mpw-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                          to                         

Commission file number 001-32559

Commission file number 333-177186

 

MEDICAL PROPERTIES TRUST, INC.

MPT OPERATING PARTNERSHIP, L.P.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

 

MARYLAND

DELAWARE

 

20-0191742

20-0242069

(State or other jurisdiction of

incorporation or organization)

 

(I. R. S. Employer

Identification No.)

 

 

 

 

1000 URBAN CENTER DRIVE, SUITE 501

BIRMINGHAM, AL

 

35242

(Address of principal executive offices)

 

(Zip Code)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (205) 969-3755

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

Large accelerated filer

 

  (Medical Properties Trust, Inc. only)

  

Accelerated filer

 

Non-accelerated filer

 

  (MPT Operating Partnership, L.P. only)

  

Smaller reporting company

 

 

 

 

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 2, 2018, Medical Properties Trust, Inc. had 364,941,199 shares of common stock, par value $0.001, outstanding.

 

 


 

EXPLANATORY NOTE

This report combines the Quarterly Reports on Form 10-Q for the three and nine months ended September 30, 2018 of Medical Properties Trust, Inc., a Maryland corporation, and MPT Operating Partnership, L.P., a Delaware limited partnership, through which Medical Properties Trust, Inc. conducts substantially all of its operations. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” “our company,” “Medical Properties,” “MPT,” or “the company” refer to Medical Properties Trust, Inc. together with its consolidated subsidiaries, including MPT Operating Partnership, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to “our operating partnership” or “the operating partnership” refer to MPT Operating Partnership, L.P. together with its consolidated subsidiaries.

 

 

 

 

 

 


 

MEDICAL PROPERTIES TRUST, INC. AND MPT OPERATING PARTNERSHIP, L.P.

AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED September 30, 2018

Table of Contents

 

 

Page

PART I — FINANCIAL INFORMATION

3

Item 1 Financial Statements

3

Medical Properties Trust, Inc. and Subsidiaries

 

Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017

3

Condensed Consolidated Statements of Net Income for the Three and Nine Months Ended September 30, 2018 and 2017

4

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017

5

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

6

MPT Operating Partnership, L.P. and Subsidiaries

 

Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017

7

Condensed Consolidated Statements of Net Income for the Three and Nine Months Ended September 30, 2018 and 2017

8

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017

9

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

10

Medical Properties Trust, Inc. and MPT Operating Partnership, L.P.

 

Notes to Condensed Consolidated Financial Statements

11

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3 Quantitative and Qualitative Disclosures about Market Risk

33

Item 4 Controls and Procedures

34

PART II — OTHER INFORMATION

35

Item 1 Legal Proceedings

35

Item 1A Risk Factors

35

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3 Defaults Upon Senior Securities

35

Item 4 Mine Safety Disclosures

35

Item 5 Other Information

35

Item 6 Exhibits

36

SIGNATURE

37

 

 

 

2


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

 

September 30,

2018

 

 

December 31,

2017

 

(In thousands, except per share amounts)

 

(Unaudited)

 

 

(Note 2)

 

Assets

 

 

 

 

 

 

 

 

Real estate assets

 

 

 

 

 

 

 

 

Land, buildings and improvements, intangible lease assets, and other

 

$

4,926,462

 

 

$

5,944,220

 

Mortgage loans

 

 

1,428,069

 

 

 

1,778,316

 

Net investment in direct financing leases

 

 

690,897

 

 

 

698,727

 

Gross investment in real estate assets

 

 

7,045,428

 

 

 

8,421,263

 

Accumulated depreciation and amortization

 

 

(432,279

)

 

 

(455,712

)

Net investment in real estate assets

 

 

6,613,149

 

 

 

7,965,551

 

Cash and cash equivalents

 

 

710,965

 

 

 

171,472

 

Interest and rent receivables

 

 

87,939

 

 

 

78,970

 

Straight-line rent receivables

 

 

195,329

 

 

 

185,592

 

Other loans

 

 

482,453

 

 

 

150,209

 

Other assets

 

 

684,681

 

 

 

468,494

 

Total Assets

 

$

8,774,516

 

 

$

9,020,288

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Debt, net

 

$

4,043,849

 

 

$

4,898,667

 

Accounts payable and accrued expenses

 

 

202,033

 

 

 

211,188

 

Deferred revenue

 

 

11,162

 

 

 

18,178

 

Lease deposits and other obligations to tenants

 

 

30,964

 

 

 

57,050

 

Total liabilities

 

 

4,288,008

 

 

 

5,185,083

 

Equity

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value. Authorized 10,000 shares;

   no shares outstanding

 

 

-

 

 

 

-

 

Common stock, $0.001 par value. Authorized 500,000 shares;

   issued and outstanding — 364,858 shares at September 30, 2018 and

   364,424 shares at December 31, 2017

 

 

365

 

 

 

364

 

Additional paid-in capital

 

 

4,343,768

 

 

 

4,333,027

 

Retained earnings (deficit)

 

 

179,703

 

 

 

(485,932

)

Accumulated other comprehensive loss

 

 

(50,569

)

 

 

(26,049

)

Treasury shares, at cost

 

 

(777

)

 

 

(777

)

Total Medical Properties Trust, Inc. Stockholders’ Equity

 

 

4,472,490

 

 

 

3,820,633

 

Non-controlling interests

 

 

14,018

 

 

 

14,572

 

Total equity

 

 

4,486,508

 

 

 

3,835,205

 

Total Liabilities and Equity

 

$

8,774,516

 

 

$

9,020,288

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Net Income

(Unaudited)

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

(In thousands, except per share amounts)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rent billed

 

$

118,238

 

 

$

110,930

 

 

$

369,076

 

 

$

311,140

 

Straight-line rent

 

 

18,293

 

 

 

17,505

 

 

 

49,157

 

 

 

46,561

 

Income from direct financing leases

 

 

18,998

 

 

 

19,115

 

 

 

55,613

 

 

 

55,307

 

Interest and fee income

 

 

41,467

 

 

 

29,030

 

 

 

130,098

 

 

 

86,776

 

Total revenues

 

 

196,996

 

 

 

176,580

 

 

 

603,944

 

 

 

499,784

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

57,215

 

 

 

42,759

 

 

 

172,364

 

 

 

120,498

 

Real estate depreciation and amortization

 

 

29,949

 

 

 

31,915

 

 

 

100,217

 

 

 

88,994

 

Property-related

 

 

2,719

 

 

 

1,519

 

 

 

6,823

 

 

 

4,000

 

General and administrative

 

 

20,982

 

 

 

15,011

 

 

 

58,352

 

 

 

43,287

 

Acquisition costs

 

 

506

 

 

 

7,434

 

 

 

917

 

 

 

20,996

 

Total expenses

 

 

111,371

 

 

 

98,638

 

 

 

338,673

 

 

 

277,775

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of real estate and other, net

 

 

647,204

 

 

 

18

 

 

 

672,822

 

 

 

7,431

 

Debt refinancing costs

 

 

-

 

 

 

(4,414

)

 

 

-

 

 

 

(18,794

)

Other

 

 

5,711

 

 

 

3,865

 

 

 

6,245

 

 

 

8,999

 

Total other income (expense)

 

 

652,915

 

 

 

(531

)

 

 

679,067

 

 

 

(2,364

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax

 

 

738,540

 

 

 

77,411

 

 

 

944,338

 

 

 

219,645

 

Income tax expense

 

 

(2,064

)

 

 

(530

)

 

 

(4,802

)

 

 

(783

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

736,476

 

 

 

76,881

 

 

 

939,536

 

 

 

218,862

 

Net income attributable to non-controlling interests

 

 

(442

)

 

 

(417

)

 

 

(1,334

)

 

 

(1,013

)

Net income attributable to MPT common stockholders

 

$

736,034

 

 

$

76,464

 

 

$

938,202

 

 

$

217,849

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share — basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to MPT common stockholders

 

$

2.01

 

 

$

0.21

 

 

$

2.56

 

 

$

0.63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share — diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to MPT common stockholders

 

$

2.00

 

 

$

0.21

 

 

$

2.56

 

 

$

0.63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding — basic

 

 

365,024

 

 

 

364,315

 

 

 

364,934

 

 

 

345,076

 

Weighted average shares outstanding — diluted

 

 

366,467

 

 

 

365,046

 

 

 

365,784

 

 

 

345,596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.25

 

 

$

0.24

 

 

$

0.75

 

 

$

0.72

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

736,476

 

 

$

76,881

 

 

$

939,536

 

 

$

218,862

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

 

(8,216

)

 

 

17,426

 

 

 

(24,520

)

 

 

57,738

 

Total comprehensive income

 

 

728,260

 

 

 

94,307

 

 

 

915,016

 

 

 

276,600

 

Comprehensive income attributable to non-controlling

   interests

 

 

(442

)

 

 

(417

)

 

 

(1,334

)

 

 

(1,013

)

Comprehensive income attributable to MPT common

   stockholders

 

$

727,818

 

 

$

93,890

 

 

$

913,682

 

 

$

275,587

 

 

See accompanying notes to condensed consolidated financial statements.

5


 

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For the Nine Months

Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

939,536

 

 

$

218,862

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

106,508

 

 

 

93,805

 

Amortization of deferred financing costs and debt discount

 

 

5,543

 

 

 

4,748

 

Direct financing lease interest accretion

 

 

(7,213

)

 

 

(7,276

)

Straight-line rent revenue

 

 

(64,840

)

 

 

(47,678

)

Share-based compensation

 

 

11,695

 

 

 

7,148

 

Gain from sale of real estate and other, net

 

 

(672,822

)

 

 

(7,431

)

Straight-line rent and other write-off

 

 

17,615

 

 

 

1,117

 

Debt refinancing costs

 

 

-

 

 

 

18,794

 

Other adjustments

 

 

(21,354

)

 

 

(7,140

)

Changes in:

 

 

 

 

 

 

 

 

Interest and rent receivables

 

 

(10,158

)

 

 

(14,613

)

Accounts payable and accrued expenses

 

 

(5,387

)

 

 

(40,378

)

Net cash provided by operating activities

 

 

299,123

 

 

 

219,958

 

Investing activities

 

 

 

 

 

 

 

 

Cash paid for acquisitions and other related investments

 

 

(1,166,618

)

 

 

(2,152,069

)

Net proceeds from sale of real estate

 

 

1,513,666

 

 

 

64,362

 

Principal received on loans receivable

 

 

531,772

 

 

 

6,760

 

Investment in loans receivable

 

 

(174,494

)

 

 

(18,574

)

Construction in progress and other

 

 

(32,425

)

 

 

(52,953

)

Other investments, net

 

 

(63,080

)

 

 

(73,982

)

Net cash provided by (used for) investing activities

 

 

608,821

 

 

 

(2,226,456

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from term debt

 

 

759,735

 

 

 

2,355,280

 

Payments of term debt

 

 

-

 

 

 

(688,221

)

Revolving credit facilities, net

 

 

(818,116

)

 

 

155,089

 

Distributions paid

 

 

(272,360

)

 

 

(239,211

)

Lease deposits and other obligations to tenants

 

 

(25,511

)

 

 

(8,346

)

Proceeds from sale of common shares, net of offering costs

 

 

-

 

 

 

548,055

 

Other financing activities

 

 

(3,106

)

 

 

(27,167

)

Net cash (used for) provided by financing activities

 

 

(359,358

)

 

 

2,095,479

 

Increase in cash, cash equivalents and restricted cash for period

 

 

548,586

 

 

 

88,981

 

Effect of exchange rate changes

 

 

(8,313

)

 

 

15,136

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

172,247

 

 

 

84,882

 

Cash, cash equivalents and restricted cash at end of period

 

$

712,520

 

 

$

188,999

 

Interest paid

 

$

175,715

 

 

$

131,708

 

Supplemental schedule of non-cash financing activities:

 

 

 

 

 

 

 

 

Distributions declared, not paid

 

$

91,547

 

 

$

87,519

 

Cash, cash equivalents and restricted cash are comprised of the following:

 

 

 

 

 

 

 

 

Beginning of period:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

171,472

 

 

$

83,240

 

Restricted cash, included in Other assets

 

 

775

 

 

 

1,642

 

 

 

$

172,247

 

 

$

84,882

 

End of period:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

710,965

 

 

$

188,224

 

Restricted cash, included in Other assets

 

 

1,555

 

 

 

775

 

 

 

$

712,520

 

 

$

188,999

 

 

See accompanying notes to condensed consolidated financial statements.

