3. Real Estate and Lending Activities

Acquisitions

We acquired the following assets (in thousands):


	Six Months Ended June 30,
	2017			2016
Assets Acquired
Land and land improvements	$	86,434		$	6,382
Building		420,731			36,455
Intangible lease assets — subject to amortization (weighted average useful life 28.4 years for 2017 and 25.8 years for 2016)		54,044			4,154
Net investments in direct financing leases		40,450			63,000
Liabilities assumed		(878	)		—

Total assets acquired	$	600,781		$	109,991

The purchase price allocations attributable to the 2017 acquisitions and certain acquisitions made in the second half of 2016 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.

2017 Activity

Median Transactions

On June 22, 2017, we acquired an acute care hospital in Germany for a purchase price of €19.4 million (€18.6 of which has been funded to date). This property is leased to affiliates of Median Kliniken S.a.r.l. (“MEDIAN”), one of our current tenants, pursuant to an existing 27-year master lease agreement that ends in December 2042 with terms similar to the master lease agreement reached with MEDIAN in 2015.

During the second quarter of 2017, we acquired 11 rehabilitation hospitals in Germany for an aggregate purchase price of €127 million. These 11 properties are leased to affiliates of MEDIAN, pursuant to a third master lease that has terms similar to the original master lease in 2015 with a fixed term ending in August 2043. These acquisitions are part of the portfolio of 20 properties in Germany that we agreed to acquire in July 2016 for €215.7 million, of which seven properties totaling €49.5 million closed in 2016. See Note 10 for an update on the final two properties totaling €39.2 million that closed after June 30, 2017.

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 pursuant to the original long-term master lease agreement reached with MEDIAN in 2015.

Other Transactions

On June 1, 2017, we acquired the real estate assets of Ohio Valley Medical Center, a 218-bed acute care hospital located in Wheeling, West Virginia, and the East Ohio Regional Hospital, a 139-bed acute care hospital in Martins Ferry, Ohio, from Ohio Valley Health Services, a not-for-profit entity in West Virginia, for an aggregate purchase price of approximately $40 million. We simultaneously leased the facilities to Alecto Healthcare Services LLC (“Alecto”), the current operator of three facilities in our portfolio, pursuant to a lease with a 15-year initial term with 2% annual minimum rent increases and three 5-year extension options. The facilities are cross-defaulted and cross-collateralized with our other hospitals currently operated by Alecto. We also agreed to provide up to $20.0 million in capital improvement funding on these two facilities - none of which has been funded to date. With these acquisitions, we also obtained a 20% interest in the operator of these facilities.

On May 1, 2017, we acquired eight hospitals previously affiliated with Community Health Systems, Inc. in Florida, Ohio, and Pennsylvania for an aggregate purchase price of $301.3 million. These facilities are leased to Steward Health Care System LLC (“Steward”), pursuant to the existing long-term master lease entered into with Steward in October 2016.

On May 1, 2017, we acquired the real estate of St. Joseph Regional Medical Center, a 145-bed acute care hospital in Lewiston, Idaho for $87.5 million. This facility is leased to RCCH Healthcare Partners (“RCCH”), pursuant to the existing long-term master lease entered into with RCCH in April 2016.

From the respective acquisition dates, the properties acquired in 2017 contributed $8.2 million of revenue and $6.0 of income (excluding related acquisition expenses and taxes) for the three months ended June 30, 2017, and $8.4 million of revenue and $6.1 million of income (excluding related acquisition expenses and taxes) for the six months ended June 30, 2017. In addition, we expensed $9.1 million and $9.6 million of acquisition-related costs on these 2017 acquisitions for the three and six months ended June 30, 2017, respectively.

2016 Activity

On May 2, 2016, we acquired an acute care 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 had 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 last property of the original €688 million MEDIAN transaction for a purchase price of €41.6 million. Upon acquisition, this property became subject to an existing master lease between us and affiliates of MEDIAN. The master lease had an initial start date of July 1, 2015, 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.

From the respective acquisition dates, the properties acquired in 2016 contributed $1.1 million of revenue and income (excluding related acquisition expenses and taxes), 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.

Development Activities

During the first six months of 2017, we completed construction on the following facilities:

•

Adeptus Health, Inc. (“Adeptus Health”) – We completed four acute care facilities for this tenant during 2017 totaling approximately $68 million in development costs. 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.

