| 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
2024 2023
Land and land improvements $ — $ 9,313
Buildings — 11,652
Intangible lease assets — subject to amortization (weighted-average useful 28.8 years for 2023) — 1,935
Investments in unconsolidated operating entities — 50,000
$ — $ 72,900
Loans repaid(1) — ( 22,900 )
Total net assets acquired $ — $ 50,000 (1) The 2023 column includes a $ 23 million mortgage loan that was converted to fee simple ownership of one property as described under Lifepoint Transaction below. 2023 Activity Prospect Transaction 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 Medical Holdings, Inc. ("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 was secured by a first lien on a California hospital. Prospect's operations were negatively impacted by the coronavirus global pandemic commencing in early 2020, but Prospect remained current with respect to contractual rent and interest payments until the fourth quarter of 2022. Accordingly, and due further to the termination of certain refinancing negotiations between Prospect and certain third parties in early 2023 that would have recapitalized Prospect and provided for payment of unpaid rent and interest, 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. However, Prospect continued to pursue a recapitalization plan, and, in late March 2023, Prospect received a binding commitment from several lenders to provide liquidity to pay down certain debt instruments. Along with these commitments from third-party lenders, we agreed to pursue certain transactions with Prospect as part of their recapitalization plan, including originating a $ 50 million convertible loan to PHP Holdings, the managed care business of Prospect, in the first quarter of 2023. On May 23, 2023, Prospect completed its recapitalization plan, which included receiving $ 375 million in new financing from several lenders. Along with this new debt capital from third-party lenders, we agreed to the following restructuring of our then $ 1.7 billion investment in Prospect including: a) maintaining the master lease covering six California hospitals without any changes in rental rates or escalator provisions, but with cash payments starting in September 2023 for a substantial portion of the contractual monthly rent due on these California properties, b) transitioning the Pennsylvania properties back to Prospect in return for a $ 150 million first lien mortgage on the facilities, c) providing up to $ 75 million in a loan secured by a first lien on Prospect's accounts receivable and certain other assets, of which we funded in full during 2023, d) continuing to pursue the previously disclosed sale of the three Connecticut properties to Yale New Haven ("Yale"), as more fully described in Note 9 to the condensed consolidated financial statements, and e) obtaining a non-controlling ownership interest in PHP Holdings of approximately $ 654 million, after applying a discount for lack of marketability, consisting of an approximate $ 68 million equity investment and $ 586 million loan convertible into equity of PHP Holdings (collectively, the "Prospect Transaction"). This non-controlling ownership interest was received in exchange for unpaid rent and interest through December 2022, previously unrecorded rent and interest revenue in 2023 totaling approximately $ 82 million, our $ 151 million mortgage loan on a California property, our $ 112.9 million term loan, and other obligations at the time of such investment. Lifepoint Transaction On February 7, 2023, a subsidiary of Lifepoint Health, Inc. ("Lifepoint") acquired a majority interest in Springstone (now Lifepoint Behavioral Health, "Lifepoint Behavioral") (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, including accrued interest, and we retained our minority equity investment in the operations of Lifepoint Behavioral. Separately, we converted a mortgage loan (as part of our initial acquisition in 2021) into the fee simple ownership of a property in Washington, which is leased, along with the other 18 behavioral health hospitals, to Lifepoint Behavioral, under a master lease agreement. In connection with the Lifepoint Transaction, Lifepoint extended its lease on eight existing general acute care hospitals by five years to 2041 . In the first quarter of 2024, we sold our minority equity investment in Lifepoint Behavioral for approximately $ 12 million. Development Activities See table below for a status summary of our current development projects (in thousands):
Property Commitment Costs Estimated Rent
IMED Hospitales ("IMED") (Spain) $ 37,790 $ 21,586 4Q 2024
IMED (Spain) 51,802 19,299 1Q 2025
