| Real Estate and Other Activities | 3. Real Estate a nd Other Activities New Investments We acquired or invested in the following net assets (in thousands):
For the Six Months
2022 2021
Land and land improvements $ 34,204 $ 345,039
Buildings 290,256 825,322
Intangible lease assets — subject to amortization (weighted-average useful 20.1 years for 2022 and 45.0 years for 2021) 16,949 96,455
Mortgage loans(1)(2) 100,000 1,090,400
Investments in unconsolidated real estate joint ventures 399,456 —
Investments in unconsolidated operating entities 131,105 845,646
Liabilities assumed ( 25,727 ) ( 65,411 )
946,243 3,137,451
Loans repaid(1) — ( 1,090,400 )
Total net assets acquired $ 946,243 $ 2,047,051 (1) The 2021 column includes an £ 800 million mortgage loan advanced to the Priory Group ("Priory") in the first quarter of 2021 and converted to fee simple ownership of 35 properties in the second quarter of 2021 as described below. (2) In the 2022 second quarter, we increased our mortgage loan to Prospect Medical Holdings, Inc. ("Prospect") that was originated in 2019 and that is secured by a first lien on a California hospital. The loan bears interest at a current market rate plus a component of additional interest upon repayment, which is anticipated during the fourth quarter. 2022 Activity Macquarie Transaction On March 14, 2022, we completed a transaction with Macquarie Asset Management (“MAM”) to form a partnership (the “Macquarie Transaction”), pursuant to which we contributed eight Massachusetts-based general acute care hospitals that are leased to Steward Health Care System LLC ("Steward"), and a fund managed by MAM has acquired, for cash consideration, a 50 % interest in the partnership. The transaction valued the portfolio at approximately $ 1.7 billion, and we recognized a gain on real estate of approximately $ 600 million from this transaction, partially offset by the write-off of unbilled straight-line rent receivables. The partnership raised nonrecourse secured debt of 55 % of asset value, and we received proceeds, including from the secured debt, of approximately $ 1.3 billion, virtually all of which was used to repay debt. We obtained a 50 % interest in the real estate partnership valued at approximately $ 400 million (included in the "Investments in unconsolidated real estate joint ventures" line of the condensed consolidated balance sheets), which is being accounted for under the equity method of accounting. Other Transactions On March 11, 2022, we acquired four general acute care hospitals in Finland for € 178 million ($ 194 million). These hospitals are leased to Pihlajalinna pursuant to a long-term lease with annual inflation-based escalators. We acquired these facilities by the share purchase of real estate holding entities that included deferred income tax and other liabilities of approximately $ 26 million. On February 16, 2022, we agreed to participate in an existing syndicated term loan with a term of six years originated on behalf of Priory. We funded £ 96.5 million towards a £ 100 million participation level in the variable rate loan, reflecting a 3.5 % discount. Other acquisitions in the first half of 2022 included five general acute care facilities. Three general acute care facilities, located throughout Spain, were acquired on April 29, 2022 for € 27 million and are leased to GenesisCare pursuant to a long-term lease with annual inflation-based escalators. The other two general acute care facilities, one in Arizona and the other in Florida, were acquired on April 18 and 25, 2022, respectively, for approximately $ 80 million and are leased to Steward pursuant to an already existing master lease agreement with annual inflation-based escalators. 2021 Activity Priory Group Transaction On January 19, 2021, we completed the first of two phases in the Priory transaction in which we funded an £ 800 million interim mortgage loan on an identified portfolio of Priory real estate assets in the United Kingdom. On June 25, 2021, we completed the second phase of the transaction in which we converted this interim mortgage loan to fee simple ownership in a portfolio of 35 select real estate assets from Priory (which is currently majority-owned by Waterland Private Equity Fund VII C.V. (“Waterland VII”)) in individual sale-and-leaseback transactions. Therefore, the net aggregate purchase price for the real estate assets we acquired from Priory was approximately £ 800 million, plus customary stamp duty, tax, and other transaction costs. In addition to the real estate investment, on January 19, 2021, we made a £ 250 million interim acquisition loan to Waterland VII, in connection with the closing of Waterland VII’s acquisition of Priory, which was repaid in full plus interest on October 22, 2021. In addition, we acquired a 9.9 % equity interest in the Waterland VII affiliate that indirectly owns Priory. Other Transactions On April 16, 2021, we made a CHF 145 million investment in Swiss Medical Network, our tenant via