UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,September 30, 2017
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number001-32559
Commission file number333-177186
MEDICAL PROPERTIES TRUST, INC.
MPT OPERATING PARTNERSHIP, L.P.
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND DELAWARE | 20-0191742 20-0242069 | |
(State or other jurisdiction of incorporation or organization) | (I. R. S. Employer Identification No.) |
1000 URBAN CENTER DRIVE, SUITE 501 BIRMINGHAM, AL | 35242 | ||
(Address of principal executive offices) | (Zip Code) |
(205) 969-3755
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:(205) 969-3755
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-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). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company”company,” and “emerging growth company” inRule12b-2 of the Exchange Act.
Large accelerated filer | ☒ | (Medical Properties Trust, Inc. only) | Accelerated filer | ☐ | ||||
Non-accelerated filer | ☒ | (MPT Operating Partnership, L.P. only) | Smaller reporting company | ☐ | ||||
(Do not check if a smaller reporting company) | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 5,November 3, 2017, Medical Properties Trust, Inc. had 363,994,452364,156,080 shares of common stock, par value $0.001, outstanding.
EXPLANATORY NOTE
This report combines the Quarterly Reports on Form10-Q for the three and nine months ended March 31,September 30, 2017, of Medical Properties Trust, Inc., a Maryland corporation, and MPT Operating Partnership, L.P., a Delaware limited partnership, through which Medical Properties Trust, Inc. conducts substantially all of its operations. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” “our company,” “Medical Properties,” “MPT,” or “the company” refer to Medical Properties Trust, Inc. together with its consolidated subsidiaries, including MPT Operating Partnership, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to “our operating partnership” or “the operating partnership” refer to MPT Operating Partnership, L.P. together with its consolidated subsidiaries.
MEDICAL PROPERTIES TRUST, INC. AND MPT OPERATING PARTNERSHIP, L.P.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM10-Q
FOR THE QUARTERLY PERIOD ENDED March 31,SEPTEMBER 30, 2017
PART I — FINANCIAL INFORMATION
Item 1. | Financial Statements. |
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||
(In thousands, except per share amounts) | (Unaudited) | (Note 2) | (Unaudited) | (Note 2) | ||||||||||||
Assets | ||||||||||||||||
Real estate assets | ||||||||||||||||
Land, buildings and improvements, intangible lease assets, and other | $ | 4,310,407 | $ | 4,317,866 | $ | 5,795,286 | $ | 4,317,866 | ||||||||
Mortgage loans | 1,060,397 | 1,060,400 | 1,777,555 | 1,060,400 | ||||||||||||
Net investment in direct financing leases | 650,388 | 648,102 | 695,829 | 648,102 | ||||||||||||
|
|
|
| |||||||||||||
Gross investment in real estate assets | 6,021,192 | 6,026,368 | 8,268,670 | 6,026,368 | ||||||||||||
Accumulated depreciation and amortization | (351,462 | ) | (325,125 | ) | (418,880 | ) | (325,125 | ) | ||||||||
|
|
|
| |||||||||||||
Net investment in real estate assets | 5,669,730 | 5,701,243 | 7,849,790 | 5,701,243 | ||||||||||||
Cash and cash equivalents | 446,948 | 83,240 | 188,224 | 83,240 | ||||||||||||
Interest and rent receivables | 61,912 | 57,698 | 105,817 | 57,698 | ||||||||||||
Straight-line rent receivables | 129,879 | 116,861 | 166,142 | 116,861 | ||||||||||||
Other loans | 154,032 | 155,721 | 151,709 | 155,721 | ||||||||||||
Other assets | 318,229 | 303,773 | 465,358 | 303,773 | ||||||||||||
|
|
|
| |||||||||||||
Total Assets | $ | 6,780,730 | $ | 6,418,536 | $ | 8,927,040 | $ | 6,418,536 | ||||||||
|
|
|
| |||||||||||||
Liabilities and Equity | ||||||||||||||||
Liabilities | ||||||||||||||||
Debt, net | $ | 3,277,986 | $ | 2,909,341 | $ | 4,832,264 | $ | 2,909,341 | ||||||||
Accounts payable and accrued expenses | 194,311 | 207,711 | 180,631 | 207,711 | ||||||||||||
Deferred revenue | 19,411 | 19,933 | 18,906 | 19,933 | ||||||||||||
Lease deposits and other obligations to tenants | 32,451 | 28,323 | 54,035 | 28,323 | ||||||||||||
|
|
|
| |||||||||||||
Total liabilities | 3,524,159 | 3,165,308 | ||||||||||||||
Total Liabilities | 5,085,836 | 3,165,308 | ||||||||||||||
Equity | ||||||||||||||||
Preferred stock, $0.001 par value. Authorized 10,000 shares; no shares outstanding | — | — | — | — | ||||||||||||
Common stock, $0.001 par value. Authorized 500,000 shares; issued and outstanding — 320,801 shares at March 31, 2017 and 320,514 shares at December 31, 2016 | 321 | 321 | ||||||||||||||
Common stock, $0.001 par value. Authorized 500,000 shares; issued and outstanding — 364,084 shares at September 30, 2017 and 320,514 shares at December 31, 2016 | 364 | 321 | ||||||||||||||
Additional paid in capital | 3,777,163 | 3,775,336 | 4,330,495 | 3,775,336 | ||||||||||||
Distributions in excess of net income | (443,315 | ) | (434,114 | ) | (468,473 | ) | (434,114 | ) | ||||||||
Accumulated other comprehensive loss | (86,611 | ) | (92,903 | ) | (35,165 | ) | (92,903 | ) | ||||||||
Treasury shares, at cost | (777 | ) | (262 | ) | (777 | ) | (262 | ) | ||||||||
|
|
|
| |||||||||||||
Total Medical Properties Trust, Inc. Stockholders’ Equity | 3,246,781 | 3,248,378 | 3,826,444 | 3,248,378 | ||||||||||||
Non-controlling interests | 9,790 | 4,850 | 14,760 | 4,850 | ||||||||||||
|
|
|
| |||||||||||||
Total Equity | 3,256,571 | 3,253,228 | 3,841,204 | 3,253,228 | ||||||||||||
|
|
|
| |||||||||||||
Total Liabilities and Equity | $ | 6,780,730 | $ | 6,418,536 | $ | 8,927,040 | $ | 6,418,536 | ||||||||
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Net Income
(Unaudited)
For the Three Months Ended March 31, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
(In thousands, except per share amounts) | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Rent billed | $ | 96,763 | $ | 74,061 | $ | 110,930 | $ | 82,387 | $ | 311,140 | $ | 234,408 | ||||||||||||
Straight-line rent | 12,779 | 8,217 | 17,505 | 9,741 | 46,561 | 26,509 | ||||||||||||||||||
Income from direct financing leases | 17,880 | 18,951 | 19,115 | 14,678 | 55,307 | 47,181 | ||||||||||||||||||
Interest and fee income | 28,975 | 33,770 | 29,030 | 19,749 | 86,776 | 79,756 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total revenues | 156,397 | 134,999 | 176,580 | 126,555 | 499,784 | 387,854 | ||||||||||||||||||
Expenses | ||||||||||||||||||||||||
Real estate depreciation and amortization | 27,586 | 21,142 | 31,915 | 23,876 | 88,994 | 67,850 | ||||||||||||||||||
Impairment charges | — | (80 | ) | — | 7,295 | |||||||||||||||||||
Property-related | 1,328 | 901 | 1,519 | (93 | ) | 4,000 | 1,592 | |||||||||||||||||
Acquisition expenses | 7,434 | 2,677 | 20,996 | 6,379 | ||||||||||||||||||||
General and administrative | 13,197 | 11,471 | 15,011 | 12,305 | 43,287 | 35,821 | ||||||||||||||||||
Acquisition expenses | 2,756 | (1,065 | ) | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total operating expenses | 44,867 | 32,449 | 55,879 | 38,685 | 157,277 | 118,937 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Operating income | 111,530 | 102,550 | 120,701 | 87,870 | 342,507 | 268,917 | ||||||||||||||||||
Other income (expense) | ||||||||||||||||||||||||
Other income (expense) | 53 | 329 | ||||||||||||||||||||||
Interest expense | (42,759 | ) | (40,262 | ) | (120,498 | ) | (121,132 | ) | ||||||||||||||||
Gain on sale of real estate and other asset dispositions, net | 7,413 | 40 | 18 | 44,616 | 7,431 | 61,294 | ||||||||||||||||||
Earnings (loss) from equity and other interests | 1,714 | (5,001 | ) | 3,384 | 1,245 | 7,898 | (2,556 | ) | ||||||||||||||||
Unutilized financing fees/debt refinancing costs | (13,629 | ) | (4 | ) | (4,414 | ) | (22,535 | ) | (18,794 | ) | (22,539 | ) | ||||||||||||
Interest expense | (38,029 | ) | (39,369 | ) | ||||||||||||||||||||
Other income (expense) | 481 | 99 | 1,101 | (118 | ) | |||||||||||||||||||
Income tax expense | (867 | ) | (319 | ) | (530 | ) | (490 | ) | (783 | ) | (1,173 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net other expense | (43,345 | ) | (44,324 | ) | (43,820 | ) | (17,327 | ) | (123,645 | ) | (86,224 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income from continuing operations | 68,185 | 58,226 | 76,881 | 70,543 | 218,862 | 182,693 | ||||||||||||||||||
Loss from discontinued operations | — | (1 | ) | — | — | — | (1 | ) | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net income | 68,185 | 58,225 | 76,881 | 70,543 | 218,862 | 182,692 | ||||||||||||||||||
Net income attributable tonon-controlling interests | (215 | ) | (298 | ) | (417 | ) | (185 | ) | (1,013 | ) | (683 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net income attributable to MPT common stockholders | $ | 67,970 | $ | 57,927 | $ | 76,464 | $ | 70,358 | $ | 217,849 | $ | 182,009 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Earnings per common share — basic and diluted | ||||||||||||||||||||||||
Earnings per common share — basic | ||||||||||||||||||||||||
Income from continuing operations attributable to MPT common stockholders | $ | 0.21 | $ | 0.24 | $ | 0.21 | $ | 0.29 | $ | 0.63 | $ | 0.75 | ||||||||||||
Loss from discontinued operations attributable to MPT common stockholders | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net income attributable to MPT common stockholders | $ | 0.21 | $ | 0.24 | $ | 0.21 | $ | 0.29 | $ | 0.63 | $ | 0.75 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Weighted average shares outstanding — basic | 321,057 | 237,510 | 364,315 | 246,230 | 345,076 | 240,607 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Earnings per common share — diluted | ||||||||||||||||||||||||
Income from continuing operations attributable to MPT common stockholders | $ | 0.21 | $ | 0.28 | $ | 0.63 | $ | 0.75 | ||||||||||||||||
Loss from discontinued operations attributable to MPT common stockholders | — | — | — | — | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net income attributable to MPT common stockholders | $ | 0.21 | $ | 0.28 | $ | 0.63 | $ | 0.75 | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Weighted average shares outstanding — diluted | 321,423 | 237,819 | 365,046 | 247,468 | 345,596 | 241,432 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Dividends declared per common share | $ | 0.24 | $ | 0.22 | $ | 0.24 | $ | 0.23 | $ | 0.72 | $ | 0.68 | ||||||||||||
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
For the Three Months Ended March 31, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
(In thousands) | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||
Net income | $ | 68,185 | $ | 58,225 | $ | 76,881 | $ | 70,543 | $ | 218,862 | $ | 182,692 | ||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||
Unrealized gain on interest rate swap | — | 815 | — | 854 | — | 2,494 | ||||||||||||||||||
Foreign currency translation gain | 6,292 | 20,587 | 17,426 | 4,450 | 57,738 | 10,354 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total comprehensive income | 74,477 | 79,627 | 94,307 | 75,847 | 276,600 | 195,540 | ||||||||||||||||||
Comprehensive income attributable tonon-controlling interests | (215 | ) | (298 | ) | (417 | ) | (185 | ) | (1,013 | ) | (683 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Comprehensive income attributable to MPT common stockholders | $ | 74,262 | $ | 79,329 | $ | 93,890 | $ | 75,662 | $ | 275,587 | $ | 194,857 | ||||||||||||
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended March 31, | For the Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | |||||||||||||||
(In thousands) | ||||||||||||||||
(In thousands) | 2017 | 2016 | ||||||||||||||
Operating activities | ||||||||||||||||
Net income | $ | 68,185 | $ | 58,225 | $ | 218,862 | $ | 182,692 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 28,954 | 21,694 | 93,805 | 69,720 | ||||||||||||
Amortization of deferred financing costs and debt discount | 4,748 | 5,799 | ||||||||||||||
Direct financing lease interest accretion | (2,286 | ) | (2,612 | ) | (7,276 | ) | (6,757 | ) | ||||||||
Straight-line rent revenue | (13,896 | ) | (8,217 | ) | (47,678 | ) | (27,009 | ) | ||||||||
Share-based compensation | 1,971 | 2,020 | 7,148 | 5,832 | ||||||||||||
Amortization of deferred financing costs and debt discount | 1,617 | 1,835 | ||||||||||||||
Gain from sale of real estate and other asset dispositions, net | (7,413 | ) | (40 | ) | (7,431 | ) | (61,294 | ) | ||||||||
Impairment charges | — | 7,295 | ||||||||||||||
Straight-line rent and otherwrite-off | 1,117 | — | 1,117 | 3,063 | ||||||||||||
Unutilized financing fees/ debt refinancing costs | 13,629 | 4 | ||||||||||||||
Unutilized financing fees/debt refinancing costs | 18,794 | 22,539 | ||||||||||||||
Other adjustments | (2,971 | ) | (3,142 | ) | (7,152 | ) | (8,398 | ) | ||||||||
Changes in: | ||||||||||||||||
Interest and rent receivables | (4,208 | ) | (3,453 | ) | (14,613 | ) | (12,790 | ) | ||||||||
Accounts payable and accrued liabilities | (20,428 | ) | 3,022 | |||||||||||||
Accounts payable and accrued expenses | (40,378 | ) | (12,403 | ) | ||||||||||||
|
|
|
| |||||||||||||
Net cash provided by operating activities | 64,271 | 69,336 | 219,946 | 168,289 | ||||||||||||
Investing activities | ||||||||||||||||
Cash paid for acquisitions and other related investments | (9,004 | ) | — | (2,152,069 | ) | (213,100 | ) | |||||||||
Net proceeds from sale of real estate | 64,335 | — | 64,362 | 198,767 | ||||||||||||
Principal received on loans receivable | 3,233 | 1,954 | 6,760 | 804,809 | ||||||||||||
Investment in loans receivable | (1,410 | ) | — | (18,574 | ) | (102,909 | ) | |||||||||
Construction in progress and other | (30,593 | ) | (55,301 | ) | (52,953 | ) | (139,336 | ) | ||||||||
Investment in unsecured senior notes | — | (50,000 | ) | |||||||||||||
Proceeds from sale of unsecured senior notes | — | 50,000 | ||||||||||||||
Other investments, net | (73,982 | ) | (52,701 | ) | ||||||||||||
|
|
|
| |||||||||||||
Net cash provided by (used for) investing activities | 26,561 | (53,347 | ) | |||||||||||||
Net cash (used for) provided by investing activities | (2,226,456 | ) | 495,530 | |||||||||||||
Financing activities | ||||||||||||||||
Revolving credit facilities, net | 90,000 | (455,000 | ) | |||||||||||||
Proceeds from term debt | 955,280 | 500,000 | 2,355,280 | 1,000,000 | ||||||||||||
Payments of term debt | (675,201 | ) | (74 | ) | (688,221 | ) | (515,221 | ) | ||||||||
Revolving credit facilities, net | 155,089 | (1,100,000 | ) | |||||||||||||
Distributions paid | (74,521 | ) | (52,402 | ) | (239,211 | ) | (160,060 | ) | ||||||||
Lease deposits and other obligations to tenants | 3,307 | 3,371 | (7,467 | ) | 13,784 | |||||||||||
Proceeds from sale of common shares, net of offering costs | 548,055 | 1,024,088 | ||||||||||||||
Debt issuance costs paid and other financing activities | (15,882 | ) | (8,173 | ) | (27,167 | ) | (31,317 | ) | ||||||||
|
|
|
| |||||||||||||
Net cash provided by (used for) financing activities | 282,983 | (12,278 | ) | |||||||||||||
Net cash provided by financing activities | 2,096,358 | 231,274 | ||||||||||||||
|
|
|
| |||||||||||||
Increase in cash and cash equivalents for period | 373,815 | 3,711 | 89,848 | 895,093 | ||||||||||||
Effect of exchange rate changes | (10,107 | ) | 7,158 | 15,136 | 4,283 | |||||||||||
Cash and cash equivalents at beginning of period | 83,240 | 195,541 | 83,240 | 195,541 | ||||||||||||
|
|
|
| |||||||||||||
Cash and cash equivalents at end of period | $ | 446,948 | $ | 206,410 | $ | 188,224 | $ | 1,094,917 | ||||||||
|
|
|
| |||||||||||||
Interest paid | $ | 51,601 | $ | 26,470 | $ | 131,708 | $ | 120,374 | ||||||||
Supplemental schedule of non-cash investing activities: | ||||||||||||||||
(Decrease) increase in development project construction costs incurred, not paid | $ | (9,036 | ) | $ | 17,458 | |||||||||||
Supplemental schedule ofnon-cash financing activities: | ||||||||||||||||
Distributions declared, unpaid | $ | 77,172 | $ | 52,386 | ||||||||||||
Distributions declared, not paid | $ | 87,519 | $ | 58,333 |
See accompanying notes to condensed consolidated financial statements.
MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||
(In thousands) | (Unaudited) | (Note 2) | (Unaudited) | (Note 2) | ||||||||||||
Assets | ||||||||||||||||
Real estate assets | ||||||||||||||||
Land, buildings and improvements, intangible lease assets, and other | $ | 4,310,407 | $ | 4,317,866 | $ | 5,795,286 | $ | 4,317,866 | ||||||||
Mortgage loans | 1,060,397 | 1,060,400 | 1,777,555 | 1,060,400 | ||||||||||||
Net investment in direct financing leases | 650,388 | 648,102 | 695,829 | 648,102 | ||||||||||||
|
|
|
| |||||||||||||
Gross investment in real estate assets | 6,021,192 | 6,026,368 | 8,268,670 | 6,026,368 | ||||||||||||
Accumulated depreciation and amortization | (351,462 | ) | (325,125 | ) | (418,880 | ) | (325,125 | ) | ||||||||
|
|
|
| |||||||||||||
Net investment in real estate assets | 5,669,730 | 5,701,243 | 7,849,790 | 5,701,243 | ||||||||||||
Cash and cash equivalents | 446,948 | 83,240 | 188,224 | 83,240 | ||||||||||||
Interest and rent receivables | 61,912 | 57,698 | 105,817 | 57,698 | ||||||||||||
Straight-line rent receivables | 129,879 | 116,861 | 166,142 | 116,861 | ||||||||||||
Other loans | 154,032 | 155,721 | 151,709 | 155,721 | ||||||||||||
Other assets | 318,229 | 303,773 | 465,358 | 303,773 | ||||||||||||
|
|
|
| |||||||||||||
Total Assets | $ | 6,780,730 | $ | 6,418,536 | $ | 8,927,040 | $ | 6,418,536 | ||||||||
|
|
|
| |||||||||||||
Liabilities and Capital | ||||||||||||||||
Liabilities | ||||||||||||||||
Debt, net | $ | 3,277,986 | $ | 2,909,341 | $ | 4,832,264 | $ | 2,909,341 | ||||||||
Accounts payable and accrued expenses | 116,819 | 132,868 | 92,793 | 132,868 | ||||||||||||
Deferred revenue | 19,411 | 19,933 | 18,906 | 19,933 | ||||||||||||
Lease deposits and other obligations to tenants | 32,451 | 28,323 | 54,035 | 28,323 | ||||||||||||
Payable due to Medical Properties Trust, Inc. | 77,102 | 74,453 | 87,448 | 74,453 | ||||||||||||
|
|
|
| |||||||||||||
Total liabilities | 3,523,769 | 3,164,918 | ||||||||||||||
Total Liabilities | 5,085,446 | 3,164,918 | ||||||||||||||
Capital | ||||||||||||||||
General Partner — issued and outstanding — 3,207 units at March 31, 2017 and 3,204 units at December 31, 2016 | 33,357 | 33,436 | ||||||||||||||
General Partner — issued and outstanding — 3,641 units at September 30, 2017 and 3,204 units at December 31, 2016 | 38,639 | 33,436 | ||||||||||||||
Limited Partners: | ||||||||||||||||
Common units — issued and outstanding — 317,594 units at March 31, 2017 and 317,310 units at December 31, 2016 | 3,300,425 | 3,308,235 | ||||||||||||||
LTIP units — issued and outstanding — 292 units at March 31, 2017 and December 31, 2016 | — | — | ||||||||||||||
Common units — issued and outstanding — 360,443 units at September 30, 2017 and 317,310 units at December 31, 2016 | 3,823,360 | 3,308,235 | ||||||||||||||
LTIP units — issued and outstanding — 292 units at September 30, 2017 and December 31, 2016 | — | — | ||||||||||||||
Accumulated other comprehensive loss | (86,611 | ) | (92,903 | ) | (35,165 | ) | (92,903 | ) | ||||||||
|
|
|
| |||||||||||||
Total MPT Operating Partnership, L.P. Capital | 3,247,171 | 3,248,768 | 3,826,834 | 3,248,768 | ||||||||||||
Non-controlling interests | 9,790 | 4,850 | 14,760 | 4,850 | ||||||||||||
|
|
|
| |||||||||||||
Total capital | 3,256,961 | 3,253,618 | ||||||||||||||
Total Capital | 3,841,594 | 3,253,618 | ||||||||||||||
|
|
|
| |||||||||||||
Total Liabilities and Capital | $ | 6,780,730 | $ | 6,418,536 | $ | 8,927,040 | $ | 6,418,536 | ||||||||
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Net Income
(Unaudited)
For the Three Months Ended March 31, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
(In thousands, except per unit amounts) | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Rent billed | $ | 96,763 | $ | 74,061 | $ | 110,930 | $ | 82,387 | $ | 311,140 | $ | 234,408 | ||||||||||||
Straight-line rent | 12,779 | 8,217 | 17,505 | 9,741 | 46,561 | 26,509 | ||||||||||||||||||
Income from direct financing leases | 17,880 | 18,951 | 19,115 | 14,678 | 55,307 | 47,181 | ||||||||||||||||||
Interest and fee income | 28,975 | 33,770 | 29,030 | 19,749 | 86,776 | 79,756 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total revenues | 156,397 | 134,999 | 176,580 | 126,555 | 499,784 | 387,854 | ||||||||||||||||||
Expenses | ||||||||||||||||||||||||
Real estate depreciation and amortization | 27,586 | 21,142 | 31,915 | 23,876 | 88,994 | 67,850 | ||||||||||||||||||
Impairment charges | — | (80 | ) | — | 7,295 | |||||||||||||||||||
Property-related | 1,328 | 901 | 1,519 | (93 | ) | 4,000 | 1,592 | |||||||||||||||||
Acquisition expenses | 7,434 | 2,677 | 20,996 | 6,379 | ||||||||||||||||||||
General and administrative | 13,197 | 11,471 | 15,011 | 12,305 | 43,287 | 35,821 | ||||||||||||||||||
Acquisition expenses | 2,756 | (1,065 | ) | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total operating expenses | 44,867 | 32,449 | 55,879 | 38,685 | 157,277 | 118,937 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Operating income | 111,530 | 102,550 | 120,701 | 87,870 | 342,507 | 268,917 | ||||||||||||||||||
Other income (expense) | ||||||||||||||||||||||||
Other income (expense) | 53 | 329 | ||||||||||||||||||||||
Interest expense | (42,759 | ) | (40,262 | ) | (120,498 | ) | (121,132 | ) | ||||||||||||||||
Gain on sale of real estate and other asset dispositions, net | 7,413 | 40 | 18 | 44,616 | 7,431 | 61,294 | ||||||||||||||||||
Earnings (loss) from equity and other interests | 1,714 | (5,001 | ) | 3,384 | 1,245 | 7,898 | (2,556 | ) | ||||||||||||||||
Unutilized financing fees/debt refinancing costs | (13,629 | ) | (4 | ) | (4,414 | ) | (22,535 | ) | (18,794 | ) | (22,539 | ) | ||||||||||||
Interest expense | (38,029 | ) | (39,369 | ) | ||||||||||||||||||||
Other income (expense) | 481 | 99 | 1,101 | (118 | ) | |||||||||||||||||||
Income tax expense | (867 | ) | (319 | ) | (530 | ) | (490 | ) | (783 | ) | (1,173 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net other expense | (43,345 | ) | (44,324 | ) | (43,820 | ) | (17,327 | ) | (123,645 | ) | (86,224 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Income from continuing operations | 68,185 | 58,226 | 76,881 | 70,543 | 218,862 | 182,693 | ||||||||||||||||||
Loss from discontinued operations | — | (1 | ) | — | — | — | (1 | ) | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net income | 68,185 | 58,225 | 76,881 | 70,543 | 218,862 | 182,692 | ||||||||||||||||||
Net income attributable tonon-controlling interests | (215 | ) | (298 | ) | (417 | ) | (185 | ) | (1,013 | ) | (683 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net income attributable to MPT Operating Partnership partners | $ | 67,970 | $ | 57,927 | $ | 76,464 | $ | 70,358 | $ | 217,849 | $ | 182,009 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Earnings per units — basic and diluted | ||||||||||||||||||||||||
Earnings per unit — basic | ||||||||||||||||||||||||
Income from continuing operations attributable to MPT Operating Partnership partners | $ | 0.21 | $ | 0.24 | $ | 0.21 | $ | 0.29 | $ | 0.63 | $ | 0.75 | ||||||||||||
Loss from discontinued operations attributable to MPT Operating Partnership partners | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net income attributable to MPT Operating Partnership partners | $ | 0.21 | $ | 0.24 | $ | 0.21 | $ | 0.29 | $ | 0.63 | $ | 0.75 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Weighted average units outstanding — basic | 321,057 | 237,510 | 364,315 | 246,230 | 345,076 | 240,607 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Earnings per unit — diluted | ||||||||||||||||||||||||
Income from continuing operations attributable to MPT Operating Partnership partners | $ | 0.21 | $ | 0.28 | $ | 0.63 | $ | 0.75 | ||||||||||||||||
Loss from discontinued operations attributable to MPT Operating Partnership partners | — | — | — | — | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net income attributable to MPT Operating Partnership partners | $ | 0.21 | $ | 0.28 | $ | 0.63 | $ | 0.75 | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Weighted average units outstanding — diluted | 321,423 | 237,819 | 365,046 | 247,468 | 345,596 | 241,432 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Dividends declared per unit | $ | 0.24 | $ | 0.22 | $ | 0.24 | $ | 0.23 | $ | 0.72 | $ | 0.68 | ||||||||||||
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
For the Three Months Ended March 31, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
(In thousands) | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||
Net income | $ | 68,185 | $ | 58,225 | $ | 76,881 | $ | 70,543 | $ | 218,862 | $ | 182,692 | ||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||
Unrealized gain on interest rate swap | — | 815 | — | 854 | — | 2,494 | ||||||||||||||||||
Foreign currency translation gain | 6,292 | 20,587 | 17,426 | 4,450 | 57,738 | 10,354 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total comprehensive income | 74,477 | 79,627 | 94,307 | 75,847 | 276,600 | 195,540 | ||||||||||||||||||
Comprehensive income attributable tonon-controlling interests | (215 | ) | (298 | ) | (417 | ) | (185 | ) | (1,013 | ) | (683 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Comprehensive income attributable to MPT Operating Partnership partners | $ | 74,262 | $ | 79,329 | ||||||||||||||||||||
Comprehensive income attributable to MPT Operating Partnership Partners | $ | 93,890 | $ | 75,662 | $ | 275,587 | $ | 194,857 | ||||||||||||||||
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended March 31, | For the Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | |||||||||||||||
(In thousands) | ||||||||||||||||
(In thousands) | 2017 | 2016 | ||||||||||||||
Operating activities | ||||||||||||||||
Net income | $ | 68,185 | $ | 58,225 | $ | 218,862 | $ | 182,692 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 28,954 | 21,694 | 93,805 | 69,720 | ||||||||||||
Amortization of deferred financing costs and debt discount | 4,748 | 5,799 | ||||||||||||||
Direct financing lease interest accretion | (2,286 | ) | (2,612 | ) | (7,276 | ) | (6,757 | ) | ||||||||
Straight-line rent revenue | (13,896 | ) | (8,217 | ) | (47,678 | ) | (27,009 | ) | ||||||||
Unit-based compensation | 1,971 | 2,020 | 7,148 | 5,832 | ||||||||||||
Amortization of deferred financing costs and debt discount | 1,617 | 1,835 | ||||||||||||||
Gain from sale of real estate and other asset dispositions, net | (7,413 | ) | (40 | ) | (7,431 | ) | (61,294 | ) | ||||||||
Impairment charges | — | 7,295 | ||||||||||||||
Straight-line rent and otherwrite-off | 1,117 | — | 1,117 | 3,063 | ||||||||||||
Unutilized financing fees/ debt refinancing costs | 13,629 | 4 | ||||||||||||||
Unutilized financing fees/debt refinancing costs | 18,794 | 22,539 | ||||||||||||||
Other adjustments | (2,971 | ) | (3,142 | ) | (7,152 | ) | (8,398 | ) | ||||||||
Changes in: | ||||||||||||||||
Interest and rent receivables | (4,208 | ) | (3,453 | ) | (14,613 | ) | (12,790 | ) | ||||||||
Accounts payable and accrued expenses | (20,428 | ) | 3,022 | (40,378 | ) | (12,403 | ) | |||||||||
|
|
|
| |||||||||||||
Net cash provided by operating activities | 64,271 | 69,336 | 219,946 | 168,289 | ||||||||||||
Investing activities | ||||||||||||||||
Cash paid for acquisitions and other related investments | (9,004 | ) | — | (2,152,069 | ) | (213,100 | ) | |||||||||
Net proceeds from sale of real estate | 64,335 | — | 64,362 | 198,767 | ||||||||||||
Principal received on loans receivable | 3,233 | 1,954 | 6,760 | 804,809 | ||||||||||||
Investment in loans receivable | (1,410 | ) | — | (18,574 | ) | (102,909 | ) | |||||||||
Construction in progress and other | (30,593 | ) | (55,301 | ) | (52,953 | ) | (139,336 | ) | ||||||||
Investment in unsecured senior notes | — | (50,000 | ) | |||||||||||||
Proceeds from sale of unsecured senior notes | — | 50,000 | ||||||||||||||
Other investments, net | (73,982 | ) | (52,701 | ) | ||||||||||||
|
|
|
| |||||||||||||
Net cash provided by (used for) investing activities | 26,561 | (53,347 | ) | |||||||||||||
Net cash (used for) provided by investing activities | (2,226,456 | ) | 495,530 | |||||||||||||
Financing activities | ||||||||||||||||
Revolving credit facilities, net | 90,000 | (455,000 | ) | |||||||||||||
Proceeds from term debt | 955,280 | 500,000 | 2,355,280 | 1,000,000 | ||||||||||||
Payments of term debt | (675,201 | ) | (74 | ) | (688,221 | ) | (515,221 | ) | ||||||||
Revolving credit facilities, net | 155,089 | (1,100,000 | ) | |||||||||||||
Distributions paid | (74,521 | ) | (52,402 | ) | (239,211 | ) | (160,060 | ) | ||||||||
Lease deposits and other obligations to tenants | 3,307 | 3,371 | (7,467 | ) | 13,784 | |||||||||||
Proceeds from sale of units, net of offering costs | 548,055 | 1,024,088 | ||||||||||||||
Debt issuance costs paid and other financing activities | (15,882 | ) | (8,173 | ) | (27,167 | ) | (31,317 | ) | ||||||||
|
|
|
| |||||||||||||
Net cash provided by (used for) financing activities | 282,983 | (12,278 | ) | |||||||||||||
Net cash provided by financing activities | 2,096,358 | 231,274 | ||||||||||||||
|
|
|
| |||||||||||||
Increase in cash and cash equivalents for period | 373,815 | 3,711 | 89,848 | 895,093 | ||||||||||||
Effect of exchange rate changes | (10,107 | ) | 7,158 | 15,136 | 4,283 | |||||||||||
Cash and cash equivalents at beginning of period | 83,240 | 195,541 | 83,240 | 195,541 | ||||||||||||
|
|
|
| |||||||||||||
Cash and cash equivalents at end of period | $ | 446,948 | $ | 206,410 | $ | 188,224 | $ | 1,094,917 | ||||||||
|
|
|
| |||||||||||||
Interest paid | $ | 51,601 | $ | 26,470 | $ | 131,708 | $ | 120,374 | ||||||||
Supplemental schedule of non-cash investing activities: | ||||||||||||||||
(Decrease) increase in development project construction costs incurred, not paid | $ | (9,036 | ) | $ | 17,458 | |||||||||||
Supplemental schedule ofnon-cash financing activities: | ||||||||||||||||
Distributions declared, unpaid | $ | 77,172 | $ | 52,386 | ||||||||||||
Distributions declared, not paid | $ | 87,519 | $ | 58,333 |
See accompanying notes to condensed consolidated financial statements.
MEDICAL PROPERTIES TRUST, INC. AND MPT OPERATING PARTNERSHIP, L.P.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization
Medical Properties Trust, Inc., a Maryland corporation, was formed on August 27, 2003, under the Maryland General Corporation Law for the purpose of engaging in the business of investing in, owning, and leasing commercial real estate. Our operating partnership subsidiary, MPT Operating Partnership, L.P., (the “Operating Partnership”) through which we conduct all of our operations, was formed in September 2003. Through another wholly-owned subsidiary, Medical Properties Trust, LLC, we are the sole general partner of the Operating Partnership. At present, we directly own substantially all of the limited partnership interests in the Operating Partnership and have elected to report our required disclosures and that of the Operating Partnership on a combined basis except where material differences exist.
We have operated as a real estate investment trust (“REIT”) since April 6, 2004, and accordingly, elected REIT status upon the filing in September 2005 of the calendar year 2004 federal income tax return. Accordingly, we will generally not be subject to federal income tax in the United States (“U.S.”), provided that we continue to qualify as a REIT and our distributions to our stockholders equal or exceed our taxable income. Certain activities we undertake must be conducted by entities which we elected to be treated as taxable REIT subsidiaries (“TRS”TRSs”). Our TRS entitiesTRSs are subject to both U.S. federal and state income taxes. For our properties located outside the U.S., we are subject to local taxes; however, we do not expect to incur additional taxes in the U.S. as such income will flow through our REIT.
Our primary business strategy is to acquire and develop real estate and improvements, primarily for long-term lease to providers of healthcare services such as operators of general acute care hospitals, inpatient physical rehabilitation hospitals, long-term acute care hospitals, surgery centers, centers for treatment of specific conditions such as cardiac, pulmonary, cancer, and neurological hospitals, and other healthcare-oriented facilities. We also make mortgage and other loans to operators of similar facilities. In addition, we may obtain profits or equity interests in our tenants, from time to time, in order to enhance our overall return. We manage our business as a single business segment. OurAll of our properties are located in the U.S. and Europe.
2. Summary of Significant Accounting Policies
Unaudited Interim Condensed Consolidated Financial Statements: The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information, including rules and regulations of the Securities and Exchange Commission (“SEC”).Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periodperiods ended March 31,September 30, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The condensed consolidated balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements.
