments or revisions to these estimates. During the competing alternative goalthird quarter of maximizing short-term profitability. Our intention is to strike an appropriate balance between these competing interests within the context2023, we designated as non-performing a mortgage note receivable of our investor profile. As interest rates rise, our share price may decline as investors adjust prices to reflect a dividend yield that is sufficiently in excess of a risk free rate.
$2.1 million due from Bickford. For the year ended December 31, 2017,2023, we recognized credit loss charges of $(0.3) million of which $0.7 million related to this mortgage upon its designation as non-performing.
While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results. Our model utilizes estimates of probability of default and loss given default. We review our assumptions and adjust these estimates accordingly on a quarterly basis. A 10% increase or decrease in either the probability of default or loss given default would result in an additional provision or recovery of $1.6 million.
2023 Activity
The following summarizes significant activity that occurred for the year ended December 31, 2023:
•Completed new real estate investments of $54.8 million, for which the consideration included the conversion of a $14.2 million construction loan.
•Repaid $175.0 million of private placement notes.
•Amended a mezzanine loan receivable with Capital Funding Group, Inc. to increase the loan balance from $8.1 million to $25.0 million, increase the interest rate to 10% and extend the maturity to December 31, 2028.
•Disposed of 12 facilities from our Real Estate Investments segment for aggregate net proceeds of $59.1 million, including seller financing of $2.2 million in total, net of discounts, on four of the transactions, with an aggregate net real estate investment of $45.1 million.
•The SHOP segment NOI was $9.2 million.
During the year ended December 31, 2023, we completed the following real estate acquisitions within our Real Estate Investments segment ($ in thousands):
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| | Date | | Properties | | Asset Class | | Amount |
Silverado Senior Living | | Q1 2023 | | 2 | | ALF | | $ | 37,493 | |
Bickford | | Q1 2023 | | 1 | | ALF | | 17,288 | |
| | | | | | | | |
| | | | | | | | $ | 54,781 | |
In February 2023, we acquired two memory care communities operated by Silverado Senior Living for approximately 27%$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 our revenue was derived from operators7.5% and annual escalators of our skilled nursing facilities that receive2.0%.
In February 2023, we also acquired a significant portion of their revenue from governmental payors, primarily Medicare and Medicaid. Such revenues are subject annually to statutory and regulatory changes and in recent years have been reduced due to federal and state budgetary pressures. Over the past five years, we have selectively diversified our portfolio by directing a significant portion of our investments into properties which do not rely primarily on Medicare and Medicaid reimbursement, but rather on private pay sources (assisted64-unit assisted living and memory care facilities, senior living campuses, independent living facilitiescommunity 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 entrance-fee communities). We will occasionally acquire skilled nursing facilitiesapproximately $0.1 million in good physical condition withclosing costs. The acquisition price also included a proven operator and strong local market fundamentals, because diversification implies a periodic rebalancing, but our recent investment focusreduction of $2.5 million in Bickford’s outstanding pandemic-related rent deferrals that has been recognized in “Rental income.” We added the community to an existing master lease with Bickford at an initial lease rate of 8.0%.
Capital Funding Group, Inc. Loan Extension
In September 2023, we amended a mezzanine loan with Capital Funding Group, Inc. Pursuant to the terms of the amended agreement, the loan increased from its balance at June 30, 2023 of $8.1 million to $25.0 million. The interest rate on acquiring need-driventhe loan was increased to 10% and discretionary senior housing assets.the maturity was extended to December 31, 2028.
Considering individual tenant lease revenueAsset Dispositions
During the year ended December 31, 2023, we completed the following real estate property dispositions within our Real Estate Investments segment ($ in thousands):
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Operator | | Date | | Properties | | Asset Class | | Net Proceeds | | Net Real Estate Investment | | Gain | | Impairment2 |
BAKA Enterprises, LLC1,3 | | Q1 2023 | | 1 | | ALF | | $ | 7,478 | | | $ | 7,505 | | | $ | — | | | $ | 27 | |
Bickford1 | | Q1 2023 | | 1 | | ALF | | 2,553 | | | 1,421 | | | 1,132 | | | — | |
Chancellor Health Care1,3 | | Q2 2023 | | 1 | | ALF | | 2,355 | | | 1,977 | | | 378 | | | — | |
Milestone Retirement1,3,4 | | Q2 2023 | | 2 | | ALF | | 3,803 | | | 3,934 | | | — | | | 131 | |
Chancellor Health Care1,3 | | Q2 2023 | | 1 | | ALF | | 7,633 | | | 6,140 | | | 1,493 | | | — | |
Milestone Retirement1,3,4 | | Q2 2023 | | 1 | | ALF | | 1,602 | | | 1,452 | | | 150 | | | — | |
Chancellor Health Care | | Q2 2023 | | 1 | | ALF | | 23,724 | | | 14,476 | | | 9,248 | | | — | |
Chancellor Health Care1,3 | | Q3 2023 | | 1 | | ALF | | 2,923 | | | 2,292 | | | 631 | | | — | |
Senior Living Management1,4 | | Q4 2023 | | 2 | | ALF | | 5,522 | | | 4,770 | | | 752 | | | — | |
Senior Living Management1,3 | | Q4 2023 | | 1 | | ALF | | 1,515 | | | 1,100 | | | 415 | | | — | |
| | | | | | | | $ | 59,108 | | | $ | 45,067 | | | $ | 14,199 | | | $ | 158 | |
1 Assets were previously classified as a percentage“Assets held for sale” in the Consolidated Balance Sheet at December 31, 2022.
2 Impairments are included in “Loan and realty losses, net” in the Consolidated Statement of total revenue, Bickford is our largest assisted living tenant, an affiliateIncome for the year ended December 31, 2023.
3 Total aggregate impairment charges previously recognized on these properties were $0.3 million and $17.4 million for the years ended December 31, 2023 and 2022, respectively.
4 The Company provided aggregate financing of Holiday is our largest independent living tenant, National HealthCare Corporation (“NHC”) is our largest skilled nursing tenant and Senior Living is our largest entrance-fee community tenant. Our shift toward private payor facilities, as well as our expansion into the discretionary senior housing market, has further resulted in a portfolio whose current composition is relatively balanced between medical facilities, need-driven and discretionary senior housing.
We manage our business with a goalapproximately $2.2 million, net of increasing the regular annual dividends paid to shareholders. Our Board of Directors approves a regular quarterly dividend which is reflective of expected taxable incomediscounts, on a recurring basis. Ourthese transactions that are infrequent and non-recurring that generate additional taxable income have been distributed to shareholders in the form of special dividends. Taxablenotes receivable, which is included in net proceeds.
Total rental income related to the disposed properties was $3.3 million, $0.7 million and $6.1 million for years ended December 31, 2023, 2022 and 2021, respectively.
Assets Held for Sale and Long-Lived Assets
At December 31, 2023, one property in our Real Estate Investments segment, with a net real estate balance of $5.0 million, was classified as assets held for sale on our Consolidated Balance Sheet. Rental income associated with the asset held for sale was $1.7 million, $0.9 million, and $1.1 million for the years ended December 31, 2023, 2022 and 2021, respectively.
During the year ended December 31, 2023, we recorded aggregate impairments of approximately $1.6 million on four properties in our Real Estate Investments segment, of which $0.5 million related to three properties either sold or classified as assets held for sale. During the year ended December 31, 2022, we recorded impairments of approximately $51.6 million on 19 properties which were sold or classified as held for sale related to our Real Estate Investments segment. Impairment charges are included in “Loan and realty losses, net” in the Consolidated Statements of Income.
Tenant Purchase Options
Certain of our leases contain purchase options allowing tenants to acquire the leased properties. A summary of these tenant options is presented below ($ in thousands):
| | | | | | | | | | | | | | | | | |
Asset | Number of | Lease | 1st Option | Option | Contractual Rent For Year Ended |
Type | Properties | Expiration | Open Year | Basis1 | December 31, 2023 |
| | | | | |
| | | | | |
SHO | 2 | May 2035 | 2027 | i | $ | 6,092 | |
SNF | 1 | September 2028 | 2028 | ii | $ | 511 | |
1 Tenant purchase options generally give the lessee an option to purchase the underlying property for consideration determined by (i) a fixed base price plus a specified share in any appreciation; or (ii) fixed base price.
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.
Other
Our leases for real estate are typically structured as “triple-net leases” on single-tenant properties having an initial leasehold term of 10 to 15 years with one or more five-year renewal options. As such, there may be reporting periods in which we experience few, if any, lease renewals or expirations. During the year ended December 31, 2023, we did not have any significant renewing or expiring leases. Most of our existing leases contain annual escalators in rent payments. For financial statement purposes, rental income is determinedrecognized on a straight-line basis over the term of the lease.
Discovery Senior Living - Effective November 1, 2023, we amended our master lease for the consolidated real estate partnership with Discovery Senior Housing Investor XXIV, LLC, a related party of Discovery that leases six senior housing properties to a related party of Discovery. Significant terms of this amendment are as follows:
•Deferred the contractual rate increase from November 1, 2023 to May 1, 2025;
•Lowered the contractual rent increase to a minimum of a 5% yield on gross investment from a 6.5% yield on gross investment;
•Required outstanding deferred rents be repaid at a minimum amount plus an additional repayment based on monthly revenues in accordanceexcess of a minimum threshold; and
•Extended the maturity date by six months to November 30, 2029.
Rental income associated with this master lease was $8.6 million, $7.4 million and $7.8 million for the Internal Revenue Codeyears ended December 31, 2023, 2022 and differs from net2021, respectively.
In addition, the Company modified its two other single-property triple-net leases with Discovery to abate rent temporarily throughout 2024 by approximately $1.1 million and extended the maturity dates by six months. Rental income associated with these leases was $3.7 million for both years ended December 31, 2023 and 2022, and $3.8 million for the year ended December 31, 2021.
Tenant Concentration
As discussed in Note 3 to the consolidated financial statements purposes determinedincluded in accordancethis Annual Report on Form 10-K, we have three tenants (including their affiliated entities, which are the legal tenants) from whom we individually derive at least 10% of our total revenues.
Cash Basis Operators
We had three operators on the cash basis of accounting for their leases as of December 31, 2023. In addition to Bickford as discussed previously, we placed two operators on cash basis of accounting for their leases during 2022. During 2021, the Welltower-controlled tenant of our Holiday portfolio was the only tenant on the cash basis prior to the completion of the portfolio transition. Rental income associated with U.S. generally accepted accounting principles. these tenants totaled $48.3 million, $21.4 million and $68.8 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Included in rental income are amounts received from prior rent deferrals granted to cash basis tenants totaling $2.8 million and $0.3 million for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, aggregate rent deferrals subject to future collection from these cash basis tenants totaled approximately $22.8 million, of which approximately $18.0 million related to Bickford. See Note 3 to our consolidated financial statements for further discussion.
Occupancy
The following table summarizes the average portfolio occupancy for Senior Living, Bickford and SHOP for the periods indicated, excluding development properties in operation less than 24 months, notes receivable, and properties transitioned to new tenants or disposed of.
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| Properties | 4Q22 | 1Q23 | 2Q23 | 3Q23 | 4Q23 | December 2023 | January 2024 |
Senior Living Same-Store | 9 | 83.5% | 83.5% | 82.2% | 81.9% | 83.0% | 83.1% | 83.3% |
Senior Living | 10 | 83.2% | 82.7% | 81.4% | 81.0% | 82.4% | 82.7% | 82.8% |
Bickford Same-Store1 | 38 | 83.6% | 81.3% | 81.6% | 83.8% | 84.8% | 84.6% | 85.3% |
Bickford2 | 39 | 83.9% | 81.6% | 82.0% | 84.2% | 85.2% | 85.0% | 85.7% |
SHOP | 15 | 75.8% | 75.2% | 75.5% | 79.0% | 83.2% | 84.4% | 84.7% |
1All prior periods restated for the sale of an ALF in Iowa.
2Includes Chesapeake, Virginia building which opened in the second quarter of 2022. NHI exercised its purchase option in February 2023.
Tenant Monitoring
Our goaloperators report to us the results of increasing annual dividends requirestheir operations on a periodic basis, which we in turn subject to further analysis as a means of monitoring potential concerns within our portfolio. We have identified EBITDARM (earnings before interest, taxes, depreciation, amortization, rent and management fees) as a primary performance measure for our tenants, based on results they have reported to us. We believe EBITDARM is useful in our most fundamental analyses, as it is a property-level measure of our operators’ success, by eliminating the effects of the operator’s method of acquiring the use of its assets (interest and rent), its non-cash expenses (depreciation and amortization), expenses that are dependent on its level of success (income taxes), and also excluding the effect of the operator’s payment of its management fees, as typically those fees are contractually subordinate to our lease payment. For operators of our entrance-fee communities, our calculation of EBITDARM includes other cash flow adjustments typical of the industry which may include, but are not limited to, net cash flows from entrance fees; amortization of deferred entrance fees; adjustments for tenant rent obligations, and management fee true-ups. The eliminations and adjustments reflect covenants in our leases and provide a comparable basis for assessing our various relationships.
We believe that EBITDARM is a useful way to analyze the cash potential of a group of assets. From EBITDARM we calculate a coverage ratio (EBITDARM/cash rent), measuring the ability of the operator to meet its monthly obligation. In addition to EBITDARM and the coverage ratio, we rely on a careful balance between identification of high-quality lease and mortgage assets in which to invest and the cost of our capital with which to fund such investments. We consider the competing interests of short and long-term debt (interest rates, maturitiessheet analysis, and other terms) versus the higher costanalytical procedures to help us identify potential areas of new equity. We accept some level of risk associated with leveragingconcern relative to our investments. We intendoperators’ ability to generate sufficient liquidity to meet their obligations, including their obligation to continue to pay the amount due to us. Typical among our operators is a varying lag in reporting to us the results of their operations. Across our portfolio, however, our operators report their results, typically within either 30 or 45 days and at the latest, within 90 days of month’s end. For computational purposes, we exclude mortgages and other notes receivable, development and lease-up properties that have been in operation less than 24 months. For stabilized acquisitions in the portfolio less than 24 months and renewing leases with changes in scheduled rent, we include pro forma cash rent. Same-store portfolio coverage excludes properties that have transitioned operators in the past 24 months or assets subsequently sold except as noted.
The results of our coverage ratio analysis are presented below on a trailing twelve-month basis, as of September 30, 2023 and 2022 (the most recent periods available).
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NHI Real Estate Investments Portfolio1 | | | | |
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Property Type | SHO | SNF | MEDICAL NON-SNF | TOTAL | | |
Properties | 89 | 68 | 1 | 158 | | |
3Q22 | 1.20x | 2.41x | 2.51x | 1.66x | | |
3Q22 Occupancy | 84.6% | 77.1% | 75.3% | 80.7% | | |
3Q23 | 1.36x | 2.72x | 3.05x | 1.91x | | |
3Q23 Occupancy | 84.3% | 80.7% | 77.9% | 82.4% | | |
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Property Class | Need Driven | Need Driven excl. Bickford | Discretionary | Discretionary excl. SLC | Medical | Medical excl. NHC |
Properties | 75 | 37 | 14 | 5 | 69 | 34 |
3Q22 | 1.06x | 1.03x | 1.36x | 1.69x | 2.42x | 2.03x |
3Q22 Occupancy | 85.4% | 86.2% | 83.5% | 85.6% | 77.1% | 69.6% |
3Q23 | 1.31x | 1.13x | 1.41x | 1.38x | 2.74x | 2.11x |
3Q23 Occupancy | 85.0% | 86.8% | 83.3% | 84.1% | 80.6% | 72.9% |
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Major Tenants | NHC2 | SLC3 | Bickford3 | | | |
Properties | 35 | 10 | 38 | | | |
3Q22 | 2.98x | 1.22x | 1.10x | | | |
3Q22 Occupancy | 83.2% | 82.2% | 84.2% | | | |
3Q23 | 3.54x | 1.39x | 1.52x | | | |
3Q23 Occupancy | 87.1% | 82.1% | 82.6% | | | |
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1All tables based on trailing 12 months; excludes transitioned properties under cash-flow based leases, loans, mortgages; excludes development and lease up properties in operation less than 24 months; includes proforma cash rent for stabilized acquisitions in the portfolio less than 24 months.
2 NHC Fixed Charge Coverage Ratio and displayed occupancies are on corporate-level. The occupancies are for the SNF portfolio only as can be seen in NHC’s public filings.
3 There are no longer any significant paycheck protection program funds included in the coverages above. SLC operates nine discretionary CCRC properties and one need driven assisted living community.
Coverage ratios may include amounts provided by state and federal government programs to support businesses, including healthcare providers, that have been impacted by the COVID-19 pandemic. These funds were largely distributed in 2020 and 2021 and as such do not substantially impact the reported coverage ratios.
Fluctuations in portfolio coverage are a result of market and economic trends, local market competition, and regulatory factors as well as the operational success of our tenants. We use the results of individual leases to inform our decision making with respect to specific tenants, but trends described above by property type and operator bear analysis. For many of the affected operators, as is typical of our portfolio in general, NHI has security deposits in place and/or corporate guarantees should actual cash rental shortfalls eventually materialize. In certain instances, our operators may increase their security deposits with us in an amount equal to the coverage shortfall, and, upon subsequent compliance with the required lease coverage ratio, the operator would then be entitled to a full refund. The sufficiency of credit enhancements (e.g. tenant deposits and guarantees) as a protection against economic downturn will be a focus as we monitor economic and financial conditions. The metrics presented in the tables above give no effect to the presence of these security deposits.
Other Portfolio Activity
Real Estate and Mortgage Write-downs
In addition to inflation risk and increased interest rates, our borrowers and tenants experience periods of significant financial pressures and difficulties similar to those encountered by other healthcare providers.
We have established a reserve for estimated credit losses of $15.5 million and a liability of $0.3 million for estimated credit losses on unfunded loan commitments as of December 31, 2023. The provision for expected credit losses, reflected in “Loan and realty losses, net” on the Consolidated Statements of Income, totaled $(0.3) million, $10.4 million and $0.9 million for the years ended December 31, 2023, 2022 and 2021, respectively. We evaluate the reserves for estimated credit losses on a quarterly basis and make adjustments based on current circumstances as considered necessary.
Our consolidated financial statements for the year ended December 31, 2023 reflect impairment charges of our long-lived assets of approximately $1.6 million. We reduced the carrying value of any impaired properties to estimated fair values, or with respect to the properties classified as held for sale, to estimated fair value less estimated transactions costs. We have no significant intangible assets currently recorded on our Consolidated Balance Sheet as of December 31, 2023, that would require assessment for impairment.
We believe that the carrying amounts of our real estate properties are recoverable and that mortgage and other notes receivable, net of reserves, are realizable and supported by the value of the underlying collateral. However, it is possible that future events could require us to make additional significant adjustments to these carrying amounts. Refer to Notes 3 and 4 to the consolidated financial statements included in this Annual Report on Form 10-K for more information.
Results of Operations
The significant items affecting revenues and expenses are described below ($ in thousands):
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| Years Ended | | | | |
| December 31, | | Period Change |
| 2023 | | 2022 | | $ | | % |
Revenues: | | | | | | | |
Rental income | | | | | | | |
ALFs leased to Silverado Senior Living | $ | 2,445 | | | $ | — | | | $ | 2,445 | | | NM |
EFCs leased to Senior Living | 48,836 | | | 47,209 | | | 1,627 | | | 3.4 | % |
ALFs leased to NHC | 38,567 | | | 34,990 | | | 3,577 | | | 10.2 | % |
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ALFs leased to Chancellor Health Care | 4,755 | | | 2,471 | | | 2,284 | | | 92.4 | % |
SHOs leased to Discovery | 9,487 | | | 6,683 | | | 2,804 | | | 42.0 | % |
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SHOs leased to Holiday Retirement | — | | | 15,588 | | | (15,588) | | | (100.0) | % |
ALFs leased to Bickford | 34,821 | | | 26,757 | | | 8,064 | | | 30.1 | % |
Other new and existing leases | 88,439 | | | 84,680 | | | 3,759 | | | 4.4 | % |
Disposals and assets held for sale | 5,924 | | | 13,770 | | | (7,846) | | | (57.0) | % |
| 233,274 | | | 232,148 | | | 1,126 | | | 0.5 | % |
Straight-line rent adjustments, new and existing leases | 6,961 | | | (16,681) | | | 23,642 | | | NM |
Amortization of lease incentives | (2,521) | | | (7,555) | | | 5,034 | | | (66.6) | % |
Escrow funds received from tenants for property operating expenses | 11,513 | | | 9,788 | | | 1,725 | | | 17.6 | % |
Total Rental Income | 249,227 | | | 217,700 | | | 31,527 | | | 14.5 | % |
Resident fees and services | 48,809 | | | 35,796 | | | 13,013 | | | 36.4 | % |
Interest income from mortgage and other notes | | | | | | | |
Encore Senior Living construction loans | 4,016 | | | 2,579 | | | 1,437 | | | 55.7 | % |
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Capital Funding Group | 3,209 | | | 384 | | | 2,825 | | | NM |
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Mortgage loan payoffs | 225 | | | 7,776 | | | (7,551) | | | (97.1) | % |
Other existing mortgages and notes | 13,998 | | | 13,644 | | | 354 | | | 2.6 | % |
Total Interest Income from Mortgage and Other Notes | 21,448 | | | 24,383 | | | (2,935) | | | (12.0) | % |
Other income | 351 | | | 315 | | | 36 | | | 11.4 | % |
Total Revenue | 319,835 | | | 278,194 | | | 41,641 | | | 15.0 | % |
Expenses: | | | | | | | |
Depreciation | | | | | | | |
SHOs leased to Holiday Retirement | — | | | 2,326 | | | (2,326) | | | (100.0) | % |
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SHOP depreciation | 9,158 | | | 6,408 | | | 2,750 | | | 42.9 | % |
Disposals and assets held for sale | 268 | | | 2,629 | | | (2,361) | | | (89.8) | % |
Other new and existing assets | 60,547 | | | 59,517 | | | 1,030 | | | 1.7 | % |
Total Depreciation | 69,973 | | | 70,880 | | | (907) | | | (1.3) | % |
Interest | 58,160 | | | 44,917 | | | 13,243 | | | 29.5 | % |
Senior housing operating expenses | 39,587 | | | 28,193 | | | 11,394 | | | 40.4 | % |
Legal | 507 | | | 2,555 | | | (2,048) | | | (80.2) | % |
Share-based compensation | 4,605 | | | 8,613 | | | (4,008) | | | (46.5) | % |
Taxes and insurance on leased properties | 11,513 | | | 9,788 | | | 1,725 | | | 17.6 | % |
Loan and realty losses, net | 1,376 | | | 61,911 | | | (60,535) | | | (97.8) | % |
Other expenses | 15,158 | | | 14,999 | | | 159 | | | 1.1 | % |
| 200,879 | | | 241,856 | | | (40,977) | | | (16.9) | % |
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Gain (loss) on operations transfer, net | 20 | | | (710) | | | 730 | | | NM |
Gain on note receivable payoff | — | | | 1,113 | | | (1,113) | | | (100.0) | % |
Loss on early retirement of debt | (73) | | | (151) | | | 78 | | | (51.7) | % |
Gains from equity method investment | 555 | | | 569 | | | (14) | | | (2.5) | % |
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Gains on sales of real estate, net | 14,721 | | | 28,342 | | | (13,621) | | | (48.1) | % |
Other income | 202 | | | — | | | 202 | | | NM |
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Net income | 134,381 | | | 65,501 | | | 68,880 | | | NM |
Less: net loss attributable to noncontrolling interests | 1,273 | | | 902 | | | 371 | | | 41.1 | % |
Net income attributable to stockholders | 135,654 | | | 66,403 | | | 69,251 | | | NM |
Less: net income attributable to unvested restricted stock awards | (57) | | | — | | | (57) | | | NM |
Net income attributable to common stockholders | $ | 135,597 | | | $ | 66,403 | | | $ | 69,194 | | | NM |
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Financial highlights for the year ended December 31, 2023, compared to 2022, were as follows:
•Rental income recognized from our tenants increased $31.5 million, or 14.5%, primarily as a result of a decrease in pandemic-related rent concessions granted of approximately $10.7 million and new investments that meetfunded since December 2022. Included in rental income for the year ended December 31, 2022 are write offs in the second quarter of 2022 of $18.1 million of straight-line rents receivable and $7.1 million of lease incentives related to placing Bickford on the cash basis of revenue recognition, partially offset by the recognition of the Holiday lease deposit and escrow of $15.6 million.
•Resident fees and services and senior housing operating expenses include revenues and expenses from our underwriting criteriaSHOP activities which commenced on April 1, 2022. Revenues less expenses from our SHOP segment increased $1.6 million, or 21%. See Note 5 to the consolidated financial statements.
•Funds received for reimbursement of property operating expenses totaled $11.5 million for the year ended December 31, 2023, and whereare reflected as a component of rental income. These property operating expenses are recognized in operating expenses in the spreads overline item “Taxes and insurance on leased properties.” The increase in the reimbursement income and corresponding property expenses is the result of additional amounts received from tenants and expenses paid on their behalf in the current year.
•Interest income from mortgage and other notes decreased $2.9 million, or 12.0%, primarily related to net paydowns of loans offset by new and existing loan fundings.
•Depreciation expense decreased $0.9 million, or 1.3%, primarily as a result of dispositions of approximately $143.0 million since December 2022.
•Interest expense increased $13.2 million, or 29.5%, primarily as the result of increased interest rates and borrowings on the unsecured revolving credit facility, offset by partial repayments on term loans.
•Legal expenses decreased $2.0 million primarily related to the Welltower, Inc. litigation and transition activities for the legacy Holiday portfolio occurring in 2022.
•Non-cash share-based compensation expense decreased $4.0 million, or 46.5%, due primarily to the reduced number of stock options granted in 2023 compared to the prior year’s grants.
•Loan and realty losses, net decreased $60.5 million, or 97.8%. Impairment charges of $1.6 million were recognized in the year ended December 31, 2023 on four properties in the real estate investment segment compared to impairment charges on 19 real estate properties of $51.6 million in the year ended December 31, 2022. Credit loss expense decreased $10.7 million compared to 2022. Credit loss expense totaling $10.4 million was recognized in 2022 for 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.
•Gain on note receivable payoff of $1.1 million reflects the prepayment fee from the early repayment of an $111.3 million mortgage note receivable in the second quarter of 2022.
•Gains on sales of real estate, net decreased $13.6 million, for the year ended December 31, 2023, compared to the prior year. For the year ended December 31, 2023, we recorded $14.7 million in gains primarily from dispositions of real estate assets as described under “Asset Dispositions” in Note 3 to the consolidated financial statements included in this Annual Report on Form 10-K. For the year ended December 31, 2022, we sold 22 properties generating gains on sales of real estate totaling $28.3 million.
Liquidity and Capital Resources
At December 31, 2023, we had $455.0 million available to draw on our unsecured revolving credit facility, $22.3 million in unrestricted cash and cash equivalents, and the potential to access $500.0 million through the issuance of common stock under the Company’s ATM equity program. In addition, the Company maintains an effective automatic shelf registration statement through which capital could be raised via the issuance of debt and or equity securities.
Sources and Uses of Funds
Our primary sources of cash include rent payments, receipts from residents, principal and interest payments on mortgage and other notes receivable, proceeds from the sales of real property, net proceeds from offerings of equity securities and borrowings from our loans and unsecured revolving credit facility. Our primary uses of cash include debt service payments (both principal and interest), new investments in real estate and notes receivable, dividend distributions to our stockholders, operating expenses for SHOP and general corporate overhead.
These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows as summarized below ($ in thousands):
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| Year Ended | | One Year Change | | Year Ended | | One Year Change |
| 12/31/2023 | | 12/31/2022 | | $ | | % | | 12/31/2021 | | $ | | % |
Cash and cash equivalents and restricted cash, January 1 | $ | 21,516 | | | $ | 39,485 | | | $ | (17,969) | | | (45.5) | % | | $ | 46,343 | | | $ | (6,858) | | | (14.8)% |
Net cash provided by operating activities | 184,450 | | | 185,340 | | | (890) | | | (0.5) | % | | 210,859 | | | (25,519) | | | (12.1)% |
Net cash (used in) provided by investing activities | (11,630) | | | 197,945 | | | (209,575) | | | (105.9) | % | | 185,277 | | | 12,668 | | | 6.8% |
Net cash used in financing activities | (169,719) | | | (401,254) | | | 231,535 | | | (57.7) | % | | (402,994) | | | 1,740 | | | (0.4)% |
Cash and cash equivalents and restricted cash, December 31 | $ | 24,617 | | | $ | 21,516 | | | $ | 3,101 | | | 14.4 | % | | $ | 39,485 | | | $ | (17,969) | | | (45.5)% |
Operating Activities – Net cash provided by operating activities for the year ended December 31, 2023, which includes new investments completed, the SHOP ventures, lease payment collections arising from escalators on existing leases and interest payments on new real estate and note investments completed, decreased $0.9 million from the year ended December 31, 2022. Cash provided by operating activities was negatively impacted by the disposition of 34 properties since January 1, 2022, and the funding of a $10.0 million lease incentive to Timber Ridge OpCo and benefited by the reduction in pandemic-related rent concessions granted of approximately $10.7 million.
Investing Activities – Net cash used in investing activities for the year ended December 31, 2023 was comprised primarily of the proceeds from the sales of real estate of approximately $57.0 million and the collection of principal on mortgage and other notes receivable of $13.5 million, offset by $85.2 million of investments in mortgage and other notes receivable and renovations and acquisitions of real estate and equipment.
Financing Activities – Net cash used in financing activities for the year ended December 31, 2023 differs from the same period in 2022 primarily as a result of an approximately $81.0 million increase in net borrowings, a decrease of $8.8 million in proceeds from noncontrolling interests, a decrease in the repurchase of common stock of approximately $152.0 million, a decrease in debt issuance cost of capital will generate sufficient returns$1.9 million and a decrease in dividend payments of approximately $5.5 million compared to 2022.
Debt Obligations
As of December 31, 2023, we had outstanding debt of $1.1 billion. Reference Note 8 to the consolidated financial statements for additional information about our outstanding indebtedness. Also, reference “Item 7a. Quantitative and Qualitative Disclosures About Market Risk” for more details on our indebtedness and the impact of interest rate risk.
Unsecured Bank Credit Facility - On March 31, 2022, we entered into 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 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 shareholders.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
Our dividends0.50% or (iii) the adjusted Term SOFR for a one-month tenor in effect on such day plus 1.0%. We incurred $4.5 million of deferred financing costs in connection with the 2022 Credit Agreement.
Concurrently with the execution of the 2022 Credit Agreement, we amended our $300.0 million 2023 Term Loan to modify 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. As of December 31, 2022, we had repaid $60.0 million of the 2023 Term Loan.
In the first quarter of 2023, we repaid $20.0 million of the 2023 Term Loan. In June 2023, we entered into the two-year $200.0 million 2025 Term Loan bearing interest at a variable rate which is SOFR-based with a margin determined according to our credit ratings plus a 0.10% credit spread adjustment. The Company incurred approximately $2.7 million of deferred financing cost associated with this loan. The 2025 Term Loan proceeds were used to repay a portion of the remaining $220.0 million 2023 Term Loan balance, which was repaid in full in June 2023. Upon repayment, we expensed approximately $0.1 million of unamortized loan costs associated with this loan which are included in “Loss on early retirement of debt” in our Consolidated Statement of Income for the year ended December 31, 2023.
As of December 31, 2023, the unsecured revolving credit facility and 2025 Term Loan bore interest at a rate of one-month Term SOFR (plus a 10 bps spread adjustment) plus 105 bps and 125 bps, based on our debt ratings, or 6.49% and 6.69%, respectively. The facility fee for the unsecured revolving credit facility was 25 bps per annum.
During 2023, we repaid $175.0 million of private placement notes primarily with proceeds from the unsecured revolving credit facility. At January 31, 2024, $273.0 million was outstanding under the revolving credit facility.
The current SOFR spreads and facility fee for our revolving credit facility and 2025 Term Loan reflect our ratings compliance based on the applicable margin for SOFR loans at a debt rating of BBB-/Baa3 in the Interest Rate Schedule provided below in summary format:
Interest Rate Schedule
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| | SOFR Spread |
Debt Ratings | | Revolving Credit Facility | | Revolving Credit Facility Fee | | 2025 Term Loan |
A+/A1 | | 0.725% | | 0.125% | | 0.75% |
A/A2 | | 0.725% | | 0.125% | | 0.80% |
A-/A3 | | 0.725% | | 0.125% | | 0.85% |
BBB+/Baa1 | | 0.775% | | 0.150% | | 0.90% |
BBB/Baa2 | | 0.850% | | 0.200% | | 1.00% |
BBB-/Baa3 | | 1.050% | | 0.250% | | 1.25% |
Lower than BBB-/Baa3 | | 1.400% | | 0.300% | | 1.65% |
Beyond the applicable ratios detailed above, if our credit rating from at least two credit rating agencies is downgraded below “BBB-/Baa3” the debt under our debt agreements will be subject to defined increases in interest rates and fees.
The 2022 Credit Agreement requires that we calculate specified financial statement metrics and meet or exceed a variety of financial ratios, which are usual and customary in nature. These ratios are calculated quarterly and as of December 31, 2023, we were within required limits for each reporting period in 2023 and 2022. The calculation of our leverage ratio involves intermediate determinations of our “Consolidated Total Indebtedness” and of our “Total Asset Value,” as defined in the 2022 Credit Agreement.
Senior Notes Offering - In January 2021, we issued $400.0 million in aggregate principal amount of 3.00% senior notes that mature on February 1, 2031 and pay interest semi-annually on February 1 and August 1 of each year (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 and were used to repay a $100.0 million term loan and reduce borrowings outstanding under our unsecured revolving credit facility.
We remain in compliance with all debt covenants under the last two years are as follows:unsecured revolving credit facility, 2031 Senior Notes and other debt agreements.
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| | | | | | | | | | |
2017 | | 2016 | | 2015 |
$ | 3.80 |
| | $ | 3.60 |
| | $ | 3.40 |
|
When we take on new debt or when we modify or replace existing debt, we incur debt issuance costs. These costs are subject to amortization over the term of the new debt instrument and may result in the write-off of fees associated with debt which has been replaced or modified.
Debt Maturities - Reference Note 8, Debt to the consolidated financial statements for more information on our debt maturities.
Credit Ratings - Moody's reaffirmed its credit rating and a senior unsecured debt rating of Baa3 and “Stable” outlook on the Company on October 16, 2023. Fitch reaffirmed its public issuer credit rating of BBB- and “Stable” outlook on the Company on May 15, 2023 and S&P Global reaffirmed its BBB- rating and “Stable” outlook on the Company on November 14, 2023. Our investmentsunsecured private placement note agreements include a rate increase provision that is effective if any rating agency lowers our credit rating below investment grade and our compliance leverage increases to 50% or more. Any reduction in healthcare real estate have been partially accomplished by our ability to effectively leverage our balance sheet. However, we continue to maintain a relatively low-leverage balance sheet compared with manyoutlook or downgrade in our peer group.credit ratings from the rating agencies could negatively impact our costs of borrowings.
Debt Metrics - We believe that our fixed charge coverage ratio, which is the ratio of Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, including amounts in discontinued operations, excluding real estate asset impairments and gains on dispositions) to fixed charges (interest expense at contractual rates net of capitalized interest and principal payments on debt), and the ratio of consolidated net debt to Adjusted EBITDA are meaningful measures of our ability to service our debt. We use these two measures as a useful basis to compare the strength of our balance sheet with those in our peer group. We also believe thisour balance sheet gives us a competitive advantage when accessing debt markets.
We calculate our fixed charge coverage ratio as approximately 6.4x4.5x for the year ended December 31, 20172023 (see our discussion of under the heading Adjusted EBITDA and including a reconciliation to our net income on page 50)income). Giving effect to oursignificant acquisitions, financings, disposals and financingspayoffs on an annualized basis, our consolidated net debt-todebt to Adjusted EBITDA ratio is approximately 4.2x4.5x for the year ended December 31, 2017 2023 ($ in thousands)thousands):
| | | | | |
Consolidated Total Debt | $ | 1,135,051 | |
Less: cash and cash equivalents | (22,347) | |
Consolidated Net Debt | $ | 1,112,704 | |
| |
Adjusted EBITDA | $ | 249,603 | |
Annualized impact of recent investments, disposals and payoffs | (1,669) | |
| $ | 247,934 | |
| |
Consolidated Net Debt to Adjusted EBITDA | 4.5x |
|
| | | |
Consolidated Total Debt | $ | 1,145,497 |
|
Less: cash and cash equivalents | (3,063 | ) |
Consolidated Net Debt | $ | 1,142,434 |
|
| |
Adjusted EBITDA | $ | 265,026 |
|
Annualized impact of recent investments | 5,509 |
|
| $ | 270,535 |
|
| |
Consolidated Net Debt to Adjusted EBITDA | 4.2 | x |
Supplemental Guarantor Financial Information
According to the Administration
The Company’s $900.0 million bank credit facility, unsecured private placement notes due September 2024 through January 2027 with an aggregate principal amount of $225.0 million and 2031 Senior Notes are fully and unconditionally guaranteed on Aging (“AoA”)a senior unsecured basis by each of the US Department of Health and Human Services, in 2014, the latest yearCompany’s subsidiaries, except for which data is available, 46.2 million people (or 14.5%certain excluded subsidiaries (“Guarantors”). The Guarantors are either owned by, controlled by or are affiliates of the population) were age 65 or older in the United States. Census estimates showed that, by 2040, those 65 or older are expected to comprise 21.7% of the population.Company.
