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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
For the quarterly period ended
September 30, 2019
 
 
 
 
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from
_____________
to
_____________
 

Commission File Number 001-10822
National Health Investors Inc
(Exact name of registrant as specified in its charter)
Maryland
 
62-1470956
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
222 Robert Rose Drive
 
 
Murfreesboro
Tennessee
 
37129
(Address of principal executive offices)
 
(Zip Code)

(615)
890-9100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
NHI
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
 
Emerging growth company
 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No


There were 43,960,521 shares of common stock outstanding of the registrant as of November 4, 2019.



Table of Contents

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

 
September 30,
2019
 
December 31,
2018
 
(unaudited)
 
 
Assets:
 
 
 
Real estate properties:
 
 
 
Land
$
213,102

 
$
202,196

Buildings and improvements
2,827,227

 
2,599,526

Construction in progress
19,954

 
16,643

 
3,060,283

 
2,818,365

Less accumulated depreciation
(494,834
)
 
(451,483
)
Real estate properties, net
2,565,449

 
2,366,882

Mortgage and other notes receivable, net
315,316

 
246,111

Cash and cash equivalents
5,882

 
4,659

Straight-line rent receivable
82,634

 
105,620

Assets held for sale, net
18,420

 

Other assets
31,659

 
27,298

Total Assets
$
3,019,360

 
$
2,750,570

 
 
 
 
Liabilities and Stockholders’ Equity:
 
 
 
Debt
$
1,449,360

 
$
1,281,675

Accounts payable and accrued expenses
28,625

 
19,890

Dividends payable
46,154

 
42,700

Lease deposit liabilities
10,638

 
10,638

Deferred income
21,590

 
5,954

Total Liabilities
1,556,367

 
1,360,857

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
National Health Investors, Inc. Stockholders' Equity:
 
 
 
Common stock, $.01 par value; 60,000,000 shares authorized;
 
 
 
43,956,238 and 42,700,411 shares issued and outstanding
440

 
427

Capital in excess of par value
1,467,289

 
1,369,919

Cumulative net income in (excess) deficit of dividends
(554
)
 
18,068

Accumulated other comprehensive (loss) income
(4,809
)
 
1,299

Total National Health Investors, Inc. Stockholders' Equity
1,462,366

 
1,389,713

Noncontrolling interest
627

 

Total Equity
1,462,993

 
1,389,713

Total Liabilities and Stockholders’ Equity
$
3,019,360

 
$
2,750,570


The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements. The Condensed Consolidated Balance Sheet at December 31, 2018 was derived from the audited consolidated financial statements at that date.


3

Table of Contents

NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
(unaudited)
 
(unaudited)
Revenues:
 
 
 
 
 
 
 
Rental income
$
75,247

 
$
71,688

 
$
218,777

 
$
210,809

Interest income and other
6,435

 
3,227

 
17,109

 
9,807

 
81,682

 
74,915

 
235,886

 
220,616

Expenses:
 
 
 
 
 
 
 
Depreciation
19,695

 
18,153

 
57,206

 
53,282

Interest
14,661

 
12,374

 
41,925

 
36,207

Legal
40

 
371

 
409

 
705

Franchise, excise and other taxes
121

 
245

 
1,441

 
857

General and administrative
2,802

 
2,793

 
9,787

 
9,727

Property taxes and insurance on leased properties
1,608

 

 
4,205

 

Loan and realty losses

 

 
2,500

 
1,849

 
38,927

 
33,936

 
117,473

 
102,627

 
 
 
 
 
 
 
 
Income before loss on convertible note retirement
42,755

 
40,979

 
118,413

 
117,989

Loss on convertible note retirement

 

 

 
(738
)
Net income
42,755

 
40,979

 
118,413

 
117,251

Less: net loss attributable to noncontrolling interest
3

 

 
4

 

Net income attributable to common stockholders
$
42,758

 
$
40,979

 
$
118,417

 
$
117,251

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
43,505,332

 
42,187,077

 
43,187,847

 
41,808,017

Diluted
43,861,089

 
42,434,499

 
43,494,714

 
41,932,736

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Net income attributable to common stockholders - basic
$
.98

 
$
.97

 
$
2.74

 
$
2.80

Net income attributable to common stockholders - diluted
$
.97

 
$
.97

 
$
2.72

 
$
2.80



The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

4

Table of Contents

NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
(unaudited)
 
(unaudited)
 
 
 
 
 
 
 