In April 2017, we completed the acquisition of the long leasehold interest of a development site in Birmingham, England from the Circle Health Group (“Circle”) (the tenant of our existing site in Bath, England) for a purchase price of £2.7 million. Simultaneously with the acquisition, we entered into contracts with the property landlord and the Circle committing us to construct an acute care hospital on the site. Our total development costs are anticipated to be approximately £30 million. Circle is contracted to enter into a lease of the hospital following completion of construction for an initial 15-year term with rent to be calculated based on our total development costs.

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


Property	Commitment		Costs Incurred as of June 30, 2017		Estimated Completion Date
Ernest (Flagstaff)	$	28,067	$	11,351		1Q 2018
Circle (Birmingham)		42,017		7,088		4Q 2018

	$	70,084	$	18,439

Disposals

2017 Activity

On March 31, 2017, we sold the EASTAR Health System real estate located in Muskogee, Oklahoma, which was leased to 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.

2016 Activity

Capella Transaction

Effective April 30, 2016, our investment in the operator of Capella Healthcare, Inc. (“Capella”) merged with Regional Care Hospital Partners, Inc. (“Regional Care”) (an affiliate of certain funds managed by affiliates of Apollo Global Management, LLC. (“Apollo”)) to form RCCH. 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 original 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 in connection with the original Capella transaction. We made a new $93.3 million loan for a hospital property in Olympia, Washington that was subsequently converted to real estate on July 22, 2016. 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 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.

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.

The sales in 2017 and 2016 were not strategic shifts in our operations, and therefore the results of operations related to these facilities were not reclassified as discontinued operations.

Summary of Operations for Disposed Assets in 2016

The following represents the operating results (excluding gain on sale, transaction costs, and impairment or other non-cash charges) from the properties which sold during the first half of 2016 (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,
	2017		2016			2017		2016
Revenues	$	—	$	1,139		$	—	$	3,700
Real estate depreciation and amortization		—		(357	)		—		(857	)
Property-related expenses		—		(67	)		—		(106	)
Other income (expense)		—		(9	)		—		(68	)

Income from real estate dispositions, net	$	—	$	706		$	—	$	2,669

Leasing Operations

At June 30, 2017, leases on two Alecto facilities, 15 Ernest facilities and 10 Prime facilities are accounted for as DFLs. The components of our net investment in DFLs consisted of the following (in thousands):


	As of June 30, 2017			As of December 31, 2016
Minimum lease payments receivable	$	2,329,161		$	2,207,625
Estimated residual values		448,098			407,647
Less: Unearned income		(2,084,016	)		(1,967,170	)

Net investment in direct financing leases	$	693,243		$	648,102

Adeptus Health

On April 4, 2017, we announced that we had agreed in principle with Deerfield Management Company, L.P. (“Deerfield”), a healthcare-only investment firm, to the restructuring in bankruptcy of Adeptus Health, a current tenant and operator of facilities representing less than 5% of our total gross assets. In furtherance of the restructuring, Adeptus Health and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code on April 19, 2017. Funds advised by Deerfield acquired Adeptus Health’s outstanding bank debt and Deerfield has agreed to provide additional financing, along with operational and managerial support, to Adeptus Health as part of the restructuring.

The Adeptus Health restructuring and terms of our agreement with Deerfield provide for the payment to us of 100% of the rent payable during the restructuring and the assumption by Deerfield of approximately 80% of the facilities under our master lease agreement with Adeptus Health at current rental rates. Through August 4, 2017, Adeptus Health is current on its rent obligations to us. We have agreed to a post bankruptcy $3.1 million concession that will reduce our rental revenue by approximately $220 thousand annually over the remaining 14-year initial lease term.

On April 4, 2017, we also announced that our Louisiana freestanding emergency facilities then-operated by Adeptus Health (with a total budgeted investment of approximately $24.5 million) had been re-leased to Ochsner Clinic Foundation (“Ochsner”), a health care system in the New Orleans area. The leases provide for initial terms of 15 years with a 9.2% average minimum lease rate based on our total development and construction cost. Under these leases, Ochsner also 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. 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.

In addition, we expect to re-lease or sell 13 Texas facilities that are not being assumed as part of the Adeptus Health restructuring representing approximately 15% of the current Adeptus Health master-leased portfolio. These lease or sale transactions are expected to be completed by the end of 2018, and Adeptus Health is obligated to pay contractual rent to us under the master lease until the earlier of (a) transition to a new operator is complete, or (b) one year following Adeptus Health’s emergence from bankruptcy (for seven of the Texas facilities) or 90 days following Adeptus Health’s emergence from bankruptcy (for the remainder of the Texas facilities).

Hoboken Facility

In the first half of 2017, a subsidiary of the operator of our Hoboken facility acquired 20% of our subsidiary that owns the real estate for $10 million, which increases its interest in our real estate entity to 30%. This is reflected in the non-controlling interest line of our condensed consolidated balance sheets.

