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

FORM 10-Q
(Mark One)
[ x ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended June 30, 2016
 
 
[ ]
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)

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 [ x ] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files) Yes [ x ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer          [ x ]
 
Accelerated filer                      [ ]
Non-accelerated filer            [ ]
 
Smaller reporting company     [ ]
(Do not check if a smaller reporting company)
 
 

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

There were 39,162,079 shares of common stock outstanding of the registrant as of August 3, 2016.



Table of Contents

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

 
June 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
Assets:
 
 
 
Real estate properties:
 
 
 
Land
$
163,476

 
$
137,532

Buildings and improvements
2,156,763

 
1,945,323

Construction in progress
27,782

 
13,011

 
2,348,021

 
2,095,866

Less accumulated depreciation
(281,963
)
 
(259,059
)
Real estate properties, net
2,066,058

 
1,836,807

Mortgage and other notes receivable, net
160,062

 
133,714

Cash and cash equivalents
3,876

 
13,286

Marketable securities
23,751

 
72,744

Straight-line rent receivable
62,034

 
59,777

Equity-method investment and other assets
19,673

 
15,544

Assets held for sale, net

 
1,346

Total Assets
$
2,335,454

 
$
2,133,218

 
 
 
 
Liabilities and Equity:
 
 
 
Debt
$
1,072,835

 
$
914,443

Accounts payable and accrued expenses
26,235

 
19,397

Dividends payable
35,239

 
32,637

Lease deposit liabilities
21,275

 
21,275

Real estate purchase liabilities
750

 
750

Deferred income
477

 
2,256

Total Liabilities
1,156,811

 
990,758

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
National Health Investors Stockholders' Equity:
 
 
 
Common stock, $.01 par value; 60,000,000 shares authorized;
 
 
 
39,154,872 and 38,396,727 shares issued and outstanding, respectively
392

 
384

Capital in excess of par value
1,135,726

 
1,085,136

Cumulative net income in excess of dividends
27,379

 
19,862

Accumulated other comprehensive income
6,074

 
27,910

Total National Health Investors Stockholders' Equity
1,169,571

 
1,133,292

Noncontrolling interest
9,072

 
9,168

Total Equity
1,178,643

 
1,142,460

Total Liabilities and Equity
$
2,335,454

 
$
2,133,218


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, 2015 was derived from the audited consolidated financial statements at that date.


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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
(unaudited)
 
(unaudited)
Revenues:
 
 
 
 
 
 
 
Rental income
$
57,028

 
$
52,670

 
$
112,102

 
$
105,165

Interest income from mortgage and other notes
3,232

 
2,521

 
6,324

 
4,642

Investment income and other
944

 
1,122

 
1,796

 
2,257

 
61,204

 
56,313

 
120,222

 
112,064

Expenses:
 
 
 
 
 
 
 
Depreciation
14,695

 
13,004

 
28,429

 
26,017

Interest, including amortization of debt discount and issuance costs
10,666

 
9,287

 
20,928

 
17,699

Legal
124

 
75

 
250

 
179

Franchise, excise and other taxes
273

 
217

 
555

 
444

General and administrative
2,120

 
2,514

 
5,048

 
6,358

Loan and realty losses (recoveries)
14,726

 
(491
)
 
14,726

 
(491
)
 
42,604

 
24,606

 
69,936

 
50,206

 
 
 
 
 
 
 
 
Income before equity-method investee, TRS tax benefit, investment and
 
 
 
 
 
 
 
other gains and noncontrolling interest
18,600

 
31,707

 
50,286

 
61,858

Loss from equity-method investee
(57
)
 
(283
)
 
(460
)
 
(513
)
Income tax benefit attributable to taxable REIT subsidiary
23

 
113

 
184

 
206

Investment and other gains
26,415

 

 
28,080

 

Net income
44,981

 
31,537

 
78,090

 
61,551

Less: net income attributable to noncontrolling interest
(386
)
 
(355
)
 
(770
)
 
(685
)
Net income attributable to common stockholders
$
44,595

 
$
31,182

 
$
77,320

 
$
60,866

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
38,520,221

 
37,566,221

 
38,460,934

 
37,562,144

Diluted
38,561,384

 
37,607,117

 
38,488,088

 
37,626,192

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Net income attributable to common stockholders - basic
$
1.16

 
$
.83

 
$
2.01

 
$
1.62

Net income attributable to common stockholders - diluted
$
1.16

 
$
.83

 
$
2.01

 
$
1.62



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

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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
(unaudited)
 
(unaudited)
Net income
$
44,981

 
$
31,537

 
$
78,090

 
$
61,551

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in unrealized gains on securities
(42,354
)
 
(1,723
)
 
(39,540
)
 
(839
)
Less: reclassification adjustment for gains in net income
23,487

 

 
23,498

 

Increase (decrease) in fair value of cash flow hedge
(2,331
)
 
3,635

 
(7,811
)
 
1,305

Less: reclassification adjustment for amounts recognized in net income
1,004

 
(1,177
)
 
2,017

 
(2,134
)
Total other comprehensive income (loss)
(20,194
)
 
735

 
(21,836
)
 
(1,668
)
Comprehensive income
24,787

 
32,272

 
56,254

 
59,883

Less: comprehensive income attributable to noncontrolling interest
(386
)
 
(355
)
 
(770
)
 
(685
)
Comprehensive income attributable to common stockholders
$
24,401

 
$
31,917

 
$
55,484

 
$
59,198



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

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NATIONAL HEALTH INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six Months Ended
 
June 30,
 
2016
 
2015
 
(unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
78,090

 
$
61,551

Adjustments to reconcile net income to net cash provided by
 
 
 
operating activities:
 
 
 
Depreciation
28,429

 
26,017

Amortization
1,772

 
1,709

Straight-line rental income
(10,583
)
 
(12,308
)
Non-cash interest income on construction loan
(386
)
 

Non-cash write-offs due to lease transition
14,726

 

Gain on sale of real estate
(4,582
)
 

Gain on sale of marketable securities
(23,498
)
 

Loan recovery

 
(491
)
Share-based compensation
1,230

 
1,697

Amortization of commitment fees
(143
)
 

Loss from equity-method investee
460

 
513

Change in operating assets and liabilities:
 
 
 
Equity-method investment and other assets
(109
)
 
740

Accounts payable and accrued expenses
(431
)
 
(1,004
)
Deferred income
(1,780
)
 
1,572

Net cash provided by operating activities
83,195

 
79,996

 
 
 
 
Cash flows from investing activities:
 
 
 
Investment in mortgage and other notes receivable
(41,673
)
 
(52,580
)
Collection of mortgage and other notes receivable
15,855

 
16,765

Investment in real estate
(261,610
)
 
(3,261
)
Investment in real estate development
(15,554
)
 
(4,571
)
Investment in renovations of existing real estate
(815
)
 
(1,816
)
Payment allocated to lease purchase option
(6,400
)
 

Long-term escrow deposit
(4,500
)
 

Proceeds from disposition of real estate properties
27,723

 

Proceeds from sales of marketable securities
56,449

 

Net cash used in investing activities
(230,525
)
 
(45,463
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net change in borrowings under revolving credit facilities
157,000

 
(273,000
)
Proceeds from issuance of secured debt

 
78,084

Borrowings on term loans

 
225,000

Payments on term loans
(381
)
 
(368
)
Debt issuance costs

 
(2,305
)
Equity offering costs

 
(275
)
Taxes remitted in relation to employee stock options exercised
(822
)
 

Proceeds from issuance of common shares
50,190

 
1

Distributions to noncontrolling interest
(866
)
 
(869
)
Dividends paid to stockholders
(67,201
)
 
(60,795
)
Net cash provided by (used in) financing activities
137,920

 
(34,527
)
 
 
 
 
Increase (decrease) in cash and cash equivalents
(9,410
)
 
6

Cash and cash equivalents, beginning of period
13,286

 
3,287

Cash and cash equivalents, end of period
$
3,876

 
$
3,293


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

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

 
Six Months Ended
 
June 30,
 
2016
 
2015
 
(unaudited)
Supplemental disclosure of cash flow information:
 
 
 
Interest paid, net of amounts capitalized
$
19,057

 
$
13,723

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Change in accounts payable related to investments in real estate development
$
1,475

 
$
1,112

Conversion of note balance into real estate investment
$

 
$
255



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

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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 Net Income in Excess of Dividends
 
Accumulated Other Comprehensive Income
 
Total National Health Investors Stockholders’ Equity
 
Noncontrolling Interest
 
Total Equity
 
Shares
 
Amount
 
 
 
 
 
 
Balances at December 31, 2015
38,396,727

 
$
384

 
$
1,085,136

 
$
19,862

 
$
27,910

 
$
1,133,292

 
$
9,168

 
$
1,142,460

Total comprehensive income

 

 

 
77,320

 
(21,836
)
 
55,484

 
770

 
56,254

Distributions to noncontrolling interest

 

 

 

 

 

 
(866
)
 
(866
)
Issuance of common stock, net
714,666

 
8

 
50,181

 

 

 
50,189

 

 
50,189

Taxes remitted on employee stock options exercised

 

 
(822
)
 

 

 
(822
)
 

 
(822
)
Shares issued on stock options exercised, net of shares withheld
43,479

 

 
1

 

 

 
1

 

 
1

Share-based compensation

 

 
1,230

 

 

 
1,230

 

 
1,230

Dividends declared, $1.80 per common share

 

 

 
(69,803
)
 

 
(69,803
)
 

 
(69,803
)
Balances at June 30, 2016
39,154,872

 
$
392

 
$
1,135,726

 
$
27,379

 
$
6,074

 
$
1,169,571

 
$
9,072

 
$
1,178,643





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

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NATIONAL HEALTH INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(unaudited)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

We, the management of National Health Investors, Inc., (“NHI” or the “Company”) believe that the unaudited condensed consolidated financial statements of which these notes are an integral part include all normal, recurring adjustments that are necessary to fairly present the condensed consolidated financial position, results of operations and cash flows of NHI in all material respects. The Condensed Consolidated Balance Sheet at December 31, 2015 has been derived from the audited consolidated financial statements at that date. We assume that users of these condensed consolidated financial statements have read or have access to the audited December 31, 2015 consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate those contained in our most recent Annual Report on Form 10-K for the year ended December 31, 2015 have been omitted. This condensed consolidated financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons including, but not limited to, acquisitions and dispositions, changes in interest rates, rents and the timing of debt and equity financings. For a better understanding of NHI and its condensed consolidated financial statements, we recommend reading these condensed consolidated financial statements in conjunction with the audited consolidated financial statements for the year ended December 31, 2015, which are included in our 2015 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, a copy of which is available at our web site: www.nhireit.com.

