UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172019
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission file number001-32559
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) | (IRS Employer Identification No.) | |
1000 Urban Center Drive, Suite 501 Birmingham, AL | 35242 | |
(Address of Principal Executive Offices) | (Zip Code) |
(205) 969-3755
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of | Trading Symbol | Name of |
Common Medical Properties Trust, Inc. | MPW | The New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Medical Properties Trust, Inc. Yes ☒ No ☐ MPT Operating Partnership, L.P. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Medical Properties Trust, Inc. Yes ☐ No ☒ MPT Operating Partnership, L.P. Yes ☐ No ☒
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.
Medical Properties Trust, Inc. Yes ☒ No ☐ MPT Operating Partnership, L.P. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Medical Properties Trust, Inc. Yes ☒ No ☐ MPT Operating Partnership, L.P. Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of RegulationS-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form10-K. ☒.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-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 Rule12b-2 of the Exchange Act.
Medical Properties Trust, Inc.
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
MPT Operating Partnership, L.P.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ | 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 in12b-2 of the Act).
Medical Properties Trust, Inc. Yes ☐ No ☒ MPT Operating Partnership, L.P. Yes ☐ No ☒
As of June 30, 2017,2019, the aggregate market value of the 361,010,288392,133,979 shares of common stock, par value $0.001 per share (“Common Stock”), held bynon-affiliates of the registrantMedical Properties Trust, Inc. was $4,646,202,407$6,838,816,594 based upon the last reported sale price of $12.87$17.44 on the New York Stock Exchange on that date. For purposes of the foregoing calculation only, all directors and executive officers of the registrantMedical Properties Trust, Inc. have been deemed affiliates.
As of February 28, 2018, 364,694,86521, 2020, 520,927,310 shares of Medical Properties Trust, Inc. Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement of Medical Properties Trust, Inc. for the Annual Meeting of Stockholders to be held on May 24, 201821, 2020 are incorporated by reference into Items 10 through 14 of Part III, of this Annual Report onForm 10-K.
TABLE OF CONTENTS
3 | ||||||
ITEM 1 | 5 | |||||
ITEM 1A. | 17 | |||||
ITEM 1B. | 35 | |||||
ITEM 2. | 36 | |||||
ITEM 3. | 38 | |||||
ITEM 4. | 38 | |||||
ITEM 5. | 39 | |||||
ITEM 6. | 41 | |||||
ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 44 | ||||
ITEM 7A. | 58 | |||||
ITEM 8. | 60 | |||||
ITEM 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 102 | ||||
ITEM 9A. | 102 | |||||
ITEM 9B. | 103 | |||||
ITEM 10. | 104 | |||||
ITEM 11. | 104 | |||||
ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 104 | ||||
ITEM 13. | Certain Relationships and Related Transactions, and Director Independence | 104 | ||||
ITEM 14. | 104 | |||||
ITEM 15. | 105 | |||||
ITEM 16. | 110 | |||||
111 |
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EXPLANATORY NOTE
This report combines the Annual Reports on Form10-K for the year ended December 31, 2017,2019, 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.
CAUTIONARY LANGUAGE REGARDING FORWARD LOOKING STATEMENTS
We make forward-looking statements in this Annual Report onForm 10-K that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans, and objectives. Statements regarding the following subjects, among others, are forward-looking by their nature:
• | our business strategy; |
• | our projected operating results; |
• | our ability to acquire, develop, and/or manage additional facilities in the United States (“U.S.”), Europe, Australia, or other foreign locations; |
• | availability of suitable facilities to acquire or develop; |
• | our ability to enter into, and the terms of, our prospective leases and loans; |
• | our ability to raise additional funds through offerings of debt and equity securities, joint venture arrangements, and/or property disposals; |
• | our ability to obtain future financing arrangements; |
• | estimates relating to, and our ability to pay, future distributions; |
• | our ability to service our debt and comply with all of our debt covenants; |
• | our ability to compete in the marketplace; |
• | lease rates and interest rates; |
• | market trends; |
• | projected capital expenditures; and |
• | the impact of technology on our facilities, operations, and business. |
The forward-looking statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account information currently available to us. These beliefs, assumptions, and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our common stock and other securities, along with, among others, the following factors that could cause actual results to vary from our forward-looking statements:
| • | the factors referenced in this Annual Report on Form 10-K, including those set forth under the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business;” |
• | the political, economic, business, real estate, and other market conditions of the U.S. (both national and local), Europe (in particular Germany, the United Kingdom, Spain, Italy, Portugal, and Switzerland), Australia, and other foreign jurisdictions; |
• | 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 (including the transactions described in Note 8 to Item 8 of this Annual Report on Form 10-K) 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; |
• | the competitive environment in which we operate; |
• | the execution of our business plan; |
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• | financing risks; |
• | 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 MPT’s status as a REIT for federal and state income tax purposes; |
• | our ability to attract and retain qualified personnel; |
• | changes in foreign currency exchange rates; |
• | changes in federal, state, or local tax laws in the U.S., Europe, Australia or other jurisdictions in which we may own healthcare facilities; |
• | healthcare and other regulatory requirements of the U.S., Europe, Australia, and other foreign countries; and |
• | the political, economic, business, real estate, and other market conditions of the U.S., Europe, Australia, and other foreign jurisdictions in which we may 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, 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. |
When we use the words “believe,” “expect,” “may,” “potential,” “anticipate,” “estimate,” “plan,” “will,” “could,” “intend”“intend,” or similar expressions, we are identifying forward-looking statements. You should not place undue reliance on these forward-looking statements. Except as required by law, we disclaim any obligation to update such statements or to publicly announce the result of any revisions to any of the forward-looking statements contained in this Annual Report on Form10-K to reflect future events or developments.
10-K.
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Overview
We are a self-advised real estate investment trust (“REIT”) focused on investingformed in 2003 to acquire and owningdevelop net-leased healthcare facilities. We currently have investments in 388 facilities acrossand approximately 41,000 licensed beds in 34 states in the U.S., in six countries in Europe, and selectively in foreign jurisdictions.across Australia. We have operated as a REIT since April 6, 2004, and accordingly, elected REIT status upon the filing of our calendar year 2004 federal income tax return. 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 other loans to certain of our operators through our taxable REIT subsidiaries (“TRS”), the proceeds of which are typically used for acquisition and working capital purposes. 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 tenants’ profits and losses. Our business model facilitates acquisitions and recapitalization, and allows operators of healthcare facilities to unlock the value of their real estate assets to fund facility improvements, technology upgrades, and other investments in operations.
Our investments in healthcare real estate, including mortgage and other loans, as well asand any equity investments in our tenants are considered a single reportable segment as further discussed in Note 1 of Item 8 in Part II of this Annual Report onForm 10-K. All of our investments are currently located in the U.S., Europe and Europe. Australia.
At December 31, 20172019 and 2016,2018, our total assets were made up of the following (dollars in thousands):
2017 | 2016 |
| 2019 |
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|
| 2018 |
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|
|
| |||||||||||||||||
Real estate owned (gross) | $ | 6,595,252 | 73.1 | % | $ | 4,912,320 | 76.6 | % |
| $ | 9,994,844 |
|
|
| 69.1 | % |
| $ | 5,868,340 |
|
|
| 66.3 | % | ||||||||
Mortgage loans | 1,778,316 | 19.7 | % | 1,060,400 | 16.5 | % |
|
| 1,275,022 |
|
|
| 8.8 | % |
|
| 1,213,322 |
|
|
| 13.7 | % | ||||||||||
Other loans | 150,209 | 1.7 | % | 155,721 | 2.4 | % |
|
| 544,832 |
|
|
| 3.8 | % |
|
| 373,198 |
|
|
| 4.2 | % | ||||||||||
Construction in progress | 47,695 | 0.5 | % | 53,648 | 0.8 | % |
|
| 168,212 |
|
|
| 1.2 | % |
|
| 84,172 |
|
|
| 1.0 | % | ||||||||||
Other | 448,816 | 5.0 | % | 236,447 | 3.7 | % |
|
| 2,484,421 |
|
|
| 17.1 | % |
|
| 1,304,611 |
|
|
| 14.8 | % | ||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total(1) | $ | 9,020,288 | 100.0 | % | $ | 6,418,536 | 100.0 | % | ||||||||||||||||||||||||
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|
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| |||||||||||||||||||||||||||||
Total assets(1) |
| $ | 14,467,331 |
|
|
| 100.0 | % |
| $ | 8,843,643 |
|
|
| 100.0 | % |
(1) | At December 31, 2019, our total pro forma gross assets were $16.5 billion, which represents total assets plus accumulated depreciation and |
Revenue by property type:Property Type:
The following is our revenue by property type for the year ended December 31 (dollars in thousands):
2017 | 2016 | 2015 | ||||||||||||||||||||||
General Acute Care Hospitals | $ | 488,764 | 69.4 | % | $ | 344,523 | 63.7 | % | $ | 255,029 | 57.7 | % | ||||||||||||
Inpatient Rehabilitation Hospitals | 173,149 | 24.6 | % | 149,964 | 27.7 | % | 134,198 | 30.4 | % | |||||||||||||||
Long-Term Acute Care Hospitals | 42,832 | 6.0 | % | 46,650 | 8.6 | % | 52,651 | 11.9 | % | |||||||||||||||
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|
|
|
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| |||||||||||||
Total revenue(1) | $ | 704,745 | 100.0 | % | $ | 541,137 | 100.0 | % | $ | 441,878 | 100.0 | % | ||||||||||||
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| 2019 |
|
|
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|
|
| 2018 |
|
|
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|
|
| 2017 |
|
|
|
|
| |||
General acute care hospitals |
| $ | 741,232 |
|
|
| 86.8 | % |
| $ | 596,426 |
|
|
| 76.0 | % |
| $ | 488,764 |
|
|
| 69.4 | % |
Inpatient rehabilitation hospitals |
|
| 83,515 |
|
|
| 9.8 | % |
|
| 158,193 |
|
|
| 20.2 | % |
|
| 173,149 |
|
|
| 24.6 | % |
Long-term acute care hospitals |
|
| 29,450 |
|
|
| 3.4 | % |
|
| 29,903 |
|
|
| 3.8 | % |
|
| 42,832 |
|
|
| 6.0 | % |
Total revenues(1) |
| $ | 854,197 |
|
|
| 100.0 | % |
| $ | 784,522 |
|
|
| 100.0 | % |
| $ | 704,745 |
|
|
| 100.0 | % |
(1) | For 2019 and 2018, our adjusted revenues were $938.2 million and |
See “Overview” in Item 7 of this Annual Report onForm 10-K for details of transaction activity for 2017, 20162019, 2018, and 2015.2017. More information is available on the Internet at www.medicalpropertiestrust.com.
5
Portfolio of Properties
As of February 28, 2018,21, 2020, our portfolio consisted of 275388 properties: 253366 facilities are leased to 3141 tenants, twothree are under development, 1511 are in the form of mortgage loans to fourfive operators, and fiveeight properties are Adeptus Health, Inc. (“Adeptus Health”) transition properties not currently leased to a tenant, as discussed in Note 3 to Item 8 of this Annual Report on Form 10-K. Of our portfolio of properties, 97 facilities are owned by way of joint venture arrangements in which we hold a 50% or less ownership interest. Our facilities consist of 161259 general acute care hospitals, 97106 inpatient rehabilitation hospitals (“IRFs”), and 1723 long-term acute care hospitals (“LTACHs”).
At February 28, 2018, no single property accounted for more than 3.7% of our total gross assets.
Outlook and Strategy
Our strategy is to lease the facilities that we acquire or develop to experienced healthcare operators pursuant to long-term net leases. Alternatively, we have structured certain of our investments as long-term, interest-only mortgage loans to healthcare operators, and we may make similar investments in the future. Our mortgage loans are structured such that we obtain annual cash returns similar economic returns asto our net leases. In addition, we have obtained and willmay continue to obtain profits or other interests in certain of our tenants’ operations in order to enhance our overall return.
The market for healthcare real estate is extensive and includes real estate owned by a variety of healthcare operators. We focus on acquiring and developing thosenet-leased facilities that are specifically designed to reflect the latest trends in healthcare delivery methods and that focus on the most critical components of healthcare. We typically invest in facilities that have the highest intensity of care (as shown by the graph below) including:
• | General acute care — provides inpatient care for the treatment of acute conditions and manifestations of chronic conditions. This type of facility also provides ambulatory care through hospital outpatient departments and emergency rooms. |
• | IRFs — provides rehabilitation to patients with various neurological, musculoskeletal orthopedic, and other medical conditions following stabilization of their acute medical issues. |
• | LTACHs — a specialty-care hospital designed for patients with serious medical problems that require intense, special treatment for an extended period of time, sometimes requiring a hospital stay averaging in excess of three weeks. |
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Diversification
A fundamental component of our business plan is the continued diversification of our portfolio. We monitor diversification in several ways including concentration in any one facility, our tenant relationships, the types of hospitals we own, and the geographic areas in which we invest.
At December 31, 2019, no single property accounted for more than 2.6% of our total assets (or 2.3% of our total pro forma gross assets), down from approximately 4% at December 31, 2018. From a tenant relationship perspective, see section titled “Significant Tenants” below for detail. See sections titled “Revenue by Property Type” and “Portfolio of Properties” above for information on the diversification of our hospital types. From a geographical perspective, we have investments across the U.S., Europe, and in Europe.Australia. See below for investment and revenue concentration in the U.S. and our global concentration at December 31, 2017:2019:
We continue to believe that Europe represents an attractive market in which to invest, particularly in Germany. Germany is an attractive investment opportunity for us given its strong macroeconomic position and healthcare environment. Germany’s Gross Domestic Product (“GDP”), which is approximately $3.5 billion according to World Bank 2016 data, has been relatively more stable than other countries in the European Union due to Germany’s stable business practices and monetary policy. In addition to cultural influences, government policies emphasizing sound public finance and a significant presence of small andmedium-sized enterprises
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(which employ 61% of the employment base) have also contributed to Germany’s strong and sustainable economic position. The above factors have contributed to an unemployment rate in Germany of 3.6% as of December 2017, which is significantly less than the 8.7% unemployment rate in the European Union as of December 2017, according to Eurostat.
Underwriting/Asset Management
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 whichperformance indicators that we believe may provideprovides us with early indications of conditions that maycould affect the level of risk in our portfolio.
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Key factors that we consider in underwriting prospective tenants and in our ongoing monitoring of our tenants’ (and any guarantors’) performance include the following:
• | the scope and breadth of clinical services and programs, including utilization trends (both inpatient and outpatient) by service type; |
• | the size and composition of medical staff and physician leadership at our facilities, including specialty, tenure, and number of procedures performed and/or referrals; |
• | an evaluation of our operator's administrative team, as applicable, including background and tenure within the healthcare industry; |
• | facility operating performance measured by current, historical, and prospective operating margins (measured by a tenant's earnings before interest, taxes, depreciation, amortization, management fees, and facility rent) of each tenant and at each facility; |
• | the ratio of our tenants' operating earnings to facility rent and to other fixed costs, including debt costs; |
• | changes in revenue sources of our tenants, including the relative mix of public payors (including Medicare, Medicaid/MediCal, and managed care in the U.S., as well as equivalent payors in Europe and Australia) and private payors (including commercial insurance and private pay patients); |
• | trends in tenants' cash collections, including comparison to recorded net patient service revenues; |
• | tenants' free cash flow; |
• | the potential impact of healthcare legislation and other regulations (including changes in reimbursement) on our tenants' profitability and liquidity; |
• | the potential impact of any legal, regulatory, or compliance proceedings with our tenants; |
• | an ongoing assessment of the operating environment of our tenants, including demographics, competition, market position, status of compliance, accreditation, quality performance, and health outcomes as measured by The Centers for Medicare and Medicaid Services ("CMS"), Joint Commission, and other governmental bodies in which our tenants operate; and |
• | the level of investment in the hospital infrastructure and health IT systems. |
Healthcare Industry
The delivery of healthcare services, whether in the U.S. or elsewhere, requires real estate and, asestate. As a consequence, healthcare providers depend on real estate to maintain and grow their businesses. We believe that the healthcare real estate market provides investment opportunities due to the:
• | compelling demographics driving the demand for health services; |
• | specialized nature of healthcare real estate investing; and |
• | consolidation of the fragmented healthcare real estate sector. |
As noted previously, we have investments in eight different countries around the demand for healthcare services;
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United States
Healthcareeconomy is the single largest industry in the U.S. based on GDP. According to the National Health Expenditures report dated July 2017 by the CMS: (i) national health expenditures are projected to grow 5.4% in 2017; (ii) the average compound annual growth ratea consistent theme. See below for national health expenditures, over the projection perioddetails of 2017 through 2025, is anticipated to be 5.6%; and (iii) the healthcare industry is projected to represent 19.9% of U.S. GDP by 2025.
Germany
The healthcare industry is also the single largest industry in Germany. Behind only the U.S., Netherlands and France, Germany’s healthcare expenditures represent approximately 11.0% of its total GDP according to the Organization for EconomicCo-operation and Development’s 2013 data.
The German rehabilitation market (which includes the majority of our facilities in Germany) serves a broader scope of treatment with over 1,233 rehabilitation facilities (compared to 1,165 in the U.S.) and 208.5 beds per 100,000 population (compared to 114.7 in the U.S.). Approximately 90%each of the paymentscountries in the German healthcare system come from governmental sources. The largest payor category is the public pension fund system representing 39% of payments. Public health insurance and payments for government employees represent 46% of payments. The balance of the payments into the German rehabilitation market come from a variety of sources including private pay and private insurance. One particular focus area of investors in the German market is the healthcare industry because the German Social Code mandates universal access, coverage and a high standard of care, thereby creating a robust healthcare dynamic in the country. Germany spends approximately 7.4% of health spending for inpatient facilities on prevention and rehabilitation facilities.which we do business:
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United States
• | Healthcare is one of the largest industries in the U.S. based on GDP, according to the National Health Expenditures report dated February 20, 2019 by the CMS. |
• | Under current law, national health spending is projected to grow at an average rate of 5.5% per year for the 2018-2027 period and to reach nearly $6.0 trillion by 2027. |
• | Health spending is projected to grow 0.8% faster than GDP per year over the 2018-2027 period; as a result, the health share of GDP is expected to rise from 17.9% in 2017 to 19.4% by 2027. |
• | Prices for healthcare goods and services are projected to grow somewhat faster over the 2018-2027 period (2.5% compared to 1.1% for the 2014-2017 period). |
• | As a result of comparatively higher projected enrollment growth, average annual spending growth in Medicare (7.4%) is expected to exceed that of Medicaid (5.5%) and private health insurance (4.8%). |
• | Hospital spending is projected to have grown 4.4% in 2018. |
• | Hospital spending growth is projected to accelerate to 5.7% per year on average over the 2020-2027 period because of faster spending growth from all payors and Medicare in particular. |
Germany
• | Healthcare is the single largest industry in Germany. Behind only the U.S., Switzerland, and Norway, Germany’s healthcare expenditures represent approximately 11.2% of its total GDP according to the Organization for Economic Co-operations and Development’s (“OECD”) 2019 data. |
• | Germany has a universal, multi-payor health care system paid for by a combination of statutory health insurance and private health insurance. |
• | Health insurance is compulsory for the whole population in Germany. |
• | Approximately 12.5% of the population have private health insurance. |
• | The German rehabilitation market (which includes the majority of our facilities in Germany) serves a broader scope of treatment with 1,233 rehabilitation facilities (compared to 1,165 in the U.S.) and 208.5 facilities per 100,000 population (compared to 114.7 in the U.S.). |
• | The German Social Code mandates universal access coverage for rehabilitation hospitalization and a high standard of care. |
• | Germany spends approximately 7.4% of health spending for inpatient facilities on prevention and rehabilitation facilities. |
• | Approximately 90% of the payments in the German health care system come from governmental sources. The largest payor category is the public pension fund system representing 39% of payments. Public health insurance and payments for government employees represent 46% of payments. The balance of the payments into the German rehabilitation market come from a variety of sources including private pay and private insurance. |
United Kingdom
Healthcare services in the United Kingdom are provided through the National Health Service (“NHS”). In 2014, the United Kingdom spent 9.9% of GDP on healthcare. The majority of this funding for the NHS comes from general taxation, and a smaller proportion from national insurance (a payroll tax). The NHS also receives income from copayments, people using NHS services as private patients, and some other minor sources. In 2015, 10.5% of the United Kingdom population had private voluntary health insurance provided mostly through employers. Private insurance offers more rapid and convenient access to care, especially for elective hospital procedures. It is estimated that four insurers account for 87.5% of the market, with small providers comprising the rest. Demand for private health insurance rose by 2.1% in 2015.
Publicly owned hospitals are organized either as NHS trusts, approximately 72 in number or as foundation trusts, approximately 150 in number. NHS trusts are accountable to the Department of Health while foundation trusts enjoy greater freedom from central control. An estimated 548 private hospitals are located in the United Kingdom and offer a range of treatments. Their charges to private patients are not regulated, and they receive no public subsidies. NHS use of private hospitals remains low with about 3.6% of NHS funding used for this purpose. The NHS budget is projected to grow 1.1% between 2015 and 2021.
Italy
The Italian national health service (Servizio Sanitario Nazionale) is regionally based and organized at the national, regional, and local levels. Under the Italian constitution, responsibility for healthcare is shared by the national government and the 19 regions and 2 autonomous provinces. The central government controls the distribution of tax revenue for publicly financed health care and defines a national statutory benefits package to be offered to all residents in every region — the “Essential Levels of Care.” The 19 regions and two autonomous provinces have responsibility for the organization and delivery of health services through local health units.
| • | Healthcare services in the United Kingdom are primarily provided through the National Health Service (“NHS”). |
• | In 2018, the United Kingdom spent 9.8% of GDP on healthcare. |
• | The majority of public healthcare funding comes from general taxation, and a smaller proportion from national insurance through a payroll tax. The NHS also receives income from copayments, people using NHS services as private patients, and some other minor sources. |
• | Approximately 10.5% of the United Kingdom population have private voluntary health insurance provided mostly through employers. Private insurance offers patients improved access and avoidance of long queues to access elective hospital services. |
• | Publicly owned hospitals are organized either as NHS trusts, approximately 72 in number, or as foundation trusts, approximately 150 in number. |
• | Approximately 550 private hospitals are located in the United Kingdom (of which we own 42 of these facilities at February 21, 2020) and offer a range of treatments. |
• | Hospital charges to private patients are not regulated, and they receive no public subsidies. |
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• | Approximately 3.6% of NHS funding is used to support private hospitals. |
Australia
• | Healthcare is a large and growing industry in Australia, currently ranked 4th among industries based on percentage of GDP. |
• | An estimated 25.2 million people comprise the population of Australia. |
• | Healthcare spending was $170 billion in 2015-16, and healthcare expenditures grew 3.4% for the period between 2011-2012 to 2015-2016. |
• | The government funded 67% of total healthcare expenditures, with the Australian Government contributing 61% of this amount and territory government contributing 39%. Private insurance funds around 9% of the total. |
• | Healthcare expenditures had an average annual growth rate of 2.8% between 2006-2007 and 2015-2016. |
• | As a percent of GDP, healthcare expenditure is 10.3% of GDP in 2015-2016. Based on 2016 data, Australia spends more on health care than the OECD average of 9.0%. |
• | Hospitals receive 39% of total healthcare expenditures and are the largest percentage of the total amount spent by Australia on healthcare. |
• | Private hospitals account for 23%, or $15 billion, of total hospital expenditures in Australia. |
Switzerland
• | Healthcare in Switzerland is universal, and the Swiss are required to purchase basic health insurance. Swiss law establishes a base of services that must be provided, but there are no free state-provided health services. Private health insurance is compulsory for all persons residing in Switzerland. |
• | An individual pays part of the insurance premium for the basic plan up to 8% of their personal income. Health insurance covers the costs of medical treatment and hospitalization. |
• | An individual pays part of the cost of treatment by means of an annual deductible called the franchise and by a charge of 10% of the costs over and above the deductible. For hospitalization, one pays a contribution to room and service costs. |
• | This compulsory insurance can be supplemented by private complementary insurance policies that allow for coverage of some of the treatment categories not covered by basic insurance, or to improve the standard of room and service in case of hospitalization. |
• | Healthcare costs in Switzerland are 11.4% of GDP, comparable to Germany, France, and other European countries. |
• | In the Swiss healthcare system, an individual selects its health insurers and its providers of service. |
• | The Swiss hospital market contains 129 general hospitals. |
Spain
• | Spain provides universal coverage to its citizens. |
• | Spanish healthcare expenditures were 8.9% of GDP in 2018. |
• | Expenditures for private healthcare are 26.4% of total health expenditures and have been growing at a compounded annual growth rate of 1.7%. |
• | Approximately 80% of all Spanish patients use a combination of both private and public healthcare services. |
• | Private hospitals comprise about 55% of total Spanish hospitals. |
Italy
• | The Italian constitution mandates universal healthcare coverage. |
• | The Italian healthcare system is a regionally based national system of healthcare organized around 19 regions and two autonomous provinces. The central government controls the distribution of tax revenue for publicly financed healthcare and defines a national statutory benefits package, the “Essential Levels of Care.” |
• | Total health expenditures were 8.8% of GDP in 2018. |
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• | The public system is financed primarily through a corporate tax (35.6% of overall funding in 2012) pooled nationally and allocated back to regions and a fixed proportion of national value-added tax revenue (approximately 47.3% of the total in 2012). |
• | Private health insurance plays less of a role with six million people being covered by some form of voluntary insurance. Private insurance is of two types: corporate where companies cover employees and sometimes their families and non-corporate with individuals buying insurance. |
Public financing accounted for 76% of total health spending in 2014, with total expenditure standing at 9.1% of GDP. The public system is financed primarily through a corporate tax (approximately 35.6% of the overall funding in 2012) pooled nationally and allocated back to regions, typically the source region, and a fixed proportion of national value-added tax revenue (approximately 47.3% of the total in 2012) collected by the central government and redistributed to regions unable to raise sufficient resources to provide the Essential Levels of Care.Portugal
In 2012, there were approximately 187,000 beds in public hospitals and 45,500 beds in private accredited hospitals. A diagnosis-related group-based prospective payment system operates across the country and accounts for most hospital revenue.
Private health insurance plays a limited role in the health system, accounting for roughly 1% of total spending in 2014. Approximately 6 million people are covered by some form of voluntary insurance which generally covers services excluded under the Essential Levels of Care, to offer a higher standard of comfort and privacy in hospital facilities, and wider choice among public and private providers. Some private health insurance policies also cover copayments for privately provided services, or a daily rate of compensation during hospitalization. There are two types of private health insurance: corporate, where companies cover employees and sometimes their families; andnon-corporate, with individuals buying insurance for themselves or their family.
Depending on the region, public funds are allocated by local health units to public and accredited private hospitals. Rates paid to hospitals include all hospital costs including those of physicians. Funding for health is defined by the July 2014 Pact for Health which defines funding between $143.4 billion and $151.3 billion annually for the years 2014 to 2016.
Spain
The Spanish health system was established by the General Health Law of 1986. This law carries out a mandate of the Spanish Constitution, which establishes the right of all citizens to protection of their health. The National Health System (Sistema Nacional de Salud, SNS) is the administrative device set up by the law. Spain spends approximately 9.6% of its GDP on health care. Expenditures for private healthcare are 26.4% of total health expenditures and have been growing at a compounded annual growth rate of 1.7%. 80% of all Spanish patients use a combination of both private and public healthcare services.
In 2014, private hospitals comprised 55% of total Spanish hospitals. Specifically, private hospitals numbered 421 while public hospitals accounted for 343 of Spain’s total number of hospitals.
Public expenditures on healthcare accounted for 5.9% of total public expenditures. They are projected to grow to 7.1% of total public expenditures by 2050. In 2015, public spending on healthcare reached €68 million, a significant increase from 1995 when they were €23 million.