 
Net income
$
42,755

 
$
40,979

 
$
118,413

 
$
117,251

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Decrease (increase) in fair value of cash flow hedges
(960
)
 
401

 
(5,077
)
 
2,774

Reclassification for amounts recognized as interest expense
(390
)
 
(27
)
 
(1,031
)
 
326

Total other comprehensive (loss) income
(1,350
)
 
374

 
(6,108
)
 
3,100

Comprehensive income
41,405

 
41,353

 
112,305

 
120,351

Less: comprehensive loss attributable to noncontrolling interest
3

 

 
4

 

Comprehensive income attributable to common stockholders
$
41,408

 
$
41,353

 
$
112,309

 
$
120,351



The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

5

Table of Contents

NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended
 
September 30,
 
2019
 
2018
 
(unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
118,413

 
$
117,251

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
57,206

 
53,282

Amortization of debt issuance costs, debt discounts and prepaids
3,664

 
3,229

Amortization of commitment fees and note receivable discounts
(365
)
 
(625
)
Amortization of lease incentives
607

 
240

Straight-line rent income
(16,255
)
 
(17,516
)
Non-cash interest income on construction loans
(1,509
)
 
(1,257
)
Loss on convertible note retirement

 
738

Loan and realty losses
2,500

 
1,849

Payment of lease incentives
(3,100
)
 
(3,000
)
Non-cash stock-based compensation
2,955

 
2,131

Changes in operating assets and liabilities:
 
 
 
Other assets
2,059

 
(3,350
)
Accounts payable and accrued expenses
1,757

 
4,030

Deferred income
16,877

 
(690
)
Net cash provided by operating activities
184,809

 
156,312

 
 
 
 
Cash flows from investing activities:
 
 
 
Investments in mortgage and other notes receivable
(83,946
)
 
(16,144
)
Collections of mortgage and other notes receivable
2,566

 
3,640

Investments in real estate
(209,227
)
 
(129,558
)
Investments in renovations of existing real estate
(14,295
)
 
(7,412
)
Net cash used in investing activities
(304,902
)
 
(149,474
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility
332,000

 
211,000

Payments on revolving credit facility
(166,000
)
 
(409,000
)
Borrowings on term loan

 
300,000

Payments on term loans
(886
)
 
(854
)
Debt issuance costs
(126
)
 
(2,113
)
Proceeds from noncontrolling interest, net
631

 

Taxes remitted on employee stock awards
(1,374
)
 
(730
)
Proceeds from issuance of common shares, net
95,802

 
47,893

Convertible note redemption

 
(29,985
)
Dividends paid to stockholders
(133,585
)
 
(123,160
)
Net cash provided by (used in) financing activities
126,462

 
(6,949
)
 
 
 
 
Increase (decrease) in cash and cash equivalents and restricted cash
6,369

 
(111
)
Cash and cash equivalents and restricted cash, beginning of period
9,912

 
8,075

Cash and cash equivalents and restricted cash, end of period
$
16,281

 
$
7,964


The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

6

Table of Contents

NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)

 
Nine Months Ended
 
September 30,
 
2019
 
2018
 
(unaudited)
Supplemental disclosure of cash flow information:
 
 
 
Interest paid, net of amounts capitalized
$
39,355

 
$
32,680

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Change in accounts payable related to investments in real estate construction
$
(1,981
)
 
$
568

Change in accounts payable related to investments in real estate acquisition
$
1,178

 
$

Change in straight-line rent receivable related to investments in real estate
$
38,000

 
$

Change in mortgage notes receivable related to investments in real estate
$
14,035

 
$

Change in other assets related to investments in real estate
$
176

 
$

Tenant investment in leased asset
$

 
$
3,775



The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

7

Table of Contents

NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited, in thousands, except share and per share amounts)

 
Common Stock
 
Capital in Excess of Par Value
 
Cumulative Net Income in (Excess) of Dividends
 
Accumulated Other Comprehensive Income (Loss)
 
Total National Health Investors Stockholders’ Equity
 
Noncontrolling Interest
 
Total Equity
 
Shares
 
Amount
 
 
 
 
 
 
Balances at December 31, 2018
42,700,411

 
$
427

 
$
1,369,919

 
$
18,068

 
$
1,299

 
$
1,389,713

 
$

 
$
1,389,713

Noncontrolling interest conveyed in acquisition

 

 

 

 

 

 
642

 
642

Total comprehensive income

 

 

 
75,659

 
(4,758
)
 
70,901

 
(1
)
 
