| Real Estate and Lending Activities | 3. Real Estate and Lending Activities
Acquisitions
We acquired the following assets (in thousands):
Six Months
2017 2016
Assets Acquired
Land and land improvements $ 86,434 $ 6,382
Building 420,731 36,455
Intangible lease assets — subject to amortization (weighted
average useful life 28.4 years for 2017 and 25.8 years for
2016) 54,044 4,154
Net investments in direct financing leases 40,450 63,000
Liabilities assumed (878 )
—
Total assets acquired $ 600,781 $ 109,991
The purchase price allocations attributable to the 2017
acquisitions and certain acquisitions made in the second half of
2016 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.
2017 Activity
Median Transactions
On June 22, 2017, we acquired an acute care hospital in
Germany for a purchase price of €19.4 million
(€18.6 of which has been funded to date). This property is
leased to affiliates of Median Kliniken S.a.r.l.
(“MEDIAN”), one of our current tenants, pursuant to an
existing 27-year
During the second quarter of 2017, we acquired 11 rehabilitation
hospitals in Germany for an aggregate purchase price of
€127 million. These 11 properties are leased to
affiliates of MEDIAN, pursuant to a third master lease that has
terms similar to the original master lease in 2015 with a fixed
term ending in August 2043. These acquisitions are part of the
portfolio of 20 properties in Germany that we agreed to acquire in
July 2016 for €215.7 million, of which seven properties
totaling €49.5 million closed in 2016. See Note 10 for an
update on the final two properties totaling
€39.2 million that closed after June 30, 2017.
On January 30, 2017, we acquired an inpatient rehabilitation
hospital in Germany for €8.4 million. This acquisition
was the final property to close as part of the six hospital
portfolio that we agreed to buy in September 2016 for an aggregate
amount of €44.1 million. This property is leased to
affiliates of MEDIAN pursuant to the original long-term master
lease agreement reached with MEDIAN in 2015.
Other Transactions
On June 1, 2017, we acquired the real estate assets of Ohio
Valley Medical Center, a 218-bed 139-bed not-for-profit 15-year 5-year
On May 1, 2017, we acquired eight hospitals previously
affiliated with Community Health Systems, Inc. in Florida, Ohio,
and Pennsylvania for an aggregate purchase price of
$301.3 million. These facilities are leased to Steward Health
Care System LLC (“Steward”), pursuant to the existing
long-term master lease entered into with Steward in October
2016.
On May 1, 2017, we acquired the real estate of St. Joseph
Regional Medical Center, a 145-bed
From the respective acquisition dates, the properties acquired in
2017 contributed $8.2 million of revenue and $6.0 of income
(excluding related acquisition expenses and taxes) for the three
months ended June 30, 2017, and $8.4 million of revenue
and $6.1 million of income (excluding related acquisition
expenses and taxes) for the six months ended June 30, 2017. In
addition, we expensed $9.1 million and $9.6 million of
acquisition-related costs on these 2017 acquisitions for the three
and six months ended June 30, 2017, respectively.
2016 Activity
On May 2, 2016, we acquired an acute care hospital in Newark,
New Jersey for an aggregate purchase price of $63 million
leased to Prime Healthcare Services, Inc. (“Prime”)
pursuant to a fifth master lease, which had a 15-year
On June 22, 2016, we closed on the last property of the
original €688 million MEDIAN transaction for a purchase
price of €41.6 million. Upon acquisition, this property
became subject to an existing master lease between us and
affiliates of MEDIAN. The master lease had an initial start date of
July 1, 2015, an initial term of 27 years, and provided for an
initial GAAP lease rate of 9.3%, with annual escalators at the
greater of one percent or 70% of the German consumer price
index.
From the respective acquisition dates, the properties acquired in
2016 contributed $1.1 million of revenue and income (excluding
related acquisition expenses and taxes), for the three and six
months ended June 30, 2016. In addition, we incurred
$2.4 million of acquisition-related costs on the 2016
acquisitions for both the three and six months ended June 30,
2016.
Development Activities
During the first six months of 2017, we completed construction on
the following facilities:
• Adeptus Health, Inc. (“Adeptus
Health”) – We completed four acute care facilities for
this tenant during 2017 totaling approximately $68 million in
development costs. These facilities are leased pursuant to an
existing long-term master lease.
• IMED Group (“IMED”)
– Our general acute facility located in Valencia, Spain
opened on March 31, 2017, and is being leased to IMED pursuant
to a long-term master lease. Our ownership in this facility is
effected through a joint venture between us and clients of AXA Real
Estate, in which we own a 50% interest. Our share of the aggregate
purchase and development cost of this facility is approximately
€21 million.
