DIRECT FINANCING LEASES

12 Months Ended

Dec. 31, 2019

Direct Financing Leases [Abstract]

DIRECT FINANCING LEASES

NOTE 4 – DIRECT FINANCING LEASES

The components of investments in direct financing leases consist of the following:

	December 31,
	2019		2018
	(in thousands)
Minimum lease payments receivable	$	27,227	$	28,294
Less unearned income		(15,522)		(16,577)
Investment in non-Orianna direct financing leases		11,705		11,717
Investment in Orianna direct financing leases		—		223,745
Less allowance for loss on Orianna direct financing leases		—		(103,200)
Less allowance for loss on non-Orianna direct financing leases		(217)		—
Investment in direct financing leases – net	$	11,488	$	132,262
Properties subject to direct financing leases		2		17
Number of direct financing leases		2		3

The following table summarizes our investments in the direct financing leases by operator, net of allowance for loss:

	December 31,
	2019		2018
	(in thousands)
Orianna	$	—	$	120,545
Sun Mar Healthcare		11,488		11,491
Markleysburg Healthcare Investors, LP		—		226
Investment in direct financing leases - net	$	11,488	$	132,262

The following minimum rents are due under our direct financing leases for the next five years (in thousands):

	Contractual Rent		Straight-Line Rent		Total
2020	$	1,170		(1,037)	$	133
2021		1,084		(915)		169
2022		1,106		(1,023)		83
2023		1,128		(1,014)		114
2024		1,151		(1,003)		148
Thereafter		21,588		(10,530)		11,058
	$	27,227	$	(15,522)	$	11,705

In 2018, we sold one SNF with a carrying value of approximately $15.4 million subject to a direct financing lease to an unrelated third-party for approximately $15.4 million.  

Orianna Direct Financing Lease and Operating Lease

On November 27, 2013, we closed an aggregate $529 million purchase/leaseback transaction in connection with the acquisition of Ark Holding Company, Inc. (“Ark Holding”) by 4 West Holdings Inc. At closing, we acquired 55 SNFs and 1 ALF operated by Ark Holding and leased the facilities back to Ark Holding, now known as New Ark Investment Inc. (“New Ark” which does business as “Orianna Health Systems” and is herein referred to as “Orianna”), pursuant to four 50-year master leases with rental payments yielding 10.6% per annum over the term of the leases. The purchase/leaseback transaction was accounted for as a direct financing lease.

In addition to our direct financing leases with Orianna, we previously leased three facilities to Orianna under a master lease which was to expire in 2026. The remaining three facility lease was accounted for as an operating lease. Our recorded investment in the three facilities subject to this operating lease was $30.5 million as of December 31, 2018.  On October 31, 2018, Orianna rejected the operating lease and as a result we transitioned these three facilities to an existing operator during the first quarter of 2019.  

In 2017, we sold eight facilities subject to direct financing leases with Orianna in the Northwest region and the Southeast region of the U.S. with a carrying value of approximately $36.4 million for approximately $33.3 million to unrelated third parties.  These facilities were subject to direct financing leases with Orianna in the Northwest region and the Southeast region.  We recorded approximately $3.3 million of impairment related to these sales.  In addition, we transitioned nine SNFs, representing all of the facilities subject to another direct financing lease with Orianna in the Texas region, to an existing operator of ours pursuant to an operating lease.  In connection with this transaction, we recorded the real estate properties at our original cost basis of approximately $19.0 million, eliminated our investment in the Texas region direct financing lease and recorded an impairment of approximately $1.8 million.  In conjunction with this transaction, we also amended our Orianna Southeast region master lease to reduce the outstanding balance by $19.3 million.  As a result of the lease amendment in 2017, we recorded an impairment on our investment in direct financing lease of approximately $20.8 million in 2017.

