UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2012
OR
For the transition period from to
Commission file number 001-32559
MEDICAL PROPERTIES TRUST, INC.
MPT OPERATING PARTNERSHIP, L.P.
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND
DELAWARE
20-0191742
20-0242069
(State or other jurisdiction of
incorporation or organization)
(I. R. S. Employer
Identification No.)
1000 URBAN CENTER DRIVE, SUITE 501
BIRMINGHAM, AL
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (205) 969-3755
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 5, 2012, Medical Properties Trust, Inc. had 135,572,131 shares of common stock, par value $.001, outstanding.
EXPLANATORY NOTE
This report combines the Quarterly Reports on Form 10-Q for the three and nine months ended September 30, 2012 of Medical Properties Trust, Inc., a Maryland corporation, and MPT Operating Partnership, L.P., a Delaware limited partnership, through which Medical Properties Trust, Inc. conducts substantially all of its operations. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” “our company,” “Medical Properties,” “MPT,” or “the company” refer to Medical Properties Trust, Inc. together with its consolidated subsidiaries, including MPT Operating Partnership, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to “our operating partnership” or “the operating partnership” refer to MPT Operating Partnership, L.P. together with its consolidated subsidiaries.
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MEDICAL PROPERTIES TRUST, INC. AND MPT OPERATING PARTNERSHIP, L.P.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED September 30, 2012
Table of Contents
PART I — FINANCIAL INFORMATION
Item 1 Financial Statements
Medical Properties Trust, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011
Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2012 and 2011
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Nine Months Ended September 30, 2012 and 2011
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011
MPT Operating Partnership, L.P. and Subsidiaries
Medical Properties Trust, Inc. and MPT Operating Partnership, L.P.
Notes to Condensed Consolidated Financial Statements
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Item 4 Controls and Procedures
PART II — OTHER INFORMATION
Item 1 Legal Proceedings
Item 1A Risk Factors
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Mine Safety Disclosures
Item 5 Other Information
Item 6 Exhibits
SIGNATURE
INDEX TO EXHIBITS
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Item 1. Financial Statements.
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
Assets
Real estate assets
Land, buildings and improvements, and intangible lease assets
Real estate held for sale
Mortgage loans
Net investment in direct financing leases
Gross investment in real estate assets
Accumulated depreciation and amortization
Net investment in real estate assets
Cash and cash equivalents
Interest and rent receivable
Straight-line rent receivable
Other loans
Other assets
Total Assets
Liabilities and Equity
Liabilities
Debt, net
Accounts payable and accrued expenses
Deferred revenue
Lease deposits and other obligations to tenants
Total liabilities
Equity
Preferred stock, $0.001 par value. Authorized 10,000 shares; no shares outstanding
Common stock, $0.001 par value. Authorized 250,000 shares; issued and outstanding — 134,657 shares at September 30, 2012, and 110,786 shares at December 31, 2011
Additional paid in capital
Distributions in excess of net income
Accumulated other comprehensive loss
Treasury shares, at cost
Total equity
Total Liabilities and Equity
See accompanying notes to condensed consolidated financial statements.
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Condensed Consolidated Statements of Income
(Unaudited)
Revenues
Rent billed
Straight-line rent
Income from direct financing leases
Interest and fee income
Total revenues
Expenses
Real estate depreciation and amortization
Property-related
General and administrative
Acquisition expenses
Total operating expenses
Operating income
Other income (expense)
Interest and other (expense) income
Earnings from equity and other interests
Debt refinancing costs
Interest expense
Net other expense
Income (loss) from continuing operations
Income from discontinued operations
Net income
Net income attributable to non-controlling interests
Net income attributable to MPT common stockholders
Earnings per common share — basic and diluted
Income (loss) from continuing operations attributable to MPT common stockholders
Income from discontinued operations attributable to MPT common stockholders
Weighted average shares outstanding:
Basic
Diluted
Dividends declared per common share
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Condensed Consolidated Statements of Comprehensive Income (Loss)
Other comprehensive income (loss):
Unrealized loss on interest rate swap
Total comprehensive income (loss)
Comprehensive income attributable to non-controlling interests
Comprehensive income (loss) attributable to MPT common stockholders
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Condensed Consolidated Statements of Cash Flows
Operating activities
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization
Straight-line rent revenue (net of write-offs)
Direct financing lease interest accretion
Share-based compensation
(Gain) loss on sale of real estate
Real estate impairment
Amortization and write-off of deferred financing costs and debt discount
Premium paid on extinguishment of debt
Other adjustments
Changes in:
Net cash provided by operating activities
Investing activities
Cash paid for acquisitions and other related investments
Principal received on loans receivable
Net proceeds from sale of real estate
Investment in loans receivable
Construction in progress and other
Net cash used for investing activities
Financing activities
Revolving credit facilities, net
Additions to term debt
Payments of term debt
Distributions paid
Sale of common stock, net
Debt issuance costs paid and other financing activities
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents for period
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Interest paid
Supplemental schedule of non-cash investing activities:
Loan conversion to equity interest
Real estate acquired via assumption of mortgage loan
Mortgage loan issued from sale of real estate
Supplemental schedule of non-cash financing activities:
Distributions declared, unpaid
Assumption of mortgage loan (as part of real estate acquired)
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MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
Liabilities and Capital
Payable due to Medical Properties Trust, Inc.
Capital
General Partner — issued and outstanding — 1,345 units at September 30, 2012 and 1,107 units at December 31, 2011
Limited Partners:
Common units — issued and outstanding — 133,312 units at September 30, 2012 and 109,679 units at December 31, 2011
LTIP units — issued and outstanding — 150 units at September 30, 2012 and at December 31, 2011
Total capital
Total Liabilities and Capital
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Interest and other income (expense)
Net income attributable to MPT Operating Partnership partners
Earnings per units — basic and diluted
Income (loss) from continuing operations attributable to MPT Operating Partnership partners
Income from discontinued operations attributable to MPT Operating Partnership partners
Net income attributable to MPT Operating Partnership Partners
Weighted average units outstanding:
Dividends declared per unit
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Comprehensive income (loss) attributable to MPT Operating Partnership partners
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MEDICAL PROPERTIES TRUST, INC., AND MPT OPERATING PARTNERSHIP, L.P.
1. Organization
Medical Properties Trust, Inc., a Maryland corporation, was formed on August 27, 2003 under the General Corporation Law of Maryland for the purpose of engaging in the business of investing in, owning, and leasing commercial real estate. Our operating partnership subsidiary, MPT Operating Partnership, L.P., through which we conduct all of our operations, was formed in September 2003. Through another wholly-owned subsidiary, Medical Properties Trust, LLC, we are the sole general partner of the Operating Partnership. At present, we directly own substantially all of the limited partnership interests in the Operating Partnership and have elected to report our required disclosures and that of the Operating Partnership on a combined basis except where material differences exist.
We have operated as a real estate investment trust (“REIT”) since April 6, 2004, and accordingly, elected REIT status upon the filing in September 2005 of the calendar year 2004 federal income tax return. Accordingly, we will not be subject to U.S. federal income tax, provided that we continue to qualify as a REIT and our distributions to our stockholders equal or exceed our taxable income. Certain activities we undertake must be conducted by entities which we elected to be treated as taxable REIT subsidiaries (“TRSs”). Our TRSs are subject to both federal and state income taxes.
