| Real Estate and Lending Activities | 3. Real Estate and Lending Activities
Acquisitions
2015 Activity
MEDIAN Transaction Update
On April 29, 2015, we entered into a series of definitive
agreements with Median Kliniken S.à r.l.,
(“MEDIAN”), a German provider of post-acute and acute
rehabilitation services, to acquire the real estate assets of 32
hospitals owned by MEDIAN for an aggregate purchase price of
approximately €688 million. Upon acquisition, each property
became subject to a master lease between us and MEDIAN providing
for the leaseback of the property to MEDIAN. The master lease has
an initial term of 27 years and provides for an initial GAAP lease
rate of 9.3%, with annual escalators at the greater of one percent
or 70% of the German consumer price index. We expect to acquire
three additional facilities from MEDIAN in a substantially similar
sale-leaseback transaction subject to the master lease, resulting
in an aggregate purchase price for all acquired facilities of
approximately €705 million.
MEDIAN is owned by an affiliate of Waterland Private Equity Fund V
C.V. (“Waterland”), which acquired 94.9% of the
outstanding equity interests in MEDIAN, and by a subsidiary of our
operating partnership, which acquired the remaining 5.1% of the
outstanding equity interests in MEDIAN, each in December 2014. In
December 2014, we provided interim acquisition loans to affiliates
of Waterland and MEDIAN in connection with Waterland’s
acquisition of its stake in MEDIAN in an aggregate amount of
approximately €425 million. In addition, we made further
loans to MEDIAN during the first half of 2015 in an aggregate
amount of approximately €240 million, which were used by
MEDIAN to repay existing debt on properties we have acquired or
expect to acquire. We may make additional loans to MEDIAN for the
purpose of repaying existing property debt, up to a total aggregate
amount of all loans to Waterland and MEDIAN in the amount of
approximately €705 million.
Closing of the sale-leaseback transactions, which began in the
second quarter of 2015, is subject to customary real estate,
regulatory and other closing conditions, including waiver of any
statutory pre-emption rights by local municipalities and antitrust
clearance. At each closing, the purchase price for each facility
will be reduced and offset against the interim loans made to
affiliates of Waterland and MEDIAN as described above and against
the amount of any debt assumed or repaid by us in connection with
the closing. As of June 30, 2015, we have closed on 17 of the
35 properties for an aggregate amount of €317 million
($354 million). As of August 1, 2015, we have closed on 30 of
the 35 (including the three additional facilities) properties
subject to the agreements for a cumulative purchase price to date
of approximately €627 million.
Other Acquisitions
On June 16, 2015, we acquired the real estate of two
facilities in Lubbock, Texas, a 60-bed inpatient rehabilitation
hospital and a 37-bed long term acute care hospital, for an
aggregate purchase price of $31.5 million. We entered into a
20-year lease with Ernest for the rehabilitation hospital, which
provides for three five-year extension options, and separately
entered into a lease with Ernest for the long-term acute care
hospital that has a final term ending December 31, 2034. In
connection with the transaction, we funded an acquisition loan to
Ernest of approximately $12.0 million. Ernest will operate the
rehabilitation hospital in a joint venture with Covenant Health
System, while the long term acute care hospital will continue to be
operated by Fundamental Health under a new sublease with
Ernest.
On February 27, 2015, we acquired an inpatient rehabilitation
hospital in Weslaco, Texas for $10.7 million leased to Ernest
pursuant to the 2012 master lease which has a remaining 17-year
fixed term and three five year extension options. This lease
provides for consumer-priced-indexed annual rent increases, subject
to a floor and a cap. In addition we agreed to fund an acquisition
loan in the amount of $5 million.
On February 13, 2015, we acquired two general acute care
hospitals in the Kansas City area for $110 million. Affiliates of
Prime Healthcare Services, Inc. (“Prime”) is the tenant
and operator pursuant to a new master lease that has similar terms
and security enhancements as the other master lease agreements
entered into in 2013. This master lease has a 10 year initial fixed
term with two extension options of five years each. The lease
provides for consumer-price-indexed annual rent increases, subject
to a specified floor. In addition, we agreed to fund a mortgage
loan in the amount of $40 million, which has a 10-year term.
