| Real Estate and Lending Activities | 3. Real Estate and Lending Activities
Acquisitions
2015 Activity
Acquisition of Capella Healthcare Hospital
Portfolio
On August 31, 2015, we closed on our acquisition of Capella.
Our investment in the portfolio includes seven acute care hospitals
(two properties of which our investment is in the form of mortgage
loans), an acquisition loan, and an equity interest in the operator
for a combined purchase price and investment of approximately $900
million. The real estate leases and mortgage loans have 15-year
terms with four 5-year extension options, plus consumer
price-indexed increases, limited to a 2% floor and a 4% ceiling
annually. We have closed on six of the seven Capella properties and
expect to close on the last property in the fourth quarter of 2015.
The remaining investment in the operations of Capella are in the
form of an acquisition loan to Capella, which will have a fixed
interest rate of 8%, and we have a 49% interest in the equity of
the operator, with management owning the remaining 51%.
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.
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.
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
has been 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 September 30, 2015, we have closed on 30
properties for an aggregate amount of €627 million. At
September 30, 2015, we had loans outstanding to MEDIAN and
Waterland for an aggregate amount of approximately €37
million. These loans were repaid by MEDIAN and Waterland in
October 2015.
Other Acquisitions
On September 30, 2015, we provided a $100 million mortgage
financing (of which $85 million has been funded to-date) to Prime
Healthcare Services (“Prime”) for a System consists of
three general acute care hospitals and one free-standing emergency
department and health center in New Jersey. The loan provides for
consumer-priced indexed interest increases, subject to a floor. We
expect to purchase these facilities in the 2015 fourth quarter and
will reduce the outstanding mortgage loan accordingly.
On September 9, 2015, we acquired the real estate of a general
acute care hospital under development located in Valencia, Spain
The acquisition was effected through a newly-formed joint venture
between us and clients of AXA Real Estate, in which we will own a
50% interest. Our expected share of the aggregate purchase and
development price to us is €21.4 million. Upon completion,
the facility will be leased to a Spanish operator of acute care
hospitals, pursuant to a long-term lease.
On August 31, 2015, we closed on a $30 million mortgage loan
transaction with Prime for the acquisition of Lake Huron Medical
Center, a 144-bed general acute care hospital located in Port
Huron, Michigan. The mortgage loan has a 5-year term with
conversion rights to our standard sale leaseback agreement. The
loan provides for consumer-priced indexed interest increases,
subject to a floor.
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. 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 September 19, 2014, we acquired an acute care hospital in
Fairmont, West Virginia for an aggregate purchase price of $15
million from Alecto Healthcare Services. The facility was
simultaneously leased back to the seller under a 15-year initial
term with three five-year extension options. In addition, we made a
$5 million working capital loan to the tenant with a five year term
and a commitment to fund up to $5 million in capital
improvements.
On July 1, 2014, we acquired an acute care hospital in
Peasedown St. John, United Kingdom from Circle Health Ltd., through
its subsidiary Circle Hospital (Bath) Ltd. The sale/leaseback
transaction, excluding any transfer taxes, is valued at
approximately £28.3 million (approximately $48.0 million
at that time). The lease has an initial term of 15-years with a
tenant option to extend the lease for an additional 15 years. The
lease includes annual rent increases, which will equal the
year-over-year change in the retail price index with a floor of 2%
and a cap of 5%. With the transaction, we incurred approximately
£1.1 million (approximately $1.9 million at that time) of
transfer and other taxes that have been expensed as acquisition
costs.
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 future sale of the
facility.
As part of these acquisitions, we acquired the following
assets:
2015
2014
Assets Acquired
Land and land improvements
$
154,698
$
13,058
Building
748,854
152,096
Intangible lease assets — subject to
amortization (weighted average useful life 15 years)
66,461
12,828
Mortgage loans
365,000
—
Net investments in direct financing leases
170,700
—
Other loans
514,484
5,000
Total net assets acquired
$
2,022,926
$
182,982
The majority of 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 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 $30.0 million and
$13.9 million of revenue and income (excluding related
acquisition expenses), respectively, for the three months ended
September 30, 2015. From the respective acquisition dates, the
properties and mortgage loans acquired in 2015 contributed $59.2
million and $34.3 million of revenue and income (excluding related
acquisition expenses), respectively, for the nine months ended
September 30, 2015. In addition, we incurred $23.3 million and
$51.6 million of acquisition related costs on the 2015 acquisitions
for the three and nine months ended September 30, 2015,
respectively.