Our primary business strategy is to acquire and develop real estate and improvements, primarily for long-term lease to providers of healthcare services such as operators of general acute care hospitals, inpatient physical rehabilitation hospitals, long-term acute care hospitals, surgery centers, centers for treatment of specific conditions such as cardiac, pulmonary, cancer, and neurological hospitals, and other healthcare-oriented facilities. We also make mortgage and other loans to operators of similar facilities. In addition, we may obtain profits or equity interests in our tenants, from time to time, in order to enhance our overall return. We manage our business as a single business segment.
2. Summary of Significant Accounting Policies
Unaudited Interim Condensed Consolidated Financial Statements: The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, including rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The condensed consolidated balance sheet at December 31, 2011 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
For information about significant accounting policies, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2011. During the three and nine months ended September 30, 2012, there were no material changes to these policies, except we began using direct financing lease (“DFL”) accounting with the acquisition and lease of the real estate of Ernest Health, Inc. (“Ernest”) and the acquisition and lease of two acute care hospitals to Prime Healthcare Services, Inc. (“Prime”). Under DFL accounting, future minimum lease payments are recorded as a receivable. Unearned income, which represents the net investment in the DFL less the sum of minimum lease payments receivable and the estimated residual values of the leased properties, is deferred and amortized to income over the lease term to provide a constant yield when collectability of the lease payments is reasonably assured. Investments in DFLs are presented net of unamortized and unearned income. DFLs are placed on non-accrual status when management determines that the collectability of contractual amounts is not reasonably assured. While on non-accrual status, DFLs are accounted for on a cash basis, in which income is recognized only upon receipt of cash.
For our equity interest in Ernest and related loans (as more fully described in Note 3), we have elected to account for these investments at fair value due to the size of the investments and because we believe this method is more reflective of current values. We have not made a similar election for other equity interests or loans made in or prior to 2012.
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Variable Interest Entities
In regard to the Ernest Transaction (defined in Note 3), we have determined that Ernest is a variable interest entity (“VIE”); however, we are not the primary beneficiary as we lack the ability to direct the activities of Ernest that most significantly impact the entity’s economic performance. At September 30, 2012, we had loans to and/or equity investments in several VIEs for which we are not the primary beneficiary. The carrying value and classification of the related assets and maximum exposure to loss as a result of our involvement with these VIEs are presented below at September 30, 2012 (in thousands):
VIE Type
Loans, net
Equity investments
For the VIE types above, we do not consolidate the VIE because we do not have the ability to control the activities (such as the day-to-day healthcare operations of our borrowers or investees) that most significantly impact the VIE’s economic performance. As of September 30, 2012, we were not required to provide financial support through a liquidity arrangement or otherwise to our unconsolidated VIEs, including circumstances in which it could be exposed to further losses (e.g., cash short falls).
Typically, our loans are collateralized by assets of the borrower (some assets of which are on the premises of facilities owned by us) and further supported by limited guarantees made by certain principals of the borrower.
See Note 3 for additional description of the nature, purpose and activities of our more significant VIEs and interests therein.
3. Real Estate and Lending Activities
Acquisitions
2012 Activity
On September 19, 2012, we acquired the real estate of the 380 bed St. Mary’s Regional Medical Center, an acute care hospital in Reno, Nevada for $80 million and the real estate of the 140 bed Roxborough Memorial Hospital in Pennsylvania for $30 million. The acquired facilities are leased to Prime pursuant to a master lease agreement, which is more fully described below in the Leasing Operations section.
On July 3, 2012, we funded a $100 million mortgage loan secured by the real property of Centinela Hospital Medical Center. Centinela is a 369 bed acute care facility that is operated by Prime. This mortgage loan is cross-defaulted with other mortgage loans to Prime and the master lease agreements.
On February 29, 2012, we made loans to and acquired assets from Ernest for a combined purchase price and investment of $396.5 million, consisting of $200 million to purchase real estate assets, a first mortgage loan of $100 million, an acquisition loan for $93.2 million and a capital contribution of $3.3 million (“Ernest Transaction”).
Real Estate Acquisition and Mortgage Loan Financing
Pursuant to a definitive real property asset purchase agreement (the “Purchase Agreement”), we acquired from Ernest and certain of its subsidiaries (i) a portfolio of five rehabilitation facilities (including a ground lease interest relating to a community-based acute rehabilitation facility in Wyoming), (ii) seven long-term acute care facilities located in seven states and (iii) undeveloped land in Provo, Utah (collectively, the “Acquired Facilities”) for an aggregate purchase price of $200 million, subject to certain adjustments. The Acquired Facilities are leased to subsidiaries of Ernest pursuant to a master lease agreement. The master lease agreement has a 20-year term with three five-year extension options and provides for an initial rental rate of 9%, with consumer price-indexed increases, limited to a 2% floor and 5% ceiling annually thereafter. In addition, we made Ernest a $100 million loan secured by a first mortgage interest in four subsidiaries of Ernest, which has terms similar to the leasing terms described above.
Acquisition Loan and Equity Contribution
Through an affiliate of one of our TRSs, we made investments of approximately $96.5 million in Ernest Health Holdings, LLC (“Ernest Holdings”), which is the owner of Ernest. These investments, which are structured as a $93.2 million loan and a $3.3 million equity contribution generally provide that we will receive a preferential return of 15% of the loan amount and approximately 79% of
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the remaining earnings of Ernest. Ernest is required to pay us a minimum of 6% and 7% of the loan amount in years one and two, respectively, and 10% thereafter, although there are provisions in the loan agreement that are expected to result in full payment of the 15% preference when funds are sufficient. Any of the 15% in excess of the minimum that is not paid may be accrued and paid upon the occurrence of a capital or liquidity event and is payable at maturity. The loan may be prepaid without penalty at any time.
Financing of Ernest Transaction
To finance the Ernest Transaction, we completed equity and senior unsecured notes offerings in February 2012. See Notes 4 and 5 for more information on these financing activities.
2011 Activity
On January 4, 2011, we acquired the real estate of the 19-bed, 4-year old Gilbert Hospital in a suburb of Phoenix, Arizona area for $17.1 million. Gilbert Hospital is operated by affiliates of Visionary Health, LLC. We acquired this asset subject to an existing lease that expires in May 2022.
On January 31, 2011, we acquired for $23.5 million the real estate of the 60-bed Atrium Medical Center at Corinth in the Dallas area, a long-term acute care hospital that was completed in 2009 and is subject to a lease that expires in June 2024. In addition, through one of our affiliates, we invested $1.3 million to acquire approximately 19% of a joint venture arrangement with an affiliate of Vibra Healthcare, LLC (“Vibra”) that will manage and has acquired a 51% interest in the operations of the facility. We also made a $5.2 million working capital loan to the joint venture. The former operators of the hospital, comprised primarily of local physicians, retained ownership of 49% of the operating entity.
On February 4, 2011, we purchased for $58 million the real estate of Bayonne Medical Center, a 6-story, 278-bed acute care hospital in the New Jersey area of metropolitan New York, and leased the facility to the operator under a 15-year lease, with six 5-year extension options. The operator is an affiliate of a private hospital operating company that acquired the hospital in 2008.
On February 9, 2011, we acquired the real estate of the 306-bed Alvarado Hospital in San Diego, California for $70 million from Prime who is the operator of the facility.
On February 14, 2011, we completed the acquisition of the Northland LTACH Hospital located in Kansas City, a 35-bed hospital that opened in April 2008 and has a lease that expires in 2028. This hospital is currently being operated by Kindred Healthcare Inc. The purchase price of this hospital was $19.5 million, which included the assumption of a mortgage loan.
