| Real Estate and Lending Activities | 3. Real Estate and Lending Activities New Investments We acquired or invested in the following net assets (in thousands):
For the Nine Months Ended September 30,
2020
2019
Land and land improvements
$
330,941
$
375,721
Buildings
2,610,197
1,320,449
Intangible lease assets — subject to amortization (weighted average useful life 27.6 years for 2020 and 18.7 years for 2019)
364,006
149,201
Investment in financing leases
—
1,386,797
Equity investments
—
284,399
Mortgage loans
47,641
51,267
Other loans and assets
306,328
135,258
Liabilities assumed
(134,203
)
—
Total assets acquired
$
3,524,910
$
3,703,092
Loans repaid(1)
(737,242
)
—
Total net assets acquired
$
2,787,668
$
3,703,092
(1)
The 2020 column includes $737 million of loans advanced to Steward Health Care, Inc. (“Steward”) in 2017 and exchanged for the fee simple real estate of two hospitals as described below. 2020 Activity Circle Transaction On January 8, 2020, we acquired a portfolio of 30 acute care hospitals located throughout the United Kingdom for approximately £1.5 billion from affiliates of BMI Healthcare, Inc. (“BMI”). In a related transaction, affiliates of Circle Health Ltd. (“Circle”) entered into definitive agreements to acquire BMI and assume operations of its 52 facilities in the United Kingdom subject to customary regulatory conditions. As part of our acquisition, we inherited 30 existing leases with the operator that had initial fixed terms ending in 2050, with no renewal options but with annual inflation-based escalators. Once final regulatory approval was received in the 2020 second quarter, these 30 leases with Circle were amended (effe ctive June 16, 2020) to include two five-year renewal options and improve the annual inflation-based escalators. These 30 leases are cross-defaulted and guaranteed by Circle. Other Transactions On August 13, 2020, we acquired a general acute care hospital in Lynwood, California for a total investment of approximately $300 million. This property is leased to Prime Healthcare Services, Inc. (“Prime”) pursuant to an existing long-term master lease, which Prime has agreed to extend to August 2035, with annual escalations and multiple extension options. On July 8, 2020, we acquired the fee simple real estate of two general acute care hospitals located in the Salt Lake City, Utah area, Davis Hospital & Medical Center and Jordan Valley Medical Center, in exchange for the reduction of the mortgage loans made to Steward for such properties and additional cash consideration of $200 million based on their relative fair value. The approximate $950 million investment in these two facilities is now subject to the Steward master lease. On June 24, 2020, we originated a CHF 45 million secured loan to Infracore SA (“Infracore”). On May 13, 2020, we formed a joint venture for the purpose of investing in the operations of international hospitals. As part of the formation, we originated a $205 million acquisition loan. We have a 49% interest in this joint venture and are accounting for our investment using the fair value option election. The joint venture simultaneously purchased from Steward the rights and existing assets related to all present and future international opportunities previously owned by Steward for strategic, regulatory, and risk management purposes. Other acquisitions throughout the first nine months of 2020 included one inpatient rehabilitation hospital and one general acute care hospital. The inpatient rehabilitation facility, located in Dahlen, Germany, was acquired on August 5, 2020 for €12.5 million and is leased to MEDIAN Kliniken S.à.r.l. pursuant to the existing master lease. The general acute care facility, located in Darlington, United Kingdom, was acquired on August 7, 2020 for £29.4 million and is leased to Circle pursuant to a long-term lease. 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 included the acquisition of the real estate of 11 acute care hospitals and two behavioral health facilities for $1.4 billion. We accounted for these properties as a financing receivable (as presented in the “Investment in financing leases” 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 initial 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 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 master lease agreement with an initial lease term of 20 years. The lease provides for annual escalations and includes three five-year 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 that had approximately 18-year remaining lease terms upon our acquisition 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 had an average remaining lease term of 14 years upon our acquisition. The leases provide for fixed escalations every five years and include two five-year 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 had an average initial term of 20 years, upon our acquisition, with annual fixed escalations 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 stake in a Swiss healthcare real estate company, Infracore, 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 that had an average 23-year remaining term upon our acquisition and are subject to annual escalation provisions. We are accounting for our 40% 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 through income 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. Development Activities On May 15, 2020, we agreed to finance the development of and lease an inpatient rehabilitation facility in Bakersfield, California for $47.9 million. This facility will be leased to Ernest Health, Inc. (“Ernest”) and is expected to commence rent in the fourth quarter of 2021. During the 2020 second quarter, we completed construction on one general acute care facility and one inpatient rehabilitation facility, both located in Birmingham, England. We began recognizing revenue on these two properties on June 29, 2020. These facilities are leased to Circle pursuant to a long-term lease. During the 2020 first quarter, we completed construction and began recording rental income on a general acute care facility located in Idaho Falls, Idaho. This facility commenced rent on January 21, 2020 and is being leased to Surgery Partners, Inc. pursuant to an existing long-term lease. See table below for a status update on our current development projects (in thousands):
Property
Commitment
Costs Incurred as of September 30, 2020