6


 

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

 

 

September 30,

2018

 

 

December 31,

2017

 

(In thousands)

 

(Unaudited)

 

 

(Note 2)

 

Assets

 

 

 

 

 

 

 

 

Real estate assets

 

 

 

 

 

 

 

 

Land, buildings and improvements, intangible lease assets, and other

 

$

4,926,462

 

 

$

5,944,220

 

Mortgage loans

 

 

1,428,069

 

 

 

1,778,316

 

Net investment in direct financing leases

 

 

690,897

 

 

 

698,727

 

Gross investment in real estate assets

 

 

7,045,428

 

 

 

8,421,263

 

Accumulated depreciation and amortization

 

 

(432,279

)

 

 

(455,712

)

Net investment in real estate assets

 

 

6,613,149

 

 

 

7,965,551

 

Cash and cash equivalents

 

 

710,965

 

 

 

171,472

 

Interest and rent receivables

 

 

87,939

 

 

 

78,970

 

Straight-line rent receivables

 

 

195,329

 

 

 

185,592

 

Other loans

 

 

482,453

 

 

 

150,209

 

Other assets

 

 

684,681

 

 

 

468,494

 

Total Assets

 

$

8,774,516

 

 

$

9,020,288

 

Liabilities and Capital

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Debt, net

 

$

4,043,849

 

 

$

4,898,667

 

Accounts payable and accrued expenses

 

 

110,155

 

 

 

121,465

 

Deferred revenue

 

 

11,162

 

 

 

18,178

 

Lease deposits and other obligations to tenants

 

 

30,964

 

 

 

57,050

 

Payable due to Medical Properties Trust, Inc.

 

 

91,488

 

 

 

89,333

 

Total liabilities

 

 

4,287,618

 

 

 

5,184,693

 

Capital

 

 

 

 

 

 

 

 

General Partner — issued and outstanding — 3,648 units at September 30, 2018

   and 3,644 units at December 31, 2017

 

 

45,261

 

 

 

38,489

 

Limited Partners:

 

 

 

 

 

 

 

 

Common units — issued and outstanding — 361,210 units at

   September 30, 2018 and 360,780 units at December 31, 2017

 

 

4,478,188

 

 

 

3,808,583

 

LTIP units — issued and outstanding — 232 units at September 30, 2018

   and 292 units at December 31, 2017

 

 

-

 

 

 

-

 

Accumulated other comprehensive loss

 

 

(50,569

)

 

 

(26,049

)

Total MPT Operating Partnership, L.P. Capital

 

 

4,472,880

 

 

 

3,821,023

 

Non-controlling interests

 

 

14,018

 

 

 

14,572

 

Total capital

 

 

4,486,898

 

 

 

3,835,595

 

Total Liabilities and Capital

 

$

8,774,516

 

 

$

9,020,288

 

 

See accompanying notes to condensed consolidated financial statements.

7


 

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Condensed Consolidated Statements of Net Income

(Unaudited)

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

(In thousands, except per unit amounts)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rent billed

 

$

118,238

 

 

$

110,930

 

 

$

369,076

 

 

$

311,140

 

Straight-line rent

 

 

18,293

 

 

 

17,505

 

 

 

49,157

 

 

 

46,561

 

Income from direct financing leases

 

 

18,998

 

 

 

19,115

 

 

 

55,613

 

 

 

55,307

 

Interest and fee income

 

 

41,467

 

 

 

29,030

 

 

 

130,098

 

 

 

86,776

 

Total revenues

 

 

196,996

 

 

 

176,580

 

 

 

603,944

 

 

 

499,784

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

57,215

 

 

 

42,759

 

 

 

172,364

 

 

 

120,498

 

Real estate depreciation and amortization

 

 

29,949

 

 

 

31,915

 

 

 

100,217

 

 

 

88,994

 

Property-related

 

 

2,719

 

 

 

1,519

 

 

 

6,823

 

 

 

4,000

 

General and administrative

 

 

20,982

 

 

 

15,011

 

 

 

58,352

 

 

 

43,287

 

Acquisition costs

 

 

506

 

 

 

7,434

 

 

 

917

 

 

 

20,996

 

Total expenses

 

 

111,371

 

 

 

98,638

 

 

 

338,673

 

 

 

277,775

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of real estate and other, net

 

 

647,204

 

 

 

18

 

 

 

672,822

 

 

 

7,431

 

Debt refinancing costs

 

 

-

 

 

 

(4,414

)

 

 

-

 

 

 

(18,794

)

Other

 

 

5,711

 

 

 

3,865

 

 

 

6,245

 

 

 

8,999

 

Total other income (expense)

 

 

652,915

 

 

 

(531

)

 

 

679,067

 

 

 

(2,364

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax

 

 

738,540

 

 

 

77,411

 

 

 

944,338

 

 

 

219,645

 

Income tax expense

 

 

(2,064

)

 

 

(530

)

 

 

(4,802

)

 

 

(783

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

736,476

 

 

 

76,881

 

 

 

939,536

 

 

 

218,862

 

Net income attributable to non-controlling interests

 

 

(442

)

 

 

(417

)

 

 

(1,334

)

 

 

(1,013

)

Net income attributable to MPT Operating

   Partnership partners

 

$

736,034

 

 

$

76,464

 

 

$

938,202

 

 

$

217,849

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per unit — basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to MPT Operating

   Partnership partners

 

$

2.01

 

 

$

0.21

 

 

$

2.56

 

 

$

0.63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per unit — diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to MPT Operating

   Partnership partners

 

$

2.00

 

 

$

0.21

 

 

$

2.56

 

 

$

0.63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average units outstanding — basic

 

 

365,024

 

 

 

364,315

 

 

 

364,934

 

 

 

345,076

 

Weighted average units outstanding — diluted

 

 

366,467

 

 

 

365,046

 

 

 

365,784

 

 

 

345,596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per unit

 

$

0.25

 

 

$

0.24

 

 

$

0.75

 

 

$

0.72

 

 

See accompanying notes to condensed consolidated financial statements.

8


 

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

736,476

 

 

$

76,881

 

 

$

939,536

 

 

$

218,862

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

 

(8,216

)

 

 

17,426

 

 

 

(24,520

)

 

 

57,738

 

Total comprehensive income

 

 

728,260

 

 

 

94,307

 

 

 

915,016

 

 

 

276,600

 

Comprehensive income attributable to non-controlling

   interests

 

 

(442

)

 

 

(417

)

 

 

(1,334

)

 

 

(1,013

)

Comprehensive income attributable to MPT Operating

   Partnership partners

 

$

727,818

 

 

$

93,890

 

 

$

913,682

 

 

$

275,587

 

 

See accompanying notes to condensed consolidated financial statements.

9


 

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For the Nine Months

Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

939,536

 

 

$

218,862

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

106,508

 

 

 

93,805

 

Amortization of deferred financing costs and debt discount

 

 

5,543

 

 

 

4,748

 

Direct financing lease interest accretion

 

 

(7,213

)

 

 

(7,276

)

Straight-line rent revenue

 

 

(64,840

)

 

 

(47,678

)

Unit-based compensation

 

 

11,695

 

 

 

7,148

 

Gain from sale of real estate and other, net

 

 

(672,822

)

 

 

(7,431

)

Straight-line rent and other write-off

 

 

17,615

 

 

 

1,117

 

Debt refinancing costs

 

 

-

 

 

 

18,794

 

Other adjustments

 

 

(21,354

)

 

 

(7,140

)

Changes in:

 

 

 

 

 

 

 

 

Interest and rent receivables

 

 

(10,158

)

 

 

(14,613

)

Accounts payable and accrued expenses

 

 

(5,387

)

 

 

(40,378

)

Net cash provided by operating activities

 

 

299,123

 

 

 

219,958

 

Investing activities

 

 

 

 

 

 

 

 

Cash paid for acquisitions and other related investments

 

 

(1,166,618

)

 

 

(2,152,069

)

Net proceeds from sale of real estate

 

 

1,513,666

 

 

 

64,362

 

Principal received on loans receivable

 

 

531,772

 

 

 

6,760

 

Investment in loans receivable

 

 

(174,494

)

 

 

(18,574

)

Construction in progress and other

 

 

(32,425

)

 

 

(52,953

)

Other investments, net

 

 

(63,080

)

 

 

(73,982

)

Net cash provided by (used for) investing activities

 

 

608,821

 

 

 

(2,226,456

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from term debt

 

 

759,735

 

 

 

2,355,280

 

Payments of term debt

 

 

-

 

 

 

(688,221

)

Revolving credit facilities, net

 

 

(818,116

)

 

 

155,089

 

Distributions paid

 

 

(272,360

)

 

 

(239,211

)

Lease deposits and other obligations to tenants

 

 

(25,511

)

 

 

(8,346

)

Proceeds from sale of units, net of offering costs

 

 

-

 

 

 

548,055

 

Other financing activities

 

 

(3,106

)

 

 

(27,167

)

Net cash (used for) provided by financing activities

 

 

(359,358

)

 

 

2,095,479

 

Increase in cash, cash equivalents and restricted cash for period

 

 

548,586

 

 

 

88,981

 

Effect of exchange rate changes

 

 

(8,313

)

 

 

15,136

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

172,247

 

 

 

84,882

 

Cash, cash equivalents and restricted cash at end of period

 

$

712,520

 

 

$

188,999

 

Interest paid

 

$

175,715

 

 

$

131,708

 

Supplemental schedule of non-cash financing activities:

 

 

 

 

 

 

 

 

Distributions declared, not paid

 

$

91,547

 

 

$

87,519

 

Cash, cash equivalents, and restricted cash are comprised of the following:

 

 

 

 

 

 

 

 

Beginning of period:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

171,472

 

 

$

83,240

 

Restricted cash, included in Other assets

 

 

775

 

 

 

1,642

 

 

 

$

172,247

 

 

$

84,882

 

End of period:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

710,965

 

 

$

188,224

 

Restricted cash, included in Other assets

 

 

1,555

 

 

 

775

 

 

 

$

712,520

 

 

$

188,999

 

 

See accompanying notes to condensed consolidated financial statements.

10


 

MEDICAL PROPERTIES TRUST, INC. AND MPT OPERATING PARTNERSHIP, L.P.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization

Medical Properties Trust, Inc., a Maryland corporation, was formed on August 27, 2003, under the Maryland General Corporation Law for the purpose of engaging in the business of investing in, owning, and leasing commercial real estate. Our operating partnership subsidiary, MPT Operating Partnership, L.P. (the “Operating Partnership”), through which we conduct all of our operations, was formed in September 2003. Through another wholly-owned subsidiary, Medical Properties Trust, LLC, we are the sole general partner of the Operating Partnership. At present, we directly own substantially all of the limited partnership interests in the Operating Partnership and have elected to report our required disclosures and that of the Operating Partnership on a combined basis except where material differences exist.

We have operated as a real estate investment trust (“REIT”) since 2004. Accordingly, we will generally not be subject to federal income tax in the United States (“U.S.”), provided that we continue to qualify as a REIT and our distributions to our stockholders equal or exceed our taxable income. Certain non-real estate activities we undertake are conducted by entities which we elected to be treated as taxable REIT subsidiaries (“TRS”). Our TRS entities are subject to both U.S. federal and state income taxes. For our properties located outside the U.S., we are subject to local taxes; however, we do not expect to incur additional taxes in the U.S. as such real estate related income currently flows through our REIT.

Our primary business strategy is to acquire and develop real estate and improvements, primarily for long-term lease to providers of healthcare services, such as operators of general acute care hospitals, inpatient physical rehabilitation hospitals, long-term acute care hospitals, surgery centers, centers for treatment of specific conditions, such as cardiac, pulmonary, cancer, and neurological hospitals, and other healthcare-oriented facilities. We also make mortgage and other loans to operators of similar facilities. In addition, we may obtain profits or equity interests in our tenants, from time to time, in order to enhance our overall return. We manage our business as a single business segment. Our properties are located in the U.S. and Europe.

2. Summary of Significant Accounting Policies

Unaudited Interim Condensed Consolidated Financial Statements: The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information, including rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The condensed consolidated balance sheet at December 31, 2017 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements.

For information about significant accounting policies, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017, and as updated in our Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018. There have been no material changes to these significant accounting policies.

Recent Accounting Developments:

Leases

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-02, “Leases”, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either financing or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.  In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”), allowing companies to record a cumulative adjustment to retained earnings in the period of adoption rather than requiring the restatement of prior periods.

