| Real Estate and Other Activities | 3. Real Estate and Other Activities New Investments We acquired or invested in the following net assets (in thousands):
For the Six Months Ended June 30,
2021
2020
Land and land improvements
$
345,039
$
265,991
Buildings
825,322
1,608,771
Intangible lease assets — subject to amortization (weighted-average useful life of 45.0 years for 2021 and 30.8 years for 2020)
96,455
231,774
Equity investments
108,710
—
Mortgage loans
1,090,400
47,641
Other loans and assets
736,936
206,328
Liabilities assumed
(65,411
)
(134,203
)
Total assets acquired
3,137,451
2,226,302
Loans repaid(1)
(1,090,400
)
—
Total net assets acquired
$
2,047,051
$
2,226,302
(1)
The 2021 column includes an £800 million mortgage loan advanced to the Priory Group (“Priory”) in the first quarter of 2021 and converted to fee simple ownership of 35 properties in the second quarter of 2021 as described below 2021 Activity Priory Group Transaction On January 19, 2021, we completed the first of two phases in the Priory transaction in which we funded an £800 million interim mortgage loan on an identified portfolio of Priory real estate assets in the United Kingdom. On June 25, 2021, we completed the second phase of the transaction in which we converted this mortgage loan to fee simple ownership in a portfolio of 35 select real estate assets from Priory (now owned by Waterland Private Equity Fund VII C.V. (“Waterland VII”)) in individual sale-and-leaseback transactions. T he applicable purchase price for the asset w as paid by us by proportionally converting and reducing the principal balance of the interim mortgage loan we made to Waterland VII in phase one. The refore, the net aggregate purchase price for the real estate assets we acquire d from Priory was approximately £ 800 million, plus customary stamp duty, tax, and other transaction costs . As part of the real estate acquisition (for which some of the assets were acquired by the share purchase of real estate holding entities), we incurred deferred income tax liabilities of approximately £ 47.1 million. In addition to the real estate investment, on January 19, 2021, we made a 364-day, £250 million acquisition loan to Waterland VII, in connection with the closing of Waterland VII’s acquisition of Priory. Finally, we also acquired a 9.9% passive equity interest in the Waterland VII affiliate that indirectly owns Priory for a nominal amount. We funded this total investment using £500 million from a new $900 million interim credit facility as described in Note 4 , £350 million from our revolving facility, and the remainder from cash on-hand. Other On April 16, 2021, we made a CHF 145 million investment in Swiss Medical Network, our tenant via our Infracore SA (“Infracore”) equity investment. On January 8, 2021, we made a $335 million loan to affiliates of Steward Health Care System LLC (“Steward”), which was used to redeem a similarly sized convertible loan from Steward’s former private equity sponsor. 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 its operations 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 (effective June 16, 2020) to include two five-year Other On June 24, 2020, we originated a CHF 45 million secured loan to Infracore, which was paid in full on December 2, 2020. 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 . Development Activities See table below for a status summary of our current development projects (in thousands):
Property
Commitment
Costs Incurred as of June 30, 2021
Estimated Rent Commencement Date
Ernest (Bakersfield, California)
$
47,929
$
33,034
4Q 2021
Ernest (Stockton, California)
47,700
19,509
2Q 2022
$
95,629
$
52,543
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 being 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. Disposals 2021 Activity During the first half of 2021, we completed the sale of five facilities and an ancillary property for approximately $25 million, resulting in a net loss on real estate of approximately $0.4 million. 2020 Activity During the first half of 2020, we completed the disposition of five facilities and four ancillary properties for approximately $79 million. The transactions resulted in a net loss on real estate of $1.8 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 at least 15 years) and most include renewal options at the election of our tenants, generally in five year increments. Approximately 99% 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 rent escalations (typically at least 2.0%). 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 $230 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 classified as financing leases as noted below, all of our leases are classified as operating leases. At June 30, 2021, leases on 13 Ernest Health, Inc. (“Ernest”) facilities and five Prime Healthcare Services, Inc. (“Prime”) facilities are accounted for as direct financing leases and leases on 13 of our Prospect Medical Holdings, Inc. (“Prospect”) facilities and five of our Ernest facilities are accounted for as a financing. The components of our total investment in financing leases consisted of the following (in thousands):
As of June 30, 2021
As of December 31, 2020
Minimum lease payments receivable
$
1,206,411
$
1,228,966
Estimated residual values
203,818
