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 JuneSeptember 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:

 

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” inRule 12b-2 of the Exchange Act.

 

Large accelerated filer  (Medical  (Medical Properties Trust, Inc. only)  Accelerated filer 
Non-accelerated filer  

(MPT  (MPT Operating Partnership, L.P. only)

(Do

Smaller reporting company
  (Do not check if a smaller reporting company)

  

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 August 4,November 3, 2017, Medical Properties Trust, Inc. had 364,083,580364,156,080 shares of common stock, par value $0.001, outstanding.

 

 

 


EXPLANATORY NOTE

This report combines the Quarterly Reports on Form10-Q for the three and sixnine months ended JuneSeptember 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 JUNESEPTEMBER 30, 2017

Table of Contents

 

   Page 

PART I — FINANCIAL INFORMATION

   4 

Item 1 Financial Statements

   4 

Medical Properties Trust, Inc. and Subsidiaries

  

Condensed Consolidated Balance Sheets at JuneSeptember  30, 2017 and December 31, 2016

   4 

Condensed Consolidated Statements of Net Income for the Three Months and SixNine Months Ended JuneSeptember 30, 2017 and 2016

   5 

Condensed Consolidated Statements of Comprehensive Income for the Three Months and SixNine Months Ended JuneSeptember 30, 2017 and 2016

   6 

Condensed Consolidated Statements of Cash Flows for the SixNine Months Ended JuneSeptember 30, 2017 and 2016

   7 

MPT Operating Partnership, L.P. and Subsidiaries

  

Condensed Consolidated Balance Sheets at JuneSeptember  30, 2017 and December 31, 2016

   8 

Condensed Consolidated Statements of Net Income for the Three Months and SixNine Months Ended JuneSeptember 30, 2017 and 2016

   9 

Condensed Consolidated Statements of Comprehensive Income for the Three Months and SixNine Months Ended JuneSeptember 30, 2017 and 2016

   10 

Condensed Consolidated Statements of Cash Flows for the SixNine Months Ended JuneSeptember 30, 2017 and 2016

   11 

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

  

Notes to Condensed Consolidated Financial Statements

   12 

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

   30 

Item 3 Quantitative and Qualitative Disclosures about Market Risk

   4241 

Item 4 Controls and Procedures

   4342 

PART II — OTHER INFORMATION

   4443 

Item 1 Legal Proceedings

   4443 

Item 1A Risk Factors

   4443 

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

   4644 

Item 3 Defaults Upon Senior Securities

   4644 

Item 4 Mine Safety Disclosures

   4644 

Item 5 Other Information

   4644 

Item 6 Exhibits

   47

SIGNATURE

4945 

INDEX TO EXHIBITS

   5046

SIGNATURE

47 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

Item 1.Financial Statements.

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

  June 30,
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

  $4,976,129  $4,317,866   $5,795,286  $4,317,866 

Mortgage loans

   1,062,558  1,060,400    1,777,555  1,060,400 

Net investment in direct financing leases

   693,243  648,102    695,829  648,102 
  

 

  

 

   

 

  

 

 

Gross investment in real estate assets

   6,731,930  6,026,368    8,268,670  6,026,368 

Accumulated depreciation and amortization

   (384,826 (325,125   (418,880 (325,125
  

 

  

 

   

 

  

 

 

Net investment in real estate assets

   6,347,104  5,701,243    7,849,790  5,701,243 

Cash and cash equivalents

   236,364  83,240    188,224  83,240 

Interest and rent receivables

   68,537  57,698    105,817  57,698 

Straight-line rent receivables

   147,755  116,861    166,142  116,861 

Other loans

   152,968  155,721    151,709  155,721 

Other assets

   375,109  303,773    465,358  303,773 
  

 

  

 

   

 

  

 

 

Total Assets

  $7,327,837  $6,418,536   $8,927,040  $6,418,536 
  

 

  

 

   

 

  

 

 

Liabilities and Equity

      

Liabilities

      

Debt, net

  $3,221,054  $2,909,341   $4,832,264  $2,909,341 

Accounts payable and accrued expenses

   219,527  207,711    180,631  207,711 

Deferred revenue

   20,108  19,933    18,906  19,933 

Lease deposits and other obligations to tenants

   34,943  28,323    54,035  28,323 
  

 

  

 

   

 

  

 

 

Total Liabilities

   3,495,632  3,165,308    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 — 364,020 shares at June 30, 2017 and 320,514 shares at December 31, 2016

   364  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

   4,327,733  3,775,336    4,330,495  3,775,336 

Distributions in excess of net income

   (457,419 (434,114   (468,473 (434,114

Accumulated other comprehensive loss

   (52,591 (92,903   (35,165 (92,903

Treasury shares, at cost

   (777 (262   (777 (262
  

 

  

 

   

 

  

 

 

Total Medical Properties Trust, Inc. Stockholders’ Equity

   3,817,310  3,248,378    3,826,444  3,248,378 

Non-controlling interests

   14,895  4,850    14,760  4,850 
  

 

  

 

   

 

  

 

 

Total Equity

   3,832,205  3,253,228    3,841,204  3,253,228 
  

 

  

 

   

 

  

 

 

Total Liabilities and Equity

  $7,327,837  $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 June 30,
 For the Six Months
Ended June 30,
   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 2017 2016 

Revenues

         

Rent billed

 $103,447  $77,960  $200,210  $152,021   $110,930  $82,387  $311,140  $234,408 

Straight-line rent

 16,277  8,551  29,056  16,768    17,505  9,741  46,561  26,509 

Income from direct financing leases

 18,312  13,552  36,192  32,503    19,115  14,678  55,307  47,181 

Interest and fee income

 28,771  26,237  57,746  60,007    29,030  19,749  86,776  79,756 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total revenues

 166,807  126,300  323,204  261,299    176,580  126,555  499,784  387,854 

Expenses

         

Real estate depreciation and amortization

 29,493  22,832  57,079  43,974    31,915  23,876  88,994  67,850 

Impairment charges

    7,375     7,375    —    (80  —    7,295 

Property-related

 1,153  784  2,481  1,685    1,519  (93 4,000  1,592 

Acquisition expenses

 10,806  4,767  13,562  3,702    7,434  2,677  20,996  6,379 

General and administrative

 15,079  12,045  28,276  23,516    15,011  12,305  43,287  35,821 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total operating expenses

 56,531  47,803  101,398  80,252    55,879  38,685  157,277  118,937 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Operating income

 110,276  78,497  221,806  181,047    120,701  87,870  342,507  268,917 

Other income (expense)

         

Interest expense

 (39,710 (41,501 (77,739 (80,870   (42,759 (40,262 (120,498 (121,132

Gain on sale of real estate and other asset dispositions, net

    16,638  7,413  16,678    18  44,616  7,431  61,294 

Earnings (loss) from equity and other interests

 2,800  1,200  4,514  (3,801   3,384  1,245  7,898  (2,556

Unutilized financing fees/debt refinancing costs

 (751    (14,380 (4   (4,414 (22,535 (18,794 (22,539

Other income (expense)

 567  (546 620  (217   481  99  1,101  (118

Income tax benefit (expense)

 614  (364 (253 (683

Income tax expense

   (530 (490 (783 (1,173
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net other expense

 (36,480 (24,573 (79,825 (68,897   (43,820 (17,327 (123,645 (86,224
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Income from continuing operations

 73,796  53,924  141,981  112,150    76,881  70,543  218,862  182,693 

Loss from discontinued operations

          (1   —     —     —    (1
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net income

 73,796  53,924  141,981  112,149    76,881  70,543  218,862  182,692 

Net income attributable tonon-controlling interests

 (381 (200 (596 (498   (417 (185 (1,013 (683
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net income attributable to MPT common stockholders

 $73,415  $53,724  $141,385  $111,651   $76,464  $70,358  $217,849  $182,009 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Earnings per common share — basic

         

Income from continuing operations attributable to MPT common stockholders

 $0.21  $0.23  $0.42  $0.47   $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  $0.23  $0.42  $0.47   $0.21  $0.29  $0.63  $0.75 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Weighted average shares outstanding — basic

 349,856  238,082  335,456  237,796    364,315  246,230  345,076  240,607 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Earnings per common share — diluted

         

Income from continuing operations attributable to MPT common stockholders

 $0.21  $0.22  $0.42  $0.47   $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  $0.22  $0.42  $0.47   $0.21  $0.28  $0.63  $0.75 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Weighted average shares outstanding — diluted

 350,319  239,008  335,871  238,413    365,046  247,468  345,596  241,432 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Dividends declared per common share

 $0.24  $0.23  $0.48  $0.45   $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 June 30,
 For the Six Months
Ended June 30,
   For the Three Months
Ended September 30,
 For the Nine Months
Ended September 30,
 
(In thousands)  2017 2016 2017 2016   2017 2016 2017 2016 

Net income

  $73,796  $53,924  $141,981  $112,149   $76,881  $70,543  $218,862  $182,692 

Other comprehensive income:

        

Unrealized gain on interest rate swap

     825     1,640    —    854   —    2,494 

Foreign currency translation gain (loss)

   34,020  (14,683 40,312  5,904 

Foreign currency translation gain

   17,426  4,450  57,738  10,354 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total comprehensive income

   107,816  40,066  182,293  119,693    94,307  75,847  276,600  195,540 

Comprehensive income attributable tonon-controlling interests

   (381 (200 (596 (498   (417 (185 (1,013 (683
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Comprehensive income attributable to MPT common stockholders

  $107,435  $39,866  $181,697  $119,195   $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 Six Months
Ended June 30,
   For the Nine Months
Ended September 30,
 
(In thousands)  2017 2016   2017 2016 

Operating activities

      

Net income

  $141,981  $112,149   $218,862  $182,692 

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

      

Depreciation and amortization

   59,825  45,170    93,805  69,720 

Amortization of deferred financing costs and debt discount

   3,139  3,893    4,748  5,799 

Direct financing lease interest accretion

   (4,690 (4,766   (7,276 (6,757

Straight-line rent revenue

   (30,173 (17,268   (47,678 (27,009

Share-based compensation

   4,377  4,152    7,148  5,832 

Gain from sale of real estate and other asset dispositions, net

   (7,413 (16,678   (7,431 (61,294

Impairment charges

     7,375    —    7,295 

Straight-line rent and otherwrite-off

   1,117  3,063    1,117  3,063 

Unutilized financing fees/debt refinancing costs

   14,380  4    18,794  22,539 

Other adjustments

   (5,747 (6,605   (7,152 (8,398

Changes in:

      

Interest and rent receivables

   (10,786 (2,743   (14,613 (12,790

Accounts payable and accrued expenses

   (11,126 9,544    (40,378 (12,403
  

 

  

 

   

 

  

 

 

