| Real Estate and Lending Activities | 3. Real Estate and Lending Activities
Acquisitions
We acquired the following assets (in thousands):
Six Months Ended June 30,
2016 2015
Assets Acquired
Land and land improvements $ 9,398 $ 62,434
Building 37,593 390,320
Intangible lease assets — subject to amortization (weighted
average useful life 25.8 years)
— 42,262
Mortgage loans
— 40,000
Net investments in direct financing leases 63,000 10,700
Other loans
— 16,917
Total assets acquired $ 109,991 $ 562,633
Loans repaid (1)
— (183,826 )
Total net assets acquired $ 109,991 $ 378,807
(1) Loans advanced to MEDIAN in 2014 and
repaid in 2015 as a part of the MEDIAN transaction.
The purchase price allocations attributable to the 2016 and certain
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.
2016 Activity
On May 2, 2016, we acquired an acute hospital in Newark, New
Jersey for an aggregate purchase price of $63 million leased to
Prime Healthcare Services, Inc. (“Prime”) pursuant to a
fifth master lease, which has a 15-year term with three five-year
extension options, plus consumer price-indexed increases, limited
to a 2% floor. Furthermore, we committed to advance an
additional $30 million to Prime over a three-year period to be used
solely for capital additions to the real estate; any such additions
will be added to the basis upon which the lessee will pay us
rents.
On June 22, 2016, we closed on the final Median Kliniken
S.à r.l., (“MEDIAN”) property for a purchase price
of €41.6 million. See “2015 Activity” for a
description of the initial MEDIAN Transaction.
From the respective acquisition dates, the properties acquired in
2016 contributed $1.1 million of revenue and income (excluding
related acquisition expenses), for the three and six months ended
June 30, 2016. In addition, we incurred $2.4 million of
acquisition-related costs on the 2016 acquisitions for both the
three and six months ended June 30, 2016.
2015 Activity
MEDIAN Transaction
On April 29, 2015, we entered into a series of definitive
agreements with 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 had
an initial term of 27 years and provided 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 acquired.
Closing of the sale-leaseback transactions began in the second
quarter of 2015. At each closing, the purchase price for each
facility was 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 had closed on 17
properties for an aggregate amount of €317 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 is operating the
rehabilitation hospital in a joint venture with Covenant Health
System, while the long-term acute care hospital continues 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 had an original 20-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 funded 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 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
funded a mortgage loan in the amount of $40 million, which has a
10-year term.
From the respective acquisition dates, the properties and other
assets 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 other assets 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.
Pro Forma Information
The following unaudited supplemental pro forma operating data is
presented for the three and six months ended June 30, 2015, as
if each acquisition (including completed development projects) was
completed on January 1, 2015. 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 For the Six
Total revenues $ 109 $ 219
Net income $ 50 $ 100
Net income per share/unit — diluted $ 0.21 $ 0.42
Development Activities
During the first six months of 2016, we completed construction and
began recording rental income on the following facilities:
• Adeptus Health, Inc. (“Adeptus
Health”) – We completed seven acute care facilities for
this tenant during 2016. These facilities are leased pursuant to
the master leases entered into in both 2014 and 2015 and are
cross-defaulted with each other and with the original master lease
executed in 2013.
• Ernest Toledo – This inpatient
rehabilitation facility located in Toledo, Ohio opened on
April 1, 2016 and is being leased to Ernest pursuant to the
original 2012 master lease.
See table below for a status update on our current domestic
development projects (in thousands):
Property
Commitment
Costs Incurred as of 06/30/16
Estimated Completion Date
Adeptus Health $ 62,154 $ 43,763 3Q 2016
Adeptus Health 53,836 15,343 4Q 2016
Adeptus Health 5,730 206 1Q 2017
Adeptus Health 61,997 16,311 2Q 2017
Adeptus Health 71,331
— Various
$ 255,048 $ 75,623
On September 9, 2015, we acquired 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 was effected through a 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. We expect construction to complete on this facility in the
second quarter of 2017.
Disposals
Capella Transaction
On March 21, 2016, we entered into definitive agreements with
RegionalCare Hospital Partners, Inc. (“RegionalCare”),
an affiliate of certain funds managed by affiliates of Apollo
Global Management, LLC (together with its consolidated
subsidiaries, “Apollo”), under which our investment in
the operations of Capella Healthcare, Inc. (“Capella”)
would be merged with RegionalCare, forming RCCH Healthcare Partners
(“RCCH”).
