UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-32559
Commission file number 333-177186
MEDICAL PROPERTIES TRUST, INC.
MPT OPERATING PARTNERSHIP, L.P.
(Exact Name of Registrant as Specified in Its Charter)
Maryland
Delaware
20-0191742
20-0242069
(State or other jurisdiction of
incorporation or organization)
(I. R. S. Employer
Identification No.)
1000 URBAN CENTER DRIVE, SUITE 501
BIRMINGHAM, AL
35242
(Address of principal executive offices)
(Zip Code)
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (205) 969-3755
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒ (Medical Properties Trust, Inc. only)
Accelerated filer
Non-accelerated filer
☒ (MPT Operating Partnership, L.P. only)
Smaller reporting company
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 ☒
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.001 per share, of Medical Properties Trust, Inc.
MPW
The New York Stock Exchange
As of November 8, 2019, Medical Properties Trust, Inc. had 517,440,399 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 nine months ended September 30, 2019 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 September 30, 2019
Table of Contents
Page
PART I — FINANCIAL INFORMATION
3
Item 1 Financial Statements
Medical Properties Trust, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets at September 30, 2019 and December 31, 2018
Condensed Consolidated Statements of Net Income for the Three and Nine Months Ended September 30, 2019 and 2018
4
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018
5
Condensed Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2019, and 2018
6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018
8
MPT Operating Partnership, L.P. and Subsidiaries
9
10
11
Condensed Consolidated Statements of Capital for the Three and Nine Months Ended September 30, 2019 and 2018
12
14
Medical Properties Trust, Inc. and MPT Operating Partnership, L.P.
Notes to Condensed Consolidated Financial Statements
15
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
Item 3 Quantitative and Qualitative Disclosures about Market Risk
39
Item 4 Controls and Procedures
40
PART II — OTHER INFORMATION
41
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
42
SIGNATURE
43
Item 1. Financial Statements.
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30,
2019
December 31,
2018
(In thousands, except per share amounts)
(Unaudited)
(Note 2)
Assets
Real estate assets
Land, buildings and improvements, intangible lease assets, and other
$
7,310,604
5,268,459
Mortgage loans
1,268,563
1,213,322
Net investment in direct financing leases
688,891
684,053
Investment in sale leaseback transactions
1,390,619
—
Gross investment in real estate assets
10,658,677
7,165,834
Accumulated depreciation and amortization
(571,589
)
(464,984
Net investment in real estate assets
10,087,088
6,700,850
Cash and cash equivalents
461,622
820,868
Interest and rent receivables
25,653
25,855
Straight-line rent receivables
299,993
220,848
Equity investments
777,102
520,058
Other loans
521,398
373,198
Other assets
279,297
181,966
Total Assets
12,452,153
8,843,643
Liabilities and Equity
Liabilities
Debt, net
6,096,232
4,037,389
Accounts payable and accrued expenses
249,642
204,325
Deferred revenue
16,377
13,467
Obligations to tenants and other lease liabilities
103,084
27,524
Total Liabilities
6,465,335
4,282,705
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 — 459,778 shares at September 30, 2019 and
370,637 shares at December 31, 2018
460
371
Additional paid-in capital
5,972,341
4,442,948
Retained earnings
91,535
162,768
Accumulated other comprehensive loss
(90,019
(58,202
Treasury shares, at cost
(777
Total Medical Properties Trust, Inc. Stockholders’ Equity
5,973,540
4,547,108
Non-controlling interests
13,278
13,830
Total Equity
5,986,818
4,560,938
Total Liabilities and Equity
See accompanying notes to condensed consolidated financial statements.
Condensed Consolidated Statements of Net Income
For the Three Months
Ended September 30,
For the Nine Months
Revenues
Rent billed
124,361
118,238
343,841
369,076
Straight-line rent
31,026
18,293
76,813
49,157
Income from direct financing leases
17,502
18,998
52,168
55,613
Interest and other income
51,867
41,467
124,937
130,098
Total revenues
224,756
196,996
597,759
603,944
Expenses
Interest
64,519
57,215
167,396
172,364
Real estate depreciation and amortization
40,833
29,949
108,161
100,217
Property-related
4,038
2,719
15,394
6,823
General and administrative
23,286
20,982
69,009
58,352
Acquisition costs
506
917
Total expenses
132,676
111,371
359,960
338,673
Other income (expense)
Gain on sale of real estate and other, net
209
647,204
62
672,822
Earnings from equity interests
3,474
3,116
11,635
10,542
Unutilized financing fees
(3,959
(4,873
Other
(2,282
2,595
(1,497
(4,297
Total other income
(2,558
652,915
5,327
679,067
Income before income tax
89,522
738,540
243,126
944,338
Income tax benefit (expense)
745
(2,064
3,352
(4,802
Net income
90,267
736,476
246,478
939,536
Net income attributable to non-controlling interests
(481
(442
(1,432
(1,334
Net income attributable to MPT common stockholders
89,786
736,034
245,046
938,202
Earnings per common share — basic
0.20
2.01
0.60
2.56
Earnings per common share — diluted
2.00
Weighted average shares outstanding — basic
439,581
365,024
404,902
364,934
Weighted average shares outstanding — diluted
440,933
366,467
406,100
365,784
Dividends declared per common share
0.26
0.25
0.76
0.75
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
Other comprehensive income:
Unrealized loss on interest rate swap
(15,441
(20,699
Foreign currency translation loss
(8,048
(8,216
(11,118
(24,520
Total comprehensive income
66,778
728,260
214,661
915,016
Comprehensive income attributable to non-controlling
interests
Comprehensive income attributable to MPT common
stockholders
66,297
727,818
213,229
913,682
Condensed Consolidated Statements of Equity
Preferred
Common
Shares
Par
Value
Additional
Paid-in
Capital
Retained
Earnings
(Deficit)
Accumulated
Comprehensive
Loss
Treasury
Stock
Non-
Controlling
Interests
Total
Balance at December 31, 2018
370,637
75,822
469
76,291
(3,772
(5,918
Stock vesting and amortization of
stock-based compensation
1,055
1
6,714
6,715
Distributions to non-controlling interests
(645
Proceeds from offering (net of
offering costs)
20,147
20
354,010
354,030
Dividends declared ($0.25 per
common share)
(97,163
Balance at March 31, 2019
391,839
392
4,803,672
141,427
(67,892
13,654
4,890,476
79,438
482
79,920
(1,486
Foreign currency translation gain
2,848
119
6,317
(670
2,467
2
45,321
45,323
(99,093
Balance at June 30, 2019
394,425
394
4,855,310
121,772
(66,530
13,466
4,923,635
481
118
9,087
(669
65,235
66
1,107,944
1,108,010
Dividends declared ($0.26 per
(120,023
Balance at September 30, 2019
459,778
Balance at December 31, 2017
364,424
364
4,333,027
(485,932
(26,049
14,572
3,835,205
90,601
442
91,043
Cumulative effect of change in accounting
principles
1,938
16,088
271
1,855
1,856
Redemption of MOP units
(816
(620
(94
(91,411
Balance at March 31, 2018
364,695
365
4,333,972
(484,804
(9,961
14,394
3,853,189
111,567
450
112,017
(32,392
36
4,869
(638
(43
(91,547
Balance at June 30, 2018
364,731
4,338,798
(464,784
(42,353
14,206
3,845,455
127
4,970
(630
Dividends declared ($0.25 per common
share)
Balance at September 30, 2018
364,858
4,343,768
179,703
(50,569
14,018
4,486,508
7
Condensed Consolidated Statements of Cash Flows
Operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
111,067
106,508
Amortization of deferred financing costs and debt discount
6,293
5,543
Direct financing lease interest accretion
(6,858
(7,213
Straight-line rent revenue and other
(84,758
(64,840
Share-based compensation
22,119
11,695
Gain from sale of real estate, net
(62
(672,822
Straight-line rent and other write-off
7,232
17,615
4,873
Other adjustments
16,052
(21,354
Changes in:
528
(10,158
4,413
(5,387
Net cash provided by operating activities
327,377
299,123
Investing activities
Cash paid for acquisitions and other related investments
(3,703,092
(1,166,618
Net proceeds from sale of real estate
4,859
1,513,666
Principal received on loans receivable
920
531,772
Investment in loans receivable
(34,149
(174,494
Construction in progress and other
(55,168
(32,425
Capital additions and other investments, net
(213,096
(63,080
Net cash (used for) provided by investing activities
(3,999,726
608,821
Financing activities
Proceeds from term debt, net of discount
1,732,740
759,735
Revolving credit facilities, net
417,089
(818,116
Distributions paid
(291,675
(272,360
Lease deposits and other obligations to tenants
(8,349
(25,511
Proceeds from sale of common shares, net of offering costs
1,507,363
Other financing activities
(24,187
(3,106
Net cash provided by (used for) financing activities
3,332,981
(359,358
(Decrease) increase in cash, cash equivalents and restricted cash for period
(339,368
548,586
Effect of exchange rate changes
(16,645
(8,313
Cash, cash equivalents and restricted cash at beginning of period
822,425
172,247
Cash, cash equivalents and restricted cash at end of period
466,412
712,520
Interest paid
158,259
175,715
Supplemental schedule of non-cash financing activities:
Distributions declared, unpaid
120,023
91,547
Cash, cash equivalents and restricted cash are comprised of the following:
Beginning of period:
171,472
Restricted cash, included in Other assets
1,557
775
End of period:
710,965
4,790
1,555
MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
Liabilities and Capital
129,289
108,574
Payable due to Medical Properties Trust, Inc.