2014 Activity
On March 31, 2014, we acquired a general acute care hospital
and an adjacent parcel of land for an aggregate purchase price of
$115 million from a joint venture of LHP Hospital Group, Inc. and
Hackensack University Medical Center Mountainside. The facility was
simultaneously leased back to the seller under a lease with a
15-year initial term with a 3-year extension option, followed by a
further 12-year extension option at fair market value. The lease
provides for consumer price-indexed annual rent increases, subject
to a specified floor and ceiling. The lease includes a customary
right of first refusal with respect to a subsequent proposed sale
of the facility.
As part of these acquisitions, we acquired the following
assets:
2015 2014
Assets Acquired
Land and land improvements $ 21,591 $ 8,477
Building 473,425 99,640
Intangible lease assets — subject to amortization (weighted
average useful life 15 years)
— 6,883
Mortgage loans 40,000
—
Net investments in direct financing leases 10,700
—
Other loans 16,917
—
Total assets acquired $ 562,633 $ 115,000
The purchase price allocations attributable to the 2015
acquisitions are preliminary. When all relevant information is
obtained, resulting changes, if any, to our provisional purchase
price allocation will be retrospectively adjusted to reflect new
information obtained about the facts and circumstances that existed
as of the respective acquisition dates that, if known, would have
affected the measurement of the amounts recognized as of those
dates.
From the respective acquisition dates, the properties and mortgage
loans acquired in 2015 contributed $4.2 million and
$3.5 million of revenue and income (excluding related
acquisition expenses), respectively, for the three months ended
June 30, 2015. From the respective acquisition dates, the
properties and mortgage loans acquired in 2015 contributed $6.2
million and $4.9 million of revenue and income (excluding related
acquisition expenses), respectively, for the six months ended June
30, 2015. In addition, we incurred $22.6 million and $26.7 million
of acquisition related costs on the 2015 acquisitions for the three
and six months ended June 30, 2015, respectively.
From the respective acquisition dates in 2014, the 2014
acquisitions contributed $2.3 million and $1.6 million of revenue
and income (excluding related acquisition and financing expenses),
respectively, for the three and six months ended June 30, 2014. In
addition, we incurred $0.4 million of acquisition related costs on
the 2014 acquisitions for the three and six months ended June 30,
2014.
Pro Forma Information
The following unaudited supplemental pro forma operating data is
presented for the three and six months ended June 30, 2015 and
2014, as if each acquisition (including completed development
projects) was completed on January 1, 2014. Supplemental pro forma
earnings were adjusted to exclude acquisition-related costs on
consummated deals incurred. The unaudited supplemental pro forma
operating data is not necessarily indicative of what the actual
results of operations would have been assuming the transactions had
been completed as set forth above, nor do they purport to represent
our results of operations for future periods (in thousands, except
per share/unit amounts).
For the Three June 30, For the Six Months Ended June 30,
2015 2014 2015 2014
Total revenues $ 108.8 $ 106.2 $ 218.7 $ 211.5
Net income $ 50.2 $ 20.6 $ 99.8 $ 44.6
Net income per share/unit — diluted $ 0.21 $ 0.09 $ 0.42 $ 0.19
Development Activities
During the first six months of 2015, we completed construction and
began recording rental income on the following facilities:
• First Choice ER (a subsidiary of
Adeptus Health) – We completed seven acute care facilities
for this tenant during 2015. These facilities are leased pursuant
to the master lease entered into in 2014 and are cross-defaulted
with the original master lease executed with First Choice ER in
2013. One property is leased pursuant to the master lease entered
into in 2015 and is cross-defaulted with the master leases entered
into in 2014 and 2013.
• UAB Medical West – This acute
care facility and medical office building located in Birmingham,
Alabama is leased to Medical West, an affiliate of The University
of Alabama at Birmingham.
On June 16, 2015, we entered into definitive agreements to
acquire the real estate of a general acute care hospital under
development located in Spain, for an aggregate purchase and
development price to us of approximately €21.4 million. The
acquisition will be effected through a newly-formed joint venture
between us and clients of AXA Real Estate, in which we will own a
50% interest. Upon completion, the facility will be leased to a
Spanish operator of acute care hospitals, pursuant to a long-term
lease. Closing of the transaction which is expected during the
second half of 2015, is subject to customary real estate,
regulatory and other closing conditions.