11


 

We will adopt this new standard on January 1, 2019. We are continuing to evaluate this standard and the impact to us from both a lessor and lessee perspective. We do have leases in which we are the lessee, including ground leases, on which certain of our facilities reside, along with corporate office and equipment leases. Although we do not expect any change in the current operating lease classification of these leases, we will record a right-of-use asset and a lease liability on our balance sheet upon adoption of this standard, with any difference recorded as a cumulative adjustment in equity. From a lessor perspective, we do not expect any change in the current classification and accounting of our existing leases. However, we do expect certain non-lease components (such as certain operating expenses that we pay and our tenants reimburse us for pursuant to our “triple-net” leases) to be recorded gross versus net of the respective expenses upon adoption of this standard in 2019 in accordance with ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606). For those operating expenses that our tenants pay directly to third parties pursuant to our leases, we will continue to present on a net basis.

Reclassifications

Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to the current period presentation.

Variable Interest Entities

At September 30, 2018, we had loans to and/or equity investments in certain variable interest entities (“VIEs”), which are also tenants of our facilities. We have determined that we are not the primary beneficiary of these VIEs. The carrying value and classification of the related assets and maximum exposure to loss as a result of our involvement with these VIEs are presented below at September 30, 2018 (in thousands):

 

VIE Type

 

Maximum Loss

Exposure(1)

 

 

Asset Type

Classification

 

Carrying

Amount(2)

 

Loans, net

 

$

329,340

 

 

Mortgage and other loans

 

$

228,960

 

Equity investments

 

$

14,616

 

 

Other assets

 

$

-

 

 

(1)

Our maximum loss exposure related to loans with VIEs represents our current aggregate gross carrying value of the loan plus accrued interest and any other related assets (such as rent receivables), less any liabilities. Our maximum loss exposure related to our equity investment in VIEs represents the current carrying values of such investment plus any other related assets (such as rent receivables), less any liabilities.

(2)

Carrying amount reflects the net book value of our loan or equity interest only in the VIE.

For the VIE types above, we do not consolidate the VIE because we do not have the ability to control the activities (such as the day-to-day healthcare operations of our borrowers or investees) that most significantly impact the VIE’s economic performance. As of September 30, 2018, we were not required to provide financial support through a liquidity arrangement or otherwise to our unconsolidated VIEs, including circumstances in which they could be exposed to further losses (e.g., cash short falls).

Typically, our loans are collateralized by assets of the borrower (some assets of which are on the premises of facilities owned by us) and further supported by limited guarantees made by certain principals of the borrower.

See Note 3, Note 7 and Note 10 for additional description of the nature, purpose and activities of our more significant VIEs and interests therein, including Ernest Health Inc. (“Ernest”), which makes up $329 million of the maximum loss exposure above at September 30, 2018.

12


 

3. Real Estate and Lending Activities

Acquisitions

We acquired the following assets (in thousands):

 

 

 

For the Nine Months

Ended September 30,

 

 

 

2018

 

 

2017

 

Assets Acquired

 

 

 

 

 

 

 

 

Land and land improvements

 

$

57,452

 

 

$

220,864

 

Building

 

 

467,164

 

 

 

928,687

 

Intangible lease assets — subject to amortization (weighted average useful

   life 27.8 years for 2018 and 27.2 years for 2017)

 

 

60,277

 

 

 

162,946

 

Net investments in direct financing leases

 

 

-

 

 

 

40,450

 

Other loans

 

 

336,458

 

 

 

-

 

Mortgage loans

 

 

-

 

 

 

700,000

 

Equity investments

 

 

245,267

 

 

 

100,000

 

Liabilities assumed

 

 

-

 

 

 

(878

)

Total assets acquired

 

$

1,166,618

 

 

$

2,152,069

 

Loans repaid

 

 

(525,426

)

 

 

-

 

Total net assets acquired

 

$

641,192

 

 

$

2,152,069

 

 

2018 Activity

Joint Venture Transaction

On August 31, 2018, we completed a joint venture arrangement with Primotop Holdings S.à.r.l. (“Primotop”) pursuant to which we contributed 71 of our post-acute hospitals in Germany, with an aggregate fair value of €1.635 billion, for a 50% interest, while Primotop contributed cash for its 50% interest in the joint venture. As part of the transaction, we received an aggregate amount of approximately €1.14 billion, from the proceeds of the cash contributed by Primotop and the secured debt financing placed on the joint venture’s real estate (as more fully discussed in Note 4), and we recognized an approximate €500 million gain on sale. Our interest in the joint venture is made up of a 50% equity investment valued at approximately €211 million (included in “Other assets” on the condensed consolidated balance sheets), which is being accounted for under the equity method of accounting, and a €290 million shareholder loan (with terms identical to Primotop’s shareholder loan).

Other Transactions

On August 31, 2018, we acquired an acute care facility in Pasco, Washington for $17.5 million. The property is leased to RCCH Healthcare Partners (“RCCH”), pursuant to the existing long-term master lease entered into with RCCH in April 2016.

On August 28, 2018, we acquired three inpatient rehabilitation hospitals in Germany for €17.3 million (including real estate transfer taxes). These hospitals are part of a four-hospital portfolio that we agreed to purchase for an aggregate amount of €23 million (including real estate transfer taxes). The final property is expected to close in the fourth quarter of 2018. The properties are leased to affiliates of Median Kliniken S.à.r.l. (“MEDIAN”), pursuant to a new 27-year master lease with annual escalators at the greater of 1% or 70% of the change in German consumer price index (“CPI”).

During the second and third quarters of 2018, we acquired the fee simple real estate of four general acute care hospitals, three of which are located in Massachusetts and one located in Texas, from Steward Health Care System LLC (“Steward”) in exchange for the reduction of $525.4 million of mortgage loans made to Steward in October 2016 and March 2018, along with additional cash consideration. These properties are being leased to Steward pursuant to the original master lease from October 2016 that had an initial 15-year term with three five-year extension options, plus CPI increases.

13


 

2017 Activity

Steward Transactions

On September 29, 2017, we acquired from IASIS Healthcare LLC (“IASIS”) a portfolio of ten acute care hospitals and one behavioral health facility, along with ancillary land and buildings, that are located in Arizona, Utah, Texas, and Arkansas. The portfolio is now operated by Steward, which separately completed its acquisition of IASIS on September 29, 2017. Our investment in the portfolio included the acquisition of eight acute care hospitals and one behavioral health facility for approximately $700 million, the origination of $700 million in mortgage loans on two acute care hospitals, and a $100 million minority equity contribution in Steward, for a combined investment of approximately $1.5 billion. The nine facilities acquired are being leased to Steward pursuant to the original long-term master lease agreement entered into in October 2016. The initial term, extension options, and interest rate of the mortgage loans are substantially similar to the initial term, renewal options, and lease rate of the master lease.

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 original long-term master lease entered into in October 2016.

MEDIAN Transactions

During the third quarter of 2017, we acquired two rehabilitation hospitals in Germany for an aggregate purchase price of €39.2 million, in addition to 11 rehabilitation hospitals in Germany that we acquired in the second quarter of 2017 for an aggregate purchase price of €127 million. These 13 properties are leased to MEDIAN, pursuant to a third master lease that has a fixed term ending in August 2043 with annual escalators at the greater of 1% or 70% of the change in German CPI. These acquisitions are the final properties 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.

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 MEDIAN pursuant to the original master lease agreement effective in 2015 and expiring December 2042 with annual escalators at the greater of 1% or 70% of the change in German CPI.

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 acquire in September 2016 for an aggregate amount of €44.1 million.  This property is leased to 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. With these acquisitions, we also obtained a 20% interest in the operator of these facilities.

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, 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 $16.7 million of revenue and $12.7 million of income (excluding related acquisition expenses and taxes) for the three months ended September 30, 2017, and $25.1 million of revenue and $18.8 million of income (excluding related acquisition expenses and taxes) for the nine months ended September 30, 2017. In addition, we expensed $5.4 million and $15.6 million of acquisition-related costs on these 2017 acquisitions for the three and nine months ended September 30, 2017, respectively.

Development Activities

During the first nine months of 2018, we completed the 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 similar to the original master lease.

14


 

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

 

Property

 

Commitment

 

 

Costs Incurred as of

September 30, 2018

 

 

Estimated

Rent

Commencement

Date

Circle Health (Birmingham, England)

 

$

44,228

 

 

$

24,113

 

 

1Q 2019

Circle Health Rehabilitation (Birmingham, England)

 

 

21,973

 

 

 

5,304

 

 

3Q 2019

Surgery Partners (Idaho Falls, Idaho)

 

 

113,468

 

 

 

30,379

 

 

1Q 2020

 

 

$

179,669

 

 

$

59,796

 

 

 

 

Disposals

2018 Activity

On August 31, 2018, we completed the previously described joint venture arrangement with Primotop, in which we contributed the real estate of 71 of our post-acute hospitals in Germany, with a fair value of approximately €1.635 billion, resulting in a gain of approximately €500 million.  See “Acquisitions” in this Note 3 for further details on this transaction.

On August 31, 2018, we sold a general acute care hospital located in Houston, Texas that was leased and operated by North Cypress for $148 million.  The transaction resulted in a gain on sale of $102.4 million, which was partially offset by a net $2.5 million non-cash charge to revenue to write-off related straight-line rent receivables.

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 had 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 do not meet the definition of discontinued operations.  However, the following represents the operating results from these properties (excluding the St. Joseph sale in March 2018) for the periods presented (in thousands):

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues(1)

 

$

20,115

 

 

$

35,846

 

 

$

88,838

 

 

$

95,320

 

Real estate depreciation and amortization(2)

 

 

(237

)

 

 

(8,786

)

 

 

(15,849

)

 

 

(23,092

)

Property-related expenses

 

 

(265

)

 

 

(388

)

 

 

(531

)

 

 

(394

)

Other(3)

 

 

692,362

 

 

 

(3,303

)

 

 

715,246

 

 

 

(11,211

)

Income from real estate dispositions, net

 

$

711,975

 

 

$

23,369

 

 

$

787,704

 

 

$

60,623

 

 

 

(1)

Includes $2.5 million and $7.6 million of straight-line rent and other write-offs associated with the disposal transactions for the three and nine months ended September 30, 2018, respectively.

 

(2)

Lower in 2018 as we stopped depreciation on properties once deemed held for sale, such as with the 71 properties on June 30, 2018.

 

(3)

Includes $695.2 million of gains on sale for the three months ended September 30, 2018 and $719.4 million for the nine months ended September 30, 2018.

15


 

Leasing Operations

At September 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 September 30, 2018

 

 

As of December 31, 2017

 

Minimum lease payments receivable

 

$

2,190,840

 

 

$

2,294,081

 

Estimated residual values

 

 

434,769

 

 

 

448,339

 

Less: Unearned income

 

 

(1,934,712

)

 

 

(2,043,693

)

Net investment in direct financing leases

 

$

690,897

 

 

$

698,727

 

 

On March 15, 2018, we entered into a new lease agreement of our long-term acute care facility in Boise, Idaho 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 – Transition Properties

As noted in previous filings, we have 16 properties 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. Through October 1, 2018, Adeptus Health vacated and stopped making rent payments on 15 properties. As a result of the shortening of our lease term on these properties, we recorded a $4 million charge to accelerate the amortization of the straight-line rent receivables in the first nine months of 2018. The final property will be transitioned away from Adeptus Health on October 1, 2019.

In August and early October 2018, we re-leased three of the vacant facilities in the Houston market and five in the San Antonio market, respectively, at rates consistent with that of the previous Adeptus Health lease.  At September 30, 2018, our investment in the remaining eight transition facilities (that have not been re-leased) approximates less than 1% of our total assets. Although we expect to re-tenant and/or sell the remaining eight facilities in the near future, we lowered the carrying value of the seven remaining vacant facilities by $18 million to fair value in the three months ended September 30, 2018, based on market data received during the 2018 third quarter.

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 September 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 $37.5 million or 0.4% of total assets at September 30, 2018, is fully recoverable.

Alecto Healthcare facilities

At September 30, 2018, we own four acute care facilities that are leased to Alecto and have a mortgage loan on a fifth property.  Our total investment in these properties is approximately 1% of our total assets.  Through October 2018, Alecto is current on its rent and interest obligations to us.  However, we have seen continued softening in their markets through the 2018 third quarter, which could impact their ability to meet future obligations to us.  Thus, in the 2018 third quarter, we lowered the carrying value of the four owned properties by $30 million to fair value.