Census estimates also project that close to half of those currently age 65 will reach age 84 or older. As Transgenerationalaging.org notes, “The fastest-growing segment of the total population is the oldest old - those 80 and over. Their growth rate is twice that of those 65 and over and almost 4-times that
The following tables present summarized financial information for the total population. InCompany and the United States, this group now represents 10%Guarantors, on a combined basis after eliminating (i) intercompany transactions and balances among the guarantor entities and (ii) equity in earnings from, and any investments in, any subsidiary that is a non-guarantor ($ in thousands):
Per the AoA, in 2013 the median | | | | | | | | |
| | As of |
| | December 31, 2023 |
Real estate properties, net | | $ | 1,827,086 | |
Other assets, net | | 359,148 | |
Note receivable due from non-guarantor subsidiary | | 81,396 | |
Totals assets | | $ | 2,267,630 | |
| | |
Debt | | $ | 1,059,013 | |
Other liabilities | | 76,092 | |
Total liabilities | | $ | 1,135,105 | |
| | |
Redeemable noncontrolling interest | | $ | 9,656 | |
Noncontrolling interest | | $ | 918 | |
| | | | | | | | |
| | Year Ended |
| | December 31, 2023 |
Revenues | | $ | 290,369 | |
Interest revenue on note due from non-guarantor subsidiary | | 4,657 | |
Expenses | | 182,467 | |
Gain from equity method investee | | 555 | |
Gains on sales of real estate | | 14,721 | |
Gain on operations transfer | | 20 | |
Loss on early retirement of debt | | (73) | |
Other income | | 202 | |
Net income | | $ | 127,984 | |
Net income attributable to NHI and the subsidiary guarantors | | $ | 129,256 | |
Equity
At December 31, 2023, we had 43,409,841 shares of common stock outstanding with a market value of homes owned by older persons was $150,000 (with a median purchase price of $63,900) compared to a median home value of $160,000 for all homeowners. Of the 26.8 million households headed by older persons in 2013, 81% were homeowners, about 65% of whom owned their homes free and clear. Home ownership provides the elderly with the freedom to choose their lifestyles.
Equipped with the basics of financial security, many will be economically able to enter the market for senior housing. Strong demographic trends provide the context for continued growth in 2018 and the years ahead. We plan to fund any new real estate and mortgage investments during 2018 using operational cash flow, debt, and equity financing. As the weight of additional debt to fund new acquisitions suggests the need to rebalance our capital structure, we will then expect to access the capital markets through an ATM or other equity offerings. Our disciplined investment strategy implemented through measured increments of debt
and equity sets the stage for annual dividend growth and continued low leverage. This discipline combined with a portfolio of diversified, high-quality assets and business relationships with experienced operators continue to be the key drivers of our business plan.
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These accounting principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and cause our reported net income to vary significantly from period to period. If actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect$2.4 billion. Equity on our consolidated resultsConsolidated Balance Sheet totaled $1.3 billion.
Dividends - Our Board of operations, liquidity and/or financial condition.
We consider an accounting estimate or assumption critical if:
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1. | the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and |
| |
2. | the impact of the estimates and assumptions on financial condition or operating performance is material. |
Our significant accounting policies and the associated estimates, judgments and the issuesDirectors approves a regular quarterly dividend which impact these estimates are as follows:
Valuations and Impairments
Our tenants and borrowers who operate SNFs derive their revenues primarily from Medicare, Medicaid and other government programs. Amounts paid under these government programs are subject to legislative and government budget constraints. From time to time, there may be material changes in government reimbursement. In the past, SNFs have experienced material reductions in government reimbursement.
The long-term health care industry has experienced significant professional liability claims which have resulted in an increase in the costis reflective of insurance to cover potential claims. In previous years, these factors have combined to cause a number of bankruptcy filings, bankruptcy court rulings and court judgments affecting our lessees and borrowers. In prior years, we have determined that impairment of certain of our investments had occurred as a result of these events.
We evaluate the recoverability of the carrying values of our propertiesexpected taxable income on a property-by-propertyrecurring basis. On a quarterly basis, we review our properties for recoverability when events or circumstances, including significant physical changesTaxable income is determined in the property, significant adverse changes in general economic conditions and significant deteriorations of the underlying cash flows of the property, indicate that the carrying amount of the property may not be recoverable. The need to recognize an impairment charge is based on estimated undiscounted future cash flows from a property compared to the carrying value of that property. If recognition of an impairment charge is necessary, it is measured as the amount by which the carrying amount of the property exceeds the fair value of the property.
For our mortgage and other notes receivable, we evaluate the estimated collectibility of contractual loan payments and general economic conditions on an instrument-by-instrument basis. On a quarterly basis, we review our notes receivable for ability to realize on such notes when events or circumstances, including the non-receipt of contractual principal and interest payments, significant deteriorations of the financial condition of the borrower and significant adverse changes in general economic conditions, indicate that the carrying amount of the note receivable may not be recoverable. If necessary, impairment is measured as the amount by which the carrying amount exceeds the fair value as measured by the discounted cash flows expected to be received under the note receivable or, if foreclosure is probable, the fair value of the collateral securing the note receivable.
The determination of fair value and whether a shortfall in operating revenues or the existence of operating losses is indicative of a loss in value that is other than temporary involves significant judgment. Our estimates consider all available evidence including, as appropriate, the present value of the expected future cash flows discounted at market rates, general economic conditions and trends, the duration of the fair value deficiency, and any other relevant factors. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results.
While we believe that the carrying amounts of our properties are recoverable and our notes receivable and other investments are realizable, it is possible that future events could require us to make significant adjustments or revisions to these estimates.
Revenue Recognition
We collect rent and interest from our tenants and borrowers. Generally, our policy is to recognize revenues on an accrual basis as earned. However, when we determine, based on insufficient historical collections and the lack of expected future collections, that rent or interest is not probable of collection until received, our policy is to recognize rental or interest income when assured, which we consider to be the period the amounts are collected. We identify investments as nonperforming if a required payment is not received within 30 days of the date it is due. This policy could cause our revenues to vary significantly from period to period. Revenue from minimum lease payments under our leases is recognized on a straight-line basis to the extent that future lease payments are considered collectible. Lease payments that depend on a factor directly related to future use of the property, such as an increase in annual revenues over base year revenues, are considered to be contingent rentals and are included in rental income when they are determinable and earned.
REIT Qualification
As part of the process of preparing our consolidated financial statements, significant management judgment is required to evaluate our complianceaccordance with REIT requirements. Our determinations are based on interpretation of tax laws, and our conclusions may have an impact on the income tax expense recognized. We believe that we have operated our business so as to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code and differs from net income for financial statements purposes determined in accordance with U.S. generally accepted accounting principles (“GAAP”). Our Board of Directors has historically directed the Company towards maintaining a strong balance sheet. Therefore, we consider the competing interests of short and long-term debt (interest rates, maturities and other terms) versus the higher cost of new equity, and we accept some level of risk associated with leveraging our investments. We intend to continue to operate in such a manner, but no assurance can be given that we will be able to so qualify at all times. Until September 30, 2016, we operated a TRS under a joint venture structured to comply with the provisions of the RIDEA through which we invested in facility operations managed by independent third-parties. On September 30, 2016, NHI and Bickford entered into a definitive agreement terminating the joint venture. In the past we recorded income tax expense or benefit with respect to the subsidiary which was taxed as a TRS under provisions similar to those applicable to regular corporations. Aside from such income taxes that may have been applicable to the taxable income in our TRS, we are not 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 our taxable income. This treatment substantially eliminates the “double taxation” (at the corporate and stockholder levels) that typically applies to corporate dividends. Our failure to continue to qualify under the applicable REIT qualification rules and regulations would cause us to owe state and federal income taxes and would have a material adverse impact on our financial position, results of operations and cash flows.
Principles of Consolidation
The consolidated financial statements include our accounts, the accounts of our wholly-owned subsidiaries and the accounts of joint ventures in which we own a majority voting interest with the ability to control operations and where no substantive participating rights or substantive kick-out rights have been granted to the noncontrolling interests. In addition, we consolidate a legal entity deemed to be a variable interest entity (“VIE”) when we determine that we are the VIE’s primary beneficiary. All material inter-company transactions and balances have been eliminated in consolidation.
We apply Financial Accounting Standards Board (“FASB”) guidance for our arrangements with VIEs which requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of the VIE. A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. We may change our assessment of a VIE due to events such as modifications of contractual arrangements that affect the characteristics or adequacy of the entity’s equity investments at risk and the disposal of all or a portion of an interest held by the primary beneficiary.
Real Estate Properties
Real property we develop is recorded at cost, including the capitalization of interest during construction. The cost of real property investments we acquire is allocated to net tangible and identifiable intangible assets based on their relative fair values. We make estimates as part of our allocation of the purchase price of acquisitions to the various components of the acquisition based upon the fair value of each component. For properties acquired in transactions accounted for as asset purchases, the purchase price allocation is based on the relative fair values of the assets acquired. Cost includes the amount of contingent consideration, if any, deemed to be probable at the acquisition date. Contingent consideration is deemed to be probable to the extent that a significant reversal in amounts recognized is not likely to occur when the uncertainty associated with the contingent consideration is subsequently resolved. The most significant components of our allocations are typically the allocation of fair value to land,
equipment, buildings and other improvements, and intangible assets, if any. Our estimates of the values of these components will affect the amount of depreciation and amortization we record over the estimated useful life of the property acquired or the remaining lease term.
Significant Operators
As discussed in Note 2 to the consolidated financial statements, we have four lessees (including their affiliated entities, which are the legal tenants) from whom we individually derive at least 10% of our rental income as follows (dollars in thousands):
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| | | | | | | | | | | | | | | | | |
| | | Original | | Rental Income | | | |
| | | Investment | | Year Ended December 31, | | | Lease |
| Asset Class | | Amount | | 2017 | | | 2016 | | | Renewal |
Holiday Retirement | ILF | | $ | 493,378 |
| | $ | 43,817 |
| 17% | | $ | 43,817 |
| 19% | | 2031 |
Senior Living Communities | EFC | | 547,262 |
| | 45,735 |
| 17% | | 40,332 |
| 17% | | 2029 |
Bickford Senior Living | ALF | | 460,245 |
| | 41,606 |
| 16% | | 30,732 |
| 13% | | Various |
National HealthCare Corporation | SNF | | 171,297 |
| | 37,467 |
| 14% | | 37,626 |
| 16% | | 2026 |
All others | Various | | 992,423 |
| | 96,502 |
| 36% | | 79,846 |
| 35% | | Various |
| | | $ | 2,664,605 |
| | $ | 265,127 |
|
| | $ | 232,353 |
|
| | |
| | | | | | | | | | | |
Straight-line rent of $7,397,000 and $8,965,000 was recognized from the Holiday lease for the years ended December 31, 2017 and 2016, respectively. Straight-line rent of $6,984,000 and $7,369,000 was recognized from the Senior Living lease for the years ended December 31, 2017 and 2016, respectively. Straight-line rent of $5,102,000 and $858,000 was recognized from the Bickford leases for the years ended December 31, 2017 and 2016, respectively. The increase in straight-line rent from Bickford reflects the extension of leases in the second quarter of 2017. For NHC, rent escalations are based on a percentage increase in revenue over a base year and do not give rise to non-cash, straight-line rental income.
Our operators report to us the results of their operations, which we in turn subject to further analysis as a means of monitoring potential concerns within our portfolio. In our most fundamental analyses, we will typically compute EBITDARM, a property level measure of our operators’ success, by eliminating the effects of the operator’s method of acquiring the use of the assets (interest and rent), its non-cash expenses (depreciation and amortization), expenses that are dependent on its level of success (income taxes), and also excluding the effect of the operator’s payment of its management fees, as those fees are contractually subordinate to our lease payment. The eliminations provide a comparable basis for assessing our various relationships.
EBITDARM attempts to tell a story in shorthand of the cash potential of a group of assets - for NHI this would be a senior housing community or a portfolio of communities. Social and other non-quantifiable benefits are disregarded. We rely on these, a careful balance sheet analysis, and other analytical procedures to guide us in making decisions and in managing our assets - our primary function as a REIT, from which flow the expected rewards of real estate ownership.
Typical among our operators is a varying lag in reporting to us the results of their operations. Across our portfolio, however, our operators can be counted on to have reported their results, at the latest, within ninety days of month’s end. We have identified EBITDARM as the most elemental barometer of success, based on results they have reported to us. From EBITDARM we calculate a lease coverage ratio (EBITDARM/Cash Rent), measuring the ability of the operator to meet its monthly rental obligation. The results are presented below on a trailing twelve-month basis, as of the quarters ended September 30, 2017, 2016 and 2015:
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| | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | EBITDARM/ Cash Rent | Number of Properties | | EBITDARM/ Cash Rent | Number of Properties | | EBITDARM/ Cash Rent | Number of Properties |
Senior Housing (SHO) | | | | | | | | |
| Need-Driven | 1.19x | 89 | | 1.20x | 80 | | 1.33x | 69 |
| Discretionary | 1.23x | 37 | | 1.26x | 36 | | 1.22x | 33 |
| Total SHO | 1.21x | 126 | | 1.23x | 116 | | 1.27x | 102 |
| | | | | | | | | |
Skilled Nursing | 2.52x | 71 | | 2.78x | 70 | | 3.09x | 65 |
Hospitals | 2.17x | 3 | | 2.62x | 3 | | 2.29x | 3 |
Medical Office | 4.79x | 2 | | 11.3x | 2 | | 7.72x | 2 |
Fluctuations in portfolio coverage are a result of market and economic trends, local market competition, and regulatory factors as well as the operational success of our tenants. While the coverages above can be seen as informational only, and we use the results of individual leases to inform our decision making with respect to our specific tenants, overall trends bear analysis. The decline in coverage in our SHO portfolio was driven primarily by changing contractual responsibility for coverages with the unwinding of our RIDEA structure in 2016 and by the inclusion of development properties in 2016 and 2017 among the population under consideration. Coverages in skilled nursing reflect changes in the operational structure of our largest skilled nursing tenant, a larger presence of new tenants within the population, and the renegotiation of certain leases resulting in the recognition of higher rental revenues by NHI. The decline in MOB coverage in 2017 followed the devastation of Hurricane Harvey along the Texas coast.
Presented below are coverages from our four largest tenants during the same periods described above. Trends discussed for our SNFs and ALFs incorporate relevant information for NHC and Bickford. Holiday undertook significant operational restructuring affecting 2017 that led to a slight downturn in trailing twelve-month coverage. Recent three-month results indicate a significant recovery toward previous occupancy levels. We regard SLC trends as within the range of normal expected deviation.
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| | | | | | | | |
| 2017 | | 2016 | | 2015 |
| EBITDARM/ Cash Rent | Number of Properties | | EBITDARM/ Cash Rent | Number of Properties | | EBITDARM/ Cash Rent | Number of Properties |
NHC | 3.61x | 42 | | 3.67x | 42 | | 3.91x | 42 |
Senior Living | 1.21x | 9 | | 1.22x | 8 | | 1.24x | 8 |
Bickford | 1.22x | 38 | | 1.19x | 37 | | 1.44x | 29 |
Holiday | 1.16x | 25 | | 1.19x | 25 | | 1.21x | 25 |
RIDEA
On September 30, 2016, NHI and Sycamore Street, LLC (“Sycamore”), an affiliate of Bickford entered into a definitive agreement terminating our joint venture which consisted of the ownership and operation of 35 properties and converting Bickford’s participation to a triple-net tenancy with assumption of existing leases and terms. Through September 30, 2016, NHI owned an 85% equity interest and Sycamore owned a 15% equity interest in our consolidated subsidiary, PropCo which owned 35 assisted living/memory care facilities, three new facilities and two facilities in development. The facilities had been leased to OpCo, in which NHI previously held a non-controlling 85% ownership interest. The facilities are managed by Bickford. The joint venture was structured to comply with the provisions of RIDEA. For the combined transaction, we recognized a gain of $1,657,000 on the sale of OpCo; we recognized $462,000 of income tax expense in applying a full valuation allowance to our state net operating loss carry-forwards on our Taxable REIT Subsidiary; Bickford’s non-controlling interest was de-recognized; and the difference between the fair value of NHI’s cost allocated to the redemption and the carrying amount of the 15% non-controlling interest was recorded as an adjustment to equity through additional-paid-in capital.
Investment Highlights
Since January 1, 2017, we have made or announced the following real estate and note investments ($ in thousands):
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| | | | | | | | | | |
| | Date | | Properties | | Asset Class | | Amount |
2017 | | | | | | | | |
Lease Investments | | | | | | | | |
Navion Senior Solutions | | February 2017 | | 2 | | SHO | | $ | 16,100 |
|
Prestige Care | | March 2017 | | 1 | | SHO | | 26,200 |
|
The LaSalle Group | | March 2017 | | 5 | | SHO | | 61,865 |
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The Ensign Group | | March 2017 | | 1 | | SNF | | 15,096 |
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Bickford Senior Living | | June 2017 | | 1 | | SHO | | 10,400 |
|
Acadia Healthcare | | July 2017 | | 1 | | HOSP | | 4,840 |
|
Senior Living Communities | | August 2017 | | 1 | | SHO | | 6,830 |
|
Marathon/Village Concepts | | October 2017 | | 1 | | SHO | | 7,100 |
|
Discovery Senior Living | | December 2017 | | 1 | | SHO | | 34,600 |
|
Navion Senior Solutions | | December 2017 | | 1 | | SHO | | 8,200 |
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| | | | | | | | |
Note Investments | | | | | | | | |
Bickford Senior Living | | January 2017 | | 1 | | SHO | | 14,000 |
|
Evolve Senior Living | | August 2017 | | 1 | | SHO | | 10,000 |
|
| | | | | | | | $ | 215,231 |
|
| | | | | | | | |
2018 | | | | | | | | |
The Ensign Group - lease investment | | January 2018 | | 1 | | SNF | | $ | 14,400 |
|
Bickford Senior Living - construction loan | | January 2018 | | 1 | | SHO | | 14,000 |
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| | | | | | | | $ | 28,400 |
|
Navion Senior Solutions
In two acquisitions, we acquired three assisted living/memory-care facilities totaling 118 units in North Carolina. In the first acquisition, on February 21, 2017, we paid $16,100,000, inclusive of $100,000 in closing costs and the funding of $207,000 in specified capital improvements for two assisted living/memory-care facilities totaling 86 units in Hendersonville, North Carolina. We leased the facilities to Navion Senior Solutions (“NSS,” previously known as Ravn Senior Solutions) for an initial lease term of 15 years plus renewal options. The initial annual lease rate is 7.35%, plus fixed annual escalators. For the two facilities acquired in February, we have additionally committed to NSS certain earnout payments contingent on reaching and maintaining certain performance metrics. As earned, the earnout payments, totaling $1,500,000, would be due in installments of up to $1,000,000 for performance measured as of December 31, 2018, with any subsequently earned cumulative unpaid amounts to be measured and due as earned for the periods ending December 31, 2019 and/or 2020. Upon funding, contingent payments earned will be added to the lease base.
On December 14, 2017, for $7,550,000, inclusive of $100,000 in closing costs, we acquired a third assisted living/memory-care facility totaling 32 units in Durham, North Carolina. We leased the facility to NSS for an initial lease term of 15 years plus renewal options. Additionally, the lease provides for lease incentives of up to $3,350,000 based upon the achievement of certain performance metrics, and we have committed $650,000 to an expansion program. The initial annual lease rate is 7.15%, plus fixed annual escalators. Payment of any incentives will be added to the lease base at the rate prevailing when funded. The Durham acquisition was incorporated into the existing master lease, which was extended for all properties through December 2032.
NSS’s relationship to NHI consists of its leasehold interests and purchase options and is considered a variable interest, analogous to a financing arrangement. NSS is structured to limit liability for potential damage claims, is capitalized for that purpose and is considered a VIE. Additionally, the master lease conveys to NHI an option to purchase a third facility currently operated by NSS.
Prestige
On March 10, 2017, we acquired a 102-unit assisted living community in Portland, Oregon for $26,200,000, inclusive of closing costs of $112,000. We leased the facility to Prestige Care (“Prestige”) under our existing master lease, which has a remaining lease term of 12 years plus renewal options. The lease provides for an initial annual lease rate of 7% plus annual escalators of 3.5% in years two through four and 2.5% thereafter. The acquisition was accounted for as an asset purchase.
In addition, we have committed to Prestige certain earnout payments contingent on reaching and maintaining specified performance metrics. If earned, the earnout payments, totaling $1,000,000, would be due in installments of up to $1,000,000 for performance measured as of December 31, 2017, with any subsequently earned cumulative unpaid amounts to be measured and due as earned for the period ending December 31, 2018. Upon funding, contingent payments earned will be added to the lease base.
The LaSalle Group
On March 16, 2017, we acquired five memory care communities totaling 223 units in Texas and Illinois for $61,800,000 plus closing costs of $65,000. We leased the facilities to The LaSalle Group (“LaSalle”) for an initial lease term of 15 years. The lease provides for an initial annual lease rate of 7% plus annual escalators of 3.5% in years two through three and 2.5% thereafter. The acquisition was accounted for as an asset purchase.
In addition, we have committed to LaSalle certain earnout payments contingent on reaching and maintaining certain performance metrics. As earned, the earnout payments, totaling $5,000,000, would be due in installments of up to $2,500,000 for performance measured as of December 31, 2018, with any subsequently earned cumulative unpaid amounts to be measured and due as earned for the trailing periods ending December 31, 2019 and/or 2020. Upon funding, contingent payments earned will be added to the lease base.
The Ensign Group
On March 24, 2017, we acquired from a developer a 126-bed skilled nursing facility in New Braunfels, Texas for a cash investment of $13,846,000 plus $1,250,000 contributed by the lessee, The Ensign Group (“Ensign”). The facility was then included under our existing master lease for the remaining lease term of 14 years plus renewal options. The initial lease rate is set at 8.35% subject to annual escalators based on prevailing inflation rates. The acquisition was accounted for as an asset purchase.
On January 12, 2018, NHI we acquired from a developer a 121-bed skilled nursing facility in Waxahachie, Texas for a cash investment of $14,400,000 plus $1,275,000 contributed by the lessee, Ensign. The facility will be included under our existing master lease with Ensign for the remaining lease term of 13 years plus renewal options. The initial lease rate is set at 8.2% subject to annual escalators based on prevailing inflation rates. The acquisition was accounted for as an asset purchase.
With the acquisition of the New Braunfels and Waxahachie properties, NHI has a continuing commitment to purchase, from the developer, two new skilled nursing facilities in Texas for approximately $28,000,000 which are newly developed and are leased to Legend Healthcare and subleased to Ensign. The fixed-price nature of the commitment creates a variable interest for NHI in the developer, whom NHI considers to lack sufficient equity to finance its operations without recourse to additional subordinated debt. The presence of these conditions causes the developer to be considered a VIE.
Bickford
As of December 31, 2017 our Bickford portfolio is structured as following (in thousands):
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| | | | | | | | | | | | | | | |
| Lease Expiration | |
| Sept / Oct 2019 | June 2023 | Sept 2027 | May 2031 | Total |
Number of Properties | 10 |
| 13 |
| 4 |
| 20 |
| 47 |
|
2017 Annual Contractual Rent | $ | 8,994 |
| $ | 10,809 |
| $ | 125 |
| $ | 16,576 |
| $ | 36,504 |
|
Straight Line Rent Adjustment | (347 | ) | 226 |
| 309 |
| 4,914 |
| 5,102 |
|
Total Revenues | $ | 8,647 |
| $ | 11,035 |
| $ | 434 |
| $ | 21,490 |
| $ | 41,606 |
|
| | | | | |
On June 1, 2017, we acquired an assisted living/memory-care facilitytotaling 60 units in Lansing, Michigan, for $10,400,000, inclusive of $200,000 in closing costs. Additionally, we have committed to the funding of $475,000 in specified capital improvements, which will be added to the lease base. We included this facility in a master lease to Bickford for a remaining term of 14 years plus renewal options. The initial lease rate is 7.25%, plus annual fixed escalators. We accounted for the acquisition as an asset purchase.
In April and August 2017, Bickford opened the last two of the five-facility development project announced in 2015. Newly-constructed facilities have an annual lease rate of 9% at completion, after six months of free rent. NHI has a right to future Bickford
acquisitions, development projects and refinancing transactions. Of these facilities, 35 were held in a RIDEA structure and operated as a joint venture until September 30, 2016, when NHI and Sycamore, an affiliate of Bickford, entered into a definitive agreement terminating the joint venture and converting Bickford’s participation to a triple-net tenancy with assumption of existing leases and terms. Through September 30, 2016, NHI owned an 85% equity interest and Sycamore owned a 15% equity interest in our consolidated subsidiary, PropCo. The facilities were leased to an operating company , in which NHI previously held a non-controlling 85% ownership interest. The facilities are managed by Bickford. Our joint venture was structured to comply with the provisions of RIDEA. On September 30, 2016, we unwound the joint venture underlying the RIDEA and reacquired Bickford’s share of its assets. Effective May 1, 2017, NHI and Bickford announced a new amended and restated master lease covering 20 Bickford properties. Under terms of the new master lease, the base term for these properties will now extend to May 2031. Additionally, effective June 28, 2017, the leases of thirteen properties acquired in June 2013 and initially set for expiration in June 2018 have been renewed and extended through June 2023.
In September 2017, upon collection of all past-due rents, we transitioned the lease of a 126-unit assisted living portfolio from our then tenant as the result of material noncompliance with lease terms. On September 30, 2017, we entered into a 10-year lease with Bickford, beginning October 1, 2017. The agreement provides for initial annual lease payments of $1,500,000 with a 4% escalator in effect for years two through four and 3% thereafter. Additionally, the lease provides a purchase option which opens immediately and is co-terminus with the lease. The option will be exercisable for the greater of $21,400,000 or at a capitalization rate of 8.5% on the forward 12-month rental at the time of exercise. The former lease provided for a contractual payment of $2,237,000 in 2016.
Acadia
In July 2017, we acquired a 10-acre parcel of land (“Property”) for $4,840,000. The Property was conveyed to NHI by a subsidiary of our tenant, Acadia Healthcare Company (“Acadia”), who is the lessee of NHI’s TrustPoint Hospital in Murfreesboro, Tennessee, which is situated on adjacent land. Our ground lease with Acadia covers a 10-year period and bears an initial rate of 7%, subject to escalation after the third year. Additionally, the lease confers a purchase option on the property, on which Acadia intends to construct a sister facility. The option opens in 2020, extends through June 2023, and is to be exercisable at our original purchase price. In connection with the ground lease, the window of Acadia’s existing purchase option on the TrustPoint Hospital facility was shifted from 2018 to 2020 to coincide with the option window on the Property. Of our total revenues, $2,537,000 and $2,392,000 were derived from Acadia for the years ended December 31, 2017 and 2016, respectively.
Evolve
On August 7, 2017, we extended a first mortgage loan of $10,000,000 to Evolve Senior Living (“Evolve”) to fund the purchase of a 40 unit memory care facility in New Hampshire. The loan provides for annual interest of 8% and a maturity of five years plus renewal terms at the option of the borrower. NHI has the option to purchase the facility at fair market value after year two of the loan.
Senior Living Communities
On August 25, 2017, we committed to fund up to $6,830,000 in upgrades covering identified needs within the nine independent living facilities operated by Senior Living. Amounts funded will be added to the lease base. No funding had occurred under the agreement as of December 31, 2017.
Marathon/Village Concepts
On October 15, 2017, we committed up to $7,100,000 to fund the expansion of our independent living community in Chehalis, Washington leased to Marathon Development and Village Concepts Retirement Communities (“Marathon”). Upon funding, incurred amounts will be added to the lease base. As of December 31, 2017, no funding had occurred under the agreement.
Discovery
On December 1, 2017, we acquired a 200-unit independent living facility in Tulsa, Oklahoma, for $34,600,000 including the assumption of a Fannie Mae mortgage with remaining balance of $18,311,000. The mortgage amortizes through 2025 when a balloon payment will be due, is subject to prepayment penalties until 2024, and bears interest at an annual rate of 4.6%. We leased the property to Discovery Senior Living (“Discovery”) at an initial lease rate of 7% with fixed annual escalators beginning in year two of the fifteen-year term. We have additionally committed up to $500,000 in capital improvements, which upon funding will be added to the lease base. The acquisition was accounted for as an asset purchase.
Potential Effects of Medicare Reimbursement
Our tenants who operate SNFs receive a significant portion of their revenues from governmental payors, primarily Medicare (federal) and Medicaid (states). Changes in reimbursement rates and limits on the scope of services reimbursed to skilled nursing facilities could have a material impact on the operators’ liquidity and financial condition. CMS released a rule outlining a 1% increase in their Medicare reimbursement for fiscal year 2018 beginning on October 1, 2017. We currently estimate that our borrowers and lessees will be able to withstand this nominal Medicare increase due to their credit quality, profitability and their debt or lease coverage ratios, although no assurances can be given as to what the ultimate effect that similar Medicare increases on an annual basis would have on each of our borrowers and lessees. According to industry studies, state Medicaid funding is not expected to keep pace with inflation. Federal legislative policies have been adopted and continue to be proposed that would reduce Medicare and/or Medicaid payments to SNFs. Any near-term acquisitions of skilled nursing facilities are planned on a selective basis, with emphasis on operator quality and newer construction.
Other Portfolio Activity
HSM Lease Extension
Effective as of May 1, 2017, we amended and extended our lease with Health Services Management (“HSM”) covering six skilled nursing facilities in Florida. The amended lease calls for $9,800,000 in first year cash rent, plus fixed annual escalators over a 12-year term. The new agreement replaced the lease set to expire September 30, 2017, which provided for a total cash rent of $7,241,000 in 2016.
Our leases are typically structured as “triple net leases” on single-tenant properties having an initial leasehold term of 10 to 15 years with one or more 5-year renewal options. As such, there may be reporting periods in which we experience few, if any, lease renewals or expirations. During the year ended December 31, 2017, except as noted above, we did not have any renewing or expiring leases.
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. Certain of our operators hold purchase options allowing them to acquire properties they currently lease from NHI. For options open or coming open in 2018, we are engaged in negotiations to continue as lessor or in some other capacity.
We adjust rental income for the amortization of payments recorded as the result of the eventual settlement of commitments and contingencies listed later in Item 7 as lease inducements. Amortization of these payments against revenues was $119,000, $40,000 and $40,000 for the years ended December 31, 2017, 2016 and 2015, respectively.
Tenant Non-Compliance
In October 2017, we issued a letter of forbearance to one of our tenants for a default on our lease terms involving coverage and liquidity ratios. Rent to the Company was current as of December 31, 2017. Lease revenues from the tenant and its affiliates comprise 3% of our rental income, and the related straight-line rent receivable was approximately $3,482,000 at December 31, 2017.
We continue to work with the tenant to resolve their defaults. In this effort, we have established a physical presence and visited specific touchpoints that concentrate on the tenant’s revenue and expenditure cycles, and we have identified potential efficiencies. The combination of monitoring and the redoubling of the operator’s efforts has yielded early (unaudited) results that indicate some improvement in collections, occupancy and margins, an attendant strengthening of operating ratios, and point the way to renewed profitability. With these developments, we continue to maintain a heightened vigilance toward the performance of the portfolio. No rent concessions have been offered to this tenant.
The defaults mentioned above typically give rise to considerations regarding the impairment or recoverability of the related assets, and we give additional attention to the nature of the default’s underlying causes. At this time, consequently, our assessment of likely undiscounted cash flows, calculated at the lowest level for which identifiable asset-specific cash flows are largely independent, reveals no basis for an impairment charge on the underlying real estate.
Real Estate and Mortgage Write-downs
Our borrowers and tenants experience periods of significant financial pressures and difficulties similar to those encountered by other health care providers. Governments at both the federal and state levels have enacted legislation to lower, or at least slow,
the growth in payments to health care providers. Furthermore, the cost of professional liability insurance has increased significantly during this same period. Since inception, a number of our facility operators and mortgage loan borrowers have undergone bankruptcy. Others have been forced to surrender properties to us in lieu of foreclosure or, for certain periods, have failed to make timely payments on their obligations to us.
We believe that the carrying amounts of our real estate properties are recoverable and that mortgage notes receivable are realizable and supported by the value of the underlying collateral. However, it is possible that future events could require us to make significant adjustments to these carrying amounts.
When present, tenant purchase options generally give the lessee an option to purchase the underlying property for consideration determined by i) a sliding base dependent upon the extent of appreciation in the property plus a specified proportion of any appreciation; ii) our acquisition costs plus a specified proportion of any appreciation; iii) an agreed capitalization rate applied to the current rental; or iv) our acquisition costs plus a profit floor plus a specified proportion of any appreciation.
Mortgage Loans
Bickford
We have the following note investments with Bickford:
|
| | | | | | | | | | | | | |
| Rate | | Maturity | | Commitment | | Drawn | | Location |
July 2016 | 9% | | 5 years | | 14,000,000 |
| | (11,096,000 | ) | | Illinois |
January 2017 | 9% | | 5 years | | 14,000,000 |
| | (4,462,000 | ) | | Michigan |
January 2018 | 9% | | 5 years | | 14,000,000 |
| | (1,490,000 | ) | | Virginia |
| | | | | $ | 42,000,000 |
| | $ | (17,048,000 | ) | | |
The promissory notes 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 subject property. Usual and customary covenants extend to the agreements, including the borrower’s obligation for payment of insurance and taxes. NHI has a purchase option on the properties at stabilization, whereby annual rent will be set with a floor of 9.55%, based on NHI’s total investment, plus fixed annual escalators.
Our loans to Bickford represent a variable interest as do our leases, which are considered analogous to financing arrangements. Bickford is structured to limit liability for potential claims for damages, is capitalized to achieve that purpose and is considered a VIE. On these and future loan development projects, Bickford as the borrower is entitled to up to $2,000,000 per project in incentive loan draws based upon the achievement of predetermined operational milestones, the funding of which will increase the principal amount and NHI's future purchase price and eventual NHI lease payment.
Evolve
In August 2017, we completed a first mortgage loan of $10,000,000 to Evolve for the purchase of a 40 unit memory care facility in New Hampshire. The loan provides for annual interest of 8% and a maturity of five years plus renewal terms at the option of the borrower. Terms of the loan grant NHI a 10% participation in the property’s appreciation during the period the loan is outstanding, and NHI also has the option to purchase the facility at fair market value after the second year of the loan. Our loan to Evolve represents a variable interest. Evolve is structured to limit liability for potential claims for damages, is capitalized to achieve that purpose and is considered a VIE.
Timber Ridge
In February 2015, we entered into an agreement to lend up to $154,500,000 to LCS-Westminster Partnership III LLP (“LCS-WP”), an affiliate of Life Care Services (“LCS”) . The loan agreement conveys a mortgage interest and facilitates the construction of Phase II of Timber Ridge at Talus (“Timber Ridge”), a Type-A Continuing Care Retirement Community in Issaquah, WA managed by LCS.
The loan takes the form of two notes under a master credit agreement. The senior note (“Note A”) totals $60,000,000 at a 6.75% interest rate with 10 basis-point escalators after year three, and has a term of 10 years. We have funded $53,622,000 of Note A as of December 31, 2017. Note A is interest-only and is locked to prepayment for three years. After year three, the prepayment penalty starts at 5% and declines 1% per year. The second note (“Note B”) is a construction loan for up to $94,500,000 at an annual interest rate of 8% and a five-year maturity and was fully funded as of December 31, 2017. We expect substantial repayment with new
resident entrance fees from the opening of Phase II in October, 2016. Repayment of Note B amounted to $92,547,000 as of December 31, 2017.
NHI has a purchase option on the entire Timber Ridge property for the greater of fair market value or $115,000,000 during a purchase option window of 120 days that will contingently open in year five or upon earlier stabilization of the development, as defined. The current basis of our investment in Timber Ridge loans, net of unamortized commitment fees, is $54,805,000, but we are obligated to complete the funding of Note A up to $60,000,000.
Other Note Activity
In June 2017 Traditions of Minnesota paid off the undiscounted balance of $4,256,000 on its mortgage note outstanding to NHI. With the early payoff, we recognized interest income of $922,000 related to a prepayment penalty and the retirement of the remaining unamortized discount.
Tenant Purchase Options
Most of our existing leases contain annual escalators in rent payments. For financial statement purposes, rental income with fixed contractual escalations is ordinarily recognized on a straight-line basis over the term of the lease. Certain of our operators hold purchase options allowing them to acquire properties they currently lease from NHI. For options open or coming open in 2018, we are engaged in preliminary negotiations to continue as lessor or in some other capacity. A summary of these tenant options to purchase senior housing communities, hospitals, medical office buildings and skilled nursing facilities is presented below ($ in thousands):
|
| | | | | | |
Asset | Number of | Lease | 1st Option | Current |
Type | Facilities | Expiration | Open Year | Cash Rent |
MOB | 1 | February 2025 | Open | $ | 300 |
|
HOSP | 1 | September 2027 | 2020 | $ | 2,398 |
|
SHO | 8 | December 2024 | 2020 | $ | 4,144 |
|
HOSP | 1 | March 2025 | 2020 | $ | 1,831 |
|
SHO | 3 | June 2025 | 2020 | $ | 4,961 |
|
SHO | 2 | May 2031 | 2021 | $ | 4,421 |
|
HOSP | 1 | June 2022 | 2022 | $ | 3,398 |
|
Various | 8 | — | Thereafter | $ | 4,061 |
|
When present, tenant purchase options generally give the lessee an option to purchase the underlying property for consideration determined by i) a sliding base dependent upon the extent of appreciation in the property plus a specified proportion of any appreciation; ii) our acquisition costs plus a specified proportion of any appreciation; iii) an agreed capitalization rate applied to the current rental; or iv) our acquisition costs plus a profit floor plus a specified proportion of any appreciation.
