Real Estate and Lending Activities | 3 Months Ended |
Mar. 31, 2015 |
Text Block [Abstract] | |
Real Estate and Lending Activities | 3. Real Estate and Lending Activities |
Acquisitions |
2015 Activity |
On February 13, 2015, we acquired two general acute care hospitals in the Kansas City area for $110 million. Affiliates of Prime Healthcare Services, Inc. (“Prime”) is the tenant and operator pursuant to a new master lease that has similar terms and security enhancements as the other master lease agreements entered into in 2013. This master lease has a 10 year initial fixed term with two extension options of five years each. The lease provides for consumer-price-indexed annual rent increases, subject to a specified floor. In addition, we agreed to fund a mortgage loan in the amount of $40 million, which has a 10-year term. |
On February 27, 2015, we acquired an inpatient rehabilitation hospital in Weslaco, Texas for $10.7 million leased to Ernest Health Inc. (“Ernest”) pursuant to the 2012 master lease which has a remaining 17-year fixed term and three five year extension options. This lease provides for consumer-priced-indexed annual rent increases, subject to a floor and a cap. In addition we agreed to fund an acquisition loan in the amount of $5 million. |
In January 2015, we advanced the remaining €63.1 million of the €425 million interim acquisition loans to MEDIAN. In April 2015, we executed definitive agreements with MEDIAN to purchase and lease back 31 hospitals and expect these properties to close during the next 30 to 60 days, subject to expiration or waiver of local government preemptive rights. As these 31 hospitals (and others) close, the related purchase prices will be offset, pro rata, against any debt that we assume on these properties or against the interim acquisition loans that have been made. |
2014 Activity |
On March 31, 2014, we acquired a general acute care hospital and an adjacent parcel for an aggregate purchase price of $115 million from a joint venture of LHP Hospital Group, Inc. and Hackensack University Medical Center Mountainside. The facility was simultaneously leased back to the seller under a lease with a 15-year initial term with a 3-year extension option, followed by a further 12-year extension option at fair market value. The lease provides for consumer-price-indexed annual rent increases, subject to a specified floor and ceiling. The lease includes a customary right of first refusal with respect to a subsequent proposed sale of the facility. |
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As part of these acquisitions, we acquired the following assets: |
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| | 2015 | | | 2014 | | | | | | | | | | | |
Assets Acquired | | | | | | | | | | | | | | | | | | |
Land | | $ | 21,591 | | | $ | 8,515 | | | | | | | | | | | |
Building | | | 88,409 | | | | 99,602 | | | | | | | | | | | |
Intangible lease assets — subject to amortization (weighted average useful life 15 years) | | | — | | | | 6,883 | | | | | | | | | | | |
Mortgage loans | | | 40,000 | | | | — | | | | | | | | | | | |
Net investments in direct financing leases | | | 10,700 | | | | — | | | | | | | | | | | |
Other loans | | | 5,000 | | | | — | | | | | | | | | | | |
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Total assets acquired | | $ | 165,700 | | | $ | 115,000 | | | | | | | | | | | |
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The purchase price allocations attributable to the 2015 acquisitions are preliminary. When all relevant information is obtained, resulting changes, if any, to our provisional purchase price allocation will be retrospectively adjusted to reflect new information obtained about the facts and circumstances that existed as of the respective acquisition dates that, if known, would have affected the measurement of the amounts recognized as of those dates. |
Development Activities |
During the 2015 first quarter, we completed construction and began recording rental income on two acute care facilities for First Choice ER (a subsidiary of Adeptus Health). These facilities are leased pursuant to the master lease entered into in 2014 and are cross-defaulted with the original master lease executed with First Choice ER in 2013. |