Principles of Consolidation - The accompanying condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries, joint ventures, partnerships and consolidated variable interest entities (“VIE”) where NHI controls the operating activities of the VIE, if any. All intercompany transactions and balances have been eliminated in consolidation. Net income is reduced by the portion of net income attributable to noncontrolling interests.

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

We apply Financial Accounting Standards Board (“FASB”) guidance for our arrangements with variable interest entities (“VIEs”) which requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of the VIE. In accordance with FASB guidance, management must evaluate each of the Company’s contractual relationships which creates a variable interest in other entities. If the Company has a variable interest and the entity is a VIE, then management must determine whether or not the Company is the primary beneficiary of the VIE. If it is determined that the Company is the primary beneficiary, NHI consolidates the VIE. We identify the primary beneficiary of a VIE as the enterprise that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. We perform this analysis on an ongoing basis.

At June 30, 2016, we held an interest in six unconsolidated VIEs, for each of whom we have concluded that NHI is not the primary beneficiary. These interests consist of 1) a start-up lessee in which NHI’s variable interest consists of its leasehold interests entered into in July 2015 and June 2016, analogous to financing arrangements (Note 2); 2) our joint venture in an operating company organized under provisions of the REIT Investment Diversification and Empowerment Act, (“RIDEA”), (Note 3); 3) a guarantee on a letter of credit for our RIDEA joint venture partner (Note 4); 4) two construction mortgage notes receivable aggregating $112,692,000 from a continuing care retirement community operator (Note 4); 5) two development loans and our lease with an entrance-fee community operator (Note 4); and 6) a fixed-price purchase option with a developer (Note 2). Our direct support of the above VIEs has been limited to the transactions described herein, including our commitments and contingencies described in Note 7, and any decision to furnish additional direct support would be at our discretion and not obligatory. We believe our exposure to losses as a result of our involvement with these unconsolidated VIEs would be limited to our carrying value of these investments, as adjusted for any unrealized loss carry-forwards, the amount of loan and other commitments, and as guarantor under the letter of credit. We generally lack, either directly or through related parties, any material input in the activities that most significantly impact the economic performance of these entities.

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We apply FASB guidance related to investments in joint ventures based on the type of controlling rights held by the members’ interests in limited liability companies that may preclude consolidation by the majority equity owner in certain circumstances in which the majority equity owner would otherwise consolidate the joint venture.

We structure our joint ventures to be compliant with the provisions of the REIT Investment Diversification and Empowerment Act of 2007 ("RIDEA") which permits NHI to receive rent payments through a triple-net lease between a property company and an operating company and is designed to give NHI the opportunity to capture additional value on the improving performance of the operating company through distributions to a taxable REIT subsidiary (“TRS”). Accordingly, the TRS holds our equity interest in an unconsolidated operating company, which we do not control, and provides an organizational structure that will allow the TRS to engage in a broad range of activities and share in revenues that would otherwise be non-qualifying income under the REIT gross income tests.

Marketable Securities. - Investments in marketable debt and equity securities must be categorized as trading, available-for-sale or held-to-maturity. Our investments in marketable equity securities are classified as available-for-sale securities. Unrealized gains and losses on available-for-sale securities are recorded in other comprehensive income. We evaluate our securities for other-than-temporary impairments on at least a quarterly basis. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis.

A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed to be other-than-temporary results in an impairment to reduce the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until a market price recovery and consider whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to period-end and forecasted performance of the investment.

Equity-Method Investment - We report our TRS’ investment in an unconsolidated entity, over whose operating and financial policies we have the ability to exercise significant influence but not control, under the equity method of accounting. Under this accounting method, our pro rata share of the entity’s earnings or losses is included in our Condensed Consolidated Statements of Income. Additionally, we adjust our investment carrying amount to reflect our share of changes in an equity-method investee’s capital resulting from its capital transactions.

The initial carrying value of our equity-method investment is based on the fair value of the net assets of the entity at the time we acquired our interest. We estimate fair values of the net assets of our equity-method investee based on discounted cash flow models. The inputs we use in these models are based on assumptions that are within a reasonable range of current market rates for the respective investments.

We evaluate our equity-method investment for impairment whenever events or changes in circumstances indicate that the carrying value of our investment may exceed the fair value. If it is determined that a decline in the fair value of our investment is not temporary, and if such reduced fair value is below its carrying value, an impairment is recorded. Determining fair value involves significant judgment. Our estimates consider all available evidence including the present value of expected future cash flows discounted at market rates, general economic conditions and other relevant factors.

Noncontrolling Interest - We present the portion of any equity that we do not own in entities that we control (and thus consolidate) as noncontrolling interest and classify such interest as a component of consolidated equity separate from total NHI stockholders’ equity in our Condensed Consolidated Balance Sheets. In addition, we exclude net income attributable to the noncontrolling interest from net income attributable to common shareholders in our Condensed Consolidated Statements of Income.

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

Earnings Per Share - The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assume the exercise of stock options using the treasury stock method, to the extent dilutive. Diluted earnings per share also incorporate the potential dilutive impact of our 3.25% convertible senior notes due 2021. We apply the treasury stock method to our convertible debt instruments, the effect of which is that conversion will not be assumed for purposes of computing diluted earnings per share unless the average share price for the period exceeds the conversion price per share.

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Reclassifications - We have reclassified, for all periods presented, certain loan commitment fees paid by our borrowers, which were previously accounted for on our Consolidated Balance Sheet at December 31, 2015, as deferred revenues. The fees are included in our consolidated balance sheets as a reduction of the related loan receivable balance. The effect has been to reduce total assets and total liabilities by $1,317,000 on our Condensed Consolidated Balance Sheet as of December 31, 2015. See Note 13 for a description of recent accounting pronouncements which require reclassification of items previously presented.
New Accounting Pronouncements - For a review of recent accounting pronouncements pertinent to our operations and management’s judgment as to the impact that the eventual adoption of these pronouncements will have on our financial position and results of operation, see Note 13.

NOTE 2. REAL ESTATE

As of June 30, 2016, we owned 194 health care real estate properties located in 32 states and consisting of 122 senior housing communities, 67 skilled nursing facilities, 3 hospitals and 2 medical office buildings. Our senior housing properties include assisted living facilities, senior living campuses, independent living facilities, and entrance-fee communities. These investments (excluding our corporate office of $1,118,000) consisted of properties with an original cost of approximately $2,346,903,000, rented under triple-net leases to 26 lessees.

During the six months ended June 30, 2016, we made investments and commitments related to real estate as described below (dollars in thousands):
Operator
 
Properties
 
Asset Class
 
Amount
Watermark Retirement Communities / East Lake Capital Mgmt.
 
2
 
SHO
 
$
66,300

The Ensign Group
 
8
 
SNF
 
118,500

Woodland Village
 
1
 
SHO
 
9,813

Bickford Senior Living
 
5
 
SHO
 
89,900

 
 
 
 
 
 
$
284,513


Watermark Retirement / East Lake Capital

On June 1, 2016, NHI acquired two entrance fee continuing care retirement communities (“CCRCs”) from funds managed by certain affiliates of East Lake Capital Management (“East Lake”) for $56,300,000 in cash, inclusive of a $4,500,000 regulatory deposit, and entered into a lease transaction with affiliates of East Lake. The CCRCs consist of 460 units and are located in Bridgeport and Southbury, Connecticut. The communities are sub-leased to affiliates of Watermark Retirement Communities (“Watermark”), the current manager. The lease has a term of 15 years, with an initial lease rate to East Lake of 7% with escalators of 3.5% in years two through four, and 3% annually thereafter. NHI has committed up to an additional $10,000,000 for capital improvements and potential expansion of the communities over the next two years, of which $747,000 was drawn at June 30, 2016. Because the facilities had no history as rental operations, we accounted for the purchase as an asset acquisition.

In conjunction with the lease, East Lake acquired a variable-rate purchase option on the properties as a whole, exercisable beginning in year six of the lease. The option will be based on our initial acquisition cost, our funding of capital improvements and expansions, other additional funding that may then be in place, or further rent escalations during the remaining duration of the option window.

East Lake’s June 2016 lease represents an expansion of its relationship with NHI, which began in July 2015, with our acquisition and lease to East Lake of two senior living campuses and one assisted living/memory care facility. East Lake’s relationship to NHI consists of its leasehold interests and purchase options and is considered a variable interest, analogous to a financing arrangement. Because we neither control East Lake nor have any role in its day-to-day management, we have no material input into activities that most significantly impact the entity’s economic performance, and we account for our transactions with East Lake at amortized cost. We are not obligated to provide further support to East Lake, and accordingly the maximum extent of our exposure to loss is limited to our investment in the facilities.

The Ensign Group

On April 1, 2016, we purchased eight skilled nursing facilities in Texas totaling 931 beds for $118,500,000 in cash. The facilities were owned and operated by NHI’s existing tenant, Legend Healthcare (“Legend”), and we accounted for the purchase as an asset acquisition. Concurrent with the acquisition, we amended in-place leases covering the nine existing skilled nursing facilities we leased to Legend, extending their provisions to the new facilities. The amendment also replaced purchase options

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that provided for equal sharing of any appreciation in value, within a specified range, with purchase options having a price determined at fair value, exercisable at the end of the lease term. Based on our analysis of the in-place rights, benefits and obligations, $6,400,000 of the consideration in the acquisition was allocated to the canceled provisions related to the in-place leases.

On May 1, 2016, Legend and NHI agreed to transition Legend’s skilled nursing operations under it’s lease with NHI to a new operator, and NHI entered into a new 15-year master lease with affiliates of The Ensign Group, Inc. (“Ensign”) on 15 of the former Legend facilities for an initial annual amount of $17,750,000, plus an annual escalator based on inflation. NHI’s total original investment in the 15 facilities leased to Ensign is approximately $211,000,000. The Ensign lease has two 5-year renewal options. Upon entering the new lease, NHI sold to Ensign for $24,600,000 two remaining skilled nursing facilities in Texas totaling 245 beds previously under lease to Legend. The Ensign lease, secured in part by the operator’s corporate guaranty, replaces the amended Legend lease, and, accordingly, the rights, benefits and obligations held by Legend have terminated. In recording the transition of our leases to Ensign, we wrote off the fair value assigned to the former Legend leases and $8,326,000 of accumulated straight-line rent receivable, leaving a preliminary allocation of $6,252,000 to land and $105,848,000 to depreciable assets.

As part of this transaction, NHI has committed to purchase, from a developer, four skilled nursing facilities under Legend management in Texas for $56,000,000. The option to purchase would occur at stabilization. On exercise of the option, NHI has committed to lease the facilities to Ensign. The buildings are in various stages of development, and the purchase window for the first facility is expected to open in 2017.

The fixed-price nature of the option creates a variable interest for NHI in the developer, whom NHI considers to lack sufficient equity to finance its operations without recourse to additional subordinated debt. The presence of these conditions causes the developer to be considered a VIE. However, because NHI lacks both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity, NHI is not its primary beneficiary. We therefore account for our transactions with the developer at historical cost. Our exposure to loss as a result of our relationship with the VIE is limited to the amount of our commitments.