$ 89,592 $ 40,885 We have two other development projects ongoing in Texas (Wadley development) and Massachusetts (Norwood redevelopment). These are not highlighted above given the ongoing restructuring of Steward Health Care System ("Steward") as discussed further in this same Note 3 . However, on a combined basis, we have spent approximately $ 395 million through March 31, 2024. Separately, on the Norwood redevelopment, we have approximately $ 150 million, net of payments received to date, due to us from a combination of recovery receivables (included in "Other assets" in the condensed consolidated balance sheets) associated with the damage to the original facility in 2020 and a $ 50 million advance (reflected in "Other loans" in the condensed consolidated balance sheets) made to Steward in the first half of 2023 that is secured by, among other things, proceeds from Steward's business interruption insurance claims. 2024 Activity During the first three months of 2024, we completed construction and began recording rental income on a $ 35.4 million behavioral health facility located in McKinney, Texas, that is leased to Lifepoint Behavioral. We also completed construction and began recording rental income on a € 45.4 million (approximately $ 49.0 million) general acute care facility located in Spain that is leased to IMED. Disposals 2024 Activity On February 19, 2024, we entered into definitive agreements to sell five properties to Prime Healthcare Services, Inc. ("Prime") for total proceeds of approximately $ 250 million along with a $ 100 million interest-bearing mortgage loan due in approximately nine months from the closing date. As such, we designated these properties as held for sale at March 31, 2024. This transaction, which closed on April 9, 2024, resulted in a gain on real estate of approximately $ 50 million and a non-cash straight-line rent write-off of approximately $ 28 million. As part of this sale transaction, we also agreed to extend the lease maturity of four other facilities with Prime to 2044. This amended lease has inflation-based escalators, collared between 2 % and 4 % and a purchase option on or prior to August 26, 2028 for a value of $ 238 million, which is greater than our net book value for these properties at March 31, 2024. After August 26, 2028, this option price reverts to $ 260 million (subject to annual escalations). During the first three months of 2024, we also completed the sale of three other facilities and two ancillary facilities for approximately $ 7 million, resulting in a loss on real estate of approximately $ 1.4 million. Summary of Operations for Disposed (or to be Disposed) Assets in 2024 The following represents the operating results from the five properties designated as held for sale at March 31, 2024, as well as the five properties sold in April 2024 as part of the Utah Transaction (further described in Note 10 to the condensed consolidated financial statements) (in thousands):
For the Three Months
2024 2023
Revenues $ 39,007 $ 43,198
Real estate depreciation and amortization ( 6,381 ) ( 10,718 )
Property-related expenses ( 4 ) ( 120 )
Other expense ( 42 ) ( 21 )
Income from real estate dispositions, net $ 32,580 $ 32,339 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 in the first quarter of 2023 and recorded approximately $ 79 million of net impairment charges at that time, which included $ 37.4 million of straight-line rent receivable writeoffs and approximately $ 8 million in fees to sell the hospitals, partially offset by approximately $ 16 million of gains from our interest rate swap and foreign currency translation amounts in accumulated other comprehensive income that were reclassified to earnings in 2023 as part of the transaction. This transaction closed in two phases. The first phase closed on May 18, 2023, in which we sold seven of the 11 facilities for A$ 730 million, and the final phase closed on October 10, 2023, in which we sold the remaining four facilities for approximately A$ 470 million. On March 8, 2023, we received notice that Prime planned to exercise its right to repurchase from us 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 that were sold on July 11, 2023. 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, 2024 , 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 nine 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 $ 606,537 $ 611,669
Estimated unguaranteed residual values 203,818 203,818
Less: Unearned income and allowance for credit loss ( 565,116 ) ( 571,059 )
Net investment in direct financing leases 245,239 244,428
Other financing leases (net of allowance for credit loss) 987,939 987,202
