3. Real Estate and Lending Activities

Acquisitions

We acquired the following assets (in thousands):


	Six Months Ended June 30,
	2016		2015
Assets Acquired
Land and land improvements	$	9,398	$	62,434
Building		37,593		390,320
Intangible lease assets — subject to amortization (weighted average useful life 25.8 years)		—		42,262
Mortgage loans		—		40,000
Net investments in direct financing leases		63,000		10,700
Other loans		—		16,917

Total assets acquired	$	109,991	$	562,633
Loans repaid (1)		—		(183,826	)

Total net assets acquired	$	109,991	$	378,807

(1)

Loans advanced to MEDIAN in 2014 and repaid in 2015 as a part of the MEDIAN transaction.

The purchase price allocations attributable to the 2016 and certain 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.

2016 Activity

On May 2, 2016, we acquired an acute hospital in Newark, New Jersey for an aggregate purchase price of $63 million leased to Prime Healthcare Services, Inc. (“Prime”) pursuant to a fifth master lease, which has 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.

On June 22, 2016, we closed on the final Median Kliniken S.à r.l., (“MEDIAN”) property for a purchase price of €41.6 million. See “2015 Activity” for a description of the initial MEDIAN Transaction.

From the respective acquisition dates, the properties acquired in 2016 contributed $1.1 million of revenue and income (excluding related acquisition expenses), for the three and six months ended June 30, 2016. In addition, we incurred $2.4 million of acquisition-related costs on the 2016 acquisitions for both the three and six months ended June 30, 2016.

2015 Activity

MEDIAN Transaction

On April 29, 2015, we entered into a series of definitive agreements with MEDIAN, a German provider of post-acute and acute rehabilitation services, to acquire the real estate assets of 32 hospitals owned by MEDIAN for an aggregate purchase price of approximately €688 million. Upon acquisition, each property became subject to a master lease between us and MEDIAN providing for the leaseback of the property to MEDIAN. The master lease had an initial term of 27 years and provided for an initial GAAP lease rate of 9.3%, with annual escalators at the greater of one percent or 70% of the German consumer price index.

MEDIAN is owned by an affiliate of Waterland Private Equity Fund V C.V. (“Waterland”), which acquired 94.9% of the outstanding equity interests in MEDIAN, and by a subsidiary of our operating partnership, which acquired the remaining 5.1% of the outstanding equity interests in MEDIAN, each in December 2014. In December 2014, we provided interim acquisition loans to affiliates of Waterland and MEDIAN in connection with Waterland’s acquisition of its stake in MEDIAN in an aggregate amount of approximately €425 million. In addition, we made further loans to MEDIAN during the first half of 2015 in an aggregate amount of approximately €240 million, which were used by MEDIAN to repay existing debt on properties we acquired.

Closing of the sale-leaseback transactions began in the second quarter of 2015. At each closing, the purchase price for each facility was reduced and offset against the interim loans made to affiliates of Waterland and MEDIAN as described above and against the amount of any debt assumed or repaid by us in connection with the closing. As of June 30, 2015, we had closed on 17 properties for an aggregate amount of €317 million.

Other Acquisitions

On June 16, 2015, we acquired the real estate of two facilities in Lubbock, Texas, a 60-bed inpatient rehabilitation hospital and a 37-bed long-term acute care hospital, for an aggregate purchase price of $31.5 million. We entered into a 20-year lease with Ernest for the rehabilitation hospital, which provides for three five-year extension options, and separately entered into a lease with Ernest for the long-term acute care hospital that has a final term ending December 31, 2034. In connection with the transaction, we funded an acquisition loan to Ernest of approximately $12.0 million. Ernest is operating the rehabilitation hospital in a joint venture with Covenant Health System, while the long-term acute care hospital continues to be operated by Fundamental Health under a new sublease with Ernest.

On February 27, 2015, we acquired an inpatient rehabilitation hospital in Weslaco, Texas for $10.7 million leased to Ernest pursuant to the 2012 master lease which had an original 20-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 funded an acquisition loan in the amount of $5 million.

On February 13, 2015, we acquired two general acute care hospitals in the Kansas City area for $110 million. Affiliates of 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 funded a mortgage loan in the amount of $40 million, which has a 10-year term.

From the respective acquisition dates, the properties and other assets acquired in 2015 contributed $4.2 million and $3.5 million of revenue and income (excluding related acquisition expenses), respectively, for the three months ended June 30, 2015. From the respective acquisition dates, the properties and other assets acquired in 2015 contributed $6.2 million and $4.9 million of revenue and income (excluding related acquisition expenses), respectively, for the six months ended June 30, 2015. In addition, we incurred $22.6 million and $26.7 million of acquisition-related costs on the 2015 acquisitions for the three and six months ended June 30, 2015, respectively.