In the first quarter of 2015, we began construction on six additional facilities pursuant to the master funding and development agreement with First Choice ER executed in 2014. |
See table below for a status update on our current development projects (in thousands): |
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Property | | Location | | Property Type | | Operator | | Commitment | | | Costs | | | Estimated | |
Incurred | Completion |
as of | Date |
3/31/15 | |
UAB Medical West | | Hoover, AL | | Acute Care Hospital & MOB | | Medical West, an affiliate of UAB | | $ | 8,653 | | | $ | 5,853 | | | | 2Q 2015 | |
First Choice ER- Chandler | | Chandler, AZ | | Acute Care Hospital | | Adeptus Health | | | 5,049 | | | | 2,502 | | | | 2Q 2015 | |
First Choice ER- Converse | | Converse, TX | | Acute Care Hospital | | Adeptus Health | | | 5,754 | | | | 4,311 | | | | 2Q 2015 | |
First Choice ER- Denver 48th | | Denver, CO | | Acute Care Hospital | | Adeptus Health | | | 5,123 | | | | 1,174 | | | | 2Q 2015 | |
First Choice ER- Aurora | | Aurora, CO | | Acute Care Hospital | | Adeptus Health | | | 5,273 | | | | 21 | | | | 3Q 2015 | |
First Choice ER- Conroe | | Houston, TX | | Acute Care Hospital | | Adeptus Health | | | 6,110 | | | | 1,668 | | | | 3Q 2015 | |
First Choice ER- Carrollton | | Carrollton, TX | | Acute Care Hospital | | Adeptus Health | | | 35,820 | | | | 23,458 | | | | 3Q 2015 | |
First Choice ER- Gilbert | | Gilbert, AZ | | Acute Care Hospital | | Adeptus Health | | | 6,500 | | | | 2,481 | | | | 3Q 2015 | |
First Choice ER- Glendale | | Glendale, AZ | | Acute Care Hospital | | Adeptus Health | | | 4,824 | | | | 564 | | | | 3Q 2015 | |
First Choice ER- McKinney | | McKinney, TX | | Acute Care Hospital | | Adeptus Health | | | 4,750 | | | | 1,002 | | | | 3Q 2015 | |
First Choice ER- Victory Lakes | | Houston, TX | | Acute Care Hospital | | Adeptus Health | | | 4,939 | | | | 554 | | | | 3Q 2015 | |
First Choice ER- Vintage Preserve | | Houston, TX | | Acute Care Hospital | | Adeptus Health | | | 45,961 | | | | 5,678 | | | | 3Q 2016 | |
First Choice Emergency Rooms | | Various | | Acute Care Hospital | | Adeptus Health | | | 13,448 | | | | — | | | | Various | |
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| | | | | | | | $ | 152,204 | | | $ | 49,266 | | | | | |
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Leasing Operations |
All of our leases are accounted for as operating leases except for the master lease of 15 Ernest facilities and five Prime facilities which are accounted for as direct financing leases (“DFLs”). The components of our net investment in DFLs consisted of the following (dollars in thousands): |
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| | As of March 31, | | | As of December 31, | | | | | | | | | | | |
2015 | 2014 | | | | | | | | | | |
Minimum lease payments receivable | | $ | 1,639,128 | | | $ | 1,607,024 | | | | | | | | | | | |
Estimated residual values | | | 225,871 | | | | 211,888 | | | | | | | | | | | |
Less: Unearned income | | | (1,411,576 | ) | | | (1,379,396 | ) | | | | | | | | | | |
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Net investment in direct financing leases | | $ | 453,423 | | | $ | 439,516 | | | | | | | | | | | |
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Florence facility |
On March 6, 2013, the tenant of our $27.2 million facility in Phoenix, Arizona filed for Chapter 11 bankruptcy. At March 31, 2015, we have approximately $1.1 million of receivables outstanding but the tenant continues to pay us in accordance with bankruptcy orders. In addition, we have a letter of credit for approximately $1.2 million to cover any rent and other monetary payments not paid. We have entered into a non-binding letter of intent with the stalking horse bidder for the assumption of the existing lease, with certain non-monetary amendments. Although no assurances can be made that we will not have any impairment charges in the future, we believe our investment in Florence at March 31, 2015 is fully recoverable. |
Gilbert facility |