119,963
95,361
6,464,945
4,282,315
General Partner — issued and outstanding — 4,598 units at September 30,
2019 and 3,706 units at December 31, 2018
60,666
46,084
Limited Partners:
Common units — issued and outstanding — 455,180 units at
September 30, 2019 and 366,931 units at December 31, 2018
6,003,283
4,559,616
LTIP units — issued and outstanding — 232 units at September 30,
2019 and 232 units at December 31, 2018
Total MPT Operating Partnership, L.P. capital
5,973,930
4,547,498
Total capital
5,987,208
4,561,328
Total Liabilities and Capital
(In thousands, except per unit amounts)
Net income attributable to MPT Operating Partnership
partners
Earnings per unit — basic
Net income attributable to MPT Operating Partnership partners
Earnings per unit — diluted
Weighted average units outstanding — basic
Weighted average units outstanding — diluted
Dividends declared per unit
Comprehensive income attributable to non-controlling interests
Comprehensive income attributable to MPT Operating Partnership
Condensed Consolidated Statements of Capital
General
Limited Partners
Partner
LTIPs
Units
Unit
3,706
366,931
232
758
75,064
Unit vesting and amortization of unit-based
compensation
68
1,044
6,647
Proceeds from offering (net of offering
costs)
201
3,540
19,946
350,490
Distributions declared ($0.25 per unit)
(972
(96,191
3,918
49,478
387,921
4,895,626
4,890,866
794
78,644
63
6,254
25
453
2,442
44,870
(991
(98,102
3,944
49,797
390,481
4,927,292
4,924,025
898
88,888
91
117
8,996
653
11,080
64,582
1,096,930
Distributions declared ($0.26 per unit)
(1,200
(118,823
4,598
455,180
3,644
38,489
360,780
3,808,583
292
3,835,595
906
89,695
19
1,919
268
1,837
Conversion of LTIP units to common units
60
(60
Redemption of common units
(1
(93
(914
(90,497
3,647
38,518
361,048
3,810,628
3,853,579
1,115
110,452
49
4,820
(915
(90,632
38,767
361,084
3,835,225
3,845,845
7,361
728,673
48
126
4,922
3,648
45,261
361,210
4,478,188
4,486,898
13
Unit-based compensation
Proceeds from sale of units, net of offering costs
Cash, cash equivalents, and restricted cash are comprised of the following:
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 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 non-real estate activities we undertake are conducted by entities which we elected to be treated as taxable REIT subsidiaries (“TRS”). Our TRS entities are subject to both U.S. federal and state income taxes. For our properties located outside the U.S., we are subject to the local taxes of the jurisdictions where our properties reside and/or legal entities are domiciled; however, we do not expect to incur additional taxes in the U.S. as the majority of such income flows through our REIT.
Our primary business strategy is to acquire and develop real estate and improvements, primarily for long-term lease to providers of healthcare services, such as operators of general acute care hospitals, inpatient physical rehabilitation hospitals, and long-term acute care hospitals. 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 currently located in the U.S., Europe, and Australia.
2. Summary of Significant Accounting Policies
Unaudited Interim Condensed Consolidated Financial Statements: The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information, including rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the three and nine months ended September 30, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The condensed consolidated balance sheet at December 31, 2018 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, 2018. There have been no material changes to these significant accounting policies other than the following:
On January 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, “Leases”, (“ASU 2016-02”). ASU 2016-02 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). We adopted this standard using the modified retrospective approach and have elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, permits the following: no reassessment of whether existing contracts are or contain a lease; no reassessment of lease classification for existing leases; and no reassessment of initial direct costs for existing leases. Additionally, we made certain elections permitted in accordance with ASU 2018-11, “Leases (Topic 842): – Targeted Improvements.” which (1) permits entities to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements and (2) permits lessors to account for lease and non-lease components as a single lease component in a contract if certain criteria are met.
The standard requires lessees to apply a dual approach, classifying leases as either financing or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method (for finance leases) or on a straight-line basis (for operating leases) over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will remain off balance sheet with lease expense recognized on a straight-line basis over the lease term, similar to previous guidance for operating leases. The standard requires lessors to account for leases using an approach that is substantially equivalent to previous guidance for sales-type leases, direct financing leases and operating leases.
For our leases in which we are the lessee, including ground leases on which certain of our facilities reside, along with corporate office and equipment leases, we recorded a right-of-use asset and offsetting lease liability of approximately $84 million upon adoption of this standard – resulting in no material cumulative effect adjustment. From a lessor perspective, we did not change the classification or accounting of our existing leases except, we are now grossing up our income statement for certain operating expenses, such as property taxes and insurance, that the tenants of our facilities are required to reimburse us for pursuant to our “triple-net” leases.
Recent Accounting Developments:
Measurement of Credit Losses on Financial Instruments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). This standard requires a new forward-looking “expected loss” model to be used for our financing receivables, including direct financing leases, investments in sale leaseback transactions, and loan receivables, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 is effective for us beginning January 1, 2020. We are still evaluating the impact of this standard, but we do not believe such impact will be material.
Reclassifications
Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to the current period presentation.
3. Real Estate and Lending Activities
Acquisitions
We acquired the following assets (in thousands):
Assets Acquired
Land and land improvements
375,721
57,452
Building
1,320,449
467,164
Intangible lease assets — subject to amortization (weighted average useful
life 18.7 years for 2019 and 27.8 years for 2018)
149,201
60,277
1,386,797
284,399
245,267
51,267
135,258
336,458
Total assets acquired
3,703,092
1,166,618
Loans repaid
(525,426
Total net assets acquired
641,192
2019 Activity
Prospect Transaction
On August 23, 2019, we invested in a portfolio of 14 acute care hospitals and two behavioral health facilities operated by Prospect Medical Holdings, Inc. (“Prospect”) for a combined purchase price of approximately $1.55 billion. Our investment includes the acquisition of the real estate of 11 acute care hospitals and two behavioral health facilities for $1.4 billion. We are accounting for these properties as a financing receivable (as presented in the Investment in sale leaseback transactions line of the condensed consolidated balance sheet) under the new lease accounting rules due to certain lessee end-of-term purchase options. In addition, we originated a $51.3 million mortgage loan, secured by a first mortgage on an acute care hospital, and a $112.9 million term loan which we expect will be converted into the acquisition of two additional acute care hospitals upon the satisfaction of certain conditions. The master leases, mortgage loan and term loan are cross-defaulted and cross-collateralized. The master leases and mortgage loan have substantially similar terms, with a 15-year fixed term subject to three extension options, plus annual increases based on inflation.
The agreements provide for the potential for a future purchase price adjustment of up to an additional $250.0 million, based on achievement of certain performance thresholds over a three-year period; any such adjustment will be added to the lease base upon which we will earn a return in accordance with the master leases.
16
Other Transactions
On August 30, 2019, we invested in a portfolio of facilities throughout various states for approximately $254 million. The properties are leased to Vibra Healthcare, LLC (“Vibra”) pursuant to a new master lease agreement with an initial lease term of 20 years. The lease provides for annual escalations at the greater of 2% or the change in Consumer Price Index (“CPI”) and includes three five-year extension options. The facilities acquired include three inpatient rehabilitation hospitals and seven long-term acute care hospitals.
On August 16, 2019, we acquired freehold interests in eight acute care hospitals located throughout England for an aggregate purchase price of approximately £347 million. The hospitals are leased to Ramsay Health Care pursuant to in-place net leases with approximately 18-year remaining lease terms and include annual fixed and periodic market-based escalations.
On June 10, 2019, we acquired seven community hospitals in Kansas for approximately $145.4 million. The properties are leased to an affiliate of Saint Luke’s Health System (“SLHS”) pursuant to seven individual in-place leases that have an average remaining lease term of 14 years. The leases provide for fixed escalations every five years and include two five-year extension options. All seven hospitals were constructed in either 2018 or 2019, and the leases are guaranteed by SLHS.
On June 6, 2019, we acquired 11 hospitals in Australia for a purchase price of approximately AUD$1.2 billion plus stamp duties and registration fees of AUD$66.6 million. The properties are leased to Healthscope, Ltd. (“Healthscope”) pursuant to master lease agreements that have an average initial term of 20 years with annual fixed escalations of 2.5% and multiple extension options. Healthscope was acquired in a simultaneous transaction by Brookfield Business Partners L.P. and certain of its institutional partners.
On May 27, 2019, we invested in a portfolio of 13 acute care campuses and two additional properties in Switzerland for an aggregate purchase price of approximately CHF 236.6 million. The investment was effected through our purchase of a 46% stake in a Swiss healthcare real estate company, Infracore SA, from the previous majority shareholder, Aevis Victoria SA (“Aevis”). The facilities are leased to Swiss Medical Network, a wholly-owned Aevis subsidiary, pursuant to leases with an average 23-year remaining term subject to annual escalation provisions. We are accounting for our 46% interest in this joint venture under the equity method. Additionally, we purchased a 4.9% stake in Aevis for approximately CHF 47 million on June 28, 2019 that we are marking to fair value each quarter.
Other acquisitions throughout the first nine months of 2019 included three acute care hospitals and one inpatient rehabilitation hospital for an aggregate investment of approximately $135 million. One of the acute care hospitals, acquired on April 12, 2019 and located in Big Spring, Texas, is leased to Steward Health Care System LLC (“Steward”) pursuant to the Steward master lease. The second facility, located in Poole, England, was acquired on April 3, 2019 and is leased to BMI Healthcare pursuant to an in-place lease with 14 years remaining on its term and fixed 2.5% annual escalators. The third acute care facility was acquired on September 30, 2019, located in Watsonville, California, and is leased to Halsen Healthcare. The inpatient rehabilitation hospital, acquired on February 8, 2019, is located in Germany and leased to affiliates of Median Kliniken S.à.r.l. (“MEDIAN”).
