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MEDICAL PROPERTIES TRUST INC - Quarter Report: 2012 September (Form 10-Q)

10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2012

OR

 

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

For the transition period from              to             

Commission file number 001-32559

 

 

MEDICAL PROPERTIES TRUST, INC.

MPT OPERATING PARTNERSHIP, L.P.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

MARYLAND

DELAWARE

 

20-0191742

20-0242069

(State or other jurisdiction of

incorporation or organization)

 

(I. R. S. Employer

Identification No.)

1000 URBAN CENTER DRIVE, SUITE 501

BIRMINGHAM, AL

  35242
(Address of principal executive offices)   (Zip Code)

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    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 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer   x  (Medical Properties Trust, Inc. only)    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨
        (MPT Operating Partnership, L.P. only)     

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

As of November 5, 2012, Medical Properties Trust, Inc. had 135,572,131 shares of common stock, par value $.001, outstanding.

 

 

 


Table of Contents

EXPLANATORY NOTE

This report combines the Quarterly Reports on Form 10-Q for the three and nine months ended September 30, 2012 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.

 

2


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

AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED September 30, 2012

Table of Contents

 

     Page  

PART I — FINANCIAL INFORMATION

     4   

Item 1 Financial Statements

     4   

Medical Properties Trust, Inc. and Subsidiaries

     4   

Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011

     4   

Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September  30, 2012 and 2011

     5   

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Nine Months Ended September 30, 2012 and 2011

     6   

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011

     7   

MPT Operating Partnership, L.P. and Subsidiaries

     8   

Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011

     8   

Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September  30, 2012 and 2011

     9   

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Nine Months Ended September 30, 2012 and 2011

     10   

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011

     11   

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

     12   

Notes to Condensed Consolidated Financial Statements

     12   

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

     34   

Item 3 Quantitative and Qualitative Disclosures about Market Risk

     41   

Item 4 Controls and Procedures

     42   

PART II — OTHER INFORMATION

     42   

Item 1 Legal Proceedings

     42   

Item 1A Risk Factors

     42   

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

     43   

Item 3 Defaults Upon Senior Securities

     43   

Item 4 Mine Safety Disclosures

     43   

Item 5 Other Information

     44   

Item 6 Exhibits

     44   

SIGNATURE

     45   

INDEX TO EXHIBITS

     46   

 

3


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

     September 30,
2012
    December 31,
2011
 
(In thousands, except per share amounts)    (Unaudited)     (Note 2)  

Assets

    

Real estate assets

    

Land, buildings and improvements, and intangible lease assets

   $ 1,251,909      $ 1,217,559   

Real estate held for sale

     17,432       48,925   

Mortgage loans

     368,650        165,000   

Net investment in direct financing leases

     312,050        —     
  

 

 

   

 

 

 

Gross investment in real estate assets

     1,950,041        1,431,484   

Accumulated depreciation and amortization

     (120,215     (94,822
  

 

 

   

 

 

 

Net investment in real estate assets

     1,829,826        1,336,662   

Cash and cash equivalents

     36,163        102,726   

Interest and rent receivable

     42,094        29,862   

Straight-line rent receivable

     38,065        33,993   

Other loans

     158,177        74,839   

Other assets

     54,074        43,792   
  

 

 

   

 

 

 

Total Assets

   $ 2,158,399      $ 1,621,874   
  

 

 

   

 

 

 

Liabilities and Equity

    

Liabilities

    

Debt, net

   $ 1,025,183      $ 689,849   

Accounts payable and accrued expenses

     64,297        51,125   

Deferred revenue

     20,374        23,307   

Lease deposits and other obligations to tenants

     15,387        28,778   
  

 

 

   

 

 

 

Total liabilities

     1,125,241        793,059   

Equity

    

Preferred stock, $0.001 par value. Authorized 10,000 shares; no shares outstanding

     —          —     

Common stock, $0.001 par value. Authorized 250,000 shares; issued and outstanding — 134,657 shares at September 30, 2012, and 110,786 shares at December 31, 2011

     135        111   

Additional paid in capital

     1,280,769        1,055,256   

Distributions in excess of net income

     (234,264     (214,059

Accumulated other comprehensive loss

     (13,220     (12,231

Treasury shares, at cost

     (262     (262
  

 

 

   

 

 

 

Total equity

     1,033,158        828,815   
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 2,158,399      $ 1,621,874   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
(In thousands, except per share amounts)    2012     2011     2012     2011  

Revenues

        

Rent billed

   $ 31,083      $ 27,760      $ 93,100      $ 81,086   

Straight-line rent

     2,762        1,643        5,473        5,318   

Income from direct financing leases

     5,773        —          12,979        —     

Interest and fee income

     14,037        5,229        33,486        15,714   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     53,655        34,632        145,038        102,118   

Expenses

        

Real estate depreciation and amortization

     8,491        7,700        25,392        22,508   

Property-related

     218        260        1,044        346   

General and administrative

     7,052        5,737        21,341        20,429   

Acquisition expenses

     410        530        4,115        3,186   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     16,171        14,227        51,892        46,469   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     37,484        20,405        93,146        55,649   

Other income (expense)

        

Interest and other (expense) income

     (23     42        (55     (12

Earnings from equity and other interests

     1,065        9        1,944        70   

Debt refinancing costs

     —          (10,425     —          (14,214

Interest expense

     (15,046     (11,935     (42,730     (32,462
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other expense

     (14,004     (22,309     (40,841     (46,618
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     23,480        (1,904     52,305        9,031   

Income from discontinued operations

     8,028        2,372        9,169        4,944   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     31,508        468        61,474        13,975   

Net income attributable to non-controlling interests

     (44     (43     (130     (131
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to MPT common stockholders

   $ 31,464      $ 425      $ 61,344      $ 13,844   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share — basic and diluted

        

Income (loss) from continuing operations attributable to MPT common stockholders

   $ 0.17      $ (0.02   $ 0.39      $ 0.07   

Income from discontinued operations attributable to MPT common stockholders

     0.06        0.02        0.07        0.05   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to MPT common stockholders

   $ 0.23      $ —        $ 0.46      $ 0.12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

        

Basic

     134,781        110,714        131,467        110,568   

Diluted

     134,782        110,719        131,467        110,576   

Dividends declared per common share

   $ 0.20      $ 0.20      $ 0.60      $ 0.60   

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
(In thousands)    2012     2011     2012     2011  

Net income

   $ 31,508      $ 468      $ 61,474      $ 13,975   

Other comprehensive income (loss):

        

Unrealized loss on interest rate swap

     (443     (5,272     (989     (8,341
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     31,065        (4,804     60,485        5,634   

Comprehensive income attributable to non-controlling interests

     (44     (43     (130     (131
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to MPT common stockholders

   $ 31,021      $ (4,847   $ 60,355      $ 5,503   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

6


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MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     For the Nine Months
Ended September 30,
 
     2012     2011  
     (In thousands)  

Operating activities

    

Net income

   $ 61,474      $ 13,975   

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

    

Depreciation and amortization

     26,899        25,254   

Straight-line rent revenue (net of write-offs)

     (4,100     (5,606

Direct financing lease interest accretion

     (2,050     —     

Share-based compensation

     5,430        5,293   

(Gain) loss on sale of real estate

     (7,278     (5

Real estate impairment

     —          564   

Amortization and write-off of deferred financing costs and debt discount

     2,577        8,523   

Premium paid on extinguishment of debt

     —          13,091   

Other adjustments

     (3,415     (4,632

Changes in:

    

Interest and rent receivable

     (12,232     (2,646

Accounts payable and accrued expenses

     7,404        13,317   
  

 

 

   

 

 

 

Net cash provided by operating activities

     74,709        67,128   

Investing activities

    

Cash paid for acquisitions and other related investments

     (606,500     (208,913

Principal received on loans receivable

     9,507        2,898   

Net proceeds from sale of real estate

     34,100        —     

Investment in loans receivable

     (1,293     (4,398

Construction in progress and other

     (35,920     (12,297
  

 

 

   

 

 

 

Net cash used for investing activities

     (600,106     (222,710

Financing activities

    

Revolving credit facilities, net

     35,400        39,600   

Additions to term debt

     300,000        450,000   

Payments of term debt

     (171     (237,810

Distributions paid

     (76,770     (67,194

Sale of common stock, net

     220,107        —     

Lease deposits and other obligations to tenants

     (13,391     7,613   

Debt issuance costs paid and other financing activities

     (6,341     (20,667
  

 

 

   

 

 

 

Net cash provided by financing activities

     458,834        171,542   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents for period

     (66,563     15,960   

Cash and cash equivalents at beginning of period

     102,726        98,408   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 36,163      $ 114,368   
  

 

 

   

 

 

 

Interest paid

   $ 31,350      $ 18,761   

Supplemental schedule of non-cash investing activities:

    

Loan conversion to equity interest

   $ 1,648      $ —     

Real estate acquired via assumption of mortgage loan

     —        $ (14,592

Mortgage loan issued from sale of real estate

   $ 3,650        —     

Supplemental schedule of non-cash financing activities:

    

Distributions declared, unpaid

   $ 27,181      $ 22,407   

Assumption of mortgage loan (as part of real estate acquired)

     —        $ 14,592   

See accompanying notes to condensed consolidated financial statements.

 

7


Table of Contents

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

 

     September 30,
2012
    December 31,
2011
 
(In thousands)    (Unaudited)     (Note 2)  

Assets

    

Real estate assets

    

Land, buildings and improvements, and intangible lease assets

   $ 1,251,909      $ 1,217,559   

Real estate held for sale

     17,432       48,925   

Mortgage loans

     368,650        165,000   

Net investment in direct financing leases

     312,050        —     
  

 

 

   

 

 

 

Gross investment in real estate assets

     1,950,041        1,431,484   

Accumulated depreciation and amortization

     (120,215     (94,822
  

 

 

   

 

 

 

Net investment in real estate assets

     1,829,826        1,336,662   

Cash and cash equivalents

     36,163        102,726   

Interest and rent receivable

     42,094        29,862   

Straight-line rent receivable

     38,065        33,993   

Other loans

     158,177        74,839   

Other assets

     54,074        43,792   
  

 

 

   

 

 

 

Total Assets

   $ 2,158,399      $ 1,621,874   
  

 

 

   

 

 

 

Liabilities and Capital

    

Liabilities

    

Debt, net

   $ 1,025,183      $ 689,849   

Accounts payable and accrued expenses

     37,157        28,780   

Deferred revenue

     20,374        23,307   

Lease deposits and other obligations to tenants

     15,387        28,778   

Payable due to Medical Properties Trust, Inc.