Net cash provided by operating activities

   154,884  137,290    219,946  168,289 

Investing activities

      

Cash paid for acquisitions and other related investments

   (600,781 (109,991   (2,152,069 (213,100

Net proceeds from sale of real estate

   64,335  89,165    64,362  198,767 

Principal received on loans receivable

   5,188  705,501    6,760  804,809 

Investment in loans receivable

   (3,574 (96,504   (18,574 (102,909

Construction in progress and other

   (36,002 (101,113   (52,953 (139,336

Investment in unsecured senior notes

     (50,000   —    (50,000

Proceeds from sale of unsecured senior notes

     50,000    —    50,000 

Other investments, net

   (67,101 (6,952   (73,982 (52,701
  

 

  

 

   

 

  

 

 

Net cash (used for) provided by investing activities

   (637,935 480,106    (2,226,456 495,530 

Financing activities

      

Proceeds from term debt

   955,280  500,000    2,355,280  1,000,000 

Payments of term debt

   (675,279 (147   (688,221 (515,221

Revolving credit facilities, net

   (39,911 (1,075,000   155,089  (1,100,000

Distributions paid

   (151,692 (104,788   (239,211 (160,060

Lease deposits and other obligations to tenants

   6,669  9,593    (7,467 13,784 

Proceeds from sale of common shares, net of offering costs

   548,063  44,306    548,055  1,024,088 

Debt issuance costs paid and other financing activities

   (16,543 (8,465   (27,167 (31,317
  

 

  

 

   

 

  

 

 

Net cash provided by (used for) financing activities

   626,587  (634,501

Net cash provided by financing activities

   2,096,358  231,274 
  

 

  

 

   

 

  

 

 

Increase (decrease) in cash and cash equivalents for period

   143,536  (17,105

Increase in cash and cash equivalents for period

   89,848  895,093 

Effect of exchange rate changes

   9,588  3,125    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

  $236,364  $181,561   $188,224  $1,094,917 
  

 

  

 

   

 

  

 

 

Interest paid

  $63,371  $57,118   $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

  $87,519  $55,272 

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

 

  June 30,
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

  $4,976,129  $4,317,866   $5,795,286  $4,317,866 

Mortgage loans

   1,062,558  1,060,400    1,777,555  1,060,400 

Net investment in direct financing leases

   693,243  648,102    695,829  648,102 
  

 

  

 

   

 

  

 

 

Gross investment in real estate assets

   6,731,930  6,026,368    8,268,670  6,026,368 

Accumulated depreciation and amortization

   (384,826 (325,125   (418,880 (325,125
  

 

  

 

   

 

  

 

 

Net investment in real estate assets

   6,347,104  5,701,243    7,849,790  5,701,243 

Cash and cash equivalents

   236,364  83,240    188,224  83,240 

Interest and rent receivables

   68,537  57,698    105,817  57,698 

Straight-line rent receivables

   147,755  116,861    166,142  116,861 

Other loans

   152,968  155,721    151,709  155,721 

Other assets

   375,109  303,773    465,358  303,773 
  

 

  

 

   

 

  

 

 

Total Assets

  $7,327,837  $6,418,536   $8,927,040  $6,418,536 
  

 

  

 

   

 

  

 

 

Liabilities and Capital

      

Liabilities

      

Debt, net

  $3,221,054  $2,909,341   $4,832,264  $2,909,341 

Accounts payable and accrued expenses

   131,599  132,868    92,793  132,868 

Deferred revenue

   20,108  19,933    18,906  19,933 

Lease deposits and other obligations to tenants

   34,943  28,323    54,035  28,323 

Payable due to Medical Properties Trust, Inc.

   87,538  74,453    87,448  74,453 
  

 

  

 

   

 

  

 

 

Total Liabilities

   3,495,242  3,164,918    5,085,446  3,164,918 

Capital

      

General Partner — issued and outstanding — 3,640 units at June 30, 2017 and 3,204 units at December 31, 2016

   38,722  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 — 360,380 units at June 30, 2017 and 317,310 units at December 31, 2016

   3,831,569  3,308,235 

LTIP units — issued and outstanding — 292 units at June 30, 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

   (52,591 (92,903   (35,165 (92,903
  

 

  

 

   

 

  

 

 

Total MPT Operating Partnership, L.P. Capital

   3,817,700  3,248,768    3,826,834  3,248,768 

Non-controlling interests

   14,895  4,850    14,760  4,850 
  

 

  

 

   

 

  

 

 

Total Capital

   3,832,595  3,253,618    3,841,594  3,253,618 
  

 

  

 

   

 

  

 

 

Total Liabilities and Capital

  $7,327,837  $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 June 30,
 For the Six Months
Ended June 30,
   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 2017 2016 

Revenues

         

Rent billed

 $103,447  $77,960  $200,210  $152,021   $110,930  $82,387  $311,140  $234,408 

Straight-line rent

 16,277  8,551  29,056  16,768    17,505  9,741  46,561  26,509 

Income from direct financing leases

 18,312  13,552  36,192  32,503    19,115  14,678  55,307  47,181 

Interest and fee income

 28,771  26,237  57,746  60,007    29,030  19,749  86,776  79,756 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total revenues

 166,807  126,300  323,204  261,299    176,580  126,555  499,784  387,854 

Expenses

         

Real estate depreciation and amortization

 29,493  22,832  57,079  43,974    31,915  23,876  88,994  67,850 

Impairment charges

    7,375     7,375    —    (80  —    7,295 

Property-related

 1,153  784  2,481  1,685    1,519  (93 4,000  1,592 

Acquisition expenses

 10,806  4,767  13,562  3,702    7,434  2,677  20,996  6,379 

General and administrative

 15,079  12,045  28,276  23,516    15,011  12,305  43,287  35,821 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total operating expenses

 56,531  47,803  101,398  80,252    55,879  38,685  157,277  118,937 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Operating income

 110,276  78,497  221,806  181,047    120,701  87,870  342,507  268,917 

Other income (expense)

         

Interest expense

 (39,710 (41,501 (77,739 (80,870   (42,759 (40,262 (120,498 (121,132

Gain on sale of real estate and other asset dispositions, net

    16,638  7,413  16,678    18  44,616  7,431  61,294 

Earnings (loss) from equity and other interests

 2,800  1,200  4,514  (3,801   3,384  1,245  7,898  (2,556

Unutilized financing fees/debt refinancing costs

 (751    (14,380 (4   (4,414 (22,535 (18,794 (22,539

Other income (expense)

 567  (546 620  (217   481  99  1,101  (118

Income tax benefit (expense)

 614  (364 (253 (683

Income tax expense

   (530 (490 (783 (1,173
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net other expense

 (36,480 (24,573 (79,825 (68,897   (43,820 (17,327 (123,645 (86,224
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Income from continuing operations

 73,796  53,924  141,981  112,150    76,881  70,543  218,862  182,693 

Loss from discontinued operations

          (1   —     —     —    (1
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net income

 73,796  53,924  141,981  112,149    76,881  70,543  218,862  182,692 

Net income attributable tonon-controlling interests

 (381 (200 (596 (498   (417 (185 (1,013 (683
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net income attributable to MPT Operating Partnership partners

 $73,415  $53,724  $141,385  $111,651   $76,464  $70,358  $217,849  $182,009 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Earnings per unit — basic

         

Income from continuing operations attributable to MPT Operating Partnership partners

 $0.21  $0.23  $0.42  $0.47   $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  $0.23  $0.42  $0.47   $0.21  $0.29  $0.63  $0.75 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Weighted average units outstanding — basic

 349,856  238,082  335,456  237,796    364,315  246,230  345,076  240,607 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Earnings per unit — diluted

         

Income from continuing operations attributable to MPT Operating Partnership partners

 $0.21  $0.22  $0.42  $0.47   $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  $0.22  $0.42  $0.47   $0.21  $0.28  $0.63  $0.75 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Weighted average units outstanding — diluted

 350,319  239,008  335,871  238,413    365,046  247,468  345,596  241,432 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Dividends declared per unit

 $0.24  $0.23  $0.48  $0.45   $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 June 30,
 For the Six Months
Ended June 30,
   For the Three Months
Ended September 30,
 For the Nine Months
Ended September 30,
 
(In thousands)  2017 2016 2017 2016   2017 2016 2017 2016 

Net income

  $73,796  $53,924  $141,981  $112,149   $76,881  $70,543  $218,862  $182,692 

Other comprehensive income:

      

Unrealized gain on interest rate swap

     825     1,640    —    854   —    2,494 

Foreign currency translation gain (loss)

   34,020  (14,683 40,312  5,904 

Foreign currency translation gain

   17,426  4,450  57,738  10,354 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total comprehensive income

   107,816  40,066  182,293  119,693    94,307  75,847  276,600  195,540 

Comprehensive income attributable tonon-controlling interests

   (381 (200 (596 (498   (417 (185 (1,013 (683
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Comprehensive income attributable to MPT Operating Partnership Partners

  $107,435  $39,866  $181,697  $119,195   $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 Six Months
Ended June 30,
   For the Nine Months
Ended September 30,
 
(In thousands)  2017 2016   2017 2016 

Operating activities

      

Net income

  $141,981  $112,149   $218,862  $182,692 

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

      

Depreciation and amortization

   59,825  45,170    93,805  69,720 

Amortization of deferred financing costs and debt discount

   3,139  3,893    4,748  5,799 

Direct financing lease interest accretion

   (4,690 (4,766   (7,276 (6,757

Straight-line rent revenue

   (30,173 (17,268   (47,678 (27,009

Unit-based compensation

   4,377  4,152    7,148  5,832 

Gain from sale of real estate and other asset dispositions, net

   (7,413 (16,678   (7,431 (61,294

Impairment charges

     7,375    —    7,295 

Straight-line rent and otherwrite-off

   1,117  3,063    1,117  3,063 

Unutilized financing fees/debt refinancing costs

   14,380  4    18,794  22,539 

Other adjustments

   (5,747 (6,605   (7,152 (8,398

Changes in:

      

Interest and rent receivables

   (10,786 (2,743   (14,613 (12,790

Accounts payable and accrued expenses

   (11,126 9,544    (40,378 (12,403
  

 

  

 

   

 

  

 

 

Net cash provided by operating activities

   154,884  137,290    219,946  168,289 

Investing activities

      

Cash paid for acquisitions and other related investments

   (600,781 (109,991   (2,152,069 (213,100

Net proceeds from sale of real estate

   64,335  89,165    64,362  198,767 

Principal received on loans receivable

   5,188  705,501    6,760  804,809 

Investment in loans receivable

   (3,574 (96,504   (18,574 (102,909

Construction in progress and other

   (36,002 (101,113   (52,953 (139,336

Investment in unsecured senior notes

     (50,000   —    (50,000

Proceeds from sale of unsecured senior notes

     50,000    —    50,000 

Other investments, net

   (67,101 (6,952   (73,982 (52,701
  

 