2018 Activity
Joint Venture Transaction
On August 31, 2018, we completed a joint venture arrangement with Primotop Holdings S.à.r.l. (“Primotop”) pursuant to which we contributed 71 of our post-acute hospitals in Germany, with an aggregate fair value of €1.635 billion, for a 50% interest, while Primotop contributed cash for its 50% interest in the joint venture. As part of the transaction, we received an aggregate amount of approximately €1.14 billion, from the proceeds of the cash contributed by Primotop and the secured debt financing placed on the joint venture’s real estate, and we recognized an approximate €500 million gain on sale. Our interest in the joint venture is made up of a 50% equity investment valued at approximately €211 million, which is being accounted for under the equity method of accounting, and a €290 million shareholder loan (with terms identical to Primotop’s shareholder loan).
During the second and third quarters of 2018, we acquired the fee simple real estate of four general acute care hospitals, three of which are located in Massachusetts and one located in Texas, from Steward in exchange for the reduction of $525.4 million of mortgage loans made to Steward in October 2016 and March 2018, along with additional cash consideration. These properties are being leased to Steward pursuant to the original master lease from October 2016.
In addition, we acquired one acute care facility and three inpatient rehabilitation hospitals during the first nine months of 2018 for an aggregate investment of approximately $38 million. The acute care hospital, acquired on August 31, 2018 and located in Pasco, Washington, is leased to LifePoint Health, Inc. (“LifePoint”) pursuant to the master lease. The inpatient rehabilitation hospitals, acquired on August 28, 2018, are located in Germany and leased to MEDIAN.
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Development Activities
See table below for a status update on our current development projects (in thousands):
Property
Commitment
Costs Incurred as of
September 30, 2019
Estimated
Rent
Commencement
Date
Circle Health (Birmingham, England)
44,061
35,108
2Q 2020
Circle Health Rehabilitation (Birmingham, England)
19,862
16,320
Surgery Partners (Idaho Falls, Idaho)
113,468
82,651
1Q 2020
177,391
134,079
Disposals
On August 31, 2018, we completed the previously described joint venture arrangement with Primotop, in which we contributed the real estate of 71 of our post-acute hospitals in Germany, with a fair value of approximately €1.635 billion, resulting in a gain of approximately €500 million. See “Acquisitions” in this Note 3 for further details on this transaction.
On August 31, 2018, we sold a general acute care hospital located in Houston, Texas that was leased and operated by North Cypress for $148 million. The transaction resulted in a gain on sale of $102.4 million, which was partially offset by a net $2.5 million non-cash charge to revenue to write-off related straight-line rent receivables.
On June 4, 2018, we sold three long-term acute care hospitals located in California, Texas, and Oregon, that were leased and operated by Vibra, which included our equity investment in operations of the Texas facility. Total proceeds from the transaction were $53.3 million in cash, a mortgage loan in the amount of $18.3 million, and a $1.5 million working capital loan. The transaction resulted in a gain on real estate of $24.2 million, which was partially offset by a $5.1 million non-cash charge to revenue to write-off related straight-line rent receivables.
On March 1, 2018, we sold the real estate of St. Joseph Medical Center in Houston, Texas, for approximately $148 million to Steward. In return, we received a mortgage loan equal to the purchase price, with such loan secured by the underlying real estate. The mortgage loan had terms consistent with the other mortgage loans in the Steward portfolio. This transaction resulted in a gain of $1.5 million, offset by a $1.7 million non-cash charge to revenue to write-off related straight-line rent receivables on this property.
The properties sold during 2018 did not meet the definition of discontinued operations. However, the following represents the operating results from these properties (excluding the St. Joseph sale in March 2018) for the periods presented (in thousands):
For the Three Months Ended September 30,
For the Nine Months Ended September 30,
Revenues(1)
20,115
88,838
(237
(15,849
Property-related expenses
(265
(531
Other(2)
692,362
715,246
Income from real estate dispositions, net
711,975
787,704
(1)
Includes $2.5 million and $7.6 million of straight-line rent and other write-offs associated with the disposal transactions for the three and nine months ended September 30, 2018, respectively.
(2)
Includes $695.2 million of gains on sale for the three months ended September 30, 2018 and $719.3 million for the nine months ended September 30, 2018.
Leasing Operations (Lessor)
As noted earlier, we acquire and develop healthcare facilities and lease the facilities to healthcare operating companies under long-term net leases (typical initial fixed terms ranging from 10 to 15 years) and most include renewal options at the election of our tenants, generally in five year increments. More than 95% of our leases provide annual rent escalations based on increases in the CPI (or similar index outside the U.S.) and/or fixed minimum annual escalations ranging from 0.5% to 3.0%. Many of our domestic leases contain purchase options with pricing set at various terms but in no case less than our total investment. For five properties with a carrying value of $210 million, our leases require a residual value guarantee from the tenant. Our leases typically require the tenant to handle and bear most of the costs associated with our properties including repair/maintenance, property taxes, and insurance. We routinely inspect our properties to ensure the residual value of each of our assets is being maintained. Except for leases noted below as direct finance leases (“DFLs”), all of our leases are classified as operating leases.
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The following table summarizes future minimum lease payments to be received, excluding operating expense reimbursements, from tenants under noncancelable leases as of September 30, 2019 (in thousands):
Total Under
Operating Leases
DFLs
2019 (three months only)
129,235
15,214
144,449
2020
542,989
62,072
605,061
2021
557,352
63,313
620,665
2022
563,977
64,579
628,556
2023
573,798
65,871
639,669
Thereafter
12,247,074
1,400,026
13,647,100
14,614,425
1,671,075
16,285,500
Direct Financing Leases
At September 30, 2019, leases on 14 Ernest Health (“Ernest”) facilities, ten Prime Healthcare Services, Inc. (“Prime”) facilities, and two Alecto Healthcare Services LLC (“Alecto”) facilities are accounted for as DFLs. The components of our net investment in DFLs consisted of the following (in thousands):
As of
Minimum lease payments receivable
2,049,738
2,091,504
Estimated residual values
419,753
424,719
Less: Unearned income
(1,780,600
(1,832,170
Adeptus Health Transition Properties
As noted in previous filings, we had 16 properties transitioning away from Adeptus Health, Inc. (“Adeptus”) in stages over a two year period as part of Adeptus’ confirmed plan of reorganization under Chapter 11 of the Bankruptcy Code. At November 8, 2019, 11 of these properties have been re-leased and two properties in the Dallas market were sold in April 2019 and in July 2019 at their approximate book value. The remaining three facilities (representing less than 0.1% of our total assets at September 30, 2019) are vacant.
At September 30, 2019, Adeptus is current on its rent obligations to us. Although no assurances can be made that we will not recognize a loss in the future, we believe, at September 30, 2019, that the sale or re-leasing of the remaining three transition facilities will not result in any material loss or additional impairment.
Gilbert Facility
In the first quarter of 2018, we terminated the lease at our Gilbert, Arizona facility due to the tenant not meeting its rent obligations pursuant to the lease. As a result of the lease terminating, we recorded a charge to reserve against the straight-line rent receivables. All outstanding receivables due from the former tenant of Gilbert are completely reserved. At September 30, 2019, our Gilbert facility is vacant. Although no assurances can be made that we will not have any impairment charges in the future, we believe our investment in the Gilbert facility (less than 0.1% of total assets at September 30, 2019), is fully recoverable.
Alecto Facilities
At September 30, 2019, we own four acute care facilities and have a mortgage loan on a fifth property. In the 2018 third quarter, we lowered the carrying value of the four owned properties to fair value resulting in a $30 million charge. With the decline in the operating results of the facility tenant, we recorded a charge to reserve against the straight-line rent and other receivables outstanding in the 2019 first quarter and did not recognize any rent revenue in the three months ended September 30, 2019.
At September 30, 2019, our total overall investment in these properties is less than 1% of our total assets. On August 7, 2019, Alecto announced closure of two facilities in the Ohio Valley region, which we have an investment in of approximately $30 million. Although no assurances can be made that we will not recognize any impairment charges in the future, we believe our investment in these properties at September 30, 2019 is fully recoverable.
Loans
The following is a summary of our loans (in thousands):
3,180,580
1,586,520
The investment in sale leaseback transactions, along with the majority of the increase in mortgage and other loans, relates to the Prospect transaction. See subheading “Acquisitions” in this Note 3 for further details. Other loans typically consist of loans to our tenants for acquisitions and working capital purposes and include our shareholder loan made to the joint venture with Primotop in the amount of €290 million.
Concentrations of Credit Risk
We monitor concentration risk in several ways due to the nature of our real estate assets that are vital to the communities in which they are located and given our history of being able to replace inefficient operators of our facilities, if needed, with more effective operators:
1)
Facility concentration – At September 30, 2019, we had no investment in any single property greater than 3% of our total assets, which is down from the 4% at December 31, 2018.
2)
Operator concentration – For the nine months ended September 30, 2019, revenue from Steward and Prime of $265.1 million and $96.0 million, respectively, exceeded 10% of our total revenues. Of these two tenants, no single property represents greater than 4% of our total revenues. In comparison, Steward ($226.0 million), Prime ($95.4 million) and MEDIAN ($99.9 million) exceeded 10% of our total revenues for the first nine months of 2018.
3)
Geographic concentration – At September 30, 2019, investments in the U.S., Europe, and Australia represented approximately 73%, 20%, and 7%, respectively, of our total assets. In comparison, investments in the U.S. and Europe represented approximately 80% and 20%, respectively, of our total assets at December 31, 2018.
4)
Facility type concentration – For the nine months ended September 30, 2019, approximately 86% of our revenues are from our general acute care facilities, while rehabilitation and long-term acute care facilities make up 10% and 4%, respectively. These percentages are similar to those for the first nine months of 2018.