16


 

Loans

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

 

 

 

As of September 30, 2018

 

 

As of December 31, 2017

 

Mortgage loans

 

$

1,428,069

 

 

$

1,778,316

 

Acquisition loans

 

 

117,376

 

 

 

118,448

 

Working capital and other loans

 

 

365,077

 

 

 

31,761

 

 

 

$

1,910,522

 

 

$

1,928,525

 

 

The decrease in mortgage loans relates to the use of four Steward mortgage loans to fund our acquisition of the related fee simple real estate of the four facilities during 2018, while the increase to working capital and other loans primarily relates to our €290 million shareholder loan to the joint venture with Primotop – see “Acquisitions” in this Note 3 for further information. At September 30, 2018, acquisition loans includes $113.3 million in loans to Ernest; however, as described in Note 10, the full Ernest acquisition loan balance was repaid on October 4, 2018.

Concentrations of Credit Risk

We monitor concentration risk in several ways due to the nature of our real estate assets that are vital to the communities in which they are located and given our history of being able to replace inefficient operators of our facilities if needed, with more effective operators:

 

1)

Facility concentration – At September 30, 2018, we had no investment of any single property greater than 4% of our total assets, which is consistent with December 31, 2017.

 

2)

Operator concentration – For the nine months ended September 30, 2018, revenue from Steward, Prime, MEDIAN, and Ernest represented 37%, 16%, 16% and 9%, respectively. In comparison, these operators represented 23%, 19%, 15% and 11%, respectively, for the first nine months of 2017.

 

3)

Geographic concentration – At September 30, 2018, investments in the U.S. and Europe represented approximately 80% and 20%, respectively, of our total assets, which is consistent with December 31, 2017.

 

4)

Facility type concentration – For the nine months ended September 30, 2018, approximately 72% of our revenues are from our general acute care facilities, while rehabilitation and long-term acute care facilities make up 24% and 4%, respectively. These percentages are similar to those for the first nine months of 2017.

4. Debt

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

 

 

 

As of

September 30,

2018

 

 

As of

December 31,

2017

 

Revolving credit facility(A)

 

$

22,153

 

 

$

840,810

 

Term loan

 

 

200,000

 

 

 

200,000

 

4.000% Senior Unsecured Notes due 2022(B)

 

 

580,200

 

 

 

600,250

 

5.500% Senior Unsecured Notes due 2024

 

 

300,000

 

 

 

300,000

 

6.375% Senior Unsecured Notes due 2024

 

 

500,000

 

 

 

500,000

 

3.325% Senior Unsecured Notes due 2025(B)

 

 

580,200

 

 

 

600,250

 

5.250% Senior Unsecured Notes due 2026

 

 

500,000

 

 

 

500,000

 

5.000% Senior Unsecured Notes due 2027

 

 

1,400,000

 

 

 

1,400,000

 

 

 

$

4,082,553

 

 

$

4,941,310

 

Debt issue costs, net

 

 

(38,704

)

 

 

(42,643

)

 

 

$

4,043,849

 

 

$

4,898,667

 

 

(A)

Includes £17 million and £8 million of GBP-denominated borrowings that reflect the exchange rate at September 30, 2018 and December 31, 2017, respectively.

(B)

These notes are Euro-denominated and reflect the exchange rate at September 30, 2018 and December 31, 2017, respectively.

17


 

As of September 30, 2018, principal payments due on our debt (which exclude the effects of any discounts, premiums, or debt issue costs recorded) are as follows (in thousands):

 

2018

 

$

-

 

2019

 

 

-

 

2020

 

 

-

 

2021

 

 

22,153

 

2022

 

 

780,200

 

Thereafter

 

 

3,280,200

 

Total

 

$

4,082,553

 

 

2018 Activity

In preparation of the joint venture with Primotop described under “Acquisitions” in Note 3, we issued secured debt on August 3, 2018, resulting in gross proceeds of €655 million.  Subsequently, on August 31, 2018, the secured debt was contributed along with the related real estate of 71 properties to form the joint venture. Provisions of the secured debt include a term of seven years and a swapped fixed rate of approximately 2.3%.

 

2017 Activity

On February 1, 2017, we replaced our previous unsecured credit facility with a new revolving credit and term loan agreement (“Credit Facility”). The Credit Facility includes a $1.3 billion unsecured revolving loan facility, a $200 million unsecured term loan facility ($50 million lower than the previous term loan), and a new €200 million unsecured term loan facility.

On March 4, 2017, we redeemed the €200 million aggregate principal amount of our 5.750% Senior Unsecured Notes due 2020.

On March 24, 2017, we completed a €500 million senior unsecured notes offering (“3.325% Senior Unsecured Notes due 2025”). A portion of the proceeds from this offering were used to prepay and extinguish the €200 million term loan facility portion of our Credit Facility on March 30, 2017.

On September 7, 2017, we completed a $1.4 billion senior unsecured notes offering (“5.000% Senior Unsecured Notes due 2027”). We used a portion of the net proceeds from the 5.000% Senior Unsecured Notes due 2027 offering to redeem the $350 million aggregate principal amount of our 6.375% Senior Unsecured Notes due 2022 on October 7, 2017.

Furthermore, the completion of the 5.000% Senior Unsecured Notes due 2027 offering resulted in the cancellation of the $1.0 billion term loan facility commitment from JP Morgan Chase Bank, N.A. that we received to assist in funding the September 2017 Steward transaction. With this commitment, we paid $5.2 million of underwriting and other fees, which we fully expensed upon the cancellation of the commitment.

On September 29, 2017, we prepaid the principal amount of the mortgage loan on our property in Kansas City, Missouri at par in the amount of $12.9 million. To fund such prepayment, including accrued and unpaid interest thereon, we used borrowings from the revolving credit facility portion of our Credit Facility.

With the replacement of our old credit facility, the redemption of the 5.750% Senior Unsecured Notes due 2020, the payoff of our €200 million euro term loan, the cancellation of the $1.0 billion term loan facility commitment, and the payment of our $12.9 million mortgage loan, we incurred a debt refinancing charge of $18.8 million in the first nine months of 2017.

Covenants

Our debt facilities impose certain restrictions on us, including restrictions on our ability to: incur debts; create or incur liens; provide guarantees in respect of obligations of any other entity; make redemptions and repurchases of our capital stock; prepay, redeem or repurchase debt; engage in mergers or consolidations; enter into affiliated transactions; dispose of real estate or other assets; and change our business. In addition, the credit agreements governing our Credit Facility limit the amount of dividends we can pay as a percentage of normalized adjusted funds from operations, as defined in the agreements, on a rolling four quarter basis. At September 30, 2018, the dividend restriction was 95% of normalized adjusted funds from operations (“NAFFO”). The indentures governing our senior unsecured notes also limit the amount of dividends we can pay based on the sum of 95% of NAFFO, proceeds of equity issuances and certain other net cash proceeds. Finally, our senior unsecured notes require us to maintain total unencumbered assets (as defined in the related indenture) of not less than 150% of our unsecured indebtedness.

18


 

In addition to these restrictions, the Credit Facility contains customary financial and operating covenants, including covenants relating to our total leverage ratio, fixed charge coverage ratio, secured leverage ratio, consolidated adjusted net worth, unsecured leverage ratio, and unsecured interest coverage ratio. The Credit Facility also contains customary events of default, including among others, nonpayment of principal or interest, material inaccuracy of representations and failure to comply with our covenants. If an event of default occurs and is continuing under the Credit Facility, the entire outstanding balance may become immediately due and payable. At September 30, 2018, we were in compliance with all such financial and operating covenants.

5. Common Stock/Partners’ Capital

Medical Properties Trust, Inc.

On May 1, 2017, we completed an underwritten public offering of approximately 43.1 million shares (including the exercise of the underwriters’ 30-day option to purchase an additional 5.6 million shares) of our common stock, resulting in net proceeds of approximately $548 million, after deducting offering expenses.

MPT Operating Partnership, L.P.

At September 30, 2018, the Company has a 99.92% ownership interest in the Operating Partnership with the remainder owned by two other partners, who are employees.

During the nine months ended September 30, 2017, the Operating Partnership issued approximately 43.1 million units in direct response to the common stock offerings by Medical Properties Trust, Inc. during the same period.

6. Stock Awards

We adopted the 2013 Equity Incentive Plan (the “Equity Incentive Plan”) during the second quarter of 2013, which authorizes the issuance of common stock options, restricted stock, restricted stock units, deferred stock units, stock appreciation rights, performance units and awards of interests in our Operating Partnership. The Equity Incentive Plan is administered by the Compensation Committee of the Board of Directors. We have reserved 8,196,770 shares of common stock for awards under the Equity Incentive Plan, out of which 1,697,002 shares remain available for future stock awards as of September 30, 2018. Share-based compensation expense totaled $11.7 million and $7.1 million for the nine months ended September 30, 2018 and 2017, respectively.

7. Fair Value of Financial Instruments

We have various assets and liabilities that are considered financial instruments. We estimate that the carrying value of cash and cash equivalents and accounts payable and accrued expenses approximate their fair values. We estimate the fair value of our interest and rent receivables using Level 2 inputs such as discounting the estimated future cash flows using the current rates at which similar receivables would be made to others with similar credit ratings and for the same remaining maturities. The fair value of our mortgage loans and working capital loans are estimated by using Level 2 inputs such as discounting the estimated future cash flows using the current rates which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. We determine the fair value of our senior unsecured notes using Level 2 inputs such as quotes from securities dealers and market makers. We estimate the fair value of our revolving credit facility and term loan using Level 2 inputs based on the present value of future payments, discounted at a rate which we consider appropriate for such debt.

Fair value estimates are made at a specific point in time, are subjective in nature, and involve uncertainties and matters of significant judgment. Settlement of such fair value amounts may not be possible and may not be a prudent management decision. The following table summarizes fair value estimates for our financial instruments (in thousands):

 

 

 

As of

 

 

As of

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Asset (Liability)

 

Book

Value

 

 

Fair

Value

 

 

Book

Value

 

 

Fair

Value

 

Interest and rent receivables

 

$

87,939

 

 

$

87,067

 

 

$

78,970

 

 

$

78,028

 

Loans (1)

 

 

1,681,562

 

 

 

1,700,346

 

 

 

1,698,471

 

 

 

1,722,101

 

Debt, net

 

 

(4,043,849

)

 

 

(4,087,207

)

 

 

(4,898,667

)

 

 

(5,073,707

)

19


 

 

(1)

Excludes loans related to Ernest since they are recorded at fair value and discussed below.

Items Measured at Fair Value on a Recurring Basis

Our equity interest in Ernest along with their related loans are measured at fair value on a recurring basis as we elected to account for these investments using the fair value option method. We have elected to account for these investments at fair value due to the size of the investments and because we believe this method is more reflective of current values. We have not made a similar election for other currently existing equity interests or loans.

At September 30, 2018, these amounts were as follows (in thousands):

 

Asset Type

 

Fair

Value

 

 

Original

Cost

 

 

Asset Type

Classification

Mortgage loans

 

$

115,000

 

 

$

115,000

 

 

Mortgage loans

Equity investment and other loans

 

 

108,373

 

 

 

117,260

 

 

Other loans/other assets

 

 

$

223,373

 

 

$

232,260

 

 

 

 

Our equity investment and other loans with Ernest are recorded at fair value using a Level 1 input based on the proceeds of the October 4, 2018 transaction in which such equity investment was sold and such loans were repaid, as more fully described in Note 10 to this Form 10-Q.  Our mortgage loans are recorded at fair value based on Level 2 inputs by discounting the estimated future cash flows using the market rates which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities.  Because the fair value of the Ernest investments noted above is below our original cost, we recognized an unrealized loss during the nine months of 2018. No unrealized gain/loss on the Ernest investments was recorded in the first nine months of 2017.

8. Earnings Per Share

Medical Properties Trust, Inc.