In April 2017, we completed the acquisition of the long leasehold
interest of a development site in Birmingham, England from the
Circle Health Group (“Circle”) (the tenant of our
existing site in Bath, England) for a purchase price of
£2.7 million. Simultaneously with the acquisition, we
entered into contracts with the property landlord and the Circle
committing us to construct an acute care hospital on the site. Our
total development costs are anticipated to be approximately
£30 million. Circle is contracted to enter into a lease
of the hospital following completion of construction for an
initial 15-year
See table below for a status update on our current development
projects (in thousands):
Property Commitment Costs Incurred as of June 30, 2017 Estimated Completion Date
Ernest (Flagstaff) $ 28,067 $ 11,351 1Q 2018
Circle (Birmingham) 42,017 7,088 4Q 2018
$ 70,084 $ 18,439
Disposals
2017 Activity
On March 31, 2017, we sold the EASTAR Health System real
estate located in Muskogee, Oklahoma, which was leased to RCCH.
Total proceeds from this transaction were approximately
$64 million resulting in a gain of $7.4 million,
partially offset by a $0.6 million non-cash write-off
2016 Activity
Capella Transaction
Effective April 30, 2016, our investment in the operator of
Capella Healthcare, Inc. (“Capella”) merged with
Regional Care Hospital Partners, Inc. (“Regional Care”)
(an affiliate of certain funds managed by affiliates of Apollo
Global Management, LLC. (“Apollo”)) to form RCCH. As
part of the transaction, we received net proceeds of approximately
$550 million including approximately $492 million for our
equity investment and loans made as part of the original Capella
transaction that closed on August 31, 2015. In addition, we
received $210 million in prepayment of two mortgage loans for
hospitals in Russellville, Arkansas, and Lawton, Oklahoma, that we
made in connection with the original Capella transaction. We made a
new $93.3 million loan for a hospital property in Olympia,
Washington that was subsequently converted to real estate on
July 22, 2016. Additionally, we and an Apollo affiliate
invested $50 million each in unsecured senior notes issued by
RegionalCare, which we sold to a large institution on June 20,
2016 at par. The proceeds from this transaction represented
the recoverability of our investment in full, except for
transaction costs incurred of $6.3 million.
We maintained our ownership of five hospitals in Hot Springs,
Arkansas; Camden, South Carolina; Hartsville, South Carolina;
Muskogee, Oklahoma; and McMinnville, Oregon. Pursuant to the
transaction described above, the underlying leases, one of which is
a master lease covering all but one property, was amended to
shorten the initial fixed lease term, increase the security
deposit, and eliminate the lessees’ purchase option
provisions. Due to this lease amendment, we reclassified the lease
of the properties under the master lease from a direct finance
lease (“DFL”) to an operating lease. This
reclassification resulted in a write-off
Post Acute Transaction
On May 23, 2016, we sold five properties (three of which were
in Texas and two in Louisiana) that were leased and operated by
Post Acute Medical (“Post Acute”). As part of this
transaction, our outstanding loans of $4 million were paid in
full, and we recovered our investment in the operations. Total
proceeds from this transaction were $71 million resulting in a
net gain of approximately $15 million.
Corinth Transaction
On June 17, 2016, we sold the Atrium Medical Center real
estate located in Corinth, Texas, which was leased and operated by
Corinth Investor Holdings. Total proceeds from the transaction were
$28 million resulting in a gain on real estate of
approximately $8 million. This gain on real estate was offset
by approximately $9 million of non-cash write-off
The sales in 2017 and 2016 were not strategic shifts in our
operations, and therefore the results of operations related to
these facilities were not reclassified as discontinued
operations.
Summary of Operations for Disposed Assets in 2016
The following represents the operating results (excluding gain on
sale, transaction costs, and impairment or other non-cash charges)
from the properties which sold during the first half of 2016
(excluding loans repaid in the Capella Transaction) for the periods
presented (in thousands):
For the Three Months
For the Six Months
Ended June 30, Ended June 30,
2017 2016 2017 2016
Revenues $
— $ 1,139 $
— $ 3,700
Real estate depreciation and amortization
— (357 )
— (857 )
Property-related expenses
— (67 )
— (106 )
Other income (expense)
— (9 )
— (68 )
Income from real estate dispositions, net $
— $ 706 $
— $ 2,669
Leasing Operations
At June 30, 2017, leases on two Alecto facilities, 15 Ernest
facilities and 10 Prime facilities are accounted for as DFLs. The
components of our net investment in DFLs consisted of the following
(in thousands):
As of June 30,
As of December 31,
Minimum lease payments receivable $ 2,329,161 $ 2,207,625
Estimated residual values 448,098 407,647
Less: Unearned income (2,084,016 ) (1,967,170 )
Net investment in direct financing leases $ 693,243 $ 648,102
Adeptus Health
On April 4, 2017, we announced that we had agreed in principle
with Deerfield Management Company, L.P. (“Deerfield”),
a healthcare-only investment firm, to the restructuring in
bankruptcy of Adeptus Health, a current tenant and operator of
facilities representing less than 5% of our total gross assets. In
furtherance of the restructuring, Adeptus Health and certain of its
subsidiaries filed voluntary petitions for relief under Chapter 11
of the United States Bankruptcy Code on April 19, 2017. Funds
advised by Deerfield acquired Adeptus Health’s outstanding
bank debt and Deerfield has agreed to provide additional financing,
along with operational and managerial support, to Adeptus Health as
part of the restructuring.