For information about significant accounting policies, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form10-K for the year ended December 31, 2016. During the threenine months ended March 31,September 30, 2017, there were no material changes to these policies.
Recent Accounting Developments:
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” Under the new standard, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. This standard is effective for us beginning January 1, 2018, and we plan to adopt under the modified retrospective approach. We do not expect this standard to have a significant impact on our financial results upon adoption, as a substantial portion of our revenue consists of rental income from leasing arrangements and interest income from loans, which are specifically excluded from ASU No. 2014-09. Under ASU No. 2014-09, we do expect more transactions to qualify as sales of real estate with gains on sales being recognized earlier than under current accounting guidance, as the new guidance is based on transfer of control versus whether or not the seller has continuing involvement. Thus, we expect to record an approximate $2 million adjustment to retained earnings upon adoption of ASU No. 2014-09 to fully recognize a gain on real estate sold in prior years that was required to be deferred under existing accounting guidance.
Clarifying the Definition of a Business
In January 2017, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”)ASU No. 2017-01, “Clarifying the Definition of a Business” (“ASU2017-01”). The amendments in ASU2017-01 provide an initial screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, in which case, the transaction would be accounted for as an asset acquisition rather than as a business combination. In addition, ASU2017-01 clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. A reporting entity must apply the amendments in ASU2017-01 using a prospective approach. We expect towill adopt ASU2017-01 on January 1, 2018 for our 2018 fiscal year. Upon adoption, we expect to recognize a majority of our real estate acquisitions as asset transactions rather than business combinations, which will result in the capitalization of third party transaction costs that are directly related to an acquisition. Indirect and internal transaction costs will continue to be expensed, but
we do not expect to include these costs as an adjustment in deriving normalized funds from operations in the future. We expect this change in accounting, once adopted, may decrease our normalized funds from operations by $1.5$1 million to $2 million per quarter.
ReclassificationsLeases
In February 2016, the FASB issued ASU 2016-02, “Leases”, which sets out the principles for the recognition, measurement, presentation and Revisionsdisclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.
Certain amountsWe expect to adopt this new standard on January 1, 2019. We are continuing to evaluate this standard and the impact to us from both a lessor and lessee perspective. However, we do have leases in which we are the consolidated financial statements for prior periods have been reclassifiedlessee, including ground leases, on which certain of our facilities reside, along with corporate office and equipment leases, that will be required to conformbe recorded on our balance sheet upon adoption of this standard. From a lessor perspective, we do expect certain non-lease components (including property taxes, insurance and other operating expenses that the tenants of our facilities are required to pay pursuant to our “triple-net” leases) to be recorded gross versus net of the current period presentation.respective expenses upon adoption of this standard in 2019 in accordance with ASU No. 2014-09.
Variable Interest Entities
At March 31,September 30, 2017, we had loans to and/or equity investments in certain variable interest entities (“VIEs”), which are also tenants of our facilities. We have determined that we are not the primary beneficiary of these VIEs. The carrying value and classification of the related assets and maximum exposure to loss as a result of our involvement with these VIEs at September 30, 2017 are presented below at March 31, 2017 (in thousands):
VIE Type | Maximum Loss Exposure(1) | Asset Type Classification | Carrying Amount(2) | Maximum Loss Exposure(1) | Asset Type Classification | Carrying Amount(2) | ||||||||||||||
Loans, net | $ | 320,668 | Mortgage and other loans | $ | 234,821 | $ | 331,857 | Mortgage and other loans | $ | 235,287 | ||||||||||
Equity investments | $ | 13,114 | Other assets | $ | — | $ | 13,242 | Other assets | $ | — |
(1) | Our maximum loss exposure related to loans with VIEs represents our current aggregate gross carrying value of the loan plus accrued interest and any other related assets (such as rent receivables), less any liabilities. Our maximum loss exposure related to our equity investment in VIEs represents the current carrying values of such investment plus any other related assets (such as rent receivables) |
(2) | Carrying amount reflects the net book value of our loan or equity interest only in the VIE. |
For the VIE types above, we do not consolidate the VIE because we do not have the ability to control the activities (such as theday-to-day healthcare operations of our borrowersborrower or investees) that most significantly impact the VIE’s economic performance. As of March 31,September 30, 2017, we were not required to provide any material financial support through a liquidity arrangement or otherwise to our unconsolidated VIEs, including circumstances in which it could be exposed to further losses (e.g., cash short falls).
Typically, our loans are collateralized by assets of the borrower (some assets of which are on the premises of facilities owned by us) and further supported by limited guarantees made by certain principals of the borrower.
See Note 3 and Note 57 for additional description of the nature, purpose and activities of our more significant VIEs and interests therein, (suchsuch as Ernest Health, Inc. (“Ernest”)).
3. Real Estate and Lending Activities
Acquisitions
We acquired the following assets (in thousands):
Three Months Ended March 31, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Assets Acquired | ||||||||||||||||
Land | $ | 1,081 | $ | — | ||||||||||||
Land and land improvements | $ | 196,094 | $ | 13,602 | ||||||||||||
Building | 7,050 | — | 987,442 | 125,744 | ||||||||||||
Intangible | 873 | — | ||||||||||||||
Intangible lease assets — subject to amortization (weighted average useful life 28.7 years for 2017 and 19.4 years for 2016) | 128,961 | 10,754 | ||||||||||||||
Net investments in direct financing leases | 40,450 | 63,000 | ||||||||||||||
Mortgage loans | 700,000 | — | ||||||||||||||
Equity investments | 100,000 | — | ||||||||||||||
Liabilities assumed | (878 | ) | — | |||||||||||||
|
|
|
| |||||||||||||
Total assets acquired | $ | 9,004 | $ | — | $ | 2,152,069 | $ | 213,100 | ||||||||
Loans repaid (1) | — | (93,262 | ) | |||||||||||||
|
|
|
| |||||||||||||
Total net assets acquired | $ | 2,152,069 | $ | 119,838 | ||||||||||||
|
|
(1) | $93.3 million loans advanced to Capella (now RCCH Healthcare Partners (“RCCH”)) in 2015 and repaid in 2016 as a part of the Capella Transaction discussed below. |
The purchase price allocations attributable to this firstthe 2017 acquisitions and certain acquisitions made in the last quarter 2017 acquisitionof 2016 are preliminary. When all relevant information is obtained, resulting changes, if any, to our provisional purchase price allocation will be retrospectively adjusted to reflect new information obtained about the facts and circumstances that existed as of the respective acquisition dates that, if known, would have affected the measurement of the amounts recognized as of those dates.
2017 Activity
Steward Transactions
On September 29, 2017, we acquired from IASIS Healthcare LLC (“IASIS”) a portfolio of ten acute care hospitals and one behavioral health facility, along with ancillary land and buildings, that are located in Arizona, Utah, Texas, and Arkansas. The portfolio is now operated by Steward Health Care System LLC (“Steward”), which separately completed its acquisition of IASIS on September 29, 2017. Our investment in the portfolio includes the acquisition of eight acute care hospitals and one behavioral health facility for approximately $700 million, the making of $700 million in mortgage loans on two acute care hospitals, and a $100 million minority equity contribution in Steward, for a combined investment of approximately $1.5 billion. The nine facilities acquired are being leased to Steward pursuant to the original long-term master lease agreement entered into in October 2016 that had an initial 15-year term with three 5-year extension options, plus annual inflation-based escalators. The terms of the mortgage loan are substantially similar to the master lease.
On May 1, 2017, we acquired eight hospitals previously affiliated with Community Health Systems, Inc. in Florida, Ohio, and Pennsylvania for an aggregate purchase price of $301.3 million. These facilities are leased to Steward, pursuant to the original long-term master lease with Steward.
MEDIAN Transactions
During the third quarter of 2017, we acquired two rehabilitation hospitals in Germany for an aggregate purchase price of €39.2 million, in addition to 11 rehabilitation hospitals in Germany that we acquired in the second quarter of 2017 for an aggregate purchase price of €127 million. These 13 properties are leased to affiliates of Median Kliniken S.a.r.l. (“MEDIAN”), pursuant to a third master lease that has a fixed term ending in August 2043 with annual escalators at the greater of one percent or 70% of German consumer price index. These acquisitions are the final properties of the portfolio of 20 properties in Germany that we agreed to acquire in July 2016 for €215.7 million, of which seven properties totaling €49.5 million closed in December 2016.
On June 22, 2017, we acquired an acute care hospital in Germany for a purchase price of €19.4 million of which €18.6 million was paid upon closing with the remainder being paid over four years. This property is leased to affiliates of MEDIAN, pursuant to an existing master lease agreement that ends in December 2042 with annual escalators at the greater of one percent or 70% of the German consumer price index.
On January 30, 2017, we acquired an inpatient rehabilitation hospital in Germany for €8.4 million. This acquisition was the final property to close as part of the six hospital portfolio that we agreed to buy in September 2016 for an aggregate amount of €44.1 million. This property is leased to affiliates of Median Kliniken S.à r.l. (“MEDIAN”)MEDIAN pursuant to the existingoriginal long-term master lease agreement reached with MEDIAN in 2015.
Other Transactions
On June 1, 2017, we acquired the real estate assets of Ohio Valley Medical Center, a 218-bed acute care hospital located in Wheeling, West Virginia, and the East Ohio Regional Hospital, a 139-bed acute care hospital in Martins Ferry, Ohio, from Ohio Valley Health Services, a not-for-profit entity in West Virginia, for an aggregate purchase price of approximately $40 million. We simultaneously leased the facilities to Alecto Healthcare Services LLC (“Alecto”), the current operator of three facilities in our portfolio, pursuant to a lease with a 15-year initial term with 2% annual minimum rent increases and three 5-year extension options. The facilities are cross-defaulted and cross-collateralized with our other hospitals currently operated by Alecto. We also agreed to provide up to $20.0 million in capital improvement funding on these two facilities - none of which has been funded to date. With these acquisitions, we also obtained a 20% interest in the operator of these facilities.
On May 1, 2017, we acquired the real estate of St. Joseph Regional Medical Center, a 145-bed acute care hospital in Lewiston, Idaho for $87.5 million. This facility is leased to RCCH, pursuant to the existing long-term master lease entered into with RCCH in April 2016.
From the respective acquisition dates, the properties acquired in 2017 contributed $16.7 million of revenue and $12.7 million of income (excluding related acquisition expenses and taxes) for the three months ended September 30, 2017, and $25.1 million of revenue and $18.8 million of income (excluding related acquisition expenses and taxes) for the nine months ended September 30, 2017. In addition, we expensed $5.4 million and $15.6 million of acquisition-related costs on these 2017 acquisitions for the three and nine months ended September 30, 2017, respectively.
2016 Activity
On July 22, 2016, we acquired an acute care facility in Olympia, Washington in exchange for a $93.3 million loan and an additional $7 million in cash. The property has been leased to RCCH on terms substantially similar to those of the existing long-term master lease entered into with RCCH in April 2016.
On June 22, 2016, we closed on the last property of the €688 million MEDIAN transaction, that was announced on April 29, 2015, for a purchase price of €41.6 million. Upon acquisition, this property became subject to an existing master lease between us and affiliates of MEDIAN that has a lease term ending December 2042 and annual escalators at the greater of one percent or 70% of the German consumer price index.
On May 2, 2016, we acquired an acute care hospital in Newark, New Jersey for an aggregate purchase price of $63 million leased to Prime Healthcare Services, Inc. (“Prime”) pursuant to a new fifth master lease, which had a 15-year term with three five-year extension options, plus consumer price-indexed increases, limited to a 2% floor. Furthermore, we committed to advance an additional $30 million to Prime over a three-year period to be used solely for capital additions to the real estate; any such additions will be added to the basis upon which the lessee will pay us rents. None of the additional $30 million has been funded to date.
From the respective acquisition dates, the properties acquired during the nine months ended September 30, 2016, contributed $4.6 million and $3.8 million of revenue and income (excluding related acquisition expenses), respectively, for the three months ended September 30, 2016. From the respective acquisition dates, the properties acquired during the nine months ended September 30, 2016 contributed $5.7 million and $4.9 million of revenue and income (excluding related acquisition expenses), respectively, for the nine months ended September 30, 2016. In addition, we incurred $2.4 million of acquisition-related costs on the 2016 acquisitions for the nine months ended September 30, 2016.
Pro Forma Information
The following unaudited supplemental pro forma operating data is presented for the three and nine months ended September 30, 2017 and 2016, as if each acquisition was completed on January 1, 2016 and January 1, 2015 for the period ended September 30, 2017 and 2016, respectively. Supplemental pro forma earnings were adjusted to exclude acquisition-related costs on consummated deals incurred. The unaudited supplemental pro forma operating data is not necessarily indicative of what the actual results of operations would have been assuming the transactions had been completed as set forth above, nor do they purport to represent our results of operations for future periods (in thousands, except per share/unit amounts).
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Total revenues | $ | 209,368 | $ | 207,898 | $ | 623,635 | $ | 622,798 | ||||||||
Net income | $ | 102,112 | $ | 107,863 | $ | 311,306 | $ | 307,645 | ||||||||
Net income per share/unit — diluted | $ | 0.28 | $ | 0.30 | $ | 0.85 | $ | 0.84 |
Development Activities
During the 2017 first quarter,nine months of 2017, we completed construction on the following facilities:
In April 2017, we completed the acquisition of the long leasehold interest of a development site in Birmingham, England from the Circle Health Group (“Circle”) (the tenant of our existing site in Bath, England) for a purchase price of £2.7 million. Simultaneously with the acquisition, we entered into contracts with the property landlord and the Circle committing us to construct an acute care hospital on the site. Our total development costs are anticipated to be approximately £30 million. Circle is contracted to enter into a lease of the hospital following completion of construction for an initial 15-year term with rent to be calculated based on our total development costs.
See table below for a status update on our current development projects (in thousands):
Operator | Commitment | Costs Incurred as of March 31, 2017 | Estimated Completion Date | |||||||||
Adeptus Health | $ | 12,220 | $ | 7,939 | 2Q 2017 | |||||||
Ernest | 28,067 | 5,231 | 4Q 2017 | |||||||||
Adeptus Health | 7,804 | 1,771 | 1Q 2018 | |||||||||
|
|
|
| |||||||||
$ | 48,091 | $ | 14,941 | |||||||||
|
|
|
|
Property | Commitment | Costs Incurred as of September 30, 2017 | Estimated Completion Date | |||||||||
Ernest (Flagstaff, Arizona) | $ | 28,067 | $ | 16,619 | 1Q 2018 | |||||||
Circle (Birmingham, England) | 43,221 | 11,389 | 1Q 2019 | |||||||||
|
|
|
| |||||||||
$ | 71,288 | $ | 28,008 | |||||||||
|
|
|
|
Disposals
2017 Activity
On March 31, 2017, we sold the EASTAR Health System real estate located in Muskogee, Oklahoma, which was leased to RCCH Healthcare Partners (“RCCH”).RCCH. Total proceeds from this transaction were approximately $64 million resulting in a gain of $7.4 million, partially offset by a $0.6 millionnon-cash charge to revenue towrite-off related straight-line rent receivables on this property.
2016 Activity
Capella Transaction
Effective April 30, 2016, our investment in the operator of Capella Healthcare, Inc. (“Capella”) merged with Regional Care Hospital Partners, Inc. (“Regional Care”) (an affiliate of certain funds managed by affiliates of Apollo Global Management, LLC. (“Apollo”)) to form RCCH. As part of the transaction, we received net proceeds of approximately $550 million including approximately $492 million for our equity investment and loans made as part of the original Capella transaction that closed on August 31, 2015. In addition, we received $210 million in prepayment of two mortgage loans for hospitals in Russellville, Arkansas, and Lawton, Oklahoma, that we made in connection with the original Capella transaction. We made a new $93.3 million loan for a hospital property in Olympia, Washington that was subsequently converted to real estate on July 22, 2016. Additionally, we and an Apollo affiliate invested $50 million each in unsecured senior notes issued by RegionalCare, which we sold to a large institution on June 20, 2016 at par. The proceeds from this transaction represented the recoverability of our investment in full, except for transaction costs incurred of $6.3 million.
We maintained our ownership of five hospitals in Hot Springs, Arkansas; Camden, South Carolina; Hartsville, South Carolina; Muskogee, Oklahoma; and McMinnville, Oregon. Pursuant to the transaction described above, the underlying leases, one of which is a master lease covering all but one property, was amended to shorten the initial fixed lease term, increase the security deposit, and
eliminate the lessees’ purchase option provisions. Due to this lease amendment, we reclassified the lease of the properties under the master lease from a direct finance lease (“DFL”) to an operating lease. This reclassification resulted in a write-off of $2.6 million in unbilled DFL rent in the 2016 second quarter.
Post Acute Transaction
On May 23, 2016, we sold five properties (three of which were in Texas and two in Louisiana) that were leased and operated by Post Acute Medical (“Post Acute”). As part of this transaction, our outstanding loans of $4 million were paid in full, and we recovered our investment in the operations. Total proceeds from this transaction were $71 million resulting in a net gain of approximately $15 million.
Corinth Transaction
On June 17, 2016, we sold the Atrium Medical Center real estate located in Corinth, Texas, which was leased and operated by Corinth Investor Holdings. Total proceeds from the transaction were $28 million resulting in a gain on real estate of approximately $8 million. This gain on real estate was offset by approximately $9 million of non-cash charges that included the write-off of our investment in the operations of the facility, straight-line rent receivables, and a lease intangible.
HealthSouth Transaction
On July 20, 2016, we sold three inpatient rehabilitation hospitals located in Texas and operated by HealthSouth Corporation (“HealthSouth”) for $111.5 million, resulting in a net gain of approximately $45 million.
The sales in 2017 and 2016 were not strategic shifts in our operations, and therefore the results of operations related to these facilities were not reclassified as discontinued operations.