70,900

Issuance of common stock, net
618,654

 
6

 
47,848

 

 

 
47,854

 

 
47,854

Taxes paid on employee stock awards

 

 
(1,016
)
 

 

 
(1,016
)
 

 
(1,016
)
Shares issued on stock options exercised
37,953

 
1

 
(1
)
 

 

 

 

 

Stock-based compensation

 

 
2,478

 

 

 
2,478

 

 
2,478

Dividends declared, $2.10 per common share

 

 

 
(90,885
)
 

 
(90,885
)
 

 
(90,885
)
Activity for the six months ended June 30, 2019
656,607

 
7

 
49,309

 
(15,226
)
 
(4,758
)
 
29,332

 
641

 
29,973

Noncontrolling interest distribution

 

 

 

 

 

 
(11
)
 
(11
)
Total comprehensive income

 

 

 
42,758

 
(1,350
)
 
41,408

 
(3
)
 
41,405

Issuance of common stock, net
590,868

 
6

 
47,942

 

 

 
47,948

 

 
47,948

Taxes paid on employee stock awards

 

 
(358
)
 

 

 
(358
)
 

 
(358
)
Shares issued on stock options exercised
8,352

 

 

 

 

 

 

 

Stock-based compensation

 

 
477

 

 

 
477

 

 
477

Dividends declared, $1.05 per common share

 

 

 
(46,154
)
 

 
(46,154
)
 

 
(46,154
)
Activity for the three months ended September 30, 2019
599,220

 
6

 
48,061

 
(3,396
)
 
(1,350
)
 
43,321

 
(14
)
 
43,307

Balances at September 30, 2019
43,956,238

 
$
440

 
$
1,467,289

 
$
(554
)
 
$
(4,809
)
 
$
1,462,366

 
$
627

 
$
1,462,993

 
Common Stock
 
Capital in Excess of Par Value
 
Cumulative Net Income in Excess of Dividends
 
Accumulated Other Comprehensive Income (Loss)
 
Total National Health Investors Stockholders’ Equity
 
Noncontrolling Interest
 
Total Equity
 
Shares
 
Amount
 
 
 
 
 
 
Balances at December 31, 2017
41,532,154

 
$
415

 
$
1,289,919

 
$
32,605

 
$
(822
)
 
$
1,322,117

 
$

 
$
1,322,117

Cumulative effect of change in accounting principle

 

 

 
(235
)
 
235

 

 

 

Total comprehensive income

 

 

 
76,272

 
2,726

 
78,998

 

 
78,998

Equity component in redemption of convertible notes

 

 
(2,427
)
 

 

 
(2,427
)
 

 
(2,427
)
Issuance of common stock, net
628,403

 
7

 
44,913

 

 

 
44,920

 

 
44,920

Taxes remitted on employee stock awards

 

 
(325
)
 

 

 
(325
)
 

 
(325
)
Shares issued on stock options exercised
11,309

 

 

 

 

 

 

 

Non-cash stock-based compensation

 

 
1,794

 

 

 
1,794

 

 
1,794

Dividends declared, $2.00 per common share

 

 

 
(83,703
)
 

 
(83,703
)
 

 
(83,703
)
Activity for the six months ended June 30, 2018
639,712

 
7

 
43,955

 
(7,666
)
 
2,961

 
39,257

 

 
39,257

Total comprehensive income

 

 

 
40,979

 
374

 
41,353

 

 
41,353

Issuance of common stock, net
39,669

 

 
2,973

 

 

 
2,973

 

 
2,973

Taxes remitted on employee stock awards

 

 
(405
)
 

 

 
(405
)
 

 
(405
)
Shares issued on stock options exercised
19,316

 

 

 

 

 

 

 

Non-cash stock-based compensation

 

 
337

 

 

 
337

 

 
337

Dividends declared, $1.00 per common share

 

 

 
(42,232
)
 

 
(42,232
)
 

 
(42,232
)
Activity for the three months ended September 30, 2018
58,985

 

 
2,905

 
(1,253
)
 
374

 
2,026

 

 
2,026

Balances at September 30, 2018
42,230,851

 
$
422

 
$
1,336,779

 
$
23,686

 
$
2,513

 
$
1,363,400

 
$

 
$
1,363,400



The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

8

Table of Contents

NATIONAL HEALTH INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(unaudited)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

