10-K 1 d295656d10k.htm 10-K 10-K
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Index to Financial Statements

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

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

For the fiscal year ended December 31, 2016

or

 

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

For the transition period from                  to                 

Commission file number 001-32559

 

 

Medical Properties Trust, Inc.

MPT Operating Partnership, L.P.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Maryland

Delaware

 

20-0191742

20-0242069

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

1000 Urban Center Drive, Suite 501

Birmingham, AL

  35242
(Address of Principal Executive Offices)   (Zip Code)

(205) 969-3755

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, par value $0.001 per share of

Medical Properties Trust, Inc.

  New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Medical Properties Trust, Inc.    Yes  ☒    No  ☐            MPT Operating Partnership, L.P.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Medical Properties Trust, Inc.    Yes  ☐    No  ☒            MPT Operating Partnership, L.P.    Yes  ☐    No  ☒

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.

Medical Properties Trust, Inc.    Yes  ☒    No  ☐            MPT Operating Partnership, L.P.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Medical Properties Trust, Inc.    Yes  ☒    No  ☐            MPT Operating Partnership, L.P.    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐.

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

Medical Properties Trust, Inc.

 

Large accelerated Filer      Accelerated Filer  
Non-accelerated Filer   ☐  (Do not check if a smaller reporting company)    Smaller Reporting Company  

MPT Operating Partnership, L.P.

 

Large accelerated Filer      Accelerated Filer  
Non-accelerated Filer   ☒  (Do not check if a smaller reporting company)    Smaller Reporting Company  

Indicate by check mark whether the registrant is a shell company (as defined in 12b-2 of the Act).

Medical Properties Trust, Inc.    Yes  ☐    No  ☒            MPT Operating Partnership, L.P.    Yes  ☐    No  ☒

As of June 30, 2016, the aggregate market value of the 236,587,490 shares of common stock, par value $0.001 per share (“Common Stock”), held by non-affiliates of the registrant was $3,598,495,723 based upon the last reported sale price of $15.21 on the New York Stock Exchange on that date. For purposes of the foregoing calculation only, all directors and executive officers of the registrant have been deemed affiliates.

As of February 24, 2017, 320,934,225 shares of Medical Properties Trust, Inc. Common Stock were outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 25, 2017 are incorporated by reference into Items 10 through 14 of Part III, of this Annual Report on Form 10-K.

 

 

 


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TABLE OF CONTENTS

 

A WARNING ABOUT FORWARD LOOKING STATEMENTS

     3  

PART I

     

ITEM 1

  

Business

     5  

ITEM 1A.

  

Risk Factors

     18  

ITEM 1B.

  

Unresolved Staff Comments

     38  

ITEM 2.

  

Properties

     39  

ITEM 3.

  

Legal Proceedings

     41  

ITEM 4.

  

Mine Safety Disclosures

     41  

PART II

     

ITEM 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

     42  

ITEM 6.

  

Selected Financial Data

     44  

ITEM 7.

  

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

     48  

ITEM 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

     68  

ITEM 8.

  

Financial Statements and Supplementary Data

     69  

ITEM 9.

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     120  

ITEM 9A.

  

Controls and Procedures

     120  

ITEM 9B.

  

Other Information

     121  

PART III

     

ITEM 10.

  

Directors, Executive Officers and Corporate Governance

     122  

ITEM 11.

  

Executive Compensation

     122  

ITEM 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     122  

ITEM 13.

  

Certain Relationships and Related Transactions, and Director Independence

     122  

ITEM 14.

  

Principal Accountant Fees and Services

     122  

PART IV

     

ITEM 15.

  

Exhibits and Financial Statement Schedules

     123  

ITEM 16.

  

Form 10-K Summary

     131  

SIGNATURES

     132  

 

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EXPLANATORY NOTE

This report combines the Annual Reports on Form 10-K for the year ended December 31, 2016, 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.