Summary of Operations for Assets Disposed in 2016
The following represents the operating results (excluding gain on sale, transaction costs, and impairment or other non-cash charges) from the properties which sold during 2016 (excluding loans repaid in the Capella Transaction) for the periods presented (in thousands):
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues | $ | — | $ | 244 | $ | — | $ | 7,851 | ||||||||
Real estate depreciation and amortization | — | — | — | (1,754 | ) | |||||||||||
Property-related expenses | — | — | — | (114 | ) | |||||||||||
Other income (expense) | — | 45 | — | (23 | ) | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Income from real estate dispositions, net | $ | — | $ | 289 | $ | — | $ | 5,960 | ||||||||
|
|
|
|
|
|
|
|
Leasing Operations
All of ourAt September 30, 2017, leases are accounted for as operating leases, except we are accounting foron two Alecto facilities, 15 Ernest facilities and 10 Prime Healthcare Services, Inc. (“Prime”) facilities are accounted for as direct financing leases (“DFLs”).DFLs. The components of our net investment in DFLs consisted of the following (in thousands):
As of March 31, 2017 | As of December 31, 2016 | As of September 30, 2017 | As of December 31, 2016 | |||||||||||||
Minimum lease payments receivable | $ | 2,192,020 | $ | 2,207,625 | $ | 2,312,621 | $ | 2,207,625 | ||||||||
Estimated residual values | 407,647 | 407,647 | 448,098 | 407,647 | ||||||||||||
Less: Unearned income | (1,949,279 | ) | (1,967,170 | ) | (2,064,890 | ) | (1,967,170 | ) | ||||||||
|
|
|
| |||||||||||||
Net investment in direct financing leases | $ | 650,388 | $ | 648,102 | $ | 695,829 | $ | 648,102 | ||||||||
|
|
|
|
Adeptus Health
On March 2, 2017, Adeptus Health, currently our sixth largest tenant, advised in a filing with the SEC that it would be delayed in the filing of its Annual Report on Form10-K for the fiscal year ended December 31, 2016. In the filing, Adeptus Health further advised that it had identified material weaknesses with respect to internal control over financial reporting in certain areas and disclosed that there is substantial doubt about its ability to continue as a going concern absent its securing committed long-term financing. On April 4, 2017, we announced an agreementthat we had agreed in principle with Deerfield Management Company, L.P. (“Deerfield”), a healthcare-only investment firm, to the restructuring in bankruptcy of Adeptus Health, including the assumptiona current tenant and operator of facilities representing less than 5% of our master leasestotal gross assets. In furtherance of facilities in Texas, Colorado, Arizona and Ohio.the restructuring, Adeptus Health and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S.United States Bankruptcy Code on April 19, 2017. Funds advised by Deerfield has purchasedacquired Adeptus Health’s outstanding bank debt and expectsDeerfield agreed to provide additional financing, along with operational and managerial support, to Adeptus Health duringas part of the bankruptcy process. Ourrestructuring.
The Adeptus Health restructuring and terms of our agreement with Deerfield providesprovided for the pre-bankruptcy payment to us of 100% of the rent payable during the restructuring and the assumption by Deerfield of all rent, the assumption of all of our master leases subject to their existing terms, pre-bankruptcy severance from our master leases of three New Orleans area facilities representing about 5% of ourand related agreements with Adeptus Health investment and re-leasing them to Ochsner Clinic Foundation (“Ochsner”), and the post-bankruptcy severance from our master leases of 13 facilities in Texas representing about 15% of our Adeptus Health investment. We also agreed to a $3.1 million concession that will reduce ourat current rental revenue by approximately $220 thousand annually over the remaining 14-year initial lease term.
We expect to sell or re-lease to other operators the 13 Texas facilities during transition periods ending in the fourth quarter of 2018. During the transition periods,rates. Through November 3, 2017, Adeptus Health is obligatedcurrent on its rent obligations to us.
On September 29, 2017, the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, entered an order confirming the Debtors’ Third Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Plan”). The Plan became effective on October 2, 2017 (the “Confirmation Effective Date”). In connection with the confirmation of the Plan, Deerfield agreed that it would assume all of the master leases and related agreements between us and Adeptus Health, cure all defaults that had arisen prior to the commencement of the bankruptcy proceedings with respect to all properties, and continue to pay contractual rent with respect to all but 16 of the 56 Adeptus Health properties according to the terms of the master leases and related agreements. Rent will remain the same, and a previously disclosed rent concession was removed from the terms. We plan to re-lease or sell the remaining 16 properties, and Adeptus Health will continue to pay rent with respect to those 16 properties until the earlier of (a) transition to a new operator is complete, or (b) an agreed future date. The agreed future date for approximately 60 percent oftwo years following the facilities isConfirmation Effective Date (for one facility), (c) one year following bankruptcy exitthe Confirmation Effective Date (for seven facilities), (d) six months following the Confirmation Effective Date (for three facilities), and (e) three months following the remainder have agreedConfirmation Effective Date (for five facilities). These lease or sale transactions are expected to be completed by the end of 2019. Although no assurances can be made that we will not recognize a loss in the future, dateswe believe the sale or re-leasing of 90 days post-bankruptcy exit.
As noted above,On April 4, 2017, we announced that our New Orleans free standingLouisiana freestanding emergency facilities then-operated by Adeptus Health (with a total budgeted investment of up to approximately $24.5 million) havehad beenre-leased to Ochsner asClinic Foundation (“Ochsner”), a health care system in the New Orleans area. We incurred a non-cash charge of March 31, 2017. The$0.5 million to write-off the straight-line rent receivables associated with the previous Adeptus Health lease on these properties. On October 18, 2017, Ochsner leases provideagreed to an amended and restated lease that provided for15-year initial terms of 15 years with a 9.2% average minimum lease rate based on our total development and construction cost. Under these leases, Ochsner hascost, as well as the right to purchaseaddition of three five-year renewal options.
Hoboken Facility
In the freestanding emergency facilities (i) at our cost within two yearsfirst half of rent commencement or (ii) for2017, a subsidiary of the greater of fair market value or our cost after suchtwo-year period. With this transaction, we incurred anon-cash charge of $0.5 million towrite-off the straight-line rent receivables associated with the previous Adeptus Health lease on these properties.
Adeptus Health is current on its rent obligations to us through May 2017. In addition, we currently hold letters of credit approximating $12.4 million to cover defaults in rent payments. These letters of credit would cover approximately four months of rent. At March 31, 2017, our investment in Adeptus Health facilities represents less than 6%operator of our total gross assets. We believe this investmentHoboken facility acquired 20% of our subsidiary that owns the real estate for $10 million, which increased its interest in our real estate entity to 30%. This transaction is fully recoverable at March 31, 2017; however, no assurances can be made that we will not have any impairment charges related to this investmentreflected in the future.non-controlling interest line of our condensed consolidated balance sheets.
Loans
The following is a summary of our loans (in thousands):
As of March 31, 2017 | As of December 31, 2016 | As of September 30, 2017 | As of December 31, 2016 | |||||||||||||
Mortgage loans | $ | 1,060,397 | $ | 1,060,400 | $ | 1,777,555 | $ | 1,060,400 | ||||||||
Acquisition loans | 120,766 | 121,464 | 119,256 | 121,464 | ||||||||||||
Working capital and other loans | 33,266 | 34,257 | 32,453 | 34,257 | ||||||||||||
|
|
|
| |||||||||||||
$ | 1,214,429 | $ | 1,216,121 | $ | 1,929,264 | $ | 1,216,121 | |||||||||
|
|
|
|
As of September 30, 2017, our mortgage loans consist of loans made to four operators that are secured by the real estate of 14 properties, and include the $700 million investment made on September 29, 2017, as part of the Steward Transaction. Ournon-mortgage loans typically consist of loans to our tenants for acquisitions and working capital purposes. At March 31,September 30, 2017, acquisition loans includes $114.8$114.4 million in loans to Ernest.
Concentrations of Credit Risk
Our revenue concentration for the threenine months ended March 31,September 30, 2017 as compared to the prior year is as follows (dollars in thousands):
Revenue by Operator
For the Three Months Ended March 31, | ||||||||||||||||||||||||||||||||
2017 | 2016 | For the Nine Months Ended September 30, 2017 | For the Nine Months Ended September 30, 2016 | |||||||||||||||||||||||||||||
Operators | Total Revenue | Percentage of Total Revenue | Total Revenue | Percentage of Total Revenue | Total Revenue | Percentage of Total Revenue | Total Revenue | Percentage of Total Revenue | ||||||||||||||||||||||||
Steward (1) | $ | 114,776 | 23.0 | % | $ | 20,969 | 5.4 | % | ||||||||||||||||||||||||
Prime | $ | 31,511 | 20.1 | % | $ | 28,897 | 21.4 | % | 94,644 | 18.9 | % | 89,389 | 23.1 | % | ||||||||||||||||||
Steward | 26,584 | 17.0 | % | — | — | |||||||||||||||||||||||||||
MEDIAN | 23,450 | 15.0 | % | 23,510 | 17.4 | % | 73,793 | 14.8 | % | 70,242 | 18.1 | % | ||||||||||||||||||||
Ernest | 17,520 | 11.2 | % | 16,406 | 12.2 | % | 53,007 | 10.6 | % | 50,564 | 13.0 | % | ||||||||||||||||||||
Adeptus Health | 39,638 | 7.9 | % | 25,873 | 6.7 | % | ||||||||||||||||||||||||||
RCCH | 9,306 | 6.0 | % | 21,477 | 15.9 | % | 30,668 | 6.1 | % | 42,776 | 11.0 | % | ||||||||||||||||||||
Other operators | 48,026 | 30.7 | % | 44,709 | 33.1 | % | 93,258 | 18.7 | % | 88,041 | 22.7 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total | $ | 156,397 | 100.0 | % | $ | 134,999 | 100.0 | % | $ | 499,784 | 100.0 | % | $ | 387,854 | 100.0 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
(1) | Includes approximately $21.6 million and $21 million of revenue for the nine months ended September 30, 2017 and 2016, respectively, from facilities leased to IASIS prior to it being acquired by Steward on September 29, 2017. |
Revenue by U.S. State and Country
For the Three Months Ended March 31, | ||||||||||||||||||||||||||||||||
2017 | 2016 | For the Nine Months Ended September 30, 2017 | For the Nine Months Ended September 30, 2016 | |||||||||||||||||||||||||||||
U.S. States and Other Countries | Total Revenue | Percentage of Total Revenue | Total Revenue | Percentage of Total Revenue | Total Revenue | Percentage of Total Revenue | Total Revenue | Percentage of Total Revenue | ||||||||||||||||||||||||
Massachusetts | $ | 26,584 | 17.0 | % | $ | — | — | $ | 79,741 | 16.0 | % | $ | — | — | ||||||||||||||||||
Texas | 24,737 | 15.8 | % | 24,472 | 18.1 | % | 74,489 | 14.9 | % | 72,811 | 18.8 | % | ||||||||||||||||||||
California | 16,565 | 10.6 | % | 16,597 | 12.3 | % | 49,681 | 9.9 | % | 49,724 | 12.8 | % | ||||||||||||||||||||
New Jersey | 10,943 | 7.0 | % | 8,612 | 6.4 | % | 32,756 | 6.6 | % | 28,398 | 7.3 | % | ||||||||||||||||||||
Arizona | 7,332 | 4.7 | % | 5,797 | 4.3 | % | 23,902 | 4.8 | % | 17,678 | 4.6 | % | ||||||||||||||||||||
All other states | 43,056 | 27.5 | % | 54,906 | 40.7 | % | 147,606 | 29.5 | % | 143,289 | 36.9 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total U.S. | $ | 129,217 | 82.6 | % | $ | 110,384 | 81.8 | % | $ | 408,175 | 81.7 | % | $ | 311,900 | 80.4 | % | ||||||||||||||||
Germany | $ | 26,190 | 16.7 | % | $ | 23,510 | 17.4 | % | $ | 88,525 | 17.7 | % | $ | 72,718 | 18.8 | % | ||||||||||||||||
United Kingdom, Italy, and Spain | 990 | 0.7 | % | 1,105 | 0.8 | % | 3,084 | 0.6 | % | 3,236 | 0.8 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total International | $ | 27,180 | 17.4 | % | $ | 24,615 | 18.2 | % | $ | 91,609 | 18.3 | % | $ | 75,954 | 19.6 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Grand Total | $ | 156,397 | 100.0 | % | $ | 134,999 | 100.0 | % | $ | 499,784 | 100.0 | % | $ | 387,854 | 100.0 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
On a total 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 (see Notes 79 and 810 of Item 1 on this Form 10-Q), and assumes cash on hand is fully used in these transactions, our concentration as of March 31,September 30, 2017 as compared to December 31, 2016 is as follows (dollars in thousands):
Gross Assets by Operator
As of March 31, 2017 | As of December 31, 2016 | As of September 30, 2017 | As of December 31, 2016 | |||||||||||||||||||||||||||||
Operators | Total Gross Assets | Percentage of Total Gross Assets | Total Gross Assets | Percentage of Total Gross Assets | Total Gross Assets | Percentage of Total Gross Assets | Total Gross Assets | Percentage of Total Gross Assets | ||||||||||||||||||||||||
Steward (1) | $ | 1,551,292 | 20.8 | % | $ | 1,250,000 | 17.5 | % | $ | 3,445,379 | 36.8 | % | $ | 1,609,583 | 22.5 | % | ||||||||||||||||
MEDIAN | 1,209,767 | 12.9 | % | 993,677 | 13.9 | % | ||||||||||||||||||||||||||
Prime | 1,115,356 | 15.0 | % | 1,144,055 | 16.0 | % | 1,118,070 | 12.0 | % | 1,144,055 | 16.0 | % | ||||||||||||||||||||
MEDIAN | 1,006,432 | 13.5 | % | 993,677 | 13.9 | % | ||||||||||||||||||||||||||
Ernest | 627,971 | 8.4 | % | 627,906 | 8.8 | % | 631,501 | 6.7 | % | 627,906 | 8.8 | % | ||||||||||||||||||||
RCCH | 506,265 | 6.8 | % | 566,600 | 7.9 | % | 506,265 | 5.4 | % | 566,600 | 7.9 | % | ||||||||||||||||||||
Other operators | 2,313,871 | 31.1 | % | 2,259,980 | 31.7 | % | 1,992,448 | 21.3 | % | 1,900,397 | 26.7 | % | ||||||||||||||||||||
Other assets | 324,635 | 4.4 | % | 300,903 | 4.2 | % | 452,505 | 4.9 | % | 300,903 | 4.2 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total | $ | 7,445,822 | 100.0 | % | $ | 7,143,121 | 100.0 | % | $ | 9,355,935 | 100.0 | % | $ | 7,143,121 | 100.0 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
(1) | Includes |
Gross Assets by U.S. State and Country
As of March 31, 2017 | As of December 31, 2016 | As of September 30, 2017 | As of December 31, 2016 | |||||||||||||||||||||||||||||
U.S. States and Other Countries | Total Gross Assets | Percentage of Total Gross Assets | Total Gross Assets | Percentage of Total Gross Assets | Total Gross Assets | Percentage of Total Gross Assets | Total Gross Assets | Percentage of Total Gross Assets | ||||||||||||||||||||||||
Massachusetts | $ | 1,250,000 | 16.8 | % | $ | 1,250,000 | 17.5 | % | $ | 1,284,156 | 13.7 | % | $ | 1,250,000 | 17.5 | % | ||||||||||||||||
Texas | 893,749 | 12.0 | % | 947,443 | 13.3 | % | 1,275,784 | 13.6 | % | 947,443 | 13.3 | % | ||||||||||||||||||||
Utah | 1,035,793 | 11.1 | % | 107,151 | 1.5 | % | ||||||||||||||||||||||||||
California | 542,886 | 7.3 | % | 542,889 | 7.6 | % | 542,879 | 5.8 | % | 542,889 | 7.6 | % | ||||||||||||||||||||
New Jersey | 416,490 | 5.6 | % | 447,436 | 6.3 | % | ||||||||||||||||||||||||||
Arizona | 331,833 | 4.5 | % | 331,834 | 4.6 | % | 498,844 | 5.3 | % | 331,834 | 4.6 | % | ||||||||||||||||||||
All other states | 2,175,466 | 29.2 | % | 1,894,047 | 26.5 | % | 2,506,538 | 26.8 | % | 2,234,332 | 31.3 | % | ||||||||||||||||||||
Other domestic assets | 284,070 | 3.8 | % | 264,215 | 3.7 | % | 397,850 | 4.3 | % | 264,215 | 3.7 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total U.S. | $ | 5,894,494 | 79.2 | % | $ | 5,677,864 | 79.5 | % | $ | 7,541,844 | 80.6 | % | $ | 5,677,864 | 79.5 | % | ||||||||||||||||
Germany | $ | 1,320,487 | 17.7 | % | $ | 1,281,649 | 17.9 | % | $ | 1,556,392 | 16.6 | % | $ | 1,281,649 | 17.9 | % | ||||||||||||||||
United Kingdom, Italy, and Spain | 190,276 | 2.5 | % | 146,920 | 2.1 | % | 203,044 | 2.2 | % | 146,920 | 2.1 | % | ||||||||||||||||||||
Other international assets | 40,565 | 0.6 | % | 36,688 | 0.5 | % | 54,655 | 0.6 | % | 36,688 | 0.5 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total International | $ | 1,551,328 | 20.8 | % | $ | 1,465,257 | 20.5 | % | $ | 1,814,091 | 19.4 | % | $ | 1,465,257 | 20.5 | % | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Grand Total | $ | 7,445,822 | 100.0 | % | $ | 7,143,121 | 100.0 | % | $ | 9,355,935 | 100.0 | % | $ | 7,143,121 | 100.0 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
On an individual property basis, we had no investment of any single property greater than 3.2%3.8% of our total gross assets as of March 31,September 30, 2017.