Estimated Rent Commencement Date
NeuroPsychiatric Hospitals (Houston, Texas)
$
27,500
$
20,241
2Q 2021
Ernest (Bakersfield, California)
47,929
16,010
4Q 2021
$
75,429
$
36,251
Disposals During the first nine months of 2020, we completed the disposition of nine facilities and six ancillary properties for approximately $93 million. The transactions resulted in a net loss on real estate of $2.7 million. Leasing Operations (Lessor) We acquire and develop healthcare facilities and lease the facilities to healthcare operating companies under long-term net leases (typical initial fixed terms of 15 years) and most include renewal options at the election of our tenants, generally in five year increments. More than 97% 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 that are generally priced at the greater of fair market value or our total investment. For five properties with a carrying value of $229 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 repairs/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 classified as financing leases, all of our leases are classified as operating leases. At September 30, 2020, leases on 14 Ernest facilities and ten Prime facilities are accounted for as direct financing leases and leases on 13 of our Prospect facilities are accounted for as a financing. The components of our total investment in financing leases consisted of the following (in thousands):
As of September 30, 2020
As of December 31, 2019
Minimum lease payments receivable
$
1,838,490
$
1,884,921
Estimated residual values
394,195
394,195
Less: Unearned income and allowance for credit loss
(1,566,655
)
(1,618,252
)
Net investment in direct financing leases
666,030
660,864
Other financing leases (net of allowance for credit loss)
1,423,189
1,399,438
Total investment in financing leases
$
2,089,219
$
2,060,302
Rent Deferrals Due to the COVID-19 pandemic and its impact on our tenants’ business during the first nine months of 2020, we agreed to defer collection on approximately 2% of our rent. The amount of this deferral, net of subsequent collections, is approximately $13 million as of September 30, 2020. Pursuant to our agreements with the tenants, we expect such deferred rent to be paid over specified periods in the future, with interest. Beginning October 1, 2020, we resumed collection on substantially all of our rent and interest. Adeptus Health Due to a decline in operating results of 20 freestanding emergency facilities and one acute care facility caused by a reduction in volumes from COVID-19 and other factors, we entered into agreements to sever the remaining leases with Adeptus Health, Inc. (“Adeptus”) in the second quarter of 2020. As a result, we recorded an approximate $20 million net charge, primarily all of which was for the write off of straight-line rent, partially offset by approximately $9 million of proceeds received from a letter of credit in the second quarter of 2020. Additionally, we recorded a $9.9 million real estate impairment charge on these severed facilities. At September 30, 2020, we no longer lease any properties to Adeptus and our net book value on those properties that were previously leased to Adeptus but are currently vacant approximates less than 1% of our total assets. In the third quarter of 2020, we re-leased two of these facilities to a new operator, pursuant to a long-term master lease. At September 30, 2020, we believe our investment in these real estate assets are fully recoverable, but no assurances can be given that we will not have any impairment in future periods. Alecto Facilities At September 30, 2020, we lease one acute care facility to Alecto Healthcare Services LLC (“Alecto”) and have a mortgage loan on a second property, representing less than 1% of our total assets. During the second quarter of 2020, we re-leased one acute care facility to West Virginia University and sold another facility previously leased to Alecto. In addition, we donated the Wheeling facility to a local municipality, resulting in a $9.1 million real estate impairment charge in the first quarter of 2020. Other Leasing Activity On July 24, 2020, we re-leased our five San Antonio, Texas free standing emergency facilities (with a total investment of approximately $30 million) to Methodist Healthcare System of San Antonio, a joint venture between HCA Healthcare and Methodist Healthcare Ministries of South Texas, pursuant to a long-term master lease. As a result, we recorded an approximate $1.5 million write-off of straight-line rent in the third quarter. Loans The following is a summary of our loans (net of allowance for credit loss in 2020):
(in thousands)
As of September 30, 2020
As of December 31, 2019
Mortgage loans
$
602,479
$
1,275,022
Acquisition loans
334,281
123,893
Other loans
576,186
420,939
Total
$
1,512,946
$
1,819,854
The decrease in mortgage loans relates to the conversion of Steward mortgage loans for the underlying fee simple real estate of two general acute care hospitals as more fully described under “New Investments” in this same Note 3 . The increase in acquisition loans relates to the $205 million loan to the new international joint venture described under “New Investments” in this same Note 3 Other loans consist of loans to our tenants for working capital and other 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 September 30, 2020, our largest investment in any single property approximated 3% of our total assets, similar to December 31, 2019.
2)
Operator concentration – For the nine months ended September 30, 2020, revenue from Steward, Circle, Prospect, and Prime represented 30%, 13%, 13%, and 11% of our total revenues, respectively. In comparison, Steward and Prime represented 44% and 16%, respectively, of our total revenues for the first nine months of 2019, while Prospect and Circle, collectively, represented less than 4%.
3)
Geographic concentration – At September 30, 2020, investments in the U.S., Europe, and Australia represented approximately 70%, 25%, and 5%, respectively, of our total assets, compared to 74%, 20%, and 6% at December 31, 2019.
4)
Facility type concentration – For the nine months ended September 30, 2020, approximately 89% of our revenues are from our general acute care facilities, while rehabilitation and long-term acute care facilities make up 8% and 3%, respectively. These percentages are similar to those for the first nine months of 2019. |