4. Debt
The following is a summary of debt (dollar amounts in thousands):
Revolving credit facility(A)
451,006
28,059
USD term loan
200,000
Australian term loan facility(B)
810,000
4.000% Senior Unsecured Notes due 2022(C)
544,950
573,350
5.500% Senior Unsecured Notes due 2024
300,000
6.375% Senior Unsecured Notes due 2024
500,000
3.325% Senior Unsecured Notes due 2025(C)
5.250% Senior Unsecured Notes due 2026
5.000% Senior Unsecured Notes due 2027
1,400,000
4.625% Senior Unsecured Notes due 2029
900,000
6,150,906
4,074,759
Debt issue costs, net and discount
(54,674
(37,370
(A)
Includes £367 million and £22 million of GBP-denominated borrowings that reflect the exchange rate at September 30, 2019 and December 31, 2018, respectively.
(B)
This note is Australian dollar-denominated and reflects the exchange rate at September 30, 2019.
(C)
These notes are Euro-denominated and reflect the exchange rate at September 30, 2019 and December 31, 2018, respectively.
As of September 30, 2019, principal payments due on our debt (which exclude the effects of any discounts, premiums, or debt issue costs recorded) are as follows (in thousands):
744,950
4,954,950
On July 26, 2019, we completed a $900 million senior unsecured notes offering (“4.625% Senior Unsecured Notes due 2029”). Interest on the notes is payable semi-annually on February 1 and August 1 of each year, commencing on February 1, 2020. The notes were issued at 99.5% of par value, pay interest at a rate of 4.625% per year and mature on August 1, 2029. We may redeem some or all of the notes at any time prior to August 1, 2024 at a “make whole” redemption price. On or after August 1, 2024, we may redeem some or all of the notes at a premium that will decrease over time. In addition, at any time prior to August 1, 2022, we may redeem up to 40% of the notes at a redemption price equal to 104.625% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, using proceeds from one or more equity offerings. In the event of a change in control, each holder of the notes may require us to repurchase some or all of the notes at a repurchase price equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest to the date of purchase.
We used the net proceeds from the 4.625% Senior Unsecured Notes due 2029 offering along with the proceeds from our July 2019 equity offering to finance the Prospect transaction described in Note 3. As a result of these offerings, we canceled the $1.55 billion senior unsecured bridge loan facility commitment from Barclays Bank PLC that we received on July 10, 2019. With this commitment, we paid $4.0 million of underwriting and other fees, which we fully expensed upon the cancellation of the commitment during the 2019 third quarter.
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Australian Term Loan Facility
On May 23, 2019, we entered into an AUD$1.2 billion term loan facility agreement with Bank of America, N.A., as administrative agent, and several lenders from time-to-time are parties thereto. The term loan facility matures on May 23, 2024. We used the proceeds under the facility to finance our acquisition of the Healthscope portfolio. The interest rate under the term loan is adjustable based on a pricing grid from 0.85% to 1.65%, dependent on our current senior unsecured credit rating. On June 27, 2019, we entered into an interest rate swap transaction (effective July 3, 2019) to fix the interest rate to approximately 1.20% for the duration of the loan. The current applicable margin for the pricing grid (which can vary based on the Company’s credit rating) is 1.25% for an all-in fixed rate of 2.45%. We paid approximately $8 million in one-time structuring and underwriting fees associated with this term loan facility.
In preparation of the joint venture with Primotop described under “Acquisitions” in Note 3, we issued secured debt on August 3, 2018, resulting in gross proceeds of €655 million. Subsequently, on August 31, 2018, the secured debt was contributed along with the related real estate of 71 properties to form the joint venture. Provisions of the secured debt include a term of seven years and a swapped fixed rate of approximately 2.3%.
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 revolving credit and term loan agreement (“Credit Facility”) limit the amount of dividends we can pay as a percentage of normalized adjusted funds from operations, as defined in the agreements, on a rolling four quarter basis. At September 30, 2019, the dividend restriction was 95% of normalized adjusted funds from operations (“NAFFO”). The indentures governing our senior unsecured notes also limit the amount of dividends we can pay based on the sum of 95% of NAFFO, proceeds of equity issuances and certain other net cash proceeds. Finally, our senior unsecured notes require us to maintain total unencumbered assets (as defined in the related indenture) of not less than 150% of our unsecured indebtedness.
In addition to these restrictions, the Credit Facility contains customary financial and operating covenants, including covenants relating to our total leverage ratio, fixed charge coverage ratio, secured leverage ratio, consolidated adjusted net worth, unsecured leverage ratio, and unsecured interest coverage ratio. This Credit Facility also contains customary events of default, including among others, nonpayment of principal or interest, material inaccuracy of representations and failure to comply with our covenants. If an event of default occurs and is continuing under the Credit Facility, the entire outstanding balance may become immediately due and payable. At September 30, 2019, we were in compliance with all such financial and operating covenants.
5. Common Stock/Partners’ Capital
Medical Properties Trust, Inc.
In the first nine months of 2019, we sold 36.1 million shares of common stock under our at-the-market equity offering program, resulting in net proceeds of approximately $649 million.
On July 18, 2019, we completed an underwritten public offering of 51.75 million shares (including the exercise of the underwriters’ 30-day option to purchase an additional 6.75 million shares) of our common stock, resulting in net proceeds of $858.1 million, after deducting underwriting discounts and commissions and estimated offering expenses.
MPT Operating Partnership, L.P.
At September 30, 2019, the Company has a 99.9% ownership interest in the Operating Partnership with the remainder owned by two other partners, which are employees.
During the nine months ended September 30, 2019, the Operating Partnership issued approximately 87.9 million units in direct response to the common stock offerings by Medical Properties Trust, Inc. during the same period.
6. Stock Awards
We adopted the 2019 Equity Incentive Plan (the “Equity Incentive Plan”) during the second quarter of 2019, which authorizes the issuance of common stock options, restricted stock, restricted stock units, deferred stock units, stock appreciation rights, performance units and other stock-based awards. The Equity Incentive Plan is administered by the Compensation Committee of the Board of Directors, and we have reserved 12.9 million shares of common stock for awards, out of which 11.4 million shares remain
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available for future stock awards as of September 30, 2019. Share-based compensation expense totaled $22.1 million and $11.7 million for the nine months ended September 30, 2019 and 2018, respectively.
7. Fair Value of Financial Instruments
We have various assets and liabilities that are considered financial instruments. We estimate that the carrying value of cash and cash equivalents and accounts payable and accrued expenses approximate their fair values. We estimate the fair value of our interest and rent receivables using Level 2 inputs such as discounting the estimated future cash flows using the current rates at which similar receivables would be made to others with similar credit ratings and for the same remaining maturities. The fair value of our mortgage loans and other loans (including the financing receivable from the sale leaseback transaction) are estimated by using Level 2 inputs such as discounting the estimated future cash flows using the current rates which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. We determine the fair value of our senior unsecured notes using Level 2 inputs such as quotes from securities dealers and market makers. We estimate the fair value of our revolving credit facility and term loan using Level 2 inputs based on the present value of future payments, discounted at a rate which we consider appropriate for such debt.
Fair value estimates are made at a specific point in time, are subjective in nature, and involve uncertainties and matters of significant judgment. Settlement of such fair value amounts may not be possible and may not be a prudent management decision. The following table summarizes fair value estimates for our financial instruments (in thousands):
December 31, 2018
Asset (Liability)
Book
Fair
24,793
24,942
Loans(1)
3,065,580
3,112,717
1,471,520
1,490,758
(6,096,232
(6,352,115
(4,037,389
(3,947,795
Excludes mortgage loans related to Ernest since they are recorded at fair value and discussed below.
Items Measured at Fair Value on a Recurring Basis
Our Ernest mortgage loans are measured at fair value on a recurring basis as we elected to account for these investments using the fair value option method in 2012 when we acquired an equity interest in and made an acquisition loan to Ernest. Such equity interest was sold and the acquisition loan was paid off in October 2018. We elected to account for these investments at fair value due to the size of the investments and because we believe this method was more reflective of current values. We have not made a similar election for other investments existing at September 30, 2019.
At September 30, 2019, these amounts were as follows (in thousands):
Asset Type
Original
Cost
Classification
115,000
Our mortgage 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.
During the first nine months of 2018, we recognized an unrealized loss on our investment in Ernest. There was no gain or loss recorded during the first nine months of 2019.
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8. Earnings Per Share
Our earnings per share were calculated based on the following (amounts in thousands):
Numerator:
Non-controlling interests’ share in net income
Participating securities’ share in earnings
(432
(290
Net income, less participating securities’ share in earnings
89,354
735,744
Denominator:
Basic weighted-average common shares
Dilutive potential common shares
1,352
1,443
Dilutive weighted-average common shares
(1,354
(808
243,692
937,394
1,198
850
Our earnings per common unit were calculated based on the following (amounts in thousands):
Basic weighted-average units
Dilutive potential units
Diluted weighted-average units
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9. 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. Leases (Lessee)
We have leased land on which certain of our facilities reside, along with corporate office and equipment. Our leases have remaining lease terms of 4.8 years to 47.3 years, some of which may include options to extend the leases up to, or just beyond, the depreciable life of the properties that occupy the leased land. Renewal options that we are reasonably certain to exercise are recognized in our right-of-use assets and lease liabilities. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at lease commencement date in determining the present value of future payments.
Properties subject to ground leases are subleased to our tenants, except for two Adeptus transition properties.
The following is a summary of our lease expense (in thousands):
Three Months
Ended September 30, 2019
Nine Months Ended September 30, 2019
Operating lease cost (1)
2,163
6,725
Finance lease cost:
Amortization of right-of-use assets
38
Interest on lease liabilities
Interest expense
32
85
Sublease income
(873
(2,682
Total lease cost
1,335
4,166
Includes short-term leases.
$1.4 million and $4.5 million for the three and nine months ended September 30, 2019, respectively, included in Property-related, with the remainder reflected in General and administrative expenses.
