| Real Estate and Lending Activities | 3. Real Estate and Lending Activities Acquisitions We acquired the following assets (in thousands):
Three Months Ended March 31,
2019
2018
Assets Acquired
Land
$
169
$
—
Building
5,327
—
Intangible lease assets — subject to amortization
996
—
Total assets acquired
$
6,492
$
—
On February 8, 2019, we acquired an inpatient rehabilitation hospital in Germany for €5.7 million (including real estate transfer taxes). This acquisition was the final property to close as part of a four-hospital portfolio that we agreed to purchase for an aggregate amount of €23 million (including real estate transfer taxes). The property is leased to affiliates of Median Kliniken S.à.r.l. (“MEDIAN”), pursuant to a new 27-year master lease with annual escalators at the greater of 1% or 70% of the change in German consumer price index (“CPI”). Development Activities During the 2018 first quarter, we completed construction on a $25.5 million inpatient rehabilitation facility located in Flagstaff, Arizona. This facility opened on March 1, 2018 and is being leased to Ernest Health, Inc. (“Ernest”) pursuant to a stand-alone lease, with terms generally similar to the original master lease. See table below for a status update on our current development projects (in thousands):
Property
Commitment
Costs Incurred as of March 31, 2019
Estimated Rent Commencement Date
Circle Health (Birmingham, England)
$
44,241
$
34,705
3Q 2019
Circle Health Rehabilitation (Birmingham, England)
21,979
11,677
3Q 2019
Surgery Partners (Idaho Falls, Idaho)
113,468
55,857
1Q 2020
$
179,688
$
102,239
Disposals On March 1, 2018, we sold the real estate of St. Joseph Medical Center in Houston, Texas, for approximately $148 million to Steward Health Care System LLC (“Steward”). In return, we received a mortgage loan equal to the purchase price, with such loan secured by the underlying real estate. The mortgage loan had terms consistent with the other mortgage loans in the Steward portfolio. This transaction resulted in a gain of $1.5 million, offset by a $1.7 million non-cash charge to revenue to write-off related straight-line rent receivables on this property. Leasing Operations (Lessor) As noted earlier, we acquire and develop healthcare facilities and lease the facilities to healthcare operating companies under long-term net leases (typical initial fixed terms ranging from 10 to 15 years) and most include renewal options at the election of our tenants, generally in five year increments. More than 95% of our leases provide annual rent escalations based on increases in the consumer price index (or similar index outside the U.S.) and/or fixed minimum annual escalations ranging from 0.5% to 3.0%. Many of our domestic leases contain purchase options with pricing set at various terms but in no case less than our total investment. For five properties with a carrying value of $210 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 noted below as direct finance leases (“DFLs”), all of our leases are classified as operating leases. The following table summarizes future minimum lease payments to be received, excluding operating expense reimbursements, from tenants under noncancelable leases as of March 31, 2019 (in thousands):
Total Under Operating Leases
Total Under DFLs
Total
2019 (nine months only)
$
329,487
$
48,491
$
377,978
2020
438,596
66,008
504,604
2021
447,232
67,388
514,620
2022
452,173
68,796
520,969
2023
459,222
70,232
529,454
Thereafter
9,636,734
1,550,857
11,187,591
$
11,763,444
$
1,871,772
$
13,635,216
Direct Financing Leases At March 31, 2019, leases on 14 Ernest facilities, ten Prime Healthcare Services, Inc. (“Prime”) facilities, and two Alecto Healthcare Services LLC (“Alecto”) facilities are accounted for as DFLs. The components of our net investment in DFLs consisted of the following (in thousands):
As of March 31, 2019
As of December 31, 2018
Minimum lease payments receivable
$
2,078,099
$
2,091,504
Estimated residual values
421,893
424,719
Less: Unearned income
(1,815,445
)
(1,832,170
)
Net investment in direct financing leases
$
684,547
$
684,053
On March 15, 2018, we entered into a new lease agreement of our long-term acute care facility in Boise, Idaho with a joint venture formed by Vibra Healthcare, LLC (“Vibra”) and Ernest. The new lease had an initial 15-year fixed term (ending March 2033) with three extension options of five years each. With this transaction, we incurred a non-cash charge of $1.5 million to write-off DFL unbilled interest associated with the previous lease to Ernest on this property. Adeptus Health Transition Properties As noted in previous filings, effective October 2, 2017, we had 16 properties transitioning away from Adeptus Health, Inc. (“Adeptus”) in stages over a two year period as part of Adeptus’ confirmed plan of reorganization under Chapter 11 of the Bankruptcy Code. At March 31, 2019, nine of these properties have been re-leased at rates consistent with that of the previous Adeptus lease, and one property in the Dallas market was sold in April 2019. Of the six remaining facilities (representing less than 0.6% of our total assets at March 31, 2019), five remain vacant and the final property will be transitioned away from Adeptus on October 1, 2019. At March 31, 2019, Adeptus is current on its rent obligations to us. Although no assurances can be made that we will not recognize a loss in the future, we believe, at March 31, 2019, that the sale or re-leasing of the remaining six transition facilities will not result in any material loss or additional impairment. Gilbert and Florence Facilities In the first quarter of 2018, we terminated the lease at our Gilbert and Florence, Arizona facilities due to the tenant not meeting its rent obligations pursuant to the lease. As a result of the lease terminating, we recorded a charge of $1.1 million to reserve against the straight-line rent receivables. At March 31, 2019, all outstanding receivables due from the former tenant of Florence and Gilbert were completely reserved. On December 14, 2018, the Florence facility was re-leased to Steward pursuant to our original master lease with them with a term to begin in the second quarter of 2019. At March 31, 2019, our Gilbert facility is vacant. Although no assurances can be made that we will not have any impairment charges in the future, we believe our investment in the Gilbert facility (less than 0.2% of total assets at March 31, 2019), is fully recoverable. Alecto Facilities At March 31, 2019, we own four acute care facilities that are leased to Alecto and have a mortgage loan on a fifth property. With the decline in the operating results of the facility tenant, we recorded a charge to reserve against the straight-line rent and other receivables outstanding during the three months ended March 31, 2019. At March 31, 2019, our total overall investment in these properties is approximately 1% of our total assets. Loans The following is a summary of our loans (in thousands):
As of March 31, 2019
As of December 31, 2018
Mortgage loans
$
1,214,780
$
1,213,322
Other loans
365,402
373,198
Total
$
1,580,182
$
1,586,520
Other loans typically consist of loans to our tenants for acquisitions and working capital purposes, and include our shareholder loan made to the joint venture with Primotop Holdings S.à.r.l. (“Primotop”) in the amount of €290 million. 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 March 31, 2019, we had no investment in any single property greater than 4% of our total assets, which is consistent with December 31, 2018.
2)
Operator concentration – For the three months ended March 31, 2019, revenue from Steward and Prime of $86.6 million and $32.0 million, respectively, exceeded 10% of our total revenues. In comparison, Steward ($73.2 million), Prime ($31.8 million) and MEDIAN ($29.1 million), respectively, exceeded 10% of our total revenues for the first three months of 2018.
3)
Geographic concentration – At March 31, 2019, investments in the U.S. and Europe represented approximately 80% and 20%, respectively, of our total assets, which is consistent with December 31, 2018.
4)
Facility type concentration – For the three months ended March 31, 2019, approximately 86% of our revenues are from our general acute care facilities, while rehabilitation and long-term acute care facilities make up 10% and 4%, respectively. These percentages are similar to those for the first three months of 2018. |