• | The Portuguese healthcare system is national and universal. |
• | Private health insurance complements the public sector and approximately 15% of the population have private health insurance, mainly through corporate group policies. |
• | Several private healthcare corporations operate hospitals in Portugal. |
• | Health spending in Portugal accounted for about 9.7% of GDP in 2013. |
• | Out-of-pocket payments by patients are higher in Portugal than most other European countries. |
Our Leases and Loans
The leases for our facilities are generally “net” leases with terms requiring the tenant to pay all ongoing operating and maintenance expenses of the facility, including property, casualty, general liability, and other insurance coverages, utilities, and other charges incurred in the operation of the facilities, as well as real estate and certain other taxes, ground lease rent (if any), and the costs of capital expenditures, repairs, and maintenance (including any repairs mandated by regulatory requirements). Similarly, borrowers under our mortgage loan arrangements retain the responsibilities of ownership, including physical maintenance and improvements and all costs and expenses. Our leases and loans typically require our tenants to indemnify us for any past or future environmental liabilities. Our current leases and loans have a weighted averageweighted-average remaining initial lease or loan term of 13.714.6 years (see Item 2 for more information on remaining lease orand loan terms). and most include renewal options at the election of our tenants. Based on current monthly
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revenue, more than 95%approximately 97% of our leases and loans provide for some type of inflation-protected annual rent or interest escalations based on either increases in the consumer price index (“CPI”) and/or fixed minimum annual rent or interest escalations ranging from 0.5% to 4.0%3.0%. In some cases, our domestic leases and loans provide for escalations based on CPI subject to floors and/or ceilings. In certain limited cases, we may have arrangements that provide for additional rents based on the level of a tenant’s revenue.
RIDEA Investments
We have made, and willmay make in the future, investments in certain of our tenants in the form of equity investments, loans (with equity like returns), and obtainor profit interests in certain of our tenants.interests. Some of these investments fall under a structure permitted by the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”), which was signed into law under the Housing and Economic Recovery Act of 2008. Under the provisions of RIDEA, a REIT may lease “qualified health care properties” on an arm’s length basis to a TRS if the property is operated on behalf of such subsidiary by a person who qualifies as an “eligible independent contractor.” We view RIDEA as a structure primarily to be used on properties that present attractive valuation entry points. At December 31, 2017,2019, our RIDEA investments totaled approximately $107.5$8.3 million.
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Significant Tenants
At December 31, 2017,2019, we had total assets of approximately $9.0$14.5 billion comprised of 275359 healthcare properties (including 97 real estate facilities held in 29five real estate joint ventures) in 34 states across the U.S., in Germany, the United Kingdom, Italy, Spain, Portugal, Switzerland, and Spain.Australia. The properties are leased to or mortgaged by 3142 different hospital operating companies. On a total pro forma gross asset basis, (which is total assets before accumulated depreciation/amortization and assumes all real estate binding commitments on new investments and unfunded amounts on development deals and commenced capital improvement projects are fully funded, and assumes cash on hand is fully used in these transactions, as more fully described in the section titled“Non-GAAP “Non-GAAP Financial Measures” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K),10-K, our top five tenants were as follows (dollars in thousands):
Total Pro Forma Gross Assets by Operator
|
| As of December 31, 2019 |
|
| As of December 31, 2018 |
| ||||||||||||
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 |
| $ | 4,052,162 |
|
|
|
| 24.5 | % |
| $ | 3,823,625 |
|
|
|
| 38.0 | % |
Circle |
|
| 2,152,951 |
|
|
|
| 13.0 | % |
|
| 100,823 |
|
|
|
| 1.0 | % |
Prospect |
|
| 1,563,642 |
|
|
|
| 9.5 | % |
|
| — |
|
|
|
| — |
|
LifePoint |
|
| 1,202,319 |
|
|
|
| 7.3 | % |
|
| 502,072 |
|
|
|
| 5.0 | % |
Prime |
|
| 1,144,705 |
|
|
|
| 6.9 | % |
|
| 1,124,711 |
|
|
|
| 11.2 | % |
Other operators |
|
| 5,509,952 |
|
|
|
| 33.4 | % |
|
| 3,978,547 |
|
|
|
| 39.5 | % |
Other assets |
|
| 903,543 |
|
|
|
| 5.4 | % |
|
| 528,669 |
|
|
|
| 5.3 | % |
Total |
| $ | 16,529,274 |
|
|
|
| 100.0 | % |
| $ | 10,058,447 |
|
|
|
| 100.0 | % |
Steward
As of December 31, 2017 | As of December 31, 2016 | |||||||||||||||
Operators | Total Gross Assets | Percentage of Total Gross Assets | Total Gross Assets | Percentage of Total Gross Assets | ||||||||||||
Steward | $ | 3,457,384 | (1) | 36.5 | % | $ | 1,609,583 | (2) | 22.5 | % | ||||||
MEDIAN | 1,229,325 | 13.0 | % | 993,677 | 13.9 | % | ||||||||||
Prime | 1,119,484 | 11.8 | % | 1,144,055 | 16.0 | % | ||||||||||
Ernest | 629,161 | 6.6 | % | 627,906 | 8.8 | % | ||||||||||
RCCH | 506,265 | 5.3 | % | 566,600 | 7.9 | % | ||||||||||
Other operators | 2,089,934 | 22.1 | % | 1,900,397 | 26.7 | % | ||||||||||
Other assets | 444,659 | 4.7 | % | 300,903 | 4.2 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 9,476,212 | 100.0 | % | $ | 7,143,121 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
Affiliates of Steward Health Care System LLC (“Steward”(collectively, “Steward”) lease 2841 facilities pursuant to aone master lease agreement, which had an initial15-year term (ending in October 2031) with three five-year extension options, plus annual inflation-based escalators. At December 31, 2017,2019, these facilities had an average remaining initial lease term of 13.811.8 years. In addition to the master lease, we hold a mortgage loan on sixtwo facilities with terms and provisions substantiallythat produce economic results in terms of day-to-day cash flows that are similar to thethose of our master lease agreement. The master lease and loan agreements includeagreement includes extension options that must include all or none of the master leased properties, cross default provisions for the leases, and loans, and a right of first refusal for the repurchase of the leased properties. The master loan agreement has independent extension options for each property and does not provide comparable cross default provisions. In addition to the master lease and mortgage loans, we hold a promissory note which consists of three tranches with varying terms. The three terms end in December 2023, December 2024, and October 2031. At December 31, 2017,2019, we hold a 9.9% equity investment in Steward for $150 million.
Circle
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AffiliatesPost our acquisition of Median Kliniken S.à r.l.(“MEDIAN”30 properties on January 8, 2020 (as more fully described in Note 8 of Item 8 in Part II of this Annual Report on Form 10-K), affiliates of Circle Health Ltd. (collectively, “Circle”) lease 7731 facilities pursuant to fourseparate lease agreements. Of these 31 leases, 30 are cross-defaulted leases guaranteed by Circle and have initial fixed terms ending in 2050, with two five-year extension options plus annual inflation-based escalators. The remaining lease is for 15 years (ending in 2029) and a tenant option to extend the lease for an additional 15 years. The lease also includes annual inflation-based escalators. In addition to these leased properties, we are currently developing two facilities in Birmingham, England that will be leased to Circle upon completion.
Prospect
Affiliates of Prospect Medical Holdings, Inc. (collectively, “Prospect”) lease 13 facilities pursuant to two master lease agreements. EachBoth master leases have initial fixed terms of 15 years (ending in April 2034) and contain three extension options plus annual inflation-based escalators. In addition to these master leases, we hold a mortgage loan secured by a first mortgage on an acute care hospital and a term loan which we expect will be converted into the acquisition of two additional acute care hospitals upon the satisfaction of certain conditions. The master leases, mortgage loan, and term loan are all cross-defaulted and cross-collateralized.
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LifePoint
Affiliates of LifePoint Health, Inc. (collectively, “LifePoint”) lease 17 facilities, including 15 facilities pursuant to two master leases. One master lease agreement has no renewal(covering five properties) had an initial fixed term of 13.5 years with four five-year extension options that may be exercised with respect to any or repurchase options.all of the properties. The annual escalator for onesecond master lease that represents 15 facilities(covering 10 properties), which started in December 2019, is for 20 years and contains two five-year extension options. Both leases contain annual inflation-based escalators. At the end of the MEDIAN portfolio provided for a fixed increaseterm and during any exercised extension options of 2% through 2017 and provides for additional fixed increasesthe master leases, the lessee will have the right of 0.5% each year thereafter.first refusal to purchase the leased property. In addition at December 31, 2020to the master leases, two facilities are leased pursuant to stand-alone leases with a weighted-average remaining fixed term of 9.1 years. The terms and every three years thereafter, rent will be increased, if needed, byprovisions of these leases are generally equivalent to the positive difference between 1.5%terms and 70%provisions of the change in German CPI during the review period. This master lease had an approximate27-year fixed term ending in November 2040. The annual escalators for the other master leases that cover the remaining facilities of the MEDIAN portfolio provide for increases of the greater of 1% or 70% of the change in German CPI. The lease terms for these remaining leases end in November 2044 for three of the facilities, December 2042 for 39 of the facilities and August 2043 for 20 of the facilities.agreements.
Prime
Affiliates of Prime Healthcare Services, Inc. (“Prime”(collectively, “Prime”) lease 22 facilities pursuant to five master lease agreements. Four of the master leases, covering 17 properties, have initial fixed terms of 10 years (ending between July 2022 and February 2025) and contain two renewal options of five years each. The fifth master lease (covering the remaining 5 properties) is for 15 years (ending in May 2031) and contains three renewal options for five years each. Rent escalates each year based on the CPI increase, with a 2% minimum floor.All five master leases contain annual inflation-based escalators. At the end of the initial or any renewal term, Prime must exercise any available extension or purchase option with respect to all or none of the leased and mortgaged properties relative to each master lease. The master leases include repurchase options, including provisions establishing minimum repurchase prices equal to our total investment. At December 31, 2017, these2019, our facilities leased to Prime had an average remaining initial fixed term of 75.0 years. In addition to the master leases, we hold mortgage loans on three facilities owned by affiliates of Prime. The terms and provisions of these loans are generally equivalent to the terms and provisions of our Prime lease arrangements.
Affiliates of Ernest Health, Inc. (“Ernest”) lease 22 facilities, including one under development, pursuant to a master lease agreement and two stand-alone lease agreements. The original master lease agreement entered into in 2012, covering 20 properties, had a20-yearwith an average remaining initial fixed term with three five-year extension options and provides for consumer price-indexed increases, limited to a 2% floor and 5% ceiling annually. At December 31, 2017, these facilities had a remaining initial fixed lease term of 14.22.3 years. This master lease includes purchase options that allow the lessee to purchase the leased property at an option price equal to the greater of fair market value of the lease property or the lease base increased by an amount equal to the annual rate of increase in the CPI on each adjustment date. All leases and loans are cross-defaulted, including the mortgage loans. In addition to the original master lease, Ernest affiliates lease two other properties, including one property that is currently under development, pursuant to two separate stand-alone leases that have terms generally similar to the original master lease agreement. Furthermore, we hold a mortgage loan on four facilities owned by affiliates of Ernest that will mature in 2032. The terms and provisions of these loans are generally equivalent to the terms and provisions of the original master lease agreement.
Affiliates of RCCH (formerly Capella Healthcare Inc. (“Capella”)) lease six facilities (four of which are leased pursuant to a master lease agreement). The master lease agreement has an initial fixed13.5-year term with four five-year extension options, plus consumer price-indexed increases, limited to a 2% floor and a 4% ceiling annually. The extension options may be exercised with respect to any or all of the properties. At the end of the fixed term and during any exercised extension options, the lessee will have the right of first refusal to purchase the leased property. At December 31, 2017, these facilities had an average remaining initial fixed lease term of 11.2 years. In addition to the master lease, two facilities are leased pursuant to stand-alone leases with a weighted average remaining fixed term of 11.1 years. The terms and provisions of these leases are generally equivalent to the terms and provisions of the master lease agreement.leases.
No other tenant accounted for more than 3.7%6.3% of our total pro forma gross assets at December 31, 2017.2019.
Environmental Matters
Under various U.S. federal, state, and local environmental laws and regulations and similar international laws, a current or previous owner, operator, or tenant of real estate may be required to remediate hazardous or
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toxic substance releases or threats of releases. There may also be certain obligations and liabilities on property owners with respect to asbestos containing materials. Investigation, remediation, and monitoring costs may be substantial. The confirmed presence of contamination or the failure to properly remediate contamination on a property may adversely affect our ability to sell or rent that property or to borrow funds using such property as collateral and may adversely impact our investment in that property. Generally, prior to completing any acquisition or closing any mortgage loan, we obtain Phase I environmental assessments (or similar studies outside the U.S.) in order to attempt to identify potential environmental concerns at the facilities. These assessments are carried out in accordance with an appropriate level of due diligence and generally include a physical site inspection, a review of relevant environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property’s chain of title, and review of historic aerial photographs and other information on past uses of the property. We may also conduct limited subsurface investigations and test for substances of concern where the results of the Phase I environmental assessments or other information indicates possible contamination or where our consultants recommend such procedures. Upon closing and for the remainder of the lease or loan term, our transaction documents require our tenants to repair and remediate environmental issues at the applicable facility, and to comply in full with all environmental laws and regulations.
California Seismic Standards
California’sExisting law, the Alfred E. Alquist Hospital Facilities Seismic Safety Act of 1973 (the “Alquist1983 (“Alquist Act”) established a seismic safety building standards program, establishes, under the jurisdiction of the Office of Statewide Health Planning and Development (“OSHPD”) jurisdiction, a program of seismic safety building standards for certain hospitals builtconstructed on orand after March 7, 1973. It requiredThe law requires the California Building Standards Commission to adopt earthquake performance categories, seismic evaluation procedures, standards and timeframes for upgrading certain facilities, and seismic retrofit building standards. These regulations required hospitals to meet certain seismic performance standards to ensure that they are capable of providing medical services to the public after an earthquake or other disaster. This legislation was adopted to avoid the loss of life and the disruption of operations and the provision of emergency medical services that may result from structural damage sustained to hospitals resulting from an earthquake. A violation of any provision of the act is a misdemeanor.
The Building Standards Commission completed its adoption of evaluation criteria and retrofit standards in 1998. TheUnder the Alquist Act required the Building Standards Commission to adopt certain evaluation criteria and retrofit standards such as:
Since the Alquist Act, subsequent legislation has modified requirements of seismic safety standards and deadlines for compliance. Originally, hospital buildings considered hazardous and at risk of collapse in the event of an earthquake must have been retrofitted, replaced or removed from providing acute care servicesdeveloped by January 1, 2008; however, provisions were made to allow this deadline to be extended to January 1, 2013.
Senate Bill 499 was signed into law that provided for a number of seismic relief measures, including criteria for reclassifying buildings into a lower seismic risk category. These buildings would have until January 1, 2030 to comply with structural seismic safety standards. Buildings denied reclassification must have met seismic compliance standards by January 1, 2013, unless further extensions were granted.
OSHPD.
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California’s AB 306 legislation permitted OSHPD to grant extensions to acute care hospitals that lacked the financial capacity to meet the January 1, 2013, retrofit deadline, and instead, requires them to replace those buildings by January 1, 2020. More recently, California SB 90 allows a hospital to seek an extension for seismic compliance up to seven years based on three elements:
InHowever, in 2017, the OSHPD adopted a new performance category that will allowallowed hospitals to explore the possibilities of upgrading currentSPC-1 andSPC-2nonconforming buildings to a new performance level that is not as rigorous as the current requirement to upgrade toSPC-5.rigorous. UnderSPC-4D, buildings undergoing a retrofit to this level can continue functioning indefinitely beyond 2030. In addition, California AB 2190 bill (effective January 1, 2019) required OSHPD to grant an additional extension of time to an owner who is subject to the January 1, 2020, deadline if specified conditions were met. The bill authorized the additional extension to be until July 1, 2022, if the compliance plan was based upon replacement or retrofit or up to 5 years if the compliance plan was for a rebuild.
According to a recent OSHPD report, California’s acute care hospitals continue to make progress in achieving seismic safety compliance. More than 91 percentOwners of thegeneral acute care hospital buildings that are no longer at significant riskclassified as nonconforming must submit reports to OSHPD describing the status of collapseeach building in a strong earthquake. The inventory of buildings at risk of collapse continuescomplying with the extension provisions, and to decline from 1,313 in 2002 to 251 in August 2016.annually update OSHPD with any changes or adjustments.
As of December 31, 2017,2019, we have 1321 licensed hospitals in California totaling investments of approximately $527.1 million,$1.3 billion, which includesexcludes investments of $30$15.8 million of medical office buildings not subject to OSHPD standards.
Exclusive of certain buildings associated with three hospitals granted an OSHPD extension to 2022 (representing less than 2.3% of our hospitals granted OSHPD extensions,total assets), under California AB 2190, all of our California hospitals are seismically compliant through 2030 as determined by OSHPD. For hospital buildings granted extensions, one completed its seismic retro upgrades in 2016 and is currently awaiting final OSHPD reclassification. The second hospital received an extension through 2020 for one of its buildings and began retrofit planning last year, and weWe expect full compliance by their 2020 deadline. Our third hospital has a storage building on campus2022 for the remaining three hospitals.
It is noted that will be moved/relocated to a new building to meet compliance requirements.
Underunder our current agreements, our tenants are responsible for capital expenditures in connection with seismic laws. We do not expect California seismic standards to have a negative impact on our financial condition or cash flows. We also do not expect compliance with California seismic standards to materially impact the financial condition of our tenants.
Competition
We compete in acquiring and developing facilities with financial institutions, other lenders, real estate developers, healthcare operators, other REITs, other public and private real estate companies, and private real estate investors. Among the factors that may adversely affect our ability to compete are the following:
• | we may have less knowledge than our competitors of certain markets in which we seek to invest in or develop facilities; |
• | some of our competitors may have greater financial and operational resources than we have; |
• | some of our competitors may have lower costs of capital than we do; |
• | our competitors or other entities may pursue a strategy similar to ours; and |
• | some of our competitors may have existing relationships with our potential tenants/operators. |
To the extent that we experience vacancies in our facilities, we will also face competition in leasing those facilities to prospective tenants. The actual competition for tenants varies depending on the characteristics of each local market. Virtually all of our facilities operate in highly competitive environments, and patients and referral sources, including physicians, may change their preferences for healthcare facilities from time to time.
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The operators of our properties compete on a local and regional basis with operators of properties that provide comparable services. Operators compete for patients and residents based on a number of factors including quality of care, reputation, physical appearance of a facility, location, services offered, physicians, staff, and price. We also face competition from other health carehealthcare facilities for tenants, such as physicians and other health carehealthcare providers that provide comparable facilities and services.
For additional information, see “Risk Factors” in Item 1A of this Annual Report on Form10-K.
Insurance
Our leases and mortgage loans require our tenants to carry property, loss of income, general liability, professional liability, and other insurance coverages in order to protect our interests. We monitor the adequacy of such coverages on an ongoing basis. In addition, we maintain separate insurance that provides coverage for bodily injury and property damage to third parties arising from our ownership of the healthcare facilities that are leased to and occupied by our tenants, as well as contingent business interruption insurance. At December 31, 2017,2019, we believe that the policy specifications and insured limits are appropriate given the relative risk of loss, the cost of the coverage, and standard industry practice.
Healthcare Regulatory Matters
The following discussion describes certain material federal healthcare laws and regulations that may affect our operations and those of our tenants. The discussion, however, does not address all applicable federal healthcare laws, and does not address state healthcare laws and regulations, except as otherwise indicated. These state laws and regulations, like the federal healthcare laws and
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regulations, could affect the operations of our tenants and, accordingly, our operations. In addition, in some instances we own a minority interest in our tenants’ operations and, in addition to the effect on our tenant’s ability to meet its financial obligations to us, our ownership and investment returns may also be negatively impacted by such laws and regulations. Moreover, the discussion relating to reimbursement for healthcare services addresses matters that are subject to frequent review and revision by Congress and the agencies responsible for administering federal payment programs. Consequently, predicting future reimbursement trends or changes, along with the potential impact to us, is inherently difficult and imprecise. Finally, though we have not included a discussion of applicable foreign laws or regulations, our tenants in Europe and Australia may be subject to similar laws and regulations governing the ownership or operation of healthcare facilities including, without limitation, laws governing patient care and safety, reimbursement, licensure, and data protection.
Ownership and operation of hospitals and other healthcare facilities are subject, directly and indirectly, to substantial U.S. federal, state, and local government healthcare laws, rules, and regulations. Our tenants’ failure to comply with these laws and regulations could adversely affect their ability to meet their obligations to us. Physician investment in our facilities or in joint ventures to own real estate also will be subject to such laws and regulations. Although we are not a healthcare provider or in a position to influence the referral of patients or ordering of items and services reimbursable by the federal government, to the extent that a healthcare provider engages in transactions with our tenants, such as sublease or other financial arrangements, the Anti-Kickback Statute and the Stark Law (both discussed in this section), and any state counterparts thereto, could be implicated. Our leases and mortgage loans require theour tenants to comply with all applicable laws, including healthcare laws. Additionally, our foreign tenants in the United Kingdom and Western Europe may be subject to similar laws and regulations governing the ownership or operation of healthcare facilities including, without limitation, laws governing patient care and safety, reimbursement, licensure, and data protection. We intend for all of our business activities and operations to conform in all material respects with all applicable laws, rules, and regulations, including healthcare laws, rules, and regulations.
Our tenants in Australia, the United Kingdom, and other parts of Europe are in many cases subject to similar laws and regulations governing the ownership and operation of healthcare facilities including, without limitation, laws governing patient care and safety, reimbursement, licensure, and data protection. As in the U.S. under HIPAA, our tenants in foreign jurisdictions are typically subject to strict laws and regulations governing data protection, generally, and the protection of a patient’s personal health information, specifically. Tenants may also be subject to laws and regulations addressing billing and reimbursement for healthcare items and services. Furthermore, in certain cases, as with certificate of need laws in the U.S., government approval may also be required prior to the transfer of a healthcare facility or prior to the establishment of new or replacement facilities, the addition of beds, the addition or expansion of services, and certain capital expenditures. Our leases and loan documents require our tenants in foreign jurisdictions to comply with all applicable laws, including healthcare laws, and we intend for all our business activities and operations in such jurisdictions to conform in all material respects with all applicable healthcare laws, rules, and regulations.
Applicable Laws (not intended to be a complete list)
Anti-Kickback Statute. The federal Anti-Kickback Statute (codified at 42 U.S.C.§ 1320a-7b(b)) prohibits, among other things, the offer, payment, solicitation, or acceptance of remuneration, directly or indirectly, in return for referring an individual to a provider of items or services for which payment may be made in whole, or
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in part, under a federal healthcare program, including the Medicare or Medicaid programs. Violation of the Anti-Kickback Statute is a crime, punishable by fines of up to $25,000$100,000 per violation, fiveten years imprisonment, or both. Violations may also result in civil sanctions, including civil monetary penalties of up to $50,000 per violation, exclusion from participation in federal healthcare programs, including Medicare and Medicaid, and additional monetary penalties in amounts treble to the underlying remuneration. The Anti-Kickback Statute is an intent based statute, however, itand has been broadly interpreted. As an example, courts have held that there is a violation of the Anti-Kickback Statute if just one purpose of an arrangement is to generate referrals despite the fact that there may be one or more other lawful purposes to the arrangement at issue.
The Office of Inspector General of the Department of Health and Human Services has issued “Safe Harbor Regulations” that describe practices that will not be considered violations of the Anti-Kickback Statute. Nonetheless, the fact that a particular arrangement does not meet safe harbor requirements does not also mean that the arrangement violates the Anti-Kickback Statute. Rather, the safe harbor regulations simply provide a guaranty that qualifying arrangements will not be prosecuted under the Anti-Kickback Statute. We intend to use commercially reasonable efforts to structure our arrangements involving facilities, so as to satisfy, or meet as closely as possible, all safe harbor conditions. We cannot assure you, however, that we will meet all the conditions for an applicable safe harbor.
Physician Self-Referral Statute (“Stark Law”). Any physicians investing in us or our subsidiary entities could also be subject to the Ethics in Patient Referrals Act of 1989, or the Stark Law (codified at 42 U.S.C. § 1395nn). Unless subject to an exception, the Stark Law prohibits a physician from making a referral to an “entity” furnishing “designated health services” (which would include, without limitation, certain inpatient and outpatient hospital services, clinical laboratory services, and radiology services) paid by Medicare or Medicaid if the physician or a member of his immediate family has a “financial relationship” with that entity. A reciprocal prohibition bars the entity from billing Medicare or Medicaid for any services furnished pursuant to a prohibited referral. Sanctions for violating the Stark Law include denial of payment, refunding amounts received for services provided pursuant to prohibited referrals, civil monetary penalties of up to $15,000 per prohibited service provided, and exclusion from the participation in federal healthcare programs. The statute also provides for a penalty of up to $100,000 for a circumvention scheme.
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There are exceptions to the self-referral prohibition for many of the customary financial arrangements between physicians and providers, including, without limitation, employment contracts, leases,rental of office space or equipment, personal services agreements and recruitment agreements. Unlike safe harbors under the Anti-Kickback Statute, the Stark Law imposes strict liability on the parties to an arrangement, and an arrangement must comply with every requirement of a Stark Law exception or the arrangement is in violation of the Stark Law.
CMS has issued multiple phases of final regulations implementing the Stark Law and continues to make changes to these regulations. The CMS proposed lowering barriers to care coordination and management to make it easier for providers to enter into value-based arrangements without running afoul of kickback concerns. While these regulations help clarify the exceptions to the Stark Law, it is unclear how the government will interpret many of these exceptions for enforcement purposes. Although our lease and loan agreements require lessees and borrowers to comply with the Stark Law and we intend for facilities to comply with the Stark Law, we cannot offer assurance that the arrangements entered into by us and our facilities will be found to be in compliance with the Stark Law, as it ultimately may be implemented or interpreted. In addition, changes to the Stark Law could require our tenants to restructure certain arrangements with physicians, which could impact the business of our tenants.
False Claims Act. The federal False Claims Act prohibits the making or presenting of any false claim for payment to the federal government; itgovernment. It is the civil equivalent to federal criminal provisions prohibiting the submission of false claims to federally funded programs. Additionally,qui tam, or whistleblower, provisions of the federal False Claims Act allow private individuals to bring actions on behalf of the federal government alleging that the defendant has defrauded the federal government. Whistleblowers may collect a portion of the federal government’s recovery — an incentive for private parties to bring such actions. A successful federal False Claims Act case may result in a penalty of three times the actual damages, plus additional civil penalties
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payable to the government, plus reimbursement of the fees of counsel for the whistleblower. Many states have enacted similar statutes preventing the presentation of a false claim to a state government, and we expect more to do so because the Social Security Act provides a financial incentive for states to enact statutes establishing state level liability.government.
The Civil Monetary Penalties Law. The Civil Monetary Penalties Law (“CMPL”) is a comprehensive statute that covers an array of fraudulent and abusive activities and is very similar to the False Claims Act. Among other things, the Civil Monetary PenaltiesCMPL law prohibits the knowing presentation of a claim for certain healthcare services that is false or fraudulent, the presentation of false or misleading information in connection with claims for payment, and other acts involving fraudulent conduct. Penalties include a monetary civil penaltyViolation of upthe CMPL may result in penalties ranging from $20,000 to $10,000in excess of $100,000 (penalties are periodically adjusted). Notably, such penalties apply to each instance of prohibited conduct, including, for example, each item or service $15,000 fornot provided as claimed, and each individual with respectprovision of false information or each false record. In addition, violators of the CMPL may be penalized up to whom false or misleading information was given, as well as treble damages forthree times the total amount of remuneration claimed.unlawfully claimed and may be excluded from participation in federal healthcare programs.
Licensure.Our tenants and borrowers under mortgage loans are subject to extensive U.S. federal, state, and local licensure, certification, and inspection laws and regulations including, in some cases, certificate of need laws. Further, various licenses and permits are required to dispense narcotics, operate pharmacies, handle radioactive materials, and operate equipment. Failure to comply with any of these laws could result in loss of licensure, certification, or accreditation, denial of reimbursement, imposition of fines, and suspension or decertification from federal and state healthcare programs.
EMTALA. Our tenants and borrowers under mortgage loans that provide emergency care are subject to the Emergency Medical Treatment and Active Labor Act (“EMTALA”). ThisRegardless of an individual’s ability to pay, this federal law requires such healthcare facilities to conduct an appropriate medical screening examination of every individual who presents to the hospital’s emergency room for treatment and, if the individual is suffering from an emergency medical condition, to either stabilize the condition or make an appropriate transfer of the individual to a facility able to handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of an individual’s ability to pay for treatment. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer an individual or if the hospital delays appropriate treatment in order to first inquire about the individual’s ability to pay. Liability for violations of EMTALA includes,are severe and include, among other things, civil monetary penalties and exclusion from participation in the federal healthcare programs. Our lease and mortgage loan agreements require our tenants to comply with EMTALA, and we believe our tenants conduct business in substantial compliance with EMTALA.
