UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2017
OR
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
(205) 969-3755
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 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-acceleratedfiler, 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.
(MPT Operating Partnership, L.P. only)
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 4, 2017, Medical Properties Trust, Inc. had 364,083,580 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, 2017, of Medical Properties Trust, Inc., a Maryland corporation, and MPT Operating Partnership, L.P., a Delaware limited partnership, through which Medical Properties Trust, Inc. conducts substantially all of its operations. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” “our company,” “Medical Properties,” “MPT,” or “the company” refer to Medical Properties Trust, Inc. together with its consolidated subsidiaries, including MPT Operating Partnership, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to “our operating partnership” or “the operating partnership” refer to MPT Operating Partnership, L.P. together with its consolidated subsidiaries.
MEDICAL PROPERTIES TRUST, INC. AND MPT OPERATING PARTNERSHIP, L.P.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017
Table of Contents
PART I — FINANCIAL INFORMATION
Item 1 Financial Statements
Medical Properties Trust, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets at June 30, 2017 and December 31, 2016
Condensed Consolidated Statements of Net Income for the Three Months and Six Months Ended June 30, 2017 and 2016
Condensed Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended June 30, 2017 and 2016
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016
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
3
Item 1. Financial Statements.
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
Assets
Real estate assets
Land, buildings and improvements, intangible lease assets, and other
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 receivables
Straight-line rent receivables
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 500,000 shares; issued and outstanding — 364,020 shares at June 30, 2017 and 320,514 shares at December 31, 2016
Additional paid in capital
Distributions in excess of net income
Accumulated other comprehensive loss
Treasury shares, at cost
Total Medical Properties Trust, Inc. Stockholders’ Equity
Non-controlling interests
Total Equity
Total Liabilities and Equity
See accompanying notes to condensed consolidated financial statements.
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Condensed Consolidated Statements of Net 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
Impairment charges
Property-related
Acquisition expenses
General and administrative
Total operating expenses
Operating income
Other income (expense)
Interest expense
Gain on sale of real estate and other asset dispositions, net
Earnings (loss) from equity and other interests
Unutilized financing fees/debt refinancing costs
Income tax benefit (expense)
Net other expense
Income from continuing operations
Loss from discontinued operations
Net income
Net income attributable to non-controllinginterests
Net income attributable to MPT common stockholders
Earnings per common share — basic
Income from continuing operations attributable to MPT common stockholders
Loss from discontinued operations attributable to MPT common stockholders
Weighted average shares outstanding — basic
Earnings per common share — diluted
Weighted average shares outstanding — diluted
Dividends declared per common share
5
Condensed Consolidated Statements of Comprehensive Income
Other comprehensive income:
Unrealized gain on interest rate swap
Foreign currency translation gain (loss)
Total comprehensive income
Comprehensive income attributable to non-controllinginterests
Comprehensive income 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
Amortization of deferred financing costs and debt discount
Direct financing lease interest accretion
Straight-line rent revenue
Share-based compensation
Gain from sale of real estate and other asset dispositions, net
Straight-line rent and other write-off
Other adjustments
Changes in:
Net cash provided by operating activities
Investing activities
Cash paid for acquisitions and other related investments
Net proceeds from sale of real estate
Principal received on loans receivable
Investment in loans receivable
Construction in progress and other
Investment in unsecured senior notes
Proceeds from sale of unsecured senior notes
Other investments, net
Net cash (used for) provided by investing activities
Financing activities
Proceeds from term debt
Payments of term debt
Revolving credit facilities, net
Distributions paid
Proceeds from sale of common shares, net of offering costs
Debt issuance costs paid and other financing activities
Net cash provided by (used for) financing activities
Increase (decrease) in cash and cash equivalents for period
Effect of exchange rate changes
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Interest paid
Supplemental schedule of non-cash financing activities:
Distributions declared, unpaid
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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 — 3,640 units at June 30, 2017 and 3,204 units at December 31, 2016
Limited Partners:
Common units — issued and outstanding — 360,380 units at June 30, 2017 and 317,310 units at December 31, 2016
LTIP units — issued and outstanding — 292 units at June 30, 2017 and December 31, 2016
Total MPT Operating Partnership, L.P. Capital
Total Capital
Total Liabilities and Capital
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Net income attributable to MPT Operating Partnership partners
Earnings per unit — basic
Income from continuing operations attributable to MPT Operating Partnership partners
Loss from discontinued operations attributable to MPT Operating Partnership partners
Weighted average units outstanding — basic
Earnings per unit — diluted
Weighted average units outstanding — diluted
Dividends declared per unit
9
Comprehensive income attributable to MPT Operating Partnership Partners
10
Unit-based compensation
Proceeds from sale of units, net of offering costs
11
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 Maryland General Corporation Law for the purpose of engaging in the business of investing in, owning, and leasing commercial real estate. Our operating partnership subsidiary, MPT Operating Partnership, L.P., (the “Operating Partnership”) through which we conduct all of our operations, was formed in September 2003. Through another wholly-owned subsidiary, Medical Properties Trust, LLC, we are the sole general partner of the Operating Partnership. At present, we directly own substantially all of the limited partnership interests in the Operating Partnership and have elected to report our required disclosures and that of the Operating Partnership on a combined basis except where material differences exist.
We have operated as a real estate investment trust (“REIT”) since April 6, 2004, and accordingly, elected REIT status upon the filing in September 2005 of the calendar year 2004 federal income tax return. Accordingly, we will generally not be subject to federal income tax in the United States (“U.S.”), provided that we continue to qualify as a REIT and our distributions to our stockholders equal or exceed our taxable income. Certain activities we undertake must be conducted by entities which we elected to be treated as taxable REIT subsidiaries (“TRSs”). Our TRSs are subject to both U.S. federal and state income taxes. For our properties located outside the U.S., we are subject to local taxes; however, we do not expect to incur additional taxes in the U.S. as such income will flow through our REIT.
Our primary business strategy is to acquire and develop real estate and improvements, primarily for long-term lease to providers of healthcare services such as operators of general acute care hospitals, inpatient physical rehabilitation hospitals, long-term acute care hospitals, surgery centers, centers for treatment of specific conditions such as cardiac, pulmonary, cancer, and neurological hospitals, and other healthcare-oriented facilities. We also make mortgage and other loans to operators of similar facilities. In addition, we may obtain profits or equity interests in our tenants, from time to time, in order to enhance our overall return. We manage our business as a single business segment. All of our properties are located in the U.S. and Europe.
2. Summary of Significant Accounting Policies
Unaudited Interim Condensed Consolidated Financial Statements: The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information, including rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The condensed consolidated balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements.
For information about significant accounting policies, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016. During the six months ended June 30, 2017, there were no material changes to these policies.
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Recent Accounting Developments:
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” Under the new standard, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. On April 1, 2015, the FASB proposed deferring the effective date of this standard by one year to December 15, 2017, for annual reporting periods beginning after that date. The FASB also proposed permitting early adoption of the standard, but not before the original effective date of December 15, 2016. We are still evaluating this standard but do not expect this standard to have a significant impact on our financial results, as a substantial portion of our revenue consists of rental income from leasing arrangements, which are specifically excluded from ASU No. 2014-09.
Leases
In February 2016, the FASB issued ASU 2016-02, “Leases”, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The ASU is not effective for us until January 1, 2019, with early adoption permitted. We are continuing to evaluate this standard and the impact to us from both a lessor and lessee perspective.