our Infracore SA ("Infracore") equity investment. On January 8, 2021, we made a $ 335 million loan to affiliates of Steward, all of the proceeds of which were used to pay to and redeem a similarly sized convertible loan from Steward’s former private equity sponsor. This loan now carries a four percent interest rate with possible additional returns based on the increase in the value of Steward. The initial term of the loan is seven years . Development Activities During the 2022 second quarter, we agreed to finance the development of four new projects. One of these development projects is a behavioral health facility in McKinney, Texas with a total budget of approximately $ 35 million. This facility will be leased to Springstone, LLC ("Springstone") pursuant to the existing long-term master lease. In addition, we agreed to finance the development of and lease three general acute care facilities located throughout Spain for a total commitment of approximately € 120 million. These facilities will be leased to our existing tenant, IMED Hospitales ("IMED"), under a long-term master lease agreement. During the 2022 first quarter, we completed construction and began recording rental income on an inpatient rehabilitation facility located in Bakersfield, California. This facility commenced rent on March 1, 2022 and is being leased to Ernest Health, Inc. ("Ernest") pursuant to an existing long-term master lease. See table below for a status summary of our current development projects (in thousands):
Property Commitment Costs Estimated Rent
Steward (Texas) $ 169,408 $ 57,405 2Q 2024
IMED (Spain) 49,371 12,542 2Q 2023
Ernest (California) 47,700 42,073 3Q 2022
IMED (Spain) 44,470 29,538 3Q 2023
IMED (Spain) 35,975 8,000 3Q 2024
Springstone (Texas) 34,600 — 1Q 2024
$ 381,524 $ 149,558 Disposals 2022 Activity On March 14, 2022, we completed the previously described partnership with MAM, in which we sold the real estate of eight Massachusetts-based general acute care hospitals, with a fair value of approximately $ 1.7 billion. See "New Investments" in this Note 3 for further details on this transaction. During the first half of 2022, we also completed the sale of four other facilities and two ancillary properties for approximately $ 154 million, resulting in a gain on real estate of approximately $ 31 million. Summary of Operations for Disposed Assets in 2022 The properties sold during 2022 do not meet the definition of discontinued operations. However, the following represents the operating results from these properties for the periods presented (in thousands):
For the Three Months For the Six Months
2022 2021 2022 2021
Revenues(1) $ ( 400 ) $ 35,215 $ 20,948 $ 67,484
Real estate depreciation and amortization(2) ( 215 ) ( 8,205 ) ( 961 ) ( 16,254 )
Property-related expenses ( 1,310 ) ( 2,823 ) ( 1,854 ) ( 3,518 )
Other income(3) 16,348 63 467,957 135
Income from real estate dispositions, net $ 14,423 $ 24,250 $ 486,090 $ 47,847 (1) Includes $ 1.8 million and $ 6.3 million of straight-line rent write-offs associated with the non-Macquarie disposal transactions for the three and six months ended June 30, 2022, respectively. (2) Lower in 2022 as we stopped depreciating the properties making up the Macquarie Transaction once deemed held for sale in September 2021. (3) Includes $ 16.4 million and $ 468.0 million of gains (net of $ 125 million write-off of straight-line rent receivables related to the Macquarie Transaction) for the three and six months ended June 30, 2022, respectively. 2021 Activity During the first half of 2021, we completed the sale of five facilities and an ancillary property for approximately $ 25 million, resulting in a net loss on real estate of approximately $ 0.4 million. Leasing Operations (Lessor) We acquire and develop healthcare facilities and lease the facilities to healthcare operating companies. These infrastructure-type assets generally require a longer term (typical initial fixed terms of at least 15 years), and most include renewal options at the election of our tenants, generally in five year increments. Over 99 % of our leases provide annual rent escalations based on increases in the Consumer Price Index (or similar indices outside the U.S.) and/or fixed minimum annual rent escalations. Many of our domestic leases contain purchase options with pricing set at various terms but in no case less than our total initial investment. For five properties with a carrying value of approximately $ 230 million, our leases require a residual value guarantee from the tenant. Our leases typically require the tenant to handle and bear most of the costs associated with our properties including repair/maintenance, property taxes, and insurance. We routinely inspect our properties to ensure the residual value of each of our assets is being maintained. Except for leases classified as financing leases as noted below, all of our leases are classified as operating leases. At June 30, 2022 , leases on 13 Ernest facilities and five Prime Healthcare Services, Inc. ("Prime") facilities are accounted for as direct financing leases and leases on 13 of our Prospect facilities and five of our Ernest facilities are accounted for as a financing. The components of our total investment in financing leases consisted of the following (in thousands):