Fixed minimum payments due over the remaining lease term under non-cancelable leases of more than one year and amounts to be received in the future from non-cancelable subleases over their remaining lease term at September 30, 2019 are as follows (amounts in thousands):
Finance Leases
Amounts to
be Received
From
Subleases
Net
Payments
2019 (1)
1,487
31
702
6,040
125
(3,322
2,843
6,219
(3,439
2,906
6,407
128
(3,567
2,968
6,470
129
(3,568
3,031
183,294
5,045
(92,095
96,244
Total undiscounted minimum lease payments
209,917
5,584
(106,807
108,694
Less: interest
(134,274
(3,653
Present value of lease liabilities
75,643
1,931
Represents remaining three months of 2019.
Reflects certain ground leases, in which we are the lessee, that have longer initial fixed terms than our existing sublease to our tenants. However, we would expect to either renew the related sublease, enter into a lease with a new tenant or early terminate the ground lease to reduce or avoid any significant impact from such ground leases.
Supplemental balance sheet information is as follows (in thousands, except lease terms and discount rate):
Right of use assets:
Operating leases - real estate
Land, buildings and improvements,
intangible lease assets, and other
58,753
Finance leases - real estate
1,900
Real estate right of use assets, net
60,653
Operating leases - corporate
10,261
Total right of use assets, net
70,914
Lease liabilities:
Operating leases
Obligations to tenants and
other lease liabilities
Financing leases
Total lease liabilities
77,574
Weighted average remaining lease term:
31.9
Finance leases
37.2
Weighted average discount rate:
6.3
%
6.6
26
The following is supplemental cash flow information (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
4,408
Operating cash flows from finance leases
83
Financing cash flows from finance leases
Right-of-use assets obtained in exchange for lease obligations:
1,575
11. Subsequent Events
Investments
On October 25, 2019, we entered into an agreement to finance the development of and lease an acute care hospital in Clear Lake, Texas, for $27.5 million. This facility will be leased to NeuroPsychiatric Hospitals pursuant to a long-term lease and is expected to open in the third quarter of 2020.
On November 5, 2019, we entered into definitive agreements pursuant to which we will acquire a portfolio of 10 acute care hospitals owned and operated by LifePoint for a combined purchase price of approximately $700.0 million. Under the terms of the agreements, we will lease back the hospitals to LifePoint under one master lease agreement. The master lease will have a 20-year initial term and two five-year extension options, plus annual escalators at the greater of 2% or the change in the applicable CPI, with a cap of 4%.
On November 5, 2019, we completed the sale of the real estate of two acute care hospitals for net proceeds to us of approximately $93.0 million, which is in excess of our net book value.
Financing
On November 4, 2019, we filed Articles of Amendment to our charter with the Maryland State Department of Assessments and Taxation increasing the number of authorized shares of common stock, par value $0.001 per share, available for issuance from 500,000,000 to 750,000,000.
On November 8, 2019, we completed an underwritten public offering of 57.5 million shares (including the exercise of the underwriters’ 30-day option to purchase an additional 7.5 million shares) of our common stock, resulting in net proceeds of $1.026 billion, after deducting underwriting discounts and commissions and estimated offering expenses.
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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 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, 2018.
Forward-Looking Statements.
This quarterly report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or future performance, achievements or transactions or events to be materially different from those expressed or implied by such forward-looking statements, including, but not limited to, the risks described in our Annual Report on Form 10-K and as updated in our quarterly reports on Form 10-Q for future periods, and current reports on Form 8-K as we file them with the SEC under the Securities Exchange Act of 1934, as amended. Such factors include, among others, the following:
•
the risk that a condition to closing under the agreements governing any or all of our outstanding transactions that have not closed as of the date hereof (including the transactions described in Note 11 to Item 1 of this Quarterly Report on Form 10-Q) may not be satisfied;
the possibility that the anticipated benefits from any or all of the transactions we enter into will take longer to realize than expected or will not be realized at all;
the competitive environment in which we operate;
the execution of our business plan;
financing risks;
acquisition and development risks;
potential environmental contingencies and other liabilities;
adverse developments affecting the financial health of one or more of our tenants, including insolvency;
other factors affecting the real estate industry generally or the healthcare real estate industry in particular;
our ability to maintain MPT’s status as a REIT for federal and state income tax purposes;
our ability to attract and retain qualified personnel;
changes in foreign currency exchange rates;
changes in federal, state or local tax laws in the U.S., Europe, Australia or other jurisdictions in which we may own healthcare facilities;
healthcare and other regulatory requirements of the U.S., Europe, Australia and other foreign countries; and
the political, economic, business, real estate and other market conditions of the U.S., Europe, Australia, and other foreign jurisdictions in which we may own healthcare facilities, which may have a negative effect on the following, among other things:
the financial condition of our tenants, our lenders, or institutions that hold our cash balances, which may expose us to increased risks of default by these parties;
our ability to obtain equity or debt financing on attractive terms or at all, which may adversely impact our ability to pursue acquisition and development opportunities, refinance existing debt and our future interest expense; and
the value of our real estate assets, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing secured by our properties or on an unsecured basis.
Key Factors that May Affect Our Operations
Our revenue is derived from rents we earn pursuant to the lease agreements with our tenants, from interest income from loans to our tenants and other facility owners and from profits or equity interests in certain of our tenants’ operations. Our tenants operate in
the healthcare industry, generally providing medical, surgical and rehabilitative care to patients. The capacity of our tenants to pay our rents and interest is dependent upon their ability to conduct their operations at profitable levels. We believe that the business environment of the industry segments in which our tenants operate is generally positive for efficient operators. However, our tenants’ operations are subject to economic, regulatory and market conditions that may affect their profitability, which could impact our results. Accordingly, we monitor certain key factors, changes to which we believe may provide early indications of conditions that may affect the level of risk in our portfolio.
Key factors that we consider in underwriting prospective tenants and borrowers and in monitoring the performance of existing tenants and borrowers include the following:
admission levels and surgery/procedure/diagnosis volumes by type;
the current, historical and prospective operating margins (measured by earnings before interest, taxes, depreciation, amortization and facility rent) of each tenant or borrower and at each facility;
the ratio of our tenants’ or borrowers’ operating earnings both to facility rent and to facility rent plus other fixed costs, including debt costs;
changes in revenue sources of our tenants’ or borrowers’ revenue, including the relative mix of public payors (including Medicare, Medicaid/MediCal, and managed care in the U.S., pension funds in Germany and National Health Service in the United Kingdom) and private payors (including commercial insurance and private pay patients);
trends in tenants’ cash collections, including comparison to recorded net patient service revenues;
tenants’ free cash flows;
the effect of evolving healthcare legislation and other regulations on our tenants’ or borrowers’ profitability and liquidity; and
the competition and demographics of the local and surrounding areas in which the tenants or borrowers operate.
Certain business factors, in addition to those described above that directly affect our tenants and borrowers, will likely materially influence our future results of operations. These factors include:
trends in the cost and availability of capital, including market interest rates, that our prospective tenants may use for their real estate assets instead of financing their real estate assets through lease structures;
changes in healthcare regulations that may limit the opportunities for physicians to participate in the ownership of healthcare providers and healthcare real estate;
reductions in reimbursements from Medicare, state healthcare programs, and commercial insurance providers that may reduce our tenants’ or borrowers’ profitability and our lease rates;
competition from other financing sources; and
the ability of our tenants and borrowers to access funds in the credit markets.
CRITICAL ACCOUNTING POLICIES
Refer to our 2018 Annual Report on Form 10-K for a discussion of our critical accounting policies, which include revenue recognition, investments in real estate, purchase price allocation, loans, losses from rent and interest receivables, stock-based compensation, our fair value option election, and our accounting policy on consolidation. During the nine months ended September 30, 2019, there were no material changes to these policies except for those described in Note 2 to Item 1 of this Form 10-Q.
Overview
We are a self-advised REIT focused on investing in and owning net-leased healthcare facilities across the U.S. and selectively in foreign jurisdictions. We have operated as a REIT since 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.
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At September 30, 2019, our portfolio consisted of 348 properties leased or loaned to 38 operators, of which three are under development and 11 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., Europe and Australia. Our total assets are made up of the following (dollars in thousands):
As of September 30,
% of
As of December 31,
Real estate owned (gross)(1)
9,256,035
74.3
5,868,340
66.4
10.2
13.7
4.2
Construction in progress
1.1
84,172
1.0
6.2
5.9
494,976
4.0
784,553
8.8
Total assets
100.0
Includes our investments in direct finance leases and sale leaseback transactions.
Additional Concentration Details
On a pro forma gross asset basis (as defined in the “Reconciliation of Non-GAAP Financial Measures” section of Item 2 of this Quarterly Report on Form 10-Q), our concentration as of September 30, 2019 as compared to December 31, 2018 is as follows (dollars in thousands):
Pro Forma Gross Assets by Operator
As of September 30, 2019
As of December 31, 2018
Operators
Total Pro Forma
Gross Assets
Percentage of
Steward
3,953,099
29.2
3,823,625
38.0
Prospect
1,554,823
11.5
Prime
1,143,557
8.4
1,124,711
11.2
MEDIAN
999,732
7.4
1,075,504
10.7
Healthscope
863,002
6.4
858,569
8.5
Other operators
4,131,153
30.4
2,647,369
26.3
908,969
6.7
528,669
5.3
13,554,335
10,058,447
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Pro Forma Gross Assets by U.S. State and Country
U.S. States and Other Countries
Massachusetts
1,489,359
11.0
1,469,423
14.6
California
1,294,937
9.6
522,753
5.2
Texas
1,254,397
9.3
1,126,217
Utah
1,065,674
7.9
1,054,539
10.5
Pennsylvania
575,264
141,893
1.4
All other states
3,850,836
28.4
2,972,116
29.5
Other domestic assets
710,512
482,992
4.8
Total U.S.