We, the management of National Health Investors, Inc., (“NHI” or the “Company”) believe that the unaudited condensed consolidated financial statements of which these notes are an integral part include all normal, recurring adjustments that are necessary to fairly present the condensed consolidated financial position, results of operations and cash flows of NHI in all material respects. The Condensed Consolidated Balance Sheet at December 31, 2018 has been derived from the audited consolidated financial statements at that date. We assume that users of these condensed consolidated financial statements have read or have access to the audited December 31, 2018 consolidated financial statements and that the adequacy of additional disclosure needed for a fair presentation, except regarding material contingencies, may be determined in that context. Accordingly, notes and other disclosures which would substantially duplicate those contained in our most recent Annual Report on Form 10-K for the year ended December 31, 2018 have been omitted. This condensed consolidated financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons including, but not limited to, acquisitions and dispositions, changes in interest rates, rents and the timing of debt and equity financings. For a better understanding of NHI and its condensed consolidated financial statements, we recommend reading these condensed consolidated financial statements in conjunction with the audited consolidated financial statements for the year ended December 31, 2018, which are included in our 2018 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”), a copy of which is available at our web site: www.nhireit.com.

Principles of Consolidation - The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, joint ventures, partnerships and consolidated variable interest entities (“VIE”), if any. All intercompany transactions and balances have been eliminated in consolidation.

A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights.

We apply Financial Accounting Standards Board (“FASB”) guidance for our arrangements with VIEs which requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of the VIE. In accordance with FASB guidance, management must evaluate each of the Company’s contractual relationships which creates a variable interest in other entities. If the Company has a variable interest and the entity is a VIE, then management must determine whether the Company is the primary beneficiary of the VIE. If it is determined that the Company is the primary beneficiary, NHI would consolidate the VIE. We identify the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. We perform this analysis on an ongoing basis.

If the Company has determined that an entity is not a VIE, the Company assesses the need for consolidation under all other provisions of Accounting Standards Codification (“ASC”) Topic 810 Consolidation. These provisions provide for consolidation of majority-owned entities where a majority voting interest held by the Company demonstrates control of such entities in the absence of any legal constraints.

At September 30, 2019, we held interests in seven unconsolidated VIEs, and, because we generally lack either directly or through related parties any material input in the activities that most significantly impact their economic performance, we have concluded that NHI is not the primary beneficiary. Accordingly, we account for our transactions with these entities and their subsidiaries at either amortized cost or net realizable value for straight-line receivables.

Our VIEs are summarized below by date of initial involvement. For further discussion of the nature of the relationships, including the sources of our exposure to these VIEs, see the notes to our condensed consolidated financial statements cross-referenced below.

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Date
Name
Source of Exposure
Carrying Amount
Maximum Exposure to Loss
Note Reference
2012
Bickford Senior Living
Various1
$
60,133,000

$
69,665,000

Notes 2, 3
2014
Senior Living Communities
Notes and straight-line receivable
$
83,814,000

$
94,059,000

Notes 2, 3
2015
Timber Ridge, LCS affiliate
Notes receivable
$
59,156,000

$
59,808,000

Note 3
2016
Senior Living Management
Notes and straight-line receivable
$
26,796,000

$
26,796,000

Note 3
2017
Evolve Senior Living
Note receivable
$
9,943,000

$
9,943,000

2018
Sagewood, LCS affiliate
Notes receivable
$
107,890,000

$
178,498,000

Note 3
2019
41 Management, LLC
Notes receivable
$
3,223,000

$
10,800,000

Note 3

1 Notes, straight-line rent receivables, and 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 to a new tenant. 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 leases are accumulated straight-line receivables and unamortized lease incentives. For VIE relationships listed above without a note reference, refer to our financial statements included in our most recent Annual Report on Form 10-K for the year ended December 31, 2018.

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 in accordance with agency agreements governing our Fannie Mae and HUD mortgages.

The following table sets forth our cash, cash equivalents and restricted cash reported within the Company’s Condensed Consolidated Statements of Cash Flows (in thousands):
 
