MEDICAL PROPERTIES TRUST INC - Quarter Report: 2018 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2018

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

For the transition period from to

Commission file number 001-32559

Commission file number 333-177186

MEDICAL PROPERTIES TRUST, INC.

MPT OPERATING PARTNERSHIP, L.P.

(Exact Name of Registrant as Specified in Its Charter)

MARYLAND

DELAWARE

20-0191742

20-0242069

(State or other jurisdiction of

incorporation or organization)

(I. R. S. Employer

Identification No.)

1000 URBAN CENTER DRIVE, SUITE 501

BIRMINGHAM, AL

35242

(Address of principal executive offices)

(Zip Code)

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

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

Indicate by check mark whether the registrant has submitted electronically 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 ☒ No ☐

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


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

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

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

As of August 3, 2018, Medical Properties Trust, Inc. had 364,858,202 shares of common stock, par value $0.001, outstanding.

EXPLANATORY NOTE

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

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

AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED June 30, 2018

Table of Contents

	Page
PART I — FINANCIAL INFORMATION	3
Item 1 Financial Statements	3
Medical Properties Trust, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets at June 30, 2018 and December 31, 2017	3
Condensed Consolidated Statements of Net Income for the Three and Six Months Ended June 30, 2018 and 2017	4
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017	5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017	6
MPT Operating Partnership, L.P. and Subsidiaries
Condensed Consolidated Balance Sheets at June 30, 2018 and December 31, 2017	7
Condensed Consolidated Statements of Net Income for the Three and Six Months Ended June 30, 2018 and 2017	8
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017	9
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017	10
Medical Properties Trust, Inc. and MPT Operating Partnership, L.P.
Notes to Condensed Consolidated Financial Statements	11
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3 Quantitative and Qualitative Disclosures about Market Risk	32
Item 4 Controls and Procedures	32
PART II — OTHER INFORMATION	34
Item 1 Legal Proceedings	34
Item 1A Risk Factors	34
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3 Defaults Upon Senior Securities	34
Item 4 Mine Safety Disclosures	34
Item 5 Other Information	34
Item 6 Exhibits	35
SIGNATURE	36

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

	June 30, 2018			December 31, 2017
(In thousands, except per share amounts)	(Unaudited)			(Note 2)
Assets
Real estate assets
Land, buildings and improvements, intangible lease assets, and other	$	4,671,829		$	5,797,605
Real estate held for sale		1,263,257			146,615
Mortgage loans		1,686,866			1,778,316
Net investment in direct financing leases		688,427			698,727
Gross investment in real estate assets		8,310,379			8,421,263
Accumulated depreciation and amortization		(419,061	)		(455,712	)
Net investment in real estate assets		7,891,318			7,965,551
Cash and cash equivalents		146,569			171,472
Interest and rent receivables		85,181			78,970
Straight-line rent receivables		215,297			185,592
Other loans		147,855			150,209
Other assets		470,604			468,494
Total Assets	$	8,956,824		$	9,020,288
Liabilities and Equity
Liabilities
Debt, net	$	4,864,261		$	4,898,667
Accounts payable and accrued expenses		204,505			211,188
Deferred revenue		14,133			18,178
Lease deposits and other obligations to tenants		28,470			57,050
Total liabilities		5,111,369			5,185,083
Equity
Preferred stock, $0.001 par value. Authorized 10,000 shares; no shares outstanding		—			—
Common stock, $0.001 par value. Authorized 500,000 shares; issued and outstanding — 364,731 shares at June 30, 2018 and 364,424 shares at December 31, 2017		365			364
Additional paid-in capital		4,338,798			4,333,027
Distributions in excess of net income		(464,784	)		(485,932	)
Accumulated other comprehensive loss		(42,353	)		(26,049	)
Treasury shares, at cost		(777	)		(777	)
Total Medical Properties Trust, Inc. Stockholders’ Equity		3,831,249			3,820,633
Non-controlling interests		14,206			14,572
Total Equity		3,845,455			3,835,205
Total Liabilities and Equity	$	8,956,824		$	9,020,288

See accompanying notes to condensed consolidated financial statements.

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Net Income

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(In thousands, except per share amounts)	2018			2017			2018			2017
Revenues
Rent billed	$	122,827		$	103,447		$	250,838		$	200,210
Straight-line rent		15,073			16,277			30,864			29,056
Income from direct financing leases		18,934			18,312			36,615			36,192
Interest and fee income		45,068			28,771			88,631			57,746
Total revenues		201,902			166,807			406,948			323,204
Expenses
Interest		58,126			39,710			115,149			77,739
Real estate depreciation and amortization		34,466			29,493			70,268			57,079
Property-related		1,920			1,153			4,104			2,481
General and administrative		19,552			15,079			37,370			28,276
Acquisition costs		411			10,806			411			13,562
Total expenses		114,475			96,241			227,302			179,137
Other income (expense)
Gain on sale of real estate, net		24,151			—			25,618			7,413
Debt refinancing costs		—			(751	)		—			(14,380	)
Other		2,002			3,367			534			5,134
Total other income (expense)		26,153			2,616			26,152			(1,833	)

Income before income tax		113,580			73,182			205,798			142,234
Income tax (expense) benefit		(1,563	)		614			(2,738	)		(253	)

Net income		112,017			73,796			203,060			141,981
Net income attributable to non-controlling interests		(450	)		(381	)		(892	)		(596	)
Net income attributable to MPT common stockholders	$	111,567		$	73,415		$	202,168		$	141,385

Earnings per common share — basic and diluted
Net income attributable to MPT common stockholders	$	0.30		$	0.21		$	0.55		$	0.42

Weighted average shares outstanding — basic		364,897			349,856			364,889			335,456
Weighted average shares outstanding — diluted		365,541			350,319			365,442			335,871

Dividends declared per common share	$	0.25		$	0.24		$	0.50		$	0.48

See accompanying notes to condensed consolidated financial statements.

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(In thousands)	2018			2017			2018			2017
Net income	$	112,017		$	73,796		$	203,060		$	141,981
Other comprehensive income:
Foreign currency translation (loss) gain		(32,392	)		34,020			(16,304	)		40,312
Total comprehensive income		79,625			107,816			186,756			182,293
Comprehensive income attributable to non-controlling interests		(450	)		(381	)		(892	)		(596	)
Comprehensive income attributable to MPT common stockholders	$	79,175		$	107,435		$	185,864		$	181,697

See accompanying notes to condensed consolidated financial statements.

