Summarized Financial Information of Equity Affiliates

9 Months Ended

Sep. 30, 2021

Equity Method Investments And Joint Ventures [Abstract]

Summarized Financial Information of Equity Affiliates

(5) Summarized Financial Information of Equity Affiliates

In accordance with U.S. GAAP and guidance relating to accounting for investments and real estate ventures, we account for our unconsolidated investments in LLCs/LPs which we do not control using the equity method of accounting.  The third-party members in these investments have equal voting rights with regards to issues such as, but not limited to: (i) divestiture of property; (ii) annual budget approval, and; (iii) financing commitments. These investments, which represent 33% to 95% non-controlling ownership interests, are recorded initially at our cost and subsequently adjusted for our net equity in the net income, cash contributions to, and distributions from, the investments. Pursuant to certain agreements, allocations of sales proceeds and profits and losses of some of the LLC investments may be allocated disproportionately as compared to ownership interests after specified preferred return rate thresholds have been satisfied.

Distributions received from equity method investees in the consolidated statements of cash flows are classified based upon the nature of the distribution. Returns on investments are presented net of equity in income from unconsolidated investments as cash flows from operating activities.  Returns of investments are classified as cash flows from investing activities.

At September 30, 2021, we have non-controlling equity investments or commitments in five jointly-owned LLCs/LPs which own MOBs. We account for these LLCs/LPs on an unconsolidated basis pursuant to the equity method since they are not variable interest entities which we are the primary beneficiary nor do we have a controlling voting interest. The majority of these entities are joint-ventures between us and non-related parties that hold minority ownership interests in the entities. Each entity is generally self-sustained from a cash flow perspective and generates sufficient cash flow to meet its operating cash flow requirements and service the third-party debt (if applicable) that is non-recourse to us. Although there is typically no ongoing financial support required from us to these entities since they are cash-flow sufficient, we may, from time to time, provide funding for certain purposes such as, but not limited to, significant capital expenditures, leasehold improvements and debt financing. Although we are not obligated to do so, if approved by us at our sole discretion, additional cash funding is typically advanced as equity or member loans. These entities maintain property insurance on the properties.  

Subsequent to September 30, 2021, we purchased the third-party 5% ownership interest in Grayson Properties, LP which owns the Texoma Medical Plaza, an MOB located in Denison, Texas for a purchase price of approximately $3.1 million.  We formerly held a non-controlling majority ownership interest in this LP.  As a result of our purchase of the minority ownership interest, we now hold 100% of the ownership interest in this LP and we will begin accounting for this LP on a consolidated basis effective with the minority ownership interest purchase date. The property’s assets and liabilities will be recorded at the carrying amount of its previously held interest, plus the incremental cost which will be allocated based upon relative fair values.  A third-party appraisal was completed to determine the fair value of the property.  We do not expect a material impact on our net income as a result of the consolidation of this LP subsequent to the transaction.  

The following property table represents the five LLCs/LPs in which we owned a non-controlling interest and were accounted for under the equity method as of September 30, 2021:

Name of LLC/LP	Ownership			Property Owned by LLC/LP
Suburban Properties		33	%	St. Matthews Medical Plaza II
Brunswick Associates (a.)(e.)		74	%	Mid Coast Hospital MOB
Grayson Properties (b.)(f.)		95	%	Texoma Medical Plaza
FTX MOB Phase II (c.)		95	%	Forney Medical Plaza II
Grayson Properties II (d.)(f.)		95	%	Texoma Medical Plaza II

(a.) This LLC has a third-party term loan of $9.1 million, which is non-recourse to us, outstanding as of September 30, 2021.

(b.) This building is on the campus of a UHS hospital and has tenants that include subsidiaries of UHS.  During the third quarter of 2021, this LP paid off its $13.2 million mortgage loan upon maturity utilizing an equity contribution from us which was funded utilizing borrowings from our revolving credit agreement. Subsequent to the third quarter of 2021, we purchased the 5% minority ownership interest in this LP from the third-party minority ownership partner for approximately $3.1 million and subsequently own 100% of this LP.

(c.) During the first quarter of 2021, this LP paid off its $4.7 million mortgage loan, upon maturity, utilizing pro rata equity contributions from the limited partners as well as a $3.5 million member loan from us to the LP which was funded utilizing borrowings from our revolving credit agreement.

(d.) Construction of this MOB, which is located in Denison, Texas on the campus of a hospital owned and operated by a wholly-owned subsidiary of UHS, was substantially completed in December 2020. We have committed to invest up to $4.8 million in equity and debt financing, $1.4 million of which has been funded as of September 30, 2021. This LP entered into a $13.1 million third-party construction loan commitment, which is non-recourse to us, which has an outstanding balance of $13.1 million as of September 30, 2021.

(e.) The LLC is the lessee with a third-party lessor under a ground lease for land.