Reimbursement Pressures.Healthcare facility operating margins continue to face significant pressure due to the deterioration in pricing flexibility and payor mix, a shift toward alternative payment models, increases in operating expenses that exceed increases in payments under the Medicare program, reductions in levels of Medicaid funding due to state budget shortfalls, and other similar cost pressures on our tenants. More specifically, certain facilities and departments such as IRFs, LTACHs, continue toand Hospital Outpatient Departments (“HOPDs”) face reimbursement pressures including those resulting from the passagebecause of the SGR Reform Act of 2013,legislative and CMS is also implementing regulatory restrictions and limitations on reimbursement for hospital outpatient departments.reimbursement. We cannot predict how and to what extent these or other initiatives will impact the business of our tenants or whether our business will be adversely impacted.
Healthcare Reform.Generally, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “Reform Law”) provides for expanded health insurance coverage through tax subsidies and federal health insurance programs, individual and employer mandates for health insurance coverage, and health insurance exchanges. The Reform Law also includes various cost containment initiatives, including quality control and payment system refinements for federal programs, such aspay-for-performance criteria and value-based purchasing programs, bundled provider
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payments, accountable care organizations, geographic payment variations, comparative effectiveness research, and lower payments for hospital readmissions. The Reform Law also increases health information technology (“HIT”) standards for healthcare providers in an effort to improve quality and reduce costs. The Reform Law has led and will continue to lead, to significant changes in the healthcare system, and although there are continuing efforts to repeal and replacesystem. We believe the Reform Law we believewill continue to lead to changes in healthcare delivery and reimbursement for years to come, and it is likely that certain trends that have been in place since the passage of the Reform Law, such as development and implementation of cost containment initiatives, increased
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use of HIT, and pressure on reimbursement, will continue irrespective of any future repeal or replacement of the Reform Law.efforts. We cannot predict the continued impact of the Reform Law or the impact of its possiblefuture repeal and replacementefforts on our business, as some aspects benefit the operations of our tenants, while other aspects present challenges.
Employees
We have 6686 employees as of February 28, 2018.21, 2020. As we continue to grow, we expect our head count to increase as well. However, we do not believe that any adjustments to the number of employees will have a material effect on our operations or to general and administrative expenses as a percent of revenues. We believe that our relations with our employees are good. None of our employees are members of any union.
Available Information
Our website address is www.medicalpropertiestrust.com and provides access in the “Investor Relations” section, free of charge, to our Annual Report onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K, including exhibits, and all amendments to these reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Also available on our website, free of charge, are our Corporate Governance Guidelines, the charters of our Ethics, Nominating, and Corporate Governance, Audit and Compensation Committees and our Code of Ethics and Business Conduct. If you are not able to access our website, the information is available in print free of charge to any stockholder who should request the information directly from us at(205) 969-3755. Information on or connected to our website is neither part of nor incorporated by reference into this Annual Report or any other SEC filings.
The risks and uncertainties described herein are not the only ones facing us and there may be additional risks that we do not presently know of or that we currently consider not likely to have a significant impact on us. All of these risks could adversely affect our business, results of operations, financial condition, and financial condition.our ability to service our debt and make distributions to our stockholders. Some statements in this report including statements in the following risk factors constitute forward-looking statements. Please refer to the section entitled “Cautionary Language Regarding Forward Looking Statements” at the beginning of this Annual Report.
RISKS RELATED TO OUR BUSINESS AND GROWTH STRATEGY(Including Financing Risks)
Limited access to capital may restrict our growth.
Our business plan contemplates growth through acquisitions and development of facilities. As a REIT, we are required to make cash distributions, which reduce our ability to fund acquisitions and developments with retained earnings. We are dependent on acquisition financing and access to the capital markets for cash to make investments in new facilities. Due to market or other conditions, we may have limited access to capital from the equity and debt markets. We may not be able to obtain additional equity or debt capital or dispose of assets on favorable terms, if at all, at the time we need additional capital to acquire healthcare properties or to meet our obligations, which could have a material adverse effect on our results of operations and our ability to make distributions to our stockholders.
Our indebtedness could adversely affect our financial condition and may otherwise adversely impact our business operations and our ability to make distributions to stockholders.
As of February 28, 2018, we had $4.9 billion of debt outstanding.
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Our indebtedness could have significant effects on our business. For example, it could:
Our future borrowings under our loan facilities may bear interest at variable rates in addition to the $1.0 billion in variable interest rate debt that we had outstanding as of February 28, 2018. If interest rates increase significantly, our operating results would decline along with the cash available for distributions to our stockholders.
In addition, most of our current debt is, and we anticipate that much of our future debt will be,non-amortizing and payable in balloon payments. Therefore, we will likely need to refinance at least a portion of that debt as it matures. There is a risk that we may not be able to refinance debt maturing in future years or that the terms of any refinancing will not be as favorable as the terms of the then-existing debt. If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as new equity capital or sales of facilities, our cash flow may not be sufficient to repay all maturing debt in years when significant balloon payments come due. Additionally, we may incur significant penalties if we choose to prepay the debt. See Item 7 of Part II of this Annual Report on Form10-K for further information on our current debt maturities.
Covenants in our debt instruments limit our operational flexibility, and a breach of these covenants could materially affect our financial condition and results of operations.
The terms of our unsecured credit facility (“Credit Facility”) and the indentures governing our outstanding unsecured senior notes, and other debt instruments that we may enter into in the future are subject to customary financial and operational covenants. For example, our Credit Facility imposes 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; and change our business. In addition, the agreements governing our unsecured credit facility limit the amount of dividends we can pay as a percentage of normalized adjusted funds from operations, as defined, on a rolling four quarter basis. Through the quarter ending December 31, 2017, 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.
Fromtime-to-time, the lenders of our Credit Facility may adjust certain covenants to give us more flexibility to complete a transaction; however, such modified covenants are temporary, and we must be in a position to meet the lowered reset covenants in the future. Our continued ability to incur debt and operate our business is subject
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to compliance with the covenants in our debt instruments, which limit operational flexibility. Breaches of these covenants could result in defaults under applicable debt instruments and other debt instruments due to cross-default provisions, even if payment obligations are satisfied. Financial and other covenants that limit our operational flexibility, as well as defaults resulting from a breach of any of these covenants in our debt instruments, could have a material adverse effect on our financial condition and results of operations.
Failure to hedge effectively against interest rate changes may adversely affect our results of operations and our ability to make distributions to our stockholders.
As of February 28, 2018, we had approximately $1.0 billion in variable interest rate debt, which constitutes 21.2% of our overall indebtedness and subjects us to interest rate volatility. We may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements. However, even these hedging arrangements involve risk, including the risk that counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes and that these arrangements may result in higher interest rates than we would otherwise have. Moreover, no hedging activity can completely insulate us from the risks associated with changes in interest rates. Failure to hedge effectively against interest rate changes may materially adversely affect our results of operations and our ability to make distributions to our stockholders.
Dependence on our tenants for payments of rent and interest may adversely impact our ability to service our debt and make distributions to our stockholders.
We expect to continue to qualify as a REIT and, accordingly, as a REIT operating in the healthcare industry, we are severely limited by current tax law with respect to our ability to operate or manage the businesses conducted in our facilities.
Accordingly, we rely heavily on rent payments from our tenants under leases or interest payments from operators under mortgage or other loans for cash with which to make distributions to our stockholders. We have no control over the success or failure of these tenants’ businesses. Significant adverse changes in the operations of our facilities, or the financial condition of our tenants, operators or guarantors, could have a material adverse effect on our ability to collect rent and interest payments and, accordingly, on our ability to make distributions to our stockholders.stockholders and/or service our debt. Facility management by our tenants and their compliance with healthcare and other laws could have a material impact on our tenants’ operating and financial condition and, in turn, their ability to pay rent and interest to us.
It may be costly to replace defaulting tenants and we may not be able to replace defaulting tenants with suitable replacements on suitable terms.
Failure on the part of a tenant to comply materially with the terms of a lease could give us the right to terminate our lease with that tenant, repossess the applicable facility, cross default certain other leases and loans with that tenant and enforce the payment obligations under the lease. The process of terminating a lease with a defaulting tenant and repossessing the applicable facility may be costly and require a disproportionate amount of management’s attention. In addition, defaulting tenants or their affiliates may initiate litigation in connection with a lease termination or repossession against us or our subsidiaries. If a tenant-operator defaults and we choose to terminate our lease, we are then required to find another tenant-operator, such as the case was with our Monroe facility in 2014. The transfer of most types of healthcare facilities is highly regulated, which may result in delays and increased costs in locating a suitable replacement tenant. The sale or lease of these properties to entities other than healthcare operators may be difficult due to the added cost and time of refitting the properties. If we are unable tore-let the properties to healthcare operators, we may be forced to sell the properties at a loss due to the repositioning expenses likely to be incurred bynon-healthcare purchasers. Alternatively, we may be required to spend substantial amounts to adapt the facility to other uses. There can be no assurance that we would be able to find another tenant in a timely fashion, or at all, or that, if another tenant were found, we would be able
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to enter into a new lease on favorable terms. Defaults by our tenants under our leases may adversely affect our results of operations, financial condition, and our ability to make distributions to our stockholders. Defaults by our significant tenants under master leases (like Steward, Prime, MEDIAN, Ernest, and RCCH) will have an even greater effect.
It may be costly to find new tenants when lease terms end and we may not be able to replace such tenants with suitable replacements on suitable terms.
Failure on the part of a tenant to renew or extend the lease at the end of its fixed term on one of our facilities could result in us having to search for, negotiate with and execute new lease agreements, such was the case with our two South Carolina facilities — Bennettsville and Cheraw in 2015. The process of finding and negotiating with a new tenant along with costs (such as maintenance, property taxes, utilities, etc.) that we will incur while the facility is untenanted may be costly and require a disproportionate amount of management’s attention. There can be no assurance that we would be able to find another tenant in a timely fashion, or at all, or that, if another tenant were found, we would be able to enter into a new lease on favorable terms. If we are unable tore-let the properties to healthcare operators, we may be forced to sell the properties at a loss due to the repositioning expenses likely to be incurred bynon-healthcare purchasers. Alternatively, we may be required to spend substantial amounts to adapt the facility to other uses. Thus, thenon-renewal or extension of leases may adversely affect our results of operations, financial condition, and our ability to make distributions to our stockholders. This risk is even greater for those properties under master leases (like Steward, Prime, MEDIAN, Ernest, and RCCH) because several properties have the same lease ending dates.
We have made investments in the operators of certain of our healthcare facilities and the cash flows (and related returns) from these investments are subject to more volatility than our properties with the traditional net leasing structure.
At December 31, 2017, we have 13 investments in the operations of certain of our healthcare facilities by utilizing RIDEA (or similar investments). These investments include profits interest, equity investments, and equity like loans that generate returns dependent upon the operator’s performance. As a result, the cash flow and returns from these investments may be more volatile than that of our traditionaltriple-net leasing structure. Our business, results of operations, and financial condition may be adversely affected if the related operators fail to successfully operate the facilities efficiently and in a manner that is in our best interest.
We have less experience with healthcare facilities in Germany, the United Kingdom, Italy, and Spain or anywhere else outside the U.S.
We have less experience investing in healthcare properties or other real estate-related assets located outside the U.S. Investing in real estate located in foreign countries, including Germany, the United Kingdom, Italy, and Spain, creates risks associated with the uncertainty of foreign laws and markets including, without limitation, laws respecting foreign ownership, the enforceability of loan and lease documents and foreclosure laws. German real estate and tax laws are complex and subject to change, and we cannot assure you we will always be in compliance with those laws or that compliance will not expose us to additional expense. The properties we acquired in connection with the MEDIAN acquisition (as more fully described in Note 3 to Item 8 of thisForm 10-K) will also face risks in connection with unexpected changes in German or European regulatory requirements, political and economic instability, potential imposition of adverse or confiscatory taxes, possible challenges to the anticipated tax treatment of the structures that allow us to acquire and hold investments, possible currency transfer restrictions, the difficulty in enforcing obligations in other countries and the burden of complying with a wide variety of foreign laws. In addition, to qualify as a REIT, we generally will be required to operate anynon-U.S. investments in accordance with the rules applicable to U.S. REITs, which may be inconsistent with local practices. We may also be subject to fluctuations in local real estate values or markets or the European economy as a whole, which may adversely affect our European investments.
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In addition, the rents payable under our leases of foreign assets are payable in either euros or British pounds, which could expose us to losses resulting from fluctuations in exchange rates to the extent we have not hedged our position, which in turn could adversely affect our revenues, operating margins and dividends, and may also affect the book value of our assets and the amount of stockholders’ equity. Further, any international currency gain recognized with respect to changes in exchange rates may not qualify under the 75% gross income test that we must satisfy annually in order to qualify and maintain our status as a REIT. While we may hedge some of our foreign currency risk, we may not be able to do so successfully and may incur losses on our investments as a result of exchange rate fluctuations. Furthermore, we are subject to laws and regulations, such as the Foreign Corrupt Practices Act and similar local anti-bribery laws, which generally prohibit companies and their employees, agents and contractors from making improper payments to governmental officials for the purpose of obtaining or retaining business. Failure to comply with these laws could subject us to civil and criminal penalties that could materially adversely affect our results of operations, the value of our international investments, and our ability to make distributions to our stockholders.
Our revenues are dependent upon our relationships with and success of our largest tenants,Steward, MEDIAN, Prime, Ernest, RCCHCircle, Prospect, LifePoint, and Adeptus Health.Prime.
As of December 31, 2017,2019, affiliates of Steward, MEDIAN,Circle, Prospect, LifePoint, and Prime Ernest, RCCH and Adeptus Health represented 36.5%24.5%, 13.0%, 11.8%9.5%, 6.6%7.3%, 5.3% and 3.5%6.9%, respectively, of our total pro forma gross assets (which consist primarily of real estate leases and mortgage loans).
Our relationships with these operators and their financial performance and resulting ability to satisfy their lease and loan obligations to us are material to our financial results and our ability to service our debt and make distributions to our stockholders. We are dependent upon the ability of these operators to make rent and loan payments to us, and any failure to meet these obligations could have a material adverse effect on our financial condition and results of operations.
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Our tenants operate in the healthcare industry, which is highly regulated by U.S. federal, state, and local laws along with laws in Europe and Australia and changes in regulations may negativelytemporarily impact our tenants’ operations until they are able to make the appropriate adjustments to their business. For example, recentpast modifications to regulations concerning patient criteria and reimbursement for long-term acute care hospitals, or LTACHs have resulted in volumeimpacted volumes and profitability declines in certain facilities operated by Ernest.in our portfolio.
We are aware of various federal and state inquiries, investigations, and other proceedings currently affecting several of our tenants and would expect such government compliance and enforcement activities to be ongoing at any given time with respect to one or more of our tenants, either on a confidential or public basis. During the second quarter of 2016, the Department of Justice joined a lawsuit against Prime alleging irregular admission practices intended to increase the number of inpatient care admissions of Medicare patients, including unnecessarily classifying some patients as “inpatient” rather than “observation”. Other large acute hospital operators have also recently defended similar allegations, sometimes resulting in financial settlements and agreements with regulators to modify admission policies, resulting in lower reimbursements for those patients.
OurIn addition, our tenants experience operational challenges fromtime-to-time, and this can be even more of a risk for those tenants that grow (or have grown) via acquisitions in a short time frame, like Steward, Prime, Adeptus HealthCircle, and others.
In May 2017, Prime advised that it would be delayed in furnishing its 2016 financial statements to its lenders and that it would take a significant write-down to its accounts receivables. Prime received a notice of default from its lenders related to its failure to furnish its 2016 financials until after the deadline. As a result of these developments, Standard and Poor’s (“S&P”) downgraded Prime’s corporate credit rating and senior secured term loan credit rating. These financial and operational setbacks affecting Prime may adversely impact its ability to make required lease and interest payments to us.
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The ability of our tenants and operators to integrate newly acquired businesses into their existing operational, financial reporting, and collection systems is critical towards ensuring their continued success. If such integration is not successfully implemented in a timely manner, operators can be negatively impacted in the form of write-offs of uncollectible accounts receivable (similar to Prime’s expected write-offs) or even insolvency in certain extreme cases.
Any further adverse result to any of Steward, MEDIAN,Circle, Prospect, LifePoint, or Prime Ernest, RCCH or Adeptus Health in regulatory proceedings or financial or operational setbacks may have a material adverse effect on the relevant tenant’s operations and financial condition and on its ability to make required lease and loan payments to us. If any one of these tenants further fileswere to file for bankruptcy protection, we may not be able to collect anypre-filing amounts owed to us by such tenant. In addition, in a bankruptcy proceeding, such tenant may terminate our lease(s), in which case we would have a general unsecured claim that would likely be for less than the full amount owed to us. Any secured claims we have against such tenant may only be paid to the extent of the value of the collateral, which may not cover all or any of our losses. If we are ultimately required to find one or more tenant-operators to lease one or more properties currently leased by such tenant, we may face delays and increased costs in locating a suitable replacement tenant. The protections that we have in place to protect against such failure or delay, which can include letters of credit, cross default provisions, parent guarantees, repair reserves, and the right to exercise remedies including the termination of the lease and replacement of the operator, may prove to be insufficient, in whole or in part, or may entail further delays. In instances where we have an equity investment in our tenant’s operations, in addition to the effect on these tenants’ ability to meet their financial obligation to us, our ownership and investment interests may also be negatively impacted.
We have experienced and expect to continue to experience rapid growth, and our failure to effectively manage our growth may adversely impact our financial condition, results of operations, and cash flows, which could negatively affect our ability to service our debt and make distributions to our stockholders.
We have experienced and expect to continue to experience rapid growth through prior acquisitions and the potential acquisition of healthcare properties we are currently evaluating. Year-over-year, our total assets grew by more than 60% since December 31, 2018, and we have expanded our presence to eight countries. In addition, we continually evaluate property acquisition and development opportunities as they arise, and we typically have a number of potential acquisition and development transactions under active consideration.
There is no assurance that we will be able to adapt our management, administrative, accounting, and operational systems, or hire and retain sufficient operational staff, to manage the facilities we have acquired and those that we may acquire or develop in the future. Additionally, investing in real estate located in foreign countries creates risks associated with the uncertainty of foreign laws, economies, and markets, and exposes us to local economic downturns and adverse market developments.
Our failure to manage such growth effectively may adversely impact our financial condition, results of operations, and cash flows, which could negatively affect our ability to service our debt and make distributions to our stockholders. Our rapid growth could also increase our capital requirements, which may require us to issue potentially dilutive equity securities and/or incur additional debt.
It may be costly to replace defaulting tenants and we may not be able to replace defaulting tenants with suitable replacements on suitable terms.
Failure on the part of a tenant to comply materially with the terms of a lease could give us the right to terminate our lease with that tenant, repossess the applicable facility, cross default certain other leases and loans with that tenant, and enforce the payment obligations under the lease. The process of terminating a lease with a defaulting tenant and repossessing the applicable facility may be costly and require a disproportionate amount of management’s attention. In addition, defaulting tenants or their affiliates may initiate litigation in connection with a lease termination or repossession against us or our subsidiaries. If a tenant-operator defaults and we choose to terminate our lease, we are then required to find another tenant-operator, such as the case was with 16 transition Adeptus Health, Inc. (“Adeptus”) facilities in 2017. The transfer of most types of healthcare facilities is highly regulated, which may result in delays and increased costs in locating a suitable replacement tenant. The sale or lease of these properties to entities other than healthcare operators may be difficult due to the added cost and time of refitting the properties. If we are unable to re-let the properties
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to healthcare operators, we may be forced to sell the properties at a loss due to the repositioning expenses likely to be incurred by non-healthcare purchasers. Alternatively, we may be required to spend substantial amounts to adapt the facility to other uses. There can be no assurance that we would be able to find another tenant in a timely fashion, or at all, or that, if another tenant were found, we would be able to enter into a new lease on favorable terms. Defaults by our tenants under our leases may adversely affect our results of operations, financial condition, and our ability to make distributions to our stockholders. Defaults by our significant tenants under master leases (like Steward, Circle, Prospect, LifePoint, and Prime) will have an even greater effect.
It may be costly to find new tenants when lease terms end and we may not be able to replace such tenants with suitable replacements on suitable terms.
Failure on the part of a tenant to renew or extend the lease at the end of its fixed term on one of our facilities could result in us having to search for, negotiate with, and execute new lease agreements, such is the case with our Hillsboro property for which its lease term will end in 2020 (representing less than 0.2% of our total assets). The process of finding and negotiating with a new tenant along with costs (such as maintenance, property taxes, utilities, ground lease expenses, etc.) that we will incur while the facility is untenanted may be costly and require a disproportionate amount of our management’s attention. There can be no assurance that we would be able to find another tenant in a timely fashion, or at all, or that, if another tenant were found, we would be able to enter into a new lease on favorable terms. If we are unable to re-let the properties to healthcare operators, we may be forced to sell the properties at a loss due to the repositioning expenses likely to be incurred by non-healthcare purchasers. Alternatively, we may be required to spend substantial amounts to adapt the facility to other uses. Thus, the non-renewal or extension of leases may adversely affect our results of operations, financial condition, and our ability to make distributions to our stockholders. This risk is even greater for those properties under master leases (like Steward, Circle, Prospect, LifePoint, and Prime) because several properties have the same lease ending dates.
We have made investments in the operators of certain of our healthcare facilities and the cash flows (and related returns) from these investments are subject to more volatility than our properties with the traditional net leasing structure.
At December 31, 2019, we have 10 investments in the operations of certain of our healthcare facilities by utilizing RIDEA or similar investments. These investments include profits interest and equity investments that generate returns dependent upon the operator’s performance. As a result, the cash flow and returns from these investments may be more volatile than that of our traditional triple-net leasing structure. Our business, results of operations, and financial condition may be adversely affected if the related operators fail to successfully operate the facilities efficiently and in a manner that is in our best interest.
We have less experience with healthcare facilities in Germany, the United Kingdom, Italy, Spain, Portugal, Switzerland, and Australia or anywhere else outside the U.S.
We have less experience investing in healthcare properties or other real estate-related assets located outside the U.S. Investing in real estate located in foreign countries, including Germany, the United Kingdom, Italy, Spain, Portugal, Switzerland, and Australia creates risks associated with the uncertainty of foreign laws and markets including, without limitation, laws respecting foreign ownership, the enforceability of loan and lease documents, and foreclosure laws. German real estate and tax laws are complex and subject to change, and we cannot assure you we will always be in compliance with those laws or that compliance will not expose us to additional expense. Additionally (as more fully described in Note 3 to Item 8 of this Form 10-K), we expanded our operations into Australia, a geography we have never operated in, with the acquisition of a portfolio of 11 hospitals, which may subject us to new and unforeseen risks. The properties we acquired in Europe (as more fully described in Note 3 to Item 8 of this Form 10-K) will face risks in connection with unexpected changes in regulatory requirements, political and economic instability, potential imposition of adverse or confiscatory taxes, possible challenges to the anticipated tax treatment of the structures that allow us to acquire and hold investments, possible currency transfer restrictions, the difficulty in enforcing obligations in other countries, the impact from Brexit, and the burden of complying with a wide variety of foreign laws. In addition, to qualify as a REIT, we generally will be required to operate any non-U.S. investments in accordance with the rules applicable to U.S. REITs, which may be inconsistent with local practices. We may also be subject to fluctuations in local real estate values or markets or the European economy as a whole, which may adversely affect our European investments.
In addition, the rents payable under our leases of foreign assets are payable in either euros, British pounds, Swiss francs, or Australian dollars, which could expose us to losses resulting from fluctuations in exchange rates to the extent we have not hedged our position, which in turn could adversely affect our revenues, operating margins, and dividends, and may also affect the book value of our assets and the amount of stockholders’ equity. Further, any international currency gain recognized with respect to changes in exchange rates may not qualify under the 75% gross income test that we must satisfy annually in order to qualify and maintain our status as a REIT. While we may hedge some of our foreign currency risk, we may not be able to do so successfully and may incur losses on our investments as a result of exchange rate fluctuations. Furthermore, we are subject to laws and regulations, such as the Foreign Corrupt Practices Act and similar local anti-bribery laws, which generally prohibit companies and their employees, agents, and contractors from making improper payments to governmental officials for the purpose of obtaining or retaining business. Failure
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to comply with these laws could subject us to civil and criminal penalties that could materially adversely affect our results of operations, the value of our international investments, and our ability to make distributions to our stockholders.
We have now, and may have in the future, exposure to contingent rent escalators, which could hinder our growth and profitability.
We receive a significant portion of our revenues by leasing assets under long-term net leases that generally provide for fixed rental rates subject to annual escalations. These annual escalations may be contingent on changes in CPI, typically with specified caps and floors. Certain of our other leases may provide for additional rents contingent upon a percentage of the tenant’s revenues in excess of specified threshold. If, as a result of weak economic conditions or other factors, the CPI does not increase, or the properties subject to these leases do not generate sufficient revenue to achieve the specified threshold, our growth and profitability may be hindered by these leases. In addition, if strong economic conditions result in significant increases in CPI, but the escalations under our leases are capped, our growth and profitability may be limited.
The bankruptcy or insolvency of our tenants or investees could harm our operating results and financial condition.
Some of our tenants/investees are, and some of our prospective tenants/investees may be newly organized, have limited or no operating history and may be dependent on loans from us to acquire the facility’s operations and for initial working capital. Any bankruptcy filings by or relating to one of our tenants/investees could bar us from collectingpre-bankruptcy debts from that tenant or their property, unless we receive an order permitting us to do so from the bankruptcy court. A tenant bankruptcy can be expected to delay our efforts to collect past due balances under our leases and loans, and could ultimately preclude collection of these sums. If a lease is assumed by a tenant in bankruptcy, we expect that allpre-bankruptcy balances due under the lease would be paid to us in full. However, if a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any secured claims we have against our tenants may only be paid to the extent of the value of the collateral, which may not cover any or all of our losses. Any unsecured claim (such as our equity interests in our tenants) we hold against a bankrupt entity may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. We may recover none or substantially less than the full value of any unsecured claims, which would harm our financial condition.
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Our business is highly competitive and we may be unable to compete successfully.
We compete for development opportunities and opportunities to purchase healthcare facilities with, among others:
• | private investors, including large private equity funds; |
• | healthcare providers, including physicians; |
• | other REITs; |
• | real estate developers; |
• | government-sponsored and/or not-for-profit agencies; |
• | financial institutions; and |
• | other lenders. |
Some of these competitors may have substantially greater financial and other resources than we have and may have better relationships with lenders and sellers. Competition for healthcare facilities from competitors may adversely affect our ability to acquire or develop healthcare facilities and the prices we pay for those facilities. If we are unable to acquire or develop facilities or if we pay too much for facilities, our revenue, earnings growth, and financial return could be materially adversely affected. Certain of our facilities, or facilities we may acquire or develop in the future will face competition from other nearby facilities that provide services comparable to those offered at our facilities. Some of those facilities are owned by governmental agencies and supported by tax revenues, and others are owned bytax-exempt corporations and may be supported to a large extent by endowments and charitable contributions. Those types of support are not generally available to our facilities. In addition, competing healthcare facilities located in the areas served by our facilities may provide healthcare services that are not available at our facilities and additional facilities we may acquire or develop. From time to time, referral sources, including physicians and managed care organizations, may change the healthcare facilities to which they refer patients, which could adversely affect our tenants and thus our rental revenues, interest income, and/or our earnings from equity investments.
Many of our current tenants have, and prospective tenants may have, an option to purchase the facilities we lease to them which could disrupt our operations.
Many of our current tenants have, and some prospective tenants will have, the option to purchase the facilities we lease to them. There is no assurance that the formulas we have developed for setting the purchase price will yield a fair market value purchase price.
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In the event our tenants and prospective tenants determine to purchase the facilities they lease either during the lease term or after their expiration, the timing of those purchases may be outside of our control, and we may not be able tore-invest the capital on as favorable terms, or at all. Our inability to effectively manage the turnover of our facilities could materially adversely affect our ability to execute our business plan and our results of operations.
