Real Estate and Lending Activities

3 Months Ended

Mar. 31, 2015

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Real Estate and Lending Activities

3. Real Estate and Lending Activities

Acquisitions

2015 Activity

On February 13, 2015, we acquired two general acute care hospitals in the Kansas City area for $110 million. Affiliates of Prime Healthcare Services, Inc. (“Prime”) is the tenant and operator pursuant to a new master lease that has similar terms and security enhancements as the other master lease agreements entered into in 2013. This master lease has a 10 year initial fixed term with two extension options of five years each. The lease provides for consumer-price-indexed annual rent increases, subject to a specified floor. In addition, we agreed to fund a mortgage loan in the amount of $40 million, which has a 10-year term.

On February 27, 2015, we acquired an inpatient rehabilitation hospital in Weslaco, Texas for $10.7 million leased to Ernest Health Inc. (“Ernest”) pursuant to the 2012 master lease which has a remaining 17-year fixed term and three five year extension options. This lease provides for consumer-priced-indexed annual rent increases, subject to a floor and a cap. In addition we agreed to fund an acquisition loan in the amount of $5 million.

In January 2015, we advanced the remaining €63.1 million of the €425 million interim acquisition loans to MEDIAN. In April 2015, we executed definitive agreements with MEDIAN to purchase and lease back 31 hospitals and expect these properties to close during the next 30 to 60 days, subject to expiration or waiver of local government preemptive rights. As these 31 hospitals (and others) close, the related purchase prices will be offset, pro rata, against any debt that we assume on these properties or against the interim acquisition loans that have been made.

2014 Activity

On March 31, 2014, we acquired a general acute care hospital and an adjacent parcel for an aggregate purchase price of $115 million from a joint venture of LHP Hospital Group, Inc. and Hackensack University Medical Center Mountainside. The facility was simultaneously leased back to the seller under a lease with a 15-year initial term with a 3-year extension option, followed by a further 12-year extension option at fair market value. The lease provides for consumer-price-indexed annual rent increases, subject to a specified floor and ceiling. The lease includes a customary right of first refusal with respect to a subsequent proposed sale of the facility.

As part of these acquisitions, we acquired the following assets:

	2015		2014
Assets Acquired
Land	$	21,591	$	8,515
Building		88,409		99,602
Intangible lease assets — subject to amortization (weighted average useful life 15 years)		—		6,883
Mortgage loans		40,000		—
Net investments in direct financing leases		10,700		—
Other loans		5,000		—
Total assets acquired	$	165,700	$	115,000

The purchase price allocations attributable to the 2015 acquisitions 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.

Development Activities

During the 2015 first quarter, we completed construction and began recording rental income on two acute care facilities for First Choice ER (a subsidiary of Adeptus Health). These facilities are leased pursuant to the master lease entered into in 2014 and are cross-defaulted with the original master lease executed with First Choice ER in 2013.

In the first quarter of 2015, we began construction on six additional facilities pursuant to the master funding and development agreement with First Choice ER executed in 2014.

See table below for a status update on our current development projects (in thousands):

Property	Location	Property Type	Operator	Commitment		Costs Incurred as of 03/31/15		Estimated Completion Date
UAB Medical West	Hoover, AL	Acute Care Hospital & MOB	Medical West, an affiliate of UAB	$	8,653	$	5,853		2Q 2015
First Choice ER- Chandler	Chandler, AZ	Acute Care Hospital	Adeptus Health		5,049		2,502		2Q 2015
First Choice ER- Converse	Converse, TX	Acute Care Hospital	Adeptus Health		5,754		4,311		2Q 2015
First Choice ER- Denver 48th	Denver, CO	Acute Care Hospital	Adeptus Health		5,123		1,174		2Q 2015
First Choice ER- Aurora	Aurora, CO	Acute Care Hospital	Adeptus Health		5,273		21		3Q 2015
First Choice ER- Conroe	Houston, TX	Acute Care Hospital	Adeptus Health		6,110		1,668		3Q 2015
First Choice ER- Carrollton	Carrollton, TX	Acute Care Hospital	Adeptus Health		35,820		23,458		3Q 2015
First Choice ER- Gilbert	Gilbert, AZ	Acute Care Hospital	Adeptus Health		6,500		2,481		3Q 2015
First Choice ER- Glendale	Glendale, AZ	Acute Care Hospital	Adeptus Health		4,824		564		3Q 2015
First Choice ER- McKinney	McKinney, TX	Acute Care Hospital	Adeptus Health		4,750		1,002		3Q 2015
First Choice ER- Victory Lakes	Houston, TX	Acute Care Hospital	Adeptus Health		4,939		554		3Q 2015
First Choice ER- Vintage Preserve	Houston, TX	Acute Care Hospital	Adeptus Health		45,961		5,678		3Q 2016
First Choice Emergency Rooms	Various	Acute Care Hospital	Adeptus Health		13,448		—		Various
				$	152,204	$	49,266