Woodland Village

On January 15, 2016, we acquired a 98-unit independent living community in Chehalis, Washington, for $9,463,000 in cash inclusive of closing costs of $213,000 plus an additional commitment to fund $350,000 in specified capital improvements, of which $125,000 has been funded at June 30, 2016. We leased the facility to a partnership between Marathon Development and Village Concepts Retirement Communities for an initial lease term of 15 years. The lease provides for an initial annual lease rate of 7.25% plus annual escalators. Because the facility was owner-occupied, the acquisition was accounted for as an asset purchase.

Bickford

On June 1, 2016, in an asset acquisition, we acquired five assisted living and memory care facilities owned and operated by Bickford Senior Living (“Bickford”) for $87,500,000, including $77,747,000 in cash and cancellation of notes and accrued interest receivable totaling $9,753,000 (Note 4). Additionally, we have committed $2,400,000 for capital expenditures and expansion of the existing facilities, the funding of which will be added to the lease base. The lease provides for an initial rate of 7.25% and term of 15 years plus two five-year renewal options. The annual lease escalator is 3%. NHI’s purchase option on an additional Bickford facility was relinquished. The facilities, consisting of 277 total units, are located in Iowa (2), Missouri, Illinois, and Nebraska. We recognized $849,000 in revenues from this lease through June 30, 2016. The facilities are not included in the existing RIDEA joint venture between the parties.

As of June 30, 2016, we owned an 85% equity interest and Sycamore Street, LLC (“Sycamore”), an affiliate of Bickford Senior Living (“Bickford”), owned a 15% equity interest in our consolidated subsidiary (“PropCo”) which owns 32 assisted living/memory care facilities plus 5 facilities in pre-development and development. The facilities are leased to an operating company (“OpCo”), in which we retain a non-controlling 85% ownership interest. The facilities are managed by Bickford. Our joint venture is structured to comply with the provisions of RIDEA. See Note 12 for a discussion of our decision to convert the RIDEA portfolio to a triple-net tenancy.

As of June 30, 2016, the annual contractual rent from OpCo to PropCo is $25,359,000, plus annual escalators of 3%. NHI has an exclusive right to Bickford’s future acquisitions, development projects and refinancing transactions. Of our total revenues, $6,315,000 (10%) and $5,890,000 (10%) were recognized as rental income from the RIDEA joint venture for the three months

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ended June 30, 2016 and 2015, respectively, and $12,622,000 (10%) and $11,695,000 (10%) for the six months ended June 30, 2016 and 2015, respectively.

Holiday

As of June 30, 2016, we leased 25 independent living facilities to an affiliate of Holiday Retirement (“Holiday”). The master lease term of 17 years began in December 2013 and provides for an escalator of 4.5% in 2017 and a minimum of 3.5% each year thereafter.

Of our total revenues, $10,954,000 (18%) and $10,954,000 (19%) were derived from Holiday for the three months ended June 30, 2016 and 2015, including $2,241,000 and $2,616,000 in straight-line rent, respectively. Of our total revenues, $21,908,000 (18%) and $21,908,000 (20%) were derived from Holiday for the six months ended June 30, 2016 and 2015, including $4,482,000 and $5,233,000 in straight-line rent, respectively. Our tenant operates the facilities pursuant to a management agreement with a Holiday-affiliated manager.

NHC

As of June 30, 2016, we leased 42 facilities under two master leases to National HealthCare Corporation (“NHC”), a publicly-held company and the lessee of our legacy properties. The facilities leased to NHC consist of 3 independent living facilities and 39 skilled nursing facilities (4 of which are subleased to other parties for whom the lease payments are guaranteed to us by NHC). These facilities are leased to NHC under the terms of an amended master lease agreement originally dated October 17, 1991 (“the 1991 lease”) which includes our 35 remaining legacy properties and a master lease agreement dated August 30, 2013 (“the 2013 lease”) which includes 7 skilled nursing facilities acquired from a third party.

The 1991 lease has been amended to extend the lease expiration to December 31, 2026. There are two additional 5-year renewal options, each at fair rental value of such leased property as negotiated between the parties and determined without including the value attributable to any improvements to the leased property voluntarily made by NHC at its expense. Under the terms of the lease, the base annual rental is $30,750,000 and rent escalates by 4% of the increase, if any, in each facility’s revenue over a 2007 base year. The 2013 lease provides for a base annual rental of $3,450,000 and has a lease expiration of August 2028. Under the terms of the 2013 lease, rent escalates 4% of the increase in each facility’s revenue over the 2014 base year. For both the 1991 lease and the 2013 lease, we refer to this additional rent component as “percentage rent.” During the last three years of the 2013 lease, NHC will have the option to purchase the facilities for $49,000,000.

The following table summarizes the percentage rent income from NHC (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Current year
$
733

 
$
596

 
$
1,466

 
$
1,192

Prior year final certification1

 

 
547

 
94

Total percentage rent income
$
733

 
$
596

 
$
2,013

 
$
1,286

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

Of our total revenues, $9,270,000 (15%) and $9,133,000 (16%) were derived from NHC for the three months ended June 30, 2016 and 2015, respectively and $19,087,000 (16%) and $18,360,000 (16%) for the six months ended June 30, 2016 and 2015, respectively.

The chairman of our board of directors is also a director on NHC’s board of directors. As of June 30, 2016, NHC owned 1,630,462 shares of our common stock.

Senior Living Communities

Beginning in December 2014 we leased eight retirement communities with 1,671 units to Senior Living Communities, LLC (“Senior Living”). The 15-year master lease contains two 5-year renewal options and provides for annual escalators of 4% in years two through four and 3% thereafter.

Of our total revenue, $9,855,000 (16%) and $9,855,000 (18%) in lease revenues were derived from Senior Living for the three months ended June 30, 2016 and 2015, respectively, including $1,795,000 and $2,105,000, respectively, in straight-line

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rent. For the six months ended June 30, 2016 and 2015, of our total revenues, $19,711,000 (16%) and $19,711,000 (18%) were derived from Senior Living including $3,591,000 and $4,211,000, respectively, in straight-line rent.

Disposition of Assets

On March 22, 2016, we sold a skilled nursing facility in Idaho for cash consideration of $3,000,000. The carrying value of the facility was $1,346,000, and we recorded a gain of $1,654,000. As discussed above in connection with The Ensign Group, we sold two skilled nursing facilities in May 2016 for total consideration of $24,600,000 and realized a gain of $2,805,000 on the disposal. In June 2016, we recognized a gain of $123,000 on the sale of a vacant land parcel.

NOTE 3. EQUITY-METHOD INVESTMENT AND OTHER ASSETS

Our equity-method investment in OpCo and other assets consist of the following (in thousands):
 
June 30,
2016
 
December 31,
2015
Equity-method investment in OpCo
$
7,197

 
$
7,657

Accounts receivable and other assets
3,905

 
3,256

Reserves for replacement, insurance and tax escrows
8,571

 
4,631

 
$
19,673

 
$
15,544


Upon the acquisition of our equity method investment in OpCo in 2012, our purchase price was allocated to the assets acquired based upon their estimated relative fair values. Accounting guidance for equity method investments requires that we account for the difference between the cost basis of our investment in OpCo and our pro rata share of the amount of underlying equity in the net assets of OpCo as though OpCo were a consolidated subsidiary. Accordingly, the excess of the original purchase price over the fair value of identified tangible assets at acquisition of $8,986,000 is treated as implied goodwill and is subject to periodic review for impairment in conjunction with our equity method investment. When we acquired Bickford properties in June 2013, an assignment was entered into whereby the operations of the facilities were conveyed by an affiliate of Bickford to OpCo. The transaction mandated the effective cut-off of operating revenues and expenses and the settlement of operating assets and liabilities as of the acquisition date. Specified remaining net tangible assets were assigned to OpCo at the transferor's carryover basis resulting in an adjustment, through NHI's capital in excess of par value to our equity method investment in OpCo, of $817,000. We monitor and periodically review our equity method investment in OpCo for impairment to determine whether a decline, if any, in the value of the investment is other-than temporary. We noted no decline in value as of June 30, 2016. See Note 12 for a discussion of our decision to convert the RIDEA portfolio to a triple-net tenancy.

Reserves for replacement, insurance and tax escrows include amounts required to be held on deposit in accordance with regulatory agreements governing our Fannie Mae and HUD mortgages.

With the adoption of ASU 2015-03, Interest-Imputation of Interest, in the first quarter of 2016, the balance in Equity Method Investment and Other Assets was reduced to reflect the reclassification of our unamortized loan costs which are now being offset against the loan balances as shown in Note 6.

NOTE 4. MORTGAGE AND OTHER NOTES RECEIVABLE

At June 30, 2016, we had net investments in mortgage notes receivable with a net carrying value of $128,984,000, secured by real estate and UCC liens on the personal property of 8 facilities, and other notes receivable with a carrying value of $31,078,000, guaranteed by significant parties to the notes or by cross-collateralization of properties with the same owner. No allowance for doubtful accounts was considered necessary at June 30, 2016 or December 31, 2015.

Timber Ridge

In February 2015, we entered into an agreement to lend up to $154,500,000 to LCS-Westminster Partnership III LLP (“LCS-WP”), an affiliate of Life Care Services (“LCS”) . The loan agreement conveys a mortgage interest and will facilitate the construction of Phase II of Timber Ridge at Talus (“Timber Ridge”), a Type-A Continuing Care Retirement Community in Issaquah, WA managed by LCS.

The loan takes the form of two notes under a master credit agreement. The senior note (“Note A”) totals $60,000,000 at a 6.75% interest rate with 10 basis-point escalators after year three, and has a term of 10 years. We have funded $28,000,000 of Note A as of June 30, 2016. We anticipate fully funding Note A by December 31, 2016. Note A is interest-only and is locked to prepayment

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for three years. After year three, the prepayment penalty starts at 5% and declines 1% per year. The second note (“Note B”) is a construction loan for up to $94,500,000 at an annual interest rate of 8% and a 5 year maturity. We anticipate funding Note B through December 2016 and expect substantial repayment with new resident entrance fees upon the opening of Phase II. The total amount funded on Note B was $85,872,000 as of June 30, 2016.

NHI has a purchase option on the entire Timber Ridge property for the greater of fair market value or $115,000,000 during a purchase option window of 120 days that will contingently open in year five or upon earlier stabilization of the development, as defined. The current basis of our investment in Timber Ridge loans, net of unamortized commitment fees, is $112,692,000, but we are obligated to complete the funding of both Notes A and B of up to $154,500,000 which represents the maximum exposure to loss of NHI due to our relationship with Timber Ridge. Because we neither control the entity, nor have any role in its day-to-day management, we account for our investment in LCS-WP at amortized cost.

