NATIONAL HEALTH INVESTORS INC - Quarter Report: 2021 September (Form 10-Q)
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, 2021 | ||||||||||||||||
| ☐ | 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 45,850,599 shares of common stock outstanding of the registrant as of November 1, 2021.
Table of Contents
| Page | |||||
2
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, 2021 | December 31, 2020 | ||||||||||
| (unaudited) | |||||||||||
| Assets: | |||||||||||
| Real estate properties: | |||||||||||
| Land | $ | 200,559 | $ | 220,361 | |||||||
| Buildings and improvements | 2,818,321 | 3,041,616 | |||||||||
| Construction in progress | 2,784 | 3,093 | |||||||||
| 3,021,664 | 3,265,070 | ||||||||||
| Less accumulated depreciation | (593,215) | (597,638) | |||||||||
| Real estate properties, net | 2,428,449 | 2,667,432 | |||||||||
Mortgage and other notes receivable, net of reserve of $5,139 and $4,946, respectively | 284,608 | 292,427 | |||||||||
| Cash and cash equivalents | 48,393 | 43,344 | |||||||||
| Straight-line rent receivable | 99,895 | 95,703 | |||||||||
| Assets held for sale, net | 17,443 | — | |||||||||
| Other assets | 33,389 | 21,583 | |||||||||
| Total Assets | $ | 2,912,177 | $ | 3,120,489 | |||||||
| Liabilities and Stockholders’ Equity: | |||||||||||
| Debt | $ | 1,285,287 | $ | 1,499,285 | |||||||
| Accounts payable and accrued expenses | 20,886 | 25,189 | |||||||||
| Dividends payable | 41,266 | 49,818 | |||||||||
| Lease deposit liabilities | 8,838 | 10,638 | |||||||||
| Deferred income | 6,694 | 12,614 | |||||||||
| Total Liabilities | 1,362,971 | 1,597,544 | |||||||||
| Commitments and Contingencies | |||||||||||
| National Health Investors, Inc. Stockholders' Equity: | |||||||||||
| Common stock, $0.01 par value, 100,000,000 shares authorized | |||||||||||
| 45,850,599 and 45,185,992 shares issued and outstanding, respectively | 459 | 452 | |||||||||
| Capital in excess of par value | 1,590,194 | 1,540,946 | |||||||||
| Cumulative dividends in excess of net income | (49,768) | (22,015) | |||||||||
| Accumulated other comprehensive loss | (1,828) | (7,149) | |||||||||
| Total National Health Investors, Inc. Stockholders' Equity | 1,539,057 | 1,512,234 | |||||||||
| Noncontrolling interests | 10,149 | 10,711 | |||||||||
| Total Equity | 1,549,206 | 1,522,945 | |||||||||
| Total Liabilities and Stockholders’ Equity | $ | 2,912,177 | $ | 3,120,489 | |||||||
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, 2020 was derived from the audited consolidated financial statements at that date.
3
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, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Rental income | $ | 67,043 | $ | 77,821 | $ | 210,143 | $ | 232,266 | |||||||||||||||
| Interest income and other | 6,790 | 6,480 | 18,905 | 19,306 | |||||||||||||||||||
| 73,833 | 84,301 | 229,048 | 251,572 | ||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Depreciation | 20,035 | 20,836 | 61,499 | 62,126 | |||||||||||||||||||
| Interest | 12,715 | 12,892 | 38,528 | 40,589 | |||||||||||||||||||
| Legal | 117 | 241 | 207 | 826 | |||||||||||||||||||
| Franchise, excise and other taxes | 244 | 164 | 709 | 553 | |||||||||||||||||||
| General and administrative | 3,650 | 2,785 | 15,229 | 10,127 | |||||||||||||||||||
| Taxes and insurance on leased properties | 3,182 | 4,187 | 7,519 | 7,190 | |||||||||||||||||||
| Loan and realty losses (gains) | 22,425 | (193) | 23,596 | 1,002 | |||||||||||||||||||
| 62,368 | 40,912 | 147,287 | 122,413 | ||||||||||||||||||||
| Loss from equity method investment | (557) | (728) | (2,274) | (2,018) | |||||||||||||||||||
| Gains on sales of real estate, net | 19,941 | — | 26,426 | 21,007 | |||||||||||||||||||
| Loss on early retirement of debt | — | — | (451) | — | |||||||||||||||||||
| Net income | 30,849 | 42,661 | 105,462 | 148,148 | |||||||||||||||||||
| Less: net income attributable to noncontrolling interests | (35) | (66) | (135) | (162) | |||||||||||||||||||
| Net income attributable to common stockholders | $ | 30,814 | $ | 42,595 | $ | 105,327 | $ | 147,986 | |||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||||||
| Basic | 45,850,599 | 44,661,650 | 45,668,762 | 44,641,748 | |||||||||||||||||||
| Diluted | 45,851,424 | 44,662,403 | 45,689,091 | 44,643,514 | |||||||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||
| Net income attributable to common stockholders - basic | $ | 0.67 | $ | 0.95 | $ | 2.31 | $ | 3.31 | |||||||||||||||
| Net income attributable to common stockholders - diluted | $ | 0.67 | $ | 0.95 | $ | 2.31 | $ | 3.31 | |||||||||||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
4
NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||
| Net income | $ | 30,849 | $ | 42,661 | $ | 105,462 | $ | 148,148 | |||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| (Decrease) increase in fair value of cash flow hedges | (46) | 92 | (128) | (9,966) | |||||||||||||||||||
| Reclassification for amounts recognized as interest expense | 1,851 | 1,778 | 5,449 | 4,533 | |||||||||||||||||||
| Total other comprehensive income (loss) | 1,805 | 1,870 | 5,321 | (5,433) | |||||||||||||||||||
| Comprehensive income | 32,654 | 44,531 | 110,783 | 142,715 | |||||||||||||||||||
| Comprehensive income attributable to noncontrolling interest | (35) | (66) | (135) | (162) | |||||||||||||||||||
| Comprehensive income attributable to common stockholders | $ | 32,619 | $ | 44,465 | $ | 110,648 | $ | 142,553 | |||||||||||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
5
NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
(unaudited) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 105,462 | $ | 148,148 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 61,499 | 62,126 | |||||||||
| Amortization of debt issuance costs, debt discounts and prepaids | 3,281 | 3,775 | |||||||||
| Amortization of commitment fees and note receivable discounts | (645) | (581) | |||||||||
| Amortization of lease incentives | 774 | 735 | |||||||||
| Straight-line rent income | (12,189) | (15,481) | |||||||||
| Non-cash interest income on mortgage and other notes receivable | (1,351) | (2,865) | |||||||||
| Gains on sales of real estate, net | (26,426) | (21,007) | |||||||||
| Loss from equity method investment | 2,274 | 2,018 | |||||||||
| Loss on early retirement of debt | 451 | — | |||||||||
| Loan and realty losses | 23,596 | 1,002 | |||||||||
| Payment of lease incentives | (1,042) | (498) | |||||||||
| Non-cash stock-based compensation | 7,427 | 2,772 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Other assets | (3,138) | (835) | |||||||||
| Accounts payable and accrued expenses | (2,591) | (2,513) | |||||||||
| Deferred income | 119 | (269) | |||||||||
| Net cash provided by operating activities | 157,501 | 176,527 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Investments in mortgage and other notes receivable | (54,887) | (41,715) | |||||||||
| Collections of mortgage and other notes receivable | 64,509 | 33,895 | |||||||||
| Acquisition of real estate | (46,817) | (102,712) | |||||||||
| Proceeds from sales of real estate | 203,147 | 39,260 | |||||||||
| Investments in renovations of existing real estate | (3,006) | (11,113) | |||||||||
| Investments in equipment | (64) | (158) | |||||||||
| Investment in equity method investment | — | (875) | |||||||||
| Distribution from equity method investment | 476 | — | |||||||||
| Net cash provided by (used in) investing activities | 163,358 | (83,418) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from revolving credit facility | 95,000 | 145,000 | |||||||||
| Payments on revolving credit facility | (393,000) | (157,000) | |||||||||
| Borrowings on term loan | — | 100,000 | |||||||||
| Payments on term loans | (250,277) | (917) | |||||||||
| Proceeds from issuance of senior notes | 396,784 | — | |||||||||
| Debt issuance costs | (5,018) | (1,039) | |||||||||
| Proceeds from issuance of common shares, net | 47,904 | 4,791 | |||||||||
| Distributions to noncontrolling interests | (692) | (537) | |||||||||
| Convertible note redemption | (66,076) | — | |||||||||
| Dividends paid to stockholders | (141,632) | (145,270) | |||||||||
| Taxes remitted on employee stock awards | — | (2,705) | |||||||||
| Proceeds from noncontrolling interests | — | 13 | |||||||||
| Net cash used in financing activities | (317,007) | (57,664) | |||||||||
| Increase in cash and cash equivalents and restricted cash | 3,852 | 35,445 | |||||||||
| Cash and cash equivalents and restricted cash, beginning of period | 46,343 | 15,669 | |||||||||
| Cash and cash equivalents and restricted cash, end of period | $ | 50,195 | $ | 51,114 | |||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
6
NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| (unaudited) | |||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Interest paid, net of amounts capitalized | $ | 34,991 | $ | 33,174 | |||||||
| Supplemental disclosure of non-cash investing and financing activities: | |||||||||||
| Real estate acquired in exchange for mortgage notes receivable | $ | — | $ | 63,220 | |||||||
| Noncash portion of noncontrolling interest conveyed in acquisition | $ | — | $ | 10,778 | |||||||
| Increase in mortgage note receivable from sale of real estate | $ | — | $ | 4,000 | |||||||
| Change in other assets related to investments in real estate | $ | — | $ | 348 | |||||||
| Change in other assets related to sales of real estate | $ | 12,814 | $ | — | |||||||
| Change in accounts payable related to investments in real estate construction | $ | (112) | $ | (1,744) | |||||||
| Change in accounts payable related to renovations of existing real estate | $ | — | $ | 355 | |||||||
| Change in accounts payable related to distributions to noncontrolling interests | $ | 5 | $ | 85 | |||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
7
NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands, except share and per share amounts)
| Common Stock | Capital in Excess of Par Value | Cumulative Dividends in Excess of Net Income | Accumulated Other Comprehensive Loss | Total National Health Investors, Inc. Stockholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2020 | 45,185,992 | $ | 452 | $ | 1,540,946 | $ | (22,015) | $ | (7,149) | $ | 1,512,234 | $ | 10,711 | $ | 1,522,945 | ||||||||||||||||||||||||||||||||
| Noncontrolling interest distribution | — | — | — | — | — | — | (466) | (466) | |||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | — | — | — | 74,515 | 3,516 | 78,031 | 100 | 78,131 | |||||||||||||||||||||||||||||||||||||||
| Equity component in redemption of convertible debt | — | — | (6,076) | — | — | (6,076) | — | (6,076) | |||||||||||||||||||||||||||||||||||||||
| Equity issuance costs | — | — | (47) | — | — | (47) | — | (47) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net | 661,951 | 7 | 47,944 | — | — | 47,951 | — | 47,951 | |||||||||||||||||||||||||||||||||||||||
| Shares issued on stock options exercised | 2,656 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 6,438 | — | — | 6,438 | — | 6,438 | |||||||||||||||||||||||||||||||||||||||
| Dividends declared, $2.0025 per common share | — | — | — | (91,816) | — | (91,816) | — | (91,816) | |||||||||||||||||||||||||||||||||||||||
| Activity for the six months ended June 30, 2021 | 664,607 | 7 | 48,259 | (17,301) | 3,516 | 34,481 | (366) | 34,115 | |||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest distribution | — | — | — | — | — | — | (231) | (231) | |||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | — | — | — | 30,814 | 1,805 | 32,619 | 35 | 32,654 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 989 | — | — | 989 | — | 989 | |||||||||||||||||||||||||||||||||||||||
| Dividends declared, $.90 per common share | — | — | — | (41,266) | — | (41,266) | — | (41,266) | |||||||||||||||||||||||||||||||||||||||
| Activity for the three months ended September 30, 2021 | — | — | 989 | (10,452) | 1,805 | (7,658) | (196) | (7,854) | |||||||||||||||||||||||||||||||||||||||
| Balances at September 30, 2021 | 45,850,599 | $ | 459 | $ | 1,590,194 | $ | (49,768) | $ | (1,828) | $ | 1,539,057 | $ | 10,149 | $ | 1,549,206 | ||||||||||||||||||||||||||||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
8
NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands, except share and per share amounts)
| Common Stock | Capital in Excess of Par Value | Cumulative Dividends in Excess of Net Income | Accumulated Other Comprehensive Loss | Total National Health Investors Stockholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2019 | 44,587,486 | $ | 446 | $ | 1,505,948 | $ | (5,331) | $ | (3,432) | $ | 1,497,631 | $ | 621 | $ | 1,498,252 | ||||||||||||||||||||||||||||||||
| Cumulative effect of change in accounting principle | — | — | — | (4,225) | — | (4,225) | — | (4,225) | |||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest conveyed in acquisition | — | — | — | — | — | — | 10,791 | 10,791 | |||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest distribution | — | — | — | — | — | — | (398) | (398) | |||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | — | — | — | 105,391 | (7,303) | 98,088 | 96 | 98,184 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net | — | — | (291) | — | — | (291) | — | (291) | |||||||||||||||||||||||||||||||||||||||
| Taxes remitted on employee stock awards | — | — | (2,705) | — | — | (2,705) | — | (2,705) | |||||||||||||||||||||||||||||||||||||||
| Shares issued on stock options exercised | 62,516 | 1 | (2) | — | — | (1) | — | (1) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 2,315 | — | — | 2,315 | — | 2,315 | |||||||||||||||||||||||||||||||||||||||
| Dividends declared, $2.205 per common share | — | — | — | (98,453) | — | (98,453) | — | (98,453) | |||||||||||||||||||||||||||||||||||||||
| Activity for the six months ended June 30, 2020 | 62,516 | 1 | (683) | 2,713 | (7,303) | (5,272) | 10,489 | 5,217 | |||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest conveyed in acquisition | — | — | — | — | — | — | (223) | (223) | |||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | — | — | — | 42,595 | 1,870 | 44,465 | 66 | 44,531 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net | 79,155 | — | 5,082 | — | — | 5,082 | — | 5,082 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 457 | — | — | 457 | — | 457 | |||||||||||||||||||||||||||||||||||||||
| Dividends declared, $1.1025 per common share | — | — | — | (49,314) | — | (49,314) | — | (49,314) | |||||||||||||||||||||||||||||||||||||||
| Activity for the three months ended September 30, 2020 | 79,155 | — | 5,539 | (6,719) | 1,870 | 690 | (157) | 533 | |||||||||||||||||||||||||||||||||||||||
| Balances at September 30, 2020 | 44,729,157 | $ | 447 | $ | 1,510,804 | $ | (9,337) | $ | (8,865) | $ | 1,493,049 | $ | 10,953 | $ | 1,504,002 | ||||||||||||||||||||||||||||||||
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
9
NATIONAL HEALTH INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Note 1. Organization and Nature of Business
National Health Investors, Inc. (“NHI,” “the Company,” “we,” “us,” or “our”), established in 1991 as a Maryland corporation, is a self-managed real estate investment trust (“REIT”) specializing in sale-leaseback, joint venture, mortgage and mezzanine financing of need-driven and discretionary senior housing and medical facility investments. Our portfolio consists of lease, mortgage and other note investments in independent living facilities, assisted living facilities, entrance-fee communities, senior living campuses, skilled nursing facilities, hospitals and a medical office building. As of September 30, 2021, we had investments of approximately $3.0 billion in 208 health care real estate properties located in 34 states and leased pursuant primarily to triple-net leases to 33 lessees consisting of 133 senior housing communities (“SHO”), 72 skilled nursing facilities, two hospitals and one medical office building, excluding three properties classified to assets held for sale. Our portfolio of 14 mortgages along with other notes receivable totaled $289.7 million, excluding an allowance for expected credit losses of $5.1 million, as of September 30, 2021.
Note 2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements. In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation. Interim results of operations are not necessarily indicative of the results that may be achieved for a full year. The condensed consolidated financial statements and related notes do not include all information and footnotes required by GAAP for annual reports. These interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2020, included in our 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and subsidiaries in which we have a controlling interest. We also consolidate certain entities when control of such entities can be achieved through means other than voting rights (“variable interest entities” or “VIEs”) if the Company is deemed to be the primary beneficiary of such entities. All material intercompany transactions and balances are eliminated in consolidation.
At September 30, 2021, we held interests in ten unconsolidated VIEs, and, because we lack either directly or through related parties the power to direct the activities that most significantly impact their economic performance, we have concluded that the Company is not the primary beneficiary. Accordingly, we account for our transactions with these entities and their subsidiaries at either amortized cost or net realizable value for straight-line rent receivables, excluding our investment accounted for under the equity method discussed in Note 5.
The Company’s unconsolidated VIEs are summarized below by date of initial involvement. For further discussion of the nature of the relationships, including the sources of exposure to these VIEs, see the notes to our condensed consolidated financial statements cross-referenced below ($ in thousands).
10
| Date | Name | Source of Exposure | Carrying Amount | Maximum Exposure to Loss | Note Reference | ||||||||||||
| 2012 | Bickford Senior Living | Various1 | $ | 67,000 | $ | 88,000 | Notes 3, 4 | ||||||||||
| 2014 | Senior Living Communities | Notes and straight-line receivable | $ | 83,000 | $ | 93,000 | Notes 3, 4 | ||||||||||
| 2016 | Senior Living Management | Notes and straight-line receivable | $ | 27,000 | $ | 27,000 | — | ||||||||||
| 2018 | Sagewood, LCS affiliate | Notes | $ | 109,000 | $ | 109,000 | Note 4 | ||||||||||
| 2019 | 41 Management, LLC | Notes and straight-line receivable | $ | 25,000 | $ | 34,000 | — | ||||||||||
| 2020 | Timber Ridge OpCo, LLC | Various2 | $ | (5,000) | $ | 5,000 | Note 5 | ||||||||||
| 2020 | Watermark Retirement | Notes and straight-line receivable | $ | 9,000 | $ | 10,000 | — | ||||||||||
| 2021 | Montecito Medical Real Estate | Notes and funding commitment | $ | 2,000 | $ | 50,000 | Note 4 | ||||||||||
| 2021 | Vizion Health | Notes and straight-line receivable | $ | 20,000 | $ | 22,000 | Notes 3, 4 | ||||||||||
| 2021 | Navion Senior Solutions | Notes and straight-line receivable | $ | 7,000 | $ | 14,000 | Notes 3, 4 | ||||||||||
1 Notes, loan commitments, straight-line rent receivables, and unamortized lease incentives
2 Loan commitment, equity method investment and straight-line rent receivables
We are not obligated to provide support beyond our stated commitments to these tenants and borrowers whom we classify as VIEs, and accordingly, our maximum exposure to loss as a result of these relationships is limited to the amount of our commitments, as shown above and discussed in the notes. Economic loss on a lease, in excess of what is presented in the table above, if any, would be limited to that resulting from any period of arrearage and non-payment of monthly rent before we are able to take effective remedial action, as well as costs incurred in transitioning the lease to a new tenant. The potential extent of such loss would be dependent upon individual facts and circumstances, and is therefore not included in the table above.
In the future, NHI may be deemed the primary beneficiary of the operations if the tenants do not have adequate liquidity to accept the risks and rewards as the tenant and operator of the properties and might be required to consolidate the financial position and results of operations of the tenants into our consolidated financial statements.
We consolidate two real estate partnerships formed with our partners, Discovery Senior Housing Investor XXIV, LLC, (“Discovery”) and LCS Timber Ridge LLC (“LCS”), to invest in senior housing facilities. As of and for the three and nine months ended September 30, 2021 and 2020, our noncontrolling interests relate to these partnerships with Discovery and LCS.
We use the equity method of accounting when we own an interest in an entity whereby we can exert significant influence over but cannot control the entity’s operations. We discontinue equity method accounting if our investment in an entity (and net advances) is reduced to zero unless we have guaranteed obligations of the entity or are otherwise committed to provide further financial support for the entity.
Cash and Cash Equivalents and Restricted Cash
Cash equivalents consist of all highly liquid investments with an original maturity of three months or less. Restricted cash includes amounts required to be held on deposit or subject to an agreement (e.g., with a qualified intermediary subject to an Internal Revenue Code §1031 exchange agreement or in accordance with agency agreements governing our mortgages).
The following table sets forth our “Cash, cash equivalents and restricted cash” reported within the Company’s Condensed Consolidated Statements of Cash Flows ($ in thousands):
| September 30, 2021 | September 30, 2020 | ||||||||||
| Cash and cash equivalents | $ | 48,393 | $ | 42,198 | |||||||
| Restricted cash (included in Other assets) | 1,802 | 8,916 | |||||||||
| $ | 50,195 | $ | 51,114 | ||||||||
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
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reasonable given our estimate of current market value. Upon designation of a property as an asset held for sale, we record the property’s value at the lower of its carrying value or its estimated fair value, less estimated transaction costs. Depreciation and amortization of the property are discontinued.
