| Real Estate and Lending Activities | 3. Real Estate and Lending Activities
Acquisitions
We acquired the following assets (in thousands):
Nine Months Ended September 30,
2017 2016
Assets Acquired
Land and land improvements $ 196,094 $ 13,602
Building 987,442 125,744
Intangible lease assets — subject to amortization (weighted
average useful life 28.7 years for 2017 and 19.4 years for
2016) 128,961 10,754
Net investments in direct financing leases 40,450 63,000
Mortgage loans 700,000
—
Equity investments 100,000
—
Liabilities assumed (878 )
—
Total assets acquired $ 2,152,069 $ 213,100
Loans repaid (1)
— (93,262 )
Total net assets acquired $ 2,152,069 $ 119,838
(1) $93.3 million loans advanced to
Capella (now RCCH Healthcare Partners (“RCCH”)) in 2015
and repaid in 2016 as a part of the Capella Transaction discussed
below.
The purchase price allocations attributable to the 2017
acquisitions and certain acquisitions made in the last quarter of
2016 are preliminary. When all relevant information is obtained,
resulting changes, if any, to our provisional purchase price
allocation will be 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
Steward Transactions
On September 29, 2017, we acquired from IASIS Healthcare LLC
(“IASIS”) a portfolio of ten acute care hospitals and
one behavioral health facility, along with ancillary land and
buildings, that are located in Arizona, Utah, Texas, and Arkansas.
The portfolio is now operated by Steward Health Care System LLC
(“Steward”), which separately completed its acquisition
of IASIS on September 29, 2017. Our investment in the
portfolio includes the acquisition of eight acute care hospitals
and one behavioral health facility for approximately $700 million,
the making of $700 million in mortgage loans on two acute care
hospitals, and a $100 million minority equity contribution in
Steward, for a combined investment of approximately $1.5 billion.
The nine facilities acquired are being leased to Steward pursuant
to the original long-term master lease agreement entered into in
October 2016 that had an initial 15-year term with three 5-year
extension options, plus annual inflation-based escalators. The
terms of the mortgage loan are substantially similar to the master
lease.
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, pursuant to the original
long-term master lease with Steward.
MEDIAN Transactions
During the third quarter of 2017, we acquired two rehabilitation
hospitals in Germany for an aggregate purchase price of
€39.2 million, in addition to 11 rehabilitation
hospitals in Germany that we acquired in the second quarter of 2017
for an aggregate purchase price of €127 million. These 13
properties are leased to affiliates of Median Kliniken S.a.r.l.
(“MEDIAN”), pursuant to a third master lease that has a
fixed term ending in August 2043 with annual escalators at the
greater of one percent or 70% of German consumer price index. These
acquisitions are the final properties 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 December 2016.
On June 22, 2017, we acquired an acute care hospital in
Germany for a purchase price of €19.4 million of which
€18.6 million was paid upon closing with the remainder
being paid over four years. This property is leased to affiliates
of MEDIAN, pursuant to an existing master lease agreement that ends
in December 2042 with annual escalators at the greater of one
percent or 70% of the German consumer price index.
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 acute care hospital located in
Wheeling, West Virginia, and the East Ohio Regional Hospital, a
139-bed acute care hospital in Martins Ferry, Ohio, from Ohio
Valley Health Services, a not-for-profit entity in West Virginia,
for an aggregate purchase price of approximately $40 million. We
simultaneously leased the facilities to Alecto Healthcare Services
LLC (“Alecto”), the current operator of three
facilities in our portfolio, pursuant to a lease with a 15-year
initial term with 2% annual minimum rent increases and three 5-year
extension options. The facilities are cross-defaulted and
cross-collateralized with our other hospitals currently operated by
Alecto. We also agreed to provide up to $20.0 million in capital
improvement funding on these two facilities - none of which has
been funded to date. With these acquisitions, we also obtained a
20% interest in the operator of these facilities.