September 30,
2019
 
September 30,
2018
Cash and cash equivalents
$
5,882

 
$
2,638

Restricted cash (included in Other assets)
10,399

 
5,326

 
$
16,281

 
$
7,964



Leases - Operating leases entered into during 2019 are accounted for under the guidance of ASC Topic 842, Leases. Our leases generally have an initial leasehold term of 10 to 15 years followed by one or more 5-year tenant renewal options. The leases are “triple net leases” under which the tenant is responsible for the payment of all taxes, utilities, insurance premiums, repairs and other charges relating to the operation of the properties, including required levels of capital expenditures each year. The tenant is obligated at its expense to keep all improvements, fixtures and other components of the properties covered by “all risk” insurance in an amount equal to at least the full replacement cost thereof, and to maintain specified minimal personal injury and property damage insurance, protecting us as well as the tenant. The leases also require the tenant to indemnify and hold us harmless from all claims resulting from the use, occupancy and related activities of each property by the tenant, and to indemnify us against all costs related to any release, discovery, clean-up and removal of hazardous substances or materials, or other environmental responsibility with respect to each facility. These provisions, along with a growing senior demographic and the historical propensity for real estate to hold its value, collectively constitute much of the means by which the risk associated with the residual value of our properties is mitigated. While we do not incorporate residual value guarantees, the above lease provisions and considerations inform our expectation of realizable value from our properties upon the expiration of their lease terms. The residual value of our real estate under lease is still subject to various market, asset, and tenant-specific risks and characteristics. As the classification of our leases is dependent on the fair value of estimated cash flows at lease commencement, management’s projected residual values represent significant assumptions in our accounting for operating leases. Similarly, the exercise of options is also subject to these same risks, making a tenant’s lease term another significant variable in a lease’s cash flows.

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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Earnings Per Share - The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assumes the exercise of stock options using the treasury stock method, to the extent dilutive. Diluted earnings per share also incorporate the potential dilutive impact of our convertible senior notes. We apply the treasury stock method to our convertible debt instruments, the effect of which is that conversion will not be assumed for purposes of computing diluted earnings per share unless the average share price for the period exceeds the conversion price per share.

Reclassifications - We have reclassified certain balances where necessary to conform the presentation of prior periods to the current period. These reclassifications had no effect on previously reported net income.

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 operations, see Note 10.

NOTE 2. REAL ESTATE

As of September 30, 2019, we owned 222 health care real estate properties located in 34 states and consisting of 145 senior housing communities (“SHO”), 72 skilled nursing facilities, 3 hospitals and 2 medical office buildings. Our senior housing communities include assisted living facilities, senior living campuses, independent living facilities, and entrance-fee communities. These investments (excluding our corporate office of $2,508,000) consisted of properties with an original cost of approximately $3,057,775,000 rented under triple-net leases to 31 lessees.

During the nine months ended September 30, 2019, we made the following real estate investments and related commitments as described below ($ in thousands):
Operator
 
Date
 
Properties
 
Asset Class
 
Amount
Wingate Healthcare
 
January 2019
 
1
 
SHO
 
$
52,200

Holiday Retirement
 
January 2019
 
1
 
SHO
 
38,000

Comfort Care Senior Living
 
April 2019
 
1
 
SHO
 
10,800

Comfort Care Senior Living
 
May 2019
 
1
 
SHO
 
13,500

Discovery Senior Living (PropCo Joint Venture)
 
May 2019
 
6
 
SHO
 
127,917

Capella Living Solutions
 
July 2019
 
1
 
SHO
 
7,600

Bickford Senior Living
 
September 2019
 
1
 
SHO
 
15,100

 
 
 
 
 
 
 
 
$
265,117



Wingate

On January 15, 2019, we acquired a 267-unit senior living campus in Massachusetts for a purchase price of $50,300,000, including closing costs of $300,000. The facility is being leased to Wingate Healthcare, Inc. (“Wingate”) for a term of 10 years, with three renewal options of five years each, at an initial lease rate of 7.5% plus annual fixed escalators. We have committed to the additional funding of up to $1,900,000 in capital improvements, and the lease provides for incentive payments up to $5,000,000 to become available beginning in 2020 upon the attainment of certain operating metrics. NHI has a right of first offer on two additional Wingate-operated facilities. We accounted for the transaction as an asset purchase.

Comfort Care

On April 30, 2019, we acquired a newly-constructed 60-unit assisted living facility in Shelby, Michigan which has 14 memory care units under construction. The total commitment of $10,800,000 includes $9,282,000 funded at closing with the remaining amount to be funded as construction progresses. On May 20, 2019, we acquired a property in Brighton, Michigan, consisting of 73 assisted living/memory care units. The purchase price for the Brighton acquisition was $13,500,000, inclusive of closing costs. We leased the properties to Comfort Care Senior Living (“Comfort Care”), under leases which provide for initial lease rate of 7.75%, with annual fixed escalators beginning in year three over the term of ten years plus two renewal options of five years each. The leases each include a $3,000,000 earnout incentive which will be added to the respective lease base if funded. We accounted for the acquisitions as asset purchases.



