3. Real Estate and Lending Activities

Acquisitions

We acquired the following assets (in thousands):


	Three Months Ended March 31,
	2017		2016
Assets Acquired
Land	$	1,081	$	—
Building		7,050		—
Intangible		873		—

Total assets acquired	$	9,004	$	—

The purchase price allocations attributable to this first quarter 2017 acquisition 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.

On January 30, 2017, we acquired an inpatient rehabilitation hospital in Germany for €8.4 million. This acquisition was the final property to close as part of the six hospital portfolio that we agreed to buy in September 2016 for an aggregate amount of €44.1 million. This property is leased to affiliates of Median Kliniken S.à r.l. (“MEDIAN”) pursuant to the existing long-term master lease agreement reached with MEDIAN in 2015.

Development Activities

During the 2017 first quarter, we completed construction on the following facilities:

•

Adeptus Health, Inc. (“Adeptus Health”) – We completed two acute care facilities for this tenant and began recording rental income in the quarter. These facilities are leased pursuant to an existing long-term master lease.

•

IMED Group (“IMED”) – Our general acute facility located in Valencia, Spain opened on March 31, 2017, and is being leased to IMED pursuant to a long-term master lease. Our ownership in this facility is effected through a joint venture between us and clients of AXA Real Estate, in which we own a 50% interest. Our share of the aggregate purchase and development cost of this facility is approximately €21 million.

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


Operator	Commitment		Costs Incurred as of March 31, 2017		Estimated Completion Date
Adeptus Health	$	12,220	$	7,939		2Q 2017
Ernest		28,067		5,231		4Q 2017
Adeptus Health		7,804		1,771		1Q 2018

	$	48,091	$	14,941

Disposals

On March 31, 2017, we sold the EASTAR Health System real estate located in Muskogee, Oklahoma, which was leased to RCCH Healthcare Partners (“RCCH”). Total proceeds from this transaction were approximately $64 million resulting in a gain of $7.4 million, partially offset by a $0.6 million non-cash charge to revenue to write-off related straight-line rent receivables on this property.

Leasing Operations

All of our leases are accounted for as operating leases, except we are accounting for 15 Ernest facilities and 10 Prime Healthcare Services, Inc. (“Prime”) facilities as direct financing leases (“DFLs”). The components of our net investment in DFLs consisted of the following (in thousands):


	As of March 31, 2017			As of December 31, 2016
Minimum lease payments receivable	$	2,192,020		$	2,207,625
Estimated residual values		407,647			407,647
Less: Unearned income		(1,949,279	)		(1,967,170	)

Net investment in direct financing leases	$	650,388		$	648,102

Adeptus Health

On March 2, 2017, Adeptus Health, currently our sixth largest tenant, advised in a filing with the SEC that it would be delayed in the filing of its Annual Report on Form 10-K for the fiscal year ended December 31, 2016. In the filing, Adeptus Health further advised that it had identified material weaknesses with respect to internal control over financial reporting in certain areas and disclosed that there is substantial doubt about its ability to continue as a going concern absent its securing committed long-term financing. On April 4, 2017, we announced an agreement in principle with Deerfield Management Company, L.P. (“Deerfield”) to the restructuring in bankruptcy of Adeptus Health, including the assumption of our master leases of facilities in Texas, Colorado, Arizona and Ohio. Adeptus Health and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code on April 19, 2017. Deerfield has purchased Adeptus Health’s outstanding bank debt and expects to provide additional financing, along with operational and managerial support, to Adeptus Health during the bankruptcy process. Our agreement with Deerfield provides for the pre-bankruptcy payment of all rent, the assumption of all of our master leases subject to their existing terms, pre-bankruptcy severance from our master leases of three New Orleans area facilities representing about 5% of our Adeptus Health investment and re-leasing them to Ochsner Clinic Foundation (“Ochsner”), and the post-bankruptcy severance from our master leases of 13 facilities in Texas representing about 15% of our Adeptus Health investment. We also agreed to a $3.1 million concession that will reduce our rental revenue by approximately $220 thousand annually over the remaining 14 year initial lease term.

We expect to sell or re-lease to other operators the 13 Texas facilities during transition periods ending in the fourth quarter of 2018. During the transition periods, Adeptus Health is obligated to pay contractual rent until the earlier of (a) transition to a new operator is complete or (b) an agreed future date. The agreed future date for approximately 60 percent of the facilities is one year following bankruptcy exit and the remainder have agreed future dates of 90 days post-bankruptcy exit.

As noted above, our New Orleans free standing emergency facilities (with a total budgeted investment of up to approximately $24.5 million) have been re-leased to Ochsner as of March 31, 2017. The Ochsner leases provide for 15-year initial terms with a 9.2% average minimum lease rate based on our total development and construction cost. Under these leases, Ochsner has the right to purchase the freestanding emergency facilities (i) at our cost within two years of rent commencement or (ii) for the greater of fair market value or our cost after such two-year period. With this transaction, we incurred a non-cash charge of $0.5 million to write-off the straight-line rent receivables associated with the previous Adeptus Health lease on these properties.

