| Real Estate and Other Activities | 3. Real Estate a nd Other Activities New Investments We acquired or invested in the following net assets (in thousands):
For the Three Months
2023 2022
Land and land improvements $ 9,313 $ 9,671
Buildings 11,652 204,829
Intangible lease assets — subject to amortization (weighted-average useful 28.8 years for 2023 and 13.2 years for 2022) 1,935 5,461
Investments in unconsolidated real estate joint ventures — 399,456
Investments in unconsolidated operating entities 50,000 131,105
Liabilities assumed — ( 25,727 )
$ 72,900 $ 724,795
Loans repaid(1) ( 22,900 ) —
Total net assets acquired $ 50,000 $ 724,795 (1) The 2023 column includes a $ 23 million mortgage loan to Springstone Health Opco, LLC ("Springstone") that was converted to fee simple ownership of one property as described below. 2023 Activity Lifepoint Transaction On February 7, 2023, a subsidiary of Lifepoint Health, Inc. ("Lifepoint") acquired a majority interest in Springstone (the "Lifepoint Transaction") based on an enterprise value of $ 250 million. As part of the transaction, we received approximately $ 205 million in full satisfaction of our initial acquisition loan to Springstone, including accrued interest, and we retained our minority equity investment in the operations of Springstone. Separately, and as part of our acquisition in 2021 of Springstone's real estate assets, we converted a mortgage loan into the fee simple ownership of a property in Washington, which will be leased, along with the other 17 behavioral health hospitals already leased to Springstone, under the master lease agreement. In connection with the Lifepoint Transaction, Lifepoint extended its current lease with us on eight existing general acute care hospitals by five years to 2041 . Other Transactions As part of an expected series of Prospect Medical Holdings, Inc. ("Prospect") capital restructuring transactions, we originated a $ 50 million convertible loan to PHP Holdings, the managed care business of Prospect, in the first quarter of 2023. The loan is convertible into equity of PHP Holdings. See subsection titled "Leasing Operations (Lessor)" in this same Note 3 for further information on Prospect. 2022 Activity Macquarie Transaction On March 14, 2022, we completed a transaction with Macquarie Asset Management (“MAM”), an unrelated party, to form a partnership (the “Macquarie Transaction”), pursuant to which we contributed eight Massachusetts-based general acute care hospitals that are leased to Steward Health Care System LLC ("Steward"), and a fund managed by MAM acquired, for cash consideration, a 50 % interest in the partnership. The transaction valued the portfolio at approximately $ 1.7 billion, and we recognized a gain on sale of real estate of approximately $ 600 million from this transaction, partially offset by the write-off of unbilled straight-line rent receivables. The partnership raised nonrecourse secured debt of 55 % of asset value, and we received proceeds, including from the secured debt, of approximately $ 1.3 billion. We obtained a 50 % interest in the real estate partnership valued at approximately $ 400 million (included in the "Investments in unconsolidated real estate joint ventures" line of our condensed consolidated balance sheets), which is being accounted for under the equity method of accounting. In connection with this transaction, we separated the eight Massachusetts-based facilities into a new master lease with terms generally identical to the other master lease, and the initial fixed lease term of both master leases was extended to 2041 . Other Transactions On March 11, 2022, we acquired four general acute care hospitals in Finland for € 178 million ($ 194 million). These hospitals are leased to Pihlajalinna pursuant to a long-term lease with annual inflation-based escalators. We acquired these facilities by purchasing the shares of the real estate holding entities, which included deferred income tax and other liabilities of approximately $ 26 million. On February 16, 2022, we agreed to participate in an existing syndicated term loan with a term of six years originated on behalf of Priory Group ("Priory"), of which we funded £ 96.5 million towards a £ 100 million participation level in the variable rate loan. Development Activities See table below for a status summary of our current development projects (in thousands):
Property Commitment Costs Estimated Rent
Ernest Health, Inc. ("Ernest") (Stockton, California) $ 47,700 $ 46,372 2Q 2023
IMED Hospitales ("IMED") (Spain) 51,043 13,323 2Q 2023
Ernest (South Carolina) 22,400 14,469 3Q 2023
IMED (Spain) 45,976 37,568 3Q 2023
Springstone (Texas) 31,600 4,099 1Q 2024
IMED (Spain) 37,193 9,170 3Q 2024
Steward (Texas) 169,408 57,059 1Q 2026