10,240,979
75.6
7,769,933
77.2
Germany
1,088,936
8.0
1,164,973
11.6
Australia
United Kingdom
582,521
4.3
100,823
Switzerland
467,351
3.4
Italy and Spain
113,089
0.8
118,472
1.2
Other international assets
198,457
1.5
45,677
0.5
Total International
3,313,356
24.4
2,288,514
22.8
Grand Total
On an individual property basis, we had no investment in any single property greater than 2.7% of our total pro forma gross assets as of September 30, 2019.
On an adjusted revenue basis (as defined in the “Reconciliation of Non-GAAP Financial Measures” section of Item 2 of this Quarterly Report on Form 10-Q), concentration for the nine months ended September 30, 2019 as compared to the prior year is as follows (dollars in thousands):
Adjusted Revenue by Operator
Total Adjusted
Revenue
265,060
40.2
225,989
36.6
95,961
95,439
15.5
66,231
10.1
99,924
16.2
Ernest
38,744
52,752
LifePoint
34,420
31,484
5.1
157,762
24.0
112,104
18.1
658,178
617,692
Adjusted Revenue by U.S. State and Country
102,893
15.6
85,054
13.8
88,818
13.5
87,588
14.2
65,128
9.9
62,598
56,143
45,326
7.3
Arizona
37,590
5.7
35,204
196,616
29.9
184,091
29.8
547,188
83.1
499,861
80.9
72,135
106,198
17.2
Australia, United Kingdom, Switzerland, Italy, and
Spain
38,855
11,633
1.9
110,990
16.9
117,831
19.1
Adjusted Revenue by Facility Type
Facility Types
General acute care hospitals
530,383
80.6
449,445
72.8
Rehabilitation hospitals
105,369
16.0
145,442
23.5
Long-term acute care hospitals
22,426
22,805
3.7
Results of Operations
Three Months Ended September 30, 2019 Compared to September 30, 2018
Net income for the three months ended September 30, 2019, was $89.8 million, compared to $736.0 million for the three months ended September 30, 2018. This decrease is primarily due to the $695.2 million of gains on sales of real estate in the 2018 third quarter, including the joint venture transaction with Primotop and the North Cypress disposal described in Note 3 to Item 1 of this Form 10-Q. This decrease is partially offset by incremental revenue from new investments in 2018 and 2019. Funds from operations (“FFO”), after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $147.5 million for the 2019 third quarter as compared to $127.2 million for the 2018 third quarter. This increase in FFO is primarily due to incremental revenue from new investments in 2018 and 2019.
A comparison of revenues for the three month periods ended September 30, 2019 and 2018 is as follows (dollar amounts in thousands):
Year over
Year
Change
55.3
60.0
69.6
7.8
9.7
-7.9
23.1
21.0
25.1
14.1
Our total revenue for the 2019 third quarter is up $27.8 million, or 14%, from the prior year. This increase is made up of the following:
Operating lease revenue (includes rent billed and straight-line rent) – up $18.9 million from the prior year of which $24.4 million is from incremental revenue from acquisitions ($13.2 million of which relates to Healthscope), along with expansion and development projects, and $12.9 million of additional lease revenue related to the conversion of five Steward mortgage loans to fee simple assets in 2018. This increase is partially offset by a net $18.9 million of lower revenues due to property dispositions in 2018 (majority of which relates to the formation of the Primotop joint venture in the 2018 third quarter) and approximately $1.2 million from unfavorable foreign currency fluctuations.
Income from direct financing leases – down $1.5 million primarily due to not recording rent on two Alecto properties during the three months ended September 30, 2019 as described in Note 3 to Item 1 of this Form 10-Q.
Interest and other income – up $10.4 million from the prior year due to the following:
-
Interest from loans – up $7.4 million over the prior year of which $20.0 million is from incremental revenue from new loans made after September 2018 (of which $16.4 million relates to Prospect). This increase is partially offset by $8.3 million of lower interest revenue related to Steward mortgage loans converted to fee simple assets in 2018 and $4.4 million from the payoff of our Ernest acquisition and other loans in the fourth quarter of 2018.
Other income – up $3.0 million due to the implementation of the lease accounting standard on January 1, 2019, whereby we are now reflecting certain payments made by our tenants, including ground lease payments and reimbursements of property taxes and insurance, as revenue. This revenue is offset by a corresponding expense in the “Property-related” line on the Condensed Consolidated Statements of Net Income.
Interest expense, for the quarters ended September 30, 2019 and 2018, totaled $64.5 million and $57.2 million, respectively. This increase is primarily related to additional interest from the $900 million senior unsecured notes offering in the third quarter of 2019.
Real estate depreciation and amortization during the third quarter of 2019 increased to $40.8 million from $29.9 million in 2018 due to the new investments made in 2019, partially offset by property sales in 2018 and the conversion of the five Steward mortgage loans to fee simple assets.
Property-related expenses totaled $4.0 million and $2.7 million for the quarters ended September 30, 2019 and 2018, respectively. As noted above under the caption “Other income,” this increase was primarily due to the grossing up of certain expenses (such as ground lease, property taxes and insurance) as part of our implementation of the lease accounting standard on January 1, 2019.
General and administrative expenses totaled $23.3 million for the 2019 third quarter, which is a $2.3 million increase from the prior year third quarter. The majority of the increase relates to stock compensation expense from our performance-based awards. Given our strong performance in 2018 with a total shareholder return of 25% along with our performance to-date in 2019, we believe it is more likely that such performance awards will be earned and have adjusted our stock compensation expense accordingly. We do expect a quarterly run-rate for general and administrative expenses to be in the $23 million to $25 million range.
During the three months ended September 30, 2018, we completed the joint venture transaction with Primotop (as more fully described in Note 3 to Item 1 of this Form 10-Q), in which we sold 71 inpatient rehabilitation hospitals by way of a joint venture arrangement, as well as one general acute care hospital located in Texas, resulting in a total gain of $695.2 million. This gain was partially offset by a $48 million adjustment to lower the carrying value of the real estate to fair value on seven of our transitioning Adeptus Health facilities and four of our Alecto facilities – see Note 3 to Item 1 of this Form 10-Q for further details. During the three months ended September 30, 2019, we sold one Adeptus transition facility that was vacant for a gain of $0.2 million.
Earnings from equity interests totaled $3.5 million for the quarter ended September 30, 2019, a $0.4 million increase from the same period in 2018 due to our investment in the Primotop joint venture made in the third quarter of 2018 and our investment in Switzerland made at the end of the second quarter of 2019, partially offset by a lower return year-over-year in our Hoboken investment.
In the third quarter of 2019, we recognized a $4.0 million unutilized financing fee charge related to the commitment fee paid on the unused bridge loan for the Prospect transaction. There was no similar charge in the 2018 third quarter.
Income tax expense typically includes U.S. federal and state income taxes on our TRS entities, as well as non-U.S. income based or withholding taxes on certain investments located in jurisdictions outside the U.S. The $0.7 million income tax benefit for the three months ended September 30, 2019, represents the benefit from our TRS in the quarter. The benefit is partially offset by tax expense from our international investments. We utilize the asset and liability method of accounting for income taxes. Deferred tax
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assets are recorded to the extent we believe these assets will more likely than not be realized. In making such determination, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based upon our review of all positive and negative evidence, including our three-year cumulative pre-tax book loss position in certain entities, we concluded that a full valuation allowance of $3 million should continue to be recorded against certain of our international net deferred tax assets at September 30, 2019. In the future, if we determine that it is more likely than not that we will realize our net deferred tax assets, we will reverse the applicable portion of the valuation allowance, recognize an income tax benefit in the period in which such determination is made, and incur higher income taxes in future periods as income earned.
Nine Months Ended September 30, 2019 Compared to September 30, 2018
Net income for the nine months ended September 30, 2019, was $245.0 million, compared to $938.2 million for the nine months ended September 30, 2018. This decrease is primarily due to the $720.8 million of gains on sales of real estate during the first nine months of 2018 from the disposal of five properties and the joint venture transaction with Primotop, partially offset by the $48 million adjustment to lower the carrying value of certain real estate to fair value in 2018- see Note 3 to Item 1 of this form 10-Q for additional details. FFO, after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $386.2 million for the first nine months of 2019 as compared to $388.6 million for the first nine months of 2018. This decrease in FFO is primarily due to lower revenue from the property sales in 2018, partially offset by revenues from new investments in 2019.
A comparison of revenues for the nine month periods ended September 30, 2019 and 2018 is as follows (dollar amounts in thousands):
57.5
61.1
-6.8
12.9
8.1
56.3
8.7
9.2
-6.2
20.9
21.6
-4.0
-1.0
Our total revenue for the first nine months of 2019 is down $6.2 million, or 1%, from the prior year. This decrease is made up of the following:
Operating lease revenue (includes rent billed and straight-line rent) – up $2.4 million from the prior year of which $53.1 million of additional lease revenue is related to the conversion of five Steward mortgage loans to fee simple assets in 2018, and $34.9 million is from incremental revenue from acquisitions ($16.8 million of which relates to Healthscope). This increase is partially offset by a net $80.0 million of lower revenues due to property dispositions in 2018 (majority of which relates to the formation of the Primotop joint venture in the 2018 third quarter) and approximately $7.1 million from unfavorable foreign currency fluctuations.
Income from direct financing leases – down $3.4 million primarily due to lower revenue from Alecto properties, as more fully described in Note 3 to Item 1 of this Form 10-Q.
Interest and other income – down $5.2 million from the prior year due to the following:
Interest from loans – down $15.9 million over the prior year of which $34.9 million is the result of lower interest revenue related to Steward mortgage loans converted to fee simple assets in 2018 and $13.2 million is from the payoff of our Ernest acquisition and other loans in the fourth quarter of 2018. This is partially offset by $32 million of interest revenue earned on new loan investments ($16.4 million of which relates to Prospect and $11.1 million relates to the shareholder loan with the Primotop joint venture).
