| Real Estate and Lending Activities | 3. Real Estate and Lending Activities Acquisitions We acquired the following assets (in thousands):
For the Nine Months Ended September 30,
2019
2018
Assets Acquired
Land and land improvements
$
375,721
$
57,452
Building
1,320,449
467,164
Intangible lease assets — subject to amortization (weighted average useful life 18.7 years for 2019 and 27.8 years for 2018)
149,201
60,277
Investment in sale leaseback transactions
1,386,797
—
Equity investments
284,399
245,267
Mortgage loans
51,267
—
Other loans
135,258
336,458
Total assets acquired
$
3,703,092
$
1,166,618
Loans repaid
—
(525,426
)
Total net assets acquired
$
3,703,092
$
641,192
2019 Activity Prospect Transaction On August 23, 2019, we invested in a portfolio of 14 acute care hospitals and two behavioral health facilities operated by Prospect Medical Holdings, Inc. (“Prospect”) for a combined purchase price of approximately $1.55 billion. Our investment includes the acquisition of the real estate of 11 acute care hospitals and two behavioral health facilities for $1.4 billion. We are accounting for these properties as a financing receivable (as presented in the Investment in sale leaseback transactions line of the condensed consolidated balance sheet) under the new lease accounting rules due to certain lessee end-of-term purchase options. In addition, we originated a $51.3 million mortgage loan, secured by a first mortgage on an acute care hospital, and a $112.9 million term loan which we expect will be converted into the acquisition of two additional acute care hospitals upon the satisfaction of certain conditions. The master leases, mortgage loan and term loan are cross-defaulted and cross-collateralized. The master leases and mortgage loan have substantially similar terms, with a 15-year fixed term subject to three extension options, plus annual increases based on inflation. The agreements provide for the potential for a future purchase price adjustment of up to an additional $250.0 million, based on achievement of certain performance thresholds over a three-year period; any such adjustment will be added to the lease base upon which we will earn a return in accordance with the master leases. Other Transactions On August 30, 2019, we invested in a portfolio of facilities throughout various states for approximately $254 million. The properties are leased to Vibra Healthcare, LLC (“Vibra”) pursuant to a new master lease agreement with an initial lease term of 20 years. The lease provides for annual escalations at the greater of 2% or the change in Consumer Price Index (“CPI”) and includes three five-year extension options. The facilities acquired include three inpatient rehabilitation hospitals and seven long-term acute care hospitals. On August 16, 2019, we acquired freehold interests in eight acute care hospitals located throughout England for an aggregate purchase price of approximately £347 million. The hospitals are leased to Ramsay Health Care pursuant to in-place net leases with approximately 18-year remaining lease terms and include annual fixed and periodic market-based escalations. On June 10, 2019, we acquired seven community hospitals in Kansas for approximately $145.4 million. The properties are leased to an affiliate of Saint Luke’s Health System (“SLHS”) pursuant to seven individual in-place leases that have an average remaining lease term of 14 years. The leases provide for fixed escalations every five years and include two five-year extension options. All seven hospitals were constructed in either 2018 or 2019, and the leases are guaranteed by SLHS. On June 6, 2019, we acquired 11 hospitals in Australia for a purchase price of approximately AUD$1.2 billion plus stamp duties and registration fees of AUD$66.6 million. The properties are leased to Healthscope, Ltd. (“Healthscope”) pursuant to master lease agreements that have an average initial term of 20 years with annual fixed escalations of 2.5% and multiple extension options. Healthscope was acquired in a simultaneous transaction by Brookfield Business Partners L.P. and certain of its institutional partners. On May 27, 2019, we invested in a portfolio of 13 acute care campuses and two additional properties in Switzerland for an aggregate purchase price of approximately CHF 236.6 million. The investment was effected through our purchase of a 46% stake in a Swiss healthcare real estate company, Infracore SA, from the previous majority shareholder, Aevis Victoria SA (“Aevis”). The facilities are leased to Swiss Medical Network, a wholly-owned Aevis subsidiary, pursuant to leases with an average 23-year remaining term subject to annual escalation provisions. We are accounting for our 46% interest in this joint venture under the equity method. Additionally, we purchased a 4.9% stake in Aevis for approximately CHF 47 million on June 28, 2019 that we are marking to fair value each quarter. Other acquisitions throughout the first nine months of 2019 included three acute care hospitals and one