Our earnings per share were calculated based on the following (amounts in thousands):

 

 

 

For the Three Months

Ended September 30,

 

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

Net income

 

$

736,476

 

 

$

76,881

 

Non-controlling interests’ share in net income

 

 

(442

)

 

 

(417

)

Participating securities’ share in earnings

 

 

(290

)

 

 

(82

)

Net income, less participating securities’ share in

   earnings

 

$

735,744

 

 

$

76,382

 

Denominator:

 

 

 

 

 

 

 

 

Basic weighted-average common shares

 

 

365,024

 

 

 

364,315

 

Dilutive potential common shares

 

 

1,443

 

 

 

731

 

Dilutive weighted-average common shares

 

 

366,467

 

 

 

365,046

 

 

 

 

For the Nine Months

Ended September 30,

 

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

Net income

 

$

939,536

 

 

$

218,862

 

Non-controlling interests’ share in net income

 

 

(1,334

)

 

 

(1,013

)

Participating securities’ share in earnings

 

 

(808

)

 

 

(307

)

Net income, less participating securities’ share in

   earnings

 

$

937,394

 

 

$

217,542

 

Denominator:

 

 

 

 

 

 

 

 

Basic weighted-average common shares

 

 

364,934

 

 

 

345,076

 

Dilutive potential common shares

 

 

850

 

 

 

520

 

Dilutive weighted-average common shares

 

 

365,784

 

 

 

345,596

 

 

20


 

MPT Operating Partnership, L.P.

Our earnings per common unit were calculated based on the following (in thousands):

 

 

 

For the Three Months

Ended September 30,

 

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

Net income

 

$

736,476

 

 

$

76,881

 

Non-controlling interests’ share in net income

 

 

(442

)

 

 

(417

)

Participating securities’ share in earnings

 

 

(290

)

 

 

(82

)

Net income, less participating securities’ share in

   earnings

 

$

735,744

 

 

$

76,382

 

Denominator:

 

 

 

 

 

 

 

 

Basic weighted-average units

 

 

365,024

 

 

 

364,315

 

Dilutive potential units

 

 

1,443

 

 

 

731

 

Diluted weighted-average units

 

 

366,467

 

 

 

365,046

 

 

 

 

For the Nine Months

Ended September 30,

 

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

Net income

 

$

939,536

 

 

$

218,862

 

Non-controlling interests’ share in net income

 

 

(1,334

)

 

 

(1,013

)

Participating securities’ share in earnings

 

 

(808

)

 

 

(307

)

Net income, less participating securities’ share in

   earnings

 

$

937,394

 

 

$

217,542

 

Denominator:

 

 

 

 

 

 

 

 

Basic weighted-average units

 

 

364,934

 

 

 

345,076

 

Dilutive potential units

 

 

850

 

 

 

520

 

Diluted weighted-average units

 

 

365,784

 

 

 

345,596

 

 

9. Commitments and Contingencies

Commitments

On June 6, 2018, we entered into a definitive agreement to acquire four rehabilitation hospitals in Germany for a purchase price of approximately €23 million (including real estate transfer taxes). We have closed on three of the facilities during the third quarter of 2018, with the remaining facility expected to close in the fourth quarter of 2018 for approximately €5.8 million (including real estate transfer taxes).  See Note 3 “Acquisitions” for more details on this transaction.

Contingencies

We are a party to various legal proceedings incidental to our business. In the opinion of management, after consultation with legal counsel, the ultimate liability, if any, with respect to those proceedings is not presently expected to materially affect our financial position, results of operations or cash flows.

 

10. Subsequent Events

On October 4, 2018, we finalized a recapitalization agreement to sell our investment in the operations of Ernest Health Holdings, LLC and be repaid for our outstanding acquisition loans, working capital loans, and any unpaid interest.  Total proceeds received from this transaction approximated $176 million.  We will retain ownership of the real estate and secured mortgage loans of our Ernest properties.

21


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the consolidated financial condition and consolidated results of operations are presented on a combined basis for Medical Properties Trust and MPT Operating Partnership, L.P. as there are no material differences between these two entities.

The following discussion and analysis of the consolidated financial condition and consolidated results of operations should be read together with the condensed consolidated financial statements and notes thereto contained in this Form 10-Q and the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2017.

Forward-Looking Statements.

This report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or future performance, achievements or transactions or events to be materially different from those expressed or implied by such forward-looking statements, including, but not limited to, the risks described in our Annual Report on Form 10-K and as updated in our quarterly reports on Form 10-Q for future periods, and current reports on Form 8-K as we file them with the SEC under the Securities Exchange Act of 1934, as amended. Such factors include, among others, the following:

U.S. (both national and local) and European (in particular Germany, the United Kingdom, Spain and Italy) political, economic, business, real estate, and other market conditions;

the competitive environment in which we operate;

the execution of our business plan;

financing risks, such as our ability to repay, refinance, restructure, or extend our indebtedness as it becomes due;

the risk that a condition to closing under the agreements governing any or all of our outstanding transactions that have not closed as of the date hereof may not be satisfied;

the possibility that the anticipated benefits from any or all of the transactions we enter into will take longer to realize than expected or will not be realized at all;

acquisition and development risks;

potential environmental contingencies and other liabilities;

adverse developments affecting the financial health of one or more of our tenants, including insolvency;

other factors affecting the real estate industry generally or the healthcare real estate industry in particular;

our ability to maintain our status as a real estate investment trust, or REIT, for U.S. federal and state income tax purposes;

our ability to attract and retain qualified personnel;

changes in foreign currency exchange rates;

U.S. (both federal and state) and European (in particular Germany, the United Kingdom, Spain and Italy) healthcare and other regulatory requirements; and

U.S. national and local economic conditions, as well as conditions in Europe and any other foreign jurisdictions where we own or will own healthcare facilities, which may have a negative effect on the following, among other things:

 

the financial condition of our tenants, our lenders, or institutions that hold our cash balances, which may expose us to increased risks of default by these parties;

 

our ability to obtain equity or debt financing on attractive terms or at all, which may adversely impact our ability to pursue acquisition and development opportunities, our ability to refinance existing debt and our future interest expense; and

 

the value of our real estate assets, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing secured by our properties or on an unsecured basis.

22


 

Key Factors that May Affect Our Operations

Our revenue is derived from rents we earn pursuant to the lease agreements with our tenants, from interest income from loans to our tenants and other facility owners and from profits or equity interests in certain of our tenants’ operations. Our tenants operate in the healthcare industry, generally providing medical, surgical and rehabilitative care to patients. The capacity of our tenants to pay our rents and interest is dependent upon their ability to conduct their operations at profitable levels. We believe that the business environment of the industry segments in which our tenants operate is generally positive for efficient operators. However, our tenants’ operations are subject to economic, regulatory and market conditions that may affect their profitability, which could impact our results. Accordingly, we monitor certain key factors, changes to which we believe may provide early indications of conditions that may affect the level of risk in our portfolio.

Key factors that we consider in underwriting prospective tenants and borrowers and in monitoring the performance of existing tenants and borrowers include the following:

admission levels and surgery/procedure/diagnosis volumes by type;

the current, historical and prospective operating margins (measured by earnings before interest, taxes, depreciation, amortization and facility rent) of each tenant or borrower and at each facility;

the ratio of our tenants’ or borrowers’ operating earnings both to facility rent and to facility rent plus other fixed costs, including debt costs;

trends in the source of our tenants’ or borrowers’ revenue, including the relative mix of public payors (including Medicare, Medicaid/MediCal, managed care in the U.S. and pension funds in Germany) and private payors (including commercial insurance and private pay patients);

the effect of evolving healthcare legislation and other regulations on our tenants’ or borrowers’ profitability and liquidity; and

the competition and demographics of the local and surrounding areas in which the tenants or borrowers operate.

Certain business factors, in addition to those described above that directly affect our tenants and borrowers, will likely materially influence our future results of operations. These factors include:

trends in the cost and availability of capital, including market interest rates, that our prospective tenants may use for their real estate assets instead of financing their real estate assets through lease structures;

changes in healthcare regulations that may limit the opportunities for physicians to participate in the ownership of healthcare providers and healthcare real estate;

reductions in reimbursements from Medicare, state healthcare programs, and commercial insurance providers that may reduce our tenants’ or borrowers’ profitability and our lease rates;

competition from other financing sources; and

the ability of our tenants and borrowers to access funds in the credit markets.

CRITICAL ACCOUNTING POLICIES

Refer to our 2017 Annual Report on Form 10-K for a discussion of our critical accounting policies, which include revenue recognition, investments in real estate, purchase price allocation, loans, losses from rent and interest receivables, stock-based compensation, our fair value option election, and our accounting policy on consolidation. During the nine months ended September 30, 2018, there were no material changes to these policies.

Overview

We are a self-advised REIT focused on investing in and owning net-leased healthcare facilities across the U.S. and selectively in foreign jurisdictions. We have operated as a REIT since 2004. Medical Properties Trust, Inc. was incorporated under Maryland law on August 27, 2003, and MPT Operating Partnership, L.P. was formed under Delaware law on September 10, 2003. We conduct substantially all of our business through MPT Operating Partnership, L.P. We acquire and develop healthcare facilities and lease the facilities to healthcare operating companies under long-term net leases, which require the tenant to bear most of the costs associated with the property. We also make mortgage loans to healthcare operators collateralized by their real estate assets. In addition, we selectively make loans to certain of our operators through our taxable REIT subsidiaries, the proceeds of which are typically used for acquisitions and working capital. Finally, from time to time, we acquire a profits or other equity interest in our tenants that gives us a right to share in such tenant’s profits and losses.

23


 

At September 30, 2018, our portfolio consisted of 275 properties leased or loaned to 29 operators, of which three are under development and 11 are in the form of mortgage loans.

Our investments in healthcare real estate, including mortgage and other loans, as well as any equity investments in our tenants are considered a single reportable segment. All of our investments are currently located in the U.S. and Europe. Our total assets are made up of the following (dollars in thousands):

 

 

 

As of September 30,

2018

 

 

% of

Total

 

 

As of December 31,

2017

 

 

% of

Total

 

Real estate owned (gross)

 

$

5,557,563

 

 

 

63.3

%

 

$

6,595,252

 

 

 

73.1

%

Mortgage loans

 

 

1,428,069

 

 

 

16.3

%

 

 

1,778,316

 

 

 

19.7

%

Other loans

 

 

482,453

 

 

 

5.5

%

 

 

150,209

 

 

 

1.7

%

Construction in progress

 

 

59,796

 

 

 

0.7

%

 

 

47,695

 

 

 

0.5

%

Other assets

 

 

1,246,635

 

 

 

14.2

%

 

 

448,816

 

 

 

5.0

%

Total assets

 

$

8,774,516

 

 

 

100.0

%

 

$

9,020,288

 

 

 

100.0

%

 

Additional Concentration Details

On a pro forma gross asset basis (as defined in the “Reconciliation of Non-GAAP Financial Measures” section of Item 2 of this Form 10-Q), our concentration as of September 30, 2018 as compared to December 31, 2017 is as follows (dollars in thousands):

Pro Forma Gross Assets by Operator

 

 

 

As of September 30, 2018

 

 

As of December 31, 2017

 

Operators

 

Total Pro Forma

Gross Assets

 

 

Percentage of

Total Pro Forma  Gross Assets

 

 

Total Pro Forma

Gross Assets

 

 

Percentage of

Total Pro Forma  Gross Assets

 

Steward

 

$

3,621,660

 

 

 

37.8

%

 

$

3,457,384

 

 

 

36.5

%

Prime

 

 

1,123,350

 

 

 

11.7

%

 

 

1,119,484

 

 

 

11.8

%

MEDIAN

 

 

1,091,987

 

 

 

11.4

%

 

 

1,229,325

 

 

 

13.0

%

RCCH

 

 

506,267

 

 

 

5.3

%

 

 

506,265

 

 

 

5.3

%

Ernest

 

 

499,335

 

 

 

5.2

%

 

 

629,161

 

 

 

6.6

%

Other operators

 

 

1,692,041

 

 

 

17.6

%

 

 

2,089,934

 

 

 

22.1

%

Other assets

 

 

1,052,186

 

 

 

11.0

%

 

 

444,659

 

 

 

4.7

%

Total

 

$

9,586,826

 

 

 

100.0

%

 

$

9,476,212

 

 

 

100.0

%

 

Pro Forma Gross Assets by U.S. State and Country

 

 

 

As of September 30, 2018

 

 

As of December 31, 2017

 

U.S. States and Other Countries

 

Total Pro Forma

Gross Assets

 

 

Percentage of

Total Pro Forma Gross Assets

 

 

Total Pro Forma

Gross Assets

 

 

Percentage of

Total Pro Forma Gross Assets

 

Massachusetts

 

$

1,378,535

 

 

 

14.4

%

 

$

1,297,226

 

 

 

13.7

%

Texas

 

 

1,109,034

 

 

 

11.6

%

 

 

1,257,390

 

 

 

13.3

%

Utah

 

 

1,026,296

 

 

 

10.7

%

 

 

1,035,501

 

 

 

10.9

%

California

 

 

522,756

 

 

 

5.5

%

 

 

542,876

 

 

 

5.7

%

Arizona

 

 

479,582

 

 

 

5.0

%

 

 

491,284

 

 

 

5.2

%

All other states

 

 

2,614,526

 

 

 

27.1

%

 

 

2,618,536

 

 

 

27.6

%

Other domestic assets

 

 

497,916

 

 

 

5.2

%

 

 

387,050

 

 

 

4.1

%

Total U.S.