Real Estate Investment Impairment
We evaluate the recoverability of the carrying amount of our real estate properties on a property-by-property basis. We review our properties for recoverability when events or circumstances, including significant physical changes in the property, significant adverse changes in general economic conditions and significant deterioration of the underlying cash flows of the property, indicate that the carrying amount of the property may not be recoverable. The need to recognize an impairment charge is based on estimated undiscounted future cash flows from a property compared to the carrying amount of that property. If recognition of an impairment charge is necessary, it is measured as the amount by which the carrying amount of the property exceeds the estimated fair value of the property.
During the three and nine months ended September 30, 2021, we recognized impairment charges on five real estate properties of approximately $22.5 million included in “Loan and realty losses (gains)” in our Condensed Consolidated Statement of Income for the nine months ended September 30, 2021. Reference Note 3 for more discussion.
Rental Income
Our leases generally provide for rent escalators throughout the term of the lease. Base rental income is recognized using the straight-line method over the term of the lease to the extent that lease payments are considered collectible and the lease provides for specific contractual escalators. The Company reviews its operating lease receivables for collectibility on a regular basis, taking into consideration changes in factors such as the tenant’s payment history, the financial condition of the tenant, business conditions in which the tenant operates and economic conditions in the area where the property is located. In the event that collectibility with respect to any tenant is not probable, a direct write-off of the receivable is made as an adjustment to rental income and any future rental revenue is recognized only when the tenant makes a rental payment.
On July 30, 2021, Atria Senior Living acquired the management services of the legacy Holiday Retirement (“Holiday”) portfolio who is the tenant for 17 independent living facilities leased pursuant to a master lease. We have not received any contractual rent due under the master lease since this transaction. Accordingly, we have placed the tenant on cash basis. Rent due but uncollected and unrecognized for August and September 2021 totaled $4.8 million.
Accounting for Lease Modifications related to Coronavirus Disease 2019
In April 2020, the FASB issued a question-and-answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the coronavirus (“COVID-19”) pandemic. The Lease Modification Q&A clarifies that entities may elect not to evaluate whether lease-related relief provided to mitigate the economic effects of the COVID-19 pandemic is a lease modification under Accounting Standard Codification (“ASC”) 842, Leases (“ASC 842”). Instead, an entity that elects not to evaluate whether a concession directly related to the COVID-19 pandemic, which does not substantially increase either its rights as lessor or the obligations of the tenant, is a lease modification can decide whether or not to apply the modification guidance. An entity should apply the election consistently to leases with similar characteristics and similar circumstances. NHI has elected not to apply the modification guidance under ASC 842 and has accounted for qualified rent concessions as variable lease payments when applicable, recorded as rental income when received. During the three and nine months ended September 30, 2021, we provided $5.8 million and $19.9 million, respectively, in lease concessions as a result of the COVID-19 pandemic, as discussed in more detail in Note 7.
Note 3. Real Estate Properties and Investments
During the nine months ended September 30, 2021, we completed the following real estate acquisitions as described below ($ in thousands):
| Operator | Date | Properties | Asset Class | Land | Building and Improvements | Total | ||||||||||||||||||||||||||||||||
| Vizion Health | Q2 2021 | 1 | HOSP | $ | 1,470 | $ | 38,780 | $ | 40,250 | |||||||||||||||||||||||||||||
| Navion Senior Solutions | Q2 2021 | 1 | SHO | 531 | 6,069 | 6,600 | ||||||||||||||||||||||||||||||||
| $ | 2,001 | $ | 44,849 | $ | 46,850 | |||||||||||||||||||||||||||||||||
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Vizion Health
In May 2021, we acquired a 64-bed specialty behavioral hospital located in Oklahoma for a total purchase price of $40.3 million, including $0.3 million in closing costs, and concurrently leased the hospital to an affiliate of Vizion Health. The 15-year master lease, which includes two -year extension options, has an initial lease rate of 8.5% with fixed annual escalators of 2.5%. We have committed to additional funding of capital improvements for the hospital of up to $2.0 million which will be added to the lease base as funded. At September 30, 2021, no funds have been drawn.
Navion Senior Solutions
In June 2021, we acquired a 48-unit assisted living and memory care community in Tennessee for a purchase price of $6.6 million, including closing costs of $0.1 million. The community was added to an existing master lease with Navion Senior Solutions (“Navion”) whose term was reset for 12 years, has a lease rate of 7.5% with fixed annual escalators of 2.5% and offers two optional extensions of five years each.
Asset Dispositions
During the nine months ended September 30, 2021, we completed the following real estate dispositions as described below ($ in thousands):
| Operator | Date | Properties | Asset Class | Net Proceeds | Net Real Estate Investment | Other1 | Gain/(Impairment)2 | |||||||||||||||||||||||||||||||||||||
| Bickford | Q2 2021 | 6 | SHO | $ | 39,924 | $ | 34,485 | $ | 1,871 | $ | 3,568 | $ | 3,568 | |||||||||||||||||||||||||||||||
| Community Health Systems | Q2 2021 | 1 | MOB | 3,887 | 946 | 62 | 2,879 | |||||||||||||||||||||||||||||||||||||
| TrustPoint Hospital | Q3 2021 | 1 | HOSP | 31,215 | 21,018 | 1,562 | 8,635 | |||||||||||||||||||||||||||||||||||||
| Holiday | Q3 2021 | 8 | SHO | 114,133 | 113,611 | (1,360) | 1,882 | |||||||||||||||||||||||||||||||||||||
| Quorum Health | Q3 2021 | 1 | HOSP | 8,314 | 9,568 | — | (1,254) | |||||||||||||||||||||||||||||||||||||
| Senior Living Management | Q3 2021 | 1 | SHO | 12,847 | 3,212 | 210 | 9,425 | |||||||||||||||||||||||||||||||||||||
| Holiday | Q3 2021 | 1 | SHO | 5,666 | 10,388 | (81) | (4,641) | |||||||||||||||||||||||||||||||||||||
| $ | 215,986 | $ | 193,228 | $ | 2,264 | $ | 20,494 | |||||||||||||||||||||||||||||||||||||
1 includes straight-line rent and deferred lease intangibles
2 impairment charges are included in “Loan and realty losses (gains)” in our Condensed Consolidated Income Statement as of September 30, 2021
Bickford
During the second quarter of 2021, we sold to affiliates of Bickford a portfolio of six properties that were being leased to Bickford for a purchase price of $52.9 million. We received approximately $39.9 million in cash consideration upon sale and originated a second mortgage note receivable for the remaining purchase price of $13.0 million. A gain was not recognized related to the $13.0 million second mortgage note receivable, which is discussed in more detail in Note 4. We recorded a gain upon completion of this transaction totaling approximately $3.6 million representing the excess of the $39.9 million cash consideration received over the net book value of the assets sold of $34.5 million and the write off of straight-line rents receivable of approximately $1.9 million. Rental income from this portfolio was $1.6 million and $4.5 million for the nine months ended September 30, 2021 and 2020, respectively.
Upon completion of the sale, Bickford satisfied the terms of our prior agreement that contingently waived $2.1 million in rental income for the third quarter of 2020. These properties were part of our ongoing negotiations for the sale to Bickford of nine properties being leased to Bickford. We continue to explore our options for the remaining three properties, which could include a sale to a third party, re-tenanting, or retaining the existing lease with Bickford. Reference Note 7 for discussion of additional contingent consideration associated with this disposition that was not included in the transaction price at the time of closing.
Community Health Systems
During the second quarter of 2021, we sold a medical office building located in Florida for approximately $4.3 million in cash consideration, and incurred $0.4 million of transaction costs, resulting in a gain of approximately $2.9 million. Revenue for this property was $0.1 million and $0.3 million for the nine months ended September 30, 2021 and 2020, respectively.
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TrustPoint Hospital
In July 2021, we sold a behavioral hospital located in Tennessee for cash consideration of $31.2 million and recorded a gain of approximately $8.6 million. Rental income was $0.1 million and $1.4 million, for the three and nine months ended September 30, 2021, respectively, and $0.7 million and $2.0 million for the three and nine months ended September 30, 2020, respectively.
Holiday
In August 2021, we sold a portfolio of eight properties that was leased to Holiday with an aggregate net book value of $113.6 million for total cash consideration of $115.0 million, and incurred transaction costs of $0.9 million, and recognized a gain of approximately $1.9 million associated with this transaction. Rental income was $0.9 million and $5.9 million, for the three and nine months ended September 30, 2021, respectively, and $2.5 million and $7.5 million for the three and nine months ended September 30, 2020, respectively.
In September 2021, we sold a property that was leased to Holiday located in Indiana with a net book value of $10.4 million for total cash consideration of $5.8 million, incurred transactions costs of $0.1 million, and recognized an impairment of approximately $4.6 million associated with this transaction. Rental income was $0.1 million and $0.4 million, for the three and nine months ended September 30, 2021, respectively and $0.2 million and $0.5 million for the three and nine months ended September 30, 2020, respectively.
Quorum Health
In September 2021, we sold an acute care hospital located in Kentucky for cash consideration of $9.0 million, incurred $0.7 million of transaction costs, and recorded an impairment charge of approximately $1.3 million. Rental income was $0.7 million and $2.5 million, for the three and nine months ended September 30, 2021, respectively, and $0.9 million and $2.3 million, for the three and nine months ended September 30, 2020, respectively.
Senior Living Management
On September 30 2021, we sold a senior living community located in Florida for cash consideration of $14.0 million that was received October 1, 2021, incurred transaction costs of $1.2 million and recorded a gain of approximately $9.4 million. Rental income was $0.3 million and $0.8 million, for the three and nine months ended September 30, 2021, respectively, and $0.3 million and $1.0 million for the three and nine months ended September 30, 2020, respectively. The consideration receivable for the sale is included in “Other assets” in our Condensed Consolidated Balance Sheet as of September 30, 2021.
Assets Held for Sale and Impairment of Real Estate
During the third quarter of 2021, we reclassified three transition properties to assets held for sale on our Condensed Consolidated Balance Sheet as of September 30, 2021 and recorded impairment charges of approximately $16.6 million to reduce their net book values to estimated fair values less estimated transaction costs. Two of the properties are located in Texas and one property is located in Tennessee. Rental income for these properties was based on operating income, net of management fees, and did not generate significant revenues for either the nine months ended September 30, 2021 or the nine months ended September 30, 2020.
As discussed above, we recognized real estate impairment charges of approximately $5.9 million during the three and nine months ended September 30, 2021, related to the disposition of one Holiday property located in Indiana and an acute care hospital located in Kentucky.
Tenant Concentration
The following table contains information regarding tenant concentration in our portfolio, excluding $2.6 million for our corporate office and a credit loss reserve balance of $5.1 million, based on the percentage of revenues for the nine months ended September 30, 2021 and 2020, related to tenants or affiliates of tenants, that exceed 10% of total revenue ($ in thousands):
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| as of September 30, 2021 | Revenues1 | |||||||||||||||||||||||||||||||||||||
| Asset | Number of | Real | Notes | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| Class | Properties | Estate | Receivable | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Senior Living Communities | EFC | 10 | $ | 573,631 | $ | 42,609 | $ | 38,094 | 17% | $ | 38,972 | 15% | ||||||||||||||||||||||||||
| National HealthCare Corporation (NHC) | SNF | 42 | 171,188 | — | 28,290 | 12% | 28,362 | 11% | ||||||||||||||||||||||||||||||
| Bickford Senior Living | ALF | 42 | 490,308 | 38,751 | 26,224 | 11% | 39,142 | 16% | ||||||||||||||||||||||||||||||
| Holiday | ILF | 17 | 377,735 | — | 22,811 | 10% | 30,529 | 12% | ||||||||||||||||||||||||||||||
All others, net2 | Various | 1,406,251 | 208,387 | 106,110 | 46% | 107,377 | 43% | |||||||||||||||||||||||||||||||
| Escrow funds received from tenants | ||||||||||||||||||||||||||||||||||||||
| for property operating expenses | Various | — | — | 7,519 | 4% | 7,190 | 3% | |||||||||||||||||||||||||||||||
| $ | 3,019,113 | $ | 289,747 | $ | 229,048 | $ | 251,572 | |||||||||||||||||||||||||||||||
1 includes interest income on notes receivable
2 includes prior period amounts for disposals or transitioned to new operators
At September 30, 2021, the two states in which we had an investment concentration of 10% or more were South Carolina (11.1%) and Texas (10.1%).
Two of our board members, including our chairman, are also members of NHC’s board of directors.
Tenant Purchase Options
Certain of our leases contain purchase options allowing tenants to acquire the leased properties. At September 30, 2021, we had a net investment of $18.8 million in five real estate properties which are subject to exercisable tenant purchase options. Tenant purchase options on 10 properties in which we had an aggregate net investment of $90.5 million at September 30, 2021, become exercisable between 2025 and 2028. Rental income from all leased properties with tenant purchase options was $3.4 million and $10.3 million for the three and nine months ended September 30, 2021, respectively, and $3.4 million and $10.0 million for the three and nine months ended September 30, 2020, respectively.
In June 2021, we received notification of a tenant’s intention to acquire, pursuant to a purchase option, a hospital located in California. The purchase option calls for a minimum purchase price of $15.0 million with any appreciation above $15.0 million to be split evenly between the parties. The net investment at September 30, 2021 was $9.5 million. Rental income was $0.5 million and $1.4 million, for both the three and nine months ended September 30, 2021 and 2020, respectively. The transaction will close no earlier than one year after the receipt of the notice of exercise.
We cannot reasonably estimate at this time the probability that any other purchase options will be exercised in the future. Consideration to be received from the exercise of any tenant purchase option is expected to exceed our net investment in the leased property or properties.
Tenant Transitioning
Nine properties were transitioned during 2019 to five new tenants following a period of non-compliance by the former operators. We recognized rental income from these nine properties of $0.7 million and $2.4 million for the three and nine months ended September 30, 2021, respectively, and $0.9 million and $3.7 million for the three and nine months ended September 30, 2020, respectively. Three of the properties were reclassified to assets held for sale on our Condensed Consolidated Balance Sheet as of September 30, 2021, as noted above.
Future Minimum Base Rent
Future minimum lease payments to be received by us under our operating leases at September 30, 2021, are as follows ($ in thousands):
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| Remainder of 2021 | $ | 68,151 | |||
| 2022 | 271,682 | ||||
| 2023 | 267,619 | ||||
| 2024 | 263,266 | ||||
| 2025 | 264,666 | ||||
| 2026 | 268,736 | ||||
| Thereafter | 1,102,245 | ||||
| $ | 2,506,365 | ||||
Variable Lease Payments
Most of our existing leases contain annual escalators in rent payments. For financial statement purposes, rental income is recognized on a straight-line basis over the term of the lease where the lease contains fixed escalators. Some of our leases contain escalators that are determined annually based on a variable index or other factor that is indeterminable at the inception of the lease. The table below indicates the revenue recognized as a result of fixed and variable lease escalators ($ in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Lease payments based on fixed escalators, net of deferrals | $ | 59,027 | $ | 67,592 | $ | 188,008 | $ | 206,179 | |||||||||||||||
| Lease payments based on variable escalators | 1,288 | 1,386 | 3,201 | 4,151 | |||||||||||||||||||
| Straight-line rent income | 3,798 | 5,086 | 12,189 | 15,481 | |||||||||||||||||||
| Escrow funds received from tenants for property operating expenses | 3,182 | 4,007 | 7,519 | 7,190 | |||||||||||||||||||
| Amortization of lease incentives | (252) | (250) | (774) | (735) | |||||||||||||||||||
| Rental income | $ | 67,043 | $ | 77,821 | $ | 210,143 | $ | 232,266 | |||||||||||||||
Note 4. Mortgage and Other Notes Receivable
At September 30, 2021, our investments in mortgage notes receivable totaled $224.2 million secured by real estate and other assets of the borrower (e.g., UCC liens on personal property) related to 14 facilities and other notes receivable totaled $65.6 million substantially all of which are guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner. These balances exclude a credit loss reserve of $5.1 million at September 30, 2021. All our notes were on full accrual basis at September 30, 2021.
Montecito Medical Real Estate
In April 2021, the Company entered into a $50.0 million mezzanine loan and security agreement with Montecito Medical Real Estate for a new fund that will invest in medical real estate, including medical office buildings, throughout the United States. Amounts under the loan agreement will be funded as real estate investments are identified for acquisition. Borrowings under the loan agreement will bear interest at an annual rate of 9.5% and accrue an additional 2.5% in interest to be paid upon certain future events including repayments, sales of fund investments, and refinancings. Funds drawn in accordance with this agreement are required to be repaid on a per-investment basis five years from deployment of the funds for the applicable investment and includes two -year extensions. At September 30, 2021, we had funded $2.1 million of our commitment that was used to acquire two medical office buildings for a combined purchase price of approximately $11.1 million.
Vizion Health - Brookhaven
In May 2021, we provided a $20.0 million, -year loan to Vizion Health-Brookhaven, LLC to finance the acquisition of healthcare operations, including the real and personal property of a behavioral hospital we acquired in May 2021 discussed in Note 3. The loan requires monthly principal and interest payments and bears an initial annual interest rate of 8.5% with fixed annual escalators of 2.5% beginning June 1, 2022. Initial principal loan repayments are equal to 90% of the excess cash flow as defined in the agreement. Principal repayments are reduced to 50% of the excess cash flow once the outstanding loan balance is reduced below $15.0 million.
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Bickford
As part of the sale of six properties to Bickford discussed in Note 3, we executed a $13.0 million second mortgage as a component of the purchase price consideration. The loan is secured by a security interest in the portfolio that is subordinate only to the first mortgage on the portfolio held by a third party. This second mortgage note receivable bears interest at a 10% annual rate and matures in April 2026. Commencing in January 2022, payments of principal and interest are required based on a 15-year amortization schedule. In addition, the interest rate will be reset to 8% if Bickford prepays approximately $5.3 million in principal prior to December 31, 2022. Interest income was $0.3 million and $0.6 million, for the three and nine months ended September 30, 2021.
Given the size of the Company financing provided relative to the purchase price, its subordination to the first mortgage outstanding and the ongoing negative impact of the COVID-19 pandemic on Bickford’s operating results, we did not include this note receivable in the determination of the gain to be recognized upon sale of the portfolio in accordance with the provisions of ASC 610-20, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets. Therefore, this note receivable is not reflected in “Mortgage and other notes receivable, net” in the Condensed Consolidated Balance Sheet as of September 30, 2021. We will re-evaluate the collectability of this note receivable each reporting period and recognize the note receivable and related deferred gain at such time the note receivable is considered probable of collection in accordance with ASC 610-20.
Navion Senior Solutions
In May 2021, we provided a -year corporate loan to Navion for $3.6 million. The loan requires interest-only payments at an annual interest rate of 8% until June 1, 2024, and gives us first option to provide permanent development financing for a future project.
Life Care Services - Sagewood
During the three and nine months ended September 30, 2021, LCS-Westminster Partnership IV LLP, an affiliate of LCS, repaid the remaining principal of $9.8 million and $61.2 million on its second note of two notes under a master credit agreement (“Note B”). As a result, we recognized the remaining Note B commitment fee of $0.4 million in “Interest income and other” during the third quarter of 2021. The balance on its first note (“Note A”) was $109.2 million as of September 30, 2021.
Credit Loss Reserve
Our principal measures of credit quality, except for construction mortgages, are debt service coverage for amortizing loans and interest or fixed charge coverage for non-amortizing loans collectively (“Coverage”). A Coverage ratio provides a measure of the borrower’s ability to make scheduled principal and interest payments. The Coverage ratios presented in the following table have been calculated utilizing the most recent date for which data is available, June 30, 2021, using EBITDARM (earnings before interest, taxes, depreciation, amortization, rent and management fees) and the requisite debt service, interest service or fixed charges, as defined in the applicable loan agreement. We categorize Coverage into three levels: (i) more than 1.5x, (ii) between 1.0x and 1.5x, and (iii) less than 1.0x. We update the calculation of coverage on a quarterly basis. Coverage is not a meaningful credit quality indicator for construction mortgages as either these developments are not generating any operating income, or they have insufficient operating income as occupancy levels necessary to stabilize the properties have not yet been achieved. We measure credit quality for these mortgages by considering the construction and stabilization timeline and the financial condition of the borrower as well as economic and market conditions. As of September 30, 2021, we did not have any construction loans that we considered underperforming. The tables below present outstanding note balances as of September 30, 2021 at amortized cost.