As of June 30, As of December 31,
Minimum lease payments receivable $ 1,160,820 $ 1,183,855
Estimated residual values 203,818 203,818
Less: Unearned income and allowance for credit loss ( 893,158 ) ( 918,584 )
Net investment in direct financing leases 471,480 469,089
Other financing leases (net of allowance for credit loss) 1,605,333 1,584,238
Total investment in financing leases $ 2,076,813 $ 2,053,327 COVID-19 Rent Deferrals Due to the COVID-19 pandemic and its impact on our tenants' business, we agreed to defer collection of a certain amount of rent for a few tenants. Pursuant to our agreements with these tenants, we expect repayments of previously deferred rent to continue, with the remaining outstanding deferred rent balance of approximately $ 15.7 million as of June 30, 2022, to be paid over specified periods in the future with interest. Halsen Healthcare On September 30, 2019, we acquired the real estate of Watsonville Community Hospital in Watsonville, California for $ 40 million, which was then leased to Halsen Healthcare. In addition, we made a working capital loan to Halsen Healthcare. The hospital operator faced significant financial challenges over a two-year period that were worsened by revenue losses during the COVID-19 pandemic. During this time, we increased the loan in an effort to support the operator of this facility, allowing it to continue serving the community's needs. On December 5, 2021, Halsen Healthcare filed Chapter 11 bankruptcy in order to reorganize, while keeping the hospital open. As such, we have a credit loss reserve against the estimated uncollectible portion of the loan and have written off approximately $ 2.5 million of billed and straight-line rent receivables. On February 23, 2022, the bankruptcy court approved the Pajaro Valley Healthcare District's bid to purchase the operations of the Watsonville Community Hospital and lease the real estate from us. Although there are certain hurdles still to be met, this transaction is progressing and expected to close during the third quarter of 2022. At June 30, 2022, we believe our current investment in the Watsonville property, representing less than 0.3 % of total assets, is fully recoverable, but no assurances can be given that we will not have any further write-offs or impairments in future periods. Other Leasing Activities Prime has certain rights to repurchase from us during the third quarter the real estate associated with two master leases representing approximately $ 300 million of net book value at June 30, 2022. If this repurchase closes, we expect to receive cash proceeds approximating $ 370 million and recognize a gain, net of any straight-line rent write-offs. At June 30, 2022, 99 % of our properties are occupied by tenants, leaving five properties as vacant, representing less than 0.3 % of total assets. We are in various stages of either releasing or selling these vacant properties, for one of which we received and recorded a significant termination fee in 2019. Investments in Unconsolidated Entities Investments in Unconsolidated Real Estate Joint Ventures Our primary business strategy is to acquire real estate and lease to providers of healthcare services. Typically, we directly own 100 % of such fee simple real estate. However, from time-to-time, we will co-invest with other investors that share a similar view that hospital real estate is a necessary infrastructure-type asset in communities. In these types of investments, we will own undivided interests of less than 100 % of the real estate and share control over the assets through unconsolidated real estate joint ventures. The underlying real estate and leases in these unconsolidated real estate joint ventures are structured similarly and carry a similar risk profile to the rest of our real estate portfolio. The following is a summary of our investments in unconsolidated real estate joint ventures by operator (amounts in thousands):
Operator As of June 30, As of December 31,
Median Kliniken S.á.r.l ("MEDIAN") $ 477,509 $ 517,648
Swiss Medical Network 434,323 476,193
Steward (Macquarie Transaction) 408,681 —
Policlinico di Monza 82,548 95,468
HM Hospitales 57,312 63,618
Total $ 1,460,373 $ 1,152,927 See "New Investments" section in this same Note 3 for a discussion of the Macquarie Transaction. Through the first half of 2022, we earned approximately $ 50 million of dividends from these real estate joint ventures, including approximately $ 27 million of annual dividends from our joint venture in Switzerland. Investments in Unconsolidated Operating Entities Our investments in unconsolidated operating entities are noncontrolling investments that are typically made in conjunction with larger real estate transactions in which the operators are vetted as part of our overall underwriting process. In many cases, we would not be able to acquire the larger real estate portfolio without such investments in operators. These investments also offer the opportunity to enhance our overall return and provide for certain minority rights and protections. The following is a summary of our investments in unconsolidated operating entities (amounts in thousands):