On April 29, 2016, this transaction closed and funded,
effective April 30, 2016. As part of the transaction, we
received net proceeds of approximately $550 million including
approximately $492 million for our equity investment and loans made
as part of the Capella transaction that closed on August 31,
2015. In addition, we received $210 million in prepayment of two
mortgage loans for hospitals in Russellville, Arkansas, and Lawton,
Oklahoma, that we made to subsidiaries of Capella in connection
with the Capella transaction on August 31, 2015. We made a new
$93.3 million loan for a hospital property in Olympia, Washington.
Additionally, we and an Apollo affiliate invested $50 million each
in unsecured senior notes issued by RegionalCare, which we sold to
a large institution on June 20, 2016 at par. The proceeds from
this transaction represented the recoverability of our investment
in full, except for transaction costs incurred of $6.3 million.
We maintained our ownership of five Capella hospitals in Hot
Springs, Arkansas; Camden, South Carolina; Hartsville, South
Carolina; Muskogee, Oklahoma; and McMinnville,
Oregon. Pursuant to the transaction described above, the
underlying leases, one of which is a master lease covering all but
one property, was amended to shorten the initial fixed lease term,
increase the security deposit, and eliminate the lessees’
purchase option provisions. Due to this lease amendment, we
reclassified the lease of the properties under the master lease
from a direct finance lease (“DFL”) to an operating
lease. This reclassification resulted in a write-off of $2.6
million in unbilled DFL rent in the 2016 second quarter.
On July 22, 2016, we acquired the Olympia, Washington property in
exchange for the $93.3 million loan and an additional $7 million,
which was contemplated in the original Capella transaction. The
terms of the Olympia lease will be similar to the other leases with
this tenant.
Post Acute Transaction
On May 23, 2016, we sold five properties (three of which were
in Texas and two in Louisiana) that were leased and operated by
Post Acute Medical (“Post Acute”). As part of this
transaction, our outstanding loans of $4 million were paid in full,
and we recovered our investment in the operations. Total proceeds
from this transaction were $71 million resulting in a net gain of
approximately $15 million.
Corinth Transaction
On June 17, 2016, we sold the Atrium Medical Center real
estate located in Corinth, Texas, which was leased and operated by
Corinth Investor Holdings. Total proceeds from the transaction were
$28 million resulting in a gain on real estate of approximately
$8 million. This gain on real estate was offset by
approximately $9 million of non-cash charges that included the
write-off of our investment in the operations of the facility,
straight-line rent receivables, and a lease intangible.
HealthSouth Transaction
On May 20, 2016, we reached a firm commitment to sell three
inpatient rehabilitation hospitals located in Texas and operated by
HealthSouth Corporation (“HealthSouth”) for $111.5
million. At June 30, 2016, these facilities and related net assets
were designated as held for sale and included the following (in
thousands):
Real estate held for sale $ 63,074
Straight-line rent receivables 2,441
Other, net (625 )
$ 64,890
On July 20, 2016, we completed this sale resulting in a net gain of
approximately $45 million.
Summary of Operations for Disposed Assets
The properties which sold during the quarter and the assets held
for sale at June 30, 2016, do not meet the definition of
discontinued operations. However, the following represents the
operating results (excluding gain on sale, transaction costs, and
impairment or other non-cash charges) from these properties
(excluding loans repaid in the Capella Transaction) for the periods
presented (in thousands):
For the Three Months
For the Six Months
Ended June 30, Ended June 30,
2016 2015 2016 2015
Revenues $ 3,092 $ 4,525 $ 7,607 $ 9,075
Real estate depreciation and amortization (805 ) (949 ) (1,754 ) (1,897 )
Property-related expenses (72 ) (12 ) (113 ) (72 )
Other income (expense) (9 ) 228 (68 ) 557
Income from real estate dispositions, net $ 2,206 $ 3,792 $ 5,672 $ 7,663
Leasing Operations
All of our leases are currently accounted for as operating leases
except for the master lease of 15 Ernest facilities and six Prime
facilities which are accounted for as DFLs. The components of our
net investment in DFLs (which includes the Capella properties for
2015 only) consisted of the following (in thousands):
As of June 30,
As of December 31,
Minimum lease payments receivable $ 1,875,751 $ 2,587,912
Estimated residual values 292,646 393,097
Less: Unearned income (1,639,650 ) (2,354,013 )
Net investment in direct financing leases $ 528,747 $ 626,996
Twelve Oaks Facility
In the third quarter of 2015, we sent notice of termination of the
lease to the tenant at our Twelve Oaks facility. This former tenant
continues to occupy the facility. We called their letter of credit
for approximately $0.5 million in the 2016 first quarter. At
June 30, 2016, all past due receivables are fully reserved.