4. Debt
The following is a summary of our debt (dollar amounts in thousands):
As of March 31, 2017 | As of December 31, 2016 | As of September 30, 2017 | As of December 31, 2016 | |||||||||||||
Revolving credit facility | $ | 380,000 | $ | 290,000 | $ | 445,359 | $ | 290,000 | ||||||||
Term loans | 213,020 | 263,101 | 200,000 | 263,101 | ||||||||||||
6.375% Senior Unsecured Notes due 2022: | ||||||||||||||||
Principal amount | 350,000 | 350,000 | 350,000 | 350,000 | ||||||||||||
Unamortized premium | 1,726 | 1,814 | 1,549 | 1,814 | ||||||||||||
|
|
|
| |||||||||||||
351,726 | 351,814 | 351,549 | 351,814 | |||||||||||||
5.750% Senior Unsecured Notes due 2020 | — | 210,340 | — | 210,340 | ||||||||||||
4.000% Senior Unsecured Notes due 2022 | 532,600 | 525,850 | 590,700 | 525,850 | ||||||||||||
5.500% Senior Unsecured Notes due 2024 | 300,000 | 300,000 | 300,000 | 300,000 | ||||||||||||
6.375% Senior Unsecured Notes due 2024 | 500,000 | 500,000 | 500,000 | 500,000 | ||||||||||||
3.325% Senior Unsecured Notes due 2025 | 532,600 | — | 590,700 | — | ||||||||||||
5.250% Senior Unsecured Notes due 2026 | 500,000 | 500,000 | 500,000 | 500,000 | ||||||||||||
5.000% Senior Unsecured Notes due 2027 | 1,400,000 | — | ||||||||||||||
|
|
|
| |||||||||||||
$ | 3,309,946 | $ | 2,941,105 | $ | 4,878,308 | $ | 2,941,105 | |||||||||
Debt issue costs, net | (31,960 | ) | (31,764 | ) | (46,044 | ) | (31,764 | ) | ||||||||
|
|
|
| |||||||||||||
$ | 3,277,986 | $ | 2,909,341 | $ | 4,832,264 | $ | 2,909,341 | |||||||||
|
|
|
|
(A) | Includes £4 million of GBP-denominated borrowings that reflect the exchange rate at September 30, 2017. |
(B) | These notes are |
As of March 31,September 30, 2017, principal payments due on our debt (which exclude the effects of any discounts, premiums, or debt issue costs recorded) are as follows (in thousands):
2017 | $ | 239 | $ | 350,000 | (A) | |||
2018 | 12,781 | — | ||||||
2019 | — | — | ||||||
2020 | — | — | ||||||
2021 | 380,000 | 445,359 | ||||||
Thereafter | 2,915,200 | 4,081,400 | ||||||
|
| |||||||
Total | $ | 3,308,220 | $ | 4,876,759 | ||||
|
|
(A) | The $350 million 6.375% Senior Unsecured Notes due 2022 were redeemed on October 7, 2017 with proceeds from our $1.4 billion 5.000% Senior Unsecured Notes due 2027. |
2017 Activity
Credit Facility
On February 1, 2017, we replaced our unsecured credit facility with a new revolving credit and term loan agreement (“Credit Facility”). The new agreement includes a $1.3 billion unsecured revolving loan facility, a $200 million unsecured term loan facility, and a €200 million unsecured term loan facility. The new unsecured revolving loan facility matures in February 2021 and can be extended for an additional 12 months at our option. The $200 million unsecured term loan facility matures on February 1, 2022, and
the €200 million unsecured term loan facility had a maturity date of January 31, 2020; however, it was paid off on March 30, 2017 – see below. The commitment fee on the revolving loan facility is paid at a rate of 0.25%. The term loan and/or revolving loan commitments may be increased in an aggregate amount not to exceed $500 million.
At our election, loans under the Credit Facility may be made as either ABR Loans or Eurodollar Loans. The applicable margin for term loans that are ABR Loans is adjustable on a sliding scale from 0.00% to 0.95% based on our current credit rating. The
applicable margin for term loans that are Eurodollar Loans is adjustable on a sliding scale from 0.90% to 1.95% based on our current credit rating. The applicable margin for revolving loans that are ABR Loans is adjustable on a sliding scale from 0.00% to 0.65% based on our current credit rating. The applicable margin for revolving loans that are Eurodollar Loans is adjustable on a sliding scale from 0.875% to 1.65% based on our current credit rating. The commitment fee is adjustable on a sliding scale from 0.125% to 0.30% based on our current credit rating and is payable on the revolving loan facility. At March 31,September 30, 2017, the interest rate in effect on our term loan and revolver was 2.49%2.74% and 2.24%2.48%, respectively.
On March 30, 2017, we prepaid and extinguished the €200 million of outstanding term loans under the euro term loan facility portion of our Credit Facility. To fund such prepayment, including accrued and unpaid interest thereon, we used part of the proceeds of the 3.325% Senior Unsecured Notes due 2025 – see discussion below.
5.750% Senior Unsecured Notes due 2020
On March 4, 2017, we redeemed the €200 million aggregate principal amount of our 5.750% Senior Unsecured Notes due 2020 and incurred a redemption premium of approximately $9 million. We funded this redemption, including the premium and accrued interest, with the proceeds of the new euro term loan (see discussion above) together with cash on hand.
3.325% Senior Unsecured Notes due 2025
On March 24, 2017, we completed a €500 million senior unsecured notes offering (“3.325% Senior Unsecured Notes due 2025”). Interest on the notes is payable annually on March 24 of each year. The notes pay interest in cash at a rate of 3.325% per year. The notes mature on March 24, 2025. We may redeem some or all of the 3.325% Senior Unsecured Notes due 2025 at any time. If the notes are redeemed prior to 90 days before maturity, the redemption price will be equal to 100% of their principal amount, plus a make-whole premium, plus accrued and unpaid interest up to, but excluding, the applicable redemption date. Within the period beginning on or after 90 days before maturity, the notes may be redeemed, in whole or in part, at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the applicable redemption date. The 3.325% Senior Unsecured Notes due 2025 are fully and unconditionally guaranteed on a senior unsecured basis by us. In the event of a change of control, each holder of the notes may require us to repurchase some or all of our notes at a repurchase price equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest up to, but excluding, the date of the purchase.
5.000% Senior Unsecured Notes due 2027
On March 30,September 7, 2017, we completed a $1.4 billion senior unsecured notes offering (“5.000% Senior Unsecured Notes due 2027”). Interest on the notes is payable annually on April 15 and October 15 of each year, commencing on April 15, 2018. The notes pay interest in cash at a rate of 5.000% per year. The notes mature on October 15, 2027. We may redeem some or all of the notes at any time prior to October 15, 2022 at a “make whole” redemption price. On or after October 15, 2022, we may redeem some or all of the notes at a premium that will decrease over time. In addition, at any time prior to October 15, 2020, we may redeem up to 40% of the notes at a redemption price equal to 105% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, using proceeds from one or more equity offerings. In the event of a change in control, each holder of the notes may require us to repurchase some or all of the notes at a repurchase price equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest to the date of purchase.
We used a portion of the net proceeds from the 5.000% Senior Unsecured Notes due 2027 offering to redeem the $350 million aggregate principal amount of our 6.375% Senior Unsecured Notes due 2022. The notes were repaid on October 7, 2017, and we will incur a debt refinancing charge of approximately $14 million in the fourth quarter of 2017, consisting of an $11.2 million redemption premium along with the write-off of the unamortized premium and deferred debt issuance costs associated with the redeemed notes.
Furthermore, the completion of the 5.000% Senior Unsecured Notes due 2027 offering resulted in the cancellation of the $1.0 billion term loan facility commitment from JP Morgan Chase Bank, N.A. that we received to assist in funding the September 2017 Steward transaction. With this commitment, we paid $5.2 million of underwriting and other fees, which we fully expensed upon the cancellation of the commitment.
Other
On September 29, 2017, we prepaid and extinguished the €200 millionprincipal amount of outstanding term loans under the euro termmortgage loan facility portionon our property in Kansas City, Missouri at par in the amount of our Credit Facility.$12.9 million. To fund such prepayment, including accrued and unpaid interest thereon, we used partborrowings from the revolving credit facility portion of the proceeds of the 3.325% Senior Unsecured Notes due 2025.our Credit Facility.
With the replacement of our old credit facility, the redemption of the 5.750% Senior Unsecured Notes due 2020, and the payoff of our €200 million euro term loan, the cancellation of the $1.0 billion term loan facility commitment, and the payment of our $12.9 million mortgage loan, we incurred a debt refinancing charge of approximately $14$18.8 million in the 2017 first quarter.nine months of 2017.
2016 Activity
5.250% Senior Unsecured Notes due 2026
On July 22, 2016, we completed a $500 million senior unsecured notes offering (“5.250% Senior Unsecured Notes due 2026”). Interest on the notes is payable on February 1 and August 1 of each year. Interest on the notes is to be paid in cash at a rate of 5.25% per year. The notes mature on August 1, 2026. We may redeem some or all of the notes at any time prior to August 1, 2021 at a “make whole” redemption price. On or after August 1, 2021, we may redeem some or all of the notes at a premium that will decrease over time. In addition, at any time prior to August 1, 2019, we may redeem up to 35% of the notes at a redemption price equal to 105.25% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, using proceeds from one or more equity offerings. In the event of a change in control, each holder of the notes may require us to repurchase some or all of the notes at a repurchase price equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest to the date of purchase.
We used the net proceeds from the 5.250% Senior Unsecured Notes due 2026 offering to redeem our $450 million 6.875% Senior Unsecured Notes due 2021. This redemption resulted in a $22.5 million debt refinancing charge during the 2016 third quarter, consisting of a $15.5 million redemption premium along with the write-off of deferred debt issuance costs associated with the redeemed notes.
6.375% Senior Unsecured Notes due 2024
On February 22, 2016, we completed a $500 million senior unsecured notes offering (“6.375% Senior Unsecured Notes due 2024”). Interest on the notes is payable on March 1 and September 1 of each year. Interest on the notes is paid in cash at a rate of 6.375% per year. The notes mature on March 1, 2024. We may redeem some or all of the notes at any time prior to March 1, 2019 at a “make whole” redemption price. On or after March 1, 2019, we may redeem some or all of the notes at a premium that will decrease over time. In addition, at any time prior to March 1, 2019, we may redeem up to 35% of the notes at a redemption price equal to 106.375% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, using proceeds from one or more equity offerings. In the event of a change in control, each holder of the notes may require us to repurchase some or all of the notes at a repurchase price equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest to the date of purchase.
Covenants
Our debt facilities impose certain restrictions on us, including restrictions on our ability to: incur debts; create or incur liens; provide guarantees in respect of obligations of any other entity; make redemptions and repurchases of our capital stock; prepay, redeem or repurchase debt; engage in mergers or consolidations; enter into affiliated transactions; dispose of real estate or other assets; and change our business. In addition, the credit agreements governing our Credit Facility limit the amount of dividends we can pay as a percentage of normalized adjusted funds from operations (“FFO”), as defined in the agreements, on a rolling four quarter basis. At March 31,September 30, 2017, the dividend restriction was 95% of normalized adjusted funds from operations (“FFO”).FFO. The indentures governing our senior unsecured notes also limit the amount of dividends we can pay based on the sum of 95% of FFO, 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.
In addition to these restrictions, the Credit Facility contains customary financial and operating covenants, including covenants relating to our total leverage ratio, fixed charge coverage ratio, secured leverage ratio, consolidated adjusted net worth, unsecured leverage ratio, and unsecured interest coverage ratio. This Credit Facility also contains customary events of default, including among others, nonpayment of principal or interest, material inaccuracy of representations and failure to comply with our covenants. If an event of default occurs and is continuing under the Credit Facility, the entire outstanding balance may become immediately due and payable. At March 31,September 30, 2017, we were in compliance with all such financial and operating covenants.
5. Common Stock/Partners’ Capital
Medical Properties Trust, Inc.
2017 Activity
On May 1, 2017, we completed an underwritten public offering of approximately 43.1 million shares (including the exercise of the underwriters’ 30-day option to purchase an additional 5.6 million shares) of our common stock, resulting in net proceeds of approximately $548 million, after deducting offering expenses.
2016 Activity
On September 30, 2016, we completed an underwritten public offering of 57.5 million shares (including the exercise of the underwriters’ 30-day option to purchase an additional 7.5 million shares) of our common stock, resulting in net proceeds of $799.5 million, after deducting estimated offering expenses.
During the nine months ended September 30, 2016, we sold approximately 15 million shares of common stock under anat-the-market equity offering program, resulting in net proceeds of approximately $224 million, after deducting approximately $2.8 million of commissions. There is no availability under this equity offering program at September 30, 2017.
MPT Operating Partnership, L.P.
At September 30, 2017, the Company has a 99.89% ownership interest in the Operating Partnership with the remainder owned by three other partners, two of whom are employees and one of whom is the estate of a former director. During the nine months ended September 30, 2017 and 2016, the Operating Partnership issued approximately 43.1 million units and approximately 72.5 million units, respectively, in direct response to the common stock offerings by Medical Properties Trust, Inc.
6. Stock Awards
We adopted the 2013 Equity Incentive Plan (the “Equity Incentive Plan”) during the second quarter of 2013, which authorizes the issuance of common stock options, restricted stock, restricted stock units, deferred stock units, stock appreciation rights, performance units and awards of interests in our Operating Partnership. The Equity Incentive Plan is administered by the Compensation Committee of the Board of Directors. We have reserved 8,196,770 shares of common stock for awards under the Equity Incentive Plan for which 3.3 million shares remain available for future stock awards as of September 30, 2017. Share-based compensation expense totaled $7.1 million and $5.8 million for the nine months ended September 30, 2017 and 2016, respectively, of which $0.4 million relates to the acceleration of vestings on time-based awards previously granted to three former board members.
7. Fair Value of Financial Instruments
We have various assets and liabilities that are considered financial instruments. We estimate that the carrying value of cash and cash equivalents and accounts payable and accrued expenses approximate their fair values. We estimate the fair value of our interest
and rent receivables using Level 2 inputs such as discounting the estimated future cash flows using the current rates at which similar receivables would be made to others with similar credit ratings and for the same remaining maturities. The fair value of our mortgage loans and working capital loans are estimated by using Level 2 inputs such as discounting the estimated future cash flows using the current rates which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. We determine the fair value of our senior unsecured notes using Level 2 inputs such as quotes from securities dealers and market makers. We estimate the fair value of our revolving credit facility and term loans using Level 2 inputs based on the present value of future payments, discounted at a rate which we consider appropriate for such debt.
Fair value estimates are made at a specific point in time, are subjective in nature, and involve uncertainties and matters of significant judgment. Settlement of such fair value amounts may not be possible and may not be a prudent management decision. The following table summarizes fair value estimates for our financial instruments (in thousands):
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||
March 31, 2017 | December 31, 2016 | Book | Fair | Book | Fair | |||||||||||||||||||||||||||
Asset (Liability) | Book Value | Fair Value | Book Value | Fair Value | Value | Value | Value | Value | ||||||||||||||||||||||||
Interest and rent receivables | $ | 61,912 | $ | 61,941 | $ | 57,698 | $ | 57,707 | $ | 105,817 | $ | 105,803 | $ | 57,698 | $ | 57,707 | ||||||||||||||||
Loans (1) | 985,570 | 1,018,548 | 986,987 | 1,017,428 | 1,698,866 | 1,722,912 | 986,987 | 1,017,428 | ||||||||||||||||||||||||
Debt, net | (3,277,986 | ) | (3,372,482 | ) | (2,909,341 | ) | (2,966,759 | ) | (4,832,264 | ) | (5,032,821 | ) | (2,909,341 | ) | (2,966,759 | ) |
(1) | Excludes loans related to Ernest since they are recorded at fair value and discussed below. |
Items Measured at Fair Value on a Recurring Basis
Our equity interest in Ernest along with their related loans are measured at fair value on a recurring basis as we elected to account for these investments using the fair value option method. We have elected to account for these investments at fair value due to the size of the investments and because we believe this method is more reflective of current values. We have not made a similar election for other existing equity interests or loans.
At March 31,September 30, 2017, these amounts were as follows (in thousands):
Fair | Asset Type | |||||||||||||||||||||||
Asset Type | Fair Value | Cost | Asset Type Classification | Value | Cost | Classification | ||||||||||||||||||
Mortgage loans | $ | 112,836 | $ | 112,836 | Mortgage loans | $ | 115,000 | $ | 115,000 | Mortgage loans | ||||||||||||||
Acquisition and other loans | 116,023 | 116,023 | Other loans | 115,398 | 115,398 | Other loans | ||||||||||||||||||
Equity investments | 3,300 | 3,300 | Other assets | 3,300 | 3,300 | Other assets | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||
$ | 232,159 | $ | 232,159 | $ | 233,698 | $ | 233,698 | |||||||||||||||||
|
|
|
|
Our mortgage and other 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 forecast 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 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 March 31,September 30, 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 Ernest’s 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 | $ | (53 | ) | |
- 100 basis points | 53 |
Basis Point Change in Marketability Discount +100 basis points - 100 basis points Estimated Increase (Decrease)
In Fair Value $ (51 ) 51
Because the fair value of the Ernest investments noted above approximate their original cost, we did not recognize any unrealized gains/losses during the first quarternine months of 2017 or 2016. To date, we have not received any distribution payments from our equity investment in Ernest.
6.8. Earnings Per ShareShare/Common Unit
Medical Properties Trust, Inc.