We have 135205 leased properties that are subject to purchase options as of December 31, 2017.2019. For 106115 of these properties, the purchase option generally allows the lessee to purchase the real estate at the end of the lease term, as long as no default has occurred, at a price equivalent to the greater of (i) fair market value or (ii) our original purchase price (increased, in some cases, by a certain annual rate of return from the lease commencement date). The lease agreements provide for an appraisal process to determine fair market value. For 17 of these properties, the purchase option generally allows the lessee to purchase the real estate at the end of the lease term, as long as no default has occurred, at our purchase price (increased, in some cases, by a certain annual rate of return from lease commencement date). For the remaining 1273 leases, the purchase options approximate fair value. At December 31, 2017, none of our leases contained any bargain purchase options.
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In certain circumstances, a prospective purchaser of our hospital real estate may be deemed to be subject to Anti-Kickback and Stark statutes, which are described on in the “Healthcare Regulatory Matters” section in Item 1 of this Annual Report on Form10-K. In such event, it may not be practicable for us to sell property to such prospective purchasers at prices other than fair market value.
We may not be able to adapt our management and operational systems to manage thenet-leased facilities we have acquired or are developing or those that we may acquire or develop in the future without unanticipated disruption or expense.
There is no assurance that we will be able to adapt our management, administrative, accounting, and operational systems, or hire and retain sufficient operational staff, to manage the facilities we have acquired and those that we may acquire or develop, including those properties located in Europe and Australia or any future investments outside the U.S. Our failure to successfully manage our current portfolio of facilities or any future acquisitions or developments could have a material adverse effect on our results of operations and financial condition and our ability to make distributions to our stockholders.
Merger and acquisition activity or consolidation in the healthcare industry may result in a change of control of, or a competitor’s investment in, one or more of our tenants or operators, which could have a material adverse effect on us.
The healthcare industry has experienced increasedcontinues to experience consolidation, including among owners of real estate and healthcare providers. We compete with other healthcare REITs, healthcare providers, healthcare lenders, real estate partnerships, banks, insurance companies, private equity firms, and other investors that pursue a variety of investments, which may include investments in our tenants or operators. We have historically developed strong, long-term relationships with many of our tenants and operators. A competitor’s investment in one of our tenants or operators, any change of control of a tenant or operator, or a change in the tenant’s or operator’s management team could enable our competitor to influence or control that tenant’s or operator’s business and strategy. This influence could have a material adverse effect on us by impairing our relationship with the tenant or operator, negatively affecting our interest, or impacting the tenant’s or operator’s financial and operational performance, including their ability to pay us rent or interest. Depending on our contractual agreements and the specific facts and circumstances, we may have consent rights, termination rights, remedies upon default, or other rights and remedies related to a competitor’s investment in, a change of control of, or other transactions impacting a tenant or operator. In deciding whether to exercise our rights and remedies, including termination rights or remedies upon default, we assess numerous factors, including legal, contractual, regulatory, business, and other relevant considerations.
Our investments in joint ventures could be adversely affected by our lack of control, our partners’ failure to meet their obligations, and disputes with our partners.
We have entered into five real estate joint ventures with independent parties for which we have a 50% or less interest. Joint venture arrangements involve risks including the possibility that the other party may refuse or not be able to make capital contributions when due, that our partner might have economic or other business interests that are inconsistent with the joint venture’s interests, or that we may become engaged in a dispute with our partner. If any of these events occur, we might need to provide additional funding to the joint ventures to meet its obligations, incur additional expenses to resolve disputes, or be forced to buy out the partner’s interest or to sell our interests at a time that is not advantageous to us. Any loss of income, cash flow, or disruption of management’s time could have a negative impact on the rest of our business.
We depend on key personnel, the loss of any one of whom may threaten our ability to operate our business successfully.
We depend on the services of Edward K. Aldag, Jr., R. Steven Hamner, and Emmett E. McLeanour executive officers to carry out our business and investment strategy. If we were to lose any of these executive officers, it may be more difficult for us to locate attractive acquisition targets, complete our acquisitions, and manage the facilities that we have acquired or developed. Additionally, as we expand, we will continue to need to attract and retain additional qualified officers and employees. The loss of the services of any of our executive officers, or our inability to recruit and retain qualified personnel in the future, could have a material adverse effect on our business and financial results.
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Changes in currency exchange rates may subject us to risk.
As our operations have expanded internationally where the U.S. dollar is not the denominated currency, currency exchange rate fluctuations could affect our results of operations and financial position. A significant change in the value of the foreign currency of one or more countries where we have a significant investment may have a material adverse effect on our financial position, debt covenant ratios, results of operations, and cash flows.
Although we may enter into foreign exchange agreements with financial institutions and/or obtain local currency mortgage debt in order to reduce our exposure to fluctuations in the value of foreign currencies, we cannot assure you that foreign currency fluctuations will not have a material adverse effect on us.
The United Kingdom’s exit from the European Union could adversely affect us.
After January 31, 2020, the United Kingdom was officially no longer part of the European Union. Negotiations continue to determine the future terms of the United Kingdom’s relationship with the European Union, including, among other things, the terms of trade between the United Kingdom and the European Union. The effects of the United Kingdom’s exit will depend on any agreements the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. This change could adversely affect European and global economic or market conditions and could contribute to instability in global financial markets. In addition, it could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replace or replicate. Any of these effects, and others we cannot anticipate, may adversely affect us.
We currently hold, and may acquire additional, interests in healthcare facilities located in the United Kingdom and Europe, as well as other investments that are denominated in British pounds and euros. In addition, our Operating Partnership has issued, and may issue in the future, senior unsecured notes denominated in euros and in British pounds. Any of the effects of the United Kingdom’s exit described above, and others we cannot anticipate, could have a material adverse effect on our business, the value of our real estate and other investments, and our potential growth in Europe, and could amplify the currency risks faced by us.
Adverse U.S. and global market, economic and political conditions, health crises and other events beyond our control could have a material adverse effect on our business, results of operations and financial condition.
Another economic or financial crisis, significant concerns over energy costs, geopolitical issues, the availability and cost of credit or a declining real estate market in the U.S. or abroad can contribute to increased volatility, diminished expectations for the economy and the markets, and high levels of structural unemployment by historical standards. As was the case from 2008 through 2010, these factors, combined with volatile oil prices and fluctuating business and consumer confidence, can precipitate a steep economic decline.
Adverse U.S. and global market, economic and political conditions, including dislocations and volatility in the credit markets and general global economic uncertainty, could have a material adverse effect on our business, results of operations and financial condition as a result of the following potential consequences, among others:
• | reduced values of our properties may limit our ability to dispose of assets at attractive prices, or at all, or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans; and |
• | our ability to obtain financing on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to pursue acquisition and redevelopment opportunities and refinance existing debt, reduce our returns from our acquisition and redevelopment activities and increase our future interest expense. |
Public health crises, pandemics and epidemics, such as those caused by new strains of viruses such as H5N1 (avian flu), severe acute respiratory syndrome (SARS) and, most recently, the novel coronavirus (COVID-19), could adversely impact our and our tenants’ business by disrupting supply chains and transactional activities, and negatively impacting local, national or global economies.
RISKS RELATED TO FINANCING OUR BUSINESS
Limited access to capital may restrict our growth.
Our business plan contemplates growth through acquisitions and development of facilities. As a REIT, we are required to make cash distributions, which reduce our ability to fund acquisitions and developments with retained earnings. Thus, we are somewhat dependent on acquisition financing and access to the capital markets for cash to make new opportunistic investments. Due to market or other conditions, we may have limited access to capital from the equity and debt markets. We may not be able to obtain additional equity or debt capital or dispose of assets on favorable terms, if at all, at the time we need additional capital to acquire healthcare
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properties, which could have a material adverse effect on our results of operations and our ability to make distributions to our stockholders.
Our indebtedness could adversely affect our financial condition and may otherwise adversely impact our business operations and our ability to make distributions to stockholders.
As of February 21, 2020, we had approximately $7.9 billion of debt outstanding.
Our indebtedness could have significant effects on our business. For example, it could:
• | require us to use a substantial portion of our cash flow from operations to service our indebtedness, which would reduce the available cash flow to fund working capital, development projects, and other general corporate purposes and reduce cash for distributions; |
• | require payments of principal and interest that may be greater than our cash flow from operations; |
• | force us to dispose of one or more of our properties, possibly on disadvantageous terms, to make payments on our debt; |
• | increase our vulnerability to general adverse economic and industry conditions; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
• | restrict us from making strategic acquisitions or exploiting other business opportunities; |
• | make it more difficult for us to satisfy our obligations; and |
• | place us at a competitive disadvantage compared to our competitors that have less debt. |
Our future borrowings under our loan facilities may bear interest at variable rates in addition to the $1.1 billion in variable interest rate debt that we had outstanding as of February 21, 2020 (excluding the variable rate debt that we have fixed through interest rate swaps). If interest rates increase significantly, our operating results would decline along with the cash available for distributions to our stockholders.
In July 2017, the Financial Conduct Authority that regulates the London Interbank Offered Rate (“LIBOR”) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021, thereby discontinuing LIBOR after the end of 2021. While we expect LIBOR to be available in substantially its current form until then, it is possible that LIBOR will become unavailable prior to that point. As of February 21, 2020, approximately $1.1 billion of our outstanding debt is indexed to LIBOR and we are monitoring and evaluating any risks related to potential discontinuation of LIBOR, including transitioning to a new alternative rate and any resulting value transfer that may occur. If LIBOR is discontinued or if the methods of calculating LIBOR change from their current form, interest rates on our indebtedness indexed to LIBOR may be adversely affected. Uncertainty about the extent and manner of future changes may also result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.
In addition, most of our current debt is, and we anticipate that much of our future debt will be, non-amortizing and payable in balloon payments. Therefore, we will likely need to refinance at least a portion of that debt as it matures. There is a risk that we may not be able to refinance debt maturing in future years or that the terms of any refinancing will not be as favorable as the terms of the then-existing debt. If principal payments due at maturity cannot be refinanced, extended, or repaid with proceeds from other sources, such as new equity capital or sales of facilities, our cash flow may not be sufficient to repay all maturing debt in years when significant balloon payments come due. Additionally, we may incur significant penalties if we choose to prepay the debt. See Item 7 of Part II of this Annual Report on Form 10-K for further information on our current debt maturities.
Covenants in our debt instruments limit our operational flexibility, and a breach of these covenants could materially affect our financial condition and results of operations.
The terms of our unsecured credit facility (“Credit Facility”) and the indentures governing our outstanding unsecured senior notes, and other debt instruments that we may enter into in the future are subject to customary financial and operational covenants. For example, our Credit Facility imposes 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; and change our business. In addition, the agreements governing our Credit Facility limit the amount of dividends we can pay as a percentage of normalized adjusted funds from operations (“NAFFO”), as defined, on a rolling four quarter basis. Through the quarter ending December 31, 2019, the dividend restriction was 95% of 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. From time-to-time, the lenders of our Credit Facility may adjust certain covenants
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to give us more flexibility to complete a transaction; however, such modified covenants are temporary, and we must be in a position to meet the lowered reset covenants in the future. Our continued ability to incur debt and operate our business is subject to compliance with the covenants in our debt instruments, which limit operational flexibility. Breaches of these covenants could result in defaults under applicable debt instruments and other debt instruments due to cross-default provisions, even if payment obligations are satisfied. Financial and other covenants that limit our operational flexibility, as well as defaults resulting from a breach of any of these covenants in our debt instruments, could have a material adverse effect on our financial condition and results of operations.
Failure to hedge effectively against interest rate changes may adversely affect our results of operations and our ability to make distributions to our stockholders.
As of February 21, 2020, we had approximately $1.9 billion in variable interest rate debt along with an additional €655 million in our joint venture arrangement with Primotop Holdings S.à.r.l. (“Primotop”) for which we are a 50% equity owner. This variable rate debt subjects us to interest rate volatility. To manage this interest rate volatility, we have entered into interest rate swaps to fix the interest rate on all but $1.1 billion of this debt. However, even these hedging arrangements involve risk, including the risk that counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes and that these arrangements may result in higher interest rates than we would otherwise have. Moreover, no hedging activity can completely insulate us from the risks associated with changes in interest rates. Failure to hedge effectively against interest rate changes may materially adversely affect our results of operations and our ability to make distributions to our stockholders.
The market price and trading volume of our common stock may be volatile.
The market price of our common stock may be highly volatile and be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above your purchase price.
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We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:
• | actual or anticipated variations in our quarterly operating results or distributions; |
• | changes in our funds from operations, earnings estimates, or publication of research reports about us or the real estate industry; |
• | increases in market interest rates that lead purchasers of our shares of common stock to demand a higher yield; |
• | changes in market valuations of similar companies; |
• | changes in the market value of our facilities; |
• | adverse market reaction to any increased indebtedness we incur in the future; |
• | additions or departures of key management personnel; |
• | actions by institutional stockholders; |
• | local conditions such as an oversupply of, or a reduction in demand for, IRFs, LTACHs, ambulatory surgery centers, medical office buildings, specialty hospitals, skilled nursing facilities, regional and community hospitals, women’s and children’s hospitals, and other single-discipline facilities; |
• | speculation in the press or investment community; and |
• | general market and economic conditions. |
Future sales of common stock may have adverse effects on our stock price.
We cannot predict the effect, if any, of future sales of common stock, or the availability of shares for future sales, on the market price of our common stock. Sales of substantial amounts of common stock, or the perception that these sales could occur, may adversely affect prevailing market prices for our common stock. We may issue from time to timetime-to-time additional common stock or units of our operating partnership in connection with the acquisition of facilities and we may grant additional demand or piggyback registration rights in connection with these issuances. Sales of substantial amounts of common stock or the perception that these sales could occur may adversely affect the prevailing market price for our common stock. In addition, the sale of these shares could impair our ability to raise future capital through a sale of additional equity securities.
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Downgrades in our credit ratings could have a material adverse effect on our cost and availability of capital.
On May 19, 2017, S&P revised its rating outlook on us to negative from stable and affirmed the BB+ corporate credit rating. As of February 28, 2018,21, 2020, our corporate credit rating from S&P remained at BB+, and our corporate family rating from Moody’s Investors Service was Ba1. There can be no assurance that we will be able to maintain our current credit ratings. Any downgrades in terms of ratings or outlook by any or all of the rating agencies could have a material adverse effect on our cost and availability of capital, which could in turn have a material adverse effect on our financial condition and results of operations.
An increase in market interest rates may have an adverse effect on the market price of our securities.
One of the factors that investors may consider in deciding whether to buy or sell our securities is our distributiondividend rate as a percentage of our price per share of common stock, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher distribution on our securities or seek securities paying higher distributions. The market price of our common stock likely will be based primarily on the earnings that we derive from rental and interest income with respect to our facilities and our related distributions to stockholders, and not from the underlying appraised value of the facilities themselves. As a
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result, interest rate fluctuations and capital market conditions can affect the market price of our common stock. In addition, rising interest rates would result in increased interest expense on our variable-rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and make distributions.
Changes in currency exchange rates may subject us to risk.
As our operations have expanded internationally where the U.S. dollar is not the denominated currency, currency exchange rate fluctuations could affect our results of operations and financial position. A significant change in the value of the foreign currency of one or more countries where we have a significant investment may have a material adverse effect on our financial position, debt covenant ratios, results of operations and cash flow.
Although we may enter into foreign exchange agreements with financial institutions and/or obtain local currency mortgage debt in order to reduce our exposure to fluctuations in the value of foreign currencies, we cannot assure you that foreign currency fluctuations will not have a material adverse effect on us.
The United Kingdom’s exit from the European Union could adversely affect us.
On June 23, 2016, the United Kingdom held a referendum in which a majority of voters voted to exit the European Union, known as Brexit. Negotiations have commenced to determine the future terms of the United Kingdom’s relationship with the European Union, including, among other things, the terms of trade between the United Kingdom and the European Union. The effects of Brexit will depend on any agreements the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. Brexit could adversely affect European and global economic or market conditions and could contribute to instability in global financial markets. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replace or replicate. Any of these effects of Brexit, and others we cannot anticipate, may adversely affect us.
We currently hold, and may acquire additional, interests in healthcare facilities located in the United Kingdom and Europe, as well as other investments that are denominated in British pounds and euros. In addition, our operating partnership has issued, and may issue in the future, senior unsecured notes denominated in euros along with borrowings denominated in British pounds. Any of the effects of Brexit described above, and others we cannot anticipate, could have a material adverse effect on our business, the value of our real estate and other investments, and our potential growth in Europe, and could amplify the currency risks faced by us.
RISKS RELATING TO REAL ESTATE INVESTMENTS
Our real estate, mortgage, and equity investments are and are expected to continue to be concentrated in a single industry segment, making us more vulnerable economically than if our investments were more diversified.
We acquire, develop, and make mortgage investments in healthcare real estate. In addition, we selectively make RIDEA investments (or similar investments) in healthcare operators. We are subject to risks inherent in concentrating investments in real estate. The risks resulting from a lack of diversification become even greater as a result of our business strategy to invest solely in healthcare facilities. A downturn in the real estate industry could materially adversely affect the value of our facilities. A downturn in the healthcare industry could negatively affect our tenants’ ability to make lease or loan payments to us as well as our return on our equity investments. Consequently, our ability to meet debt service obligations or make distributions to our stockholders are dependent on the real estate and healthcare industries. These adverse effects could be more pronounced than if we diversified our investments outside of real estate or outside of healthcare facilities.
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Our facilities may not have efficient alternative uses, which could impede our ability to find replacement tenants in the event of termination or default under our leases.
All of the facilities in our current portfolio are and all of the facilities we expect to acquire or develop in the future will benet-leased healthcare facilities. If we, or our tenants, terminate the leases for these facilities, or if these tenants lose their regulatory authority to operate these facilities, we may not be able to locate suitable replacement tenants to lease the facilities for their specialized uses. Alternatively, we may be required to spend substantial amounts to adapt the facilities to other uses. Any loss of revenues or additional capital expenditures occurring as a result could have a material adverse effect on our financial condition and results of operations and could hinder our ability to meet debt service obligations or make distributions to our stockholders.
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our facilities and harm our financial condition.
Real estate investments are relatively illiquid. Additionally, the real estate market is affected by many factors beyond our control, including adverse changes in global, national, and local economic and market conditions and the availability, costs, and terms of financing. Our ability to quickly sell or exchange any of our facilities in response to changes in economic and other conditions will be limited. No assurances can be given that we will recognize full value for any facility that we are required to sell for liquidity reasons. Our inability to respond rapidly to changes in the performance of our investments could adversely affect our financial condition and results of operations.
Development and construction risks could adversely affect our ability to make distributions to our stockholders.
We have developed and constructed facilities in the past and are currently developing threefour facilities. We will develop additional facilities in the future as opportunities present themselves. Our development and related construction activities may subject us to the following risks:
• | we may have to compete for suitable development sites; |
• | our ability to complete construction is dependent on there being no title, environmental, or other legal proceedings arising during construction; |
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• | we may be subject to delays due to weather conditions, strikes, and other contingencies beyond our control; |
• | we may be unable to obtain, or suffer delays in obtaining, necessary zoning, land-use, building, occupancy healthcare regulatory, and other required governmental permits and authorizations, which could result in increased costs, delays in construction, or our abandonment of these projects; |
• | we may incur construction costs for a facility which exceed our original estimates due to increased costs for materials or labor or other costs that we did not anticipate; and |
• | we may not be able to obtain financing on favorable terms, which may render us unable to proceed with our development activities. |
We expect to fund our development projects over time. The time frame required for development and construction of these facilities means that we may have to wait for some time to earn significant cash returns. In addition, our tenants may not be able to obtain managed care provider contracts in a timely manner or at all. Finally, there is no assurance that future development projects will occur without delays and cost overruns. Risks associated with our development projects may reduce anticipated rental revenue which could affect the timing of, and our ability to make, distributions to our stockholders.
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We may be subject to risks arising from future acquisitions of real estate.
We may be subject to risks in connection with our acquisition of healthcare real estate, including without limitation the following:
• | we may have no previous business experience with the tenants at the facilities acquired, and we may face difficulties in working with them; |
• | underperformance of the acquired facilities due to various factors, including unfavorable terms and conditions of the existing lease agreements relating to the facilities, disruptions caused by the management of our tenants, or changes in economic conditions; |
• | diversion of our management’s attention away from other business concerns; |
• | exposure to any undisclosed or unknown potential liabilities relating to the acquired facilities (or entities acquired in a share deal); and |
• | potential underinsured losses on the acquired facilities. |
We cannot assure you that we will be able to manage the new properties without encountering difficulties or that any such difficulties will not have a material adverse effect on us.
Our facilities may not achieve expected results or we may be limited in our ability to finance future acquisitions, which may harm our financial condition and operating results and our ability to make the distributions to our stockholders required to maintain our REIT status.
Acquisitions and developments entail risks that investments will fail to perform in accordance with expectations and that estimates of the costs of improvements necessary to acquire and develop facilities will prove inaccurate, as well as general investment risks associated with any new real estate investment. Newly-developed or newly-renovated facilities may not have operating histories that are helpful in making objective pricing decisions. The purchase prices of these facilities will be based in part upon projections by management as to the expected operating results of the facilities, subjecting us to risks that these facilities may not achieve anticipated operating results or may not achieve these results within anticipated time frames.
We anticipate that future acquisitions and developments will largely be financed through externally generated funds such as borrowings under credit facilities and other secured and unsecured debt financing and from issuances of equity securities. Because we must distribute at least 90% of our REIT taxable income, excluding net capital gains, each year to maintain our qualification as a REIT, our ability to rely upon income from operations or cash flows from operations to finance our growth and acquisition activities will be limited.
If our facilities do not achieve expected results and generate ample cash flows from operations, or if we are unable to obtain funds from borrowings or the capital markets to finance our acquisition and development activities, amounts available for distribution to stockholders could be adversely affected and we could be required to reduce distributions, thereby jeopardizing our ability to maintain our status as a REIT.
If we suffer losses that are not covered by insurance or that are in excess of our insurance coverage limits, we could lose investment capital and anticipated profits.
Our leases and mortgage loans, generally require our tenantstenants/borrowers to carry property, general liability, professional liability, loss of earnings, all risk, and extended coverage insurance in amounts sufficient to permit the replacement of the facility in the event of a total loss, subject to applicable deductibles. We carry general liability insurance and loss of earnings coverage on all of our properties as a contingent measure in case our tenant’s coverage is not sufficient. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, and acts of terrorism, which may be uninsurable or not insurable at a price we or our tenantstenants/borrowers can afford. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it impracticable to use insurance proceeds to replace a facility after it has been damaged or destroyed.
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destroyed. Under such circumstances, the insurance proceeds we receive might not be adequate to restore our economic position with respect to the affected facility. If any of these or similar events occur, it may reduce our return from the facility and the value of our investment. We continually review the insurance maintained by our tenants and operatorstenants/borrowers and believe the coverage provided to be adequate and customary for similarly situated companies in our industry. However, we cannot provide any assurances that such insurance will be available at a reasonable cost in the future. Also, we cannot assure you that material uninsured losses, or losses in excess of insurance proceeds, will not occur in the future.
Our capital expenditures for facility renovation may be greater than anticipated and may adversely impact rent payments by our tenants and our ability to make distributions to stockholders.
Facilities, particularly those that consist of older structures, have an ongoing need for renovations and other capital improvements, including periodic replacement of fixtures and fixed equipment. Although our leases require our tenants to be primarily responsible for the cost of such expenditures, renovation of facilities involves certain risks, including the possibility of environmental problems, regulatory requirements, construction cost overruns and delays, uncertainties as to market demand or deterioration in market demand after commencement of renovation, and the emergence of unanticipated competition from other facilities. All of these factors could adversely impact rent and loan payments by our tenants and returns on our equity investments, which in turn could have a material adverse effect on our financial condition and results of operations along with our ability to make distributions to our stockholders.
All of our healthcare facilities are subject to property taxes that may increase in the future and adversely affect our business.
Our facilities are subject to real and personal property taxes that may increase as property tax rates change and as the facilities are assessed or reassessed by taxing authorities. Our leases generally provide that the property taxes are charged to our tenants as an expense related to the facilities that they occupy. As the owner of the facilities, however, we are ultimately responsible for payment of the taxes to the government. If property taxes increase, our tenants may be unable to make the required tax payments, ultimately requiring us to pay the taxes. If we incur these tax liabilities, our ability to make expected distributions to our stockholders could be adversely affected. In addition, if such taxes increase on properties in which we have an equity investment in the tenant, our return on investment maybe negatively affected.
As the owner and lessor of real estate, we are subject to risks under environmental laws, the cost of compliance with which and any violation of which could materially adversely affect us.
Our operating expenses could be higher than anticipated due to the cost of complying with existing and future environmental laws and regulations. Various environmental laws may impose liability on the current or prior owner or operator of real property for removal or remediation of hazardous or toxic substances. Current or prior owners or operators may also be liable for government fines and damages for injuries to persons, natural resources, and adjacent property. These environmental laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence or disposal of the hazardous or toxic substances. The cost of complying with environmental laws could materially adversely affect amounts available for distribution to our stockholders and could exceed the value of all of our facilities. In addition, the presence of hazardous or toxic substances, or the failure of our tenants to properly manage, dispose of, or remediate such substances, including medical waste generated by physicians and our other healthcare tenants,operators, may adversely affect our tenants or our ability to use, sell, or rent such property or to borrow using such property as collateral which, in turn, could reduce our revenue and our financing ability. We typically obtain Phase I environmental assessments (or similar studies) on facilities we acquire or develop or on which we make mortgage loans, and intend to obtain on future facilities we acquire. However, even if the Phase I environmental assessment reports do not reveal any material environmental contamination, it is possible that material environmental contamination and liabilities may exist, of which we are unaware.
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Although the leases for our facilities and our mortgage loans generally require our operators to comply with laws and regulations governing their operations, including the disposal of medical waste, and to indemnify us for certain environmental liabilities, the scope of their obligations may be limited. We cannot assure you that our tenants would be able to fulfill their indemnification obligations and, therefore, any material violation of environmental laws could have a material adverse effect on us. In addition, environmental laws are constantly evolving, and changes in laws, regulations, or policies, or changes in interpretations of the foregoing, could create liabilities where none exist today.
Our interests in facilities through ground leases expose us to the loss of the facility upon breach or termination of the ground lease, and may limit our use of the facility, and may result in additional expense to us if our tenants vacate our facility.
We have acquired interests in 3525 of our facilities, at least in part, by acquiring leasehold interests in the land on which the facility is located rather than an ownership interest in the property, and we may acquire additional facilities in the future through ground leases. As lessee under ground leases, we are exposed to the possibility of losing the property upon termination, or an earlier breach by us, of the ground lease.lease, which would be a negative impact to our financial condition. Ground leases may also restrict our use of facilities, which may limit our flexibility in renting the facility and may impede our ability to sell the property. Finally, if our lease
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expires or is terminated for whatever reason resulting in the tenant vacating the facility, we would be successful.
We are exposed toresponsible for the risk that some ofground lease payments until we found a replacement tenant, which would negatively impact our acquisitions may not prove to be successful. We could encounter unanticipated difficultiescash flows and expenditures relating to any acquired properties, including contingent liabilities, and acquired properties might require significant management attention that would otherwise be devoted to our ongoing business. In addition, we might be exposed to undisclosed and unknown liabilities related to any acquired properties. If we agree to provide construction funding to an operator/tenant and the project is not completed, we may need to take steps to ensure completion of the project. Moreover, if we issue equity securities or incur additional debt, or both, to finance future acquisitions, it may reduce our per share financial results. These costs may negatively affect our results of operations.
RISKS RELATING TO THE HEALTHCARE INDUSTRY
Continued reductions inThe continued pressure on fee-for-service reimbursement from third-party payors and the shift towards alternative payment models, could adversely affect the profitability of our tenants and hinder their ability to make payments to us.
Sources of revenue for our tenants and operators may include the Medicare and Medicaid programs, private insurance carriers, and health maintenance organizations, among others. Both government and private payors continue theirIn addition to ongoing efforts to reduce healthcare costs, which results in reductions or slower growth in reimbursement for certain services provided by some of our tenants. In addition, the failure of any of our tenants to comply with various laws and regulations could jeopardize their ability to continue participating in Medicare, Medicaid, and other government-sponsored payment programs.