We consider the guidance in ASC 310-20 when determining whether a modification, extension or renewal constitutes a current period origination. The credit quality indicator as of September 30, 2021, is presented below for the amortized cost, net by year of origination of ($ in thousands):
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| 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total | |||||||||||||||||
| Mortgages | |||||||||||||||||||||||
| more than 1.5x | $ | — | $ | 20,382 | $ | 9,013 | $ | 28,700 | $ | — | $ | 4,402 | $ | 62,497 | |||||||||
| between 1.0x and 1.5x | — | — | — | 108,606 | — | — | 108,606 | ||||||||||||||||
| less than 1.0x | — | 3,960 | 39,123 | — | — | 10,000 | 53,083 | ||||||||||||||||
| — | 24,342 | 48,136 | $ | 137,306 | — | 14,402 | 224,186 | ||||||||||||||||
| Mezzanine | |||||||||||||||||||||||
| more than 1.5x | 3,566 | — | — | — | — | — | 3,566 | ||||||||||||||||
| between 1.0x and 1.5x | 22,233 | — | — | — | — | 10,472 | 32,705 | ||||||||||||||||
| less than 1.0x | — | — | — | — | — | 14,500 | 14,500 | ||||||||||||||||
| No coverage available | — | — | 750 | — | — | — | 750 | ||||||||||||||||
| 25,799 | — | 750 | — | — | 24,972 | 51,521 | |||||||||||||||||
| Revolver | |||||||||||||||||||||||
| more than 1.5x | 4,131 | ||||||||||||||||||||||
| between 1.0x and 1.5x | 9,909 | ||||||||||||||||||||||
| less than 1.0x | — | ||||||||||||||||||||||
| 14,040 | |||||||||||||||||||||||
| Credit loss reserve | (5,139) | ||||||||||||||||||||||
| $ | 284,608 | ||||||||||||||||||||||
Due to the economic uncertainty created by the COVID-19 pandemic and the potential impact on the collectability of our mortgages and other notes receivable, we forecasted at the beginning of the pandemic a 20% increase in the probability of a default and a 20% increase in the amount of loss from a default resulting in an effective adjustment of 44%.
The allowance for expected credit losses is presented in the following table for the nine months ended September 30, 2021 ($ in thousands):
| Beginning balance January 1, 2021 | $ | 4,946 | |||
| Provision for expected credit losses | 193 | ||||
| Balance September 30, 2021 | $ | 5,139 | |||
Bickford Construction Loans
As of September 30, 2021, we had commitments of $42.9 million in three construction loans to Bickford. At September 30, 2021, we had funded $34.8 million toward these commitments. The construction loans are secured by first mortgage liens on substantially all real and personal property as well as a pledge of any and all leases or agreements which may grant a right of use to the property. Usual and customary covenants extend to the agreements, including the borrower’s obligation for payment of insurance and taxes. NHI has a fair market value purchase option on the properties at stabilization of the underlying operations. On these development projects, Bickford, as borrower, is entitled to up to $2.0 million per project in incentives based on the achievement of predetermined operational milestones and, if funded, will increase NHI's future purchase price and eventual NHI lease payment.
Senior Living Communities
On March 30, 2021, we amended the revolving line of credit agreement with Senior Living Communities (“Senior Living”) to increase availability from $15.0 million to $20.0 million. Borrowings by Senior Living under the revolver are to be used for working capital needs and to finance construction projects within its portfolio, including building additional units. Beginning January 1, 2023, availability under the revolver reduces to $15.0 million. The revolver matures in December 2029 at the time of lease maturity. At September 30, 2021, the $9.9 million outstanding under the facility bears interest at 7.52% per annum, the prevailing 10-year U.S. Treasury rate plus 6%.
The Company also has a mortgage loan of $32.7 million with Senior Living originated in July 2019 for the acquisition of a 248-unit continuing care retirement community (“CCRC”) in Columbia, South Carolina. The mortgage loan is for a term of five
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years with two one year extensions and carries an interest rate of 7.25%. Additionally, the loan conveys to NHI a purchase option at a stated minimum price of $38.3 million, subject to adjustment for market conditions.
Note 5. Equity Method Investment
Our initial $0.9 million investment in the operating company, Timber Ridge OpCo, held by our Taxable REIT Subsidiary (“TRS”) arose in conjunction with the acquisition of a CCRC from LCS-Westminster Partnership III, LLP, in January 2020. We structured our arrangement with our JV partner, LCS Timber Ridge LLC, to be compliant with the provisions of the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”). Accordingly, the TRS holds our 25% equity interest in Timber Ridge OpCo, which permits the TRS to engage in activities and share in cash flows that would otherwise be non-qualifying income under the REIT gross income test. As part of our investment, we provided Timber Ridge OpCo a revolving credit facility of up to $5.0 million of which no funds have been drawn.
We account for our investment in Timber Ridge OpCo under the equity method since we are not the primary beneficiary of Timber Ridge OpCo as our participating rights do not give us the power to direct the activities that most significantly impact Timber Ridge OpCo’s economic performance. Our equity share in the losses of Timber Ridge OpCo during the nine months ended September 30, 2021 and 2020, was $2.3 million and $2.0 million, respectively. During the nine months ended September 30, 2021, we received $0.5 million in cash distributions from Timber Ridge OpCo.
Under the equity method, we decrease the carrying value of our investment for losses in the entity and distributions to NHI for cumulative amounts up to and including our basis plus any commitments to fund operations. Our commitments are currently limited to the additional $5.0 million under the revolving credit facility. As of September 30, 2021, we have recognized our share of Timber Ridge OpCo’s operating losses in excess of our initial investment. These cumulative losses of $5.0 million in excess of our original basis are included in “Accounts payable and accrued expenses” in our Condensed Consolidated Balance Sheet as of September 30, 2021. Excess unrecognized equity method losses were $0.3 million as of September 30, 2021.
The Timber Ridge property is subject to early resident mortgages secured by a Deed of Trust and Indenture of Trust (the “Deed and Indenture”). As part of our acquisition, Timber Ridge PropCo acquired the Timber Ridge property and a subordination agreement was entered into pursuant to which the Trustee acknowledged and confirmed that the security interests created under the Deed and Indenture were subordinate to any security interests granted in connection with the loan made by NHI to Timber Ridge PropCo. In addition, by terms of the resident loan assumption agreement, during the term of the lease (seven years with two renewal options), Timber Ridge OpCo is to indemnify Timber Ridge PropCo for any repayment by Timber Ridge PropCo of these liabilities under the guarantee. As a result of the subordination and resident loan assumption agreements, a liability was not recorded for the resident loan obligation upon acquisition and as of September 30, 2021. The balance secured by the Deed and Indenture was $15.5 million at September 30, 2021.
Note 6. Debt
Debt consists of the following ($ in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Revolving credit facility - unsecured | $ | — | $ | 298,000 | |||||||
| Bank term loans - unsecured | 400,000 | 650,000 | |||||||||
Senior notes - unsecured, net of discount of $3,002 | 396,998 | — | |||||||||
| Private placement term loans - unsecured | 400,000 | 400,000 | |||||||||
| Fannie Mae term loans - secured, non-recourse | 95,077 | 95,354 | |||||||||
| Convertible senior notes - unsecured | — | 60,000 | |||||||||
| Unamortized loan costs | (6,788) | (4,069) | |||||||||
| $ | 1,285,287 | $ | 1,499,285 | ||||||||
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Aggregate principal maturities of debt as of September 30, 2021 are as follows ($ in thousands):
| Remainder of 2021 | $ | 95 | |||
| 2022 | 100,389 | ||||
| 2023 | 475,408 | ||||
| 2024 | 75,425 | ||||
| 2025 | 143,761 | ||||
| 2026 | — | ||||
| Thereafter | 496,997 | ||||
| 1,292,075 | |||||
| Less: unamortized loan costs | (6,788) | ||||
| $ | 1,285,287 | ||||
Convertible senior notes
On April 1, 2021, our 3.25% senior unsecured convertible notes (the “Convertible Notes”) matured. The Company paid $67.1 million, including accrued interest of $1.0 million and a $6.1 million conversion premium, to retire the Convertible Notes. The conversion premium was recorded as a reduction of “Capital in excess of par value” in our Condensed Consolidated Balance Sheet as of September 30, 2021.
Unsecured revolving credit facility and bank term loans
Our unsecured bank credit facility consists of two term loans - $100.0 million maturing in August 2022 and $300.0 million maturing in September 2023 - and a $550.0 million revolving credit facility that was initially scheduled to mature in August 2021. In April 2021, the Company elected to exercise the extension option on the revolving credit facility available after payment of a 10 basis point extension fee totaling $0.6 million, extending the maturity of the revolver to August 2022. Some combination of cash on hand, proceeds from recent and planned asset sales and operating cash flows is expected to be used to pay off the $100.0 million term loan at its maturity in August 2022. We also plan to execute a multiple year extension of our revolving credit facility prior to the August 2022 maturity date at an amount at least equal to the current $550.0 million capacity. We have swap agreements to fix the interest rates on $400.0 million of term loans that expire in December 2021.
In January 2021, we repaid a $100.0 million term loan that was entered into July 2020 with the net proceeds from the 2031 Senior Notes offering discussed below. The term loan bore interest at a rate of 30-day LIBOR (with a 50 basis point floor) plus 185 basis points (“bps”), based on our current leverage ratios. Upon repayment, the Company expensed approximately $0.5 million of deferred financing cost associated with this loan which is included in “Loss on early retirement of debt” in our Condensed Consolidated Statement of Income for the nine months ended September 30, 2021.
The revolving facility fee is currently 25 bps per annum and based on our current credit ratings, the facility presently provides for floating interest on the revolver and the term loans at 30-day LIBOR plus 120 bps and a blended 128 bps, respectively. At September 30, 2021 and December 31, 2020, 30-day LIBOR was 8 bps and 14 bps, respectively.
At September 30, 2021, we had $550.0 million available to draw on the revolving portion of our credit facility, subject to usual and customary covenants. Among other stipulations, the unsecured credit facility agreement requires that we maintain certain financial ratios within limits set by our creditors. At September 30, 2021, we were in compliance with these ratios.
Pinnacle Bank is a participating member of our banking group. A member of NHI’s Board of Directors and chairman of our audit committee is also the chairman of Pinnacle Financial Partners, Inc., the holding company for Pinnacle Bank. NHI’s local banking transactions are conducted primarily through Pinnacle Bank.
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Senior Notes 2031
On January 26, 2021, we issued $400.0 million aggregate principal amount of 3.00% senior notes that mature on February 1, 2031 and pay interest semi-annually (the “2031 Senior Notes”). The 2031 Senior Notes were sold at an issue price of 99.196% of face value before the underwriters’ discount. Our net proceeds from the 2031 Senior Notes offering, after deducting underwriting discounts and expenses, were approximately $392.3 million. We used the net proceeds from the 2031 Senior Notes offering to repay our $100.0 million term loan that was entered into in July 2020 and reduce borrowings outstanding under our revolving credit facility.
The 2031 Senior Notes are subject to affirmative and negative covenants, including financial covenants. As of September 30, 2021, we were in compliance with all affirmative and negative covenants, including financial covenants for our 2031 Senior Notes borrowings.
Private placement term loans
Our unsecured private placement term loans, payable interest-only, are summarized below ($ in thousands):
| Amount | Inception | Maturity | Fixed Rate | |||||||||||||||||
| $ | 125,000 | January 2015 | January 2023 | 3.99% | ||||||||||||||||
| 50,000 | November 2015 | November 2023 | 3.99% | |||||||||||||||||
| 75,000 | September 2016 | September 2024 | 3.93% | |||||||||||||||||
| 50,000 | November 2015 | November 2025 | 4.33% | |||||||||||||||||
| 100,000 | January 2015 | January 2027 | 4.51% | |||||||||||||||||
| $ | 400,000 | |||||||||||||||||||
Except for specific debt-coverage ratios and net worth minimums, covenants pertaining to the private placement term loans are generally conformed with those governing our credit facility. Our unsecured private placement term loan agreements include a rate increase provision that is effective if any rating agency lowers our credit rating on our senior unsecured debt below investment grade and our compliance leverage increases to 50% or more.
Fannie Mae term loans
In March 2015, we obtained $78.1 million in Fannie Mae financing. The term-debt financing consists of interest-only payments at an annual rate of 3.79% and a 10-year maturity. The mortgages are non-recourse and secured by thirteen properties leased to Bickford. In a December 2017 acquisition, we assumed additional Fannie Mae debt that amortizes through 2025 when a balloon payment will be due, is subject to prepayment penalties until 2024, bears interest at a nominal rate of 4.6%, and has a remaining balance of $17.0 million at September 30, 2021. Collectively, these notes are secured by facilities having a net book value of $127.0 million at September 30, 2021.
Interest Rate Swap Agreements
Our existing interest rate swap agreements will collectively continue through December 2021 to hedge against fluctuations in variable interest rates applicable to $400.0 million of our bank loans. During the remainder of 2021, approximately $1.8 million of losses, which are included in “Accumulated other comprehensive loss” in our Condensed Consolidated Balance Sheets, are projected to be reclassified into earnings.
As of September 30, 2021, we employed the following interest rate swap contracts to mitigate our interest rate risk on our bank term and revolver loans described above ($ in thousands):
| Date Entered | Maturity Date | Swap Rate | Rate Index | Notional Amount | Fair Value (Liability) | |||||||||||||||||||||||||||
| March 2019 | December 2021 | 2.22% | 1-month LIBOR | $ | 100,000 | $ | (533) | |||||||||||||||||||||||||
| March 2019 | December 2021 | 2.21% | 1-month LIBOR | $ | 100,000 | $ | (537) | |||||||||||||||||||||||||
| June 2019 | December 2021 | 1.61% | 1-month LIBOR | $ | 150,000 | $ | (567) | |||||||||||||||||||||||||
| June 2019 | December 2021 | 1.63% | 1-month LIBOR | $ | 50,000 | $ | (191) | |||||||||||||||||||||||||
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If the fair value of the hedge is an asset, we include it in our Condensed Consolidated Balance Sheets in the line item “Other assets”, and, if a liability, as a component of “Accounts payable and accrued expenses”. See Note 11 for fair value disclosures about our interest rate swap agreements. Net liability balances for our hedges included as components of “Accounts payable and accrued expenses” on September 30, 2021 and December 31, 2020, were $1.8 million and $7.1 million, respectively.
The following table summarizes interest expense ($ in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Interest expense on debt at contractual rates | $ | 10,234 | $ | 10,129 | $ | 31,055 | $ | 33,701 | |||||||||||||||
| Losses reclassified from accumulated other | |||||||||||||||||||||||
| comprehensive income into interest expense | 1,851 | 1,778 | 5,449 | 4,533 | |||||||||||||||||||
| Capitalized interest | (6) | (9) | (40) | (169) | |||||||||||||||||||
| Amortization of debt issuance costs, debt discount and other | 636 | 994 | 2,064 | 2,524 | |||||||||||||||||||
| Total interest expense | $ | 12,715 | $ | 12,892 | $ | 38,528 | $ | 40,589 | |||||||||||||||
Note 7. Commitments, Contingencies and Uncertainties
In the normal course of business, we enter into a variety of commitments, typically consisting of funding of revolving credit arrangements, construction and mezzanine loans to our operators to conduct expansions and acquisitions for their own account, and commitments for the funding of construction for expansion or renovation to our existing properties under lease. In our leasing operations, we offer to our tenants and to sellers of newly acquired properties a variety of inducements which originate contractually as contingencies but which may become commitments upon the satisfaction of the contingent event. Contingent payments earned will be included in the respective lease bases when funded.
As of September 30, 2021, we had working capital, construction and mezzanine loan commitments to seven operators for $274.7 million, of which we had funded $183.6 million toward these commitments.
As of September 30, 2021, we had $31.3 million of development commitments for construction and renovation for ten properties of which we had funded $21.6 million toward these commitments. In addition to these commitments, Discovery PropCo, discussed more fully in Note 2 to the condensed consolidated financial statements, has committed to funding up to $2.0 million for the purchase of condominium units located at one of the facilities of which $1.0 million had been funded.
As of September 30, 2021, we had $33.9 million of contingent lease inducement commitments in seven lease agreements which are generally based on the performance of facility operations and may or may not be met by the tenant. At September 30, 2021, we had funded $1.5 million toward these commitments of which $1.0 million was funded during the nine months ended September 30, 2021.
As provided above, loans funded do not include the effects of discounts or commitment fees.
The credit loss liability for unfunded loan commitments is estimated using the same methodology as for our funded mortgage and other notes receivable based on the estimated amount that we expect to fund. We applied the same COVID-19 pandemic adjustments as discussed in Note 4.
The liability for expected credit losses on our unfunded loans is presented in the following table for the nine months ended September 30, 2021 ($ in thousands):
| Beginning balance January 1, 2021 | $ | 270 | |||
| Provision for expected credit losses | 941 | ||||
| Balance at September 30, 2021 | $ | 1,211 | |||
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Bickford Contingent Note Arrangement
Related to the sale of six properties to Bickford discussed further in Note 3, we reached an agreement with Bickford in the third quarter of 2021 whereby Bickford would owe us up to $4.5 million under a contingent note arrangement. We have the one-time option to determine fair market value of the portfolio between May 1, 2023 and April 30, 2026, at which time the amount owed under the contingent note arrangement, if any, will be determined as the lesser of (i) the difference between the fair market value of the portfolio and $52.1 million, which amount represents the purchase consideration for the portfolio of $52.9 million less $0.8 million in mortgage debt repayment fees previously paid by us associated with this portfolio, and (ii) $4.5 million. Any amount due on the contingent note arrangement will accrue interest at an annual rate of 10% and will be due in five years from the determination date.
COVID-19 Pandemic Contingencies
Since the World Health Organization declared coronavirus disease 2019 a pandemic on March 11, 2020, the continually evolving pandemic has resulted in a widespread health crisis adversely affecting governments, businesses, and financial markets. The COVID-19 pandemic and related health and safety measures continue to impact the operations of many of the Company’s tenants, operators and borrowers. The federal government has provided economic assistance and other forms of assistance which mitigated to some extent the negative financial impact of the pandemic for certain of our tenants and operators who are eligible.
Revenues for the operators of our properties continue to be significantly impacted by occupancy. Building occupancy rates have been and may continue to be adversely affected by the COVID-19 pandemic if it continues to cause sustained negative trends such as early resident move-outs, delays in admitting new residents, or other collateral events. In addition, our operators may experience a material increase in their operating costs, including costs related to enhanced health and safety precautions among other measures. A decrease in occupancy or increase in costs could have a material adverse effect on the ability of our operators to meet their financial and other contractual obligations to us, including the payment of rent, as well as on our results of operations.
Since the pandemic began, our rent concessions activity is as shown in the following table ($ in thousands):
| Year ended | Three months ended | Nine months ended | ||||||||||||||||||||||||||||||||||||
| December 31, 2020 | September 30, 2021 | September 30, 2021 | Cumulative Totals | |||||||||||||||||||||||||||||||||||
| Deferrals | Abatements | Deferrals | Collections | Deferrals | Collections | Deferrals | Abatements | Collections | ||||||||||||||||||||||||||||||
| Bickford | $ | 3,750 | $ | 2,100 | $ | 3,500 | $ | — | $ | 13,750 | $ | — | $ | 17,500 | $ | 2,100 | $ | — | ||||||||||||||||||||
| Holiday | — | — | 600 | — | 1,800 | — | 1,800 | — | — | |||||||||||||||||||||||||||||
| All Others | 1,232 | 50 | 1,675 | 44 | 4,323 | 44 | 5,555 | 50 | 44 | |||||||||||||||||||||||||||||
| $ | 4,982 | $ | 2,150 | $ | 5,775 | $ | 44 | $ | 19,873 | $ | 44 | $ | 24,855 | $ | 2,150 | $ | 44 | |||||||||||||||||||||
The majority of the deferred amounts noted in the table above accrue interest starting at 8% per annum from the date of the deferral until paid in full under the terms of each tenant’s deferral agreement.
In addition to the concessions noted above, we have agreed with Bickford to defer $4.5 million in contractual rent due for the fourth quarter of 2021 and expect to grant up to $4.0 million in deferrals in the first quarter of 2022. We have also reached agreement with two other tenants regarding additional rent deferrals of approximately $0.5 million for the fourth quarter of 2021. We agreed with Holiday to utilize $0.6 million of the lease deposit towards July 2021 contractual rent. The balance of the lease deposit at September 30, 2021 was $8.8 million. Reference Note 2 for discussion of additional Holiday contractual rent activity.
When applicable, we have accounted for rent concessions as variable lease payments, recorded as rental income when received, in accordance with the FASB's Lease Modification Q&A. Reference Note 2 for further discussion. We will evaluate any rent deferral requests as a result of the COVID-19 pandemic on a tenant-by-tenant basis. The extent of future concessions we make as a result of the COVID-19 pandemic, which could have a material impact on our future operating results, cannot be reasonably or reliably projected by us at this time.
Litigation
Our facilities are subject to claims and suits in the ordinary course of business. Our lessees and borrowers have indemnified, and are obligated to continue to indemnify us, against all liabilities arising from the operation of the facilities, and are further
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obligated to indemnify us against environmental or title problems affecting the real estate underlying such facilities. While there may be lawsuits pending against certain of the owners and/or lessees of the facilities, management believes that the ultimate resolution of all such pending proceedings will have no direct material adverse effect on our financial condition, results of operations or cash flows.