CAUTIONARY LANGUAGE REGARDING FORWARD LOOKING STATEMENTS

We make forward-looking statements in this Annual Report on Form 10-K that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. Statements regarding the following subjects, among others, are forward-looking by their nature:

 

    our business strategy;

 

    our projected operating results;

 

    our ability to acquire or develop additional facilities in the United States (“U.S.”) or Europe;

 

    availability of suitable facilities to acquire or develop;

 

    our ability to enter into, and the terms of, our prospective leases and loans;

 

    our ability to raise additional funds through offerings of debt and equity securities and/or property disposals;

 

    our ability to obtain future financing arrangements;

 

    estimates relating to, and our ability to pay, future distributions;

 

    our ability to service our debt and comply with all of our debt covenants;

 

    our ability to compete in the marketplace;

 

    lease rates and interest rates;

 

    market trends;

 

    projected capital expenditures; and

 

    the impact of technology on our facilities, operations and business.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our common stock and other securities, along with, among others, the following factors that could cause actual results to vary from our forward-looking statements:

 

    the factors referenced in this Annual Report on Form 10-K, including those set forth under the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business;”

 

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

 

    the competitive environment in which we operate;

 

    the execution of our business plan;

 

    financing risks;

 

    acquisition and development risks;

 

    potential environmental contingencies and other liabilities;

 

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

 

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

 

    our ability to attract and retain qualified personnel;

 

    changes in foreign currency exchange rates;

 

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

 

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

 

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

 

    our ability to obtain equity or debt financing 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.

When we use the words “believe,” “expect,” “may,” “potential,” “anticipate,” “estimate,” “plan,” “will,” “could,” “intend” or similar expressions, we are identifying forward-looking statements. You should not place undue reliance on these forward-looking statements. Except as required by law, we disclaim any obligation to update such statements or to publicly announce the result of any revisions to any of the forward-looking statements contained in this Annual Report on Form 10-K to reflect future events or developments.

 

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PART I

 

ITEM 1. Business

Overview

We are a self-advised real estate investment trust (“REIT”) focused on investing in and owning net-leased healthcare facilities across the U.S. and selectively in foreign jurisdictions. We have operated as a REIT since April 6, 2004, and accordingly, elected REIT status upon the filing of our calendar year 2004 federal income tax return. Medical Properties Trust, Inc. was incorporated under Maryland law on August 27, 2003, and MPT Operating Partnership, L.P. was formed under Delaware law on September 10, 2003. We conduct substantially all of our business through MPT Operating Partnership, L.P. We acquire and develop healthcare facilities and lease the facilities to healthcare operating companies under long-term net leases, which require the tenant to bear most of the costs associated with the property. We also make mortgage loans to healthcare operators collateralized by their real estate assets. In addition, we selectively make loans to certain of our operators through our taxable REIT subsidiaries, the proceeds of which are typically used for acquisition and working capital purposes. 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 tenants’ profits and losses.

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 as further discussed in Note 1 of Item 8 in Part II of this Annual Report on Form 10-K. All of our investments are currently located in the United States and Europe. At December 31, 2016 and 2015, we had $6.4 billion and $5.6 billion, respectively, in total assets made up of the following:

 

(dollars in thousands)    2016            2015         

Real estate owned (gross)

   $ 4,912,320        76.6   $ 3,875,536        69.1

Mortgage loans

     1,060,400        16.5     757,581        13.5

Other loans

     155,721        2.4     664,822        11.9

Construction in progress

     53,648        0.8     49,165        0.9

Other assets

     236,447        3.7     262,247        4.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total(1)

   $ 6,418,536        100.0   $ 5,609,351        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Includes $1.3 billion of healthcare real estate owned and other assets in Europe in 2016 and 2015.