  

 

   

 

  

 

 

Net cash (used for) provided by investing activities

   (637,935 480,106    (2,226,456 495,530 

Financing activities

      

Proceeds from term debt

   955,280  500,000    2,355,280  1,000,000 

Payments of term debt

   (675,279 (147   (688,221 (515,221

Revolving credit facilities, net

   (39,911 (1,075,000   155,089  (1,100,000

Distributions paid

   (151,692 (104,788   (239,211 (160,060

Lease deposits and other obligations to tenants

   6,669  9,593    (7,467 13,784 

Proceeds from sale of units, net of offering costs

   548,063  44,306    548,055  1,024,088 

Debt issuance costs paid and other financing activities

   (16,543 (8,465   (27,167 (31,317
  

 

  

 

   

 

  

 

 

Net cash provided by (used for) financing activities

   626,587  (634,501

Net cash provided by financing activities

   2,096,358  231,274 
  

 

  

 

   

 

  

 

 

Increase (decrease) in cash and cash equivalents for period

   143,536  (17,105

Increase in cash and cash equivalents for period

   89,848  895,093 

Effect of exchange rate changes

   9,588  3,125    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

  $236,364  $181,561   $188,224  $1,094,917 
  

 

  

 

   

 

  

 

 

Interest paid

  $63,371  $57,118   $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

  $87,519  $55,272 

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 (“TRSs”). Our TRSs 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. All 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. 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 sixnine month periods ended JuneSeptember 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 sixnine months ended JuneSeptember 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. Entities may use a fullThis standard is effective for us beginning January 1, 2018, and we plan to adopt under the modified retrospective approach or report the cumulative effect as of the date of adoption. On April 1, 2015, the FASB proposed deferring the effective date of this standard by one year to December 15, 2017, for annual reporting periods beginning after that date. The FASB also proposed permitting early adoption of the standard, but not before the original effective date of December 15, 2016.approach. We are still evaluating this standard but 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.

Leases

In February 2016, 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 FASB issued ASU 2016-02, “Leases”, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leasesguidance is based on the principletransfer of control versus whether or not the lease is effectivelyseller 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 financed purchase by the lessee. This classification will determine whether lease expense is recognized basedgain on an effective interest method or on a straight line basis over the term of the lease. A lessee is alsoreal estate sold in prior years that was 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 todeferred under 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. The ASU is not effective for us until January 1, 2019, with early adoption permitted. We are continuing to evaluate this standard and the impact to us from both a lessor and lessee perspective.accounting guidance.

Clarifying the Definition of a Business

In January 2017, the FASB issued ASUNo. 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 million to $2 million per quarter.

ReclassificationsLeases

Certain amountsIn February 2016, the FASB issued ASU 2016-02, “Leases”, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either 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.

We 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 JuneSeptember 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 JuneSeptember 30, 2017 are presented below (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

  $328,111   Mortgage and other loans  $236,174   $331,857   Mortgage and other loans  $235,287 

Equity investments

  $12,922   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) less any liabilities.
(2)Carrying amount reflects the net book value of our loan or equity interest only in the VIE.

For the VIE types above, we do not consolidate the VIE because we do not have the ability to control the activities (such as theday-to-day healthcare operations of our borrower or investees) that most significantly impact the VIE’s economic performance. As of JuneSeptember 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 7 for additional description of the nature, purpose and activities of our more significant VIEs and interests therein, such as Ernest Health, Inc. (“Ernest”).

3. Real Estate and Lending Activities

Acquisitions

We acquired the following assets (in thousands):

 

  Six Months
Ended June 30,
   Nine Months
Ended September 30,
 
  2017   2016   2017   2016 

Assets Acquired

        

Land and land improvements

  $86,434   $6,382   $196,094   $13,602 

Building

   420,731    36,455    987,442    125,744 

Intangible lease assets — subject to amortization (weighted average useful life 28.4 years for 2017 and 25.8 years for 2016)

   54,044    4,154 

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    40,450    63,000 

Mortgage loans

   700,000    —   

Equity investments

   100,000    —   

Liabilities assumed

   (878   —      (878   —   
  

 

   

 

   

 

   

 

 

Total assets acquired

  $600,781   $109,991   $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 the 2017 acquisitions and certain acquisitions made in the second halflast quarter of 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

MedianSteward Transactions

On June 22,September 29, 2017, we acquired anfrom IASIS Healthcare LLC (“IASIS”) a portfolio of ten acute care hospitalhospitals 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 aan aggregate purchase price of €19.4€39.2 million, (€18.6in addition to 11 rehabilitation hospitals in Germany that we acquired in the second quarter of which has been funded to date). This property is2017 for an aggregate purchase price of €127 million. These 13 properties are leased to affiliates of Median Kliniken S.a.r.l. (“MEDIAN”), one of our current tenants, pursuant to an existing27-year master lease agreement that ends in December 2042 with terms similar to the master lease agreement reached with MEDIAN in 2015.

During the second quarter of 2017, we acquired 11 rehabilitation hospitals in Germany for an aggregate purchase price of €127 million. These 11 properties are leased to affiliates of MEDIAN, pursuant to a third master lease that has terms similar to the original master lease in 2015 with a fixed term ending in August 2043.2043 with annual escalators at the greater of one percent or 70% of German consumer price index. These acquisitions are partthe 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. See Note 10

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 update onexisting master lease agreement that ends in December 2042 with annual escalators at the final two properties totaling €39.2 million that closed after June 30, 2017.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 pursuant to the original 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, a218-bed acute care hospital located in Wheeling, West Virginia, and the East Ohio Regional Hospital, a139-bed acute care hospital in Martins Ferry, Ohio, from Ohio Valley Health Services, anot-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 a15-year initial term with 2% annual minimum rent increases and three5-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 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 Health Care System LLC (“Steward”), pursuant to the existing long-term master lease entered into with Steward in October 2016.

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 is leased to RCCH, Healthcare Partners (“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 $8.2$16.7 million of revenue and $6.0$12.7 million of income (excluding related acquisition expenses and taxes) for the three months ended JuneSeptember 30, 2017, and $8.4$25.1 million of revenue and $6.1$18.8 million of income (excluding related acquisition expenses and taxes) for the sixnine months ended JuneSeptember 30, 2017. In addition, we expensed $9.1$5.4 million and $9.6$15.6 million of acquisition-related costs on these 2017 acquisitions for the three and sixnine months ended JuneSeptember 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 a15-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.

On June 22, 2016, we closed on the last property None of the original €688additional $30 million MEDIAN transaction for a purchase price of €41.6 million. Upon acquisition, this property became subjecthas been funded to an existing master lease between us and affiliates of MEDIAN. The master lease had an initial start date of July 1, 2015, an initial term of 27 years, and provided for an initial GAAP lease rate of 9.3%, with annual escalators at the greater of one percent or 70% of the German consumer price index.date.

From the respective acquisition dates, the properties acquired induring the nine months ended September 30, 2016, contributed $1.1$4.6 million and $3.8 million of revenue and income (excluding related acquisition expenses and taxes)expenses), respectively, for the three and six months ended JuneSeptember 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 boththe nine months ended September 30, 2016.

Pro Forma Information

The following unaudited supplemental pro forma operating data is presented for the three and sixnine months ended JuneSeptember 30, 2016.2017 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 first sixnine months of 2017, we completed construction on the following facilities:

 

Adeptus Health, Inc. (“Adeptus Health”) – We completed four acute care facilities for this tenant during 2017 totaling approximately $68 million in development costs. These facilities are leased pursuant to an existing long-term master lease.

 

IMED Group (“IMED”) – Our general acute facility located in Valencia, Spain opened on March 31, 2017, and is being leased to IMED pursuant to a long-term master lease.30-year lease that provides for quarterly fixed rent payments beginning six months from the lease start date with annual increases of 1% beginning April 1, 2020. Our ownership in this facility is effected through a joint venture between us and clients of AXA Real Estate, in which we own a 50% interest. Our share of the aggregate purchase and development cost of this facility is approximately €21 million.

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 initial15-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):

 

Property

  Commitment   Costs
Incurred
as of
June 30, 2017
   Estimated
Completion
Date
 

Ernest (Flagstaff)

  $28,067   $11,351    1Q 2018 

Circle (Birmingham)

   42,017    7,088    4Q 2018 
  

 

 

   

 

 

   
  $70,084   $18,439   
  

 

 

   

 

 

   

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. 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 awrite-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 ofnon-cash charges that included thewrite-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 Assets 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 the first half of 2016 (excluding loans repaid in the Capella Transaction) for the periods presented (in thousands):

 

  For the Three Months   For the Six Months 
  Ended June 30,   Ended June 30,   For the Three Months
Ended September 30,
   For the Nine Months
Ended September 30,
 
  2017   2016   2017   2016   2017   2016   2017   2016 

Revenues

  $—     $1,139   $—     $3,700   $—     $244   $—     $7,851 

Real estate depreciation and amortization

   —      (357   —      (857   —      —      —      (1,754

Property-related expenses

   —      (67   —      (106   —      —      —      (114

Other income (expense)

   —      (9   —      (68   —      45    —      (23
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Income from real estate dispositions, net

  $—     $706   $—     $2,669   $—     $289   $—     $5,960 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Leasing Operations

At JuneSeptember 30, 2017, leases on two Alecto facilities, 15 Ernest facilities and 10 Prime facilities are accounted for as DFLs. The components of our net investment in DFLs consisted of the following (in thousands):

 

  As of June 30,
2017
   As of December 31,
2016
   As of September 30,
2017
   As of December 31,
2016
 

Minimum lease payments receivable

  $2,329,161   $2,207,625   $2,312,621   $2,207,625 

Estimated residual values

   448,098    407,647    448,098    407,647 

Less: Unearned income

   (2,084,016   (1,967,170   (2,064,890   (1,967,170
  

 

   

 

   

 

   

 

 

Net investment in direct financing leases

  $693,243   $648,102   $695,829   $648,102 
  

 

   

 

   

 

   

 

 

Adeptus Health

On April 4, 2017, we announced that 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, a current tenant and operator of facilities representing less than 5% of our total gross assets. In furtherance of the restructuring, Adeptus Health and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code on April 19, 2017. Funds advised by Deerfield acquired Adeptus Health’s outstanding bank debt and Deerfield has agreed to provide additional financing, along with operational and managerial support, to Adeptus Health as part of the restructuring.