On May 1, 2017, we acquired the real estate of St. Joseph
Regional Medical Center, a 145-bed acute care hospital in Lewiston,
Idaho for $87.5 million. This facility is leased to RCCH, pursuant
to the existing long-term master lease entered into with RCCH in
April 2016.
From the respective acquisition dates, the properties acquired in
2017 contributed $16.7 million of revenue and $12.7 million of
income (excluding related acquisition expenses and taxes) for the
three months ended September 30, 2017, and $25.1 million of
revenue and $18.8 million of income (excluding related acquisition
expenses and taxes) for the nine months ended September 30,
2017. In addition, we expensed $5.4 million and $15.6 million of
acquisition-related costs on these 2017 acquisitions for the three
and nine months ended September 30, 2017, respectively.
2016 Activity
On July 22, 2016, we acquired an acute care facility in
Olympia, Washington in exchange for a $93.3 million loan and an
additional $7 million in cash. The property has been leased to RCCH
on terms substantially similar to those of the existing long-term
master lease entered into with RCCH in April 2016.
On June 22, 2016, we closed on the last property of the
€688 million MEDIAN transaction, that was announced on
April 29, 2015, 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 that has a lease
term ending December 2042 and annual escalators at the greater of
one percent or 70% of the German consumer price index.
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
new fifth master lease, which had a 15-year term with three
five-year extension options, plus consumer price-indexed increases,
limited to a 2% floor. Furthermore, we committed to advance an
additional $30 million to Prime over a three-year period to be used
solely for capital additions to the real estate; any such additions
will be added to the basis upon which the lessee will pay us rents.
None of the additional $30 million has been funded to date.
From the respective acquisition dates, the properties acquired
during the nine months ended September 30, 2016, contributed
$4.6 million and $3.8 million of revenue and income (excluding
related acquisition expenses), respectively, for the three months
ended September 30, 2016. From the respective acquisition
dates, the properties acquired during the nine months ended
September 30, 2016 contributed $5.7 million and $4.9 million
of revenue and income (excluding related acquisition expenses),
respectively, for the nine months ended September 30, 2016. In
addition, we incurred $2.4 million of acquisition-related costs on
the 2016 acquisitions for the nine months ended September 30,
2016.
Pro Forma Information
The following unaudited supplemental pro forma operating data is
presented for the three and nine months ended September 30,
2017 and 2016, as if each acquisition was completed on
January 1, 2016 and January 1, 2015 for the period ended
September 30, 2017 and 2016, respectively. Supplemental pro forma
earnings were adjusted to exclude acquisition-related costs on
consummated deals incurred. The unaudited supplemental pro forma
operating data is not necessarily indicative of what the actual
results of operations would have been assuming the transactions had
been completed as set forth above, nor do they purport to represent
our results of operations for future periods (in thousands, except
per share/unit amounts).
For the Three
Months For the Nine
Months
Ended September 30, Ended September 30,
2017 2016 2017 2016
Total revenues $ 209,368 $ 207,898 $ 623,635 $ 622,798
Net income $ 102,112 $ 107,863 $ 311,306 $ 307,645
Net income per share/unit — diluted $ 0.28 $ 0.30 $ 0.85 $ 0.86
Development Activities
During the first nine 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 30-year lease that provides for quarterly fixed rent payments
beginning six months from the lease start date with annual
increases of 1% beginning April 1, 2020. 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 term
with rent to be calculated based on our total development
costs.
See table below for a status update on our current development
projects (in thousands):
Property Commitment Costs Incurred as of Estimated
Ernest (Flagstaff, Arizona) $ 28,067 $ 16,619 1Q 2018
Circle (Birmingham, England) 43,221 11,389 1Q 2019
$ 71,288 $ 28,008
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 charge to revenue to write-off related
straight-line rent receivables on this property.
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 of $2.6 million in
unbilled DFL rent in the 2016 second quarter.
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 charges that included the write-off of our
investment in the operations of the facility, straight-line rent
receivables, and a lease intangible.
HealthSouth Transaction
On July 20, 2016, we sold three inpatient rehabilitation
hospitals located in Texas and operated by HealthSouth Corporation
(“HealthSouth”) for $111.5 million, resulting in a net
gain of approximately $45 million.