Many of our tenants continue to experience aThe shift in theirour tenants' payor mix away fromfee-for-service payors which results in an increase in the percentage of revenues attributable to alternative payment models implemented by private and government payors. CMS continuespayors, which can lead to reductions in reimbursement for services provided by our tenants. There is continued focus on transitioning Medicare from its traditionalfee-for-service model to models that employ one or more capitated, value-based, or bundled payment approaches, and private payors are implementinghave implemented similar types of alternative payment models. Such efforts from private and government payors, in addition to general industry trends, continue to place pressures on our tenants to control healthcare costs. Furthermore, pressures to control healthcare costs and a shift away from traditional health insurance reimbursement have resulted in an increase in the number of patients whose healthcare coverage is provided under managed care plans, such as health maintenance organizations and preferred provider organizations. These shifts place further cost pressures on our tenants. We also continue to believe that, due to the aging of the population and the expansion of governmental payor programs, there will be a marked increase in the number of patients relying on healthcare coverage provided by governmental payors. In instances where we have an equity investment in our tenants’ operations, in addition to the effect on these tenants’ ability to meet their financial obligations to us, our ownership and investment interests may also be negatively impacted.
CMS’s regulatory restrictions on reimbursement for LTACHs, IRFs, and HOPDs can lead to reduced reimbursement for our tenants that operate such facilities and departments. CMS continues to explore restrictions on LTACH, IRF, and HOPD reimbursement focused on more restrictive facility and patient level criteria.
The Reform Law represented a major shift in the U.S. healthcare industry by, among other things, allowing millions of formerly uninsured individuals to obtain health insurance coverage and by significantly expanding Medicaid. Though efforts to repeal and replace the Reform Law may continue in the future, we believe that certain trends, including, but not limited to, various quality and reimbursement initiatives discussed above, will continue irrespective of whether the Reform Law is repealed or replaced. We cannot predict with any certainty or precision what effect a repeal or replacement law would have on the operations of our tenants.
All of these changes
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could have a material adverse effect on the financial condition of some or all of our tenants, which could have a material adverse effect on our financial condition and results of operations and could negatively affect our ability to make distributions to our stockholders. In instances where we have an equity investment in our tenants’ operations, in addition to the effect on these tenants’ ability to meet their financial obligations to us, our ownership and investment interests may also be negatively impacted.
CMS’s increased regulatory restrictions on reimbursement for LTACH and inpatient rehabilitation facilities (“IRFs”), has reduced reimbursement for some tenants that operate LTACHs and IRFs, and CMS has also begun to implement regulatory restrictions on reimbursement for hospital outpatient departments (“HOPD”), which may also lead to reduced reimbursement for our tenants that operate HOPDs. CMS is likely to continue exploring other restrictions on LTACH, IRF, and HOPD reimbursement and possibly develop more restrictive facility and patient level criteria for these types of facilities or departments. These changes could have a material adverse effect on the financial condition of some of our tenants, which could have a material adverse effect on our financial condition and results of operations and could negatively affect our ability to make distributions to our stockholders.
The Reform Law represented a major shift in the U.S. healthcare industry by, among other things, allowing millions of formerly uninsured individuals to obtain health insurance coverage and by significantly expanding Medicaid. The Reform Law, however, remains controversial, and there are continuing efforts to repeal and replace the Reform Law. Though we believe that certain trends in the healthcare system will continue irrespective of whether the Reform Law is repealed or replaced, we cannot predict with any certainty or precision what effect a repeal or replacement law would have on the operations of our tenants, but it could have a material adverse effect on the financial condition of some or all of our tenants.
The U.S. healthcare industry is heavily regulatedSignificant regulation and loss of licensure or certification or failure to obtain licensure or certification could negatively impact our tenants' financial condition and results of operations.operations and affect their ability to make payments to us.
The U.S. healthcare industry is highly regulated by federal, state, and local laws and is directly affected by federal conditions of participation, state licensing requirements, facility inspections, state and federal reimbursement policies, regulations concerning capital and other expenditures, certification requirements and other such laws, regulations, and rules. As with the U.S. healthcare industry, our tenants in Australia, the United Kingdom, and other parts of Europe are also subject in some instances to comparable types of laws, regulations, and rules that affect their ownership and operation of healthcare facilities. Although our lease and mortgage loan agreements require our tenants/borrowers to comply with applicable laws, and we intend for these facilities to comply with such laws, we do not actively monitor compliance. Therefore, we cannot offer any assurance that our tenants/borrowers will be found to be in compliance with such, as the same may ultimately be implemented or interpreted.
We are aware of various federal and state inquiries, investigations, and other proceedings currently affecting several of our tenants and would expect such governmental compliance and enforcement activities to be ongoing at any given time with respect to one or more of our tenants, either on a confidential or public basis. As discussed in further detail below, anAn adverse result to our tenantstenant/borrower in one or more such governmental proceedings may have a material adverse effect on the relevant tenant’stheir operations and financial condition and on its ability to make required lease and/or mortgageloan payments to us. In instances where we have an equity investment in our tenants’ operations,the operator, in addition to the effect on these tenants’/borrowers’ ability to meet their financial obligation to us, our ownership and investment interests may also be negatively impacted.
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In the U.S., licensed health care facilities must comply with minimum health and safety standards and are subject to survey and inspection by state and federal agencies and their agents or affiliates, including CMS, the Joint Commission, and state departments of health. CMS develops Conditions of Participation and Conditions for Coverage that health care organizations must meet in order to begin and continue participating in the Medicare and Medicaid programs and receive payment under such programs. These minimum health and safety standards are aimed at improving quality and protecting the health and safety of beneficiaries, and there are several common criteria that exist across health entities. The failure to comply with any of these standards could jeopardize a healthcare organization’s Medicare certification and, in turn, its right to receive payment under the Medicare and Medicaid programs.
Further, many hospitals and other institutional providers in the U.S. are accredited by accrediting agenciesorganizations, such as the Joint Commission, a national healthcare accrediting organization.Commission. The Joint Commission was created to accredit
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healthcare organizationsproviders, including our tenants that meet its minimum health and safety standards. A national accrediting organization, such as the Joint Commission, enforces standards that meet or exceed such requirements. Surveyors for the Joint Commission, prior to the opening of a facility and approximately every three years thereafter, conduct on site surveys of facilities for compliance with a multitude of patient safety, treatment, and administrative requirements. Facilities may lose accreditation for failure to meet such requirements, which in turn may result in the loss of license or certification including under the Medicare and Medicaid programs. For example, a facility may lose accreditation for failing to maintain proper medication in the operating room to treat potentially fatal reactions to anesthesia or for failure to maintain safe and sanitary medical equipment.
Finally, healthcare facility reimbursement practices and quality of care issues may result in loss of license or certification. For instance,certification- such as engaging in the practice of “upcoding,” whereby services are billed for higher procedure codes, than were actually performed, may lead to the revocation of a hospital’s license or the imposition of penalties. Anan event involving poor quality of care, such as that which leads to the serious injury or death of a patient, may also result in loss of license or certification. Prime continues certain litigation against the Service Employees International Union (“SEIU”) relating to allegations that SEIU and other defendants conspired to drive Prime out of certain markets, primarily by lobbying for governmental action relating to alleged fraudulent billing practices. Prime has addressed these fraudulent billing practice allegations publicly and has provided clinical and other data to us refuting these allegations. Prime has also informed us that SEIU regularly attempts to organize certain Prime employees. Prime has also disclosed a complaint filed against it by the U.S. Department of Justice relating to alleged improper admitting practices, addressed this complaint publicly and denied the allegations.
patient. The failure of any tenanttenant/borrower to comply with such laws, requirements, and regulations resulting in a loss of its license would affect its ability to continue its operation of the facility and would adversely affect the tenant’sits ability to make lease and/or principal and interestloan payments to us. This, in turn, could have a material adverse effect on our financial condition and results of operations and could negatively affect our ability to make distributions to our stockholders. In instances where we have an equity investment in our tenants’ operations,the operator, in addition to the effects on these tenants’/borrowers’ ability to meet their financial obligations to us, our ownership and investment interests would be negatively impacted.
In addition, establishment of healthcare facilities and transfers of operations of healthcare facilities in the U.S are typically subject to regulatory approvals, not required for establishment, or transfers, of other types of commercial operations and real estate including, but not limited to,such as state certificate of need laws.laws in the U.S. Restrictions and delays in transferring the operations of healthcare facilities, in obtaining new third-party payor contracts, including Medicare and Medicaid provider agreements, and in receiving licensure and certification approval from appropriate state and federal agencies by new tenants, may affect our ability to terminate lease agreements, remove tenants that violate lease terms, and replace existing tenants with new tenants. Furthermore, these matters may affect a new tenant’stenant’s/borrower’s ability to obtain reimbursement for services rendered, which could adversely affect theirits ability to pay rent to usmake lease and/or to pay principal and interest on their loansloan payments to us. In instances where we have an equity investment in our tenants’ operations,the operator, in addition to the effect on these tenants’/borrowers’ ability to meet their financial obligations to us, our ownership and investment interests may also be negatively impacted.
Our tenants are subject to fraud and abuse laws, the violation of which by a tenant may jeopardize the tenant’s ability to make payments to us and adversely affect their profitability.
As noted earlier, in the U.S., the federal government and numerous state governments have passed laws and regulations that attempt to eliminate healthcare fraud and abuse by prohibiting business arrangements that induce patient referrals or the ordering of specific ancillary services. In addition, federal and state governments continue to investigate and conduct enforcement activity to detect and eliminate fraud and abuse inservices, or the Medicare and Medicaid programs. It is anticipated that thesubmission of false claim for payment. The trend toward increased investigation and enforcement activity in the areas of fraud and abuse and patient self-referrals willto detect and eliminate fraud and abuse in the Medicare and Medicaid programs is likely to continue in future years. ViolationsAs described above, the penalties for violations of these laws can be substantial and may result in the imposition of criminal and civil penalties includingand possible exclusion from federal and state healthcare programs. Imposition of any of these penalties upon any of our tenants could jeopardize a tenant’s
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ability to operate a facility or to make lease and/or loan payments, thereby potentially adversely affecting us. In instances where we have an equity investment in our tenants’ operations, in addition to the effect on the tenants’ ability to meet their financial obligations to us, our ownership and investment interests may also be negatively impacted.
SomeIn the case of an acquisition of a provider’s operations, some of our tenants have accepted, and prospective tenants may accept, an assignment of the previous operator’s Medicare provider agreement. Such operators and othernew-operator tenants that take assignment of Medicare provider agreements might be subject to liability for federal or state regulatory, civil, and criminal investigations of the previous owner’s operations and claims submissions. While we conduct due diligence in connection with the acquisition of such facilities, theseThese types of issues may not be discovered prior to purchase or after our tenants commence operations in our facilities. Adverse decisions, fines, or recoupments might negatively impact our tenants’ financial condition, and in turn their ability to make lease and/or loan payments to us. In instances where we have an equity investment in our tenants’ operations, in addition to the effect on these tenants’ ability to meet their financial obligations to us, our ownership and investment interests may also be negatively impacted.
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Certain of our lease arrangements may be subject to laws related to fraud and abuse or physician self-referral laws.self-referrals.
Physician investment in our operating partnership or our subsidiaries that ownlease our facilities could subject our lease arrangements to scrutiny under fraud and abuse and physician self-referral laws. Under the Stark Law, and its implementing regulations, if our lease arrangements do not satisfy the requirements of an applicable exception, the ability of our tenants to bill for services provided to Medicare beneficiaries pursuant to referrals from physician investors could be adversely impacted and subject us and our tenants to fines, which could impact our tenants’ ability to make lease andand/or loan payments to us. In instances where we have an equity investment in our tenants’ operations, in addition to the effect on the tenants’ ability to meet their financial obligations to us, our ownership and investment interests may also be negatively impacted.
We Therefore, in all cases, we intend to use our good faith efforts to structure our lease arrangements to comply with these laws; however, if we are unable to do so, this failure may restrict our ability to permit physician investment or, where such physicians do participate, may restrict the types of lease arrangements into which we may enter, including our ability to enter into percentage rent arrangements.laws.
We may be required to incur substantial renovation costs to make certain of our healthcare properties suitable for other operators and tenants.
Healthcare facilities are typically highly customized, subject to healthcare-specific building code requirements, and may not be easily adapted tonon-healthcare-related uses. The improvements generally required to conform a property to healthcare use can be costly and at times tenant-specific. A new or replacement operator or tenant may require different features in a property, depending on that operator’s or tenant’s particular business. If a current operator or tenant is unable to pay rent and/or vacates a property, we may incur substantial expenditures to modify a property before we are able to secure another operator or tenant. Also, if the property needs to be renovated to accommodate multiple operators or tenants, or regulatory requirements, we may incur substantial expenditures before we are able tore-lease the space. These expenditures or renovations may have a material adverse effect on our business, results of operations, and financial condition.
State certificate of need laws may adversely affect our development of facilities and the operations of our tenants.
Certain healthcare facilities in which we invest may also be subject to state laws in the U.S. which require regulatory approval in the form of a certificate of need prior to the transfer of a healthcare facility or prior to initiation of certain projects, including, but not limited to, the establishment of new or replacement facilities, the addition of beds, the addition or expansion of services, and certain capital expenditures. State certificate of need laws are not uniform throughout the U.S., are subject to change, and may delay developments of facilities or acquisitions or
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certain other transfers of ownership of facilities.facilities including, but limited to, a delay in obtaining approval of a replacement operator for an existing facility. We cannot predict the impact of state certificate of need laws on any of the preceding activities or on the operations of our tenants. Certificate of need laws often materially impact the ability of competitors to enter into the marketplace of our facilities. In addition, in limited circumstances, loss of state licensure or certification or closure of a facility could ultimately result in loss of authority to operate the facility and requirere-licensure or new certificate of need authorization tore-institute operations. As a result, a portion of the value of the facility may be related to the limitation on new competitors. In the event of a change in the certificate of need laws, this value may markedly change.
RISKS RELATING TO OUR ORGANIZATION AND STRUCTURE
Pursuant to Maryland law, our charter and bylaws contain provisions that may have the effect of deterring changes in management and third-party acquisition proposals, which in turn could depress the price of Medical Properties common stock or cause dilution.
Our charter contains ownership limitations that may restrict business combination opportunities, inhibit change of control transactions, and reduce the value of our common stock. To qualify as a REIT under the Internal Revenue Code of 1986, as amended, or the Code, no more than 50% in value of our outstanding stock, after taking into account options to acquire stock, may be owned, directly or indirectly, by five or fewer persons during the last half of each taxable year. Our charter generally prohibits direct or indirect ownership by any person of more than 9.8% in value or in number, whichever is more restrictive, of outstanding shares of any class or series of our securities, including our common stock. Generally, our common stock owned by affiliated owners will be aggregated for purposes of the ownership limitation. The ownership limitation could have the effect of delaying, deterring, or preventing a change in control or other transaction in which holders of common stock might receive a premium for their common stock over the then-current market price or which such holders otherwise might believe to be in their best interests. The ownership limitation provisions also may make our common stock an unsuitable investment vehicle for any person seeking to obtain, either alone or with others as a group, ownership of more than 9.8% of either the value or number of the outstanding shares of our common stock.
Our charter and bylaws contain provisions that may impede third-party acquisition proposals. Our charter and bylaws also provide restrictions on replacing or removing directors. Directors may only be removed by the affirmative vote of the holders oftwo-thirds of our common stock. Additionally, stockholders are required to give us advance notice of director nominations. Special meetings of stockholders can only be called by our president, our board of directors, or the holders of at least 25% of stock entitled to vote at the meetings. These and other charter and bylaw provisions may delay or prevent a change of control or other transaction in which holders of our common stock might receive a premium for their common stock over the then-current market price or which such holders otherwise might believe to be in their best interests.
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Our UPREIT structure may result in conflicts of interest between our stockholders and the holders of our operating partnership units.
We are organized as an umbrella partnership real estate investment trust, “UPREIT”, which means that we hold our assets and conduct substantially all of our operations through an operating limited partnership, and may issue operating partnership units to employees and/or third parties. Persons holding operating partnership units would have the right to vote on certain amendments to the partnership agreement of our operating partnership, as well as on certain other matters. Persons holding these voting rights may exercise them in a manner that conflicts with the interests of our stockholders. Circumstances may arise in the future, such as the sale or refinancing of one of our facilities, when the interests of limited partners in our operating partnership conflict with the interests of our stockholders. As the sole member of the general partner of the operating partnership, we have fiduciary duties to the limited partners of the operating partnership that may conflict with fiduciary duties that our officers and directors owe to its stockholders. These conflicts may result in decisions that are not in the best interest of our stockholders.
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We rely on information technology in our operations, and any material failure, inadequacy, interruption, or security failure of that technology could harm our business.
We rely on information technology networks and systems, including the Internet, to process, transmit, and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, and maintaining personal identifying information (in accordance with GDPR law in Europe and similar laws elsewhere) along with tenant and lease data. We purchase or license some of our information technology from vendors, on whom our systems depend.vendors. We rely on commercially available systems, software, tools, and monitoring to provide security for the processing, transmission, and storage of confidential tenant data. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not prevent the systems’ improper functioning or the improper access or disclosure of our or our tenant’s information such as in the event of cyber-attacks. Security
Even well-protected information systems remain potentially vulnerable because the techniques used in security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to entirely mitigate this risk.
A security breach, including physical or electronicbreak-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosureother significant disruption involving our IT networks and related systems could:
• | disrupt the proper functioning of our networks and systems and therefore our operations and/or those of certain of our tenants; |
• | result in misstated financial reports, violations of loan covenants, and/or missed reporting deadlines; |
• | result in our inability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT; |
• | result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information of ours or others, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes; |
• | require management attention and resources to remedy any resulting damages; |
• | subject us to liability claims or regulatory penalties; or |
• | damage our reputation among our tenants and investors generally. |
Any of confidential information. The risk of security breaches has generally increased as the number, intensity and sophistication of attacks have increased. In some cases, it may be difficult to anticipate or immediately detect such incidents and the damage they cause. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties andforegoing could have a materially adverse effect on our business, financial condition, and results of operations.
Unfavorable resolution of pending and future litigation matters and disputes could have a material adverse effect on our financial condition.
From time to time, we are involved in legal proceedings, lawsuits, and other claims. We also are named as defendants in lawsuits allegedly arising out of our actions or the actions of our operators/tenants in which such operators/tenants have agreed to indemnify, defend, and hold us harmless from and against various claims, litigation, and liabilities arising in connection with their respective businesses. An unfavorable resolution of pending or future litigation or legal proceedings may have a material adverse effect on our business, results of operations, and financial condition. Regardless of its outcome, litigation may result in substantial costs and expenses, significantly divert the attention of management, and could damage our reputation. We cannot guarantee losses incurred in connection with any current or future legal or regulatory proceedings or actions will not exceed any available insurance coverage.
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Changes in accounting pronouncements could adversely affect our operating results, in addition to the reported financial performance of our tenants.
Uncertainties posed by various initiatives of accounting standard-setting by the Financial Accounting Standards Board (“FASB”) and the SEC, which create and interpret applicable accounting standards for U.S. companies, may change the financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of our financial statements. Proposed changes include, but are not limited to, changes in lease accounting, revenue recognition and the adoption of accounting standards likely to require the increased use of “fair-value” measures.
These changes could have a material impact on our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in potentially material restatements of prior period financial statements. Similarly, these changes could have a material impact on our tenants’/borrowers’ reported financial condition or results of operations or could affect our tenants’ preferences regarding leasing real estate.
TAX RISKS ASSOCIATED WITH OUR STATUS AS A REIT
Loss of our tax status as a REIT would have significant adverse consequences to us and the value of our common stock.
We believe that we qualify as a REIT for federal income tax purposes and have elected to be taxed as a REIT under the federal income tax laws commencing with our taxable year that began on April 6, 2004, and ended on December 31, 2004. The REIT qualification requirements are extremely complex, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Accordingly, there is no assurance that we will be successful in operating so as to qualify as a REIT. At any time, new laws, regulations, interpretations, or court decisions may change the federal tax laws relating to, or the federal income tax consequences of, qualification as a REIT. It is possible that future economic, market, legal, tax, or other considerations may cause our board of directors to revoke the REIT election, which it may do without stockholder approval.
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If we lose or revoke our REIT status, we will face serious tax consequences that will substantially reduce the funds available for distribution because:
• | we would not be allowed a deduction for distributions to stockholders in computing our taxable income; therefore, we would be subject to federal income tax at regular corporate rates, and we might need to borrow money or sell assets in order to pay any such tax; |
• | we also could be subject to increased state and local taxes; and |
• | unless we are entitled to relief under statutory provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify. |
Furthermore, we own a direct interest in a subsidiary REIT that has elected to be taxed as a REIT commencing with the 2019 tax year. Provided that this subsidiary REIT qualifies as a REIT, our interest in the subsidiary will be treated as a qualifying real estate asset for purposes of the REIT asset tests, and any dividend income or gains derived by us from such subsidiary REIT will generally be treated as income that qualifies for purposes of the REIT 95% gross income test. To qualify as a REIT, the subsidiary REIT must independently satisfy all of the REIT qualification requirements. If such subsidiary REIT were to fail to qualify as a REIT, and certain relief provisions did not apply, it would be treated as a regular taxable corporation and its income would be subject to U.S. federal income tax at regular corporate rates, and we might needtax. In addition, a failure of the subsidiary REIT to borrow money or sell assets in order to pay any such tax;
As a result of all these factors, a failure to achieve or a loss or revocation of our REIT status could have a material adverse effect on our financial condition and results of operations and would adversely affect the value of our common stock.
Loss of our tax status as a Managed Investment Trust for our Australia subsidiary would result in additional foreign tax liability.
We have structured our Australia investment through a Managed Investment Trust which provides certain tax benefits to us. In order to obtain these tax benefits, we must meet specific qualifying conditions on an annual basis. If these conditions are not met, we will be subject to higher foreign income tax liabilities related to our Australian investment. We believe all qualifying conditions have been met; however, these qualifications can be subjective and could result in differing interpretations by the local tax authorities.
Failure to make required distributions as a REIT would subject us to tax.
In order to qualify as a REIT, each year we must distribute to our stockholders at least 90% of our REIT taxable income, excluding net capital gains. To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible
32
excise tax on the amount, if any, by which our distributions in any year are less than the sum of (1) 85% of our ordinary income for that year; (2) 95% of our capital gain net income for that year; and (3) 100% of our undistributed taxable income from prior years.
We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Differences in timing between the recognition of income and the related cash receipts or the effect of required debt amortization payments could require us to borrow money or sell assets to pay out enough of our taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. In the future, we may borrow to pay distributions to our stockholders and the limited partners of our operating partnership. Any funds that we borrow would subject us to interest rate and other market risks.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities.
To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders, and the ownership of our stock. In order to meet these tests, we may be required to forego attractive business or investment opportunities. Currently, no more than 25%20% of the value of our assets may consist of securities of one or more TRSsTRS and no more than 25% of the value of our assets may consist of securities that are not qualifying assets under the test requiring that 75% of a REIT’s assets consist of real estate and other related assets. In addition, at least 75% of our gross income must be generated from either rents from real estate or interest on loans secured by real estate (i.e. mortgage loans). Further, a TRS may not directly or indirectly operate or manage a healthcare facility. For purposes of this definition a “healthcare facility” means a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients and which is operated by a service provider that is eligible for participation in the Medicare program under Title XVIII of the Social Security Act with respect to the facility. Compliance with current and future changes to REIT requirements may limit our flexibility in executing our business plan.
If certain sale-leaseback transactions are not characterized by the Internal Revenue Service (“IRS”) or similar tax authorities internationally as “true leases,” we may be subject to adverse tax consequences.
We have purchased certain properties and leased them back to the sellers of such properties, and we may enter into similar transactions in the future. We intend for any such sale-leaseback transaction to be structured in
37
a manner that the lease will be characterized as a “true lease,” thereby allowing us to be treated as the owner of the property for U.S. federal income tax purposes. However, depending on the terms of any specific transaction, the IRStaxing authorities might take the position that the transaction is not a “true lease” but is more properly treated in some other manner.. In the event any sale-leaseback transaction is challenged and successfullyre-characterized, we might not be able to deduct depreciation expense on the real estate or fail to satisfy the REIT asset tests or income test and, consequently could lose our REIT status effective with the year ofre-characterizations. re-characterization.
Transactions with TRSs may be subject to excise tax.
We have historically entered into lease and other transactions with our TRSsTRS and theirits subsidiaries and expect to continue to do so in the future. Under applicable rules, transactions such as leases between our TRSsTRS and theirits parent REIT that are not conducted on a market terms basis may be subject to a 100% excise tax. While we believe that all of our transactions with our TRSsTRS are at arm’s length, imposition of a 100% excise tax could have a material adverse effect on our financial condition and results of operations and could adversely affect the trading price of our common stock.
Loans to our tenants could be characterized as equity, in which case our income from that tenant might not be qualifying income under the REIT rules and we could lose our REIT status.
In connection with the acquisition in 2004 of certain Vibra Healthcare, LLC (“Vibra”) facilities, our TRS made a loan to Vibra to acquire the operations at those Vibra facilities. The acquisition loan bore interest at an annual rate of 10.25%. Our operating partnership loaned the funds to the TRS to make this loan. The loan from our operating partnership to the TRS bore interest at an annual rate of 9.25%.
Like the Vibra loan discussed above, our TRSs haveTRS has made and will make loans to tenants in our facilities to acquire operations or for working capital purposes. The IRS may take the position that certain loans to tenants should be treated as equity interests rather than debt, and that our interest income from such tenant should not be treated as qualifying income for purposes of the REIT gross income tests. If the IRS were to successfully treat a loan to a particular tenant as equity interests, the tenant would be a “related party tenant” with respect to our company and the rent that we receive from the tenant would not be qualifying income for purposes of the REIT gross income tests. As a result, we could be in jeopardy of failing the 75% income test discussed above, which if we did would cause us to lose our REIT status. In addition, if the IRS were to successfully treat a particular loan as interests held by our operating partnership rather than by our TRSs,TRS, we could fail the 5% asset test, and if the IRS further successfully treated the loan as other than straight debt, we could fail the 10% asset test with respect to such interest. As a result of the failure of either test, we could lose our REIT status, which would subject us to corporate level income tax and adversely affect our ability to make distributions to our stockholders.
33
Certain property transfers may generate prohibited transaction income, resulting in a penalty tax on gain attributable to the transaction.
From time to time, we may transfer or otherwise dispose of some of our properties, including by contributing properties to ourco-investment ventures. Under the Code, any gain resulting from transfers of properties we hold as inventory or primarily for sale to customers in the ordinary course of business is treated as income from a prohibited transaction subject to a 100% penalty tax. We do not believe that our transfers or disposals of property or our contributions of properties into ourco-investment ventures are prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The IRS may contend that certain transfers or dispositions of properties by us or contributions of properties into ourco-investment ventures are prohibited transactions. While we believe that the IRS would not prevail in any such dispute, if the CodeIRS were to argue successfully that a transfer, disposition, or contribution of property constituted a prohibited transaction, we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction. In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a REIT.
38
Changes in U.S. or foreign tax laws, regulations, including changes to tax rates, may adversely affect our results of operations.
We are headquartered in the U.S. with subsidiaries and investments globally and are subject to income taxes in these jurisdictions. Significant judgment is required in determining our provision for income taxes. Although we believe that we have adequately assessed and accounted for our potential tax liabilities, and that our tax estimates are reasonable, there can be no assurance that additional taxes will not be due upon audit of our tax returns or as a result of changes to applicable tax laws. The U.S. government (particularly with the recent presidential election coupled with a Republican-controlled Congress) as well as the governments of many of the countrieslocations in which we operate (such as Australia, Germany, the United Kingdom, and Luxembourg, which is where most of our Europe entities are domiciled) are actively discussing changes to the corporate recognition and taxationtaxation. Our future tax expense could be adversely affected by these changes in tax laws or their interpretation, both domestically and internationally. Potential tax reforms being considered by many countries include changes that could impact, among other things, global tax reporting, intercompany transfer pricing arrangements, the definition of worldwide income.taxable permanent establishments, and other legal or financial arrangements. The nature and timing of any changes to each jurisdiction’s tax laws and the impact on our future tax liabilities both in the U.S. and abroad cannot be predicted with any accuracy but could materially and adversely impact our results of operations and cash flows.