The Adeptus Health restructuring and terms of our agreement with Deerfield provideprovided for the payment to us of 100% of the rent payable during the restructuring and the assumption by Deerfield of approximately 80% of the facilities underall our master lease agreementleases and related agreements with Adeptus Health at current rental rates. Through August 4,November 3, 2017, Adeptus Health is current 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 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 have agreedplan 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 post bankruptcy $3.1 million concessionnew operator is complete, (b) two years following the Confirmation Effective Date (for one facility), (c) one year following the Confirmation Effective Date (for seven facilities), (d) six months following the Confirmation Effective Date (for three facilities), and (e) three months following the Confirmation 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 reduce our rental revenue by approximately $220 thousand annually overnot recognize a loss in the remaining14-year initial lease term.future, we believe the sale or re-leasing of the assets related to these 16 facilities will not result in any material loss or impairment.

On April 4, 2017, we also announced that our Louisiana freestanding emergency facilities then-operated by Adeptus Health (with a total budgeted investment of approximately $24.5 million) had beenre-leased to Ochsner Clinic Foundation (“Ochsner”), a health care system in the New Orleans area. The leases provideWe incurred a non-cash charge of $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 agreed to an amended and restated lease that provided for 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 also hascost, as well as the right to purchase the freestanding emergency facilities (i) at our cost within two yearsaddition of rent commencement or (ii) for the greater of fair market value or our cost after suchtwo-year period. 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.

In addition, we expect tore-lease or sell 13 Texas facilities that are not being assumed as part of the Adeptus Health restructuring representing approximately 15% of the current Adeptus Health master-leased portfolio. These lease or sale transactions are expected to be completed by the end of 2018, and Adeptus Health is obligated to pay contractual rent to us under the master lease until the earlier of (a) transition to a new operator is complete, or (b) one year following Adeptus Health’s emergence from bankruptcy (for seven of the Texas facilities) or 90 days following Adeptus Health’s emergence from bankruptcy (for the remainder of the Texas facilities).three five-year renewal options.

Hoboken Facility

In the first half of 2017, a subsidiary of the operator of our Hoboken facility acquired 20% of our subsidiary that owns the real estate for $10 million, which increasesincreased its interest in our real estate entity to 30%. This transaction is reflected in the non-controlling interest line of our condensed consolidated balance sheets.

Loans

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

 

  As of
June 30, 2017
   As of
December 31, 2016
   As of
September 30, 2017
   As of
December 31, 2016
 

Mortgage loans

  $1,062,558   $1,060,400   $1,777,555   $1,060,400 

Acquisition loans

   120,048    121,464    119,256    121,464 

Working capital and other loans

   32,920    34,257    32,453    34,257 
  

 

   

 

   

 

   

 

 
  $1,215,526   $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 JuneSeptember 30, 2017, acquisition loans includes $114.6$114.4 million in loans to Ernest.

Concentrations of Credit Risk

Our revenue concentration for the sixnine months ended JuneSeptember 30, 2017 as compared to the prior year is as follows (dollars in thousands):

Revenue by Operator

 

  For the Six Months Ended
June 30, 2017
 For the Six Months Ended
June 30, 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

  $63,059    19.5 $58,859    22.5   94,644    18.9 89,389    23.1

Steward

   58,278    18.0  —      —   

MEDIAN

   47,744    14.8 47,745    18.3   73,793    14.8 70,242    18.1

Ernest

   35,269    10.9 33,322    12.8   53,007    10.6 50,564    13.0

Adeptus Health

   26,137    8.1 16,205    6.2   39,638    7.9 25,873    6.7

RCCH

   19,632    6.1 32,909    12.6   30,668    6.1 42,776    11.0

Other operators

   73,085    22.6 72,259    27.6   93,258    18.7 88,041    22.7
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total

  $323,204    100.0 $261,299    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 Six Months Ended
June 30, 2017
 For the Six Months Ended
June 30, 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

  $53,159    16.5 $—      —     $79,741    16.0 $—      —   

Texas

   49,851    15.4 48,256    18.5   74,489    14.9 72,811    18.8

California

   33,123    10.3 33,187    12.7   49,681    9.9 49,724    12.8

New Jersey

   21,852    6.8 18,243    7.0   32,756    6.6 28,398    7.3

Arizona

   15,542    4.8 11,722    4.5   23,902    4.8 17,678    4.6

All other states

   93,080    28.7 99,931    38.2   147,606    29.5 143,289    36.9
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total U.S.

  $266,607    82.5 $211,339    80.9  $408,175    81.7 $311,900    80.4

Germany

  $54,576    16.9 $47,745    18.3  $88,525    17.7 $72,718    18.8

United Kingdom, Italy, and Spain

   2,021    0.6 2,215    0.8   3,084    0.6 3,236    0.8
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total International

  $56,597    17.5 $49,960    19.1  $91,609    18.3 $75,954    19.6
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Grand Total

  $323,204    100.0 $261,299    100.0  $499,784    100.0 $387,854    100.0
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

On a total gross asset basis, which is total assets before accumulated depreciation/amortization, assumes all real estate binding commitments on new investments and unfunded amounts on development deals and commenced capital improvement projects are fully funded (see Notes 9 and 10 of Item 1 on this Form10-Q), and assumes cash on hand is fully used in these transactions, our concentration as of JuneSeptember 30, 2017 as compared to December 31, 2016 is as follows (dollars in thousands):

Gross Assets by Operator

 

  As of June 30, 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)

  $3,410,874    37.4 $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

   1,116,694    12.2 1,144,055    16.0   1,118,070    12.0 1,144,055    16.0

MEDIAN

   1,086,109    11.9 993,677    13.9

Ernest

   630,811    6.9 627,906    8.8   631,501    6.7 627,906    8.8

RCCH

   506,265    5.5 566,600    7.9   506,265    5.4 566,600    7.9

Other operators

   1,977,356    21.7 2,259,980    31.7   1,992,448    21.3 1,900,397    26.7

Other assets

   401,669    4.4 300,903    4.2   452,505    4.9 300,903    4.2
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total

  $9,129,778    100.0 $7,143,121    100.0  $9,355,935    100.0 $7,143,121    100.0
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

(1)Includes approximately $360 million of gross assets as of December 31, 2016 related to facilities leased to IASIS prior to it being acquired by Steward on September 29, 2017.

Gross Assets by U.S. State and Country

 

  As of June 30, 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

  $1,262,041    13.8 $1,250,000    17.5  $1,284,156    13.7 $1,250,000    17.5

Texas

   1,230,945    13.5 947,443    13.3   1,275,784    13.6 947,443    13.3

Utah

   1,083,152    11.9 107,151    1.5   1,035,793    11.1 107,151    1.5

California

   542,883    5.9 542,889    7.6   542,879    5.8 542,889    7.6

Arizona

   486,547    5.3 331,834    4.6   498,844    5.3 331,834    4.6

All other states

   2,502,791    27.4 2,234,332    31.3   2,506,538    26.8 2,234,332    31.3

Other domestic assets

   352,748    3.9 264,215    3.7   397,850    4.3 264,215    3.7
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total U.S.

  $7,461,107    81.7 $5,677,864    79.5  $7,541,844    80.6 $5,677,864    79.5

Germany

  $1,421,350    15.6 $1,281,649    17.9  $1,556,392    16.6 $1,281,649    17.9

United Kingdom, Italy, and Spain

   198,400    2.2 146,920    2.1   203,044    2.2 146,920    2.1

Other international assets

   48,921    0.5 36,688    0.5   54,655    0.6 36,688    0.5
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total International

  $1,668,671    18.3 $1,465,257    20.5  $1,814,091    19.4 $1,465,257    20.5
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Grand Total

  $9,129,778    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 3.9%3.8% of our total gross assets as of JuneSeptember 30, 2017.

4. Debt

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

 

 As of June 30, 2017 As of December 31, 2016  As of September 30, 2017 As of December 31, 2016 

Revolving credit facility(A)

 $250,210  $290,000  $445,359  $290,000 

Term loans

 212,943  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

 1,636  1,814  1,549  1,814 
 

 

  

 

  

 

  

 

 
 351,636  351,814  351,549  351,814 

5.750% Senior Unsecured Notes due 2020(A)(B)

  —    210,340   —    210,340 

4.000% Senior Unsecured Notes due 2022(A)(B)

 571,300  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(A)(B)

 571,300   —    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   —   
 

 

  

 

  

 

  

 

 
 $3,257,389  $2,941,105  $4,878,308  $2,941,105 

Debt issue costs, net

 (36,335 (31,764 (46,044 (31,764
 

 

  

 

  

 

  

 

 
 $3,221,054  $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 Euro-denominated and reflect the exchange rate at JuneSeptember 30, 2017 and December 31, 2016, respectively.

As of JuneSeptember 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

  $162   $ 350,000 (A) 

2018

   12,781    —   

2019

   —      —   

2020

   —      —   

2021

   250,210    445,359 

Thereafter

   2,992,600    4,081,400 
  

 

   

 

 

Total

  $3,255,753   $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 JuneSeptember 30, 2017, the interest rate in effect on our term loan and revolver was 2.72%2.74% and 2.46%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 $13.6$18.8 million in the first sixnine 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 JuneSeptember 30, 2017, the

dividend restriction was 95% of normalized adjusted 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 JuneSeptember 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 sixnine months ended JuneSeptember 30, 2016, we sold approximately 315 million shares of common stock under anat-the-market equity offering program, resulting in net proceeds of approximately $45$224 million, after deducting approximately $0.6$2.8 million of commissions. There is no availability under this equity offering program at JuneSeptember 30, 2017.

MPT Operating Partnership, L.P.

At JuneSeptember 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 sixnine months ended JuneSeptember 30, 2017 and 2016, the Operating Partnership issued approximately 43.1 million units and approximately 372.5 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 JuneSeptember 30, 2017. Share-based compensation expense totaled $4.4$7.1 million and $4.2$5.8 million for the sixnine months ended JuneSeptember 30, 2017 and 2016, respectively, of which $0.3$0.4 million relates to the acceleration of vestings on time-based awards previously granted to two retiringthree 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 
  June 30, 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

  $68,537   $68,698   $57,698  $57,707   $105,817   $105,803   $57,698   $57,707 

Loans (1)

   984,784    1,009,687    986,987  1,017,428    1,698,866    1,722,912    986,987    1,017,428 

Debt, net

   (3,221,054   (3,384,541   (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 JuneSeptember 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

  $115,000   $115,000    Mortgage loans   $115,000   $115,000    Mortgage loans 

Acquisition and other loans

   115,742    115,742    Other loans    115,398    115,398    Other loans 

Equity investments

   3,300    3,300    Other assets    3,300    3,300    Other assets 
  

 

   

 

     

 

   

 

   
  $234,042   $234,042     $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 JuneSeptember 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
   Estimated Increase (Decrease)
In Fair Value
 

+100 basis points

  $(52  $(51

- 100 basis points

   52    51 

Because the fair value of Ernest investments noted above approximate their original cost, we did not recognize any unrealized gains/losses during the first halfnine months of 2017 or 2016. To date, we have not received any distribution payments from our equity investment in Ernest.