Leasing Operations

All of our leases are accounted for as operating leases except for the master lease of 15 Ernest facilities and five Prime facilities which are accounted for as direct financing leases (“DFLs”). The components of our net investment in DFLs consisted of the following (dollars in thousands):

	As of March 31, 2015			As of December 31, 2014
Minimum lease payments receivable	$	1,639,128		$	1,607,024
Estimated residual values		225,871			211,888
Less: Unearned income		(1,411,576	)		(1,379,396	)
Net investment in direct financing leases	$	453,423		$	439,516

Florence facility

On March 6, 2013, the tenant of our $27.2 million facility in Phoenix, Arizona filed for Chapter 11 bankruptcy. At March 31, 2015, we have approximately $1.1 million of receivables outstanding but the tenant continues to pay us in accordance with bankruptcy orders. In addition, we have a letter of credit for approximately $1.2 million to cover any rent and other monetary payments not paid. We have entered into a non-binding letter of intent with the stalking horse bidder for the assumption of the existing lease, with certain non-monetary amendments. Although no assurances can be made that we will not have any impairment charges in the future, we believe our investment in Florence at March 31, 2015 is fully recoverable.

Gilbert facility

In the first quarter of 2014, the tenant of our facility in Gilbert, Arizona filed for Chapter 11 bankruptcy; however, we sent notice of termination of the lease prior to the bankruptcy filing. As a result of the lease terminating, we recorded a charge of approximately $1 million to reserve against the straight-line rent receivables. In addition, we accelerated the amortization of the related lease intangible asset resulting in $1.1 million of additional expense in the 2014 first quarter. The tenant has continued to perform its monetary obligations, and we have agreed to the terms of an amended lease upon the tenant’s bankruptcy exit. Although no assurances can be made that we will not have any impairment charges or write-offs of receivables in the future, we believe our real estate investment in Gilbert of $14.1 million at March 31, 2015 is fully recoverable.

Loans

The following is a summary of our loans (in thousands):

	As of March 31, 2015		As of December 31, 2014
Mortgage loans	$	437,591	$	397,594
Acquisition loans		555,391		525,136
Working capital and other loans		46,566		48,031
	$	1,039,548	$	970,761

Our non-mortgage loans typically consist of loans to our tenants for acquisitions and working capital purposes. At March 31, 2015, acquisition loans includes our $102.5 million loans to Ernest plus $442.4 million related to the MEDIAN Kliniken S.à r.l. (“MEDIAN”), transaction in 2014.

On March 1, 2012, pursuant to our convertible note agreement, we converted $1.7 million of our $5.0 million convertible note into a 9.9% equity interest in the operator of our Hoboken University Medical Center facility. At March 31, 2015, $3.3 million remains outstanding on the convertible note, and we retain the option, subject to regulatory approvals, to convert this remainder into 15.1% of equity interest in the operator.

Concentrations of Credit Risk

For the three months ended March 31, 2015 and 2014, revenue from affiliates of Prime (including rent and interest from mortgage loans) accounted for 25.0% and 29.1%, respectively, of total revenue. From an investment concentration perspective, assets leased and loaned to Prime represented 15.2% and 8.3%, respectively of our total assets, at March 31, 2015. Assets leased and loaned to Prime represented 12.6% and 7.4%, respectively, of our total assets at December 31, 2014.

For the three months ended March 31, 2015, revenue from affiliates of MEDIAN accounted for 9.5% of total revenue. From an investment concentration perspective, MEDIAN represented 11.6% and 11.3% of our total assets at March 31, 2015 and December 31, 2014, respectively.

For the three months ended March 31, 2015 and 2014, revenue from affiliates of Ernest (including rent and interest from mortgage and acquisition loans) accounted for 15.3% and 19.6% of total revenue, respectively. From an investment concentration perspective, assets leased and loaned to Ernest represented 7.9% and 5.3%, respectively, of our total assets at March 31, 2015. Assets leased and loaned to Ernest represented 7.7% and 5.3%, respectively, of our total assets at December 31, 2014.

On an individual property basis, we had no investment of any single property greater than 4% of our total assets as of March 31, 2015.

From a global geographic perspective, approximately 80% of our total assets are in the United States while 20% reside in Europe as of March 31, 2015 and December 31, 2014. Revenue from our European investments was $16.3 million and $5.5 million in the first quarter of 2015 and 2014, respectively.

From a United States geographic perspective, investments located in California represented 14.3% of our total assets at March 31, 2015, compared to 14.6% at December 31, 2014. Investments located in Texas represented 20.5% of our total assets at March 31, 2015, compared to 20.2% at December 31, 2014.