Operator As of June 30, As of December 31,
Steward (loan investment) $ 362,821 $ 360,164
International joint venture 231,402 219,387
Springstone 196,768 187,450
Priory 156,389 42,315
Swiss Medical Network 152,128 159,208
Steward (equity investment) 139,000 139,000
Prospect 112,772 112,283
Aevis Victoria SA ("Aevis") 72,590 61,271
Aspris Children's Services ("Aspris") 16,040 8,356
Total $ 1,439,910 $ 1,289,434 The increase during the 2022 first half is primarily due to our investment in the Priory syndicated term loan as described under "New Investments" in this Note 3 . Pursuant to our approximate 5 % stake in Aevis and other investments marked to fair value, we recorded a $ 9.0 million favorable non-cash fair value adjustment during the first half of 2022; whereas, this was a $ 1.9 million favorable non-cash fair value adjustment for the same period of 2021. We also earned $ 2.0 million of dividend income during the first half of 2022. Pursuant to our existing 9.9 % equity interest in Steward, we received an $ 11 million cash distribution during the first half of 2021, which was accounted for as a return of capital. Credit Loss Reserves Upon the adoption of Accounting Standards Update ("ASU") No. 2016-13 "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13") on January 1, 2020, we began applying a forward-looking "expected loss" model to all of our financing receivables, including financing leases and loans. We are using ASU 2016-13 to establish credit loss reserves on all outstanding loans based on historical credit losses of similar instruments. The following table summarizes the activity in our credit loss reserves (in thousands):
For the Three Months
2022 2021
Balance at beginning of the period $ 53,933 $ 8,722
Provision (recovery) for credit loss 1,345 ( 939 )
Expected credit losses related to financial instruments sold ( 28 ) —
Balance at end of the period $ 55,250 $ 7,783
For the Six Months
2022 2021
Balance at beginning of the year $ 48,527 $ 8,726
Provision (recovery) for credit loss 6,757 ( 939 )
Expected credit losses related to financial instruments sold ( 34 ) ( 4 )
Balance at end of the period $ 55,250 $ 7,783 Other Investment Activities In the 2022 second quarter, we loaned $ 150 million to Steward pursuant to a five-year secured loan. The loan bears interest at a current market rate (comparable to recent lease rates) plus a component of additional interest upon repayment. The loan is prepayable without penalty and is mandatorily prepayable upon certain sales of Steward assets and operations. Concentrations of Credit Risk We monitor concentration risk in several ways due to the nature of our real estate assets that are vital to the communities in which they are located and given our history of being able to replace inefficient operators of our facilities, if needed, with more effective operators: 1) Facility concentration – At June 30, 2022 , our largest single property represented approximately 2.8 % of our total assets, similar to December 31, 2021. 2) Operator concentration – For the three and six months ended June 30 , 2022 and 20 21, revenue from Steward, Circle Health Ltd. ("Circle"), and Prospect individually represented more than 10 % of our total revenues. At June 30, 2022, the assets leased under triple-net leases to Steward (our largest tenant), including our share of assets leased through the MAM partnership discussed above, represented less than 20 % of our total assets. 3) Geographic concentration – At June 30, 2022 , investments in the U.S., Europe, Australia, and South America represented approximately 63 %, 31 %, 5 %, and 1 %, respectively, of our total assets compared to 64 %, 30 %, 5 %, and 1 %, respectively, of our total assets at December 31, 2021. 4) Facility type concentration – For the three and six months ended June 30, 2022 , approximately 77 % of our revenues were generated from our general acute care facilities, while revenues from our behavioral and rehabilitation facilities made up 13 % and 7 %, respectively. Freestanding ER/urgent care facilities and long-term acute care facilities combined to make up the remaining 3 %. In comparison, general acute care and rehabilitation facilities made up 80 % and 10 %, respectively, of our total revenues for the three and six months ended June 30, 2021. Revenues from our behavioral health, freestanding ER/urgent care, and long-term acute care facilities combined to make up less than 10 % of our revenues for the three and six months ended June 30, 2021. |