On July 18, 2011, we acquired the real estate of the 40-bed Vibra Specialty Hospital of DeSoto in Desoto, Texas for $13.0 million. Vibra Specialty Hospital of DeSoto is a long-term acute care hospital. This facility is leased to a subsidiary of Vibra for a fixed term of 15 years with options to extend. In addition, we made a $2.5 million equity investment in the operator of this facility for a 25% equity ownership.
On September 30, 2011, we purchased the real estate of a 40-bed long-term acute care facility in New Braunfels, Texas for $10.0 million. This facility is leased to an affiliate of Post Acute Medical, LLC for a fixed term of 15 years with options to extend. In addition, we made a $1.4 million equity investment for a 25% equity ownership in the operator of this facility and funded a $2.0 million working capital loan.
As part of these acquisitions, we purchased and invested in the following assets during the first nine months: (dollar amounts in thousands)
Assets Acquired
Land
Building
Intangible lease assets — subject to amortization (weighted average useful life of 13.5 years in 2011)
Net investments in direct financing leases
Total assets acquired
Total liabilities assumed
Net assets acquired
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From the respective acquisition dates, the properties and mortgage loans acquired in 2012 contributed $14.1 million and $29.1 million of revenue and income (excluding related acquisition expenses) for the three and nine month periods ended September 30, 2012, respectively. In addition, we incurred $0.1 million and $3.8 million of acquisition related costs on the 2012 acquisitions for the three and nine months ended September 30, 2012.
From the respective acquisition dates, the seven hospitals acquired in 2011 contributed $5.5 million and $14.0 million of revenue and $3.7 million and $9.1 million of income (excluding related acquisition expenses) for the three and nine months ended September 30, 2011, respectively. In addition, we incurred $0.5 million and $3.2 million of acquisition related costs on consummated and non-consummated deals for the three and nine months ended September 30, 2011.
The results of operations for each of the properties acquired are included in our consolidated results from the effective date of each acquisition. The following table sets forth certain unaudited pro forma consolidated financial data for 2012 and 2011, as if each acquisition in 2012 and 2011 were consummated on the same terms at the beginning of 2011. Supplemental pro forma earnings were adjusted to exclude acquisition-related costs on consummated deals incurred in the three and nine months ended September 30, 2012 and 2011 (dollar amounts in thousands except per share/unit data).
Net income per share/unit — diluted
Development Activities
On June 13, 2012, we entered into an agreement with Ernest to develop and lease a 40-bed rehabilitation hospital in Lafayette, Indiana. Total development cost is estimated to be $16.6 million and the facility is expected to be completed in the 2013 second quarter. We have funded $7.2 million through the third quarter of 2012.
On May 4, 2012, we amended the current lease on our Victoria, Texas facility with Post Acute Medical to extend the current lease term into 2028, and we agreed to develop and lease a 26-bed facility next to the current facility. Total development cost of the new facility is estimated to be $9.4 million and it is expected to be completed in the third quarter of 2013.
On March 1, 2012, we received a certificate of occupancy for our recently constructed Florence acute care facility near Phoenix, Arizona. With this, we started recognizing rent on this facility in March 2012. During the construction period, we accrued and deferred rent based on the cost paid during the construction period. In March 2012, we began recognizing a portion of the accrued construction period rent along with interest on the unpaid amount. This accrued construction period rent will be recognized in our income statement and paid over the 25 year lease term. Land and building costs associated with this property approximates $30 million.
In addition to the new development projects, our other three development projects, which will be leased to Emerus Holding, Inc., are expected to be completed between October 2012 and early 2013. Estimated total development cost for these three facilities is $30 million. We have funded $17.6 million through the third quarter of 2012. In regard to our River Oaks facility, re-development efforts continue and we currently expect this facility to be partially occupied starting in the first quarter of 2013.
Disposals
During the third quarter of 2012, we entered into a definitive agreement to sell the real estate of two LTACH facilities, Thornton and New Bedford, to Vibra for total cash proceeds of $42 million. The sale of Thornton was completed on September 28, 2012, resulting in a gain of $8.4 million. Due to this sale, we wrote-off $1.6 million in straight-line rent receivables. The sale of New Bedford was completed on October 22, 2012, resulting in a gain of approximately $7.0 million. Associated with this sale, we will write-off $4.1 million in straight-line rent receivables in the fourth quarter 2012. At September 30, 2012, our New Bedford facility is classified as held for sale, which required us to reclassify the operating results of this facility for the current and all prior periods to discontinued operations and reclassify the related real estate to Real Estate Held for Sale.
On August 21, 2012, we sold our Denham Springs facility for $5.2 million, resulting in a gain of $0.3 million. Due to this sale, the operating results of this facility for the current and all prior periods have been included in discontinued operations, and we have reclassified the related real estate to Real Estate Held for Sale.
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On June 15, 2012, we sold the HealthSouth Rehabilitation Hospital of Fayetteville in Fayetteville, Arkansas for $16 million, resulting in a loss of $1.4 million. Due to this sale, the operating results of this facility for the current and all prior periods have been included in discontinued operations, and we have reclassified the related real estate to Real Estate Held for Sale. In connection with this sale, HealthSouth Corporation agreed to extend the lease on our Wichita, Kansas property, which is now set to end in March 2022.
Leasing Operations
On July 3, 2012, we entered into master lease agreements with certain subsidiaries of Prime, which replaced the then current leases with the same tenants covering the same properties. The master leases are for 10 years and contain two renewal options of five years each. The initial lease rate is generally consistent with the blended average rate of the prior lease agreements. However, the annual escalators, which in the prior leases were limited, have been increased to reflect 100% of CPI increases, along with a minimum floor. The master leases include repurchase options substantially similar to those in the prior leases, including provisions establishing minimum repurchase prices equal to our total investment.
As noted previously, we are accounting for the master lease of 12 Ernest facilities and our Roxborough and Reno facilities as a DFL. The components of our net investment in DFL consisted of the following (dollars in thousands):
Minimum lease payments receivable
Estimated residual values
Less unearned income
Monroe facility
As of September 30, 2012, we have advanced $29.9 million to the operator/lessee of Monroe Hospital in Bloomington, Indiana pursuant to a working capital loan agreement, but no additional advances were made during the 2012 third quarter. In addition, as of September 30, 2012, we have $19.0 million of rent, interest and other charges owed to us by the operator, of which $5.8 million of interest receivables are significantly more than 90 days past due. Because the operator has not made all payments required by the working capital loan agreement and the related real estate lease agreement, we consider the loan to be impaired. During 2010, we recorded a $12 million impairment charge on the working capital loan and recorded a valuation allowance for unbilled straight-line rent in the amount of $2.5 million. We have not recognized any interest income on the Monroe loan since it was considered impaired and have not recorded any unbilled rent since 2010.
At September 30, 2012, our net investment (exclusive of the related real estate) of approximately $37 million is our maximum exposure to Monroe and the amount is deemed collectible/recoverable. In making this determination, we considered our first priority secured interest in approximately (i) $5 million in hospital patient receivables, (ii) cash balances of approximately $0.1 million, (iii) our assessment of the realizable value of our other collateral and (iv) continued improvement in operational revenue statistics compared to previous years. However, no assurances can be made that we will not have additional charges for further impairment of our working capital loan in the future.
On September 4, 2012, Monroe Hospital entered into a four-year agreement with St. Vincent Health, Inc. whereby St. Vincent will manage the operations of the hospital. At the same time we agreed with St. Vincent to exclusively negotiate the terms of a possible sale or lease of the hospital real estate by the end of such four year term. St. Vincent is a member of Ascension Health, the largest Catholic health care system in the country. However, there is no assurance that we will reach a satisfactory agreement with St. Vincent and St. Vincent has certain rights to terminate the management agreement during the four year term.