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Discovery

On May 31, 2019, we invested $25,028,000 in cash for a 97.5% equity interest in a consolidated subsidiary ("Discovery PropCo"), which simultaneously acquired from a third party six senior housing facilities comprising 145 independent-living units, 356 assisted-living units and 95 memory-care units, for a total of 596 units. Discovery Senior Housing Investor XXIV, LLC, (“Discovery”) contributed $631,000 for its non-controlling 2.5% equity interest. We invested an additional $102,258,000 as a preferred equity contribution, for a total NHI investment of $127,286,000. The additional equity contribution of $102,258,000 carries a preference in liquidation as well as in the distribution of operating cash flow. After the completion of all transaction accounting during the quarter ended September 30, 2019, minor adjustments were made to reconcile the partnership equity interests. Total cash of $127,917,000 invested in Discovery PropCo included approximately $1,067,000 in closing costs.

The facilities were leased by Discovery PropCo to Discovery for a term of ten years with two renewal periods of five years each at an initial lease rate of 6.5% with fixed annual escalators through the fifth year of the initial lease term followed by CPI-based escalators, subject to floor and ceiling, thereafter. Discovery is eligible, beginning in 2023, for up to $4,000,000 of lease inducement payments upon meeting specified performance metrics. Inducement payments funded under the agreement will be added to the lease base. Additionally, PropCo has committed to Discovery for funding up to $2,000,000 toward the purchase of condominium units located at one of the facilities. The total purchase price for the properties acquired, as discussed above, was allocated to the tangible assets based upon their relative fair values consisting of $6,301,000 to the land and $121,616,000 to the buildings and improvements. We accounted for the transaction as an asset purchase.

As the managing member, NHI manages Discovery Propco, subject to certain consent rights of Discovery for significant business decisions. Because of our control of Discovery PropCo, we include its assets, liabilities, noncontrolling interest and operations in our condensed consolidated financial statements.

Cappella Living Solutions

On July 23, 2019, we acquired a 51-unit assisted living facility in Pueblo, Colorado for $7,600,000 including $100,000 of closing costs. We leased the facility to Christian Living Services, Inc., d/b/a Cappella Living Solutions, for a term of 15 years at an initial lease rate of 7.25%, with CPI escalators subject to a floor and ceiling. We accounted for this transaction as an asset purchase.

Major Tenants

Holiday

In November 2018, we entered into a lease amendment and guaranty release (“the Agreement”) with an affiliate of Holiday Retirement (“Holiday”). Among other provisions, the Agreement decreased base rent beginning in 2019 from $39,000,000 to $31,500,000, extended the term of the original lease through 2035, and increased required minimum capital expenditure per unit. As consideration for amending provisions included in the original 2013 lease, Holiday agreed to pay NHI $55,125,000 in cash or real estate and forfeit $10,637,000 of their original $21,275,000 security deposit.

On January 31, 2019, we acquired a senior housing facility in Vero Beach, Florida from Holiday consisting of 157 independent living and 71 assisted living units in exchange for $38,000,000 toward the $55,125,000 receivable arising from the lease amendment, discussed above. The property was added to the master lease at a 6.71% lease rate. Under the restructured master lease, annual lease escalators ranging from 2% to 3%, based on portfolio revenue growth, will go into effect on November 1, 2020. Holiday settled the remaining commitment to NHI with a cash payment of $17,125,000 at closing. Acquisition of the property and collection of residual cash flowed through our accounts as adjustments to lease receivables and resulted in the change of our straight-line receivable from Holiday at the beginning of the year into a straight-line payable, which is included in the accompanying Condensed Consolidated Balance Sheets as “deferred income” at September 30, 2019.

As of September 30, 2019, we leased 26 independent living facilities to Holiday. Of our total revenues, $10,176,000 (12%) and $10,954,000 (15%) were derived from Holiday for the three months ended September 30, 2019 and 2018, including $1,664,000 and $1,530,000 in straight-line rent income, respectively. Of our total revenues, $30,283,000 (13%) and $32,863,000 (15%) were derived from Holiday for the nine months ended September 30, 2019 and 2018, including $4,958,000 and $4,591,000 in straight-line rent income, respectively. Our tenant operates the facilities pursuant to a management agreement with a Holiday-affiliated manager.