The recently enacted Tax Cuts and Jobs Act is a complex revision to the U.S. federal income tax laws with impacts on different categories of taxpayers and industries, and will require subsequent rulemaking and interpretation in a number of areas. The long-term impact of the Tax Cuts and Jobs Act on the overall economy, government revenues, our tenants, our company, and the real estate industry cannot be reliably predicted at this time. Furthermore, the Tax Cuts and Jobs Act may impact certain of our tenants’ operating results, financial condition, and future business plans. The Tax Cuts and Jobs Act may also result in reduced government revenues, and therefore reduced government spending, which may impact some of our tenants that rely on government funding. There can be no assurance that the Tax Cuts and Jobs Act will not impact our operating results, financial condition, and future business operations.
Changes in or interpretation of tax law could impact the determination of our income tax liability for the current and future tax years.
We have investments in multiple countries. Consequently, we are subject to the jurisdiction of a significant number of taxing authorities. The income earned in these various jurisdictions is taxed on differing bases, which includes numerous complexities that vary by jurisdiction. The final determination of our income tax liabilities involves interpretation of local tax laws, tax treaties, and related authorities for each source of income earned and expenditure incurred. We go to significant lengths, and incur additional costs, to support all material tax positions taken in these foreign jurisdictions. However, changes in the tax environment or interpretation of tax law could impact the determination of our income tax liabilities for the year and result in higher tax liabilities for us.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
Income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts, and estates are generally subject to tax at preferential rates. Dividends payable by REITs, however, generally are not eligible for the preferential tax rates applicable to qualified dividend income. Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the preferential rates continue to apply to regular corporate qualified dividends, investors who are individuals, trusts, and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks ofnon-REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the per share trading price of our capital stock.
The Tax Cuts and Jobs Act provides a deduction tonon-corporate taxpayers (e.g., individuals, trusts, and estates) of 20% on dividends paid by a REIT that are not classified as capital gains. This provides closer parity between the treatment under the new law of ordinary REIT dividends and qualified dividends. The new law also provides for a maximum individual marginal tax rate on ordinary income, without regard to the effect of this deduction, of 37%. Fornon-corporate taxpayers, this would reduce the maximum marginal tax rate on ordinary REIT dividends to 33.4% (including the 3.8% Medicare tax that is applied before the 20% deduction.)deduction).
34
The new tax law’s 20% deduction on dividends paid by a REIT to non-corporate taxpayers and the reduced individual tax rates are scheduled to sunset for tax years beginning after 2025, absent further legislation.
None.
35
At December 31, 2017,2019, our portfolio (including properties in our five real estate joint ventures) consisted of 275359 properties: 258336 facilities (of the 261348 facilities that we owned) were in operation and leased to 3142 operators, 1411 assets were in the form of first mortgage loans to four
39
five operators, and threefour properties were under construction. Our owned facilities consisted of 148222 general acute care hospitals, 94 inpatient rehabilitation hospitals, 16 LTACHs,103 IRFs, and three medical office buildings.23 LTACHs. The14 11 non-owned facilities consisted of tenseven general acute care facilities, three inpatient rehabilitation hospitals,IRFs, and one LTACH.
Total Properties | Total 2017 Revenue | Total Assets(A) | ||||||||||
(Dollars in thousands) | ||||||||||||
United States: | ||||||||||||
Alabama | 2 | $ | 763 | $ | 8,614 | |||||||
Arizona | 16 | 36,393 | 485,012 | (B) | ||||||||
Arkansas | 2 | 8,288 | 97,441 | |||||||||
California | 13 | 66,241 | 542,876 | |||||||||
Colorado | 14 | 13,082 | 100,498 | |||||||||
Connecticut | — | 90 | 1,500 | (D) | ||||||||
Florida | 4 | 11,064 | 161,356 | |||||||||
Idaho | 6 | 18,013 | 201,970 | (B) | ||||||||
Indiana | 2 | 4,805 | 52,003 | |||||||||
Kansas | 3 | 11,441 | 99,287 | |||||||||
Louisiana | 6 | 11,351 | 143,646 | |||||||||
Massachusetts | 9 | 107,195 | 1,290,590 | |||||||||
Michigan | 2 | 4,382 | 40,743 | |||||||||
Missouri | 4 | 19,691 | 210,921 | |||||||||
Montana | 1 | 2,634 | 21,927 | |||||||||
Nevada | 1 | 10,064 | 85,541 | |||||||||
New Jersey | 8 | 43,658 | 419,700 | |||||||||
New Mexico | 2 | 6,426 | 56,373 | |||||||||
Ohio | 6 | 9,190 | 128,075 | |||||||||
Oklahoma | — | 789 | — | (E) | ||||||||
Oregon | 2 | 13,057 | 133,503 | |||||||||
Pennsylvania | 3 | 9,727 | 119,484 | |||||||||
South Carolina | 6 | 14,463 | 173,220 | |||||||||
Texas | 62 | 102,926 | 1,257,382 | (C) | ||||||||
Utah | 7 | 28,831 | 1,035,501 | |||||||||
Virginia | 1 | 1,072 | 10,915 | |||||||||
Washington | 1 | 10,758 | 114,943 | |||||||||
West Virginia | 2 | 4,944 | 54,604 | |||||||||
Wisconsin | 1 | 2,990 | 29,062 | |||||||||
Wyoming | 1 | 2,803 | 23,342 | |||||||||
Other assets | — | — | 87,624 | |||||||||
|
|
|
|
|
| |||||||
Total United States | 187 | $ | 577,131 | $ | 7,187,653 | |||||||
International: | ||||||||||||
Germany | 77 | $ | 123,453 | $ | 1,581,726 | |||||||
United Kingdom | 2 | 3,681 | 52,869 | (B) | ||||||||
Italy | 8 | — | 99,347 | (F) | ||||||||
Spain | 1 | 480 | 25,901 | (F) | ||||||||
Other assets | — | — | 72,792 | |||||||||
|
|
|
|
|
| |||||||
Total International | 88 | $ | 127,614 | $ | 1,832,635 | |||||||
|
|
|
|
|
| |||||||
Total | 275 | $ | 704,745 | $ | 9,020,288 | |||||||
|
|
|
|
|
|
|
| Total Properties |
|
| Total 2019 Revenue |
|
| Total Assets(A) |
|
| |||
|
| (Dollars in thousands) |
|
| |||||||||
United States: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama |
|
| 2 |
|
| $ | 783 |
|
| $ | 8,911 |
|
|
Arizona |
|
| 16 |
|
|
| 50,374 |
|
|
| 503,020 |
| (C) |
Arkansas |
|
| 2 |
|
|
| 8,920 |
|
|
| 100,938 |
|
|
California |
|
| 23 |
|
|
| 92,322 |
|
|
| 1,298,244 |
|
|
Colorado |
|
| 13 |
|
|
| 10,712 |
|
|
| 98,014 |
|
|
Connecticut |
|
| 3 |
|
|
| 16,592 |
|
|
| 464,614 |
|
|
Florida |
|
| 4 |
|
|
| 16,744 |
|
|
| 208,318 |
|
|
Idaho |
|
| 6 |
|
|
| 19,423 |
|
|
| 285,518 |
| (B) |
Illinois |
|
| 1 |
|
|
| 8 |
|
|
| 2,000 |
|
|
Indiana |
|
| 3 |
|
|
| 4,734 |
|
|
| 53,003 |
|
|
Iowa |
|
| 1 |
|
|
| 205 |
|
|
| 57,029 |
|
|
Kansas |
|
| 11 |
|
|
| 16,944 |
|
|
| 305,206 |
|
|
Kentucky |
|
| 1 |
|
|
| 2,638 |
|
|
| 66,300 |
|
|
Louisiana |
|
| 7 |
|
|
| 13,726 |
|
|
| 153,968 |
|
|
Massachusetts |
|
| 10 |
|
|
| 137,501 |
|
|
| 1,449,422 |
|
|
Michigan |
|
| 2 |
|
|
| 4,545 |
|
|
| 39,875 |
|
|
Missouri |
|
| 4 |
|
|
| 19,952 |
|
|
| 210,921 |
|
|
Montana |
|
| 1 |
|
|
| 1,701 |
|
|
| 17,680 |
|
|
Nevada |
|
| 1 |
|
|
| 10,325 |
|
|
| 87,181 |
|
|
New Jersey |
|
| 6 |
|
|
| 42,625 |
|
|
| 310,854 |
|
|
New Mexico |
|
| 2 |
|
|
| 4,518 |
|
|
| 43,791 |
|
|
Ohio |
|
| 7 |
|
|
| 13,420 |
|
|
| 136,593 |
| (C) |
Oklahoma |
|
| 2 |
|
|
| 517 |
|
|
| 79,354 |
|
|
Oregon |
|
| 1 |
|
|
| 10,038 |
|
|
| 110,000 |
|
|
Pennsylvania |
|
| 11 |
|
|
| 31,858 |
|
|
| 905,887 |
|
|
Rhode Island |
|
| 2 |
|
|
| 3,035 |
|
|
| 112,937 |
|
|
South Carolina |
|
| 7 |
|
|
| 12,679 |
|
|
| 168,511 |
|
|
Texas |
|
| 61 |
|
|
| 119,087 |
|
|
| 1,363,086 |
| (B)(C) |
Utah |
|
| 7 |
|
|
| 87,191 |
|
|
| 1,084,051 |
|
|
Virginia |
|
| 2 |
|
|
| 1,793 |
|
|
| 25,580 |
|
|
Washington |
|
| 2 |
|
|
| 12,653 |
|
|
| 136,600 |
|
|
West Virginia |
|
| 2 |
|
|
| (27 | ) |
|
| 28,171 |
| (C) |
Wisconsin |
|
| 2 |
|
|
| 3,137 |
|
|
| 31,062 |
|
|
Wyoming |
|
| 3 |
|
|
| 2,239 |
|
|
| 102,446 |
|
|
Other assets |
|
| — |
|
|
| — |
|
|
| 681,437 |
|
|
Total United States |
|
| 228 |
|
| $ | 772,912 |
|
| $ | 10,730,522 |
|
|
International: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany |
|
| 81 |
|
| $ | 33,620 |
|
|
| 750,313 |
| (D) |
Switzerland |
|
| 15 |
|
|
| — |
|
|
| 308,486 |
| (D) |
Australia |
|
| 11 |
|
|
| 31,238 |
|
|
| 897,915 |
|
|
United Kingdom |
|
| 12 |
|
|
| 15,776 |
|
|
| 618,954 |
| (B) |
Italy |
|
| 8 |
|
|
| — |
|
|
| 91,405 |
| (D) |
Spain |
|
| 3 |
|
|
| 482 |
|
|
| 159,451 |
| (D) |
Portugal |
|
| 1 |
|
|
| 169 |
|
|
| 34,291 |
|
|
Other assets |
|
| — |
|
|
| — |
|
|
| 875,994 |
|
|
Total International |
|
| 131 |
|
| $ | 81,285 |
|
| $ | 3,736,809 |
|
|
Total |
|
| 359 |
|
| $ | 854,197 |
|
| $ | 14,467,331 |
|
|
(A) | Represents total assets at December 31, |
(B) | Includes |
40
(C) | Arizona, Ohio, and West Virginia each include one facility that is |
(D) | For Germany, Switzerland, Italy, and Spain, we own properties through five real estate joint venture arrangements. The table below shows revenues earned from our joint venture arrangements: |
Type of Property (includes properties subject to leases and mortgage loans) | Number of Properties | Total Square Footage | Total Licensed Beds(C) | |||||||||
General Acute Care Hospitals(A) | 161 | 26,768,711 | 15,926 | |||||||||
Inpatient Rehabilitation Hospitals(B) | 97 | 11,234,149 | 15,485 | |||||||||
Long-Term Acute Care Hospitals | 17 | 983,205 | 1,015 | |||||||||
|
|
|
|
|
| |||||||
275 | 38,986,065 | 32,426 | ||||||||||
|
|
|
|
|
|
|
| Total Properties |
| Total 2019 Revenue |
| |
|
| (Dollars in thousands) |
| |||
Germany |
| 71 |
| $ | 62,356 |
|
Switzerland |
| 15 |
|
| 10,844 |
|
Italy |
| 8 |
|
| 7,876 |
|
Spain |
| 3 |
|
| 2,886 |
|
Total |
| 97 |
| $ | 83,962 |
|
A breakout of our facilities at December 31, 2019 based on property type is as follows:
|
| Number of Properties |
|
| Total Square Footage |
|
| Total Licensed Beds(A) |
| |||
General acute care hospitals |
|
| 229 |
|
|
| 37,212,980 |
|
|
| 21,584 |
|
IRFs |
|
| 106 |
|
|
| 11,988,031 |
|
|
| 15,962 |
|
LTACHs |
|
| 24 |
|
|
| 1,365,150 |
|
|
| 1,396 |
|
|
|
| 359 |
|
|
| 50,566,161 |
|
|
| 38,942 |
|
(A) |
Excludes our |
The following table shows lease and mortgage loan expirations, for the next 10 years and thereafter, assuming that none of the tenants/borrowers exercise any of their renewal options (dollars in thousands):
Total Lease and Mortgage Loan Portfolio(2) | Total Leases/ Mortgage Loans | Annualized Base Rent/ Interest(1) | % of Total Annualized Base Rent/ Interest | Total Square Footage | Total Licensed Beds | ||||||||||||||||||||||||||||||||||||
2018 | 15 | (3) | $ | 7,561 | 1.0 | % | 114,330 | — | |||||||||||||||||||||||||||||||||
2019 | 4 | 9,082 | 1.3 | % | 431,391 | 418 | |||||||||||||||||||||||||||||||||||
Total Lease and Loan Portfolio(1) |
| Total Leases/ Loans(2) |
|
|
| Annualized Base Rent/ Interest(3) |
|
| % of Total Annualized Base Rent/ Interest |
|
| Total Square Footage |
|
| Total Licensed Beds |
| |||||||||||||||||||||||||
2020 | 1 | 2,032 | 0.3 | % | 47,937 | 64 |
|
| 1 |
|
|
| $ | 925 |
|
|
| 0.1 | % |
|
| — |
|
|
| — |
| ||||||||||||||
2021 | 3 | 13,397 | 1.9 | % | 422,679 | 338 |
|
| 2 |
|
|
|
| 3,444 |
|
|
| 0.3 | % |
|
| 143,382 |
|
|
| 190 |
| ||||||||||||||
2022 | 15 | 74,227 | 10.3 | % | 3,543,907 | 2,547 |
|
| 18 |
|
|
|
| 85,500 |
|
|
| 7.9 | % |
|
| 4,170,429 |
|
|
| 3,134 |
| ||||||||||||||
2023 | 4 | 12,883 | 1.8 | % | 912,652 | 823 |
|
| 4 |
|
|
|
| 13,476 |
|
|
| 1.3 | % |
|
| 912,652 |
|
|
| 823 |
| ||||||||||||||
2024 | 1 | 2,273 | 0.3 | % | 183,545 | 204 |
|
| 2 |
|
|
|
| 5,459 |
|
|
| 0.5 | % |
|
| 387,870 |
|
|
| 374 |
| ||||||||||||||
2025 | 7 | 22,957 | 3.2 | % | 1,360,953 | 857 |
|
| 5 |
|
|
|
| 20,430 |
|
|
| 1.9 | % |
|
| 1,299,924 |
|
|
| 731 |
| ||||||||||||||
2026 | 6 | 26,501 | 3.7 | % | 986,091 | 907 |
|
| 2 |
|
|
|
| 8,676 |
|
|
| 0.8 | % |
|
| 212,272 |
|
|
| 187 |
| ||||||||||||||
2027 | 1 | 2,990 | 0.4 | % | 102,948 | 13 |
|
| 1 |
|
|
|
| 3,129 |
|
|
| 0.3 | % |
|
| 102,948 |
|
|
| 13 |
| ||||||||||||||
2028 |
|
| 4 |
|
|
|
| 5,478 |
|
|
| 0.5 | % |
|
| 141,725 |
|
|
| 74 |
| ||||||||||||||||||||
2029 |
|
| 22 |
|
|
|
| 54,746 |
|
|
| 5.1 | % |
|
| 2,882,622 |
|
|
| 1,377 |
| ||||||||||||||||||||
2030 |
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||
Thereafter | 205 | 546,675 | 75.8 | % | 29,352,412 | 25,167 |
|
| 316 |
|
|
|
| 876,418 |
|
|
| 81.3 | % |
|
| 40,566,496 |
|
|
| 33,966 |
| ||||||||||||||
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total | 262 | $ | 720,578 | 100.0 | % | 37,458,845 | 31,338 |
|
| 377 |
|
|
| $ | 1,077,681 |
|
|
| 100.0 | % |
|
| 50,820,320 |
|
|
| 40,869 |
| |||||||||||||
|
|
|
|
|
(1) | Schedule includes leases and mortgage loans. |
(2) | Includes all properties, including 97 properties owned through joint ventures and 30 properties acquired on January 8, 2020 as more fully described in Note 8 of Item 8 of this Annual Report on Form 10-K, except eight vacant properties representing less than 1% of our total pro forma gross assets, and four facilities that are under development. |
(3) | The most recent monthly base rent and mortgage loan interest annualized. This does not include tenant recoveries, additional rents, and other lease/loan-related adjustments to revenue (i.e., straight-line rents and deferred revenues). |
37
41
ITEM 3. | Legal Proceedings |
From time to time,time-to-time, there are various legal proceedings pending to which we are a party or to which some of our properties are subject to arising in the normal course of business. At this time, we do not believe that the ultimate resolution of these proceedings will have a material adverse effect on our consolidated financial position or results of operations.
None.
38
42
ITEM 5. | Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |
(a) Medical Properties’ common stock is traded on the New York Stock Exchange under the symbol “MPW.” The following table sets forth the high and low sales prices for the common stock for the periods indicated, as reported by the New York Stock Exchange Composite Tape, and the dividends per share declared by us with respect to each such period.
| High |
|
| Low |
|
| Dividends |
| ||||||||||||||||
High | Low | Dividends | ||||||||||||||||||||||
Year ended December 31, 2017 | ||||||||||||||||||||||||
Year Ended December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
First Quarter | $ | 13.86 | $ | 11.90 | $ | 0.24 |
| $ | 18.89 |
|
| $ | 15.50 |
|
| $ | 0.25 |
| ||||||
Second Quarter | 14.22 | 12.25 | 0.24 |
|
| 18.92 |
|
|
| 16.83 |
|
|
| 0.25 |
| |||||||||
Third Quarter | 13.54 | 12.27 | 0.24 |
|
| 19.67 |
|
|
| 17.06 |
|
|
| 0.26 |
| |||||||||
Fourth Quarter | 14.19 | 12.89 | 0.24 |
|
| 21.63 |
|
|
| 18.94 |
|
|
| 0.26 |
| |||||||||
Year ended December 31, 2016 | ||||||||||||||||||||||||
Year Ended December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
First Quarter | $ | 13.29 | $ | 9.61 | $ | 0.22 |
| $ | 13.89 |
|
| $ | 11.82 |
|
| $ | 0.25 |
| ||||||
Second Quarter | 15.50 | 12.61 | 0.23 |
|
| 14.18 |
|
|
| 12.25 |
|
|
| 0.25 |
| |||||||||
Third Quarter | 15.92 | 13.64 | 0.23 |
|
| 15.24 |
|
|
| 13.79 |
|
|
| 0.25 |
| |||||||||
Fourth Quarter | 15.04 | 11.54 | 0.23 |
|
| 17.52 |
|
|
| 13.98 |
|
|
| 0.25 |
|
On February 28, 2018,21, 2020, the closing price for our common stock, as reported on the New York Stock Exchange, was $12.26$24.15 per share. As of February 28, 2018,21, 2020, there were 7685 holders of record of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee name.
To qualify as a REIT, we must distribute at least 90% of our REIT taxable income, excluding net capital gain, as dividends to our stockholders. If dividends are declared in a quarter, those dividends will be paid during the subsequent quarter. We expect to continue the policy of distributing our taxable income through regular cash dividends on a quarterly basis, although there is no assurance as to future dividends because they depend on future earnings, capital requirements, and our financial condition. In addition, our Credit Facility limits the amounts of dividends we can pay — see Note 4 of Item 8 of this Annual Report onForm 10-K for more information.
(b) Not applicable.
(c) None.
39
43
The following graph provides comparison of cumulative total stockholder return for the period from December 31, 20122014 through December 31, 2017,2019, among us, the Russell 2000 Index, NAREIT All Equity REIT Index, and SNL US REIT Healthcare Index. The stock performance graph assumes an investment of $100 in us and the three indices, and the reinvestment of dividends. The historical information below is not indicative of future performance.
Period Ending | ||||||||||||||||||||||||
Index | 12/31/12 | 12/31/13 | 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | ||||||||||||||||||
Medical Properties Trust, Inc. | 100.00 | 108.39 | 130.22 | 116.83 | 133.77 | 161.26 | ||||||||||||||||||
Russell 2000 | 100.00 | 138.82 | 145.62 | 139.19 | 168.85 | 193.58 | ||||||||||||||||||
NAREIT All Equity REIT Index | 100.00 | 102.86 | 131.68 | 135.40 | 147.09 | 159.85 | ||||||||||||||||||
SNL US REIT Healthcare | 100.00 | 93.72 | 124.81 | 115.74 | 124.32 | 124.14 |
|
| Period Ending |
| |||||||||||||||||||||
Index |
| 12/31/2014 |
|
| 12/31/2015 |
|
| 12/30/2016 |
|
| 12/31/2017 |
|
| 12/31/2018 |
|
| 12/31/2019 |
| ||||||
Medical Properties Trust, Inc. |
|
| 100.00 |
|
|
| 89.72 |
|
|
| 102.73 |
|
|
| 123.84 |
|
|
| 154.83 |
|
|
| 214.49 |
|
Russell 2000 |
|
| 100.00 |
|
|
| 95.59 |
|
|
| 115.95 |
|
|
| 132.94 |
|
|
| 118.30 |
|
|
| 148.49 |
|
NAREIT All Equity REIT Index |
|
| 100.00 |
|
|
| 102.83 |
|
|
| 111.70 |
|
|
| 121.39 |
|
|
| 116.48 |
|
|
| 149.86 |
|
SNL US REIT Healthcare |
|
| 100.00 |
|
|
| 92.73 |
|
|
| 99.61 |
|
|
| 99.46 |
|
|
| 105.83 |
|
|
| 128.59 |
|
The graph and accompanying text shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form10-K into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended.
40
44
The following tables set forth are selected consolidated financial and operating data for Medical Properties Trust, Inc. and MPT Operating Partnership, L.P. and their respective subsidiaries. You should read the following selected financial data in conjunction with the consolidated historical financial statements and notes thereto of each of Medical Properties Trust, Inc. and MPT Operating Partnership, L.P. and their respective subsidiaries included in Item 8, in this Annual Report onForm 10-K, along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7, in this Annual Report on Form10-K.
Medical Properties Trust, Inc.
The consolidated operating data and balance sheetssheet data have been derived from our audited consolidated financial statements. As of December 31, 2017,2019, Medical Properties Trust, Inc. had a 99.9% equity ownership interest in the Operating Partnership. Medical Properties Trust, Inc. has no significant operations other than as the sole member of its wholly owned subsidiary, Medical Properties Trust, LLC, which is the sole general partner of the Operating Partnership, and no material assets, other than its direct and indirect investment in the Operating Partnership.