On May 5, 2015, we entered into an agreement to finance the
development of and lease an inpatient rehabilitation facility in
Toledo, Ohio for $19.2 million, which will be leased to Ernest
under the 2012 master lease. The facility is expected to be
completed in the second quarter of 2016.
In April 2015, we executed an agreement with Adeptus Health that
provides for the acquisition and development of general acute care
hospitals and free standing emergency facilities with an aggregate
commitment of $250 million. These facilities will be leased to
Adeptus Health pursuant to the terms of the 2014 master lease
agreement that has a 15-year initial term with three extension
options of five years each that provides for annual rent increases
based on changes in the consumer price index with a 2% minimum.
See table below for a status update on our current development
projects (in thousands):
Property
Location
Property Type
Operator Commitment Costs Incurred as of 06/30/15 Estimated Completion Date
First Choice ER- Aurora Aurora, CO Acute Care Hospital Adeptus Health $ 5,273 $ 1,614 3Q 2015
First Choice ER- Carrollton Carrollton, TX Acute Care Hospital Adeptus Health 35,820 30,692 3Q 2015
First Choice ER- Conroe Houston, TX Acute Care Hospital Adeptus Health 6,110 3,150 3Q 2015
First Choice ER- Gilbert Gilbert, AZ Acute Care Hospital Adeptus Health 6,500 4,291 3Q 2015
First Choice ER- McKinney McKinney, TX Acute Care Hospital Adeptus Health 4,750 2,582 3Q 2015
First Choice ER- Chandler-Ray Chandler, AZ Acute Care Hospital Adeptus Health 5,261 1,741 4Q 2015
First Choice ER- Cinco Ranch Katy, TX Acute Care Hospital Adeptus Health 5,105 162 4Q 2015
First Choice ER- Highland Village Highland Village, TX Acute Care Hospital Adeptus Health 4,884 361 4Q 2015
First Choice ER- Parker Parker, CO Acute Care Hospital Adeptus Health 6,868 1,843 4Q 2015
First Choice ER- Frisco Eldorado Frisco, TX Acute Care Hospital Adeptus Health 5,124 50 1Q 2016
First Choice ER- Helotes Helotes, TX Acute Care Hospital Adeptus Health 7,530 2,251 2Q 2016
Rehabilitation
Hospital of
Northwest Ohio Toledo, OH Inpatient Rehabilitation Hospital Ernest Health 19,212 1,649 2Q 2016
First Choice ER-Vintage Preserve Houston, TX Acute Care Hospital Adeptus Health 45,961 6,376 3Q 2016
First Choice Emergency Rooms Various Acute Care Hospital Adeptus Health 231,649
— Various
$ 390,047 $ 56,762
Leasing Operations
All of our leases are accounted for as operating leases except for
the master lease of 15 Ernest facilities and five Prime facilities
which are accounted for as direct financing leases
(“DFLs”). The components of our net investment in DFLs
consisted of the following (dollars in thousands):
As of June 30,
As of December 31,
Minimum lease payments receivable $ 1,627,898 $ 1,607,024
Estimated residual values 225,872 211,888
Less: Unearned income (1,398,750 ) (1,379,396 )
Net investment in direct financing leases $ 455,020 $ 439,516
Florence facility
On March 6, 2013, the tenant of our $27.1 million facility in
Phoenix, Arizona filed for Chapter 11 bankruptcy. At June 30,
2015, we have approximately $1.1 million of receivables outstanding
but the tenant continues to pay us in accordance with bankruptcy
orders. In addition, we have a letter of credit for approximately
$1.2 million to cover any rent and other monetary payments not
paid. Although no assurances can be made that we will not have any
impairment charges in the future, we believe our investment in
Florence at June 30, 2015 is fully recoverable.
Gilbert facility
In the first quarter of 2014, the tenant of our facility in
Gilbert, Arizona filed for Chapter 11 bankruptcy; however, we sent
notice of termination of the lease prior to the bankruptcy filing.