8. Earnings Per Share/Common Unit

Medical Properties Trust, Inc.

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

 

  For the Three Months
Ended June 30,
   For the Three Months
Ended September 30,
 
  2017   2016   2017   2016 

Numerator:

        

Income from continuing operations

  $73,796   $53,924 

Net income

  $76,881   $70,543 

Non-controlling interests’ share in net income

   (381   (200   (417   (185

Participating securities’ share in earnings

   (100   (132   (82   (154
  

 

   

 

   

 

   

 

 

Net income, less participating securities’ share in earnings

  $73,315   $53,592   $76,382   $70,204 
  

 

   

 

   

 

   

 

 

Denominator:

        

Basic weighted-average common shares

   349,856    238,082    364,315    246,230 

Dilutive potential common shares

   463    926    731    1,238 
  

 

   

 

   

 

   

 

 

Dilutive weighted-average common shares

   350,319    239,008    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 
  

 

   

 

 

   For the Six Months
Ended June 30,
 
   2017   2016 

Numerator:

    

Income from continuing operations

  $141,981   $112,150 

Non-controlling interests’ share in continuing operations

   (596   (498

Participating securities’ share in earnings

   (225   (276
  

 

 

   

 

 

 

Income from continuing operations, less participating securities’ share in earnings

   141,160    111,376 

Loss from discontinued operations attributable to MPT common stockholders

   —      (1
  

 

 

   

 

 

 

Net income, less participating securities’ share in earnings

  $141,160   $111,375 
  

 

 

   

 

 

 

Denominator:

    

Basic weighted-average common shares

   335,456    237,796 

Dilutive potential common shares

   415    617 
  

 

 

   

 

 

 

Dilutive weighted-average common
shares

   335,871    238,413 
  

 

 

   

 

 

 

MPT Operating Partnership, L.P.

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

 

  For the Three Months
Ended June 30,
   For the Three Months
Ended September 30,
 
  2017   2016   2017   2016 

Numerator:

        

Income from continuing operations

  $73,796   $53,924 

Net income

  $76,881   $70,543 

Non-controlling interests’ share in net income

   (381   (200   (417   (185

Participating securities’ share in earnings

   (100   (132   (82   (154
  

 

   

 

   

 

   

 

 

Net income, less participating securities’ share in earnings

  $73,315   $53,592   $76,382   $70,204 
  

 

   

 

   

 

   

 

 

Denominator:

        

Basic weighted-average units

   349,856    238,082    364,315    246,230 

Dilutive potential units

   463    926    731    1,238 
  

 

   

 

   

 

   

 

 

Dilutive weighted-average units

   350,319    239,008    365,046    247,468 
  

 

   

 

   

 

   

 

 

  For the Six Months
Ended June 30,
   For the Nine Months
Ended September 30,
 
  2017   2016   2017   2016 

Numerator:

        

Income from continuing operations

  $141,981   $112,150   $218,862   $182,693 

Non-controlling interests’ share in continuing operations

   (596   (498   (1,013   (683

Participating securities’ share in earnings

   (225   (276   (307   (430
  

 

   

 

   

 

   

 

 

Income from continuing operations, less participating securities’ share in earnings

   141,160    111,376    217,542    181,580 

Loss from discontinued operations attributable to MPT Operating Partnership partners

   —      (1   —      (1
  

 

   

 

   

 

   

 

 

Net income, less participating securities’ share in earnings

  $141,160   $111,375   $217,542   $181,579 
  

 

   

 

   

 

   

 

 

Denominator:

        

Basic weighted-average units

   335,456    237,796    345,076    240,607 

Dilutive potential units

   415    617    520    825 
  

 

   

 

   

 

   

 

 

Dilutive weighted-average units

   335,871    238,413    345,596    241,432 
  

 

   

 

   

 

   

 

 

9. Commitments and Contingencies

Commitments

RCCH Commitment

On September 28, 2016, we entered into a definitive agreement to acquire one acute care hospital in Washington for a purchase price 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.

Steward Commitment

On May 18, 2017, we entered into definitive agreements to invest in a portfolio of ten acute care hospitals and one behavioral health facility currently operated by IASIS Healthcare (“IASIS”) for a combined purchase price and investment of approximately $1.4 billion. Following closing, the portfolio will be operated by Steward, which separately announced a simultaneous merger transaction with IASIS, the completion of which is a condition to our investment.

Pursuant to the terms of an asset purchase agreement with IASIS and its affiliates, dated May 18, 2017, subsidiaries of the Operating Partnership will acquire from IASIS and its affiliates all of their interests in the real estate of eight acute care hospitals and one behavioral health facility for an aggregate purchase price of $700 million. At closing, these facilities will be leased to Steward pursuant to the existing master lease agreement. In addition, pursuant to the terms of the agreement, subsidiaries of the Operating Partnership will make mortgage loans in an aggregate amount of $700 million, secured by first mortgages in two other acute care hospitals. The real estate master lease and mortgage loans will have substantially similar terms, which have an initial fixed term expiration of October 31, 2031 and include three5-year extension options, plus annual inflation protected escalators.

In addition, in conjunction with the real estate and mortgage loans transactions described above, a subsidiary of the Operating Partnership will also invest approximately $100 million in minority preferred interests of Steward. We will have no management authority or control of Steward except for certain protective rights consistent with a minority passive ownership interest, such as a limited right to approve certain extraordinary transactions.

To assist in funding the Steward commitment, if needed, we received a commitment for a new $1.0 billion term loan facility pursuant to a commitment letter with JP Morgan Chase Bank, N.A. The term loan facility, if funded, would have a maturity date of one year after the date on which it is consummated, and could be extended an additional 12 months at our option. With this commitment, we paid $4.5 million of underwriting and other fees, which will be expensed over the commitment period. Through June 30, 2017, we have expensed approximately $0.8 million as an unutilized financing fee.

Contingencies

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

10. Subsequent Events

As described in Note 3 under the heading “2017 Activity,” on July 20, 2016,On October 5, 2017, we entered into definitive agreements to acquire 20three rehabilitation hospitals in Germany for an aggregate purchase price to us of approximately €215.7 million to€80 million. Upon closing, the facilities will be leased to affiliates of MEDIAN. As of June 30, 2017, we had closedMEDIAN, pursuant to a newlong-term master lease. The lease will begin on 18the day the first property is funded, and the term will be 27 years from the funding date of the 20 facilitiesthird property. The lease provides for increases of the greater of 1% or 70% of the change in German CPI. Closing of the amounttransaction, which is expected to begin during the fourth quarter of €176.5 million. The remaining two facilities totaling €39.2 million closed in July 2017.2017, 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 Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. Such factors include, among others, the following:

 

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

 

the competitive environment in which we operate;

 

the execution of our business plan;

 

financing risks;

 

the risk that a condition to closing under the agreements governing any or all of our outstanding transactions that have not closed as of the date hereof (including the StewardRCCH and RCCHMEDIAN transactions described in Note 9)Notes 9 and 10) may not be satisfied;

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

 

acquisition and development risks;

 

potential environmental contingencies and other liabilities;

 

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

 

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

 

our ability and willingness to maintain our status as a real estate investment trust, or REIT, for U.S. federal and state income tax purposes;purposes (particularly in light of current tax reform considerations);

 

our ability to attract and retain qualified personnel;

 

changes in foreign currency exchange rates;

 

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

 

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

 

the financial condition of our tenants, our lenders, counterparties to our interest rate swaps and other hedged transactions and institutions that may hold our cash balances, which may expose us to increased risks of default by these parties;

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

 

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

Key Factors that May Affect Our Operations

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

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

 

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

 

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

 

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

 

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

 

the effect of evolving healthcare regulations on our tenants’ and borrowers’ profitability; and

 

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

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

 

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

 

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

 

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

 

competition from other financing sources; and

 

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

CRITICAL ACCOUNTING POLICIES

Refer to our 2016 Annual Report on Form10-K, for a discussion of our critical accounting policies, which include revenue recognition, investment in real estate, purchase price allocation, loans, losses from rent

receivables, stock-based compensation, our fair value option election, and our accounting policy on consolidation. During the sixnine months ended JuneSeptember 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 JuneSeptember 30, 2017, our portfolio consisted of 256271 properties leased or loaned to 3230 operators, of which two 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 June 30,
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)

  $5,650,933    77.1 $4,912,320    76.6  $6,463,107    72.4 $4,912,320    76.6

Mortgage loans

   1,062,558    14.5 1,060,400    16.5   1,777,555    19.9 1,060,400    16.5

Other loans

   152,968    2.1 155,721    2.4   151,709    1.7 155,721    2.4

Construction in progress

   18,439    0.3 53,648    0.8   28,008    0.3 53,648    0.8

Other assets

   442,939    6.0 236,447    3.7   506,661    5.7 236,447    3.7
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total assets (1)

  $7,327,837    100.0 $6,418,536    100.0  $8,927,040    100.0 $6,418,536    100.0
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

 

(1)Includes $1.7$1.8 billion and $1.3 billion of healthcare real estate assets in Europe at JuneSeptember 30, 2017 and December 31, 2016, respectively.

The following is our revenue by operating type (dollar amounts in thousands):

Revenue by property type:

 

  For the Three
Months Ended
June 30, 2017
   % of
Total
 For the Three
Months Ended
June 30, 2016
   % of
Total
   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)

  $114,942    68.9 $76,468    60.5  $119,572    67.7 $78,622    62.1

Rehabilitation Hospitals

   41,065    24.6 38,265    30.3   46,485    26.3 37,075    29.3

Long-term Acute Care Hospitals

   10,800    6.5 11,567    9.2   10,523    6.0 10,858    8.6
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total revenue

  $166,807    100.0 $126,300    100.0  $176,580    100.0 $126,555    100.0
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 
  For the Six
Months Ended
June 30, 2017
   % of
Total
 For the Six
Months Ended
June 30, 2016
   % of
Total
   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)

  $222,068    68.7 $159,978    61.2  $341,640    68.4 $238,600    61.5

Rehabilitation Hospitals

   79,344    24.6 76,388    29.3   125,829    25.2 113,463    29.3

Long-term Acute Care Hospitals

   21,792    6.7 24,933    9.5   32,315    6.4 35,791    9.2
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

Total revenue

  $323,204    100.0 $261,299    100.0  $499,784    100.0 $387,854    100.0
  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

 

 

(1)Includes three medical office buildings.