Revenue by property type:

The following is our revenue by property type for the year ended December 31 (dollars in thousands):

 

     2016            2015            2014         

General Acute Care Hospitals(1)

   $ 344,523        63.7   $ 255,029        57.7   $ 187,060        59.9

Inpatient Rehabilitation Hospitals

     149,964        27.7     134,198        30.4     71,564        22.9

Long-Term Acute Care Hospitals

     46,650        8.6     52,651        11.9     53,908        17.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue(2)

   $ 541,137        100.0   $ 441,878        100.0   $ 312,532        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Includes three medical office buildings.
(2) Includes $101.6 million and $83.0 million in revenue (primarily from rehabilitation facilities) from the healthcare real estate assets in Europe in 2016 and 2015, respectively.

See “Overview” in Item 7 of this Annual Report on Form 10-K for details of transaction activity for 2016, 2015 and 2014. More information is available on the Internet at www.medicalpropertiestrust.com.

 

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Portfolio of Properties

As of February 24, 2017, our portfolio consisted of 232 properties: 215 facilities (of the 220 facilities that we own) are leased to 30 tenants, five are under development, and the remaining assets are in the form of mortgage loans to four operators. Our facilities consist of 136 general acute care hospitals, 79 inpatient rehabilitation hospitals, and 17 long-term acute care hospitals (“LTACHs”).

At February 24, 2017, no single property accounted for more than 3.6% of our total gross assets.

Outlook and Strategy

Our strategy is to lease the facilities that we acquire or develop to experienced healthcare operators pursuant to long-term net leases. Alternatively, we have structured certain of our investments as long-term, interest-only mortgage loans to healthcare operators, and we may make similar investments in the future. Our mortgage loans are structured such that we obtain similar economic returns as our net leases. In addition, we have obtained and will continue to obtain profits or other interests in certain of our tenants’ operations in order to enhance our overall return. The market for healthcare real estate is extensive and includes real estate owned by a variety of healthcare operators. We focus on acquiring and developing those net-leased facilities that are specifically designed to reflect the latest trends in healthcare delivery methods and that focus on the most critical components of healthcare. We typically invest in facilities that have the highest intensity of care including:

 

    General acute care — provide inpatient care for the treatment of acute conditions and manifestations of chronic conditions. They also provide ambulatory care through hospital outpatient departments and emergency rooms.

 

    Inpatient rehabilitation — provide rehabilitation to patients with various neurological, muscular, skeletal orthopedic and other medical conditions following stabilization of their acute medical issues.

 

    Long-term acute care — specialty-care hospital designed for patients with serious medical problems that require intense, special treatment for an extended period of time, sometimes requiring a hospital stay averaging in excess of three weeks.

 

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Diversification

A fundamental component of our business plan is the continued diversification of our tenant relationships, the types of hospitals we own and the geographic areas in which we invest. From a tenant relationship perspective, see section titled “Significant Tenants” below for detail. See sections titled “Revenue by Property Type” and “Portfolio of Properties” above for information on the diversification of our hospital types. From a geographical perspective, we have investments across the U.S. and in Europe. See below for investment and revenue concentration in the U.S. and our global concentration at December 31, 2016:

 

 

LOGO

 

(1) Represents investment concentration as a percentage of gross real estate assets, other loans, and equity investments assuming all real estate commitments at December 31, 2016 are fully funded.

We continue to believe that Europe represents an attractive market in which to invest, particularly in Germany. Germany is an attractive investment opportunity for us given Germany’s strong macroeconomic position and healthcare environment. Germany’s Gross Domestic Product (“GDP”), which is approximately $3,363 billion according to World Bank 2015 data, has been relatively more stable than other countries in the European Union due to Germany’s stable business practices and monetary policy. In addition to cultural influences, government policies emphasizing sound public finance and a significant presence of small and medium-sized enterprises (which employ 68% of the employment base) have also contributed to Germany’s strong and sustainable economic position. The above factors have contributed to an unemployment rate in Germany of 3.9% as of December 2016, which is significantly less than the 9.6% unemployment rate in the European Union as of December 2016, according to Eurostat.