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	For the Six Months Ended June 30,
	2018			2017
	(In thousands)
Operating activities
Net income	$	203,060		$	141,981
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		74,441			59,825
Amortization of deferred financing costs and debt discount		3,590			3,139
Direct financing lease interest accretion		(4,743	)		(4,690	)
Straight-line rent revenue		(41,664	)		(30,173	)
Share-based compensation		6,725			4,377
Gain from sale of real estate, net		(25,618	)		(7,413	)
Straight-line rent and other write-off		13,294			1,117
Debt refinancing costs		—			14,380
Other adjustments		(14,718	)		(5,735	)
Changes in:
Interest and rent receivables		(7,285	)		(10,786	)
Accounts payable and accrued expenses		(10,603	)		(11,126	)
Net cash provided by operating activities		196,479			154,896
Investing activities
Cash paid for acquisitions and other related investments		(273,728	)		(600,781	)
Net proceeds from sale of real estate		221,931			64,335
Principal received on loans receivable		262,862			5,188
Investment in loans receivable		(169,435	)		(3,574	)
Construction in progress and other		(22,875	)		(36,002	)
Other investments, net		(20,400	)		(67,101	)
Net cash used for investing activities		(1,645	)		(637,935	)
Financing activities
Proceeds from term debt		—			955,280
Payments of term debt		—			(675,279	)
Revolving credit facilities, net		(4,618	)		(39,911	)
Distributions paid		(180,813	)		(151,692	)
Lease deposits and other obligations to tenants		(28,001	)		5,790
Proceeds from sale of common shares, net of offering costs		—			548,063
Other financing activities		(2,328	)		(16,543	)
Net cash (used for) provided by financing activities		(215,760	)		625,708
(Decrease) increase in cash, cash equivalents and restricted cash for period		(20,926	)		142,669
Effect of exchange rate changes		(3,477	)		9,588
Cash, cash equivalents and restricted cash at beginning of period		172,247			84,882
Cash, cash equivalents and restricted cash at end of period	$	147,844		$	237,139
Interest paid	$	115,245		$	63,371
Supplemental schedule of non-cash financing activities:
Distributions declared, unpaid	$	91,547		$	87,519
Cash, cash equivalents and restricted cash are comprised of the following:
Beginning of period:
Cash and cash equivalents	$	171,472		$	83,240
Restricted cash, included in Other assets		775			1,642
	$	172,247		$	84,882
End of period:
Cash and cash equivalents	$	146,569		$	236,364
Restricted cash, included in Other assets		1,275			775
	$	147,844		$	237,139

See accompanying notes to condensed consolidated financial statements.

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

	June 30, 2018			December 31, 2017
(In thousands)	(Unaudited)			(Note 2)
Assets
Real estate assets
Land, buildings and improvements, intangible lease assets, and other	$	4,671,829		$	5,797,605
Real estate held for sale		1,263,257			146,615
Mortgage loans		1,686,866			1,778,316
Net investment in direct financing leases		688,427			698,727
Gross investment in real estate assets		8,310,379			8,421,263
Accumulated depreciation and amortization		(419,061	)		(455,712	)
Net investment in real estate assets		7,891,318			7,965,551
Cash and cash equivalents		146,569			171,472
Interest and rent receivables		85,181			78,970
Straight-line rent receivables		215,297			185,592
Other loans		147,855			150,209
Other assets		470,604			468,494
Total Assets	$	8,956,824		$	9,020,288
Liabilities and Capital
Liabilities
Debt, net	$	4,864,261		$	4,898,667
Accounts payable and accrued expenses		112,626			121,465
Deferred revenue		14,133			18,178
Lease deposits and other obligations to tenants		28,470			57,050
Payable due to Medical Properties Trust, Inc.		91,489			89,333
Total liabilities		5,110,979			5,184,693
Capital
General Partner — issued and outstanding — 3,647 units at June 30, 2018 and 3,644 units at December 31, 2017		38,767			38,489
Limited Partners:
Common units — issued and outstanding — 361,084 units at June 30, 2018 and 360,780 units at December 31, 2017		3,835,225			3,808,583
LTIP units — issued and outstanding — 232 units at June 30, 2018 and 292 units at December 31, 2017		—			—
Accumulated other comprehensive loss		(42,353	)		(26,049	)
Total MPT Operating Partnership, L.P. Capital		3,831,639			3,821,023
Non-controlling interests		14,206			14,572
Total capital		3,845,845			3,835,595
Total Liabilities and Capital	$	8,956,824		$	9,020,288

See accompanying notes to condensed consolidated financial statements.

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Condensed Consolidated Statements of Net Income

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(In thousands, except per unit amounts)	2018			2017			2018			2017
Revenues
Rent billed	$	122,827		$	103,447		$	250,838		$	200,210
Straight-line rent		15,073			16,277			30,864			29,056
Income from direct financing leases		18,934			18,312			36,615			36,192
Interest and fee income		45,068			28,771			88,631			57,746
Total revenues		201,902			166,807			406,948			323,204
Expenses
Interest		58,126			39,710			115,149			77,739
Real estate depreciation and amortization		34,466			29,493			70,268			57,079
Property-related		1,920			1,153			4,104			2,481
General and administrative		19,552			15,079			37,370			28,276
Acquisition costs		411			10,806			411			13,562
Total expenses		114,475			96,241			227,302			179,137
Other income (expense)
Gain on sale of real estate, net		24,151			—			25,618			7,413
Debt refinancing costs		—			(751	)		—			(14,380	)
Other		2,002			3,367			534			5,134
Total other income (expense)		26,153			2,616			26,152			(1,833	)

Income before income tax		113,580			73,182			205,798			142,234
Income tax (expense) benefit		(1,563	)		614			(2,738	)		(253	)

Net income		112,017			73,796			203,060			141,981
Net income attributable to non-controlling interests		(450	)		(381	)		(892	)		(596	)
Net income attributable to MPT Operating Partnership partners	$	111,567		$	73,415		$	202,168		$	141,385

Earnings per unit — basic and diluted
Net income attributable to MPT Operating Partnership partners	$	0.30		$	0.21		$	0.55		$	0.42

Weighted average units outstanding — basic		364,897			349,856			364,889			335,456
Weighted average units outstanding — diluted		365,541			350,319			365,442			335,871

Dividends declared per unit	$	0.25		$	0.24		$	0.50		$	0.48

See accompanying notes to condensed consolidated financial statements.

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(In thousands)	2018			2017			2018			2017
Net income	$	112,017		$	73,796		$	203,060		$	141,981
Other comprehensive income:
Foreign currency translation (loss) gain		(32,392	)		34,020			(16,304	)		40,312
Total comprehensive income		79,625			107,816			186,756			182,293
Comprehensive income attributable to non-controlling interests		(450	)		(381	)		(892	)		(596	)
Comprehensive income attributable to MPT Operating Partnership partners	$	79,175		$	107,435		$	185,864		$	181,697

See accompanying notes to condensed consolidated financial statements.

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	For the Six Months Ended June 30,
	2018			2017
	(In thousands)
Operating activities
Net income	$	203,060		$	141,981
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		74,441			59,825
Amortization of deferred financing costs and debt discount		3,590			3,139
Direct financing lease interest accretion		(4,743	)		(4,690	)
Straight-line rent revenue		(41,664	)		(30,173	)
Unit-based compensation		6,725			4,377
Gain from sale of real estate, net		(25,618	)		(7,413	)
Straight-line rent and other write-off		13,294			1,117
Debt refinancing costs		—			14,380
Other adjustments		(14,718	)		(5,735	)
Changes in:
Interest and rent receivables		(7,285	)		(10,786	)
Accounts payable and accrued expenses		(10,603	)		(11,126	)
Net cash provided by operating activities		196,479			154,896
Investing activities
Cash paid for acquisitions and other related investments		(273,728	)		(600,781	)
Net proceeds from sale of real estate		221,931			64,335
Principal received on loans receivable		262,862			5,188
Investment in loans receivable		(169,435	)		(3,574	)
Construction in progress and other		(22,875	)		(36,002	)
Other investments, net		(20,400	)		(67,101	)
Net cash used for investing activities		(1,645	)		(637,935	)
Financing activities
Proceeds from term debt		—			955,280
Payments of term debt		—			(675,279	)
Revolving credit facilities, net		(4,618	)		(39,911	)
Distributions paid		(180,813	)		(151,692	)
Lease deposits and other obligations to tenants		(28,001	)		5,790
Proceeds from sale of units, net of offering costs		—			548,063
Other financing activities		(2,328	)		(16,543	)
Net cash (used for) provided by financing activities		(215,760	)		625,708
(Decrease) increase in cash, cash equivalents and restricted cash for period		(20,926	)		142,669
Effect of exchange rate changes		(3,477	)		9,588
Cash, cash equivalents and restricted cash at beginning of period		172,247			84,882
Cash, cash equivalents and restricted cash at end of period	$	147,844		$	237,139
Interest paid	$	115,245		$	63,371
Supplemental schedule of non-cash financing activities:
Distributions declared, unpaid	$	91,547		$	87,519
Cash, cash equivalents, and restricted cash are comprised of the following:
Beginning of period:
Cash and cash equivalents	$	171,472		$	83,240
Restricted cash, included in Other assets		775			1,642
	$	172,247		$	84,882
End of period:
Cash and cash equivalents	$	146,569		$	236,364
Restricted cash, included in Other assets		1,275			775
	$	147,844		$	237,139

See accompanying notes to condensed consolidated financial statements.