We have 5762 employees as of August 4,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 JuneSeptember 30, 2017 Compared to JuneSeptember 30, 2016

Net income for the three months ended JuneSeptember 30, 2017, was $73.4$76.5 million, compared to $53.7$70.4 million for the three months ended JuneSeptember 30, 2016. This increase is due to additional revenue from the Steward and MEDIAN investments made in the fourth quarter of 2016 and during the second quarterfirst nine months of 2017, partially offset by increased depreciation and acquisition expense and the $16.6$44.6 million gainof gains on sale of propertiesreal estate and other asset dispositions in the 2016 secondthird quarter. Funds from operations (“FFO”), after adjusting for certain items (as more fully described in Reconciliation ofNon-GAAP Financial Measures), was $113.6$120.6 million, or $0.32$0.33 per diluted share for the 2017 secondthird quarter as compared to $75.5$75.1 million, or $0.32$0.30 per diluted share for the 2016 secondthird quarter. This 50%61% increase in FFO per share is primarily due to the increase in revenue from our new investments made since June 2016.September 2016, partially offset by more shares outstanding in 2017 from the May 2017 equity offering.

A comparison of revenues for the three month periods ended JuneSeptember 30, 2017 and 2016 is as follows (dollar amounts in thousands):

 

   2017   % of
Total
  2016   % of
Total
  Year over
Year
Change
 

Rent billed

  $103,447    62.0 $77,960    61.7  32.7

Straight-line rent

   16,277    9.8  8,551    6.8  90.4

Income from direct financing leases

   18,312    11.0  13,552    10.7  35.1

Interest and fee income

   28,771    17.2  26,237    20.8  9.7
  

 

 

   

 

 

  

 

 

   

 

 

  

Total revenues

  $166,807    100.0 $126,300    100.0  32.1
  

 

 

   

 

 

  

 

 

   

 

 

  

   2017   % of
Total
  2016   % of
Total
  Year over
Year
Change
 

Rent billed

  $110,930    62.8 $82,387    65.1  34.6

Straight-line rent

   17,505    9.9  9,741    7.7  79.7

Income from direct financing leases

   19,115    10.8  14,678    11.6  30.2

Interest and fee income

   29,030    16.5  19,749    15.6  47.0
  

 

 

   

 

 

  

 

 

   

 

 

  

Total revenues

  $176,580    100.0 $126,555    100.0  39.5
  

 

 

   

 

 

  

 

 

   

 

 

  

Our total revenue for the 2017 secondthird quarter is up $40.5$50.0 million or 32.1%39.5% over the prior year. This increase is made up of the following:

 

Operating lease revenue (including rent billed and straight-line rent) – up $33.2$36.3 million over the prior year of which $29.3$32.6 million is incremental revenue from acquisitions made after JuneSeptember 30, 2016, $5.9$4.2 million is incremental revenue from development properties that were completed and put into service in late 2016 and 2017, $0.7$1.3 million is incremental revenue from capital additions made to existing facilities in late 2016 and 2017, $1.4and $2.0 million relatesis due to the conversion of certain RCCH facilitiesan increase in 2016 from direct financing leases into operating leases, and a $0.5 million straight line rent write-off related to our Corinth facility in the 2016 second quarter.exchange rates. These increases were partially offset by $3.8$1.8 million of lower revenue related to dispositions and $1.0 million in foreign currency fluctuations.dispositions.

 

Income from direct financing leases – up $4.8$4.4 million over the prior year of which $0.2$0.3 million is from our annual escalation provisions in our leases, $0.9$1.1 million is incremental revenue from acquisitions made after JuneSeptember 30, 2016, and $3.0 million relates to the conversion of certain Prime facilities, valued at approximately $100 million, in 2016 from mortgagesmortgage loans into direct financing leases, and a $2.6 millionwrite-off related to the RCCH facilities that converted from direct financing leases into operating leases in 2016. These increases were partially offset by $2.0 million of lower revenue related to those RCCH facilities that converted from direct financing leases into operating leases in the 2016 second quarter.leases.

 

Interest from loans – up $2.5$9.3 million over the prior year of which $11.3$0.4 million is from our annual escalation provisions in our loans, $11.5 million is incremental revenue from new loans (primarily Steward mortgage loans) made after JuneSeptember 30, 2016. This increase was partially offset by $6.6$0.5 million of lower revenue from loans that were repaid in 2016 and $2.2 million of lower revenue related to the conversion of certain Prime facilities, valued at approximately $100 million, from mortgagesmortgage loans to direct financing leases post JuneSeptember 30, 2016.

Real estate depreciation and amortization during the secondthird quarter of 2017 increased to $29.5$31.9 million from $22.8$23.9 million in 2016, due to the incremental depreciation from the properties acquired since JuneSeptember 30, 2016 and the development properties completed in 2016 and 2017. In

Property expenses for the 2017 third quarter increased $1.6 million from the prior year quarter as the 2016 secondthird quarter we acceleratedincluded $0.9 million reimbursement for property expenses incurred in multiple previous periods from the amortizationtenant of the lease intangible asset related to our Corinth facility resulting in $1.1 million of additional expense.Twelve Oaks facility.

Acquisition expenses increased from $4.8$2.7 million in 2016 to $10.8$7.4 million in 2017 primarily as a result of the Steward and MEDIAN acquisitions in 2017, including approximately $9.0$2.3 million of real estate transfer taxes.

During the three months ended June 30, 2016, we had various dispositions resulting in a net gain on sale of real estate and other asset dispositions of $16.6 million and impairment charges of $7.4 million (see Note 3 to Item 1 of thisForm 10-Q for further details).

General and administrative expenses totaled $15.1$15.0 million for the 2017 secondthird quarter, which is 9.0%8.5% of total revenues, down from 9.5%9.7% of total revenues in prior year secondthird 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 expenses at the same rate. On a dollar basis, general and administrative expenses were up $3.0$2.7 million from the prior year secondthird quarter due primarily to the growth of our company, including increases in travel, international administration, costs associated with opening a European office, and compensation related to increased headcount and public company board expenses.headcount.

Interest expense, for the quarters ended JuneSeptember 30, 2017 and 2016, totaled $39.7$42.8 million and $41.5$40.3 million, respectively. This decreaseincrease is primarily related to the higher average debt balance for the 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 on fixed rate debt held during the quarter ended June 30, 2017 as compared to June 30, 2016.year-over-year. Our weighted averageweighted-average interest rate was 4.6% for the quarter ended JuneSeptember 30, 2017, which is a slight decrease from 5.1%compared to 5.2% in 2016. We did incur approximately $0.8

With the redemption of the $450 million in unutilized facility feessenior unsecured notes during the quarter ended September 30, 2016, we incurred $22.5 million in debt refinancing charges ($15.5 million of which was a redemption premium). During the 2017 secondthird quarter, we incurred $4.4 million of charges primarily related to structuring and underwriting fees associated with the short termtermination of theshort-term loan commitment we made in anticipation of the $1.5 billion Steward acquisition describedacquisition.

During the three months ended September 30, 2016, we sold three HealthSouth properties resulting in a net gain on sale of approximately $45 million (see Note 9 and in3 to Item 1 of this Form10-Q. See Note 4 to our Condensed Consolidated Financial Statements in Item 1 to this Form10-Q for further information on our debt activities.details).

Earnings from our equity interests was $2.8$3.4 million for the 2017 secondthird quarter, up $1.6$2.1 million from the prior year primarily related to our increased ownership in and the improved operating results of the operator of our Hoboken facility.facility, along with our first quarter to generate income on our 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 benefitexpense of $0.5 million for the three months ended JuneSeptember 30, 2017, was primarily due to $1.3$1.1 million of foreign tax expense related to our German investments offset partially by $0.6 million of tax benefit recognized on approximately $8.8$2 million of acquisition costs incurred on our European 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 many entities, we concluded that a full valuation allowance should continue to be recorded against the majority of our U.S and certain of our international net deferred tax assets at JuneSeptember 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.

SixNine Months Ended JuneSeptember 30, 2017 Compared to JuneSeptember 30, 2016

Net income for the sixnine months ended JuneSeptember 30, 2017, was $141.4$217.8 million compared to net income of $111.7$182.0 million for the sixnine months ended JuneSeptember 30, 2016, primarily due to additional revenue from the MEDIAN, Steward, and RCCH investments made in the fourth quarter of 2016 and the second quarterfirst nine months of 2017, incremental revenue from completed development projects a $7.4 million gain on the sale of our facility in Muskogee, Oklahoma, and

increased income from our equity investments, partially offset by a $14.4 million debt refinancing charge in 2017, higher depreciation expensesexpense from investments made subsequent to JuneSeptember 30, 2016, increased acquisition and travel expense due to more foreign investments, and the $16.7approximately $54 million gainin higher gains on sale of several properties in the first halfnine months of 2016. FFO, after adjusting for certain items (as more fully described in Reconciliation ofNon-GAAP Financial Measures), was $219.6$340.1 million, or $0.65$0.98 per diluted share for the first sixnine months in 2017 as compared to $159.0$234.1 million, or $0.67$0.97 per diluted share for the first sixnine months of 2016. This 38.1%45.3% increase in FFO is primarily due to the increase in revenue from acquisitions and completed development projects made since JuneSeptember 2016, while FFO per share is loweronly slightly higher in the first halfnine 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 sixnine month periods ended JuneSeptember 30, 2017 and 2016 is as follows (dollar amounts in thousands):

 

  2017   % of
Total
 2016   % of
Total
 Year over
Year
Change
   2017   % of
Total
 2016   % of
Total
 Year over
Year
Change
 

Rent billed

  $200,210    61.9 $152,021    58.2 31.7  $311,140    62.3 $234,408    60.4 32.7

Straight-line rent

   29,056    9.0 16,768    6.4 73.3   46,561    9.3 26,509    6.8 75.6

Income from direct financing leases

   36,192    11.2 32,503    12.4 11.3   55,307    11.1 47,181    12.2 17.2

Interest and fee income

   57,746    17.9 60,007    23.0 (3.8%)    86,776    17.3 79,756    20.6 8.8
  

 

   

 

  

 

   

 

    

 

   

 

  

 

   

 

  

Total revenues

  $323,204    100.0 $261,299    100.0 23.7  $499,784    100.0 $387,854    100.0 28.9
  

 

   

 

  

 

   

 

    

 

   

 

  

 

   

 

  

Our total revenue for the first sixnine months of 2017 is up $61.9$111.9 million or 23.7%28.9% over the prior year. This increase is made up of the following:

 

Operating lease revenue (including rent billed and straight-line rent) – up $60.5$96.8 million over the prior year of which $0.4 million is from our annual escalation provisions in our leases, $50.5$83.1 million is

incremental revenue from acquisitions made after September 30, 2016, $16.2 million is incremental revenue from development properties that were completed and put into service in 2016 and 2017, $2.7 million is incremental revenue from capital additions made to existing facilities in 2017 and 2016, $5.6 million relates to the conversion of certain RCCH facilities in 2016 from direct financing leases into operating leases, and a $0.5 million straight-line rent write-off related to our Corinth facility in the 2016 second quarter. These increases are partially offset by $8.5 million of lower revenue related to dispositions, $1.1 million of straight-line rent write-offs in 2017 related to three Adeptus facilities re-leased to Ochsner and the sale of our Muskogee property, and foreign currency fluctuations.

incremental revenue from acquisitions made after June 30, 2016, $11.2 million is incremental revenue from development properties that were completed and put into service in 2016 and 2017, $1.1 million is incremental revenue from capital additions made to existing facilities in 2017 and 2016, $5.6 million relates to the conversion of certain RCCH facilities in 2016 from direct financing leases into operating leases, and a $0.5 million straight-line rentwrite-off related to our Corinth facility in the 2016 second quarter. These increases are partially offset by $7.2 million lower revenue related to dispositions and $2.2 million in foreign currency fluctuations.