In June 2018, East Lake Capital Management LLC and certain related entities, including Regency (for three assisted living facilities in Tennessee, Indiana and North Carolina) (“East Lake”), filed suit against NHI in Texas seeking injunctive and declaratory relief and unspecified monetary damages. NHI responded with counterclaims and filed motions requesting the immediate appointment of a receiver and for pre-judgment possession. Resulting from these claims and counterclaims, on December 6, 2018, the parties entered into an agreement resulting in Regency vacating the facilities in December 2018. On September 22, 2021, all parties entered into an agreement whereby NHI is entitled to receive $0.4 million, due in the fourth quarter of 2021, to settle all claims for this matter. We will recognize the settlement amount as other income when it is received. In addition, we had approximately $0.3 million in liabilities recorded related to the facilities subject to the litigation that was reversed and recognized in “Interest and other income” during the third quarter of 2021.
Note 8. Equity and Dividends
At-the-Market (ATM) Equity Program
During the nine months ended September 30, 2021, we sold 661,951 common shares through the ATM program with an average price of $73.62, resulting in net proceeds of approximately $47.9 million. We intend to use the proceeds from any further activity under the ATM program for general corporate purposes, which may include future acquisitions and repayment of indebtedness, including borrowings under our credit facility.
Dividends
The following table summarizes dividends declared by the Board of Directors or paid during the nine months ended September 30, 2021 and 2020:
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||
| Date of Declaration | Date of Record | Date Paid/Payable | Quarterly Dividend | |||||||||||||||||
| December 15, 2020 | December 31, 2020 | January 29, 2021 | $1.1025 | |||||||||||||||||
| March 12, 2021 | March 31, 2021 | May 7, 2021 | $1.1025 | |||||||||||||||||
| June 3, 2021 | June 30, 2021 | August 6, 2021 | $0.90 | |||||||||||||||||
| August 6, 2021 | September 30, 2021 | November 5, 2021 | $0.90 | |||||||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||
| Date of Declaration | Date of Record | Date Paid/Payable | Quarterly Dividend | |||||||||||||||||
| November 7, 2019 | December 31, 2019 | January 31, 2020 | $1.05 | |||||||||||||||||
| February 19, 2020 | March 31, 2020 | May 8, 2020 | $1.1025 | |||||||||||||||||
| June 15, 2020 | June 30, 2020 | August 7, 2020 | $1.1025 | |||||||||||||||||
| September 14, 2020 | September 30, 2020 | November 6, 2020 | $1.1025 | |||||||||||||||||
On November 5, 2021, the Board of Directors declared a $0.90 per share dividend to common stockholders of record on December 31, 2021, payable on January 31, 2022.
Note 9. Stock-Based Compensation
The Company’s outstanding stock incentive awards have been granted under two incentive plans – the 2012 Stock Incentive Plan (“2012 Plan”) and the 2019 Stock Incentive Plan (“2019 Plan”). During the first quarter of 2021, we granted stock options under the 2019 Plan of 639,500 and the remaining 12,500 awards available under the 2012 Plan. As of September 30, 2021, shares available for future grants totaled 2,117,336 all under the 2019 plan. The following is a summary of stock-based compensation expense, net of any forfeitures, included in “General and administrative expenses” in the Condensed Consolidated Statements of Income ($ in thousands):
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| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Non-cash stock-based compensation expense | $ | 989 | $ | 457 | $ | 7,427 | $ | 2,772 | |||||||||||||||
The weighted average fair value of options granted during the nine months ended September 30, 2021 and 2020 was $14.54 and $5.54 per option, respectively. The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
| 2021 | 2020 | ||||||||||
| Dividend yield | 6.7% | 5.1% | |||||||||
| Expected volatility | 48.1% | 17.1% | |||||||||
| Expected lives | 2.9 years | 2.9 years | |||||||||
| Risk-free interest rate | 0.33% | 1.30% | |||||||||
The following table summarizes our outstanding stock options:
| Weighted Average | |||||||||||||||||
| Number | Weighted Average | Remaining | |||||||||||||||
| of Shares | Exercise Price | Contractual Life (Years) | |||||||||||||||
| Options outstanding, January 1, 2020 | 1,004,014 | $74.35 | |||||||||||||||
| Options granted | 592,000 | $90.32 | |||||||||||||||
| Options exercised | (512,509) | $72.98 | |||||||||||||||
| Options forfeited | (10,500) | $88.73 | |||||||||||||||
| Options outstanding, September 30, 2020 | 1,073,005 | $83.68 | |||||||||||||||
| Exercisable at September 30, 2020 | 601,994 | $81.09 | |||||||||||||||
| Options outstanding, January 1, 2021 | 1,033,838 | $83.54 | |||||||||||||||
| Options granted | 652,000 | $69.20 | |||||||||||||||
| Options exercised | (20,000) | $60.52 | |||||||||||||||
| Options outstanding, September 30, 2021 | 1,665,838 | $78.20 | 3.37 | ||||||||||||||
| Exercisable at September 30, 2021 | 1,183,324 | $79.25 | 3.08 | ||||||||||||||
At September 30, 2021, the stock options outstanding and exercisable had no intrinsic value. The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2021 and 2020 was $0.2 million or $9.27 per share and $8.1 million or $15.84 per share, respectively.
As of September 30, 2021, unrecognized compensation expense totaling $2.8 million associated with unvested stock options is expected to be recognized over the following periods: remainder of 2021 - $1.0 million, 2022 - $1.6 million and 2023 - $0.2 million.
Note 10. Earnings Per Common Share
The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assume the exercise of stock options and the conversion of our convertible debt prior to its retirement using the treasury stock method, to the extent dilutive. Dilution resulting from the conversion option within our convertible debt was determined by computing an average of incremental shares included in each diluted EPS computation.
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The following table summarizes the average number of common shares and the net income used in the calculation of basic and diluted earnings per common share ($ in thousands, except share and per share amounts):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income attributable to common stockholders | $ | 30,814 | $ | 42,595 | $ | 105,327 | $ | 147,986 | |||||||||||||||
| BASIC: | |||||||||||||||||||||||
| Weighted average common shares outstanding | 45,850,599 | 44,661,650 | 45,668,762 | 44,641,748 | |||||||||||||||||||
| DILUTED: | |||||||||||||||||||||||
| Weighted average common shares outstanding | 45,850,599 | 44,661,650 | 45,668,762 | 44,641,748 | |||||||||||||||||||
| Stock options | 825 | 753 | 6,391 | 1,766 | |||||||||||||||||||
| Convertible senior notes | — | — | 13,938 | — | |||||||||||||||||||
| Weighted average dilutive common shares outstanding | 45,851,424 | 44,662,403 | 45,689,091 | 44,643,514 | |||||||||||||||||||
| Net income attributable to common stockholders - basic | $ | 0.67 | $ | 0.95 | $ | 2.31 | $ | 3.31 | |||||||||||||||
| Net income attributable to common stockholders - diluted | $ | 0.67 | $ | 0.95 | $ | 2.31 | $ | 3.31 | |||||||||||||||
| Incremental anti-dilutive shares excluded: | |||||||||||||||||||||||
| Net share effect of stock options with an exercise price in excess of the average market price for our common shares | 505,459 | 410,012 | 308,313 | 427,180 | |||||||||||||||||||
| Regular dividends declared per common share | $ | 0.90 | $ | 1.1025 | $ | 2.9025 | $ | 3.3075 | |||||||||||||||
Note 11. Fair Value of Financial Instruments
Our financial assets and liabilities measured at fair value on a recurring basis include derivative financial instruments. Derivative financial instruments include our interest rate swap agreements.
Derivative financial instruments. Derivative financial instruments are valued in the market using discounted cash flow techniques. These techniques incorporate Level 1 and Level 2 inputs. The market inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation model for interest rate swaps are observable in active markets and are classified as Level 2 in the hierarchy.
Assets and liabilities measured at fair value on a recurring basis are as follows ($ in thousands):
| Fair Value Measurement | |||||||||||||||||
| Balance Sheet Classification | September 30, 2021 | December 31, 2020 | |||||||||||||||
| Level 2 | |||||||||||||||||
| Interest rate swap liability | Accounts payable and accrued expenses | $ | 1,828 | $ | 7,150 | ||||||||||||
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Carrying amounts and fair values of financial instruments that are not carried at fair value at September 30, 2021 and December 31, 2020 in the Condensed Consolidated Balance Sheets are as follows ($ in thousands):
| Carrying Amount | Fair Value Measurement | ||||||||||||||||||||||
| September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | ||||||||||||||||||||
| Level 2 | |||||||||||||||||||||||
| Variable rate debt | $ | 398,311 | $ | 945,078 | $ | 400,000 | $ | 948,000 | |||||||||||||||
| Fixed rate debt | $ | 886,976 | $ | 554,207 | $ | 876,917 | $ | 575,292 | |||||||||||||||
| Level 3 | |||||||||||||||||||||||
| Mortgage and other notes receivable, net | $ | 284,608 | $ | 292,427 | $ | 301,053 | $ | 321,021 | |||||||||||||||
Fixed rate debt. Fixed rate debt is classified as Level 2 and its value is based on quoted prices for similar instruments or calculated utilizing model derived valuations in which significant inputs are observable in active markets.
Mortgage and other notes receivable. The fair value of mortgage and other notes receivable is based on credit risk and discount rates that are not observable in the marketplace and therefore represents a Level 3 measurement.
Carrying amounts of cash and cash equivalents and restricted cash, accounts receivable and accounts payable approximate fair value due to their short-term nature. The fair values of our borrowings under our revolving credit facility and other variable rate debt are reasonably estimated at their notional amounts at September 30, 2021 and December 31, 2020, due to the predominance of floating interest rates, which generally reflect market conditions.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
References throughout this document to NHI or the Company include National Health Investors, Inc., and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words “we”, “our”, “ours” and “us” refer only to National Health Investors, Inc. and its consolidated subsidiaries and not any other person. Unless the context indicates otherwise, references herein to “the Company” include all of our consolidated subsidiaries.
This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission, as well as information included in oral statements made, or to be made, by our senior management contain certain “forward-looking” statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding our expected future financial position, results of operations, cash flows, funds from operations, continued performance improvements, ability to service and refinance our debt obligations, ability to finance growth opportunities, and similar statements including, without limitation, those containing words such as “may,” “will,” “believes,” “anticipates,” “expects,” “intends,” “estimates,” “plans,” and other similar expressions, are forward-looking statements.
Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements as a result of factors including, but not limited to, the following:
* Actual or perceived risks associated with public health epidemics or outbreaks, such as the coronavirus (“COVID-19”), have had and are expected to continue to have a material adverse effect on our business and results of operations;
* We depend on the operating success of our tenants and borrowers for collection of our lease and note payments;
* We are exposed to the risk that our tenants and borrowers may become subject to bankruptcy or insolvency proceedings;
* Certain tenants in our portfolio account for a significant percentage of the rent we expect to generate from our portfolio, and the failure of any of these tenants to meet their obligations to us could materially and adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders;
* We are exposed to risks related to governmental regulations and payors, principally Medicare and Medicaid, and the effect that lower reimbursement rates would have on our tenants’ and borrowers’ business;
* We are exposed to the risk that the cash flows of our tenants and borrowers would be adversely affected by increased liability claims and liability insurance costs;
* We are exposed to the risk that we may not be fully indemnified by our lessees and borrowers against future litigation;
* We are subject to risks of damage from catastrophic weather and other natural or man-made disasters and the physical effects of climate change;
* We depend on the success of property development and construction activities, which may fail to achieve the operating results we expect;
* We are exposed to the risk that the illiquidity of real estate investments could impede our ability to respond to adverse changes in the performance of our properties;
* We are exposed to risks associated with our investments in unconsolidated entities, including our lack of sole decision-making authority and our reliance on the financial condition of other interests;
* We are subject to additional risks related to healthcare operations associated with our investments in unconsolidated entities, which could have a material adverse effect on our results of operations;
* We are subject to risks associated with our joint venture investment with Life Care Services for Timber Ridge, an Entrance Fee CCRC, associated with Type A benefits offered to the residents of the joint venture's Entrance Fee community and related accounting requirements;
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* If our efforts to maintain the privacy and security of Company information are not successful, we could incur substantial costs and reputational damage, and could become subject to litigation and enforcement actions;
* We are exposed to risks related to environmental laws and the costs associated with liabilities related to hazardous substances;
* We depend on the success of our future acquisitions and investments;
* We depend on our ability to reinvest cash in real estate investments in a timely manner and on acceptable terms;
* Competition for acquisitions may result in increased prices for properties;
* We are exposed to the risk that our assets may be subject to impairment charges;
* We may need to refinance existing debt or incur additional debt in the future, which may not be available on terms acceptable to us;
* We have covenants related to our indebtedness which impose certain operational limitations and a breach of those covenants could materially adversely affect our financial condition and results of operations;
* Downgrades in our credit ratings could have a material adverse effect on our cost and availability of capital;
* We depend on revenues derived mainly from fixed rate investments in real estate assets, while a portion of our debt used to finance those investments bears interest at variable rates;
* We are subject to risks related to changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, which may adversely affect interest rates on our current or future indebtedness and may otherwise adversely affect our financial condition and result of operations;
* We depend on the ability to continue to qualify for taxation as a Real Estate Investment Trust;
* Complying with REIT requirements may cause us to forego otherwise attractive acquisition opportunities or liquidate otherwise attractive investments, which could materially hinder our performance;
* Legislative, regulatory, or administrative changes could adversely affect us or our security holders;
* We have ownership limits in our charter with respect to our common stock and other classes of capital stock which may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or might otherwise be in the best interests of our stockholders;
* We are subject to certain provisions of Maryland law and our charter and bylaws that could hinder, delay or prevent a change in control transaction, even if the transaction involves a premium price for our common stock or our stockholders believe such transaction to be otherwise in their best interests; and
* When interest rates increase, our common stock may decline in price.
See the notes to the annual audited consolidated financial statements in our most recent Annual Report on Form 10-K for the year ended December 31, 2020, and “Business” and “Risk Factors” under Item 1 and Item 1A therein for a further discussion of these and of various governmental regulations and other operating factors relating to the healthcare industry and the risk factors inherent in them. You should carefully consider these risks before making any investment decisions in the Company. These risks and uncertainties are not the only ones facing the Company. There may be additional risks that we do not presently know of and or that we currently deem immaterial. If any of the risks actually occur, our business, financial condition, results of operations, or cash flows could be materially and adversely affected. In that case, the trading price of our shares of stock could decline and you may lose part or all of your investment. Given these risks and uncertainties, we can give no assurance that these forward-looking statements will, in fact, occur and, therefore, caution investors not to place undue reliance on them.
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Executive Overview
National Health Investors, Inc., established in 1991 as a Maryland corporation, is a self-managed real estate investment trust (“REIT”) specializing in sale-leaseback, joint-venture, mortgage and mezzanine financing of need-driven and discretionary senior housing and medical facility investments. Our portfolio consists of real estate investments in independent living facilities, assisted living facilities, entrance-fee communities, senior living campuses, skilled nursing facilities, specialty hospitals and medical office building. We fund 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.
Portfolio
As of September 30, 2021, we had investments in real estate and mortgage and other notes receivable involving 222 facilities located in 34 states. These investments involve 144 senior housing properties, 75 skilled nursing facilities, two hospitals and one medical office building, excluding three properties classified to assets held for sale. These investments consisted of properties with an original cost of approximately $3.0 billion, rented under primarily triple-net leases to 33 lessees, and $289.7 million aggregate carrying value of mortgage and other notes receivable, excluding an allowance for expected credit losses of $5.1 million, due from ten borrowers.
We classify all of the properties in our portfolio as either senior housing or medical properties. Because our leases represent different underlying revenue sources and result in differing risk profiles, we further classify our senior housing communities as either need-driven (assisted living and memory care communities and senior living campuses) or discretionary (independent living and entrance-fee communities.)
Senior Housing – Need-Driven includes assisted living and memory care communities (“ALF”) and senior living campuses (“SLC”) which primarily attract private payment for services from residents who require assistance with activities of daily living. Need-driven properties are subject to regulatory oversight.
Senior Housing – Discretionary includes independent living (“ILF”) and entrance-fee communities (“EFC”) which primarily attract private payment for services from residents who are making the lifestyle choice of living in an age-restricted multi-family community that offers social programs, meals, housekeeping and in some cases access to healthcare services. Discretionary properties are subject to limited regulatory oversight. There is a correlation between demand for this type of community and the strength of the housing market.
Medical Facilities within our portfolio receive payment primarily from Medicare, Medicaid and health insurance. These properties include skilled nursing facilities (“SNF”), medical office buildings (“MOB”) and hospitals that attract patients who have a need for acute or complex medical attention, preventative medicine, or rehabilitation services. Medical properties are subject to state and federal regulatory oversight and, in the case of hospitals, Joint Commission accreditation.
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The following tables summarize our investments in real estate and mortgage and other notes receivable as of and for the nine months ended September 30, 2021 ($ in thousands):
| Properties | Beds/Sq. Ft.* | Revenue | % Total | Investment | |||||||||||||||||||||||||||||||
| Real Estate Properties | |||||||||||||||||||||||||||||||||||
| Senior Housing - Need-Driven | |||||||||||||||||||||||||||||||||||
| Assisted Living | 87 | 4,844 | $ | 43,669 | 19.1 | % | $ | 896,343 | |||||||||||||||||||||||||||
| Senior Living Campus | 12 | 1,690 | 13,968 | 6.1 | % | 277,535 | |||||||||||||||||||||||||||||
| Total Senior Housing - Need-Driven | 99 | 6,534 | 57,637 | 25.2 | % | 1,173,878 | |||||||||||||||||||||||||||||
| Senior Housing - Discretionary | |||||||||||||||||||||||||||||||||||
| Independent Living | 23 | 2,674 | 21,285 | 9.3 | % | 445,678 | |||||||||||||||||||||||||||||
| Entrance-Fee Communities | 11 | 2,707 | 46,132 | 20.1 | % | 744,420 | |||||||||||||||||||||||||||||
| Total Senior Housing - Discretionary | 34 | 5,381 | 67,417 | 29.4 | % | 1,190,098 | |||||||||||||||||||||||||||||
| Total Senior Housing | 133 | 11,915 | 125,054 | 54.6 | % | 2,363,976 | |||||||||||||||||||||||||||||
| Medical Facilities | |||||||||||||||||||||||||||||||||||
| Skilled Nursing Facilities | 72 | 9,433 | 61,906 | 27.0 | % | 595,414 | |||||||||||||||||||||||||||||
| Hospitals | 2 | 130 | 2,803 | 1.2 | % | 52,750 | |||||||||||||||||||||||||||||
| Medical Office Building | 1 | 61,500 | * | 248 | 0.1 | % | 6,973 | ||||||||||||||||||||||||||||
| Total Medical Facilities | 75 | 64,957 | 28.3 | % | 655,137 | ||||||||||||||||||||||||||||||
| Total Real Estate Properties | 208 | 190,011 | 82.9 | % | $ | 3,019,113 | |||||||||||||||||||||||||||||
| Income From Properties Sold and Held For Sale | 12,613 | ||||||||||||||||||||||||||||||||||
| Escrow Funds Received From Tenants | 7,519 | ||||||||||||||||||||||||||||||||||
| Total Rental Income | 210,143 | ||||||||||||||||||||||||||||||||||
| Mortgage and Other Notes Receivable | |||||||||||||||||||||||||||||||||||
| Senior Housing - Need-Driven | 9 | 565 | 4,566 | 2.1 | % | $ | 78,478 | ||||||||||||||||||||||||||||
| Senior Housing - Discretionary | 2 | 714 | 9,875 | 4.3 | % | 141,306 | |||||||||||||||||||||||||||||
| Skilled Nursing Facilities | 3 | 180 | 304 | 0.1 | % | 4,402 | |||||||||||||||||||||||||||||
| Other Notes Receivable | — | — | 3,599 | 1.6 | % | 65,561 | |||||||||||||||||||||||||||||
| Total Mortgage and Other Notes Receivable | 14 | 1,459 | 18,344 | 8.1 | % | $ | 289,747 | ||||||||||||||||||||||||||||
| Other Income | 561 | ||||||||||||||||||||||||||||||||||
| Total Revenue | $ | 229,048 | |||||||||||||||||||||||||||||||||
| Portfolio Summary | Properties | Revenue | % Portfolio | Investment | |||||||||||||||||||||||||||||||
| Real Estate Properties | 208 | $ | 190,011 | 91.2 | % | $ | 3,019,113 | ||||||||||||||||||||||||||||
| Mortgage and Other Notes Receivable | 14 | 18,344 | 8.8 | % | 289,747 | ||||||||||||||||||||||||||||||
| Total Portfolio | 222 | $ | 208,355 | 100.0 | % | $ | 3,308,860 | ||||||||||||||||||||||||||||
| Portfolio by Operator Type | |||||||||||||||||||||||||||||||||||
| Public | 63 | $ | 48,152 | 23.1 | % | $ | 464,199 | ||||||||||||||||||||||||||||
| National Chain (Privately Owned) | 19 | 31,854 | 15.3 | % | 621,233 | ||||||||||||||||||||||||||||||
| Regional | 127 | 120,912 | 58.0 | % | 2,102,924 | ||||||||||||||||||||||||||||||
| Small | 13 | 7,437 | 3.6 | % | 120,504 | ||||||||||||||||||||||||||||||
| Total Portfolio | 222 | $ | 208,355 | 100.0 | % | $ | 3,308,860 | ||||||||||||||||||||||||||||
For the nine months ended September 30, 2021, operators of facilities who provided 3% or more and collectively 73% of our total revenues were (parent company, in alphabetical order): Bickford Senior Living; Chancellor Health Care; Discovery Senior Living; Health Services Management; Holiday Retirement; Life Care Services; National HealthCare Corporation; Senior Living Communities; and The Ensign Group.
