| Real Estate and Other Activities | 3. Real Estate and Other Activities New Investments We acquired or invested in the following net assets (in thousands):
For the Three Months Ended March 31,
2021
2020
Land and land improvements
$
—
$
265,991
Buildings
—
1,608,771
Intangible lease assets — subject to amortization (weighted- average useful life 30.8 years for 2020)
—
231,774
Mortgage loans
1,090,400
—
Other loans and assets
688,017
1,328
Liabilities assumed
—
(134,203
)
Total net assets acquired
$
1,778,417
$
1,973,661
2021 Activity Priory Group Transaction On January 19, 2021, we completed the first of two phases in the Priory Group (“Priory”) transaction in which we funded an In addition, we agreed to provide Waterland VII with a 364-day £250 million acquisition loan, which we funded on January 19, 2021, in connection with the closing of Waterland VII’s acquisition of Priory. The loan is secured by the same security assets securing the £800 million interim mortgage loan. In connection with these transactions, we also acquired a 9.9% passive equity interest in the Waterland VII affiliate that indirectly owns Priory for a nominal amount. We funded this investment using £500 million from a new $900 million interim credit facility as described in Note 4 , £350 million from our revolving facility, and the remainder from cash on-hand. Other On January 8, 2021, we made a $335 million loan to Steward Health Care System LLC (“Steward”), which was used to redeem a similarly sized convertible loan from Steward’s former private equity sponsor. 2020 Activity Circle Transaction On January 8, 2020, we acquired a portfolio of 30 acute care hospitals located throughout the United Kingdom for a net purchase price of approximately £1.5 billion from affiliates of BMI Healthcare, Inc. (“BMI”), as part of a share purchase in which we also inherited certain deferred income tax liabilities and £27.6 million of unearned rent revenue. 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. 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 was received in the 2020 second quarter, these 30 leases with Circle were amended (effective June 16, 2020) to include two five-year 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 summary of our current development projects (in thousands):
Property
Commitment
Costs Incurred as of March 31, 2021
Estimated Rent Commencement Date
Ernest Health, Inc. ("Ernest") (Bakersfield, California)
$
47,929
$
28,502
4Q 2021
Ernest (Stockton, California)
47,700
13,539
1Q 2022
$
95,629
$
42,041
Disposals 2021 Activity During the first three months of 2021, we completed the sale of one facility and an ancillary property for approximately $11 million, resulting in a net gain of approximately $1.0 million. 2020 Activity During the first three months of 2020, we sold four ancillary properties resulting in a net gain of $1.3 million. 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 of 15 years) and most include renewal options at the election of our tenants, generally in five year increments. Approximately 99% of our leases provide annual rent escalations based on increases in the 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 $230 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 as noted below, all of our leases are classified as operating leases. At March 31, 2021, leases on 13 Ernest facilities and five 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 and five of our Ernest 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, 2021
As of December 31, 2020
Minimum lease payments receivable
$
1,217,689
$
1,228,966
Estimated residual values
203,818
203,818
Less: Unearned income and allowance for credit loss
(956,490
)
(969,061
)
Net investment in direct financing leases
465,017
463,723
Other financing leases (net of allowance for credit loss)
1,556,463
1,547,199
Total investment in financing leases
$
2,021,480
$
2,010,922
COVID-19 Rent Deferrals In the first quarter of 2021, we collected $0.8 million of rent previously deferred due to the COVID-19 pandemic. Pursuant to our agreements with certain tenants, we expect the remaining outstanding deferred rent balance of approximately $10.6 million as of March 31, 2021, to be paid over specified periods in the future, with interest. Adeptus Health As discussed in previous filings, our original real estate portfolio of approximately 60 properties leased to Adeptus Health, Inc. (“Adeptus”) has gone through significant changes starting with Adeptus filing for Chapter 11 bankruptcy in 2017. During 2020, we transitioned the remaining facilities away from Adeptus, which resulted in impairment charges including approximately $9.9 million in the first quarter of 2020, along with a charge to write-off straight-line rent and other receivables, partially offset by a draw on a $9.1 million letter of credit. However, these transition measures have also provided for new tenant relationships being formed with strong credit worthy operators like Ochsner Health System, Dignity Health, UC Health, and HCA Healthcare, that are now leasing approximately 40 of these transitional facilities under long-term leases. At March 31, 2021, 17 of these transitional properties, representing less than 1% of our total assets, remain vacant, and each of these properties are in various stages of being re-leased or sold. At March 31, 2021, we believe our investment in these real estate assets are fully recoverable, but no assurances can be given that we will not have any further impairments in future periods. Alecto Facilities As noted in previous filings, we originally leased four acute care facilities to and had a mortgage loan on a fifth property (Olympia Medical Center) with Alecto Healthcare Services LLC (“Alecto”). During the first quarter of 2020, we donated the Wheeling facility to a local municipality, resulting in a $9.1 million real estate impairment charge. In addition, we re-leased one acute care facility to West Virginia University and sold another facility in 2020. In the first quarter of 2021, Alecto completed the sale of Olympia Medical Center to the UCLA Health System. Our proceeds of approximately $51 million from this sale were used to payoff the mortgage and working capital loans in full, with the remaining proceeds used to recover certain past due amounts. At March 31, 2021, we continue to lease one acute care facility to Alecto approximating 0.1% of our total assets. Loans The following is a summary of our loans (net of allowance for credit loss) (in thousands):
As of March 31, 2021
As of December 31, 2020
Mortgage loans
$
1,324,865
$
248,080
Acquisition loans
682,665
338,273
Other loans
840,001
520,095
Total
$
2,847,531
$
1,106,448
The increase in mortgage and acquisition loans relates to the £800 million and £250 million loans funded in connection with the Priory Group Transaction (as more fully described above in this Note 3 ). 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 €297 million. The increase in other loans is primarily related to the $335 million loan to Steward (as more fully described above in this Note 3 ). Other Investment Activities Pursuant to our existing 9.9% equity interest in Steward, we received an $11 million cash distribution during the first quarter of 2021, which was accounted for as a return of capital. Pursuant to our 4.9% stake in Aevis Victoria SA (“Aevis”), we recorded a $4.1 million favorable non-cash fair value adjustment to mark our investment in Aevis stock to market during the first quarter of 2021; whereas, this was a $10.4 million unfavorable non-cash fair value adjustment in the 2020 first quarter. 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, 2021, our largest single property represented approximately 3% of our total assets, similar to December 31, 2020.
2)
Operator concentration – For the three months ended March 31, 2021, revenue from Steward, Circle, and Prospect, individually, represented more than 10% of our total revenues. In comparison, Steward, Circle, Prospect, and Prime, individually, represented more than 10% of our total revenues for the 2020 first quarter.
3)
Geographic concentration – At March 31, 2021, investments in the U.S., Europe, Australia, and South America represented approximately 63%, 31%, 5%, and 1%, respectively, of our total assets, compared to 65%, 28%, 6%, and 1%, respectively, at December 31, 2020.
4)
Facility type concentration – For the three months ended March 31, 2021, approximately 83% of our revenues are from our general acute care facilities, while rehabilitation and long-term acute care facilities make up 8% and 2%, respectively. Freestanding ER/urgent care facilities and behavioral health facilities combined to make up the remaining 7%. In comparison, general acute care, rehabilitation, and long-term acute care facilities made up 86%, 9%, and 3%, respectively, of our total revenues for the three months ended March 31, 2020, while freestanding ER/urgent care facilities and behavioral health facilities combined to make up the remaining 2%. |