Results of Operations
The significant items affecting revenues and expenses are described below (in thousands):
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| | | | | | | | | | | | | | |
| Years ended December 31, | | Period Change |
| 2017 | | 2016 | | $ | | % |
Revenues: | | | | | | | |
Rental income | | | | | | | |
ALFs leased to Bickford | 36,504 |
| | 29,874 |
| | 6,630 |
| | 22.2 | % |
8 EFCs and 1 SLC leased to Senior Living Communities | 38,751 |
| | 32,964 |
| | 5,787 |
| | 17.6 | % |
ALFs leased to The LaSalle Group | 3,437 |
| | — |
| | 3,437 |
| | NM |
|
15 SNFs leased to Ensign Group transitioned from Legend | 19,025 |
| | 16,653 |
| | 2,372 |
| | 14.2 | % |
1 ALF and 2 SLCs leased to East Lake Capital Management | 9,382 |
| | 7,110 |
| | 2,272 |
| | 32.0 | % |
ALFs leased to Chancellor Health Care | 7,559 |
| | 5,558 |
| | 2,001 |
| | 36.0 | % |
SNFs leased to Health Services Management | 9,001 |
| | 7,241 |
| | 1,760 |
| | 24.3 | % |
2 ALFs and 3 SNFs leased to Prestige Senior Living | 5,293 |
| | 3,712 |
| | 1,581 |
| | 42.6 | % |
ILFs leased to an affiliate of Holiday Retirement | 36,420 |
| | 34,852 |
| | 1,568 |
| | 4.5 | % |
Other new and existing leases | 73,665 |
| | 72,191 |
| | 1,474 |
| | 2.0 | % |
| 239,037 |
| | 210,155 |
| | 28,882 |
| | 13.7 | % |
Straight-line rent adjustments, new and existing leases | 26,090 |
| | 22,198 |
| | 3,892 |
| | 17.5 | % |
Total Rental Income | 265,127 |
| | 232,353 |
| | 32,774 |
| | 14.1 | % |
Interest income from mortgage and other notes | | | | | | | |
Timber Ridge | 5,118 |
| | 8,249 |
| | (3,131 | ) | | NM |
|
Senior Living Management | 2,006 |
| | 444 |
| | 1,562 |
| | NM |
|
Bickford construction loans | 782 |
| | 69 |
| | 713 |
| | NM |
|
Senior Living Communities | 1,575 |
| | 997 |
| | 578 |
| | NM |
|
Mortgage and other notes paid off during the period | 1,104 |
| | 940 |
| | 164 |
| | 17.4 | % |
Other new and existing mortgages | 2,549 |
| | 3,106 |
| | (557 | ) | | (17.9 | )% |
Total Interest Income from Mortgage and Other Notes | 13,134 |
| | 13,805 |
| | (671 | ) | | (4.9 | )% |
Investment income and other | 398 |
| | 2,302 |
| | (1,904 | ) | | (82.7 | )% |
Total Revenue | 278,659 |
| | 248,460 |
| | 30,199 |
| | 12.2 | % |
Expenses: | | | | | | | |
Depreciation | | | | | | | |
ALFs operated by Bickford Senior Living | 12,024 |
| | 9,783 |
| | 2,241 |
| | 22.9 | % |
7 EFCs and 1 SLC leased to Senior Living Communities | 14,328 |
| | 12,821 |
| | 1,507 |
| | 11.8 | % |
ALFs leased to The LaSalle Group | 1,217 |
| | — |
| | 1,217 |
| | NM |
|
15 SNFs leased to Ensign Group transitioned from Legend | 5,665 |
| | 4,487 |
| | 1,178 |
| | 26.3 | % |
ALFs leased to Chancellor Health Care | 2,437 |
| | 1,767 |
| | 670 |
| | 37.9 | % |
Other new and existing assets | 31,502 |
| | 30,667 |
| | 835 |
| | 2.7 | % |
Total Depreciation | 67,173 |
| | 59,525 |
| | 7,648 |
| | 12.8 | % |
Interest expense and amortization of debt issuance costs and discounts | 46,324 |
| | 43,108 |
| | 3,216 |
| | 7.5 | % |
Payroll and related compensation expenses | 6,352 |
| | 4,272 |
| | 2,080 |
| | 48.7 | % |
Compliance, consulting and administrative fees | 2,514 |
| | 3,048 |
| | (534 | ) | | (17.5 | )% |
Non-cash share-based compensation expense | 2,612 |
| | 1,732 |
| | 880 |
| | 50.8 | % |
Loan and realty losses (recoveries) | — |
| | 15,856 |
| | (15,856 | ) | | NM |
|
Other expenses | 2,193 |
| | 2,152 |
| | 41 |
| | 1.9 | % |
| 127,168 |
| | 129,693 |
| | (2,525 | ) | | (1.9 | )% |
Income before equity-method investee, income tax benefit (expense), | | | | | | | |
investment and other gains and noncontrolling interest | 151,491 |
| | 118,767 |
| | 32,724 |
| | 27.6 | % |
Loss from equity-method investee | — |
| | (1,214 | ) | | 1,214 |
| | NM |
|
Loss on convertible note retirement | (2,214 | ) | | — |
| | (2,214 | ) | | NM |
|
Income tax (expense) benefit of taxable REIT subsidiary | — |
| | (749 | ) | | 749 |
| | NM |
|
Investment and other gains | 10,088 |
| | 35,912 |
| | (25,824 | ) | | (71.9 | )% |
Net income | 159,365 |
| | 152,716 |
| | 6,649 |
| | 4.4 | % |
Net income attributable to noncontrolling interest | — |
| | (1,176 | ) | | 1,176 |
| | (100.0 | )% |
Net income attributable to common stockholders | $ | 159,365 |
| | $ | 151,540 |
| | $ | 7,825 |
| | 5.2 | % |
| | | | | | | |
NM - not meaningful | | | | | | | |
Financial highlights of the year ended December 31, 2017, compared to 2016 were as follows:
Rental income increased $32,774,000, or 14.1%, primarily as a result of new investments funded in 2017 and 2016. The increase in rental income included a $3,892,000 increase in straight-line rent adjustments. Generally accepted accounting principles require rental income to be recognized on a straight-line basis over the term of the lease to give effect to scheduled rent escalators that are determinable at lease inception. Generally, future increases in rental income depend on our ability to make new investments whichthat meet our underwriting criteria.
Interest income from mortgagecriteria and other notes decreased $671,000, due to a combination ofwhere the continued repayment of our construction loan to Timber Ridge, interest income received on development loans to Bickford Senior Living and Senior Living Management and the recognition of an unamortized note discount related to a mortgage note which was paid in full during the second quarter. We expect total interest income from our loan portfolio to decrease with the full repayment of our $94,500,000 construction loan to Timber Ridge in January 2018.
Depreciation expense increased $7,648,000 primarily due to new real estate investments completed during 2017 and 2016.
Interest expense, including amortization of debt discount and issuance costs, increased $3,216,000 primarily as a result of an increase in 30-day LIBOR, which is the benchmark for our revolving debt, and the refinancing of $75,000,000 in September 2016 to an 8-year note with annual interest at 3.93%.
Payroll and related compensation expenses increased $2,080,000 due primarily to the addition of new corporate employees and the expense of certain incentive bonuses.
Investment and other gains for the year ended December 31, 2017 consist of $10,038,000 from the sale of marketable securities. For the year ended December 31, 2016, investment and other gains include $29,673,000 from the sale of marketable securities, $2,805,000 from the sale of two Texas skilled nursing facilities, $1,654,000 from the sale of an Idaho skilled nursing facility, $123,000 from the sale of a vacant land parcel in Alabama and $1,657,000 recorded as a gain on the sale of our 85% non-controlling interest in OpCo.
Loan and realty losses of $15,856,000 for the year ended December 31, 2016 relate to non-cash transactional write-offs involving the acquisition of eight skilled nursing facilities from Legend and transition of a total of 15 SNF leases to Ensign in the second quarter of 2016, and the non-cash write-off of straight-line rent receivable during the third quarter of 2016 resulting from a tenant’s material non-compliance with our lease terms which, as of October 1, 2017, NHI has transitioned to another tenant.
The significant items affecting revenues and expenses are described below (in thousands):
|
| | | | | | | | | | | | | | |
| Years ended December 31, | | Period Change |
| 2016 | | 2015 | | $ | | % |
Revenues: | | | | | | | |
Rental income | | | | | | | |
15 SNFs leased to Ensign Group transitioned from Legend | 15,660 |
| | 9,394 |
| | 6,266 |
| | 66.7 | % |
ALFs leased to Bickford | 29,874 |
| | 23,853 |
| | 6,021 |
| | 25.2 | % |
1 ALF and 2 SLCs leased to East Lake Capital Management | 7,110 |
| | 2,342 |
| | 4,768 |
| | NM |
|
8 EFCs and 1 SLC leased to Senior Living Communities | 32,964 |
| | 31,000 |
| | 1,964 |
| | 6.3 | % |
ALFs leased to Chancellor Health Care | 5,558 |
| | 3,738 |
| | 1,820 |
| | 48.7 | % |
ILFs leased to an affiliate of Holiday Retirement | 34,852 |
| | 33,351 |
| | 1,501 |
| | 4.5 | % |
SNFs leased to Fundamental Long Term Care1 | 2,682 |
| | 5,416 |
| | (2,734 | ) | | (50.5 | )% |
2 SNFs leased to Legend2 | 993 |
| | 3,127 |
| | (2,134 | ) | | (68.2 | )% |
Other new and existing leases | 80,462 |
| | 77,563 |
| | 2,899 |
| | 3.7 | % |
| 210,155 |
| | 189,784 |
| | 20,371 |
| | 10.7 | % |
Straight-line rent adjustments, new and existing leases | 22,198 |
| | 24,623 |
| | (2,425 | ) | | (9.8 | )% |
Total Rental Income | 232,353 |
| | 214,407 |
| | 17,946 |
| | 8.4 | % |
Interest income from mortgage and other notes | | | | | | | |
Timber Ridge | 7,976 |
| | 3,569 |
| | 4,407 |
| | NM |
|
Senior Living Communities | 976 |
| | 411 |
| | 565 |
| | NM |
|
Mortgage and other notes paid off during the period | 556 |
| | 2,189 |
| | (1,633 | ) | | (74.6 | )% |
Other new and existing mortgages | 4,297 |
| | 4,037 |
| | 260 |
| | 6.4 | % |
Total Interest Income from Mortgage and Other Notes | 13,805 |
| | 10,206 |
| | 3,599 |
| | 35.3 | % |
Investment income and other | 2,302 |
| | 4,335 |
| | (2,033 | ) | | (46.9 | )% |
Total Revenue | 248,460 |
| | 228,948 |
| | 19,512 |
| | 8.5 | % |
Expenses: | | | | | | | |
Depreciation | | | | | | | |
1 ALF, 2 SLCs and 2 EFCs leased to East Lake Capital | 2,495 |
| | 889 |
| | 1,606 |
| | NM |
|
15 SNFs leased to Ensign Group transitioned from Legend | 4,487 |
| | 2,102 |
| | 2,385 |
| | NM |
|
ALFs operated by Bickford Senior Living | 9,783 |
| | 7,669 |
| | 2,114 |
| | 27.6 | % |
ALFs leased to Chancellor Health Care | 1,767 |
| | 1,104 |
| | 663 |
| | 60.1 | % |
Other new and existing assets | 40,993 |
| | 41,359 |
| | (366 | ) | | (0.9 | )% |
Total Depreciation | 59,525 |
| | 53,123 |
| | 6,402 |
| | 12.1 | % |
Interest expense and amortization of debt issuance costs and discounts | 43,108 |
| | 37,629 |
| | 5,479 |
| | 14.6 | % |
Payroll and related compensation expenses | 4,272 |
| | 4,375 |
| | (103 | ) | | (2.4 | )% |
Compliance, consulting and professional fees | 3,048 |
| | 3,292 |
| | (244 | ) | | (7.4 | )% |
Non-cash share-based compensation expense | 1,732 |
| | 2,134 |
| | (402 | ) | | (18.8 | )% |
Loan and realty losses (recoveries) | 15,856 |
| | (491 | ) | | 16,347 |
| | NM |
|
Other expenses | 2,152 |
| | 2,167 |
| | (15 | ) | | (0.7 | )% |
| 129,693 |
| | 102,229 |
| | 27,464 |
| | 26.9 | % |
Income before equity-method investee, income tax benefit (expense), | | | | | | | |
investment and other gains and noncontrolling interest | 118,767 |
| | 126,719 |
| | (7,952 | ) | | (6.3 | )% |
Loss from equity-method investee | (1,214 | ) | | (1,767 | ) | | 553 |
| | 31.3 | % |
Income tax (expense) benefit of taxable REIT subsidiary | (749 | ) | | 707 |
| | (1,456 | ) | | NM |
|
Investment and other gains | 35,912 |
| | 24,655 |
| | 11,257 |
| | 45.7 | % |
Net income | 152,716 |
| | 150,314 |
| | 2,402 |
| | 1.6 | % |
Net income attributable to noncontrolling interest | (1,176 | ) | | (1,452 | ) | | 276 |
| | (19.0 | )% |
Net income attributable to common stockholders | $ | 151,540 |
| | $ | 148,862 |
| | $ | 2,678 |
| | 1.8 | % |
| | | | | | | |
NM - not meaningful | | | | | | | |
1 2015 includes two Texas SNFs disposed April 2016 | | | | | | | |
2 Disposed May 2016 | | | | | | | |
Financial highlights of the year ended December 31, 2016, compared to 2015 were as follows:
Rental income increased $17,946,000, or 8.4%, primarily as a result of new investments funded in 2015 and 2016. The increase in rental income included a $2,425,000 decrease in straight-line rent adjustments. Generally accepted accounting principles require rental income to be recognized on a straight-line basisspreads over the term of the lease to give effect to scheduled rent escalators that are determinable at lease inception. Generally, future increases in rental income depend on our ability to make new investments which meet our underwriting criteria.
Interest income from mortgage and other notes increased $3,599,000 primarily due to advances made on our mortgage and construction loan commitment to the Timber Ridge entrance fee community as described in Investment Highlights, partially offset by lower interest income from notes paid off during 2016. We expect total interest income from our loan portfolio to decrease as repayments of our $94,500,000 construction loan to Timber Ridge began in October 2016, and the loan was substantially repaid during 2017. Repayments amounted to $61,289,000 as of December 31, 2016, plus an additional $7,304,000 through February 15, 2017.
Interest income from our loan portfolio is also subject to decrease due to normal maturities, scheduled principal amortization and early payoffs of individual loans.
Investment income decreased primarily due to our decision to sell 1,043,800 shares of LTC, Inc. common stock.
Depreciation expense increased $6,402,000 primarily due to new real estate investments completed during 2015 and 2016.
Interest expense, including amortization of debt issuance costs and discounts, increased $5,479,000 primarily as a result of the timing and amount of new borrowings and our strategic focus to refinance short-term borrowings on our revolving credit facility at variable interest rates with long-term debt at fixed rates. This strategy helps to mitigate the risk of rising interest rates and locks in the investment spread between our lease revenue and our cost of equity and debt capital.
Loan and realty losses of $15,856,000 relate to non-cash transactional write-offs involving the acquisition of eight skilled nursing facilities from Legend and transition ofcapital on a total of 15 SNF leases to Ensign in the second quarter of 2016, and the non-cash write-off of straight-line rent receivable during the third quarter of 2016 resulting from a tenant’s material non-compliance with our lease terms and our planned transition to another tenant or to market the properties.
The loss from equity method investee of $1,214,000 reflects our pro rata portion of the investee’s net loss for 2016 as described earlier in our discussion of our joint venture with a Bickford affiliate which was terminated on September 30, 2016.
Investment and other gains includes $29,673,000 from the sale of marketable securities, $2,805,000 from the sale of two Texas skilled nursing facilities in May 2016, $1,654,000 from the sale of an Idaho skilled nursing facility in March 2016, $123,000 from the sale of a vacant land parcel in Alabama and $1,657,000 recorded as a gain on the sale of our 85% non-controlling interest in OpCo.
Liquidity and Capital Resources
Sources and Uses of Funds
Our primary sources of cash include rent payments, principal and interest payments on mortgage and other notes receivable, interest and dividends received on our marketable securities, proceeds from the sales of real property, net proceeds from offerings of equity securities and borrowings from our term loans and revolving credit facility. Our primary uses of cash include debt service payments (both principal and interest), new investments in real estate and notes, dividend distributionsleverage neutral basis will generate sufficient returns to our shareholders and general corporate overhead.
These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows as summarized below (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | One Year Change | | Year Ended | | One Year Change |
| 12/31/2017 | | 12/31/2016 | | $ | | % | | 12/31/2015 | | $ | | % |
Cash and cash equivalents at beginning of period | $ | 4,636 |
| | $ | 13,090 |
| | $ | (8,454 | ) | | NM |
| | 3,091 |
| | $ | 9,999 |
| | 323.5 | % |
Net cash provided by operating activities | 197,325 |
| | 177,219 |
| | 20,106 |
| | 11.3 | % | | 164,425 |
| | 12,794 |
| | 7.8 | % |
Net cash used in investing activities | (163,846 | ) | | (329,838 | ) | | 165,992 |
| | NM |
| | (136,326 | ) | | (193,512 | ) | | 141.9 | % |
Net cash (used in) provided by financing activities | (35,052 | ) | | 144,165 |
| | (179,217 | ) | | NM |
| | (18,100 | ) | | 162,265 |
| | (896.5 | )% |
Cash and cash equivalents at end of period | $ | 3,063 |
| | $ | 4,636 |
| | $ | (1,573 | ) | | (33.9 | )% | | 13,090 |
| | $ | (8,454 | ) | | NM |
|
Operating Activities – Net cash provided by operating activities for the year ended December 31, 2017 increased primarily as a result of the collection of lease and interest payments on new real estate investments completed during 2017 and 2016.
Investing Activities – Net cash flows used in investing activities for the year ended December 31, 2017 decreased primarily duestockholders. We do not expect to $225,646,000 of investments in real estate and notes, which were partially offset by collection of notes receivable, sales of marketable securities and certain real estate assets, compared with $486,788,000 of investments in real estate and notes in 2016 that were similarly offset by collections.
Financing Activities – The use of cash in financing activities resulted primarily from the excess of dividend payments over proceeds from equity offerings, the impact of other large transactions primarily being the restructuring of our debt.
Liquidity
At December 31, 2017, our liquidity was strong, with $332,063,000 available in cash and borrowing capacity on our revolving credit facility.
We began liquidating our position in LTC Properties, Inc. (“LTC”) common stock in the fourth quarter of 2015, realizing cumulative total proceeds of $109,318,000 through December 31, 2017. We realized taxable gains of $10,038,000, $29,673,000, and $23,529,000 for the years ended December 31, 2017, 2016 & 2015 respectively.
Our ATM program, discussed below, represents an additional source of liquidity. Traditionally, debt financing and cash resulting from operating and investing activities, which are derived from proceeds of lease and note collections, loan payoffs and the recovery of previous write-downs, have been usedutilize borrowings to satisfy our operational and investing needs and to provide a return to our shareholders. Those operational and investing needs reflect the resources necessary to maintain and cultivate our funding sources and have generally fallen into three categories: debt service, REIT operating expenses, and new real estate and note investments.
In June 2016, we completed an at-the market (“ATM”) equity offering. The following table summarizes the issuances on our ATM as of December 31, 2017.
|
| | | | | | | | |
| Shares | Weighted Average Share Price | Net Proceeds |
June 2016 | 714,666 |
| $ | 71.30 |
| $ | 50,189,000 |
|
August - September 2016 | 680,976 |
| $ | 80.51 |
| $ | 54,001,000 |
|
March 2017 | 1,123,184 |
| $ | 72.31 |
| $ | 79,722,000 |
|
August - October 2017 | 537,977 |
| $ | 80.20 |
| $ | 42,515,000 |
|
| 3,056,803 |
| | $ | 226,427,000 |
|
The use of funds from our ATM and the liquidation of our position in LTC common stock effected a rebalancing of our leverage in response to our acquisitions and has kept our options flexible for further expansion. We continue to explore various other funding sources including bank term loans, convertible debt, traditional equity placement, unsecured bonds and senior notes, debt private placement and secured government agency financing. We view our ATM program as an effective way to match-fund our smaller acquisitions by exercising control over the timing and size of transactions and achieving a more favorable cost of capital as compared to larger follow-on offerings.
We expect that borrowings on our revolving credit facility, borrowings on term loans, and our ATM program will allow us to continue to make real estate investments during 2018. However, we anticipate that our historically low cost of debt capital will continue to rise in the near to mid-term, as the federal government prolongs the upward transitioning of the federal funds rate. In response to the changed interest-rate environment, we may find it advisable within the coming year to acquire a public credit rating as a tool for managing our interest costs.
We anticipate continued use of proceeds from the ATM program for general corporate purposes, which may include future acquisitions and repayment of indebtedness, including borrowings under our credit facility. The ATM offerings have been made pursuant to a prospectus supplement dated February 17, 2015 and a related prospectus dated March 18, 2014, as well as the new prospectus, effective February 22, 2017, filed as part of our automatic “shelf” registration statement on Form S-3 and updating our previous filings with the Securities and Exchange Commission.
In August 2017, we amended our unsecured $800,000,000 credit facility, scheduled to mature in June 2020, consolidated our three bank term loans into a single $250,000,000 term loan and extended the maturity of the term loan and $550,000,000 revolving credit facility to August 2022. The facility provides for floating interest on the term loan and revolver to be initially set at 30-day LIBOR plus 130 and 115 bps, respectively, based on current leverage metrics. Additional significant amendments to the facility include the refinement of the collateral pool, imposition of a 0% floor to the LIBOR base, movement from the payment of unused commitment fees to a facility fee of 20 basis pointsdividends and the composition of creditors participating in our loan syndication. The employment of interest rate swaps to fix LIBOR on our bank term debt leaves only our revolving credit facility exposed to variable rate risk. Our swaps and the financial instruments to which they relate are described in the table below, under the caption “Interest Rate Swap Agreements.” Also in August 2017, we amended our private placement term loan agreements to largely conform those agreements with our bank credit facility.
Concurrent with the amendments to our credit facility and with the exception of specific debt-coverage ratios, covenants pertaining to our private placement term loans were generally conformed with those governing the credit facility. We generally accounted for these transactions and related fees as modifications of the debt, recording $3,806,000 in fees to creditors, $478,000 in third party fees and wrote off $407,000 of unamortized debt issuance costs pertaining to members of the lending syndicate whose roles in the amended facility had been reduced or eliminated.
During the year ended December 31, 2017, we undertook targeted open-market repurchases of certain of our convertible notes having an original face amount of $200,000,000. Payments ofproject that cash negotiated in the transactions were dependent on prevailing market conditions, our liquidity requirements, contractual restrictions, individual circumstances of the selling parties and other factors. The total balance of notes repurchased and retired through December 31, 2017, net of unamortized original issue discount and associated issuance costs, was $50,785,000, resulting in the recognition of losses on the note retirements for the year ended December 31, 2017, of $2,214,000, calculated as the excess of cash paid over the carrying value of that portion of the notes accounted for as debt. For the retirement of that portion of the outlay allocated to the fair value of the conversion feature, $7,930,000 was charged to additional paid-in capital during the year ended December 31, 2017.
Generally, the targeted noteholders have been and will continue to be large institutional investors who may also hold a position in our common stock. The focus on “sophisticated investors,” will likely restrict the extent of the program to only a portion of our noteholders. Beginning with favorable market conditions, the circumstances enumerated above outline when,flows from time to time, we might expect to find the climate favorable for us to negotiate a fair price with these stakeholders. We expect to extend the targeted repurchase program to allow willing sellers the opportunity to participate, though we anticipate that the continuity of the buy-backs will likely be affected by quarterly and event-specific blackout periods, if any. Critical to our ability to prolong the targeted repurchase program is the necessity that we continue to be in compliance with all restrictive covenants embodied in our institutional debt. Should we be successful in negotiating further buy-backs of our notes, we expect each transaction to stand on its own merits as either an open-market or privately negotiated transaction.
To mitigate our exposure to interest rate risk, we have in place the following interest rate swap contracts in place to hedge against floating rates on our $250,000,000 bank term loan as of December 31, 2017 (dollars in thousands):
|
| | | | | | | | | | | | | | |
Date Entered | | Maturity Date | | Fixed Rate | | Rate Index | | Notional Amount | | Fair Value |
May 2012 | | April 2019 | | 3.29% | | 1-month LIBOR | | $ | 40,000 |
| | $ | 159 |
|
June 2013 | | June 2020 | | 3.86% | | 1-month LIBOR | | $ | 80,000 |
| | $ | (227 | ) |
March 2014 | | June 2020 | | 3.91% | | 1-month LIBOR | | $ | 130,000 |
| | $ | (520 | ) |
For instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative has been reported as a component of other comprehensive income (“OCI”), and reclassified into earnings in the same period, or periods, during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness have been recognized in earnings. Hedge ineffectiveness related to our cash flow hedges, which is reported in current period earnings as interest expense, was not significant for the two years ended December 31, 2016 and 2015. With the amendment of our bank credit facility in August 2017, discussed above, the introduction to the debt instrument of a LIBOR floor not present in the hedges resulted in hedge inefficiency of approximately $353,000 for the year ended December 31, 2017, which we credited to interest expense.
In the first quarter of 2018, we intend to adopt ASU 2017-12 Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, among whose provisions is a change in the timing and income statement line item for ineffectiveness related to cash flow hedges. The transition method is a modified retrospective approach that will require the Company to recognize the cumulative effect of initially applying the ASU as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year in which we adopt the update. The primary provision in the ASU requiring an adjustment to our beginning retained earnings is the change in timing and income statement line item for ineffectiveness related to cash flow hedges. As a result of the transition guidance provided in the ASU, as of January 1, 2018, cumulative ineffectiveness as adjusted for any prior off-market cashflow hedgesoperations will be reclassified out of beginning retained earnings and into accumulated other comprehensive income. Upon adoption ofadequate to fund dividends at the ASU, a better alignment of the Company’s financial reporting for hedging activities with the economic objectives of those activities should result.current rate.
We periodically refinance the borrowings on our revolving credit facility through the ATM and longer-term debt instruments. We consider secured debt from U.S. Govt. agencies, including HUD, private placements of unsecured debt, and public offerings of debt and equity. We anticipate that our historically low cost of debt capital will rise in the near to mid-term, as the federal government continues its upward transitioning of the Federal funds rate.
If we modify or replace existing debt, we would incur debt issuance costs. These fees would be subject to amortization over the term of the new debt instrument and may result in the write-off of fees associated with debt which has been replaced or modified. Sustaining long-term dividend growth will require that we consider all forms of capital mentioned above, with the goal of maintaining a low-leverage balance sheet as mitigation against potential adverse changes in the business of our tenants and borrowers.
We intend to comply with REIT dividend requirements that we distribute at least 90% of our annual taxable income for the year endingended December 31, 20172023 and thereafter. Historically, the Company has distributed at least 100% of annual taxable income. Dividends declared for the fourth quarter of each fiscal year are paid by the end of the following January and are, with some exceptions, treated for tax purposes as having been paid in the fiscal year just ended as provided in IRSInternal Revenue Service Code Sec.Section 857(b)(8). We declare special
Our dividends when we compute our REIT taxable income in an amount that exceeds our regular dividendsper share for the fiscal year.last three years are as follows: | | | | | | | | | | | | | | |
2023 | | 2022 | | 2021 |
$ | 3.60 | | | $ | 3.60 | | | $ | 3.8025 | |
Share Repurchase Plan - Beginning in April 2022, our Board of Directors has authorized a stock repurchase plan. No common stock was repurchased under this plan during 2023. During the year ended December 31, 2022, we repurchased through open market transactions 2,468,354 shares of common stock for an average price of $61.56 per share, excluding 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 “Retained earnings” in the Consolidated Balance Sheet ArrangementsSheet.
On February 16, 2024, our Board of Directors renewed the stock 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 stock repurchase plan is effective for a period of one year and does not require us to repurchase any specific number of shares. It 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.
Shelf Registration Statement - We currently have no outstanding guarantees. Asan automatic shelf registration statement on file with the Securities and Exchange Commission that allows the Company to offer and sell to the public an unspecified amount of common stock, preferred stock, debt securities, warrants and/or units at prices and on terms to be announced when and if such securities are offered. The details of any future offerings, along with the use of proceeds from any securities offered, will be described in Note 1a prospectus supplement or other offering materials, at the time of offering. Our shelf registration statement expires in March 2026.
At-the-Market (ATM) Equity Program - We maintain an ATM equity program which allows us to sell our common stock directly into the consolidated financial statements, our leases, mortgagesmarket and other notes receivable with certain entities represent variable interests in those enterprises. However, because we do not control these entities, nor do we have any role in their day-to-day management, we are not their primary beneficiary. Except as discussed belowentered into an ATM equity offering sales agreement pursuant to which the Company may sell, from time to time, up to an aggregate sales price of $500.0 million of the Company’s common shares. No shares were issued under Contractual Obligations and Contingent Liabilities, we have no further material obligations arising from our transactions with these entities, and we believe our maximum exposure to loss atthe ATM equity program during the years ended December 31, 2017, due2023 and 2022.
Our use of ATM proceeds is to this involvement would be limitedallow us to rebalance our leverage in response to our contractual commitmentsacquisitions and contingent liabilitieskeeps our options flexible for further expansion. We have historically used proceeds from the ATM equity program for general corporate purposes, which may include future acquisitions and repayment of indebtedness, including borrowings under our credit facility. We view our ATM program as an effective way to match-fund our smaller acquisitions by exercising control over the amounttiming and size of our current investments with them, as detailed further in in Notes 1, 2, 3transactions and 6 to the consolidated financial statements.
In March 2014 we issued $200,000,000 of convertible notes, the conversion feature being intended to broaden the Company’s credit profile and as a means to obtainachieving a more favorable coupon rate. For this featurecost of capital as compared to larger follow-on offerings.
Material Cash Requirements
We had approximately $18.8 million in cash and cash equivalents on hand and $427.0 million in availability under our unsecured revolving credit facility as of January 31, 2024.Our expected material cash requirements for the twelve months ended December 31, 2024 and thereafter consist of long-term debt maturities; interest on long-term debt; and contractually obligated expenditures. We expect to meet our short-term liquidity needs largely through cash generated from operations and borrowings under our unsecured revolving credit facility (refer to the Unsecured Bank Credit Facility discussion above) and sales from real estate investments, although we calculate the dilutive effect using market
prices prevailing over the reporting period. Because the dilution calculation is market-driven, and per share guidancemay choose to seek alternative sources of liquidity. Should we provide is based on diluted amounts, the theoretical effects of the conversion feature result in per share unpredictability.
Additional disclosure requirements also give widely ranging results depending on market price variability. The notes will be freely convertiblehave additional liquidity needs, we believe that we could access long-term financing in the last six months of their contractual life, beginning in the fourth quarter of 2020; however, generally accepted accounting principles require us to periodically report the amount by which the notes’ convertible value exceeds their principal amount, without regard to the current availability of the conversion feature. Further, the mechanics of the calculation require the use of an end-of-period stock price, so that using that amount for the remaining notes outstanding of $147,575,000 at December 31, 2017, delivers an excess of $10,776,000, whereas the use of another price point would give a different result.debt and equity capital markets.
The conversion feature is generally available to the noteholders entering the last six months of the notes’ term but may also become actionable if the market price of NHI’s common stock should, for 20 of 30 consecutive trading days within a calendar quarter, sustain a level in excess of 130% of the adjusted conversion price, or $91.35 per share, down from $93.55 per share, initially. The notes are “optional net-share settlement” instruments, meaning that NHI has the ability and intent to settle the principal amount of the indebtedness in cash, with possible dilutive share issuances for any excess, at NHI’s option. Settlement of the notes requires management to allocate the consideration we ultimately pay between the debt component and the equity conversion feature as though they were separate instruments. The allocation is effected by valuing the debt component first, with any remainder allocated to the conversion feature. Amounts expended to settle the notes will be recognized first as a settlement of the notes at par and then will be recognized in income to the extent the portion allocated to the debt instrument differs from par value. The remainder of the allocation, if any, will be treated as settlement of equity and adjusted through our paid in capital account.
Contractual Obligations
As of December 31, 2017, our contractual payment obligations were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Debt, including interest1 | $ | 1,425,101 |
| | $ | 44,168 |
| | $ | 276,452 |
| | $ | 787,572 |
| | $ | 316,909 |
|
Real estate purchase liabilities | 42,000 |
| | 14,000 |
| | 28,000 |
| | — |
| | — |
|
Construction commitments | 24,186 |
| | 24,186 |
| | — |
| | — |
| | — |
|
Loan commitments | 33,204 |
| | 33,204 |
| | — |
| | — |
| | — |
|
| $ | 1,524,491 |
| | $ | 115,558 |
| | $ | 304,452 |
| | $ | 787,572 |
| | $ | 316,909 |
|
1 Interest is calculated based on the weighted average interest rate of outstanding debt balancesfollowing table summarizes information as of December 31, 2017. The calculation also includes a commitment fee2023 related to our material cash requirements ($ in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Total | | Twelve Months Ended December 31, 2024 | | Thereafter |
| | | | | | |
Debt maturities | | $ | 1,146,241 | | | $ | 75,425 | | | $ | 1,070,816 | |
Interest payments | | 95,112 | | | 54,966 | | | 40,146 | |
Construction and loan commitments | | 44,958 | | | 15,213 | | | 29,745 | |
| | $ | 1,286,311 | | | $ | 145,604 | | | $ | 1,140,707 | |
| | | | | | |
Our debt maturities in 2024 are comprised primarily of .20%.private placement notes of $75.0 million due in September 2024.
We believe our current liquidity position, supplemented by our ability to generate positive cash flows from operations in the future, and our low net leverage will be sufficient to meet all of our short-term and long-term financial commitments.
Loan and Development Commitments and Contingencies
The following tables summarize information as of December 31, 20172023 related to our outstanding commitments and contingencies which are more fully described in the notes to the consolidated financial statements.statements ($ in thousands):
|
| | | | | | | | | | | | | | | |
| Asset Class | | Type | | Total | | Funded | | Remaining |
Loan Commitments: | | | | | | | | | |
Life Care Services Note A | SHO | | Construction | | $ | 60,000,000 |
| | $ | (53,622,000 | ) | | $ | 6,378,000 |
|
Bickford Senior Living | SHO | | Construction | | 28,000,000 |
| | (15,558,000 | ) | | 12,442,000 |
|
Senior Living Communities | SHO | | Revolving Credit | | 15,000,000 |
| | (616,000 | ) | | 14,384,000 |
|
| | | | | $ | 103,000,000 |
| | $ | (69,796,000 | ) | | $ | 33,204,000 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Class | | Type | | Total | | Funded | | Remaining1 |
Loan Commitments: | | | | | | | | | |
Encore Senior Living | SHO | | Construction | | $ | 50,725 | | | $ | (49,846) | | | $ | 879 | |
Senior Living | SHO | | Revolving Credit | | 20,000 | | | (16,250) | | | 3,750 | |
Timber Ridge OpCo | SHO | | Working Capital | | 5,000 | | | — | | | 5,000 | |
Watermark Retirement | SHO | | Working Capital | | 5,000 | | | (2,976) | | | 2,024 | |
Montecito Medical Real Estate | MOB | | Mezzanine Loan | | 50,000 | | | (20,255) | | | 29,745 | |
| | | | | $ | 130,725 | | | $ | (89,327) | | | $ | 41,398 | |
In addition to smaller ongoing renovation commitments which will be included in the lease base when funded, in 2014 we provided a $15,000,000 revolving line1As of credit to Senior Living, the maturity of which mirrors the 15-year termDecember 31, 2023, $11,653 of the master lease also dating from 2014. While borrowingsfunding obligations are usedexpected to be payable within 12 months with the Senior Living portfolioremaining commitment due between three to finance construction projects, including building additional units, up to $5,000,000 of the facility may be used to meet general working-capital needs. In March 2016, we extended two additional mezzanine loans totaling $14,000,000 to affiliates of Senior Living, to partially fund construction of a 186-unit senior living campus on Daniel Island in South Carolina.five years.