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As of September 30, 2021, our average effective annualized rental income was $8,790 per bed for SNFs, $10,483 per unit for SLCs, $12,769 per unit for ALFs, $6,311 per unit for ILFs, $22,723 per unit for EFCs, $45,765 per bed for hospitals, and $5 per square foot for MOBs.
Substantially all of our revenues and sources of cash flows from operations are rents paid under operating leases and interest earned on mortgages and notes receivable. Revenues from these investments represent a primary source of liquidity to fund our distributions to stockholders and depend upon the performance of the operators. Operating difficulties experienced by our operators could have a material adverse effect on the ability of our operators to meet their financial and other contractual obligations to us, as well as on our results of operations. We monitor operator performance through periodic reviews of operating results for each facility, covenant compliance and property inspections, among other activities.
COVID-19 Pandemic
Since the World Health Organization declared COVID-19 a pandemic on March 11, 2020, the continually evolving pandemic has resulted in a widespread health crisis adversely affecting governments, businesses, and financial markets. The COVID-19 pandemic and related health and safety measures continue to impact the operations of many of the Company’s tenants, operators and borrowers. The federal government has provided economic assistance and other forms of assistance which mitigated to some extent the negative financial impact of the pandemic for certain of our tenants and operators who are eligible.
Revenues for the operators of our properties continue to be significantly impacted by occupancy. Building occupancy rates have been and may continue to be adversely affected by the COVID-19 pandemic if it continues to cause sustained negative trends such as early resident move-outs, delays in admitting new residents, or other collateral events. In addition, our operators may experience a material increase in their operating costs, including costs related to enhanced health and safety precautions among other measures. A decrease in occupancy or increase in costs could have a material adverse effect on the ability of our operators to meet their financial and other contractual obligations to us, including the payment of rent, as well as on our results of operations.
Since the pandemic began, our rent concessions activity is as shown in the following table ($ in thousands):
| Year ended | Three months ended | Nine months ended | ||||||||||||||||||||||||||||||||||||
| December 31, 2020 | September 30, 2021 | September 30, 2021 | Cumulative Totals | |||||||||||||||||||||||||||||||||||
| Deferrals | Abatements | Deferrals | Collections | Deferrals | Collections | Deferrals | Abatements | Collections | ||||||||||||||||||||||||||||||
| Bickford | $ | 3,750 | $ | 2,100 | $ | 3,500 | $ | — | $ | 13,750 | $ | — | $ | 17,500 | $ | 2,100 | $ | — | ||||||||||||||||||||
| Holiday | — | — | 600 | — | 1,800 | — | 1,800 | — | — | |||||||||||||||||||||||||||||
| All Others | 1,232 | 50 | 1,675 | 44 | 4,323 | 44 | 5,555 | 50 | 44 | |||||||||||||||||||||||||||||
| $ | 4,982 | $ | 2,150 | $ | 5,775 | $ | 44 | $ | 19,873 | $ | 44 | $ | 24,855 | $ | 2,150 | $ | 44 | |||||||||||||||||||||
The majority of the deferred amounts noted in the table above accrue interest starting at 8% per annum from the date of the deferral until paid in full under the terms of each tenant’s deferral agreement.
In addition to the concessions noted above, we have agreed with Bickford to defer $4.5 million in contractual rent due for the fourth quarter of 2021 and expect to grant up to $4.0 million in deferrals in the first quarter of 2022. We have also reached agreement with two other tenants regarding additional rent deferrals of approximately $0.5 million for the fourth quarter of 2021. We agreed with Holiday to utilize $0.6 million of the lease deposit towards July 2021 contractual rent. The balance of the lease deposit at September 30, 2021 was $8.8 million. We anticipate some of our tenants may need additional rent deferrals to assist them with the impact of the pandemic on their operations. The timing and amount of any additional deferrals cannot yet be determined.
When applicable, we have elected not to apply the modification guidance under ASC 842 and have decided to account for the related concessions as variable lease payments, recorded as rental income when received. We will evaluate any rent deferral requests as a result of the COVID-19 pandemic on a tenant-by-tenant basis. The extent of future concessions we make as a result of the COVID-19 pandemic, which could have a material impact on our future operating results, cannot be reasonably or reliably projected by us at this time.
We had approximately $73.8 million in unrestricted cash and cash equivalents on hand and $550.0 million in availability under our unsecured revolving credit facility as of October 31, 2021. In addition, we believe we continue to have access to additional
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debt sources and maintain availability under our at-the-market (“ATM”) equity issuance program and shelf registration statement to fund our future obligations, although no assurances can be made. We believe these liquidity sources position us to manage through the negative effects of the COVID-19 pandemic.
See “Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K for further information regarding the risks presented by the COVID-19 pandemic.
Investment Highlights
Since January 1, 2021, we have completed or announced the following real estate and note investments ($ in thousands):
| Date | Properties | Asset Class | Amount | |||||||||||||||||||||||
| 2021 | ||||||||||||||||||||||||||
| Real Estate Investments | ||||||||||||||||||||||||||
| Vizion Health | Q2 2021 | 1 | HOSP | $ | 40,250 | |||||||||||||||||||||
| Navion | Q2 2021 | 1 | SHO | 6,600 | ||||||||||||||||||||||
| Note Investments | ||||||||||||||||||||||||||
| Montecito Medical Real Estate | Q2 2021 | 1 | MOB | 50,000 | ||||||||||||||||||||||
| Vizion Health-Brookhaven | Q2 2021 | 1 | HOSP | 20,000 | ||||||||||||||||||||||
| Navion Senior Solutions | Q2 2021 | 1 | SHO | 3,600 | ||||||||||||||||||||||
| $ | 120,450 | |||||||||||||||||||||||||
Vizion Health
In May 2021, we acquired a 64-bed specialty behavioral hospital located in Oklahoma for a total purchase price of $40.3 million, including $0.3 million in closing costs, and concurrently leased the hospital to an affiliate of Vizion Health. The 15-year master lease, which includes two five-year extension options, has an initial lease rate of 8.5% with fixed annual escalators of 2.5%. We have committed to additional funding of capital improvements for the hospital of up to $2.0 million which will be added to the lease base as funded. At September 30, 2021, no funds have been drawn.
In May 2021, we provided a $20.0 million, five-year loan to Vizion Health-Brookhaven, LLC to finance the acquisition of healthcare operations, including the real and personal property of a behavioral hospital we acquired in May 2021 discussed above. The loan requires monthly principal and interest payments and bears an initial annual interest rate of 8.5% with fixed annual escalators of 2.5% beginning June 1, 2022. Initial principal loan repayments are equal to 90% of the excess cash flow as defined in the agreement. Principal repayments are reduced to 50% of the excess cash flow once the outstanding loan balance is reduced below $15.0 million.
Navion Senior Solutions
In June 2021, we acquired a 48-unit assisted living and memory care community in Tennessee for a purchase price of $6.6 million, including closing costs of $0.1 million. The community was added to an existing master lease with Navion Senior Solutions (“Navion”) whose term was reset for 12 years, has a lease rate of 7.5% with fixed annual escalators of 2.5% and offers two optional extensions of five years each.
In May 2021, we provided a ten-year corporate loan to Navion for $3.6 million. The loan requires interest-only payments at an annual interest rate of 8% until June 1, 2024 and gives us first option to provide permanent development financing for a future project.
Montecito Medical Real Estate
In April 2021, the Company entered into a $50.0 million mezzanine loan and security agreement with Montecito Medical Real Estate for a new fund that will invest in medical real estate, including medical office buildings, throughout the United States. Amounts under the loan agreement will be funded as real estate investments are identified for acquisition. Borrowings under the loan agreement will bear interest at an annual rate of 9.5% and accrue an additional 2.5% in interest to be paid upon certain future events including repayments, sales of fund investments, and refinancings. Funds drawn in accordance with this agreement are required to be repaid on a per-investment basis five years from deployment of the funds for the applicable investment and
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includes two one-year extensions. At September 30, 2021, we had funded $2.1 million of our commitment that was used to acquire two medical office buildings for a combined purchase price of approximately $11.1 million.
Asset Dispositions
During the nine months ended September 30, 2021, we completed the following real estate dispositions as described below ($ in thousands):
| Operator | Date | Properties | Asset Class | Net Proceeds | Net Real Estate Investment | Other1 | Gain/(Impairment)2 | |||||||||||||||||||||||||||||||||||||
| Bickford | Q2 2021 | 6 | SHO | $ | 39,924 | $ | 34,485 | $ | 1,871 | $ | 3,568 | $ | 3,568 | |||||||||||||||||||||||||||||||
| Community Health Systems | Q2 2021 | 1 | MOB | 3,887 | 946 | 62 | 2,879 | |||||||||||||||||||||||||||||||||||||
| TrustPoint Hospital | Q3 2021 | 1 | HOSP | 31,215 | 21,018 | 1,562 | 8,635 | |||||||||||||||||||||||||||||||||||||
| Holiday | Q3 2021 | 8 | SHO | 114,133 | 113,611 | (1,360) | 1,882 | |||||||||||||||||||||||||||||||||||||
| Quorum Health | Q3 2021 | 1 | HOSP | 8,314 | 9,568 | — | (1,254) | |||||||||||||||||||||||||||||||||||||
| Senior Living Management | Q3 2021 | 1 | SHO | 12,847 | 3,212 | 210 | 9,425 | |||||||||||||||||||||||||||||||||||||
| Holiday | Q3 2021 | 1 | SHO | 5,666 | 10,388 | (81) | (4,641) | |||||||||||||||||||||||||||||||||||||
| $ | 215,986 | $ | 193,228 | $ | 2,264 | $ | 20,494 | |||||||||||||||||||||||||||||||||||||
1 includes straight-line rent and deferred lease intangibles
2 impairment charges are included in “Loan and realty losses (gains)” in our Condensed Consolidated Income Statement as of September 30, 2021
Total rental income from the dispositions was $2.1 million and $12.6 million for the three and nine months ended September 30, 2021, respectively, and $6.1 million and $18.0 million for the three and nine months ended September 30, 2020, respectively. Reference Note 3 to the condensed consolidated financial statements for more detail on dispositions.
Assets Held for Sale and Impairment of Real Estate
During the third quarter of 2021, we reclassified three transition properties to assets held for sale on our Condensed Consolidated Balance Sheet as of September 30, 2021 and recorded impairment charges of approximately $16.6 million to reduce their net book values to estimated fair values less estimated transaction costs. Two of the properties are located in Texas and one property is located in Tennessee. Rental income for these properties was based on operating income, net of management fees, and did not generate significant revenues for either the nine months ended September 30, 2021 or the nine months ended September 30, 2020.
We recognized real estate impairment charges of approximately $5.9 million during the three and nine months ended September 30, 2021, $4.6 million related to the disposition of one Holiday property located in Indiana and $1.3 million related to an acute care hospital located in Kentucky.
Notes Receivable Repayment
During the three and nine months ended September 30, 2021, LCS-Westminster Partnership IV LLP, an affiliate of LCS, repaid the remaining principal of $9.8 million and $61.2 million on its second note of two notes under a master credit agreement (“Note B”). As a result, we recognized the remaining Note B commitment fee of $0.4 million in “Interest income and other” during the third quarter of 2021. The balance on its first note (“Note A”) was $109.2 million as of September 30, 2021.
Other
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 five-year renewal options. As such, there may be reporting periods in which we experience few, if any, lease renewals or expirations. During the nine months ended September 30, 2021, 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 recognized on a straight-line basis over the term of the lease.
Certain of our leases contain purchase options allowing tenants to acquire the leased properties. At September 30, 2021, we had a net investment of $18.8 million in five real estate properties which are subject to exercisable tenant purchase options.
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Tenant purchase options on 10 properties in which we had an aggregate net investment of $90.5 million at September 30, 2021, become exercisable between 2025 and 2028. Rental income from leased properties with tenant purchase options either currently exercisable or exercisable in the future was $3.4 million and $10.3 million for the three and nine months ended September 30, 2021, respectively, and $3.4 million and $10.0 million for the three and nine months ended September 30, 2020, respectively.
In June 2021, we received notification of a tenant’s intention to acquire, pursuant to a purchase option, a hospital located in California. The purchase option calls for a minimum purchase price of $15.0 million with any appreciation above $15.0 million to be split evenly between the parties. The net investment at September 30, 2021 was $9.5 million. Rental income was $0.5 million and $1.4 million, for both the three and nine months ended September 30, 2021 and 2020, respectively. The transaction will close no earlier than one year after the receipt of the notice of exercise.
We cannot reasonably estimate at this time the probability that any other purchase options will be exercised in the future. Consideration to be received from the exercise of any tenant purchase option is expected to exceed our net investment in the leased property or properties.
Tenant Concentration
As discussed in Note 3 to the condensed consolidated financial statements, we have four lessees (including their affiliated entities, which are the legal tenants) excluding $2.6 million for our corporate office and a credit loss reserve balance of $5.1 million, from whom we individually derive at least 10% of our total revenues as follows ($ in thousands):
| As of September 30, 2021 | Revenues1 | |||||||||||||||||||||||||||||||||||||
| Asset | Number of | Real | Notes | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| Class | Properties | Estate | Receivable | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Senior Living Communities | EFC | 10 | $ | 573,631 | $ | 42,609 | $ | 38,094 | 17% | $ | 38,972 | 15% | ||||||||||||||||||||||||||
| National HealthCare Corporation (NHC) | SNF | 42 | 171,188 | — | 28,290 | 12% | 28,362 | 11% | ||||||||||||||||||||||||||||||
| Bickford Senior Living | ALF | 42 | 490,308 | 38,751 | 26,224 | 11% | 39,142 | 16% | ||||||||||||||||||||||||||||||
| Holiday Retirement | ILF | 17 | 377,735 | — | 22,811 | 10% | 30,529 | 12% | ||||||||||||||||||||||||||||||
All others, net2 | Various | 1,406,251 | 208,387 | 106,110 | 46% | 107,377 | 43% | |||||||||||||||||||||||||||||||
| Escrow funds received from tenants | ||||||||||||||||||||||||||||||||||||||
| for property operating expenses | Various | — | — | 7,519 | 4% | $ | 7,190 | 3% | ||||||||||||||||||||||||||||||
| $ | 3,019,113 | $ | 289,747 | $ | 229,048 | $ | 251,572 | |||||||||||||||||||||||||||||||
1includes interest income on notes receivable
2 includes prior period amounts for disposals or transitioned to new operators
Straight-line rent of $1.8 million and $3.2 million and interest revenue of $2.4 million and $3.2 million was recognized from the Senior Living Communities lease for the nine months ended September 30, 2021 and 2020, respectively. 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. Straight-line rent of $1.3 million and $2.0 million and interest revenue of $3.0 million and $2.0 million was recognized from the Bickford leases for the nine months ended September 30, 2021 and 2020, respectively. Straight-line rent of $4.3 million and $5.0 million was recognized from the Holiday lease for the nine months ended September 30, 2021 and 2020, respectively.
On July 30, 2021, Atria Senior Living acquired the management services of the legacy Holiday Retirement (“Holiday”) portfolio who is the tenant for 17 independent living facilities leased pursuant to a master lease. We have not received any contractual rent due from under the master lease since this transaction. Accordingly, we have placed the tenant on cash basis. Rent due but uncollected and unrecognized for August and September 2021 totaled $4.8 million.
For the nine months ended September 30, 2021, approximately 27% of our total revenue was derived from operators of our skilled nursing facilities who receive a significant portion of their revenue from governmental payors, primarily Medicare and Medicaid. Such revenues are subject annually to statutory and regulatory changes.
The following table summarizes the average portfolio occupancy for Senior Living Communities, Bickford and Holiday for the periods indicated, excluding development properties in operation less than 24 months, notes receivable, and properties transitioned to new operators or disposed.
35
| Properties | 3Q20 | 4Q20 | 1Q21 | 2Q21 | 3Q21 | September 2021 | |||||||||||||||||
| Senior Living Communities | 9 | 79.0% | 77.3% | 77.7% | 78.5% | 80.4% | 80.9% | ||||||||||||||||
Bickford1 | 42 | 81.2% | 79.1% | 75.0% | 77.4% | 80.2% | 80.7% | ||||||||||||||||
Holiday2 | 17 | 81.7% | 78.8% | 75.6% | 75.8% | 77.8% | 78.9% | ||||||||||||||||
1Prior period occupancies have been restated to include an additional building, in operation for at least 24-months, and the sale of six properties in the second quarter of 2021.
2Holiday occupancy for 17 properties is restated retroactively to reflect the sale of the Fort Wayne, IN property and the sale of eight properties in the third quarter of 2021.
The following table summarizes the revenue concentration of our top five states for the nine months ended September 30, 2021 and 2020, respectively, excluding any escrow funds received for property operating expenses ($ in thousands).
| Nine Months Ended September 30, | ||||||||||||||
| Location | 2021 | 2020 | ||||||||||||
| South Carolina | $ | 25,356 | $ | 27,265 | ||||||||||
| Florida | 22,118 | 23,877 | ||||||||||||
| Texas | 20,903 | 20,859 | ||||||||||||
| Washington | 12,814 | 13,711 | ||||||||||||
| California | 10,375 | 12,998 | ||||||||||||
| All others | 129,963 | 145,672 | ||||||||||||
| Escrow funds received from tenants for property operating expenses | 7,519 | 7,190 | ||||||||||||
| $ | 229,048 | $ | 251,572 | |||||||||||
Tenant Monitoring
Our operators report to us the results of their 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 sheet analysis and other analytical procedures to help us identify potential areas of concern relative to our operators’ 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 June 30, 2021 and 2020 (the most recent periods available).
36
| NHI Total Portfolio | ||||||||||||||||||||
| By asset type | SHO | SNF | MEDICAL NON-SNF | TOTAL | ||||||||||||||||
| Properties | 123 | 74 | 3 | 200 | ||||||||||||||||
| 2Q20 | 1.17x | 2.90x | 2.95x | 1.74x | ||||||||||||||||
| 2Q21 | 1.06x | 2.80x | 3.60x | 1.64x | ||||||||||||||||
| Market served | Need Driven | Need Driven excl. Bickford | Discretionary | Discretionary excl. SLC & Holiday | Medical | Medical excl. NHC | ||||||||||||||
| Properties | 93 | 51 | 30 | 4 | 77 | 35 | ||||||||||||||
| 2Q20 | 1.14x | 1.13x | 1.20x | 1.43x | 2.90x | 2.18x | ||||||||||||||
| 2Q21 | 0.86x | 0.76x | 1.27x | 1.74x | 2.85x | 2.10x | ||||||||||||||
| Major tenants | NHC1 | SLC3 | Bickford3 | Holiday | ||||||||||||||||
| Properties | 42 | 10 | 42 | 17 | ||||||||||||||||
| 2Q20 | 3.81x | 1.09x | 1.15x | 1.20x | ||||||||||||||||
| 2Q21 | 3.82x | 1.28x | 0.97x | 0.94x | ||||||||||||||||
NHI Same-Store Portfolio2 | ||||||||||||||||||||
| By asset type | SHO | SNF | MEDICAL NON-SNF | TOTAL | ||||||||||||||||
| Properties | 115 | 74 | 2 | 191 | ||||||||||||||||
| 2Q20 | 1.17x | 2.90x | 3.80x | 1.74x | ||||||||||||||||
| 2Q21 | 1.05x | 2.80x | 4.82x | 1.63x | ||||||||||||||||
| Market served | Need Driven | Need Driven excl. Bickford | Discretionary | Discretionary excl. SLC & Holiday | Medical | Medical excl. NHC | ||||||||||||||
| Properties | 86 | 44 | 29 | 3 | 76 | 34 | ||||||||||||||
| 2Q20 | 1.14x | 1.12x | 1.21x | 1.48x | 2.92x | 2.16x | ||||||||||||||
| 2Q21 | 0.85x | 0.73x | 1.27x | 1.76x | 2.86x | 2.05x | ||||||||||||||
| Major tenants | NHC1 | SLC3 | Bickford3 | Holiday | ||||||||||||||||
| Properties | 42 | 10 | 42 | 17 | ||||||||||||||||
| 2Q20 | 3.81x | 1.09x | 1.15x | 1.20x | ||||||||||||||||
| 2Q21 | 3.82x | 1.28x | 0.97x | 0.94x | ||||||||||||||||
1 NHC based on corporate-level Fixed Charge Coverage Ratio and includes 3 independent living facilities.
2 Excludes properties that have transitioned operators in past 24 months.
3 Pro forma SLC & Bickford T12 EBITDARM coverage excluding PPP income is 1.09x and 0.81x, respectively.
These results include any amounts received and recognized by the operators from the HHS CARES Act Provider Relief Fund and funds received under the Paycheck Protection Program if the loan has been forgiven. Our operators may not consistently account for any COVID-19 pandemic relief funds received which can impact comparability among operators and across periods.