 

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Underwriting/Asset Management

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 in our ongoing monitoring of our tenants’ (and any guarantors’) performance include the following:

 

    the scope and breadth of clinical services and programs, including admission levels by service type;

 

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

 

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

 

    trends in the source of our tenants’ revenue, including the relative mix of public payors (including Medicare, Medicaid/MediCal, and managed care in the U.S. as well as equivalent payors in Germany, the United Kingdom, Italy, and Spain) and private payors (including commercial insurance and private pay patients);

 

    trends in tenant cash collections, including comparison to recorded net patient service revenues;

 

    the effect of any legal, regulatory or compliance proceedings with our tenants;

 

    the effect of evolving healthcare legislation and other regulations (including changes in reimbursement) on our tenants’ profitability and liquidity;

 

    demographics of the local and surrounding areas in which our tenants operate;

 

    the competition, including the prospective tenant’s market position relative to competition;

 

    evaluation of medical staff doctors and physician leadership associated with the facility/facilities, including specialty, tenure and number of procedures performed;

 

    evaluation of the operator’s and facility’s administrative team, as applicable, including background and tenure within the healthcare industry;

 

    compliance, accreditation, quality performance and health outcomes as measured by The Centers for Medicare and Medicaid Services (“CMS”) and Joint Commission; and

 

    the level of investment in the hospital infrastructure and health IT systems.

Healthcare Industry

The delivery of healthcare services, whether in the U.S. or elsewhere, requires real estate and, as a consequence, healthcare providers depend on real estate to maintain and grow their businesses. We believe that the healthcare real estate market provides investment opportunities due to the:

 

    compelling demographics driving the demand for healthcare services;

 

    specialized nature of healthcare real estate investing; and

 

    consolidation of the fragmented healthcare real estate sector.

 

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United States

Healthcare is the single largest industry in the U.S. based on GDP. According to the National Health Expenditures report dated July 2016 by the CMS: (i) national health expenditures are projected to grow 5.1% in 2017; (ii) the average compound annual growth rate for national health expenditures, over the projection period of 2017 through 2025, is anticipated to be 6.0%; and (iii) the healthcare industry is projected to represent 20.1% of U.S. GDP by 2025.

Germany

The healthcare industry is also the single largest industry in Germany. Behind only the U.S., Netherlands and France, Germany’s healthcare expenditures represent approximately 11.0% of its total GDP according to the Organization for Economic Co-operation and Development’s 2013 data.

The German rehabilitation market (which includes our facilities in Germany) serves a broader scope of treatment with over 1,233 rehabilitation facilities (compared to 1,165 in the U.S.) and 208.5 beds per 100,000 population (compared to 114.7 in the U.S.). Approximately 90% of the payments in the German system come from governmental sources. The largest payor category is the public pension fund system representing 39% of payments. Public health insurance and payments for government employees represent 46% of payments. The balance of the payments into the German rehabilitation market come from a variety of sources including private pay and private insurance. One particular focus area of investors in the German market is the healthcare industry because the German Social Code mandates universal access, coverage and a high standard of care, thereby creating a robust healthcare dynamic in the country.

United Kingdom

Healthcare services in the United Kingdom are provided through the National Health Service (“NHS”). In 2013, the United Kingdom spent 8.8% of GDP on healthcare. The majority of this funding for the NHS comes from general taxation, and a smaller proportion from national insurance (a payroll tax). The NHS also receives income from copayments, people using NHS services as private patients, and some other minor sources. In 2012, 10.9% of the United Kingdom population had private voluntary health insurance provided mostly through employers. Private insurance offers more rapid and convenient access to care, especially for elective hospital procedures. It is estimated that four insurers account for 87.5% of the market, with small providers comprising the rest.

Publicly owned hospitals are organized either as NHS trusts, approximately 98 in number or as Foundation trusts, approximately 147 in number. NHS trusts are accountable to the Department of Health while foundation trusts enjoy greater freedom from central control. An estimated 548 hospitals are located in the United Kingdom and offer a range of treatments. Their charges to private patients are not regulated, and they receive no public subsidies. NHS use of private hospitals remains low with about 3.6% of NHS funding used for this purpose. The NHS budget was flat for the period from 2010 to 2015.