Clarifying the Definition of a Business
In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business” (“ASU 2017-01”). The amendments in ASU 2017-01 provide an initial screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, in which case, the transaction would be accounted for as an asset acquisition rather than as a business combination. In addition, ASU 2017-01 clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. A reporting entity must apply the amendments in ASU2017-01 using a prospective approach. We expect to adopt ASU 2017-01 on January 1, 2018 for our 2018 fiscal year. Upon adoption, we expect to recognize a majority of our real estate acquisitions as asset transactions rather than business combinations, which will result in the capitalization of third party transaction costs that are directly related to an acquisition. Indirect and internal transaction costs will continue to be expensed but we do not expect to include these costs as an adjustment in deriving normalized funds from operations in the future. We expect this change in accounting, once adopted, may decrease our normalized funds from operations by $1 million to $2 million per quarter.
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, 2017, we had loans to and/or equity investments in certain variable interest entities (“VIEs”), which are also tenants of our facilities. We have determined that we are not the primary beneficiary of these
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VIEs. The carrying value and classification of the related assets and maximum exposure to loss as a result of our involvement with these VIEs at June 30, 2017 are presented below (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 borrower or investees) that most significantly impact the VIE’s economic performance. As of June 30, 2017, we were not required to provide any material financial support through a liquidity arrangement or otherwise to our unconsolidated VIEs, including circumstances in which it could be exposed to further losses (e.g., cash short falls).
Typically, our loans are collateralized by assets of the borrower (some assets of which are on the premises of facilities owned by us) and further supported by limited guarantees made by certain principals of the borrower.
See Note 3 and 7 for additional description of the nature, purpose and activities of our more significant VIEs and interests therein, such as Ernest Health, Inc. (“Ernest”).
3. Real Estate and Lending Activities
Acquisitions
We acquired the following assets (in thousands):
Assets Acquired
Land and land improvements
Building
Intangible lease assets — subject to amortization (weighted average useful life 28.4 years for 2017 and 25.8 years for 2016)
Net investments in direct financing leases
Liabilities assumed
Total assets acquired
The purchase price allocations attributable to the 2017 acquisitions and certain acquisitions made in the second half of 2016 are preliminary. When all relevant information is obtained, resulting changes, if any, to our provisional purchase price allocation will be retrospectively adjusted to reflect new information obtained about the facts and circumstances that existed as of the respective acquisition dates that, if known, would have affected the measurement of the amounts recognized as of those dates.
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2017 Activity
Median Transactions
On June 22, 2017, we acquired an acute care hospital in Germany for a purchase price of €19.4 million (€18.6 of which has been funded to date). This property is leased to affiliates of Median Kliniken S.a.r.l. (“MEDIAN”), one of our current tenants, pursuant to an existing 27-year master lease agreement that ends in December 2042 with terms similar to the master lease agreement reached with MEDIAN in 2015.
During the second quarter of 2017, we acquired 11 rehabilitation hospitals in Germany for an aggregate purchase price of €127 million. These 11 properties are leased to affiliates of MEDIAN, pursuant to a third master lease that has terms similar to the original master lease in 2015 with a fixed term ending in August 2043. 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 2016. See Note 10 for an update on the final two properties totaling €39.2 million that closed after June 30, 2017.
On January 30, 2017, we acquired an inpatient rehabilitation hospital in Germany for €8.4 million. This acquisition was the final property to close as part of the six hospital portfolio that we agreed to buy in September 2016 for an aggregate amount of €44.1 million. This property is leased to affiliates of MEDIAN pursuant to the original long-term master lease agreement reached with MEDIAN in 2015.
Other Transactions
On June 1, 2017, we acquired the real estate assets of Ohio Valley Medical Center, 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, anot-for-profit entity in West Virginia, for an aggregate purchase price of approximately $40 million. We simultaneously leased the facilities to Alecto Healthcare Services LLC (“Alecto”), the current operator of three facilities in our portfolio, pursuant to a lease with a 15-year initial term with 2% annual minimum rent increases and three 5-year extension options. The facilities are cross-defaulted and cross-collateralized with our other hospitals currently operated by Alecto. We also agreed to provide up to $20.0 million in capital improvement funding on these two facilities - none of which has been funded to date. With these acquisitions, we also obtained a 20% interest in the operator of these facilities.
On May 1, 2017, we acquired eight hospitals previously affiliated with Community Health Systems, Inc. in Florida, Ohio, and Pennsylvania for an aggregate purchase price of $301.3 million. These facilities are leased to Steward Health Care System LLC (“Steward”), pursuant to the existing long-term master lease entered into with Steward in October 2016.
On May 1, 2017, we acquired the real estate of St. Joseph Regional Medical Center, a 145-bedacute 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 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.
2016 Activity
On May 2, 2016, we acquired an acute care hospital in Newark, New Jersey for an aggregate purchase price of $63 million leased to Prime Healthcare Services, Inc. (“Prime”) pursuant to a fifth master lease, which had a15-year term with three five-year extension options, plus consumer price-indexed increases, limited to a 2%
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floor. Furthermore, we committed to advance an additional $30 million to Prime over a three-year period to be used solely for capital additions to the real estate; any such additions will be added to the basis upon which the lessee will pay us rents.
On June 22, 2016, we closed on the last property of the original €688 million MEDIAN transaction for a purchase price of €41.6 million. Upon acquisition, this property became subject to an existing master lease between us and affiliates of MEDIAN. The master lease had an initial start date of July 1, 2015, an initial term of 27 years, and provided for an initial GAAP lease rate of 9.3%, with annual escalators at the greater of one percent or 70% of the German consumer price index.
From the respective acquisition dates, the properties acquired in 2016 contributed $1.1 million of revenue and income (excluding related acquisition expenses and taxes), for the three and six months ended June 30, 2016. In addition, we incurred $2.4 million of acquisition-related costs on the 2016 acquisitions for both the three and six months ended June 30, 2016.
Development Activities
During the first six months of 2017, we completed construction on the following facilities:
In April 2017, we completed the acquisition of the long leasehold interest of a development site in Birmingham, England from the Circle Health Group (“Circle”) (the tenant of our existing site in Bath, England) for a purchase price of £2.7 million. Simultaneously with the acquisition, we entered into contracts with the property landlord and the Circle committing us to construct an acute care hospital on the site. Our total development costs are anticipated to be approximately £30 million. Circle is contracted to enter into a lease of the hospital following completion of construction for an initial 15-year term with rent to be calculated based on our total development costs.
See table below for a status update on our current development projects (in thousands):
Property
Ernest (Flagstaff)
Circle (Birmingham)
Disposals
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.
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Capella Transaction
Effective April 30, 2016, our investment in the operator of Capella Healthcare, Inc. (“Capella”) merged with Regional Care Hospital Partners, Inc. (“Regional Care”) (an affiliate of certain funds managed by affiliates of Apollo Global Management, LLC. (“Apollo”)) to form RCCH. As part of the transaction, we received net proceeds of approximately $550 million including approximately $492 million for our equity investment and loans made as part of the original Capella transaction that closed on August 31, 2015. In addition, we received $210 million in prepayment of two mortgage loans for hospitals in Russellville, Arkansas, and Lawton, Oklahoma, that we made in connection with the original Capella transaction. We made a new $93.3 million loan for a hospital property in Olympia, Washington that was subsequently converted to real estate on July 22, 2016. Additionally, we and an Apollo affiliate invested $50 million each in unsecured senior notes issued by RegionalCare, which we sold to a large institution on June 20, 2016 at par. The proceeds from this transaction represented the recoverability of our investment in full, except for transaction costs incurred of $6.3 million.