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

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization

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

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

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

2. Summary of Significant Accounting Policies

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

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

On July 1, 2018, we early adopted Accounting Standards Update (“ASU”) No. 2018-07, “Compensation-Stock Compensation.” Under the new standard, non-employee stock awards are to be accounted for similar to employee stock awards. This standard simplifies the accounting for non-employee stock awards, including fixing the value of the stock award at date of grant. The adoption of this standard did not have a material impact on our financial statements.

Recent Accounting Developments:

Leases

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

and operating leases. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”), allowing companies to record a cumulative adjustment to retained earnings in the period of adoption rather than requiring the restatement of prior periods.

We plan to adopt ASU 2016-02 on January 1, 2019, along with ASU 2018-11. We are continuing to evaluate this standard and the impact to us from both a lessor and lessee perspective. We do have leases in which we are the lessee, including ground leases, on which certain of our facilities reside, along with corporate office and equipment leases. Although we do not expect any change in the current classification of these leases, we will record a right-of-use asset and a lease liability on our balance sheet upon adoption of this standard, with any difference recorded as a cumulative adjustment in equity. From a lessor perspective, we do not expect any change in the current classification and accounting of our existing leases. However, we do expect certain non-lease components (including certain operating expenses that the tenants of our facilities are required to pay pursuant to our “triple-net” leases) to be recorded gross versus net of the respective expenses upon adoption of this standard in 2019 in accordance with ASU No. 2014-09.

Reclassifications

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

Variable Interest Entities

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

VIE Type

Maximum Loss

Exposure(1)

Asset Type

Classification

Carrying

Amount(2)

Loans, net

325,963

Mortgage and other loans

229,367

Equity investments

14,395

Other assets

—

(1)

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

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

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

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

See Note 3 and Note 7 for additional description of the nature, purpose and activities of our more significant VIEs (such as Ernest Health Inc. (“Ernest”)) and interests therein.

3. Real Estate and Lending Activities

Acquisitions

We acquired the following assets (in thousands)

	For the Six Months Ended June 30,
	2018			2017
Assets Acquired
Land and land improvements	$	16,121		$	87,620
Building		232,409			399,867
Intangible lease assets — subject to amortization (weighted average useful life 20.0 years for 2018 and 28.5 years for 2017)		25,198			73,722
Net investments in direct financing leases		—			40,450
Liabilities assumed		—			(878	)
Total assets acquired	$	273,728		$	600,781
Loans repaid(1)		(259,378	)		—
Total net assets acquired	$	14,350		$	600,781

(1)

Includes $259.4 million of loans advanced to Steward Health Care System LLC (“Steward”) in 2017 and repaid in 2018 as described more fully below.

2018 Activity

On June 27, 2018, we acquired the fee simple real estate of two general acute care hospitals in Massachusetts from Steward in exchange for the reduction of $259.4 million of mortgage loans made to Steward in October 2016, along with an additional $14.4 million in cash consideration. These properties are being leased to Steward pursuant to the original master lease from October 2016 that has a 15-year term with three five-year extension options, plus consumer-price indexed increases.

2017 Activity

MEDIAN Transactions

On June 22, 2017, we acquired an acute care hospital in Germany for a purchase price of €19.4 million. This property is leased to affiliates of Median Kliniken S.à.r.l. (“MEDIAN”), pursuant to the original master lease agreement effective in 2015 and expiring December 2042 with annual escalators at the greater of one percent or 70% of the change in German CPI.

During the second quarter of 2017, we acquired 11 rehabilitation hospitals in Germany for an aggregate purchase price of €127 million. These 11 properties are leased to affiliates of MEDIAN, pursuant to a third master lease that has terms similar to the original master lease in 2015 with a fixed 27-year lease term ending in August 2043. These acquisitions are part of the portfolio of 20 properties in Germany that we agreed to acquire in July 2016 for €215.7 million, of which seven properties totaling €49.5 million closed in December 2016. The final two properties closed post June 30, 2017 for a purchase price of €39.2 million.

On January 30, 2017, we acquired an inpatient rehabilitation hospital in Germany for €8.4 million. This acquisition was the final property to close as part of the six hospital portfolio that we agreed to buy in September 2016 for an aggregate amount of €44.1 million. This property is leased to affiliates of MEDIAN, pursuant to the original long-term master lease agreement reached with MEDIAN in 2015 and as described above.

Other Transactions

On June 1, 2017, we acquired the real estate assets of Ohio Valley Medical Center, a 218-bed acute care hospital located in Wheeling, West Virginia, and the East Ohio Regional Hospital, a 139-bed acute care hospital in Martins Ferry, Ohio, from Ohio Valley Health Services, a not-for-profit entity in West Virginia, for an aggregate purchase price of approximately $40 million. We simultaneously leased the facilities to Alecto Healthcare Services LLC (“Alecto”), pursuant to a lease with a 15-year initial term with 2% annual minimum rent increases and three 5-year extension options. The facilities are cross-defaulted and cross-collateralized with our other hospitals operated by Alecto. We also agreed to provide up to $20.0 million in capital improvement funding on these two facilities - none of which has been funded to date. With these acquisitions, we also obtained a 20% interest in the operator of these facilities.

On May 1, 2017, we acquired eight hospitals previously affiliated with Community Health Systems, Inc. in Florida, Ohio, and Pennsylvania for an aggregate purchase price of $301.3 million. These facilities are leased to Steward, pursuant to the existing long-term master lease entered into with Steward in October 2016 and as described above.

On May 1, 2017, we also acquired the real estate of St. Joseph Regional Medical Center, a 145-bed acute care hospital in Lewiston, Idaho for $87.5 million. This facility is leased to RCCH Healthcare Partners (“RCCH”), pursuant to the existing long-term master lease entered into with RCCH in April 2016.

From the respective acquisition dates, the properties acquired in 2017 contributed $8.2 million of revenue and $6.0 million of income (excluding related acquisition expenses and taxes) for the three months ended June 30, 2017, and $8.4 million of revenue and $6.1 million of income (excluding related acquisition expenses and taxes) for the six months ended June 30, 2017. In addition, we expensed $9.1 million and $9.6 million of acquisition-related costs on these 2017 acquisitions for the three and six months ended June 30, 2017, respectively.

Development Activities

During the first six months of 2018, we completed construction on Ernest Flagstaff. This $25.5 million inpatient rehabilitation facility located in Flagstaff, Arizona opened on March 1, 2018 and is being leased to Ernest pursuant to a stand-alone lease, with terms generally similar to the original master lease.