 

$

7,628,645

 

 

 

79.5

%

 

$

7,629,863

 

 

 

80.5

%

Germany

 

$

1,182,318

 

 

 

12.3

%

 

$

1,581,726

 

 

 

16.7

%

United Kingdom, Italy, and Spain

 

 

221,593

 

 

 

2.4

%

 

 

207,014

 

 

 

2.2

%

Other international assets

 

 

554,270

 

 

 

5.8

%

 

 

57,609

 

 

 

0.6

%

Total International

 

$

1,958,181

 

 

 

20.5

%

 

$

1,846,349

 

 

 

19.5

%

Grand Total

 

$

9,586,826

 

 

 

100.0

%

 

$

9,476,212

 

 

 

100.0

%

 

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

24


 

On an adjusted revenue basis (as defined in the “Reconciliation of Non-GAAP Financial Measures” section of Item 2 of this Form 10-Q), concentration for the nine months ended September 30, 2018 as compared to the prior year is as follows (dollars in thousands):

Adjusted Revenue by Operator

 

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Operators

 

Total Adjusted

Revenue

 

 

Percentage of

Total Adjusted

Revenue

 

 

Total Adjusted

Revenue

 

 

Percentage of

Total Adjusted

Revenue

 

Steward (1)

 

$

225,989

 

 

 

36.6

%

 

$

114,776

 

 

 

23.0

%

MEDIAN

 

 

99,924

 

 

 

16.2

%

 

 

73,793

 

 

 

14.8

%

Prime

 

 

95,439

 

 

 

15.5

%

 

 

94,644

 

 

 

18.9

%

Ernest

 

 

52,752

 

 

 

8.5

%

 

 

53,007

 

 

 

10.6

%

RCCH

 

 

31,484

 

 

 

5.1

%

 

 

30,668

 

 

 

6.1

%

Other operators

 

 

112,104

 

 

 

18.1

%

 

 

132,896

 

 

 

26.6

%

Total

 

$

617,692

 

 

 

100.0

%

 

$

499,784

 

 

 

100.0

%

 

(1)

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

 

Adjusted Revenue by U.S. State and Country

 

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

U.S. States and Other Countries

 

Total Adjusted

Revenue

 

 

Percentage of

Total Adjusted

Revenue

 

 

Total Adjusted

Revenue

 

 

Percentage of

Total Adjusted

Revenue

 

Texas

 

$

87,588

 

 

 

14.2

%

 

$

74,489

 

 

 

14.9

%

Massachusetts

 

 

85,054

 

 

 

13.8

%

 

 

79,741

 

 

 

16.0

%

Utah

 

 

62,598

 

 

 

10.1

%

 

 

7,999

 

 

 

1.6

%

California

 

 

45,326

 

 

 

7.3

%

 

 

49,681

 

 

 

9.9

%

Arizona

 

 

35,204

 

 

 

5.7

%

 

 

23,902

 

 

 

4.8

%

All other states

 

 

184,091

 

 

 

29.8

%

 

 

172,363

 

 

 

34.5

%

Total U.S.

 

$

499,861

 

 

 

80.9

%

 

$

408,175

 

 

 

81.7

%

Germany

 

$

106,198

 

 

 

17.2

%

 

$

88,525

 

 

 

17.7

%

United Kingdom, Italy, and Spain

 

 

11,633

 

 

 

1.9

%

 

 

3,084

 

 

 

0.6

%

Total International

 

$

117,831

 

 

 

19.1

%

 

$

91,609

 

 

 

18.3

%

Grand Total

 

$

617,692

 

 

 

100.0

%

 

$

499,784

 

 

 

100.0

%

Adjusted Revenue by Facility Type

 

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

Total Adjusted

Revenue

 

 

Percentage of

Total Adjusted

Revenue

 

 

Total Adjusted

Revenue

 

 

Percentage of

Total Adjusted

Revenue

 

General acute care hospitals

 

$

449,445

 

 

 

72.8

%

 

$

341,640

 

 

 

68.4

%

Rehabilitation hospitals

 

 

145,442

 

 

 

23.5

%

 

 

125,829

 

 

 

25.2

%

Long-term acute care hospitals

 

 

22,805

 

 

 

3.7

%

 

 

32,315

 

 

 

6.4

%

Total revenues

 

$

617,692

 

 

 

100.0

%

 

$

499,784

 

 

 

100.0

%

 

25


 

Results of Operations

Three Months Ended September 30, 2018 Compared to September 30, 2017

Net income for the three months ended September 30, 2018, was $736 million, compared to $76.5 million for the three months ended September 30, 2017. This increase is primarily due to the $695.2 million gain on the sale of real estate in the 2018 third quarter from the joint venture transaction with Primotop and North Cypress disposal described in Note 3 to Item 1 of this Form 10-Q, along with additional revenue from the Steward and MEDIAN investments that were made at the end of 2017. This increase is partially offset by the $48 million adjustment to lower the carrying value of certain real estate to fair value in 2018 as described in Note 3 to Item 1 of this Form 10-Q, along with incremental interest expense and depreciation expense due primarily to the 2017 investments. Funds from operations (“FFO”), after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $127.2 million for the 2018 third quarter as compared to $120.6 million for the 2017 third quarter. This 5.5% increase in FFO is due to the increase in revenue from acquisitions made in 2017 (primarily our Steward and MEDIAN investments), partially offset by higher interest expense to fund such investments.

A comparison of revenues for the three month periods ended September 30, 2018 and 2017 is as follows (dollar amounts in thousands):

 

 

 

2018

 

 

% of

Total

 

 

2017

 

 

% of

Total

 

 

Year over

Year

Change

 

Rent billed

 

$

118,238

 

 

 

60.0

%

 

$

110,930

 

 

 

62.8

%

 

 

6.6

%

Straight-line rent

 

 

18,293

 

 

 

9.3

%

 

 

17,505

 

 

 

9.9

%

 

 

4.5

%

Income from direct financing leases

 

 

18,998

 

 

 

9.7

%

 

 

19,115

 

 

 

10.8

%

 

 

-0.6

%

Interest and fee income

 

 

41,467

 

 

 

21.0

%

 

 

29,030

 

 

 

16.5

%

 

 

42.8

%

Total revenues

 

$

196,996

 

 

 

100.0

%

 

$

176,580

 

 

 

100.0

%

 

 

11.6

%

 

Our total revenue for the 2018 third quarter is up $20.4 million, or 11.6%, over the prior year. This increase is made up of the following:

 

Operating lease revenue (includes rent billed and straight-line rent) – up $8.1 million over the prior year, of which $18.7 million is from incremental revenue from acquisitions (primarily the Steward and MEDIAN acquisitions in 2017) and $8.1 million is from rent recorded on the new Steward leases that converted from mortgage loans in 2018. These increases are partially offset by approximately $11 million of lower revenue as a result of the joint venture transaction with Primotop as more fully described in Note 3 to Item 1 of this Form 10-Q, approximately $3 million of lower revenue related to dispositions, approximately $4 million of higher straight-line rent write-offs in 2018 related to North Cypress and Adeptus Health, and approximately $0.3 million is from unfavorable foreign currency fluctuations.

 

Income from direct financing leases – remained relatively flat over the prior year primarily due to $0.3 million from annual escalations of rental rates in accordance with provisions in our leases. The increase was offset by the decrease of DFL unbilled interest no longer recorded on the Boise lease that converted from DFL to operating lease accounting classification upon execution of the new lease with the Vibra/Ernest joint venture in the 2018 first quarter - see Note 3 to Item 1 of this Form 10-Q for details.

 

Interest and fee income – up $12.4 million over the prior year of which $17.1 million is from incremental revenue from new loans (primarily the $700 million Steward mortgage loans in 2017), $0.4 million is from our annual escalations in interest rates in accordance with loan provisions. These increases are partially offset by $5.4 million of lower interest revenue related to loans converted to fee simple assets in 2018.

Interest expense, for the quarters ended September 30, 2018 and 2017, totaled $57.2 million and $42.8 million, respectively. This increase is primarily related to the higher average debt balance during the 2018 third quarter compared to the prior year third quarter in order to fund our investment activity in the last half of 2017 and in 2018 along with approximately $2 million of interest expense representing one month of interest on the secured debt placed in advance of the joint venture transaction with Primotop - see Note 4 to Item 1 of this Form 10-Q for additional information. This impact on interest expense is partially offset by slightly lower weighted-average interest rates period over period due to certain refinancing activities in our debt during 2017. Our weighted-average interest rate was 4.5% for the three months ended September 30, 2018, as compared to 4.6% in the same period in 2017.

Real estate depreciation and amortization during the third quarter of 2018 decreased to $29.9 million from $31.9 million in 2017, due to the 71 facilities sold on August 31, 2018 as part of the joint venture transaction with Primotop.  These assets were classified as held for sale as of June 30, 2018, so no depreciation expense was recognized for the 2018 third quarter.

26


 

General and administrative expenses totaled $21 million for the 2018 third quarter, which is a $6 million increase from the prior year third quarter. As noted in our 2018 first and second quarter Form 10-Qs, general and administrative expenses are higher in 2018 due to our adoption of the new accounting standard on asset acquisitions (ASU 2017-01). Excluding the $1.4 million of higher expense due to the accounting change, general and administrative expenses represented approximately 9.9% of revenue in the 2018 third quarter. On a dollar basis (exclusive of the accounting change impact), general and administrative expenses were up $4.5 million from the prior year third quarter due to travel and compensation expenses, which are up as a result of the growth and expansion of our company.

Acquisition costs decreased $6.9 million from the prior year. The $7.4 million of acquisition costs in 2017 primarily related to the Steward and MEDIAN transactions along with deals completed subsequent to September 2017. In regards to the 2018 third quarter, all third party transaction costs directly related to acquisitions are now capitalized due to the adoption of ASU 2017-01. However, we did incur $0.5 million in the current period related to the settlement of a contingency involving an acquisition that occurred prior to the adoption of ASU 2017-01.

During the three months ended September 30, 2018, we completed the joint venture transaction with Primotop (as more fully described in Note 3 to Item 1 of this Form 10-Q), in which we sold 71 inpatient rehabilitation hospitals by way of a joint venture arrangement, as well as one general acute care hospital located in Texas, resulting in a total gain of $695.2 million. This gain was partially offset by a $48 million adjustment to lower the carrying value of the real estate to fair value on seven of our transitioning Adeptus Health facilities and four of our Alecto facilities – see Note 3 to Item 1 of this Form 10-Q for further details.

During the 2017 third quarter, we incurred $4.4 million of debt refinancing charges primarily related to structuring and underwriting fees associated with the termination of the short-term loan commitment entered into in anticipation of the 2017 Steward acquisition.  There were no debt refinancing charges in the 2018 third quarter.  

Income tax expense typically includes U.S. federal and state income taxes on our TRS entities, as well as non-U.S. income based or withholding taxes on certain investments located in jurisdictions outside the U.S. The income tax expense for the three months ended September 30, 2018 reflects an increase over the prior year due to an increase in financial taxable income from our international investments.  We utilize the asset and liability method of accounting for income taxes. Deferred tax assets are recorded to the extent we believe these assets will more likely than not be realized. In making such determination, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based upon our review of all positive and negative evidence, including our three-year cumulative pre-tax book loss position in certain entities, we concluded that a full valuation allowance should continue to be recorded against the majority of our U.S. and certain of our international net deferred tax assets at September 30, 2018. In the future, if we determine that it is more likely than not that we will realize our net deferred tax assets, we will reverse the applicable portion of the valuation allowance, recognize an income tax benefit in the period in which such determination is made, and incur higher income taxes in future periods.  For example, on October 4, 2018, we sold the Ernest Health equity investment held by our TRS. Due to the sale, it is possible the TRS will have sufficient sources of future taxable income to realize the federal and state deferred tax assets.  This would result in a reversal of the valuation allowance on the TRS of $6.8 million in the fourth quarter of 2018.