As a result of the lease terminating, we recorded a charge of
approximately $1 million to reserve against the straight-line rent
receivables. In addition, we accelerated the amortization of the
related lease intangible asset resulting in $1.1 million of
additional expense in the 2014 first quarter. The tenant has
continued to pay its monetary obligations, and we have agreed to
the terms of an amended lease upon the tenant’s bankruptcy
exit. Although no assurances can be made that we will not have any
impairment charges or write-offs of receivables in the future, we
believe our real estate investment in Gilbert of $13.9 million at
June 30, 2015 is fully recoverable.
Loans
The following is a summary of our loans (in thousands):
As of June 30, 2015 As of December 31, 2014
Mortgage loans $ 437,587 $ 397,594
Acquisition loans 503,012 525,136
Working capital and other loans 45,853 48,031
$ 986,452 $ 970,761
The increase in our mortgage loans is related to the two property
acquisition with Prime. See “ Acquisition
Our non-mortgage loans typically consist of loans to our tenants
for acquisitions and working capital purposes. At June 30,
2015, acquisition loans includes our $114.4 million loans to Ernest
plus $376.8 million related to the MEDIAN transaction.
On March 1, 2012, pursuant to our convertible note agreement,
we converted $1.7 million of our $5.0 million convertible
note into a 9.9% equity interest in the operator of our Hoboken
University Medical Center facility. At June 30, 2015,
$3.3 million remains outstanding on the convertible note, and
we retain the option, subject to regulatory approvals, to convert
this remainder into 15.1% of equity interest in the operator.
Concentrations of Credit Risk
For the three months ended June 30, 2015 and 2014, revenue
from affiliates of Prime (including rent and interest from mortgage
loans) accounted for 25.9% and 27.9%, respectively, of total
revenue. For the six months ended June 30, 2015 and 2014,
revenue from affiliates of Prime (including rent and interest from
mortgage loans) accounted for 25.5% and 28.5%, respectively, of
total revenue. From an investment concentration perspective, assets
leased and loaned to Prime represented 13.8% and 7.5%, respectively
of our total assets, at June 30, 2015. Assets leased and
loaned to Prime represented 12.6% and 7.4%, respectively, of our
total assets at December 31, 2014.
For the three and six months ended June 30, 2015, revenue from
affiliates of MEDIAN accounted for 11.1% and 10.3% of total
revenue, respectively. From an investment concentration
perspective, MEDIAN represented 17.3% and 11.3% of our total assets
at June 30, 2015 and December 31, 2014, respectively.
For the three months ended June 30, 2015 and 2014, revenue
from affiliates of Ernest (including rent and interest from
mortgage and acquisition loans) accounted for 15.0% and 18.2%,
respectively, of total revenue. For the six months ended
June 30, 2015 and 2014, revenue from affiliates of Ernest
(including rent and interest from mortgage and acquisition loans)
accounted for 15.2% and 18.9%, respectively, of total revenue. From
an investment concentration perspective, assets leased and loaned
to Ernest represented 7.9% and 5.1%, respectively, of our total
assets at June 30, 2015. Assets leased and loaned to Ernest
represented 7.7% and 5.3%, respectively, of our total assets at
December 31, 2014.
On an individual property basis, we had no investment of any single
property greater than 3% of our total assets as of June 30,
2015.
From a global geographic perspective, approximately 75% of our
total assets are in the United States while 25% reside in Europe
(primarily in Germany) as of June 30, 2015. From a global
geographic perspective, approximately 80% of our total assets are
in the United States while 20% reside in Europe as of
December 31, 2014.
For the three months ended June 30, 2015 and 2014, revenue
from our European investments was $18.1 million and $5.5 million,
respectively. For the six months ended June 30, 2015 and 2014,
revenue from our European investments was $34.4 million and $10.9
million, respectively.
From a United States geographic perspective, investments located in
Texas represented 19.8% of our total assets at June 30, 2015,
compared to 20.2% at December 31, 2014. Investments located in
California represented 12.9% of our total assets at June 30,
2015, compared to 14.6% at December 31, 2014. |