We maintained our ownership of five hospitals in Hot Springs, Arkansas; Camden, South Carolina; Hartsville, South Carolina; Muskogee, Oklahoma; and McMinnville, Oregon. Pursuant to the transaction described above, the underlying leases, one of which is a master lease covering all but one property, was amended to shorten the initial fixed lease term, increase the security deposit, and eliminate the lessees’ purchase option provisions. Due to this lease amendment, we reclassified the lease of the properties under the master lease from a direct finance lease (“DFL”) to an operating lease. This reclassification resulted in a write-off of $2.6 million in unbilled DFL rent in the 2016 second quarter.
Post Acute Transaction
On May 23, 2016, we sold five properties (three of which were in Texas and two in Louisiana) that were leased and operated by Post Acute Medical (“Post Acute”). As part of this transaction, our outstanding loans of $4 million were paid in full, and we recovered our investment in the operations. Total proceeds from this transaction were $71 million resulting in a net gain of approximately $15 million.
Corinth Transaction
On June 17, 2016, we sold the Atrium Medical Center real estate located in Corinth, Texas, which was leased and operated by Corinth Investor Holdings. Total proceeds from the transaction were $28 million resulting in a gain on real estate of approximately $8 million. This gain on real estate was offset by approximately $9 million of non-cash charges that included the write-off of our investment in the operations of the facility, straight-line rent receivables, and a lease intangible.
The sales in 2017 and 2016 were not strategic shifts in our operations, and therefore the results of operations related to these facilities were not reclassified as discontinued operations.
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Summary of Operations for Disposed Assets in 2016
The following represents the operating results (excluding gain on sale, transaction costs, and impairment or other non-cash charges) from the properties which sold during the first half of 2016 (excluding loans repaid in the Capella Transaction) for the periods presented (in thousands):
Property-related expenses
Income from real estate dispositions, net
Leasing Operations
At June 30, 2017, leases on two Alecto facilities, 15 Ernest facilities and 10 Prime facilities are accounted for as DFLs. The components of our net investment in DFLs consisted of the following (in thousands):
Minimum lease payments receivable
Estimated residual values
Less: Unearned income
Adeptus Health
On April 4, 2017, we announced that we had agreed in principle with Deerfield Management Company, L.P. (“Deerfield”), a healthcare-only investment firm, to the restructuring in bankruptcy of Adeptus Health, a current tenant and operator of facilities representing less than 5% of our total gross assets. In furtherance of the restructuring, Adeptus Health and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code on April 19, 2017. Funds advised by Deerfield acquired Adeptus Health’s outstanding bank debt and Deerfield has agreed to provide additional financing, along with operational and managerial support, to Adeptus Health as part of the restructuring.
The Adeptus Health restructuring and terms of our agreement with Deerfield provide for the payment to us of 100% of the rent payable during the restructuring and the assumption by Deerfield of approximately 80% of the facilities under our master lease agreement with Adeptus Health at current rental rates. Through August 4, 2017, Adeptus Health is current on its rent obligations to us. We have agreed to a post bankruptcy $3.1 million concession that will reduce our rental revenue by approximately $220 thousand annually over the remaining 14-year initial lease term.
On April 4, 2017, we also announced that our Louisiana freestanding emergency facilities then-operated by Adeptus Health (with a total budgeted investment of approximately $24.5 million) had been re-leased to Ochsner Clinic Foundation (“Ochsner”), a health care system in the New Orleans area. The leases provide for initial terms of 15 years with a 9.2% average minimum lease rate based on our total development and construction cost. Under these leases, Ochsner also has the right to purchase the freestanding emergency facilities (i) at our cost within two years of rent commencement or (ii) for the greater of fair market value or our cost after such two-yearperiod. We incurred a non-cash charge of $0.5 million to write-off the straight-line rent receivables associated with the previous Adeptus Health lease on these properties.
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In addition, we expect to re-lease or sell 13 Texas facilities that are not being assumed as part of the Adeptus Health restructuring representing approximately 15% of the current Adeptus Health master-leased portfolio. These lease or sale transactions are expected to be completed by the end of 2018, and Adeptus Health is obligated to pay contractual rent to us under the master lease until the earlier of (a) transition to a new operator is complete, or (b) one year following Adeptus Health’s emergence from bankruptcy (for seven of the Texas facilities) or 90 days following Adeptus Health’s emergence from bankruptcy (for the remainder of the Texas facilities).
Hoboken Facility
In the first half of 2017, a subsidiary of the operator of our Hoboken facility acquired 20% of our subsidiary that owns the real estate for $10 million, which increases its interest in our real estate entity to 30%. This is reflected in the non-controlling interest line of our condensed consolidated balance sheets.
Loans
The following is a summary of our loans (in thousands):
Acquisition loans
Working capital and other loans
Our non-mortgage loans typically consist of loans to our tenants for acquisitions and working capital purposes. At June 30, 2017, acquisition loans includes $114.6 million in loans to Ernest.
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Concentrations of Credit Risk
Our revenue concentration for the six months ended June 30, 2017 as compared to the prior year is as follows (dollars in thousands):
Revenue by Operator
Operators
Prime
Steward
MEDIAN
Ernest
RCCH
Other operators
Total
Revenue by U.S. State and Country
U.S. States and Other Countries
Massachusetts
Texas
California
New Jersey
Arizona
All other states
Total U.S.
Germany
United Kingdom, Italy, and Spain
Total International
Grand Total
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On a total gross asset basis, which is total assets before accumulated depreciation/amortization, assumes all real estate binding commitments on new investments and unfunded amounts on development deals and commenced capital improvement projects are fully funded (see Notes 9 and 10 of Item 1 on this Form10-Q), and assumes cash on hand is fully used in these transactions, our concentration as of June 30, 2017 as compared to December 31, 2016 is as follows (dollars in thousands):
Gross Assets by Operator
Gross Assets by U.S. State and Country
Utah
Other domestic assets
Other international assets
On an individual property basis, we had no investment of any single property greater than 3.9% of our total gross assets as of June 30, 2017.
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4. Debt
The following is a summary of our debt (dollar amounts in thousands):
Revolving credit facility
Term loans
6.375% Senior Unsecured Notes due 2022:
Principal amount
Unamortized premium
5.750% Senior Unsecured Notes due 2020(A)
4.000% Senior Unsecured Notes due 2022(A)
5.500% Senior Unsecured Notes due 2024
6.375% Senior Unsecured Notes due 2024
3.325% Senior Unsecured Notes due 2025(A)
5.250% Senior Unsecured Notes due 2026
Debt issue costs, net
As of June 30, 2017, principal payments due on our debt (which exclude the effects of any discounts, premiums, or debt issue costs recorded) are as follows (in thousands):
2017
2018
2019
2020
2021
Thereafter
On February 1, 2017, we replaced our unsecured credit facility with a new revolving credit and term loan agreement (“Credit Facility”). The new agreement includes a $1.3 billion unsecured revolving loan facility, a $200 million unsecured term loan facility, and a €200 million unsecured term loan facility. The new unsecured revolving loan facility matures in February 2021 and can be extended for an additional 12 months at our option. The $200 million unsecured term loan facility matures on February 1, 2022, and the €200 million unsecured term loan facility had a maturity date of January 31, 2020; however, it was paid off on March 30, 2017 – see below. The commitment fee on the revolving loan facility is paid at a rate of 0.25%. The term loan and/or revolving loan commitments may be increased in an aggregate amount not to exceed $500 million.