Other income – up $10.7 million due to the implementation of the lease accounting standard on January 1, 2019, whereby we are now reflecting certain payments made by our tenants, including ground lease payments and reimbursements of property taxes and insurance, as revenue. This revenue is offset by a corresponding expense in the “Property-related” line on the Condensed Consolidated Statements of Net Income.
Interest expense, for the nine months ended September 30, 2019 and 2018, totaled $167.4 million and $172.4 million, respectively. This decrease is primarily related to the lower average revolving debt balance during the first nine months of 2019 compared to the first nine months of 2018 as we paid down our revolver with proceeds from property sales in 2018. This decrease was partially offset by additional interest from the Australian term loan and the $900 million senior unsecured notes offering during the first nine months of 2019.
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Real estate depreciation and amortization during the first nine months of 2019 increased to $108.2 million from $100.2 million in the same period of 2018, due to new investments made in 2018 and 2019 and the conversion of the five Steward mortgage loans to fee simple assets, partially offset by property sales in 2018.
Property-related expenses totaled $15.4 million and $6.8 million for the nine months ended September 30, 2019 and 2018, respectively. As noted above under the caption “Other income,” this increase was primarily due to the grossing up of certain expenses (such as ground lease, property taxes and insurance) as part of our implementation of the lease accounting standard on January 1, 2019.
General and administrative expenses totaled $69.0 million for the first nine months of 2019, which is a $10.7 million increase from the prior year. The majority of the increase relates to stock compensation expense from our performance-based awards. Given our strong performance in 2018 with a total shareholder return of 25% along with our performance to-date in 2019, we believe it is more likely that such performance awards will be earned and have adjusted our stock compensation expense accordingly.
During the nine months ended September 30, 2018, we sold one acute care property (operated by Steward), three long-term acute care properties (operated by Vibra), 71 inpatient rehabilitation hospitals (operated by MEDIAN) by way of a joint venture arrangement, and one general acute care hospital located in Texas (operated by North Cypress), resulting in a total net gain of $720.8 million. This gain was partially offset by a $48 million adjustment to lower the carrying value of the real estate to fair value on seven of our transitioning Adeptus Health facilities and four of our Alecto facilities – see Note 3 to Item 1 of this Form 10-Q for further details.
Earnings from equity interests was $11.6 million for the first nine months of 2019, up $1.1 million from the same period of 2018 due to our investment in the Primotop joint venture made in the third quarter of 2018 and our investment in Switzerland made at the end of the second quarter of 2019, partially offset by a lower return year-over-year in our Hoboken investment.
During the first nine months of 2019, we recognized a $4.0 million unutilized financing fee charge related to the commitment fee paid on the unused bridge loan for the Prospect transaction. We also incurred a $0.9 million charge of accelerated commitment fee amortization expense in the 2019 second quarter associated with our Australian term loan facility. There were no similar charges during the first nine months of 2018.
Income tax expense typically includes U.S. federal and state income taxes on our TRS entities, as well as non-U.S. income based or withholding taxes on certain investments located in jurisdictions outside the U.S. The $3.4 million income tax benefit for the nine months ended September 30, 2019, represents the benefit from straight-line rent and other write-offs on our TRS in this period. The benefit is partially offset by tax expense from our international investments. We utilize the asset and liability method of accounting for income taxes. Deferred tax assets are recorded to the extent we believe these assets will more likely than not be realized. In making such determination, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based upon our review of all positive and negative evidence, including our three-year cumulative pre-tax book loss position in certain entities, we concluded that a full valuation allowance of $3 million should continue to be recorded against certain of our international net deferred tax assets at September 30, 2019. In the future, if we determine that it is more likely than not that we will realize our net deferred tax assets, we will reverse the applicable portion of the valuation allowance, recognize an income tax benefit in the period in which such determination is made, and incur higher income taxes in future periods as income earned.
Reconciliation of Non-GAAP Financial Measures
Investors and analysts following the real estate industry utilize funds from operations, or FFO, as a supplemental performance measure. FFO, reflecting the assumption that real estate asset values rise or fall with market conditions, principally adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assumes that the value of real estate diminishes predictably over time. We compute FFO in accordance with the definition provided by the National Association of Real Estate Investment Trusts, or Nareit, which represents net income (loss) (computed in accordance with GAAP), excluding gains (losses) on sales of real estate and impairment charges on real estate assets, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.
In addition to presenting FFO in accordance with the Nareit definition, we also disclose normalized FFO, which adjusts FFO for items that relate to unanticipated or non-core events or activities or accounting changes that, if not noted, would make comparison to prior period results and market expectations less meaningful to investors and analysts.
We believe that the use of FFO, combined with the required GAAP presentations, improves the understanding of our operating results among investors and the use of normalized FFO makes comparisons of our operating results with prior periods and other companies more meaningful. While FFO and normalized FFO are relevant and widely used supplemental measures of operating and financial performance of REITs, they should not be viewed as a substitute measure of our operating performance since the measures do not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, which can be significant economic costs that could materially impact our results of operations. FFO and normalized FFO should not be considered an alternative to net income (loss) (computed in accordance with
35
GAAP) as indicators of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity.
The following table presents a reconciliation of net income attributable to MPT common stockholders to FFO for the three and nine months ended September 30, 2019 and 2018 (in thousands, except per share data):
For the Three Months Ended
For the Nine Months Ended
September 30, 2018
FFO information:
50,163
32,641
130,424
104,314
(209
(647,204
Funds from operations
139,308
121,181
374,054
368,886
Write-off of straight-line rent and other, net of tax benefit
4,230
4,321
3,959
Acquisition costs, net of tax benefit
1,661
2,072
Normalized funds from operations
147,497
127,163
386,159
388,573
Per diluted share data:
0.12
0.09
0.32
0.29
(1.76
(1.84
0.33
0.92
1.01
0.01
0.02
0.04
0.35
0.95
1.06
Pro Forma Gross Assets
Pro forma gross assets is total assets before accumulated depreciation/amortization (adjusted for our unconsolidated joint ventures) and assumes all real estate binding commitments on new investments and unfunded amounts on development deals and commenced capital improvement projects as of the applicable reporting periods are fully funded, and assumes cash on hand is used in these transactions. We believe pro forma 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 pro forma gross assets (in thousands):
Add:
Binding real estate commitments on new investments(1)
27,500
865,165
Unfunded amounts on development deals and commenced
capital improvement projects(2)
130,096
229,979
571,589
464,984
Incremental gross assets of our joint ventures(3)
530,593
375,544
Less:
(157,596
(720,868
Total pro forma gross assets
The 2019 column reflects a commitment to finance the development of a facility in Texas, and the 2018 column reflects the acquisition of 11 facilities in Australia in June 2019 along with the acquisition of one property in Germany in February 2019.
Includes $43.3 million and $94.1 million of unfunded amounts on ongoing development projects and $86.8 million and $135.9 million of unfunded amounts on capital improvement and development projects that have commenced rent, as of September 30, 2019 and December 31, 2018, respectively.
(3)
Adjustment needed to reflect our share of our joint ventures’ gross assets.
Adjusted revenue
Adjusted revenue is total revenues adjusted for our pro rata portion of similar revenues in our joint venture arrangements. We believe adjusted revenue is useful to investors as it provides a more complete view of revenue across all of our investments and allows for better understanding of our revenue concentration. The following table presents a reconciliation of total revenues to total adjusted revenue (in thousands):
Revenue from properties owned through joint venture arrangements
60,419
13,748
Total adjusted revenues
LIQUIDITY AND CAPITAL RESOURCES
2019 Cash Flow Activity
During the nine months ended September 30, 2019, we generated approximately $330 million of cash flows from operating activities, primarily consisting of rent and interest from mortgage and other loans. We used these operating cash flows to fund our dividends of $291.7 million.
Certain investing and financing activities in the first nine months of 2019 included:
a)
Purchased $3.7 billion in real estate assets representing more than 70 facilities across four countries;
b)
Funded approximately $260 million of development, capital addition and other projects;
c)
Sold 36.1 million shares of common stock under our at-the-market equity offering program, resulting in net proceeds of approximately $649 million;
d)
Closed on an Australian term loan facility for approximately $837 million to help fund the Healthscope acquisition; and
e)
Completed an underwritten public offering of 51.75 million shares, resulting in net proceeds of $858.1 million. Completed a $900 million senior unsecured notes offering resulting in net proceeds of approximately $885 million. We used proceeds from these offerings to invest in 16 facilities for $1.55 billion leased or loaned to Prospect.
Subsequent to quarter-end, we completed an underwritten public offering of 57.5 million shares resulting in net proceeds of approximately $1.026 billion. We plan to use these proceeds to finance the commitments described in Note 11 in Item 1 of this Form 10-Q.
2018 Cash Flow Activity
During the nine months ended September 30, 2018, we generated $299.1 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 $272.4 million and certain investing and financing activities.
Certain investing and financing activities in the first nine months of 2018 included:
Generated $2.3 billion of cash proceeds from the joint venture transaction with Primotop (which included the disposal of 71 inpatient rehabilitation hospitals in Germany and issuance of secured debt) and the sale of five other acute care and long-term acute care properties. Approximately $580 million was reinvested in the joint venture with Primotop in the form of an equity interest and shareholder loan;
Funded the acquisition of one property in Pasco, Washington for $17.5 million and three properties in Germany for €17.3 million;
Originated $174.5 million in mortgage loans;
Funded approximately $91.5 million of development and capital improvement projects;
Acquired four facilities operated by Steward by converting the $525.4 million in mortgage loans on the same properties plus cash consideration; and
f)
We used the net cash received from the joint venture transaction with Primotop to reduce our revolver by approximately $820 million during the nine months ended September 30, 2018.