See Note 34 to theour consolidated financial statements for full details of our loan commitments. As provided above, loans funded do not include the effects of discounts or commitment fees. LCS has been repaying its constructionThe credit loss liability for unfunded loan and indications are that additional draws on Note A in 2018 will not result in full funding under terms of the agreement. Funding of the promissory note commitment to Bickford is expected to continue monthly through 2018.
|
| | | | | | | | | | | | | | | |
| Asset Class | | Type | | Total | | Funded | | Remaining |
Development Commitments: | | | | | | | | | |
Legend/The Ensign Group | SNF | | Purchase | | $ | 56,000,000 |
| | $ | (14,000,000 | ) | | $ | 42,000,000 |
|
East Lake/Watermark Retirement | SHO | | Renovation | | 10,000,000 |
| | (5,900,000 | ) | | 4,100,000 |
|
Santé Partners | SHO | | Renovation | | 3,500,000 |
| | (2,621,000 | ) | | 879,000 |
|
Bickford Senior Living | SHO | | Renovation | | 2,400,000 |
| | (122,000 | ) | | 2,278,000 |
|
East Lake Capital Management | SHO | | Renovation | | 400,000 |
| | — |
| | 400,000 |
|
Senior Living Communities | SHO | | Renovation | | 6,830,000 |
| | (970,000 | ) | | 5,860,000 |
|
Discovery Senior Living | SHO | | Renovation | | 500,000 |
| | — |
| | 500,000 |
|
Woodland Village | SHO | | Renovation | | 7,450,000 |
| | (762,000 | ) | | 6,688,000 |
|
Chancellor Health Care | SHO | | Construction | | 650,000 |
| | (62,000 | ) | | 588,000 |
|
Navion Senior Solutions | SHO | | Construction | | 650,000 |
| | — |
| | 650,000 |
|
| | | | | $ | 88,380,000 |
| | $ | (24,437,000 | ) | | $ | 63,943,000 |
|
We remain obligated to purchase, from a developer, three new skilled nursing facilities in Texas for $42,000,000 which are leased to Legend and subleased to Ensign.
|
| | | | | | | | | | | | | | | |
| Asset Class | | Type | | Total | | Funded | | Remaining |
Contingencies: | | | | | | | | | |
Bickford / Sycamore | SHO | | Lease Inducement | | $ | 14,000,000 |
| | $ | (2,250,000 | ) | | $ | 11,750,000 |
|
East Lake Capital Management | SHO | | Lease Inducement | | 8,000,000 |
| | — |
| | 8,000,000 |
|
Navion Senior Solutions | SHO | | Lease Inducement | | 4,850,000 |
| | — |
| | 4,850,000 |
|
Prestige Care | SHO | | Lease Inducement | | 1,000,000 |
| | — |
| | 1,000,000 |
|
The LaSalle Group | SHO | | Lease Inducement | | 5,000,000 |
| | — |
| | 5,000,000 |
|
| | | | | $ | 32,850,000 |
| | $ | (2,250,000 | ) | | $ | 30,600,000 |
|
Contingent payments related to the five Bickford development properties constructed in 2016 and 2017 include a licensure incentive of $250,000 per property. Additionally, each property is subject to a three-tiered operator incentive schedule paying up to an additional $1,750,000, based on the attainment of certain performance metrics. As funded, these payments are added to the lease base and amortized against rental income.
In connection with our July 2015 lease to East Lake of three senior housing properties, NHI has committed to certain lease inducement payments of $8,000,000 contingent on reaching and maintaining certain metrics, which have been assessed as not probable of payment and which we have not recorded on our balance sheetcommitments was $0.3 million as of December 31, 2017. We are unaware of circumstances that would change2023 and is estimated using the same methodology as our initial assessment as to the contingent lease incentives. Not included in the above table is a seller earnout of $750,000, which was recorded on our consolidated balance sheet within accounts payablefunded mortgage and other accrued expensesnotes receivable based on the estimated amount that we expect to fund.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Class | | Type | | Total | | Funded | | Remaining1 |
Development Commitments: | | | | | | | | | |
Woodland Village | SHO | | Renovation | | $ | 7,515 | | | $ | (7,425) | | | $ | 90 | |
Navion Senior Solutions | SHO | | Renovation | | 3,500 | | | (2,059) | | | 1,441 | |
Vizion Health | SHO | | Renovation | | 2,000 | | | (250) | | | 1,750 | |
SHOP | ILF | | Renovation | | 1,500 | | | (1,221) | | | 279 | |
| | | | | $ | 14,515 | | | $ | (10,955) | | | $ | 3,560 | |
1 Expected to be payable within 12 months..
Discovery PropCo has committed to fund up to $2.0 million toward the purchase of condominium units located at acquisition in 2014.
In February 2014, we entered into a commitment on a letterone of credit for the benefitfacilities of Sycamore, an affiliate of Bickford, which previously held a minority interest in PropCo. In the fourth quarter of 2017, Sycamore began to draw on other means to furnish its resource provider the required letter of credit, and our commitment under the 2014 letter was ended. As$1.0 million has been funded as of December 31, 2017, we furnish no direct support2023.
| | | | | | | | | | | | | | | | | | | | | | | |
| Asset Class | | Total | | Funded | | Remaining |
Contingencies (Lease Inducements): | | | | | | | |
IntegraCare | SHO | | $ | 750 | | | — | | | $ | 750 | |
Navion Senior Solutions | SHO | | 4,850 | | | (2,700) | | | 2,150 | |
Discovery | SHO | | 4,000 | | | — | | | 4,000 | |
Ignite Medical Resorts | SNF | | 2,000 | | | — | | | 2,000 | |
| | | $ | 11,600 | | | $ | (2,700) | | | $ | 8,900 | |
We adjust rental income for the amortization of lease inducements paid to Sycamore. As an affiliate companyour tenants. Amortization of lease inducement payments against revenues was $2.5 million for the year ended December 31, 2023. Amortization of lease inducement payments against revenues was $7.6 million for the year ended December 31, 2022, which includes the write-off of $7.1 million of lease incentives related to Bickford Sycamore is structured to limit liability for potential claims for damages, is capitalized to achieve that purpose and is considered a VIE.
Seein the second quarter of 2022 as discussed in more detail in Note 23 to the consolidated financial statements included in this Annual Report on Form 10-K. Amortization of lease inducement payments against revenues was $1.0 million for furtherthe year ended December 31, 2021.
Capital Funding Commitments
Capital expenditures related to our Real Estate Investments segment are primarily for the acquisition of new investments. The leases for our properties in the Real Estate Investments segment generally require the tenant to pay for all repairs and maintenance expenses and a minimum amount of capital expenditures each year. The tenants are also required to maintain
insurance coverage at least equal to the replacement cost of a property. Therefore, we do not expect material expenditures in 2024 related to existing properties in the Real Estate Investments segment.
The capital funding commitments in our SHOP segment are principally for improvements to our facilities. We expect our SHOP ventures to incur approximately $12.0 million in capital expenditures during 2024 that we anticipate will be funded partially from the net operating income generated from the ventures and additional capital contributions from the partners. We expect to fund our commitments to the ventures for capital expenditures with our operating cash flow and other existing liquidity sources.
Natural Disasters
During the year ended December 31, 2023, our properties incurred minimal to no damage relating to natural disaster events. We or our tenants may incur unplanned costs for minor repairs and restoring operations, as well as costs to evacuate employees and residents. Our lease agreements require our tenants to maintain sufficient property and business interruption insurance, subject to certain deductibles.
Litigation
For a description of contingent lease inducements available to Navion, LaSalle and Prestige.our currently outstanding litigation, see “Legal Proceedings” in Part I, Item 3 of this Annual Report on Form 10-K.
Litigation
Our facilities are subject to claims and suits in the ordinary course of business. Our lessees and borrowers have indemnified, and are obligated to continue to indemnify us, against all liabilities arising from the operation of the facilities, and are further obligated to indemnify us against environmental or title problems affecting the real estate underlying such facilities. While there may be lawsuits pending against certain of the owners and/or lessees of the facilities, management believes that the ultimate resolution of all such pending proceedings will have no material adverse effect on our financial condition, results of operations or cash flows.
FFO AFFO & FAD
These supplemental operating performance measures described below may not be comparable to similarly titled measures used by other REITs. Consequently, our Funds From Operations (“FFO”), Normalized FFO Normalized Adjusted Funds From Operations (“AFFO”) and Normalized Funds Available for Distribution (“FAD”) may not provide a meaningful measure of our performance as compared to that of other REITs. Since other REITs may not use our definition of these operating performance measures, caution should be exercised when comparing our Company’s FFO, Normalized FFO Normalized AFFO and Normalized FAD to that of other REITs. These financial performance measures do not represent cash generated from operating activities in accordance with generally accepted accounting principles (“GAAP”)GAAP (these measures do not include changes in operating assets and liabilities) and therefore, should not be considered an alternative to net earnings as an indication of operating performance, or to net cash flow from operating activities as determined by GAAP as a measure of liquidity, and are not necessarily indicative of cash available to fund cash needs.
Funds From Operations - FFO
Our FFO per diluted common share for the year ended December 31, 20172023 increased $0.25 (4.8%)$0.84 or 23.7% over the same period in 2016. Our normalized2022 due primarily to the write-offs of straight-line rents receivable and unamortized lease incentives totaling approximately $36.4 million incurred during 2022, a reduction of legal fees and pandemic-related rent concessions since December 2022, partially offset by the recognition of the Holiday lease deposit and escrow of $15.7 million in prior year rental income, increased interest expense in 2023 and the repurchase of common stock in the prior year. FFO for the year ended December 31, 2017 increased $0.42 (9%) over the same period in 2016, primarily as the result of our new real estate investments in 2016 and 2017. FFO,per share, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) and applied by us, is calculated using the two-class method with net income allocated to common stockholders and holders of unvested restricted stock by applying the respective weighted-average shares outstanding during each period. The calculation of FFO begins with net income attributable to common stockholders (computed in accordance with GAAP), excludingand excludes gains (or losses) from sales of real estate property, plusimpairments of real estate, and real estate depreciation and amortization and impairment, if applicable, and after adjustmentsadjusting for unconsolidated partnerships and joint ventures, if any. The Company’s computation ofDiluted FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or have a different interpretation of the current NAREIT definition from that of the Company; therefore, caution should be exercised when comparing our Company’s FFO to that of other REITs. Diluted FFOper share assumes the exercise of stock options and other potentially dilutive securities.
Our Normalized FFO per diluted common share for the year ended December 31, 2023 increased $0.03 or 0.7% over the same period in 2022. Normalized FFO excludes from FFO certain items which, due to their infrequent or unpredictable nature, may create some difficulty in comparing FFO for the current period to similar prior periods, and may include, but are not limited to, impairment of non-real estate assets, gains and losses attributable to the acquisition and disposition of non-real estate assets and liabilities, and recoveries of previous write-downs and the write off of debt issuance costs due to credit facility modifications.write-downs.
FFO and normalizedNormalized FFO are important supplemental measures of operating performance for a REIT. Because the historical cost accounting convention used for real estate assets requires depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen and fallen with market conditions, presentations of operating results for a REIT that uses historical cost accounting for depreciation could be less informative, and should be supplemented with a measure such as FFO. The term FFO was designed by the REIT industry to address this issue.
Funds From OperationsAvailable for Distribution - AFFOFAD
Our normalized AFFO per diluted common shareNormalized FAD for the year ended December 31, 2017 increased $0.36 (8.2%)2023 decreased $13.2 million or 6.6% over the same period in 20162022 due primarily to the impact of real estate investmentsan increase in interest expense and property dispositions completed during 2016 and 2017.since December 2022. In addition to the adjustments included in the calculation of normalizedNormalized FFO, normalized AFFONormalized FAD excludes the impact of any straight-line rentlease revenue, amortization of the original issue discount on our convertible senior unsecured notes, and amortization of debt issuance costs.costs, and non-cash share based compensation. We also adjust Normalized FAD for the net change in our allowance for expected credit losses, non-cash share based compensation as well as certain non-cash items related to our equity method investments such as straight-line lease expense and amortization of purchase accounting adjustments.
Normalized AFFOFAD is an important supplemental performance measure for a REIT and a useful measure of operating performance for a REIT.liquidity as an indicator of the ability to distribute dividends to stockholders. GAAP requires a lessor to recognize contractual lease payments into income on a straight-line basis over the expected term of the lease. This straight-line adjustment has the effect of reporting lease income that is significantly more or less than the contractual cash flows received pursuant to the terms of the lease agreement. GAAP also requires the original issueany discount of our convertible senior notesor premium related to indebtedness and debt issuance costs to be amortized as non-cash adjustments to earnings. Normalized AFFO is useful to our investors as it reflects the growth inherent in the contractual lease payments of our real estate portfolio.
Funds Available for Distribution - FAD
Our normalized FAD for the year ended December 31, 2017 increased $24,290,000 (14.0%) over the same period in 2016 due primarily to the impact of real estate investments completed during 2016 and 2017. In addition to the adjustments included in the calculation of normalized AFFO, normalized FAD excludes the impact of non-cash stock based compensation. Normalized FAD is an important supplemental measure of operating performance for a REIT as a useful indicator of the ability to distribute dividends to shareholders. Additionally, normalized FAD improves the understanding of our operating results among investors and makes comparisons with: (i) expected results, (ii) results of previous periods and (iii) results among REITs, more meaningful. Because FAD may function as a liquidity measure, we do not present FAD on a per-share basis.
The following table reconciles net“Net income attributable to common stockholders”, the most directly comparable GAAP metric, to FFO, Normalized FFO Normalized AFFO and Normalized FAD and is presented for both basic and diluted weighted average common shares for FFO and Normalized FFO ($ in thousands, except share and per share amounts)amounts):
|
| | | | | | | | | | | |
| Years ended December 31, |
| 2017 | | 2016 | | 2015 |
Net income attributable to common stockholders | $ | 159,365 |
| | $ | 151,540 |
| | $ | 148,862 |
|
Elimination of certain non-cash items in net income: | | | | | |
Depreciation | 67,173 |
| | 59,525 |
| | 53,123 |
|
Depreciation related to noncontrolling interest | — |
| | (927 | ) | | (1,150 | ) |
Net gain on sales of real estate | (50 | ) | | (4,582 | ) | | (1,126 | ) |
NAREIT FFO attributable to common stockholders | $ | 226,488 |
| | $ | 205,556 |
| | $ | 199,709 |
|
Gain on sale of marketable securities | (10,038 | ) | | (29,673 | ) | | (23,529 | ) |
Gain on sale of equity-method investee | — |
| | (1,657 | ) | | — |
|
Write-off of deferred tax asset | — |
| | 1,192 |
| | — |
|
Loss on early retirement of convertible debt | 2,214 |
| | — |
| | — |
|
Debt issuance costs written-off due to credit facility modifications | 407 |
| | — |
| | — |
|
Ineffective portion of cash flow hedges | (353 | ) | | — |
| | — |
|
Non-cash write-off of straight-line rent receivable | — |
| | 9,456 |
| | — |
|
Write-off of lease intangible | — |
| | 6,400 |
| | — |
|
Revenue recognized due to early lease termination | — |
| | (303 | ) | | — |
|
Recognition of note discount and early payment penalty | (922 | ) | | (288 | ) | | — |
|
Recovery of previous write-down | — |
| | — |
| | (491 | ) |
Normalized FFO attributable to common stockholders | $ | 217,796 |
| | $ | 190,683 |
| | $ | 175,689 |
|
Straight-line lease revenue, net | (26,090 | ) | | (22,198 | ) | | (24,623 | ) |
Straight-line lease revenue, net, related to noncontrolling interest | — |
| | (4 | ) | | 40 |
|
Amortization of lease incentives | 119 |
| | 40 |
| | 40 |
|
Amortization of original issue discount | 1,109 |
| | 1,145 |
| | 1,101 |
|
Amortization of debt issuance costs | 2,483 |
| | 2,368 |
| | 2,311 |
|
Amortization of debt issuance costs related to noncontrolling interest | — |
| | (27 | ) | | (30 | ) |
Normalized AFFO | $ | 195,417 |
| | $ | 172,007 |
| | $ | 154,528 |
|
Non-cash stock based compensation | 2,612 |
| | 1,732 |
| | 2,134 |
|
Normalized FAD | $ | 198,029 |
| | $ | 173,739 |
| | $ | 156,662 |
|
| | | | | |
| | | | | |
BASIC | | | | | |
Weighted average common shares outstanding | 40,894,219 |
| | 39,013,412 |
| | 37,604,594 |
|
FFO per common share | $ | 5.54 |
| | $ | 5.27 |
| | $ | 5.31 |
|
Normalized FFO per common share | $ | 5.33 |
| | $ | 4.89 |
| | $ | 4.67 |
|
Normalized AFFO per common share | $ | 4.78 |
| | $ | 4.41 |
| | $ | 4.11 |
|
| | | | | |
DILUTED | | | | | |
Weighted average common shares outstanding | 41,151,453 |
| | 39,155,380 |
| | 37,644,171 |
|
FFO per common share | $ | 5.50 |
| | $ | 5.25 |
| | $ | 5.31 |
|
Normalized FFO per common share | $ | 5.29 |
| | $ | 4.87 |
| | $ | 4.67 |
|
Normalized AFFO per common share | $ | 4.75 |
| | $ | 4.39 |
| | $ | 4.10 |
|
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2023 | | 2022 | | 2021 |
Net income attributable to common stockholders | $ | 135,597 | | | $ | 66,403 | | | $ | 111,804 | |
Elimination of certain non-cash items in net income: | | | | | |
Real estate depreciation | 69,436 | | | 70,734 | | | 80,798 | |
Real estate depreciation related to noncontrolling interests | (1,585) | | | (1,393) | | | (839) | |
Gains on sales of real estate, net | (14,721) | | | (28,342) | | | (32,498) | |
Impairments of real estate | 1,642 | | | 51,555 | | | 51,817 | |
NAREIT FFO attributable to common stockholders | 190,369 | | | 158,957 | | | 211,082 | |
| | | | | |
Gain (loss) on operations transfer, net | (20) | | | 710 | | | — | |
Portfolio transition costs, net of noncontrolling interests | — | | | 426 | | | — | |
Gain on note receivable payoff | — | | | (1,113) | | | — | |
Loss on early retirement of debt | 73 | | | 151 | | | 1,912 | |
| | | | | |
| | | | | |
Non-cash write-offs of straight-line receivable and lease incentives | — | | | 36,353 | | | 709 | |
Non-cash rental income | (2,500) | | | (3,000) | | | — | |
| | | | | |
Recognition of unamortized note receivable commitment fees | — | | | — | | | (375) | |
Lease termination fee | — | | | — | | | (2,464) | |
Litigation settlement | — | | | — | | | (616) | |
Normalized FFO attributable to common stockholders | 187,922 | | | 192,484 | | | 210,248 | |
Straight-line lease revenue, net | (6,961) | | | (12,563) | | | (15,312) | |
Straight-line lease revenue, net, related to noncontrolling interests | 58 | | | 124 | | | 91 | |
Straight-line lease expense related to equity method investment | (14) | | | (16) | | | 46 | |
Non-real estate depreciation | 537 | | | 146 | | | — | |
Non-real estate depreciation related to noncontrolling interest | (49) | | | (16) | | | — | |
Amortization of lease incentives | 2,521 | | | 446 | | | 1,026 | |
Amortization of lease incentive related to noncontrolling interests | (434) | | | — | | | — | |
Amortization of original issue discount | 322 | | | 322 | | | 295 | |
Amortization of debt issuance costs | 2,325 | | | 2,155 | | | 2,404 | |
Amortization related to equity method investment | (1,633) | | | (847) | | | 1,109 | |
Note receivable credit loss (income) expense | (266) | | | 10,356 | | | 949 | |
| | | | | |
Equity method investment capital expenditures | (210) | | | (420) | | | (420) | |
Equity method investment non-refundable fees received | 1,327 | | | 1,206 | | | 622 | |
Equity method investment distributions | (555) | | | (569) | | | — | |
Non-cash share-based compensation | 4,605 | | | 8,613 | | | 8,415 | |
SHOP recurring capital expenditures | (1,845) | | | (390) | | | — | |
SHOP recurring capital expenditures related to noncontrolling interests | 191 | | | — | | | — | |
Normalized FAD attributable to common stockholders | $ | 187,841 | | | $ | 201,031 | | | $ | 209,473 | |
| | | | | |
BASIC | | | | | |
Weighted average common shares outstanding | 43,388,794 | | | 44,774,708 | | | 45,714,221 | |
NAREIT FFO attributable to common stockholders per share | $ | 4.39 | | | $ | 3.55 | | | $ | 4.62 | |
Normalized FFO attributable to common stockholders per share | $ | 4.33 | | | $ | 4.30 | | | $ | 4.60 | |
| | | | | |
| | | | | |
DILUTED | | | | | |
Weighted average common shares outstanding | 43,389,466 | | | 44,794,236 | | | 45,729,497 | |
NAREIT FFO attributable to common stockholders per share | $ | 4.39 | | | $ | 3.55 | | | $ | 4.62 | |
Normalized FFO attributable to common stockholders per share | $ | 4.33 | | | $ | 4.30 | | | $ | 4.60 | |
| | | | | |
Adjusted EBITDA
We consider Adjusted EBITDA to be an important supplemental measure because it provides information which we use to evaluate our performance and serves as an indication of our ability to service debt. We define Adjusted EBITDA as consolidated earnings before interest, taxes, depreciation and amortization, including amounts in discontinued operations, excluding real estate asset impairments and gains on dispositions and certain items which, due to their infrequent or unpredictable nature, may create some difficulty in comparing Adjusted EBITDA for the current period to similar prior periods, and mayperiods. These items include, but are not limited to, impairment of non-real estate assets, gains and losses attributable to the acquisition and disposition of assets and liabilities, and recoveries of previous write-downs. Adjusted EBITDA also includes our proportionate share of unconsolidated equity method investments presented on a similar basis. Since others may not use our definition of Adjusted EBITDA, caution should be exercised when comparing our Adjusted EBITDA to that of other companies. EBITDA reflects GAAP interest expense, which excludes amounts capitalized during the period.
The following table reconciles “Net income”, the most directly comparable GAAP metric, to Adjusted EBITDA ($ in thousands):
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2023 | | 2022 | | 2021 |
Net income | $ | 134,381 | | | $ | 65,501 | | | $ | 111,967 | |
Interest expense | 58,160 | | | 44,917 | | | 50,810 | |
Franchise, excise and other taxes | 449 | | | 844 | | | 788 | |
Depreciation | 69,973 | | | 70,880 | | | 80,798 | |
NHI’s share of EBITDA adjustments for unconsolidated entities | 2,432 | | | 2,976 | | | 2,848 | |
Gains on sales of real estate, net | (14,721) | | | (28,342) | | | (32,498) | |
Impairments of real estate | 1,642 | | | 51,555 | | | 51,817 | |
(Gain) loss on operations transfer, net | (20) | | | 710 | | | — | |
Litigation settlement | — | | | — | | | (616) | |
Gain on note receivable payoff | — | | | (1,113) | | | — | |
Loss on early retirement of debt | 73 | | | 151 | | | 1,912 | |
Non-cash write-off of straight-line rents receivable and lease amortization | — | | | 36,353 | | | 709 | |
Non-cash rental income | (2,500) | | | (3,000) | | | — | |
Note receivable credit loss expense | (266) | | | 10,356 | | | 949 | |
Lease termination fee | — | | | — | | | (2,464) | |
Recognition of unamortized note receivable commitment fees | — | | | — | | | (375) | |
Adjusted EBITDA | $ | 249,603 | | | $ | 251,788 | | | $ | 266,645 | |
| | | | | |
Interest expense at contractual rates | $ | 55,603 | | | $ | 42,487 | | | $ | 40,866 | |
Interest rate swap payments, net | — | | | — | | | 7,306 | |
Principal payments | 408 | | | 389 | | | 371 | |
Fixed Charges | $ | 56,011 | | | $ | 42,876 | | | $ | 48,543 | |
| | | | | |
Fixed Charge Coverage | 4.5x | | 5.9x | | 5.5x |
For all periods presented, EBITDA reflects GAAP interest expense, which excludes amounts capitalized during the period.
Net Operating Income
NOI is a non-GAAP supplemental financial measure used to evaluate the operating performance of real estate. We define NOI as total revenues, less tenant reimbursements and property operating expenses. We believe NOI provides investors relevant and useful information as it measures the operating performance of our properties at the property level on an unleveraged basis. We use NOI to make decisions about resource allocations and to assess the property level performance of our properties.
The following table reconciles NOI to net income, the most directly comparable GAAP metric to Adjusted EBITDA:($ in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
NOI Reconciliations: | 2023 | | 2022 | | 2021 |
Net income | $ | 134,381 | | | $ | 65,501 | | | $ | 111,967 | |
(Gains) losses from equity method investment | (555) | | | (569) | | | 1,545 | |
Other income | (202) | | | — | | | (350) | |
| | | | | |
Loss on early retirement of debt | 73 | | | 151 | | | 1,912 | |
Gain on note receivable payoff | — | | | (1,113) | | | — | |
(Gain) loss on operations transfer, net | (20) | | | 710 | | | — | |
Gains on sales of real estate, net | (14,721) | | | (28,342) | | | (32,498) | |
Loan and realty losses, net | 1,376 | | | 61,911 | | | 52,766 | |
General and administrative | 19,314 | | | 22,768 | | | 18,431 | |
Franchise, excise and other taxes | 449 | | | 844 | | | 788 | |
Legal | 507 | | | 2,555 | | | 908 | |
Interest | 58,160 | | | 44,917 | | | 50,810 | |
Depreciation | 69,973 | | | 70,880 | | | 80,798 | |
Consolidated NOI | $ | 268,735 | | | $ | 240,213 | | | $ | 287,077 | |
NOI by segment: | | | | | |
Real Estate Investments | $ | 259,162 | | | $ | 232,295 | | | $ | 283,945 | |
SHOP | 9,222 | | | 7,603 | | | — | |
Non-Segment/Corporate | 351 | | | 315 | | | 3,132 | |
Total NOI | $ | 268,735 | | | $ | 240,213 | | | $ | 287,077 | |
| | | | | |
|
| | | | | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Net income | $ | 159,365 |
| | $ | 152,716 |
| | $ | 150,314 |
|
Interest expense | 46,324 |
| | 43,108 |
| | 37,629 |
|
Franchise, excise and other taxes | 960 |
| | 1,009 |
| | 985 |
|
Income tax of taxable REIT subsidiary | — |
| | 749 |
| | (707 | ) |
Depreciation | 67,173 |
| | 59,525 |
| | 53,123 |
|
Net gain on sales of real estate | (50 | ) | | (4,582 | ) | | (1,126 | ) |
Normalizing items | — |
| | — |
| | — |
|
Gain on sale of marketable securities | (10,038 | ) | | (29,673 | ) | | (23,529 | ) |
Gain on sale of equity-method investee | — |
| | (1,657 | ) | | — |
|
Loss on early retirement of convertible debt | 2,214 |
| | — |
| | — |
|
Non-cash write-off of straight-line rent receivable | — |
| | 9,456 |
| | — |
|
Write-off of lease intangible | — |
| | 6,400 |
| | — |
|
Revenue recognized due to early lease termination | — |
| | (303 | ) | | — |
|
Acquisition costs under business combination accounting | — |
| | — |
| | — |
|
Recognition of note discount and early payment penalty | (922 | ) | | (288 | ) | | — |
|
Expenses related to abandoned capital offerring | — |
| | — |
| | — |
|
Write-off of previously accrued executive bonus | — |
| | — |
| | — |
|
Recovery of previous write-down | — |
| | — |
| | (491 | ) |
Change in fair value of interest rate swap | — |
| | — |
| | — |
|
Other items, net | — |
| | — |
| | — |
|
Adjusted EBITDA | $ | 265,026 |
| | $ | 236,460 |
| | $ | 216,198 |
|
| | | | | |
Interest expense at contractual rates | $ | 40,385 |
| | $ | 36,197 |
| | $ | 30,094 |
|
Principal payments | 794 |
| | 768 |
| | 743 |
|
Fixed Charges | $ | 41,179 |
| | $ | 36,965 |
| | $ | 30,837 |
|
| | | | | |
Fixed Charge Coverage | 6.4x |
| | 6.4x |
| | 7.7x |
|
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
At December 31, 2017,2023, we were exposed to market risks related to fluctuations in interest rates on approximately $221,000,000$445.0 million of variable-rate indebtedness (excluding $250,000,000 of variable-rate debt that has been hedged through interest-rate swap contracts) and on our mortgage and other notes receivable. The unused portion ($329,000,000($455.0 million at December 31, 2017)2023) of our unsecured revolving credit facility, should it be drawn upon, is subject to variable rates.
Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt and loans receivable unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. Conversely, changes in interest rates on variable rate debt and investments would change our future earnings and cash flows, but not significantly affect the fair value of those instruments. Assuming a 50 basis pointbasis-point increase or decrease in the interest rate related to variable-rate debt, and assuming no change in the outstanding balance as of December 31, 2017,2023, net interest expense would increase or decrease annually by approximately $1,105,000$2.2 million or $.03$0.05 per common share on a diluted basis.
We usehave historically used derivative financial instruments in the normal course of business to mitigate interest rate risk. We do not use derivative financial instruments for speculative purposes. Derivatives, if any, are included in the Consolidated Balance Sheets at their fair value. We may engage in hedging strategies to manage our exposure to market risks in the future, depending on an analysis of the interest rate environment and the costs and risks of such strategies. We had no derivative financial instruments outstanding during 2023.
The following table sets forth certain information with respect to our debt (dollar amounts$ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Balance1 | | % of total | | Rate2 | | Balance1 | | % of total | | Rate2 |
Fixed rate: | | | | | | | | | | | |
| | | | | | | | | | | |
Private placement notes - unsecured | $ | 225,000 | | | 19.6 | % | | 4.28 | % | | $ | 400,000 | | | 34.5 | % | | 4.15 | % |
Senior notes - unsecured | 400,000 | | | 34.9 | % | | 3.00 | % | | 400,000 | | | 34.5 | % | | 3.00 | % |
| | | | | | | | | | | |
Fannie Mae term loans - secured, non-recourse | 76,241 | | | 6.7 | % | | 3.96 | % | | 76,649 | | | 6.6 | % | | 3.96 | % |
| | | | | | | | | | | |
Variable rate: | | | | | | | | | | | |
Bank term loans - unsecured | 200,000 | | | 17.4 | % | | 6.69 | % | | 240,000 | | | 20.8 | % | | 5.71 | % |
Revolving credit facility - unsecured | 245,000 | | | 21.4 | % | | 6.49 | % | | 42,000 | | | 3.6 | % | | 5.51 | % |
| $ | 1,146,241 | | | 100.0 | % | | 4.70 | % | | $ | 1,158,649 | | | 100.0 | % | | 3.91 | % |
| | | | | | | | | | | |
1 Differs from carrying amount due to unamortized discounts and loan costs. | | | | | | |
2 Total is weighted average rate | | | | | | |
| | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | December 31, 2016 |
| Balance1 | | % of total | | Rate5 | | Balance1 | | % of total | | Rate5 |
Fixed rate: | | | | | | | | | | | |
Convertible senior notes | $ | 147,575 |
| | 12.7 | % | | 3.25 | % | | $ | 200,000 |
| | 17.7 | % | | 3.25 | % |
Unsecured term loans2 | 650,000 |
| | 56.0 | % | | 3.83 | % | | 650,000 |
| | 57.4 | % | | 4.01 | % |
HUD mortgage loans3 | 45,047 |
| | 3.9 | % | | 4.04 | % | | 45,841 |
| | 4.0 | % | | 4.04 | % |
Fannie Mae mortgage loans4 | 96,367 |
| | 8.3 | % | | 3.94 | % | | 78,084 |
| | 6.9 | % | | 3.79 | % |
| | | | | | | | | | | |
Variable rate: | | | | | | | | | | | |
Unsecured revolving credit facility | 221,000 |
| | 19.1 | % | | 2.96 | % | | 158,000 |
| | 14.0 | % | | 2.27 | % |
| $ | 1,159,989 |
| | 100.0 | % | | 3.61 | % | | $ | 1,131,925 |
| | 100.0 | % | | 3.62 | % |
| | | | | | | | | | | |
1 Differs from carrying amount due to unamortized discount. | | | | | | |
2 Includes six term loans in 2017 and eight in 2016; rate is a weighted average | | | | | | |
3 Includes 10 HUD mortgages; rate is a weighted average inclusive of a mortgage insurance premium | | | | | | |
4 Includes 14 Fannie Mae mortgages in 2017 and 13 in 2016 | | | | | | |
5 Total is weighted average rate | | | | | | |
The unsecured term loans in the table above give effect to $40,000,000, $80,000,000, and $130,000,000 notional amount interest rate swaps with maturities of April 2019, June 2020 and June 2020, respectively, that collectively are continuing to hedge against fluctuations in variable interest rates applicable to the $250,000,000 term loan maturing in 2022. These loans bear interest at LIBOR plus a spread, currently 130 basis points, based on our current Consolidated Coverage Ratio, as defined.
To highlight the sensitivity of our fixed-rateterm loans, senior notes and secured mortgage debt to changes in interest rates, the following summary shows the effects on fair value (“FV”) assuming a parallel shift of 50 basis points (“bps”) in market interest rates for a contract with similar maturities as of December 31, 2017 2023 (dollar amounts$ in thousands)thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance | | Fair Value1 | | FV reflecting change in interest rates |
Fixed rate: | | | | | -50 bps | | +50 bps |
Private placement notes - unsecured | $ | 225,000 | | | $ | 216,435 | | | $ | 218,516 | | | $ | 214,379 | |
Senior notes - unsecured | 400,000 | | | 332,129 | | | 342,836 | | | 321,787 | |
Fannie Mae term loans - secured, non-recourse | 76,241 | | | 74,171 | | | 74,647 | | | 73,698 | |
1 The change in fair value of our fixed rate debt was due primarily to the overall change in interest rates. |
|
| | | | | | | | | | | | | | | |
| Balance | | Fair Value1 | | FV reflecting change in interest rates |
Fixed rate: | | | | | -50 bps | | +50 bps |
Private placement term loans - unsecured | $ | 400,000 |
| | $ | 390,816 |
| | $ | 402,515 |
| | $ | 379,509 |
|
Convertible senior notes | 147,575 |
| | 150,172 |
| | 152,562 |
| | 147,821 |
|
Fannie Mae mortgage loans | 96,367 |
| | 92,055 |
| | 95,006 |
| | 89,206 |
|
HUD mortgage loans | 45,047 |
| | 46,342 |
| | 49,666 |
| | 43,323 |
|
| | | | | | | |
1 The change in fair value of our fixed rate debt was due primarily to the overall change in interest rates. |
At December 31, 2017,2023, the fair value of our mortgage and other notes receivable, discounted for estimated changes in the risk-free rate, was approximately $140,049,000.$237.6 million. A 50 basis pointbasis-point increase in market rates would decrease the estimated fair value of our mortgage and other notes receivableloans by approximately $2,903,000,$2.7 million, while a 50 basis pointbasis-point decrease in such rates would increase their estimated fair value by approximately $2,990,000.$2.7 million.
Equity Price Risk
The Company is no longernot subject to equity risk since it no longer owns anyno marketable securities.
Inflation Risk
Our real estate leases generally provide for annual increases in contractual rent due based on a fixed amount or percentage or based on increases in the Consumer Price Index (“CPI”). Leases with increases based on CPI may contain a minimum or a cap on the maximum annual increase. Substantially all of our leases require the tenant to pay all operating expenses for the property, whether paid directly by the tenant or reimbursed to us. We believe that inflationary increases will be at least partially offset by the contractual rent increases and expense reimbursements described above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm
Stockholders and Board of Directors and Stockholders
National Health Investors, Inc.
Murfreesboro, Tennessee
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of National Health Investors, Inc. (the “Company”) and subsidiaries as of December 31, 20172023 and 2016,2022, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2017,2023, and the related notes and financial statement schedules listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 20172023 and 2016,2022, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172023, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 15, 201820, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Asset Impairment - Real Estate Properties
The Company had total real estate properties, net of approximately $2.1 billion as of December 31, 2023. As described in Note 2 to the Company’s consolidated financial statements, management evaluates the recoverability of the carrying amount of its real estate properties 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 real estate properties, indicate that the carrying amount of the real estate properties 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
real estate properties. The Company recognized approximately $1.6 million in impairment charges for the year ended December 31, 2023.
We identified management’s identification and assessment of the indicators of potential impairment of real estate properties as a critical audit matter. Identification of a potential impairment of real estate properties including due to significant physical changes in the property, significant adverse changes in general economic conditions, or significant deterioration of the underlying cash flows of the property requires a high degree of judgment. Auditing these judgments was especially challenging and complex due to the nature and extent of auditor effort required to address these matters.
The primary procedures we performed to address this critical audit matter included:
•Assessing the reasonableness of management’s assessment, including property specific factors for certain properties that included changes to the physical condition of the property, changes in general economic conditions, and deterioration of the underlying cash flows of the property, including due to changes in occupancy, which are used by management to identify and assess whether an impairment indicator existed.
•Examine internal documentation relevant to the analysis for certain properties including Board of Director minutes, letters of intent, and operations department communications, as applicable on a property-by-property basis, including for certain properties with lower lease coverage ratios, to assess whether additional indicators of impairment were present.
/s/ BDO USA, LLPP.C.
We have served as the Company's auditor since 2004.