Adeptus Health is current on its rent obligations to us through May 2017. In addition, we currently hold letters of credit approximating $12.4 million to cover defaults in rent payments. These letters of credit would cover approximately four months of rent. At March 31, 2017, our investment in Adeptus Health facilities represents less than 6% of our total gross assets. We believe this investment is fully recoverable at March 31, 2017; however, no assurances can be made that we will not have any impairment charges related to this investment in the future.

Loans

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


	As of March 31, 2017		As of December 31, 2016
Mortgage loans	$	1,060,397	$	1,060,400
Acquisition loans		120,766		121,464
Working capital and other loans		33,266		34,257

	$	1,214,429	$	1,216,121

Our non-mortgage loans typically consist of loans to our tenants for acquisitions and working capital purposes. At March 31, 2017, acquisition loans includes $114.8 million in loans to Ernest.

Concentrations of Credit Risk

Our revenue concentration for the three months ended March 31, 2017 as compared to the prior year is as follows (dollars in thousands):

Revenue by Operator


	For the Three Months Ended March 31,
	2017					2016
Operators	Total Revenue		Percentage of Total Revenue			Total Revenue		Percentage of Total Revenue
Prime	$	31,511		20.1	%	$	28,897		21.4	%
Steward		26,584		17.0	%		—		—
MEDIAN		23,450		15.0	%		23,510		17.4	%
Ernest		17,520		11.2	%		16,406		12.2	%
RCCH		9,306		6.0	%		21,477		15.9	%
Other operators		48,026		30.7	%		44,709		33.1	%

Total	$	156,397		100.0	%	$	134,999		100.0	%

Revenue by U.S. State and Country


	For the Three Months Ended March 31,
	2017					2016
U.S. States and Other Countries	Total Revenue		Percentage of Total Revenue			Total Revenue		Percentage of Total Revenue
Massachusetts	$	26,584		17.0	%	$	—		—
Texas		24,737		15.8	%		24,472		18.1	%
California		16,565		10.6	%		16,597		12.3	%
New Jersey		10,943		7.0	%		8,612		6.4	%
Arizona		7,332		4.7	%		5,797		4.3	%
All other states		43,056		27.5	%		54,906		40.7	%

Total U.S.	$	129,217		82.6	%	$	110,384		81.8	%
Germany	$	26,190		16.7	%	$	23,510		17.4	%
United Kingdom, Italy, and Spain		990		0.7	%		1,105		0.8	%

Total International	$	27,180		17.4	%	$	24,615		18.2	%

Grand Total	$	156,397		100.0	%	$	134,999		100.0	%

On a gross asset basis, which is total assets before accumulated depreciation/amortization and assumes all real estate binding commitments on new investments and unfunded amounts on development deals and commenced capital improvement projects are fully funded (see Notes 7 and 8 of Item 1 on this Form 10-Q), our concentration as of March 31, 2017 as compared to December 31, 2016 is as follows (dollars in thousands):

Gross Assets by Operator


	As of March 31, 2017					As of December 31, 2016
Operators	Total Gross Assets		Percentage of Total Gross Assets			Total Gross Assets		Percentage of Total Gross Assets
Steward (1)	$	1,551,292		20.8	%	$	1,250,000		17.5	%
Prime		1,115,356		15.0	%		1,144,055		16.0	%
MEDIAN		1,006,432		13.5	%		993,677		13.9	%
Ernest		627,971		8.4	%		627,906		8.8	%
RCCH		506,265		6.8	%		566,600		7.9	%
Other operators		2,313,871		31.1	%		2,259,980		31.7	%
Other assets		324,635		4.4	%		300,903		4.2	%

Total	$	7,445,822		100.0	%	$	7,143,121		100.0	%

(1)

Includes $600 million of mortgage loans.

Gross Assets by U.S. State and Country


	As of March 31, 2017					As of December 31, 2016
U.S. States and Other Countries	Total Gross Assets		Percentage of Total Gross Assets			Total Gross Assets		Percentage of Total Gross Assets
Massachusetts	$	1,250,000		16.8	%	$	1,250,000		17.5	%
Texas		893,749		12.0	%		947,443		13.3	%
California		542,886		7.3	%		542,889		7.6	%
New Jersey		416,490		5.6	%		447,436		6.3	%
Arizona		331,833		4.5	%		331,834		4.6	%
All other states		2,175,466		29.2	%		1,894,047		26.5	%
Other domestic assets		284,070		3.8	%		264,215		3.7	%

Total U.S.	$	5,894,494		79.2	%	$	5,677,864		79.5	%
Germany	$	1,320,487		17.7	%	$	1,281,649		17.9	%
United Kingdom, Italy, and Spain		190,276		2.5	%		146,920		2.1	%
Other international assets		40,565		0.6	%		36,688		0.5	%

Total International	$	1,551,328		20.8	%	$	1,465,257		20.5	%

Grand Total	$	7,445,822		100.0	%	$	7,143,121		100.0	%

On an individual property basis, we had no investment of any single property greater than 3.2% of our total gross assets as of March 31, 2017.