Senior Living Communities

In connection with the acquisition in December 2014 of the properties leased to Senior Living, we provided a $15,000,000 revolving line of credit to Senior Living, the maturity of which mirrors the 15-year term of the master lease. Borrowings are used to finance construction projects within the Senior Living portfolio, including building additional units. Up to $5,000,000 of the facility may be used to meet general working capital needs. Amounts outstanding under the facility, $12,467,000 at June 30, 2016, bear interest at an annual rate equal to the 10-year U.S. Treasury rate, 1.49% at June 30, 2016, plus 6%.

In March 2016, we extended mezzanine loans of $12,000,000 and $2,000,000 to affiliates of Senior Living, to partially fund construction of a 186-unit senior living campus on Daniel Island in South Carolina. The loans bear interest payable monthly at a 10% annual rate and mature in March 2021. The loans have a total balance of $2,109,000 at June 30, 2016.

Our loans to Senior Living, and its subsidiaries represent a variable interest as does our lease, which is considered to be analogous to a financing arrangement. Senior Living is structured to limit liability for potential claims for damages and is appropriately capitalized for that purpose. Accordingly, NHI holds guarantees that reach to the underlying ownership interests. Because we neither control Senior Living, nor have any role in its day-to-day management, we have no material input into activities that most significantly impact the entity’s economic performance, and we account for our transactions with Senior Living and its subsidiaries at amortized cost. We are not obligated to provide support beyond our stated commitments to Senior Living, and accordingly the maximum extent of our exposure to loss is limited to our investment in the facilities and the amount of our commitments, as discussed above.

Sycamore

As discussed in Note 2, on June 1, 2016, two notes receivable from Sycamore having an aggregate principal and accrued interest balance of $9,753,000 were retired as part of an asset acquisition.

As of June 30, 2016, our direct support of Sycamore is limited to our guarantee on a $3,930,000 letter of credit established for their benefit. We are not obligated to extend support to Sycamore beyond our guarantee; and, accordingly, our commitment embodied in this guarantee represents our maximum exposure to loss. Because we do not control Sycamore, nor do we have any role in the day-to-day management, we account for our guarantee at fair value.

NOTE 5. INVESTMENTS IN MARKETABLE SECURITIES

Our investments in marketable securities include available-for-sale securities which are reported at fair value and investments in marketable debt securities, also classified as available-for-sale, which consist of U.S. government agency debt and long-term certificates of deposit. Unrealized gains and losses on available-for-sale securities are presented as a component of accumulated other comprehensive income. Realized gains and losses from securities sales are determined based upon specific identification of the securities. Marketable securities consist of the following (in thousands):
 
June 30, 2016
 
December 31, 2015
 
Amortized Cost

 
Fair Value

 
Amortized Cost

 
Fair Value

Common stock of other healthcare REITs
$
5,127

 
$
23,751

 
$
21,040

 
$
55,815

Debt securities
$

 
$

 
$
17,037

 
$
16,929


Net unrealized gains related to available-for-sale securities were $18,624,000 at June 30, 2016 and $34,667,000 at December 31, 2015. During the quarter ended June 30, 2016, we recognized gains on sales of marketable securities of $23,498,000 which were

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reclassified from accumulated other comprehensive income and are included in our Condensed Consolidated Statements of Income as Investment and other gains.

NOTE 6. DEBT

Debt consists of the following (in thousands):
 
June 30,
2016
 
December 31,
2015
Convertible senior notes - unsecured (net of discount of $5,295 and $5,862)
$
194,705

 
$
194,138

Revolving credit facility - unsecured
191,000

 
34,000

Bank term loans - unsecured
250,000

 
250,000

Private placement term loans - unsecured
325,000

 
325,000

HUD mortgage loans (net of discount of $1,530 and $1,573)
44,698

 
45,035

Fannie Mae term loans - secured, non-recourse
78,084

 
78,084

Unamortized loan costs
(10,652
)
 
(11,814
)
 
$
1,072,835

 
$
914,443


Aggregate principal maturities of debt as of June 30, 2016 for each of the next five years and thereafter are as follows (in thousands):
Twelve months ended June 30,
 
2017
$
781

2018
808

2019
835

2020
441,863

2021
200,893

Thereafter
445,132

 
1,090,312

Less: discount
(6,825
)
Less: unamortized loan costs
(10,652
)
 
$
1,072,835


In November 2015 we issued $50,000,000 of 8-year notes with a coupon of 3.99% and $50,000,000 of 10-year notes with a coupon of 4.33% to a private placement lender. The notes are unsecured and require quarterly payments of interest only until maturity. We used the proceeds from the notes to pay down borrowings on our revolving credit facility. Terms and conditions of the new financing are similar to those under our bank credit facility with the exception of provisions regarding prepayment premiums.

In June 2015 we entered into an amended $800,000,000 senior unsecured credit facility with a group of banks. The facility can be expanded, subject to certain conditions, up to an additional $250,000,000. The amended credit facility provides for: (1) a $550,000,000 revolving credit facility that matures in June 2020 (inclusive of an embedded 1-year extension option) with interest at 150 basis points over LIBOR (47 bps at June 30, 2016); (2) an existing $130,000,000 term loan that matures in June 2020 with interest at 175 basis points over LIBOR; and (3) two existing term loans which remain in place totaling $120,000,000, maturing in June 2020 and bearing interest at 175 basis points over LIBOR. At closing, the new facility replaced a smaller credit facility last amended in March 2014 that provided for $700,000,000 of total commitments. The employment of interest rate swaps for our fixed term debt leaves only our revolving credit facility exposed to variable rate risk. Our swaps and the financial instruments to which they relate are described in the table below, under the caption “Interest Rate Swap Agreements.”

At June 30, 2016 we had $359,000,000 available to draw on the revolving portion of the credit facility. The unused commitment fee is 40 basis points per annum. The unsecured credit facility agreement requires that we maintain certain financial ratios within limits set by our creditors. To date, these ratios, which are calculated quarterly, have been within the limits required by the credit facility agreements.

Pinnacle Bank, which is a participating member of our banking group, is a wholly owned subsidiary and the primary active business of the bank holding company, Pinnacle Financial Partners, Inc. The chairman of Pinnacle Financial Partners' board of

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directors is also a director on NHI’s board and is chairman of our audit committee. NHI's local banking transactions are conducted primarily through Pinnacle Bank.

In March 2015 we obtained $78,084,000 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 in NHI’s joint venture with Bickford. Proceeds were used to reduce borrowings on our revolving bank credit facility. The notes are secured by the facilities previously pledged as security on Fannie Mae term debt that was retired in December 2014.

In January 2015 we issued $125,000,000 of 8-year notes with a coupon of 3.99% and $100,000,000 of 12-year notes with a coupon of 4.51% to a private placement lender. The notes are unsecured and require quarterly payments of interest only until maturity. We used the proceeds from the notes to pay down borrowings on our revolving credit facility. Terms and conditions of the new financing are similar to those under our bank credit facility with the exception of provisions regarding prepayment premiums.

In March 2014 we issued $200,000,000 of 3.25% senior unsecured convertible notes due April 2021 (the “Notes”). Interest is payable April 1st and October 1st of each year. As adjusted for terms of the indenture, the Notes are convertible at a conversion rate of 14.05 shares of common stock per $1,000 principal amount, representing a conversion price of approximately $71.17 per share for a total of approximately 2,810,065 underlying shares. The conversion rate is subject to adjustment upon the occurrence of certain events, as defined in the indenture governing the Notes, but will not be adjusted for any accrued and unpaid interest except in limited circumstances. The conversion option is considered an “optional net-share settlement conversion feature,” meaning that upon conversion, NHI’s conversion obligation may be satisfied, at our option, in cash, shares of common stock or a combination of cash and shares of common stock. Because the conversion price is in excess of the average stock price for the quarter, the impact of the conversion option is currently anti-dilutive to the earnings per share calculation and as such has no effect on our earnings per share.

The embedded conversion options (1) do not require net cash settlement, (2) are not conventionally convertible but can be classified in stockholders’ equity under ASC 815-40, and (3) are considered indexed to NHI’s own stock. Therefore, the conversion feature satisfies the conditions to qualify for an exception to the derivative liability rules, and the Notes are split into debt and equity components. The value of the debt component is based upon the estimated fair value of a similar debt instrument without the conversion feature at the time of issuance and was estimated to be approximately $192,238,000. The $7,762,000 difference between the contractual principal on the debt and the value allocated to the debt was recorded as an equity component and represents the estimated value of the conversion feature of the instrument. The excess of the contractual principal amount of the debt over its estimated fair value, the original issue discount, is amortized to interest expense using the effective interest method over the estimated term of the Notes. The effective interest rate used to amortize the debt discount and the liability component of the debt issue costs was approximately 3.9% based on our estimated non-convertible borrowing rate at the date the Notes were issued.

The total cost of issuing the Notes was $6,063,000, $275,000 of which was allocated to the equity component and $5,788,000 of which was allocated to the debt component and subject to amortization over the estimated term of the notes. The remaining unamortized balance at June 30, 2016, was $3,696,000.

Our HUD mortgage loans are secured by ten properties in our joint venture with Bickford. Nine mortgage notes require monthly payments of principal and interest from 4.65% to 4.75% in the first year and from 4.3% to 4.4% thereafter (inclusive of mortgage insurance premium) and mature in August and October 2049. An additional HUD mortgage loan assumed in 2014 requires monthly payments of principal and interest of 2.9% (inclusive of mortgage insurance premium) and matures in October 2047. The loan has an outstanding principal balance of $9,213,000 and an estimated fair value of $8,163,000.

The following table summarizes interest expense (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Interest expense at contractual rates
$
9,991

 
$
8,511

 
$
19,505

 
$
16,223

Capitalized interest
(196
)
 
(84
)
 
(316
)
 
(204
)
Amortization of debt issuance costs and debt discount
871

 
860

 
1,739

 
1,680

Total interest expense
$
10,666

 
$
9,287

 
$
20,928

 
$
17,699





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Interest Rate Swap Agreements

To mitigate our exposure to interest rate risk, we have entered into the following interest rate swap contracts on our bank term loans as of June 30, 2016 (dollars in thousands):
Date Entered
 
Maturity Date
 
Fixed Rate
 
Rate Index
 
Notional Amount
 
Fair Value
May 2012
 
April 2019
 
3.29%
 
1-month LIBOR
 
$
40,000

 
$
(1,030
)
June 2013
 
June 2020
 
3.86%
 
1-month LIBOR
 
$
80,000

 
$
(4,335
)
March 2014
 
June 2020
 
3.91%
 
1-month LIBOR
 
$
130,000

 
$
(7,281
)

See Note 11 for fair value disclosures about our variable and fixed rate debt and interest rate swap agreements.