In the third quarter of 2017, we recorded an allowance for loss on direct financing leases of $172.2 million with Orianna covering 38 facilities in the Southeast region of the U.S. The amount of the allowance was determined based on the fair value of the facilities subject to the direct financing lease. To estimate the fair value of the underlying collateral, we utilized an income approach and Level 3 inputs. Our estimate of fair value assumed annual rents ranging between $32.0 million and $38.0 million, rental yields between 9% and 10%, current and projected operating performance of the facilities, coverage ratios and bed values.  

In March 2018, Orianna commenced voluntary Chapter 11 proceedings in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the “Bankruptcy Court”).  As described in Orianna’s filings with the Bankruptcy Court, we entered into a Restructuring Support Agreement (“RSA”) that was expected to form the basis for Orianna’s restructuring.  The RSA provided for the recommencement, in April 2018, of partial rent payments at $1.0 million per month and established a specific timeline for the implementation of Orianna’s planned restructuring.  The RSA provided for the transition of 23 facilities to new operators and the potential sale of the remaining 19 facilities subject to the plan of reorganization (the “Plan”), if approved by the Bankruptcy Court.

To provide liquidity to Orianna during their Chapter 11 proceedings, we entered into a senior secured superpriority debtor-in-possession (“DIP”) credit agreement with Orianna for a revolving credit and term loan DIP financing of up to $30 million, which DIP financing was approved by the Bankruptcy Court on an interim basis on March 9, 2018 and on a final basis on May 14, 2018.

On July 23, 2018, we notified Orianna that it was in default under the DIP credit agreement.  On July 25, 2018, we terminated the RSA with its tenant, 4 West Holdings, and the sponsor of Orianna’s Plan.      

During the third quarter of 2018, we transitioned 22 facilities with a net carrying value of approximately $184.5 million from Orianna to five other existing operators with annual contractual rent of approximately $16.8 million.  See Note 3 – Properties.  In addition, during the second half of 2018, we sold Orianna’s headquarters and one SNF with a carrying value of approximately $5.5 million to unrelated third-parties for approximately $5.5 million.

During the fourth quarter of 2018, the Bankruptcy Court ruled that Orianna’s Plan, if confirmed, would allow Orianna to use the value of Orianna’s remaining facilities to pay the administrative costs of Orianna’s Chapter 11 cases and to pay certain other creditor claims, with the net amount of such value being paid to us.  As a result, we recorded $27.2 million in additional allowance for loss to reduce the remaining investment in the direct financing lease covering the remaining 15 facilities located in the Southeast region of the U.S.  As of December 31, 2018, our net investment in the Orianna direct financing lease was approximately $120.5 million, net of an allowance of $103.2 million. 

On January 11, 2019, pursuant to a Bankruptcy Court order, affiliates of Orianna purchased the remaining 15 SNFs subject to the direct financing lease with Orianna for $176 million of consideration, comprised of $146 million in cash received by Orianna and a $30.0 million seller note held by the Company.  The $30.0 million note bears interest at 6% per annum and matures on January 11, 2026.  Interest on the unpaid principal balance is due quarterly in arrears. Commencing on January 11, 2022, quarterly principal payments are due based on a 15-year amortization schedule on the then outstanding principal balance of the loan.  On the same date, Orianna repaid the DIP financing, including all related interest.  

On January 16, 2019, the Bankruptcy Court confirmed Orianna’s Plan, creating a Distribution Trust (the “Trust”) to distribute the proceeds from Orianna’s sale of the remaining 15 SNFs, as well as the Trust’s collections of Orianna’s accounts receivable portfolio. In January 2019, we reclassified our net investment in direct financing lease of $115.8 million from the Trust to other assets on our Consolidated Balance Sheet.  For the period from January 16, 2019 through December 31, 2019, we received approximately $94 million from the Trust as a partial liquidation.

In March 2019, we received updated information from the Trust indicating diminished collectability of the accounts receivable owed to us.  As a result, we recorded an additional $7.7 million allowance.  As of December 31, 2019, our remaining receivable from the Trust is approximately $14 million.  As of December 31, 2019, the Trust was comprised of approximately $14 million of cash.