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. Our senior housing portfolio shows a decline brought about primarily by a softening in occupancy and rising expenses, including wage pressures. Additionally, the COVID-19 pandemic in the U.S. has further softened coverage for these operators as well as across our portfolio. For many of the affected operators, as is typical of our portfolio in general, NHI has security deposits in place and/or
37
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 the economic effects of the COVID-19 pandemic continue. The metrics presented in the tables above give no effect to the presence of these security deposits. Because of the recent disposals of the Florida medical office building and the behavioral hospital discussed in Note 3 to the condensed consolidated financial statements, we combined the MOB and Hospital categories previously presented into the “Medical Non-SNF” Category. Each MOB’s coverage is driven by the underlying performance of its on-campus hospital as the tenant or guarantor under the lease. As a result, it is typical for MOB operations to have large fluctuations in coverage resulting from hospital operations.
Other Portfolio Activity
Tenant Transitioning
Nine properties were transitioned during 2019 to five new tenants following a period of non-compliance by the former operators. We recognized rental income from these nine properties of $0.7 million and $2.4 million for the three and nine months ended September 30, 2021, respectively, and $0.9 million and $3.7 million for the three and nine months ended September 30, 2020, respectively. Three of the properties were reclassified to assets held for sale on our Condensed Consolidated Balance Sheet as of September 30, 2021, as noted in Investment Highlights.
The following table summarizes the transition properties during the nine months ended September 30, 2021:
Occupancy1 | |||||||||||||||||||||||
| Facility Name (New Tenant) | Units | State | September 2020 | December 2020 | March 2021 | June 2021 | September 2021 | ||||||||||||||||
| Discovery Commons of College Park | 148 | IN | 13.8% | 15.7% | 23.1% | 36.7% | 43.3% | ||||||||||||||||
| The Charlotte (SLC) | 99 | NC | 38.9% | 42.9% | 46.6% | 57.1% | 73.6% | ||||||||||||||||
Maybelle Carter (Vitality)2 | 135 | TN | 76.8% | 73.1% | 68.7% | 64.9% | 63.7% | ||||||||||||||||
Chancellor TX-IL portfolio3 | 196 | IL/TX | 54.4% | 53.7% | 54.4% | 56.6% | 62.8% | ||||||||||||||||
| Beaver Dam Assisted Living (BAKA) | 120 | WI | 61.8% | 60.4% | 60.4% | 60.6% | 57.9% | ||||||||||||||||
| 698 | 49.2% | 49.0% | 50.5% | 54.7% | 59.5% | ||||||||||||||||||
1 Monthly Average
2 Reclassified to Assets Held for Sale in the third quarter of 2021
3 Two Texas Properties Reclassified to Assets Held for Sale in the third quarter of 2021
Real Estate and Mortgage Write-downs
In addition to the impact of the COVID-19 pandemic, our borrowers and tenants experience periods of significant financial pressures and difficulties similar to those encountered by other health care providers. Our condensed consolidated financial statements for the three and nine months ended September 30, 2021 reflect impairment charges of our long-lived assets of approximately $16.6 million related to three transition properties reclassified to assets held for sale to reduce their book values to estimated fair values less estimated transaction costs and $5.9 million related to two properties sold in the third quarter of 2021 as a result of the COVID-19 pandemic or other factors. We have no significant intangible assets currently recorded on our Condensed Consolidated Balance Sheet that would require assessment for impairment.
We have established a reserve for estimated credit losses of $5.1 million and a liability of $1.2 million for estimated credit losses on unfunded loan commitments as of September 30, 2021. We evaluate the reserves for estimated credit losses on a quarterly basis and make adjustments based on current circumstances as considered necessary.
We believe that the carrying amounts of our real estate properties are recoverable and that mortgage and other notes receivable are realizable and supported by the value of the underlying collateral. However, it is possible that future events could require us to make additional significant adjustments to these carrying amounts.
38
Results of Operations
The significant items affecting revenues and expenses are described below ($ in thousands):
| Three Months Ended | |||||||||||||||||||||||
| September 30, | Period Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Rental income | |||||||||||||||||||||||
| HOSP leased to Vizion Health | $ | 855 | $ | — | $ | 855 | NM | ||||||||||||||||
| EFCs leased to Senior Living Communities | 11,199 | 10,857 | 342 | 3.2 | % | ||||||||||||||||||
| ALFs leased to 41 Management | 746 | 530 | 216 | 40.8 | % | ||||||||||||||||||
| SHOs leased to Comfort Care | 546 | 782 | (236) | (30.2) | % | ||||||||||||||||||
| SHOs leased to Wingate Healthcare | 340 | 980 | (640) | (65.3) | % | ||||||||||||||||||
| ALFs leased to Bickford Senior Living | 7,827 | 8,948 | (1,121) | (12.5) | % | ||||||||||||||||||
| SHOs leased to Holiday Retirement | 1,552 | 6,307 | (4,755) | (75.4) | % | ||||||||||||||||||
| Other new and existing leases | 35,121 | 34,668 | 453 | 1.3 | % | ||||||||||||||||||
| Current year disposals | 1,877 | 5,656 | (3,779) | (66.8) | % | ||||||||||||||||||
| 60,063 | 68,728 | (8,665) | (12.6) | % | |||||||||||||||||||
| Straight-line rent adjustments, new and existing leases | 3,798 | 5,086 | (1,288) | (25.3) | % | ||||||||||||||||||
| Escrow funds received from tenants for taxes and insurance | 3,182 | 4,007 | (825) | (20.6) | % | ||||||||||||||||||
| Total Rental Income | 67,043 | 77,821 | (10,778) | (13.8) | % | ||||||||||||||||||
| Interest income and other | |||||||||||||||||||||||
| Bickford construction loans | 1,178 | 739 | 439 | 59.4 | % | ||||||||||||||||||
| Vizion Health loan | 434 | — | 434 | NM | |||||||||||||||||||
| 41 Management mortgage loan | 527 | 185 | 342 | NM | |||||||||||||||||||
| Life Care Services mortgages and construction loans | 2,397 | 2,972 | (575) | (19.3) | % | ||||||||||||||||||
| Loan payoffs | — | 540 | (540) | (100.0) | % | ||||||||||||||||||
| Other new and existing mortgages and notes | 1,833 | 1,807 | 26 | 1.4 | % | ||||||||||||||||||
| Total Interest Income from Mortgage and Other Notes | 6,369 | 6,243 | 126 | 2.0 | % | ||||||||||||||||||
| Other income | 421 | 237 | 184 | 77.6 | % | ||||||||||||||||||
| Total Revenues | 73,833 | 84,301 | (10,468) | (12.4) | % | ||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Depreciation | |||||||||||||||||||||||
| HOSP leased to Vizion Health | 260 | — | 260 | NM | |||||||||||||||||||
| ALFs leased to 41 Management | 260 | 168 | 92 | 54.8 | % | ||||||||||||||||||
| SHOs leased to Holiday Retirement | 2,353 | 2,469 | (116) | (4.7) | % | ||||||||||||||||||
| Current year disposals and assets held for sale | 420 | 1,562 | (1,142) | (73.1) | % | ||||||||||||||||||
| Other new and existing assets | 16,742 | 16,637 | 105 | 0.6 | % | ||||||||||||||||||
| Total Depreciation | 20,035 | 20,836 | (801) | (3.8) | % | ||||||||||||||||||
| Interest | 12,715 | 12,892 | (177) | (1.4) | % | ||||||||||||||||||
| Non-cash stock-based compensation expense | 989 | 457 | 532 | NM | |||||||||||||||||||
| Loan and realty losses (gains) | 22,425 | (193) | 22,618 | NM | |||||||||||||||||||
| Taxes and insurance on leased properties | 3,182 | 4,187 | (1,005) | (24.0) | % | ||||||||||||||||||
| Other expenses | 3,022 | 2,733 | 289 | 10.6 | % | ||||||||||||||||||
| Total Expenses | 62,368 | 40,912 | 21,456 | 52.4 | % | ||||||||||||||||||
| Loss from equity method investment | (557) | (728) | 171 | (23.5) | % | ||||||||||||||||||
| Gains on sales of real estate, net | 19,941 | — | 19,941 | NM | |||||||||||||||||||
| Net income | 30,849 | 30849000 | 42,661 | (11,812) | (27.7) | % | |||||||||||||||||
| Less: net income attributable to noncontrolling interests | (35) | (66) | 31 | (47.0) | % | ||||||||||||||||||
| Net income attributable to common stockholders | $ | 30,814 | $ | 42,595 | $ | (11,781) | (27.7) | % | |||||||||||||||
| NM - not meaningful | |||||||||||||||||||||||
39
Financial highlights of the three months ended September 30, 2021, compared to the same period of 2020 were as follows:
•Rental income received from our tenants decreased $10.8 million, or 13.8%, primarily as a result of rent concessions granted for the third quarter of 2021 totaling $5.8 million, Holiday’s nonpayment of contractual rent of $4.8 million and property dispositions of approximately $3.8 million, net of new investments funded since September 2020.
•Interest income from mortgage and other notes increased $0.1 million, or 2.0%, primarily due to interest income on new loans funded since September 2020 offset by LCS principal repayments on a mortgage note of $61.2 million in 2021 and other paydowns.
•Interest expense decreased $0.2 million, or 1.4%, as a result of the convertible bond that matured in April 2021, the payoff of the HUD mortgages in the fourth quarter of 2020 and a net decrease in the borrowings on the unsecured credit facility.
•Non-cash stock-based compensation expense increased $0.5 million from the same period one year ago. The Company’s stock option grants in the first quarter of 2021 had an increase in estimated fair value of $9.00 per option share compared to the first quarter of 2020 as determined using the Black-Scholes valuation model primarily from the increased volatility in the Company’s common stock price caused by the COVID-19 pandemic. In addition, the Company granted 60,000 additional options in 2021 compared to 2020, of which 50,000 options relate to the two new directors added during 2020.
•Loan and realty losses (gains) increased $22.6 million primarily as a result of impairment charges on five real estate properties of $22.5 million in the third quarter of 2021 as described under the heading “Assets Held for Sale and Impairment of Real Estate” in Note 3 to the condensed consolidated financial statements.
•During 2021, we recorded $19.9 million in gains from the disposition of real estate assets as described under the heading “Asset Dispositions” in Note 3 to the condensed consolidated financial statements.
•The following table summarizes our real estate under lease to transitioning tenants ($ in thousands):
| Three Months Ended | |||||||||||||||||||||||
| September 30, | Period Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Rental income | |||||||||||||||||||||||
| SHOs leased to Chancellor Health Care | $ | — | $ | — | $ | — | NM | ||||||||||||||||
| SHO leased to Senior Living Communities | 56 | 38 | 18 | 47.4 | % | ||||||||||||||||||
| SHO leased to Discovery Senior Living | 45 | 19 | 26 | NM | |||||||||||||||||||
| SLC leased to Vitality Senior Living | — | 66 | (66) | (100.0) | % | ||||||||||||||||||
| ALF leased to BAKA Enterprises | 213 | 210 | 3 | 1.4 | % | ||||||||||||||||||
| Straight-line rent adjustments | 413 | 584 | (171) | (29.3) | % | ||||||||||||||||||
| Total Rental Income | 727 | 917 | (190) | (20.7) | % | ||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Depreciation | |||||||||||||||||||||||
| SHOs leased to Chancellor Health Care | 406 | 406 | — | — | % | ||||||||||||||||||
| SHO leased to Senior Living Communities | 153 | 153 | — | — | % | ||||||||||||||||||
| SHO leased to Discovery Senior Living | 171 | 171 | — | — | % | ||||||||||||||||||
| SLC leased to Vitality Senior Living | 158 | 158 | — | — | % | ||||||||||||||||||
| ALF leased to BAKA Enterprises | 135 | 135 | — | — | % | ||||||||||||||||||
| Total Depreciation | 1,023 | 1,023 | — | — | % | ||||||||||||||||||
| Legal | — | (6) | 6 | (100.0) | % | ||||||||||||||||||
| 1,023 | 1,017 | 6 | 0.6 | % | |||||||||||||||||||
| Net loss | $ | (296) | $ | (100) | $ | (196) | NM | ||||||||||||||||
40
The significant items affecting revenues and expenses are described below (in thousands):
| Nine Months Ended | |||||||||||||||||||||||
| September 30, | Period Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Rental income | |||||||||||||||||||||||
| EFCs leased to Senior Living Communities | $ | 33,838 | $ | 32,585 | 1,253 | 3.8 | % | ||||||||||||||||
| HOSP leased to Vizion Health | 1,178 | — | 1,178 | NM | |||||||||||||||||||
| SNF leased to Ignite Team Partners | 1,826 | 892 | 934 | NM | |||||||||||||||||||
| CCRC leased to Timber Ridge OpCo | 6,935 | 6,070 | 865 | 14.3 | % | ||||||||||||||||||
| ALFs leased to 41 Management | 2,237 | 1,354 | 883 | 65.2 | % | ||||||||||||||||||
| SHOs leased to Discovery Senior Living | 7,753 | 8,551 | (798) | (9.3) | % | ||||||||||||||||||
| ALFs leased to Chancellor Health Care | 3,924 | 4,480 | (556) | (12.4) | % | ||||||||||||||||||
| SHOs leased to Holiday Retirement | 13,250 | 18,922 | (5,672) | (30.0) | % | ||||||||||||||||||
| SHOs leased to Wingate Healthcare | 1,348 | 2,926 | (1,578) | (53.9) | % | ||||||||||||||||||
| ALF’s leased to Bickford Senior Living | 20,363 | 30,672 | (10,309) | (33.6) | % | ||||||||||||||||||
| Other new and existing leases | 86,112 | 85,397 | 715 | 0.8 | % | ||||||||||||||||||
| Current year disposals | 11,671 | 17,746 | (6,075) | (34.2) | % | ||||||||||||||||||
| 190,435 | 209,595 | (19,160) | (9.1) | % | |||||||||||||||||||
| Straight-line rent adjustments, new and existing leases | 12,189 | 15,481 | (3,292) | (21.3) | % | ||||||||||||||||||
| Escrow funds received from tenants for taxes and insurance | 7,519 | 7,190 | 329 | 4.6 | % | ||||||||||||||||||
| Total Rental Income | 210,143 | 232,266 | (22,123) | (9.5) | % | ||||||||||||||||||
| Interest income and other | |||||||||||||||||||||||
| Bickford construction loans | 2,959 | 2,000 | 959 | 48.0 | % | ||||||||||||||||||
| Vizion Health loan | 594 | — | 594 | NM | |||||||||||||||||||
| Life Care Services mortgages and construction loans | 8,097 | 8,324 | (227) | (2.7) | % | ||||||||||||||||||
| Senior Living Communities mortgage and other notes | 2,407 | 3,184 | (777) | (24.4) | % | ||||||||||||||||||
| Loan payoffs | — | 1,240 | (1,240) | (100.0) | % | ||||||||||||||||||
| Other new and existing mortgages and notes | 4,288 | 4,199 | 89 | 2.1 | % | ||||||||||||||||||
| Total Interest Income from Mortgage and Other Notes | 18,345 | 18,947 | (602) | (3.2) | % | ||||||||||||||||||
| Other income | 560 | 359 | 201 | 56.0 | % | ||||||||||||||||||
| Total Revenues | 229,048 | 251,572 | (22,524) | (9.0) | % | ||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Depreciation | |||||||||||||||||||||||
| SNF leased to Ignite Team Partners | 639 | 253 | 386 | NM | |||||||||||||||||||
| HOSP leased to Vizion Health | 347 | — | 347 | NM | |||||||||||||||||||
| ALFs leased to Bickford | 9,906 | 10,113 | (207) | (2.0) | % | ||||||||||||||||||
| SHOs leased to Holiday Retirement | 7,051 | 7,407 | (356) | (4.8) | % | ||||||||||||||||||
| Current year disposals and assets held for sale | 4,018 | 5,504 | (1,486) | (27.0) | % | ||||||||||||||||||
| Other new and existing assets | 39,538 | 38,849 | 689 | 1.8 | % | ||||||||||||||||||
| Total Depreciation | 61,499 | 62,126 | (627) | (1.0) | % | ||||||||||||||||||
| Interest | 38,528 | 40,589 | (2,061) | (5.1) | % | ||||||||||||||||||
| Non-cash stock-based compensation expense | 7,427 | 2,772 | 4,655 | NM | |||||||||||||||||||
| Loan and realty losses (gains) | 23,596 | 1,002 | 22,594 | NM | |||||||||||||||||||
| Taxes and insurance on leased properties | 7,519 | 7,190 | 329 | 4.6 | % | ||||||||||||||||||
| Other expenses | 8,718 | 8,734 | (16) | (0.2) | % | ||||||||||||||||||
| Total Expenses | 147,287 | 122,413 | 24,874 | 20.3 | % | ||||||||||||||||||
| Loss from equity method investment | (2,274) | (2,018) | (256) | 12.7 | % | ||||||||||||||||||
| Gains on sales of real estate, net | 26,426 | 21,007 | 5,419 | 25.8 | % | ||||||||||||||||||
| Loss on early retirement of debt | (451) | — | (451) | NM | |||||||||||||||||||
| Net income | 105,462 | 148,148 | (42,686) | (28.8) | % | ||||||||||||||||||
| Less: net income attributable to noncontrolling interest | (135) | (162) | 27 | (16.7) | % | ||||||||||||||||||
| Net income attributable to common stockholders | $ | 105,327 | $ | 147,986 | $ | (42,659) | (28.8) | % | |||||||||||||||
| NM - not meaningful | |||||||||||||||||||||||
41
Financial highlights of the nine months ended September 30, 2021, compared to the same period in 2020 were as follows:
•Rental income received from our tenants decreased $22.1 million, or 9.5%, primarily as a result of additional rent concessions granted for the first nine months of 2021 totaling $17.2 million, Holiday’s nonpayment of contractual rent of $4.8 million and property dispositions of approximately $6.1 million, net of new investments funded since September 2020.
•Interest income from mortgage and other notes decreased $0.6 million, or 3.2%, primarily due to net paydowns on loans.
•Interest expense decreased $2.1 million, or 5.1%, as a result of the convertible bond that matured in April 2021, the payoff of the HUD mortgages in the fourth quarter of 2020 and a net decrease in the borrowings on the unsecured credit facility.
•Non-cash stock-based compensation expense increased $4.7 million from the same period one year ago. The Company’s stock option grants in the first quarter of 2021 had an increase in estimated fair value of $9.00 per option share compared to the first quarter of 2020 as determined using the Black-Scholes valuation model primarily from the increased volatility in the Company’s common stock price caused by the COVID-19 pandemic. In addition, the Company granted 60,000 additional options in 2021 compared to 2020, of which 50,000 options relate to the two new directors added during 2020.
•Loan and realty losses (gains) increased $22.6 million primarily as a result of impairment charges on five real estate properties of $22.5 million in the third quarter of 2021 as described under the heading “Assets Held for Sale and Impairment of Real Estate” in Note 3 to the condensed consolidated financial statements.
•Gains on sales of real estate, net increased $5.4 million, or 25.8%, for the nine months ended September 30, 2021 as compared to the the same period in the prior year. For the nine months ended September 30, 2021, we recorded $26.4 million in gains from dispositions of real estate assets as described under “Asset Dispositions” in Note 3 to the condensed consolidated financial statements. For the nine months ended September 30, 2020, we disposed of a portfolio of eight assisted living properties to Brookdale Senior Living.
•Loss on early retirement of debt of $0.5 million for the nine months ended September 30, 2021, represents the remaining deferred financing costs expensed upon repayment of the $100.0 million term loan in January 2021.
The following table summarizes our real estate under lease to transitioning tenants ($ in thousands):
| Nine Months Ended | |||||||||||||||||||||||
| September 30, | Period Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Rental income | |||||||||||||||||||||||
| SHOs leased to Chancellor Health Care | $ | — | $ | 862 | $ | (862) | (100.0) | % | |||||||||||||||
| SHO leased to Senior Living Communities | 409 | 129 | 280 | NM | |||||||||||||||||||
| SHO leased to Discovery Senior Living | 134 | 50 | 84 | NM | |||||||||||||||||||
| SLC leased to Vitality Senior Living | 6 | 251 | (245) | (97.6) | % | ||||||||||||||||||
| ALF leased to BAKA Enterprises | 543 | 540 | 3 | 0.6 | % | ||||||||||||||||||
| Straight-line rent adjustments | 1,255 | 1,908 | (653) | (34.2) | % | ||||||||||||||||||
| Total Rental Income | 2,347 | 3,740 | (1,393) | (37.2) | % | ||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Depreciation | |||||||||||||||||||||||
| SHOs leased to Chancellor Health Care | 1,217 | 1,217 | — | — | % | ||||||||||||||||||
| SHO leased to Senior Living Communities | 459 | 459 | — | — | % | ||||||||||||||||||
| SHO leased to Discovery Senior Living | 513 | 513 | — | — | % | ||||||||||||||||||
| SLC leased to Vitality Senior Living | 474 | 472 | 2 | 0.4 | % | ||||||||||||||||||
| ALF leased to BAKA Enterprises | 404 | 404 | — | — | % | ||||||||||||||||||
| Total Depreciation | 3,067 | 3,065 | 2 | 0.1 | % | ||||||||||||||||||
| Legal | — | (16) | 16 | (100.0) | % | ||||||||||||||||||
| 3,067 | 3,049 | 18 | 0.6 | % | |||||||||||||||||||
| Net income (loss) | $ | (720) | $ | 691 | $ | (1,411) | NM | ||||||||||||||||
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Liquidity and Capital Resources
At September 30, 2021, we had $550.0 million available to draw on our revolving credit facility, $48.4 million in unrestricted cash and cash equivalents, and the potential to access the remaining $417.4 million through the issuance of common stock under the Company’s $500.0 million ATM equity program. In addition, the Company maintains an effective automatic shelf registration statement through which capital could be raised via the issuance of debt and or equity securities.