203,818
Less: Unearned income and allowance for credit loss
(943,865
)
(969,061
)
Net investment in direct financing leases
466,364
463,723
Other financing leases (net of allowance for credit loss)
1,565,817
1,547,199
Total investment in financing leases
$
2,032,181
$
2,010,922
COVID-19 Rent Deferrals In the first six months of 2021, we collected $1.6 million of rent previously deferred due to the COVID-19 pandemic. Pursuant to our agreements with certain tenants, we expect the remaining outstanding deferred rent balance of approximately $9.8 million as of June 30, 2021, to be paid over specified periods in the future, with interest. Adeptus Health As discussed in previous filings, our original real estate portfolio of approximately 60 properties leased to Adeptus Health, Inc. (“Adeptus”) has gone through significant changes starting with Adeptus filing for Chapter 11 bankruptcy in 2017. During 2020, we transitioned the remaining facilities away from Adeptus, which resulted in impairment charges including approximately $9.9 million in the first half of 2020, along with a charge to writeoff straight-line rent and other receivables, partially offset by a draw on a $9.1 million letter of credit. However, these transition measures have also provided for new tenant relationships being formed with strong credit worthy operators like Ochsner Health System, Dignity Health, UC Health, and HCA Healthcare, that are now leasing approximately 40 of these transitional facilities under long-term leases. At June 30, 2021, 13 of these transitional properties, representing less than 1% of our total assets, remain vacant, and each of these properties are in various stages of being re-leased or sold. At June 30, 2021, we believe our investment in these real estate assets are fully recoverable, but no assurances can be given that we will not have any further impairments in future periods. Alecto Facilities As noted in previous filings, we originally leased four acute care facilities to and had a mortgage loan on a fifth property (Olympia Medical Center) with Alecto Healthcare Services LLC (“Alecto”). During the first quarter of 2020, we donated the Wheeling facility to a local municipality, resulting in a $9.1 million real estate impairment charge. In addition, we re-leased one acute care facility to West Virginia University and sold another facility in 2020. In the first quarter of 2021, Alecto completed the sale of Olympia Medical Center to the UCLA Health System. Our proceeds of approximately $51 million from this sale were used to pay off the mortgage and working capital loans in full, with the remaining proceeds used to recover certain previously reserved past due amounts. At June 30, 2021, we continue to lease one acute care facility to Alecto representing less than 0.1% of our total assets. Loans The following is a summary of our loans (net of allowance for credit loss) (in thousands):
As of June 30, 2021
As of December 31, 2020
Mortgage loans
$
219,561
$
248,080
Acquisition loans
688,106
338,273
Other loans
823,740
520,095
Total
$
1,731,407
$
1,106,448
The increase in acquisition loans relates to the £250 million loan funded in connection with the Priory Group Transaction (as more fully described above in 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 €297 million. The increase in other loans is primarily related to the $335 million loan to affiliates of Steward (as more fully described above in this Note 3 ), partially offset by the repayment of $75 million in other loans from Prime. Other Investment Activities Pursuant to our existing 9.9% equity interest in Steward, we received an $11 million cash distribution during the first quarter of 2021, which was accounted for as a return of capital. Pursuant to our 4.9% stake in Aevis Victoria SA (“Aevis”), we recorded a $1.9 million favorable non-cash fair value adjustment to mark our investment in Aevis stock to market during the first six months of 2021; whereas, this was a $6.8 million unfavorable non-cash fair value adjustment for the same period of 2020. 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 June 30, 2021, our largest single property represented approximately 3% of our total assets, similar to December 31, 2020.
2)
Operator concentration – For the three and six months ended June 30, 2021, revenue from Steward, Circle, and Prospect, individually, represented more than 10% of our total revenues. In comparison, Steward, Prospect, Circle, and Prime, individually, represented more than 10% of our total revenues for the three and six months ended June 30, 2020.
3)
Geographic concentration – At June 30, 2021, investments in the U.S., Europe, Australia, and South America represented approximately 61%, 34%, 4%, and 1%, respectively, of our total assets, compared to 65%, 28%, 6%, and 1%, respectively, at December 31, 2020.
4)
Facility type concentration – For the three and six months ended June 30, 2021 and 2020, approximately 80% of our revenues were generated from our general acute care facilities, while revenues from our rehabilitation facilities approximated 10% for each period. Revenues from our behavioral health, freestanding ER/urgent care, and long-term acute care facilities combined to make up less than 10% of our revenues for all periods presented. |