Total investment in financing leases $ 1,233,178 $ 1,231,630 Other Leasing Activities At March 31, 2024 , our vacant properties represent less than 0.3 % of total assets. We are in various stages of either re-leasing or selling these vacant properties. 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 cybersecurity attacks or public health crises (like the COVID-19 pandemic), economic issues resulting in high inflation and spikes in labor costs, extreme or severe weather and climate-related events, 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 Pipeline Health System), or in the form of temporary loans (like as described previously in the Prospect Transaction). See below for an update on some of our tenants: Steward Health Care System Due to the uncertainty concerning the sale of Steward's managed care business, ongoing operational and liquidity challenges, and the bankruptcy filing as more fully described in "Significant Tenant Update" under the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-Q, we have recorded approximately $ 470 million of additional impairment charges in the quarter ending March 31, 2024, that fully reserves for the remaining value of our 9.9 % equity investment in Steward and the $ 362 million loan due from affiliates of Steward along with the accrual for property taxes and other obligations not paid by Steward under its master leases. The equity investment and loan to Steward affiliates are included in “Investments in unconsolidated operating entities” on our condensed consolidated balance sheets and were adjusted for after comparing our carrying value of these investments to an updated fair value analysis of the underlying collateral, with assistance from a third-party, independent valuation firm. At March 31, 2024, we have approximately $ 346 million of non-real estate investments in Steward, consisting of the working capital loan and other secured loans advanced in 2024. Based on the analysis discussed above, we believe these investments are fully recoverable at this time. However, no assurances can be given that we will not have any additional impairments in future periods. In the three months ending March 31, 2024, we received approximately $ 11 million of rent and interest, which we recorded as revenue. In addition, approximately $ 38 million of rent ($ 9 million relating to December 2023) was received in our Massachusetts partnership during the 2024 first quarter, of which approximately $ 19 million represents our share. Prospect Starting January 1, 2023, we began accounting for our leases and loans to Prospect on a cash basis versus our normal accrual method. In the first quarter of 2024, we recognized approximately $ 7 million of revenue representing cash received for rents on our California properties. In regard to PHP Holdings, we account for our investment (both the equity investment and convertible loan) using the fair value option method. On May 23, 2024, Prospect's investment bankers informed us that they had received updated indications of interest from prospective bidders for PHP Holdings. Based on our consideration of information in the updated indications, along with consultations with our third party appraisers, we recorded as of March 31, 2024, a $ 201 million unfavorable fair value adjustment, resulting in a total investment in PHP Holdings of approximately $ 500 million at March 31, 2024. Each quarter, we mark such investment to fair value as more fully described in Note 7 to the condensed consolidated financial statements. Pipeline Health System On October 2, 2022, Pipeline Health System ("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 lease of our California assets remained 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. As part of the settlement, we deferred approximately $ 6 million, or approximately 30 %, of rent in 2023 to be paid in 2024 with interest. As of March 31, 2024, Pipeline is current on their monthly rent obligations per the terms of the lease, and we hold a rent deposit that more than covers all rent previously deferred. Other Matters As discussed in our Annual Report on Form 10-K for the year ending December 31, 2023, we placed our loan to the international joint venture on the cash basis of accounting, as we determined that it was no longer probable that the borrower would pay its future interest in full. This loan, accounted for under the fair value option method, was collateralized by the equity of Steward held by an investor in both Steward and the international joint venture. Consistent with the discussion above on non-real estate investments in Steward, we have recorded a $ 220 million unfavorable fair value adjustment in the 2024 first quarter to fully reserve for the loan. The loan, which is included in “Investments in unconsolidated operating entities” on our condensed consolidated balance sheets, was adjusted for after comparing our carrying value of the loan to an updated fair value analysis of the underlying collateral, with assistance from a third-party, independent valuation firm. 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 investments. 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 generally 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 50 % $ 471,303 $ 471,336
Swiss Medical Network 70 % 441,636 472,434
Steward (Macquarie partnership) 50 % 405,781 394,052
Policlinico di Monza 50 % 78,752 80,562
HM Hospitales 45 % 53,010 56,071