NOTE 7. COMMITMENTS AND CONTINGENCIES

Bickford

In February 2015 our joint venture with Bickford announced plans to develop five senior housing facilities in Illinois and Virginia. Each community will be managed by Bickford and consist of 60 private-pay assisted living and memory care units. These five properties will represent the culmination of plans announced in 2012 between NHI and Bickford to construct a total of eight facilities. The first three communities, all in Indiana, opened in 2013 and 2014. Pre-development and land acquisition on the five facilities started in mid-2015 with openings planned beginning in late 2016. The total estimated project cost is $55,000,000. As of June 30, 2016, land and development costs incurred on the project totaled $34,536,000.

In February 2014 we entered into a commitment on a letter of credit for the benefit of Sycamore which holds a minority interest in PropCo. At June 30, 2016 our commitment on the letter of credit totaled $3,930,000.

In conjunction with our acquisition of five assisted living and memory care communities in June 2016, we have committed to Bickford the funding of an additional $2,400,000 for capital expenditures and the expansion of the existing facilities, the funding of which will be added to the lease base. No amounts have been funded toward our commitment as of June 30, 2016.

Chancellor

At June 30, 2016, we had a continuing commitment with Chancellor Health Care ("Chancellor") to provide up to $650,000 for renovations and improvements related to a senior housing community in Oregon. Renovations began on this property during the second quarter of 2015, and we have funded $52,000 as of June 30, 2016.

Discovery

As a lease inducement, we have a contingent commitment to fund a series of payments up to $2,500,000 in connection with our September 2013 lease to Discovery Senior Living (“Discovery”) of a senior living campus in Rainbow City, Alabama. Discovery would earn the contingent payments upon attaining, and maintaining, a specified lease coverage ratio. Payments were assessed for funding in an amount of $750,000 in September 2015 with the residual potentially due later in 2016. As of June 30, 2016, incurring the contingent payments were not considered probable. Accordingly, no provision for these payments is reflected in the condensed consolidated financial statements.

East Lake

In connection with our July 2015 lease of three senior housing properties, NHI has committed to East Lake certain lease incentive payments of $8,000,000 contingent on reaching and maintaining certain metrics, a contingent earnout of $750,000 payable to the seller upon attaining certain metrics, and the funding of an additional $400,000 for specified capital improvements. At acquisition, we estimated the seller contingent earnout payment to be probable and accordingly, have reflected that amount in our Condensed Consolidated Balance Sheet at June 30, 2016. Funding of capital improvements and contingent payments earned will be included in the lease base when funded.

The Ensign Group

Our May 2016 lease of 15 skilled nursing facilities in Texas to The Ensign Group, as discussed in Note 2, includes a commitment from NHI to purchase four skilled nursing facilities being developed in Texas for $56,000,000 and lease them to Ensign. The

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facilities are in various stages of development, and the purchase window for the first facility is expected to open in 2017. As of June 30, 2016, no amounts related to this commitment have been funded.

Life Care Services

See Note 4 for a discussion of our loan commitments to Timber Ridge, an affiliate of Life Care Services.

Santé

We are committed to fund a $3,500,000 expansion and renovation program at our Silverdale, Washington senior living campus and as of June 30, 2016, had funded $2,621,000, which was added to the basis on which the lease amount is calculated. In addition, we have a contingent commitment to fund two lease inducement payments of $1,000,000 each. Santé would earn the payments upon attaining and sustaining a specified lease coverage ratio. If earned, the first payment would be due following calendar year 2015 and the second payment would be due following calendar year 2016. At acquisition, incurring the contingent payments was not considered probable. No change to our initial assessment has been made as a result of 2015 operations, and accordingly, no provision for these payments is reflected in the condensed consolidated financial statements.

Senior Living Communities

See Note 4 for a discussion of our loan commitments to Senior Living Communities, LLC and its affiliates.

Watermark Retirement Communities

In connection with our acquisition of two entrance fee continuing care retirement communities currently operated by Watermark Retirement Communities in June 2016, we have committed to our tenant East Lake up to an additional $10,000,000 for capital improvements and potential expansion of the communities over the next two years. A total of $747,000 has been funded toward this commitment as of June 30, 2016.

Woodland Village

See Note 2 for a discussion of our renovation commitment to Village Concepts Retirement Communities.

Litigation

Our facilities are subject to claims and suits in the ordinary course of business. Our lessees and borrowers have indemnified, and are obligated to continue to indemnify us, against all liabilities arising from the operation of the facilities, and are further obligated to indemnify us against environmental or title problems affecting the real estate underlying such facilities. While there may be lawsuits pending against certain of the owners and/or lessees of the facilities, management believes that the ultimate resolution of all such pending proceedings will have no material adverse effect on our financial condition, results of operations or cash flows.

NOTE 8. INVESTMENT AND OTHER GAINS

The following table summarizes our investment and other gains (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,

2016
 
2015
 
2016
 
2015
Gains on sales of real estate
$
2,928

 
$

 
$
4,582

 
$

Gains on sales of marketable securities
23,487

 

 
23,498

 

 
$
26,415

 
$

 
$
28,080

 
$


NOTE 9. SHARE-BASED COMPENSATION

We recognize share-based compensation for all stock options granted over the requisite service period using the fair value of these grants as estimated at the date of grant using the Black-Scholes pricing model, and all restricted stock granted over the requisite service period using the market value of our publicly-traded common stock on the date of grant.

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Share-Based Compensation Plans

The Compensation Committee of the Board of Directors (“the Committee”) has the authority to select the participants to be granted options; to designate whether the option granted is an incentive stock option (“ISO”), a non-qualified option, or a stock appreciation right; to establish the number of shares of common stock that may be issued upon exercise of the option; to establish the vesting provision for any award; and to establish the term any award may be outstanding. The exercise price of any ISO’s granted will not be less than 100% of the fair market value of the shares of common stock on the date granted, and the term of an ISO may not be more than ten years. The exercise price of any non-qualified options granted will not be less than 100% of the fair market value of the shares of common stock on the date granted unless so determined by the Committee.

In May 2012, our stockholders approved the 2012 Stock Incentive Plan (“the 2012 Plan”) pursuant to which 1,500,000 shares of our common stock were made available to grant as share-based payments to employees, officers, directors or consultants. Through a vote of our shareholders on May 7, 2015, we increased the maximum number of shares under the plan from 1,500,000 shares to 3,000,000 shares; increased the automatic annual grant to non-employee directors from 15,000 shares to 20,000 shares; and limited the Company’s ability to re-issue shares under the Plan. As of June 30, 2016, there were 1,446,668 shares available for future grants under the 2012 Plan. The individual restricted stock and option grant awards vest over periods up to five years. The term of the options under the 2012 Plan is up to ten years from the date of grant.

In May 2005, our stockholders approved the NHI 2005 Stock Option Plan (“the 2005 Plan”) pursuant to which 1,500,000 shares of our common stock were made available to grant as share-based payments to employees, officers, directors or consultants. As of June 30, 2016, the 2005 Plan has expired and no additional shares may be granted under the 2005 Plan. The individual restricted stock and option grant awards vest over periods up to ten years. The term of the options outstanding under the 2005 Plan is up to ten years from the date of grant.

Compensation expense is recognized only for the awards that ultimately vest. Accordingly, forfeitures that were not expected will result in the reversal of previously recorded compensation expense. The compensation expense reported for the three months ended June 30, 2016 and 2015 was $251,000 and $233,000, respectively, and is included in general and administrative expense in the Condensed Consolidated Statements of Income. For the six months ended June 30, 2016 and 2015 compensation expense included in general and administrative expense was $1,230,000 and $1,697,000, respectively.

At June 30, 2016, we had $900,000 of unrecognized compensation cost related to unvested stock options which is expected to be expensed over the following periods: 2016 - $501,000, 2017 - $360,000 and 2018 - $39,000. Stock-based compensation is included in general and administrative expense in the Condensed Consolidated Statements of Income.

The weighted average fair value per share of options granted was $3.65 and $4.74 for 2016 and 2015, 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:

 
2016
 
2015
Dividend yield
5.9%
 
4.7%
Expected volatility
19.1%
 
17.8%
Expected lives
2.9 years
 
2.8 years
Risk-free interest rate
0.91%
 
0.98%














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The following table summarizes our outstanding stock options:
 
Six Months Ended
 
June 30,
 
2016
 
2015
Options outstanding January 1,
741,676

 
871,671

Options granted under 2012 Plan
470,000

 
450,000

Options granted under 2005 Plan

 
20,000

Options exercised under 2012 Plan
(451,668
)
 
(421,657
)
Options exercised under 2005 Plan

 
(50,002
)
Options outstanding, June 30,
760,008

 
870,012

 
 
 
 
Exercisable at June 30,
406,660

 
596,664


NOTE 10. EARNINGS AND DIVIDENDS PER SHARE

The weighted average number of common shares outstanding during the reporting period is used to calculate basic earnings per common share. Diluted earnings per common share assume the exercise of stock options and the conversion of our convertible debt using the treasury stock method, to the extent dilutive. If our average stock price for the period increases over the conversion price of our convertible debt, the conversion feature will be considered dilutive.

The following table summarizes the average number of common shares and the net income used in the calculation of basic and diluted earnings per common share (in thousands, except share and per share amounts):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net income attributable to common stockholders
$
44,595

 
$
31,182

 
$
77,320

 
$
60,866

 
 
 
 
 
 
 
 
BASIC:
 
 
 
 
 
 
 
Weighted average common shares outstanding
38,520,221

 
37,566,221

 
38,460,934

 
37,562,144

 
 
 
 
 
 
 
 
DILUTED:
 
 
 
 
 
 
 
Weighted average common shares outstanding
38,520,221

 
37,566,221

 
38,460,934

 
37,562,144

Stock options
41,163

 
40,896

 
27,154

 
54,577

Convertible subordinated debentures

 

 

 
9,471

Average dilutive common shares outstanding
38,561,384

 
37,607,117

 
38,488,088

 
37,626,192

 
 
 
 
 
 
 
 
Net income per common share - basic
$
1.16

 
$
.83

 
$
2.01

 
$
1.62

Net income per common share - diluted
$
1.16

 
$
.83

 
$
2.01

 
$
1.62

 
 
 
 
 
 
 
 
Incremental shares excluded since anti-dilutive:
 
 
 
 
 
 
 
Net share effect of stock options with an exercise price in excess of the average market price for our common shares
41,163

 
51,643

 
23,367

 
22,401

Regular dividends declared per common share
$
.90

 
$
.85

 
$
1.80

 
$
1.70

 
 
 
 
 
 
 
 

NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS

Our financial assets and liabilities measured at fair value (based on the hierarchy of the three levels of inputs described in Note 1 to the consolidated financial statements contained in our most recent Annual Report on Form 10-K) on a recurring basis include marketable securities, derivative financial instruments and contingent consideration arrangements. Marketable securities consist of common stock of other healthcare REITs. Derivative financial instruments include our interest rate swap agreements. Contingent consideration arrangements relate to certain provisions of recent real estate purchase agreements involving both business combinations.