inpatient rehabilitation hospital for an aggregate investment of approximately $135 million. One of the acute care hospitals, acquired on April 12, 2019 and located in Big Spring, Texas, is leased to Steward Health Care System LLC (“Steward”) pursuant to the Steward master lease. The second facility, located in Poole, England, was acquired on April 3, 2019 and is leased to BMI Healthcare pursuant to an in-place lease with 14 years remaining on its term and fixed 2.5% annual escalators. The third acute care facility was acquired on September 30, 2019, located in Watsonville, California, and is leased to Halsen Healthcare. The inpatient rehabilitation hospital, acquired on February 8, 2019, is located in Germany and leased to affiliates of Median Kliniken S.à.r.l. (“MEDIAN”). 2018 Activity Joint Venture Transaction On August 31, 2018, we completed a joint venture arrangement with Primotop Holdings S.à.r.l. (“Primotop”) pursuant to which we contributed 71 of our post-acute hospitals in Germany, with an aggregate fair value of €1.635 billion, for a 50% interest, while Primotop contributed cash for its 50% interest in the joint venture. As part of the transaction, we received an aggregate amount of approximately €1.14 billion, from the proceeds of the cash contributed by Primotop and the secured debt financing placed on the joint venture’s real estate, and we recognized an approximate €500 million gain on sale. Our interest in the joint venture is made up of a 50% equity investment valued at approximately €211 million, which is being accounted for under the equity method of accounting, and a €290 million shareholder loan (with terms identical to Primotop’s shareholder loan). Other Transactions During the second and third quarters of 2018, we acquired the fee simple real estate of four general acute care hospitals, three of which are located in Massachusetts and one located in Texas, from Steward in exchange for the reduction of $525.4 In addition, we acquired one acute care facility and three inpatient rehabilitation hospitals during the first nine months of 2018 for an aggregate investment of approximately $38 million. The acute care hospital, acquired on August 31, 2018 and located in Pasco, Washington, is leased to LifePoint Health, Inc. (“LifePoint”) pursuant to the master lease. The inpatient rehabilitation hospitals, acquired on August 28, 2018, are located in Germany and leased to MEDIAN Development Activities See table below for a status update on our current development projects (in thousands):
Property
Commitment
Costs Incurred as of September 30, 2019
Estimated Rent Commencement Date
Circle Health (Birmingham, England)
$
44,061
$
35,108
2Q 2020
Circle Health Rehabilitation (Birmingham, England)
19,862
16,320
2Q 2020
Surgery Partners (Idaho Falls, Idaho)
113,468
82,651
1Q 2020
$
177,391
$
134,079
Disposals On August 31, 2018, we completed the previously described joint venture arrangement with Primotop, in which we contributed the real estate of 71 of our post-acute hospitals in Germany, with a fair value of approximately €1.635 billion, resulting in a gain of approximately €500 million. See “Acquisitions” in this Note 3 for further details on this transaction. On August 31, 2018, we sold a general acute care hospital located in Houston, Texas that was leased and operated by North Cypress for $148 million. The transaction resulted in a gain on sale of $102.4 million, which was partially offset by a net $2.5 million non-cash charge to revenue to write-off related straight-line rent receivables. On June 4, 2018, we sold three long-term acute care hospitals located in California, Texas, and Oregon, that were leased and operated by Vibra, which included our equity investment in operations of the Texas facility. Total proceeds from the transaction were $53.3 million in cash, a mortgage loan in the amount of $18.3 million, and a $1.5 million working capital loan. The transaction resulted in a gain on real estate of $24.2 million, which was partially offset by a $5.1 million non-cash charge to revenue to write-off related straight-line rent receivables. On March 1, 2018, we sold the real estate of St. Joseph Medical Center in Houston, Texas, for approximately $148 million to 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. The properties sold during 2018 did not meet the definition of discontinued operations. However, the following represents the operating results from these properties (excluding the St. Joseph sale in March 2018) for the periods presented (in thousands):
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
2018
2018
Revenues(1)
$
20,115
$
88,838
Real estate depreciation and amortization
(237
)
(15,849
)
Property-related expenses
(265
)
(531
)
Other(2)
692,362
715,246
Income from real estate dispositions, net
$
711,975
$
787,704
(1)
Includes $2.5 million and $7.6 million of straight-line rent and other write-offs associated with the disposal transactions for the three and nine months ended September 30, 2018, respectively.