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

Property	Commitment		Costs Incurred as of June 30, 2018		Estimated Completion Date
Circle Health (Birmingham, England)	$	44,825	$	20,942	1Q 2019
Circle Health Rehabilitation (Birmingham, England)		22,269		3,360	3Q 2019
Surgery Partners (Idaho Falls, Idaho)		113,468		23,318	1Q 2020
	$	180,562	$	47,620

Disposals

2018 Activity

Joint Venture Transaction

On June 7, 2018, we entered into a subscription agreement with Primotop Holdings S.à.r.l. (“Primotop”), an entity managed by Primonial Group, pursuant to which Primotop will acquire a 50% interest by way of a joint venture in the real estate of 71 post-acute hospitals in Germany that we currently own, with an aggregate agreed valuation of approximately €1.635 billion. The remaining 50% interest in the joint venture will be retained by us. Immediately following the closing, which is expected to occur during the third quarter of 2018, the joint venture is expected to make cash distributions to us in an aggregate amount of approximately €1.14 billion from the proceeds of the cash contributions from Primotop and certain secured debt financings within the joint venture. In preparation of this joint venture, we issued such secured debt on these properties on August 3, 2018, resulting in gross proceeds of €655 million. At June 30, 2018, the 71 facilities subject to the joint venture were designated as held for sale and included the following net assets (in thousands):

Real estate held for sale	$	1,263,257
Straight-line rent receivables		36,246
	$	1,299,503

Other Transactions

On June 4, 2018, we sold three long-term acute care hospitals located in California, Texas, and Oregon, that were leased and operated by Vibra Healthcare, LLC (“Vibra”), which included our equity investment in operations of the Texas facility. Total proceeds from the transaction were $53.3 million in cash, a mortgage loan in the amount of $18.3 million, and a $1.5 million working capital loan. The transaction resulted in a gain on real estate of $24.2 million, which was partially offset by a $5.1 million non-cash charge to revenue to write-off related straight-line rent receivables.

On March 1, 2018, we sold the real estate of St. Joseph Medical Center in Houston, Texas, for approximately $148 million to Steward. In return, we received a mortgage loan equal to the purchase price, with such loan secured by the underlying real estate. The mortgage loan has terms consistent with the other mortgage loans in the Steward portfolio. This transaction resulted in a gain of $1.5 million, offset by a $1.7 million non-cash charge to revenue to write-off related straight-line rent receivables on this property.

2017 Activity

On March 31, 2017, we sold the EASTAR Health System real estate located in Muskogee, Oklahoma, which was leased to RCCH. Total proceeds from this transaction were approximately $64 million resulting in a gain of $7.4 million, partially offset by a $0.6 million non-cash charge to revenue to write-off related straight-line rent receivables on this property.

Summary of Operations for Disposed Assets in 2018

The properties sold during 2018 and the assets held for sale (from the Joint Venture Transaction) at June 30, 2018, do not meet the definition of discontinued operations. However, the following represents the operating results (excluding gain on sale and any non-cash charges such as straight-line rent write-offs) from these properties (excluding the St. Joseph sale which was converted to a mortgage loan) for the periods presented (in thousands):

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017
Revenues	$	34,142		$	28,817		$	69,900		$	55,536
Real estate depreciation and amortization		(6,129	)		(7,070	)		(14,902	)		(13,595	)
Property-related expenses		(14	)		(1	)		(255	)		(1	)
Other income (expense)		(410	)		(5,501	)		(969	)		(7,045	)
Income from real estate dispositions, net	$	27,589		$	16,245		$	53,774		$	34,895

As noted previously, we will retain a 50% interest in the Joint Venture Transaction; however, such interest has not been factored into the summary of operations above.

Leasing Operations

At June 30, 2018, leases on 14 Ernest facilities, ten Prime Healthcare Services, Inc. (“Prime”) facilities, and two Alecto facilities are accounted for as direct financing leases (“DFLs”). The components of our net investment in DFLs consisted of the following (in thousands):

	As of June 30, 2018			As of December 31, 2017
Minimum lease payments receivable	$	2,207,355		$	2,294,081
Estimated residual values		434,769			448,339
Less: Unearned income		(1,953,697	)		(2,043,693	)
Net investment in direct financing leases	$	688,427		$	698,727

On March 15, 2018, we entered into a new lease agreement of our long-term acute care facility in Boise, Idaho (the “Boise Lease”) with a joint venture formed by Vibra and Ernest. The new lease has an initial 15-year fixed term (ending March 2033) with three extension options of five years each. With this transaction, we incurred a non-cash charge of $1.5 million to write-off DFL unbilled interest associated with the previous lease to Ernest on this property.

Adeptus Health

As noted in previous filings, we have 16 properties that are transitioning away from Adeptus Health in stages over a two year period as part of Adeptus Health’s confirmed plan of reorganization under Chapter 11 of the Bankruptcy Code. On January 1, 2018

and April 1, 2018, Adeptus Health vacated and stopped making rent payments on five and three properties, respectively. Another seven properties will be transitioned away from Adeptus Health on October 1, 2018, with the remaining property on October 1, 2019. During the transition period, Adeptus Health has and will continue to make lease payments. As a result of the shortening of our lease term on these properties, we recorded a $3.9 million charge to accelerate the amortization of the straight-line rent receivables in the first half of 2018. At June 30, 2018, our investment in these 16 facilities approximates 1% of our total assets. Although no assurances can be made that we will not recognize a loss in the future, we believe at June 30, 2018 that our plans to sell or re-lease these 16 transition facilities will not result in any material loss or impairment.

At June 30, 2018, excluding the 16 transition properties, we have 21 properties leased to Adeptus Health representing $131.3 million or 1.4% of our total assets. During the last fifteen months, we have re-tenanted 22 properties with an investment of $172.1 million to strong credit worthy operators including:

Three Louisiana freestanding emergency facilities to Ochsner Clinic Foundation (“Ochsner”) on April 4, 2017;

11 Colorado freestanding emergency facilities to UCHealth on December 1, 2017; and

Eight Arizona facilities to Dignity Health on June 8, 2018.

Through June 30, 2018, all rent has been paid on these facilities, and we have only incurred a $0.5 million charge to-date related to the write-off of straight-line rent receivables on the facilities re-tenanted to Ochsner in 2017.

Gilbert and Florence Facilities

In the first quarter of 2018, we terminated the lease at our Gilbert and Florence, Arizona facilities due to the tenant not meeting its rent obligations pursuant to the lease. As a result of the lease terminating, we recorded a charge of $1.1 million to reserve against the straight-line rent receivables in February 2018. On April 25, 2018, this former tenant filed for involuntary bankruptcy. At June 30, 2018, all outstanding receivables were completely reserved. Although no assurances can be made that we will not have any impairment charges in the future, we believe our investment in the Gilbert and Florence facilities of $37.8 million at June 30, 2018, is fully recoverable.

Loans

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

	As of June 30, 2018		As of December 31, 2017
Mortgage loans	$	1,686,866	$	1,778,316
Acquisition loans		118,290		118,448
Working capital and other loans		29,565		31,761
	$	1,834,721	$	1,928,525

The decrease in mortgage loans relates to the use of two Steward mortgage loans to fund our acquisition of the related fee simple real estate of two facilities on June 27, 2018 – see “Acquisitions” of this Note 3 for further information. This decrease was partially offset by the new mortgage loans made on the St. Joseph property on March 1, 2018 and as part of the Vibra disposal transaction on June 4, 2018 – see “Disposals” of this Note 3 for further information.

Our non-mortgage loans typically consist of loans to our tenants for acquisitions and working capital purposes. At June 30, 2018, acquisition loans includes $113.6 million in loans to Ernest.