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Marketable securities. We utilize quoted prices in active markets to measure debt and equity securities; these items are classified as Level 1 in the hierarchy and include the common and preferred stock of other publicly held healthcare REITs.

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.

Contingent consideration. Contingent consideration arrangements are classified as Level 3 and are valued using unobservable inputs about the nature of the contingent arrangement and the counter-party to the arrangement, as well as our assumptions about the probability of full settlement of the contingency.

Assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):
 
 
 
Fair Value Measurement
 
Balance Sheet Classification
 
June 30,
2016
 
December 31,
2015
Level 1
 
 
 
 
 
Common stock of other healthcare REITs
Marketable securities
 
$
23,751

 
$
55,815

Debt securities
Marketable securities
 
$

 
$
16,929

 
 
 
 
 
 
Level 2
 
 
 
 
 
Interest rate swap liability
Accounts payble and accrued expenses
 
$
12,646

 
$
6,730


Carrying values and fair values of financial instruments that are not carried at fair value at June 30, 2016 and December 31, 2015 in the Condensed Consolidated Balance Sheets are as follows (in thousands):
 
Carrying Amount
 
Fair Value Measurement
 
2016
 
2015
 
2016
 
2015
Level 2
 
 
 
 
 
 
 
Variable rate debt
$
437,302

 
$
279,745

 
$
441,000

 
$
284,000

Fixed rate debt
$
635,533

 
$
634,698

 
$
676,989

 
$
641,066

 
 
 
 
 
 
 
 
Level 3
 
 
 
 
 
 
 
Mortgage and other notes receivable
$
160,062

 
$
133,714

 
$
172,012

 
$
141,408


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.

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.

Carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature. The fair value of our borrowings under our revolving credit facility are reasonably estimated at their carrying value at June 30, 2016 and December 31, 2015, due to the predominance of floating interest rates, which generally reflect market conditions.

NOTE 12. SUBSEQUENT EVENTS

New Debt Financing

On July 15, 2016, we committed to additional debt financing from a private placement lender and locked in a fixed interest rate.  On or before October 6, 2016, we expect to issue $75,000,000 of 8-year notes with a coupon of 3.93%.  The notes are unsecured and require quarterly payments of interest only until maturity.  Terms and conditions of the new financing are similar to those under our bank credit facility with the exception of provisions regarding prepayment premiums.

Senior Living Management

On August 3, 2016, we entered into an agreement to furnish to our current tenant, Senior Living Management, Inc. (“SLM”), through its affiliates, loans of up to $24,500,000 to facilitate SLM’s acquisition of five senior housing facilities that it currently

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operates. The loans consist of two notes under a master credit agreement, include both a mortgage and a corporate loan, and bear interest at 8.25% with terms of five years, plus optional one and two-year extensions. NHI has a right of first refusal if SLM elects to sell the facilities.

Bickford

On July 15, 2016, NHI extended a $14,000,000 construction loan facility to Bickford for the purpose of developing and operating an assisted living/memory care community in Illinois. Initial funding at the loan date was $1,037,000, interest is to accrue at 9%, and the loan is to mature on July 15, 2021. The promissory note is secured by a first mortgage lien on substantially all real and personal property as well as a pledge of any and all leases or agreements which may grant a right of use to the subject property. Usual and customary covenants extend to the agreement, including the borrower’s obligation for payment of insurance and taxes. The loan and subject property are not included in the existing RIDEA joint venture between the parties.

On August 4, 2016, NHI and Bickford announced their intention under a letter of understanding, to terminate the joint venture that has been in place between the parties since September 30, 2012 and convert Bickford to a triple-net tenancy. The letter of understanding is subject to certain conditions including: final approval by secured lenders, legal and tax review, and the negotiation and execution of legal documents. According to plans for the unwinding, NHI has agreed to redeem Bickford’s 15% interest in the real estate underlying the joint venture (PropCo) for a payment to Bickford of $25,100,000, and Bickford is to pay NHI $8,100,000 in redemption of our non-controlling 85% interest in senior housing operations (OpCo), which we have carried on our balance sheet as an equity-method investment. For accounting purposes, these allocations will be subject to final fair valuation.

NHI’s gain from the sale of OpCo, if any, will be calculated on the difference between the carrying amount of our equity-method investment, including the related net operating loss carry-forward, and proceeds attributed to the redemption, based on fair value of the interests conveyed. No gain or loss will be recognized on our acquisition of Bickford’s 15% interest in PropCo, which has previously been consolidated. Rather, Bickford’s non-controlling interest will be de-recognized, and the difference between the fair value of NHI’s cost allocated to the redemption and the carrying amount for Bickford’s non-controlling interest will be recorded as an adjustment to equity through additional-paid-in capital.

Additional provisions of the letter of understanding govern the unwinding of developmental and expansion projects either currently being undertaken or in the planning stages, provide for dispensation of transaction costs, impose a purchase option structure related to in-place loans for the construction of facilities, put in place rights of first refusal on future development, and generally preserve the existing rent structure. Personal guarantees are to be modified to more appropriately reflect the revision of ownership roles. Because of the nature and extent of conditions precedent to closing, a precise time-frame to finalize the closing is still uncertain.

NOTE 13. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2015 the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, which is generally effective for fiscal years and interim periods beginning after December 15, 2015. ASU 2015-02 changed the consolidation analysis for all reporting entities. The changes primarily affect the consolidation of limited partnerships and their equivalents (e.g., limited liability corporations), the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, as well as structured vehicles such as collateralized debt obligations. We adopted the provisions of ASU 2015-02 in the first quarter of 2016. The adoption of ASU 2015-02 did not have a material effect on our consolidated financial statements.

In April 2015 the FASB issued ASU 2015-03, Interest-Imputation of Interest, whose primary effect as subsequently modified is to mandate that, except for revolving credit facilities (which may carry a zero balance), debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability. Debt issuance costs have previously been presented among assets on the balance sheet. The standard does not affect the recognition and measurement of debt issuance costs. The ASU is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. In adopting ASU 2015-03 in the first quarter of 2016, we have chosen to deduct debt issuance costs from amounts owing under our line of credit arrangements, and we have restated prior periods for the effect of these reclassifications. The adoption had the effect of reducing total assets and total liabilities on our Condensed Consolidated Balance Sheet at December 31, 2015, by the amount of unamortized loan costs of $11,814,000.

In September 2015 the FASB issued ASU 2015-16 Simplifying the Accounting for Measurement Period Adjustments, whose principal provisions require that in a business combination an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments

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in ASU 2015-16 require that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Previously, GAAP required that during the measurement period, the acquirer retrospectively adjust the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments in ASU 2015-16 eliminate the requirement to retrospectively account for those adjustments. For public business entities, the amendments in ASU 2015-16 are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. We adopted the provisions of ASU 2015-16 in the first quarter of 2016. The adoption of ASU 2015-16 did not have a material effect on our consolidated financial statements.
In January 2016 the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. Public companies will be required to apply 2016-01 for all accounting periods beginning after December 15, 2017. For public companies, the primary effects of 2016-01 are to:

Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value.

Eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet.

Require the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.

Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

We are evaluating what effect, if any, that adopting the provisions of ASU 2015-01 in 2018 will have on NHI.

In February 2016 the FASB issued ASU 2016-02, Leases. Public companies will be required to apply ASU 2016-02 for all accounting periods beginning after December 15, 2018 - for REITs this means application will be required beginning Jan. 1, 2019. Early adoption is permitted. All leases with lease terms greater than one year are subject to ASU 2016-02 , including leases in place as of the adoption date. Management expects that, because of the ASU 2016-02’s emphasis on lessee accounting, ASU 2016-02 will not have a material impact on our accounting for leases. Consistent with present standards, NHI will continue to account for lease revenue on a straight-line basis for most leases. Also consistent with NHI’s current practice, under ASU 2016-02 only initial direct costs that are incremental to the lessor will be capitalized.

In March 2016 the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, as part of its simplification initiative. ASU 2016-09 is effective for public companies starting in fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The areas for simplification in ASU 2016-09 involve several aspects of accounting for share-based payment transactions, including related income tax consequences, classification of awards as either equity or liabilities, and classification of equity awards within the statement of cash flows. Because NHI is designed as a pass-through entity for purposes of Federal taxation, many of the provisions of ASU 2016-09 which deal with taxation will not have a material effect on our financial statements. Among the provisions with broader reach are simplifications as to treatment of forfeitures, which under current GAAP are based on the number of awards that are expected to vest. Upon adoption of ASU 2016-09, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, as in current GAAP, or account for forfeitures when they occur. Additionally, ASU 2016-09 clarifies that cash

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paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. Our adoption of the provisions of ASU 2016-09 in the first quarter of 2016 had no material effect on our consolidated financial statements.

In March 2016 the FASB issued ASU 2016-06, Contingent Put and Call Options in Debt Instruments, which clarifies how to assess whether contingent call (put) options that can accelerate the payment on debt instruments are clearly and closely related to their debt hosts. This assessment is necessary to determine if the options must be separately accounted for as derivatives. The ASU clarifies that an entity is required to assess the embedded options solely in accordance with a specific four-step decision sequence and is not also required to assess whether the contingency for exercising the options is indexed to interest rates or credit risk. The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We adopted the provisions of ASU 2016-06 in the first quarter of 2016. The adoption of ASU 2016-06 did not have a material effect on our consolidated financial statements.

In June 2016 the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 will require more timely recognition of credit losses associated with financial assets. While current GAAP includes multiple credit impairment objectives for instruments, the previous objectives generally delayed recognition of the full amount of credit losses until the loss was probable of occurring. The amendments in ASU 2016-13, whose scope is asset-based and not restricted to financial institutions, are an improvement to existing standards in eliminating the probable initial recognition threshold in current GAAP and, instead, reflect an entity’s current estimate of all expected credit losses. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. The amendments in ASU 2016-13 broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss that will be more useful to users of the financial statements. ASU 2016-13 is effective for public entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Because we are likely to continue to invest in loans, adoption of ASU 2016-13 will have some effect on our accounting for these investments; accordingly, we are evaluating the extent of the effects, if any, that adopting the provisions of ASU 2016-13 in 2020 will have on NHI.