Italy

The Italian national health service (Servizio Sanitario Nazionale) is regionally based and organized at the national, regional, and local levels. Under the Italian constitution, responsibility for healthcare is shared by the national government and the 19 regions and 2 autonomous provinces. The central government controls the distribution of tax revenue for publicly financed health care and defines a national statutory benefits package to be offered to all residents in every region — the “Essential Levels of Care.” The 19 regions and two autonomous provinces have responsibility for the organization and delivery of health services through local health units.

Public financing accounted for 78% of total health spending in 2013, with total expenditure standing at 9.1% of GDP. The public system is financed primarily through a corporate tax (approximately 35.6% of the

 

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overall funding in 2012) pooled nationally and allocated back to regions, typically the source region, and a fixed proportion of national value-added tax revenue (approximately 47.3% of the total in 2012) collected by the central government and redistributed to regions unable to raise sufficient resources to provide the essential levels of care.

In 2011, there were approximately 194,000 beds in public hospitals and 47,500 beds in private accredited hospitals. A diagnosis-related group-based prospective payment system operates across the country and accounts for most hospital revenue.

Private health insurance plays a limited role in the health system, accounting for roughly 1% of total spending in 2009. Approximately 15% of the population has some form of private insurance which generally covers services excluded under the Essential Levels of Care, to offer a higher standard of comfort and privacy in hospital facilities, and wider choice among public and private providers. Some private health insurance policies also cover copayments for privately provided services, or a daily rate of compensation during hospitalization. There are two types of private health insurance: corporate, where companies cover employees and sometimes their families; and non-corporate, with individuals buying insurance for themselves or their family.

Depending on the region, public funds are allocated by local health units to public and accredited private hospitals. Rates paid to hospitals include all hospital costs including those of physicians. Funding for health is defined by the July 2014 Pact for Health which defines funding between $143.4 billion and $151.3 billion annually for the years 2014 to 2016.

Spain

The Spanish health system was established by the General Health Law of 1986. This law carries out a mandate of the Spanish Constitution which establishes the right of all citizens to protection of their health. The National Health System (Sistema Nacional de Salud, SNS) is the administrative device set up by the law. Spain spends approximately 9.6% of its GDP on health care. Expenditures for private healthcare are 26.4% of total health expenditures have been growing at a compounded annual growth rate of 1.7%. 80% of all Spanish patients use a combination of both private and public healthcare services.

Private hospitals comprise 53% of total Spanish hospitals and 32% of total beds. Private hospitals account for 24% of hospital discharges, 30% of surgeries and 20% of visits to Accident and Emergency Services. Demand for private hospital services is increasing at a compound rate of 3.8% from 2008 through 2011. In terms of private insurance, the top ten companies in Spain account for 82% of the market.

Our Leases and Loans

The leases for our facilities are “net” leases with terms generally requiring the tenant to pay all ongoing operating and maintenance expenses of the facility, including property, casualty, general liability and other insurance coverages, utilities and other charges incurred in the operation of the facilities, as well as real estate and certain other taxes, ground lease rent (if any) and the costs of capital expenditures, repairs and maintenance (including any repairs mandated by regulatory requirements). Similarly, borrowers under our mortgage loan arrangements retain the responsibilities of ownership, including physical maintenance and improvements and all costs and expenses. Our leases and loans typically require our tenants to indemnify us for any past or future environmental liabilities. Our current leases and loans have a weighted-average remaining initial lease or loan term of 14.1 years (see Item 2 for more information on remaining lease or loan terms). Based on current monthly revenue, approximately 99% of our leases and loans provide for annual rent or interest escalations based on either increases in the U.S. Consumer Price Index (“CPI”) or minimum annual rent or interest escalations ranging from 0.5% to 5%. In some cases, our domestic leases and loans provide for escalations based on CPI subject to floors and/or ceilings. In certain limited cases, we may have arrangements that provide for additional rents based on the level of a tenant’s revenue.