Our earnings per share were calculated based on the following (amounts in(in thousands):
For the Three Months Ended March 31, | For the Three Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Numerator: | ||||||||||||||||
Income from continuing operations | $ | 68,185 | $ | 58,226 | ||||||||||||
Net income | $ | 76,881 | $ | 70,543 | ||||||||||||
Non-controlling interests’ share in net income | (215 | ) | (298 | ) | (417 | ) | (185 | ) | ||||||||
Participating securities’ share in earnings | (125 | ) | (144 | ) | (82 | ) | (154 | ) | ||||||||
|
| |||||||||||||||
Income from continuing operations, less participating securities’ share in earnings | 67,845 | 57,784 | ||||||||||||||
Loss from discontinued operations | — | (1 | ) | |||||||||||||
|
|
|
| |||||||||||||
Net income, less participating securities’ share in earnings | $ | 67,845 | $ | 57,783 | $ | 76,382 | $ | 70,204 | ||||||||
|
|
|
| |||||||||||||
Denominator: | ||||||||||||||||
Basic weighted-average common shares | 321,057 | 237,510 | 364,315 | 246,230 | ||||||||||||
Dilutive potential common shares | 366 | 309 | 731 | 1,238 | ||||||||||||
|
|
|
| |||||||||||||
Dilutive weighted-average common shares | 321,423 | 237,819 | 365,046 | 247,468 | ||||||||||||
|
|
|
| |||||||||||||
For the Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Numerator: | ||||||||||||||||
Income from continuing operations | $ | 218,862 | $ | 182,693 | ||||||||||||
Non-controlling interests’ share in continuing operations | (1,013 | ) | (683 | ) | ||||||||||||
Participating securities’ share in earnings | (307 | ) | (430 | ) | ||||||||||||
|
| |||||||||||||||
Income from continuing operations, less participating securities’share in earnings | 217,542 | 181,580 | ||||||||||||||
Loss from discontinued operations attributable to MPT common stockholders | — | (1 | ) | |||||||||||||
|
| |||||||||||||||
Net income, less participating securities’ share in earnings | $ | 217,542 | $ | 181,579 | ||||||||||||
|
| |||||||||||||||
Denominator: | ||||||||||||||||
Basic weighted-average common shares | 345,076 | 240,607 | ||||||||||||||
Dilutive potential common shares | 520 | 825 | ||||||||||||||
|
| |||||||||||||||
Dilutive weighted-average common shares | 345,596 | 241,432 | ||||||||||||||
|
|
MPT Operating Partnership, L.P.
Our earnings per common unit were calculated based on the following (amounts in(in thousands):
For the Three Months Ended March 31, | For the Three Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Numerator: | ||||||||||||||||
Income from continuing operations | $ | 68,185 | $ | 58,226 | ||||||||||||
Net income | $ | 76,881 | $ | 70,543 | ||||||||||||
Non-controlling interests’ share in net income | (215 | ) | (298 | ) | (417 | ) | (185 | ) | ||||||||
Participating securities’ share in earnings | (125 | ) | (144 | ) | (82 | ) | (154 | ) | ||||||||
|
| |||||||||||||||
Income from continuing operations, less participating securities’ share in earnings | 67,845 | 57,784 | ||||||||||||||
Loss from discontinued operations | — | (1 | ) | |||||||||||||
|
|
|
| |||||||||||||
Net income, less participating securities’ share in earnings | $ | 67,845 | $ | 57,783 | $ | 76,382 | $ | 70,204 | ||||||||
|
|
|
| |||||||||||||
Denominator: | ||||||||||||||||
Basic weighted-average units | 321,057 | 237,510 | 364,315 | 246,230 | ||||||||||||
Dilutive potential units | 366 | 309 | 731 | 1,238 | ||||||||||||
|
|
|
| |||||||||||||
Diluted weighted-average units | 321,423 | 237,819 | ||||||||||||||
Dilutive weighted-average units | 365,046 | 247,468 | ||||||||||||||
|
|
|
|
For the Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Numerator: | ||||||||
Income from continuing operations | $ | 218,862 | $ | 182,693 | ||||
Non-controlling interests’ share in continuing operations | (1,013 | ) | (683 | ) | ||||
Participating securities’ share in earnings | (307 | ) | (430 | ) | ||||
|
|
|
| |||||
Income from continuing operations, less participating securities’ share in earnings | 217,542 | 181,580 | ||||||
Loss from discontinued operations attributable to MPT Operating Partnership partners | — | (1 | ) | |||||
|
|
|
| |||||
Net income, less participating securities’ share in earnings | $ | 217,542 | $ | 181,579 | ||||
|
|
|
| |||||
Denominator: | ||||||||
Basic weighted-average units | 345,076 | 240,607 | ||||||
Dilutive potential units | 520 | 825 | ||||||
|
|
|
| |||||
Dilutive weighted-average units | 345,596 | 241,432 | ||||||
|
|
|
|
7.9. Commitments and Contingencies
Commitments
On July 20, 2016, we entered into definitive agreements to acquire 20 rehabilitation hospitals in Germany for an aggregate purchase price to us of approximately €215.7 million. Upon closing, the facilities will be leased to affiliates of MEDIAN, pursuant to a new master lease with a term of approximately 27 years with annual escalators of the greater of one percent or 70% of the annual percentage change in the German consumer price index. Closing of the transaction, which began during the fourth quarter of 2016, is subject to customary real estate, regulatory and other closing conditions. As of March 31, 2017, we have closed seven of the 20 facilities in the amount of €49.5 million, and we expect the remaining 13 facilities to close in the second quarter of 2017.
On September 28, 2016, we entered into a definitive agreement to acquire one acute care hospital in Washington for a purchase price to us of approximately $17.5 million. Upon closing, this facility will be leased to RCCH, pursuant to the current long-term master lease. Closing of the transaction, which is expected to be completed no later than the fourthfirst quarter of 2017,2018, is subject to customary real estate, regulatory and other closing conditions.
On March 8, 2017, we entered into a non-binding agreement to purchase the real estate of two acute care hospitals in West Virginia and Ohio for an aggregate purchase price of $40.0 million and lease them to Alecto, which is the current operator of three facilities in our portfolio. The lease on these facilities is expected to have a15-year initial term with 2% annual minimum increases and three5-year extension options. The facilities will be cross-defaulted and cross collateralized with our other hospitals currently operated by Alecto. With these acquisitions, we will also obtain a 20% interest in the operator of these facilities. We expect to complete this transaction in the second quarter of 2017.
On March 31, 2017, we entered into a definitive agreement to acquire one acute care hospital in Germany for a purchase price to us of approximately €20 million. Upon closing, this facility will be leased to affiliates of MEDIAN, pursuant to an existing 27-year master lease with terms similar to the master lease agreement reached with MEDIAN in 2015. We expect to complete this transaction during the second quarter of 2017.
Contingencies
We are a party to various legal proceedings incidental to our business. In the opinion of management, after consultation with legal counsel, the ultimate liability, if any, with respect to those proceedings is not presently expected to materially affect our financial position, results of operations or cash flows.
8.
10. Subsequent Events
On May 1,October 5, 2017, we completed an underwritten public offering of 43.1 million shares (including the exercise of the underwriters’30-day option to purchase an additional 5.6 million shares) of our common stock, resulting in net proceeds of $547.6 million, after deducting estimated offering expenses.
On May 1, 2017, we acquired the real estate of St. Joseph Regional Medical Center, a145-bed acute care hospital in Lewiston, Idaho for $87.5 million. This facility will be leased to RCCH, pursuant to the existing long-term master lease entered into with RCCHdefinitive agreements to acquire three rehabilitation hospitals in April 2016.
On May 1, 2017, we acquired eight hospitals previously affiliated with Community Health Systems, Inc. in Florida, Ohio, and PennsylvaniaGermany for an aggregate purchase price to us of $301.3approximately €80 million. TheseUpon closing, the facilities will be leased to Steward Health Care System LLC (“Steward”),MEDIAN, pursuant to a newlong-term master lease. The lease will begin on the existing long-term master lease entered into with Steward in October 2016.
In April 2017, we completedday the acquisitionfirst property is funded, and the term will be 27 years from the funding date of the long leasehold interest of a development site in Birmingham, England from the Circle Health Group (the tenant of our existing site in Bath, England)third property. The lease provides for a purchase price of approximately £2.72 million. Simultaneously with the acquisition, we entered into contracts with the property freeholder and the Circle Health Group committing us to construct an acute care hospital on the site. Our total development costs are anticipated to be approximately £30 million. Circle Health Group is contracted to enter into a leaseincreases of the hospital following completiongreater of construction for an initial15-year term with rent1% or 70% of the change in German CPI. Closing of the transaction, which is expected to be calculated based on our total development costs.begin during the fourth quarter of 2017, is subject to customary real estate, regulatory and other closing conditions.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis of the consolidated financial condition and consolidated results of operations are presented on a combined basis for Medical Properties Trust, Inc. and MPT Operating Partnership, L.P. as there are no material differences between these two entities.
The following discussion and analysis of the consolidated financial condition and consolidated results of operations should be read together with the condensed consolidated financial statements and notes thereto contained in this Form10-Q and the consolidated financial statements and notes thereto contained in our Annual Report on Form10-K for the year ended December 31, 2016.
Forward-Looking Statements.
This report on Form10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or future performance, achievements or transactions or events to be materially different from those expressed or implied by such forward-looking statements, including, but not limited to, the risks described in our Annual Report on Form10-K and as updated in our quarterly reports on Form10-Q for future periods, and current reports on Form8-K as we file them with the SECSecurities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. Such factors include, among others, the following:
Key Factors that May Affect Our Operations
Our revenue is derived from rents we earn pursuant to the lease agreements with our tenants, from interest income from loans to our tenants and other facility owners and from profits or equity interests in certain of our tenants’ operations. Our tenants operate in the healthcare industry, generally providing medical, surgical and rehabilitative care to patients. The capacity of our tenants to pay our rents and interest is dependent upon their ability to conduct their operations at profitable levels. We believe that the business environment of the industry segments in which our tenants operate is generally positive for efficient operators. However, our tenants’
operations are subject to economic, regulatory and market conditions that may affect their profitability, which could impact our results. Accordingly, we monitor certain key factors, changes to which we believe may provide early indications of conditions that may affect the level of risk in our portfolio.
Key factors that we consider in underwriting prospective tenants and borrowers and in monitoring the performance of existing tenants and borrowers include the following:
Certain business factors, in addition to those described above that directly affect our tenants and borrowers, will likely materially influence our future results of operations. These factors include:
CRITICAL ACCOUNTING POLICIES
Refer to our 2016 Annual Report on Form10-K, for a discussion of our critical accounting policies, which include revenue recognition, investmentsinvestment in real estate, purchase price allocation, loans, losses from rent and interest receivables, stock-based compensation, our fair value option election, and our accounting policy on consolidation. During the threenine months ended March 31,September 30, 2017, there were no material changes to these policies.
Overview
We are a self-advised real estate investment trust (“REIT”) focused on investing in and owningnet-leased healthcare facilities across the U.S. and selectively in foreign jurisdictions. 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 loans to certain of our operators through our taxable REIT subsidiaries,TRSs, the proceeds of which are typically used for acquisitions and working capital. Finally, from time to time, we acquire a profits or other equity interest in our tenants that gives us a right to share in such tenant’s profits and losses.
At March 31,September 30, 2017, our portfolio consisted of 231271 properties leased or loaned to 3130 operators, of which fourtwo are under development and 1214 are in the form of mortgage loans.
Our investments in healthcare real estate, including mortgage and other loans, as well as any equity investments in our tenants are considered a single reportable segment. All of our investments are currently located in the U.S. and Europe. Our total assets are made up of the following (dollars in thousands):
As of March 31, 2017 | % of Total | As of December 31, 2016 | % of Total | As of September 30, 2017 | % of Total | As of December 31, 2016 | % of Total | |||||||||||||||||||||||||
Real estate owned (gross) | $ | 4,945,854 | 72.9 | % | $ | 4,912,320 | 76.6 | % | $ | 6,463,107 | 72.4 | % | $ | 4,912,320 | 76.6 | % | ||||||||||||||||
Mortgage loans | 1,060,397 | 15.7 | % | 1,060,400 | 16.5 | % | 1,777,555 | 19.9 | % | 1,060,400 | 16.5 | % | ||||||||||||||||||||
Other loans | 154,032 | 2.3 | % | 155,721 | 2.4 | % | 151,709 | 1.7 | % | 155,721 | 2.4 | % | ||||||||||||||||||||
Construction in progress | 14,941 | 0.2 | % | 53,648 | 0.8 | % | 28,008 | 0.3 | % | 53,648 | 0.8 | % | ||||||||||||||||||||
Other assets | 605,506 | 8.9 | % | 236,447 | 3.7 | % | 506,661 | 5.7 | % | 236,447 | 3.7 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total assets (1) | $ | 6,780,730 | 100.0 | % | $ | 6,418,536 | 100.0 | % | $ | 8,927,040 | 100.0 | % | $ | 6,418,536 | 100.0 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
(1) | Includes |
The following is our revenue by operating type (dollar amounts in thousands):
Revenue by property type:
For the Three Months Ended March 31, 2017 | % of Total | For the Three Months Ended March 31, 2016 | % of Total | |||||||||||||
General Acute Care Hospitals (1) | $ | 107,126 | 68.5 | % | $ | 83,510 | 61.9 | % | ||||||||
Rehabilitation Hospitals | 38,279 | 24.5 | % | 38,123 | 28.2 | % | ||||||||||
Long-term Acute Care Hospitals | 10,992 | 7.0 | % | 13,366 | 9.9 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total revenue | $ | 156,397 | 100.0 | % | $ | 134,999 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2017 | % of Total | For the Three Months Ended September 30, 2016 | % of Total | |||||||||||||
General Acute Care Hospitals (1) | $ | 119,572 | 67.7 | % | $ | 78,622 | 62.1 | % | ||||||||
Rehabilitation Hospitals | 46,485 | 26.3 | % | 37,075 | 29.3 | % | ||||||||||
Long-term Acute Care Hospitals | 10,523 | 6.0 | % | 10,858 | 8.6 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total revenue | $ | 176,580 | 100.0 | % | $ | 126,555 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
| |||||||||
For the Nine Months Ended September 30, 2017 | % of Total | For the Nine Months Ended September 30, 2016 | % of Total | |||||||||||||
General Acute Care Hospitals (1) | $ | 341,640 | 68.4 | % | $ | 238,600 | 61.5 | % | ||||||||
Rehabilitation Hospitals | 125,829 | 25.2 | % | 113,463 | 29.3 | % | ||||||||||
Long-term Acute Care Hospitals | 32,315 | 6.4 | % | 35,791 | 9.2 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total revenue | $ | 499,784 | 100.0 | % | $ | 387,854 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
(1) | Includes three medical office buildings. |
We have 5262 employees as of May 5,November 3, 2017. We believe that any foreseeable increase in the number of our employees will have only immaterial effects on our operations and general and administrative expenses. We believe that our relations with our employees are good. None of our employees are members of any labor union.
Results of Operations
Three Months Ended March 31,September 30, 2017 Compared to March 31,September 30, 2016
Net income for the three months ended March 31,September 30, 2017, was $68.0$76.5 million, compared to $57.9$70.4 million for the three months ended March 31,September 30, 2016. This increase is due to additional revenue from the Steward investment that wasand MEDIAN investments made in the fourth quarter of 2016 and a $7.4 million gain onduring the salefirst nine months of our facility in Muskogee, Oklahoma,2017, partially offset by a $13.6increased depreciation and acquisition expense and $44.6 million debt refinancing chargeof gains on real estate and other asset dispositions in 2017 and higher depreciation expenses from investments made subsequent to March 31, 2016.the 2016 third quarter. Funds from operations (“FFO”), after adjusting for certain items (as more fully described in Reconciliation ofNon-GAAP Financial Measures), was $105.9$120.6 million, or $0.33 per diluted share for the 2017 firstthird quarter as compared to $83.5$75.1 million, or $0.35$0.30 per diluted share for the 2016 firstthird quarter. This 61% increase in FFO per share is primarily due to the increase in revenue from our new investments made since MarchSeptember 2016, (primarily our Steward investment), while FFO per share is lower in the 2017 first quarter compared to the prior year due topartially offset by more shares outstanding in 2017 from our 2016the May 2017 equity offerings.offering.
A comparison of revenues for the three month periods ended March 31,September 30, 2017 and 2016 is as follows (dollar amounts in thousands):
2017 | % of Total | 2016 | % of Total | Year over Year Change | ||||||||||||||||
Rent billed | $ | 96,763 | 61.9 | % | $ | 74,061 | 54.9 | % | 30.7 | % | ||||||||||
Straight-line rent | 12,779 | 8.2 | % | 8,217 | 6.1 | % | 55.5 | % | ||||||||||||
Income from direct financing leases | 17,880 | 11.4 | % | 18,951 | 14.0 | % | (5.7 | )% | ||||||||||||
Interest and fee income from loans | 28,975 | 18.5 | % | 33,770 | 25.0 | % | (14.2 | )% | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total revenue | $ | 156,397 | 100.0 | % | $ | 134,999 | 100.0 | % | 15.9 | % | ||||||||||
|
|
|
|
|
|
|
|
Rent billed Straight-line rent Income from direct financing leases Interest and fee income Total revenues 2017 % of
Total 2016 % of
Total Year over
Year
Change $ 110,930 62.8 % $ 82,387 65.1 % 34.6 % 17,505 9.9 % 9,741 7.7 % 79.7 % 19,115 10.8 % 14,678 11.6 % 30.2 % 29,030 16.5 % 19,749 15.6 % 47.0 % $ 176,580 100.0 % $ 126,555 100.0 % 39.5 %
Our total revenue for the 2017 firstthird quarter is up $21.4$50.0 million or 15.9%,39.5% over the prior year. This increase is made up of the following:
Real estate depreciation and amortization during the firstthird quarter of 2017 increased to $27.6$31.9 million from $21.1$23.9 million in 2016, due to the incremental depreciation from the properties acquired (particularly the nine Steward facilities acquired in thesince September 30, 2016 fourth quarter) and the development properties completed in 2016 and 2017.
Property expenses for the first2017 third quarter increased $1.6 million from the prior year quarter as the 2016 third quarter included $0.9 million reimbursement for property expenses incurred in multiple previous periods from the tenant of 2017.our Twelve Oaks facility.