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Bickford

As of September 30, 2019, our Bickford Senior Living (“Bickford”) lease portfolio consists of the following ($ in thousands):
 
Lease Expiration
 
 
June 2023
September 2024
September 2027
May 2031
April 2033
Total
Number of Properties
13

10

4

19

5

51

2019 Contractual Rent
$
11,468

$
9,542

$
1,576

$
12,203

$
4,918

$
39,707

2019 Straight Line Rent
358

670

195

1,695

860

3,778

 
$
11,826

$
10,212

$
1,771

$
13,898

$
5,778

$
43,485



On September 1, 2019, NHI amended a master lease, which matures in May 2031 and covers 14 Bickford properties, to change the annual escalator from a fixed percentage to a CPI-based escalator with a floor of 2% and a ceiling of 3%.

On September 10, 2019, we acquired a 60-unit assisted living/memory care facility located in Gurnee, Illinois, from Bickford. The acquisition price was $15,100,000, including $100,000 in closing costs, and the cancellation of an outstanding construction note receivable of $14,035,000, including interest. The $965,000 difference was funded into an agreed-upon escrow. We leased the building for a term of twelve years at an initial lease rate of 8%, with CPI escalators subject to a floor and ceiling. We accounted for the transaction as an asset purchase.

Of our total revenues, $13,285,000 (16%) and $12,937,000 (17%) were recognized as rental income from Bickford for the three months ended September 30, 2019 and 2018, including $1,117,000 and $1,169,000 in straight-line rent income, respectively. Of our total revenues, $39,796,000 (17%) and $36,792,000 (17%) were recognized as rental income from Bickford for the nine months ended September 30, 2019 and 2018, including $3,812,000 and $3,541,000 in straight-line rent income, respectively.

Effective October 1, 2019, NHI and Bickford amended the master lease covering ten Bickford properties secured by HUD financing to reduce the annual rent by $466,000. Included in the amendment, NHI agreed to change the annual escalator from a fixed percentage to CPI-based subject to a floor and ceiling.

Senior Living Communities

As of September 30, 2019, we leased 10 retirement communities totaling 2,068 units to Senior Living Communities, LLC (“Senior Living”). The 15-year master lease, which began in December 2014, contains two renewal options of five years each and provides for an annual escalator of 3% effective January 1, 2019.

Of our total revenues, $11,924,000 (15%) and $11,469,000 (15%) in rental income were derived from Senior Living for the three months ended September 30, 2019 and 2018, including $1,404,000 and $1,359,000 in straight-line rent income, respectively. Of our total revenues, $35,001,000 (15%) and $34,374,000 (16%) in rental income were derived from Senior Living for the nine months ended September 30, 2019 and 2018, including $3,519,000 and $4,076,000 in straight-line rent income, respectively.

NHC

As of September 30, 2019, we leased 42 facilities under two master leases to National HealthCare Corporation (“NHC”), a publicly-held company. The facilities leased to NHC consist of three independent living facilities and 39 skilled nursing facilities (4 of which are subleased to other parties for whom the lease payments are guaranteed to us by NHC). These facilities are leased to NHC under the terms of an amended master lease agreement originally dated October 17, 1991 (“the 1991 lease”) that includes our 35 legacy properties and a master lease agreement dated August 30, 2013 (“the 2013 lease”) that includes 7 skilled nursing facilities acquired in 2013.

The 1991 lease expiration is December 31, 2026. There are two additional renewal options of five years, each at fair rental value as negotiated between the parties. Under the terms of the 1991 lease, the base annual rental is $30,750,000 and rent escalates by 4% of the increase, if any, in each facility’s revenue over a 2007 base year. The 2013 lease provides for a base annual rental of $3,450,000 and has a lease expiration of August 2028. Under the terms of the 2013 lease, rent escalates 4% of the increase, if any, in each facility’s revenue over the 2014 base year. For both the 1991 lease and the 2013 lease, we refer to this additional rent component as “percentage rent.” During the last three years of the 2013 lease, NHC will have the option to purchase the facilities for $49,000,000.




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The following table summarizes the percentage rent income from NHC (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Current year
$
924

 
$
853

 
$
2,726

 
$
2,558

Prior year final certification1

 

 
334

 
285

Total percentage rent income
$
924

 
$
853

 
$
3,060

 
$
2,843

1 For purposes of the percentage rent calculation described in the master lease agreement, NHC’s annual revenue by facility for a given year is certified to NHI by March 31st of the following year.

Of our total revenues, $9,461,000 (12%) and $9,389,000 (13%) in rental income were derived from NHC for the three months ended September 30, 2019 and 2018, respectively. Of our total revenues, $28,670,000 (12%) and $28,453,000 (13%) in rental income were derived from NHC for the nine months ended September 30, 2019 and 2018, respectively.