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
(In thousands except per share data) | ||||||||||||||||||||
OPERATING DATA | ||||||||||||||||||||
Total revenue | $ | 704,745 | $ | 541,137 | $ | 441,878 | $ | 312,532 | $ | 242,523 | ||||||||||
Real estate depreciation and amortization expense | (125,106 | ) | (94,374 | ) | (69,867 | ) | (53,938 | ) | (36,978 | ) | ||||||||||
Property-related and general and administrative expenses | (64,410 | ) | (51,623 | ) | (47,431 | ) | (39,125 | ) | (32,513 | ) | ||||||||||
Acquisition expenses(2) | (29,645 | ) | (46,273 | ) | (61,342 | ) | (26,389 | ) | (19,494 | ) | ||||||||||
Impairment charges | — | (7,229 | ) | — | (50,128 | ) | — | |||||||||||||
Interest expense | (176,954 | ) | (159,597 | ) | (120,884 | ) | (98,156 | ) | (66,746 | ) | ||||||||||
Gain on sale of real estate and other asset dispositions, net | 7,431 | 61,224 | 3,268 | 2,857 | 7,659 | |||||||||||||||
Unutilized financing fees/ debt refinancing costs | (32,574 | ) | (22,539 | ) | (4,367 | ) | (1,698 | ) | — | |||||||||||
Other income (expense) | 10,432 | (1,618 | ) | 175 | 5,183 | (4,424 | ) | |||||||||||||
Income tax (expense) benefit(3) | (2,681 | ) | 6,830 | (1,503 | ) | (340 | ) | (726 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income from continuing operations | 291,238 | 225,938 | 139,927 | 50,798 | 89,301 | |||||||||||||||
Income (loss) from discontinued operations | — | (1 | ) | — | (2 | ) | 7,914 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income | 291,238 | 225,937 | 139,927 | 50,796 | 97,215 | |||||||||||||||
Net income attributable tonon-controlling interests | (1,445 | ) | (889 | ) | (329 | ) | (274 | ) | (224 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income attributable to MPT common stockholders | $ | 289,793 | $ | 225,048 | $ | 139,598 | $ | 50,522 | $ | 96,991 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income from continuing operations attributable to MPT common stockholders per diluted share | $ | 0.82 | $ | 0.86 | $ | 0.63 | $ | 0.29 | $ | 0.58 | ||||||||||
Income from discontinued operations attributable to MPT common stockholders per diluted share | — | — | — | — | 0.05 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income attributable to MPT common stockholders per diluted share | $ | 0.82 | $ | 0.86 | $ | 0.63 | $ | 0.29 | $ | 0.63 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||||
|
| (In thousands except per share data) |
| |||||||||||||||||
OPERATING DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
| $ | 854,197 |
|
| $ | 784,522 |
|
| $ | 704,745 |
|
| $ | 541,137 |
|
| $ | 441,878 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
| 237,830 |
|
|
| 223,274 |
|
|
| 176,954 |
|
|
| 159,597 |
|
|
| 120,884 |
|
Real estate depreciation and amortization |
|
| 152,313 |
|
|
| 133,083 |
|
|
| 125,106 |
|
|
| 94,374 |
|
|
| 69,867 |
|
Property-related |
|
| 23,992 |
|
|
| 9,237 |
|
|
| 5,811 |
|
|
| 2,712 |
|
|
| 3,792 |
|
General and administrative |
|
| 96,411 |
|
|
| 80,086 |
|
|
| 58,599 |
|
|
| 48,911 |
|
|
| 43,639 |
|
Acquisition costs |
|
| — |
|
|
| 917 |
|
|
| 29,645 |
|
|
| 46,273 |
|
|
| 61,342 |
|
Total expenses |
|
| 510,546 |
|
|
| 446,597 |
|
|
| 396,115 |
|
|
| 351,867 |
|
|
| 299,524 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of real estate and other |
|
| 41,560 |
|
|
| 719,392 |
|
|
| 7,431 |
|
|
| 61,224 |
|
|
| 3,268 |
|
Impairment charges |
|
| (21,031 | ) |
|
| (48,007 | ) |
|
| — |
|
|
| (7,229 | ) |
|
| — |
|
Earnings from equity interests |
|
| 16,051 |
|
|
| 14,165 |
|
|
| 10,058 |
|
|
| (1,116 | ) |
|
| 2,849 |
|
Debt refinancing and unutilized financing costs |
|
| (6,106 | ) |
|
| — |
|
|
| (32,574 | ) |
|
| (22,539 | ) |
|
| (4,367 | ) |
Other |
|
| (345 | ) |
|
| (4,071 | ) |
|
| 374 |
|
|
| (503 | ) |
|
| (2,674 | ) |
Income tax benefit (expense) |
|
| 2,621 |
|
|
| (927 | ) |
|
| (2,681 | ) |
|
| 6,830 |
|
|
| (1,503 | ) |
Net income |
|
| 376,401 |
|
|
| 1,018,477 |
|
|
| 291,238 |
|
|
| 225,937 |
|
|
| 139,927 |
|
Net income attributable to non-controlling interests |
|
| (1,717 | ) |
|
| (1,792 | ) |
|
| (1,445 | ) |
|
| (889 | ) |
|
| (329 | ) |
Net income attributable to MPT common stockholders |
| $ | 374,684 |
|
| $ | 1,016,685 |
|
| $ | 289,793 |
|
| $ | 225,048 |
|
| $ | 139,598 |
|
Net income attributable to MPT common stockholders per diluted share |
| $ | 0.87 |
|
| $ | 2.76 |
|
| $ | 0.82 |
|
| $ | 0.86 |
|
| $ | 0.63 |
|
Weighted-average shares outstanding — diluted |
|
| 428,299 |
|
|
| 366,271 |
|
|
| 350,441 |
|
|
| 261,072 |
|
|
| 218,304 |
|
OTHER DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
| $ | 1.02 |
|
| $ | 1.00 |
|
| $ | 0.96 |
|
| $ | 0.91 |
|
| $ | 0.88 |
|
FFO(1) |
| $ | 535,768 |
|
| $ | 485,335 |
|
| $ | 408,512 |
|
| $ | 253,478 |
|
| $ | 205,168 |
|
Normalized FFO(1) |
| $ | 557,413 |
|
| $ | 501,004 |
|
| $ | 474,879 |
|
| $ | 334,826 |
|
| $ | 274,805 |
|
Normalized FFO per share(1) |
| $ | 1.30 |
|
| $ | 1.37 |
|
| $ | 1.35 |
|
| $ | 1.28 |
|
| $ | 1.26 |
|
Cash paid for acquisitions and other related investments |
| $ | 4,565,594 |
|
| $ | 666,548 |
|
| $ | 2,246,788 |
|
| $ | 1,489,147 |
|
| $ | 1,833,018 |
|
4541
|
| December 31, |
| |||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||||
|
| (In thousands) |
| |||||||||||||||||
BALANCE SHEET DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate assets — at cost |
| $ | 10,163,056 |
|
| $ | 5,952,512 |
|
| $ | 6,642,947 |
|
| $ | 4,965,968 |
|
| $ | 3,924,701 |
|
Real estate accumulated depreciation/amortization |
|
| (570,042 | ) |
|
| (464,984 | ) |
|
| (455,712 | ) |
|
| (325,125 | ) |
|
| (257,928 | ) |
Mortgage and other loans |
|
| 1,819,854 |
|
|
| 1,586,520 |
|
|
| 1,928,525 |
|
|
| 1,216,121 |
|
|
| 1,422,403 |
|
Cash and cash equivalents |
|
| 1,462,286 |
|
|
| 820,868 |
|
|
| 171,472 |
|
|
| 83,240 |
|
|
| 195,541 |
|
Other assets |
|
| 1,592,177 |
|
|
| 948,727 |
|
|
| 733,056 |
|
|
| 478,332 |
|
|
| 324,634 |
|
Total assets |
| $ | 14,467,331 |
|
| $ | 8,843,643 |
|
| $ | 9,020,288 |
|
| $ | 6,418,536 |
|
| $ | 5,609,351 |
|
Debt, net |
| $ | 7,023,679 |
|
| $ | 4,037,389 |
|
| $ | 4,898,667 |
|
| $ | 2,909,341 |
|
| $ | 3,322,541 |
|
Other liabilities |
|
| 415,498 |
|
|
| 245,316 |
|
|
| 286,416 |
|
|
| 255,967 |
|
|
| 179,545 |
|
Total Medical Properties Trust, Inc. stockholders’ equity |
|
| 7,028,047 |
|
|
| 4,547,108 |
|
|
| 3,820,633 |
|
|
| 3,248,378 |
|
|
| 2,102,268 |
|
Non-controlling interests |
|
| 107 |
|
|
| 13,830 |
|
|
| 14,572 |
|
|
| 4,850 |
|
|
| 4,997 |
|
Total equity |
|
| 7,028,154 |
|
|
| 4,560,938 |
|
|
| 3,835,205 |
|
|
| 3,253,228 |
|
|
| 2,107,265 |
|
Total liabilities and equity |
| $ | 14,467,331 |
|
| $ | 8,843,643 |
|
| $ | 9,020,288 |
|
| $ | 6,418,536 |
|
| $ | 5,609,351 |
|
42
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
(In thousands except per share data) | ||||||||||||||||||||
Weighted average number of common shares — diluted | 350,441 | 261,072 | 218,304 | 170,540 | 152,598 | |||||||||||||||
OTHER DATA | ||||||||||||||||||||
Dividends declared per common share | $ | 0.96 | $ | 0.91 | $ | 0.88 | $ | 0.84 | $ | 0.81 | ||||||||||
FFO(1) | $ | 408,512 | $ | 253,478 | $ | 205,168 | $ | 106,682 | $ | 126,289 | ||||||||||
Normalized FFO(1) | $ | 474,879 | $ | 334,826 | $ | 274,805 | $ | 181,741 | $ | 147,240 | ||||||||||
Cash paid for acquisitions and other related investments | $ | 2,246,788 | $ | 1,489,147 | $ | 1,833,018 | $ | 767,696 | $ | 654,922 |
December 31, | ||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
BALANCE SHEET DATA | ||||||||||||||||||||
Real estate assets — at cost | $ | 6,642,947 | $ | 4,965,968 | $ | 3,924,701 | $ | 2,612,291 | $ | 2,296,479 | ||||||||||
Real estate accumulated depreciation/amortization | (455,712 | ) | (325,125 | ) | (257,928 | ) | (202,627 | ) | (159,776 | ) | ||||||||||
Mortgage and other loans | 1,928,525 | 1,216,121 | 1,422,403 | 970,761 | 549,746 | |||||||||||||||
Cash and cash equivalents | 171,472 | 83,240 | 195,541 | 144,541 | 45,979 | |||||||||||||||
Other assets | 733,056 | 478,332 | 324,634 | 195,364 | 147,915 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total assets | $ | 9,020,288 | $ | 6,418,536 | $ | 5,609,351 | $ | 3,720,330 | $ | 2,880,343 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Debt, net | $ | 4,898,667 | $ | 2,909,341 | $ | 3,322,541 | $ | 2,174,648 | $ | 1,397,329 | ||||||||||
Other liabilities | 286,416 | 255,967 | 179,545 | 163,635 | 138,806 | |||||||||||||||
Total Medical Properties Trust, Inc. Stockholders’ Equity | 3,820,633 | 3,248,378 | 2,102,268 | 1,382,047 | 1,344,208 | |||||||||||||||
Non-controlling interests | 14,572 | 4,850 | 4,997 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total equity | 3,835,205 | 3,253,228 | 2,107,265 | 1,382,047 | 1,344,208 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total liabilities and equity | $ | 9,020,288 | $ | 6,418,536 | $ | 5,609,351 | $ | 3,720,330 | $ | 2,880,343 | ||||||||||
|
|
|
|
|
|
|
|
|
|
46
MPT Operating Partnership, L.P.
The consolidated operating data, other data and balance sheet data presented below have been derived from the Operating Partnership’s audited consolidated financial statements.
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
(In thousands except per unit data) | ||||||||||||||||||||
OPERATING DATA | ||||||||||||||||||||
Total revenue | $ | 704,745 | $ | 541,137 | $ | 441,878 | $ | 312,532 | $ | 242,523 | ||||||||||
Real estate depreciation and amortization expense | (125,106 | ) | (94,374 | ) | (69,867 | ) | (53,938 | ) | (36,978 | ) | ||||||||||
Property-related and general and administrative expenses | (64,410 | ) | (51,623 | ) | (47,431 | ) | (39,125 | ) | (32,513 | ) | ||||||||||
Acquisition expenses(2) | (29,645 | ) | (46,273 | ) | (61,342 | ) | (26,389 | ) | (19,494 | ) | ||||||||||
Impairment charges | — | (7,229 | ) | — | (50,128 | ) | — | |||||||||||||
Interest expense | (176,954 | ) | (159,597 | ) | (120,884 | ) | (98,156 | ) | (66,746 | ) | ||||||||||
Gain on sale of real estate and other asset dispositions, net | 7,431 | 61,224 | 3,268 | 2,857 | 7,659 | |||||||||||||||
Unutilized financing fees/debt refinancing costs | (32,574 | ) | (22,539 | ) | (4,367 | ) | (1,698 | ) | — | |||||||||||
Other income (expense) | 10,432 | (1,618 | ) | 175 | 5,183 | (4,424 | ) | |||||||||||||
Income tax (expense) benefit(3) | (2,681 | ) | 6,830 | (1,503 | ) | (340 | ) | (726 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income from continuing operations | 291,238 | 225,938 | 139,927 | 50,798 | 89,301 | |||||||||||||||
Income (loss) from discontinued operations | — | (1 | ) | — | (2 | ) | 7,914 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income | 291,238 | 225,937 | 139,927 | 50,796 | 97,215 | |||||||||||||||
Net income attributable to non-controlling interests | (1,445 | ) | (889 | ) | (329 | ) | (274 | ) | (224 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income attributable to MPT Operating Partnership, L.P. partners | $ | 289,793 | $ | 225,048 | $ | 139,598 | $ | 50,522 | $ | 96,991 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income from continuing operations attributable to MPT Operating Partnership, L.P. partners per diluted unit | $ | 0.82 | $ | 0.86 | $ | 0.63 | $ | 0.29 | $ | 0.58 | ||||||||||
Income from discontinued operations attributable to MPT Operating Partnership, L.P. partners per diluted unit | — | — | — | — | 0.05 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income attributable to MPT Operating Partnership, L.P. partners per diluted unit | $ | 0.82 | $ | 0.86 | $ | 0.63 | $ | 0.29 | $ | 0.63 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Weighted average number of units — diluted | 350,441 | 261,072 | 218,304 | 170,540 | 152,598 | |||||||||||||||
OTHER DATA | ||||||||||||||||||||
Dividends declared per unit | $ | 0.96 | $ | 0.91 | $ | 0.88 | $ | 0.84 | $ | 0.81 | ||||||||||
FFO(1) | $ | 408,512 | $ | 253,478 | $ | 205,168 | $ | 106,682 | $ | 126,289 | ||||||||||
Normalized FFO(1) | $ | 474,879 | $ | 334,826 | $ | 274,805 | $ | 181,741 | $ | 147,240 | ||||||||||
Cash paid for acquisitions and other related investments | $ | 2,246,788 | $ | 1,489,147 | $ | 1,833,018 | $ | 767,696 | $ | 654,922 |
47
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||||
|
| (In thousands except per unit data) |
| |||||||||||||||||
OPERATING DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
| $ | 854,197 |
|
| $ | 784,522 |
|
| $ | 704,745 |
|
| $ | 541,137 |
|
| $ | 441,878 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
| 237,830 |
|
|
| 223,274 |
|
|
| 176,954 |
|
|
| 159,597 |
|
|
| 120,884 |
|
Real estate depreciation and amortization |
|
| 152,313 |
|
|
| 133,083 |
|
|
| 125,106 |
|
|
| 94,374 |
|
|
| 69,867 |
|
Property-related |
|
| 23,992 |
|
|
| 9,237 |
|
|
| 5,811 |
|
|
| 2,712 |
|
|
| 3,792 |
|
General and administrative |
|
| 96,411 |
|
|
| 80,086 |
|
|
| 58,599 |
|
|
| 48,911 |
|
|
| 43,639 |
|
Acquisition costs |
|
| — |
|
|
| 917 |
|
|
| 29,645 |
|
|
| 46,273 |
|
|
| 61,342 |
|
Total expenses |
|
| 510,546 |
|
|
| 446,597 |
|
|
| 396,115 |
|
|
| 351,867 |
|
|
| 299,524 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of real estate and other |
|
| 41,560 |
|
|
| 719,392 |
|
|
| 7,431 |
|
|
| 61,224 |
|
|
| 3,268 |
|
Impairment charges |
|
| (21,031 | ) |
|
| (48,007 | ) |
|
| — |
|
|
| (7,229 | ) |
|
| — |
|
Earnings from equity interests |
|
| 16,051 |
|
|
| 14,165 |
|
|
| 10,058 |
|
|
| (1,116 | ) |
|
| 2,849 |
|
Debt refinancing and unutilized financing costs |
|
| (6,106 | ) |
|
| — |
|
|
| (32,574 | ) |
|
| (22,539 | ) |
|
| (4,367 | ) |
Other |
|
| (345 | ) |
|
| (4,071 | ) |
|
| 374 |
|
|
| (503 | ) |
|
| (2,674 | ) |
Income tax benefit (expense) |
|
| 2,621 |
|
|
| (927 | ) |
|
| (2,681 | ) |
|
| 6,830 |
|
|
| (1,503 | ) |
Net income |
|
| 376,401 |
|
|
| 1,018,477 |
|
|
| 291,238 |
|
|
| 225,937 |
|
|
| 139,927 |
|
Net income attributable to non-controlling interests |
|
| (1,717 | ) |
|
| (1,792 | ) |
|
| (1,445 | ) |
|
| (889 | ) |
|
| (329 | ) |
Net income attributable to MPT Operating Partnership partners |
| $ | 374,684 |
|
| $ | 1,016,685 |
|
| $ | 289,793 |
|
| $ | 225,048 |
|
| $ | 139,598 |
|
Net income attributable to MPT Operating Partnership partners per diluted unit |
| $ | 0.87 |
|
| $ | 2.76 |
|
| $ | 0.82 |
|
| $ | 0.86 |
|
| $ | 0.63 |
|
Weighted-average units outstanding — diluted |
|
| 428,299 |
|
|
| 366,271 |
|
|
| 350,441 |
|
|
| 261,072 |
|
|
| 218,304 |
|
OTHER DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per unit |
| $ | 1.02 |
|
| $ | 1.00 |
|
| $ | 0.96 |
|
| $ | 0.91 |
|
| $ | 0.88 |
|
FFO(1) |
| $ | 535,768 |
|
| $ | 485,335 |
|
| $ | 408,512 |
|
| $ | 253,478 |
|
| $ | 205,168 |
|
Normalized FFO(1) |
| $ | 557,413 |
|
| $ | 501,004 |
|
| $ | 474,879 |
|
| $ | 334,826 |
|
| $ | 274,805 |
|
Normalized FFO per unit(1) |
| $ | 1.30 |
|
| $ | 1.37 |
|
| $ | 1.35 |
|
| $ | 1.28 |
|
| $ | 1.26 |
|
Cash paid for acquisitions and other related investments |
| $ | 4,565,594 |
|
| $ | 666,548 |
|
| $ | 2,246,788 |
|
| $ | 1,489,147 |
|
| $ | 1,833,018 |
|
December 31, | ||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
BALANCE SHEET DATA | ||||||||||||||||||||
Real estate assets — at cost | $ | 6,642,947 | $ | 4,965,968 | $ | 3,924,701 | $ | 2,612,291 | $ | 2,296,479 | ||||||||||
Real estate accumulated depreciation/amortization | (455,712 | ) | (325,125 | ) | (257,928 | ) | (202,627 | ) | (159,776 | ) | ||||||||||
Mortgage and other loans | 1,928,525 | 1,216,121 | 1,422,403 | 970,761 | 549,746 | |||||||||||||||
Cash and cash equivalents | 171,472 | 83,240 | 195,541 | 144,541 | 45,979 | |||||||||||||||
Other assets | 733,056 | 478,332 | 324,634 | 195,364 | 147,915 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total assets | $ | 9,020,288 | $ | 6,418,536 | $ | 5,609,351 | $ | 3,720,330 | $ | 2,880,343 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Debt, net | $ | 4,898,667 | $ | 2,909,341 | $ | 3,322,541 | $ | 2,174,648 | $ | 1,397,329 | ||||||||||
Other liabilities | 286,026 | 255,577 | 179,155 | 163,245 | 138,416 | |||||||||||||||
Total MPT Operating Partnership, L.P. capital | 3,821,023 | 3,248,768 | 2,102,658 | 1,382,437 | 1,344,598 | |||||||||||||||
Non-controlling interests | 14,572 | 4,850 | 4,997 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total capital | 3,835,595 | 3,253,618 | 2,107,655 | 1,382,437 | 1,344,598 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total liabilities and capital | $ | 9,020,288 | $ | 6,418,536 | $ | 5,609,351 | $ | 3,720,330 | $ | 2,880,343 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| December 31, |
| |||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||||
|
| (In thousands) |
| |||||||||||||||||
BALANCE SHEET DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate assets — at cost |
| $ | 10,163,056 |
|
| $ | 5,952,512 |
|
| $ | 6,642,947 |
|
| $ | 4,965,968 |
|
| $ | 3,924,701 |
|
Real estate accumulated depreciation/amortization |
|
| (570,042 | ) |
|
| (464,984 | ) |
|
| (455,712 | ) |
|
| (325,125 | ) |
|
| (257,928 | ) |
Mortgage and other loans |
|
| 1,819,854 |
|
|
| 1,586,520 |
|
|
| 1,928,525 |
|
|
| 1,216,121 |
|
|
| 1,422,403 |
|
Cash and cash equivalents |
|
| 1,462,286 |
|
|
| 820,868 |
|
|
| 171,472 |
|
|
| 83,240 |
|
|
| 195,541 |
|
Other assets |
|
| 1,592,177 |
|
|
| 948,727 |
|
|
| 733,056 |
|
|
| 478,332 |
|
|
| 324,634 |
|
Total assets |
| $ | 14,467,331 |
|
| $ | 8,843,643 |
|
| $ | 9,020,288 |
|
| $ | 6,418,536 |
|
| $ | 5,609,351 |
|
Debt, net |
| $ | 7,023,679 |
|
| $ | 4,037,389 |
|
| $ | 4,898,667 |
|
| $ | 2,909,341 |
|
| $ | 3,322,541 |
|
Other liabilities |
|
| 415,108 |
|
|
| 244,926 |
|
|
| 286,026 |
|
|
| 255,577 |
|
|
| 179,155 |
|
Total MPT Operating Partnership, L.P. capital |
|
| 7,028,437 |
|
|
| 4,547,498 |
|
|
| 3,821,023 |
|
|
| 3,248,768 |
|
|
| 2,102,658 |
|
Non-controlling interests |
|
| 107 |
|
|
| 13,830 |
|
|
| 14,572 |
|
|
| 4,850 |
|
|
| 4,997 |
|
Total capital |
|
| 7,028,544 |
|
|
| 4,561,328 |
|
|
| 3,835,595 |
|
|
| 3,253,618 |
|
|
| 2,107,655 |
|
Total liabilities and capital |
| $ | 14,467,331 |
|
| $ | 8,843,643 |
|
| $ | 9,020,288 |
|
| $ | 6,418,536 |
|
| $ | 5,609,351 |
|
(1) | See section titled |
48
43
Unless otherwise indicated, references to “our,” “we”“we,” and “us” in this management’s discussion and analysis of financial condition and results of operations refer to Medical Properties Trust, Inc. and its consolidated subsidiaries, including MPT Operating Partnership, L.P.
Overview
We were incorporated in Maryland on August 27, 2003, primarily for the purpose of investing in and owningnet-leased healthcare facilities. We also make real estate mortgage loans and other loans to our tenants. We conduct our business operations in one segment. We currently have healthcare investments in the U.S., Europe and Europe.Australia. We have operated as a REIT since April 6, 2004, and accordingly, elected REIT status upon the filing of our calendar year 2004 U.S. federal income tax return. Our existing tenants are, and our prospective tenants will generally be, healthcare operating companies and other healthcare providers that use substantial real estate assets in their operations. We offer financing for these operators’ real estate through 100% lease and mortgage financing and generally seek lease and loan terms on a long-term basis ranging from 10 to 15 years with a series of shorter renewal terms at the option of our tenants and borrowers. We also have included and intend to include in our lease and loan agreements annual contractual minimum rate increases. Our existing portfolio’s minimum escalators generally range from 0.5% to 4%, while less than 3% of our properties do not have an escalator. Most. In addition, most of our leases and loans also include rate increases based on the general rate of inflation if greater than the minimum contractual increases. In addition toOnly less than 3% of our properties do not have either a minimum escalator or an escalator based on inflation. Beyond rent or mortgage interest, our leases and loans typically require our tenants to pay all operating costs and expenses associated with the facility. Some leases also may require our tenants to pay percentage rents, which are based on the tenant’s revenues from their operations. Finally, we may acquire a profits or other equity interest in our tenants that gives us a right to share in the tenant’s income or loss.
We selectively make loans to certain of our operators through our TRSs, which the operators use for acquisitions and working capital. We consider our lending business an important element of our overall business strategy for two primary reasons: (1) it provides opportunities to make income-earning investments that yield attractive risk-adjusted returns in an industry in which our management has expertise, and (2) by making debt capital available to certain qualified operators, we believe we create for our company a competitive advantage over other buyers of, and financing sources for, healthcare facilities.
At December 31, 2017,2019, our portfolio (including real estate assets in joint ventures) consisted of 275359 properties leased or loaned to 3142 operators, of which threefour are under development and 1411 are in the form of mortgage loans.
2019 Highlights
In 2019, we invested in approximately $4.5 billion in healthcare real estate assets. These significant investments enhanced the size and scale of our healthcare portfolio, while expanding our geographic footprint in the U.S. and Europe, and entering into new territories such as Australia. These investments also extended our lease and loan maturity schedule. To fund these new investments, we raised $2.5 billion in proceeds from equity sales during 2019, received proceeds of $837 million from an Australian term loan facility in June 2019, and completed $900 million and £1 billion senior unsecured notes offerings in July and December 2019, respectively. In addition to the record breaking acquisition year, we generated returns to our shareholders of 39% during 2019, outpacing the returns of several key indexes, as noted in Item 5 of this Annual Report on Form 10-K. Our return included an increase to our dividend to $0.26 per share per quarter in 2019, which is the 5th year in a row for such an increase.
A summary of our 2019 highlights is as follows:
• | Acquired real estate assets or commenced development projects totaling more than $4.5 billion, as noted below: |
• | Invested in three acute care hospitals and one IRF for an aggregate investment of approximately $135 million. One of the acute care hospitals is located in Big Spring, Texas and leased to Steward pursuant to the existing master lease agreement. The second facility, located in Poole, England, is leased to BMI Healthcare (“BMI”). The third acute care facility is located in Watsonville, California and is leased to Halsen Healthcare. The IRF is located in Germany and leased to affiliates of Median Kliniken S.à r.l. (“MEDIAN”); |
• | Invested in a portfolio of 13 acute care campuses and two additional properties in Switzerland for a combined purchase price of approximately CHF 236.6 million, effected through our purchase of a 46% stake in a Swiss healthcare real estate company, Infracore SA. These facilities are leased to Swiss Medical Network. Additionally, we purchased a 4.9% stake in Aevis Victoria SA, previous majority shareholder of Infracore, for CHF 47 million; |
• | Acquired 11 hospitals in Australia for a purchase price of approximately AUD $1.2 billion plus stamp duties and registration fees of AUD $66.6 million. These facilities are leased to Healthscope; |
• | Acquired seven community hospitals in Kansas for approximately $145.4 million. These facilities are leased to Saint Luke’s Health System; |
44
• | Acquired 14 acute care hospitals and two behavioral health facilities for a combined purchase price of approximately $1.55 billion. These facilities are leased to Prospect; |
• | Acquired eight private hospitals located throughout England for an aggregate purchase price of £347 million. These facilities are leased to Ramsay Health Care; |
• | Acquired 10 post-acute facilities in various states throughout the U.S. for approximately $268 million. These facilities are leased to Vibra; |
• | Commenced the development of a behavioral hospital in Houston, Texas for $27.5 million. This facility will be leased to NeuroPsychiatric Hospitals upon completion in the fourth quarter of 2020; |
• | Acquired an acute care hospital in Portugal for approximately €28.2 million. This facility is leased to Jose de Mello; |
• | Acquired two acute care hospitals in Spain for €117.3 million, effected through our purchase of a 45% interest in a joint venture. These facilities are leased to HM Hospitales; and |
• | Acquired 10 acute care hospitals in six U.S. states for approximately $700.0 million leased to LifePoint. |
With these new investments, we expanded our total assets to $14.5 billion, increased the number of properties in our portfolio to 359, increased our total operators to 42, expanded our geographic footprint in the U.S. to 34 states, and entered the Australian market.
• | To help fund these investments, we used cash on-hand and generated proceeds through equity offerings, utilization of our at-the-market equity program, through new issuances of unsecured notes, and from sales of real estate. Details of such activities are as follows: |
• | Sold 36.1 million shares under our at-the-market equity program, generating proceeds of approximately $650 million; |
• | Received proceeds from an Australian term facility of approximately $837 million in June 2019 and fixed the interest rate to approximately 2.45% in July 2019 using an interest rate swap; |
• | Completed an underwritten public offering of 51.75 million shares of our common stock in July 2019, resulting in net proceeds of approximately $860 million; after deducting underwriting discounts and commissions and offering expenses; |
• | Completed a $900 million senior unsecured notes offering in July 2019 with a rate of 4.625%; |
• | Completed an underwritten public offering of 57.5 million shares of our common stock in November 2019, resulting in net proceeds of $1.026 billion, after deducting underwriting discounts and commissions and offering expenses; |
• | Completed a £400 million and £600 million unsecured notes offering in December 2019 with a rate of 2.550% and 3.692%, respectively; and |
• | Sold five properties in 2019 generating net proceeds of $97 million and a gain of $41.6 million. |
Subsequent to year-end, we acquired 30 acute care hospital facilities located throughout the United Kingdom for a purchase price of £1.5 billion. These facilities will ultimately be leased to Circle as they acquired the hospital operations from BMI in a related transaction. This acquisition was funded using proceeds from the December 2019 Sterling bond offering along with proceeds from a £700 million term loan entered into in January 2020.
2018 Highlights
In 2018, we demonstrated the value of our portfolio through strategic property sales that generated gains exceeding $700 million and cash proceeds of approximately $2 billion. In addition, we generated strong returns to our shareholders of 25% during 2018. Our return included an increase in our quarterly dividend to $0.25 per share in 2018. Finally, we improved our liquidity position and leverage metrics during 2018.
A summary of our 2018 highlights is as follows:
• | Sold the real estate of 76 properties (71 of which are leased to MEDIAN and were contributed to a joint venture arrangement) and sold our equity interest in Ernest Health, Inc. (“Ernest”) (along with the repayment of all outstanding loans and accrued interest) for a net gain of approximately $720 million, as noted below: |
• | Sold two acute care hospitals in Houston, Texas for a net gain of approximately $100 million; |
• | Sold three long-term acute care hospitals located in California, Texas, and Oregon, for $53 million of cash and resulting in a net gain of $19.1 million; |
45
• | Sold 71 properties located in Germany for a net gain of approximately €500 million by way of a joint venture arrangement, for which we own a 50% interest; and |
• | Sold our investment in the operations of Ernest and were repaid outstanding loans and accrued interest generating over $176 million in cash. |
• | Acquired the following real estate assets: |
• | Acquired three inpatient rehabilitation hospitals in Germany for a combined purchase price of €17.3 million. These facilities are leased to MEDIAN; |
• | Acquired five acute care hospitals from Steward in exchange for the reduction of $764 million in mortgage loans plus cash, which further increased the strength of our portfolio; and |
• | Acquired an acute care hospital in Pasco, Washington for $17.5 million. This facility is leased to LifePoint. |
• | After completing our strategic dispositions, we repaid over $800 million in outstanding revolver debt, resulting in approximately $1.3 billion in available liquidity from the revolving credit facility at December 31, 2018. |
• | Sold 5.6 million shares under our at-the-market equity program, generating proceeds of approximately $95 million. |
• | Successfully re-tenanted nine of the 16 Adeptus transition properties and our Florence facility. |
2017 Highlights
In 2017, we invested or committed to invest approximately $2.2 billion in healthcare real estate assets. These significant investments enhanced the size and scale of our healthcare portfolio, while expanding our geographic footprint in the U.S. and extending our lease and mortgage loan maturity schedule. Furthermore, we strategically sold an asset for proceeds totaling $64 million, raised $548 million in proceeds from a successful equity offering, and refinanced approximately $0.6 billion of debt, in order to strengthenwhich strengthened our balance sheet, reducereduced interest rates, and fundfunded acquisitions. Finally, we increased our dividend to $0.24 per share per quarter in 2017 — the third year in a row for such an increase.2017.
A summary of our 2017 highlights is as follows:
• | Acquired real estate assets, entered into development agreements, entered into leases, and made new loan investments, totaling more than $2.2 billion as noted below: |
• | Acquired 17 inpatient rehabilitation hospitals and one acute care hospital in Germany for a combined purchase price of €274 million. These facilities are leased to MEDIAN or its affiliates; |
| • | Acquired 15 acute care hospitals, one rehabilitation hospital, and one behavioral health facility, completed mortgage financing on two acute care hospitals, and invested in an additional minority equity contribution in Steward for an aggregate investment of $1.8 billion; |
• | Acquired an acute care hospital in Lewiston, Idaho for $87.5 million. This facility is leased to LifePoint; and |
• | Executed agreements totaling more than $150 million with Circle |
With these new investments, we expanded our gross assets to $9.5 billion, increased the total number of properties in our portfolio to 275, and increased our total number of beds to more than 32 thousand, as of December 31, 2017.