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 Assets Disposed 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 2016 (excluding loans repaid
in the Capella Transaction) for the periods presented (in
thousands):
For the Three Months
For the Nine Months
2017 2016 2017 2016
Revenues $
— $ 244 $
— $ 7,851
Real estate depreciation and amortization
—
—
— (1,754 )
Property-related expenses
—
—
— (114 )
Other income (expense)
— 45
— (23 )
Income from real estate dispositions, net $
— $ 289 $
— $ 5,960
Leasing Operations
At September 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 September 30,
As of December 31,
Minimum lease payments receivable $ 2,312,621 $ 2,207,625
Estimated residual values 448,098 407,647
Less: Unearned income (2,064,890 ) (1,967,170 )
Net investment in direct financing leases $ 695,829 $ 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 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 provided for the payment to us of 100% of the rent
payable during the restructuring and the assumption by Deerfield of
all our master leases and related agreements with Adeptus Health at
current rental rates. Through November 3, 2017, Adeptus Health
is current on its rent obligations to us.
On September 29, 2017, the United States Bankruptcy Court for
the Northern District of Texas, Dallas Division, entered an order
confirming the Debtors’ Third Amended Joint Plan of
Reorganization under Chapter 11 of the Bankruptcy Code (the
“Plan”). The Plan became effective on October 2,
2017 (the “Confirmation Effective Date”). In connection
with the confirmation of the Plan, Deerfield agreed that it would
assume all of the master leases and related agreements between us
and Adeptus Health, cure all defaults that had arisen prior to the
commencement of the bankruptcy proceedings with respect to all
properties, and continue to pay rent with respect to all but 16 of
the 56 Adeptus Health properties according to the terms of the
master leases and related agreements. Rent will remain the same,
and a previously disclosed rent concession was removed from the
terms. We plan to re-lease or sell the remaining 16 properties, and
Adeptus Health will continue to pay rent with respect to those 16
properties until the earlier of (a) transition to a new
operator is complete, (b) two years following the Confirmation
Effective Date (for one facility), (c) one year following the
Confirmation Effective Date (for seven facilities), (d) six
months following the Confirmation Effective Date (for three
facilities), and (e) three months following the Confirmation
Effective Date (for five facilities). These lease or sale
transactions are expected to be completed by the end of 2019.
Although no assurances can be made that we will not recognize a
loss in the future, we believe the sale or re-leasing of the assets
related to these 16 facilities will not result in any material loss
or impairment.
On April 4, 2017, we 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 to Ochsner Clinic Foundation (“Ochsner”), a
health care system in the New Orleans area. We incurred a non-cash
charge of $0.5 million to write-off the straight-line rent
receivables associated with the previous Adeptus Health lease on
these properties. On October 18, 2017, Ochsner agreed to an
amended and restated lease that provided for initial terms of 15
years with a 9.2% average minimum lease rate based on our total
development and construction cost, as well as the addition of three
five-year renewal options.
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 increased its interest in our real
estate entity to 30%. This transaction 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 September 30, 2017 As of December 31, 2016
Mortgage loans $ 1,777,555 $ 1,060,400
Acquisition loans 119,256 121,464
Working capital and other loans 32,453 34,257
$ 1,929,264 $ 1,216,121
As of September 30, 2017, our mortgage loans consist of loans
made to four operators that are secured by the real estate of 14
properties, and include the $700 million investment made on
September 29, 2017, as part of the Steward Transaction. Our
non-mortgage loans typically consist of loans to our tenants for
acquisitions and working capital purposes. At September 30,
2017, acquisition loans includes $114.4 million in loans to
Ernest.