Concentrations of Credit Risk

Our revenue concentration for the six months ended June 30, 2018 as compared to the prior year is as follows (dollars in thousands):

Revenue by Operator

	For the Six Months Ended June 30,
	2018					2017
Operators	Total Revenue		Percentage of Total Revenue			Total Revenue		Percentage of Total Revenue
Steward (1)	$	147,868		36.3	%	$	72,518		22.4	%
Prime		63,590		15.6	%		63,059		19.5	%
MEDIAN		57,289		14.1	%		47,744		14.8	%
Ernest		34,542		8.5	%		35,269		10.9	%
RCCH		20,414		5.0	%		19,632		6.1	%
Other operators		83,245		20.5	%		84,982		26.3	%
Total	$	406,948		100.0	%	$	323,204		100.0	%

(1)

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

Revenue by U.S. State and Country

	For the Six Months Ended June 30,
	2018					2017
U.S. States and Other Countries	Total Revenue		Percentage of Total Revenue			Total Revenue		Percentage of Total Revenue
Texas	$	60,361		14.8	%	$	49,851		15.4	%
Massachusetts		54,433		13.4	%		53,159		16.5	%
Utah		41,734		10.3	%		5,057		1.6	%
California		29,422		7.2	%		33,123		10.3	%
Arizona		23,286		5.7	%		15,542		4.8	%
All other states		121,307		29.8	%		109,875		33.9	%
Total U.S.	$	330,543		81.2	%	$	266,607		82.5	%
Germany	$	74,176		18.2	%	$	54,576		16.9	%
United Kingdom, Italy, and Spain		2,229		0.6	%		2,021		0.6	%
Total International	$	76,405		18.8	%	$	56,597		17.5	%
Grand Total	$	406,948		100.0	%	$	323,204		100.0	%

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

4. Debt

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

	As of June 30, 2018			As of December 31, 2017
Revolving credit facility(A)	$	835,848		$	840,810
Term loan		200,000			200,000
4.000% Senior Unsecured Notes due 2022(B)		584,200			600,250
5.500% Senior Unsecured Notes due 2024		300,000			300,000
6.375% Senior Unsecured Notes due 2024		500,000			500,000
3.325% Senior Unsecured Notes due 2025(B)		584,200			600,250
5.250% Senior Unsecured Notes due 2026		500,000			500,000
5.000% Senior Unsecured Notes due 2027		1,400,000			1,400,000
	$	4,904,248		$	4,941,310
Debt issue costs, net		(39,987	)		(42,643	)
	$	4,864,261		$	4,898,667

(A)	Includes £12 million and £8 million of GBP-denominated borrowings that reflect the exchange rate at June 30, 2018 and December 31, 2017, respectively.

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

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

2018	$	—
2019		—
2020		—
2021		835,848
2022		784,200
Thereafter		3,284,200
Total	$	4,904,248

2017 Activity

On February 1, 2017, we replaced our previous unsecured credit facility (which we had entered into in 2014 and amended in 2015) with a new revolving credit and term loan agreement (“Credit Facility”). The new agreement included a $1.3 billion unsecured revolving loan facility (same amount as the previous revolving loan facility), a $200 million unsecured term loan facility ($50 million lower than the previous term loan), and a new €200 million unsecured term loan facility.

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

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

With the replacement of our old credit facility, the redemption of the 5.750% Senior Unsecured Notes due 2020, and the payoff of our €200 million euro term loan, we incurred a debt refinancing charge of approximately $14 million in the first six months of 2017.

Covenants

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

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

5. Common Stock/Partners’ Capital

Medical Properties Trust, Inc.

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

MPT Operating Partnership, L.P.

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

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

6. Stock Awards

We adopted the 2013 Equity Incentive Plan (the “Equity Incentive Plan”) during the second quarter of 2013, which authorizes the issuance of common stock options, restricted stock, restricted stock units, deferred stock units, stock appreciation rights, performance units and awards of interests in our Operating Partnership. The Equity Incentive Plan is administered by the Compensation Committee of the Board of Directors. We have reserved 8,196,770 shares of common stock for awards under the Equity Incentive Plan for which 1,690,590 million shares remain available for future stock awards as of June 30, 2018. Share-based compensation expense totaled $6.7 million and $4.4 million for the six months ended June 30, 2018 and 2017, respectively.

7. Fair Value of Financial Instruments

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

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

	As of						As of
	June 30, 2018						December 31, 2017
Asset (Liability)	Book Value			Fair Value			Book Value			Fair Value
Interest and rent receivables	$	85,181		$	84,292		$	78,970		$	78,028
Loans (1)		1,605,355			1,627,579			1,698,471			1,722,101
Debt, net		(4,864,261	)		(4,889,856	)		(4,898,667	)		(5,073,707	)

(1)

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

Items Measured at Fair Value on a Recurring Basis

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

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

Asset Type	Fair Value		Original Cost		Asset Type Classification
Mortgage loans	$	115,000	$	115,000	Mortgage loans
Equity investments and other loans		110,672		117,666	Other loans/other assets
	$	225,672	$	232,666

Our mortgage and other loans with Ernest are recorded at fair value based on Level 2 inputs by discounting the estimated cash flows using the market rates which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities. Our equity investment in Ernest is recorded at fair value based on Level 3 inputs, by using a discounted cash flow model, which requires significant estimates of our investee such as projected revenue and expenses and appropriate consideration of the underlying risk profile of the forecast assumptions associated with the investee. We classify the equity investment as Level 3, as we use certain unobservable inputs to the valuation methodology that are significant to the fair value measurement, and the valuation requires management judgment due to the absence of quoted market prices. For the cash flow model, our observable inputs include use of a capitalization rate, discount rate (which is based on a weighted average cost of capital), and market interest rates, and our unobservable input includes an adjustment for a marketability discount (“DLOM”) on our equity investment of 40% at June 30, 2018.

In regards to the underlying projection of revenues and expenses used in the discounted cash flow model, such projections are provided by Ernest. However, we will modify such projections (including underlying assumptions used) as needed based on our review and analysis of Ernest’s historical results, meetings with key members of management, and our understanding of trends and developments within the healthcare industry.

In arriving at the DLOM, we started with a DLOM range based on the results of studies supporting valuation discounts for other transactions or structures without a public market. To select the appropriate DLOM within the range, we then considered many qualitative factors including the percent of control, the nature of the underlying investee’s business along with our rights as an investor pursuant to the operating agreement, the size of investment, expected holding period, number of shareholders, access to capital marketplace, etc. To illustrate the effect of movements in the DLOM, we performed a sensitivity analysis below by using basis point variations (dollars in thousands):

Basis Point Change in Marketability Discount

Estimated

Increase

(Decrease)

In Fair Value

+100 basis points

(60

)

- 100 basis points

Because the fair value of the Ernest investments noted above is below our original cost, we recognized an unrealized loss during the first half of 2018. No unrealized gain/loss on the Ernest investments was recorded in the first half of 2017.

8. Earnings Per Share

Medical Properties Trust, Inc.

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

	For the Three Months Ended June 30,
	2018			2017
Numerator:
Net income	$	112,017		$	73,796
Non-controlling interests’ share in net income		(450	)		(381	)
Participating securities’ share in earnings		(323	)		(100	)
Net income, less participating securities’ share in earnings	$	111,244		$	73,315
Denominator:
Basic weighted-average common shares		364,897			349,856
Dilutive potential common shares		644			463
Dilutive weighted-average common shares		365,541			350,319

	For the Six Months Ended June 30,
	2018			2017
Numerator:
Net income	$	203,060		$	141,981
Non-controlling interests’ share in net income		(892	)		(596	)
Participating securities’ share in earnings		(518	)		(225	)
Net income, less participating securities’ share in earnings	$	201,650		$	141,160
Denominator:
Basic weighted-average common shares		364,889			335,456
Dilutive potential common shares		553			415
Dilutive weighted-average common shares		365,442			335,871

MPT Operating Partnership, L.P.