At our election, loans under the Credit Facility may be made as either ABR Loans or Eurodollar Loans. The applicable margin for term loans that are ABR Loans is adjustable on a sliding scale from 0.00% to 0.95% based on our current credit rating. The applicable margin for term loans that are Eurodollar Loans is adjustable on a sliding scale from 0.90% to 1.95% based on our current credit rating. The applicable margin for revolving loans that are ABR Loans is adjustable on a sliding scale from 0.00% to 0.65% based on our current credit rating. The
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applicable margin for revolving loans that are Eurodollar Loans is adjustable on a sliding scale from 0.875% to 1.65% based on our current credit rating. The commitment fee is adjustable on a sliding scale from 0.125% to 0.30% based on our current credit rating and is payable on the revolving loan facility. At June 30, 2017, the interest rate in effect on our term loan and revolver was 2.72% and 2.46%, respectively.
On March 4, 2017, we redeemed the €200 million aggregate principal amount of our 5.750% Senior Unsecured Notes due 2020 and incurred a redemption premium of approximately $9 million. We funded this redemption, including the premium and accrued interest, with the proceeds of the new euro term loan together with cash on hand.
On March 24, 2017, we completed a €500 million senior unsecured notes offering (“3.325% Senior Unsecured Notes due 2025”). Interest on the notes is payable annually on March 24 of each year. The notes pay interest in cash at a rate of 3.325% per year. The notes mature on March 24, 2025. We may redeem some or all of the 3.325% Senior Unsecured Notes due 2025 at any time. If the notes are redeemed prior to 90 days before maturity, the redemption price will be equal to 100% of their principal amount, plus a make-whole premium, plus accrued and unpaid interest up to, but excluding, the applicable redemption date. Within the period beginning on or after 90 days before maturity, the notes may be redeemed, in whole or in part, at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the applicable redemption date. The 3.325% Senior Unsecured Notes due 2025 are fully and unconditionally guaranteed on a senior unsecured basis by us. In the event of a change of control, each holder of the notes may require us to repurchase some or all of our notes at a repurchase price equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest up to, but excluding, the date of the purchase.
On March 30, 2017, we prepaid and extinguished the €200 million of outstanding term loans under the euro term loan facility portion of our Credit Facility. To fund such prepayment, including accrued and unpaid interest thereon, we used part of the proceeds of the 3.325% Senior Unsecured Notes due 2025.
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 $13.6 million in the first six months of 2017.
On February 22, 2016, we completed a $500 million senior unsecured notes offering (“6.375% Senior Unsecured Notes due 2024”). Interest on the notes is payable on March 1 and September 1 of each year. Interest on the notes is paid in cash at a rate of 6.375% per year. The notes mature on March 1, 2024. We may redeem some or all of the notes at any time prior to March 1, 2019 at a “make whole” redemption price. On or after March 1, 2019, we may redeem some or all of the notes at a premium that will decrease over time. In addition, at any time prior to March 1, 2019, we may redeem up to 35% of the notes at a redemption price equal to 106.375% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, using proceeds from one or more equity offerings. In the event of a change in control, each holder of the notes may require us to repurchase some or all of the notes at a repurchase price equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest to the date of purchase.
Covenants
Our debt facilities impose certain restrictions on us, including restrictions on our ability to: incur debts; create or incur liens; provide guarantees in respect of obligations of any other entity; make redemptions and repurchases of our capital stock; prepay, redeem or repurchase debt; engage in mergers or consolidations; enter into affiliated transactions; dispose of real estate or other assets; and change our business. In addition, the credit agreements governing our Credit Facility limit the amount of dividends we can pay as a percentage of normalized adjusted funds from operations (“FFO”), as defined in the agreements, on a rolling four quarter basis. At June 30, 2017, the
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dividend restriction was 95% of normalized adjusted FFO. The indentures governing our senior unsecured notes also limit the amount of dividends we can pay based on the sum of 95% of FFO, proceeds of equity issuances and certain other net cash proceeds. Finally, our senior unsecured notes require us to maintain total unencumbered assets (as defined in the related indenture) of not less than 150% of our unsecured indebtedness.
In addition to these restrictions, the Credit Facility contains customary financial and operating covenants, including covenants relating to our total leverage ratio, fixed charge coverage ratio, secured leverage ratio, consolidated adjusted net worth, unsecured leverage ratio, and unsecured interest coverage ratio. This Credit Facility also contains customary events of default, including among others, nonpayment of principal or interest, material inaccuracy of representations and failure to comply with our covenants. If an event of default occurs and is continuing under the Credit Facility, the entire outstanding balance may become immediately due and payable. At June 30, 2017, 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.
During the six months ended June 30, 2016, we sold approximately 3 million shares of common stock under an at-the-market equity offering program, resulting in net proceeds of approximately $45 million, after deducting approximately $0.6 million of commissions. There is no availability under this equity offering program at June 30, 2017.
MPT Operating Partnership, L.P.
At June 30, 2017, the Company has a 99.89% ownership interest in the Operating Partnership with the remainder owned by three other partners, two of whom are employees and one of whom is a director. During the six months ended June 30, 2017 and 2016, the Operating Partnership issued approximately 43.1 million units and approximately 3 million units, respectively, in direct response to the common stock offerings by Medical Properties Trust, Inc.
6. Stock Awards
We adopted the 2013 Equity Incentive Plan (the “Equity Incentive Plan”) during the second quarter of 2013, which authorizes the issuance of common stock options, restricted stock, restricted stock units, deferred stock units, stock appreciation rights, performance units and awards of interests in our Operating Partnership. The Equity Incentive Plan is administered by the Compensation Committee of the Board of Directors. We have reserved 8,196,770 shares of common stock for awards under the Equity Incentive Plan for which 3.3 million shares remain available for future stock awards as of June 30, 2017. Share-based compensation expense totaled $4.4 million and $4.2 million for the six months ended June 30, 2017 and 2016, respectively, of which $0.3 million relates to the acceleration of vestings on time-based awards previously granted to two retiring board members.
7. Fair Value of Financial Instruments
We have various assets and liabilities that are considered financial instruments. We estimate that the carrying value of cash and cash equivalents and accounts payable and accrued expenses approximate their fair values. We estimate the fair value of our interest and rent receivables using Level 2 inputs such as discounting the estimated future cash flows using the current rates at which similar receivables would be made to others with
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similar credit ratings and for the same remaining maturities. The fair value of our mortgage loans and working capital loans are estimated by using Level 2 inputs such as discounting the estimated future cash flows using the current rates which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. We determine the fair value of our senior unsecured notes using Level 2 inputs such as quotes from securities dealers and market makers. We estimate the fair value of our revolving credit facility and term loans using Level 2 inputs based on the present value of future payments, discounted at a rate which we consider appropriate for such debt.
Fair value estimates are made at a specific point in time, are subjective in nature, and involve uncertainties and matters of significant judgment. Settlement of such fair value amounts may not be possible and may not be a prudent management decision. The following table summarizes fair value estimates for our financial instruments (in thousands):
Asset (Liability)
Loans (1)
Items Measured at Fair Value on a Recurring Basis
Our equity interest in Ernest along with their related loans are measured at fair value on a recurring basis as we elected to account for these investments using the fair value option method. We have elected to account for these investments at fair value due to the size of the investments and because we believe this method is more reflective of current values. We have not made a similar election for other existing equity interests or loans.