Sources and Uses of Funds
Our primary sources of cash include rent payments, principal and interest payments on mortgage and other notes receivable, proceeds from the sales of real property, net proceeds from offerings of equity securities and borrowings from our loans and revolving credit facility. Our primary uses of cash include debt service payments (both principal and interest), new investments in real estate and notes receivable, dividend distributions to our stockholders and general corporate overhead.
These sources and uses of cash are reflected in our Condensed Consolidated Statements of Cash Flows as summarized below ($ in thousands):
| Nine Months Ended September 30, | One Year Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Cash and cash equivalents and restricted cash, January 1 | $ | 46,343 | $ | 15,669 | $ | 30,674 | NM | ||||||||||||||||
| Net cash provided by operating activities | 157,501 | 176,527 | (19,026) | (10.8) | % | ||||||||||||||||||
| Net cash provided by (used in) investing activities | 163,358 | (83,418) | 246,776 | NM | |||||||||||||||||||
| Net cash used in financing activities | (317,007) | (57,664) | (259,343) | NM | |||||||||||||||||||
| Cash and cash equivalents and restricted cash, September 30 | $ | 50,195 | $ | 51,114 | $ | (919) | (1.8) | % | |||||||||||||||
Operating Activities – Net cash provided by operating activities for the nine months ended September 30, 2021, which includes new investments completed during 2021 and lease payment collections arising from escalators on existing leases and previously funded lease incentives, was impacted by $19.9 million in rent deferrals granted during the nine months ended September 30, 2021.
Investing Activities – Net cash used in investing activities for the nine months ended September 30, 2021 was comprised primarily of $104.8 million of investments in mortgage and other notes and renovations of real estate, offset by the proceeds from the sales of real estate of $203.1 million and the collection of principal on mortgage and other notes receivable of $64.5 million.
Financing Activities – Net cash used in financing activities for the nine months ended September 30, 2021 differs from the same period in 2020 primarily as a result of a $238.6 million decrease in net borrowings, inclusive of a $400.0 million senior note offering, a $43.1 million increase in proceeds from issuance of common shares and dividend payments which increased $3.6 million over the same period in 2020.
Debt Obligations
As of September 30, 2021, we had outstanding debt of $1.3 billion. Reference Note 6 to the condensed consolidated financial statements for additional information about our outstanding indebtedness. Also, reference “Item 3. Quantitative and Qualitative Disclosures About Market Risk” for more details on our indebtedness and the impact of interest rate risk.
Unsecured Bank Credit Facility - Our bank credit facility derives from the Credit Agreement dated as of August 3, 2017 (the “2017 Agreement”), and a Term Loan Agreement dated as of September 17, 2018 (the “2018 Agreement”). Together these agreements establish our unsecured $950.0 million bank credit facility, which consists of two term loans – $100.0 million maturing in August 2022 and $300.0 million maturing in September 2023 - and a $550.0 million revolving credit facility with an initial maturity in August 2021. In April 2021, the Company elected to exercise the extension option on the revolving credit facility available after payment of a 10 basis point extension fee totaling $0.6 million, extending the maturity of the revolver to August 2022. Some combination of cash on hand, proceeds from recent and planned asset sales and operating cash flows is expected to be used to pay off the $100.0 million term loan at its maturity in August 2022. We also plan to execute a multiple year extension of our revolving credit facility prior to the August 2022 maturity date at an amount at least equal to the current $550.0 million capacity. We have swap agreements to fix the interest rates on $400.0 million of term loans that expire in December 2021.
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Effective August 1, 2021, we exercised our one-time option included in our credit agreements to shift from the leverage-based interest schedule to the ratings-based interest schedule. This change potentially reduces the volatility of our interest costs on borrowings under the credit agreements during periods when our leverage may fluctuate higher. Our decision to move to the credit ratings-based interest schedule considered the relative costs under each interest schedule in addition to our desire to have a more stable interest cost if our leverage were to fluctuate.
As of September 30, 2021, the LIBOR spreads on the revolver and term loans were 120 bps and a blended 128 bps, respectively, based on our current debt ratings. The facility fee was 25 bps per annum. At September 30, 2021, no amount was outstanding under the revolving facility.
As of September 30, 2021, we had no outstanding variable rate debt exposed to interest rate risk through December 2021, at which time our remaining hedges expire. Our swaps and the financial instruments to which they relate are described in the table below, under the caption “Interest Rate Swap Agreements.” The current LIBOR spreads and facility fee reflect our ratings compliance based on the applicable margin for LIBOR loans at Level 4 in the Interest Rate Schedule provided below in summary format:
Interest Rate Schedule
| LIBOR Spread | |||||||||||||||||
| Level | Debt Ratings | Revolver | $300m Term Loan | $100m Term Loan | Revolver Facility Fee | ||||||||||||
| 1 | A-/A3 | 0.83% | 0.85% | 0.90% | 0.13% | ||||||||||||
| 2 | BBB+/Baa1 | 0.90% | 0.90% | 0.95% | 0.15% | ||||||||||||
| 3 | BBB/Baa2 | 1.00% | 1.00% | 1.10% | 0.20% | ||||||||||||
| 4 | BBB/Baa3 | 1.20% | 1.25% | 1.35% | 0.25% | ||||||||||||
| 5 | Lower than BBB/Baa3 | 1.55% | 1.65% | 1.75% | 0.30% | ||||||||||||
Beyond the applicable ratios detailed above, if our credit rating from at least two credit rating agencies is downgraded below “BBB-/Baa3” (not shown below Level 5) the debt under our credit agreements will be subject to defined increases in interest rates and fees.
The 2017 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 September 30, 2021, were within required limits. The calculation of our leverage ratio involves intermediate determinations of our “total indebtedness” and of our “total asset value,” as defined in the 2017 Agreement. The 2018 Agreement generally includes the same covenants and financial statement metrics required for compliance with terms of the 2017 Agreement.
Senior Notes Offering - On January 26, 2021, we issued $400.0 million aggregate principal amount of 3.00% senior notes that mature on February 1, 2031 and pay interest semi-annually (the “2031 Senior Notes”). The 2031 Senior Notes were sold at an issue price of 99.196% of face value before the underwriters’ discount. Our net proceeds from the 2031 Senior Notes offering, after deducting underwriting discounts and expenses, were approximately $392.3 million. We used the net proceeds from the 2031 Senior Notes offering to repay our $100.0 million term loan that was entered into in July 2020 and reduce borrowings outstanding under our revolving credit facility. The $100.0 million 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.
We remain in compliance with all debt covenants under the unsecured bank credit facility, 2031 Senior Notes and other debt agreements.
Convertible Senior Notes - On April 1, 2021, our 3.25% senior unsecured convertible notes (the “Convertible Notes”) matured. The Company paid $67.1 million, including accrued interest of $1.0 million and a $6.1 million conversion premium, to retire the Convertible Notes. The conversion premium was recorded as a reduction of “Capital in excess of par value” in our Condensed Consolidated Balance Sheet as of September 30, 2021.
Debt Maturities - Reference Note 6 to the condensed consolidated financial statements for more information on our debt maturities.
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Credit Ratings - Moody's Investors Services (“Moody's”) announced on November 5, 2020 that it assigned an investment grade issuer credit rating and a senior unsecured debt rating of ‘Baa3’ with a “Negative” outlook to the Company. Moody’s released a credit opinion on October 31, 2021 which affirmed the rating and outlook for the Company. Both Fitch and S&P Global announced in November 2019 a public issuer credit rating of BBB- with an outlook of “Stable.” Fitch confirmed its rating most recently on September 30, 2020 and S&P Global confirmed its rating on November 4, 2020. Our unsecured private placement term loan 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 outlook or downgrade in our credit ratings from the rating agencies could negatively impact our costs of borrowings.
Reference Rate Reform - On March 5, 2021, the Financial Conduct Authority (“FCA”) announced that USD LIBOR will no longer be published after June 30, 2023. This announcement has several implications, including setting the spread that may be used to automatically convert contracts from LIBOR to the Secured Overnight Financing Rate ("SOFR"). Additionally, banking regulators are encouraging banks to discontinue new LIBOR debt issuances by December 31, 2021. We may choose not to hedge any more of our LIBOR positions for the relatively short duration remaining during which LIBOR may be referenced.
The Company anticipates that LIBOR will continue to be available at least until June 30, 2023. Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form. Upon the issuance of the 2031 Senior Notes, the Company has reduced its LIBOR-based financial instruments.
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 our balance sheet gives us a competitive advantage when accessing debt markets.
We calculate our fixed charge coverage ratio as approximately 5.6x for the nine months ended September 30, 2021 (see our discussion under the heading Adjusted EBITDA including a reconciliation to our net income). Giving effect to significant acquisitions, financings, disposals and payoffs on an annualized basis, our consolidated net debt to Annualized Adjusted EBITDA ratio is approximately 4.8x for the three months ended September 30, 2021 ($ in thousands):
| Consolidated Total Debt | $ | 1,285,287 | |||
| Less: cash and cash equivalents | (48,393) | ||||
| Consolidated Net Debt | $ | 1,236,894 | |||
| Adjusted EBITDA | $ | 66,364 | |||
| Annualizing Adjustment | 199,092 | ||||
| Annualized impact of recent investments, disposals and payoffs | (7,915) | ||||
| $ | 257,541 | ||||
| Consolidated Net Debt to Annualized Adjusted EBITDA | 4.8x | ||||
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Interest Rate Swap Agreements
To mitigate our exposure to interest rate risk, we have the following interest rate swap contracts in place to hedge against floating rates on our bank term loans as of September 30, 2021 ($ in thousands):
| Date Entered | Maturity Date | Fixed Rate | Rate Index | Notional Amount | Fair Value (Liability) | |||||||||||||||||||||||||||
| March 2019 | December 2021 | 2.22% | 1-month LIBOR | $ | 100,000 | $ | (533) | |||||||||||||||||||||||||
| March 2019 | December 2021 | 2.21% | 1-month LIBOR | $ | 100,000 | $ | (537) | |||||||||||||||||||||||||
| June 2019 | December 2021 | 1.61% | 1-month LIBOR | $ | 150,000 | $ | (567) | |||||||||||||||||||||||||
| June 2019 | December 2021 | 1.63% | 1-month LIBOR | $ | 50,000 | $ | (191) | |||||||||||||||||||||||||
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 (loss), 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.
Supplemental Guarantor Financial Information
The Company’s $950.0 million bank credit facility, unsecured private placement term loans due January 2023 through January 2027 with an aggregate principal amount of $400.0 million, and 2031 Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by each of the Company’s subsidiaries, except for certain excluded subsidiaries (“Guarantors”). The Guarantors are either owned, controlled or are affiliates of the Company.
The following tables present summarized financial information for the Company and the Guarantors, on a combined basis after eliminating (i) intercompany transactions and balances among the guarantor entities and (ii) equity in earnings from, and any investments in, any subsidiary that is a non-guarantor ($ in thousands):
| As of | ||||||||
| September 30, 2021 | ||||||||
| Real estate properties, net | $ | 2,069,802 | ||||||
| Other assets, net | 449,453 | |||||||
| Note receivable due from non-guarantor subsidiary | 81,383 | |||||||
| Totals assets | $ | 2,600,638 | ||||||
| Debt | $ | 1,190,787 | ||||||
| Other liabilities | 75,271 | |||||||
| Total liabilities | $ | 1,266,058 | ||||||
| Noncontrolling interest | $ | 442 | ||||||
| Nine Months Ended | ||||||||
| September 30, 2021 | ||||||||
| Revenues | $ | 202,825 | ||||||
| Interest revenue on note due from non-guarantor subsidiary | 3,484 | |||||||
| Expenses | (135,525) | |||||||
| Loss from equity method investee | (2,274) | |||||||
| Gains on sales of real estate | 26,426 | |||||||
| Loss on early retirement of debt | (451) | |||||||
| Net income | $ | 94,485 | ||||||
| Net income attributable to NHI and the subsidiary guarantors | $ | 94,350 | ||||||
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Equity
At September 30, 2021 we had 45,850,599 shares of common stock outstanding with a market value of $2.5 billion. Equity on our Condensed Consolidated Balance Sheet totaled $1.5 billion.
Dividends - Our Board of Directors approves a regular quarterly dividend which is reflective of expected taxable income on a recurring basis. Taxable income is determined in accordance with the Internal Revenue Code and differs from net income for financial statements purposes determined in accordance with U.S. generally accepted accounting principles. Our Board of Directors has historically directed the Company toward 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 make new investments that meet our underwriting criteria and where the spreads over our cost of equity and debt capital on a leverage neutral basis will generate sufficient returns to our stockholders.
We intend to comply with REIT dividend requirements that we distribute at least 90% of our annual taxable income for the year ending December 31, 2021 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 IRS Code Sec. 857(b)(8).
The following table summarizes dividends declared by the Board of Directors or paid during the nine months ended September 30, 2021 and 2020:
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||
| Date of Declaration | Date of Record | Date Paid/Payable | Quarterly Dividend | |||||||||||||||||
| December 15, 2020 | December 31, 2020 | January 29, 2021 | $1.1025 | |||||||||||||||||
| March 12, 2021 | March 31, 2021 | May 7, 2021 | $1.1025 | |||||||||||||||||
| June 3, 2021 | June 30, 2021 | August 6, 2021 | $0.90 | |||||||||||||||||
| August 6, 2021 | September 30, 2021 | November 5, 2021 | $0.90 | |||||||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||
| Date of Declaration | Date of Record | Date Paid/Payable | Quarterly Dividend | |||||||||||||||||
| November 7, 2019 | December 31, 2019 | January 31, 2020 | $1.05 | |||||||||||||||||
| February 19, 2020 | March 31, 2020 | May 8, 2020 | $1.1025 | |||||||||||||||||
| June 15, 2020 | June 30, 2020 | August 7, 2020 | $1.1025 | |||||||||||||||||
| September 14, 2020 | September 30, 2020 | November 6, 2020 | $1.1025 | |||||||||||||||||
On November 5, 2021, the Board of Directors declared a $0.90 per share dividend to common stockholders of record on December 31, 2021, payable on January 31, 2022.
At-the-Market (ATM) Equity Program - We maintain an ATM program which allows us to sell our common stock directly into the market. During the nine months ended September 30, 2021, we sold 661,951 common shares through the ATM program with an average price of $73.62, resulting in net proceeds of approximately $47.9 million. We intend to use the proceeds from any further activity under the ATM program for general corporate purposes, which may include future acquisitions and repayment of indebtedness, including borrowings under our credit facility.
Shelf Registration Statement - We have an 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 a prospectus supplement or other offering materials, at the time of offering. Our shelf registration statement expires March 2023.
47
Off Balance Sheet Arrangements
As part of the Timber Ridge transaction in January 2020, we acquired the property subject to trust liens previously granted to residents of Timber Ridge. Beginning in 2008, the initial residents of Timber Ridge executed loans to the then owner/operators which were backed by a Deed of Trust and Indenture of Trust (the “Deed and Indenture”) for the benefit of the trustee (now Wilmington Trust, N.A., “Trustee”) on behalf of all the residents who made loans to the owner/operator in accordance with a resident agreement. The Deed and Indenture granted a security interest in the Timber Ridge property to secure the loans made by the residents of the property. Subsequent to these early transactions, the repayment obligation with respect to “new” loans made to the owner/operator was no longer secured by the Timber Ridge property under the Deed and Indenture.
Our entry into the Timber Ridge transaction involved the separation of the existing owner/operator configuration into property and operating companies. Accomplishing the split required the allocation of assets and liabilities of the previously unified entity. Timber Ridge PropCo acquired the Timber Ridge property, subject to the resident mortgages secured by the Deed and Indenture. Accordingly, the remaining outstanding “old” loans made by the residents are still secured by a security interest in the Timber Ridge property. The trustee for all of the residents who made “old” loans in accordance with the resident agreements, entered into a subordination agreement concurrent with our acquisition, pursuant to which the Trustee acknowledged and confirmed that the security interests created under the Deed and Indenture were subordinate to any security interests granted in connection with the loan made by NHI to Timber Ridge PropCo.
The balance secured by the Deed and Indenture is $15.5 million at September 30, 2021. By terms of the resident loan assumption agreement, during the term of the lease (seven years with two renewal options), Timber Ridge OpCo is to indemnify Timber Ridge PropCo for any repayment by Timber Ridge PropCo of these liabilities under the guarantee. As a result of the subordination agreement mentioned above and Timber Ridge OpCo’s indemnity guarantee, no liability has been recorded for the resident loan obligation.
As described in Note 2 to the condensed consolidated financial statements, our leases, mortgages and other notes receivable with certain unconsolidated entities represent variable interests in those enterprises. However, because we do not control these entities, nor do we have any role in their day-to-day management, we are not their primary beneficiary and therefore do not consolidate their financial statements. Except as discussed in our Annual Report on Form 10-K for the year ended December 31, 2020, under Contractual Obligations and Contingent Liabilities, we have no further material obligations arising from our transactions with these entities, and we believe our maximum exposure to loss at September 30, 2021, due to this involvement would be limited to our contractual commitments and contingent liabilities and the amount of our current investments with them, as detailed further in the notes to the condensed consolidated financial statements. As of September 30, 2021, we furnished no direct support to any of these entities.
Contractual Obligations and Contingent Liabilities
As of September 30, 2021, our contractual payment obligations were as follows ($ in thousands):
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||||||||||||
Debt, including interest1 | $ | 1,391,198 | $ | 145,330 | $ | 515,067 | $ | 232,506 | $ | 498,295 | |||||||||||||||||||
| Development commitments | 9,699 | 9,699 | — | — | — | ||||||||||||||||||||||||
| Loan commitments | 91,065 | 43,173 | 47,892 | — | — | ||||||||||||||||||||||||
| $ | 1,491,962 | $ | 198,202 | $ | 562,959 | $ | 232,506 | $ | 498,295 | ||||||||||||||||||||
1 Interest is calculated based on the weighted average interest rate of outstanding debt balances as of September 30, 2021. The calculation also includes a facility fee of 0.20%.
Commitments and Contingencies
The following tables summarize information as of September 30, 2021 related to our outstanding commitments and contingencies which are more fully described in the notes to the condensed consolidated financial statements ($ in thousands):
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| Asset Class | Type | Total | Funded | Remaining | |||||||||||||||||||||||||
| Loan Commitments: | |||||||||||||||||||||||||||||
| LCS Sagewood Note A | SHO | Construction | $ | 118,800 | $ | (109,220) | $ | 9,580 | |||||||||||||||||||||
| Bickford Senior Living | SHO | Construction | 42,900 | (34,791) | 8,109 | ||||||||||||||||||||||||
| 41 Management | SHO | Construction | 22,200 | (14,405) | 7,795 | ||||||||||||||||||||||||
| Senior Living Communities | SHO | Revolving Credit | 20,000 | (9,909) | 10,091 | ||||||||||||||||||||||||
| 41 Management | SHO | Construction | 10,800 | (9,071) | 1,729 | ||||||||||||||||||||||||
| Timber Ridge OpCo | SHO | Working Capital | 5,000 | — | 5,000 | ||||||||||||||||||||||||
| Watermark Retirement | SHO | Working Capital | 5,000 | (4,131) | 869 | ||||||||||||||||||||||||
| Montecito Medical Real Estate | MOB | Mezzanine Loan | 50,000 | (2,108) | 47,892 | ||||||||||||||||||||||||
| $ | 274,700 | $ | (183,635) | $ | 91,065 | ||||||||||||||||||||||||
See Note 7 to our condensed consolidated financial statements for further details of our loan commitments. As provided above, loans funded do not include the effects of discounts or commitment fees.
