Net Investment in Direct Financing Leases

6 Months Ended

Jun. 30, 2012

Net Investment in Direct Financing Leases

Net Investment in Direct Financing Leases

(6)Net Investment in Direct Financing Leases

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 direct financing lease (“DFL”). See discussion of the HCR ManorCare Acquisition in Note 3.

The components of net investment in DFLs consisted of the following (dollars in thousands):

	June 30,			December 31,
	2012			2011
Minimum lease payments receivable(1)	$	25,483,105		$	25,744,161
Estimated residual values	4,010,514			4,010,514
Less unearned income	(22,688,690		)	(23,026,898		)
Net investment in direct financing leases	$	6,804,929		$	6,727,777
Properties subject to direct financing leases	361			361

(1)The minimum lease payments receivable are primarily attributable to HCR ManorCare ($24.3 billion and $24.5 billion at June 30, 2012 and December 31, 2011, respectively). The triple-net master lease with HCR ManorCare provides for annual rent of $489 million beginning April 1, 2012. The rent increases by 3.5% per year over the next four years and by 3% for the remaining portion of the initial lease term. The properties are grouped into four pools, and HCR ManorCare has a one-time extension option for each pool with rent increased for the first year of the extension option to the greater of fair market rent or a 3% increase over the rent for the prior year. Including the extension options, which the Company determined to be bargain renewal options, the four leased pools had total initial available terms ranging from 23 to 35 years.

Certain of the non-HCR ManorCare 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.