Other Loan Activity
On March 1, 2012, pursuant to our convertible note agreement, we converted $1.6 million of our $5.0 million convertible note into a 9.9% equity interest in the operator of our Hoboken University Medical Center facility. At September 30, 2012, $3.4 million remains outstanding on the convertible note, and we retain the option, through November 2014, to convert this remainder into a 15.1% of equity interest in the operator.
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Concentrations of Credit Risk
For the three and nine months ended September 30, 2012, revenue from affiliates of Ernest (including rent and interest from mortgage and acquisition loans) accounted for 20.8% and 18.1%, respectively, of total revenue. However, from an investment concentration perspective, Ernest represented 18.4% of our total assets at September 30, 2012.
For the three months ended September 30, 2012 and 2011, revenue from affiliates of Prime (including rent and interest from mortgage loans) accounted for 28.9% and 31.9%, respectively, of total revenue. For the nine months ended September 30, 2012 and 2011, revenue from affiliates of Prime (including rent and interest from mortgage loans) accounted for 26.3% and 31.7%, respectively, of total revenue. However, from an investment concentration perspective, Prime represented 28.7% and 25.3% of our total assets at September 30, 2012 and December 31, 2011, respectively.
On an individual property basis, we had no investment of any single property greater than 5% of our total assets as of September 30, 2012.
From a geographic perspective, all of our properties are located in the United States with 25.9% of our total assets at September 30, 2012 located in California.
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4. Debt
The following is a summary of debt, net of discounts (dollar amounts in thousands):
Revolving credit facilities (A)
2006 Senior Unsecured Notes
2011 Senior Unsecured Notes
2012 Senior Unsecured Notes
Exchangeable senior notes:
Principal amount
Unamortized discount
Term loans
As of September 30, 2012, principal payments due for our debt (which exclude the effects of any discounts recorded) are as follows (in thousands):
2012
2013
2014
2015
2016
Thereafter
Total
To help fund the 2012 acquisitions disclosed in Note 3, on February 17, 2012, we completed a $200 million offering of senior unsecured notes (“2012 Senior Unsecured Notes”), resulting in net proceeds, after underwriting discount, of $196.5 million. These 2012 senior unsecured notes accrue interest at a fixed rate of 6.375% per year and mature on February 15, 2022. The 2012 Senior Unsecured Notes include covenants substantially consistent with our 2011 Senior Unsecured Notes.
In addition, on March 9, 2012, we closed on a $100 million senior unsecured term loan facility (“2012 Term Loan”) and exercised the $70 million accordion feature on our revolving credit facility, increasing its capacity from $330 million to $400 million ($125.0 million outstanding at September 30, 2012). The 2012 Term Loan facility has an interest rate option of (1) LIBOR plus an initial spread of 2.25% or (2) the higher of the “prime rate”, federal funds rate plus 0.5%, or Eurodollar rate plus 1.0%, plus an initial spread of 1.25%. The 2012 Term Loan facility is scheduled to mature on March 9, 2016, but we have the option to extend the facility one year to March 9, 2017.
During the second quarter 2010, we entered into an interest rate swap to fix $65 million of our 2006 Senior Unsecured Notes, which started July 31, 2011 (date on which the interest rate turned variable) through maturity date (or July 2016), at a rate of 5.507%. We also entered into an interest rate swap to fix $60 million of our 2006 Senior Unsecured Notes which started October 31, 2011 (date on which the related interest rate turned variable) through the maturity date (or October 2016) at a rate of 5.675%. At September 30, 2012 and December 31, 2011, the fair value of the interest rate swaps was $13.2 million and $12.2 million, respectively, which is reflected in accounts payable and accrued expenses on the condensed consolidated balance sheets.
We designated our interest rate swaps as cash flow hedges. Accordingly, the effective portion of changes in the fair value of our swaps is recorded as a component of accumulated other comprehensive income/loss on the balance sheet and reclassified into earnings in the same period, or periods, during which the hedged transactions effect earnings, while any ineffective portion is recorded through earnings immediately. We did not have any hedge ineffectiveness in the periods; therefore, there was no income statement effect recorded during the three and nine month periods ended September 30, 2012 or 2011. We do not expect any of the current losses included in accumulated other comprehensive loss to be reclassified into earnings in the next 12 months. At September 30, 2012 and December 31, 2011, we had $6.7 million and $6.3 million, respectively, posted as collateral, which is currently reflected in other assets on our consolidated balance sheets.
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Our debt facilities impose certain restrictions on us, including restrictions on our ability to: incur debts; create or incur liens; provide guarantees in respect of obligations of any other entity; make redemptions and repurchases of our capital stock; prepay, redeem or repurchase debt; engage in mergers or consolidations; enter into affiliated transactions; dispose of real estate or other assets; and change our business. In addition, the credit agreements governing our revolving credit facility and 2012 Term Loan limit the amount of dividends we can pay as a percentage of normalized adjusted funds from operations, as defined in the agreements, on a rolling four quarter basis. Through the quarter ending June 30, the dividend restriction was 115% of normalized adjusted FFO. Thereafter, a similar dividend restriction exists but the percentage drops each quarter (110% for quarter ending September 30, 2012) until reaching 95% at September 30, 2013. The indentures governing our 2011 and 2012 Senior Unsecured Notes also limit the amount of dividends we can pay based on the sum of 95% of funds from operations, proceeds of equity issuances and certain other net cash proceeds. Finally, our 2011 and 2012 Senior Unsecured Notes require us to maintain total unencumbered assets (as defined in the related indenture) of not less than 150% of our unsecured indebtedness.
In addition to these restrictions, the revolving credit facility and 2012 Term Loan contain customary financial and operating covenants, including covenants relating to our total leverage ratio, fixed charge coverage ratio, mortgage secured leverage ratio, recourse mortgage secured leverage ratio, consolidated adjusted net worth, facility leverage ratio, and borrowing base interest coverage ratio. This facility also contains customary events of default, including among others, nonpayment of principal or interest, material inaccuracy of representations and failure to comply with our covenants. If an event of default occurs and is continuing under the facility, the entire outstanding balance may become immediately due and payable. At September 30, 2012, we were in compliance with all such financial and operating covenants.
5. Common Stock/Partner’s Capital
Medical Properties Trust, Inc.
To help fund the 2012 acquisitions disclosed in Note 3, on February 7, 2012, we completed an offering of 23,575,000 shares of our common stock (including 3,075,000 shares sold pursuant to the exercise in full of the underwriters’ overallotment option) at a price of $9.75 per share, resulting in net proceeds (after underwriting discount) of $220.1 million.
MPT Operating Partnership, L.P.
At September 30, 2012, the Company has a 99.8% ownership interest in Operating Partnership with the remainder owned by three other partners, two of which are employees and one of which is a director. During the nine months ended September 30, 2012, the partnership issued 23,575,000 units in direct response to the common stock offering by Medical Properties Trust, Inc.