In the first quarter of 2014, the tenant of our facility in Gilbert, Arizona filed for Chapter 11 bankruptcy; however, we sent notice of termination of the lease prior to the bankruptcy filing. As a result of the lease terminating, we recorded a charge of approximately $1 million to reserve against the straight-line rent receivables. In addition, we accelerated the amortization of the related lease intangible asset resulting in $1.1 million of additional expense in the 2014 first quarter. The tenant has continued to perform its monetary obligations, and we have agreed to the terms of an amended lease upon the tenant’s bankruptcy exit. Although no assurances can be made that we will not have any impairment charges or write-offs of receivables in the future, we believe our real estate investment in Gilbert of $14.1 million at March 31, 2015 is fully recoverable. |
Loans |
The following is a summary of our loans (in thousands): |
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| | As of | | | As of | | | | | | | | | | | |
March 31, | December 31, | | | | | | | | | | |
2015 | 2014 | | | | | | | | | | |
Mortgage loans | | $ | 437,591 | | | $ | 397,594 | | | | | | | | | | | |
Acquisition loans | | | 555,391 | | | | 525,136 | | | | | | | | | | | |
Working capital and other loans | | | 46,566 | | | | 48,031 | | | | | | | | | | | |
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| | $ | 1,039,548 | | | $ | 970,761 | | | | | | | | | | | |
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Our non-mortgage loans typically consist of loans to our tenants for acquisitions and working capital purposes. At March 31, 2015, acquisition loans includes our $102.5 million loans to Ernest plus $442.4 million related to the MEDIAN Kliniken S.à r.l. (“MEDIAN”), transaction in 2014. |
On March 1, 2012, pursuant to our convertible note agreement, we converted $1.7 million of our $5.0 million convertible note into a 9.9% equity interest in the operator of our Hoboken University Medical Center facility. At March 31, 2015, $3.3 million remains outstanding on the convertible note, and we retain the option, subject to regulatory approvals, to convert this remainder into 15.1% of equity interest in the operator. |
Concentrations of Credit Risk |
For the three months ended March 31, 2015 and 2014, revenue from affiliates of Prime (including rent and interest from mortgage loans) accounted for 25.0% and 29.1%, respectively, of total revenue. From an investment concentration perspective, assets leased and loaned to Prime represented 15.2% and 8.3%, respectively of our total assets, at March 31, 2015. Assets leased and loaned to Prime represented 12.6% and 7.4%, respectively, of our total assets at December 31, 2014. |
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For the three months ended March 31, 2015, revenue from affiliates of MEDIAN accounted for 9.5% of total revenue. From an investment concentration perspective, MEDIAN represented 11.6% and 11.3% of our total assets at March 31, 2015 and December 31, 2014, respectively. |
For the three months ended March 31, 2015 and 2014, revenue from affiliates of Ernest (including rent and interest from mortgage and acquisition loans) accounted for 15.3% and 19.6% of total revenue, respectively. From an investment concentration perspective, assets leased and loaned to Ernest represented 7.9% and 5.3%, respectively, of our total assets at March 31, 2015. Assets leased and loaned to Ernest represented 7.7% and 5.3%, respectively, of our total assets at December 31, 2014. |
On an individual property basis, we had no investment of any single property greater than 4% of our total assets as of March 31, 2015. |
From a global geographic perspective, approximately 80% of our total assets are in the United States while 20% reside in Europe as of March 31, 2015 and December 31, 2014. Revenue from our European investments was $16.3 million and $5.5 million in the first quarter of 2015 and 2014, respectively. |
From a United States geographic perspective, investments located in California represented 14.3% of our total assets at March 31, 2015, compared to 14.6% at December 31, 2014. Investments located in Texas represented 20.5% of our total assets at March 31, 2015, compared to 20.2% at December 31, 2014. |