     26,750        21,955   
  

 

 

   

 

 

 

Total liabilities

     1,124,851        792,669   

Capital

    

General Partner — issued and outstanding — 1,345 units at September 30, 2012 and 1,107 units at December 31, 2011

     10,431        8,418   

Limited Partners:

    

Common units — issued and outstanding — 133,312 units at September 30, 2012 and 109,679 units at December 31, 2011

     1,036,337        833,018   

LTIP units — issued and outstanding — 150 units at September 30, 2012 and at December 31, 2011

     —          —     

Accumulated other comprehensive loss

     (13,220     (12,231
  

 

 

   

 

 

 

Total capital

     1,033,548        829,205   
  

 

 

   

 

 

 

Total Liabilities and Capital

   $ 2,158,399      $ 1,621,874   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

8


Table of Contents

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
(In thousands, except per unit amounts)    2012     2011     2012     2011  

Revenues

        

Rent billed

   $ 31,083      $ 27,760      $ 93,100      $ 81,086   

Straight-line rent

     2,762        1,643        5,473        5,318   

Income from direct financing leases

     5,773        —          12,979        —     

Interest and fee income

     14,037        5,229        33,486        15,714   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     53,655        34,632        145,038        102,118   

Expenses

        

Real estate depreciation and amortization

     8,491        7,700        25,392        22,508   

Property-related

     218        260        1,044        346   

General and administrative

     7,052        5,719        21,341        20,367   

Acquisition expenses

     410        530        4,115        3,186   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     16,171        14,209        51,892        46,407   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     37,484        20,423        93,146        55,711   

Other income (expense)

        

Interest and other income (expense)

     (23     42        (55     (12

Earnings from equity and other interests

     1,065        9        1,944        70   

Debt refinancing costs

     —          (10,425     —          (14,214

Interest expense

     (15,046     (11,935     (42,730     (32,462
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other expense

     (14,004     (22,309     (40,841     (46,618
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     23,480        (1,886     52,305        9,093   

Income from discontinued operations

     8,028        2,372        9,169        4,944   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     31,508        486        61,474        14,037   

Net income attributable to non-controlling interests

     (44     (43     (130     (131
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to MPT Operating Partnership partners

   $ 31,464      $ 443      $ 61,344      $ 13,906   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per units — basic and diluted

        

Income (loss) from continuing operations attributable to MPT Operating Partnership partners

   $ 0.17      $ (0.02   $ 0.39      $ 0.07   

Income from discontinued operations attributable to MPT Operating Partnership partners

     0.06        0.02        0.07       0.05   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to MPT Operating Partnership Partners

   $ 0.23      $ —        $ 0.46      $ 0.12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average units outstanding:

        

Basic

     134,781        110,714        131,467        110,568   

Diluted

     134,782        110,719        131,467        110,576   

Dividends declared per unit

   $ 0.20      $ 0.20      $ 0.60      $ 0.60   

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
(In thousands)    2012     2011     2012     2011  

Net income

   $ 31,508      $ 486      $ 61,474      $ 14,037   

Other comprehensive income (loss):

        

Unrealized loss on interest rate swap

     (443     (5,272     (989     (8,341
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     31,065        (4,786     60,485        5,696   

Comprehensive income attributable to non-controlling interests

     (44     (43     (130     (131
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to MPT Operating Partnership partners

   $ 31,021      $ (4,829   $ 60,355      $ 5,565   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

10


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MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     For the Nine Months
Ended September 30,
 
     2012     2011  
     (In thousands)  

Operating activities

    

Net income

   $ 61,474      $ 14,037   

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

    

Depreciation and amortization

     26,899        25,254   

Straight-line rent revenue (net of write-offs)

     (4,100     (5,606

Direct financing lease interest accretion

     (2,050     —     

Share-based compensation

     5,430        5,293   

(Gain) loss on sale of real estate

     (7,278     (5

Real estate impairment

     —          564   

Amortization and write-off of deferred financing costs and debt discount

     2,577        8,523   

Premium paid on extinguishment of debt

     —          13,091   

Other adjustments

     (3,415     (4,694

Changes in:

    

Interest and rent receivable

     (12,232     (2,646

Accounts payable and accrued expenses

     7,404        13,317   
  

 

 

   

 

 

 

Net cash provided by operating activities

     74,709        67,128   

Investing activities

    

Cash paid for acquisitions and other related investments

     (606,500     (208,913

Principal received on loans receivable

     9,507        2,898   

Net proceeds from sale of real estate

     34,100        —     

Investment in loans receivable

     (1,293     (4,398

Construction in progress and other

     (35,920     (12,297
  

 

 

   

 

 

 

Net cash used for investing activities

     (600,106     (222,710

Financing activities

    

Revolving credit facilities, net

     35,400        39,600   

Additions to term debt

     300,000        450,000   

Payments of term debt

     (171     (237,810

Distributions paid

     (76,770     (67,194

Sale of common stock, net

     220,107        —     

Lease deposits and other obligations to tenants

     (13,391     7,613   

Debt issuance costs paid and other financing activities

     (6,341     (20,667
  

 

 

   

 

 

 

Net cash provided by financing activities

     458,834        171,542   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents for period

     (66,563     15,960   

Cash and cash equivalents at beginning of period

     102,726        98,408   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 36,163      $ 114,368   
  

 

 

   

 

 

 

Interest paid

   $ 31,350      $ 18,761   

Supplemental schedule of non-cash investing activities:

    

Loan conversion to equity interest

   $ 1,648      $ —     

Real estate acquired via assumption of mortgage loan

     —        $ (14,592

Mortgage loan issued from sale of real estate

   $ 3,650        —     

Supplemental schedule of non-cash financing activities:

    

Distributions declared, unpaid

   $ 27,181      $ 22,407   

Assumption of mortgage loan (as part of real estate acquired)

     —        $ 14,592   

See accompanying notes to condensed consolidated financial statements.

 

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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 General Corporation Law of Maryland 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., 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 not be subject to U.S. federal income tax, 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 federal and state income taxes.

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.

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 United States 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 for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The condensed consolidated balance sheet at December 31, 2011 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 United States for complete financial statements.

For information about significant accounting policies, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2011. During the three and nine months ended September 30, 2012, there were no material changes to these policies, except we began using direct financing lease (“DFL”) accounting with the acquisition and lease of the real estate of Ernest Health, Inc. (“Ernest”) and the acquisition and lease of two acute care hospitals to Prime Healthcare Services, Inc. (“Prime”). Under DFL accounting, future minimum lease payments are recorded as a receivable. Unearned income, which represents the net investment in the DFL less the sum of minimum lease payments receivable and the estimated residual values of the leased properties, is deferred and amortized to income over the lease term to provide a constant yield when collectability of the lease payments is reasonably assured. Investments in DFLs are presented net of unamortized and unearned income. DFLs are placed on non-accrual status when management determines that the collectability of contractual amounts is not reasonably assured. While on non-accrual status, DFLs are accounted for on a cash basis, in which income is recognized only upon receipt of cash.

For our equity interest in Ernest and related loans (as more fully described in Note 3), 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 equity interests or loans made in or prior to 2012.

 

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Variable Interest Entities

In regard to the Ernest Transaction (defined in Note 3), we have determined that Ernest is a variable interest entity (“VIE”); however, we are not the primary beneficiary as we lack the ability to direct the activities of Ernest that most significantly impact the entity’s economic performance. At September 30, 2012, we had loans to and/or equity investments in several VIEs for which we are not the primary beneficiary. The carrying value and classification of the related assets and maximum exposure to loss as a result of our involvement with these VIEs are presented below at September 30, 2012 (in thousands):

 

VIE Type

   Maximum Loss
Exposure(1)
     Asset Type
Classification
   Carrying
Amount(2)
 

Loans, net

   $ 274,073       Mortgage and other loans    $ 230,105   

Equity investments

   $ 13,764       Other assets    $ 3,179   

 

(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 rents receivable), less any liabilities. Our maximum loss exposure related to our equity investment in VIEs represents the current carrying values of such investment plus any other related assets (such as rent receivables) less any liabilities.
(2) Carrying amount reflects the net book value of our loan or equity interest only in the VIE.

For the VIE types above, we do not consolidate the VIE because we do not have the ability to control the activities (such as the day-to-day healthcare operations of our borrowers or investees) that most significantly impact the VIE’s economic performance. As of September 30, 2012, we were not required to provide 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 for additional description of the nature, purpose and activities of our more significant VIEs and interests therein.

3. Real Estate and Lending Activities

Acquisitions

2012 Activity

On September 19, 2012, we acquired the real estate of the 380 bed St. Mary’s Regional Medical Center, an acute care hospital in Reno, Nevada for $80 million and the real estate of the 140 bed Roxborough Memorial Hospital in Pennsylvania for $30 million. The acquired facilities are leased to Prime pursuant to a master lease agreement, which is more fully described below in the Leasing Operations section.

On July 3, 2012, we funded a $100 million mortgage loan secured by the real property of Centinela Hospital Medical Center. Centinela is a 369 bed acute care facility that is operated by Prime. This mortgage loan is cross-defaulted with other mortgage loans to Prime and the master lease agreements.

On February 29, 2012, we made loans to and acquired assets from Ernest for a combined purchase price and investment of $396.5 million, consisting of $200 million to purchase real estate assets, a first mortgage loan of $100 million, an acquisition loan for $93.2 million and a capital contribution of $3.3 million (“Ernest Transaction”).

Real Estate Acquisition and Mortgage Loan Financing

Pursuant to a definitive real property asset purchase agreement (the “Purchase Agreement”), we acquired from Ernest and certain of its subsidiaries (i) a portfolio of five rehabilitation facilities (including a ground lease interest relating to a community-based acute rehabilitation facility in Wyoming), (ii) seven long-term acute care facilities located in seven states and (iii) undeveloped land in Provo, Utah (collectively, the “Acquired Facilities”) for an aggregate purchase price of $200 million, subject to certain adjustments. The Acquired Facilities are leased to subsidiaries of Ernest pursuant to a master lease agreement. The master lease agreement has a 20-year term with three five-year extension options and provides for an initial rental rate of 9%, with consumer price-indexed increases, limited to a 2% floor and 5% ceiling annually thereafter. In addition, we made Ernest a $100 million loan secured by a first mortgage interest in four subsidiaries of Ernest, which has terms similar to the leasing terms described above.

Acquisition Loan and Equity Contribution

Through an affiliate of one of our TRSs, we made investments of approximately $96.5 million in Ernest Health Holdings, LLC (“Ernest Holdings”), which is the owner of Ernest. These investments, which are structured as a $93.2 million loan and a $3.3 million equity contribution generally provide that we will receive a preferential return of 15% of the loan amount and approximately 79% of

 

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the remaining earnings of Ernest. Ernest is required to pay us a minimum of 6% and 7% of the loan amount in years one and two, respectively, and 10% thereafter, although there are provisions in the loan agreement that are expected to result in full payment of the 15% preference when funds are sufficient. Any of the 15% in excess of the minimum that is not paid may be accrued and paid upon the occurrence of a capital or liquidity event and is payable at maturity. The loan may be prepaid without penalty at any time.

Financing of Ernest Transaction

To finance the Ernest Transaction, we completed equity and senior unsecured notes offerings in February 2012. See Notes 4 and 5 for more information on these financing activities.

2011 Activity

On January 4, 2011, we acquired the real estate of the 19-bed, 4-year old Gilbert Hospital in a suburb of Phoenix, Arizona area for $17.1 million. Gilbert Hospital is operated by affiliates of Visionary Health, LLC. We acquired this asset subject to an existing lease that expires in May 2022.

On January 31, 2011, we acquired for $23.5 million the real estate of the 60-bed Atrium Medical Center at Corinth in the Dallas area, a long-term acute care hospital that was completed in 2009 and is subject to a lease that expires in June 2024. In addition, through one of our affiliates, we invested $1.3 million to acquire approximately 19% of a joint venture arrangement with an affiliate of Vibra Healthcare, LLC (“Vibra”) that will manage and has acquired a 51% interest in the operations of the facility. We also made a $5.2 million working capital loan to the joint venture. The former operators of the hospital, comprised primarily of local physicians, retained ownership of 49% of the operating entity.

