(6) Net Investment in Direct Financing Leases
The components of net investment in DFLs consisted of the following (dollars in thousands):
|
December 31, | ||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Minimum lease payments receivable(1) |
$ | 24,808,386 | $ | 25,217,520 | |||
Estimated residual values |
4,134,405 | 4,010,514 | |||||
Less unearned income |
(21,789,392 | ) | (22,346,641 | ) | |||
Net investment in direct financing leases |
$ | 7,153,399 | $ | 6,881,393 | |||
Properties subject to direct financing leases |
364 | 361 | |||||
On November 21, 2013, the Company reached an agreement with Tenet Healthcare Corporation to modify and extend three acute care hospital leases. The leases were extended at current rent levels and contain annual CPI-based escalators under staggered terms from three to eight years with purchase options exercisable for a fixed price at the end of each term. As a result of these lease modifications, the Company reassessed the classification of the leases and accounted for the lease agreements as DFLs.
During the quarter ended September 30, 2013, the Company placed a 14-property senior housing DFL (the "DFL Portfolio") on non-accrual status. Based on the Company's determination that the collection of all rental payments is no longer reasonably assured, rental revenue for the DFL Portfolio will be recognized on a cash basis. Furthermore, the Company assessed the DFL Portfolio for impairment. The Company determined that the DFL Portfolio was not impaired at September 30, 2013, based on its belief that: (i) it is not probable that it will not collect all of the rental payments under the terms of the lease; and (ii) the fair value of the underlying collateral exceeds the DFL Portfolio's $376 million carrying amount. The fair value of the DFL Portfolio was estimated based on a discounted cash flow model, the inputs to which are considered to be a Level 3 measurement within the fair value hierarchy. Inputs to this valuation model include real estate capitalization rates, industry growth rates and operating margins, some of which influence the Company's expectation of future cash flows from the DFL Portfolio and, accordingly, the fair value of its investment. During the year ended December 31, 2013, 2012 and 2011, the Company recognized DFL income of $24.4 million, $27.8 million and $27.5 million, respectively, and received cash payments of $24.0 million, $23.8 million and $21.9 million, respectively, from the DFL Portfolio.
On April 7, 2011, the Company completed the acquisition of 334 HCR ManorCare properties subject to a single master lease that the Company classified as a DFL. See discussion of the HCR ManorCare Acquisition in Note 3.
Certain leases contain provisions that allow the tenants to elect to purchase the properties during or at the end of the lease terms for the aggregate initial investment amount plus adjustments, if any, as defined in the lease agreements. Certain leases also permit the Company to require the tenants to purchase the properties at the end of the lease terms.
Future minimum lease payments contractually due under DFLs at December 31, 2013, were as follows (in thousands):
Year |
Amount | |||
---|---|---|---|---|
2014 |
$ | 594,270 | ||
2015 |
606,618 | |||
2016 |
626,713 | |||
2017 |
638,775 | |||
2018 |
656,263 | |||
Thereafter |
21,685,747 | |||
|
$ | 24,808,386 | ||