6. Stock Awards
Our Second Amended and Restated Medical Properties Trust, Inc. 2004 Equity Incentive Plan (the “Equity Incentive Plan”) authorizes the issuance of common stock options, restricted stock, restricted stock units, deferred stock units, stock appreciation rights, performance units and awards of interests in our Operating Partnership. The Equity Incentive Plan is administered by the Compensation Committee of the Board of Directors. We have reserved 7,441,180 shares of common stock for awards under the Equity Incentive Plan for which 1,436,693 shares remain available for future stock awards as of September 30, 2012. We awarded the following during 2012 and 2011:
Time-based awards — We granted 275,464 and 292,803 shares in 2012 and 2011, respectively, of time-based restricted stock to management, independent directors, and certain employees (2011 only). These awards vest quarterly based on service, over three years, in equal amounts.
Performance-based awards— Our management team and certain employees (2011 only) were awarded 252,566 and 253,655 performance based awards in 2012 and 2011, respectively. These awards vest ratably over a three year period based on the achievement of certain total shareholder return measures, with a carry-back and carryforward provision through December 31, 2015 (for the 2011 awards) and December 31, 2016 (for the 2012 awards). Dividends on these awards are paid only upon achievement of the performance measures.
Multi-year Performance-based awards — We awarded 649,793 and 600,000 shares in 2012 and 2011, respectively, of multi-year performance-based awards to management and certain employees. These shares are subject to three-year cumulative performance hurdles based on total shareholder return. At the end of the third-year performance period, any earned shares will be subject to an additional two years of ratable time-based vesting on an annual basis. Dividends are paid on these shares only upon achievement of the performance measures.
7. Fair Value of Financial Instruments
We have various assets and liabilities that are considered financial instruments. We estimate that the carrying value of cash and cash equivalents, and accounts payable and accrued expenses approximate their fair values. Included in our accounts payable and accrued expenses are our interest rate swaps, which are recorded at fair value based on Level 2 observable market assumptions using standardized derivative pricing models. We estimate the fair value of our interest and rent receivables using Level 2 inputs such as
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discounting the estimated future cash flows using the current rates at which similar receivables would be made to others with similar credit ratings and for the same remaining maturities. The fair value of our mortgage loans and working capital loans is generally estimated by using Level 2 and Level 3 inputs such as discounting the estimated future cash flows using the current rates which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. We determine the fair value of our exchangeable notes and 2011 and 2012 Senior Unsecured Notes, using Level 2 inputs such as quotes from securities dealers and market makers. We estimate the fair value of our 2006 Senior Unsecured Notes, revolving credit facilities, and term loans using Level 2 inputs based on the present value of future payments, discounted at a rate which we consider appropriate for such debt.
Fair value estimates are made at a specific point in time, are subjective in nature, and involve uncertainties and matters of significant judgment. Settlement of such fair value amounts may not be possible and may not be a prudent management decision. The following table summarizes fair value estimates for our financial instruments (in thousands):
Asset (Liability)
Interest and rent receivables
Loans (1)
Items Measured at Fair Value on a Recurring Basis
As discussed in Note 2, our equity interest in Ernest and related loans are being measured at fair value on a recurring basis. At September 30, 2012, these amounts were as follows (in thousands):
Asset Type
Acquisition loan
Our mortgage loans with Ernest are recorded at fair value based on Level 3 inputs by discounting the estimated cash flows using the current rates which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities. Our acquisition loan and equity investments are recorded at fair value based on Level 3 inputs, by using a discounted cash flow model, which requires significant estimates of our investee such as projected revenue and expenses and appropriate discount rates based on the risk profile of comparable companies. We classify these loans and equity investments as Level 3, as we use certain unobservable inputs to the valuation methodology that are significant to the fair value measurement, and the valuation requires management judgment due to the absence of quoted market prices. For these cash flow models, our observable inputs include capitalization rates and market interest rates, and our unobservable input includes our adjustment for minority discount, which was 500 basis points at September 30, 2012.
For the quarter and nine month period ended September 30, 2012, we had no gains/losses from fair value adjustments in our income statement. However, we recorded $5.7 million and $13.5 million of interest on these loans during the three and nine months ended September 30, 2012, respectively.
8. Discontinued Operations
As disclosed in Note 3, we sold our Thornton facility in Colorado and our Denham Springs facility in Louisiana in the 2012 third quarter and our HealthSouth Rehabilitation Hospital of Fayetteville in Fayetteville, Arkansas during the 2012 second quarter. In addition, our New Bedford facility was sold in October 2012, and at September 30, 2012, we reclassified the New Bedford facility as held for sale.
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On December 30, 2011, we sold Mountain View Regional Rehabilitation Hospital in Morgantown, West Virginia to HealthSouth Corporation for $21.1 million, resulting in a gain of $2.3 million. We also sold Sherman Oaks Hospital in Sherman Oaks, California to Prime, on December 30, 2011 for $20.0 million, resulting in a gain of $3.1 million. Due to this sale, we wrote-off $1.2 million in straight-line rent receivables.
The following table presents the results of discontinued operations, which include the revenue and expenses of the previously-owned facilities noted above, for the three and nine months ended September 30, 2012 and 2011 (dollar amounts in thousands except per share/unit amounts):
Gain on sale
Income
Earnings per share/unit — diluted
9. Earnings Per Share/Common Unit
Our earnings per share were calculated based on the following (in thousands):
Numerator:
Non-controlling interests’ share in continuing operations
Participating securities’ share in earnings
Income (loss) from continuing operations, less participating securities’ share in earnings
Net income, less participating securities’ share in earnings
Denominator
Basic weighted-average common shares
Dilutive share options
Dilutive weighted-average common shares
Income from continuing operations
Income from continuing operations, less participating securities’ share in earnings
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Our earnings per common unit were calculated based on the following (amounts in thousands):
Basic weighted-average units
Dilutive options
Dilutive weighted-average units
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For the three and nine months ended September 30, 2012 and 2011, 0.1 million of options were excluded from the diluted earnings per share/unit calculation as they were not determined to be dilutive. Shares/units that may be issued in the future in accordance with our exchangeable senior notes were excluded from the diluted earnings per share/unit calculation as they were not determined to be dilutive.
10. Contingencies
We are a party to various legal proceedings incidental to our business. In the opinion of management, after consultation with legal counsel, the ultimate liability, if any, with respect to those proceedings is not presently expected to materially affect our financial position, results of operations or cash flows.
11. Subsequent Events
In October 2012, we agreed to fund the construction of an inpatient rehabilitation hospital in Spartanburg, SC that will be operated by Ernest. The estimated cost for the development is $18 million, and the construction is expected to be completed by the third quarter of 2013.
12. Condensed Consolidating Financial Information
The following tables present the condensed consolidating financial information for (a) Medical Properties Trust, Inc. (“Parent” and a guarantor to our 2011 and 2012 Senior Unsecured Notes), (b) MPT Operating Partnership, L.P. and MPT Finance Corporation (“Subsidiary Issuer”), (c) on a combined basis, the guarantors of our 2011 and 2012 Senior Unsecured Notes (“Subsidiary Guarantors”), and (d) on a combined basis, the non-guarantor subsidiaries (“Non-Guarantor Subsidiaries”). Separate financial statements of the Subsidiary Guarantors are not presented because the guarantee by each 100% owned Subsidiary Guarantor is joint and several, and we believe separate financial statements and other disclosures regarding the Subsidiary Guarantors are not material to investors. Furthermore, there are no significant legal restrictions on the Parent’s ability to obtain funds from its subsidiaries by dividend or loan.