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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:

*
We depend on the operating success of our tenants and borrowers for collection of our lease and interest income;

*
Certain tenants in our portfolio account for a significant percentage of the rent we expect to generate and the failure of any of these tenants to meet their obligations to us could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

*
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 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 our tenants and borrowers may become subject to bankruptcy or insolvency proceedings;

*
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;

*
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 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 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 the risk that our assets may be subject to impairment charges;

*
We depend on revenues derived mainly from fixed rate investments in real estate assets, while a portion of our debt capital used to finance those investments bears interest at variable rates. This circumstance creates interest rate risk to the Company;

*
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;

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*
We are exposed to risks related to environmental laws and the costs associated with liabilities related to hazardous substances;

*
We are exposed to the risk that we may not be fully indemnified by our lessees and borrowers against future litigation;

*
We depend on the ability to continue to qualify for taxation as a real estate investment trust;

*
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.

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, 2015, 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 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.

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 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 buildings. Other investments include mortgages and other notes, marketable securities, and a joint venture structured to comply with the provisions of the REIT Investment Diversification Empowerment Act of 2007 (“RIDEA”). Through a RIDEA joint venture, we invest in facility operations managed by independent third-parties. 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

At June 30, 2016, we had investments in real estate and mortgage and other notes receivable involving 202 facilities located in 32 states. These investments involve 124 senior housing properties, 73 skilled nursing facilities, 3 hospitals, 2 medical office buildings and other notes receivable. These investments (excluding our corporate office of $1,118,000) consisted of properties with an original cost of approximately $2,346,903,000, rented under triple-net leases to 26 lessees, and $160,062,000 aggregate carrying value of mortgage and other notes receivable due from 13 borrowers.

Our investments in real estate are located within the United States and our investments in mortgage loans are secured by real estate located within the United States. We are managed as one unit for internal reporting and decision making. Therefore, our reporting reflects our financial position and operations as a single segment.

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 and memory care communities and senior living campuses) or discretionary (independent living and entrance-fee communities.) For the table below, three parcels of land acquired have been included in their intended category.

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.


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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 Properties within our portfolio primarily receive payment 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, mortgage and other notes receivable and year-to-date revenue for each asset type as of June 30, 2016 (dollars in thousands):

Real Estate Properties
Properties

 
Beds/Sq. Ft.*

 
Revenue
 
%
 
Investment
 
Senior Housing - Need-Driven
 
 
 
 
 
 
 
 
 
 
 
Assisted Living
75

 
3,654

 
$
24,321

 
20.7
%
 
$
609,428

 
 
Senior Living Campus
9

 
1,224

 
6,691

 
5.7
%
 
134,570

 
 
Total Senior Housing - Need-Driven
84

 
4,878

 
31,012

 
26.4
%
 
743,998

 
Senior Housing - Discretionary
 
 
 
 
 
 
 
 
 
 
 
Independent Living
29

 
3,212

 
22,958

 
19.6
%
 
512,199

 
 
Entrance-Fee Communities
9

 
2,064

 
19,757

 
16.8
%
 
519,707

 
 
Total Senior Housing - Discretionary
38

 
5,276

 
42,715

 
36.4
%
 
1,031,906

 
 
Total Senior Housing
122

 
10,154

 
73,727

 
62.9
%
 
1,775,904

 
Medical Facilities
 
 
 
 
 
 
 
 
 
 
 
Skilled Nursing Facilities
67

 
8,687

 
32,880

 
28.0
%
 
509,382

 
 
Hospitals
3

 
181

 
3,846

 
3.3
%
 
51,131

 
 
Medical Office Buildings
2

 
88,517

*
500

 
0.4
%
 
10,486

 
 
Total Medical Facilities
72

 
 
 
37,226

 
31.7
%
 
570,999

 
 
Total Real Estate Properties
194

 
 
 
$
110,953

 
94.6
%
 
$
2,346,903

 
 
 
 
 
 
 
 
 
 
 
 
Mortgage and Other Notes Receivable
 
 
 
 
 
 
 
 
 
 
Senior Housing - Need-Driven
1

 
70

 
$
192

 
0.2
%
 
$
3,562

 
Senior Housing - Discretionary
1

 
400

 
3,710

 
3.2
%
 
112,692

 
Medical Facilities
6

 
450

 
589

 
0.5
%
 
12,730

 
Other Notes Receivable

 

 
1,833

 
1.5
%
 
31,078

 
 
Total Mortgage and Other Notes Receivable
8

 
920

 
6,324

 
5.4
%
 
160,062

 
 
Total Portfolio
202

 
 
 
$
117,277

 
100.0
%
 
$
2,506,965


Portfolio Summary
Properties

 
Beds/Sq. Ft.*

 
Revenue
 
%
 
Investment
 
Real Estate Properties
194

 
 
 
$
110,953

 
94.6
%
 
$
2,346,903

 
Mortgage and Other Notes Receivable
8

 
 
 
6,324

 
5.4
%
 
160,062

 
 
Total Portfolio
202

 
 
 
$
117,277

 
100.0
%
 
$
2,506,965

 
 
 
 
 
 
 
 
 
 
 
 
Summary of Facilities by Type
 
 
 
 
 
 
 
 
 
 
Senior Housing - Need-Driven
 
 
 
 
 
 
 
 
 
 
 
Assisted Living
76

 
3,724

 
$
24,513

 
20.9
%
 
$
612,989

 
 
Senior Living Campus
9

 
1,224

 
6,691

 
5.7
%
 
134,570

 
 
Total Senior Housing - Need-Driven
85

 
4,948

 
31,204

 
26.6
%
 
747,559

 
Senior Housing - Discretionary
 
 
 
 
 
 
 
 
 
 
 
Entrance-Fee Communities
10

 
2,464

 
23,467

 
20.0
%
 
632,399

 
 
Independent Living
29

 
3,212

 
22,958

 
19.6
%
 
512,199

 
 
Total Senior Housing - Discretionary
39

 
5,676

 
46,425

 
39.6
%
 
1,144,598

 
 
Total Senior Housing
124

 
10,624

 
77,629

 
66.2
%
 
1,892,157

 
Medical Facilities
 
 
 
 
 
 
 
 
 
 
 
Skilled Nursing Facilities
73

 
9,137

 
33,469

 
28.5
%
 
522,113

 
 
Hospitals
3

 
181

 
3,846

 
3.3
%
 
51,131

 
 
Medical Office Buildings
2

 
88,517

*
500

 
0.4
%
 
10,486

 
 
Total Medical
78

 
 
 
37,815

 
32.2
%
 
583,730

 
Other

 
 
 
1,833

 
1.6
%
 
31,078

 
 
Total Portfolio
202

 
 
 
$
117,277

 
100.0
%
 
$
2,506,965

 
 
 
 
 
 
 
 
 
 
 
 
Portfolio by Operator Type
 
 
 
 
 
 
 
 
 
 
Public
53

 
 
 
$
23,787

 
20.3
%
 
$
235,749

 
National Chain (Privately-Owned)
27

 
 
 
23,309

 
19.9
%
 
521,139

 
Regional
109

 
 
 
63,145

 
53.8
%
 
1,565,253

 
Small
13

 
 
 
7,036

 
6.0
%
 
184,824

 
 
Total Portfolio
202

 
 
 
$
117,277

 
100.0
%
 
$
2,506,965


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Table of Contents

For the six months ended June 30, 2016, operators of facilities which provided more than 3% of our total revenues were (in alphabetical order): Bickford Senior Living; The Ensign Group; Health Services Management; Holiday Retirement; Life Care Services; National HealthCare Corp; and Senior Living Communities.

As of June 30, 2016, our average effective annualized rental income was $8,559 per bed for skilled nursing facilities, $10,933 per unit for senior living campuses, $15,636 per unit for assisted living facilities, $14,771 per unit for independent living facilities, $21,143 per unit for entrance fee communities, $42,499 per bed for hospitals, and $11 per square foot for medical office buildings.

We invest a portion of our funds in the common shares of other publicly-held healthcare REITs. At June 30, 2016, such investments had a carrying value of $23,751,000.

Areas of Focus

We are evaluating and will potentially make additional investments during the remainder of 2016 while we continue to monitor and improve our existing properties. We seek tenants who will become mission-oriented partners in relationships where our business goals are aligned. This approach fuels steady, and thus, enduring growth for those partners and for NHI. Within the context of our growth model, we rely on a cost-effective access to debt and equity capital to finance acquisitions that will drive our earnings. In recent months, our cost of debt capital has remained relatively flat while our stock price has risen to new highs presumably in response to our investment activity and a diminished concern over rising interest rates. Large-scale portfolios continue to command premium pricing, due to the continued abundance of private and foreign buyers seeking to invest in healthcare real estate. This combination of circumstances places a premium on our ability to execute those larger transactions that will generate meaningful earnings growth.

With lower capitalization rates for existing healthcare facilities, there has been increased interest in constructing new facilities in hopes of generating better returns on invested capital. Using our relationship-driven model, we continue to look for opportunities to support new and existing tenants and borrowers with the capital needed to expand existing facilities and to initiate ground-up development of new facilities. We concentrate our efforts in those markets where there is both a demonstrated demand for a particular product type and where we perceive we have a competitive advantage. The projects we agree to finance have attractive upside potential and are expected to provide above-average returns to our shareholders to mitigate the risks inherent with property development and construction.

Longer term borrowing rates are expected to increase in the U.S. As a result, there will be pressure on the spread between our cost of capital and the returns we earn. We expect that pressure to be partially mitigated by market forces that would tend to result in higher capitalization rates for healthcare assets and higher lease rates indicative of historical levels. Our cost of capital has increased over the past year as we transition some of our short term revolving borrowings into debt instruments with longer maturities and fixed interest rates. Managing long-term risk involves trade-offs with the competing alternative goal of maximizing short-term profitability. Our intention is to strike an appropriate balance between these competing interests within the context of our investor profile. Due to more favorable pricing, we presently prefer private placement debt over a public offering of bond debt.

For the six months ended June 30, 2016, approximately 28% of our revenue from continuing operations was derived from operators of our skilled nursing facilities that receive a significant portion of their revenue from governmental payors, primarily Medicare and Medicaid. Such revenues are subject annually to statutory and regulatory changes, and in recent years, have been reduced due to federal and state budgetary pressures. Over the past five years, we have selectively diversified our portfolio by directing a significant portion of our investments into properties which do not rely primarily on Medicare and Medicaid reimbursement, but rather on private pay sources (assisted living and memory care facilities, senior living campuses, independent living facilities and entrance-fee communities). We will occasionally acquire skilled nursing facilities in good physical condition with a proven operator and strong local market fundamentals, because diversification implies a periodic rebalancing, but our recent investment focus has been on acquiring need-driven and discretionary senior housing assets.

Considering individual tenant lease revenue as a percentage of total revenue, Bickford Senior Living is our largest assisted living tenant, an affiliate of Holiday Retirement is our largest independent living tenant, National HealthCare Corporation is our largest skilled nursing tenant and Senior Living Communities is our largest entrance-fee community tenant. Our shift toward private payor facilities, as well as our expansion into the discretionary senior housing market, has further resulted in a portfolio whose current composition is relatively balanced between medical facilities, need-driven and discretionary senior housing.

