| Real Estate and Lending Activities | 3. Real Estate and Lending Activities Acquisitions We acquired the following net assets (in thousands):
For the Three Months Ended March 31,
2020
2019
Net Assets Acquired
Land and land improvements
$
265,991
$
169
Buildings
1,608,771
5,327
Intangible lease assets — subject to amortization (weighted- average useful life 30.8 years for 2020 and 26.6 years for 2019 )
231,774
996
Other assets
1,328
—
Liabilities assumed
(134,203
)
—
Total net assets acquired
$
1,973,661
$
6,492
2020 Activity On January 8, 2020, we acquired a portfolio of 30 acute care hospitals located throughout the United Kingdom for approximately £1.5 billion from affiliates of BMI Healthcare, Inc. (“BMI”). In a related transaction, affiliates of Circle Health Ltd. (“Circle”) entered into definitive agreements to acquire BMI and assume operations of its 52 facilities in the United Kingdom subject to customary regulatory conditions. As part of our acquisition, we inherited 30 existing leases with the operator that had initial fixed terms ending in 2050, with no renewal options but with annual inflation-based escalators. Once final regulatory approval is received (which we expect in the 2020 second quarter after receiving initial approval on April 29, 2020), these 30 leases with Circle will be amended to include 30-year initial fixed terms with two five-year 2019 Activity On February 8, 2019, we acquired an inpatient rehabilitation hospital in Germany for €5.7 million (including real estate transfer taxes). This acquisition was the final property to close as part of a four-hospital portfolio that we agreed to purchase for an aggregate amount of €23 million. The property is leased to affiliates of Median Kliniken S.à.r.l. (“MEDIAN”), pursuant to a 27-year master lease with annual inflation-based escalators. Development Activities During the 2020 first quarter, we completed construction and began recording rental income on a general acute care facility located in Idaho Falls, Idaho. This facility commenced rent on January 21, 2020 and is being leased to Surgery Partners, Inc. pursuant to an existing long-term lease. See table below for a status update on our current development projects (in thousands):
Property
Commitment
Costs Incurred as of March 31, 2020
Estimated Rent Commencement Date
Circle (Birmingham, England)
$
44,531
$
41,207
3Q 2020
Circle Rehabilitation (Birmingham, England)
20,074
17,097
3Q 2020
NeuroPsychiatric Hospitals (Houston, Texas)
27,500
13,169
4Q 2020
$
92,105
$
71,473
Leasing Operations (Lessor) We acquire and develop healthcare facilities and lease the facilities to healthcare operating companies under long-term net leases (typical initial fixed terms ranging from 10 to 15 years) and most include renewal options at the election of our tenants, generally in five year increments. More than 97% of our leases provide annual rent escalations based on increases in Consumer Price Index (or similar index outside the U.S.) and/or fixed minimum annual rent escalations ranging from 0.5% to 3.0%. Many of our domestic leases contain purchase options with pricing set at various terms but in no case less than our total investment. For five properties with a carrying value of $210 million, our leases require a residual value guarantee from the tenant. 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. We routinely inspect our properties to ensure the residual value of each of our assets is being maintained. Except for leases classified as financing leases, all of our leases are classified as operating leases. At March 31, 2020, leases on 14 Ernest Health, Inc. (“Ernest”) facilities and ten Prime Healthcare Services, Inc. (“Prime”) facilities are accounted for as direct financing leases and leases on 13 of our Prospect Medical Holdings, Inc. (“Prospect”) facilities 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, 2020
As of December 31, 2019
Minimum lease payments receivable
$
1,869,444
$
1,884,921
Estimated residual values
394,195
394,195
Less: Unearned income and allowance for credit loss
(1,601,658
)
(1,618,252
)
Net investment in direct financing leases
661,981
660,864
Other financing leases (net of allowance for credit loss)
1,406,185
1,399,438
Total investment in financing leases
$
2,068,166
$
2,060,302
Adeptus Health As noted in previous filings, we had 16 properties transition away from Adeptus Health, Inc. (“Adeptus”) in stages over a two year period as part of Adeptus’ confirmed plan of reorganization under Chapter 11 of the Bankruptcy Code in 2017. At March 31, 2020, 14 of these 16 properties have been re-leased to other tenants or sold, with the remaining two properties representing less than $3 million. At March 31, 2020, we own 21 facilities that are leased to Adeptus. Due to a decline in operating results at 15 of these freestanding emergency facilities caused by a decline in volumes from COVID-19 and other factors, we agreed to amend our lease with Adeptus in April 2020, whereby we would sever these 15 facilities from our lease and in return, we would increase rent on the remaining six facilities and draw on a $9.1 million letter of credit. As a result, we recorded a charge to write-off straight-line rent and other receivables, partially offset by the letter of credit in the 2020 first quarter. Additionally, we recorded a $9.9 million real estate impairment charge on these severed facilities. Although no assurances can be given, we believe our investment in these 15 facilities (representing 0.3% of our total assets) is fully recoverable at March 31, 2020. Alecto Facilities At March 31, 2020, we own four acute care facilities and have a mortgage loan on a fifth property, representing less than 0.5% of our total assets. In response to conditions created by the COVID-19 pandemic, we have offered to donate one of these facilities that was closed during 2019 to a local municipality, resulting in a $9.1 million real estate impairment charge in the first quarter of 2020. Loans The following is a summary of our loans (net of allowance for credit loss in 2020):
(in thousands)
As of March 31, 2020
As of December 31, 2019
Mortgage loans
$
1,275,543
$
1,275,022
Acquisition loans
123,105
123,893
Other loans
423,586
420,939
Total
$
1,822,234
$
1,819,854
Other loans consist of loans to our tenants for working capital and other purposes and include our shareholder loan made to the joint venture with Primotop Holdings S.à.r.l. (“Primotop”) in the amount of €290 million. 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:
1)
Facility concentration – At March 31, 2020, we had no investment in any single property greater than 2.5% of our total assets, compared to 2.6% at December 31, 2019.
2)
Operator concentration – For the three months ended March 31, 2020, revenue from Steward Health Care System LLC (“Steward”), Prospect, Circle and Prime represented 31%, 13%, 11% and 11% of our total revenues, respectively. In comparison, Steward and Prime represented 48% and 18%, respectively, of our total revenues for the 2019 first quarter, while Prospect and Circle, collectively, represented less than 1%. At March 31, 2020 and December 31, 2019, our lease concentration in any one tenant was less than 20%
3)
Geographic concentration – At March 31, 2020, investments in the U.S., Europe, and Australia represented approximately 70%, 25%, and 5% respectively, of our total assets, compared to 74%, 20%, and 6%, respectively, at December 31, 2019.
4)
Facility type concentration – For the three months ended March 31, 2020, approximately 88% of our revenues are from our general acute care facilities, while rehabilitation and long-term acute care facilities make up 9% and 3%, respectively. These percentages are similar to those for the first three months of 2019. |