Total $ 1,450,482 $ 1,474,455 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,
PHP Holdings $ 498,632 $ 699,535
Swiss Medical Network 173,647 186,113
Aevis Victoria SA ("Aevis") 65,120 77,345
Priory Group ("Priory") 40,394 163,837
Aspris Children's Services ("Aspris") 15,977 15,986
Caremax 368 1,148
Steward (loan investment) — 361,591
International joint venture — 225,960
Steward (equity investment) — 35,696
Lifepoint Behavioral — 11,429
Total $ 794,138 $ 1,778,640 See "Leasing Operations (Lessor)" under this same Note 3 for details on the change in the quarter related to Steward and the international joint venture. For our other investments marked to fair value (including our investment in PHP Holdings), we recorded approximately $ 216 million in unfavorable non-cash fair value adjustments during the first three months of 2024 as shown in the "Other (including fair value adjustments on securities)" line of the condensed consolidated statements of net income; whereas, this was a $ 4 million favorable non-cash fair value adjustment for the same period of 2023. The amount recorded in 2024 includes an approximate $ 201 million unfavorable fair market value adjustment to our investment in PHP Holdings, as further described in the "Prospect" subheading of this Note 3 . In the first quarter of 2024, we sold our interest in the Priory syndicated term loan for £ 90 million (approximately $ 115 million), resulting in an approximate £ 6 million ($ 7.8 million) economic loss. In addition, we sold our remaining minority equity investment in Lifepoint Behavioral in the 2024 first quarter. 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
2024 2023
Balance at beginning of the year $ 96,001 $ 121,146
Provision for credit loss, net 362,187 (1) 986
Expected credit loss reserve related to financial instruments ( 1,596 ) ( 160 )
Balance at end of the period $ 456,592 $ 121,972 (1) Reflects the charge related to the $ 362 million loan to Steward, as further described under "Steward Health Care System" subheading of this Note 3 . 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, 2024 As of December 31, 2023
Operators Total Assets (1) Percentage of Total Assets (1) Percentage of
Steward $ 3,218,969 18.6 % $ 3,518,537 19.2 %
Circle Health Ltd ("Circle") 2,088,232 12.1 % 2,119,392 11.6 %
Priory 1,250,626 7.2 % 1,391,005 7.6 %
Prospect 1,093,094 6.3 % 1,092,974 6.0 %
Lifepoint Behavioral 813,498 4.7 % 813,527 4.4 %
Other operators 7,018,904 40.6 % 7,352,012 40.2 %
Other assets 1,817,633 (2) 10.5 % 2,017,397 11.0 %
Total $ 17,300,956 100.0 % $ 18,304,844 100.0 % (1) Total assets by operator are generally comprised of real estate assets, mortgage loans, investments in unconsolidated real estate joint ventures, investments in unconsolidated operating entities, and other loans. (2) Includes our investment in PHP Holdings of approximately $ 500 million as part of the Prospect Transaction as further described above in this same Note 3 . Total Assets by U.S. State and Country (1)
As of March 31, 2024 As of December 31, 2023
U.S. States and Other Countries Total Assets Percentage of Total Assets Percentage of
Texas $ 1,434,667 8.3 % $ 1,891,482 10.3 %
Florida 1,271,192 7.3 % 1,348,210 7.4 %
California 1,248,995 7.2 % 1,252,674 6.8 %
Utah 818,704 4.7 % 824,048 4.5 %
Massachusetts 759,268 4.4 % 732,550 4.0 %
All other states 3,695,029 21.4 % 3,726,145 20.4 %
Other domestic assets 1,229,695 7.1 % 1,397,170 7.6 %
Total U.S. $ 10,457,550 60.4 % $ 11,172,279 61.0 %
United Kingdom $ 4,079,869 23.6 % $ 4,261,944 23.3 %
Germany 726,940 4.2 % 734,630 4.0 %
Switzerland 680,403 3.9 % 735,891 4.0 %
Spain 250,043 1.5 % 252,529 1.4 %
All other countries 518,213 3.0 % 527,344 2.9 %
Other international assets 587,938 3.4 % 620,227 3.4 %
Total international $ 6,843,406 39.6 % $ 7,132,565 39.0 %
Grand total $ 17,300,956 100.0 % $ 18,304,844 100.0 % Total Assets by Facility Type (1)
As of March 31, 2024 As of December 31, 2023
Facility Types Total Assets Percentage of Total Assets Percentage of
General acute care hospitals $ 11,115,957 64.3 % $ 11,764,151 64.3 %
Behavioral health facilities 2,432,850 14.1 % 2,576,983 14.1 %
Inpatient rehabilitation hospitals 1,436,694 8.3 % 1,445,399 7.9 %
Long-term acute care hospitals 269,235 1.5 % 270,849 1.5 %
Freestanding ER/urgent care facilities 228,587 1.3 % 230,065 1.2 %
Other assets 1,817,633 10.5 % 2,017,397 11.0 %
Total $ 17,300,956 100.0 % $ 18,304,844 100.0 % (1) For geographic and facility type concentration metrics in the tables 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 . On an individual property basis, our largest investment in any single property was approximately 2 % of our total assets as of March 31, 2024. From a revenue concentration perspective, Circle and CommonSpirit individually represented more than 10 % of our total revenues for the three months ended March 31, 2024, and Steward and Circle represented more than 10 % for the same period of 2023. |