Nashville, Tennessee
February 15, 201820, 2024
NATIONAL HEALTH INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share and per share amounts)
| | | | | | | | | | | |
| December 31, |
Assets: | 2023 | | 2022 |
Real estate properties: | | | |
Land | $ | 180,749 | | | $ | 177,527 | |
Buildings and improvements | 2,593,696 | | | 2,549,019 | |
Construction in progress | 5,913 | | | 3,352 | |
| 2,780,358 | | | 2,729,898 | |
Less accumulated depreciation | (673,276) | | | (611,688) | |
Real estate properties, net | 2,107,082 | | | 2,118,210 | |
Mortgage and other notes receivable, net of reserve of $15,476 and $15,338, respectively | 245,271 | | | 233,141 | |
Cash and cash equivalents | 22,347 | | | 19,291 | |
Straight-line rents receivable | 84,713 | | | 76,895 | |
Assets held for sale, net | 5,004 | | | 43,302 | |
Other assets, net | 24,063 | | | 16,585 | |
Total Assets(a) | $ | 2,488,480 | | | $ | 2,507,424 | |
| | | |
Liabilities and Equity: | | | |
Debt | $ | 1,135,051 | | | $ | 1,147,511 | |
Accounts payable and accrued expenses | 34,304 | | | 25,905 | |
Dividends payable | 39,069 | | | 39,050 | |
| | | |
Deferred income | 6,009 | | | 5,052 | |
Total Liabilities(a) | 1,214,433 | | | 1,217,518 | |
| | | |
Commitments and Contingencies | | | |
| | | |
Redeemable noncontrolling interest | 9,656 | | | 9,825 | |
| | | |
National Health Investors, Inc. Stockholders' Equity: | | | |
Common stock, $0.01 par value; 100,000,000 shares authorized; | | | |
43,409,841 and 43,388,742 shares issued and outstanding, respectively | 434 | | | 434 | |
Capital in excess of par value | 1,603,757 | | | 1,599,427 | |
Retained earnings | 2,466,844 | | | 2,331,190 | |
Cumulative dividends | (2,817,083) | | | (2,660,826) | |
| | | |
Total National Health Investors, Inc. Stockholders' Equity | 1,253,952 | | | 1,270,225 | |
Noncontrolling interests | 10,439 | | | 9,856 | |
Total Equity | 1,264,391 | | | 1,280,081 | |
Total Liabilities and Equity | $ | 2,488,480 | | | $ | 2,507,424 | |
|
| | | | | | | |
| December 31, |
Assets: | 2017 | | 2016 |
Real estate properties: | | | |
Land | $ | 191,623 |
| | $ | 172,003 |
|
Buildings and improvements | 2,471,602 |
| | 2,285,122 |
|
Construction in progress | 2,678 |
| | 15,729 |
|
| 2,665,903 |
| | 2,472,854 |
|
Less accumulated depreciation | (380,202 | ) | | (313,080 | ) |
Real estate properties, net | 2,285,701 |
| | 2,159,774 |
|
Mortgage and other notes receivable, net | 141,486 |
| | 133,493 |
|
Cash and cash equivalents | 3,063 |
| | 4,636 |
|
Straight-line rent receivable | 97,359 |
| | 72,518 |
|
Other assets | 18,212 |
| | 33,212 |
|
Total Assets | $ | 2,545,821 |
| | $ | 2,403,633 |
|
| | | |
Liabilities and Equity: | | | |
Debt | $ | 1,145,497 |
| | $ | 1,115,981 |
|
Accounts payable and accrued expenses | 17,476 |
| | 20,874 |
|
Dividends payable | 39,456 |
| | 35,863 |
|
Lease deposit liabilities | 21,275 |
| | 21,325 |
|
Total Liabilities | 1,223,704 |
| | 1,194,043 |
|
| | | |
Commitments and Contingencies |
| |
|
| | | |
Stockholders' Equity: | | | |
Common stock, $.01 par value; 60,000,000 shares authorized; | | | |
41,532,154 and 39,847,860 shares issued and outstanding, respectively | 415 |
| | 398 |
|
Capital in excess of par value | 1,289,919 |
| | 1,173,588 |
|
Cumulative net income in excess of dividends | 32,605 |
| | 29,873 |
|
Accumulated other comprehensive income (loss) | (822 | ) | | 5,731 |
|
Total Stockholders' Equity | 1,322,117 |
| | 1,209,590 |
|
Total Liabilities and Equity | $ | 2,545,821 |
| | $ | 2,403,633 |
|
(a) The consolidated balance sheets include the following amounts related to our consolidated Variable Interest Entities (VIEs): $513.2 million and $519.8 million of Real estate properties, net; $10.9 million and $10.3 million of Cash and cash equivalents; $9.7 million and $7.1 million of Straight-line rents receivable; $9.4 million and $1.3 million of Other assets, net; and $4.7 million and $3.3 million of Accounts payable and accrued expenses as of December 31, 2023 and 2022, respectively.
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
NATIONAL HEALTH INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
| | | | | |
Revenues: | | | | | |
Rental income | $ | 249,227 | | | $ | 217,700 | | | $ | 271,049 | |
Resident fees and services | 48,809 | | | 35,796 | | | — | |
Interest income and other | 21,799 | | | 24,698 | | | 27,666 | |
| 319,835 | | | 278,194 | | | 298,715 | |
Expenses: | | | | | |
Depreciation | 69,973 | | | 70,880 | | | 80,798 | |
Interest | 58,160 | | | 44,917 | | | 50,810 | |
Senior housing operating expenses | 39,587 | | | 28,193 | | | — | |
Legal | 507 | | | 2,555 | | | 908 | |
Franchise, excise and other taxes | 449 | | | 844 | | | 788 | |
General and administrative | 19,314 | | | 22,768 | | | 18,431 | |
| | | | | |
Taxes and insurance on leased properties | 11,513 | | | 9,788 | | | 11,638 | |
Loan and realty losses, net | 1,376 | | | 61,911 | | | 52,766 | |
| 200,879 | | | 241,856 | | | 216,139 | |
| | | | | |
Gain (loss) on operations transfer, net | 20 | | | (710) | | | — | |
Gain on note receivable payoff | — | | | 1,113 | | | — | |
Loss on early retirement of debt | (73) | | | (151) | | | (1,912) | |
Gains (losses) from equity method investment | 555 | | | 569 | | | (1,545) | |
Gains on sales of real estate, net | 14,721 | | | 28,342 | | | 32,498 | |
| | | | | |
Other income | 202 | | | — | | | 350 | |
Net income | 134,381 | | | 65,501 | | | 111,967 | |
Add: net loss (income) attributable to noncontrolling interests | 1,273 | | | 902 | | | (163) | |
Net income attributable to stockholders | $ | 135,654 | | | $ | 66,403 | | | $ | 111,804 | |
Less: net income attributable to unvested restricted stock awards | (57) | | | — | | | — | |
Net income attributable to common stockholders | $ | 135,597 | | | $ | 66,403 | | | $ | 111,804 | |
| | | | | |
Weighted average common shares outstanding: | | | | | |
Basic | 43,388,794 | | | 44,774,708 | | | 45,714,221 | |
Diluted | 43,389,466 | | | 44,794,236 | | | 45,729,497 | |
| | | | | |
Earnings per common share - basic | $ | 3.13 | | | $ | 1.48 | | | $ | 2.45 | |
Earnings per common share - diluted | $ | 3.13 | | | $ | 1.48 | | | $ | 2.44 | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| | | | | |
Revenues: | | | | | |
Rental income | $ | 265,127 |
| | $ | 232,353 |
| | $ | 214,407 |
|
Interest income from mortgage and other notes | 13,134 |
| | 13,805 |
| | 10,206 |
|
Investment income and other | 398 |
| | 2,302 |
| | 4,335 |
|
| 278,659 |
| | 248,460 |
| | 228,948 |
|
Expenses: | | | | | |
Depreciation | 67,173 |
| | 59,525 |
| | 53,123 |
|
Interest | 46,324 |
| | 43,108 |
| | 37,629 |
|
Legal | 494 |
| | 422 |
| | 464 |
|
Franchise, excise and other taxes | 960 |
| | 1,009 |
| | 985 |
|
General and administrative | 12,217 |
| | 9,773 |
| | 10,519 |
|
Loan and realty losses (recoveries), net | — |
| | 15,856 |
| | (491 | ) |
| 127,168 |
| | 129,693 |
| | 102,229 |
|
Income before equity-method investee, income tax benefit (expense), | | | | | |
investment and other gains (losses) and noncontrolling interest | 151,491 |
| | 118,767 |
| | 126,719 |
|
Loss from equity-method investee | — |
| | (1,214 | ) | | (1,767 | ) |
Loss on convertible note retirement | (2,214 | ) | | — |
| | — |
|
Income tax benefit (expense) of taxable REIT subsidiary | — |
| | (749 | ) | | 707 |
|
Investment and other gains | 10,088 |
| | 35,912 |
| | 24,655 |
|
Net income | 159,365 |
| | 152,716 |
| | 150,314 |
|
Less: net income attributable to noncontrolling interest | — |
| | (1,176 | ) | | (1,452 | ) |
Net income attributable to common stockholders | $ | 159,365 |
| | $ | 151,540 |
| | $ | 148,862 |
|
| | | | | |
Weighted average common shares outstanding: | | | | | |
Basic | 40,894,219 |
| | 39,013,412 |
| | 37,604,594 |
|
Diluted | 41,151,453 |
| | 39,155,380 |
| | 37,644,171 |
|
| | | | | |
Earnings per common share: | | | | | |
Net income per common share attributable to common stockholders - basic | $ | 3.90 |
| | $ | 3.88 |
| | $ | 3.96 |
|
Net income per common share attributable to common stockholders - diluted | $ | 3.87 |
| | $ | 3.87 |
| | $ | 3.95 |
|
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
NATIONAL HEALTH INVESTORS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
| | | | | |
Net income | $ | 134,381 | | | $ | 65,501 | | | $ | 111,967 | |
Other comprehensive income: | | | | | |
Decrease in fair value of cash flow hedges | — | | | — | | | (137) | |
Reclassification adjustment for amounts recognized in net income | — | | | — | | | 7,286 | |
Total other comprehensive income | — | | | — | | | 7,149 | |
Comprehensive income | 134,381 | | | 65,501 | | | 119,116 | |
Less: comprehensive loss (income) attributable to noncontrolling interests | 1,273 | | | 902 | | | (163) | |
Comprehensive income attributable to stockholders | $ | 135,654 | | | $ | 66,403 | | | $ | 118,953 | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| | | | | |
Net income | $ | 159,365 |
| | $ | 152,716 |
| | $ | 150,314 |
|
Other comprehensive income: | | | | | |
Change in unrealized gains on securities | (26 | ) | | 5,072 |
| | 46,780 |
|
Less: reclassification adjustment for gains in net income | (10,038 | ) | | (29,673 | ) | | (23,529 | ) |
Increase (decrease) in fair value of cash flow hedge | 884 |
| | (1,506 | ) | | (6,062 | ) |
Less: reclassification adjustment for amounts recognized in net income | 2,627 |
| | 3,928 |
| | 4,498 |
|
Total other comprehensive income (loss) | (6,553 | ) | | (22,179 | ) | | 21,687 |
|
Comprehensive income | 152,812 |
| | 130,537 |
| | 172,001 |
|
Less: comprehensive income attributable to noncontrolling interest | — |
| | (1,176 | ) | | (1,452 | ) |
Comprehensive income attributable to common stockholders | $ | 152,812 |
| | $ | 129,361 |
| | $ | 170,549 |
|
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
NATIONAL HEALTH INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Cash flows from operating activities: | | | | | |
Net income | $ | 159,365 |
| | $ | 152,716 |
| | $ | 150,314 |
|
Adjustments to reconcile net income to net cash provided by | | | | | |
operating activities: | | | | | |
Depreciation | 67,173 |
| | 59,525 |
| | 53,123 |
|
Amortization | 5,790 |
| | 3,563 |
| | 3,472 |
|
Straight-line rental income | (26,090 | ) | | (22,198 | ) | | (24,623 | ) |
Non-cash interest income on construction loan | (792 | ) | | (1,021 | ) | | (411 | ) |
Gain on sale of real estate | (50 | ) | | (4,582 | ) | | (1,126 | ) |
Loss on extinguishment of debt | 2,214 |
| | — |
| | — |
|
Loan and realty losses (recoveries), net | — |
| | 15,856 |
| | (491 | ) |
Gain on sale of equity-method investee | — |
| | (1,657 | ) | | — |
|
Net realized gains on sales of marketable securities | (10,038 | ) | | (29,673 | ) | | (23,529 | ) |
Non-cash stock-based compensation | 2,612 |
| | 1,732 |
| | 2,134 |
|
Amortization of commitment fees and note receivable discounts | (517 | ) | | (693 | ) | | — |
|
Amortization of lease incentives | 119 |
| | 40 |
| | 40 |
|
Loss from equity-method investee | — |
| | 1,214 |
| | 1,767 |
|
Change in operating assets and liabilities: | | | | | |
Equity-method investment and other assets | (4,372 | ) | | 1,018 |
| | 216 |
|
Accounts payable and accrued expenses | 1,607 |
| | 2,764 |
| | 1,038 |
|
Deferred income | 304 |
| | (1,385 | ) | | 2,501 |
|
Net cash provided by operating activities | 197,325 |
| | 177,219 |
| | 164,425 |
|
Cash flows from investing activities: | | | | | |
Investment in mortgage and other notes receivable | (49,853 | ) | | (92,051 | ) | | (92,249 | ) |
Collection of mortgage and other notes receivable | 43,168 |
| | 84,228 |
| | 21,495 |
|
Investment in real estate | (157,214 | ) | | (359,257 | ) | | (106,315 | ) |
Investment in real estate development | (10,691 | ) | | (32,102 | ) | | (14,641 | ) |
Investment in renovations of existing real estate | (7,888 | ) | | (3,378 | ) | | (3,157 | ) |
Payment allocated to cancellation of lease purchase option | — |
| | (6,400 | ) | | — |
|
Long-term escrow deposit | — |
| | (8,208 | ) | | — |
|
Proceeds from disposition of real estate properties | 450 |
| | 27,723 |
| | 9,593 |
|
Purchases of marketable securities | — |
| | — |
| | (8,458 | ) |
Proceeds from sales of marketable securities | 18,182 |
| | 59,607 |
| | 57,406 |
|
Net cash used in investing activities | (163,846 | ) | | (329,838 | ) | | (136,326 | ) |
Cash flows from financing activities: | | | | | |
Net change in borrowings under revolving credit facilities | 63,000 |
| | 124,000 |
| | (340,000 | ) |
Proceeds from issuance of secured debt | — |
| | — |
| | 78,084 |
|
Proceeds from borrowings on term loans | 250,000 |
| | 75,000 |
| | 325,000 |
|
Payments of term loans | (250,822 | ) | | (767 | ) | | (742 | ) |
Debt issuance costs | (4,935 | ) | | (258 | ) | | (2,608 | ) |
Taxes remitted in relation to employee stock options exercised | (571 | ) | | (1,133 | ) | | — |
|
Proceeds from equity offering, net | 122,237 |
| | 104,190 |
| | 49,114 |
|
Convertible bond redemption | (60,921 | ) | | — |
| | — |
|
Proceeds from exercise of stock options | — |
| | 1 |
| | 1 |
|
Distributions to noncontrolling interest | — |
| | (1,565 | ) | | (2,292 | ) |
Distribution to acquire non-controlling interest | — |
| | (17,000 | ) | | — |
|
Dividends paid to stockholders | (153,040 | ) | | (138,303 | ) | | (124,657 | ) |
Net cash (used in) provided by financing activities | (35,052 | ) | | 144,165 |
| | (18,100 | ) |
| | | | | |
Increase (decrease) in cash and cash equivalents | (1,573 | ) | | (8,454 | ) | | 9,999 |
|
Cash and cash equivalents, beginning of period | 4,636 |
| | 13,090 |
| | 3,091 |
|
Cash and cash equivalents, end of period | $ | 3,063 |
| | $ | 4,636 |
| | $ | 13,090 |
|
thousands) | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
Cash flows from operating activities: | | | | | |
Net income | $ | 134,381 | | | $ | 65,501 | | | $ | 111,967 | |
Adjustments to reconcile net income to net cash provided by | | | | | |
operating activities: | | | | | |
Depreciation | 69,973 | | | 70,880 | | | 80,798 | |
Amortization of deferred loan costs, debt discounts and prepaids | 4,685 | | | 4,283 | | | 4,354 | |
Amortization of commitment fees and note receivable discounts | (412) | | | (872) | | | (729) | |
Amortization of lease incentives | 2,521 | | | 7,555 | | | 1,026 | |
Straight-line lease revenue | (6,961) | | | 16,681 | | | (14,603) | |
Non-cash rental income | (2,500) | | | (3,000) | | | — | |
Non-cash interest income on mortgage and other notes receivable | (1,302) | | | (4,314) | | | (2,614) | |
Non-cash lease deposit liability recognized as rental income | — | | | (8,838) | | | — | |
Gains on sales of real estate, net | (14,721) | | | (28,342) | | | (32,498) | |
Gain on note receivable payoff | — | | | (1,113) | | | — | |
Loss on operations transfer, net | — | | | 710 | | | — | |
Loss on early retirement of debt | 73 | | | 151 | | | 1,912 | |
(Gains) losses from equity method investment | (555) | | | (569) | | | 1,545 | |
Loan and realty losses, net | 1,376 | | | 61,911 | | | 52,766 | |
Payment of lease incentives | (10,000) | | | (1,200) | | | (1,042) | |
| | | | | |
Non-cash share-based compensation | 4,605 | | | 8,613 | | | 8,415 | |
Changes in operating assets and liabilities: | | | | | |
Other assets, net | (2,743) | | | (3,534) | | | (4,050) | |
Accounts payable and accrued expenses | 5,929 | | | 425 | | | 3,352 | |
Deferred income | 101 | | | 412 | | | 260 | |
Net cash provided by operating activities | 184,450 | | | 185,340 | | | 210,859 | |
Cash flows from investing activities: | | | | | |
Investment in mortgage and other notes receivable | (35,625) | | | (79,801) | | | (72,236) | |
Collection of mortgage and other notes receivable | 13,465 | | | 119,212 | | | 67,790 | |
Acquisition of real estate | (38,081) | | | (6,364) | | | (46,817) | |
Proceeds from sales of real estate | 57,031 | | | 168,958 | | | 238,864 | |
Investments in renovations of existing real estate | (7,732) | | | (4,629) | | | (3,465) | |
Investments in equipment | (3,743) | | | — | | | (64) | |
| | | | | |
Distributions from equity method investment | 3,055 | | | 569 | | | 1,205 | |
| | | | | |
Net cash (used in) provided by investing activities | (11,630) | | | 197,945 | | | 185,277 | |
Cash flows from financing activities: | | | | | |
Proceeds from revolving credit facility | 364,000 | | | 225,000 | | | 95,000 | |
Payments on revolving credit facility | (161,000) | | | (183,000) | | | (393,000) | |
Borrowings on term loans | 200,000 | | | — | | | — | |
Payments on term loans and private placement notes | (415,427) | | | (135,388) | | | (293,316) | |
Proceeds from issuance of senior notes | — | | | — | | | 396,784 | |
Prepayment fee for early retirement of debt | — | | | — | | | (1,462) | |
Deferred loan costs | (2,747) | | | (4,612) | | | (5,018) | |
Distributions to noncontrolling interests | (1,280) | | | (916) | | | (910) | |
Proceeds from noncontrolling interests | 2,973 | | | 11,738 | | | — | |
Taxes remitted on employee stock awards | — | | | (288) | | | — | |
Proceeds from equity offering, net | — | | | — | | | 47,904 | |
Equity issuance costs | — | | | (66) | | | — | |
Convertible bond redemption | — | | | — | | | (66,076) | |
Dividends paid to stockholders | (156,238) | | | (161,771) | | | (182,900) | |
| | | | | |
Payments to repurchase shares of common stock | — | | | (151,951) | | | — | |
Net cash used in financing activities | (169,719) | | | (401,254) | | | (402,994) | |
Increase (decrease) in cash and cash equivalents and restricted cash | 3,101 | | | (17,969) | | | (6,858) | |
Cash and cash equivalents and restricted cash, beginning of year | 21,516 | | | 39,485 | | | 46,343 | |
Cash and cash equivalents and restricted cash, end of year | $ | 24,617 | | | $ | 21,516 | | | $ | 39,485 | |
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
NATIONAL HEALTH INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
($ in thousands)thousands)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
| | | | | |
Supplemental disclosure of cash flow information: | | | | | |
Interest paid, net of amounts capitalized | $ | 51,897 | | | $ | 42,659 | | | $ | 43,680 | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | |
| | | | | |
Real estate acquired in exchange for mortgage notes receivable | $ | 14,200 | | | $ | 23,071 | | | $ | — | |
| | | | | |
Increase in mortgage note receivable from sale of real estate | $ | 2,249 | | | $ | — | | | $ | — | |
| | | | | |
Change in other assets related to sales of real estate | $ | — | | | $ | 102 | | | $ | (33) | |
Change in accounts payable related to investments in real estate construction | $ | 325 | | | $ | 20 | | | $ | (62) | |
Right of use asset in exchange for lease liability | $ | 101 | | | $ | — | | | $ | — | |
Change in accounts payable related to renovations of existing real estate | $ | — | | | $ | (37) | | | $ | — | |
Change in accounts payable related to distributions to noncontrolling interests | $ | 6 | | | $ | 139 | | | $ | 64 | |
Operating equipment received in lease termination | $ | — | | | $ | 1,287 | | | $ | — | |
Increase in accounts payable related to transfer of operations | $ | — | | | $ | 300 | | | $ | — | |
Reclassification of prepaid equity issuance costs to capital in excess of par value | $ | 275 | | | $ | — | | | $ | — | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| | | |
Supplemental disclosure of cash flow information: | | | | | |
Interest paid, net of amounts capitalized | $ | 45,405 |
| | $ | 39,539 |
| | $ | 31,289 |
|
Supplemental disclosure of non-cash investing and financing activities: | | | | | |
Settlement of contingent asset acquisition liability | $ | — |
| | $ | — |
| | $ | (3,000 | ) |
Conditional consideration in asset acquisition | $ | — |
| | $ | — |
| | $ | 750 |
|
Change in accounts payable related to investments in real estate | $ | (1,855 | ) | | $ | (430 | ) | | $ | 1,076 |
|
Tenant investment in leased asset | $ | 1,250 |
| | $ | — |
| | $ | — |
|
Reclass of note balance into real estate investment upon acquisition | $ | — |
| | $ | 9,753 |
| | $ | 255 |
|
Assumption of debt in real estate acquisition | $ | 18,311 |
| | $ | — |
| | $ | — |
|
Unsettled marketable securities sales transactions | $ | — |
| | $ | 6,464 |
| | $ | — |
|
Non-cash sale of equity-method investment | $ | — |
| | $ | 8,100 |
| | $ | — |
|
Change in escrow deposit related to investment in real estate | $ | — |
| | $ | (227 | ) | | $ | — |
|
Conversion of preferred stock to common | $ | — |
| | $ | — |
| | $ | 38,132 |
|
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
NATIONAL HEALTH INVESTORS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
($ in thousands except share and per share amounts)amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Cumulative Dividends | | Accumulated Other Comprehensive Income | | Total National Health Investors Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| Shares | | Amount | | | | | | | |
Balances at December 31, 2020 | 45,185,992 | | | $ | 452 | | | $ | 1,540,946 | | | $ | 2,304,909 | | | $ | (2,326,924) | | | $ | (7,149) | | | $ | 1,512,234 | | | $ | 10,711 | | | $ | 1,522,945 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Distributions declared to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (974) | | | (974) | |
Total other comprehensive income | — | | | — | | | — | | | 111,804 | | | — | | | 7,149 | | | 118,953 | | | 163 | | | 119,116 | |
Equity component in redemption of convertible debt | — | | | — | | | (6,076) | | | — | | | — | | | — | | | (6,076) | | | — | | | (6,076) | |
Issuance of common stock, net | 661,951 | | | 7 | | | 47,897 | | | — | | | — | | | — | | | 47,904 | | | — | | | 47,904 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Shares issued on stock options exercised | 2,656 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Share-based compensation | — | | | — | | | 8,415 | | | — | | | — | | | — | | | 8,415 | | | — | | | 8,415 | |
Dividends declared, $3.8025 per common share | — | | | — | | | — | | | — | | | (174,347) | | | — | | | (174,347) | | | — | | | (174,347) | |
Balances at December 31, 2021 | 45,850,599 | | | 459 | | | 1,591,182 | | | 2,416,713 | | | (2,501,271) | | | — | | | 1,507,083 | | | 9,900 | | | 1,516,983 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Distributions declared to noncontrolling interests, excluding $40 attributable to redeemable noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,015) | | | (1,015) | |
Net income, excluding a loss of $843 attributable to redeemable noncontrolling interest | — | | | — | | | — | | | 66,403 | | | — | | | — | | | 66,403 | | | (59) | | | 66,344 | |
Reclassification of redeemable noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,030 | | | 1,030 | |
Equity issuance cost | | | — | | | (80) | | | — | | | — | | | — | | | (80) | | | — | | | (80) | |
| | | | | | | | | | | | | | | | | |
Taxes paid on employee stock options exercised | — | | | — | | | (288) | | | — | | | — | | | — | | | (288) | | | — | | | (288) | |
Shares issued on stock options exercised | 6,497 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Repurchases of common stock | (2,468,354) | | | (25) | | | — | | | (151,926) | | | — | | | — | | | (151,951) | | | — | | | (151,951) | |
Share-based compensation | — | | | — | | | 8,613 | | | — | | | — | | | — | | | 8,613 | | | — | | | 8,613 | |
Dividends declared, $3.60 per common share | — | | | — | | | — | | | — | | | (159,555) | | | — | | | (159,555) | | | — | | | (159,555) | |
Balances at December 31, 2022 | 43,388,742 | | | 434 | | | 1,599,427 | | | 2,331,190 | | | (2,660,826) | | | — | | | 1,270,225 | | | 9,856 | | | 1,280,081 | |
| | | | | | | | | | | | | | | | | |
Noncontrolling interests capital contributions, excluding $922 attributable to redeemable noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,051 | | | 2,051 | |
Distributions declared to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,286) | | | (1,286) | |
Net income, excluding a loss of $1,091 attributable to redeemable noncontrolling interest | — | | | — | | | — | | | 135,654 | | | — | | | — | | | 135,654 | | | (182) | | | 135,472 | |
| | | | | | | | | | | | | | | | | |
Equity issuance cost | — | | | — | | | (275) | | | — | | | — | | | — | | | (275) | | | — | | | (275) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Grants of restricted stock | 21,000 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Shares issued on stock options exercised | 99 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
Share-based compensation | — | | | — | | | 4,605 | | | — | | | — | | | — | | | 4,605 | | | — | | | 4,605 | |
Dividends declared, $3.60 per common share | — | | | — | | | — | | | — | | | (156,257) | | | — | | | (156,257) | | | — | | | (156,257) | |
Balances at December 31, 2023 | 43,409,841 | | | $ | 434 | | | $ | 1,603,757 | | | $ | 2,466,844 | | | $ | (2,817,083) | | | $ | — | | | $ | 1,253,952 | | | $ | 10,439 | | | $ | 1,264,391 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Capital in Excess of Par Value | | Cumulative Net Income in Excess (Deficit) of Dividends | | Accumulated Other Comprehensive Income | | Total National Health Investors Stockholders’ Equity | | Noncontrolling Interest | | Total Equity |
| Shares | | Amount | | | | | | |
Balances at December 31, 2014 | 37,485,902 |
| | $ | 375 |
| | $ | 1,033,896 |
| | $ | (569 | ) | | $ | 6,223 |
| | $ | 1,039,925 |
| | $ | 10,008 |
| | $ | 1,049,933 |
|
Total comprehensive income | — |
| | — |
| | — |
| | 148,862 |
| | 21,687 |
| | 170,549 |
| | 1,452 |
| | 172,001 |
|
Distributions to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,292 | ) | | (2,292 | ) |
Issuance of common stock, net | 830,506 |
| | 8 |
| | 49,381 |
| | — |
| | — |
| | 49,389 |
| | — |
| | 49,389 |
|
Equity offering costs | — |
| | — |
| | (275 | ) | | — |
| | — |
| | (275 | ) | | — |
| | (275 | ) |
Shares issued on stock options exercised | 80,319 |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Share-based compensation | — |
| | — |
| | 2,134 |
| | — |
| | — |
| | 2,134 |
| | — |
| | 2,134 |
|
Dividends declared, $3.40 per common share | — |
| | — |
| | — |
| | (128,431 | ) | | — |
| | (128,431 | ) | | — |
| | (128,431 | ) |
Balances at December 31, 2015 | 38,396,727 |
| | $ | 384 |
| | $ | 1,085,136 |
| | $ | 19,862 |
| | $ | 27,910 |
| | $ | 1,133,292 |
| | $ | 9,168 |
| | $ | 1,142,460 |
|
Total comprehensive income | — |
| | — |
| | — |
| | 151,540 |
| | (22,179 | ) | | 129,361 |
| | 1,176 |
| | 130,537 |
|
Distributions to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,565 | ) | | (1,565 | ) |
Purchase of non-controlling interest | — |
| | — |
| | (16,321 | ) | | — |
| | — |
| | (16,321 | ) | | (8,779 | ) | | (25,100 | ) |
Issuance of common stock, net | 1,395,642 |
| | 14 |
| | 104,176 |
| | — |
| | — |
| | 104,190 |
| | — |
| | 104,190 |
|
Taxes paid on employee stock awards | — |
| | — |
| | (1,133 | ) | | — |
| | — |
| | (1,133 | ) | | — |
| | (1,133 | ) |
Shares issued on stock options exercised | 55,491 |
| | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Share-based compensation | — |
| | — |
| | 1,732 |
| | — |
| | — |
| | 1,732 |
| | — |
| | 1,732 |
|
Dividends declared, $3.60 per common share | — |
| | — |
| | — |
| | (141,529 | ) | | — |
| | (141,529 | ) | | — |
| | (141,529 | ) |
Balances at December 31, 2016 | 39,847,860 |
| | $ | 398 |
| | $ | 1,173,588 |
| | $ | 29,873 |
| | $ | 5,731 |
| | $ | 1,209,590 |
| | $ | — |
| | $ | 1,209,590 |
|
Total comprehensive income | — |
| | — |
| | — |
| | 159,365 |
| | (6,553 | ) | | 152,812 |
| | — |
| | 152,812 |
|
Partial redemption of equity component of convertible debt | — |
| | — |
| | (7,930 | ) | | — |
| | — |
| | (7,930 | ) | | — |
| | (7,930 | ) |
Issuance of common stock, net | 1,661,161 |
| | 17 |
| | 122,220 |
| | — |
| | — |
| | 122,237 |
| | — |
| | 122,237 |
|
Taxes paid on employee stock awards | — |
| | — |
| | (571 | ) | | — |
| | — |
| | (571 | ) | | — |
| | (571 | ) |
Shares issued on stock options exercised | 23,133 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Share-based compensation | — |
| | — |
| | 2,612 |
| | — |
| | — |
| | 2,612 |
| | — |
| | 2,612 |
|
Dividends declared, $3.80 per common share | — |
| | — |
| | — |
| | (156,633 | ) | | — |
| | (156,633 | ) | | — |
| | (156,633 | ) |
Balances at December 31, 2017 | 41,532,154 |
| | $ | 415 |
| | $ | 1,289,919 |
| | $ | 32,605 |
| | $ | (822 | ) | | $ | 1,322,117 |
| | $ | — |
| | $ | 1,322,117 |
|
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
NATIONAL HEALTH INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172023
NOTENote 1. SIGNIFICANT ACCOUNTING POLICIESOrganization and Nature of Business
The Company - National Health Investors, Inc. (“NHI”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,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 portfolioReal Estate Investments segment consists of lease, mortgagereal estate investments and leases, mortgages and other note investmentsnotes receivables in independent living facilities (“ILF”), assisted living facilities (“ALF”), entrance-fee communities (“EFC”), senior living campuses (“SLC”), skilled nursing facilities specialty hospitals and medical office buildings. Other investments have included marketable securities(“SNF”) and a joint venture structured to comply with the provisionshospital (“HOSP”). As of the REIT Investment Diversification Empowerment ActDecember 31, 2023, we had gross investments of 2007 (“RIDEA”) through which we investedapproximately $2.4 billion in facility operations managed by independent third-parties. We fund our163 healthcare real estate investmentsproperties located in 31 states and leased pursuant primarily through: (1) operating cash flow, (2) debt offerings, including bank linesto triple-net leases to 25 tenants consisting of 97 senior housing communities (“SHO”), 65 SNFs and one HOSP, excluding one property classified as assets held for sale. Our portfolio of eight mortgages along with other notes receivable totaled $260.7 million, excluding an allowance for expected credit and term debt, both unsecured and secured, and (3) the salelosses of equity securities.$15.5 million, as of December 31, 2023. Units, beds and square footageproperty count disclosures in this annual reportthese footnotes to the consolidated financial statements are unaudited.
Our SHOP segment is comprised of two ventures that own the operations of ILFs. As of December 31, 2023, we had gross investments of approximately $347.4 million in 15 properties with a combined 1,733 units located in eight states that are operated on Form 10-K are unaudited.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
Principles of Consolidation - The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly-ownedthe Company, and its wholly owned subsidiaries, joint ventures partnerships and consolidated 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 (“VIE”entities” or “VIEs”), if any.the Company is deemed to be the primary beneficiary of such entities. All material intercompany transactions and balances have beenare eliminated in consolidation. Net income is reduced by the portion of net income attributable to noncontrolling interests.
A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.
We apply Financial Accounting Standards Board (“FASB”) guidance forevaluate our arrangements with VIEs which requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of the VIE. In accordance with FASB guidance, management must evaluate each of the Company’s contractual relationships which creates a variable interest in other entities. If the Company has a variable interest and the entity is a VIE, then management must determine whether the Company is the primary beneficiary of the VIE. If it is determined that the Company is the primary beneficiary, NHI consolidateswould consolidate the VIE. We identify the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. We perform this analysis on an ongoing basis.
AtIf the Company has determined that an entity is not a VIE, the Company assesses the need for consolidation under all other provisions of Accounting Standards Codification (“ASC”) Topic 810, Consolidation. These provisions provide for consolidation of majority-owned entities where a majority voting interest held by the Company demonstrates control of such entities in the absence of any legal constraints.
Effective April 1, 2022 and at December 31, 2017,2023, 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 of each VIE because we heldhave the ability to control the activities that most significantly impact each VIE’s economic performance. Reference Notes 5 and 17 for further discussion of our SHOP ventures.
We also consolidate two real estate partnerships formed with our partners, Discovery Senior Housing Investor XXIV, LLC, a related party of Discovery, beginning in June 2019, and LCS Timber Ridge LLC (“LCS”), beginning in January 2020, 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 partnerships, 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 consolidated financial statements. Reference Note 17 for further discussion of these real estate partnerships.
We use the equity method of accounting when we own an interest in eight unconsolidated VIEs. Becausean entity whereby we generallycan 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 have concluded that the Company is not the primary beneficiary for certain investments where we lack either directly or through related parties any material input inthe power to direct the activities that most significantly impact theirthe investments’ economic performance, we have concluded that NHI is not the primary beneficiary.performance. Accordingly, we account for our transactions with these entities and their subsidiaries at either amortized cost.cost or net realizable value for straight-line rents receivable, excluding our investments accounted for under the equity method. See Note 17 for information on unconsolidated VIEs.
Our VIEsNoncontrolling Interests - Contingently redeemable noncontrolling interests are summarized below by date ofrecorded at their initial involvement. For further discussion of the nature of the relationships, including the sources of our exposure to these VIEs, see the notes to our condensed consolidated financial statements cross-referenced below.
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Date | Name | Source of Exposure | Carrying Amount | Maximum Exposure to Loss | Sources of Exposure |
2012 | Bickford / Sycamore | Various1 | $ | 26,801,000 |
| $ | 39,243,000 |
| Notes 2, 3 |
2014 | Senior Living Communities | Notes and straight-line receivable | $ | 37,628,000 |
| $ | 52,011,000 |
| Note 2, 3 |
2014 | Life Care Services affiliate | Notes receivable | $ | 54,805,000 |
| $ | 61,183,000 |
| Note 3 |
2015 | East Lake Capital Mgmt. | Straight-line receivable | $ | 3,171,000 |
| $ | 3,171,000 |
| Note 2 |
2016 | The Ensign Group developer | N/A | $ | — |
| $ | — |
| Note 2 |
2016 | Senior Living Management | Notes and straight-line receivable | $ | 26,095,000 |
| $ | 26,095,000 |
| Note 3 |
2017 | Navion Senior Solutions | Straight-line receivable | $ | 251,000 |
| $ | 251,000 |
| Note 2 |
2017 | Evolve Senior Living | Note receivable | $ | 9,908,000 |
| $ | 9,908,000 |
| Note 3 |
1 Notes, straight-line rent receivables & unamortized lease incentives
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. When the above relationships involve leases, some additional exposure to economic loss is present. Generally, additional economic loss on a lease, if any, would be limited to that resulting from a short period of arrearage and non-payment of monthly rent before we are able to take effective remedial action, as well as costs incurred in transitioning the lease. The potential extent of such loss will be dependent upon individual facts and circumstances, cannot be quantified, and is therefore not included in the tabulation above. Typically, the only carrying amounts involving our leasesupon issuance and are accumulated straight-line receivables.
We apply FASB guidance relatedsubsequently adjusted to investments in joint ventures based on the typereflect their share of controlling rights held by the members’ interests in limited liability companies that may preclude consolidation by the majority equity owner in certain circumstances in which the majority equity owner would otherwise consolidate the joint venture.
We have structured our joint ventures to be compliant with the provisions of RIDEA which permits NHI to receive rent payments through a triple-net lease between a property companygains or losses and an operating company and allows NHI the opportunity to capture additional value on the improving performance of the operating company through distributions to a taxable REIT subsidiary (“TRS”). Accordingly, prior to the termination of our joint venture on September 30, 2016, our TRS held NHI’s equity interest in an unconsolidated operating company, which we did not control, thus providing an organizational structure that allowed the TRS to engage in a broad range of activities and share in revenues that were otherwise non-qualifying income under the REIT gross income tests.
Noncontrolling Interest - We have excluded net income attributable to the noncontrolling interest from net income attributableinterests. In periods where they are or will become probable of redemption, an adjustment to common shareholdersthe 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 Consolidated Statementscomputation of Income for the years ended December 31, 2016 and December 31, 2015.earnings per share. As of December 31, 20172023 and during2022, the year endedMerrill SHOP venture noncontrolling interest was classified in mezzanine equity, as discussed further in Note 10.
The noncontrolling interests associated with our consolidated real estate partnerships, and our Discovery member SHOP venture were classified in equity as of December 31, 2017, we did not hold any noncontrolling interests.2023 and 2022.
Equity-Method Investment - Through September 30, 2016, we reported our TRS investment in an unconsolidated entity, over whose operating and financial policies we had the ability to exercise significant influence but not control, under the equity method of accounting. Under this accounting method, our pro rata share of the entity’s earnings or losses was included in our Condensed Consolidated Statements of Income. Additionally, we adjusted our investment carrying amount to reflect our share of changes in the equity-method investee’s capital resulting from its capital transactions. On September 30, 2016, we unwound the joint venture underlying the TRS and ceased participation in the operations which comprised all its activity.