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Short-term Liquidity Requirements:
As of September 30, 2019, we have no debt principal payments due in the next twelve months — see debt maturity schedule below. At November 8, 2019, and subsequent to our equity offering in which we raised $1.026 billion, our availability under our revolving credit facility plus cash on-hand approximated $2 billion. We believe this liquidity along with our current monthly cash receipts from rent and loan interest, and regular distributions from our joint venture arrangements, is sufficient to fund our operations, debt and interest obligations, our firm commitments (including expected funding requirements on our development projects and the LifePoint transaction), and dividends in order to comply with REIT requirements for the next twelve months.
Long-term Liquidity Requirements:
As of September 30, 2019, we have no debt principal payments due between now and January 2021 when our revolving credit facility comes due (which can be extended by one year). Our liquidity at November 8, 2019, and subsequent to our equity offering that raised $1.026 billion in proceeds, of approximately $2 billion, along with our current monthly cash receipts from rent and loan interest, and regular distributions from our joint venture arrangements, is sufficient to fund our operations, debt and interest obligations, our firm commitments (including expected funding requirements on our development projects and the LifePoint transaction), and dividends in order to comply with REIT requirements for the next twelve months.
However, our acquisition pipeline continues to remain strong, so in order to fund our acquisitions and to fund debt maturities coming due in later years, we will need additional capital, and we believe the following sources of capital are generally available in the market and we may access one or a combination of them:
issuance of new USD, EUR or GBP denominated debt securities, including senior unsecured notes;
sale of equity securities;
amending or entering into new bank term loans;
placing new secured loans on real estate located in and outside the U.S.; and/or
proceeds from strategic property sales.
However, there is no assurance that conditions will be favorable for such possible transactions or that our plans will be successful.
As of September 30, 2019, principal payments due on our debt (which excludes the effects of any discounts, premiums, or debt issue costs recorded) are as follows (in thousands):
Disclosure of Contractual Obligations
We presented our contractual obligations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and updated the schedule in the first two quarters of 2019. Except for changes to our debt, there have been no other significant changes as of September 30, 2019. However, see Note 11 for activities subsequent to September 30, 2019.
The following table updates our contractual obligations schedule for updates to our debt (in thousands):
Contractual Obligations
Less Than
1 Year (1)
1-3 Years
3-5 Years
After
5 Years
83,828
83,250
1,149,750
1,316,828
This column represents the remaining three months of 2019.
Distribution Policy
The table below is a summary of our distributions declared during the two year period ended September 30, 2019:
Declaration Date
Record Date
Date of Distribution
Distribution
per Share
August 15, 2019
September 12, 2019
October 10, 2019
May 23, 2019
June 13, 2019
July 11, 2019
February 14, 2019
March 14, 2019
April 11, 2019
November 15, 2018
December 13, 2018
January 10, 2019
August 16, 2018
September 13, 2018
October 11, 2018
May 24, 2018
June 14, 2018
July 12, 2018
February 15, 2018
March 15, 2018
April 12, 2018
November 9, 2017
December 7, 2017
January 11, 2018
0.24
We intend to pay to our stockholders, within the time periods prescribed by the Internal Revenue Code (“Code”), all or substantially all of our annual taxable income, including taxable gains from the sale of real estate and recognized gains on the sale of securities. It is our policy to make sufficient cash distributions to stockholders in order for us to maintain our status as a REIT under the Code and to avoid corporate income and excise taxes on undistributed income. However, our Credit Facility limits the amount of dividends we can pay - see Note 4 in Item 1 of this Form 10-Q for further information.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. We may or may not elect to use financial derivative instruments to hedge interest rate or foreign currency exposure. For interest rate hedging, these decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. For foreign currency hedging, these decisions are principally based on how our investments are financed, the long-term nature of our investments, the need to repatriate earnings back to the U.S. and the general trend in foreign currency exchange rates.
In addition, the value of our facilities will be subject to fluctuations based on changes in local and regional economic conditions and changes in the ability of our tenants to generate profits, all of which may affect our ability to refinance our debt, if necessary. The changes in the value of our facilities would be impacted also by changes in “cap” rates, which is measured by the current base rent divided by the current market value of a facility.
Our primary exposure to market risks relates to fluctuations in interest rates and foreign currency. The following analyses present the sensitivity of the market value, earnings and cash flows of our significant financial instruments to hypothetical changes in interest rates and exchange rates as if these changes had occurred. The hypothetical changes chosen for these analyses reflect our view of changes that are reasonably possible over a one-year period. These forward looking disclosures are selective in nature and only address the potential impact from these hypothetical changes. They do not include other potential effects which could impact our business as a result of changes in market conditions. In addition, they do not include measures we may take to minimize our exposure such as entering into future interest rate swaps to hedge against interest rate increases on our variable rate debt.
Interest Rate Sensitivity
For fixed rate debt, interest rate changes affect the fair market value but do not impact net income to common stockholders or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact net income to common stockholders and cash flows, assuming other factors are held constant. At September 30, 2019, our outstanding debt totaled $6.1 billion, which consisted of fixed-rate debt, after considering the interest rate swap on the Australian term loan, of approximately $5.4 billion and variable rate debt of $0.7 billion. If market interest rates increase by 1%, the fair value of our debt at September 30, 2019 would decrease by $6.0 million. Changes in the fair value of our fixed rate debt will not have any impact on us unless we decided to repurchase the debt in the open market.
If market rates of interest on our variable rate debt increase by 1%, the increase in annual interest expense on our variable rate debt would decrease future earnings and cash flows by $0.2 million per year. If market rates of interest on our variable rate debt decrease by 1%, the decrease in interest expense on our variable rate debt would increase future earnings and cash flows by $0.2 million per year. This assumes that the average amount outstanding under our variable rate debt for a year is $0.7 billion, the balance of such variable rate debt at September 30, 2019.
Foreign Currency Sensitivity
With our investments in Germany, the United Kingdom, Spain, Italy, Switzerland, and Australia, we are subject to fluctuations in the euro, British pound, Swiss franc and Australian dollar to U.S. dollar currency exchange rates. Increases or decreases in the value of the respective non-U.S. dollar currencies 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 2019 and on an annualized basis, a 5% change to the following exchange rates would impact our net income and FFO by the amounts below (in thousands):
Net Income Impact
FFO Impact
Euro (€)
172
1,367
British pound (£)
304
725
Swiss franc (CHF)
418
978
Australian dollar (AUD $)
508
1,482
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 providing reasonable assurance that information required to be disclosed by us in the reports that we file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings.
The information contained in Note 9 “Contingencies” of Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated by reference into this Item 1.
Item 1A. Risk Factors.
Please review the risk factors disclosed under the section entitled “Risk Factors” beginning on page 15 of our Annual Report on Form 10-K for the year ended December 31, 2018 and filed with the SEC on March 1, 2019, as well as the supplemental risk factor below. There have been no other material changes to the Risk Factors as presented in our Annual Report on Form 10-K for the year ended December 31, 2018.
We have experienced and expect to continue to experience rapid growth, and our failure to effectively manage our growth may adversely impact our financial condition, results of operations and cash flows, which could negatively affect our ability to make distributions to our stockholders.
We have experienced and expect to continue to experience rapid growth through prior acquisitions and the potential acquisition of healthcare properties we are currently evaluating. Year-to-date, our total assets have grown by over 40%, and we have expanded our presence to seven countries. In addition, we continually evaluate property acquisition and development opportunities as they arise, and we typically have a number of potential acquisition and development transactions under active consideration.
There is no assurance that we will be able to adapt our management, administrative, accounting and operational systems, or hire and retain sufficient operational staff, to manage the facilities we have acquired and those that we may acquire or develop in the future. Additionally, investing in real estate located in foreign countries creates risks associated with the uncertainty of foreign laws, economies and markets, and exposes us to local economic downturns and adverse market developments.
Our failure to manage such growth effectively may adversely impact our financial condition, results of operations and cash flows, which could negatively affect our ability to make distributions to our stockholders. Our rapid growth could also increase our capital requirements, which may require us to issue potentially dilutive equity securities and/or incur additional debt.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a)
None.
(b)
Not applicable.
(c)
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits
Exhibit
Number
Description
10.1(1)
Thirteenth Supplemental Indenture, dated as of July 26, 2019, by and among MPT Operating Partnership, L.P. and MPT Finance Corporation, as issuers, Medical Properties Trust, Inc., as parent and guarantor, and Wilmington Trust, National Association, as trustee.
10.2*
Real Property Asset Purchase Agreement, dated as of July 10, 2019, by and among Prospect Medical Holdings, Inc., as “Prospect Medical Holdings”, and subsidiaries of Prospect Medical Holdings, as the “Prospect Medical Subsidiaries”, and subsidiaries of MPT Operating Partnership, L.P., as the “MPT Parties”.
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (Medical Properties Trust, Inc.)
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (Medical Properties Trust, Inc.)
31.3*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (MPT Operating Partnership, L.P.)
31.4*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. (MPT Operating Partnership, L.P.)
32.1**
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Medical Properties Trust, Inc.)
32.2**
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (MPT Operating Partnership, L.P.)
Exhibit 101.INS*
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Exhibit 101.SCH*
Inline XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104*
Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101.*)
*
Filed herewith.
**
Furnished herewith.
Incorporated by reference to Registrants’ joint current report on Form 8-K, filed with the Commission on July 29, 2019.
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.
By:
/s/ J. Kevin Hanna
J. Kevin Hanna
Vice President, Controller, Assistant Treasurer, and Chief Accounting Officer
(Principal Accounting Officer)
of the sole member of the general partner
of MPT Operating Partnership, L.P.
Date: November 12, 2019