At June 30, 2017, these amounts were as follows (in thousands):
Asset Type
Acquisition and other loans
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, 2017.
In regards to the underlying projection of revenues and expenses used in the discounted cash flow model, such projections are provided by Ernest. However, we will modify such projections (including underlying
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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
+100 basis points
- 100 basis points
Because the fair value of Ernest investments noted above approximate their original cost, we did not recognize any unrealized gains/losses during the first half of 2017 or 2016. To date, we have not received any distribution payments from our equity investment in Ernest.
8. Earnings Per Share/Common Unit
Our earnings per share were calculated based on the following (in thousands):
Numerator:
Non-controlling interests’ share in net income
Participating securities’ share in earnings
Net income, less participating securities’ share in earnings
Denominator:
Basic weighted-average common shares
Dilutive potential common shares
Dilutive weighted-average common shares
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Non-controlling interests’ share in continuing operations
Income from continuing operations, less participating securities’ share in earnings
Our earnings per common unit were calculated based on the following (in thousands):
Basic weighted-average units
Dilutive potential units
Dilutive weighted-average units
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9. Commitments and Contingencies
Commitments
RCCH Commitment
On September 28, 2016, we entered into a definitive agreement to acquire one acute care hospital in Washington for a purchase price of approximately $17.5 million. Upon closing, this facility will be leased to RCCH, pursuant to the current long-term master lease. Closing of the transaction, which is expected to be completed no later than the fourth quarter of 2017, is subject to customary real estate, regulatory and other closing conditions.
Steward Commitment
On May 18, 2017, we entered into definitive agreements to invest in a portfolio of ten acute care hospitals and one behavioral health facility currently operated by IASIS Healthcare (“IASIS”) for a combined purchase price and investment of approximately $1.4 billion. Following closing, the portfolio will be operated by Steward, which separately announced a simultaneous merger transaction with IASIS, the completion of which is a condition to our investment.
Pursuant to the terms of an asset purchase agreement with IASIS and its affiliates, dated May 18, 2017, subsidiaries of the Operating Partnership will acquire from IASIS and its affiliates all of their interests in the real estate of eight acute care hospitals and one behavioral health facility for an aggregate purchase price of $700 million. At closing, these facilities will be leased to Steward pursuant to the existing master lease agreement. In addition, pursuant to the terms of the agreement, subsidiaries of the Operating Partnership will make mortgage loans in an aggregate amount of $700 million, secured by first mortgages in two other acute care hospitals. The real estate master lease and mortgage loans will have substantially similar terms, which have an initial fixed term expiration of October 31, 2031 and include three 5-year extension options, plus annual inflation protected escalators.
In addition, in conjunction with the real estate and mortgage loans transactions described above, a subsidiary of the Operating Partnership will also invest approximately $100 million in minority preferred interests of Steward. We will have no management authority or control of Steward except for certain protective rights consistent with a minority passive ownership interest, such as a limited right to approve certain extraordinary transactions.
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To assist in funding the Steward commitment, if needed, we received a commitment for a new $1.0 billion term loan facility pursuant to a commitment letter with JP Morgan Chase Bank, N.A. The term loan facility, if funded, would have a maturity date of one year after the date on which it is consummated, and could be extended an additional 12 months at our option. With this commitment, we paid $4.5 million of underwriting and other fees, which will be expensed over the commitment period. Through June 30, 2017, we have expensed approximately $0.8 million as an unutilized financing fee.
Contingencies
We are a party to various legal proceedings incidental to our business. In the opinion of management, after consultation with legal counsel, the ultimate liability, if any, with respect to those proceedings is not presently expected to materially affect our financial position, results of operations or cash flows.
10. Subsequent Events
As described in Note 3 under the heading “2017 Activity,” on July 20, 2016, we entered into definitive agreements to acquire 20 rehabilitation hospitals in Germany for an aggregate purchase price of approximately €215.7 million to be leased to affiliates of MEDIAN. As of June 30, 2017, we had closed on 18 of the 20 facilities in the amount of €176.5 million. The remaining two facilities totaling €39.2 million closed in July 2017.
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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 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, 2016.
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 Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. Such factors include, among others, the following:
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Key Factors that May Affect Our Operations
Our revenue is derived from rents we earn pursuant to the lease agreements with our tenants, from interest income from loans to our tenants and other facility owners and from profits or equity interests in certain of our tenants’ operations. Our tenants operate in the healthcare industry, generally providing medical, surgical and rehabilitative care to patients. The capacity of our tenants to pay our rents and interest is dependent upon their ability to conduct their operations at profitable levels. We believe that the business environment of the industry segments in which our tenants operate is generally positive for efficient operators. However, our tenants’ operations are subject to economic, regulatory and market conditions that may affect their profitability, which could impact our results. Accordingly, we monitor certain key factors, changes to which we believe may provide early indications of conditions that may affect the level of risk in our portfolio.
Key factors that we consider in underwriting prospective tenants and borrowers and in monitoring the performance of existing tenants and borrowers include the following:
Certain business factors, in addition to those described above that directly affect our tenants and borrowers, will likely materially influence our future results of operations. These factors include:
CRITICAL ACCOUNTING POLICIES
Refer to our 2016 Annual Report on Form 10-K, for a discussion of our critical accounting policies, which include revenue recognition, investment in real estate, purchase price allocation, loans, losses from rent
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receivables, stock-based compensation, our fair value option election, and our accounting policy on consolidation. During the six months ended June 30, 2017, there were no material changes to these policies.
Overview
We are a self-advised real estate investment trust (“REIT”) focused on investing in and owning net-leased healthcare facilities across the U.S. and selectively in foreign jurisdictions. We have operated as a REIT since April 6, 2004, and accordingly, elected REIT status upon the filing of our calendar year 2004 federal income tax return. Medical Properties Trust, Inc. was incorporated under Maryland law on August 27, 2003, and MPT Operating Partnership, L.P. was formed under Delaware law on September 10, 2003. We conduct substantially all of our business through MPT Operating Partnership, L.P. We acquire and develop healthcare facilities and lease the facilities to healthcare operating companies under long-term net leases, which require the tenant to bear most of the costs associated with the property. We also make mortgage loans to healthcare operators collateralized by their real estate assets. In addition, we selectively make loans to certain of our operators through our taxable REIT subsidiaries, 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, 2017, our portfolio consisted of 256 properties leased or loaned to 32 operators, of which two are under development and 12 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):
Real estate owned (gross)
Construction in progress
Total assets (1)
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The following is our revenue by operating type (dollar amounts in thousands):
Revenue by property type:
General Acute Care Hospitals (1)
Rehabilitation Hospitals
Long-term Acute Care Hospitals
Total revenue
We have 57 employees as of August 4, 2017. We believe that any foreseeable increase in the number of our employees will have only immaterial effects on our operations and general and administrative expenses. We believe that our relations with our employees are good. None of our employees are members of any labor union.
Results of Operations
Three Months Ended June 30, 2017 Compared to June 30, 2016
Net income for the three months ended June 30, 2017, was $73.4 million, compared to $53.7 million for the three months ended June 30, 2016. This increase is due to additional revenue from the Steward and MEDIAN investments made in the fourth quarter of 2016 and the second quarter of 2017, partially offset by increased depreciation and acquisition expense and the $16.6 million gain on sale of properties in the 2016 second quarter. Funds from operations (“FFO”), after adjusting for certain items (as more fully described in Reconciliation of Non-GAAPFinancial Measures), was $113.6 million, or $0.32 per diluted share for the 2017 second quarter as compared to $75.5 million, or $0.32 per diluted share for the 2016 second quarter. This 50% increase in FFO is primarily due to the increase in revenue from our new investments made since June 2016.