(f.) These LPs are the lessees with UHS-related parties for the land related to these properties.

Below are the condensed combined statements of income (unaudited) for the five LLCs/LPs accounted for under the equity method at September 30, 2021 and the four LLCs/LPs accounted for under the equity method as September 30, 2020 (the 2020 periods do not include the newly constructed Texoma Medical Plaza II that was substantially completed in December, 2020).     

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(amounts in thousands)				(amounts in thousands)
Revenues	$	2,736	$	2,624	$	8,373	$	7,637
Operating expenses		1,184		1,047		3,356		3,094
Depreciation and amortization		627		444		1,684		1,333
Interest, net		388		315		1,260		949
Net income	$	537	$	818	$	2,073	$	2,261
Our share of net income	$	303	$	517	$	1,341	$	1,371

Below are the condensed combined balance sheets (unaudited) for the five above-mentioned LLCs/LPs that were accounted for under the equity method as of September 30, 2021 and December 31, 2020:     

	September 30, 2021			December 31, 2020
	(amounts in thousands)
Net property, including construction in progress	$	42,789		$	42,374
Other assets (a.)		9,484			8,818
Total assets	$	52,273		$	51,192
Other liabilities (a.)	$	6,966		$	9,402
Mortgage notes payable, non-recourse to us		22,133			39,735
Advances payable to us (b.)		3,500			-
Equity		19,674			2,055
Total liabilities and equity	$	52,273		$	51,192
Investments in and advances to LLCs before amounts included in
accrued expenses and other liabilities	$	23,123		$	4,278
Amounts included in accrued expenses and other liabilities		(1,896	)		(3,020	)
Our share of equity in LLCs, net	$	21,227		$	1,258

(a.) Other assets and other liabilities as of both September 30, 2021 and December 31, 2020 include approximately $4.3 million of right-of-use land assets and right-of-use land liabilities related to ground leases whereby the LLC/LP is the lessee, with third party lessors, including subsidiaries of UHS.  

(b.) Consists of a 7.25% member loan to FTX MOB Phase II, LP with a maturity date of March 1, 2023.

As of September 30, 2021, and December 31, 2020, aggregate principal amounts due on mortgage notes payable by unconsolidated LLCs/LPs, which are accounted for under the equity method and are non-recourse to us, are as follows (amounts in thousands):

	Mortgage Loan Balance (a.)
Name of LLC/LP	9/30/2021		12/31/2020		Maturity Date
FTX MOB Phase II (5.00% fixed rate mortgage loan) (b.)	$	-	$	4,777	February, 2021
Grayson Properties (5.034% fixed rate mortgage loan) (c.)		-		13,372	September, 2021
Grayson Properties II (3.70% fixed rate construction loan) (d.)		13,075		12,336	June, 2025
Brunswick Associates (2.80% fixed rate mortgage loan)		9,058		9,250	December, 2030
	$	22,133	$	39,735

(a.) All mortgage loans require monthly principal payments through maturity and include a balloon principal payment upon maturity. 

(b.) Upon maturity in February 2021 this LP paid off this mortgage loan utilizing pro rata equity contributions from the limited partners as well as a $3.5 million member loan from us to the LP which was funded utilizing borrowings from our revolving credit agreement.

(c.) Upon maturity in September, 2021 this LP paid off this mortgage utilizing an equity contribution from us, which was funded utilizing borrowings from our revolving credit agreement.

(d.) This construction loan has a maximum commitment of $13.1 million and requires interest on the outstanding principal balance to be paid on a monthly basis through December 1, 2022.  Monthly principal and interest payments are scheduled to commence on January 1, 2023.

Pursuant to the operating and/or partnership agreements of the five LLCs/LPs in which we continue to hold non-controlling ownership interests, the third-party member and/or the Trust, at any time, potentially subject to certain conditions, have the right to make an offer (“Offering Member”) to the other member(s) (“Non-Offering Member”) in which it either agrees to: (i) sell the entire ownership interest of the Offering Member to the Non-Offering Member (“Offer to Sell”) at a price as determined by the Offering Member (“Transfer Price”), or; (ii) purchase the entire ownership interest of the Non-Offering Member (“Offer to Purchase”) at the equivalent proportionate Transfer Price. The Non-Offering Member has 60 to 90 days to either: (i) purchase the entire ownership interest of the Offering Member at the Transfer Price, or; (ii) sell its entire ownership interest to the Offering Member at the equivalent proportionate Transfer Price. The closing of the transfer must occur within 60 to 90 days of the acceptance by the Non-Offering Member.

The minority partner in Grayson Properties, LP, as the Offering Member, made an offer to sell its entire 5% ownership interest to us at a stipulated price, and we agreed to purchase the ownership interest at the stipulated price of approximately $3.1 million. The transaction was completed during the fourth quarter of 2021, as discussed above.