The guarantees by the Subsidiary Guarantors may be released and discharged upon: (1) any sale, exchange or transfer of all of the capital stock of a Subsidiary Guarantor; (2) the merger or consolidation of a Subsidiary Guarantor with a Subsidiary Issuer or any other Subsidiary Guarantor; (3) the proper designation of any Subsidiary Guarantor by the Subsidiary Issuers as “unrestricted” for covenant purposes under the indenture governing the 2011 and 2012 Senior Unsecured Notes; (4) the legal defeasance or covenant defeasance or satisfaction and discharge of the indenture; (5) a liquidation or dissolution of a Subsidiary Guarantor permitted under the indenture governing the 2011 and 2012 Senior Unsecured Notes; or (6) the release or discharge of the Subsidiary Guarantor from its guarantee obligations under our revolving credit facility.
Subsequent to December 31, 2011, certain of our subsidiaries were re-designated as guarantors of our 2011 and 2012 Senior Unsecured Notes (such subsidiaries were non-guarantors in 2011), while other subsidiaries have been re-designated as non-guarantors as the underlying properties were sold in 2012 (such subsidiaries were guarantors during 2011). With these re-designations, we have restated the 2011 condensed consolidating financial information below to reflect these changes.
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Condensed Consolidated Balance Sheet
September 30, 2012
(in thousands)
Land, buildings and improvements and intangible lease assets
Cash & cash equivalents
Net intercompany receivable (payable)
Investment in subsidiaries
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For the Three Months Ended September 30, 2012
Operating income (expense)
Net other income (expense)
Income (loss) from discontinued operations
Equity in earnings of consolidated subsidiaries net of income taxes
Net income (loss)
Net income (loss) attributable to non-controlling interests
Net income (loss) attributable to MPT common stockholders
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For the Nine Months Ended September 30, 2012
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Other comprehensive income:
Total comprehensive income
Comprehensive income attributable to MPT common stockholders
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Operating Activities
Net cash provided by (used in) operating activities
Investing Activities
Net proceeds from sales of real estate
Investments in and advances to subsidiaries
Investments in loans receivable
Net cash provided by (used in) investing activities
Financing Activities
Net cash provided by (used in) financing activities
Increase in cash and cash equivalents for period
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December 31, 2011
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For the Three Months Ended September 30, 2011
Operating income (loss)
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For the Nine Months Ended September 30, 2011
Interest income and other
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of the consolidated financial condition and consolidated results of operations are presented on a combined basis for Medical Properties Trust, Inc. and MPT Operating Partnership, L.P. as there are no material differences between these two entities.
The discussion and analysis of the consolidated financial condition and consolidated results of operations should be read together with the condensed consolidated financial statements and notes thereto contained in this Form 10-Q and the financial statements and notes thereto contained in our Annual Report on Form 10-K (as amended) for the year ended December 31, 2011.
Forward-Looking Statements.
This report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or future performance, achievements or
transactions or events to be materially different from those expressed or implied by such forward-looking statements, including, but not limited to, the risks described in our Annual Report on Form 10-K for the year ended December 31, 2011, as amended and as updated in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. Such factors include, among others, the following:
national and local economic, business, real estate and other market conditions;
the competitive environment in which we operate;
the execution of our business plan;
financing risks;
acquisition and development risks;
potential environmental contingencies and other liabilities;
other factors affecting real estate industry generally or the healthcare real estate industry in particular;
our ability to maintain our status as a REIT for federal and state income tax purposes;
our ability to attract and retain qualified personnel;
federal and state healthcare regulatory requirements; and
the continuing impact of the recent economic recession, which may have a negative effect on the following, among other things:
the financial condition of our tenants, our lenders, and institutions that hold our cash balances, which may expose us to increased risks of default by these parties;
our ability to obtain equity and debt financing on attractive terms or at all, which may adversely impact our ability to pursue acquisition and development opportunities and our future interest expense; and
the value of our real estate assets, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing secured by our properties or on an unsecured basis.
Key Factors that May Affect Our Operations
Our revenues are derived primarily from rents we earn pursuant to the lease agreements with our tenants and from interest income from loans to our tenants and other facility owners. Our tenants operate in the healthcare industry, generally providing medical, surgical and rehabilitative care to patients. The capacity of our tenants to pay our rents and interest is dependent upon their ability to conduct their operations at profitable levels. We believe that the business environment of the industry segments in which our tenants operate is generally positive for efficient operators. However, our tenants’ operations are subject to economic, regulatory and market conditions that may affect their profitability. Accordingly, we monitor certain key factors, changes to which we believe may provide early indications of conditions that may affect the level of risk in our lease and loan portfolio.
Key factors that we consider in underwriting prospective tenants and borrowers and in monitoring the performance of existing tenants and borrowers include the following:
the historical and prospective operating margins (measured by a tenant’s earnings before interest, taxes, depreciation, amortization and facility rent) of each tenant or borrower and at each facility;
the ratio of our tenants’ and borrowers’ operating earnings both to facility rent and to facility rent plus other fixed costs, including debt costs;
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trends in the source of our tenants’ or borrowers’ revenue, including the relative mix of Medicare, Medicaid/MediCal, managed care, commercial insurance, and private pay patients; and
the effect of evolving healthcare regulations on our tenants’ and borrowers’ profitability, including recent healthcare reform and legislation.
Certain business factors, in addition to those described above that directly affect our tenants and borrowers, will likely materially influence our future results of operations. These factors include:
trends in the cost and availability of capital, including market interest rates, that our prospective tenants may use for their real estate assets instead of financing their real estate assets through lease structures;
changes in healthcare regulations that may limit the opportunities for physicians to participate in the ownership of healthcare providers and healthcare real estate;
reductions in reimbursements from Medicare, state healthcare programs, and commercial insurance providers that may reduce our tenants’ profitability and our lease rates;
competition from other financing sources; and
the ability of our tenants and borrowers to access funds in the credit markets.
CRITICAL ACCOUNTING POLICIES
Refer to our 2011 Annual Report on Form 10-K, as amended, for a discussion of our critical accounting policies, which include revenue recognition, investment in real estate, purchase price allocation, loans, losses from rent receivables, stock-based compensation, exchangeable senior notes, and our accounting policy on consolidation. During the nine months ended September 30, 2012, there were no material changes to these policies, except we began using direct financing lease (“DFL”) accounting with the acquisition and lease of the real estate of Ernest along with that of the Reno and Roxborough facilities. Under DFL accounting, future minimum lease payments are recorded as a receivable. Unearned income, which represents the net investment in the DFL less the sum of minimum lease payments receivable and the estimated residual values of the leased properties, is deferred and amortized to income over the lease term to provide a constant yield when collectability of the lease payments is reasonably assured. Investments in DFLs are presented net of unamortized and unearned income. DFLs are placed on non-accrual status when management determines that the collectability of contractual amounts is not reasonably assured. While on non-accrual status, DFLs are accounted for on a cash basis, in which income is recognized only upon receipt of cash.
Overview
We are a self-advised real estate investment trust (“REIT”) focused on investing in and owning net-leased healthcare facilities across the United States. We have operated as a REIT since April 6, 2004, and accordingly, elected REIT status upon the filing of our calendar year 2004 federal income tax return. Medical Properties Trust, Inc. was incorporated under Maryland law on August 27, 2004, and MPT Operating Partnership, L.P. was formed under Delaware law on September 10, 2003. We conduct substantially all of our business through MPT Operating Partnership, L.P. We acquire and develop healthcare facilities and lease the facilities to healthcare operating companies under long-term net leases, which require the tenant to bear most of the costs associated with the property. We also make mortgage loans to healthcare operators collateralized by their real estate assets. In addition, we selectively make loans to certain of our operators through our taxable REIT subsidiaries, the proceeds of which are typically used for acquisitions and working capital. Finally, from time to time, we acquire a profits or other equity interest in our tenants that gives us a right to share in such tenant’s profits and losses.