A comparison of revenues for the three month periods ended June 30, 2017 and 2016 is as follows (dollar amounts in thousands):
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Our total revenue for the 2017 second quarter is up $40.5 million or 32.1% over the prior year. This increase is made up of the following:
Real estate depreciation and amortization during the second quarter of 2017 increased to $29.5 million from $22.8 million in 2016, due to the incremental depreciation from the properties acquired since June 30, 2016 and the development properties completed in 2016 and 2017. In the 2016 second quarter, we accelerated the amortization of the lease intangible asset related to our Corinth facility resulting in $1.1 million of additional expense.
Acquisition expenses increased from $4.8 million in 2016 to $10.8 million in 2017 primarily as a result of the MEDIAN acquisitions in 2017, including approximately $9.0 million of real estate transfer taxes.
During the three months ended June 30, 2016, we had various dispositions resulting in a net gain on sale of real estate and other asset dispositions of $16.6 million and impairment charges of $7.4 million (see Note 3 to Item 1 of this Form 10-Q for further details).
General and administrative expenses totaled $15.1 million for the 2017 second quarter, which is 9.0% of total revenues, down from 9.5% of total revenues in prior year second quarter. The drop in general and administrative expenses as a percentage of revenue is primarily due to our business model as we can generally increase our revenue significantly without increasing our head count and related expenses at the same rate. On a dollar basis, general and administrative expenses were up $3.0 million from the prior year second quarter due primarily to increases in travel, international administration, costs associated with opening a European office, compensation related to increased headcount and public company board expenses.
Interest expense, for the quarters ended June 30, 2017 and 2016, totaled $39.7 million and $41.5 million, respectively. This decrease is primarily related to lower interest rates on fixed rate debt held during the quarter ended June 30, 2017 as compared to June 30, 2016. Our weighted average interest rate was 4.6% for the quarter ended June 30, 2017, which is a slight decrease from 5.1% in 2016. We did incur approximately $0.8 million in unutilized facility fees during the 2017 second quarter related to the short term loan commitment we made in anticipation of the $1.5 billion Steward acquisition described in Note 9 and in Item 1 of this Form 10-Q. 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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Earnings from our equity interests was $2.8 million for the 2017 second quarter, up $1.6 million from the prior year primarily related to our increased ownership in and the improved operating results of the operator of our Hoboken facility.
Income tax expense typically includes U.S. federal and state income taxes on our TRS entities, as well asnon-U.S. income based or withholding taxes on certain investments located in jurisdictions outside the U.S. The income tax benefit for the three months ended June 30, 2017, was primarily due to $1.3 million of benefit recognized on approximately $8.8 million of acquisition costs incurred on our European investments. We utilize the asset and liability method of accounting for income taxes. Deferred tax assets are recorded to the extent we believe these assets will more likely than not be realized. In making such determination, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based upon our review of all positive and negative evidence, including our three-year cumulative pre-tax book loss position in many entities, we concluded that a full valuation allowance should continue to be recorded against the majority of our U.S and certain of our international net deferred tax assets at June 30, 2017. In the future, if we determine that it is more likely than not that we will realize our U.S. and foreign net deferred tax assets, we will reverse the applicable portion of the valuation allowance, recognize an income tax benefit in the period in which such determination is made, and incur higher income taxes in future periods.
Six Months Ended June 30, 2017 Compared to June 30, 2016
Net income for the six months ended June 30, 2017, was $141.4 million compared to net income of $111.7 million for the six months ended June 30, 2016, primarily due to additional revenue from the MEDIAN, Steward, and RCCH investments made in the fourth quarter of 2016 and the second quarter of 2017, completed development projects, a $7.4 million gain on the sale of our facility in Muskogee, Oklahoma, and increased income from our equity investments, partially offset by a $14.4 million debt refinancing charge in 2017, higher depreciation expenses from investments made subsequent to June 30, 2016, increased acquisition and travel expense, and the $16.7 million gain on sale of several properties in the first half of 2016. FFO, after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $219.6 million, or $0.65 per diluted share for the first six months in 2017 as compared to $159.0 million, or $0.67 per diluted share for the first six months of 2016. This 38.1% increase in FFO is primarily due to the increase in revenue from acquisitions and completed development projects made since June 2016, while FFO per share is lower in the first half of 2017 compared to prior year due to more shares outstanding from the September 2016 and May 2017 equity offerings.
A comparison of revenues for the six month periods ended June 30, 2017 and 2016 is as follows (dollar amounts in thousands):
Our total revenue for the first six months of 2017 is up $61.9 million or 23.7% over the prior year. This increase is made up of the following:
Operating lease revenue (including rent billed and straight-line rent) – up $60.5 million over the prior year of which $0.4 million is from our annual escalation provisions in our leases, $50.5 million is
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incremental revenue from acquisitions made after June 30, 2016, $11.2 million is incremental revenue from development properties that were completed and put into service in 2016 and 2017, $1.1 million is incremental revenue from capital additions made to existing facilities in 2017 and 2016, $5.6 million relates to the conversion of certain RCCH facilities in 2016 from direct financing leases into operating leases, and a $0.5 million straight-line rent write-off related to our Corinth facility in the 2016 second quarter. These increases are partially offset by $7.2 million lower revenue related to dispositions and $2.2 million in foreign currency fluctuations.
Real estate depreciation and amortization during the first six months of 2017 increased to $57.1 million from $44.0 million in the same period of 2016 due to the incremental depreciation from the properties acquired and the development properties completed in 2016 and 2017. In the 2016 second quarter, we accelerated the amortization of the lease intangible asset related to our Corinth facility resulting in $1.1 million of additional expense.
Acquisition expenses increased from $3.7 million in 2016 to $13.6 million in 2017 primarily as a result of the MEDIAN and Steward acquisitions in 2017, including $9.5 million of real estate transfer taxes incurred on the MEDIAN acquisitions.
During the six months ended June 30, 2017, we sold the Muskogee, Oklahoma facility resulting in a net gain on sale of real estate of $7.4 million, while in the first six months of 2016, we had various dispositions resulting in a net gain on sale of real estate and other asset dispositions of $16.7 million and impairment charges of $7.4 million (see Note 3 to Item 1 of this Form 10-Q for further details).
Earnings from our equity interests increased from a loss of $3.8 million in 2016 to a gain of $4.5 million in 2017. The loss in 2016 includes $5.3 million of acquisition expenses, representing our share of such expenses incurred by our Italian joint venture to acquire its eight hospital properties. In addition, 2017 includes $3.0 million of additional income related to our increased ownership in and improved operating results of the operator of our Hoboken facility.
General and administrative expenses in the first six months of 2017 totaled $28.3 million, which is 8.7% of revenues down from 9.0% of revenues in the prior year. The decline in general and administrative expenses as a percentage of revenues is primarily due to our business model as we can generally increase our revenues significantly without increasing our head count and related expense at the same rate. On a dollar basis, general and administrative expenses were up $4.8 million from the prior year first six months due primarily to increases in travel, international administration, costs associated with opening a European office, compensation related to increased headcount and public company board expenses.