On February 4, 2011, we purchased for $58 million the real estate of Bayonne Medical Center, a 6-story, 278-bed acute care hospital in the New Jersey area of metropolitan New York, and leased the facility to the operator under a 15-year lease, with six 5-year extension options. The operator is an affiliate of a private hospital operating company that acquired the hospital in 2008.

On February 9, 2011, we acquired the real estate of the 306-bed Alvarado Hospital in San Diego, California for $70 million from Prime who is the operator of the facility.

On February 14, 2011, we completed the acquisition of the Northland LTACH Hospital located in Kansas City, a 35-bed hospital that opened in April 2008 and has a lease that expires in 2028. This hospital is currently being operated by Kindred Healthcare Inc. The purchase price of this hospital was $19.5 million, which included the assumption of a mortgage loan.

On July 18, 2011, we acquired the real estate of the 40-bed Vibra Specialty Hospital of DeSoto in Desoto, Texas for $13.0 million. Vibra Specialty Hospital of DeSoto is a long-term acute care hospital. This facility is leased to a subsidiary of Vibra for a fixed term of 15 years with options to extend. In addition, we made a $2.5 million equity investment in the operator of this facility for a 25% equity ownership.

On September 30, 2011, we purchased the real estate of a 40-bed long-term acute care facility in New Braunfels, Texas for $10.0 million. This facility is leased to an affiliate of Post Acute Medical, LLC for a fixed term of 15 years with options to extend. In addition, we made a $1.4 million equity investment for a 25% equity ownership in the operator of this facility and funded a $2.0 million working capital loan.

As part of these acquisitions, we purchased and invested in the following assets during the first nine months: (dollar amounts in thousands)

 

     2012      2011  

Assets Acquired

     

Land

   $ —         $ 17,218   

Building

     —           178,535   

Intangible lease assets — subject to amortization (weighted average useful life of 13.5 years in 2011)

     —           15,351   

Net investments in direct financing leases

     310,000         —     

Mortgage loans

     200,000         —     

Other loans

     93,200         7,233   

Equity investments

     3,300         5,168   
  

 

 

    

 

 

 

Total assets acquired

   $ 606,500       $ 223,505   

Total liabilities assumed

     —           (14,592
  

 

 

    

 

 

 

Net assets acquired

   $ 606,500       $ 208,913   
  

 

 

    

 

 

 

 

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From the respective acquisition dates, the properties and mortgage loans acquired in 2012 contributed $14.1 million and $29.1 million of revenue and income (excluding related acquisition expenses) for the three and nine month periods ended September 30, 2012, respectively. In addition, we incurred $0.1 million and $3.8 million of acquisition related costs on the 2012 acquisitions for the three and nine months ended September 30, 2012.

From the respective acquisition dates, the seven hospitals acquired in 2011 contributed $5.5 million and $14.0 million of revenue and $3.7 million and $9.1 million of income (excluding related acquisition expenses) for the three and nine months ended September 30, 2011, respectively. In addition, we incurred $0.5 million and $3.2 million of acquisition related costs on consummated and non-consummated deals for the three and nine months ended September 30, 2011.

The results of operations for each of the properties acquired are included in our consolidated results from the effective date of each acquisition. The following table sets forth certain unaudited pro forma consolidated financial data for 2012 and 2011, as if each acquisition in 2012 and 2011 were consummated on the same terms at the beginning of 2011. Supplemental pro forma earnings were adjusted to exclude acquisition-related costs on consummated deals incurred in the three and nine months ended September 30, 2012 and 2011 (dollar amounts in thousands except per share/unit data).

 

     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
     2012      2011      2012      2011  

Total revenues

   $ 56,557       $ 53,943       $ 166,952       $ 162,593   

Net income

     33,834         13,846         82,822         56,733   

Net income per share/unit — diluted

   $ 0.25       $ 0.10       $ 0.61       $ 0.42   

Development Activities

On June 13, 2012, we entered into an agreement with Ernest to develop and lease a 40-bed rehabilitation hospital in Lafayette, Indiana. Total development cost is estimated to be $16.6 million and the facility is expected to be completed in the 2013 second quarter. We have funded $7.2 million through the third quarter of 2012.

On May 4, 2012, we amended the current lease on our Victoria, Texas facility with Post Acute Medical to extend the current lease term into 2028, and we agreed to develop and lease a 26-bed facility next to the current facility. Total development cost of the new facility is estimated to be $9.4 million and it is expected to be completed in the third quarter of 2013.

On March 1, 2012, we received a certificate of occupancy for our recently constructed Florence acute care facility near Phoenix, Arizona. With this, we started recognizing rent on this facility in March 2012. During the construction period, we accrued and deferred rent based on the cost paid during the construction period. In March 2012, we began recognizing a portion of the accrued construction period rent along with interest on the unpaid amount. This accrued construction period rent will be recognized in our income statement and paid over the 25 year lease term. Land and building costs associated with this property approximates $30 million.

In addition to the new development projects, our other three development projects, which will be leased to Emerus Holding, Inc., are expected to be completed between October 2012 and early 2013. Estimated total development cost for these three facilities is $30 million. We have funded $17.6 million through the third quarter of 2012. In regard to our River Oaks facility, re-development efforts continue and we currently expect this facility to be partially occupied starting in the first quarter of 2013.

Disposals

During the third quarter of 2012, we entered into a definitive agreement to sell the real estate of two LTACH facilities, Thornton and New Bedford, to Vibra for total cash proceeds of $42 million. The sale of Thornton was completed on September 28, 2012, resulting in a gain of $8.4 million. Due to this sale, we wrote-off $1.6 million in straight-line rent receivables. The sale of New Bedford was completed on October 22, 2012, resulting in a gain of approximately $7.0 million. Associated with this sale, we will write-off $4.1 million in straight-line rent receivables in the fourth quarter 2012. At September 30, 2012, our New Bedford facility is classified as held for sale, which required us to reclassify the operating results of this facility for the current and all prior periods to discontinued operations and reclassify the related real estate to Real Estate Held for Sale.

On August 21, 2012, we sold our Denham Springs facility for $5.2 million, resulting in a gain of $0.3 million. Due to this sale, the operating results of this facility for the current and all prior periods have been included in discontinued operations, and we have reclassified the related real estate to Real Estate Held for Sale.

 

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On June 15, 2012, we sold the HealthSouth Rehabilitation Hospital of Fayetteville in Fayetteville, Arkansas for $16 million, resulting in a loss of $1.4 million. Due to this sale, the operating results of this facility for the current and all prior periods have been included in discontinued operations, and we have reclassified the related real estate to Real Estate Held for Sale. In connection with this sale, HealthSouth Corporation agreed to extend the lease on our Wichita, Kansas property, which is now set to end in March 2022.

Leasing Operations

On July 3, 2012, we entered into master lease agreements with certain subsidiaries of Prime, which replaced the then current leases with the same tenants covering the same properties. The master leases are for 10 years and contain two renewal options of five years each. The initial lease rate is generally consistent with the blended average rate of the prior lease agreements. However, the annual escalators, which in the prior leases were limited, have been increased to reflect 100% of CPI increases, along with a minimum floor. The master leases include repurchase options substantially similar to those in the prior leases, including provisions establishing minimum repurchase prices equal to our total investment.

As noted previously, we are accounting for the master lease of 12 Ernest facilities and our Roxborough and Reno facilities as a DFL. The components of our net investment in DFL consisted of the following (dollars in thousands):

 

     As of September 30,
2012
 

Minimum lease payments receivable

   $ 1,279,818   

Estimated residual values

     200,000   

Less unearned income

     (1,167,768
  

 

 

 

Net investment in direct financing leases

   $ 312,050   
  

 

 

 

Monroe facility

As of September 30, 2012, we have advanced $29.9 million to the operator/lessee of Monroe Hospital in Bloomington, Indiana pursuant to a working capital loan agreement, but no additional advances were made during the 2012 third quarter. In addition, as of September 30, 2012, we have $19.0 million of rent, interest and other charges owed to us by the operator, of which $5.8 million of interest receivables are significantly more than 90 days past due. Because the operator has not made all payments required by the working capital loan agreement and the related real estate lease agreement, we consider the loan to be impaired. During 2010, we recorded a $12 million impairment charge on the working capital loan and recorded a valuation allowance for unbilled straight-line rent in the amount of $2.5 million. We have not recognized any interest income on the Monroe loan since it was considered impaired and have not recorded any unbilled rent since 2010.

At September 30, 2012, our net investment (exclusive of the related real estate) of approximately $37 million is our maximum exposure to Monroe and the amount is deemed collectible/recoverable. In making this determination, we considered our first priority secured interest in approximately (i) $5 million in hospital patient receivables, (ii) cash balances of approximately $0.1 million, (iii) our assessment of the realizable value of our other collateral and (iv) continued improvement in operational revenue statistics compared to previous years. However, no assurances can be made that we will not have additional charges for further impairment of our working capital loan in the future.

On September 4, 2012, Monroe Hospital entered into a four-year agreement with St. Vincent Health, Inc. whereby St. Vincent will manage the operations of the hospital. At the same time we agreed with St. Vincent to exclusively negotiate the terms of a possible sale or lease of the hospital real estate by the end of such four year term. St. Vincent is a member of Ascension Health, the largest Catholic health care system in the country. However, there is no assurance that we will reach a satisfactory agreement with St. Vincent and St. Vincent has certain rights to terminate the management agreement during the four year term.

Other Loan Activity

On March 1, 2012, pursuant to our convertible note agreement, we converted $1.6 million of our $5.0 million convertible note into a 9.9% equity interest in the operator of our Hoboken University Medical Center facility. At September 30, 2012, $3.4 million remains outstanding on the convertible note, and we retain the option, through November 2014, to convert this remainder into a 15.1% of equity interest in the operator.

 

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Concentrations of Credit Risk

For the three and nine months ended September 30, 2012, revenue from affiliates of Ernest (including rent and interest from mortgage and acquisition loans) accounted for 20.8% and 18.1%, respectively, of total revenue. However, from an investment concentration perspective, Ernest represented 18.4% of our total assets at September 30, 2012.

For the three months ended September 30, 2012 and 2011, revenue from affiliates of Prime (including rent and interest from mortgage loans) accounted for 28.9% and 31.9%, respectively, of total revenue. For the nine months ended September 30, 2012 and 2011, revenue from affiliates of Prime (including rent and interest from mortgage loans) accounted for 26.3% and 31.7%, respectively, of total revenue. However, from an investment concentration perspective, Prime represented 28.7% and 25.3% of our total assets at September 30, 2012 and December 31, 2011, respectively.

On an individual property basis, we had no investment of any single property greater than 5% of our total assets as of September 30, 2012.

From a geographic perspective, all of our properties are located in the United States with 25.9% of our total assets at September 30, 2012 located in California.

 

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4. Debt

The following is a summary of debt, net of discounts (dollar amounts in thousands):

 

     As of September 30,
2012
    As of December 31,
2011
 
     Balance     Interest Rate     Balance     Interest Rate  

Revolving credit facilities (A)

   $ 125,000       Variable      $ 89,600        Variable   

2006 Senior Unsecured Notes

     125,000        Various        125,000        Various   

2011 Senior Unsecured Notes

     450,000        6.875     450,000        6.875

2012 Senior Unsecured Notes

     200,000        6.375     —       

Exchangeable senior notes:

        

Principal amount

     11,000        9.250     11,000        9.250

Unamortized discount

     (75       (180  
  

 

 

     

 

 

   
     10,925          10,820     

Term loans

     114,258        Various        14,429        6.200
  

 

 

     

 

 

   
   $ 1,025,183        $ 689,849     
  

 

 

     

 

 

   

 

(A) Our $42 million collateralized revolving credit facility expired in June 2012.