$ 405,320 $ 182,060 During the 2022 first quarter, we completed construction and began recording rental income on an inpatient rehabilitation facility located in Bakersfield, California. This facility commenced rent on March 1, 2022 and is being leased to Ernest pursuant to an existing long-term master lease. We continue to fund the redevelopment of our Norwood facility in Massachusetts, and recovery receivables of approximately $ 150 million associated with the prior storm and flood damage to this facility are included in the "Other assets" line of our condensed consolidated balance sheets. Disposals 2023 Activity On March 30, 2023, we entered into a definitive agreement to sell our 11 general acute care facilities located in Australia and operated by Healthscope Ltd. ("Healthscope") (the "Australia Transaction") to affiliates of HMC Capital for cash proceeds of approximately A$ 1.2 billion. As a result, we designated the Australian portfolio as held for sale and recorded an approximate $ 79 million net impairment charge, which included $ 37.4 million of straight-line rent receivables, an estimated $ 8 million in fees to sell the hospitals, and $ 13 million of accumulated other comprehensive loss related to foreign currency translation. This impairment charge was partially offset by approximately $ 29 million of deferred gains from our interest rate swap in accumulated other comprehensive income that was reclassified to earnings as part of this expected transaction. This transaction is expected to close in two phases with the first (and larger) phase expected to close in the second quarter and the full transaction expected to be complete by the end of 2023. We currently plan to use proceeds from the sale to prepay in full the Australian term loan. On March 8, 2023, we received notice that Prime Healthcare Services, Inc. ("Prime") will exercise its right to repurchase from us during the third quarter of 2023 the real estate associated with one master lease for approximately $ 100 million. As such, we recorded an approximate $ 11 million non-cash impairment charge in the first quarter of 2023 related to unbilled rent on the three facilities expected to be sold. Although we currently expect the Australia Transaction and Prime repurchase will occur as planned, no assurances can be given that the transactions will close as described above. 2022 Activity On March 14, 2022, we completed the previously described partnership with MAM, in which we sold the real estate of eight Massachusetts-based general acute care hospitals, with a fair value of approximately $ 1.7 billion. See "New Investments" in this same Note 3 for further details on this transaction. During the first three months of 2022, we also completed the sale of two other facilities and an ancillary property for approximately $ 48 million, resulting in a gain on real estate of approximately $ 15 million. Summary of Operations for Disposed (or to be Disposed) Assets in 2023 and 2022 The properties expected to be sold during 2023 and sold during 2022 do not meet the definition of discontinued operations. However, the following represents the operating results from these properties for the periods presented (in thousands):
For the Three Months
2023(1) 2022
Revenues(2) $ 18,877 $ 40,579
Real estate depreciation and amortization ( 4,991 ) ( 5,247 )
Property-related expenses ( 1,413 ) ( 3,015 )
Real estate and other impairment charges(3) ( 89,538 ) —
Other (expense) income(4) ( 7,244 ) 444,268
Income from real estate dispositions, net $ ( 84,309 ) $ 476,585 (1) The 2023 column consists of assets designated as held for sale in the first quarter of 2023 as a result of the transactions described in the "2023 Activity" subsection above. (2) Includes $ 4.5 million of straight-line rent write-offs associated with the non-Macquarie disposal transactions for the three months ended March 31, 2022. (3) Includes an approximate $ 79 million net impairment charge (including $ 37.4 million of straight-line rent write-offs) associated with the Australia Transaction and an approximate $ 11 million non-cash impairment charge associated with the repurchase of three Prime facilities for the three months ended March 31, 2023. (4) Includes $ 451.6 million of gains (net of $ 125 million write-off of straight-line rent receivables related to the Macquarie Transaction) for the three months ended March 31, 2022. Leasing Operations (Lessor) We acquire and develop healthcare facilities and lease the facilities to healthcare operating companies. The initial fixed lease terms of these infrastructure-type assets are typically at least 15 years, and most include renewal options at the election of our tenants, generally in five year increments. Over 99 % of our leases provide annual rent escalations based on increases in the Consumer Price Index ("CPI") (or similar indices outside the U.S.) and/or fixed minimum annual rent escalations. Many of our domestic leases contain purchase options with pricing set at various terms but in no case less than our total initial investment. 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. For all of our properties subject to lease, we are the legal owner of the property, and the tenant's right to use and possess such property is guided by the terms of a lease. At March 31, 2023 , we account for all of these leases as operating leases, except where GAAP requires alternative classification, including leases on 13 Ernest facilities that are accounted for as direct financing leases and leases on 13 of our Prospect facilities and five of our Ernest facilities that are accounted for as a financing. The components of our total investment in financing leases consisted of the following (in thousands):