Interest expense for the first six months of 2017 and 2016 totaled $77.7 million and $80.9 million, respectively. This decrease is primarily related to lower interest rates on our fixed rate debt. Our weighted average interest rate is
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slightly lower period over period – 4.6% for the first six months of 2017 and 4.7% for the first six months of 2016. We did incur $14.4 million of unutilized facility fees/debt refinancing costs in the first half of 2017 from the new credit facility and payoff of our 5.750% Senior Unsecured Notes due 2020 (see Note 4 in Item 1 to this Form 10-Q for further information on our debt activities) along with the short-term loan commitment we made in anticipation of the Steward acquisition described in Note 9 in Item 1 of this Form 10-Q.
Income tax expense for the six months ended June 30, 2017 decreased by $0.4 million from the same period in 2016 primarily due to $1.4 million of benefit recognized on approximately $9.6 million of acquisition costs incurred on our European investments in the first half of 2017. This tax benefit in 2017 was offset by additional tax expense from the acquisition of additional international properties and a distribution from one of our international equity investments in 2017.
Reconciliation of Non-GAAP Financial Measures
Funds From Operations
Investors and analysts following the real estate industry utilize funds from operations, or FFO, as a supplemental performance measure. FFO, reflecting the assumption that real estate asset values rise or fall with market conditions, principally adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assumes that the value of real estate diminishes predictably over time. We compute FFO in accordance with the definition provided by the National Association of Real Estate Investment Trusts, or NAREIT, which represents net income (loss) (computed in accordance with GAAP), excluding gains (losses) on sales of real estate and impairment charges on real estate assets, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.
In addition to presenting FFO in accordance with the NAREIT definition, we also disclose normalized FFO, which adjusts FFO for items that relate to unanticipated 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 net income attributable to MPT common stockholders to FFO for the three and six months ended June 30, 2017 and 2016 (in thousands, except per share data):
FFO information:
Gain on sale of real estate
Funds from operations
Write-off of straight line rent and other
Transaction costs from non-real estate dispositions
Acquisition expenses, net of tax benefit
Unutilized financing fees / debt refinancing costs
Normalized funds from operations
Per diluted share data:
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Total Gross Assets
Total gross assets is total assets before accumulated depreciation/amortization and assumes all real estate binding commitments on new investments and unfunded amounts on development deals and commenced capital improvement projects are fully funded, and assumes cash on hand is fully used in these transactions. We believe total gross assets is useful to investors as it provides a more current view of our portfolio and allows for a better understanding of our concentration levels as our binding commitments close and our other commitments are fully funded. The following table presents a reconciliation of total assets to total gross assets (in thousands):
Add:
Binding real estate commitments on new investments(1)
Unfunded amounts on development deals and commenced capital improvement projects(2)
Less:
LIQUIDITY AND CAPITAL RESOURCES
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 cashon-hand to fund our dividends of $151.7 million and certain investing activities.
Certain other investing and financing activities in the first half of 2017 included:
a) On February 1, 2017, we replaced our credit facility with a new facility resulting in a $50 million reduction in our U.S. dollar term loan and a new €200 million term loan;
b) On March 4, 2017, we redeemed our 5.750% Senior Unsecured Notes due 2020 for €200 million plus a redemption premium using proceeds from our €200 million term loan and cash on hand;
c) On March 24, 2017, we completed a €500 million senior unsecured notes offering and used a portion of the proceeds to pay off our €200 million term loan, and the remaining proceeds were used to acquire 12 facilities to be leased to MEDIAN for €146.4 million;
d) On March 31, 2017, we sold the EASTAR Health System real estate in Muskogee, Oklahoma for approximately $64 million; and
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e) On May 1, 2017, we completed an underwritten public offering of 43.1 million shares resulting in net proceeds of approximately $548 million. We used a portion of these proceeds to acquire eight facilities for $301.3 million (leased to Steward), a facility in Idaho for $87.5 million (leased to RCCH) and two other facilities for $40 million (leased to Alecto).
In the first half of 2017, we received a commitment for a new $1.0 billion term loan facility pursuant to a commitment letter with JP Morgan Chase Bank, N.A. This term loan facility is available to partially fund the $1.5 billion Steward transaction disclosed in Note 9 to Item 1 of this Form10-Q. This term loan has not been funded as of August 4, 2017.
2016 Cash Flow Activity
During the first half of 2016, we generated $137.3 million of cash flows from operating activities, primarily consisting of rent and interest from mortgage and other loans. We used these operating cash flows along with cash on-hand to fund our dividends of $104.8 million and certain investing activities.
On February 22, 2016, we completed the 6.375% Senior Unsecured Notes due 2024 offering for $500 million. On April 30, 2016, we closed on the Capella Transaction (as further discussed in Note 3 to Item 1 of this Form 10-Q) resulting in net proceeds of $550 million along with an additional $50 million once we sold our investment in RegionalCare bonds in June 2016. On May 23, 2016, we sold our investment in five properties leased and operated by Post Acute for $71 million. On June 17, 2016, we sold our investment in one property leased and operated by Corinth Investor Holdings for $28 million. Finally, during June 2016, we sold 3 million shares under our at-the-market offering program realizing net proceeds of approximately $45 million. We used these proceeds to reduce our revolving credit facility by $1.1 billion during 2016 and fund our remaining investing activities.
Short-term Liquidity Requirements: As of June 30, 2017, we have less than $0.2 million in debt principal payments due in 2017 — see debt maturity schedule below. At August 4, 2017, our availability under our revolving credit facility plus cash on-hand approximated $1.2 billion. We believe this liquidity and our current monthly cash receipts from rent and loan interest is sufficient to fund our operations, debt and interest obligations, the expected funding requirements on our development projects, and dividends in order to comply with REIT requirements for the next twelve months. In addition, with the additional availability from the $1.0 billion term loan facility commitment as discussed above, we believe we have the liquidity to fund the $1.5 billion Steward transaction firm commitment. We do believe other sources of capital (including senior unsecured notes, entering into joint venture arrangements and strategic property sales) are generally available as well. However, there is no assurance that such capital will be available when needed for such firm commitment or that our attempts to gain such capital will be successful.
Long-term Liquidity Requirements: Exclusive of the revolving credit facility (which we can extend for an additional year to February 2022), we have only $13 million in debt principal payments due over the next five years (see debt maturity schedule below). With our liquidity at August 4, 2017 of approximately $1.2 billion along with our current monthly cash receipts from rent and loan interest, we believe we have the liquidity available to us to fund our operations, debt and interest obligations, dividends in order to comply with REIT requirements, and the expected funding requirements on our development projects currently.
However, in order to fund our investment strategies (including the $1.5 billion Steward transaction firm commitment) and to fund debt maturities coming due in 2022 and later years, additional capital will be needed and we believe the following sources of capital are generally available in the market and we may access one or a combination of them:
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However, there is no assurance that conditions will be favorable for such possible transactions or that our plans will be successful.
Disclosure of Contractual Obligations
We presented our contractual obligations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Except for the issuance of our new Credit Facility and the 3.325% Senior Unsecured Notes due 2025 along with redemption of our 5.750% Senior Unsecured Notes due 2020, there have been no significant changes in the debt related obligation during the six months ended June 30, 2017. See Note 4 of Item 1 of this Form 10-Q for more detailed information. In regards to purchase obligations, the only significant change in 2017 was our $1.5 billion Steward commitment – see Note 9 of Item 1 of this Form 10-Q for further details.
