3. Real Estate and Lending Activities

Acquisitions

We acquired the following assets (in thousands)

	For the Six Months Ended June 30,
	2018			2017
Assets Acquired
Land and land improvements	$	16,121		$	87,620
Building		232,409			399,867
Intangible lease assets — subject to amortization (weighted average useful life 20.0 years for 2018 and 28.5 years for 2017)		25,198			73,722
Net investments in direct financing leases		—			40,450
Liabilities assumed		—			(878	)
Total assets acquired	$	273,728		$	600,781
Loans repaid(1)		(259,378	)		—
Total net assets acquired	$	14,350		$	600,781

(1)

Includes $259.4 million of loans advanced to Steward Health Care System LLC (“Steward”) in 2017 and repaid in 2018 as described more fully below.

2018 Activity

On June 27, 2018, we acquired the fee simple real estate of two general acute care hospitals in Massachusetts from Steward in exchange for the reduction of $259.4 million of mortgage loans made to Steward in October 2016, along with an additional $14.4 million in cash consideration. These properties are being leased to Steward pursuant to the original master lease from October 2016 that has a 15-year term with three five-year extension options, plus consumer-price indexed increases.

2017 Activity

MEDIAN Transactions

On June 22, 2017, we acquired an acute care hospital in Germany for a purchase price of €19.4 million. This property is leased to affiliates of Median Kliniken S.à.r.l. (“MEDIAN”), pursuant to the original master lease agreement effective in 2015 and expiring December 2042 with annual escalators at the greater of one percent or 70% of the change in German CPI.

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 27-year lease 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 December 2016. The final two properties closed post June 30, 2017 for a purchase price of €39.2 million.

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 and as described above.

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”), 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 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, pursuant to the existing long-term master lease entered into with Steward in October 2016 and as described above.

On May 1, 2017, we also 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 million 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.

Development Activities

During the first six months of 2018, we completed construction on Ernest Flagstaff. This $25.5 million inpatient rehabilitation facility located in Flagstaff, Arizona opened on March 1, 2018 and is being leased to Ernest pursuant to a stand-alone lease, with terms generally similar to the original master lease.

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

Property	Commitment		Costs Incurred as of June 30, 2018		Estimated Completion Date
Circle Health (Birmingham, England)	$	44,825	$	20,942	1Q 2019
Circle Health Rehabilitation (Birmingham, England)		22,269		3,360	3Q 2019
Surgery Partners (Idaho Falls, Idaho)		113,468		23,318	1Q 2020
	$	180,562	$	47,620

Disposals

2018 Activity

Joint Venture Transaction

On June 7, 2018, we entered into a subscription agreement with Primotop Holdings S.à.r.l. (“Primotop”), an entity managed by Primonial Group, pursuant to which Primotop will acquire a 50% interest by way of a joint venture in the real estate of 71 post-acute hospitals in Germany that we currently own, with an aggregate agreed valuation of approximately €1.635 billion. The remaining 50% interest in the joint venture will be retained by us. Immediately following the closing, which is expected to occur during the third quarter of 2018, the joint venture is expected to make cash distributions to us in an aggregate amount of approximately €1.14 billion from the proceeds of the cash contributions from Primotop and certain secured debt financings within the joint venture. In preparation of this joint venture, we issued such secured debt on these properties on August 3, 2018, resulting in gross proceeds of €655 million. At June 30, 2018, the 71 facilities subject to the joint venture were designated as held for sale and included the following net assets (in thousands):

Real estate held for sale	$	1,263,257
Straight-line rent receivables		36,246
	$	1,299,503

Other Transactions

On June 4, 2018, we sold three long-term acute care hospitals located in California, Texas, and Oregon, that were leased and operated by Vibra Healthcare, LLC (“Vibra”), which included our equity investment in operations of the Texas facility. Total proceeds from the transaction were $53.3 million in cash, a mortgage loan in the amount of $18.3 million, and a $1.5 million working capital loan. The transaction resulted in a gain on real estate of $24.2 million, which was partially offset by a $5.1 million non-cash charge to revenue to write-off related straight-line rent receivables.

On March 1, 2018, we sold the real estate of St. Joseph Medical Center in Houston, Texas, for approximately $148 million to Steward. In return, we received a mortgage loan equal to the purchase price, with such loan secured by the underlying real estate. The mortgage loan has terms consistent with the other mortgage loans in the Steward portfolio. This transaction resulted in a gain of $1.5 million, offset by a $1.7 million non-cash charge to revenue to write-off related straight-line rent receivables on this property.

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.

Summary of Operations for Disposed Assets in 2018

The properties sold during 2018 and the assets held for sale (from the Joint Venture Transaction) at June 30, 2018, do not meet the definition of discontinued operations. However, the following represents the operating results (excluding gain on sale and any non-cash charges such as straight-line rent write-offs) from these properties (excluding the St. Joseph sale which was converted to a mortgage loan) for the periods presented (in thousands):

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017
Revenues	$	34,142		$	28,817		$	69,900		$	55,536
Real estate depreciation and amortization		(6,129	)		(7,070	)		(14,902	)		(13,595	)
Property-related expenses		(14	)		(1	)		(255	)		(1	)
Other income (expense)		(410	)		(5,501	)		(969	)		(7,045	)
Income from real estate dispositions, net	$	27,589		$	16,245		$	53,774		$	34,895

As noted previously, we will retain a 50% interest in the Joint Venture Transaction; however, such interest has not been factored into the summary of operations above.