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant assumptions and estimates include purchase price allocations to record investments in real estate, impairment of real estate, and allowance for credit losses. Actual results could differ from those estimates.
Earnings Per Share - TheOur unvested restricted stock awards contain non-forfeitable rights to dividends, and accordingly, these awards are deemed to be participating securities. Therefore, the Company applies the two-class method to calculate basic and diluted earnings. Under the two-class method, we allocate net income attributable to stockholders to common stockholders and holders of unvested restricted stock by using the weighted-average shares of each class outstanding for quarter-to-date and year-to-date periods, based on their respective participation rights to dividends declared and undistributed earnings. Basic earnings per common share is computed by dividing net income attributable to common stockholders by the weighted average number of shares of common sharesstock outstanding during the reporting period is used to calculate basic earnings per common share.period. Diluted earnings per common share assumereflects the exerciseeffect of stock options using the treasury stock method, to the extent dilutive. Diluted earnings per share also incorporate the potential dilutive impact of our 3.25% convertible senior notes due 2021. securities.
We apply the treasury stock method to ourany convertible debt instruments, the effect of which is that conversion will not be assumed for purposes of computing diluted earnings per share unless the average share price of our common stock for the period exceeds the conversion price per share. Diluted earnings per share for the year ended December 31, 2021 includes the potential dilutive impact of our convertible debt that was repaid in 2021.
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 the 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.
Fair Value Measurements - Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy is required to prioritize the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair value are as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
If the fair value measurement is based on inputs from different levels of the hierarchy, the level within which the entire fair value measurement falls is the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. When an event or circumstance alters our assessment of the observability and thus the appropriate classification of an input to a fair value measurement which we deem to be significant to the fair value measurement as a whole, we will transfer that fair value measurement to the appropriate level within the fair value hierarchy.
Real Estate PropertiesProperty Owned - Real estate properties are recorded at cost or, if acquired through business combination, at fair value, including the fair value of contingent consideration, if any. Cost or fair value at the time of acquisition is allocated among land, buildings, tenant improvements, personal property and lease and other intangibles, and personal property.intangibles. For properties acquired in transactions accounted for as asset purchases, the purchase price, allocationwhich includes transaction costs, is allocated based on the relative fair values of the assets acquired. Cost includes the amount of contingent consideration, if any, deemed to be probable at the acquisition date. Contingent consideration is deemed to be probable to the extent that a significant reversal in amounts recognized is not likely to occur when the uncertainty associated with the contingent consideration is subsequently resolved. Cost also includes capitalized interest during construction periods. We use the straight-line method of depreciation for buildings over their estimated useful lives of 40 years, and improvements, including any equipment related to the SHOP segment, over their estimated useful lives ranging from 5 to 25 years. For contingent consideration arising from business combinations, the liability is adjusted to estimated fair value at each reporting date through earnings.
Expenditures for repairs and maintenance are expensed as incurred.
Impairment of Long-Lived Assets - We evaluate the recoverability of the carrying valueamount of our real estate properties on a property-by-property basis. On a quarterly basis, we review our properties for recoverabilitylong-lived assets when events or circumstances, including significant physical changes, in the property, significant adverse changes in general economic conditions andor significant deteriorationsdeterioration of the underlying cash flows of the property,long-lived assets, indicate that the carrying amount of the propertylong-lived asset may not be recoverable. The need to recognize an impairment charge is based on estimated undiscounted future cash flows from a property compared to the carrying value of that property.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 property.long-lived asset.
MortgageDuring the years ended December 31, 2023, 2022 and Other Notes Receivable2021, we recognized impairment charges of approximately $1.6 million, $51.6 million and $51.8 million, respectively, included in “Loan and realty losses, net” in our Consolidated Statements of Income. Reference Note 3 for more discussion.
Leases - Each quarter, we evaluate the carrying valuesAll of our notes receivable onleases within the Real Estate Investment segment are classified as operating leases and generally have an instrument-by-instrument basisinitial leasehold term of 10 to 15 years followed by one or more five-year tenant renewal options. The leases are “triple-net leases” under which the tenant is responsible for recoverability when events or circumstances, including the non-receiptpayment of contractual principalall taxes, utilities, insurance premiums, repairs and interest payments, significant deteriorationsother charges relating to the operation of the financial conditionproperties, including required levels of capital expenditures each year. The tenant is obligated at its expense to keep all improvements, fixtures and other components of the borrowerproperties covered by “all risk” insurance in an amount equal to at least the full replacement cost thereof, and significant adverse changes in general economic conditions, indicate thatto maintain specified minimal personal injury and property damage insurance. The leases also require the carrying amounttenant to indemnify and hold us harmless from all claims resulting from the use, occupancy and related activities of each property by the note receivable maytenant, and to indemnify us against all costs related to any release, discovery, clean-up and removal of hazardous substances or materials, or other environmental responsibility with
respect to each facility. While we do not be recoverable. If a note receivable becomes more than 30 days delinquent asincorporate residual value guarantees, the lease provisions and considerations discussed above impact our expectation of realizable value from our properties upon the expiration of their lease terms. The residual value of our real estate under lease is still subject to contractual principal or interest payments,various market, asset, and tenant-specific risks and characteristics. As the loanclassification of our leases is classified as non-performing, and thereafter we recognize all amounts due when received. If necessary, an impairment is measured as the amount by which the carrying amount exceeds the discounted cash flows expected to be received under the note receivable or, if foreclosure is probable,dependent on the fair value of estimated cash flows at lease commencement, management’s projected residual values represent significant assumptions in our accounting for operating leases. Similarly, the collateral securingexercise of renewal options is also subject to these same risks, making a tenant’s lease term another significant variable in a lease’s cash flows. Initial direct costs that are incremental to entering into a lease are capitalized in accordance with the note receivable.provisions of ASC Topic 842.
FASB Lease Modifications Related to Effects of the COVID-19 Pandemic - In accordance with the FASB’s question-and-answer document issued in April 2020, we elected to account for qualified rent concessions provided as a result of the coronavirus pandemic (“COVID-19”) as variable lease payments, recorded as rental income when received and not as lease modifications under ASC Topic 842. This guidance was applicable to certain rent concessions granted in 2021 and 2022. Reference Note 3 for more detail.
Financial Instruments - Credit Losses - We estimate and record an allowance for credit losses upon origination of the loan, based on expected credit losses over the term of the loan and update this estimate each reporting period. We calculate the estimated credit losses on mortgages by pooling these loans into two groups – investments in existing or new mortgages and construction mortgages. Mezzanine, revolving lines of credit and loans designated as non-performing are evaluated at the individual loan level. We estimate the allowance for credit losses by utilizing a loss model that relies on future expected credit losses, rather than incurred losses. This loss model incorporates our historical experience, adjusted for current conditions and our forecasts, using the probability of default and loss given default method. Incorporated into the construction mortgage loss model is an estimate of the probability that NHI will acquire the property. Using the resulting estimate, a portion of the outstanding construction mortgage balance which we currently expect will be reduced by our acquisition of the underlying property when construction is complete, is deducted from the construction mortgage balance included in the expected loss calculation. Mezzanine loans, revolving lines of credit and loans designated as non-performing are also based on the loss model to recognize expected future credit losses and are applied to each individual loan using borrower specific information. We also perform a qualitative assessment beyond model estimates and apply adjustments as necessary. The credit loss estimate is based on the net amortized cost balance of our mortgage and other notes receivables as of the balance sheet date.
Calculation of the allowance for credit losses involves significant judgment. It is possible that actual credit losses will differ materially from our current estimates. Write-offs are deducted from the allowance for credit losses when we judge the principal to be uncollectible.
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 exchange agreement pursuant to Section 1031 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) 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 Consolidated Statements of Cash Flows ($ in thousands):
| | | | | | | | | | | | | |
| As of December 31, | | |
| 2023 | | 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 | $ | 22,347 | | | $ | 19,291 | | | |
Restricted cash (included in Other assets, net) | 2,270 | | | 2,225 | | | |
Cash, cash equivalents, and restricted cash | $ | 24,617 | | | $ | 21,516 | | | |
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.
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 oftenmay exceed federally-insuredfederally 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, and marketable securities, if any, are subject to the possibility of loss of the carrying values as a result of either the failure of other parties to perform according to their contractual obligations or changes in market prices 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.
Marketable Securities - Investments in marketable debt and equity securities must be categorized as trading, available-for-sale or held-to-maturity. Our investments in marketable equity securities are classified as available-for-sale securities. Unrealized gains and losses on available-for-sale securities are recorded in other comprehensive income. We evaluate our securities for other-than-temporary impairments on at least a quarterly basis. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis.
A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed to be other-than-temporary results in an impairment to reduce the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until a market price recovery and consider whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end and forecasted performance of the investment.
Deferred Loan Costs - Costs incurred to acquire debt are capitalized and amortized by the effective intereststraight-line method, which approximates the effective-interest method, over the term of the related debt.
Deferred Income - Deferred income primarily includes rents received in advance from tenants and residents and non-refundable lease commitment fees received by us, which are amortized into income over the expected period of the related loan or lease. In the event that our financing commitment to a potential borrower or lesseetenant expires, the related commitment fees are recognized into income immediately. Commitment fees may be charged based on the terms of the lease agreements and the creditworthiness of the parties.
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.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 lesseetenant over a base year or base quarter.target threshold. We recognize contingent rent annually or quarterlyperiodically based on the actual revenues of the lesseetenant 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 rentalsrent payments and are excluded from the scheduledetermination of minimum lease payments.
If rental income calculated on a straight-line basis exceeds the cash rent due under a lease, the difference is recorded as an increase to straight-line rentrents receivable in the Consolidated Balance Sheets and an increase in rental income in the Consolidated Statements of Income. If rental income on a straight-line basis is calculated to be less than cash received, there is a decrease in the same accounts.
Property operating expenses that are reimbursed by our operators are recorded as “Rental income” in the Consolidated Statements of Income. Accordingly, we record a corresponding expense, reflected in “Taxes and insurance on leased properties” in the Consolidated Statements of Income. Rental income includes reimbursement of property operating expenses for the years ended December 2023, 2022 and 2021, totaling $11.5 million, $9.8 million and $11.6 million, respectively.
Rental income is reduced for the non-cash amortization of payments made upon the eventual settlement of commitments and contingencies originally identified and recorded as lease inducements. We record contingent consideration arising from lease inducements to the extent that it is probable that a significant reversal of amounts recognized will not occur when the uncertainty associated with the contingent consideration is subsequently resolved.
We identifyThe Company reviews its operating lease receivables for collectability on a leaseregular basis, taking into consideration changes in factors such as non-performing if a requiredthe 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 received within 30 daysprobable, a direct write-off of the date itreceivable is due. Our policy relatedmade as an adjustment to rental income and any future rental revenue is recognized only when the tenant makes a rental payment. As of December 31, 2023, we had three tenants, including
Bickford Senior Living (“Bickford”), on non-performing leased real estate properties is to recognizethe cash basis of revenue recognition for their lease arrangements. During the year ended December 31, 2022, we placed three operators on the cash basis of rental income recognition. During the year ended December 31, 2021, we placed Holiday Retirement (“Holiday”) on cash basis for its master lease which was terminated in 2022 upon the period whenformation of the SHOP ventures. Reference Note 3 for further discussion of cash basis tenants.
Resident Fees and Services - Resident fee and services revenue associated with our SHOP activities is recognized as the related cashperformance 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 received.billed monthly in arrears. The Company has elected the lessor practical expedient within ASC Topic 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 Topic 606, Revenue Recognition from Contracts with Customers.
Interest Incomefrom Mortgage and Other Notes Receivable - Mortgage interestInterest income is recognized based on the interest rates and principal amounts outstanding on the mortgage notes receivable. Under certain mortgages, we receive additional contingent interest, which is calculated on the increase in the current year revenues of a borrower over a base year. We identify a mortgage loannote as non-performing if abased on various criteria including timeliness of required payment is not received within 30 dayspayments, compliance with other provisions under the related note agreement, and an evaluation of the dateborrower’s current financial condition for indicators that it is due. Our policy relatedprobable it cannot pay its contractual amounts. A non-performing loan is returned to mortgageaccrual status at such time as the note becomes contractually current and management believes all future principal and interest income on non-performing mortgage loans iswill be received according to recognize mortgage interest income in the period whencontractual terms of the cash is received.note. As of December 31, 2017,2023, we had not identified anytwo mortgage notes receivable and a mezzanine loan totaling an aggregate of our mortgages$26.6 million with affiliates of two operators/borrowers, including Bickford, designated as non-performing.
Investment Income and Other - Investment income and other includes dividends when declared and interest when earned from our investments in marketable securities, and interest on cash and cash equivalents when earned. Realized gains and losses on sales of marketable securities using the specific-identification method are included as a separate component of continuing operations in the Consolidated Statements of Income as investment and other gains.
Derivatives - In the normal course of business, we are subject to risk from adverse fluctuations in interest rates. We have chosenOccasionally, we may choose to manage this risk through the use of derivative financial instruments, primarily interest rate swaps. Counterparties to these contracts are major financial institutions. We are exposed to credit loss in the event of nonperformance by these counterparties. We do not use derivative instruments for trading or speculative purposes. Our objective in managing exposure to market risk is to limit the impact on cash flows.flows relating to the change in market interest rates on our variable rate debt.
To qualify for hedge accounting, our interest rate swaps must effectively reduce the risk exposure that they are designed to hedge. In addition, at inception of a qualifying cash flow hedging relationship, the underlying transaction or transactions must be, and be expected to remain, probable of occurring in accordance with our related assertions. All of our hedges are cash flow hedges.
We recognize all derivative instruments, including embedded derivatives required to be bifurcated, as assets or liabilities at their fair value in the Consolidated Balance Sheets. Changes in the fair value of derivative instruments that are not designated as hedges or that do not meet the criteria of hedge accounting are recognized in earnings. For derivatives designated in qualifying cash flow hedging relationships, the change in fair value of the effective portion of the derivatives is recognized in accumulated other comprehensive income (loss), whereas the change in fair value of theany ineffective portion is recognized in earnings. Gains and losses are reclassified from accumulated other comprehensive income (loss) into earnings once the underlying hedged transaction is recognized in earnings.
Federal Income Taxes - We intend at all times to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. We record income tax expense or benefit with respect to one of our subsidiaries which is taxed TRS under provisions similar to those applicable to regular corporations. Aside from such income taxes which may be applicable to the taxable income in the TRS,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 at least equal to or in excess of 90% of our taxable income. Accordingly, no provision for federal income taxes has been made in the consolidated financial statements, except for the provision on the taxable income of the TRS, which is included in our consolidated statements of income under the caption, “Income tax benefit (expense) of taxable REIT subsidiary.” OurA failure to continue 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.
Certain activities that we undertake may be conducted by subsidiary 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 consolidated financial statements.
Earnings and profits, which determine the taxability of dividends to stockholders, differ from net income reported for financial reporting purposes due primarily to differences in the basis of assets, estimated useful lives used to compute depreciation expense, gains on sales of real estate, non-cash compensation expense and recognition of commitment fees.
Our tax returns filed for years beginning in 20132020 are subject to examination by taxing authorities. We classify interest and penalties related to uncertain tax positions, if any, in our consolidated financial statementsConsolidated Statements of Income as a component of income tax expense.
Segment DisclosuresSegments - 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 inoperated on behalf of the business of owning and financing health care properties. We are managed as one segment, rather than multiple segments, for internal purposes and for internal decision making.
Reclassifications - We have reclassified certain balances where necessary to conform the presentation of prior periodsCompany by independent managers pursuant to the current period. We have combined our investment in marketable securities intoterms of separate management agreements. Reference Notes 5 and 16 for additional information.
Recent Accounting Pronouncements - In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU enhances segment disclosures by requiring public entities to provide investors with additional, more detailed information about a reportable segment’s expenses. The ASU also requires disclosure of the chief operating decision maker’s (“CODM”) title and position on an annual basis, as well as an explanation of how the CODM uses the reported measures and other assets in our Consolidated Balance Sheet atdisclosures. The amendment is effective for the Company for the year ending December 31, 2016. These reclassifications had no effect on previously reported net income.2024.
New Accounting Pronouncements - For a review of recent accounting pronouncements pertinent to our operations and management’s judgment as to the impact that the eventual adoption of these pronouncements will have on our financial position and results of operation, see
Note 14.3. Investment Activity
NOTE 2. REAL ESTATE
As of December 31, 2017, we owned 209 health care real estate properties located in 32 states and consisting of 136 senior housing communities, 68 skilled nursing facilities, 3 hospitals and 2 medical office buildings. Our senior housing properties include assisted living facilities, senior living campuses, independent living facilities, and entrance-fee communities. These investments (excluding our corporate office of $1,298,000) consisted of properties with an original cost of approximately $2,664,605,000, rented under triple-net leases to 27 lessees.
2023 Acquisitions and New Leases of Real Estate
During the year ended December 31, 2017,2023, we announcedcompleted the following real estate investments and commitments as described below acquisitions within our Real Estate Investments segment (dollars$ in thousands)thousands):
|
| | | | | | | | | | |
Operator | | Date | | Properties | | Asset Class | | Amount |
Navion Senior Solutions | | February 2017 | | 2 | | SHO | | $ | 16,100 |
|
Prestige Care | | March 2017 | | 1 | | SHO | | 26,200 |
|
The LaSalle Group | | March 2017 | | 5 | | SHO | | 61,865 |
|
The Ensign Group | | March 2017 | | 1 | | SNF | | 15,096 |
|
Bickford Senior Living | | June 2017 | | 1 | | SHO | | 10,400 |
|
Acadia Healthcare | | July 2017 | | 1 | | HOSP | | 4,840 |
|
Senior Living Communities | | August 2017 | | 1 | | SHO | | 6,830 |
|
Marathon/Village Concepts | | October 2017 | | 1 | | SHO | | 7,100 |
|
Discovery Senior Living | | December 2017 | | 1 | | SHO | | 34,600 |
|
Navion Senior Solutions | | December 2017 | | 1 | | SHO | | 8,200 |
|
| | | | | | | | $ | 191,231 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
Navion Senior Solutions
In two acquisitions,February 2023, we acquired threetwo 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/memory-care facilities totaling 118 unitsliving and memory care community in North Carolina. 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 $2.5 million in Bickford’s outstanding pandemic-related rent deferrals that has been recognized in “Rental income.” We added the community to an existing master lease with Bickford at an initial rate of 8.0%.
2022 Acquisitions and New Leases of Real Estate
During the year ended December 31, 2022, we completed the following real estate acquisitions within our Real Estate Investments segment ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operator | | Date | | Properties | | Asset Class | | Land | | Building and Improvements | | Total |
Encore Senior Living | | Q2 2022 | | 1 | | ALF | | $ | 542 | | | $ | 12,758 | | | $ | 13,300 | |
Bickford | | Q4 2022 | | 1 | | ALF | | 2,052 | | | 15,148 | | | 17,200 | |
| | | | | | | | $ | 2,594 | | | $ | 27,906 | | | $ | 30,500 | |
In April 2022, we acquired a 53-unit ALF located in Oshkosh, Wisconsin, from Encore Senior Living. The acquisition price was $13.3 million and included the firstcancellation of an outstanding construction note receivable to us of $9.1 million, including
interest. 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%.
In November 2022, we acquired a 60-unit ALF located in Virginia Beach, Virginia, from Bickford. The acquisition on February 21, 2017, we paid $16,100,000, inclusive of $100,000price was $17.2 million, including $0.2 million in closing costs, and the fundingcancellation of $207,000an outstanding construction note receivable of $14.0 million including interest. The acquisition price also included a reduction of $3.0 million in specified capital improvements for two assisted living/memory-care facilities totaling 86 unitsBickford’s outstanding pandemic-related rent deferrals that were recognized in Hendersonville, North Carolina.rental income in the fourth quarter of 2022 based on the fair value of the real estate assets received. We leased the facilities to Navion Senior Solutions (“NSS,” previously known as Ravn Senior Solutions) for an initial lease term of 15 years plus renewal options. The initial annual lease rate is 7.35%, plus fixed annual escalators. For the two facilities acquired in February, we have additionally committed to NSS certain earnout payments contingent on reaching and maintaining certain performance metrics. As earned, the earnout payments, totaling $1,500,000, would be due in installments of up to $1,000,000 for performance measured as of December 31, 2018, with any subsequently earned cumulative unpaid amounts to be measured and due as earned for the periods ending December 31, 2019 and/or 2020. Upon funding, contingent payments earned will be added to the lease base.
On December 14, 2017, for $7,550,000, inclusive of $100,000 in closing costs, we acquired a third assisted living/memory-care facility totaling 32 units in Durham, North Carolina. We leased the facility to NSS for an initial lease term of 15 years plus renewal options. Additionally, the lease provides for lease incentives of up to $3,350,000 based upon the achievement of certain performance metrics, and we have committed $650,000 to an expansion program. The initial annual lease rate is 7.15%, plus fixed annual escalators. Payment of any incentives will be added to the lease base at the rate prevailing when funded. The Durham acquisition was incorporated into the existing master lease which was extendedwith Bickford for all properties through December 2032.
NSS’s relationship to NHI consists of its leasehold interests and purchase options and is considered a variable interest, analogous to a financing arrangement. NSS is structured to limit liability for potential damage claims, is capitalized for that purpose and is considered a VIE. Additionally, the master lease conveys to NHI an option to purchase a third facility currently operated by NSS.
Prestige
On March 10, 2017, we acquired a 102-unit assisted living community in Portland, Oregon for $26,200,000, inclusive of closing costs of $112,000. We leased the facility to Prestige Care (“Prestige”) under our existing master lease, which has a remaining lease term of 1210.5 years plus renewal options. The lease provides for an initial annual lease rate of 7% plus annual escalators of 3.5% in years two through four and 2.5% thereafter. The acquisition was accounted for as an asset purchase.
In addition, we have committed to Prestige certain earnout payments contingent on reaching and maintaining specified performance metrics. If earned, the earnout payments, totaling $1,000,000, would be due for performance measured and earned as of December 31, 2018. Upon funding, contingent payments earned will be added to the lease base.
The LaSalle Group
On March 16, 2017, we acquired five memory care communities totaling 223 units in Texas and Illinois for $61,865,000 inclusive of closing costs of $65,000. We leased the facilities to The LaSalle Group (“LaSalle”) for an initial lease term of 15
years. The lease provides for an initial annual lease rate of 7% plus annual escalators of 3.5% in years two through three and 2.5% thereafter. The acquisition was accounted for as an asset purchase.
In addition, we have committed to LaSalle certain earnout payments contingent on reaching and maintaining certain performance metrics. As earned, the earnout payments, totaling $5,000,000, would be due in installments of up to $2,500,000 for performance measured as of December 31, 2018, with any subsequently earned cumulative unpaid amounts to be measured and due as earned for the trailing periods ending December 31, 2019 and/or 2020. Upon funding, contingent payments earned will be added to the lease base.
The Ensign Group
On March 24, 2017, we acquired from a developer a 126-bed skilled nursing facility in New Braunfels, Texas for $13,846,000 plus $1,250,000 contributed by the lessee, The Ensign Group (“Ensign”). The facility is included under our existing master lease for the remaining lease term of 14 years plus renewal options. The initial lease rate is set at 8.35% subject to annual escalators based on prevailing inflation rates. The acquisition was accounted for as an asset purchase.
With the acquisition of the New Braunfels property, NHI has a continuing commitment to purchase, from the developer, three new skilled nursing facilities in Texas for $42,000,000 which are newly developed and are leased to Legend Healthcare and subleased to Ensign. The fixed-price nature of the commitment creates a variable interest for NHI in the developer, whom NHI considers to lack sufficient equity to finance its operations without recourse to additional subordinated debt. The presence of these conditions causes the developer to be considered a VIE.
Acadia
In July 2017, we acquired a 10-acre parcel of land (“Property”) for $4,840,000. The Property was conveyed to NHI by a subsidiary of our tenant, Acadia Healthcare Company (“Acadia”), who is the lessee of NHI’s TrustPoint Hospital in Murfreesboro, Tennessee, which is situated on adjacent land. Our ground lease with Acadia covers a 10-year period and bears an initial rate of 7%8.0%, with annual CPI escalators subject to escalation aftera floor and ceiling.
Asset Dispositions
2023 Asset Dispositions
During the third year. Additionally,year ended December 31, 2023, we completed the lease confers a purchase optionfollowing real estate property dispositions within our Real Estate Investments segment ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operator | | Date | | Properties | | Asset Class | | Net Proceeds | | Net Real Estate Investment | | Gain | | Impairment2 |
BAKA Enterprises, LLC1,3 | | Q1 2023 | | 1 | | ALF | | $ | 7,478 | | | $ | 7,505 | | | $ | — | | | $ | 27 | |
Bickford1 | | Q1 2023 | | 1 | | ALF | | 2,553 | | | 1,421 | | | 1,132 | | | — | |
Chancellor Health Care1,3 | | Q2 2023 | | 1 | | ALF | | 2,355 | | | 1,977 | | | 378 | | | — | |
Milestone Retirement1,3,4 | | Q2 2023 | | 2 | | ALF | | 3,803 | | | 3,934 | | | — | | | 131 | |
Chancellor Health Care1,3 | | Q2 2023 | | 1 | | ALF | | 7,633 | | | 6,140 | | | 1,493 | | | — | |
Milestone Retirement1,3,4 | | Q2 2023 | | 1 | | ALF | | 1,602 | | | 1,452 | | | 150 | | | — | |
Chancellor Health Care | | Q2 2023 | | 1 | | ALF | | 23,724 | | | 14,476 | | | 9,248 | | | — | |
Chancellor Health Care1,3 | | Q3 2023 | | 1 | | ALF | | 2,923 | | | 2,292 | | | 631 | | | — | |
Senior Living Management1,4 | | Q4 2023 | | 2 | | ALF | | 5,522 | | | 4,770 | | | 752 | | | — | |
Senior Living Management1,3 | | Q4 2023 | | 1 | | ALF | | 1,515 | | | 1,100 | | | 415 | | | — | |
| | | | 12 | | | | $ | 59,108 | | | $ | 45,067 | | | $ | 14,199 | | | $ | 158 | |
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 losses, net” in the Consolidated Statements of Income for the year ended December 31, 2023.
3 Total aggregate impairment charges previously recognized on the property, on which Acadia intends to construct a sister facility. The option opens in 2020, extends through June 2023,these properties were $0.3 million and is to be exercisable at our original purchase price. In connection with the ground lease, the window of Acadia’s existing purchase option on the TrustPoint Hospital facility was shifted from 2018 to 2020 to coincide with the option window on the Property. Of our total revenues, $2,537,000 and $2,392,000 were derived from Acadia$17.4 million for the years ended December 31, 20172023 and 2016,2022, respectively.
4 The Company provided aggregate financing of approximately $2.2 million, net of discounts, on these transactions in the form of notes receivable, which is included net proceeds.
Evolve
On August 7, 2017, we extended a first mortgage loan of $10,000,000 to Evolve Senior Living (“Evolve”) to fund the purchase of a 40 unit memory care facility in New Hampshire. The loan provides for annual interest of 8% and a maturity of five years plus renewal terms at the option of the borrower. NHI has the option to purchase the facility at fair market value after year two of the loan.
Senior Living Communities
On August 25, 2017, we committed to fund up to $6,830,000 in upgrades covering identified needs within the nine-facility independent living portfolio operated by Senior Living Communities (“Senior Living”). Amounts funded will be addedTotal rental income related to the lease base. No funding had occurred underdisposed properties was $3.3 million, $0.7 million and $6.1 million for years ended December 31, 2023, 2022 and 2021, respectively.
2022 Asset Dispositions
During the agreementyear ended December 31, 2022, we completed the following real estate property dispositions within our Real Estate Investments segment ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operator | | Date | | Properties | | Asset Class | | Net Proceeds | | Net Real Estate Investment | | Gain | | Impairment1 |
Hospital Corporation of America | | Q1 2022 | | 1 | | MOB | | $ | 4,868 | | | $ | 1,904 | | | $ | 2,964 | | | $ | — | |
Vitality Senior Living2 | | Q1 2022 | | 1 | | SLC | | 8,302 | | | 8,285 | | | 17 | | | — | |
Holiday2 | | Q2 2022 | | 1 | | ILF | | 2,990 | | | 3,020 | | | — | | | 30 | |
Chancellor Health Care2 | | Q2 2022 | | 2 | | ALF | | 7,305 | | | 7,357 | | | — | | | 52 | |
Bickford2 | | Q2 2022 | | 3 | | ALF | | 25,959 | | | 28,268 | | | — | | | 2,309 | |
Comfort Care | | Q2 2022 | | 4 | | ALF | | 40,000 | | | 38,444 | | | 1,556 | | | — | |
Helix Healthcare | | Q2 2022 | | 1 | | HOSP | | 19,500 | | | 10,535 | | | 8,965 | | | — | |
Discovery Senior Living2 | | Q3 2022 | | 2 | | ALF/SLC | | 16,379 | | | 15,159 | | | 1,220 | | | — | |
National HealthCare Corporation (“NHC”) | | Q3 2022 | | 7 | | SNF | | 43,686 | | | 30,066 | | | 13,620 | | | — | |
| | | | 22 | | | | $ | 168,989 | | | $ | 143,038 | | | $ | 28,342 | | | $ | 2,391 | |
| | | | | | | | | | | | | | |
1 Impairments are included in “Loan and realty losses, net” in the Consolidated Statement of Income for the year ended December 31, 2022.
2 Total impairment charges recognized on these properties were $28.5 million for the year ended December 31, 2022.
Total rental income related to the disposed properties was $7.0 million and $10.9 million for years ended December 31, 2022 and 2021, respectively.
Assets Held for Sale and Long-Lived Assets
The following is a summary of our assets held for sale ($ in thousands):
| | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2023 | | 2022 |
Number of facilities | | 1 | | 13 |
Real estate, net | | $5,004 | | $43,302 |
| | | | |
Rental income associated with the asset held for sale as of December 31, 2017.
Marathon/Village Concepts
On October 15, 2017, we committed up to $7,100,000 to fund the expansion of our independent living community in Chehalis, Washington leased to Marathon Development2023 totaled $1.7 million, $0.9 million, and Village Concepts Retirement Communities (“Marathon”). Upon funding, incurred amounts will be added to the lease base. As of December 31, 2017, no funding had occurred under the agreement.
Discovery
On December 1, 2017, we acquired a 200-unit independent living facility in Tulsa, Oklahoma, for $34,600,000 including the assumption of a Fannie Mae mortgage with remaining balance of $18,311,000. The mortgage amortizes through 2025 when a balloon payment will be due, is subject to prepayment penalties until 2024, and bears interest at an annual rate of 4.6%. We leased the property to Discovery Senior Living (“Discovery”) at an initial lease rate of 7% with fixed annual escalators beginning in
year two of the fifteen year term. We have additionally committed up to $500,000 in capital improvements, which upon funding will be added to the lease base. The acquisition was accounted for as an asset purchase.
Major Customers
Bickford
As of December 31, 2017 our Bickford Senior Living (“Bickford”) portfolio consists of leases with primary lease expiration dates as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Lease Expiration | |
| Sept / Oct 2019 | June 2023 | Sept 2027 | May 2031 | Total |
Number of Properties | 10 |
| 13 |
| 4 |
| 20 |
| 47 |
|
2017 Annual Contractual Rent | $ | 8,994 |
| $ | 10,809 |
| $ | 125 |
| $ | 16,576 |
| $ | 36,504 |
|
Straight Line Rent Adjustment | (347 | ) | 226 |
| 309 |
| 4,914 |
| 5,102 |
|
Total Revenues | $ | 8,647 |
| $ | 11,035 |
| $ | 434 |
| $ | 21,490 |
| $ | 41,606 |
|
| | | | | |
On June 1, 2017, we acquired an assisted living/memory-care facilitytotaling 60 units in Lansing, Michigan, for $10,400,000, inclusive of $200,000 in closing costs. Additionally, we have committed to the funding of $475,000 in specified capital improvements, which will be added to the lease base. We included this facility in a master lease to Bickford for a remaining term of 14 years plus renewal options. The initial lease rate is 7.25%, plus annual fixed escalators. We accounted for the acquisition as an asset purchase.
In April and August 2017, Bickford opened the last two of the five-facility development project announced in 2015. Newly-constructed facilities have an annual lease rate of 9% at completion, after six months of free rent. Of these facilities, 35 were held in a RIDEA structure and operated as a joint venture until September 30, 2016, when NHI and Sycamore, an affiliate of Bickford, entered into a definitive agreement terminating the joint venture and converting Bickford’s participation to a triple-net tenancy with assumption of existing leases and terms. Through September 30, 2016, NHI owned an 85% equity interest and Sycamore owned a 15% equity interest in our consolidated subsidiary (“PropCo”). The facilities were leased to an operating company (“OpCo”), in which NHI previously held a non-controlling 85% ownership interest. The facilities are managed by Bickford. Our joint venture was structured to comply with the provisions of RIDEA. On September 30, 2016, we unwound the joint venture underlying the RIDEA and reacquired Bickford’s share of its assets. Effective May 1, 2017, NHI and Bickford announced a new amended and restated master lease covering 20 Bickford properties. Under terms of the new master lease, the base term for these properties will now extend to May 2031. Additionally, effective June 28, 2017, the leases of thirteen properties acquired in June 2013 and initially set for expiration in June 2018 have been renewed and extended through June 2023. NHI has a right to future Bickford acquisitions, development projects and refinancing transactions.
In September 2017, upon collection of all past-due rents, we transitioned the lease of a 126-unit assisted living portfolio from our then tenant as the result of material noncompliance with lease terms. On September 30, 2017, we entered with Bickford into a 10-year lease, beginning October 1, 2017. The agreement provides for initial annual lease payments of $1,500,000 with a 4% escalator in effect for years two through four and 3% thereafter. Additionally, the lease provides a purchase option which opens immediately and is co-terminus with the lease. The option will be exercisable for the greater of $21,400,000 or at a capitalization rate of 8.5% on the forward 12-month rental at the time of exercise. The former lease provided for a contractual payment of $2,237,000 in 2016.
Of our total revenues, $41,606,000 (15%), $30,732,000 (12%) and $24,121,000 (11%) were recognized as rental income from Bickford$1.1 million for the years ended December 31, 2017, 20162023, 2022 and 2015, including $5,102,000, $858,000, and $267,000 in straight-line rent2021, respectively. Rental income respectively.
Senior Living
Asassociated with the assets held for sale as of December 31, 2017, we leased nine retirement communities totaling 1,970 units to Senior Living . The 15-year master lease, which began in December 2014, contains two 5-year renewal options2022 totaled $2.1 million and provides for an annual escalator of 4% in 2018 and 3% thereafter.
Of our total revenue, $45,735,000 (16%), $40,332,000 (16%) and $39,422,000 (17%) in lease revenues were derived from Senior Living$5.6 million for the years ended December 31, 2017, 20162022 and 2015, respectively, including $6,984,000, $7,369,0002021, respectively.
During the year ended December 31, 2023, we recorded impairment charges of approximately $1.6 million for four properties in our Real Estate Investments segment, of which $0.5 million related to three properties either sold or classified as assets held for sale. During the year ended December 31, 2022, we recorded impairment charges of approximately $51.6 million for 19 properties which were sold or classified as held for sale in our Real Estate Investments segment. Impairment charges are included in “Loan and $8,422,000realty losses, net” in straight-line rent.the Consolidated Statements of Income.
On August 25, 2017, we committedWe reduce the carrying value of impaired properties to funding up to $6,830,000 toward a facilities upgrade program. Senior Living’s contributiontheir estimated fair value or, with respect to the program will include continuing its capital expenditures in amounts exceeding its contractual lease commitmentsproperties 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 covering identified needs within3 inputs).
Tenant Concentration
The following table contains information regarding tenant concentration, excluding $2.6 million for our corporate office, $347.4 million for the nine-facility independent living portfolio discussed above. Amounts funded by NHI will be added toSHOP segment, and a credit loss reserve of $15.5 million, based on the lease base on which NHI’s rental income is calculated. No funding had occurred under the agreement aspercentage of December 31, 2017.
Holiday
As of December 31, 2017, we leased 25 independent living facilities to an affiliate of Holiday Retirement (“Holiday”). The 17-year master lease began in December 2013 and provides for a minimum escalator of 3.5% after 2017.
Of our total revenues $43,817,000 (16%), $43,817,000 (18%) and $43,817,000 (19%) were derived from Holiday for the years ended December 31, 2017, 20162023, 2022 and 2015, respectively, including $7,397,000, $8,965,0002021 related to tenants or affiliates of tenants, that exceed 10% of total revenue ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2023 | | Revenues1 |
| Asset | | Gross Real | | Notes | | Year Ended December 31, |
| Class | | Estate2 | | Receivable | | 2023 | | | 2022 | | | 2021 | |
| | | | | | | | | | | | | | |
Senior Living Communities | EFC | | $ | 573,631 | | | $ | 48,950 | | | $ | 51,274 | | 16% | | $ | 51,183 | | 18% | | $ | 50,726 | | 17% |
NHC | SNF | | 133,770 | | | — | | | 37,335 | | 12% | | 36,893 | | 13% | | 37,735 | | 12% |
Bickford3 | ALF | | 429,043 | | | 16,795 | | | 38,688 | | 12% | | N/A | N/A | | 34,599 | | 12% |
All others, net | Various | | 1,293,969 | | | 195,002 | | | 132,216 | | 41% | | 144,534 | | 52% | | 164,017 | | 55% |
Escrow funds received from tenants | | | | | | | | | | | | | | |
for property operating expenses | Various | | — | | | — | | | 11,513 | | 4% | | 9,788 | | 4% | | 11,638 | | 4% |
| | | $ | 2,430,413 | | | $ | 260,747 | | | 271,026 | | | | 242,398 | | | | 298,715 | | |
Resident fees and services4 | | | | | | | 48,809 | | 15% | | 35,796 | | 13% | | — | | —% |
| | | | | | | $ | 319,835 | | | | $ | 278,194 | | | | $ | 298,715 | | |
1 Includes interest income on notes receivable and $10,466,000rental income from properties classified as held for sale.
2 Amounts include any properties classified as held for sale.
3 Revenues included in straight-line rent, respectively. OurAll others, net for years when less than 10%.
4 There is no tenant operatesconcentration in resident fees and services because these agreements are with individual residents.