Acquisition expenses increased to $2.8 million from $(1.1)$2.7 million in the prior year. The acquisition expenses2016 to $7.4 million in 2017 primarily related toas a result of the Steward and MEDIAN transaction along with deals completed subsequent to March 2017. In 2016, we recorded an adjustment of $1.9acquisitions in 2017, including approximately $2.3 million due to a decrease in our estimate of real estate transfer taxes on our 2015 acquisitions in Germany.taxes.
General and administrative expenses totaled $13.2$15.0 million for the 2017 firstthird quarter, which is 8.4%8.5% of total revenues, down slightly from 8.5%9.7% of total revenues in the prior year firstthird quarter. The drop in general and administrative expenses as a percentage of revenue is primarily due to our business model as we can generally increase our revenue significantly without increasing our head count and related expenseexpenses at the same rate. On a dollar basis, general and administrative expenses were up $1.7$2.7 million from the prior year firstthird quarter due primarily to travel and international administrative expenses, which are up as a result of the growth and expansion of our company.
Earnings from our equity interestcompany, including increases in travel, international administration, costs associated with opening a European office, and compensation related to increased from a loss of $(5.0) million in the 2016 first quarter to $1.7 million of income in 2017. The loss in 2016 includes $5.3 million of acquisition expenses, representing our share of such expenses incurred by our Italian joint venture to acquire its eight hospital properties.headcount.
Interest expense, for the quarters ended March 31,September 30, 2017 and 2016, totaled $38.0$42.8 million and $39.4$40.3 million, respectively. This decreaseincrease is primarily related to lowerthe higher average debt balances inbalance for the current year, partially offset by slightly higher weighted average interest rates period over period due to more permanent debt financing in place in 2017 quarter compared to the prior year –to fund our acquisition activity. The impact on interest expense from the higher debt balance was partially offset by lower interest rates year-over-year. Our weighted-average interest rate was 4.6% for the first quarter ofended September 30, 2017, compared to 4.3% for5.2% in 2016.
With the firstredemption of the $450 million in senior unsecured notes during the quarter ended September 30, 2016, we incurred $22.5 million in debt refinancing charges ($15.5 million of 2016. See Note 4which was a redemption premium). During the 2017 third quarter, we incurred $4.4 million of charges primarily related to structuring and underwriting fees associated with the termination of theshort-term loan commitment we made in Item 1 to this Form10-Q for further information on our debt activities.anticipation of the Steward acquisition.
During the three months ended March 31, 2017,September 30, 2016, we sold one RCCH facilitythree HealthSouth properties resulting in a net gain on sale of approximately $7.4$45 million (see Note 3 to Item 1 of thisForm 10-Q for further details).
WithEarnings from our equity interests was $3.4 million for the debt refinancing activities (as described2017 third quarter, up $2.1 million from the prior year primarily related to our increased ownership in Note 4and the improved operating results of the operator of our Hoboken facility, along with our first quarter to Item 1 of this Form10-Q), we incurred approximately $14 million in debt refinancing charges ($9 million of which was an early redemption premiumgenerate income on our 5.750% Senior Unsecured Notes due 2020) in the 2017 first quarter.
IMED investment.
Income tax expense typically includes U.S. federal and state income taxes on our TRS entities, as well asnon-U.S. income based or withholding taxes on certain investments located in jurisdictions outside the U.S. The incomeIncome tax expense of $0.5 million for the three months ended March 31,September 30, 2017, was primarily due to $1.1 million of foreign tax expense related to our German investments offset partially by $0.6 million of tax benefit recognized on approximately $2 million of acquisition costs incurred on our European investments and higher than prior year due to the reversal of valuation allowances on a majority of our international entities in the 2016 fourth quarter. investments.
We utilize the asset and liability method of accounting for income taxes. Deferred tax assets are recorded to the extent we believe these assets will more likely than not be realized. In making such determination, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities,
projected future taxable income, tax planning strategies, and recent financial performance. Based upon our review of all positive and negative evidence, including our three-year cumulativepre-tax book loss position in certainmany entities, we concluded that a full valuation allowance should continue to be recorded against the majority of our U.S.U.S and certain of our international net deferred tax assets at March 31,September 30, 2017. In the future, if we determine that it is more likely than not that we will realize our U.S. and foreign net deferred tax assets, we will reverse the applicable portion of the valuation allowance, recognize an income tax benefit in the period in which such determination is made, and incur higher income taxes in future periods.
Nine Months Ended September 30, 2017 Compared to September 30, 2016
Net income for the nine months ended September 30, 2017, was $217.8 million compared to net income of $182.0 million for the nine months ended September 30, 2016, primarily due to additional revenue from the MEDIAN, Steward, and RCCH investments made in the fourth quarter of 2016 and the first nine months of 2017, incremental revenue from completed development projects and
increased income from our equity investments, partially offset by higher depreciation expense from investments made subsequent to September 30, 2016, increased acquisition and travel expense due to more foreign investments, and approximately $54 million in higher gains on sale of properties in the first nine months of 2016. FFO, after adjusting for certain items (as more fully described in Reconciliation ofNon-GAAP Financial Measures), was $340.1 million, or $0.98 per diluted share for the first nine months in 2017 as compared to $234.1 million, or $0.97 per diluted share for the first nine months of 2016. This 45.3% increase in FFO is primarily due to the increase in revenue from acquisitions and completed development projects made since September 2016, while FFO per share is only slightly higher in the first nine months of 2017 compared to prior year due to more shares outstanding from the September 2016 and May 2017 equity offerings.
A comparison of revenues for the nine month periods ended September 30, 2017 and 2016 is as follows (dollar amounts in thousands):
2017 | % of Total | 2016 | % of Total | Year over Year Change | ||||||||||||||||
Rent billed | $ | 311,140 | 62.3 | % | $ | 234,408 | 60.4 | % | 32.7 | % | ||||||||||
Straight-line rent | 46,561 | 9.3 | % | 26,509 | 6.8 | % | 75.6 | % | ||||||||||||
Income from direct financing leases | 55,307 | 11.1 | % | 47,181 | 12.2 | % | 17.2 | % | ||||||||||||
Interest and fee income | 86,776 | 17.3 | % | 79,756 | 20.6 | % | 8.8 | % | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total revenues | $ | 499,784 | 100.0 | % | $ | 387,854 | 100.0 | % | 28.9 | % | ||||||||||
|
|
|
|
|
|
|
|
Our total revenue for the first nine months of 2017 is up $111.9 million or 28.9% over the prior year. This increase is made up of the following:
Real estate depreciation and amortization during the first nine months of 2017 increased to $89.0 million from $67.9 million in the same period of 2016, primarily due to the incremental depreciation from the properties acquired and the development properties completed in 2016 and 2017. In the 2016 second quarter, we accelerated the amortization of the lease intangible asset related to our Corinth facility resulting in $1.1 million of additional expense.
Property expenses for the first nine months of 2017 increased $2.4 million compared to 2016. This increase is primarily due to the reimbursement to us in the 2016 third quarter of $0.8 million by the tenant of our Twelve Oaks facility for property expenses incurred in previous periods.
Acquisition expenses increased from $6.4 million in 2016 to $21.0 million in 2017 primarily as a result of the MEDIAN and Steward acquisitions in 2017, including $11.7 million of real estate transfer taxes incurred on the MEDIAN acquisitions.
General and administrative expenses in the first nine months of 2017 totaled $43.3 million, which is 8.7% of revenues down from 9.2% of revenues in the prior year. The decline in general and administrative expenses as a percentage of revenues is primarily due to our business model as we can generally increase our revenues significantly without increasing our head count and related expense at the same rate. On a dollar basis, general and administrative expenses were up $7.5 million from the prior year first nine months due primarily to increases in travel, international administration, costs associated with opening a European office, compensation related to increased headcount and public company board expenses.
During the nine months ended September 30, 2017, we sold the Muskogee, Oklahoma facility resulting in a net gain on sale of real estate of $7.4 million, while in the first nine months of 2016, we had various dispositions resulting in a net gain on sale of real estate and other asset dispositions of $61.3 million and impairment charges of $7.3 million (see Note 3 to Item 1 of this Form 10-Q for further details).
Earnings from our equity interests increased from a loss of $2.6 million in 2016 to a gain of $7.9 million in 2017. The loss in 2016 includes $5.3 million of acquisition expenses, representing our share of such expenses incurred by our Italian joint venture to acquire its eight hospital properties. In addition, 2017 includes $4.7 million of additional income related to our increased ownership in and improved operating results of the operator of our Hoboken facility, along with additional income from our IMED investment in the 2017 third quarter.
Interest expense remained relatively flat year-over-year as we incurred $120.5 million for the first nine months of 2017 compared to $121.1 million for the first nine months of 2016. Our average debt balance for 2017 has been higher than 2016 due to continued growth of the company; however, its impact on interest expense has been more than offset by lower interest rates. Our weighted-average interest rate for the first nine months of 2017 was 4.6% versus 4.9% in the same period for 2016.
With the redemption of the $450 million in senior unsecured notes, we incurred $22.5 million in debt refinancing charges ($15.5 million of which was a redemption premium) during the first nine months of 2016. During the first nine months of 2017, we incurred $18.8 million of debt refinancing charges related to the replacement of our credit facility, the payoff of our €200 million euro loan, the prepayment of our $12.9 million term loan, and structuring and underwriting fees associated with the termination of the short-term loan commitment we made in anticipation of the Steward acquisition (see Note 4 to Item 1 of this Form 10-Q for further details).
Income tax expense for the nine months ended September 30, 2017 decreased by $390 thousand from the same period in 2016 primarily due to $1.7 million of benefit recognized on approximately $10.7 million of acquisition costs incurred on our European investments in 2017. This tax benefit recognized in 2017 was offset by additional tax expense from our international investments, which were not realized in 2016 due to a valuation allowance position. These valuation allowances were released in the 2016 fourth quarter.
Reconciliation of Non-GAAP Financial Measures
Funds From Operations
Investors and analysts following the real estate industry utilize funds from operations, or FFO, as a supplemental performance measure. FFO, reflecting the assumption that real estate asset values rise or fall with market conditions, principally adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assumes that the value of real estate diminishes predictably over time. We compute FFO in accordance with the definition provided by the National Association of Real Estate Investment Trusts, or NAREIT, which represents net income (loss) (computed in accordance with GAAP), excluding gains (losses) on sales of real estate and impairment charges on real estate assets, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.
In addition to presenting FFO in accordance with the NAREIT definition, we also disclose normalized FFO, which adjusts FFO for items that relate to unanticipated ornon-core events or activities or accounting changes that, if not noted, would make comparison to prior period results and market expectations less meaningful to investors and analysts.
We believe that the use of FFO, combined with the required GAAP presentations, improves the understanding of our operating results among investors and the use of normalized FFO makes comparisons of our operating results with prior periods and other companies more meaningful. While FFO and normalized FFO are relevant and widely used supplemental measures of operating and financial performance of REITs, they should not be viewed as a substitute measure of our operating performance since the measures do not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, which can be significant economic costs that could materially impact our results of operations. FFO and normalized FFO should not be considered an alternative to net income (loss) (computed in accordance with GAAP) as indicators of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity.
The following table presents a reconciliation of net income attributable to MPT common stockholders to FFO for the three and nine months ended March 31,September 30, 2017 and 2016 (dollar amounts in(in thousands, except per share data):
For the Three Months Ended | For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||
March 31, 2017 | March 31, 2016 | September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | |||||||||||||||||||
FFO information: | ||||||||||||||||||||||||
Net income attributable to MPT common stockholders | $ | 67,970 | $ | 57,927 | $ | 76,464 | $ | 70,358 | $ | 217,849 | $ | 182,009 | ||||||||||||
Participating securities’ share in earnings | (125 | ) | (144 | ) | (82 | ) | (154 | ) | (307 | ) | (430 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Net income, less participating securities’ share in earnings | $ | 67,845 | $ | 57,783 | $ | 76,382 | $ | 70,204 | $ | 217,542 | $ | 181,579 | ||||||||||||
Depreciation and amortization | 28,099 | 21,472 | 32,618 | 24,374 | 90,744 | 69,181 | ||||||||||||||||||
Gain on sale of real estate | (7,413 | ) | (40 | ) | (18 | ) | (44,515 | ) | (7,431 | ) | (67,168 | ) | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Funds from operations | $ | 88,531 | $ | 79,215 | $ | 108,982 | $ | 50,063 | $ | 300,855 | $ | 183,592 | ||||||||||||
Unutilized financings fees / debt refinancing costs | 13,629 | 4 | ||||||||||||||||||||||
Write-off of straight line rent and other | 1,117 | — | — | — | 1,117 | 3,063 | ||||||||||||||||||
Transaction costs from non-real estate dispositions . | — | (101 | ) | — | 5,874 | |||||||||||||||||||
Acquisition expenses, net of tax benefit | 2,645 | 4,233 | 7,166 | 2,689 | 19,350 | 11,723 | ||||||||||||||||||
Impairment charges | — | (80 | ) | — | 7,295 | |||||||||||||||||||
Unutilized financing fees / debt refinancing costs | 4,414 | 22,535 | 18,794 | 22,539 | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Normalized funds from operations | $ | 105,922 | $ | 83,452 | $ | 120,562 | $ | 75,106 | $ | 340,116 | $ | 234,086 | ||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Per diluted share data: | ||||||||||||||||||||||||
Net income, less participating securities’ share in earnings | $ | 0.21 | $ | 0.24 | $ | 0.21 | $ | 0.28 | $ | 0.63 | $ | 0.75 | ||||||||||||
Depreciation and amortization | 0.09 | 0.09 | 0.09 | 0.10 | 0.26 | 0.29 | ||||||||||||||||||
Gain on sale of real estate | (0.02 | ) | — | — | (0.18 | ) | (0.02 | ) | (0.28 | ) | ||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Funds from operations | $ | 0.28 | $ | 0.33 | $ | 0.30 | $ | 0.20 | $ | 0.87 | $ | 0.76 | ||||||||||||
Unutilized financings fees / debt refinancing costs | 0.04 | — | ||||||||||||||||||||||
Write-off of straight line rent and other | — | — | — | — | — | 0.01 | ||||||||||||||||||
Transaction costs from non-real estate dispositions . | — | — | — | 0.03 | ||||||||||||||||||||
Acquisition expenses, net of tax benefit | 0.01 | 0.02 | 0.02 | 0.01 | 0.06 | 0.05 | ||||||||||||||||||
Impairment charges | — | — | — | 0.03 | ||||||||||||||||||||
Unutilized financing fees / debt refinancing costs | 0.01 | 0.09 | 0.05 | 0.09 | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Normalized funds from operations | $ | 0.33 | $ | 0.35 | $ | 0.33 | $ | 0.30 | $ | 0.98 | $ | 0.97 | ||||||||||||
|
|
|
|
|
|
Total Gross Assets
Total gross assets 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. We believe total gross assets is useful to investors as it provides a more current view of our portfolio and allows for a better understanding of our concentration levels as our binding commitments close and our other commitments are fully funded. The following table presents a reconciliation of total assets to total gross assets (in thousands):
As of September 30, 2017 | As of December 31, 2016 | |||||||
Total Assets | $ | 8,927,040 | $ | 6,418,536 | ||||
Add: | ||||||||
Binding real estate commitments on new investments(1) | 112,012 | 288,647 | ||||||
Unfunded amounts on development deals and commenced capital improvement projects(2) | 86,227 | 194,053 | ||||||
Accumulated depreciation and amortization | 418,880 | 325,125 | ||||||
Less: | ||||||||
Cash and cash equivalents | (188,224 | ) | (83,240 | ) | ||||
|
|
|
| |||||
Total Gross Assets | $ | 9,355,935 | $ | 7,143,121 | ||||
|
|
|
|
(1) | Reflects post September 30, 2017 commitments, including one RCCH facility and three facilities in Germany, and post December 31, 2016 transactions and commitments, including two RCCH facilities and 14 facilities in Germany. |
(2) | Includes $63.9 million and $109.1 million of unfunded amounts on ongoing development projects and $22.3 million and $84.9 million of unfunded amounts on capital improvement projects and development projects that have commenced rent, as of September 30, 2017 and December 31, 2016, respectively. |
LIQUIDITY AND CAPITAL RESOURCES
2017 Cash Flow Activity
During the nine months ended September 30, 2017, first quarter, we generated $64.3$219.9 million of cash flows from operating activities, primarily consisting of rent and interest from mortgage and other loans. We used these operating cash flows along with cashon-hand to fund our dividends of $74.5 million and certain investing activities.$239.2 million.
Certain investing and financing activities in the 2017 first quarter included:
a) On February 1, 2017, we replaced our credit facility with a new facility resulting in a $50 million reduction in our U.S. dollar term loan and a new €200 million term loan;
b) On March 4, 2017, we redeemed our 5.750% Senior Unsecured Notes due 2020 for €200 million plus a redemption premium using proceeds from our €200 million term loan and cash on hand;
c) On March 24, 2017, we completed a €500 million senior unsecured notes offering and used a portion of the proceeds |
Subsequent to pay off our €200 million term loan, and the remaining proceeds were used to acquire 12 facilities leased to MEDIAN for €146.4 million;
d) On March 31, 2017, we sold the EASTAR Health System real estate in Muskogee, Oklahoma for approximately $64 million;
e) On May 1, 2017, we completed an underwritten public offering of 43.1 million shares resulting in net proceeds of $547.6approximately $548 million. We used a portion of these proceeds to acquire eight facilities for $301.3 million (to be leased(leased to Steward) and another, a facility in Idaho for $87.5 million (to be(leased to RCCH) and two other facilities for $40 million (leased to Alecto);
f) On September 7, 2017, we completed a senior unsecured notes offering for $1.4 billion and used a portion of the proceeds to redeem our 6.375% Senior Unsecured Notes due 2022 in October 2017 for $350 million plus a redemption premium, and the remaining proceeds, along with borrowings from our revolving credit facility, were used to acquire 11 facilities and ancillary properties leased to RCCH).Steward for $1.4 billion and to make a $100 million equity investment in Steward; and
g) On September 29, 2017, we prepaid our Northland mortgage loan in the amount of $12.9 million.