 

Income from direct financing leases – up $3.7$8.1 million over the prior year of which $0.4$0.6 million is from our annual escalation provisions in our leases, $2.6$3.7 million is incremental revenue from acquisitions made after JuneSeptember 30, 2016, $6$9.0 million relates to the conversion of certain Prime facilities in 2016 from mortgages intomortgage loans to direct financing leases, and a $2.6 millionwrite-off in 2016 related to the RCCH facilities that converted from direct financing leases into operating leases in 2016.leases. These increases were partially offset by $7.9$7.8 million of lower revenue related to those RCCH facilities that converted from direct financing leases into operating leases in the first half of 2016.

 

Interest from loans – down $2.3up $7.0 million over the prior year of which $21.2$1.1 million is from annual escalation provisions and $34.0 million is incremental revenue from new loans (primarily Steward mortgage loans) made after September 30, 2016. These increases were partially offset by $21.6 million in less interest revenue earned in 2017 from loans that were repaid in 2016 (primarily from Capella Transaction) and $4.3$6.5 million of lower interest revenue related to the conversion of certain Prime facilities, valued at approximately $100 million, from mortgagesmortgage loans to direct financing leases post June 30, 2016. These decreases are partially offset by $0.8 million in higher revenue from our annual escalation provisions in our loans and $22.5 million in higher revenue from new loans (primarily Steward) made after JuneSeptember 30, 2016.

Real estate depreciation and amortization during the first sixnine months of 2017 increased to $57.1$89.0 million from $44.0$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 $3.7$6.4 million in 2016 to $13.6$21.0 million in 2017 primarily as a result of the MEDIAN and Steward acquisitions in 2017, including $9.5$11.7 million of real estate transfer taxes incurred on the MEDIAN acquisitions.

During the six months ended June 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 six months of 2016, we had various dispositions resulting in a net gain on sale of real estate and other asset dispositions of $16.7 million and impairment charges of $7.4 million (see Note 3 to Item 1 of this Form10-Q for further details).

Earnings from our equity interests increased from a loss of $3.8 million in 2016 to a gain of $4.5 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 $3.0 million of additional income related to our increased ownership in and improved operating results of the operator of our Hoboken facility.

General and administrative expenses in the first sixnine months of 2017 totaled $28.3$43.3 million, which is 8.7% of revenues down from 9.0%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 $4.8$7.5 million from the prior year first sixnine 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 sixnine months of 2017 and 2016 totaled $77.7compared to $121.1 million and $80.9 million, respectively. This decrease is primarily related to lower interest rates on our fixed rate debt. Our weighted average interest rate is

slightly lower period over period – 4.6% for the first sixnine 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 and 4.7%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 sixnine months of 2016. We did incur $14.4During the first nine months of 2017, we incurred $18.8 million of unutilized facility fees/debt refinancing costs incharges related to the first halfreplacement of 2017 from the newour credit facility, andthe payoff of our 5.750% Senior Unsecured Notes due 2020 (see Note 4 in Item 1 to thisForm 10-Q for further information on€200 million euro loan, the prepayment of our debt activities) along$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 described in(see Note 9 in4 to Item 1 of this Form10-Q. 10-Q for further details).

Income tax expense for the sixnine months ended JuneSeptember 30, 2017 decreased by $0.4 million$390 thousand from the same period in 2016 primarily due to $1.4$1.7 million of benefit recognized on approximately $9.6$10.7 million of acquisition costs incurred on our European investments in the first half of 2017. This tax benefit recognized in 2017 was offset by additional tax expense from the acquisition of additional international properties and a distribution from one of our international equity investments, which were not realized in 2017.2016 due to a valuation allowance position. These valuation allowances were released in the 2016 fourth quarter.

Reconciliation ofNon-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 sixnine months ended JuneSeptember 30, 2017 and 2016 (in thousands, except per share data):

 

 For the Three Months Ended For the Six Months Ended   For the Three Months Ended For the Nine Months Ended 
 June 30, 2017 June 30, 2016 June 30, 2017 June 30, 2016   September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016 

FFO information:

         

Net income attributable to MPT common stockholders

 $73,415  $53,724  $141,385  $111,651   $76,464  $70,358  $217,849  $182,009 

Participating securities’ share in earnings

 (100 (132 (225 (276   (82 (154 (307 (430
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Net income, less participating securities’ share in earnings

 $73,315  $53,592  $141,160  $111,375   $76,382  $70,204  $217,542  $181,579 

Depreciation and amortization

 30,027  23,335  58,126  44,807    32,618  24,374  90,744  69,181 

Gain on sale of real estate

  —    (22,613 (7,413 (22,653   (18 (44,515 (7,431 (67,168
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Funds from operations

 $103,342  $54,314  $191,873  $133,529   $108,982  $50,063  $300,855  $183,592 

Write-off of straight line rent and other

  —    3,063  1,117  3,063         1,117  3,063 

Transaction costs fromnon-real estate dispositions

  —    5,975   —    5,975 

Transaction costs from non-real estate dispositions .

     (101    5,874 

Acquisition expenses, net of tax benefit

 9,539  4,801  12,184  9,034    7,166  2,689  19,350  11,723 

Impairment charges

  —    7,375   —    7,375      (80    7,295 

Unutilized financing fees / debt refinancing costs

 751   —    14,380  4    4,414  22,535  18,794  22,539 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Normalized funds from operations

 $113,632  $75,528  $219,554  $158,980   $120,562  $75,106  $340,116  $234,086 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Per diluted share data:

         

Net income, less participating securities’ share in earnings

 $0.21  $0.22  $0.42  $0.47   $0.21  $0.28  $0.63  $0.75 

Depreciation and amortization

 0.08  0.10  0.17  0.18    0.09  0.10  0.26  0.29 

Gain on sale of real estate

  —    (0.09 (0.02 (0.09     (0.18 (0.02 (0.28
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Funds from operations

 $0.29  $0.23  $0.57  $0.56   $0.30  $0.20  $0.87  $0.76 

Write-off of straight line rent and other

  —    0.01   —    0.01            0.01 

Transaction costs fromnon-real estate dispositions

  —    0.03   —    0.03 

Transaction costs from non-real estate dispositions .

           0.03 

Acquisition expenses, net of tax benefit

 0.03  0.02  0.04  0.04    0.02  0.01  0.06  0.05 

Impairment charges

  —    0.03   —    0.03            0.03 

Unutilized financing fees / debt refinancing costs

  —     —    0.04   —      0.01  0.09  0.05  0.09 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Normalized funds from operations

 $0.32  $0.32  $0.65  $0.67   $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 June 30, 2017   As of December 31, 2016   As of September 30, 2017   As of December 31, 2016 

Total Assets

  $7,327,837   $6,418,536   $8,927,040   $6,418,536 

Add:

        

Binding real estate commitments on new investments(1)

   1,562,290    288,647    112,012    288,647 

Unfunded amounts on development deals and commenced capital improvement projects(2)

   91,189    194,053    86,227    194,053 

Accumulated depreciation and amortization

   384,826    325,125    418,880    325,125 

Less:

        

Cash and cash equivalents

   (236,364   (83,240   (188,224   (83,240
  

 

   

 

   

 

   

 

 

Total Gross Assets

  $9,129,778   $7,143,121   $9,355,935   $7,143,121 
  

 

   

 

   

 

   

 

 

 

(1)Reflects post JuneSeptember 30, 2017 transactions and commitments, including 11 Steward facilities, one RCCH facility and twothree facilities in Germany, and post December 31, 2016 transactions and commitments, including two RCCH facilities and 14 facilities in Germany.
(2)Includes $51.6$63.9 million and $109.1 million of unfunded amounts on ongoing development projects and $39.6$22.3 million and $84.9 million of unfunded amounts on capital improvement projects and development projects that have commenced rent, as of JuneSeptember 30, 2017 and December 31, 2016, respectively.

LIQUIDITY AND CAPITAL RESOURCES

2017 Cash Flow Activity

During the first half ofnine months ended September 30, 2017, we generated $154.9$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 $151.7 million and certain investing activities.$239.2 million.

Certain other investing and financing activities in the first half of 2017 included:

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

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

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

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

In the first half off) On September 7, 2017, we receivedcompleted a commitmentsenior unsecured notes offering for $1.4 billion and used a new $1.0portion of the proceeds to redeem our 6.375% Senior Unsecured Notes due 2022 in October 2017 for $350 million plus a redemption premium, and the remaining proceeds, along with borrowings from our revolving credit facility, were used to acquire 11 facilities and ancillary properties leased to Steward for $1.4 billion termand to make a $100 million equity investment in Steward; and

g) On September 29, 2017, we prepaid our Northland mortgage loan facility pursuant to a commitment letter with JP Morgan Chase Bank, N.A. This term loan facility is available to partially fundin the $1.5 billion Steward transaction disclosed in Note 9 to Item 1amount of this Form10-Q. This term loan has not been funded as of August 4, 2017.$12.9 million.

2016 Cash Flow Activity

During the first half ofnine months ended September 30, 2016, we generated $137.3$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 $104.8$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 thisForm 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. Finally, during June

e) On July 13, 2016, we completed a new $500 million senior unsecured notes offering. We used the net proceeds from this offering to redeem our $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 we 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 3three facilities leased to HealthSouth for $111.5 million, and

g) We sold 82.7 million shares under(including 10.3 million sold to Cerberus affiliates on October 7, 2016) through ourat-the-market equity offering program, realizing neta public equity offering and a private placement generating proceeds of approximately $45 million. We used these proceeds to reduce our revolving credit facility by $1.1 billion during 2016 and fund our remaining investing activities.$1.2 billion.