From the respective acquisition dates in 2014, the 2014
acquisitions contributed $4.1 million and $3.0 million of revenue
and income (excluding related acquisition and financing expenses),
respectively, for the three months ended September 30, 2014.
From the respective acquisition dates in 2014, the 2014
acquisitions contributed $6.4 million and $4.6 million of revenue
and income (excluding related acquisition and financing expenses),
respectively, for the nine months ended September 30, 2014. In
addition, we incurred $2.3 million and $3.1 million of
acquisition related costs on the 2014 acquisitions for the three
and nine months ended September 30, 2014, respectively.
Pro Forma Information
The following unaudited supplemental pro forma operating data is
presented for the three and nine months ended September 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. 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 Months For the Nine Months
2015 2014 2015 2014
Total revenues $ 134,776 $ 135,734 $ 414,632 $ 404,760
Net income $ 54,332 $ 64,303 $ 193,413 $ 157,910
Net income per share/unit — diluted $ 0.23 $ 0.27 $ 0.81 $ 0.67
Development Activities
During the first nine 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 thirteen acute care facilities
for this tenant during 2015. Eleven of 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. Two properties are 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 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 Estimated
First Choice ER- Phoenix
Phoenix, AZ
Acute Care Hospital
Adeptus Health $ 5,261 $ 3,076 4Q 2015
First Choice ER- Houston
Houston, TX
Acute Care Hospital
Adeptus Health 5,105 2,400 4Q 2015
First Choice ER- Denver
Denver, CO
Acute Care Hospital
Adeptus Health 6,868 3,109 4Q 2015
First Choice ER- DFW
Dallas, TX
Acute Care Hospital
Adeptus Health 5,124 2,632 1Q 2016
First Choice ER- Houston
Houston, TX
Acute Care Hospital
Adeptus Health 5,257 812 1Q 2016
First Choice ER- Denver
Denver, CO
Acute Care Hospital
Adeptus Health 5,300 208 2Q 2016
First Choice ER- Phoenix
Phoenix, AZ
Acute Care Hospital
Adeptus Health 6,728 1,865 2Q 2016
First Choice ER- San Antonio
San Antonio, TX
Acute Care Hospital
Adeptus Health 7,530 2,376 2Q 2016
Rehabilitation Hospital of Northwest Ohio
Toledo, OH
Inpatient Rehabilitation Hospital
Ernest Health 19,212 8,557 2Q 2016
First Choice ER- Houston
Houston, TX
Acute Care Hospital
Adeptus Health 45,961 14,167 3Q 2016
First Choice Emergency Rooms
Various
Acute Care Hospital
Adeptus Health 214,352
— Various
$ 326,698 $ 39,202
Leasing Operations
All of our leases are accounted for as operating leases except for
the master lease of 15 Ernest facilities, three Capella 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 September 30,
As of December 31,
Minimum lease payments receivable $ 2,442,386 $ 1,607,024
Estimated residual values 387,340 211,888
Less: Unearned income (2,211,233 ) (1,379,396 )
Net investment in direct financing leases $ 618,493 $ 439,516
Hoboken facility
In the 2015 third quarter, a subsidiary of the operator of our
Hoboken facility acquired 10% of our subsidiary that owns the real
estate for $5 million, which is reflected in the non-controlling
interest line of our condensed consolidated balance sheet at
September 30, 2015.