Nine Months Ended September 30, 2018 Compared to September 30, 2017

Net income for the nine months ended September 30, 2018, was $938.2 million, compared to $217.8 million for the nine months ended September 30, 2017. This increase is primarily due to the $720.8 million gain on the sale of real estate recognized in the first nine months of 2018 from the disposal of five properties and the joint venture transaction with Primotop described in Note 3 to Item 1 of this Form 10-Q, along with additional revenue from the Steward and MEDIAN investments that were made in 2017. This increase is partially offset by increased interest expense from higher average outstanding debt balances to fund new investments in 2017, higher depreciation expense from investments made in 2017, and the $48 million adjustment to lower the carrying value of certain real estate to fair value. FFO, after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $388.6 million for the first nine months of 2018 as compared to $340.1 million for the first nine months of 2017. This 14.2% increase in FFO is due to the increase in revenue from acquisitions and completed development projects made in 2017 (primarily our Steward and MEDIAN investments), partially offset by higher interest expense to fund such investments.

27


 

A comparison of revenues for the nine month periods ended September 30, 2018 and 2017 is as follows (dollar amounts in thousands):

 

 

 

2018

 

 

% of

Total

 

 

2017

 

 

% of

Total

 

 

Year over

Year

Change

 

Rent billed

 

$

369,076

 

 

 

61.1

%

 

$

311,140

 

 

 

62.3

%

 

 

18.6

%

Straight-line rent

 

 

49,157

 

 

 

8.1

%

 

 

46,561

 

 

 

9.3

%

 

 

5.6

%

Income from direct financing leases

 

 

55,613

 

 

 

9.2

%

 

 

55,307

 

 

 

11.1

%

 

 

0.6

%

Interest and fee income

 

 

130,098

 

 

 

21.6

%

 

 

86,776

 

 

 

17.3

%

 

 

49.9

%

Total revenues

 

$

603,944

 

 

 

100.0

%

 

$

499,784

 

 

 

100.0

%

 

 

20.8

%

 

Our total revenue for the first nine months of 2018 is up $104.2 million, or 20.8%, over the prior year. This increase is made up of the following:

 

Operating lease revenue (includes rent billed and straight-line rent) – up $60.5 million over the prior year of which $78 million is from incremental revenue from acquisitions primarily due to the Steward and MEDIAN acquisitions in 2017 and the first nine months of 2018, $8.1 million is from rent recorded on the new Steward leases that converted from mortgage loans in 2018, $5 million is incremental revenue from capital additions, and approximately $6.6 million is from favorable foreign currency fluctuations. These increases are partially offset by approximately $11 million of lower revenue related to the joint venture transaction with Primotop as more fully described in Note 3 to Item 1 of this Form 10-Q, approximately $13 million of lower revenue related to dispositions, and approximately $13 million of higher straight-line rent write-offs in 2018.

 

Income from direct financing leases – increased slightly over the prior year, of which $1.9 million is from incremental revenue from acquisitions made in 2017 and $0.8 million is from annual escalations of rental rates in accordance with provisions in our leases. The impact was partially offset by the write-off of $1.5 million of DFL unbilled interest and the loss of $0.9 million of DFL unbilled interest on the Boise lease that converted from DFL to operating lease accounting classification upon execution of the new lease with the Vibra/Ernest joint venture discussed in Note 3 to Item 1 of this Form 10-Q.

 

Interest and fee income – up $43.3 million over the prior year of which $47.2 million is primarily from incremental revenue from the new Steward mortgage loans made in 2017 and 2018, and $1 million is from our annual escalations in interest rates in accordance with loan provisions. These increases are partially offset by $5.4 million of lower interest revenue related to the Steward mortgage loans that converted to operating leases in 2018.

Interest expense, for the nine months ended September 30, 2018 and 2017, totaled $172.4 million and $120.5 million, respectively. This increase is primarily related to the higher average debt balance during the first nine months of 2018 compared to the first nine months of 2017 in order to fund our 2017 acquisition activity. The impact on interest expense is partially offset by slightly lower weighted average interest rates period over period due to certain refinancing activities in our debt during 2017. Our weighted-average interest rate was 4.5% for the nine months ended September 30, 2018, as compared to 4.6% in the same period in 2017.

Real estate depreciation and amortization during the first nine months of 2018 increased to $100.2 million from $89.0 million in the same period of 2017, due to the incremental depreciation from the facilities acquired (particularly the Steward and MEDIAN facilities acquired in 2017) and the development properties completed in 2017 and 2018.

General and administrative expenses totaled $58.4 million for the first nine months of 2018, which is a $15.1 million increase from the prior year. As noted previously, general and administrative expenses were higher during the first nine months of 2018 due to our adoption of ASU 2017-01. Excluding the $4.5 million of higher expense due to the accounting change, general and administrative expenses represented 8.9% of revenue in the first nine months of 2018, which was in line with the 8.7% in 2017. On a dollar basis (exclusive of the accounting change impact), general and administrative expenses were up $10.6 million from the prior year due to travel and compensation expenses, which are up as a result of the growth and expansion of our company.

Acquisition costs decreased $20 million from the prior year. The acquisition costs in 2017 primarily related to the MEDIAN transaction along with deals completed subsequent to September 2017. In regards to the first nine months of 2018, all third party transaction costs directly related to acquisitions are now capitalized due to the adoption of ASU 2017-01 as noted previously.  However, we did incur $0.9 million in the current period related to the settlement of contingencies involving acquisitions that occurred prior to the adoption of ASU 2017-01.

28


 

During the nine months ended September 30, 2018, we sold one acute care property (operated by Steward), three long-term acute care properties (operated by Vibra), 71 inpatient rehabilitation hospitals (operated by MEDIAN) by way of a joint venture arrangement, and one general acute care hospital located in Texas (operated by North Cypress), resulting in a total net gain of $720.8 million. This gain was partially offset by a $48 million adjustment to lower the carrying value of the real estate to fair value on seven of our transitioning Adeptus Health facilities and four of our Alecto facilities – see Note 3 to Item 1 of this Form 10-Q for further details. In the first nine months of 2017, we sold one RCCH property resulting in a $7.4 million gain.

In the first nine months of  2017, we incurred $18.8 million of debt refinancing costs related to various debt refinancing activities as disclosed in Note 4 to Item 1 of this Form 10-Q. We did not have any similar charges during the first nine months of 2018.

Income tax expense typically includes U.S. federal and state income taxes on our TRS entities, as well as non-U.S. income based or withholding taxes on certain investments located in jurisdictions outside the U.S. The income tax expense for the nine months ended September 30, 2018, reflects an increase from prior year due to an increase in financial taxable income from our international investments.  See quarter-over-quarter comparison for additional information about income taxes including related valuation allowances.

Reconciliation of Non-GAAP Financial Measures

Investors and analysts following the real estate industry utilize funds from operations, or FFO, as a supplemental performance measure. FFO, reflecting the assumption that real estate asset values rise or fall with market conditions, principally adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assumes that the value of real estate diminishes predictably over time. We compute FFO in accordance with the definition provided by the National Association of Real Estate Investment Trusts, or NAREIT, which represents net income (loss) (computed in accordance with GAAP), excluding gains (losses) on sales of real estate and impairment charges on real estate assets, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.

In addition to presenting FFO in accordance with the NAREIT definition, we also disclose normalized FFO, which adjusts FFO for items that relate to unanticipated or non-core events or activities or accounting changes that, if not noted, would make comparison to prior period results and market expectations less meaningful to investors and analysts.

We believe that the use of FFO, combined with the required GAAP presentations, improves the understanding of our operating results among investors and the use of normalized FFO makes comparisons of our operating results with prior periods and other companies more meaningful. While FFO and normalized FFO are relevant and widely used supplemental measures of operating and financial performance of REITs, they should not be viewed as a substitute measure of our operating performance since the measures do not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, which can be significant economic costs that could materially impact our results of operations. FFO and normalized FFO should not be considered an alternative to net income (loss) (computed in accordance with GAAP) as indicators of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity.

29


 

The following table presents a reconciliation of net income attributable to MPT common stockholders to FFO for the three and nine months ended September 30, 2018 and 2017 (in thousands, except per share data):

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

FFO information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to MPT common stockholders

 

$

736,034

 

 

$

76,464

 

 

$

938,202

 

 

$

217,849

 

Participating securities’ share in earnings

 

 

(290

)

 

 

(82

)

 

 

(808

)

 

 

(307

)

Net income, less participating securities’ share

   in earnings

 

$

735,744

 

 

$

76,382

 

 

$

937,394

 

 

$

217,542

 

Depreciation and amortization

 

 

32,641

 

 

 

32,618

 

 

 

104,314

 

 

 

90,744

 

Gain on sale of real estate and other, net

 

 

(647,204

)

 

 

(18

)

 

 

(672,822

)

 

 

(7,431

)

Funds from operations

 

$

121,181

 

 

$

108,982

 

 

$

368,886

 

 

$

300,855

 

Write-off of straight-line rent and other

 

 

4,321

 

 

 

-

 

 

 

17,615

 

 

 

1,117

 

Debt refinancing costs

 

 

-

 

 

 

4,414

 

 

 

-

 

 

 

18,794

 

Acquisition and other transaction costs, net of tax benefit

 

 

1,661

 

 

 

7,166

 

 

 

2,072

 

 

 

19,350

 

Normalized funds from operations

 

$

127,163

 

 

$

120,562

 

 

$

388,573

 

 

$

340,116

 

Per diluted share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income, less participating securities’ share

   in earnings

 

$

2.00

 

 

$

0.21

 

 

$

2.56

 

 

$

0.63

 

Depreciation and amortization

 

 

0.09

 

 

 

0.09

 

 

 

0.29

 

 

 

0.26

 

Gain on sale of real estate and other, net

 

 

(1.76

)

 

 

-

 

 

 

(1.84

)

 

 

(0.02

)

Funds from operations

 

$

0.33

 

 

$

0.30

 

 

$

1.01

 

 

$

0.87

 

Write-off of straight-line rent and other

 

 

0.01

 

 

 

-

 

 

 

0.04

 

 

 

-

 

Debt refinancing costs

 

 

-

 

 

 

0.01

 

 

 

-

 

 

 

0.05

 

Acquisition and other transaction costs, net of tax benefit

 

 

0.01

 

 

 

0.02

 

 

 

0.01

 

 

 

0.06

 

Normalized funds from operations

 

$

0.35

 

 

$

0.33

 

 

$

1.06

 

 

$

0.98

 

 

Pro Forma Gross Assets

Pro forma total gross assets 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, assumes cash on hand is fully used in these transactions and includes our pro rata portion of gross assets in joint venture arrangements. We believe total gross assets is useful to investors as it provides a more current view of our portfolio and allows for a better understanding of our concentration levels as our binding commitments close and our other commitments are fully funded. The following table presents a reconciliation of total assets to total pro forma gross assets (in thousands):

 

 

 

As of

 

 

As of

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Total Assets

 

$

8,774,516

 

 

$

9,020,288

 

Add:

 

 

 

 

 

 

 

 

Binding real estate commitments on new investments(1)

 

 

7,897

 

 

 

17,500

 

Unfunded amounts on development deals and commenced capital

   improvement projects(2)

 

 

208,497

 

 

 

154,184

 

Accumulated depreciation and amortization

 

 

432,279

 

 

 

455,712

 

Incremental gross assets of our joint ventures(3)

 

 

380,031

 

 

 

-

 

Less:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

(216,394

)

 

 

(171,472

)

Total Pro Forma Gross Assets

 

$

9,586,826

 

 

$

9,476,212

 

 

 

(1)

The 2018 column reflects a commitment to acquire a facility in Germany post September 30, 2018; while, the 2017 column includes a facility in Washington that ultimately closed in 2018.

 

(2)

Includes $119.9 million and $137.4 million of unfunded amounts on ongoing development projects and $88.6 million and $16.8 million unfunded amounts on capital improvement projects and development projects that have commenced rent, as of September 30, 2018 and December 31, 2017, respectively.

 

(3)

Adjustment needed to reflect our share of our joint venture's gross assets.