As of September 30, 2012, principal payments due for our debt (which exclude the effects of any discounts recorded) are as follows (in thousands):

 

2012

   $ 61   

2013

     11,249   

2014

     265   

2015

     125,283   

2016

     225,299   

Thereafter

     663,101   
  

 

 

 

Total

   $ 1,025,258   
  

 

 

 

To help fund the 2012 acquisitions disclosed in Note 3, on February 17, 2012, we completed a $200 million offering of senior unsecured notes (“2012 Senior Unsecured Notes”), resulting in net proceeds, after underwriting discount, of $196.5 million. These 2012 senior unsecured notes accrue interest at a fixed rate of 6.375% per year and mature on February 15, 2022. The 2012 Senior Unsecured Notes include covenants substantially consistent with our 2011 Senior Unsecured Notes.

In addition, on March 9, 2012, we closed on a $100 million senior unsecured term loan facility (“2012 Term Loan”) and exercised the $70 million accordion feature on our revolving credit facility, increasing its capacity from $330 million to $400 million ($125.0 million outstanding at September 30, 2012). The 2012 Term Loan facility has an interest rate option of (1) LIBOR plus an initial spread of 2.25% or (2) the higher of the “prime rate”, federal funds rate plus 0.5%, or Eurodollar rate plus 1.0%, plus an initial spread of 1.25%. The 2012 Term Loan facility is scheduled to mature on March 9, 2016, but we have the option to extend the facility one year to March 9, 2017.

During the second quarter 2010, we entered into an interest rate swap to fix $65 million of our 2006 Senior Unsecured Notes, which started July 31, 2011 (date on which the interest rate turned variable) through maturity date (or July 2016), at a rate of 5.507%. We also entered into an interest rate swap to fix $60 million of our 2006 Senior Unsecured Notes which started October 31, 2011 (date on which the related interest rate turned variable) through the maturity date (or October 2016) at a rate of 5.675%. At September 30, 2012 and December 31, 2011, the fair value of the interest rate swaps was $13.2 million and $12.2 million, respectively, which is reflected in accounts payable and accrued expenses on the condensed consolidated balance sheets.

We designated our interest rate swaps as cash flow hedges. Accordingly, the effective portion of changes in the fair value of our swaps is recorded as a component of accumulated other comprehensive income/loss on the balance sheet and reclassified into earnings in the same period, or periods, during which the hedged transactions effect earnings, while any ineffective portion is recorded through earnings immediately. We did not have any hedge ineffectiveness in the periods; therefore, there was no income statement effect recorded during the three and nine month periods ended September 30, 2012 or 2011. We do not expect any of the current losses included in accumulated other comprehensive loss to be reclassified into earnings in the next 12 months. At September 30, 2012 and December 31, 2011, we had $6.7 million and $6.3 million, respectively, posted as collateral, which is currently reflected in other assets on our consolidated balance sheets.

 

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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 revolving credit facility and 2012 Term Loan limit the amount of dividends we can pay as a percentage of normalized adjusted funds from operations, as defined in the agreements, on a rolling four quarter basis. Through the quarter ending June 30, the dividend restriction was 115% of normalized adjusted FFO. Thereafter, a similar dividend restriction exists but the percentage drops each quarter (110% for quarter ending September 30, 2012) until reaching 95% at September 30, 2013. The indentures governing our 2011 and 2012 Senior Unsecured Notes also limit the amount of dividends we can pay based on the sum of 95% of funds from operations, proceeds of equity issuances and certain other net cash proceeds. Finally, our 2011 and 2012 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 revolving credit facility and 2012 Term Loan contain customary financial and operating covenants, including covenants relating to our total leverage ratio, fixed charge coverage ratio, mortgage secured leverage ratio, recourse mortgage secured leverage ratio, consolidated adjusted net worth, facility leverage ratio, and borrowing base interest coverage ratio. This 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 facility, the entire outstanding balance may become immediately due and payable. At September 30, 2012, we were in compliance with all such financial and operating covenants.

5. Common Stock/Partner’s Capital

Medical Properties Trust, Inc.

To help fund the 2012 acquisitions disclosed in Note 3, on February 7, 2012, we completed an offering of 23,575,000 shares of our common stock (including 3,075,000 shares sold pursuant to the exercise in full of the underwriters’ overallotment option) at a price of $9.75 per share, resulting in net proceeds (after underwriting discount) of $220.1 million.

MPT Operating Partnership, L.P.

At September 30, 2012, the Company has a 99.8% ownership interest in Operating Partnership with the remainder owned by three other partners, two of which are employees and one of which is a director. During the nine months ended September 30, 2012, the partnership issued 23,575,000 units in direct response to the common stock offering by Medical Properties Trust, Inc.

6. Stock Awards

Our Second Amended and Restated Medical Properties Trust, Inc. 2004 Equity Incentive Plan (the “Equity Incentive Plan”) 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 7,441,180 shares of common stock for awards under the Equity Incentive Plan for which 1,436,693 shares remain available for future stock awards as of September 30, 2012. We awarded the following during 2012 and 2011:

Time-based awards — We granted 275,464 and 292,803 shares in 2012 and 2011, respectively, of time-based restricted stock to management, independent directors, and certain employees (2011 only). These awards vest quarterly based on service, over three years, in equal amounts.

Performance-based awards — Our management team and certain employees (2011 only) were awarded 252,566 and 253,655 performance based awards in 2012 and 2011, respectively. These awards vest ratably over a three year period based on the achievement of certain total shareholder return measures, with a carry-back and carryforward provision through December 31, 2015 (for the 2011 awards) and December 31, 2016 (for the 2012 awards). Dividends on these awards are paid only upon achievement of the performance measures.

Multi-year Performance-based awards — We awarded 649,793 and 600,000 shares in 2012 and 2011, respectively, of multi-year performance-based awards to management and certain employees. These shares are subject to three-year cumulative performance hurdles based on total shareholder return. At the end of the third-year performance period, any earned shares will be subject to an additional two years of ratable time-based vesting on an annual basis. Dividends are paid on these shares only upon achievement of the performance measures.

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. Included in our accounts payable and accrued expenses are our interest rate swaps, which are recorded at fair value based on Level 2 observable market assumptions using standardized derivative pricing models. We estimate the fair value of our interest and rent receivables using Level 2 inputs such as

 

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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 is generally estimated by using Level 2 and Level 3 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 exchangeable notes and 2011 and 2012 Senior Unsecured Notes, using Level 2 inputs such as quotes from securities dealers and market makers. We estimate the fair value of our 2006 Senior Unsecured Notes, revolving credit facilities, 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,
2012
    December 31,
2011
 

Asset (Liability)

   Book
Value
    Fair
Value
    Book
Value
    Fair
Value
 

Interest and rent receivables

   $ 42,094      $ 34,166      $ 29,862      $ 22,866   

Loans (1)

     333,627        333,275        239,839        243,272   

Debt, net

     (1,025,183     (1,080,514     (689,849     (688,032

 

(1) Excludes loans related to the Ernest Transaction since they are recorded at fair value and discussed below.

Items Measured at Fair Value on a Recurring Basis

As discussed in Note 2, our equity interest in Ernest and related loans are being measured at fair value on a recurring basis. At September 30, 2012, these amounts were as follows (in thousands):

 

Asset Type

   Fair
Value
     Cost      Asset Type
Classification

Mortgage loans

   $ 100,000       $ 100,000       Mortgage loans

Acquisition loan

     93,200         93,200       Other loans

Equity investments

     3,300         3,300       Other assets
  

 

 

    

 

 

    
   $ 196,500       $ 196,500      
  

 

 

    

 

 

    

Our mortgage loans with Ernest are recorded at fair value based on Level 3 inputs by discounting the estimated cash flows using the current rates which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities. Our acquisition loan and equity investments are 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 discount rates based on the risk profile of comparable companies. We classify these loans and equity investments 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 these cash flow models, our observable inputs include capitalization rates and market interest rates, and our unobservable input includes our adjustment for minority discount, which was 500 basis points at September 30, 2012.

For the quarter and nine month period ended September 30, 2012, we had no gains/losses from fair value adjustments in our income statement. However, we recorded $5.7 million and $13.5 million of interest on these loans during the three and nine months ended September 30, 2012, respectively.

8. Discontinued Operations

As disclosed in Note 3, we sold our Thornton facility in Colorado and our Denham Springs facility in Louisiana in the 2012 third quarter and our HealthSouth Rehabilitation Hospital of Fayetteville in Fayetteville, Arkansas during the 2012 second quarter. In addition, our New Bedford facility was sold in October 2012, and at September 30, 2012, we reclassified the New Bedford facility as held for sale.

 

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On December 30, 2011, we sold Mountain View Regional Rehabilitation Hospital in Morgantown, West Virginia to HealthSouth Corporation for $21.1 million, resulting in a gain of $2.3 million. We also sold Sherman Oaks Hospital in Sherman Oaks, California to Prime, on December 30, 2011 for $20.0 million, resulting in a gain of $3.1 million. Due to this sale, we wrote-off $1.2 million in straight-line rent receivables.

The following table presents the results of discontinued operations, which include the revenue and expenses of the previously-owned facilities noted above, for the three and nine months ended September 30, 2012 and 2011 (dollar amounts in thousands except per share/unit amounts):

 

     For the Three Months
Ended September 30,
     For the Nine Months
Ended September 30,
 
     2012     2011      2012      2011  

Revenues

   $ (342   $ 3,159       $ 3,455       $ 7,820   

Gain on sale

     8,726        —           7,280         5   

Income

     8,028        2,372         9,169         4,944   

Earnings per share/unit — diluted

   $ 0.06      $ 0.02       $ 0.07      $ 0.05   

9. 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 September 30,
 
     2012     2011  

Numerator:

    

Income (loss) from continuing operations

   $ 23,480      $ (1,904

Non-controlling interests’ share in continuing operations

     (44     (43

Participating securities’ share in earnings

     (225     (264
  

 

 

   

 

 

 

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

     23,211        (2,211

Income from discontinued operations attributable to MPT common stockholders

     8,028        2,372   
  

 

 

   

 

 

 

Net income, less participating securities’ share in earnings

   $ 31,239      $ 161   
  

 

 

   

 

 

 

 

                                     
     For the Three Months
Ended September 30,
 
     2012      2011  

Denominator

     

Basic weighted-average common shares

     134,781         110,714   

Dilutive share options

     1         5   
  

 

 

    

 

 

 

Dilutive weighted-average common shares

     134,782         110,719   
  

 

 

    

 

 

 

 

                                     
     For the Nine Months
Ended September 30,
 
     2012     2011  

Numerator:

    

Income from continuing operations

   $ 52,305      $ 9,031   

Non-controlling interests’ share in continuing operations

     (130     (131

Participating securities’ share in earnings

     (715     (860
  

 

 

   

 

 

 

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

     51,460        8,040   

Income from discontinued operations attributable to MPT common stockholders

     9,169        4,944   
  

 

 

   

 

 

 

Net income, less participating securities’ share in earnings

   $ 60,629      $ 12,984   
  

 

 

   

 

 

 

 

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Table of Contents
     For the Nine Months
Ended September 30,
 
     2012      2011  

Denominator

     

Basic weighted-average common shares

     131,467         110,568   

Dilutive share options

     —          8   
  

 

 

    

 

 

 

Dilutive weighted-average common shares

     131,467         110,576   
  

 

 

    

 

 

 

MPT Operating Partnership, L.P.