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

	For the Three Months Ended June 30,
	2018			2017
Numerator:
Net income	$	112,017		$	73,796
Non-controlling interests’ share in net income		(450	)		(381	)
Participating securities’ share in earnings		(323	)		(100	)
Net income, less participating securities’ share in earnings	$	111,244		$	73,315
Denominator:
Basic weighted-average units		364,897			349,856
Dilutive potential units		644			463
Diluted weighted-average units		365,541			350,319

	For the Six Months Ended June 30,
	2018			2017
Numerator:
Net income	$	203,060		$	141,981
Non-controlling interests’ share in net income		(892	)		(596	)
Participating securities’ share in earnings		(518	)		(225	)
Net income, less participating securities’ share in earnings	$	201,650		$	141,160
Denominator:
Basic weighted-average units		364,889			335,456
Dilutive potential units		553			415
Diluted weighted-average units		365,442			335,871

9. Commitments and Contingencies

Commitments

On September 28, 2016, we entered into definitive agreements to acquire an acute care hospital in Washington for a purchase price of $17.5 million. Upon closing, the facility will be leased to RCCH, pursuant to the current master lease. Closing of this transaction, which is expected to be completed in 2018 is subject to customary real estate, regulatory and other closing conditions.

On June 6, 2018, we entered into a definitive agreement to acquire four rehabilitation hospitals in Germany for a purchase price of approximately €23 million (including real estate transfer taxes). Upon closing, these facilities will be leased to affiliates of MEDIAN, pursuant to a new 27-year master lease with annual escalators at the greater of one percent or 70% of the change in German CPI. We expect to complete this transaction during the third quarter of 2018.

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.

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

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

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

Forward-Looking Statements.

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

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

•	the competitive environment in which we operate;

•	the execution of our business plan;

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

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

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

•	acquisition and development risks;

•	potential environmental contingencies and other liabilities;

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

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

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

•	our ability to attract and retain qualified personnel;

•	changes in foreign currency exchange rates;

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

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

•

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

•

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

•

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

Key Factors that May Affect Our Operations

Our revenue is derived from rents we earn pursuant to the lease agreements with our tenants, from interest income from loans to our tenants and other facility owners and from profits or equity interests in certain of our tenants’ operations. Our tenants operate in

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

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

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

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

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

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

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

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

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

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

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

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

•	competition from other financing sources; and

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

CRITICAL ACCOUNTING POLICIES

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

Overview

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

At June 30, 2018, our portfolio consisted of 272 properties leased or loaned to 31 operators, of which three are under development and 13 are in the form of mortgage loans.

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

	As of June 30, 2018		% of Total			As of December 31, 2017		% of Total
Real estate owned (gross)	$	6,575,893		73.4	%	$	6,595,252		73.1	%
Mortgage loans		1,686,866		18.8	%		1,778,316		19.7	%
Other loans		147,855		1.7	%		150,209		1.7	%
Construction in progress		47,620		0.5	%		47,695		0.5	%
Other assets		498,590		5.6	%		448,816		5.0	%
Total assets (1)	$	8,956,824		100.0	%	$	9,020,288		100.0	%

(1)	Includes $1.9 billion and $1.8 billion of healthcare real estate assets in Europe at June 30, 2018 and December 31, 2017, respectively.

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

	For the Three Months Ended June 30, 2018		% of Total			For the Three Months Ended June 30, 2017		% of Total
General Acute Care Hospitals (1)	$	147,246		72.9	%	$	114,942		68.9	%
Rehabilitation Hospitals		49,850		24.7	%		41,065		24.6	%
Long-term Acute Care Hospitals		4,806		2.4	%		10,800		6.5	%
Total revenues	$	201,902		100.0	%	$	166,807		100.0	%

	For the Six Months Ended June 30, 2018		% of Total			For the Six Months Ended June 30, 2017		% of Total
General Acute Care Hospitals (1)	$	293,043		72.0	%	$	222,068		68.7	%
Rehabilitation Hospitals		100,009		24.6	%		79,344		24.6	%
Long-term Acute Care Hospitals		13,896		3.4	%		21,792		6.7	%
Total revenues	$	406,948		100.0	%	$	323,204		100.0	%

(1)	Includes three medical office buildings.

Results of Operations

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

Net income for the three months ended June 30, 2018, was $111.6 million, compared to $73.4 million for the three months ended June 30, 2017. This increase is primarily due to additional revenue from the Steward and MEDIAN investments that were made in 2017, along with the $24.2 million gain on the sale of the three properties (operated by Vibra) in June 2018. This increase is partially offset by incremental interest expense and depreciation expense, due primarily to the 2017 investments. Funds from operations (“FFO”), after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $129.9 million, or $0.36 per diluted share for the 2018 second quarter as compared to $113.6 million, or $0.32 per diluted share for the 2017 second quarter. This 14.3% increase in FFO is due to the increase in revenue from acquisitions made in 2017 (primarily our Steward investments), partially offset by higher interest expense to fund such investments.

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

	2018		% of Total			2017		% of Total			Year over Year Change
Rent billed	$	122,827		60.8	%	$	103,447		62.0	%		18.7	%
Straight-line rent		15,073		7.5	%		16,277		9.8	%		-7.4	%
Income from direct financing leases		18,934		9.4	%		18,312		11.0	%		3.4	%
Interest and fee income from loans		45,068		22.3	%		28,771		17.2	%		56.6	%
Total revenues	$	201,902		100.0	%	$	166,807		100.0	%		21.0	%

Our total revenue for the 2018 second quarter is up $35.1 million, or 21.0%, over the prior year. This increase is made up of the following:

•

Operating lease revenue (includes rent billed and straight-line rent) – up $18.2 million over the prior year of which $22.9 million is from incremental revenue from acquisitions (primarily the Steward and MEDIAN acquisitions in 2017), $0.8 million is incremental revenue from development properties that were completed and placed into service after June 2017, and approximately $2.4 million is from favorable foreign currency fluctuations. These increases are partially offset by $0.6 million of lower revenue related to dispositions and $6.2 million of higher straight-line rent write-offs in 2018 related to Vibra and Adeptus Health.

•

Income from direct financing leases – increased slightly over the prior year primarily due to $0.3 million from annual escalations of rental rates in accordance with provisions in our leases and $0.7 million of incremental revenue from acquisitions made after June 2017. The increase was partially offset by the decrease of $0.4 million of DFL unbilled interest no longer recorded on the Boise Lease that converted from DFL to operating lease accounting classification upon execution of the new lease with the Vibra/Ernest joint venture in the 2018 first quarter - see Note 3 to Item 1 of this Form 10-Q for details.

•

Interest from loans – up $16.3 million over the prior year of which $0.4 million is from our annual escalations in interest rates in accordance with loan provisions and $15.9 million is from incremental revenue from the new Steward mortgage loans made after June 2017.