30


 

Adjusted Revenue

Adjusted revenue is total revenues adjusted for our pro rata portion of similar revenues in our joint venture arrangements. We believe adjusted revenue is useful to investors as it provides a more complete view of revenue across all of our investments and allows for better understanding of our revenue concentration. The following table presents a reconciliation of total revenues to total adjusted revenue (in thousands):

 

 

For the Nine

Months Ended September 30, 2018

 

 

For the Nine

Months Ended September 30, 2017

 

Total revenues

 

$

603,944

 

 

$

499,784

 

Revenue from properties owned through joint venture arrangements

 

 

13,748

 

 

 

-

 

Total adjusted revenue

 

$

617,692

 

 

$

499,784

 

 

LIQUIDITY AND CAPITAL RESOURCES

2018 Cash Flow Activity

During the nine months ended September 30, 2018, we generated $299.1 million of cash flows from operating activities, primarily consisting of rent and interest from mortgages and other loans.  We used these operating cash flows along with cash on-hand to fund our dividends of $272.4 million and certain investing and financing activities.

Certain investing and financing activities in the first nine months of 2018 included:

 

a)

Generated $2.3 billion of cash proceeds from the joint venture transaction with Primotop (which included the disposal of 71 inpatient rehabilitation hospitals in Germany and issuance of secured debt) and the sale of five other acute care and long-term acute care properties. Approximately $580 million was reinvested in the joint venture with Primotop in the form of an equity interest and shareholder loan;

 

b)

Funded the acquisition of one property in Pasco, Washington for $17.5 million and three properties in Germany for €17.3 million;

 

c)

Originated $174.5 million in mortgage loans;

 

d)

Funded approximately $91.5 million for development and capital improvement projects;

 

e)

Acquired four facilities operated by Steward by converting the $525.4 million in mortgage loans on the same properties plus cash consideration; and

 

f)

We used the net cash received from the joint venture transaction with Primotop to reduce our revolver by approximately $820 million during the nine months ended September 30, 2018.  

2017 Cash Flow Activity

During the nine months ended September 30, 2017, we generated $220 million of cash flows from operating activities, primarily consisting of rent and interest from mortgage and other loans. We used these operating cash flows along with cash on-hand to fund our dividends of $239.2 million and certain investing activities.

Certain investing and financing activities in the first nine months of 2017 included:

 

a)

On February 1, 2017, we replaced our credit facility with a new facility resulting in a $50 million reduction in our U.S. dollar term loan and a new €200 million term loan;

 

b)

On March 4, 2017, we redeemed our 5.750% Senior Unsecured Notes due 2020 for €200 million plus a redemption premium using proceeds from our €200 million term loan and cash on-hand;

 

c)

On March 24, 2017, we completed a €500 million senior unsecured notes offering and used a portion of the proceeds to pay off our €200 million term loan, and used the remaining proceeds to acquire 12 facilities leased to MEDIAN for €146.4 million;

 

d)

On March 31, 2017, we sold the EASTAR Health System real estate in Muskogee, Oklahoma for approximately $64 million;

 

e)

On May 1, 2017, we completed an underwritten public offering of 43.1 million shares resulting in net proceeds of approximately $548 million. We used a portion of these proceeds to acquire eight facilities for $301.3 million (leased to Steward), a facility in Idaho for $87.5 million (leased to RCCH) and two other facilities for $40 million (leased to Alecto);

31


 

 

f)

On September 7, 2017, we completed a senior unsecured notes offering for $1.4 billion and used a portion of the proceeds to redeem our 6.375% Senior Unsecured Notes due 2022 in October 2017 for $350 million plus a redemption premium, and the remaining proceeds, along with borrowings from our revolving credit facility, were used to acquire 11 facilities and ancillary properties leased to Steward for $1.4 billion and to make a $100 million equity investment in Steward; and

 

g)

On September 29, 2017, we prepaid our Northland mortgage loan in the amount of $12.9 million.

Short-term Liquidity Requirements:

As of September 30, 2018, we have no debt principal payments due in the next twelve months — see debt maturity schedule below. At November 2, 2018, our availability under our revolving credit facility plus cash on-hand approximated $2 billion. We believe this liquidity along with our current monthly cash receipts from rent and loan interest and availability under our at-the-market equity program is sufficient to fund our operations, interest obligations, our firm commitments (including expected funding requirements on our development projects), and dividends in order to comply with REIT requirements for the next twelve months.

Long-term Liquidity Requirements:

As of September 30, 2018, we have no debt principal payments due between now and January 2021 when our revolving credit facility comes due (which can be extended by one year). With our liquidity at November 2, 2018 of approximately $2 billion, along with our current monthly cash receipts from rent and loan interest and the availability under our at-the-market equity program, we believe we have the liquidity available to us to fund our operations, debt and interest obligations, dividends in order to comply with REIT requirements, and firm commitments (including expected funding requirements on our development projects) for the foreseeable future.

However, in order to fund debt maturities coming due in 2022 and later years, we may need additional capital, and we believe the following sources of capital are generally available in the market, which we may access one or a combination of them:

 

sale of equity securities;

 

amending or entering into new bank term loans;

 

issuance of new USD or EUR denominated debt securities, including senior unsecured notes;

 

proceeds from strategic property sales; and/or

 

placing new secured loans on real estate located in the U.S. and/or Europe.

However, there is no assurance that conditions will be favorable for such possible transactions or that our plans will be successful.

As of September 30, 2018, principal payments due on our debt (which excludes the effects of any discounts, premiums, or debt issue costs recorded) are as follows (in thousands):

 

2018

 

$

-

 

2019

 

 

-

 

2020

 

 

-

 

2021

 

 

22,153

 

2022

 

 

780,200

 

Thereafter

 

 

3,280,200

 

Total

 

$

4,082,553

 

 

Disclosure of Contractual Obligations

We presented our contractual obligations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Except for changes to our operating lease commitments as updated in our Form 10-Q for the quarter ended March 31, 2018, there have been no significant changes in those obligations during the nine months ended September 30, 2018.

32


 

Distribution Policy

The table below is a summary of our distributions declared during the two year period ended September 30, 2018:

 

Declaration Date

 

Record Date

 

Date of Distribution

 

Distribution per Share

 

August 16, 2018

 

September 13, 2018

 

October 11, 2018

 

$

0.25

 

May 24, 2018

 

June 14, 2018

 

July 12, 2018

 

$

0.25

 

February 15, 2018

 

March 15, 2018

 

April 12, 2018

 

$

0.25

 

November 9, 2017

 

December 7, 2017

 

January 11, 2018

 

$

0.24

 

August 17, 2017

 

September 14, 2017

 

October 12, 2017

 

$

0.24

 

May 25, 2017

 

June 15, 2017

 

July 14, 2017

 

$

0.24

 

February 16, 2017

 

March 16, 2017

 

April 13, 2017

 

$

0.24

 

November 10, 2016

 

December 8, 2016

 

January 12, 2017

 

$

0.23

 

 

We intend to pay to our stockholders, within the time periods prescribed by the Internal Revenue Code (“Code”), all or substantially all of our annual taxable income, including taxable gains from the sale of real estate and recognized gains on the sale of securities. It is our policy to make sufficient cash distributions to stockholders in order for us to maintain our status as a REIT under the Code and to avoid corporate income and excise taxes on undistributed income. However, our Credit Facility limits the amount of dividends we can pay - see Note 4 in Item 1 to this Form 10-Q for further information.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. We may or may not elect to use financial derivative instruments to hedge interest rate or foreign currency exposure. For interest rate hedging, these decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. For foreign currency hedging, these decisions are principally based on how our investments are financed, the long-term nature of our investments, the need to repatriate earnings back to the U.S. and the general trend in foreign currency exchange rates.

In addition, the value of our facilities will be subject to fluctuations based on changes in local and regional economic conditions and changes in the ability of our tenants to generate profits, all of which may affect our ability to refinance our debt, if necessary. The changes in the value of our facilities would be impacted also by changes in “cap” rates, which is measured by the current base rent divided by the current market value of a facility.

Our primary exposure to market risks relates to fluctuations in interest rates and foreign currency. The following analyses present the sensitivity of the market value, earnings and cash flows of our significant financial instruments to hypothetical changes in interest rates and exchange rates as if these changes had occurred. The hypothetical changes chosen for these analyses reflect our view of changes that are reasonably possible over a one-year period. These forward looking disclosures are selective in nature and only address the potential impact from these hypothetical changes. They do not include other potential effects which could impact our business as a result of changes in market conditions. In addition, they do not include measures we may take to minimize our exposure such as entering into future interest rate swaps to hedge against interest rate increases on our variable rate debt.

Interest Rate Sensitivity

For fixed rate debt, interest rate changes affect the fair market value but do not impact net income to common stockholders or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact net income to common stockholders and cash flows, assuming other factors are held constant. At September 30, 2018, our outstanding debt totaled $4.1 billion, which consisted of fixed-rate debt of approximately $3.9 billion and variable rate debt of $222 million. If market interest rates increase by 1%, the fair value of our debt at September 30, 2018 would decrease by $9.6 million. Changes in the fair value of our fixed rate debt will not have any impact on us unless we decided to repurchase the debt in the open market.

If market rates of interest on our variable rate debt increase by 1%, the increase in annual interest expense on our variable rate debt would decrease future earnings and cash flows by $0.1 million per year. If market rates of interest on our variable rate debt decrease by 1%, the decrease in interest expense on our variable rate debt would increase future earnings and cash flows by $0.1 million per year. This assumes that the average amount outstanding under our variable rate debt for a year is $222 million, the balance of such variable rate debt at September 30, 2018.

33


 

Foreign Currency Sensitivity

With our investments in Germany, the United Kingdom, Spain, and Italy, we are subject to fluctuations in the euro and British pound to U.S. dollar currency exchange rates. Increases or decreases in the value of the euro to U.S. dollar and the British pound to U.S. dollar exchange rates may impact our financial condition and/or our results of operations. Based solely on annualizing the operating results for the third quarter of 2018 and excluding the gain on sale of real estate as part of the joint venture transaction with Primotop, if the euro exchange rate were to change by 5%, our net income and FFO would change by approximately $2 million and $2.8 million, respectively. Based solely on annualizing the operating results for the third quarter of 2018, if the British pound exchange rate were to change by 5%, our net income and FFO would change by approximately $0.1 million and less than $0.2 million, respectively.

Item 4. Controls and Procedures.

Medical Properties Trust, Inc. and MPT Operating Partnership, L.P.

We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b), under the Securities Exchange Act of 1934, as amended, we have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

34


 

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

The information contained in Note 9 “Commitments and Contingencies” of Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated by reference into this Item 1.

Item 1A. Risk Factors.

There have been no material changes to the Risk Factors as presented in our Annual Report on Form 10-K for the year ended December 31, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a)

None.

(b)

Not applicable.

(c)

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

(a)

None.

(b)

None.

35


 

Item 6. Exhibits

 

Exhibit

Number

 

Description

 

 

10.1(1)*

 

Amended and Restated Subscription Agreement dated as of June 7, 2018 by and among MPT Operating Partnership, L.P., Primotop Holding S.à r.l. and MPT RHM Holdco S.à r.l.

 

 

31.1*

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (Medical Properties Trust, Inc.)

 

 

31.2*

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (Medical Properties Trust, Inc.)

 

 

31.3*

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (MPT Operating Partnership, L.P.)

 

 

31.4*

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (MPT Operating Partnership, L.P.)

 

 

32.1**

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Medical Properties Trust, Inc.)

 

 

32.2**

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (MPT Operating Partnership, L.P.)

 

 

Exhibit 101.INS

 

XBRL Instance Document

 

 

Exhibit 101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

Exhibit 101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

Exhibit 101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

Exhibit 101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

Exhibit 101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

*

Filed herewith.

**

Furnished herewith.

(1)

Incorporated by reference to the registrants' Quarterly Report on Form 10-Q, filed with the Commission on August 9, 2018.

36


 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

MEDICAL PROPERTIES TRUST, INC.

 

 

 

By:

 

/s/ J. Kevin Hanna

 

 

J. Kevin Hanna

 

 

Vice President, Controller, Assistant Treasurer, and Chief Accounting Officer

(Principal Accounting Officer)

 

MPT OPERATING PARTNERSHIP, L.P.

 

 

 

By:

 

/s/ J. Kevin Hanna

 

 

J. Kevin Hanna

 

 

Vice President, Controller, Assistant Treasurer, and Chief Accounting Officer

of the sole member of the general partner

of MPT Operating Partnership, L.P.

(Principal Accounting Officer)

 

Date: November 9, 2018

 

37