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

 

     For the Three Months
Ended September 30,
 
     2012     2011  

Numerator:

    

Income (loss) from continuing operations

   $ 23,480      $ (1,886

Non-controlling interests’ share in continuing operations

     (44     (43

Participating securities’ share in earnings

     (225     (264
  

 

 

   

 

 

 

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

     23,211        (2,193

Income from discontinued operations attributable to MPT Operating Partnership partners

     8,028        2,372   
  

 

 

   

 

 

 

Net income, less participating securities’ share in earnings

   $ 31,239      $ 179   
  

 

 

   

 

 

 

Denominator

    

Basic weighted-average units

     134,781        110,714   

Dilutive options

     1        5   
  

 

 

   

 

 

 

Dilutive weighted-average units

     134,782        110,719   
  

 

 

   

 

 

 

 

     For the Nine Months
Ended September 30,
 
     2012     2011  

Numerator:

    

Income from continuing operations

   $ 52,305      $ 9,093   

Non-controlling interests’ share in continuing operations

     (130     (131

Participating securities’ share in earnings

     (715     (860
  

 

 

   

 

 

 

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

     51,460        8,102   

Income from discontinued operations attributable to MPT Operating Partnership partners

     9,169        4,944   
  

 

 

   

 

 

 

Net income, less participating securities’ share in earnings

   $ 60,629      $ 13,046   
  

 

 

   

 

 

 

Denominator

    

Basic weighted-average units

     131,467        110,568   

Dilutive options

     —         8   
  

 

 

   

 

 

 

Dilutive weighted-average units

     131,467        110,576   
  

 

 

   

 

 

 

 

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For the three and nine months ended September 30, 2012 and 2011, 0.1 million of options were excluded from the diluted earnings per share/unit calculation as they were not determined to be dilutive. Shares/units that may be issued in the future in accordance with our exchangeable senior notes were excluded from the diluted earnings per share/unit calculation as they were not determined to be dilutive.

10. 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.

11. Subsequent Events

In October 2012, we agreed to fund the construction of an inpatient rehabilitation hospital in Spartanburg, SC that will be operated by Ernest. The estimated cost for the development is $18 million, and the construction is expected to be completed by the third quarter of 2013.

12. Condensed Consolidating Financial Information

The following tables present the condensed consolidating financial information for (a) Medical Properties Trust, Inc. (“Parent” and a guarantor to our 2011 and 2012 Senior Unsecured Notes), (b) MPT Operating Partnership, L.P. and MPT Finance Corporation (“Subsidiary Issuer”), (c) on a combined basis, the guarantors of our 2011 and 2012 Senior Unsecured Notes (“Subsidiary Guarantors”), and (d) on a combined basis, the non-guarantor subsidiaries (“Non-Guarantor Subsidiaries”). Separate financial statements of the Subsidiary Guarantors are not presented because the guarantee by each 100% owned Subsidiary Guarantor is joint and several, and we believe separate financial statements and other disclosures regarding the Subsidiary Guarantors are not material to investors. Furthermore, there are no significant legal restrictions on the Parent’s ability to obtain funds from its subsidiaries by dividend or loan.

The guarantees by the Subsidiary Guarantors may be released and discharged upon: (1) any sale, exchange or transfer of all of the capital stock of a Subsidiary Guarantor; (2) the merger or consolidation of a Subsidiary Guarantor with a Subsidiary Issuer or any other Subsidiary Guarantor; (3) the proper designation of any Subsidiary Guarantor by the Subsidiary Issuers as “unrestricted” for covenant purposes under the indenture governing the 2011 and 2012 Senior Unsecured Notes; (4) the legal defeasance or covenant defeasance or satisfaction and discharge of the indenture; (5) a liquidation or dissolution of a Subsidiary Guarantor permitted under the indenture governing the 2011 and 2012 Senior Unsecured Notes; or (6) the release or discharge of the Subsidiary Guarantor from its guarantee obligations under our revolving credit facility.

Subsequent to December 31, 2011, certain of our subsidiaries were re-designated as guarantors of our 2011 and 2012 Senior Unsecured Notes (such subsidiaries were non-guarantors in 2011), while other subsidiaries have been re-designated as non-guarantors as the underlying properties were sold in 2012 (such subsidiaries were guarantors during 2011). With these re-designations, we have restated the 2011 condensed consolidating financial information below to reflect these changes.

 

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Condensed Consolidated Balance Sheet

September 30, 2012

(in thousands)

 

     Parent      Subsidiary
Issuers
     Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Eliminations     Total
Consolidated
 

Assets

              

Real estate assets

              

Land, buildings and improvements and intangible lease assets

   $ —         $ 42       $ 1,185,920      $ 65,947      $ —        $ 1,251,909   

Real estate held for sale

     —           —           17,432        —          —          17,432   

Mortgage loans

     —           —           268,650        100,000        —          368,650   

Net investment in direct financing leases

     —           —           110,000        202,050        —          312,050   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Gross investment in real estate assets

     —           42         1,582,002        367,997        —          1,950,041   

Accumulated depreciation and amortization

     —           —           (114,188     (6,027     —          (120,215
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net investment in real estate assets

        42         1,467,814        361,970        —          1,829,826   

Cash & cash equivalents

     —           34,371         1,565        227        —          36,163   

Interest and rent receivable

     —           540         27,881        13,673        —          42,094   

Straight-line rent receivable

     —           —           31,882        6,183        —          38,065   

Other loans

     —           176         —          158,001        —          158,177   

Net intercompany receivable (payable)

     26,750         1,410,629         (1,039,740     (397,639     —          —     

Investment in subsidiaries

     1,033,548         602,443         43,693        —          (1,679,684     —     

Other assets

     —           32,330         1,148        20,596        —          54,074   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

   $ 1,060,298       $ 2,080,531       $ 534,243      $ 163,011      $ (1,679,684   $ 2,158,399   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Equity

              

Liabilities

              

Debt, net

   $ —         $ 1,010,925       $ —        $ 14,258      $ —        $ 1,025,183   

Accounts payable and accrued expenses

     27,140         35,958         731        468        —          64,297   

Deferred revenue

     —           100         18,796        1,478        —          20,374   

Lease deposits and other obligations to tenants

     —           —           14,372        1,015        —          15,387   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     27,140         1,046,983         33,899        17,219        —          1,125,241   

Total equity

     1,033,158         1,033,548         500,344        145,792        (1,679,684     1,033,158   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities and Equity

   $ 1,060,298       $ 2,080,531       $ 534,243      $ 163,011      $ (1,679,684   $ 2,158,399   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidated Statements of Income

For the Three Months Ended September 30, 2012

(in thousands)

 

     Parent     Subsidiary
Issuers
    Subsidiary
Guarantors
     Non-Guarantor
Subsidiaries
    Eliminations     Total
Consolidated
 

Revenues

             

Rent billed

   $ —        $ —        $ 29,256       $ 4,162      $ (2,335   $ 31,083   

Straight-line rent

     —          —          2,387         375        —          2,762   

Income from direct financing leases

     —          —          5,238         5,394        (4,859     5,773   

Interest and fee income

     —          5,242        8,917         6,943        (7,065     14,037   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     —          5,242        45,798         16,874        (14,259     53,655   

Expenses

             

Real estate depreciation and amortization

     —          —          8,066         425        —          8,491   

Property-related

     —          88        121         7,203        (7,194     218   

General and administrative

     —          6,332        —           720        —          7,052   

Acquisition expenses

     —          410        —           —          —          410   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          6,830        8,187         8,348        (7,194     16,171   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (expense)

     —          (1,588     37,611         8,526        (7,065     37,484   

Other income (expense)

             

Interest and other income (expense)

     —          (21     —           (2     —          (23

Earnings from equity and other interests

     —          —          330         735        —          1,065   

Interest expense

     —          (15,203     389         (7,297     7,065        (15,046
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net other income (expense)

     —          (15,224     719         (6,564     7,065        (14,004
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     —          (16,812     38,330         1,962        —          23,480   

Income (loss) from discontinued operations

     —          —          1,069         6,959        —          8,028   

Equity in earnings of consolidated subsidiaries net of income taxes

     31,508        48,320        1,129         —          (80,957     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

     31,508        31,508        40,528         8,921        (80,957     31,508   

Net income (loss) attributable to non-controlling interests

     (44     (44     —           —          44        (44
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to MPT common stockholders

   $ 31,464      $ 31,464      $ 40,528       $ 8,921      $ (80,913   $ 31,464   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidated Statements of Income

For the Nine Months Ended September 30, 2012

(in thousands)

 

     Parent     Subsidiary
Issuers
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Eliminations     Total
Consolidated
 

Revenues

            

Rent billed

   $ —        $ —        $ 87,579      $ 12,447      $ (6,926   $ 93,100   

Straight-line rent

     —          —          4,354        1,119        —          5,473   

Income from direct financing leases

     —          —          11,730        12,600        (11,351     12,979   

Interest and fee income

     —          13,219        20,621        17,357        (17,711     33,486   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     —          13,219        124,284        43,523        (35,988     145,038   

Expenses

            

Real estate depreciation and amortization

     —          —          24,117        1,275        —          25,392   

Property-related

     —          349        597        18,375        (18,277     1,044   

General and administrative

     —          20,067        —          1,274        —          21,341   

Acquisition expenses

     —          4,115        —          —          —          4,115   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          24,531        24,714        20,924        (18,277     51,892   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (expense)

     —          (11,312     99,570        22,599        (17,711     93,146   

Other income (expense)

            

Interest and other income (expense)

     —          (49     (2     (4     —          (55

Earnings from equity and other interests

     —          —          783        1,161        —          1,944   

Interest expense

     —          (42,905     867        (18,403     17,711        (42,730
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other income (expense)

     —          (42,954     1,648        (17,246     17,711        (40,841
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     —          (54,266     101,218        5,353        —          52,305   

Income (loss) from discontinued operations

     —          —          2,363        6,806        —          9,169   

Equity in earnings of consolidated subsidiaries net of income taxes

     61,474        115,740        3,367        —          (180,581     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     61,474        61,474        106,948        12,159        (180,581     61,474   

Net income (loss) attributable to non-controlling interests

     (130     (130     —          —          130        (130
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to MPT common stockholders

   $ 61,344      $ 61,344      $ 106,948      $ 12,159      $ (180,451   $ 61,344   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

Condensed Consolidated Statements of Comprehensive Income (Loss)

For the Three Months Ended September 30, 2012

(in thousands)

 

     Parent     Subsidiary
Issuers
    Subsidiary
Guarantors
     Non-Guarantor
Subsidiaries
     Eliminations     Total
Consolidated
 

Net income

   $ 31,508      $ 31,508      $ 40,528       $ 8,921       $ (80,957   $ 31,508   

Other comprehensive income:

              