We manage our business with a goal of increasing the regular annual dividends paid to shareholders. Our Board of Directors approves a regular quarterly dividend which is reflective of expected taxable income on a recurring basis. Our transactions that are infrequent and non-recurring that generate additional taxable income have been distributed to shareholders in the form of special dividends. Taxable income is determined in accordance with the Internal Revenue Code and differs from net income for

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financial statements purposes determined in accordance with U.S. generally accepted accounting principles. Our goal of increasing annual dividends requires a careful balance between identification of high-quality lease and mortgage assets in which to invest and the cost of our capital with which to fund such investments. We consider the competing interests of short and long-term debt (interest rates, maturities and other terms) versus the higher cost of new equity. 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 capital will generate sufficient returns to our shareholders.

Our projected dividends for the current year and actual dividends for the last two years are as follows:
20161
 
2015
 
2014
$
3.60

 
$
3.40

 
$
3.08

1 Based on $.90 per common share for the first and second quarters, annualized

Our investments in healthcare real estate have been partially accomplished by our ability to effectively leverage our balance sheet. However, we continue to maintain a relatively low-leverage balance sheet compared with many in our peer group. 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 this gives us a competitive advantage when accessing debt markets.

We calculate our fixed charge coverage ratio as approximately 5.8x for the six months ended June 30, 2016 (see our discussion of Adjusted EBITDA and a reconciliation to our net income on page 48). On an annualized basis, our consolidated net debt-to Adjusted EBITDA ratio is approximately 4.4x for the quarter ended June 30, 2016 (in thousands):

Adjusted EBITDA
$
58,796

Annualizing Adjustment
176,388

Annualized impact of recent investments
10,095

 
$
245,279

 
 
Consolidated Total Debt
$
1,072,835

Less: cash and cash equivalents
(3,876
)
Consolidated Net Debt
$
1,068,959

 
 
Consolidated Net Debt to Adjusted EBITDA
4.4
x

According to current projections by the U.S. Department of Health and Human Services, the number of Americans 65 and older is expected to grow 36% between 2010 and 2020, compared to a 9% growth rate for the general population. An increase in this age demographic is expected to increase demand for senior housing properties of all types in the coming decades. There is increasing demand for private-pay senior housing properties in countries outside the U.S., as well. We therefore consider real estate and note investments with U.S. entities who seek to expand their senior housing operations into countries where local-market demand is sufficiently demonstrated.

Strong demographic trends provide the context for continued growth in 2016 and the years ahead. We plan to fund any new real estate and mortgage investments during 2016 using our liquid assets and debt financing. Should the weight of additional debt as a result of new acquisitions suggest the need to rebalance our capital structure, we would then expect to access the capital markets through an ATM or other equity offerings. Our disciplined investment strategy implemented through measured increments of debt and equity sets the stage for annual dividend growth, continued low leverage, a portfolio of diversified, high-quality assets, and business relationships with experienced operators who we make our priority, continue to be the key drivers of our business plan.





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Table of Contents

Critical Accounting Policies

See our most recent Annual Report on Form 10-K for a discussion of critical accounting policies including those concerning revenue recognition, our status as a REIT, principles of consolidation, evaluation of impairments and allocation of property acquisition costs.

Significant Operators

As discussed in Note 2 to the condensed consolidated financial statements, we have four operators from whom we individually derive at least 10% of our rental income as follows (dollars in thousands):
 
 
 
 
 
Rental Income
 
 
 
 
 
 
Investment
 
Six Months Ended June 30,
 
 
Lease
 
Asset Class
 
Amount
 
2016
 
 
2015
 
 
Renewal
Holiday Retirement
ILF
 
$
493,378

 
$
21,908

20%
 
$
21,908

21%
 
2031
Senior Living Communities
EFC
 
476,000

 
19,711

18%
 
19,711

19%
 
2029
National HealthCare Corporation
SNF
 
171,297

 
19,087

17%
 
18,360

17%
 
2026
Bickford Senior Living
ALF
 
369,597

 
13,471

12%
 
11,695

11%
 
Various
All others
Various
 
836,631

 
37,925

34%
 
33,491

32%
 
Various
 
 
 
$
2,346,903

 
$
112,102


 
$
105,165

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Joint Venture

As of June 30, 2016, we owned an 85% equity interest and Sycamore Street, LLC (“Sycamore”), an affiliate of Bickford, owned a 15% equity interest in our consolidated subsidiary (“PropCo”) which owns 32 assisted living/memory care facilities, plus 5 facilities under development. The facilities are leased to an unconsolidated operating company, (“OpCo”), in which we also retain an 85/15 non-controlling ownership interest with Sycamore. This joint venture is structured to comply with the provisions of RIDEA. As of June 30, 2016, the annual contractual rent from OpCo to PropCo is $25,359,000, plus fixed annual escalators. NHI has an exclusive right to Bickford’s future acquisitions, development projects and refinancing transactions. Of our total revenues, $6,315,000 (10%) and $5,890,000 (10%) were recognized as rental income from the RIDEA joint venture for the three months ended June 30, 2016 and 2015, respectively, and $12,622,000 (10%) and $11,695,000 (10%) for the six months ended and June 30, 2016 and 2015, respectively.

At June 30, 2016, the carrying value of our investment in the operating company, OpCo, was $7,197,000 plus a deferred asset of $891,000 related to the carry-forward of net operating losses for tax purposes. The excess of the original purchase price over the fair value of identified tangible assets at acquisition is treated as implied goodwill and is subject to periodic review for impairment in conjunction with our equity method investment as a whole.

The income statements for OpCo include the operating results of 31 same-store properties and 1 focus property that was added to the portfolio within the last 12 months. Focus properties receive increased management oversight because they have not reached cash flow stabilization or are new additions to the portfolio. For accounting purposes we are required to expense the pre-opening expenses and operating losses of newly-developed properties.

Unaudited summarized income statements for OpCo are presented below (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Revenues
$
21,115

 
$
18,685

 
$
41,906

 
$
37,152

 
 
 
 
 
 
 
 
Operating expenses, including management fees
14,539

 
12,850

 
29,171

 
25,535

Lease expense, including straight-line rent
6,437

 
6,003

 
12,869

 
11,883

Depreciation and amortization
207

 
165

 
407

 
337

Net Loss
$
(68
)
 
$
(333
)
 
$
(541
)
 
$
(603
)


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OpCo is intended to be self-financing, and aside from initial investments therein, no direct support has been provided by NHI to OpCo since inception on September 30, 2012. While PropCo’s rental revenues associated with the related properties are sourced from OpCo, a decision to furnish additional direct support would be at our discretion and not obligatory. As a result, we believe our maximum exposure to loss at June 30, 2016, due to our investment in OpCo, would be limited to our equity interest as adjusted for any unrealized loss carry-forwards. We have concluded that OpCo meets the accounting criteria to be considered a VIE. However, because we do not control the entity, nor do we have any role in its day-to-day management, we are not the primary beneficiary of the entity, and we account for our investment using the equity method. There have been no distributions declared from OpCo since its inception.

On August 4, 2016, NHI and Bickford announced their intention under a letter of understanding, to terminate the joint venture that has been in place between the parties since September 30, 2012 and convert Bickford to a triple-net tenancy. The letter of understanding is subject to certain conditions including: final approval by secured lenders, legal and tax review, and the negotiation and execution of legal documents. According to plans for the unwinding, NHI has agreed to redeem Bickford’s 15% interest in the real estate underlying the joint venture (PropCo) for a payment to Bickford of $25,100,000, and Bickford is pay NHI $8,100,000 in redemption of our non-controlling 85% share in senior housing operations (OpCo), which we have carried on our balance sheet as an equity-method investment. For accounting purposes, these allocations will be subject to final fair valuation.

NHI’s gain from the sale of OpCo, if any, will be calculated on the difference between the carrying amount of our equity-method investment, including the related net operating loss carry-forward, and proceeds attributed to the redemption based on fair value of the interests conveyed. No gain or loss will be recognized on our acquisition of Bickford’s 15% interest in PropCo, which has previously been consolidated. Rather, Bickford’s non-controlling interest will be de-recognized, and the difference between the fair value of NHI’s cost allocated to the redemption and the carrying amount for Bickford’s non-controlling interest will be recorded as an adjustment to equity through additional-paid-in capital.

Additional provisions of the letter of understanding govern the unwinding of developmental and expansion projects either currently being undertaken or in the planning stages, provide for a 50/50 sharing of costs to complete the transaction, impose a purchase option structure related to in-place loans for the construction of facilities, put in place rights of first refusal on future development, and generally preserve the existing rent structure. Personal guarantees are to be modified to more appropriately reflect the revision of ownership roles. Because of the nature and extent of conditions precedent to closing, a precise time-frame to finalize the closing is still uncertain.

Precise estimates of the results of the letter of understanding will be affected by the resolution of uncertainties. Future results are subject to change, however, we believe the unwinding will prove to be accretive to NHI based on the interplay between ceasing current PropCo ownership distributions to Bickford, relief from NHI’s share of historical losses in OpCo, and redirecting the flow of income attributable the non-controlling interest to our common stockholders. We expect to provide appropriate pro forma financial statements when a definitive agreement is reached.

We continue to transact with Bickford. On June 1, 2016, in an asset acquisition, we acquired five assisted living and memory care facilities owned and operated by Bickford Senior Living (“Bickford”) for $87,500,000, including $77,747,000 in cash and cancellation of notes and accrued interest receivable totaling $9,753,000. Additionally, we have committed $2,400,000 for capital expenditures and expansion of these newly acquired facilities, the funding of which will be added to the lease base. The lease provides for an initial rate of 7.25% and term of 15 years plus two 5-year renewal options. The annual lease escalator is 3%. NHI’s purchase option on a sixth Bickford facility was relinquished. The facilities consist of 277 total units located in Illinois (3), Nebraska, and Iowa. The facilities are not included in the existing RIDEA joint venture between the parties.

On July 15, 2016, NHI extended a $14,000,000 construction loan facility to Bickford for the purpose of developing and operating an assisted living/memory care community in Illinois. Initial funding at the loan date was $1,037,000, interest is to accrue at 9%, and the loan is to mature on July 15, 2021. The promissory note is secured by a first mortgage lien on substantially all real and personal property as well as a pledge of any and all leases or agreements which may grant a right of use to the subject property. Usual and customary covenants extend to the agreement, including the borrower’s obligation for payment of insurance and taxes. The loan and subject property are not included in the existing RIDEA joint venture between the parties.









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Table of Contents

Investment Highlights

Since January 1, 2016, we have made or announced the following investments related to real estate ($ in thousands):
 
 
Properties
 
Asset Class
 
Amount
Lease Investments
 
 
 
 
 
 
Watermark Retirement / East Lake Capital Mgmt.
 
2
 
SHO
 
$
66,300

The Ensign Group
 
8
 
SNF