The following table updates our contractual obligations schedule for the new Credit Facility, the 3.325% Senior Unsecured Notes due 2025 offering, along with the redemption of our 5.750% Senior Unsecured Notes due 2020 (in thousands):
Contractual Obligations
Revolving credit facility (1)
3.325% Senior Unsecured Notes due 2025
5.750% Senior Unsecured Notes due 2020
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Distribution Policy
The table below is a summary of our distributions declared during the two year period ended June 30, 2017:
Declaration Date
May 25, 2017
February 16, 2017
November 10, 2016
August 18, 2016
May 19, 2016
February 19, 2016
November 12, 2015
August 20, 2015
We intend to pay to our stockholders, within the time periods prescribed by the Internal Revenue Code (“Code”), all or substantially all of our annual taxable income, including taxable gains (if any) from the sale of real estate and recognized gains on the sale of securities. It is our policy to make sufficient cash distributions to stockholders in order for us to maintain our status as a REIT under the Code and to avoid corporate income and excise taxes on undistributed income. See Note 4 to our condensed consolidated financial statements in Item 1 to this Form 10-Q for any restrictions placed on dividends by our existing credit facility.
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
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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, 2017, our outstanding debt totaled $3.2 billion, which consisted of fixed-rate debt of $2.7 billion and variable rate debt of $0.5 billion. If market interest rates increase by 1%, the fair value of our debt at June 30, 2017 would decrease by $3.8 million. Changes in the fair value of our fixed rate debt will not have any impact on us unless we decided to repurchase the debt in the open market.
If market rates of interest on our variable rate debt increase by 1%, the increase in annual interest expense on our variable rate debt would decrease future earnings and cash flows by $0.1 million per year. If market rates of interest on our variable rate debt decrease by 1%, the decrease in interest expense on our variable rate debt would increase future earnings and cash flows by $0.1 million per year. This assumes that the average amount outstanding under our variable rate debt for a year is $0.5 billion, the balance of such variable rate debt at June 30, 2017.
Foreign Currency Sensitivity
With our investments in Germany and throughout Europe, we are subject to fluctuations in the euro and British pound to U.S. dollar currency exchange rates. Increases or decreases in the value of the euro to U.S. dollar and the British pound to U.S. dollar exchange rates may impact our financial condition and/or our results of operations. Based solely on operating results to-date in 2017 and on an annualized basis, if the euro exchange rate were to change by 5%, our FFO would change by approximately $3.7 million. Based solely on operating results to-date in 2017 and on an annualized basis, if the British pound exchange rate were to change by 5%, our FFO would change by less than $0.2 million.
Item 4. 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.
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Item 1. Legal Proceedings.
The information contained in Note 9 “Contingencies” of Part I, Item 1 of this Quarterly Report on Form 10-Qis incorporated by reference into this Item 1.
Item 1A. Risk Factors.
Except to the extent set forth below or as otherwise disclosed in this Quarterly Report on Form 10-Q, there have been no material changes to the Risk Factors as presented in our Annual Report on Form 10-K for the year ended December 31, 2016.
We may fail to consummate the Steward transactions at all or on the terms described herein, and, if the Steward transactions are completed, we may be subject to additional risks.
If the Steward transactions (described in Note 9 of Item 1) are not completed, we could be subject to a number of risks that may adversely affect our business, financial condition, cash flows and the trading price of our common stock, including:
In addition to the risks described in our 2016 10-K relating to healthcare facilities that we may purchase from time to time, if the Steward transactions are completed, we would also be subject to additional risks, including without limitation the following:
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Our revenues will be dependent upon our relationship with and success of our largest tenants, Steward, Prime, MEDIAN, Ernest, RCCH and Adeptus Health.
As of June 30, 2017, affiliates of Steward, Prime, MEDIAN, Ernest, RCCH and Adeptus Health represent 37.4%, 12.2%, 11.9%, 6.9%, 5.5% and 4.6%, respectively, of our total total gross assets.
Our relationships with these operators and their financial performance and resulting ability to satisfy their lease and loan obligations to us are material to our financial results and our ability to service our debt and make distributions to our stockholders. We are dependent upon the ability of these operators to make rent and loan payments to us, and any failure to meet these obligations could have a material adverse effect on our financial condition and results of operations.
Our tenants operate in the healthcare industry, which is highly regulated by federal, state, and local laws and changes in regulations may negatively impact our tenants’ operations until they are able to make the appropriate adjustments to their business. For example, recent modifications to regulations concerning patient criteria and reimbursement for long-term acute care hospitals, or LTACHs, have resulted in volume and profitability declines in certain facilities operated by Ernest.
We are aware of various federal and state inquiries, investigations and other proceedings currently affecting several of our tenants and would expect such government compliance and enforcement activities to be ongoing at any given time with respect to one or more of our tenants, either on a confidential or public basis. During the second quarter of 2016, the Department of Justice joined a lawsuit against Prime alleging irregular admission practices intended to increase the number of inpatient care admissions of Medicare patients, including unnecessarily classifying some patients as “inpatient” rather than “observation”. Other large acute hospital operators have also recently defended similar allegations, sometimes resulting in financial settlements and agreements with regulators to modify admission policies, resulting in lower reimbursements for those patients.
Our tenants experience operational challenges fromtime-to-time, and this can be even more of a risk for those tenants that grow via acquisitions in a short time frame like Steward, Prime, Adeptus Health, etc. The ability of a company to integrate newly acquired businesses into their existing operational, financial reporting and collection systems is important to ensure the success of the overall enterprise. If such integration is not successfully implemented in a timely manner, operators can be negatively impacted whether it be through write-offs of uncollectible accounts receivable (similar to Prime’s expected write-offs of six to seven percent of their 2016 revenues) or worse in the case of Adeptus Health.
On April 19, 2017, Adeptus Health filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Texas, Dallas Division, to pursue a Chapter 11 reorganization plan (the “Plan”). Pursuant to and subject to the terms of the Plan, on the effective date of the Plan, among other things, all of Adeptus Health’s existing facility leases with us will be assumed by Deerfield, and, in accordance with section 365(b) of the Bankruptcy Code, all cure amounts due and owing to the MPT lessors under such leases shall be paid. Any failure of Adeptus Health to achieve a successful restructuring in bankruptcy could affect its ability to pay us rent and therefore have a significant adverse effect on our financial condition and results of operations.
An adverse result to Ernest, Prime, Adeptus Health, or one of our larger tenants in regulatory proceedings or financial or operational setbacks may have a material adverse effect on the relevant tenant’s operations and financial condition and on its ability to make required lease and loan payments to us, which could negatively affect our ability to service our debt and make distributions to our stockholders. The protections that we have in place to protect against such failure or delay, which can include letters of credit, cross default provisions, parent guarantees, repair reserves and the right to exercise remedies including the termination of the lease and replacement of the operator, may prove to be insufficient, in whole or in part, or may entail further delays. In instances where we have an equity investment in our tenant’s operations, in addition to the effect on these tenants’ ability to meet their financial obligation to us, our ownership and investment interests may also be negatively impacted.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
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Item 6. Exhibits.
ExhibitNumber
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/ J. Kevin Hanna
Vice President, Controller, Assistant Treasurer, and Chief Accounting Officer
(Principal Accounting Officer)
Vice President, Controller, Assistant
Treasurer, and Chief Accounting Officer
of the sole member of the general partner
of MPT Operating Partnership, L.P.
Date: August 9, 2017
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