Twelve Oaks facility
In the third quarter of 2015, we sent notice of termination of the
lease to our tenant at our Twelve Oaks facility. As a result of the
lease terminating, we recorded a charge of $1.9 million to reserve
against the straight-line rent receivables. In addition, we
accelerated the amortization of the related lease intangible asset
resulting in $0.5 million of additional expense in the 2015 third
quarter. At September 30, 2015, we have less than $1.2 million
of exposure outstanding with this tenant and we have a letter of
credit for approximately $0.5 million to cover any rent and other
monetary payments not paid. In addition, the tenant is continuing
to make partial payments on the outstanding obligations. 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
investment in Twelve Oaks at September 30, 2015 is fully
recoverable.
Florence facility
On March 6, 2013, the tenant of our $26.9 million facility in
Phoenix, Arizona filed for Chapter 11 bankruptcy. At September 30,
2015, we have approximately $0.9 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 September 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 $13.8 million
at September 30, 2015 is fully recoverable.
Loans
The following is a summary of our loans (in thousands):
As of As of
Mortgage loans $ 762,584 $ 397,594
Acquisition loans 645,207 525,136
Working capital and other loans 64,869 48,031
$ 1,472,660 $ 970,761
The increase in our mortgage loans is related to the mortgage loans
made on new properties with Prime and Capella. See
“ Acquisition
Our non-mortgage loans typically consist of loans to our tenants
for acquisitions and working capital purposes. At
September 30, 2015, acquisition loans includes our $114.4
million loans to Ernest, $41.7 million related to the MEDIAN
transaction and $489.1 million to Capella.
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 September 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.
Disposals
On July 30, 2015, we sold a long-term acute care facility in
Luling, Texas for approximately $9.7 million, resulting in a gain
of $1.5 million. Due to this sale, we wrote off $0.9 million of
straight-line receivables. On August 5, 2015, we sold six
wellness centers in the United States for total proceeds of
approximately $9.5 million (of which $1.5 million is in the form of
a note), resulting in a gain of $1.7 million. Due to this sale, we
wrote off $0.9 million of billed rent receivables.
Concentrations of Credit Risk
For the three months ended September 30, 2015 and 2014,
revenue from affiliates of Prime (including rent and interest from
mortgage loans) accounted for 22.8% and 26.4%, respectively, of
total revenue. For the nine months ended September 30, 2015
and 2014, revenue from affiliates of Prime (including rent and
interest from mortgage loans) accounted for 24.5% and 27.8%,
respectively, of total revenue. From an investment concentration
perspective, assets leased and loaned to Prime represented 10.4%
and 7.7%, respectively of our total assets, at September 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 nine months ended September 30, 2015,
revenue from affiliates of Capella accounted for 6.2% and 2.3% of
total revenue, respectively. From an investment concentration
perspective, Capella represented 17.6% of our total assets at
September 30, 2015.
For the three and nine months ended September 30, 2015,
revenue from affiliates of MEDIAN accounted for 16.1% and 12.4% of
total revenue, respectively. From an investment concentration
perspective, MEDIAN represented 13.2% and 11.3% of our total assets
at September 30, 2015 and December 31, 2014,
respectively.
For the three months ended September 30, 2015 and 2014,
revenue from affiliates of Ernest (including rent and interest from
mortgage and acquisition loans) accounted for 14.1% and 18.3%,
respectively, of total revenue. For the nine months ended
September 30, 2015 and 2014, revenue from affiliates of Ernest
(including rent and interest from mortgage and acquisition loans)
accounted for 14.8% and 18.7%, respectively, of total revenue. From
an investment concentration perspective, assets leased and loaned
to Ernest represented 6.0% and 3.8%, respectively, of our total
assets at September 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 2% of our total assets as of
September 30, 2015.
From a global geographic perspective, approximately 80% of our
total assets are in the United States while 20% reside in Europe
(primarily in Germany) as of September 30, 2015 and
December 31, 2014.
For the three months ended September 30, 2015 and 2014,
revenue from our European investments was $25.5 million and $6.5
million, respectively. For the nine months ended September 30,
2015 and 2014, revenue from our European investments was $59.9
million and $17.4 million, respectively.
From a United States geographic perspective, investments located in
Texas represented 15.9% of our total assets at September 30,
2015, compared to 20.2% at December 31, 2014. Investments
located in California represented 9.7% of our total assets at
September 30, 2015, compared to 14.6% at December 31,
2014. |