As of March 31, As of December 31,
Minimum lease payments receivable $ 626,721 $ 880,253
Estimated unguaranteed residual values 203,818 203,818
Less: Unearned income and allowance for credit loss ( 588,097 ) ( 731,915 )
Net investment in direct financing leases 242,442 352,156
Other financing leases (net of allowance for credit loss) 1,339,974 1,339,167
Total investment in financing leases $ 1,582,416 $ 1,691,323 The decrease in our net investment in direct financing leases since December 31, 2022, is the result of classifying three Prime facilities as held for sale at March 31, 2023. See subsection above titled "Disposals" for further information. Other Leasing Activities At March 31, 2023 , 99 % of our properties are occupied by tenants, leaving five properties as vacant, representing less than 0.3 % of total assets. We are in various stages of either releasing or selling these vacant properties, for one of which we received and recorded a significant termination fee in 2019. As more fully described in “Item 1A. Risk Factors” in our Annual Report on Form 10-K, our tenants’ financial performance and resulting ability to satisfy their lease and loan obligations to us are material to our financial results and our ability to service our debt and make distributions to our stockholders. Our tenants operate in the healthcare industry, which is highly regulated, and changes in regulation (or delays in enacting regulation) may temporarily impact our tenants’ operations until they are able to make the appropriate adjustments to their business. In addition, our tenants may experience operational challenges from time-to-time as a result of many factors, including those external to them, such as public health crises (like the coronavirus ("COVID-19") pandemic), economic issues resulting in high inflation and spikes in labor costs, and adverse market and political conditions. We monitor our tenants' operating results and the potential impact from these challenges. We may elect to provide support to our tenants from time-to-time in the form of short-term rent deferrals to be paid back in full (like as described below under COVID-19 Rent Deferrals and Pipeline Health System), or in the form of temporary loans (like as described below under Prospect Medical Holdings). COVID-19 Rent Deferrals Due to COVID-19 and its impact on our tenants' business, we agreed to defer collection of a certain amount of rent for certain tenants. Pursuant to our agreements with these tenants, we expect repayments of previously deferred rent to continue, with the remaining outstanding deferred rent balance of approximately $ 12.2 million as of March 31, 2023, to be paid over specified periods in the future with interest. Pipeline Health System On October 2, 2022, Pipeline filed for reorganization relief under Chapter 11 protection of the United States Bankruptcy Code in the Southern District of Texas, while keeping its hospitals open to continue providing care to the communities served. On February 6, 2023, Pipeline emerged from bankruptcy. Per the bankruptcy settlement, Pipeline's current lease of our California assets remains in place, and we were repaid on February 7, 2023 for all rent that was outstanding at December 31, 2022, along with what was due for the first quarter of 2023. We have agreed to defer $ 5.6 million, or approximately 30 %, of rent in 2023 to be paid in 2024 with interest. Prospect Medical Holdings In August 2019, we invested in a portfolio of 14 acute care hospitals in three states (California, Pennsylvania, and Connecticut) operated by and master leased to or mortgaged by Prospect for a combined investment of approximately $ 1.5 billion. In addition, we originated a $ 112.9 million term loan cross-defaulted to the master lease and mortgage loan agreements and further secured by a parent guaranty. In the 2022 second quarter, we funded an additional $ 100 million towards the existing mortgage loan that is secured by a first lien on a California hospital. Prospect's operations were negatively impacted by the COVID-19 global pandemic commencing in early 2020, but Prospect continued to remain current with respect to contractual rent and interest payments