Unrealized loss on interest rate swap

     (443     (443     —           —           443        (443
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income

     31,065        31,065        40,528         8,921         (80,514     31,065   

Comprehensive income attributable to non-controlling interests

     (44     (44     —           —           44        (44
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to MPT common stockholders

   $ 31,021      $ 31,021      $ 40,528       $ 8,921       $ (80,470   $ 31,021   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

For the Nine Months Ended September 30, 2012

(in thousands)

 

     Parent     Subsidiary
Issuers
    Subsidiary
Guarantors
     Non-Guarantor
Subsidiaries
     Eliminations     Total
Consolidated
 

Net income

   $ 61,474      $ 61,474      $ 106,948       $ 12,159       $ (180,581   $ 61,474   

Other comprehensive income:

              

Unrealized loss on interest rate swap

     (989     (989     —           —           989        (989
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total comprehensive income

     60,485        60,485        106,948         12,159         (179,592     60,485   

Comprehensive income attributable to non-controlling interests

     (130     (130     —           —           130        (130
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to MPT common stockholders

   $ 60,355      $ 60,355      $ 106,948       $ 12,159       $ (179,462   $ 60,355   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

27


Table of Contents

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2012

(in thousands)

 

    Parent     Subsidiary
Issuers
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Eliminations     Total
Consolidated
 

Operating Activities

           

Net cash provided by (used in) operating activities

  $ 16      $ (38,780   $ 114,073      $ (600   $ —        $ 74,709   

Investing Activities

           

Cash paid for acquisitions and other related investments

    —          —          (410,000     (196,500     —          (606,500

Principal received on loans receivable

    —          —          5,491        4,016        —          9,507   

Net proceeds from sales of real estate

    —          —          800        33,300        —          34,100   

Investments in and advances to subsidiaries

    (143,554     (540,016     377,472        162,560        143,538        —     

Investments in loans receivable

    —          —          —          (1,293     —          (1,293

Construction in progress and other

    —          (59     (34,349     (1,512     —          (35,920
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    (143,554     (540,075     (60,586     571        143,538        (600,106

Financing Activities

           

Revolving credit facilities, net

    —          75,000        (39,600     —          —          35,400   

Additions to term debt

    —          300,000        —          —          —          300,000   

Payments of term debt

    —          —          —          (171     —          (171

Distributions paid

    (76,569     (76,770     —          —          76,569        (76,770

Sale of common stock, net

    220,107        220,107        —          —          (220,107     220,107   

Lease deposits and other obligations to tenants

    —          —          (13,731     340        —          (13,391

Debt issuance costs paid and other financing activities

    —          (6,341     —          —          —          (6,341
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    143,538        511,996        (53,331     169        (143,538     458,834   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in cash and cash equivalents for period

    —          (66,859     156        140        —          (66,563

Cash and cash equivalents at beginning of period

    —          101,230        1,409        87        —          102,726   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ —        $ 34,371      $ 1,565      $ 227      $ —        $ 36,163   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

Condensed Consolidated Balance Sheet

December 31, 2011

(in thousands)

 

    Parent     Subsidiary
Issuers
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Eliminations     Total
Consolidated
 

Assets

           

Real estate assets

           

Land, buildings and improvements and intangible lease assets

  $ —        $ 37      $ 1,151,574      $ 65,948      $ —        $ 1,217,559   

Real estate held for sale

    —          —          22,008       26,917        —          48,925   

Mortgage loans

    —          —          165,000        —          —          165,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross investment in real estate assets

    —          37        1,338,582        92,865        —          1,431,484   

Accumulated depreciation and amortization

    —          —          (90,072     (4,750     —          (94,822
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment in real estate assets

    —          37        1,248,510        88,115        —          1,336,662   

Cash & cash equivalents

    —          101,230        1,409        87        —          102,726   

Interest and rent receivable

    —          399        22,528        6,935        —          29,862   

Straight-line rent receivable

    —          —          27,388        6,605        —          33,993   

Other loans

    —          178        5,491        69,170        —          74,839   

Net intercompany receivable (payable)

    21,955        872,380        (862,281     (32,054     —          —     

Investment in subsidiaries

    829,205        489,858        43,008        —          (1,362,071     —     

Other assets

    —          27,285        2,151        14,356        —          43,792   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

  $ 851,160      $ 1,491,367      $ 488,204      $ 153,214      $ (1,362,071   $ 1,621,874   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Equity

           

Liabilities

           

Debt, net

  $ —        $ 635,820      $ 39,600      $ 14,429      $ —        $ 689,849   

Accounts payable and accrued expenses

    22,345        25,783        2,578        419        —          51,125   

Deferred revenue

    —          559        21,372        1,376        —          23,307   

Lease deposits and other obligations to tenants

    —          —          28,103        675        —          28,778   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    22,345        662,162        91,653        16,899        —          793,059   

Total equity

    828,815        829,205        396,551        136,315        (1,362,071     828,815   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities and Equity

  $ 851,160      $ 1,491,367      $ 488,204      $ 153,214      $ (1,362,071   $ 1,621,874   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

Condensed Consolidated Statements of Income

For the Three Months Ended September 30, 2011

(in thousands)

 

    Parent     Subsidiary
Issuers
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Eliminations     Total
Consolidated
 

Revenues

           

Rent billed

  $ —        $ —        $ 25,903      $ 2,188      $ (331   $ 27,760   

Straight-line rent

    —          —          1,219        424        —          1,643   

Interest and fee income

    —          1,351        4,146        920        (1,188     5,229   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    —          1,351        31,268        3,532        (1,519     34,632   

Expenses

           

Real estate depreciation and amortization

    —          —          7,212        488        —          7,700   

Property-related

    —          87        171        333        (331     260   

General and administrative

    18        6,348        —         (629     —          5,737   

Acquisition expenses

    —          513        469       (452     —          530   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    18        6,948        7,852        (260     (331     14,227   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (18     (5,597     23,416        3,792        (1,188     20,405   

Other income (expense)

           

Interest and other income (expense)

    —          44       
—  
  
    (2     —          42   

Earnings from equity and other interests

    —          —          84        (75     —          9   

Debt refinancing costs

    —          (10,425     —          —          —          (10,425

Interest expense

    —          (11,735     63        (1,451     1,188        (11,935
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other income (expense)

    —          (22,116     147        (1,528     1,188        (22,309
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (18     (27,713     23,563        2,264        —          (1,904

Income (loss) from discontinued operations

    —          —          787        1,585        —          2,372   

Equity in earnings of consolidated subsidiaries net of income taxes

    486        28,199        1,112        —          (29,797     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    468        486        25,462        3,849        (29,797     468   

Net income (loss) attributable to non-controlling interests

    (43     (43     —          —          43        (43
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to MPT common stockholders

  $ 425      $ 443      $ 25,462      $ 3,849      $ (29,754   $ 425   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

Condensed Consolidated Statements of Income

For the Nine Months Ended September 30, 2011

(in thousands)

 

    Parent     Subsidiary
Issuers
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Eliminations     Total
Consolidated
 

Revenues

           

Rent billed

  $ —        $ —        $ 76,284      $ 5,796      $ (994   $ 81,086   

Straight-line rent

    —          —          3,974        1,344        —          5,318   

Interest and fee income

    —          4,118        13,087        2,597        (4,088     15,714   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    —          4,118        93,345        9,737        (5,082     102,118   

Expenses

           

Real estate depreciation and amortization

    —          —          21,216        1,292        —          22,508   

Property-related

    —          87       213        1,040        (994     346   

General and administrative

    62        18,356        —         2,011        —          20,429   

Acquisition expenses

    —          2,717        469       —          —          3,186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    62        21,160        21,898        4,343        (994     46,469   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (62     (17,042     71,447        5,394        (4,088     55,649   

Other income (expense)

           

Interest income and other

    —          42        2        (56     —          (12

Earnings from equity and other interests

    —          —          84        (14     —          70   

Debt refinancing costs

    —          (14,109     (105     —          —          (14,214

Interest expense

    —          (31,750     (31     (4,769     4,088        (32,462
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other income (expense)

    —          (45,817     (50     (4,839     4,088        (46,618
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (62     (62,859     71,397        555        —          9,031   

Income (loss) from discontinued operations

    —          —          263        4,681        —          4,944   

Equity in earnings of consolidated subsidiaries net of income taxes

    14,037        76,896        3,457        —          (94,390     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    13,975        14,037        75,117        5,236        (94,390     13,975   

Net income (loss) attributable to non-controlling interests

    (131     (131     —          —          131        (131
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to MPT common stockholders

  $ 13,844      $ 13,906      $ 75,117      $ 5,236      $ (94,259   $ 13,844   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

31


Table of Contents

Condensed Consolidated Statements of Comprehensive Income (Loss)

For the Three Months Ended September 30, 2011

(in thousands)

 

    Parent     Subsidiary
Issuers
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Eliminations     Total
Consolidated
 

Net income (loss)

  $ 468      $ 486      $ 25,462      $ 3,849      $ (29,797   $ 468   

Other comprehensive income (loss):

           

Unrealized loss on interest rate swap

    (5,272     (5,272     —          —          5,272        (5,272
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

    (4,804     (4,786     25,462        3,849        (24,525     (4,804

Comprehensive income attributable to non-controlling interests

    (43     (43     —          —          43        (43
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to MPT common stockholders

  $ (4,847   $ (4,829   $ 25,462      $ 3,849      $ (24,482   $ (4,847
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

For the Nine Months Ended September 30, 2011

(in thousands)

 

    Parent     Subsidiary
Issuers
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Eliminations     Total
Consolidated
 

Net income

  $ 13,975      $ 14,037      $ 75,117      $ 5,236      $ (94,390   $ 13,975   

Other comprehensive income:

           

Unrealized loss on interest rate swap

    (8,341     (8,341     —          —          8,341        (8,341
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

    5,634        5,696        75,117        5,236        (86,049     5,634   

Comprehensive income attributable to non-controlling interests

    (131     (131     —          —          131        (131
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to MPT common stockholders

  $ 5,503      $ 5,565      $ 75,117      $ 5,236      $ (85,918   $ 5,503   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2011

(in thousands)

 

    Parent     Subsidiary
Issuers
    Subsidiary
Guarantors
    Non-Guarantor
Subsidiaries
    Eliminations     Total
Consolidated
 

Operating Activities

           

Net cash provided by (used in) operating activities

  $ (124   $ (26,727   $ 86,364      $ 7,615      $ —        $ 67,128   

Investing Activities

           

Cash paid for acquisitions and other related investments

    —          —          (191,625     (17,288     —          (208,913

Principal received on loans receivable

    —          —          —          2,898        —          2,898   

Investments in and advances to subsidiaries

    67,126        (89,763     81,565        8,074        (67,002     —     

Investments in loans receivable

    —          (205     (3,314     (879     —          (4,398

Construction in progress and other

    —          —          (12,297     —          —          (12,297
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    67,126        (89,968     (125,671     (7,195     (67,002     (222,710

Financing Activities

           

Revolving credit facilities, net

    —          —          39,600        —          —          39,600   

Additions to term debt

    —          450,000        —          —          —          450,000   

Payments of term debt

    —          (229,271     (8,433     (106     —          (237,810

Distributions paid

    (67,002     (67,194     —          —          67,002        (67,194

Lease deposits and other obligations to tenants

    —          —          8,140        (527     —          7,613   

Debt issuance costs paid and other financing activities

    —          (20,530     —          (137     —          (20,667
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    (67,002     133,005        39,307        (770     67,002        171,542   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents for period

    —          16,310        —          (350     —          15,960   

Cash and cash equivalents at beginning of period

    —          96,822        —          1,586        —          98,408   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ —        $ 113,132      $ —        $ 1,236      $ —        $ 114,368   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 discussion and analysis of the consolidated financial condition and consolidated results of operations should be read together with the condensed consolidated financial statements and notes thereto contained in this Form 10-Q and the financial statements and notes thereto contained in our Annual Report on Form 10-K (as amended) for the year ended December 31, 2011.