Interest expense, for the quarters ended June 30, 2018 and 2017, totaled $58.1 million and $39.7 million, respectively. This increase is primarily related to the higher average debt balance during the 2018 second quarter compared to the prior year second quarter in order to fund our acquisition activity in the second half of 2017 and approximately $0.8 million relates to foreign currency fluctuation. This impact on interest expense is partially offset by slightly lower weighted-average interest rates period over period due to certain refinancing activities in our debt during 2017. Our weighted-average interest rate was 4.5% for the three months ended June 30, 2018, as compared to 4.6% in the same period in 2017.

Real estate depreciation and amortization during the second quarter of 2018 increased to $34.5 million from $29.5 million in 2017, due to the incremental depreciation from the facilities acquired (particularly the Steward facilities acquired in the 2017 third quarter) and the development properties completed in 2017 and the first half of 2018.

General and administrative expenses totaled $19.6 million for the 2018 second quarter, which is a $4.5 million increase from the prior year second quarter. As noted in our 2018 first quarter Form 10-Q, general and administrative expenses are higher in 2018 due to our adoption of the new accounting standard on asset acquisitions (ASU 2017-01). Excluding the $1.5 million of higher expense due to the accounting change, general and administrative expenses represented approximately 9.0% of revenue in the 2018 second quarter, which is consistent with 2017. On a dollar basis (exclusive of the accounting change impact), general and administrative expenses were up $3.0 million from the prior year second quarter due to travel and compensation expenses, which are up as a result of the growth and expansion of our company.

Acquisition costs decreased $10.4 million from the prior year. The $10.8 million of acquisition costs in 2017 primarily related to the MEDIAN transactions along with deals completed subsequent to June 2017. In regards to the 2018 second quarter, all third party transaction costs directly related to acquisitions are now capitalized due to the adoption of ASU 2017-01. However, we did incur $0.4 million in the current period related to the settlement of a contingency involving an acquisition that occurred prior to the adoption of ASU 2017-01.

During the three months ended June 30, 2018, we sold three of our long-term acute care hospitals (operated by Vibra) at a gain of $24.2 million. We had no disposals in the 2017 second quarter. See Note 3 to Item 1 of this Form 10-Q for further details.

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

Six Months Ended June 30, 2018 Compared to June 30, 2017

Net income for the six months ended June 30, 2018, was $202.2 million, compared to $141.4 million for the six months ended June 30, 2017. This increase is primarily due to additional revenue from the Steward and MEDIAN investments that were made in 2017, no debt refinancing charges in 2018 compared to $14.4 million in the 2017 first half, and $18.2 million of higher gains on sales of real estate in 2018 versus 2017. This increase is partially offset by increased interest expense from higher average outstanding debt balances to fund new investments in 2017 and higher depreciation expenses from investments made in 2017. Funds from operations (“FFO”), after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $261.4 million, or $0.71 per diluted share for the first six months of 2018 as compared to $219.6 million, or $0.65 per diluted share for the first six months of 2017. This 19.1% increase in FFO is due to the increase in revenue from acquisitions and completed development projects made in 2017 (primarily our Steward investments).

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

	2018		% of Total			2017		% of Total			Year over Year Change
Rent billed	$	250,838		61.6	%	$	200,210		61.9	%		25.3	%
Straight-line rent		30,864		7.6	%		29,056		9.0	%		6.2	%
Income from direct financing leases		36,615		9.0	%		36,192		11.2	%		1.2	%
Interest and fee income from loans		88,631		21.8	%		57,746		17.9	%		53.5	%
Total revenues	$	406,948		100.0	%	$	323,204		100.0	%		25.9	%

Our total revenue for the first six months of 2018 is up $83.7 million, or 25.9%, over the prior year. This increase is made up of the following:

•

Operating lease revenue (includes rent billed and straight-line rent) – up $52.4 million over the prior year of which $56.5 million is from incremental revenue from acquisitions (primarily the Steward and MEDIAN acquisitions in 2017), $2.0 million is incremental revenue from development properties that were completed and placed into service in 2017 and 2018, and approximately $6.6 million is from favorable foreign currency fluctuations. These increases are partially offset by $1.9 million of lower revenue related to dispositions and $9.7 million of higher straight-line rent write-offs.

•

Income from direct financing leases – increased slightly over the prior year primarily due to $0.5 million from annual escalations of rental rates in accordance with provisions in our leases and $1.9 million from incremental revenue from acquisitions made after June 2017. The impact was almost completely offset by the write-off of $1.5 million of DFL unbilled interest on the Boise Lease that converted from DFL to operating lease accounting classification upon execution of the new lease with the Vibra/Ernest joint venture discussed in Note 3 to Item 1 of this Form 10-Q.

•

Interest from loans – up $30.9 million over the prior year of which $30.0 million is from incremental revenue from the new Steward mortgage loans made in 2017 and 2018, and $0.9 million is from our annual escalations in interest rates in accordance with loan provisions.

Interest expense, for the six months ended June 30, 2018 and 2017, totaled $115.1 million and $77.7 million, respectively. This increase is primarily related to the higher average debt balance during the first six months of 2018 compared to the first six months of 2017 in order to fund our 2017 acquisition activity and approximately $2.1 million relates to foreign currency fluctuation. The impact on interest expense is partially offset by slightly lower weighted average interest rates period over period due to certain refinancing activities in our debt during 2017. Our weighted-average interest rate was 4.5% for the six months ended June 30, 2018, as compared to 4.6% in the same period in 2017.

Real estate depreciation and amortization during the first six months of 2018 increased to $70.3 million from $57.1 million in the same period of 2017, due to the incremental depreciation from the facilities acquired (particularly the Steward and MEDIAN facilities acquired in 2017) and the development properties completed in 2017 and 2018.

General and administrative expenses totaled $37.4 million for the first six months of 2018, which is a $9.1 million increase from the prior year. As noted previously, general and administrative expenses were higher during the first six months of 2018 due to our adoption of ASU 2017-01. Excluding the $3.1 million of higher expense due to the accounting change, general and administrative expenses represented 8.4% of revenue in the first half of 2018, which was lower than 8.7% in 2017. On a dollar basis (exclusive of the accounting change impact), general and administrative expenses were up $6 million from the prior year due to travel and compensation expenses, which are up as a result of the growth and expansion of our company.

Acquisition costs decreased $13.2 million from the prior year. The acquisition costs in 2017 primarily related to the MEDIAN transaction along with deals completed subsequent to June 2017. In regards to the first six months of 2018, all third party transaction costs directly related to acquisitions are now capitalized due to the adoption of ASU 2017-01 as noted previously. However, we did

incur $0.4 million in the current period related to the settlement of a contingency involving an acquisition that occurred prior to the adoption of ASU 2017-01.

During the six months ended June 30, 2018, we sold one acute care property (operated by Steward) and three long-term acute care properties (operated by Vibra) at a gain of $25.6 million. In the 2017 first half, we sold one RCCH property resulting in a $7.4 million gain. See Note 3 to Item 1 of this Form 10-Q for further details.

In the first half of 2017, we incurred $14.4 million of debt refinancing costs related to various debt refinancing activities as disclosed in Note 4 to Item 1 of this Form 10-Q. We did not have any similar charges during the first six months of 2018.

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

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.