The credit loss liability for unfunded loan commitments was $1.2 million as of September 30, 2021 and is estimated using the same methodology as for our funded mortgage and other notes receivable based on the estimated amount that we expect to fund.
| Asset Class | Type | Total | Funded | Remaining | |||||||||||||||||||||||||
| Development Commitments: | |||||||||||||||||||||||||||||
| Woodland Village | SHO | Renovation | $ | 7,515 | $ | (7,425) | $ | 90 | |||||||||||||||||||||
| Senior Living Communities | SHO | Renovation | 9,930 | (9,930) | — | ||||||||||||||||||||||||
| Discovery Senior Living | SHO | Renovation | 900 | (900) | — | ||||||||||||||||||||||||
| Watermark Retirement | SHO | Renovation | 6,500 | (3,000) | 3,500 | ||||||||||||||||||||||||
| Navion | SHO | Renovation | 3,650 | — | 3,650 | ||||||||||||||||||||||||
| Other | SHO | Various | 2,850 | (391) | 2,459 | ||||||||||||||||||||||||
| $ | 31,345 | $ | (21,646) | $ | 9,699 | ||||||||||||||||||||||||
In addition to the commitments listed above, Discovery PropCo has committed to Discovery for funding up to $2.0 million toward the purchase of condominium units located at one of the facilities, of which $1.0 million has been funded as of September 30, 2021.
| Asset Class | Total | Funded | Remaining | ||||||||||||||||||||
| Contingencies (Lease Inducements): | |||||||||||||||||||||||
| Timber Ridge OpCo | SHO | $ | 10,000 | $ | — | $ | 10,000 | ||||||||||||||||
| Comfort Care Senior Living | SHO | 6,000 | — | 6,000 | |||||||||||||||||||
| Wingate Healthcare | SHO | 5,000 | — | 5,000 | |||||||||||||||||||
| Navion Senior Solutions | SHO | 4,850 | (1,500) | 3,350 | |||||||||||||||||||
| Discovery Senior Living | SHO | 4,000 | — | 4,000 | |||||||||||||||||||
| Ignite Medical Resorts | SNF | 2,000 | — | 2,000 | |||||||||||||||||||
| Sante Partners | SHO | 2,000 | — | 2,000 | |||||||||||||||||||
| $ | 33,850 | $ | (1,500) | $ | 32,350 | ||||||||||||||||||
We adjust rental income for the amortization of lease inducements paid to our tenants.
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
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resolution of all such pending proceedings will have no direct material adverse effect on our financial condition, results of operations or cash flows.
In June 2018, East Lake Capital Management LLC and certain related entities, including Regency (for three assisted living facilities in Tennessee, Indiana and North Carolina) (“East Lake”), filed suit against NHI in Texas seeking injunctive and declaratory relief and unspecified monetary damages. NHI responded with counterclaims and filed motions requesting the immediate appointment of a receiver and for pre-judgment possession. Resulting from these claims and counterclaims, on December 6, 2018, the parties entered into an agreement resulting in Regency vacating the facilities in December 2018. On September 22, 2021, all parties entered into an agreement whereby NHI is entitled to receive $0.4 million, due in the fourth quarter of 2021, to settle all claims for this matter. We will recognize the settlement amount as other income when it is received. In addition, we had approximately $0.3 million in liabilities recorded related to the facilities subject to the litigation that was reversed and recognized in “Interest and other income” during the third quarter of 2021.
FFO & FAD
These supplemental performance measures may not be comparable to similarly titled measures used by other REITs. Consequently, our Funds From Operations (“FFO”), Normalized FFO 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 measures, caution should be exercised when comparing our FFO, Normalized FFO and Normalized FAD to that of other REITs. These measures do not represent cash generated from operating activities in accordance with generally accepted accounting principles (“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 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. Beginning in the first quarter of 2021, the Company no longer presented Adjusted Funds From Operations as a supplemental measure of operating performance.
Funds From Operations - FFO
Our FFO per diluted common share for the nine months ended September 30, 2021 decreased $0.67 or 15.9% over the same period in 2020 due primarily to the effects of the COVID-19 pandemic, partially offset by new investments completed since September 2020. FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) and applied by us, is net income (computed in accordance with GAAP), excluding gains (or losses) from sales of real estate property, impairments of real estate, and real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures, if any. The Company’s computation of 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 FFO assumes the exercise of stock options and other potentially dilutive securities.
Our Normalized FFO per diluted common share for the nine months ended September 30, 2021 decreased $0.68 or 16.1% over the same period in 2020 due primarily to the effects of the COVID-19 pandemic, partially offset by new investments completed since September 2020. 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 assets and liabilities, and recoveries of previous write-downs.
FFO and Normalized 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 Available for Distribution - FAD
Our Normalized FAD for the nine months ended September 30, 2021 decreased $17.2 million or 9.50% over the same period in 2020 due primarily to the effects of the COVID-19 pandemic, partially offset by new investments completed since September 2020. In addition to the adjustments included in the calculation of Normalized FFO, Normalized FAD excludes the impact of any
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straight-line lease revenue, amortization of the original issue discount on our senior unsecured notes, amortization of debt issuance costs, non-cash stock based compensation, as well as certain non-cash items related to our equity method investment.
Normalized FAD is an important supplemental performance measure for a REIT. GAAP requires a lessor to recognize contractual lease payments into income on a straight-line basis over the expected term of the lease. This straight-line adjustment has the effect of reporting lease income that is significantly more or less than the contractual cash flows received pursuant to the terms of the lease agreement. GAAP also requires any discount or premium related to indebtedness and debt issuance costs to be amortized as non-cash adjustments to earnings. We also adjust Normalized FAD for the net change in our allowance for expected credit losses, non-cash stock based compensation as well as certain non-cash items related to our equity method investments such as straight-line lease expense and amortization of purchase accounting adjustments. Normalized FAD is an important supplemental measure of liquidity for a REIT as a useful indicator of the ability to distribute dividends to stockholders.
The following table reconciles net income, the most directly comparable GAAP metric, to FFO, Normalized FFO and Normalized FAD and is presented for both basic and diluted weighted average common shares ($ in thousands, except share and per share amounts):
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| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income attributable to common stockholders | $ | 30,814 | $ | 42,595 | $ | 105,327 | $ | 147,986 | |||||||||||||||
| Elimination of certain non-cash items in net income: | |||||||||||||||||||||||
| Depreciation | 20,035 | 20,836 | 61,499 | 62,126 | |||||||||||||||||||
| Depreciation related to noncontrolling interests | (210) | (210) | (629) | (567) | |||||||||||||||||||
| Gains on sales of real estate, net | (19,941) | — | (26,426) | (21,007) | |||||||||||||||||||
| Impairment of real estate | 22,462 | — | 22,462 | — | |||||||||||||||||||
| NAREIT FFO attributable to common stockholders | 53,160 | 63,221 | 162,233 | 188,538 | |||||||||||||||||||
| Loss on early retirement of debt | — | — | 451 | — | |||||||||||||||||||
| Non-cash write-off of straight-line rent receivable | — | — | — | 380 | |||||||||||||||||||
| Recognition of unamortized note receivable commitment fees | (375) | — | (375) | — | |||||||||||||||||||
| Litigation settlement | (266) | — | (266) | — | |||||||||||||||||||
| Normalized FFO attributable to common stockholders | 52,519 | 63,221 | 162,043 | 188,918 | |||||||||||||||||||
| Straight-line lease revenue, net | (3,798) | (5,086) | (12,189) | (15,861) | |||||||||||||||||||
| Straight-line lease revenue, net, related to noncontrolling interests | 20 | 29 | 65 | 81 | |||||||||||||||||||
| Amortization of lease incentives | 252 | 250 | 774 | 735 | |||||||||||||||||||
| Amortization of original issue discount | 80 | 102 | 214 | 303 | |||||||||||||||||||
| Amortization of debt issuance costs | 556 | 871 | 1,849 | 2,156 | |||||||||||||||||||
| Amortization related to equity method investment | 268 | 537 | 1,324 | 535 | |||||||||||||||||||
| Straight-line lease expense related to equity method investment | 11 | 31 | 56 | 82 | |||||||||||||||||||
| Note receivable credit loss expense | (37) | (193) | 1,134 | 1,002 | |||||||||||||||||||
| Non-cash stock-based compensation | 989 | 457 | 7,427 | 2,772 | |||||||||||||||||||
| Equity method investment capital expenditures | (105) | (105) | (315) | (315) | |||||||||||||||||||
| Equity method investment non-refundable fees received | 418 | 156 | 1,179 | 330 | |||||||||||||||||||
| Normalized FAD attributable to common stockholders | $ | 51,173 | $ | 60,270 | $ | 163,561 | $ | 180,738 | |||||||||||||||
| BASIC | |||||||||||||||||||||||
| Weighted average common shares outstanding | 45,850,599 | 44,661,650 | 45,668,762 | 44,641,748 | |||||||||||||||||||
| NAREIT FFO attributable to common stockholders per share | $ | 1.16 | $ | 1.42 | $ | 3.55 | $ | 4.22 | |||||||||||||||
| Normalized FFO attributable to common stockholders per share | $ | 1.15 | $ | 1.42 | $ | 3.55 | $ | 4.23 | |||||||||||||||
| DILUTED | |||||||||||||||||||||||
| Weighted average common shares outstanding | 45,851,424 | 44,662,403 | 45,689,091 | 44,643,514 | |||||||||||||||||||
| NAREIT FFO attributable to common stockholders per share | $ | 1.16 | $ | 1.42 | $ | 3.55 | $ | 4.22 | |||||||||||||||
| Normalized FFO attributable to common stockholders per share | $ | 1.15 | $ | 1.42 | $ | 3.55 | $ | 4.23 | |||||||||||||||
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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, 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. 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):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income | $ | 30,849 | $ | 42,661 | $ | 105,462 | $ | 148,148 | |||||||||||||||
| Interest expense | 12,715 | 12,892 | 38,528 | 40,589 | |||||||||||||||||||
| Franchise, excise and other taxes | 244 | 164 | 709 | 553 | |||||||||||||||||||
| Depreciation | 20,035 | 20,836 | 61,499 | 62,126 | |||||||||||||||||||
| NHI’s share of EBITDA adjustments for unconsolidated entities | 678 | 652 | 2,164 | 652 | |||||||||||||||||||
| Note receivable credit loss expense | (37) | (193) | 1,134 | 1,002 | |||||||||||||||||||
| Gains on sales of real estate, net | (19,941) | — | (26,426) | (21,007) | |||||||||||||||||||
| Loss on early retirement of debt | — | — | 451 | — | |||||||||||||||||||
| Impairment of real estate | 22,462 | — | 22,462 | — | |||||||||||||||||||
| Recognition of unamortized note receivable commitment fees | (375) | — | (375) | — | |||||||||||||||||||
| Litigation settlement | (266) | — | -266000 | (266) | -266000 | — | |||||||||||||||||
| Non-cash write-off of straight-line rent receivable | — | — | — | 380 | |||||||||||||||||||
| Adjusted EBITDA | $ | 66,364 | $ | 77,012 | $ | 205,342 | $ | 232,443 | |||||||||||||||
| Interest expense at contractual rates | $ | 10,234 | $ | 10,129 | $ | 31,055 | $ | 33,701 | |||||||||||||||
| Interest rate swap payments, net | 1,851 | 1,778 | 5,448 | 4,519 | |||||||||||||||||||
| Principal payments | 92 | 308 | 276 | 917 | |||||||||||||||||||
| Fixed Charges | $ | 12,177 | $ | 12,215 | $ | 36,779 | $ | 39,137 | |||||||||||||||
| Fixed Charge Coverage | 5.4x | 6.3x | 5.6x | 5.9x | |||||||||||||||||||
For all periods presented, EBITDA reflects GAAP interest expense, which excludes amounts capitalized during the period.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
At September 30, 2021, we were exposed to market risks related to fluctuations in interest rates on on our mortgage and other notes receivable (excludes $400.0 million of variable-rate debt that has been hedged through interest-rate swap contracts). The unused portion ($550.0 million at September 30, 2021) of our revolving credit facility, should it be drawn upon, is subject to variable rates.
Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt and loans receivable unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. Conversely, changes in interest rates on variable rate debt and investments would change our future earnings and cash flows, but not significantly affect the fair value of those instruments. As of September 30, 2021, we had no outstanding variable rate debt exposed to interest rate risk through December 2021, at which time our remaining hedges expire.
We use derivative financial instruments in the normal course of business to mitigate interest rate risk. We do not use derivative financial instruments for speculative purposes. Derivatives are included in the Condensed Consolidated Balance Sheets at their fair value. We may engage in hedging strategies to manage our exposure to market risks in the future, depending on an analysis of the interest rate environment and the costs and risks of such strategies.
The following table sets forth certain information with respect to our debt ($ in thousands):
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
Balance1 | % of total | Rate2 | Balance1 | % of total | Rate2 | ||||||||||||||||||||||||||||||
| Fixed rate: | |||||||||||||||||||||||||||||||||||
| Convertible senior notes - unsecured | $ | — | — | % | — | % | $ | 60,000 | 4.0 | % | 3.25 | % | |||||||||||||||||||||||
| Private placement term loans - unsecured | 400,000 | 30.9 | % | 4.15 | % | 400,000 | 26.6 | % | 4.15 | % | |||||||||||||||||||||||||
| Senior notes - unsecured | 400,000 | 30.9 | % | 3.00 | % | — | — | % | — | % | |||||||||||||||||||||||||
| Bank term loans - unsecured | 400,000 | 30.9 | % | 3.23 | % | 340,000 | 22.6 | % | 3.27 | % | |||||||||||||||||||||||||
| Fannie Mae term loans - secured, non-recourse | 95,077 | 7.3 | % | 3.93 | % | 95,354 | 6.3 | % | 3.94 | % | |||||||||||||||||||||||||
| Revolving credit facility - unsecured | — | — | % | — | % | 60,000 | 4.0 | % | 2.81 | % | |||||||||||||||||||||||||
| Variable rate: | |||||||||||||||||||||||||||||||||||
| Bank term loans - unsecured | — | — | % | 1.11 | % | 310,000 | 20.7 | % | 1.77 | % | |||||||||||||||||||||||||
| Revolving credit facility - unsecured | — | — | % | — | % | 238,000 | 15.8 | % | 1.34 | % | |||||||||||||||||||||||||
| $ | 1,295,077 | 100.0 | % | 3.50 | % | $ | 1,503,354 | 100.0 | % | 2.91 | % | ||||||||||||||||||||||||
1 Differs from carrying amount due to unamortized discounts and loan costs. | |||||||||||||||||||||||||||||||||||
2 Total is weighted average rate | |||||||||||||||||||||||||||||||||||
The unsecured bank term loans in the table above reflect the effect of $400.0 million notional amount interest rate swaps with maturities in December 2021 that effectively convert variable rate debt to fixed rate debt. These loans bear interest at LIBOR plus a spread, currently a blended 128 bps, based on our ratings-based LIBOR margin.
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To highlight the sensitivity of our fixed rate debt to changes in interest rates, the following summary shows the effects on fair value (“FV”) assuming a parallel shift of 50 bps in market interest rates for a contract with similar maturities as of September 30, 2021 ($ in thousands):
| Balance | Fair Value1 | FV reflecting change in interest rates | |||||||||||||||||||||
| Fixed rate: | -50 bps | +50 bps | |||||||||||||||||||||
| Private placement term loans - unsecured | $ | 400,000 | $ | 406,430 | $ | 412,319 | $ | 400,653 | |||||||||||||||
| Senior notes | 400,000 | 375,190 | 390,961 | 360,115 | |||||||||||||||||||
| Fannie Mae loans | 95,077 | 95,297 | 96,889 | 93,733 | |||||||||||||||||||
1 The change in fair value of our fixed rate debt was due primarily to the overall change in interest rates. | |||||||||||||||||||||||
At September 30, 2021, the fair value of our mortgage and other notes receivable, discounted for estimated changes in the risk-free rate, was approximately $301.1 million. A 50 basis-point increase in market rates would decrease the estimated fair value of our mortgage and other loans by approximately $7.2 million, while a 50 basis point decrease in such rates would increase their estimated fair value by approximately $3.9 million.
Common Stock Price Volatility
Our compensation committee has historically granted stock incentive awards to employees in the form of stock options. Compensation expense is recognized for stock options 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 and the market value of our publicly traded common stock on the date of grant. This expense is reflected in the “General and administrative” expense line item in our Condensed Consolidated Statements of Income. In addition to the market value of our common stock, one of the inputs into this model that significantly impacts the fair value of the options is the expected volatility of our common stock over the estimated life of the option. We estimate expected volatility by using the most recent historical experience.
Since the COVID-19 pandemic began, our common stock has experienced periods of elevated volatility in its trading. The stock option grants in 2021 included an increase in expected volatility in the estimation of fair value of stock options that resulted in a higher fair value and related stock-based compensation expense for these awards when compared to prior years.
The fair value of the stock option awards granted on February 25, 2021 was $14.54, using the closing market value of the common stock of $69.20 on the grant date and an estimate of expected volatility of 48.1%. This fair value is $9.00 per share greater than the weighted-average fair value of stock options granted in the first quarter of 2020 which has increased the amount of stock-based compensation expense that will be recognized for the current year grant compared to prior year. See Note 9 to the condensed consolidated financial statements for more discussion.
Item 4. Controls and Procedures.
Evaluation of Disclosure Control and Procedures. As of September 30, 2021, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of management’s disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) to ensure information required to be disclosed in our filings under the Securities and Exchange Act of 1934, is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms; and (ii) accumulated and communicated to our management, including our CEO and our CFO, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving desired control objectives, and management is necessarily required to apply its judgment when evaluating the cost-benefit relationship of potential controls and procedures. Based upon the evaluation, the CEO and CFO concluded that the design and operation of these disclosure controls and procedures were effective as of September 30, 2021.
There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting identified in management’s evaluation during the nine months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Our health care 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 our facilities, management believes that the ultimate resolution of all such pending proceedings will have no direct material adverse effect on our financial condition, results of operations or cash flows.
In June 2018, East Lake Capital Management LLC and certain related entities, including Regency (for three assisted living facilities in Tennessee, Indiana and North Carolina) (“East Lake”), filed suit against NHI in Texas seeking injunctive and declaratory relief and unspecified monetary damages. NHI responded with counterclaims and filed motions requesting the immediate appointment of a receiver and for pre-judgment possession. Resulting from these claims and counterclaims, on December 6, 2018, the parties entered into an agreement resulting in Regency vacating the facilities in December 2018. On September 22, 2021, all parties entered into an agreement whereby NHI is entitled to receive $0.4 million, due in the fourth quarter of 2021, to settle all claims for this matter. We will recognize the settlement amount as other income when it is received. In addition, we had approximately $0.3 million in liabilities recorded related to the facilities subject to the litigation that was reversed and recognized in “Interest and other income” during the third quarter of 2021.
Item 1A. Risk Factors.
During the nine months ended September 30, 2021, there were no material changes to the risk factors that were disclosed in Item 1A of National Health Investors, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2020.
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Item 6. Exhibits.
| Exhibit No. | Description | ||||
| 3.1 | Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Form S-3 Registration Statement No. 333-192322) | ||||
| 3.2 | Articles of Amendment to Articles of Incorporation of National Health Investors, Inc. dated as of June 8, 1994, (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-3 Registration Statement No. 333-194653 of National Health Investors, Inc.) | ||||
| 3.3 | Amendment to Articles of Incorporation (incorporated by reference to Exhibit A to the Company’s Definitive Proxy Statement filed March 21, 2009) | ||||
| 3.4 | Amendment to Articles of Incorporation approved by shareholders on May 2, 2014 (incorporated by reference to Exhibit 3.3 to the Company’s Form 10-Q filed August 4, 2014) | ||||
| 3.5 | Restated Bylaws (incorporated by reference to Exhibit 3.3 to the Company’s Form 10-K filed February 15, 2013) | ||||
| 3.6 | Amendment No. 1 to Restated Bylaws dated February 14, 2014 (incorporated by reference to Exhibit 3.3 to the Company’s Form 10-K filed February 14, 2014) | ||||
| 3.7 | Amendment to Articles of Incorporation approved by shareholders on May 6, 2020 (incorporated by reference to Exhibit 3.6 to the Company’s Form 10-Q filed August 10, 2020) | ||||
| 4.1 | Form of Common Stock Certificate (incorporated by reference to Exhibit 39 to Form S-11 Registration Statement No. 33-41863, filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T) | ||||
| 4.2 | Indenture, dated as of March 25, 2014, between National Health Investors, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed March 31, 2014) | ||||
| 4.3 | First Supplemental Indenture, dated as of March 25, 2014, to the Indenture, dated as of March 25, 2014, between National Health Investors, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed March 31, 2014) | ||||
| 4.4 | Indenture dated as of January 26, 2021, among National Health Investors, Inc. and Regions Bank, as trustee (incorporated by reference to Exhibit 4.1 to Form 8-K dated January 26, 2021) | ||||
| 4.5 | First Supplemental Indenture dated as of January 26, 2021, among National Health Investors, Inc. Regions Bank, as trustee, and the subsidiary guarantors set forth therein (incorporated by reference to Exhibit 4.2 to Form 8-K dated January 26, 2021) | ||||
| 10.1 | Third Amendment to Master Lease (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated August 25, 2021) | ||||
| 10.2 | Fourth Amendment to Master Lease (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated October 6, 2021) | ||||
| 31.1 | |||||
| 31.2 | |||||
| 32 | |||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NATIONAL HEALTH INVESTORS, INC. | ||||||||
| (Registrant) | ||||||||
| Date: | November 8, 2021 | /s/ D. Eric Mendelsohn | ||||||
| D. Eric Mendelsohn | ||||||||
| President and Chief Executive Officer | ||||||||
| (duly authorized officer) | ||||||||
| Date: | November 8, 2021 | /s/ John L. Spaid | ||||||
| John L. Spaid | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
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