Loans

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


	As of June 30, 2017		As of December 31, 2016
Mortgage loans	$	1,062,558	$	1,060,400
Acquisition loans		120,048		121,464
Working capital and other loans		32,920		34,257

	$	1,215,526	$	1,216,121

Our non-mortgage loans typically consist of loans to our tenants for acquisitions and working capital purposes. At June 30, 2017, acquisition loans includes $114.6 million in loans to Ernest.

Concentrations of Credit Risk

Our revenue concentration for the six months ended June 30, 2017 as compared to the prior year is as follows (dollars in thousands):

Revenue by Operator


	For the Six Months Ended June 30, 2017					For the Six Months Ended June 30, 2016
Operators	Total Revenue		Percentage of Total Revenue			Total Revenue		Percentage of Total Revenue
Prime	$	63,059		19.5	%	$	58,859		22.5	%
Steward		58,278		18.0	%		—		—
MEDIAN		47,744		14.8	%		47,745		18.3	%
Ernest		35,269		10.9	%		33,322		12.8	%
Adeptus Health		26,137		8.1	%		16,205		6.2	%
RCCH		19,632		6.1	%		32,909		12.6	%
Other operators		73,085		22.6	%		72,259		27.6	%

Total	$	323,204		100.0	%	$	261,299		100.0	%

Revenue by U.S. State and Country


	For the Six Months Ended June 30, 2017					For the Six Months Ended June 30, 2016
U.S. States and Other Countries	Total Revenue		Percentage of Total Revenue			Total Revenue		Percentage of Total Revenue
Massachusetts	$	53,159		16.5	%	$	—		—
Texas		49,851		15.4	%		48,256		18.5	%
California		33,123		10.3	%		33,187		12.7	%
New Jersey		21,852		6.8	%		18,243		7.0	%
Arizona		15,542		4.8	%		11,722		4.5	%
All other states		93,080		28.7	%		99,931		38.2	%

Total U.S.	$	266,607		82.5	%	$	211,339		80.9	%
Germany	$	54,576		16.9	%	$	47,745		18.3	%
United Kingdom, Italy, and Spain		2,021		0.6	%		2,215		0.8	%

Total International	$	56,597		17.5	%	$	49,960		19.1	%

Grand Total	$	323,204		100.0	%	$	261,299		100.0	%

On a total gross asset basis, which is total assets before accumulated depreciation/amortization, 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 9 and 10 of Item 1 on this Form 10-Q), and assumes cash on hand is fully used in these transactions, our concentration as of June 30, 2017 as compared to December 31, 2016 is as follows (dollars in thousands):

Gross Assets by Operator


	As of June 30, 2017					As of December 31, 2016
Operators	Total Gross Assets		Percentage of Total Gross Assets			Total Gross Assets		Percentage of Total Gross Assets
Steward	$	3,410,874		37.4	%	$	1,250,000		17.5	%
Prime		1,116,694		12.2	%		1,144,055		16.0	%
MEDIAN		1,086,109		11.9	%		993,677		13.9	%
Ernest		630,811		6.9	%		627,906		8.8	%
RCCH		506,265		5.5	%		566,600		7.9	%
Other operators		1,977,356		21.7	%		2,259,980		31.7	%
Other assets		401,669		4.4	%		300,903		4.2	%

Total	$	9,129,778		100.0	%	$	7,143,121		100.0	%

Gross Assets by U.S. State and Country


	As of June 30, 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	$	1,262,041		13.8	%	$	1,250,000		17.5	%
Texas		1,230,945		13.5	%		947,443		13.3	%
Utah		1,083,152		11.9	%		107,151		1.5	%
California		542,883		5.9	%		542,889		7.6	%
Arizona		486,547		5.3	%		331,834		4.6	%
All other states		2,502,791		27.4	%		2,234,332		31.3	%
Other domestic assets		352,748		3.9	%		264,215		3.7	%

Total U.S.	$	7,461,107		81.7	%	$	5,677,864		79.5	%
Germany	$	1,421,350		15.6	%	$	1,281,649		17.9	%
United Kingdom, Italy, and Spain		198,400		2.2	%		146,920		2.1	%
Other international assets		48,921		0.5	%		36,688		0.5	%

Total International	$	1,668,671		18.3	%	$	1,465,257		20.5	%

Grand Total	$	9,129,778		100.0	%	$	7,143,121		100.0	%

On an individual property basis, we had no investment of any single property greater than 3.9% of our total gross assets as of June 30, 2017.