Concentrations of Credit Risk
Our revenue concentration for the nine months ended
September 30, 2017 as compared to the prior year is as follows
(dollars in thousands):
Revenue by Operator
For the Nine Months Ended
For the Nine Months Ended
Operators Total Percentage of Total Percentage of
Steward (1) $ 114,776 23.0 % $ 20,969 5.4 %
Prime 94,644 18.9 % 89,389 23.1 %
MEDIAN 73,793 14.8 % 70,242 18.1 %
Ernest 53,007 10.6 % 50,564 13.0 %
Adeptus Health 39,638 7.9 % 25,873 6.7 %
RCCH 30,668 6.1 % 42,776 11.0 %
Other operators 93,258 18.7 % 88,041 22.7 %
Total $ 499,784 100.0 % $ 387,854 100.0 %
(1) Includes approximately $21.6 million
and $21 million of revenue for the nine months ended
September 30, 2017 and 2016, respectively, from facilities
leased to IASIS prior to it being acquired by Steward on September
29, 2017.
Revenue by U.S. State and Country
For the Nine Months Ended
For the Nine Months Ended
U.S. States and Other Countries Total Percentage of Total Percentage of
Massachusetts $ 79,741 16.0 % $
—
—
Texas 74,489 14.9 % 72,811 18.8 %
California 49,681 9.9 % 49,724 12.8 %
New Jersey 32,756 6.6 % 28,398 7.3 %
Arizona 23,902 4.8 % 17,678 4.6 %
All other states 147,606 29.5 % 143,289 36.9 %
Total U.S. $ 408,175 81.7 % $ 311,900 80.4 %
Germany $ 88,525 17.7 % $ 72,718 18.8 %
United Kingdom, Italy, and Spain 3,084 0.6 % 3,236 0.8 %
Total International $ 91,609 18.3 % $ 75,954 19.6 %
Grand Total $ 499,784 100.0 % $ 387,854 100.0 %
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),
and assumes cash on hand is fully used in these transactions, our
concentration as of September 30, 2017 as compared to
December 31, 2016 is as follows (dollars in thousands):
Gross Assets by Operator
As of September 30,
2017 As of December 31, 2016
Operators Total Gross Assets Percentage of Gross Assets Total Gross Assets Percentage of Gross Assets
Steward (1) $ 3,445,379 36.8 % $ 1,609,583 22.5 %
MEDIAN 1,209,767 12.9 % 993,677 13.9 %
Prime 1,118,070 12.0 % 1,144,055 16.0 %
Ernest 631,501 6.7 % 627,906 8.8 %
RCCH 506,265 5.4 % 566,600 7.9 %
Other operators 1,992,448 21.3 % 1,900,397 26.7 %
Other assets 452,505 4.9 % 300,903 4.2 %
Total $ 9,355,935 100.0 % $ 7,143,121 100.0 %
(1) Includes approximately $360 million
of gross assets as of December 31, 2016 related to facilities
leased to IASIS prior to it being acquired by Steward on September
29, 2017.
Gross Assets by U.S. State and Country
As of September 30,
2017 As of December 31, 2016
U.S. States and Other Countries Total Gross Assets Percentage of Gross Assets Total Gross Assets Percentage of Gross Assets
Massachusetts $ 1,284,156 13.7 % $ 1,250,000 17.5 %
Texas 1,275,784 13.6 % 947,443 13.3 %
Utah 1,035,793 11.1 % 107,151 1.5 %
California 542,879 5.8 % 542,889 7.6 %
Arizona 498,844 5.3 % 331,834 4.6 %
All other states 2,506,538 26.8 % 2,234,332 31.3 %
Other domestic assets 397,850 4.3 % 264,215 3.7 %
Total U.S. $ 7,541,844 80.6 % $ 5,677,864 79.5 %
Germany $ 1,556,392 16.6 % $ 1,281,649 17.9 %
United Kingdom, Italy, and Spain 203,044 2.2 % 146,920 2.1 %
Other international assets 54,655 0.6 % 36,688 0.5 %
Total International $ 1,814,091 19.4 % $ 1,465,257 20.5 %
Grand Total $ 9,355,935 100.0 % $ 7,143,121 100.0 %
On an individual property basis, we had no investment of any single
property greater than 3.8% of our total gross assets as of
September 30, 2017. |