Although no assurances can be made that we will not have any
impairment charges in the future, we believe our real estate
investment in Twelve Oaks at June 30, 2016 is fully
recoverable.
Subsequent to June 30, 2016, we received approximately $2.5 million
representing substantially all of amounts owed to us and agreed to
general terms of a new lease, which we expect to execute during the
2016 third quarter.
Loans
The following is a summary of our loans (in thousands):
As of June 30, 2016 As of December 31, 2015
Mortgage loans $ 549,337 $ 757,581
Acquisition loans 216,100 610,469
Working capital and other loans 43,229 54,353
$ 808,666 $ 1,422,403
The decrease in our mortgage and acquisition loans are related to
the Capella Transaction as discussed previously.
Our non-mortgage loans typically consist of loans to our tenants
for acquisitions and working capital purposes. At June 30,
2016, acquisition loans includes our original $93.2 million loan to
Ernest and the $93.3 million loan to RCCH, which was repaid in July
as discussed above.
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, 2016,
$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
Our revenue concentration for the six months ended June 30,
2016 as compared to the prior year is as follows (dollars in
thousands):
Revenue by Operator
For the Six Months Ended
For the Six Months Ended
Operators Total Percentage of Total Percentage of
Prime $ 58,859 22.5 % $ 49,869 25.5 %
MEDIAN 47,745 18.3 % 32,212 16.5 %
Ernest 33,322 12.8 % 29,695 15.2 %
RCCH 32,909 12.6 %
—
—
Adeptus Health 16,205 6.2 % 7,425 3.8 %
Revenue by U.S. State and Country
For the Six Months Ended
For the Six Months Ended
U.S. States and Other Countries Total Percentage of Total Percentage of
Texas $ 48,256 18.5 % $ 42,689 21.8 %
California 33,187 12.7 % 33,065 16.9 %
All other states 129,896 49.7 % 85,620 43.7 %
Total U.S. $ 211,339 80.9 % $ 161,374 82.4 %
Germany $ 47,745 18.3 % $ 32,212 16.5 %
United Kingdom, Italy, and Spain 2,215 0.8 % 2,176 1.1 %
Total International $ 49,960 19.1 % $ 34,388 17.6 %
Grand Total $ 261,299 100.0 % $ 195,762 100.0 %
From an asset basis, our concentration as of June 30, 2016 as
compared to December 31, 2015 is as follows (dollars in
thousands):
Gross Assets by Operator
As of June 30, 2016 As of December 31, 2015
Operators Total Percentage of Total Percentage of
(A) (B) (A) (B)
Prime $ 1,126,654 20.8 % $ 1,032,353 17.1 %
MEDIAN 1,054,368 19.4 % 1,031,039 17.1 %
Ernest 584,411 10.8 % 579,182 9.6 %
Adeptus Health 500,000 9.2 % 500,000 8.3 %
RCCH 458,659 8.5 % 1,059,989 17.6 %
Gross Assets by U.S. State and Country
As of June 30, 2016 As of December 31, 2015
U.S. States and Other
Countries Total Gross Assets Percentage of Total Gross Assets Total Gross Assets Percentage of Total Gross Assets
(A) (B) (A) (B)
Texas $ 920,959 17.0 % $ 1,060,990 17.6 %
California 547,079 10.1 % 547,085 9.1 %
All other states 2,530,018 46.6 % 3,047,204 50.5 %
Other domestic assets 189,358 3.5 % 177,317 2.9 %
Total U.S. $ 4,187,414 77.2 % $ 4,832,596 80.1 %
Germany $ 1,054,368 19.4 % $ 1,031,039 17.1 %
United Kingdom, Italy, and Spain 156,630 3.0 % 161,317 2.7 %
Other international assets 23,983 0.4 % 10,970 0.1 %
Total International $ 1,234,981 22.8 % $ 1,203,326 19.9 %
Grand Total $ 5,422,395 100.0 % $ 6,035,922 100.0 %
(A) Gross Assets represents total assets
plus accumulated depreciation/amortization assuming all real estate
commitments as of the period end are fully funded.
(B) Includes both leased and loaned
assets.
On an individual property basis, we had no investment of any single
property greater than 2.3% of our total assets as of June 30,
2016. |