• | Sold the real estate of an acute care facility in Muskogee, Oklahoma, for a net gain of $7.4 million. |
• | To fund our over $2.2 billion of asset investments, while lowering our average interest cost, we successfully refinanced approximately $0.6 billion of debt and generated proceeds of approximately $2.5 billion from the sale of 43.1 million shares in an equity offering and through new issuances of unsecured notes. Details of such activities are as follows: |
• | Replaced our previous unsecured credit facility with a $1.3 billion unsecured revolving loan facility, a $200 million unsecured term loan facility, and a €200 million unsecured term loan facility; |
• | Redeemed our 5.750% Senior Unsecured Notes due 2020 using proceeds from our €200 million term loan and cash on hand; |
• | Completed a €500 million senior unsecured notes offering in March 2017 and used a portion of the proceeds to pay off our €200 million term loan; |
• | Completed a $1.4 billion senior unsecured notes offering in September 2017 at a rate of 5.000% and used a portion of the proceeds to redeem our 6.375% Senior Unsecured Notes due 2022; |
46
• | Prepaid the principal amount of the mortgage loan on our property in Kansas City, Missouri at par in the amount of $12.9 million; and |
With these transactions, our weighted average interest rate at December 31, 2017, improved to 4.42% versus 4.87% at December 31, 2016.
2016 Highlights
In 2016, we invested or committed to invest approximately $1.8 billion in healthcare real estate assets. These significant investments enhanced the size and quality of our healthcare portfolio, while improving our tenant concentration and expanding our geographic footprint in the U.S. Furthermore, we strategically sold assets for proceeds totaling more than $800 million, refinanced $1 billion of debt, and sold 82.7 million shares generating proceeds of approximately $1.2 billion in order to strengthen our balance sheet, reduce leverage, and fund acquisitions.
50
A summary of our 2016 highlights is as follows:
51
2015 Highlights
In 2015, we invested or committed to invest approximately $1.8 billion in healthcare real estate assets. These significant investments greatly strengthened our portfolio through geographic, tenant and property type diversification. We expanded total assets by 51%, increased revenues by 41%, and lowered our general and administrative expense as a percentage of revenue to less than 10%.
A summary of our 2015 highlights is as follows:
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• | Completed an underwritten public offering of 43.1 million shares of our common stock, resulting in net proceeds of $548 million, after deducting offering expenses. |
Critical Accounting Policies
In order to prepare financial statements in conformity with generally accepted accounting principles (“GAAP”) in the U.S., we must make estimates about certain types of transactions and account balances. We believe that our estimates of the amount and timing of our revenues, credit losses, fair valuesvalue adjustments (either as part of a purchase price allocation or impairment analysis or in valuing certain of our equity investments)analyses), and periodic depreciation of our real estate assets, and stock compensation expense, along with our assessment as to whether an entity that we do business with should be consolidated with our results, have significant effects on our financial statements. Each of these items involves estimates that require us to make subjective judgments. We rely on our experience, collect historical and current market data, and develop relevant assumptions to arrive at what we believe to be reasonable estimates. Under different conditions or assumptions, materially different amounts could be reported related to the critical accounting policies described below. In addition, application of these critical accounting policies involves the exercise of judgment on the use of assumptions as to future uncertainties and, as a result, actual results could materially differ from these estimates. See Note 2 to Item 8 of this Annual Report on Form10-K for more information regarding our accounting policies and recent accounting developments. Our accounting estimates include the following:
Revenue Recognition:Credit Losses:
Losses from Rent Receivables: For all leases, we continuously monitor the performance of our existing tenants including, but not limited to: admission levels and surgery/procedure volumes by type; current operating margins; ratio of our tenants’ operating margins both to facility rent and to facility rent plus other fixed costs; trends in revenue, cash collections, patient mix; and the effect of evolving healthcare regulations on tenants’ profitability and liquidity.
Losses from Operating Lease Receivables: We receive income from operating leasesutilize the information above along with the tenants’ payment and default history in evaluating (on a property-by-property basis) whether or not a provision for losses on outstanding billed rent and/or straight-line rent receivables is needed. A provision for losses on rent receivables (including straight-line rent receivables) is ultimately recorded when it becomes probable that the receivable will not be collected in full. The provision is an amount which reduces the receivable to its estimated net realizable value based on a determination of the fixed, minimum required rents (base rents) pereventual amounts to be collected either from the debtor or from existing collateral, if any.
Losses on Financing Lease Receivables: Allowances are established for financing lease agreements. Rent revenue from base rentsreceivables based upon an estimate of probable losses on a property-by-property basis. Such receivables are impaired when it is recorded ondeemed probable that we will be unable to collect all amounts due in accordance with the straight-line method over thecontractual terms of the relatedlease. Like operating lease agreementsreceivables, the need for new leases and the remaining terms of existing leases for those acquired as part of a property acquisition. The straight-line method records the periodic average amount of base rent earned over the term of a lease, taking into account contractual rent adjustments over the lease term. The straight-line method typically has the effect of recording more rent revenue from a lease than a tenantan allowance is required to pay early in the termbased upon our assessment of the lease. Duringlessee’s overall financial condition; economic resources and payment record; the later partsprospects for support from any financially responsible guarantors; and, if appropriate, the realizable value of any collateral. These estimates consider all available evidence including the expected future cash flows discounted at the effective interest rate of the financing lease, fair value of collateral, and other relevant factors, as appropriate. Financing leases are placed on non-accrual status when we determine that the collectability of contractual amounts is not reasonably assured. If on non-accrual status, we generally account for the financing lease on a lease term, this effect reverses with less rent revenue recorded than a tenant is required to pay. Rent revenue, as recorded on the straight-line method,cash basis, in the consolidated statements ofwhich income is presented as two amounts: rent billed revenue and straight-line revenue. Rent billed revenue is the amountrecognized only upon receipt of base rent actually billed to the customer each period as required by the lease. Straight-line rent revenue is the difference between rent revenue earned based on the straight-line method and the amount recorded as rent billed revenue. We record the difference between base rent revenues earned and amounts due per the respective lease agreements, as applicable, as an increase or decrease to straight-line rent receivable.cash.
We also receive additional rent (contingent rent) under some leases based on increases in CPI or where CPI exceeds the annual minimum percentage increase as stipulated in the lease. Contingent rents are recorded as rent billed revenue in the period earned.
We use direct financing lease (“DFL”) accounting to record rent on certain leases deemed to be financing leases, per accounting rules, rather than operating leases. For leases accounted for as DFLs, future minimum lease payments are recorded as a receivable. The difference between the future minimum lease payments and the estimated residual values less the costLoans: Loans consist of the properties is recorded as unearned income. Unearned income is deferred and amortized to income over the lease terms to provide a constant yield when collectability of the lease payments is reasonably assured. Investments in DFLs are presented net of unearned income.
We begin recording base rent income from our development projects when the lessee takes physical possession of the facility, which may be different from the stated start date of the lease. Also, during construction of our development projects, we are generally entitled to accrue rent based on the cost paid during the construction period (construction period rent). We accrue construction period rent as a receivable with a
53
corresponding offset to deferred revenue during the construction period. When the lessee takes physical possession of the facility, we begin recognizing the deferred construction period revenue on the straight-line method over the remaining term of the lease.
We receive interest income from our tenants/borrowers on mortgage loans, working capital loans, and other long-term loans. Interest income from theseMortgage loans are collateralized by interests in real property. Working capital and other long-term loans are generally collateralized by interests in receivables and corporate and individual guarantees. We record loans at cost. We evaluate the collectability of both interest and principal on a loan-by-loan basis (using the same process as we do for assessing the collectability of rents as discussed above) to determine whether they are impaired. A loan is recognized as earnedconsidered impaired when, based uponon current information and events, it is probable that we will be unable to collect all amounts due according to the principal outstanding and termsexisting contractual terms. When a loan is considered to be impaired, the amount of the loans.
Commitment fees received from lessee for development and leasing services are initiallyallowance is calculated by comparing the recorded as deferred revenue and recognized as income overinvestment to either the initial term of a leasevalue determined by discounting the expected future cash flows using the loan’s effective interest rate or to produce a constant effective yield on the lease (interest method). Commitment and origination fees from lending services are also recorded as deferred revenue initially and recognized as income over the lifefair value of the collateral, if the loan using the interest method.is collateral dependent.
Investments in Real Estate: We maintain our investments in real estate at cost, and we capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. While our tenants are generally responsible for all operating costs at a facility, to the extent that we incur costs of repairs and maintenance, we expense those costs as incurred. We compute depreciation using the straight-line method over the weighted averageweighted-average useful life of approximately 39.139.0 years for buildings and improvements.
When circumstances indicate a possible impairment of the value of our real estate investments, we review the recoverability of the facility’s carrying value. The review of the recoverability is generally based on our estimate of the future undiscounted cash flows excluding interest charges,
47
from the facility’s use and eventual disposition. Our forecast of these cash flows considers factors such as expected future operating income, market and other applicable trends, and residual value, as well as the effects of leasing demand, competition, and other factors. If impairment exists due to the inability to recover the carrying value of a facility on an undiscounted basis, such as was the case with our Monroe and Bucks facilities in 2014, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the facility. We do not believe that the value of any of our facilities was impaired at December 31, 2017;2019; however, given the highly specialized aspects of our properties no assurance can be given that future impairment charges will not be taken.
Acquired Real Estate Purchase Price Allocation: For properties acquired for leasing purposes,purpose, we currently account for such acquisitionsacquisition based on business combinationasset acquisition accounting rules. WeUnder this accounting method, we allocate the purchase price of acquired properties to net tangible and identified intangible assets acquired based on their fair values. In making estimates of fair value for purposes of allocating purchase prices of acquired real estate, we may utilize a number of sources, including available real estate broker data, independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, internal data from previous acquisitions or developments, and other market data. We also consider information obtained about each property as a result of ourpre-acquisition due diligence, marketing, and leasing activities in estimating the fair value of the tangible and intangible assets acquired.
We record above-market and below-marketin-place lease values, if any, for the facilities we own which are based on the present value of the difference between (i) the contractual amounts to be paid pursuant to thein-place leases and (ii) management’s estimate of fair market lease rates for the correspondingin-place leases, measured over a period equal to the remainingnon-cancelable term of the lease. We amortize any resulting capitalized above-market lease values as a reduction of rental income over lease term. We amortize any resulting capitalized below-market lease values as an increase to rental income over the lease term. Because our strategy to a large degree involves the origination and acquisition of long-term lease arrangements at market rates with independent parties, we do not expect the above-market and below-marketin-place lease values to be significant for many of our transactions.
We measure the aggregate value of other lease intangible assets to be acquired based on the difference between (i) the property valued with new orin-place leases adjusted to market rental rates and (ii) the property
54
valued as if vacant when acquired. Management’s estimates of value are made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors considered by management in our analysis include an estimate of carrying costs during hypothetical expectedlease-up periods, considering current market conditions, and costs to execute similar leases. We also consider information obtained about each targeted facility as a result of ourpre-acquisition due diligence, marketing, and leasing activities in estimating the fair value of the intangible assets acquired. In estimating carrying costs, management includes real estate taxes, insurance, and other operating expenses and estimates of lost rentals at market rates during the expectedlease-up periods, which we expect to be about six months (based on experience) depending on specific local market conditions. Management also estimates costs to execute similar leases including leasing commissions, legal costs, and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction.
Other intangible assets acquired may include customer relationship intangible values, which are based on management’s evaluation of the specific characteristics of each prospective tenant’s lease and our overall relationship with that tenant. Characteristics to be considered by management in allocating these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality, and expectations of lease renewals, including those existing under the terms of the lease agreement, among other factors. At December 31, 2017,2019, we have assigned no value to customer relationship intangibles.
We amortize the value of lease intangibles to expense over the term of the respective leases, which have a weighted averageweighted-average useful life of 26.523.7 years at December 31, 2017.2019. If a lease is terminated early, the unamortized portion of the lease intangible is charged to expense as was the case with our Twelve Oaks property in 2015.
Losses from Rent Receivables:For all leases, we continuously monitor the performance of our existing tenants including, but not limited to: admission levels and surgery/procedure volumes by type; current operating margins; ratio of our tenants’ operating margins both to facility rent and to facility rent plus other fixed costs; trends in revenue, cash collections, and patient mix; and the effect of evolving healthcare regulations on tenants’ profitability and liquidity.
Losses from Operating Lease Receivables: We utilize the information above along with the tenants’ payment and default history in evaluating (on aproperty-by-property basis) whether or not a provision for losses on outstanding rent receivables is needed. A provision for losses on rent receivables (including straight-line rent receivables) is ultimately recorded when it becomes probable that the receivable will not be collected in full. The provision is an amount which reduces the receivable to its estimated net realizable value based on a determination of the eventual amounts to be collected either from the debtor or from existing collateral, if any.
Losses on DFL Receivables: Allowances are established for DFLs based upon an estimate of probable losses on aproperty-by-property basis. DFLs are impaired when it is deemed probable that we will be unable to collect all amounts due in accordance with the contractual terms of the lease. Like operating lease receivables, the need for an allowance is based upon our assessment of the lessee’s overall financial condition; economic resources and payment record; the prospects for support from any financially responsible guarantors; and, if appropriate, the realizable value of any collateral. These estimates consider all available evidence including the expected future cash flows discounted at the DFL’s effective interest rate, fair value of collateral, and other relevant factors, as appropriate. DFLs are placed onnon-accrual status when we determine that the collectability of contractual amounts is not reasonably assured. If onnon-accrual status, we generally account for the DFLs on a cash basis, in which income is recognized only upon receipt of cash.
Loans: Loans consist of mortgage loans, working capital loans and other long-term loans. Mortgage loans are collateralized by interests in real property. Working capital and other long-term loans are generally collateralized by interests in receivables and corporate and individual guarantees. We record loans at cost. We evaluate the collectability of both interest and principal on aloan-by-loan basis (using the same process as we do
55
for assessing the collectability of rents as discussed above) to determine whether they are impaired. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is considered to be impaired, the amount of the allowance is calculated by comparing the recorded investment to either the value determined by discounting the expected future cash flows using the loans effective interest rate or to the fair value of the collateral, if the loan is collateral dependent.
Stock-Based Compensation:During the years ended December 31, 2017, 2016, and 2015, we recorded $9.9 million, $7.9 million, and $11.1 million, respectively, of expense for share-based compensation related to grants of restricted common stock and other stock-based awards. Starting in 2010, we granted annual performance-based restricted share awards that vest based on the achievement of certain market conditions as defined by the accounting rules. Typical market conditions for our awards are based on our total shareholder return (factoring in stock price appreciation and dividends paid) including comparisons of our total shareholder returns to an index of other REIT stocks. Because these awards are earned based on the achievement of these market conditions, we must initially evaluate and estimate the probability of achieving these market conditions in order to determine the fair value of the award and over what period we should recognize stock compensation expense. Because of the complexities inherently involved with these awards, we work with an independent consultant to assist us in modeling both the value of the award and the various periods over which each tranche of an award will be earned. We use what is termed a Monte Carlo simulation model, which determines a value and earnings periods based on multiple outcomes and their probabilities. We record expense over the expected or derived vesting periods using the calculated value of the awards. We record expense over these vesting periods even though the awards have not yet been earned and, in fact, may never be earned — such as was the case with our 2015 performance awards in which 348,938 shares were forfeited because the related market conditions were not achieved for the period of January 1, 2015 through December 31, 2017. If awards vest faster than our original estimate, we will record acatch-up of expense.
Fair Value Option Election: We elected to account for certain investments acquired on February 29, 2012, as part of the Ernest transaction, using the fair value option method, which means we mark these investments to fair market value on a recurring basis. Any changes in the fair value of these investments arenon-cash adjustments that will not impact our financial condition or cash flows unless we decided to liquidate these investments.
These investments include the following at December 31, 2017 (in thousands):
Asset (Liability) | Fair Value | Original Cost | ||||||
Mortgage loans | $ | 115,000 | $ | 115,000 | ||||
Equity investment and other loans | 114,554 | 118,354 | ||||||
|
|
|
| |||||
Total | $ | 229,554 | $ | 233,354 | ||||
|
|
|
|
We measure the estimated fair value of most of these investments utilizing Level 2 and 3 of the fair value hierarchy. Under current accounting guidance, Level 3 represents fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Our mortgage and acquisition loans with Ernest are recorded at fair value based on Level 2 inputs by discounting the estimated cash flows using the market rates which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities. Our equity investment in Ernest is recorded at fair value based on Level 3 inputs, by using a discounted cash flow model, which requires significant estimates of our investee such as projected revenue and expenses and appropriate consideration of the underlying risk profile of the forecasted assumptions associated with the investee. We classify the equity investment as Level 3, as we use certain unobservable inputs to the valuation methodology that are significant to the fair value measurement, and the valuation requires management judgment due to the absence of quoted market prices. For the cash flow
56
model, our observable inputs include use of a capitalization rate, discount rate (which is based on a weighted-average cost of capital), and market interest rates, and our unobservable input includes an adjustment for a marketability discount (“DLOM”) on our equity investment of 40% at December 31, 2017.
In regards to the underlying projection of revenues and expenses used in the discounted cash flow model, such projections are provided by Ernest. However, we will modify such projections (including underlying assumptions used) as needed based on our review and analysis of their historical results, meetings with key members of management, and our understanding of trends and developments within the healthcare industry.
In arriving at the DLOM, we started with a DLOM range based on the results of studies supporting valuation discounts for other transactions or structures without a public market. To select the appropriate DLOM within the range, we then considered many qualitative factors including the percent of control, the nature of the underlying investee’s business along with our rights as an investor pursuant to the operating agreement, the size of investment, expected holding period, number of shareholders, access to capital marketplace, etc. To illustrate the effect of movements in the DLOM, we performed a sensitivity analysis below by using basis point variations (dollars in thousands):
Basis Point Change in Marketability Discount | Estimated Increase (Decrease) In Fair Value | |||
+100 basis points | $ | (5 | ) | |
- 100 basis points | 5 |
Because the fair value of Ernest investments noted above is below our original cost, we recognized an unrealized loss in 2017. No unrealized gain/loss on the Ernest investments were recorded in previous years.
In 2015, we held an equity investment in Capella (now RCCH) similar to our Ernest equity investment. We accounted for this investment under the fair value option election as well. We recorded no unrealized gain/loss on this investment in 2015 and through April 2016. In April 2016, we sold our Capella equity investment at cost resulting in no recognized gain/loss.
Principles of Consolidation: Property holding entities and other subsidiaries of which we own 100% of the equity or have a controlling financial interest evidenced by ownership of a majority voting interest are consolidated. All inter-company balances and transactions are eliminated. For entities in which we own less than 100% of the equity interest, we consolidate the property if we have the direct or indirect ability to control the entities’ activities based upon the terms of the respective entities’ ownership agreements. For these entities, we record anon-controlling interest representing equity held bynon-controlling interests.
We continually evaluate all of our transactions and investments to determine if they represent variable interests in a variable interest entity. If we determine that we have a variable interest in a variable interest entity, we then evaluate if we are the primary beneficiary of the variable interest entity. The evaluation is a qualitative assessment as to whether we have the ability to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance. We consolidate each variable interest entity in which we, by virtue of or transactions with our investments in the entity, are considered to be the primary beneficiary. At December 31, 20172019 and 2016,2018, we determined that we were not the primary beneficiary of any variable interest entity in which we hold a variable interest (such as Ernest) because we do not control the activities (such as theday-to-day operations of the hospital) operations) that most significantly impact the economic performance of these entities.
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Disclosure of Contractual Obligations
The following table summarizes known material contractual obligations (including interest) as of December 31, 2017,2019, excluding the impact of subsequent events (amounts in thousands):
Contractual Obligations | Less Than 1 Year | 1-3 Years | 3-5 Years | After 5 Years | Total |
| Less Than 1 Year |
|
| 1-3 Years |
|
| 3-5 Years |
|
| After 5 Years |
|
| Total |
| ||||||||||||||||||||
4.000% Senior Unsecured Notes due 2022(1) | $ | 24,010 | $ | 48,020 | $ | 648,270 | $ | — | $ | 720,300 |
| $ | 22,426 |
|
| $ | 605,502 |
|
| $ | — |
|
| $ | — |
|
| $ | 627,928 |
| ||||||||||
2.550% Senior Unsecured Notes due 2023(1) |
|
| 13,522 |
|
|
| 27,044 |
|
|
| 543,802 |
|
|
| — |
|
|
| 584,368 |
| ||||||||||||||||||||
5.500% Senior Unsecured Notes due 2024 | 16,500 | 33,000 | 33,000 | 324,750 | 407,250 |
|
| 16,500 |
|
|
| 33,000 |
|
|
| 324,750 |
|
|
| — |
|
|
| 374,250 |
| |||||||||||||||
6.375% Senior Unsecured Notes due 2024 | 31,875 | 63,750 | 63,750 | 547,813 | 707,188 |
|
| 31,875 |
|
|
| 63,750 |
|
|
| 547,813 |
|
|
| — |
|
|
| 643,438 |
| |||||||||||||||
3.325% Senior Unsecured Notes due 2025(1) | 19,958 | 39,917 | 39,917 | 660,125 | 759,917 |
|
| 18,642 |
|
|
| 37,283 |
|
|
| 37,283 |
|
|
| 579,292 |
|
|
| 672,500 |
| |||||||||||||||
5.250% Senior Unsecured Notes due 2026 | 26,250 | 52,500 | 52,500 | 605,000 | 736,250 |
|
| 26,250 |
|
|
| 52,500 |
|
|
| 52,500 |
|
|
| 552,500 |
|
|
| 683,750 |
| |||||||||||||||
5.000% Senior Unsecured Notes due 2027 | 74,667 | 140,000 | 140,000 | 1,750,000 | 2,104,667 |
|
| 70,000 |
|
|
| 140,000 |
|
|
| 140,000 |
|
|
| 1,610,000 |
|
|
| 1,960,000 |
| |||||||||||||||
Revolving credit facility(1)(2) | 27,177 | 54,354 | 843,075 | — | 924,606 | |||||||||||||||||||||||||||||||||||
3.692% Senior Unsecured Notes due 2028(1) |
|
| 14,683 |
|
|
| 58,734 |
|
|
| 58,734 |
|
|
| 912,888 |
|
|
| 1,045,039 |
| ||||||||||||||||||||
4.625% Senior Unsecured Notes due 2029 |
|
| 42,203 |
|
|
| 83,250 |
|
|
| 83,250 |
|
|
| 1,108,125 |
|
|
| 1,316,828 |
| ||||||||||||||||||||
Revolving credit facility(2) |
|
| 3,250 |
|
|
| 271 |
|
|
| — |
|
|
| — |
|
|
| 3,521 |
| ||||||||||||||||||||
Term loan | 6,043 | 12,102 | 206,573 | — | 224,718 |
|
| 6,710 |
|
|
| 207,278 |
|
|
| — |
|
|
| — |
|
|
| 213,988 |
| |||||||||||||||
Operating lease commitments(3) | 8,210 | 17,720 | 16,184 | 191,457 | 233,571 | |||||||||||||||||||||||||||||||||||
Purchase obligations(4) | 127,209 | 50,819 | — | — | 178,028 | |||||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Australian term loan facility(3) |
|
| 20,698 |
|
|
| 41,284 |
|
|
| 871,305 |
|
|
| — |
|
|
| 933,287 |
| ||||||||||||||||||||
Operating lease commitments(4) |
|
| 6,772 |
|
|
| 13,215 |
|
|
| 12,168 |
|
|
| 179,983 |
|
|
| 212,138 |
| ||||||||||||||||||||
Purchase obligations(5) |
|
| 2,162,535 |
|
|
| 99,728 |
|
|
| 70,214 |
|
|
| 175,535 |
|
|
| 2,508,012 |
| ||||||||||||||||||||
Totals | $ | 361,899 | $ | 512,182 | $ | 2,043,269 | $ | 4,079,145 | $ | 6,996,495 |
| $ | 2,456,066 |
|
| $ | 1,462,839 |
|
| $ | 2,741,819 |
|
| $ | 5,118,323 |
|
| $ | 11,779,047 |
| ||||||||||
|
|
|
|
|
(1) | Our 4.000% Senior Unsecured Notes due 2022 and 3.325% Senior Unsecured Notes due 2025 are euro-denominated. |
(2) | As of December 31, |
(3) | This note is Australian dollar-denominated and reflects the exchange rate of 0.7021 at December 31, 2019. |
(4) | Most of our contractual obligations to make operating lease payments are related to ground leases for which we are reimbursed by our tenants along with corporate office and equipment leases. |
(5) | Includes approximately |
Off-Balance Sheet Arrangements
We own interests in certain unconsolidated joint ventures as described under Note 3 to Item 8 of this Annual Report on Form10-K. Except in limited circumstances, our risk of loss is limited to our investment in the joint venture and any outstanding receivables. We have no other materialoff-balance sheet arrangements that we expect would materially affect our liquidity and capital resources, except those described above under “Disclosure of Contractual Obligations”.
Liquidity and Capital Resources
20172019 Cash Flow Activity
We generated cash of $363$494.1 million from operating activities during 2019, 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 $412 million and certain investing activities including the additional funding of our development activities.
In regards to other investing and financing activities in 2019, we did the following:
a) | Purchased $4.5 billion in real estate assets representing over 80 facilities across seven countries; |
b) | Funded approximately $377.0 million of development, capital addition, and other projects; |
c) | In 2019, we sold 36.1 million shares of common stock under our at-the-market equity offering program, resulting in net proceeds of approximately $650 million; |
d) | On June 3, 2019, we received proceeds from an Australian term loan facility of approximately $837 million to help fund the Healthscope acquisition; |
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e) | On July 18, 2019, we completed an underwritten public offering of 51.75 million shares, resulting in net proceeds of $858 million; |
f) | On July 26, 2019, we completed a $900 million senior unsecured notes offering resulting in net proceeds of approximately $885 million; |
g) | In 2019, we sold five facilities generating net proceeds of $97 million and a gain of $41.6 million; |
h) | On November 8, 2019, we completed an underwritten public offering of 57.5 million shares of our common stock, resulting in net proceeds of $1.026 billion; |
i) | On December 5, 2019, we completed a £400 million and £600 million unsecured notes offering resulting in net proceeds of approximately £993 million, of which £367 million was used to pay down our balance on the revolving credit facility; and |
j) | On December 27, 2019, we established a new at-the-market equity program, giving us the ability to sell up to $1.0 billion of stock. |
As noted previously, we acquired 30 acute care hospital facilities located in the United Kingdom for £1.5 billion on January 8, 2020. This acquisition was funded using proceeds from the December 2019 Sterling bond offering along with proceeds from a £700 million term loan entered into in January 2020.
2018 Cash Flow Activity
We generated cash of $449.1 million from operating activities during 2018, 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 $364 million and certain investing activities including the additional funding of our development activities.
In regards to other investing and financing activities in 2018, we did the following:
a) | In 2018, we generated more than $2 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) | On August 31, 2018, we funded the acquisition of one property in Pasco, Washington for $17.5 million; |
c) | On August 28, 2018, we funded the acquisition of three properties in Germany for €17.3 million; |
d) | Originated $212 million in mortgage and other loans; |
e) | Funded less than $200 million for development and capital improvement projects; |
f) | Acquired five facilities operated by Steward by converting the $764.4 million in mortgage loans on the same properties plus cash consideration; |
g) | We used the net cash received from property disposals to reduce our revolver by approximately $810 million; |
h) | On October 4, 2018, we finalized our recapitalization agreement with Ernest generating $176.3 million (which included the sale of our equity investment in Ernest and repayment in full of non-mortgage loans outstanding plus accrued interest); and |
i) | In the fourth quarter of 2018, we sold 5.6 million shares of common stock under our at-the-market equity program generating approximately $95 million. |
2017 Cash Flow Activity
We generated cash of $362 million from operating activities during 2017, primarily consisting of rent and interest from mortgage and other loans. We used these operating cash flows along with cashon-hand to fund our dividends of $326.7 million and certain investing activities including the additional funding of our development activities.
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In regards to other investing and financing activities in 2017, we did the following:
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