Leasing Operations

At June 30, 2018, leases on 14 Ernest facilities, ten Prime Healthcare Services, Inc. (“Prime”) facilities, and two Alecto facilities are accounted for as direct financing leases (“DFLs”). The components of our net investment in DFLs consisted of the following (in thousands):

	As of June 30, 2018			As of December 31, 2017
Minimum lease payments receivable	$	2,207,355		$	2,294,081
Estimated residual values		434,769			448,339
Less: Unearned income		(1,953,697	)		(2,043,693	)
Net investment in direct financing leases	$	688,427		$	698,727

On March 15, 2018, we entered into a new lease agreement of our long-term acute care facility in Boise, Idaho (the “Boise Lease”) with a joint venture formed by Vibra and Ernest. The new lease has an initial 15-year fixed term (ending March 2033) with three extension options of five years each. With this transaction, we incurred a non-cash charge of $1.5 million to write-off DFL unbilled interest associated with the previous lease to Ernest on this property.

Adeptus Health

As noted in previous filings, we have 16 properties that are transitioning away from Adeptus Health in stages over a two year period as part of Adeptus Health’s confirmed plan of reorganization under Chapter 11 of the Bankruptcy Code. On January 1, 2018 and April 1, 2018, Adeptus Health vacated and stopped making rent payments on five and three properties, respectively. Another seven properties will be transitioned away from Adeptus Health on October 1, 2018, with the remaining property on October 1, 2019. During the transition period, Adeptus Health has and will continue to make lease payments. As a result of the shortening of our lease term on these properties, we recorded a $3.9 million charge to accelerate the amortization of the straight-line rent receivables in the first half of 2018. At June 30, 2018, our investment in these 16 facilities approximates 1% of our total assets. Although no assurances can be made that we will not recognize a loss in the future, we believe at June 30, 2018 that our plans to sell or re-lease these 16 transition facilities will not result in any material loss or impairment.

At June 30, 2018, excluding the 16 transition properties, we have 21 properties leased to Adeptus Health representing $131.3 million or 1.4% of our total assets. During the last fifteen months, we have re-tenanted 22 properties with an investment of $172.1 million to strong credit worthy operators including:

Three Louisiana freestanding emergency facilities to Ochsner Clinic Foundation (“Ochsner”) on April 4, 2017;

11 Colorado freestanding emergency facilities to UCHealth on December 1, 2017; and

Eight Arizona facilities to Dignity Health on June 8, 2018.

Through June 30, 2018, all rent has been paid on these facilities, and we have only incurred a $0.5 million charge to-date related to the write-off of straight-line rent receivables on the facilities re-tenanted to Ochsner in 2017.

Gilbert and Florence Facilities

In the first quarter of 2018, we terminated the lease at our Gilbert and Florence, Arizona facilities due to the tenant not meeting its rent obligations pursuant to the lease. As a result of the lease terminating, we recorded a charge of $1.1 million to reserve against the straight-line rent receivables in February 2018. On April 25, 2018, this former tenant filed for involuntary bankruptcy. At June 30, 2018, all outstanding receivables were completely reserved. Although no assurances can be made that we will not have any impairment charges in the future, we believe our investment in the Gilbert and Florence facilities of $37.8 million at June 30, 2018, is fully recoverable.

Loans

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

	As of June 30, 2018		As of December 31, 2017
Mortgage loans	$	1,686,866	$	1,778,316
Acquisition loans		118,290		118,448
Working capital and other loans		29,565		31,761
	$	1,834,721	$	1,928,525

The decrease in mortgage loans relates to the use of two Steward mortgage loans to fund our acquisition of the related fee simple real estate of two facilities on June 27, 2018 – see “Acquisitions” of this Note 3 for further information. This decrease was partially offset by the new mortgage loans made on the St. Joseph property on March 1, 2018 and as part of the Vibra disposal transaction on June 4, 2018 – see “Disposals” of this Note 3 for further information.

Our non-mortgage loans typically consist of loans to our tenants for acquisitions and working capital purposes. At June 30, 2018, acquisition loans includes $113.6 million in loans to Ernest.

Concentrations of Credit Risk

Our revenue concentration for the six months ended June 30, 2018 as compared to the prior year is as follows (dollars in thousands):

Revenue by Operator

	For the Six Months Ended June 30,
	2018					2017
Operators	Total Revenue		Percentage of Total Revenue			Total Revenue		Percentage of Total Revenue
Steward (1)	$	147,868		36.3	%	$	72,518		22.4	%
Prime		63,590		15.6	%		63,059		19.5	%
MEDIAN		57,289		14.1	%		47,744		14.8	%
Ernest		34,542		8.5	%		35,269		10.9	%
RCCH		20,414		5.0	%		19,632		6.1	%
Other operators		83,245		20.5	%		84,982		26.3	%
Total	$	406,948		100.0	%	$	323,204		100.0	%

(1)

Includes revenue from IASIS prior to being acquired by Steward on September 29, 2017.

Revenue by U.S. State and Country

	For the Six Months Ended June 30,
	2018					2017
U.S. States and Other Countries	Total Revenue		Percentage of Total Revenue			Total Revenue		Percentage of Total Revenue
Texas	$	60,361		14.8	%	$	49,851		15.4	%
Massachusetts		54,433		13.4	%		53,159		16.5	%
Utah		41,734		10.3	%		5,057		1.6	%
California		29,422		7.2	%		33,123		10.3	%
Arizona		23,286		5.7	%		15,542		4.8	%
All other states		121,307		29.8	%		109,875		33.9	%
Total U.S.	$	330,543		81.2	%	$	266,607		82.5	%
Germany	$	74,176		18.2	%	$	54,576		16.9	%
United Kingdom, Italy, and Spain		2,229		0.6	%		2,021		0.6	%
Total International	$	76,405		18.8	%	$	56,597		17.5	%
Grand Total	$	406,948		100.0	%	$	323,204		100.0	%

On an individual property basis, we had no investment of any single property greater than 4% of our total assets as of June 30, 2018.