Pro Forma Information

The following unaudited supplemental pro forma operating data is presented for the three and six months ended June 30, 2015, as if each acquisition (including completed development projects) was completed on January 1, 2015. 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 Ended June 30, 2015		For the Six Months Ended June 30, 2015
Total revenues	$	109	$	219
Net income	$	50	$	100
Net income per share/unit — diluted	$	0.21	$	0.42

Development Activities

During the first six months of 2016, we completed construction and began recording rental income on the following facilities:

•

Adeptus Health, Inc. (“Adeptus Health”) – We completed seven acute care facilities for this tenant during 2016. These facilities are leased pursuant to the master leases entered into in both 2014 and 2015 and are cross-defaulted with each other and with the original master lease executed in 2013.

•

Ernest Toledo – This inpatient rehabilitation facility located in Toledo, Ohio opened on April 1, 2016 and is being leased to Ernest pursuant to the original 2012 master lease.

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


Property	Commitment		Costs Incurred as of 06/30/16		Estimated Completion Date
Adeptus Health	$	62,154	$	43,763		3Q 2016
Adeptus Health		53,836		15,343		4Q 2016
Adeptus Health		5,730		206		1Q 2017
Adeptus Health		61,997		16,311		2Q 2017
Adeptus Health		71,331		—		Various

	$	255,048	$	75,623

On September 9, 2015, we acquired the real estate of a general acute care hospital under development located in Spain, for an aggregate purchase and development price to us of approximately €21.4 million. The acquisition was effected through a joint venture between us and clients of AXA Real Estate, in which we will own a 50% interest. Upon completion, the facility will be leased to a Spanish operator of acute care hospitals, pursuant to a long-term lease. We expect construction to complete on this facility in the second quarter of 2017.

Disposals

Capella Transaction

On March 21, 2016, we entered into definitive agreements with RegionalCare Hospital Partners, Inc. (“RegionalCare”), an affiliate of certain funds managed by affiliates of Apollo Global Management, LLC (together with its consolidated subsidiaries, “Apollo”), under which our investment in the operations of Capella Healthcare, Inc. (“Capella”) would be merged with RegionalCare, forming RCCH Healthcare Partners (“RCCH”).

On April 29, 2016, this transaction closed and funded, effective April 30, 2016. 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 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 to subsidiaries of Capella in connection with the Capella transaction on August 31, 2015. We made a new $93.3 million loan for a hospital property in Olympia, Washington. 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 Capella 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.

On July 22, 2016, we acquired the Olympia, Washington property in exchange for the $93.3 million loan and an additional $7 million, which was contemplated in the original Capella transaction. The terms of the Olympia lease will be similar to the other leases with this tenant.

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 May 20, 2016, we reached a firm commitment to sell three inpatient rehabilitation hospitals located in Texas and operated by HealthSouth Corporation (“HealthSouth”) for $111.5 million. At June 30, 2016, these facilities and related net assets were designated as held for sale and included the following (in thousands):


Real estate held for sale	$	63,074
Straight-line rent receivables		2,441
Other, net		(625	)

	$	64,890

On July 20, 2016, we completed this sale resulting in a net gain of approximately $45 million.

Summary of Operations for Disposed Assets

The properties which sold during the quarter and the assets held for sale at June 30, 2016, do not meet the definition of discontinued operations. However, the following represents the operating results (excluding gain on sale, transaction costs, and impairment or other non-cash charges) from these properties (excluding loans repaid in the Capella Transaction) for the periods presented (in thousands):


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2016			2015			2016			2015
Revenues	$	3,092		$	4,525		$	7,607		$	9,075
Real estate depreciation and amortization		(805	)		(949	)		(1,754	)		(1,897	)
Property-related expenses		(72	)		(12	)		(113	)		(72	)
Other income (expense)		(9	)		228			(68	)		557

Income from real estate dispositions, net	$	2,206		$	3,792		$	5,672		$	7,663

Leasing Operations

All of our leases are currently accounted for as operating leases except for the master lease of 15 Ernest facilities and six Prime facilities which are accounted for as DFLs. The components of our net investment in DFLs (which includes the Capella properties for 2015 only) consisted of the following (in thousands):


	As of June 30, 2016			As of December 31, 2015
Minimum lease payments receivable	$	1,875,751		$	2,587,912
Estimated residual values		292,646			393,097
Less: Unearned income		(1,639,650	)		(2,354,013	)

Net investment in direct financing leases	$	528,747		$	626,996

Twelve Oaks Facility

In the third quarter of 2015, we sent notice of termination of the lease to the tenant at our Twelve Oaks facility. This former tenant continues to occupy the facility. We called their letter of credit for approximately $0.5 million in the 2016 first quarter. At June 30, 2016, all past due receivables are fully reserved. Although no assurances can be made that we will not have any impairment charges in the future, we believe our real estate investment in Twelve Oaks at June 30, 2016 is fully recoverable.