2016 Cash Flow Activity
During the nine months ended September 30, 2016, first quarter, we generated $69.3$168.3 million of cash flows from operating activities, primarily consisting of rent and interest from mortgage and other loans. We used these operating cash flows along with cashon-hand to fund our dividends of $52.4$160.1 million and certain investing activities.
In regards to other financing activities, to, delever and finance the Steward acquisition in October 2016, we did the following:
a) On February 22, 2016, we completed the 6.375% Senior Unsecured Notes due 2024a senior unsecured notes offering for $500 million.
b) On April 30, 2016, we closed on the Capella Transaction (as further discussed in Note 3 to Item 1 of this Form 10-Q) resulting in net proceeds of $550 million along with an additional $50 million once we sold our investment in RegionalCare bonds in June 2016.
c) On May 23, 2016, we sold our investment in five properties leased and operated by Post Acute for $71 million.
d) On June 17, 2016, we sold our investment in one property leased and operated by Corinth Investor Holdings for $28 million.
e) On July 13, 2016, we completed a new $500 million senior unsecured notes offering. We used the net proceeds from this offering to pay downredeem our revolving credit facility by $455$450 million 6.875% Senior Unsecured Notes due 2021, which was completed on August 12, 2016. Net proceeds from the notes offering after redemption approximated $19 million, and fundwe incurred a one-time charge of $22.5 million related to the redemption (see Note 4 to Item 1 of this Form 10-Q for further details).
f) On July 20, 2016, we sold three facilities leased to HealthSouth for $111.5 million, and
g) We sold 82.7 million shares (including 10.3 million sold to Cerberus affiliates on October 7, 2016) through our remaining investing activities including the fundingat-the-market equity offering program, a public equity offering and a private placement generating proceeds of our development activities.approximately $1.2 billion.
Short-term Liquidity Requirements:As of March 31,November 3, 2017 (and after the redemption of the $350 million 6.375% Senior Unsecured
Notes due 2022 on October 7, 2017), we do not have less than $0.3 million inany debt principal payments due until the revolving credit facility comes due in 2017
2021, which we can extend for an additional 12 months — see debt maturity schedule below. At May 5,November 3, 2017, our availability under our revolving credit facility plus cashon-hand (after including the proceeds from our equity offering and factoring in the payments made for the Steward and RCCH acquisitions in May 2017) approximated $1.5$0.7 billion. We believe this liquidity and our current monthly cash receipts from rent and loan interest is sufficient to fund our operations, debt and interest obligations, our firm commitments (includingthe expected funding
requirements on our development projects),projects, and dividends in order to comply with REIT requirements for the next twelve months.
Long-term Liquidity Requirements: Exclusive of the revolving credit facility (which we can extend for an additional year to February
2022), and after the redemption of the $350 million 6.375% Senior Unsecured Notes due 2022, we do not have only $13 million inany debt principal payments due over the next five years (see debt maturity schedule below). With our liquidity at May 5,November 3, 2017 of approximately $1.5$0.7 billion (as discussed above) along with our current monthly cash receipts from rent and loan interest, we believe we have the liquidity available to us to fund our operations, debt and interest obligations, dividends in order to comply with REIT requirements, and firm commitments (includingthe expected funding requirements on our development projects)projects currently.
However, in order to fund our investment strategies, while maintaining a prudent leverage ratio, and to fund debt maturities coming due in 2022 and later years, additional capital will be needed, and we believe the following sources of capital are generally available in the market and we may access one or a combination of them:
However, there is no assurance that conditions will be favorable for such possible transactions or that our plans will be successful.
As of March 31,September 30, 2017, principal payments due on our debt (which excludesexclude the effects of any discounts, premiums, or debt issue costs recorded) are as follows (in thousands):
2017 | $ | 239 | $ | 350,000 | (A) | |||
2018 | 12,781 | — | ||||||
2019 | — | — | ||||||
2020 | — | — | ||||||
2021 | 380,000 | 445,359 | ||||||
Thereafter | 2,915,200 | 4,081,400 | ||||||
|
| |||||||
Total | $ | 3,308,220 | $ | 4,876,759 | ||||
|
|
(A) | The $350 million 6.375% Senior Unsecured Notes due 2022 were redeemed on October 7, 2017 with proceeds from our $1.4 billion 5.000% Senior Unsecured Notes due 2027. |
Disclosure of Contractual Obligations
We presented our contractual obligations in our Annual Report on Form10-K for the fiscal year ended December 31, 2016. Except forFor the nine months ended September 30, 2017, changes to our debt related contractual obligations included the issuance of our new Credit Facility, and the 3.325% Senior Unsecured Notes due 2025, and the 5.000% Senior Unsecured Notes due 2027, along with the redemption of our 5.750% Senior Unsecured Notes due 2020 there have been no significant changes in those obligations during the three months ended March 31, 2017.and prepayment of our $12.9 million term loan. Subsequent to September 30, 2017, we redeemed our 6.375% Senior Unsecured Notes due 2022. See Note 4 of Item 1 of this Form10-Q for more detailed information.
The following table updates our contractual obligations schedule for the new Credit Facility,debt activity, described above, for the 3.325%nine months ended September 30, 2017 along with the post September 30, 2017 early redemption of our 6.375% Senior Unsecured Notes due 2025 offering, along with the redemption of our 5.750% Senior Unsecured Notes due 20202022 (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 | ||||||||||||||||||||||||||||||
Revolving credit facility (1) | $ | 11,762 | $ | 23,524 | $ | 389,802 | $ | — | $ | 425,088 | $ | 14,287 | $ | 28,574 | $ | 450,122 | $ | — | $ | 492,983 | ||||||||||||||||||||
Term loans | 18,749 | 10,112 | 209,296 | — | 238,157 | |||||||||||||||||||||||||||||||||||
Term loan | 5,556 | 11,127 | 207,444 | — | 224,127 | |||||||||||||||||||||||||||||||||||
3.325% Senior Unsecured Notes due 2025 | 17,709 | 35,418 | 35,418 | 585,339 | 673,884 | 19,641 | 39,282 | 39,282 | 649,622 | 747,827 | ||||||||||||||||||||||||||||||
5.750% Senior Unsecured Notes due 2020 | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
6.375% Senior Unsecured Notes due 2022 | 364,381 | — | — | — | 364,381 | |||||||||||||||||||||||||||||||||||
5.000% Senior Unsecured Notes due 2027 | 39,667 | 140,000 | 140,000 | 1,785,000 | 2,104,667 |
(1) | As of |
Distribution Policy
The table below is a summary of our distributions declared during the two year period ended March 31,September 30, 2017:
Declaration Date | Record Date | Date of Distribution | Distribution per Share | Record Date | Date of Distribution | Distribution per Share | ||||||||||
August 17, 2017 | September 14, 2017 | October 12, 2017 | $ | 0.24 | ||||||||||||
May 25, 2017 | June 15, 2017 | July 14, 2017 | $ | 0.24 | ||||||||||||
February 16, 2017 | March 16, 2017 | April 13, 2017 | $ | 0.24 | March 16, 2017 | April 13, 2017 | $ | 0.24 | ||||||||
November 10, 2016 | December 8, 2016 | January 12, 2017 | $ | 0.23 | December 8, 2016 | January 12, 2017 | $ | 0.23 | ||||||||
August 18, 2016 | September 15, 2016 | October 13, 2016 | $ | 0.23 | September 15, 2016 | October 13, 2016 | $ | 0.23 | ||||||||
May 19, 2016 | June 16, 2016 | July 14, 2016 | $ | 0.23 | June 16, 2016 | July 14, 2016 | $ | 0.23 | ||||||||
February 19, 2016 | March 17, 2016 | April 14, 2016 | $ | 0.22 | March 17, 2016 | April 14, 2016 | $ | 0.22 | ||||||||
November 12, 2015 | December 10, 2015 | January 14, 2016 | $ | 0.22 | December 10, 2015 | January 14, 2016 | $ | 0.22 | ||||||||
August 20, 2015 | September 17, 2015 | October 15, 2015 | $ | 0.22 | ||||||||||||
May 14, 2015 | June 11, 2015 | July 9, 2015 | $ | 0.22 |
We intend to pay to our stockholders, within the time periods prescribed by the Internal Revenue Code (“Code”), all or substantially all of our annual taxable income, including taxable gains (if any) from the sale of real estate and recognized gains on the sale of securities. It is our policy to make sufficient cash distributions to stockholders in order for us to maintain our status as a REIT under the Code and to avoid corporate income and excise taxes on undistributed income. See Note 4 to our condensed consolidated financial statements in Item 1 to this Form10-Q for any restrictions placed on dividends by our existing credit facility.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. We may or may not elect to use financial derivative instruments to hedge interest rate or foreign currency exposure. For interest rate hedging, these decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. For foreign currency hedging, these decisions are principally based on how our investments are financed, the long-term nature of our investments, the need to repatriate earnings back to the U.S. and the general trend in foreign currency exchange rates.
In addition, the value of our facilities will be subject to fluctuations based on changes in local and regional economic conditions and changes in the ability of our tenants to generate profits, all of which may affect our ability to refinance our debt, if necessary. The changes in the value of our facilities would be impacted also by changes in “cap” rates, which is measured by the current base rent divided by the current market value of a facility.
Our primary exposure to market risks relates to fluctuations in interest rates and foreign currency. The following analyses present the sensitivity of the market value, earnings and cash flows of our significant financial instruments to hypothetical changes in interest rates and exchange rates as if these changes had occurred. The hypothetical changes chosen for these analyses reflect our view of changes that are reasonably possible over aone-year period. These forward looking disclosures are selective in nature and only address the potential impact from these hypothetical changes. They do not include other potential effects which could impact our business as a result of changes in market conditions. In addition, they do not include measures we may take to minimize our exposure such as entering into future interest rate swaps to hedge against interest rate increases on our variable rate debt.
Interest Rate Sensitivity
For fixed rate debt, interest rate changes affect the fair market value but do not impact net income to common stockholders or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact net income to common stockholders and cash flows, assuming other factors are held constant. At March 31,September 30, 2017, our outstanding debt totaled $3.3$4.8 billion, which consisted of fixed-rate debt of approximately $2.7$4.2 billion and variable rate debt of $0.6 billion. If market interest rates increase by 1%, the fair value of our fixed rate debt at March 31,September 30, 2017 would decrease by $6.2$8.0 million. Changes in the fair value of our fixed rate debt will not have any impact on us unless we decided to repurchase the debt in the open market.
If market rates of interest on our variable rate debt increase by 1%, the increase in annual interest expense on our variable rate debt would decrease future earnings and cash flows by $0.1$0.2 million per year. If market rates of interest on our variable rate debt decrease by 1%, the decrease in interest expense on our variable rate debt would increase future earnings and cash flows by $0.1$0.2 million per year. This assumes that the average amount outstanding under our variable rate debt for a year is $0.6 billion, the balance of such variable rate debt at March 31,September 30, 2017.
Foreign Currency Sensitivity
With our investments in Germany and throughout Europe, we are subject to fluctuations in the euro and British pound to U.S. dollar currency exchange rates. Increases or decreases in the value of the euro to U.S. dollar and the British pound to U.S. dollar exchange rates may impact our financial condition and/or our results of operations. Based solely on operating resultsto-date in 2017 and on an annualized basis, if the Euroeuro exchange rate were to change by 5%, our FFO would change by approximately $3.5$4.0 million. Based solely on operating resultsto-date in 2017 and on an annualized basis, if the British pound exchange rate were to change by 5%, our FFO would change by less than $0.2 million.
Item 4. Item 4. Controls and Procedures.
Medical Properties Trust, Inc. and MPT Operating Partnership, L.P.
We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required byRule 13a-15(b), under the Securities Exchange Act of 1934, as amended, we have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be disclosed by us in the reports that we file with the SEC.
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 1. | Legal Proceedings. |
The information contained in Note 79 “Contingencies” of Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated by reference into this Item 1.
Item 1A. | Risk Factors. |
Except to the extent set forth below or as otherwise disclosed in this Quarterly Report on Form 10-Q, there have been no material changes to the Risk Factors as presented in our Annual Report on Form10-K for the year ended December 31, 2016.
Our revenues will beare dependent upon our relationship with and success of our largest tenants, Steward, Prime, MEDIAN, Ernest, RCCH and Adeptus Health.
As of March 31,September 30, 2017, affiliates of Steward, MEDIAN, Prime, MEDIAN, Ernest, RCCH and Adeptus Health represent 20.8%represented 36.8%, 15.0%12.9%, 13.5%12.0%, 8.4%6.7%, 6.8%5.4% and 5.7%4.5%, respectively, of our total gross assets.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.
Our tenants operate in the healthcare industry, which is highly regulated by federal, state, and local laws and changes in regulations may negatively impact our tenants’ operations until they are able to make the appropriate adjustments to their business. For example, recent modifications to regulations concerning patient criteria and reimbursement for long-term acute care hospitals, or LTACHs, have resulted in volume and profitability declines in certain facilities operated by Ernest.
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.
On April 19, 2017,Our tenants experience operational challenges from time-to-time, and this can be even more of a risk for those tenants that grow via acquisitions in a short time frame like Steward, Prime, Adeptus Health filed voluntary petitions for relief under chapter 11and 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 has received a notice of the Bankruptcy Code in the U.S. Bankruptcy Court for the Northern Districtdefault from its lenders related to its failure to furnish its 2016 financials on a timely basis. As a result of Texas, Dallas Division, to pursue a chapter 11 reorganization plan (the “Plan”). Pursuant tothese developments, S&P has downgraded Prime’s corporate credit rating and subject to the terms of the Plan, on the effective date of the Plan, among other things, all of Adeptus Health’s existing facility leases with us will be assumed by Deerfield,senior secured term loan credit rating. These financial and in accordance with section 365(b) of the Bankruptcy Code, all cure amounts due and owing to the MPT lessors under such leases shall be paid. Any failure of Adeptus Health to achieve a successful restructuring in bankruptcy could affectoperational setbacks affecting Prime may adversely impact its ability to pay us rentmake required lease and therefore haveinterest payments to us.
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 significant adverse effect on our financial condition and resultstimely manner, operators can be negatively impacted whether it be through write-offs of operations.uncollectible accounts receivable (similar to Prime’s expected write-offs) or even insolvency in certain extreme cases.
An
Any further adverse result to any of Steward, Prime, MEDIAN, Ernest, Prime,RCCH or Adeptus Health or one of our larger tenants 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 further one of these tenants files for bankruptcy protection, we may not be able to collect any pre-filing amounts owed to us by such tenant. In addition, in a bankruptcy proceeding, such tenant may terminate our lease(s), in which could negatively affectcase 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 any or all of our abilitylosses. If we are ultimately required to service our debtfind one or more tenant-operators to lease one or more properties currently leased by such tenant, we may face delays and make distributions to our stockholders.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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
(a) | None. |
(b) | Not applicable. |
(c) |
Period | Total number of shares purchased | Average price per share | Total number of shares purchased as part of publicly announced programs | Approximate dollar value of shares that may yet be purchased under the plans or programs | ||||||||||||
March 1 – March 31 | 41,270 | $ | 12.46 | — | N/A |
Share purchased from William G. McKenzie, a director, at the then-current market price.
Item 3. Defaults Upon Senior Securities.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. Mine Safety Disclosures.
Item 4. | Mine Safety Disclosures. |
None.
Item 5. | Other Information. |
(a) | None. |
(b) | None. |
Item 6. | Exhibits. |
Exhibit Number | Description | |
| ||
10.1* | Joinder and | |
10.2* | Joinder and Amendment to Real Estate Loan Agreement, dated as of September 29, 2017, by and among certain Affiliates of MPT Operating Partnership, L.P. and certain Affiliates of Steward Health Care System LLC. | |
31.1* | Certification of Chief Executive Officer pursuant to Rule13a-14(a) under the Securities Exchange Act of 1934. (Medical Properties Trust, Inc.) | |
31.2* | Certification of Chief Financial Officer pursuant to Rule13a-14(a) under the Securities Exchange Act of 1934. (Medical Properties Trust, Inc.) | |
31.3* | Certification of Chief Executive Officer pursuant to Rule13a-14(a) under the Securities Exchange Act of 1934. (MPT Operating Partnership, L.P.) | |
31.4* | Certification of Chief Financial Officer pursuant to Rule13a-14(a) under the Securities Exchange Act of 1934. (MPT Operating Partnership, L.P.) | |
32.1** | Certification of Chief Executive Officer and Chief Financial Officer pursuant toRule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Medical Properties Trust, Inc.) | |
32.2** | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (MPT Operating Partnership, L.P.) | |
Exhibit 101.INS | XBRL Instance Document | |
Exhibit 101.SCH | XBRL Taxonomy Extension Schema Document | |
Exhibit 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
Exhibit 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
Exhibit 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
Exhibit 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
** |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ||
| ||
| ||
|
Date: May 10, 2017
* | Filed herewith. |
** | Furnished herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MEDICAL PROPERTIES TRUST, INC.
By: | /s/ J. Kevin Hanna | |
J. Kevin Hanna | ||
Vice President, Controller, Assistant Treasurer, and Chief Accounting Officer (Principal Accounting Officer) |
MPT OPERATING PARTNERSHIP, L.P.
By: | /s/ J. Kevin Hanna | |
J. Kevin Hanna | ||
Vice President, Controller, Assistant | ||
Treasurer, and Chief Accounting Officer | ||
of the sole member of the general partner | ||
of MPT Operating Partnership, L.P. | ||
(Principal Accounting Officer) |
Date: November 9, 2017
3347