(2)
Includes $695.2 million of gains on sale for the three months ended September 30, 2018 and $719.3 million for the nine months ended September 30, 2018. 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 CPI (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 September 30, 2019 (in thousands):
Total Under Operating Leases
Total Under DFLs
Total
2019 (three months only)
$
129,235
$
15,214
$
144,449
2020
542,989
62,072
605,061
2021
557,352
63,313
620,665
2022
563,977
64,579
628,556
2023
573,798
65,871
639,669
Thereafter
12,247,074
1,400,026
13,647,100
$
14,614,425
$
1,671,075
$
16,285,500
Direct Financing Leases At September 30, 2019, leases on 14 Ernest Health (“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 September 30, 2019
As of December 31, 2018
Minimum lease payments receivable
$
2,049,738
$
2,091,504
Estimated residual values
419,753
424,719
Less: Unearned income
(1,780,600
)
(1,832,170
)
Net investment in direct financing leases
$
688,891
$
684,053
Adeptus Health Transition Properties As noted in previous filings, 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 November 8, 2019, 11 of these properties have been re-leased and two properties in the Dallas market were sold in April 2019 and in July 2019 at their approximate book value. The remaining three facilities (representing less than 0.1% of our total assets at September 30, 2019) are vacant. At September 30, 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 September 30, 2019, that the sale or re-leasing of the remaining three transition facilities will not result in any material loss or additional impairment. Gilbert Facility In the first quarter of 2018, we terminated the lease at our Gilbert, Arizona facility due to the tenant not meeting its rent obligations pursuant to the lease. As a result of the lease terminating, we recorded a charge to reserve against the straight-line rent receivables. All outstanding receivables due from the former tenant of Gilbert are completely reserved. At September 30, 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 0.1% of total assets at September 30, 2019), is fully recoverable. Alecto Facilities At September 30, 2019, we own four acute care facilities and have a mortgage loan on a fifth property. In the 2018 third quarter, we lowered the carrying value of the four owned properties to fair value resulting in a $30 million charge. 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 in the 2019 first quarter and did not recognize any rent revenue in the three months ended September 30, 2019. At September 30, 2019, our total overall investment in these properties is less than 1% of our total assets. On August 7, 2019, Alecto announced closure of two facilities in the Ohio Valley region, which we have an investment in of approximately $30 million. Although no assurances can be made that we will not recognize any impairment charges in the future, we believe our investment in these properties at September 30, 2019 is fully recoverable. Loans The following is a summary of our loans (in thousands):
As of September 30, 2019
As of December 31, 2018
Mortgage loans
$
1,268,563
$
1,213,322
Investment in sale leaseback transactions
1,390,619
—
Other loans
521,398
373,198
Total
$
3,180,580
$
1,586,520
The investment in sale leaseback transactions, along with the majority of the increase in mortgage and other loans, relates to the Prospect transaction. See subheading “Acquisitions” in this Note 3 for further details. 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 September 30, 2019, we had no investment in any single property greater than 3% of our total assets, which is down from the 4% at December 31, 2018.
2)
Operator concentration – For the nine months ended September 30, 2019, revenue from Steward and Prime of $265.1 million and $96.0 million, respectively, exceeded 10% of our total revenues. Of these two tenants, no single property represents greater than 4% of our total revenues. In comparison, Steward ($226.0 million), Prime ($95.4 million) and MEDIAN ($99.9 million) exceeded 10% of our total revenues for the first nine months of 2018.
3)
Geographic concentration – At September 30, 2019, investments in the U.S., Europe, and Australia represented approximately 73%, 20%, and 7%, respectively, of our total assets. In comparison, investments in the U.S. and Europe represented approximately 80% and 20%, respectively, of our total assets at December 31, 2018.
4)
Facility type concentration – For the nine months ended September 30, 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 nine months of 2018. |