Subsequent to June 30, 2016, we received approximately $2.5 million representing substantially all of amounts owed to us and agreed to general terms of a new lease, which we expect to execute during the 2016 third quarter.

Loans

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


	As of June 30, 2016		As of December 31, 2015
Mortgage loans	$	549,337	$	757,581
Acquisition loans		216,100		610,469
Working capital and other loans		43,229		54,353

	$	808,666	$	1,422,403

The decrease in our mortgage and acquisition loans are related to the Capella Transaction as discussed previously.

Our non-mortgage loans typically consist of loans to our tenants for acquisitions and working capital purposes. At June 30, 2016, acquisition loans includes our original $93.2 million loan to Ernest and the $93.3 million loan to RCCH, which was repaid in July as discussed above.

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 June 30, 2016, $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

Our revenue concentration for the six months ended June 30, 2016 as compared to the prior year is as follows (dollars in thousands):

Revenue by Operator


	For the Six Months Ended June 30, 2016					For the Six Months Ended June 30, 2015
Operators	Total Revenue		Percentage of Total Revenue			Total Revenue		Percentage of Total Revenue
Prime	$	58,859		22.5	%	$	49,869		25.5	%
MEDIAN		47,745		18.3	%		32,212		16.5	%
Ernest		33,322		12.8	%		29,695		15.2	%
RCCH		32,909		12.6	%		—		—
Adeptus Health		16,205		6.2	%		7,425		3.8	%

Revenue by U.S. State and Country


	For the Six Months Ended June 30, 2016					For the Six Months Ended June 30, 2015
U.S. States and Other Countries	Total Revenue		Percentage of Total Revenue			Total Revenue		Percentage of Total Revenue
Texas	$	48,256		18.5	%	$	42,689		21.8	%
California		33,187		12.7	%		33,065		16.9	%
All other states		129,896		49.7	%		85,620		43.7	%

Total U.S.	$	211,339		80.9	%	$	161,374		82.4	%
Germany	$	47,745		18.3	%	$	32,212		16.5	%
United Kingdom, Italy, and Spain		2,215		0.8	%		2,176		1.1	%

Total International	$	49,960		19.1	%	$	34,388		17.6	%

Grand Total	$	261,299		100.0	%	$	195,762		100.0	%

From an asset basis, our concentration as of June 30, 2016 as compared to December 31, 2015 is as follows (dollars in thousands):

Gross Assets by Operator


	As of June 30, 2016					As of December 31, 2015
Operators	Total Gross Assets		Percentage of Total Gross Assets			Total Gross Assets		Percentage of Total Gross Assets
	(A)		(B)			(A)		(B)
Prime	$	1,126,654		20.8	%	$	1,032,353		17.1	%
MEDIAN		1,054,368		19.4	%		1,031,039		17.1	%
Ernest		584,411		10.8	%		579,182		9.6	%
Adeptus Health		500,000		9.2	%		500,000		8.3	%
RCCH		458,659		8.5	%		1,059,989		17.6	%

Gross Assets by U.S. State and Country


	As of June 30, 2016					As of December 31, 2015
U.S. States and Other Countries	Total Gross Assets		Percentage of Total Gross Assets			Total Gross Assets		Percentage of Total Gross Assets
	(A)		(B)			(A)		(B)
Texas	$	920,959		17.0	%	$	1,060,990		17.6	%
California		547,079		10.1	%		547,085		9.1	%
All other states		2,530,018		46.6	%		3,047,204		50.5	%
Other domestic assets		189,358		3.5	%		177,317		2.9	%

Total U.S.	$	4,187,414		77.2	%	$	4,832,596		80.1	%
Germany	$	1,054,368		19.4	%	$	1,031,039		17.1	%
United Kingdom, Italy, and Spain		156,630		3.0	%		161,317		2.7	%
Other international assets		23,983		0.4	%		10,970		0.1	%

Total International	$	1,234,981		22.8	%	$	1,203,326		19.9	%

Grand Total	$	5,422,395		100.0	%	$	6,035,922		100.0	%

(A)	Gross Assets represents total assets plus accumulated depreciation/amortization assuming all real estate commitments as of the period end are fully funded.

(B)	Includes both leased and loaned assets.

On an individual property basis, we had no investment of any single property greater than 2.3% of our total assets as of June 30, 2016.