Forward-Looking Statements.

This report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or future performance, achievements or

transactions or events to be materially different from those expressed or implied by such forward-looking statements, including, but not limited to, the risks described in our Annual Report on Form 10-K for the year ended December 31, 2011, as amended and as updated in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. Such factors include, among others, the following:

 

 

national and local economic, business, real estate and other market conditions;

 

 

the competitive environment in which we operate;

 

 

the execution of our business plan;

 

 

financing risks;

 

 

acquisition and development risks;

 

 

potential environmental contingencies and other liabilities;

 

 

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

 

 

our ability to maintain our status as a REIT for federal and state income tax purposes;

 

 

our ability to attract and retain qualified personnel;

 

 

federal and state healthcare regulatory requirements; and

 

 

the continuing impact of the recent economic recession, which may have a negative effect on the following, among other things:

 

   

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

 

   

our ability to obtain equity and debt financing on attractive terms or at all, which may adversely impact our ability to pursue acquisition and development opportunities 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 revenues are derived primarily from rents we earn pursuant to the lease agreements with our tenants and from interest income from loans to our tenants and other facility owners. 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. 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 lease and loan 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:

 

 

the historical and prospective operating margins (measured by a tenant’s 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;

 

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trends in the source of our tenants’ or borrowers’ revenue, including the relative mix of Medicare, Medicaid/MediCal, managed care, commercial insurance, and private pay patients; and

 

 

the effect of evolving healthcare regulations on our tenants’ and borrowers’ profitability, including recent healthcare reform and legislation.

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’ 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 2011 Annual Report on Form 10-K, as amended, 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, exchangeable senior notes, and our accounting policy on consolidation. During the nine months ended September 30, 2012, there were no material changes to these policies, except we began using direct financing lease (“DFL”) accounting with the acquisition and lease of the real estate of Ernest along with that of the Reno and Roxborough facilities. Under DFL accounting, future minimum lease payments are recorded as a receivable. Unearned income, which represents the net investment in the DFL less the sum of minimum lease payments receivable and the estimated residual values of the leased properties, is deferred and amortized to income over the lease term to provide a constant yield when collectability of the lease payments is reasonably assured. Investments in DFLs are presented net of unamortized and unearned income. DFLs are placed on non-accrual status when management determines that the collectability of contractual amounts is not reasonably assured. While on non-accrual status, DFLs are accounted for on a cash basis, in which income is recognized only upon receipt of cash.

Overview

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

At September 30, 2012, our portfolio consisted of 81 properties: 67 facilities (of the 73 facilities that we own, of which two are subject to long-term ground leases) are leased to 21 tenants, one was not under lease as it is under re-development, five were under development, and the remaining assets are in the form of first mortgage loans to three operators. Our facilities consisted of 30 general acute care hospitals, 26 long-term acute care hospitals, 17 inpatient rehabilitation hospitals, two medical office buildings, and six wellness centers.

 

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All of our investments are currently located in the United States. The following is our revenue by operating type (dollar amounts in thousands):

Revenue by property type:

 

     For the Three
Months Ended
September 30,
2012
     % of
Total
    For the Three
Months Ended
September 30,
2011
     % of
Total
 

General Acute Care Hospitals

   $ 29,219         54.5   $ 21,987         63.5

Long-term Acute Care Hospitals

     13,576         25.3     8,257         23.8

Rehabilitation Hospitals

     9,947         18.5     3,540         10.2

Medical Office Buildings

     498         0.9     433         1.3

Wellness Centers

     415         0.8     415         1.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue

   $ 53,655         100.0   $ 34,632         100.0
  

 

 

      

 

 

    
    

 

For the Nine 
Months Ended
September 30,
2012

     % of
Total
    For the Nine
Months Ended
September 30,
2011
     % of
Total
 

General Acute Care Hospitals

   $ 79,410         54.8   $ 65,020         63.7

Long-term Acute Care Hospitals

     37,307         25.7     23,937         23.4

Rehabilitation Hospitals

     25,685         17.7     10,617         10.4

Medical Office Buildings

     1,390         1.0     1,298         1.3

Wellness Centers

     1,246         0.8     1,246         1.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue

   $ 145,038         100.0   $ 102,118         100.0
  

 

 

      

 

 

    

We have 33 employees as of November 5, 2012. We believe that any currently anticipated 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 September 30, 2012 Compared to September 30, 2011

Net income for the three months ended September 30, 2012 was $31.5 million, compared to $0.4 million for the three months ended September 30, 2011. This increase was primarily the result of acquisitions made subsequent to September 2011 and the refinancing charges that were incurred in 2011. Funds from operations (“FFO”), after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $33.4 million, or $0.25 per diluted share for the 2012 third quarter as compared to $19.5 million, or $0.18 per diluted share for the 2011 third quarter. These increases were primarily the result of the acquisitions made subsequent to September 2011.

A comparison of revenues for the three month periods ended September 30, 2012 and 2011 is as follows, as adjusted in 2011 for discontinued operations (dollar amounts in thousands):

 

     2012      % of
Total
    2011      % of
Total
    Year over
Year
Change
 

Base rents

   $ 30,599         57.0   $ 27,283         78.8     12.2

Straight-line rents

     2,762         5.1     1,643         4.7     68.1

Percentage rents

     484         0.9     477         1.4     1.5

Fee income

     187         0.4      21         0.1     790.4

Income from direct financing leases

     5,773         10.8     —           —       100.0

Interest from loans

     13,850         25.8     5,208         15.0     165.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total revenue

   $ 53,655         100.0   $ 34,632         100.0     54.9
  

 

 

    

 

 

   

 

 

    

 

 

   

Base rents for the 2012 third quarter increased 12.2% versus the prior year as a result of the additional rent generated from annual escalation provisions in our leases and $2.8 million of incremental revenue from properties acquired or completed since September 2011. Income from direct financing leases is related to the Ernest Transaction and the Roxborough and Reno facilities.

 

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Interest from loans is higher than the prior year due to the $5.7 million and $2.6 million of additional interest related to the Ernest and Centinela loans, respectively.

Real estate depreciation and amortization during the third quarter of 2012 increased to $8.5 million from $7.7 million in the same period of 2011, due to the incremental depreciation from the properties acquired since September 2011.

General and administrative expenses totaled $7.1 million for the 2012 third quarter, which is 13.1% of total revenues, down from 16.6% of revenues in the prior year third 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 revenues substantially without significantly increasing our headcount and related expenses. On a dollar basis, our general and administrative costs are up over the 2011 third quarter primarily due to higher travel costs.

In the 2012 third quarter, we recognized $1.1 million of earnings from equity and other interests in certain of our tenants, which is a substantial increase from the 2011 third quarter. This increase is primarily related to having a full three months of returns from certain equity investees along with improved results from each of our profit and equity interests.

Interest expense (including debt refinancing costs) for the quarters ended September 30, 2012 and 2011 totaled $15.0 million and $22.4 million, respectively. This decrease is primarily related to the debt refinancing costs in 2011 of $10.4 million partially offset by higher debt balances associated with our 2012 Senior Unsecured Notes and 2012 Term Loan. See Note 4 to our Condensed Consolidated Financial Statements in Item 1 to this Form 10-Q for further information on our debt activities.

In addition to the items noted above, net income for the third quarter of 2012 and 2011, was impacted by discontinued operations. See Note 8 to our Condensed Consolidated Financial Statements in Item 1 to this Form 10-Q for further information.

Nine Months Ended September 30, 2012 Compared to September 30, 2011

Net income for the nine months ended September 30, 2012, was $61.3 million compared to net income of $13.8 million for the nine months ended September 30, 2011. This increase was primarily related to acquisitions made subsequent to September 2011 and the debt refinancing charges that were incurred in 2011, partially offset by higher interest expense due to additional debt incurred in 2012. FFO, after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $85.5 million, or $0.65 per diluted share for the first nine months in 2012 as compared to $57.5 million, or $0.52 per diluted share for the first nine months of 2011. These increases are primarily the result of the acquisitions made since September 2011.

A comparison of revenues for the nine month periods ended September 30, 2012 and 2011 is as follows (dollar amounts in thousands):

 

     2012      % of
Total
    2011      % of
Total
    Year over
Year
Change
 

Base rents

   $ 91,233         62.9   $ 79,300         77.7     15.0

Straight-line rents

     5,473         3.8     5,318         5.2     2.9

Percentage rents

     1,867         1.3     1,786         1.7     4.5

Fee income

     343         0.2     99         0.1     250.0

Income from direct financing leases

     12,979         8.9     —           —       100.0

Interest from loans

     33,143         22.9     15,615         15.3     112.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total revenue

   $ 145,038         100.0   $ 102,118         100.0     42.0
  

 

 

    

 

 

   

 

 

    

 

 

   

Base rents for the 2012 first nine months of 2012 increased 15.0% versus the prior year as a result of the additional rent generated from annual escalation provisions in our leases and $10.5 million of incremental revenue from the properties acquired or completed since September 2011. Income from direct financing leases is solely related to the Ernest Transaction and the new Roxborough and Reno facilities. Interest from loans is higher than the prior year due to the $13.5 million, $1.4 million, and $2.6 million of additional interest related to the Ernest, Hoboken, and Centinela loans, respectively.

Acquisition expenses increased from $3.2 million to $4.1 million primarily as a result of the Ernest Transaction in 2012.

Real estate depreciation and amortization during the first nine months of 2012 was $25.4 million, compared to $22.5 million in the same period of 2011 due to the incremental depreciation from the properties acquired since September 2011.

General and administrative expenses in the first three quarters of 2012 totaled $21.3 million, which is 14.7% of revenues down from 20.0% of revenues in the prior year as revenues are up significantly over the prior year due to the acquisitions, while, on a dollar basis, our costs have been basically flat.

We recognized $1.9 million of earnings from equity and other interests in certain of our tenants in the first nine months of 2012, which is up significantly over the 2011 same period due to the timing of when these investments were made in the prior year along with improved results from each of our profit and equity investees during the first nine months of 2012.

Interest expense (including debt refinancing costs) for the first nine months of 2012 and 2011 totaled $42.7 million and $46.7 million, respectively. In 2011, we recorded a charge of $14.2 million related to our debt refinancing activities. This is partially offset by higher debt balances associated with our 2012 Senior Unsecured Notes and 2012 Term Loan. See Note 4 to our Condensed Consolidated Financial Statements in Item 1 to this Form 10-Q for further information on our debt activities.

 

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In addition to the items noted above, net income for the nine month periods of 2012 and 2011 was impacted by discontinued operations. See Note 8 to our Condensed Consolidated Financial Statements in Item 1 to this Form 10-Q for further information.