At September 30, 2012, our portfolio consisted of 81 properties: 67 facilities (of the 73 facilities that we own, of which two are subject to long-term ground leases) are leased to 21 tenants, one was not under lease as it is under re-development, five were under development, and the remaining assets are in the form of first mortgage loans to three operators. Our facilities consisted of 30 general acute care hospitals, 26 long-term acute care hospitals, 17 inpatient rehabilitation hospitals, two medical office buildings, and six wellness centers.
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All of our investments are currently located in the United States. The following is our revenue by operating type (dollar amounts in thousands):
Revenue by property type:
General Acute Care Hospitals
Long-term Acute Care Hospitals
Rehabilitation Hospitals
Medical Office Buildings
Wellness Centers
Total revenue
For the Nine Months EndedSeptember 30,2012
We have 33 employees as of November 5, 2012. We believe that any currently anticipated increase in the number of our employees will have only immaterial effects on our operations and general and administrative expenses. We believe that our relations with our employees are good. None of our employees are members of any labor union.
Results of Operations
Three Months Ended September 30, 2012 Compared to September 30, 2011
Net income for the three months ended September 30, 2012 was $31.5 million, compared to $0.4 million for the three months ended September 30, 2011. This increase was primarily the result of acquisitions made subsequent to September 2011 and the refinancing charges that were incurred in 2011. Funds from operations (“FFO”), after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $33.4 million, or $0.25 per diluted share for the 2012 third quarter as compared to $19.5 million, or $0.18 per diluted share for the 2011 third quarter. These increases were primarily the result of the acquisitions made subsequent to September 2011.
A comparison of revenues for the three month periods ended September 30, 2012 and 2011 is as follows, as adjusted in 2011 for discontinued operations (dollar amounts in thousands):
Base rents
Straight-line rents
Percentage rents
Fee income
Interest from loans
Base rents for the 2012 third quarter increased 12.2% versus the prior year as a result of the additional rent generated from annual escalation provisions in our leases and $2.8 million of incremental revenue from properties acquired or completed since September 2011. Income from direct financing leases is related to the Ernest Transaction and the Roxborough and Reno facilities.
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Interest from loans is higher than the prior year due to the $5.7 million and $2.6 million of additional interest related to the Ernest and Centinela loans, respectively.
Real estate depreciation and amortization during the third quarter of 2012 increased to $8.5 million from $7.7 million in the same period of 2011, due to the incremental depreciation from the properties acquired since September 2011.
General and administrative expenses totaled $7.1 million for the 2012 third quarter, which is 13.1% of total revenues, down from 16.6% of revenues in the prior year third quarter. The drop in general and administrative expenses as a percentage of revenue is primarily due to our business model as we can generally increase our revenues substantially without significantly increasing our headcount and related expenses. On a dollar basis, our general and administrative costs are up over the 2011 third quarter primarily due to higher travel costs.
In the 2012 third quarter, we recognized $1.1 million of earnings from equity and other interests in certain of our tenants, which is a substantial increase from the 2011 third quarter. This increase is primarily related to having a full three months of returns from certain equity investees along with improved results from each of our profit and equity interests.
Interest expense (including debt refinancing costs) for the quarters ended September 30, 2012 and 2011 totaled $15.0 million and $22.4 million, respectively. This decrease is primarily related to the debt refinancing costs in 2011 of $10.4 million partially offset by higher debt balances associated with our 2012 Senior Unsecured Notes and 2012 Term Loan. See Note 4 to our Condensed Consolidated Financial Statements in Item 1 to this Form 10-Q for further information on our debt activities.
In addition to the items noted above, net income for the third quarter of 2012 and 2011, was impacted by discontinued operations. See Note 8 to our Condensed Consolidated Financial Statements in Item 1 to this Form 10-Q for further information.
Nine Months Ended September 30, 2012 Compared to September 30, 2011
Net income for the nine months ended September 30, 2012, was $61.3 million compared to net income of $13.8 million for the nine months ended September 30, 2011. This increase was primarily related to acquisitions made subsequent to September 2011 and the debt refinancing charges that were incurred in 2011, partially offset by higher interest expense due to additional debt incurred in 2012. FFO, after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $85.5 million, or $0.65 per diluted share for the first nine months in 2012 as compared to $57.5 million, or $0.52 per diluted share for the first nine months of 2011. These increases are primarily the result of the acquisitions made since September 2011.
A comparison of revenues for the nine month periods ended September 30, 2012 and 2011 is as follows (dollar amounts in thousands):
Base rents for the 2012 first nine months of 2012 increased 15.0% versus the prior year as a result of the additional rent generated from annual escalation provisions in our leases and $10.5 million of incremental revenue from the properties acquired or completed since September 2011. Income from direct financing leases is solely related to the Ernest Transaction and the new Roxborough and Reno facilities. Interest from loans is higher than the prior year due to the $13.5 million, $1.4 million, and $2.6 million of additional interest related to the Ernest, Hoboken, and Centinela loans, respectively.
Acquisition expenses increased from $3.2 million to $4.1 million primarily as a result of the Ernest Transaction in 2012.
Real estate depreciation and amortization during the first nine months of 2012 was $25.4 million, compared to $22.5 million in the same period of 2011 due to the incremental depreciation from the properties acquired since September 2011.
General and administrative expenses in the first three quarters of 2012 totaled $21.3 million, which is 14.7% of revenues down from 20.0% of revenues in the prior year as revenues are up significantly over the prior year due to the acquisitions, while, on a dollar basis, our costs have been basically flat.
We recognized $1.9 million of earnings from equity and other interests in certain of our tenants in the first nine months of 2012, which is up significantly over the 2011 same period due to the timing of when these investments were made in the prior year along with improved results from each of our profit and equity investees during the first nine months of 2012.
Interest expense (including debt refinancing costs) for the first nine months of 2012 and 2011 totaled $42.7 million and $46.7 million, respectively. In 2011, we recorded a charge of $14.2 million related to our debt refinancing activities. This is partially offset by higher debt balances associated with our 2012 Senior Unsecured Notes and 2012 Term Loan. See Note 4 to our Condensed Consolidated Financial Statements in Item 1 to this Form 10-Q for further information on our debt activities.
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In addition to the items noted above, net income for the nine month periods of 2012 and 2011 was impacted by discontinued operations. See Note 8 to our Condensed Consolidated Financial Statements in Item 1 to this Form 10-Q for further information.
Reconciliation of Non-GAAP Financial Measures
Investors and analysts following the real estate industry utilize funds from operations, or FFO, as a supplemental performance measure. FFO, reflecting the assumption that real estate asset values rise or fall with market conditions, principally adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assumes that the value of real estate diminishes predictably over time. We compute FFO in accordance with the definition provided by the National Association of Real Estate Investment Trusts, or NAREIT, which represents net income (loss) (computed in accordance with GAAP), excluding gains (losses) on sales of real estate and impairment charges on real estate assets, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.
In addition to presenting FFO in accordance with the NAREIT definition, we also disclose normalized FFO, which adjusts FFO for items that relate to unanticipated or non-core events or activities or accounting changes that, if not noted, would make comparison to prior period results and market expectations less meaningful to investors and analysts.