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

	For the Three Months Ended						For the Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
FFO information:
Net income attributable to MPT common stockholders	$	111,567		$	73,415		$	202,168		$	141,385
Participating securities’ share in earnings		(323	)		(100	)		(518	)		(225	)
Net income, less participating securities’ share in earnings	$	111,244		$	73,315		$	201,650		$	141,160
Depreciation and amortization		35,156			30,027			71,673			58,126
Gain on sale of real estate, net		(24,151	)		—			(25,618	)		(7,413	)
Funds from operations	$	122,249		$	103,342		$	247,705		$	191,873
Write-off of straight-line rent and other		7,235			—			13,294			1,117
Debt refinancing costs		—			751			—			14,380
Acquisition costs, net of tax benefit		411			9,539			411			12,184
Normalized funds from operations	$	129,895		$	113,632		$	261,410		$	219,554
Per diluted share data:
Net income, less participating securities’ share in earnings	$	0.30		$	0.21		$	0.55		$	0.42
Depreciation and amortization		0.10			0.08			0.20			0.17
Gain on sale of real estate, net		(0.07	)		—			(0.07	)		(0.02	)
Funds from operations	$	0.33		$	0.29		$	0.68		$	0.57
Write-off of straight-line rent and other		0.03			—			0.03			—
Debt refinancing costs		—			—			—			0.04
Acquisition costs, net of tax benefit		—			0.03			—			0.04
Normalized funds from operations	$	0.36		$	0.32		$	0.71		$	0.65

LIQUIDITY AND CAPITAL RESOURCES

2018 Cash Flow Activity

During the first half of 2018, we generated $196.5 million of cash flows from operating activities, primarily consisting of rent and interest from mortgage and other loans. We used these operating cash flows along with cash on-hand to fund our dividends of $180.8 million and certain investing and financing activities (including a $4.6 million reduction in our revolving credit facility).

Certain investing activities in the first half of 2018 included:

Generated $221.9 million of cash proceeds from the sale of properties;

Completed $167.9 million in mortgage loans;

Funded approximately $23 million on development and capital improvement projects; and

Purchased two facilities operated by Steward for $273.7 million by reducing the $259.4 million mortgage.

As disclosed in Note 3 to Item 1 of this Form 10-Q, we expect to close on a joint venture involving 71 properties in Germany in the 2018 third quarter with a total valuation of €1.635 billion. In preparation of this joint venture, we issued new secured debt on these properties resulting in gross proceeds of €655 million on August 3, 2018, which we expect to use to reduce our revolver balance.

2017 Cash Flow Activity

During the first half of 2017, we generated $154.9 million of cash flows from operating activities, primarily consisting of rent and interest from mortgage and other loans. We used these operating cash flows along with cash on-hand to fund our dividends of $151.7 million and certain investing activities.

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

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

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

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

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

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

Short-term Liquidity Requirements:

As of June 30, 2018, we have no debt principal payments due in the next twelve months — see debt maturity schedule below. At August 3, 2018, our availability under our revolving credit facility plus cash on-hand (factoring in the secured debt issued on August 3, 2018 in anticipation of the joint venture) approximated $1.3 billion. We believe this liquidity along with our current monthly cash receipts from rent and loan interest and availability under our at-the-market equity program is sufficient to fund our operations, interest obligations, our firm commitments (including expected funding requirements on our development projects), and dividends in order to comply with REIT requirements for the next twelve months.

We expect to lower our outstanding borrowings on our revolving credit facility and improve our leverage metrics during 2018 with the completion of the joint venture arrangement discussed above and completing strategic property sales. However, no assurance can be made that such transactions will be available to us or that our plans will be successful.

Long-term Liquidity Requirements:

As of June 30, 2018, we have no debt principal payments due between now and January 2021 when our revolving credit facility comes due (which can be extended by one year). With our liquidity at August 3, 2018 of approximately $1.3 billion, along with our current monthly cash receipts from rent and loan interest and the availability under our at-the-market equity program, we believe we have the liquidity available to us to fund our operations, debt and interest obligations, dividends in order to comply with REIT

requirements, and firm commitments (including expected funding requirements on our development projects) for the foreseeable future.

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

•

entering into joint venture arrangements (including the joint venture we expect to close in the 2018 third quarter that is expected to generate approximately €500 million in addition to the €655 million secured debt gross proceeds on August 3, 2018);

•

proceeds from strategic property sales;

•

sale of equity securities;

•

amending or entering into new bank term loans;

•

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

•

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

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

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

2018	$	—
2019		—
2020		—
2021		835,848
2022		784,200
Thereafter		3,284,200
Total	$	4,904,248

Disclosure of Contractual Obligations

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

Distribution Policy

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

Declaration Date	Record Date	Date of Distribution	Distribution per Share
May 24, 2018	June 14, 2018	July 12, 2018	$	0.25
February 15, 2018	March 15, 2018	April 12, 2018	$	0.25
November 9, 2017	December 7, 2017	January 11, 2018	$	0.24
August 17, 2017	September 14, 2017	October 12, 2017	$	0.24
May 25, 2017	June 15, 2017	July 14, 2017	$	0.24
February 16, 2017	March 16, 2017	April 13, 2017	$	0.24
November 10, 2016	December 8, 2016	January 12, 2017	$	0.23
August 18, 2016	September 15, 2016	October 13, 2016	$	0.23

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

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

Interest Rate Sensitivity

For fixed rate debt, interest rate changes affect the fair market value but do not impact net income to common stockholders or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact net income to common stockholders and cash flows, assuming other factors are held constant. At June 30, 2018, our outstanding debt totaled $4.9 billion, which consisted of fixed-rate debt of approximately $3.9 billion and variable rate debt of $1.0 billion. If market interest rates increase by 1%, the fair value of our debt at June 30, 2018 would decrease by $10.4 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 market.

If market rates of interest on our variable rate debt increase by 1%, the increase in annual interest expense on our variable rate debt would decrease future earnings and cash flows by $0.3 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 $0.3 million per year. This assumes that the average amount outstanding under our variable rate debt for a year is $1.0 billion, the balance of such variable rate debt at June 30, 2018.

Foreign Currency Sensitivity

With our investments in Germany, the United Kingdom, Spain, and Italy, we are subject to fluctuations in the euro and British pound to U.S. dollar currency exchange rates. Increases or decreases in the value of the euro to U.S. dollar and the British pound to U.S. dollar exchange rates may impact our financial condition and/or our results of operations. Based solely on operating results to-date in 2018 and on an annualized basis, if the euro exchange rate were to change by 5%, our net income and FFO would change by approximately $3.2 million and $5.0 million, respectively. Based solely on operating results to-date in 2018 and on an annualized basis, if the British pound exchange rate were to change by 5%, our net income and FFO would change by approximately $0.1 million and $0.2 million, respectively.

Item 4. Controls and Procedures.

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

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

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

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

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

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

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

(a)

None.

(b)	Not applicable.

(c)

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

(a)

None.

(b)

None.

Item 6. Exhibits

Exhibit Number		Description

3.1(1)		Amendment to Second Amended and Restated Bylaws of Medical Properties Trust, Inc.

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

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

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

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

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

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

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

Exhibit 101.INS		XBRL Instance Document

Exhibit 101.SCH		XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

Exhibit 101.LAB		XBRL Taxonomy Extension Label Linkbase Document

Exhibit 101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed herewith.

**	Furnished herewith.

(1)	Incorporated by reference to Registrant's current report on Form 8-K, filed with the Commission on May 25, 2018.

SIGNATURE

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

MEDICAL PROPERTIES TRUST, INC.

By:		/s/ J. Kevin Hanna
		J. Kevin Hanna
		Vice President, Controller, Assistant Treasurer, and Chief Accounting Officer (Principal Accounting Officer)

MPT OPERATING PARTNERSHIP, L.P.

By:		/s/ J. Kevin Hanna
		J. Kevin Hanna
		Vice President, Controller, Assistant Treasurer, and Chief Accounting Officer of the sole member of the general partner of MPT Operating Partnership, L.P. (Principal Accounting Officer)

Date: August 9, 2018