until the fourth quarter of 2022. Accordingly, and due further to termination of certain refinancing negotiations between Prospect and certain third parties, we recorded an approximate $ 280 million impairment charge in the 2022 fourth quarter. As part of this charge, we reduced the carrying value of the underperforming Pennsylvania properties by approximately $ 170 million (to approximately $ 250 million) and reserved all unbilled rent accruals for a total of $ 112 million. In the first quarter of 2023, we began accounting for Prospect revenue on a cash basis and did not recognize any rent or interest revenue in the quarter. In late March 2023, Prospect received a binding commitment from several lenders that is expected to provide them with liquidity to pay down certain debt instruments. Along with these commitments from third-party lenders, we agreed to pursue certain transactions with Prospect that would result in the following: a) maintain the master lease covering six California hospitals with no changes in rental rates or escalator provisions, and with the expectation that Prospect will begin making cash payments for approximately 50 % of the contractual monthly rent due on these California properties starting in September 2023, b) transition the Pennsylvania properties back to Prospect in return for a well-collateralized mortgage on the facilities, c) provide up to $ 75 million in a loan secured by a first lien on Prospect's accounts receivable and certain other assets, d) obtain a non-controlling ownership interest in Prospect's managed care business (PHP Holdings) equal in value to unpaid rent and interest, our $ 112.9 million term loan, and other obligations at the time of such investment, and e) complete the previously disclosed sale of the Connecticut properties to Yale New Haven ("Yale"), as more fully described in Note 9 to the condensed consolidated financial statements. As part of these capital restructuring steps (as discussed under "New Investments" in this same Note 3 ), we originated a $ 50 million loan to PHP Holdings in March 2023 that is convertible into equity of PHP Holdings. At March 31, 2023, we believe our remaining investment in the Prospect real estate and other assets are fully recoverable from the collateral available, but no assurances can be given that the transactions described above will occur or that we will not have any further impairments in future periods. Investments in Unconsolidated Entities Investments in Unconsolidated Real Estate Joint Ventures Our primary business strategy is to acquire real estate and lease to providers of healthcare services. Typically, we directly own 100 % of such investment. However, from time-to-time, we will co-invest with other investors that share a similar view that hospital real estate is a necessary infrastructure-type asset in communities. In these types of investments, we will own undivided interests of less than 100 % of the real estate and share control over the assets through unconsolidated real estate joint ventures. The underlying real estate and leases in these unconsolidated real estate joint ventures are structured similarly and carry a similar risk profile to the rest of our real estate portfolio. The following is a summary of our investments in unconsolidated real estate joint ventures by operator (amounts in thousands):
Operator Ownership Percentage As of March 31, As of December 31,
Median Kliniken S.á.r.l ("MEDIAN") 50 % $ 483,706 $ 482,735
Swiss Medical Network 70 % 461,952 454,083
Steward (Macquarie Transaction) 50 % 416,068 417,701
Policlinico di Monza 50 % 88,658 86,245
HM Hospitales 45 % 56,090 57,139
Total $ 1,506,474 $ 1,497,903 Investments in Unconsolidated Operating Entities Our investments in unconsolidated operating entities are noncontrolling investments that are typically made in conjunction with larger real estate transactions in which the operators are vetted as part of our overall underwriting process. In many cases, we would not be able to acquire the larger real estate portfolio without such investments in operators. These investments also offer the opportunity to enhance our overall return and provide for certain minority rights and protections. The following is a summary of our investments in unconsolidated operating entities (amounts in thousands):
Operator As of March 31, As of December 31,
Steward (loan investment) $ 362,586 $ 362,831
International joint venture 230,153 231,402
Priory 159,668 156,575
Swiss Medical Network 158,687 157,145
Steward (equity investment) 125,862 125,862
Prospect 112,701 112,777
Aevis Victoria SA ("Aevis") 77,618 72,904
PHP Holdings 49,895 —
Aspris Children's Services ("Aspris") 16,014 16,023
Springstone 10,933 200,827
Caremax 6,343 8,526