The Adeptus Health restructuring and terms of our agreement with
Deerfield provide for the payment to us of 100% of the rent payable
during the restructuring and the assumption by Deerfield of
approximately 80% of the facilities under our master lease
agreement with Adeptus Health at current rental rates. Through
August 4, 2017, Adeptus Health is current on its rent obligations
to us. We have agreed to a post bankruptcy $3.1 million
concession that will reduce our rental revenue by approximately
$220 thousand annually over the remaining 14-year
On April 4, 2017, we also announced that our Louisiana
freestanding emergency facilities then-operated by Adeptus Health
(with a total budgeted investment of approximately $24.5 million)
had been re-leased two-year non-cash write-off
In addition, we expect to re-lease
Hoboken Facility
In the first half of 2017, a subsidiary of the operator of our
Hoboken facility acquired 20% of our subsidiary that owns the real
estate for $10 million, which increases its interest in our real
estate entity to 30%. This is reflected in the non-controlling
interest line of our condensed consolidated balance sheets.
Loans
The following is a summary of our loans (in thousands):
As of As of
Mortgage loans $ 1,062,558 $ 1,060,400
Acquisition loans 120,048 121,464
Working capital and other loans 32,920 34,257
$ 1,215,526 $ 1,216,121
Our non-mortgage
Concentrations of Credit Risk
Our revenue concentration for the six months ended June 30,
2017 as compared to the prior year is as follows (dollars in
thousands):
Revenue by Operator
For the Six Months Ended
For the Six Months Ended
Operators Total Percentage of Total Percentage of
Prime $ 63,059 19.5 % $ 58,859 22.5 %
Steward 58,278 18.0 %
—
—
MEDIAN 47,744 14.8 % 47,745 18.3 %
Ernest 35,269 10.9 % 33,322 12.8 %
Adeptus Health 26,137 8.1 % 16,205 6.2 %
RCCH 19,632 6.1 % 32,909 12.6 %
Other operators 73,085 22.6 % 72,259 27.6 %
Total $ 323,204 100.0 % $ 261,299 100.0 %
Revenue by U.S. State and Country
For the Six Months Ended
For the Six Months Ended
U.S. States and Other Countries Total Percentage of Total Percentage of
Massachusetts $ 53,159 16.5 % $
—
—
Texas 49,851 15.4 % 48,256 18.5 %
California 33,123 10.3 % 33,187 12.7 %
New Jersey 21,852 6.8 % 18,243 7.0 %
Arizona 15,542 4.8 % 11,722 4.5 %
All other states 93,080 28.7 % 99,931 38.2 %
Total U.S. $ 266,607 82.5 % $ 211,339 80.9 %
Germany $ 54,576 16.9 % $ 47,745 18.3 %
United Kingdom, Italy, and Spain 2,021 0.6 % 2,215 0.8 %
Total International $ 56,597 17.5 % $ 49,960 19.1 %
Grand Total $ 323,204 100.0 % $ 261,299 100.0 %
On a total gross asset basis, which is total assets before
accumulated depreciation/amortization, assumes all real estate
binding commitments on new investments and unfunded amounts on
development deals and commenced capital improvement projects are
fully funded (see Notes 9 and 10 of Item 1 on this Form 10-Q),
Gross Assets by Operator
As of June 30, 2017 As of December 31, 2016
Operators Total Percentage of Gross Assets Total Percentage of Gross Assets
Steward $ 3,410,874 37.4 % $ 1,250,000 17.5 %
Prime 1,116,694 12.2 % 1,144,055 16.0 %
MEDIAN 1,086,109 11.9 % 993,677 13.9 %
Ernest 630,811 6.9 % 627,906 8.8 %
RCCH 506,265 5.5 % 566,600 7.9 %
Other operators 1,977,356 21.7 % 2,259,980 31.7 %
Other assets 401,669 4.4 % 300,903 4.2 %
Total $ 9,129,778 100.0 % $ 7,143,121 100.0 %
Gross Assets by U.S. State and Country
As of June 30, 2017 As of December 31, 2016
U.S. States and Other Countries Total Percentage of Gross Assets Total Percentage of Gross Assets
Massachusetts $ 1,262,041 13.8 % $ 1,250,000 17.5 %
Texas 1,230,945 13.5 % 947,443 13.3 %
Utah 1,083,152 11.9 % 107,151 1.5 %
California 542,883 5.9 % 542,889 7.6 %
Arizona 486,547 5.3 % 331,834 4.6 %
All other states 2,502,791 27.4 % 2,234,332 31.3 %
Other domestic assets 352,748 3.9 % 264,215 3.7 %
Total U.S. $ 7,461,107 81.7 % $ 5,677,864 79.5 %
Germany $ 1,421,350 15.6 % $ 1,281,649 17.9 %
United Kingdom, Italy, and Spain 198,400 2.2 % 146,920 2.1 %
Other international assets 48,921 0.5 % 36,688 0.5 %
Total International $ 1,668,671 18.3 % $ 1,465,257 20.5 %
Grand Total $ 9,129,778 100.0 % $ 7,143,121 100.0 %
On an individual property basis, we had no investment of any single
property greater than 3.9% of our total gross assets as of
June 30, 2017. |