At December 31, 2023 and 2022, the facilities pursuant to a management agreement with a Holiday-affiliated manager.two states in which we had an investment concentration of 10% or more were South Carolina (12.1%) and Texas (10.7%).
NHCSenior Living Communities
As of December 31, 2017,2023, we leased 42 facilities under two master leasesten retirement communities totaling 2,216 units to National HealthCare CorporationSenior Living Communities, LLC (“NHC”Senior Living”), a publicly-held company pursuant to triple-net lease agreements maturing through December 2029. We recognized straight-line rent revenue of $(1.2) million, $0.4 million and $2.5 million from the lessee of our legacy properties. Senior Living lease agreements for the years ended December 31, 2023, 2022 and 2021, respectively.
NHC
The facilities leased to NHC, a publicly held company, are under a master lease and consist of 3 independent living facilitiesthree ILFs and 39 skilled nursing facilities (432 SNFs (four of which are subleased to other parties for whom the lease payments are guaranteed to us by NHC). These facilities are leased to NHC underEffective September 1, 2022, we amended the terms of an amended master lease agreement originally dated October 17, 1991, (“concurrently with the 1991 lease”) which includes our 35 remaining legacy properties andsale of a portfolio of seven SNFs to increase the annual base rent due each year through the expiration of the master lease agreement dated August 30, 2013 (“the 2013 lease”) which includes 7 skilled nursing facilities acquired from a third party.
The 1991 lease has been amended to extend the lease expiration toon December 31, 2026. There are two additional 5-yearfive-year renewal options each at a fair rental value of such leased property as negotiated between the parties and determined without including the value attributable to any improvementsparties. In addition to the leased property voluntarily madebase rent, NHC pays any additional rent and percentage rent as required by NHC at its expense.the master lease. Under the terms of the amended lease, the base annual rental is $30,750,000 and rent escalates by 4% of the increase, if any, in each facility’s annual revenue over a 2007 base year. The 2013 lease provides for a base annual rental of $3,450,000 and has a lease expiration of August 2028. Under the terms of the 2013 lease, rent escalates 4% of the increase, if any, in each facility’s revenue over a 2014 base year. For both the 1991 lease and the 2013 lease, weWe refer to this additional rent component as “percentage rent.” DuringStraight-line rent of $(1.2) million and $(0.5) million was recognized for NHC for the last three years ofended December 31, 2023 and 2022, respectively. No material straight-line rent was recognized for the 2013 lease, NHC will have the option to purchase the facilities for $49,000,000.year ended December 31, 2021.
The following table summarizes the percentage rent income from NHC ($ in thousands):
| | | | | Year Ended December 31, | |
| Year Ended December 31, |
| | | Year Ended December 31, | |
| 2017 | | 2016 | | 2015 |
| | | Year Ended December 31, | |
| | | | | 2023 | | | | | | | 2023 | | 2022 | | 2021 |
Current year | $ | 3,127 |
| | $ | 2,932 |
| | $ | 2,385 |
|
Prior year final certification1 | 194 |
| | 547 |
| | 94 |
|
Total percentage rent | $ | 3,321 |
| | $ | 3,479 |
| | $ | 2,479 |
|
Total percentage rent income | |
1 For purposes of the percentage rent calculation described in the Master Lease Agreement,master lease agreement, NHC’s annual revenue by facility for a given year is certified to NHI by March 31st of the following year.
Of our total revenue, $37,467,000 (13%), $37,626,000 (15%) and $36,625,000 (16%) in 2017, 2016 and 2015, respectively, were derived from NHC.
The chairmanTwo of our board of directors ismembers, including our chairman, are also a director onmembers of NHC’s board of directors. As of December 31, 2017,2023, NHC owned 1,630,4621,630,642 shares of our common stock.
Bickford
In October 2017, we issued a letter of forbearance to one of our tenants for a default on our lease terms involving coverage and liquidity ratios. Rent to the Company was current as
As of December 31, 2017. Lease revenues2023, we leased 39 facilities to Bickford under four leases. During the second quarter of 2022, we converted Bickford to the cash basis of revenue recognition based upon information obtained from Bickford regarding its financial condition that raised substantial doubt as to its ability to continue as a going concern. As a result, 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, net” on the Consolidated Balance Sheet, to rental income in 2022. Straight-line rent revenue of $(18.2) million and $1.7 million was recognized from the tenant and its affiliates comprise 3% of our rental income, and the related straight-line rent receivable was approximately $3,482,000 at December 31, 2017.
We continue to work with the tenant to resolve their defaults. In this effort, we have established a physical presence and visited specific touchpoints that concentrate on the tenant’s revenue and expenditure cycles, and we have identified potential efficiencies. The combination of monitoring and the redoubling of the operator’s efforts has yielded early (unaudited) results that indicate
some improvement in collections, occupancy and margins, an attendant strengthening of operating ratios, and point the way to renewed profitability. With these developments, we continue to maintain a heightened vigilance toward the performance of the portfolio. No rent concessions have been offered to this tenant.
The defaults mentioned above typically give rise to considerations regarding the impairment or recoverability of the related assets, and we give additional attention to the nature of the default’s underlying causes. At this time, consequently, our assessment of likely undiscounted cash flows, calculated at the lowest level for which identifiable asset-specific cash flows are largely independent, reveals no basis for an impairment charge on the underlying real estate.
HSM Lease Extension
Effective as of May 1, 2017, we amended and extended our lease with Health Services Management (“HSM”) covering six skilled nursing facilities in Florida. The amended lease calls for $9,800,000 in first year cash rent, plus fixed annual escalators over a 12-year term. The new agreement replaced the lease set to expire September 30, 2017, which provided for a total cash rent of $7,241,000 in 2016.
Other Lease Activity
We adjust rental income for the amortization of payments recorded as the result of the eventual settlement of commitments and contingencies originally identified in Note 6 as lease inducements. Amortization of these payments against revenues was $119,000, $40,000 and $40,000Bickford leases for the years ended December 31, 2017, 20162022 and 2015,2021, respectively.
On March 22, 2016, we sold a skilled nursing facility in IdahoCash rent received from Bickford for cash considerationthe years ended December 31, 2023, 2022 and 2021 was $33.4 million, $27.6 million and $29.5 million, respectively, including its repayment of $3,000,000. The carrying valueoutstanding pandemic-related rent deferrals of $2.3 million and $0.2 million for the facility was $1,346,000,years ended December 31, 2023 and we recorded a gain2022, respectively. These amounts exclude $2.5 million and $3.0 million of $1,654,000. As discussed aboverental income for the years ended December 31, 2023 and 2022, respectively, related to the reduction of pandemic-related rent deferrals in connection with The Ensign Group,the acquisition of two ALFs located in Virginia discussed above. As of December 31, 2023, Bickford’s outstanding pandemic-related rent deferrals were $18.0 million.
During the first half of 2022, we sold two skilled nursing facilitiestransferred one ALF located in May 2016 for total considerationPennsylvania 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 rents receivable, reducing rental income. Effective April 1, 2022, we restructured and amended three of $24,600,000Bickford’s master lease agreements covering 28 properties and realized a gain of $2,805,000reached agreement on the disposal. In June 2016, we recognizedrepayment terms of its outstanding pandemic-related rent deferrals. Significant terms of these agreements are as follows:
• Extended 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.
• Reduced the combined rent for the portfolio to approximately $28.3 million (excluding the ALF in Virginia Beach acquired in the fourth quarter of 2022) per year through April 1, 2024, subject to a gainnominal annual increase, at which time the rent will be reset to a fair market value, but not less than 8.0% of $123,000our initial gross investment.
• Required monthly payments from October 2022 through December 2024 based on a percentage of Bickford’s monthly revenues exceeding an established threshold to be applied to the outstanding pandemic-related rent deferrals granted to Bickford. 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 of which $2.5 million was earned in the first quarter of 2023 and $3.0 million was earned in the fourth quarter of 2022.
Holiday
During the third quarter of 2021, Welltower Inc. (“Welltower”) completed an acquisition that resulted in a Welltower-controlled subsidiary becoming a tenant under our master lease for the NHI-owned Holiday real estate assets. We placed the tenant on the salecash basis of accounting effective in the third quarter of 2021 because of non-payment of rent and completed the transitioning of the remaining properties in this portfolio effective April 1, 2022. Reference Note 9 for more discussion.
Other Portfolio Activity
Cash Basis Operators and Straight-line Rents Receivable Write-offs
We placed three operators on the cash basis of accounting for their leases during 2022, including Bickford discussed above. During 2021, the Welltower-controlled tenant of our Holiday portfolio was the only tenant on the cash basis prior to the completion of the portfolio transition. Rental income associated with these tenants totaled $48.3 million, $21.4 million and $68.8 million for the years ended December 31, 2023, 2022 and 2021, respectively, which includes the impact of write-offs of $26.0 million in total straight-line rents receivable and $7.1 million of lease incentives during the year ended December 31, 2022.
Included in rental income are amounts received from prior rent deferrals granted to cash basis tenants totaling $2.8 million and $0.3 million for the years ended December 31, 2023 and 2022, respectively.
Tenant Purchase Options
Certain of our leases contain purchase options allowing tenants to acquire the leased properties. At December 31, 2023, we had tenant purchase options on three properties with an aggregate net investment of $58.4 million that will become exercisable between 2027 and 2028. Rental income from these properties with tenant purchase options was $7.2 million, $7.0 million and $6.9 million for the years ended December 31, 2023, 2022 and 2021, 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.
Lease Costs
As of December 31, 2023, we are a vacant land parcel.lessee under a ground lease related to an ALF located in Ohio. For the years ended December 31, 2023, 2022 and 2021, the expense associated with this operating lease was $0.1 million and is included within “General and administrative expense” on the Consolidated Statements of Income. Future minimum lease payments are approximately $0.1 million annually for 2024 through 2028 with cumulative payments of $2.5 million thereafter reflecting an aggregate of $1.3 million of imputed interest. At December 31, 2023, the discount rate for this lease approximated 4.7%. Supplemental balance sheet information related to the lease is as follows ($ in thousands):
| | | | | | | | | | | | | | | |
| | | |
| | | As of December 31, |
| | | | | 2023 | | 2022 |
Buildings and improvements - right of use asset | | | | | $ | 1,562 | | | $ | 1,599 | |
| | | | | | | |
Accounts payable and accrued expenses - lease liability | | | | | $ | 1,705 | | | $ | 1,724 | |
Rent Concessions
During 2022 and 2021, we granted various rent concessions to tenants whose operations were adversely affected by the COVID-19 pandemic. When applicable, we elected not to apply the modification guidance under ASC Topic 842 and accounted for the related concessions as variable lease payments until those leases were subsequently modified under ASC Topic 842. Rent deferrals accounted for as variable lease payments, reducing rental income, granted for the years ended December 31, 2022 and 2021 totaled approximately $9.3 million and $26.4 million, respectively. Of these totals, Bickford accounted for $4.0 million and $18.3 million for the years ended December 31, 2022 and 2021, respectively. There were no pandemic-related rent deferrals granted during the year ended December 31, 2023.
Future Minimum Lease Payments
At December 31, 2017, the futureFuture minimum lease payments (excluding percentage rent) to be received by us under our operating leases, with ourincluding cash basis tenants, at December 31, 2023 are as follows ($in thousands):
| | | | | |
Year Ending December 31, | Amount |
2024 | $ | 232,059 | |
2025 | 237,981 | |
2026 | 244,581 | |
2027 | 198,598 | |
2028 | 192,179 | |
Thereafter | 684,840 | |
| $ | 1,790,238 | |
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 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):
|
| | | | |
2018 | | $ | 245,167 |
|
2019 | | 248,297 |
|
2020 | | 246,497 |
|
2021 | | 248,414 |
|
2022 | | 251,312 |
|
Thereafter | | 1,742,065 |
|
| | $ | 2,981,752 |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | Year Ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
Lease payments based on fixed escalators and deferral repayments | | | | | $ | 225,565 | | | $ | 226,873 | | | $ | 241,172 | |
Lease payments based on variable escalators | | | | | 7,709 | | | 5,275 | | | 4,662 | |
Straight-line rent income, net of write-offs | | | | | 6,961 | | | (16,681) | | | 14,603 | |
Escrow funds received from tenants for property operating expenses | | | | | 11,513 | | | 9,788 | | | 11,638 | |
Amortization and write-off of lease incentives | | | | | (2,521) | | | (7,555) | | | (1,026) | |
Rental income | | | | | $ | 249,227 | | | $ | 217,700 | | | $ | 271,049 | |
NOTE 3. MORTGAGE AND OTHER NOTES RECEIVABLENote 4. Mortgage and Other Notes Receivable
At December 31, 2017, we had2023, our investments in mortgage notes receivable with a carrying value of $98,110,000totaled $162.4 million secured by real estate and other assets of the borrower (e.g., UCC liens on the personal property of 9property) related to 16 facilities and in other notes receivable with a carrying valuetotaled $98.3 million, substantially all of $43,376,000which are guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner. At December 31, 2016, we had2022, our investments in mortgage notes receivable with a carrying value of $99,179,000totaled $164.6 million and other notes receivable withtotaled $83.9 million. These balances exclude a carrying valuecredit loss reserve of $34,314,000. No allowance for doubtful accounts was considered necessary$15.5 million and $15.3 million at December 31, 2017 or 2016.2023 and 2022, respectively.
Bickford
AtOur loans designated as non-performing as of December 31, 2017,2023 and 2022 include a mortgage note receivable of $10.0 million and a mezzanine loan of $14.5 million with affiliates of one operator/borrower. This operator/borrower is also one of the tenants on the cash basis of accounting for its leases discussed in Note 3. During the third quarter of 2023, we designated as non-performing a mortgage note receivable of $2.1 million due from Bickford. Interest income recognized from these non-performing loans was $1.8 million, $1.7 million and $2.1 million, respectively, for the years ended December 31, 2023, 2022 and 2021. All other loans were on full accrual basis at December 31, 2023 and 2022.
2023 Mortgage and Other Notes Receivable
Capital Funding Group, Inc. Loan Extension
In September 2023, we amended a mezzanine loan with Capital Funding Group, Inc. Pursuant to the terms of the agreement, the loan increased from its balance at June 30, 2023 of $8.1 million to $25.0 million. The interest rate on the loan was increased to 10% and the maturity was extended to December 31, 2028.
2022 Mortgage and Other Notes Receivable
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 $27.7 million and $14.2 million as of December 31, 2023 and 2022, respectively.
Capital Funding Group, Inc.
In November 2022, we funded a $42.5 million senior loan to refinance a portfolio of five skilled nursing facilities located in Texas. The loan was made to affiliates of Capital Funding Group and the properties are leased by subsidiaries of The Ensign Group. The five-year loan agreement has an annual interest rate of 7.25% and two one-year extensions.
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 December 31, 2023 and 2022, we had funded $20.3 million of our construction loanscommitment that was used to Bickford are summarized as follows:acquire nine medical office buildings for a combined purchase price of approximately $86.7 million.
|
| | | | | | | | | | | | | |
| Rate | | Maturity | | Commitment | | Drawn | | Location |
July 2016 | 9% | | 5 years | | $ | 14,000,000 |
| | $ | (11,096,000 | ) | | Illinois |
January 2017 | 9% | | 5 years | | 14,000,000 |
| | (4,462,000 | ) | | Michigan |
| | | | | $ | 28,000,000 |
| | $ | (15,558,000 | ) | | |
Interest accrues at an annual rate ranging between 7.5% and 9.5% that is paid monthly in arrears. Deferred interest accrues at an additional annual rate ranging between 2.5% and 4.5% to be paid upon certain future events including repayments, sales of fund investments, and refinancings. The deferred interest will be recognized as interest income upon receipt. For the years ended December 31, 2023, 2022 and 2021, we received interest of $1.8 million, $1.8 million and $0.2 million, respectively. For the year ended December 31, 2022, we received principal of $0.3 million. 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, subject to two one-year extensions.
Other Activity
Bickford Construction and Mortgage Loans
As of December 31, 2023, we had one fully funded construction loan of $14.7 million to Bickford. The promissory notes areconstruction loan is 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 subject 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 atproperty upon stabilization whereby annual rent will be set with a floor of 9.55%, based on NHI’s total investment, plus fixed annual escalators.the underlying operations. On these and future loancertain development projects, Bickford as the borrower is entitled to up to $2,000,000$2.0 million per project in incentive loan drawsincentives based uponon the achievement of predetermined operational milestones, the funding of which if earned, will increase the principal amount and NHI's future purchase price and eventual NHI lease payment.payments to NHI.
Our loansWe held a second mortgage note receivable with a balance of $12.7 million and $13.0 million as of December 31, 2023 and 2022, respectively, originated in connection with the sale of six properties to Bickford representin 2021. This second mortgage note receivable bears interest at a variable interest as do our leases, which are considered analogous to financing arrangements. Bickford is structured to limit liability for potential claims for damages, is capitalized to achieve that purpose10% annual rate and is considered a VIE.
Evolve
On August 7, 2017, we completed a first mortgage loan of $10,000,000 to Evolvematures in April 2026. Interest income was $1.2 million, $1.3 million and $0.9 million for the purchase of a 40 unit memory care facilityyears ended December 31, 2023, 2022 and 2021, respectively, related to the second mortgage. We did not include this note receivable in New Hampshire. The loan provides for annual interest of 8% and a maturity of five years plus renewal terms at the optiondetermination of the borrower. Termsgain recognized upon sale of the loan grant NHI a 10% participationportfolio. Therefore, this note receivable is not reflected in “Mortgage and other notes receivable, net” in the property’s appreciationConsolidated Balance Sheets as of December 31, 2023 and 2022. During the year ended December 31, 2023, Bickford repaid $0.3 million of principal on this note receivable which is reflected in “Gains on sale of real estate, net” in the Consolidated Statement of Income.
As noted previously, we designated a mortgage note receivable of $2.1 million due from Bickford as non-performing during the periodthird quarter of 2023.
Life Care Services - Sagewood
During the loan is outstanding, and NHI also has the option to purchase the facility at fair market value after the second year of the loan. Our loan to Evolve represents a variable interest. Evolve is structured to limit liability for potential claims for damages, is capitalized to achieve that purpose and is considered a VIE.
Timber Ridge
In February 2015, we entered into an agreement to lend up to $154,500,000 to LCS-Westminster Partnership III LLP (“LCS-WP”),ended December 31, 2021, an affiliate of Life Care Services (“LCS”). The loan agreement conveysrepaid in full a $61.2 million mortgage note. As a result, we recognized the remaining commitment fee of $0.4 million in “Interest income and other” on the Consolidated Statement of Income for the year ended December 31, 2021.
In the second quarter of 2022, we received repayment of a $111.3 million mortgage note receivable along with all accrued interest and facilitateda prepayment fee of $1.1 million which is reflected in “Gain on note receivable payoff” on the constructionConsolidated Statement of Phase II of Timber Ridge at Talus (“Timber Ridge”), a Type-A Continuing Care Retirement Community in Issaquah, WA managed by LCS. Our loan to LCS-WP represents a variable interest. As an affiliate of a larger company, LCS-WP is structured to limit liabilityIncome for potential damage claims, is capitalized to achieve that purpose and is considered a VIE.
The loan takes the form of two notes under a master credit agreement. The senior note (“Note A”) totals $60,000,000 at a 6.75% interest rate with 10 basis-point escalators after year three, and has a term of 10 years. We have funded $53,622,000 of Note A as ofended December 31, 2017. Note A is interest-only2022. Interest income was $5.2 million and is locked to prepayment$10.2 million and for three years. After year three in February 2018, the prepayment penalty starts at 5% and declines 1% per year. Note B is a construction loan for up to $94,500,000 at an annual interest rate of 8% and a five-year maturity and was fully drawn during 2016. We began receiving repayment with new resident entrance fees upon the opening of Phase II during the fourth quarter of 2016. Repayment of Note B amounted to $92,547,000 as ofyears ended December 31, 2017.2022 and 2021, respectively.
NHI has a purchase option on the entire Timber Ridge property for the greater of fair market value or $115,000,000 during a purchase option window of 120 days that will contingently open in year five or upon earlier stabilization of the development, as defined.
Senior Living Communities
In connection with the acquisition in December 2014 of the properties leased to Senior Living, weWe have provided a $15,000,000$20.0 million revolving line of credit to Senior Living whose borrowings under the maturity of which mirrors the 15-year term of the master lease. Borrowingsrevolver are to be used for working capital and to finance construction projects within the Senior Livingits portfolio, including building additional units. UpBeginning January 1, 2025, availability under the revolver will be reduced to $5,000,000$15.0 million. The revolver matures in December 2029 at the time of lease maturity. At December 31, 2023, the facility may be used to meet general working capital needs. Amounts$16.3 million outstanding under the facility, $616,000revolver 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 secured by a 248-unit 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 $38.3 million, subject to adjustment for market conditions.
Credit Loss Reserve
Our principal measures of credit quality, except for construction mortgages, are debt service coverage for amortizing loans and interest or fixed charge coverage for non-amortizing loans, collectively referred to as “Coverage”. A Coverage ratio provides a measure of the borrower’s ability to make scheduled principal and interest payments. The Coverage ratios presented in the table below have been calculated utilizing the most recent date for which data is available, September 30, 2023, using EBITDARM (earnings before interest, taxes, depreciation, amortization, rent and management fees) and the requisite debt service, interest service or fixed charges, as defined in the applicable loan agreement. We categorize Coverage into three levels: (i) more than 1.5x, (ii) between 1.0x and 1.5x, and (iii) less than 1.0x. We update the calculation of Coverage on a quarterly basis. Coverage is not a meaningful credit quality indicator for construction mortgages as either these developments are not generating any operating income, or they have insufficient operating income as occupancy levels necessary to stabilize the properties have not yet been achieved. We measure credit quality for these mortgages by considering the construction and stabilization timeline and the financial condition of the borrower as well as economic and market conditions. The tables below present outstanding note balances as of December 31, 2017, bear interest2023 at amortized cost.
We consider the guidance in ASC Topic 310-20, Receivables - Nonrefundable Fees and Other Costs, when determining whether a modification, extension or renewal constitutes a current period origination. The credit quality indicator as of December 31, 2023, is presented below for the amortized cost, net by year of origination of ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total |
Mortgages | | | | | | | |
more than 1.5x | $ | — | | $ | 70,042 | | $ | — | | $ | 22,337 | | $ | 32,700 | | $ | 2,587 | | $ | 127,666 | |
between 1.0x and 1.5x | 1,550 | | — | | — | | — | | — | | 14,700 | | 16,250 | |
less than 1.0x | — | | — | | — | | — | | 6,423 | | — | | 6,423 | |
| | | | | | | |
| 1,550 | | 70,042 | | — | | 22,337 | | 39,123 | | 17,287 | | 150,339 | |
Mezzanine | | | | | | | |
more than 1.5x | 720 | | — | | 14,933 | | — | | — | | — | | 15,653 | |
between 1.0x and 1.5x | — | | — | | 23,934 | | — | | — | | — | | 23,934 | |
less than 1.0x | — | | — | | — | | — | | — | | 25,000 | | 25,000 | |
| | | | | | | |
| 720 | | — | | 38,867 | | — | | — | | 25,000 | | 64,587 | |
Non-performing | | | | | | | |
| | | | | | | |
| | | | | | | |
less than 1.0x | — | | — | | — | | 2,095 | | — | | 24,500 | | 26,595 | |
| — | | — | | — | | 2,095 | | — | | 24,500 | | 26,595 | |
Revolver | | | | | | | |
| | | | | | | |
between 1.0x and 1.5x | | | | | | | 19,226 | |
| | | | | | | |
| | | | | | | 19,226 | |
| | | | | Credit loss reserve | (15,476) | |
| | | | | | | $ | 245,271 | |
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 the sufficiency of the under lying collateral and the 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 year ended December 31, 2023 ($ in thousands):
| | | | | |
Balance at January 1, 2023 | $ | 15,338 | |
Provision for expected credit losses | 138 | |
| |
| |
| |
Balance at December 31, 2023 | $ | 15,476 | |
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 preferred and common equity interests. The Company owns 100% of the preferred equity interests in these ventures with an annual rate equalfixed preferred return of approximately $10.2 million as of December 31, 2023. 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 initially contributed $10.6 million in cash for its 20% common equity interest in the venture. In the second quarter of 2023, the members of this venture contributed an additional $4.6 million to fund additional capital expenditures, which was funded in cash in accordance with each member’s common equity interest percentage in the venture. The operating agreement for the venture provides for contingent distributions to the prevailing 10-year U.S. Treasury rate, 2.40%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 and classified in mezzanine equity as of December 31, 2017, plus 6%.2023 and 2022, 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 initially contributed $1.1 million in cash for its 2% common equity interest in the venture. In the fourth quarter of 2023, the members contributed an additional $2.6 million to fund additional capital expenditures, which was funded in cash in accordance with each member’s common equity interest percentage in the venture. The operating agreement for the venture provides for contingent distributions to the members based on the attainment of certain yields on investment calculated on an annual basis. At inception, the noncontrolling interest associated with this venture was determined to be contingently redeemable and classified in mezzanine equity on the Consolidated Balance Sheet. Effective in the fourth quarter of 2022, the operating agreement was amended, resulting in the noncontrolling interest no longer being contingently redeemable. The noncontrolling interest is classified in “Equity” on the Consolidated Balance Sheets as of December 31, 2023 and 2022.
The properties are managed by separate related parties of Discovery pursuant to management agreements, each with an initial term through March 2016,2032 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 extended two mezzanine loansinvested $0.9 million in the operating company, Timber Ridge OpCo, LLC (“Timber Ridge OpCo”) representing a 25% equity interest. This investment is held by a 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 $12,000,000$5.0 million of which no funds have been drawn.
We account for our investment in Timber Ridge OpCo under the equity method and $2,000,000, respectively,decrease the carrying value of our investment for losses in the entity and distributions to affiliates of Senior Living,NHI for cumulative amounts up to partiallyand including our basis plus any guaranteed or implied commitments to fund constructionoperations. In February 2023, we received $2.5 million from Timber Ridge OpCo, representing the Company’s proportionate share of a 186-unit senior living campuslease incentive earned, as discussed in Note 7, based on Daniel Islandits equity interest in South Carolina. The loans bear interest payable monthly at a 10% annual ratethe entity. Our guaranteed and mature in March 2021. The loans were fully drawn atimplied 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 December 31, 2017,2023, 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 providethe $2.5 million lease incentive distribution received are included in “Accounts payable and
accrued expenses” in our Consolidated Balance Sheet as of December 31, 2023. Excess unrecognized equity method losses for the years ended December 31, 2023 and 2022 were $2.7 million and $4.2 million, respectively. Cumulative unrecognized losses were $9.1 million through December 31, 2023. We recognized gains of approximately $0.6 million, representing cash distributions received related to our investment in Timber Ridge OpCo for both the years ended December 31, 2023 and 2022, respectively and losses of approximately $1.5 million related to our investment in Timber Ridge OpCo for year ended December 31, 2021.
The Timber Ridge property is subject to early resident mortgages secured by a Deed of Trust and Indenture of Trust (the “Deed and Indenture”). As part of our acquisition, 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 with a purchase option onto Timber Ridge PropCo. In addition, under the development upon its meeting certain operational metrics. The option is to remain openterms of the resident loan assumption agreement, during the term of the loans, pluslease (seven years with two renewal options), Timber Ridge OpCo is to indemnify Timber Ridge PropCo for any extensions.
Our loans to Senior Livingrepayment by Timber Ridge PropCo of these liabilities under the guarantee. As a result of the subordination agreement and its subsidiaries represent a variable interest as does our lease, which is considered to be analogous to a financing arrangement. Senior Living is structured to limitthe resident loan assumption agreements, no liability for potential claims for damages, is appropriately capitalized for that purpose and is considered a VIE.
Senior Living Management
On August 3, 2016, we entered into an agreement to furnish to our current tenant, Senior Living Management, Inc. (“SLM”), through its affiliates, loans of up to $24,500,000 to facilitate SLM’s acquisition of five senior housing facilities that it currently operates. The loans consist of two notes under a master credit agreement, include both a mortgage and a corporate loan, and bear interest at 8.25% with terms of five years, plus optional one and two-year extensions. NHI has a right of first refusal if SLM elects to sell the facilities. The loans were fully fundedbeen recorded as of December 31, 2017.2023. The balance secured by the Deed and Indenture was $11.8 million at December 31, 2023.
Our loans to SLM represent a variable interest as do our leases, which are analogous to financing arrangements. SLM is structured to limit liability for potential damage claims, is capitalized for that purpose and is considered a VIE.
Note 7. Other Assets
Other Note Activity
In June 2017 Traditions of Minnesota paid off the undiscounted balance of $4,256,000 on its mortgage note outstanding to NHI. With the early payoff, we recognized interest income of $922,000 related to a prepayment penalty and the retirement of the remaining unamortized discount.
NOTE 4. OTHER ASSETS
Our other assets, net consist of the following ($in thousands): | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 | | |
SHOP accounts receivable, net of allowance of $343 and $375, and other assets | $ | 1,620 | | | $ | 1,341 | | | |
Real estate investments accounts receivable and prepaid expenses | 3,296 | | | 3,621 | | | |
Lease incentive payments, net | 10,669 | | | 3,190 | | | |
Regulatory escrows | 6,208 | | | 6,208 | | | |
Restricted cash | 2,270 | | | 2,225 | | | |
| $ | 24,063 | | | $ | 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
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Accounts receivable and other assets | $ | 5,187 |
| | $ | 9,212 |
|
Regulatory escrows | 8,208 |
| | 8,208 |
|
Reserves for replacement, insurance and tax escrows | 4,817 |
| | 4,047 |
|
Marketable securities | — |
| | 11,745 |
|
| $ | 18,212 |
| | $ | 33,212 |
|
Regulatory escrows include mandated deposits in connection with our entrance fee communities in Connecticut. Reserves for replacement, insurance and tax escrows include amounts required to be held on deposit in accordance with agency agreements governing our Fannie Mae and HUD mortgages.
As of December 31, 2016, our investments in marketable securities included available-for-sale equity securities which are reported at fair value. Unrealized gains and losses on available-for-sale securities are presented as components of accumulated other comprehensive income. Realized gains and losses from securities sales are determined based upon specific identification of the securities.
Net unrealized gains related to available-for-sale securities were $10,065,000 at December 31, 2016.
NOTE 5. DEBT
Debt consists of the following ($ in thousands):
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
Revolving credit facility - unsecured | $ | 245,000 | | | $ | 42,000 | |
Bank term loans - unsecured | 200,000 | | | 240,000 | |
2031 Senior Notes - unsecured, net of discount of $2,278 and $2,600 | 397,722 | | | 397,400 | |
Private placement notes - unsecured | 225,000 | | | 400,000 | |
Fannie Mae term loans - secured, non-recourse | 76,241 | | | 76,649 | |
Unamortized loan costs | (8,912) | | | (8,538) | |
| $ | 1,135,051 | | | $ | 1,147,511 | |
|
| | | | | | | |
| December 31, 2017 | | December 31, 2016 |
Convertible senior notes - unsecured (net of discount of $2,637 and $4,717) | $ | 144,938 |
| | $ | 195,283 |
|
Revolving credit facility - unsecured | 221,000 |
| | 158,000 |
|
Bank term loans - unsecured | 250,000 |
| | 250,000 |
|
Private placement term loans - unsecured | 400,000 |
| | 400,000 |
|
HUD mortgage loans (net of discount of $1,402 and $1,487) | 43,645 |
| | 44,354 |
|
Fannie Mae term loans - secured, non-recourse | 96,367 |
| | 78,084 |
|
Unamortized loan costs | (10,453 | ) | | (9,740 | ) |
| $ | 1,145,497 |
| | $ | 1,115,981 |
|
Aggregate principal maturities of debt as of December 31, 20172023 for each of the next five years and thereafter are as followsincluded in
the table below. These maturities do not include the impact of any debt incurred or repaid subsequent to December 31, 2023 ($ in thousands):
|
| | | |
Twelve months ended December 31, | |
2018 | $ | 1,144 |
|
2019 | 1,188 |
|
2020 | 1,230 |
|
2021 | 148,854 |
|
2022 | 472,328 |
|
Thereafter | 535,245 |
|
| 1,159,989 |
|
Less: discounts | (4,039 | ) |
Less: unamortized loan costs | (10,453 | ) |
| $ | 1,145,497 |
|
| | | | | |
For The Year Ending December 31, | Amount |
2024 | $ | 75,425 | |
2025 | 325,816 | |
2026 | 245,000 | |
2027 | 100,000 | |
2028 | — | |
Thereafter | 400,000 | |
| 1,146,241 | |
Less: discount | (2,278) | |
Less: unamortized loan costs | (8,912) | |
| $ | 1,135,051 | |
| |
Unsecured revolving credit facility and bank term loans
On August 3, 2017,March 31, 2022, we entered into an 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%. We incurred $4.5 million of deferred financing costs in connection with the 2022 Credit Agreement which are included as a component of “Debt” on the Consolidated Balance Sheets as of December 31, 2023 and 2022.
Concurrently with the execution of the 2022 Credit Agreement, we amended our unsecured $800,000,000$300.0 million 2023 Term Loan. The amendment modified the existing covenants to align with provisions in the 2022 Credit Agreement and to accrue interest on borrowings based on SOFR (plus a credit facility, originally scheduledspread adjustment) that were previously based on LIBOR, with no change to maturethe existing applicable interest rate margins. As of December 31, 2022, we had repaid $60.0 million of the 2023 Term Loan.
In the first quarter of 2023, we repaid $20.0 million of the 2023 Term Loan. In June 2023, we entered into the two-year $200.0 million 2025 Term Loan bearing interest at a variable rate which is SOFR-based with a margin determined according to our credit ratings plus a 0.10% credit spread adjustment. The Company incurred approximately $2.7 million of deferred financing cost associated with this loan. The 2025 Term Loan proceeds were used to repay a portion of the remaining $220.0 million 2023 Term Loan balance, which was repaid in full in June 2020, consolidating2023. Upon repayment, we expensed approximately $0.1 million of unamortized loan costs associated with this loan which are included in “Loss on early retirement of debt” in our three bank term loans intoConsolidated Statement of Income for the year ended December 31, 2023.
In March 2022, we repaid a single $250,000,000$75.0 million term loan and providing for an extension ofwith a maturity in August 2022 with proceeds primarily from the maturity of therevolving credit facility. The term loan andbore interest at a rate of 30-day LIBOR plus 135 basis points (“bps”), based on our current ratings. 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 Consolidated Statement of Income for the $550,000,000 revolving credit facility to Augustyear ended December 31, 2022.
In connectionJanuary 2021, we repaid a $100.0 million term loan that originated in July 2020 with the amendmentsnet proceeds from the 2031 Senior Notes offering discussed below. The term loan bore interest at a rate of 30-day LIBOR (with a 50 basis point floor) plus 185 bps, based on our current leverage ratios. Upon repayment, the Company expensed approximately $1.9 million of deferred financing costs associated with this loan which is included in “Loss on early retirement of debt” in our Consolidated Statement of Income for the year ended December 31, 2021.
The 2022 Credit Agreement requires a facility fee equal to 0.125% to 0.30%, based on our credit rating, the facility we wrote off old and new costs of $583,000, inclusive of unamortized costs of $407,000 associated with retired or diminished participations among the previous lending group. The amended facilitypresently provides for floating interest on the term loan and revolver to be initially set at 30-day LIBOR plus 130 and 115 bps, respectively, based on current leverage metrics. Additional significant amendments to the facility include the refinement of the collateral pool, imposition of a 0% floor LIBOR base, movement from the payment of unused commitment fees to a facility fee of 20 basis points and the composition of creditors participating in our loan syndication. The employment of interest rate swaps to fix LIBOR on our bank term debt leaves only ourunsecured revolving credit facility exposed to variable rate risk. Our swaps and the financial instruments to which they relate are described in2025 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 December 31, 2023 and 2022, the table below, under the caption “Interest Rate Swap Agreements.”SOFR CME Term Option one-month was 534 bps and 436 bps, respectively.
Our existing interest rate swap agreements collectively will continue through June 2020 to hedge against fluctuations in variable interest rates applicable to the $250,000,000 term loan. Some new hedge inefficiency will result from the introduction to the debt instrument of a LIBOR floor that is not present in the hedges. To better reflect earnings, in the first quarter of 2018 we expect to adopt ASU 2017-12 Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, discussed in Note 14.
In November 2017 our acquisition of a facility in Tulsa entailed the assumption of a Fannie Mae mortgage loan with remaining balance of $18,311,000. The mortgage amortizes through 2025 when a balloon payment will be due, is subject to prepayment penalties until 2024, and bears interest at a nominal rate of 4.6%.
Our unsecured private placement term loans 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 |
| | | | | | |
On August 8, 2017, we amended our private placement term loan agreements to largely conform those agreements with the amendment to our bank credit facility as noted above.
At December 31, 2017,2023, we had $329,000,000$455.0 million available to draw on the revolving portion of our credit facility. Thefacility, 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. To date,At December 31, 2023, we were in compliance with these ratios, which are calculated quarterly, have been within the limits required by the credit facility agreements.ratios.