Total $ 1,310,460 $ 1,444,872 The change since December 31, 2022 primarily relates to the payoff of the Springstone loan in February 2023, partially offset by the loan made to PHP Holdings. See "2023 Activity" under subsection titled "New Investments" in this same Note 3 for further details. Pursuant to our approximate 5 % stake in Aevis and other investments marked to fair value, we recorded approximately $ 4 million in favorable non-cash fair value adjustments during the first quarter of 2023 as shown in the "Other (including fair value adjustments on securities)" line of the condensed consolidated statements of net income; whereas, this was an $ 8.0 million favorable non-cash fair value adjustment for the same period of 2022. Other Investment Activities In conjunction with the redevelopment of Steward's Norwood hospital, we advanced $ 50 million, in the 2023 first quarter, that is secured by, among other things, proceeds from insurance claims in excess of the advance. Credit Loss Reserves We apply a forward-looking "expected loss" model to all of our financing receivables, including financing leases and loans, based on historical credit losses of similar instruments. The following table summarizes the activity in our credit loss reserves (in thousands):
For the Three Months
2023 2022
Balance at beginning of the year $ 121,146 $ 48,527
Provision for credit loss, net 986 5,412
Expected credit loss reserve related to financial instruments ( 160 ) ( 6 )
Balance at end of the period $ 121,972 $ 53,933 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. See below for our concentration details (dollars in thousands): Total Assets by Operator
As of March 31, 2023 As of December 31, 2022
Operators Total Assets Percentage of Total Assets Percentage of
Steward $ 4,800,594 24.4 % $ 4,762,673 24.2 %
Circle Health Ltd ("Circle") 2,092,822 10.7 % 2,062,474 10.5 %
Prospect 1,533,412 7.8 % 1,483,599 7.5 %
Priory 1,310,968 6.7 % 1,290,213 6.6 %
Springstone 796,248 4.0 % 985,959 5.0 %
Other operators 7,406,721 37.7 % 7,461,923 38.0 %
Other assets 1,709,392 8.7 % 1,611,159 8.2 %
Total $ 19,650,157 100.0 % $ 19,658,000 100.0 % Total Assets by U.S. State and Country
As of March 31, 2023 As of December 31, 2022
U.S. States and Other Countries Total Assets Percentage of Total Assets Percentage of
Texas $ 2,008,146 10.2 % $ 1,967,948 10.0 %
California 1,502,060 7.7 % 1,450,112 7.4 %
Florida 1,319,878 6.7 % 1,324,555 6.8 %
Utah 1,218,883 6.2 % 1,224,484 6.2 %
Massachusetts 763,555 3.9 % 761,694 3.9 %
All other states 4,035,762 20.5 % 4,245,306 21.6 %
Other domestic assets 1,087,136 5.5 % 1,028,946 5.2 %
Total U.S. $ 11,935,420 60.7 % $ 12,003,045 61.1 %
United Kingdom $ 4,145,170 21.1 % $ 4,083,244 20.8 %
Australia 781,585 4.0 % 854,582 4.3 %
Switzerland 763,711 3.9 % 748,947 3.8 %
Germany 666,930 3.4 % 664,900 3.4 %
Spain 226,800 1.1 % 222,316 1.1 %
All other countries 508,285 2.6 % 498,753 2.5 %
Other international assets 622,256 3.2 % 582,213 3.0 %
Total international $ 7,714,737 39.3 % $ 7,654,955 38.9 %
Grand total $ 19,650,157 100.0 % $ 19,658,000 100.0 % On an individual property basis, we had no investment in any single property greater than 3 % of our total assets as of March 31, 2023. Total Revenues by Operator
For the Three Months Ended March 31,
2023 2022
Operators Total Revenues Percentage of Total Revenues Percentage of
Steward $ 103,494 29.6 % $ 121,244 29.6 %
Circle 47,415 13.5 % 51,212 12.5 %
Prospect — 0.0 % 38,684 9.4 %
Priory 24,740 7.1 % 19,070 4.7 %
Springstone 20,167 5.8 % 21,664 5.3 %
Other operators 154,395 44.0 % 157,926 38.5 %
Total $ 350,211 100.0 % $ 409,800 100.0 % Total Revenues by U.S. State and Country
For the Three Months Ended March 31,
2023 2022
U.S. States and Other Countries Total Revenues Percentage of Total Revenues Percentage of
Texas $ 44,116 12.6 % $ 34,844 8.5 %
Utah 35,641 10.2 % 33,768 8.2 %
Florida 26,182 7.5 % 25,305 6.2 %
California 19,495 5.6 % 41,291 10.1 %
Massachusetts 6,816 1.8 % 32,631 8.0 %
All other states 99,137 28.4 % 125,907 30.7 %
Total U.S. $ 231,387 66.1 % $ 293,746 71.7 %
United Kingdom $ 84,206 24.0 % $ 83,906 20.5 %
Australia 15,237 4.4 % 17,031 4.1 %
All other countries 19,381 5.5 % 15,117 3.7 %
Total international $ 118,824 33.9 % $ 116,054 28.3 %
Grand total $ 350,211 100.0 % $ 409,800 100.0 % Total Revenues by Facility Type
For the Three Months Ended March 31,
2023 2022
Facility Types Total Revenues Percentage of Total Revenues Percentage of
General acute care hospitals $ 253,036 72.3 % $ 316,019 77.0 %
Behavioral health facilities 53,658 15.3 % 50,897 12.4 %
Inpatient rehabilitation facilities 29,046 8.3 % 28,906 7.1 %
Long-term acute care hospitals 8,251 2.4 % 8,302 2.1 %
Freestanding ER/urgent care facilities 6,220 1.7 % 5,676 1.4 %
Total $ 350,211 100.0 % $ 409,800 100.0 % For geographic and facility type concentration metrics above, we allocate our investments in operating entities pro rata based on the gross book value of the real estate. Such pro rata allocations are subject to change from period to period . |