We believe that the use of FFO, combined with the required GAAP presentations, improves the understanding of our operating results among investors and the use of normalized FFO makes comparisons of our operating results with prior periods and other companies more meaningful. While FFO and normalized FFO are relevant and widely used supplemental measures of operating and financial performance of REITs, they should not be viewed as a substitute measure of our operating performance since the measures do not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, which can be significant economic costs that could materially impact our results of operations. FFO and normalized FFO should not be considered an alternative to net income (loss) (computed in accordance with GAAP) as indicators of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity.
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The following table presents a reconciliation of FFO to net income attributable to MPT common stockholders for the three and nine months ended September 30, 2012 and 2011 ($ amounts in thousands except per share data):
FFO information:
Depreciation and amortization:
Continuing operations
Discontinued operations
Loss (gain) on sale of real estate
Real estate impairment charge
Funds from operations
Write-off of straight line rent
Acquisition costs
Write-off of other receivables
Normalized funds from operations
Per diluted share data:
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2012, operating cash flows, which primarily consisted of rent and interest from mortgage and working capital loans, were $74.7 million, which with cash on-hand, were principally used to fund our dividends of $76.8 million and working capital needs.
To fund the Ernest Transaction disclosed in Note 3 to our Condensed Consolidated Financial Statements in Item 1 to this Form 10-Q, on February 7, 2012, we completed an offering of 23,575,000 shares of our common stock (including 3,075,000 shares sold pursuant to the exercise in full of the underwriters’ overallotment option), resulting in net proceeds (after underwriting discount) of $220.1 million. In addition, on February 17, 2012, we completed a $200 million offering of senior unsecured notes, resulting in net proceeds, after underwriting discount, of $196.5 million, which we also used to fund the Ernest Transaction. On March 9, 2012, we closed on a $100 million senior unsecured term loan facility and exercised the $70 million accordion feature on our revolving credit facility. Proceeds from the new term loan facility, our revolving credit facility and property sales were used to fund the $210 million of investments in the third quarter and further cash outlays on our development projects.
During the first nine months of 2011, operating cash flows, which primarily consisted of rent and interest from mortgage and working capital loans, approximated $67.1 million, which, along with cash on hand, draws on our revolvers and issuance of our 2011 Senior Unsecured Notes, were principally used to fund our dividends of $67.2 million and investing activities of $222.7 million.
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Short-term Liquidity Requirements: At November 6, 2012, our availability under our 2010 amended revolving credit facility plus cash on-hand approximated $310 million. We have only nominal principal payments due and no significant maturities in 2012– see five-year debt maturity schedule below. We believe that the liquidity available to us, along with our current monthly cash receipts from rent and loan interest, is sufficient to provide the resources necessary for operations, debt and interest obligations, our firm commitments (including capital expenditures, if any), dividends in order to comply with REIT requirements and to fund our current investment strategies for the next twelve months. In addition, we have an at-the-market equity offering program in place under which we may sell up to $50 million in shares (of which $10 million has been sold to-date) which may be used for general corporate purposes as needed.
Long-term Liquidity Requirements: As of September 30, 2012, we had less than $12 million in debt principal payments due before 2015 – see five-year debt maturity schedule below. With our current liquidity along with our current monthly cash receipts from rent and loan interest, and availability under our at-the-market equity offering program, we believe we have the liquidity available to us to fund our operations, debt and interest obligations, dividends in order to comply with REIT requirements, firm commitments (including capital expenditures, if any) and investment strategies for the foreseeable future.
As of November 6, 2012, principal payments due for our debt (which exclude the effects of any discounts recorded) are as follows (in thousands):
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Distribution Policy
The table below is a summary of our distributions declared during the two year period ended September 30, 2012:
Declaration Date
August 16, 2012
May 17, 2012
February 16, 2012
November 10, 2011
August 18, 2011
May 19, 2011
February 17, 2011
November 11, 2010
We intend to pay to our stockholders, within the time periods prescribed by the Internal Revenue Code (“Code”), all or substantially all of our annual taxable income, including taxable gains from the sale of real estate and recognized gains on the sale of securities. It is our policy to make sufficient cash distributions to stockholders in order for us to maintain our status as a REIT under the Code and to avoid corporate income and excise taxes on undistributed income. See Note 4 to our condensed consolidated financial statements in Item 1 to this Form 10-Q for any restrictions placed on dividends by our existing credit facility.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our primary exposure to market risks relates to changes in interest rates and equity prices. In addition, the value of our facilities will be subject to fluctuations based on changes in local and regional economic conditions and changes in the ability of our tenants to generate profits, all of which may affect our ability to refinance our debt if necessary. The changes in the value of our facilities would be affected also by changes in “cap” rates, which is measured by the current annual base rent divided by the current market value of a facility.
Our primary exposure to market risks relates to fluctuations in interest rates and equity prices. The following analyses present the sensitivity of the market value, earnings and cash flows of our significant financial instruments to hypothetical changes in interest rates and equity prices as if these changes had occurred. The hypothetical changes chosen for these analyses reflect our view of changes that are reasonably possible over a one year period. These forward looking disclosures are selective in nature and only address the potential impact from financial instruments. They do not include other potential effects which could impact our business as a result of changes in market conditions.
Interest Rate Sensitivity
For fixed rate debt, interest rate changes affect the fair market value but do not impact net income to common stockholders or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact net income to common stockholders and cash flows, assuming other factors are held constant. At September 30, 2012, our outstanding debt totaled $1,025.2 million, which consisted of fixed-rate debt of $800.2 million (including $125.0 million of floating debt swapped to fixed) and variable rate debt of $225.0 million. If market interest rates increase by one-percentage point, the fair value of our fixed rate debt, after considering the effects of the interest rate swaps entered into in 2010, would decrease by $35.4 million. Changes in the fair value of our fixed rate debt will not have any impact on us unless we decided to repurchase the debt in the open markets.
If market rates of interest on our variable rate debt increase by 1%, the increase in annual interest expense on our variable rate debt would decrease future earnings and cash flows by $2.3 million per year. If market rates of interest on our variable rate debt decrease by 1%, the decrease in interest expense on our variable rate debt would increase future earnings and cash flows by $2.3 million per year. This assumes that the average amount outstanding under our variable rate debt for a year is $225.0 million, the balance of our 2012 Term Loan and revolving credit facility at September 30, 2012.
Share Price Sensitivity
At November 6, 2012, we have $11 million in 2008 exchangeable notes outstanding. These notes have a conversion adjustment feature, which could affect their stated exchange ratio of 80.8898 common shares per $1,000 principal amount of notes, equating to an exchange price of $12.36 per common share. Our dividends declared since we sold the 2008 exchangeable notes have not adjusted our conversion price as of September 30, 2012. Future changes to the conversion price will depend on our level of dividends which cannot be predicted at this time. Any adjustments for dividend increases until the 2008 exchangeable notes are settled in 2013 will affect the
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price of the notes and the number of shares for which they may eventually be settled. Using the outstanding notes and, assuming a price of $20 per share, we would be required to issue an additional 0.3 million shares. At $25 per share, we would be required to issue an additional 0.4 million shares.
Item 4. Controls and Procedures.
We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b), under the Securities Exchange Act of 1934, as amended, we have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be disclosed by us in the reports that we file with the SEC.
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
There have been no material changes to the Risk Factors as presented in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2011 and as updated in our Quarterly Report on Form 10-Q filed for the quarter ended June 30, 2012.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
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Item 5. Other Information.
Item 6. Exhibits.
Exhibit
Number
Description
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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.
/s/ R. Steven Hamner
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Executive Vice President and Chief
Financial Officer of the sole member of
the general partner of
Date: November 9, 2012
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