Pinnacle Bank is a participating member of our banking group. A member of NHI’s boardBoard of directorsDirectors and chairmanchairperson of our audit committeethe 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 March 2015January 2021, we obtained $78,084,000issued $400.0 million aggregate principal amount of 3.00% senior notes that mature on February 1, 2031 and pay interest semi-annually (the “2031 Senior Notes”). The 2031 Senior Notes were sold at an issue price of 99.196% of face value before the underwriters’ discount. Our net proceeds from the 2031 Senior Notes offering, after deducting underwriting discounts and expenses, were approximately $392.3 million. We used 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 year ended December 31, 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 with which we were in compliance at December 31, 2023.
Private Placement Notes
During 2023, we repaid $175.0 million of the private placement notes primarily with proceeds from the unsecured revolving credit facility.
Our remaining unsecured private placement notes as of December 31, 2023, payable interest-only, are summarized below ($ in thousands):
| | | | | | | | | | | | | | | | | | | | |
Amount | | Inception | | Maturity | | Fixed Rate |
| | | | | | |
| | | | | | |
$ | 75,000 | | | September 2016 | | September 2024 | | 3.93 | % |
50,000 | | | November 2015 | | November 2025 | | 4.33 | % |
100,000 | | | January 2015 | | January 2027 | | 4.51 | % |
$ | 225,000 | | | | | | | |
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 December 31, 2023, we had $60.1 million in Fannie Mae financing. The term debtterm-debt financing, consists ofthat originated in March 2015, requiring interest-only payments at an annual rate of 3.79% andwith a 10-year maturity. The mortgages are non-recourse and secured by thirteen11 properties leased to Bickford. These notes togetherFor the year ended December 31, 2021, we recognized a $1.5 million loss on early retirement of debt upon repayment of two Fannie Mae term loans with a combined balance of $17.9 million, plus accrued interest of $0.1 million.
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 rate of 4.6%, and has a remaining balance of $16.1 million at December 31, 2023. Collectively, the Fannie Mae debt assumed in connection with the Tulsa acquisition and having remaining balance of $18,283,000 at December 31, 2017, mentioned above, areis secured by facilitiesproperties having a net book value of $142,258,000$100.9 million at December 31, 2017.
In March 2014 we issued $200,000,000 of 3.25% senior unsecured convertible notes due April 2021 (the “Notes”) with interest payable April 1st and October 1st of each year. The Notes were convertible at an initial conversion rate of 13.93 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $71.81 per share for a total of approximately 2,785,200 underlying shares. The conversion rate is subsequently adjusted upon the occurrence of certain events, as defined in the indenture governing the Notes, including the payment of dividends at a rate exceeding that prevailing in 2014, but is not to be adjusted for any accrued and unpaid interest except in limited circumstances. The conversion option was accounted for as an “optional net-share settlement conversion feature,” meaning that upon conversion, NHI’s conversion obligation may be satisfied, at our option, in cash, shares of common stock or a combination of cash and shares of common stock. Because we have the ability and intent to settle the convertible securities in cash upon exercise, we use the treasury stock method to account for potential dilution.
The embedded conversion options (1) do not require net cash settlement, (2) are not conventionally convertible but can be classified in stockholders’ equity under Accounting Standards Codification (“ASC”) 815-40, and (3) are considered indexed to NHI’s own stock. Therefore, the conversion feature satisfies the conditions to qualify for an exception to the derivative liability rules, and the Notes are split into debt and equity components. The carrying value of the debt component was based upon the estimated fair value at the time of issuance of a similar debt instrument without the conversion feature and was estimated to be approximately $192,238,000. The $7,762,000 difference between the contractual principal on the debt and the value allocated to the debt was recorded as the equity component and represents the estimated value of the conversion feature of the instrument. The excess of the contractual principal amount of the debt over the estimated fair value of the debt component, the original issue discount, is being amortized to interest expense using the effective interest method over the estimated term of the Notes. The effective interest rate used to amortize the debt discount and the liability component of the debt issue costs is approximately 3.9% based on our estimated non-convertible borrowing rate at the date the Notes were issued. The total cost of issuing the Notes was $6,063,000, $275,000 of which was allocated to the equity component and $5,788,000 of which was allocated to the debt component and subject to amortization over the estimated term of the notes.
During the year ended December 31, 2017, we undertook targeted open-market repurchases of certain of the convertible notes. Payments of cash negotiated in the transactions were dependent on prevailing market conditions, our liquidity requirements, contractual restrictions, individual circumstances of the selling parties and other factors. The total balance of notes repurchased and retired through December 31, 2017, net of unamortized original issue discount and associated issuance costs, was $50,777,000,
resulting in the recognition of losses on the note retirements for the year ended December 31, 2017, of $2,214,000 calculated as the excess of cash paid over the carrying value of that portion of the notes accounted for as debt. For the retirement of that portion of the outlay allocated to the fair value of the conversion feature, $7,930,000 was charged to additional paid-in capital during the year ended December 31, 2017. The remaining unamortized balance of issuance costs at December 31, 2017, was $1,752,000.
As of December 31, 2017, the outstanding balance of our 3.25% senior unsecured convertible notes was $147,575,000. As adjusted for terms of the indenture, the Notes are convertible at a conversion rate of 14.23 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $70.25 per share for a total of 2,100,700 remaining underlying shares. For the year ended December 31, 2017, dilution resulting from the conversion option within our convertible debt is 189,531 shares. If NHI’s current share price increases above the adjusted $70.25 conversion price, further dilution will be attributable to the conversion feature. On December 31, 2017, the value of the convertible debt, computed as if the debt were immediately eligible for conversion, exceeded its face amount by $10,776,000.
Our HUD mortgage loans are secured by ten properties leased to Bickford and having a net book value of $52,586,000 at December 31, 2017. Nine mortgage notes require monthly payments of principal and interest from 4.3% to 4.4% (inclusive of mortgage insurance premium) and mature in August and October 2049. One additional HUD mortgage loan assumed in 2014 requires monthly payments of principal and interest of 2.9% (inclusive of mortgage insurance premium) and matures in October 2047. The loan has an outstanding principal balance of $8,911,000 and a carrying value of $7,509,000, which approximates fair value.
The following table summarizes interest expense (in thousands):2023.
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Interest expense on debt at contractual rates | $ | 40,385 |
| | $ | 36,197 |
| | $ | 30,094 |
|
Losses reclassified from accumulated other | | | | | |
comprehensive income into interest expense | 2,627 |
| | 3,928 |
| | 4,497 |
|
Ineffective portion of cash flow hedges | (353 | ) | | 18 |
| | (18 | ) |
Capitalized interest | (510 | ) | | (549 | ) | | (357 | ) |
Charges taken on amending bank credit facility | 583 |
| | — |
| | — |
|
Amortization of debt issuance costs and debt discount | 3,592 |
| | 3,514 |
| | 3,413 |
|
Total interest expense | $ | 46,324 |
| | $ | 43,108 |
| | $ | 37,629 |
|
Interest Expense and Rate Swap Agreements
Our existingOn December 31, 2021, our remaining $400.0 million interest rate swap agreements will collectively continue through June 2020in place to hedge against fluctuations in variable interest rates applicable to our $250,000,000 bank term loan.loans matured. The introduction tomatured swaps had an average interest rate of 1.92% for the debt instrument of a LIBOR floor not present in the hedges resulted in hedge inefficiency of approximately $353,000, which we credited to interest expense. During the next twelve months, approximately $775,000 of losses, which are included as a component of accumulated other comprehensive income, are projected to be reclassified into earnings. As ofyear ended December 31, 2017, we employ the2021.
The following table summarizes interest rate swap contracts to mitigate our interest rate risk on the $250,000,000 term loanexpense (dollars$ in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
Interest expense on debt at contractual rates | $ | 55,603 | | | $ | 42,487 | | | $ | 40,866 | |
Losses reclassified from accumulated other | | | | | |
comprehensive income into interest expense | — | | | — | | | 7,286 | |
| | | | | |
Capitalized interest | (90) | | | (46) | | | (40) | |
| | | | | |
Amortization of debt issuance costs, debt discount and other | 2,647 | | | 2,476 | | | 2,698 | |
Total interest expense | $ | 58,160 | | | $ | 44,917 | | | $ | 50,810 | |
Note 9. Commitments, Contingencies and Uncertainties
|
| | | | | | | | | | | | | | |
Date Entered | | Maturity Date | | Fixed Rate | | Rate Index | | Notional Amount | | Fair Value |
May 2012 | | April 2019 | | 2.84% | | 1-month LIBOR | | $ | 40,000 |
| | $ | 159 |
|
June 2013 | | June 2020 | | 3.41% | | 1-month LIBOR | | $ | 80,000 |
| | $ | (227 | ) |
March 2014 | | June 2020 | | 3.46% | | 1-month LIBOR | | $ | 130,000 |
| | $ | (520 | ) |
If the fair value of the hedge is an asset, we include it in our Consolidated Balance Sheets among other assets, and, if a liability, as a component of accrued expenses. See Note 11 for fair value disclosures about our interest rate swap agreements. Net liability balances for our hedges included as components of consolidated other comprehensive income on December 31, 2017 and 2016 were $588,000 and $4,279,000, respectively.
NOTE 6. COMMITMENTS AND CONTINGENCIES
In the normal course of business, we enter into a variety of commitments, typicaltypically consisting of which are those for the funding of revolving credit arrangements, construction and mezzanine loans to our operators to conduct expansions and acquisitions for their own account classified below as loan commitments, and commitments for the funding of construction for expansion or renovation to our existing properties under lease.lease classified below as development commitments. In our leasing operations, we offer to our tenants and to sellers of newly-acquirednewly acquired properties a variety of inducements whichthat originate contractually as contingencies but which may become commitments upon the satisfaction of the contingent event. Contingent payments earned will be included in the respective lease bases when funded. The tables below summarize our existing, known commitments and contingencies as of December 31, 2023 according to the nature of their impact on our leasehold or loan portfolios.portfolios ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Class | | Type | | Total | | Funded | | Remaining |
Loan Commitments: | | | | | | | | | |
Encore Senior Living | SHO | | Construction | | $ | 50,725 | | | $ | (49,846) | | | $ | 879 | |
Senior Living | SHO | | Revolving Credit | | 20,000 | | | (16,250) | | | 3,750 | |
Timber Ridge OpCo | SHO | | Working Capital | | 5,000 | | | — | | | 5,000 | |
Watermark Retirement | SHO | | Working Capital | | 5,000 | | | (2,976) | | | 2,024 | |
Montecito Medical Real Estate | MOB | | Mezzanine Loan | | 50,000 | | | (20,255) | | | 29,745 | |
| | | | | $ | 130,725 | | | $ | (89,327) | | | $ | 41,398 | |
|
| | | | | | | | | | | | | | | |
| Asset Class | | Type | | Total | | Funded | | Remaining |
Loan Commitments: | | | | | | | | | |
Life Care Services Note A | SHO | | Construction | | $ | 60,000,000 |
| | $ | (53,622,000 | ) | | $ | 6,378,000 |
|
Bickford Senior Living | SHO | | Construction | | 28,000,000 |
| | (15,558,000 | ) | | 12,442,000 |
|
Senior Living Communities | SHO | | Revolving Credit | | 15,000,000 |
| | (616,000 | ) | | 14,384,000 |
|
| | | | | $ | 103,000,000 |
| | $ | (69,796,000 | ) | | $ | 33,204,000 |
|
See Note 34 for fullfurther details of our loan commitments. As provided above, loansLoans funded do not include the effects of discounts or commitment fees. We
The credit loss liability for unfunded loan commitments is estimated using the same methodology as used for our funded mortgage and other notes receivable based on the estimated amount that we expect to fully fundfund. We applied the Life Care Services Note A during 2018. Funding of the promissory note commitments to Bickford is expected to transpire monthly throughout 2018.
|
| | | | | | | | | | | | | | | |
| Asset Class | | Type | | Total | | Funded | | Remaining |
Development Commitments: | | | | | | | | | |
Legend/The Ensign Group | SNF | | Purchase | | $ | 56,000,000 |
| | $ | (14,000,000 | ) | | $ | 42,000,000 |
|
East Lake/Watermark Retirement | SHO | | Renovation | | 10,000,000 |
| | (5,900,000 | ) | | 4,100,000 |
|
Santé Partners | SHO | | Renovation | | 3,500,000 |
| | (2,621,000 | ) | | 879,000 |
|
Bickford Senior Living | SHO | | Renovation | | 2,400,000 |
| | (122,000 | ) | | 2,278,000 |
|
East Lake Capital Management | SHO | | Renovation | | 400,000 |
| | — |
| | 400,000 |
|
Senior Living Communities | SHO | | Renovation | | 6,830,000 |
| | (970,000 | ) | | 5,860,000 |
|
Discovery Senior Living | SHO | | Renovation | | 500,000 |
| | — |
| | 500,000 |
|
Woodland Village | SHO | | Renovation | | 7,450,000 |
| | (762,000 | ) | | 6,688,000 |
|
Chancellor Health Care | SHO | | Construction | | 650,000 |
| | (62,000 | ) | | 588,000 |
|
Navion Senior Solutions | SHO | | Construction | | 650,000 |
| | — |
| | 650,000 |
|
| | | | | $ | 88,380,000 |
| | $ | (24,437,000 | ) | | $ | 63,943,000 |
|
Assame market adjustments as discussed in Note 2, we remain obligated to purchase, from a developer, three new skilled nursing facilities4.
The liability for expected credit losses on our unfunded loans reflected in Texas for $42,000,000 which are leased to Legend“Accounts payable and subleased to Ensign.
|
| | | | | | | | | | | | | | | |
| Asset Class | | Type | | Total | | Funded | | Remaining |
Contingencies: | | | | | | | | | |
Bickford / Sycamore | SHO | | Lease Inducement | | $ | 14,000,000 |
| | $ | (2,250,000 | ) | | $ | 11,750,000 |
|
East Lake Capital Management | SHO | | Lease Inducement | | 8,000,000 |
| | — |
| | 8,000,000 |
|
Navion Senior Solutions | SHO | | Lease Inducement | | 4,850,000 |
| | — |
| | 4,850,000 |
|
Prestige Care | SHO | | Lease Inducement | | 1,000,000 |
| | — |
| | 1,000,000 |
|
The LaSalle Group | SHO | | Lease Inducement | | 5,000,000 |
| | — |
| | 5,000,000 |
|
| | | | | $ | 32,850,000 |
| | $ | (2,250,000 | ) | | $ | 30,600,000 |
|
Contingent payments related to the five Bickford development properties constructed in 2016 and 2017 include a licensure incentive of $250,000 per property. Additionally, each property is subject to a three-tiered operator incentive schedule paying up to an additional $1,750,000, basedaccrued expenses” on the attainment of certain performance metrics. As funded, these payments are added to the lease base and amortized against rental income.
In connection with our July 2015 lease to East Lake of three senior housing properties, NHI has committed to certain lease inducement payments of $8,000,000 contingent on reaching and maintaining certain metrics. The inducements have been assessed
as not probable of payment, and we have not recorded them on our balance sheetsConsolidated Balance Sheets as of December 31, 2017. We are unaware of circumstances that would change our initial assessment as to the contingent lease incentives. Not included2023 and 2022 is presented in the abovefollowing table is a seller earnoutfor the year ended December 31, 2023 ($ in thousands):
| | | | | |
Balance at December 31, 2022 | $ | 683 | |
Provision for expected credit losses | (404) | |
Balance at December 31, 2023 | $ | 279 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Class | | Type | | Total | | Funded | | Remaining |
Development Commitments: | | | | | | | | | |
Woodland Village | SHO | | Renovation | | $ | 7,515 | | | $ | (7,425) | | | $ | 90 | |
Navion Senior Solutions | SHO | | Renovation | | 3,500 | | | (2,059) | | | 1,441 | |
Vizion Health | SHO | | Renovation | | 2,000 | | | (250) | | | 1,750 | |
SHOP | ILF | | Renovation | | 1,500 | | | (1,221) | | | 279 | |
| | | | | $ | 14,515 | | | $ | (10,955) | | | $ | 3,560 | |
In February 2014 we entered into a commitment on a letteraddition to these commitments listed above, Discovery PropCo has committed to fund up to $2.0 million toward the purchase of credit forcondominium units located at one of the benefitfacilities of Sycamore, an affiliatewhich $1.0 million had been funded as of Bickford, which previously held a minority interest in PropCo (see Note 2). In the fourth quarter of 2017, Sycamore began to draw on other means to furnish its resource provider the required letter of credit, and our commitment under the 2014 letter was ended. December 31, 2023.
As of December 31, 2017,2023, we furnish no direct support to Sycamore. As an affiliate companyhad the following contingent lease inducement commitments which are generally based on the performance of facility operations and may or may not be met by the tenant ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Asset Class | | Total | | Funded | | Remaining |
Contingencies (Lease Inducements): | | | | | | | |
IntegraCare | SHO | | $ | 750 | | | — | | | $ | 750 | |
Navion Senior Solutions | SHO | | 4,850 | | | (2,700) | | | 2,150 | |
Discovery | SHO | | 4,000 | | | — | | | 4,000 | |
Ignite Medical Resorts | SNF | | 2,000 | | | — | | | 2,000 | |
| | | $ | 11,600 | | | $ | (2,700) | | | $ | 8,900 | |
Bickford Sycamore is structured to limit liability for potential claims for damages, is capitalized to achieve that purpose and is considered a VIE.Contingent Note Arrangement
See Note 2Related to the consolidated financial statementssale of six properties to Bickford in 2021 we reached an agreement with Bickford whereby Bickford would owe us up to $4.5 million under a contingent note arrangement. We have the one-time option to determine fair market value of the portfolio between May 1, 2023 and April 30, 2026, at which time the amount owed under the contingent note arrangement, if any, will be determined as the lesser of (i) the difference between the fair market value of the portfolio and $52.1 million, which amount represents the purchase consideration for further descriptionthe portfolio of $52.9 million less $0.8 million in mortgage debt repayment fees previously paid by us associated with this portfolio, and (ii) $4.5 million. Any amount due on the contingent lease inducements available to Navion Senior Solutions, LaSallenote arrangement will accrue interest at an annual rate of 10% and Prestige.will be due in five years from the determination date.
Litigation
Our facilities are subject to claims and suits in the ordinary course of business. Our lesseesmanagers, tenants 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. 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.
NOTE 7. INVESTMENT AND OTHER GAINS
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 after 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 year ended December 31, 2022. We recognized approximately $0.7 million as a “Loss on operations transfer, net” on the Consolidated Statements of Income for the year ended December 31, 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 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 Consolidated Balance Sheet as of December 31, 2023 and 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 December 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 Discovery member’s noncontrolling interest in its SHOP venture was also determined to be contingently redeemable at inception of the arrangement. The Discovery member’s agreement was amended in the fourth quarter of 2022 to remove the contingently redeemable feature, among other things. The noncontrolling interest is presented within the “Liabilities andEquity” section in the Consolidated Balance Sheets as of December 31, 2023 and 2022.
The following table summarizes our investment and other gains (presents the change in thousands):
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Gains on sales of marketable securities | 10,038 |
| | 29,673 |
| | 23,529 |
|
Gain on sale of real estate | 50 |
| | 4,582 |
| | 1,126 |
|
Other gains | — |
| | 1,657 |
| | — |
|
| $ | 10,088 |
| | $ | 35,912 |
| | $ | 24,655 |
|
During“Redeemable noncontrolling interest” for the years ended December 31, 2017, 20162023 and 2015,2022 ($ in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
Balance at January 1, | $ | 9,825 | | | $ | — | |
Initial carrying amount | — | | | 11,738 | |
Reclassification of Discovery member noncontrolling interest | — | | | (1,030) | |
Contributions | 922 | | | — | |
Net loss | (1,091) | | | (843) | |
Distributions | — | | | (40) | |
Balance at December 31, | $ | 9,656 | | | $ | 9,825 | |
Note 11. Equity and Dividends
Share Repurchase Plan
Beginning in April 2022, our Board of Directors has authorized a stock repurchase plan. No common stock was repurchased under this plan during 2023. During the year ended December 31, 2022, we recognized gains on salesrepurchased through open market transactions 2,468,354 shares of marketable securities whichcommon stock for an average price of $61.56 per share, excluding commissions. All shares received were reclassified from accumulated other comprehensive incomeconstructively retired upon receipt, and are included in our Consolidated Statementsthe excess of Income as Investment and other gains. During 2016 and 2015 we recognized $1,697,000, and $1,330,000, respectively, of dividend and interest income from our marketable securities and have included these amounts in investment income and otherthe purchase price over the par value per share was recorded to “Retained earnings” in the Consolidated StatementsBalance Sheet.
On February 16, 2024, our Board of Income.Directors renewed the stock 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 stock repurchase plan is effective for a period of one year and does not require us to repurchase any specific number of shares. It 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.
At-the-Market (“ATM”) Equity Program
Our ATM equity offering sales agreement allows us to sell, from time to time, up to an aggregate sales price of $500 million of the Company’s common shares through the ATM equity program. No shares were issued during the years ended December 31, 2023 and 2022. During the year ended December 31, 2021, we issued 661,951 common shares through the ATM equity program with an average price of $73.62, resulting in net proceeds after transaction costs of approximately $47.9 million.
Dividends
The following table summarizes dividends declared or paid by the Board of Directors during the years ended December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2023 |
Date of Declaration | | Date of Record | | Date Paid/Payable | | Quarterly Dividend |
February 17, 2023 | | March 31, 2023 | | May 5, 2023 | | $0.90 |
May 5, 2023 | | June 30, 2023 | | August 4, 2023 | | $0.90 |
August 4, 2023 | | September 29, 2023 | | November 3, 2023 | | $0.90 |
November 3, 2023 | | December 29, 2023 | | January 26, 2024 | | $0.90 |
| | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2022 |
Date of Declaration | | Date of Record | | Date Paid/Payable | | Quarterly Dividend |
February 16, 2022 | | March 31, 2022 | | May 6, 2022 | | $0.90 |
May 6, 2022 | | June 30, 2022 | | August 5, 2022 | | $0.90 |
August 5, 2022 | | September 30, 2022 | | November 4, 2022 | | $0.90 |
November 6, 2022 | | December 30, 2022 | | January 27, 2023 | | $0.90 |
On February 16, 2024, the Board of Directors declared a $0.90 per share dividend to common stockholders of record on March 28, 2024, payable May 3, 2024.
NOTE 8. SHARE-BASED COMPENSATIONNote 12. Share-Based Compensation
We recognize share-based compensation for all stock options granted over the requisite service period using the fair value of these grants as estimated at the date of grant using the Black-Scholes pricing model over the requisite service period using the market value of our publicly-tradedpublicly traded common stock on the date of grant. Restricted stock are issued with a grant date fair value based on the market value of our common stock on the date of grant. The restricted stock vest over five years, with 20% vesting on each anniversary of the date of grant. The restricted stock awards contain non-forfeitable rights to dividends or dividend equivalents during the vesting periods.
Share-Based Compensation Plans
The Compensation Committee of the Board of Directors (“the Committee”(the “Committee”) has the authority to select the participants to be granted options; to designate whether the option granted is an incentive stock option (“ISO”), a non-qualified option, or a stock appreciation right; to establish the number of shares of common stock that may be issued upon exercise of the option; to establish the vesting provision for any award; and to establish the term any award may be outstanding. The exercise price of any ISO’s granted will not be less than 100% of the fair market value of the shares of common stock on the date granted and the term of an ISO may not be more than ten years. The exercise price of any non-qualified options granted will not be less than 100% of the fair market value of the shares of common stock on the date granted unless so determined by the Committee.
In May 2012, our stockholders approvedThe Company’s outstanding stock incentive awards have been granted under two incentive plans – the 2012 Stock Incentive Plan (“and the 2012 Plan”) pursuant to2019 Stock Incentive Plan, which 1,500,000 shares of our common stock were made available to grant as share-based payments to employees, officers, directors or consultants.
Through a vote of our shareholderswas amended and restated in May 2015, we increased2023 (collectively the maximum number“2019 Plan”). The individual awards may vest over periods up to five years. The term of sharesthe award under the plan2019 Plan is up to ten years from 1,500,000 shares to 3,000,000 shares; increased the automatic annual grant to non-employee directors from 15,000 shares to 20,000 shares; and limited the Company’s ability to re-issue shares under the Plan.date of grant. As of December 31, 2017, there were 951,6682023, shares available for future grants totaled 4,089,168 under the 20122019 Plan.
The individual option grant awards vest over periods up to five years. The termamendment and restatement of the options2019 Plan, which was approved by stockholders in May 2023, increased the number of shares of common stock authorized for issuance under the 20122019 Plan is upfrom 3,000,000 to ten years from6,000,000 and added the ability of the Company to award shares of restricted stock and 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 executive officers with a grant date fair value of $49.30 per share based on the market value of our common stock on the date of grant.
In May 2005, our stockholders approved the NHI 2005 Stock Option Plan (“the 2005 Plan”) pursuant to which 1,500,000 shares of our common stock were made available to grant as share-based payments to employees, officers, directors or consultants. The 2005 Plan has expired and no additional shares may be granted under the 2005 Plan. The individual restricted stock and option grant awardswill vest over periods up to ten years. The termfive years, with 20% vesting on each anniversary of the options outstanding under the 2005 Plan is up to ten years from the date of grant. The restricted stock awards contain non-forfeitable rights to dividends or dividend equivalents during the vesting periods.
Compensation expense is recognized only for the awards that ultimately vest. Accordingly, forfeitures that were not expected may result in the reversal of previously recorded compensation expense. We consider the historical employee turnover rate in our estimateThe following is a summary of the number of stock option forfeitures. Ourshare-based compensation expense, reported for the years ended December 31, 2017, 2016 and 2015 was $2,612,000, $1,732,000 and $2,134,000, respectively, and isnet of any forfeitures, included in general“General and administrative expenseexpenses” in the Consolidated Statements of Income.Income ($ in thousands):
| | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
Shared-based compensation components: | | | | | |
Restricted stock expense | $ | 310 | | | $ | — | | | $ | — | |
Stock option expense | 4,295 | | | 8,613 | | | 8,415 | |
Total share-based compensation expense | $ | 4,605 | | | $ | 8,613 | | | $ | 8,415 | |
Determining Fair Value of Option Awards
The fair value of each option award was estimated on the grant date using the Black-Scholes option valuation model with the weighted average assumptions indicated in the following table. Each grant is valued as a single award with an expected term based upon expected employee and termination behavior. Compensation costexpense is recognized on the graded vesting method over the requisite service period for each separately vesting tranche of the award as though the award were, in substance, multiple awards. The expected volatility is derived using daily historical data for periods preceding the date of grant. The risk-free interest rate is the approximate yield on the United States Treasury Strips having a life equal to the expected option life on the date of grant. The expected life is an estimate of the number of years an option will be held before it is exercised.
Stock Options
The weighted average fair value per share of options granted was $5.76, $3.65$10.56, $11.92 and $4.74$14.54 for 2017, 2016the years ended December 31, 2023, 2022 and 2015,2021, respectively.
The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
| | | | | | | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
Dividend yield | 6.9% | | 7.0% | | 6.7% |
Expected volatility | 39.0% | | 49.3% | | 48.1% |
Expected lives | 2.9 years | | 2.9 years | | 2.9 years |
Risk-free interest rate | 4.56% | | 1.75% | | 0.33% |
|
| | | | | |
| 2017 | | 2016 | | 2015 |
Dividend yield | 5.3% | | 6.2% | | 4.7% |
Expected volatility | 19.8% | | 19.1% | | 17.8% |
Expected lives | 2.9 years | | 2.9 years | | 2.8 years |
Risk-free interest rate | 1.49% | | 0.91% | | 0.98% |
Stock Option Activity
The following tables summarize our outstanding stock options:
| | | | | | | | | | | | | | | | | | | | |
| | | | | Weighted Average | |
| Number | | Weighted Average | | Remaining | |
| of Shares | | Exercise Price | | Contractual Life (Years) | |
Outstanding December 31, 2020 | 1,033,838 | | | $83.54 | | | |
Options granted under 2012 Plan | 12,500 | | | $69.20 | | | |
Options granted under 2019 Plan | 639,500 | | | $69.20 | | | |
| | | | | | |
Options exercised under 2012 Plan | (20,000) | | | $60.52 | | | |
| | | | | | |
Options forfeited under 2019 Plan | (13,333) | | | $90.79 | | | |
Outstanding December 31, 2021 | 1,652,505 | | | $78.10 | | | |
| | | | | | |
Options granted under 2019 Plan | 718,000 | | | $53.62 | | | |
Options exercised under 2019 Plan | (56,832) | | | $53.41 | | | |
Options forfeited | (23,000) | | | $62.33 | | | |
Options expired | (74,498) | | | $77.93 | | | |
Outstanding December 31, 2022 | 2,216,175 | | | $70.97 | | | |
| | | | | | |
Options granted under 2019 Plan | 385,500 | | | $54.73 | | | |
| | | | | | |
Options exercised | (5,166) | | | $53.41 | | | |
Options forfeited | (61,168) | | | $66.44 | | | |
Options expired | (88,170) | | | $64.33 | | | |
Options outstanding, December 31, 2023 | 2,447,171 | | | $68.80 | | 2.26 | |
| | | | | | |
Exercisable at December 31, 2023 | 2,078,827 | | | $71.40 | | 2.00 | |
|
| | | | | | | | | | |
| | | | | Weighted Average | | |
| Number |
| | Weighted Average | | Remaining | | Aggregate |
|
| of Shares |
| | Exercise Price | | Contractual Life (Years) | | Intrinsic Value |
|
Outstanding December 31, 2014 | 871,671 |
| | $60.43 | | | | |
Options granted under 2012 Plan | 450,000 |
| | $72.11 | | | | |
Options granted under 2005 Plan | 20,000 |
| | $72.11 | | | | |
Options exercised under 2005 Plan | (66,670 | ) | | $46.87 | | | | |
Options exercised under 2012 Plan | (421,657 | ) | | $63.03 | | | | |
Options canceled under 2012 Plan | (111,668 | ) | | $71.95 | | | | |
Outstanding December 31, 2015 | 741,676 |
| | $60.43 | | | | |
Options granted under 2012 Plan | 470,000 |
| | $60.78 | | | | |
Options exercised under 2005 Plan | (61,666 | ) | | $52.36 | | | | |
Options exercised under 2012 Plan | (608,331 | ) | | $65.18 | | | | |
Outstanding December 31, 2016 | 541,679 |
| | $65.84 | | | | |
Options granted under 2012 Plan | 495,000 |
| | $74.90 | | | | |
Options exercised under 2005 Plan | (15,000 | ) | | $47.52 | | | | |
Options exercised under 2012 Plan | (155,829 | ) | | $65.73 | | | | |
Options canceled under 2012 Plan | (6,668 | ) | | $60.52 | | | | |
Outstanding December 31, 2017 | 859,182 |
| | $70.11 | | 3.39 | | $ | 4,531,000 |
|
| | | | | | | |
Exercisable December 31, 2017 | 465,831 |
| | $69.85 | | 3.01 | | $ | 2,578,000 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Remaining |
Grant | | Number | | Exercise | | Contractual |
Date | | of Shares | | Price | | Life in Years |
2/21/2019 | | 301,837 | | | $ | 79.96 | | | 0.14 |
2/21/2020 | | 516,000 | | | $ | 90.79 | | | 1.15 |
5/1/2020 | | 7,500 | | | $ | 53.76 | | | 1.33 |
2/25/2021 | | 616,000 | | | $ | 69.20 | | | 2.16 |
2/25/2022 | | 610,834 | | | $ | 53.41 | | | 3.16 |
6/1/2022 | | 25,000 | | | $ | 59.43 | | | 3.42 |
2/24/2023 | | 370,000 | | | $ | 54.73 | | | 4.15 |
Options outstanding, December 31, 2023 | | 2,447,171 | | | | | |
|
| | | | | | | | | |
| | | | | | Remaining |
Grant | | Number |
| | Exercise |
| | Contractual |
Date | | of Shares |
| | Price |
| | Life in Years |
2/25/2013 | | 15,000 |
| | $ | 64.49 |
| | 0.15 |
2/25/2014 | | 48,334 |
| | $ | 61.31 |
| | 1.15 |
2/20/2015 | | 120,004 |
| | $ | 72.11 |
| | 2.14 |
2/22/2016 | | 185,842 |
| | $ | 60.52 |
| | 3.15 |
3/8/2016 | | 26,667 |
| | $ | 63.63 |
| | 3.19 |
2/22/2017 | | 453,335 |
| | $ | 74.78 |
| | 4.15 |
9/1/2017 | | 10,000 |
| | $ | 80.55 |
| | 4.68 |
Outstanding December 31, 2017 | | 859,182 |
| | | | |
The weighted average remaining contractual life of all options outstanding at December 31, 2017 is 3.4 years. Including outstanding stock options, our stockholders have authorized an additional 1,810,850 shares of common stock that may be issued under the share-based payments plans.
The following table summarizes our outstanding non-vested stock options:
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value |
Non-vested December 31, 2022 | 515,020 | | | $12.51 |
Options granted under 2019 Plan | 385,500 | | | $11.33 |
Options vested under 2012 Plan | (4,168) | | | $14.33 |
Options vested under 2019 Plan | (505,007) | | | $12.37 |
| | | |
Non-vested options forfeited under 2019 Plan | (23,001) | | | $11.80 |
Non-vested December 31, 2023 | 368,344 | | | $11.48 |
|
| | | | |
| Number of Shares |
| | Weighted Average Grant Date Fair Value |
Non-vested December 31, 2016 | 353,348 |
| | $3.99 |
Options granted under 2012 Plan | 495,000 |
| | $5.76 |
Options vested under 2012 Plan | (441,661 | ) | | $4.98 |
Options vested under 2005 Plan | (6,668 | ) | | $4.91 |
Non-vested options canceled under 2012 Plan | (6,668 | ) | | $3.61 |
Non-vested December 31, 2017 | 393,351 |
| | $5.10 |
At As of December 31, 2017, we had $617,000 of2023, unrecognized compensation cost related to unvested stock options, net of expected forfeitures, whichexpense totaling $1.8 million associated with stock-based awards is expected to be recognized over the following periods: 20182024 - $552,000$1.3 million, 2025 - $0.3 million, and 2019thereafter - $65,000. Stock-based$0.2 million. Share-based compensation expense is included in general“General and administrative expense” in the Consolidated Statements of Income.
TheAt December 31, 2023, the aggregate intrinsic value of the totalstock options outstanding and exercisable was $1.9 million and $1.3 million, respectfully. The aggregate intrinsic value of stock options exercised forduring the years ended December 31, 2017, 20162023, 2022 and 20152021 was $2,314,000less than $0.1 million or $13.55$1.23 per share; $4,730,000$0.1 million or $7.06$6.13 per share, and $5,551,000$0.2 million or $12.69$9.27 per share, respectively.
NOTE 9. EARNINGS AND DIVIDENDS PER COMMON SHARENote 13. Earnings Per Common Share
TheOur unvested restricted stock awards contain non-forfeitable rights to dividends, and accordingly, these awards are deemed to be participating securities. Therefore, the Company applies the two-class method to calculate basic and diluted earnings. Under the two-class method, we allocate net income attributable to stockholders to common stockholders and holders of unvested restricted stock by using the weighted-average shares of each class outstanding for quarter-to-date and year-to-date periods, based on their respective participation rights to dividends declared and undistributed earnings. Basic earnings per common share is computed by dividing net income attributable to common stockholders by the weighted average number of shares of common sharesstock outstanding during the reporting period is used to calculate basic earnings per common share.period. Diluted earnings per common share assumereflects the exerciseeffect of stock options and vesting of restricted shares using the treasury stock method, to the extent dilutive.dilutive securities. Dilution resulting from the conversion option within our convertible debt isthat was repaid in April 2021 was determined by computing an average of incremental shares included in each quarterlythe three months ended March 31, 2021 diluted EPS computation. If NHI’s current share price increases above the adjusted conversion price, further dilution will be attributable to the conversion feature.
The following table summarizes the average number of common shares and the net income used in the calculation of basic and diluted earnings per common share ($ in thousands, except share and per share amounts)amounts):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
Net income | $ | 134,381 | | | $ | 65,501 | | | $ | 111,967 | |
Add: net loss (income) attributable to noncontrolling interests | 1,273 | | | 902 | | | $ | (163) | |
Net income attributable to stockholders | 135,654 | | | 66,403 | | | 111,804 | |
Less: net income attributable to unvested restricted stock awards | (57) | | | — | | | — | |
Net income attributable to common stockholders | $ | 135,597 | | | $ | 66,403 | | | $ | 111,804 | |
| | | | | |
BASIC: | | | | | |
Weighted average common shares outstanding | 43,388,794 | | | 44,774,708 | | | 45,714,221 | |
| | | | | |
DILUTED: | | | | | |
Weighted average common shares outstanding | 43,388,794 | | | 44,774,708 | | | 45,714,221 | |
Stock options | 672 | | | 19,528 | | | 4,823 | |
Convertible debt | — | | | — | | | 10,453 | |
Weighted average dilutive common shares outstanding | 43,389,466 | | | 44,794,236 | | | 45,729,497 | |
| | | | | |
Earnings per common share - basic | $ | 3.13 | | | $ | 1.48 | | | $ | 2.45 | |
Earnings per common share - diluted | $ | 3.13 | | | $ | 1.48 | | | $ | 2.44 | |
| | | | | |
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 | 802,506 | | | 564,803 | | | 383,716 | |
| | | | | |
Regular dividends declared per common share | $ | 3.60 | | | $ | 3.60 | | | $ | 3.8025 | |