Short-term Liquidity Requirements:As of June 30,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 $0.2 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 August 4,November 3, 2017, our availability under our revolving credit facility plus cashon-hand approximated $1.2$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, the expected funding

requirements on our development projects, and dividends in order to comply with REIT requirements for the next twelve months. In addition, with the additional availability from the $1.0 billion term loan facility commitment as discussed above, we believe we have the liquidity to fund the $1.5 billion Steward transaction firm commitment. We do believe other sources of capital (including senior unsecured notes, entering into joint venture arrangements and strategic property sales) are generally available as well. However, there is no assurance that such capital will be available when needed for such firm commitment or that our attempts to gain such capital will be successful.

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 August 4,November 3, 2017 of approximately $1.2$0.7 billion 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 the expected funding requirements on our development projects currently.

However, in order to fund our investment strategies, (including the $1.5 billion Steward transaction firm commitment)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:

 

availability under the $1.0 billion term commitment designated specifically for the Steward transaction,entering into joint venture arrangements,

proceeds from strategic property sales,

sale of equity securities,

 

amending or entering into new bank term loans,

 

issuing of new USD or EUR denominated debt securities, including senior unsecured notes, and/or

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

entering into joint venture arrangements,

proceeds from strategic property sales, and/or

sale of equity securities.Europe.

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

As of JuneSeptember 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

  $162   $ 350,000 (A) 

2018

   12,781    —   

2019

   —      —   

2020

   —      —   

2021

   250,210    445,359 

Thereafter

   2,992,600    4,081,400 
  

 

   

 

 

Total

  $3,255,753   $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 redemption of our 5.750% Senior Unsecured Notes due 2020 there have been no significant changes in the debt related obligation during the six months ended Juneand prepayment of our $12.9 million term loan. Subsequent to September 30, 2017.2017, we redeemed our 6.375% Senior Unsecured Notes due 2022. See Note 4 of Item 1 of this Form10-Q for more detailed information. In regards to purchase obligations, the only significant change in 2017 was our $1.5 billion Steward commitment – see Note 9 of Item 1 of this Form10-Q for further details.

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)

  $9,384   $18,768   $255,684   $—     $283,836   $14,287   $28,574   $450,122   $—     $492,983 

Term loans

   18,932    11,046    208,780    —      238,758 

Term loan

   5,556    11,127    207,444    —      224,127 

3.325% Senior Unsecured Notes due 2025

   18,996    37,991    37,991    628,287    723,265    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 JuneSeptember 30, 2017, we have a $1.3 billion revolving credit facility. However, this table assumes the balance outstanding under the revolver and rate in effect at JuneSeptember 30, 2017 remain in effect through maturity.

Distribution Policy

The table below is a summary of our distributions declared during the two year period ended JuneSeptember 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   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 

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 JuneSeptember 30, 2017, our outstanding debt totaled $3.2$4.8 billion, which consisted of fixed-rate debt of $2.7$4.2 billion and variable rate debt of $0.5$0.6 billion. If market interest rates increase by 1%, the fair value of our debt at JuneSeptember 30, 2017 would decrease by $3.8$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 $0.5$0.6 billion, the balance of such variable rate debt at JuneSeptember 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 euro exchange rate were to change by 5%, our FFO would change by approximately $3.7$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.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1.Legal Proceedings.

The information contained in Note 9 “Contingencies” of Part I, Item 1 of this Quarterly Report on Form10-Q is incorporated by reference into this Item 1.

Item 1A. Risk Factors.

Item 1A.Risk Factors.

Except to the extent set forth below or as otherwise disclosed in this Quarterly Report on Form10-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.

We may fail to consummate the Steward transactions at all or on the terms described herein, and, if the Steward transactions are completed, we may be subject to additional risks.

If the Steward transactions (described in Note 9 of Item 1) are not completed, we could be subject to a number of risks that may adversely affect our business, financial condition, cash flows and the trading price of our common stock, including:

our management’s attention may be diverted from our day-to-day business and our employees and our relationships with customers may be disrupted as a result of efforts relating to attempting to consummate the Steward transactions;

the trading price of our common stock may decline to the extent that the issue price of our common stock reflects a market assumption that the Steward transactions will be completed;

we must pay certain costs related to the Steward transactions, such as legal and accounting fees and expenses, regardless of whether the Steward transactions are consummated; and

we would not realize the benefits we expect to realize from consummating the Steward transactions.

In addition to the risks described in our 2016 10-K relating to healthcare facilities that we may purchase from time to time, if the Steward transactions are completed, we would also be subject to additional risks, including without limitation the following:

we have no previous business experience with the facilities that we expect to acquire in the Steward transactions, and we may face difficulties in successfully integrating them with our current portfolio and operating structure;

underperformance of the facilities we expect to acquire in the Steward transactions due to various factors, including unfavorable terms and conditions of any existing financing arrangements, the master lease or mortgage loans relating to the facilities, disruptions caused by the integration of such facilities or changes in economic conditions;

the properties to be acquired in the Steward transactions and leased to Steward are located in states where Steward has never operated before, and Steward may incur costs or setbacks as they gain experience in new markets and geographic regions;

diversion of our management’s attention away from other business concerns; and

exposure to any undisclosed or unknown potential liabilities relating to the facilities that we expect to acquire in the Steward transactions.

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 JuneSeptember 30, 2017, affiliates of Steward, MEDIAN, Prime, MEDIAN, Ernest, RCCH and Adeptus Health represent 37.4%represented 36.8%, 12.2%12.9%, 11.9%12.0%, 6.9%6.7%, 5.5%5.4% and 4.6%4.5%, respectively, of our total 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.

Our tenants experience operational challenges fromtime-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 etc. and others.

In May 2017, Prime advised that it would be delayed in furnishing its 2016 financial statements to its lenders and that it would take a significant write-down to its accounts receivables. Prime has received a notice of default from its lenders related to its failure to furnish its 2016 financials on a timely basis. As a result of these developments, S&P has downgraded Prime’s corporate credit rating and senior secured term loan credit rating. These financial and operational setbacks affecting Prime may adversely impact its ability to make required lease and interest payments to us.

The ability of a companyour tenants and operators to integrate newly acquired businesses into their existing operational, financial reporting and collection systems is important to ensure the success of the overall enterprise.critical towards ensuring their continued success. If such integration is not successfully implemented in a timely manner, operators can be negatively impacted whether it be through write-offs of uncollectible accounts receivable (similar to Prime’s expected write-offs of six to seven percent of their 2016 revenues)write-offs) or worseeven insolvency in the case of Adeptus Health.certain extreme cases.

On April 19, 2017, Adeptus Health filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division, to pursue a Chapter 11 reorganization plan (the “Plan”). Pursuant to 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, 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 affect its ability to pay us rent and therefore have a significant adverse effect on our financial condition and results of operations.

Anfurther 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)None.

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.

Item 5.Other Information.

 

(a)None.

 

(b)None.

Item 6. Exhibits.

Item 6.Exhibits.

 

Exhibit

Number

  

Description

4.1(1)  4.1*  EleventhTwelfth Supplemental Indenture, dated as of March 24,September 21, 2017, by and among MPT Operating Partnership, L.P. and MPT Finance Corporation, as issuers, Medical Properties Trust, Inc., as parent and guarantor, and Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, registrar and transfer agent.trustee.
10.1*IASIS (Project Ignite) Master Agreement, dated as of May 18, 2017, by and among Steward Heath Care System LLC and subsidiaries of MPT Operating Partnerships, L.P.
10.2*Real Property Asset Purchase Agreement, dated as of May 18, 2017, by and among IASIS Healthcare Corporation, as “IASIS”, and subsidiaries of IASIS, as the “Sellers”, and subsidiaries of MPT Operating Partnership, L.P., as the “MPT Parties”.
10.3*Amendment to Master Lease Agreement, dated as of December 31, 2016, by and among certain Affiliates of MPT Operating Partnership, L.P. and certain Affiliates of Steward Health Care System LLC.
10.4*  Joinder and Amendment to Master Lease Agreement, dated as of May 1,September 29, 2017, by and among certain Affiliates of MPT Operating Partnership, L.P. and certain Affiliates of Steward Health Care System LLC.
10.5*10.2*  Joinder and Amendment to Real Estate Loan Agreement, dated as of May 1, 2017, by and among certain Affiliates of MPT Operating Partnership, L.P. and certain Affiliates of Steward Health Care System LLC.
10.6*Amendment to Master Lease Agreement, dated as of May 2,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 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. (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
Number

Description

Exhibit 101.LAB  XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document

 

(1)Incorporated by reference to Registrant’s current report on Form8-K, filed with the Commission on March 27, 2017.
*Filed herewith.
**Furnished herewith.

SIGNATURE

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

MEDICAL PROPERTIES TRUST, INC.
By:

/s/ J. Kevin Hanna

J. Kevin Hanna

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

(Principal Accounting Officer)

MPT OPERATING PARTNERSHIP, L.P.
By:

/s/ J. Kevin Hanna

J. Kevin Hanna

Vice President, Controller, Assistant

Treasurer, and Chief Accounting Officer

of the sole member of the general partner

of MPT Operating Partnership, L.P.

(Principal Accounting Officer)

Date: August 9, 2017

INDEX TO EXHIBITS

 

Exhibit
Number

  

Description

4.1(1)4.1*  EleventhTwelfth Supplemental Indenture, dated as of March  24,September  21, 2017, by and among MPT Operating Partnership, L.P. and MPT Finance Corporation, as issuers, Medical Properties Trust, Inc., as parent and guarantor, and Wilmington Trust, National Association, as trustee, and Deutsche Bank Trust Company Americas, as paying agent, registrar and transfer agent.trustee.
10.1*IASIS (Project Ignite) Master Agreement, dated as of May 18, 2017, by and among Steward Heath Care System LLC and subsidiaries of MPT Operating Partnerships, L.P.
10.2*Real Property Asset Purchase Agreement, dated as of May 18, 2017, by and among IASIS Healthcare Corporation, as “IASIS”, and subsidiaries of IASIS, as the “Sellers”, and subsidiaries of MPT Operating Partnership, L.P., as the “MPT Parties”.
10.3*Amendment to Master Lease Agreement, dated as of December 31, 2016, by and among certain Affiliates of MPT Operating Partnership, L.P. and certain Affiliates of Steward Health Care System LLC.
10.4*  Joinder and Amendment to Master Lease Agreement, dated as of May 1,September  29, 2017, by and among certain Affiliates of MPT Operating Partnership, L.P. and certain Affiliates of Steward Health Care System LLC.
10.5*10.2*  Joinder and Amendment to Real Estate Loan Agreement, dated as of May 1, 2017, by and among certain Affiliates of MPT Operating Partnership, L.P. and certain Affiliates of Steward Health Care System LLC.
10.6*Amendment to Master Lease Agreement, dated as of May 2,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 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. (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
Number

Description

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

 

(1)Incorporated by reference to Registrant’s current report on Form8-K, filed with the Commission on March 27, 2017.
*Filed herewith.
**Furnished herewith.

SIGNATURE

51Pursuant 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

47