Reconciliation of Non-GAAP Financial Measures

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

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

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

 

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The following table presents a reconciliation of FFO to net income attributable to MPT common stockholders for the three and nine months ended September 30, 2012 and 2011 ($ amounts in thousands except per share data):

 

    For the Three Months Ended     For the Nine Months Ended  
    September 30,
2012
    September 30,
2011
    September 30,
2012
    September 30,
2011
 

FFO information:

       

Net income attributable to MPT common stockholders

  $ 31,464      $ 425      $ 61,344      $ 13,844   

Participating securities’ share in earnings

    (225     (264     (715     (860
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income, less participating securities’ share in earnings

  $ 31,239      $ 161      $ 60,629      $ 12,984   

Depreciation and amortization:

       

Continuing operations

    8,491        7,700        25,392        22,508   

Discontinued operations

    311        729        1,021        2,169   

Loss (gain) on sale of real estate

    (8,726     —          (7,280     (5

Real estate impairment charge

    —          —          —          564   
 

 

 

   

 

 

   

 

 

   

 

 

 

Funds from operations

  $ 31,315      $ 8,590      $ 79,762      $ 38,220   

Write-off of straight line rent

    1,640        —          1,640        —     

Acquisition costs

    410        530        4,115        3,186   

Debt refinancing costs

    —          10,425        —          14,214   

Write-off of other receivables

    —          —          —          1,846   
 

 

 

   

 

 

   

 

 

   

 

 

 

Normalized funds from operations

  $ 33,365      $ 19,545      $ 85,517      $ 57,466   
 

 

 

   

 

 

   

 

 

   

 

 

 

Per diluted share data:

       

Net income, less participating securities’ share in earnings

  $ 0.23      $ —        $ 0.46      $ 0.12   

Depreciation and amortization:

       

Continuing operations

    0.06        0.07        0.19        0.20   

Discontinued operations

    —          0.01        0.01       0.02   

Real estate impairment charge

    —          —          —          0.01   

Loss (gain) on sale of real estate

    (0.06     —          (0.05     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Funds from operations

  $ 0.23      $ 0.08      $ 0.61      $ 0.35   

Write-off of straight line rent

    0.01       —          0.01        —     

Acquisition costs

    0.01       0.01        0.03        0.03   

Debt refinancing costs

    —          0.09        —          0.13   

Write-off of other receivables

    —          —          —          0.01   
 

 

 

   

 

 

   

 

 

   

 

 

 

Normalized funds from operations

  $ 0.25      $ 0.18      $ 0.65      $ 0.52   
 

 

 

   

 

 

   

 

 

   

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

During the first nine months of 2012, operating cash flows, which primarily consisted of rent and interest from mortgage and working capital loans, were $74.7 million, which with cash on-hand, were principally used to fund our dividends of $76.8 million and working capital needs.

To fund the Ernest Transaction disclosed in Note 3 to our Condensed Consolidated Financial Statements in Item 1 to this Form 10-Q, on February 7, 2012, we completed an offering of 23,575,000 shares of our common stock (including 3,075,000 shares sold pursuant to the exercise in full of the underwriters’ overallotment option), resulting in net proceeds (after underwriting discount) of $220.1 million. In addition, on February 17, 2012, we completed a $200 million offering of senior unsecured notes, resulting in net proceeds, after underwriting discount, of $196.5 million, which we also used to fund the Ernest Transaction. On March 9, 2012, we closed on a $100 million senior unsecured term loan facility and exercised the $70 million accordion feature on our revolving credit facility. Proceeds from the new term loan facility, our revolving credit facility and property sales were used to fund the $210 million of investments in the third quarter and further cash outlays on our development projects.

During the first nine months of 2011, operating cash flows, which primarily consisted of rent and interest from mortgage and working capital loans, approximated $67.1 million, which, along with cash on hand, draws on our revolvers and issuance of our 2011 Senior Unsecured Notes, were principally used to fund our dividends of $67.2 million and investing activities of $222.7 million.

 

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Short-term Liquidity Requirements: At November 6, 2012, our availability under our 2010 amended revolving credit facility plus cash on-hand approximated $310 million. We have only nominal principal payments due and no significant maturities in 2012– see five-year debt maturity schedule below. We believe that the liquidity available to us, along with our current monthly cash receipts from rent and loan interest, is sufficient to provide the resources necessary for operations, debt and interest obligations, our firm commitments (including capital expenditures, if any), dividends in order to comply with REIT requirements and to fund our current investment strategies for the next twelve months. In addition, we have an at-the-market equity offering program in place under which we may sell up to $50 million in shares (of which $10 million has been sold to-date) which may be used for general corporate purposes as needed.

Long-term Liquidity Requirements: As of September 30, 2012, we had less than $12 million in debt principal payments due before 2015 – see five-year debt maturity schedule below. With our current liquidity along with our current monthly cash receipts from rent and loan interest, and availability under our at-the-market equity offering program, we believe we have the liquidity available to us to fund our operations, debt and interest obligations, dividends in order to comply with REIT requirements, firm commitments (including capital expenditures, if any) and investment strategies for the foreseeable future.

As of November 6, 2012, principal payments due for our debt (which exclude the effects of any discounts recorded) are as follows (in thousands):

 

2012

   $ 21   

2013

     11,249   

2014

     265   

2015

     125,283   

2016

     225,299   

Thereafter

     663,101   
  

 

 

 

Total

   $ 1,025,218   
  

 

 

 

 

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Table of Contents

Distribution Policy

The table below is a summary of our distributions declared during the two year period ended September 30, 2012:

 

Declaration Date

   Record Date    Date of Distribution    Distribution
per Share
 

August 16, 2012

   September 13, 2012    October 11, 2012    $ 0.20   

May 17, 2012

   June 14, 2012    July 12, 2012    $ 0.20   

February 16, 2012

   March 15, 2012    April 12, 2012    $ 0.20   

November 10, 2011

   December 8, 2011    January 5, 2012    $ 0.20   

August 18, 2011

   September 15, 2011    October 13, 2011    $ 0.20   

May 19, 2011

   June 16, 2011    July 14, 2011    $ 0.20   

February 17, 2011

   March 17, 2011    April 14, 2011    $ 0.20   

November 11, 2010

   December 9, 2010    January 6, 2011    $ 0.20   

We intend to pay to our stockholders, within the time periods prescribed by the Internal Revenue Code (“Code”), all or substantially all of our annual taxable income, including taxable gains from the sale of real estate and recognized gains on the sale of securities. It is our policy to make sufficient cash distributions to stockholders in order for us to maintain our status as a REIT under the Code and to avoid corporate income and excise taxes on undistributed income. See Note 4 to our condensed consolidated financial statements in Item 1 to this Form 10-Q for any restrictions placed on dividends by our existing credit facility.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our primary exposure to market risks relates to changes in interest rates and equity prices. 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 affected also by changes in “cap” rates, which is measured by the current annual base rent divided by the current market value of a facility.

Our primary exposure to market risks relates to fluctuations in interest rates and equity prices. 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 equity prices as if these changes had occurred. The hypothetical changes chosen for these analyses reflect our view of changes that are reasonably possible over a one year period. These forward looking disclosures are selective in nature and only address the potential impact from financial instruments. They do not include other potential effects which could impact our business as a result of changes in market conditions.

Interest Rate Sensitivity

For fixed rate debt, interest rate changes affect the fair market value but do not impact net income to common stockholders or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact net income to common stockholders and cash flows, assuming other factors are held constant. At September 30, 2012, our outstanding debt totaled $1,025.2 million, which consisted of fixed-rate debt of $800.2 million (including $125.0 million of floating debt swapped to fixed) and variable rate debt of $225.0 million. If market interest rates increase by one-percentage point, the fair value of our fixed rate debt, after considering the effects of the interest rate swaps entered into in 2010, would decrease by $35.4 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 markets.

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 $2.3 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 $2.3 million per year. This assumes that the average amount outstanding under our variable rate debt for a year is $225.0 million, the balance of our 2012 Term Loan and revolving credit facility at September 30, 2012.

Share Price Sensitivity

At November 6, 2012, we have $11 million in 2008 exchangeable notes outstanding. These notes have a conversion adjustment feature, which could affect their stated exchange ratio of 80.8898 common shares per $1,000 principal amount of notes, equating to an exchange price of $12.36 per common share. Our dividends declared since we sold the 2008 exchangeable notes have not adjusted our conversion price as of September 30, 2012. Future changes to the conversion price will depend on our level of dividends which cannot be predicted at this time. Any adjustments for dividend increases until the 2008 exchangeable notes are settled in 2013 will affect the

 

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price of the notes and the number of shares for which they may eventually be settled. Using the outstanding notes and, assuming a price of $20 per share, we would be required to issue an additional 0.3 million shares. At $25 per share, we would be required to issue an additional 0.4  million shares.

Item 4. Controls and Procedures.

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

As required by Rule 13a-15(b), under the Securities Exchange Act of 1934, as amended, we have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in 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.

None.

Item 1A. Risk Factors.

There have been no material changes to the Risk Factors as presented in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2011 and as updated in our Quarterly Report on Form 10-Q filed for the quarter ended June 30, 2012.

 

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

 

(a) None.

 

(b) Not applicable.

 

(c) None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

 

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Item 5. Other Information.

 

(a) None.

 

(b) None.

Item 6. Exhibits.

 

Exhibit

Number

  

Description

               10.1    Master Lease Agreement I between certain subsidiaries of MPT Operating Partnership, LP, as Lessor, and certain subsidiaries of Prime Healthcare Services, Inc., as Lessee and related first amendment and Master Lease Agreement II between certain subsidiaries of MPT Operating Partnership, LP, as Lessor, and certain subsidiaries of Prime Healthcare Services, Inc., as Lessee and related first amendment.
               31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (Medical Properties Trust, Inc.)
               31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (Medical Properties Trust, Inc.)
               31.3    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (MPT Operating Partnership, L.P.)
               31.4    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (MPT Operating Partnership, L.P.)
               32.1    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Medical Properties Trust, Inc.)
               32.2    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (MPT Operating Partnership, L.P.)
Exhibit 101.INS    XBRL Instance Document
Exhibit 101.SCH    XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB    XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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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/ R. Steven Hamner

  R. Steven Hamner
 

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

MPT OPERATING PARTNERSHIP, L.P.
By:  

/s/ R. Steven Hamner

  R. Steven Hamner
 

Executive Vice President and Chief

Financial Officer of the sole member of

the general partner of

MPT Operating Partnership, L.P.

(Principal Financial and Accounting Officer)

Date: November 9, 2012

 

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INDEX TO EXHIBITS

 

Exhibit

Number

  

Description

               10.1    Master Lease Agreement I between certain subsidiaries of MPT Operating Partnership, LP, as Lessor, and certain subsidiaries of Prime Healthcare Services, Inc., as Lessee and related first amendment and Master Lease Agreement II between certain subsidiaries of MPT Operating Partnership, LP, as Lessor, and certain subsidiaries of Prime Healthcare Services, Inc., as Lessee and related first amendment.
               31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (Medical Properties Trust, Inc.)
               31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (Medical Properties Trust, Inc.)
               31.3    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (MPT Operating Partnership, L.P.)
               31.4    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (MPT Operating Partnership, L.P.)
               32.1    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Medical Properties Trust, Inc.)
               32.2    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (MPT Operating Partnership, L.P.)
Exhibit 101.INS    XBRL Instance Document
Exhibit 101.SCH    XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB    XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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