The chairman of our board of directors is also a director on NHC’s board of directors. As of September 30, 2019, NHC owned 1,630,462 shares of our common stock.

Other Portfolio Activity

Tenant Transitioning

41 Management

As part of a geographical realignment by Bickford, we transitioned four Minnesota properties on October 1, 2019, to 41 Management. The lease calls for first-year rent of $906,000 and a term of 15 years with two renewal options of five years each. Annual escalators are fixed at 2.5%. Bickford has agreed to fund a monthly lease termination fee through December 2020, totaling $734,000.

Other

As of September 30, 2019, we had completed the contractual transition of three lease portfolios to new tenants following a period of non-compliance by the former operators, background for which is provided in the audited financial statements included in our 2018 Annual Report on Form 10-K. The portfolios consist of three former SH-Regency Leasing, LLC (“Regency”) buildings, five former LaSalle Group (“LaSalle”) buildings and one facility formerly leased to Landmark Senior Living (“Landmark”). To expedite stabilization of the facilities, we committed to specified income-generating capital expenditures for the re-branding and refurbishment of certain of these properties. The new leases each specify initial periods during which rental income to NHI shall be based on net operating income (“NOI”), after deduction of management fees. Following the initial periods, each lease converts to a structured payment based on a fair-value calculation.

The former Regency buildings have been leased to three operators, Senior Living, Discovery, and Vitality MC TN, LLC (“Vitality”). Of our total revenues, $515,000 and $1,367,000 (2%) in rental income were derived from the three former Regency buildings for the three months ended September 30, 2019 and 2018, respectively. Of our total revenues, $660,000 and $4,100,000 (3%) in rental income were derived from the three former Regency buildings for the nine months ended September 30, 2019 and 2018, respectively.

Effective July 1, 2019 we transitioned an Indiana, independent living/assisted living facility to Discovery in conjunction with our other properties in transition. The triple-net lease matures in June 2024 with two renewal options of five years each. Rent is initially based on net operating income. Beginning in 2022, rent is to reset to the greater of $1,400,000 or fair value as provided by formula. For the duration of the lease, the rent, as reset, is subject to a 2.5% escalator. Concurrent with Discovery’s entrance into the lease, NHI provided a working capital loan for amounts up to $750,000 at an interest rate of 6.5% and a $900,000 capital improvement commitment to fund improvements to the facility. The loan extends during the term of the lease.

On April 16, 2019, Chancellor Health Care leased the five former LaSalle buildings. Our lease agreement with Chancellor provides for NHI to receive 100% of net operating cash flow generated by the facilities, after management fees, pending

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stabilization of the operations of the facility. During the first quarter of 2019, we also commenced litigation for the recovery of certain funds owed by LaSalle under the lease and against the principal executive, personally, under the guaranty agreement. Of our total revenues, $437,000 and $1,317,000 (2%) in rental income were derived from the five former LaSalle buildings for the three months ended September 30, 2019 and 2018, respectively. Of our total revenues, $725,000 and $3,950,000 (3%) in rental income were derived from the five former LaSalle buildings for the nine months ended September 30, 2019 and 2018, respectively.

At December 31, 2018, we had a single-property lease in Wisconsin with Landmark that was non-performing. In February 2019, we transitioned the lease to BAKA Enterprises, temporarily acting under a management agreement with Landmark. Under terms of the new lease, NHI receives 95% of net operating cash flow, after management fees, as generated by the facilities. Upon the establishment of an operational baseline, beginning in year two, the agreement calls for a rent reset to fair value. The agreement provides for a term of 8 years, with renewal options. Of our total revenues, $150,000 and $247,000 were derived from the former Landmark property for the three months ended September 30, 2019 and 2018, respectively. Of our total revenues, $925,000 (0%) and $1,041,000 (1%) were derived from the former Landmark property for the nine months ended September 30, 2019 and 2018, respectively, including $625,000 received during 2019 as a settlement payment.

As we seek to stabilize the operations of these facilities, if our resulting tenants or operating partners do not have adequate liquidity to accept the risks and rewards of a tenant-lessee, NHI might be deemed the primary beneficiary of the operations and might be required to consolidate those statements of financial position and results of operations of the managers or operating partners into our consolidated financial statements.

Assets Held For Sale

In September 2019, we classified a portfolio of eight assisted living properties located in Arizona (4), Tennessee (