 

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RIDEA Investments

We have and will make equity investments, loans (with equity like returns) and obtain profit interests in certain of our tenants. Some of these investments fall under a structure permitted by the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”), which was signed into law under the Housing and Economic Recovery Act of 2008. Under the provisions of RIDEA, a REIT may lease “qualified health care properties” on an arm’s length basis to a taxable REIT subsidiary (“TRS”) if the property is operated on behalf of such subsidiary by a person who qualifies as an “eligible independent contractor.” We view RIDEA as a structure primarily to be used on properties that present attractive valuation entry points. At December 31, 2016, our RIDEA investments totaled approximately $105.8 million.

Significant Tenants

At December 31, 2016, we had total assets of approximately $6.4 billion comprised of 231 healthcare properties in 30 states, in Germany, the United Kingdom, Italy, and Spain. The properties are leased to or mortgaged by 30 different hospital operating companies. On a gross asset basis (which is total assets before accumulated depreciation/amortization and assumes all real estate commitments at that time are fully funded), our top five tenants were as follows (dollars in thousands):

Gross Assets by Operator

 

     As of December 31, 2016     As of December 31, 2015  

Operators

   Total
Gross Assets
     Percentage of
Total Gross Assets
    Total
Gross Assets
     Percentage of
Total Gross Assets
 

Steward

   $ 1,250,000        17.5   $ —          —    

Prime

     1,144,055        16.0     1,032,353        17.1

MEDIAN

     993,677        13.9     1,031,039        17.1

Ernest

     627,906        8.8     579,182        9.6

RCCH

     566,600        7.9     1,059,989        17.6

Affiliates of Steward Health Care System LLC (“Steward”) lease five facilities pursuant to a master lease agreement, which has a 15-year term with three five-year extension options, plus annual inflation-based escalators. At December 31, 2016, these facilities had an average remaining lease term of 14.8 years. In addition to the master lease, we hold a mortgage loan on four facilities with terms and provisions substantially similar to the master lease agreement. The master lease and loan agreements include extension options that must include all or none of the properties, cross default provisions for the leases and loans, and a right of first refusal for the repurchase of the leased properties. We closed on the Steward properties on October 3, 2016 for a combined investment of $1.25 billion, which includes a $50 million minority equity contribution in Steward.

Affiliates of Prime Healthcare Services, Inc. (“Prime”) lease 22 facilities pursuant to five master lease agreements. Four of the master leases are for 10 years and contain two renewal options of five years each. The fifth master lease is for 15 years and contains three renewal options for five years each. Rent escalates each year based on the CPI increase, with a 2% minimum floor. At the end of the initial or any renewal term, Prime must exercise any available extension or purchase option with respect to all or none of the leased and mortgaged properties relative to each master lease. The master leases include repurchase options, including provisions establishing minimum repurchase prices equal to our total investment. At December 31, 2016, these facilities had an average remaining initial fixed term of 8.1 years. In addition to leases, we hold mortgage loans on three facilities owned by affiliates of Prime. The terms and provisions of these loans are generally equivalent to the terms and provisions of our Prime lease arrangements.

Affiliates of Median Kliniken S.à r.l.(“MEDIAN”) lease 50 facilities pursuant to two master lease agreements. Each master lease agreement has an approximate 27-year fixed term with no renewal or repurchase

 

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options. The annual escalator for one master lease that represents 15 facilities of the MEDIAN portfolio provides for fixed increases of 2% for 2017 and additional fixed increases of 0.5% each year thereafter. In addition, at December 31, 2020 and every three years thereafter, rent will be increased, if needed, to reflect 70% of cumulative increases in German CPI. The annual escalator for the other master lease that covers the remaining facilities of the MEDIAN portfolio provides for increases of the greater of 1% or 70% of the change in German CPI.

Affiliates of Ernest Health, Inc. (“Ernest”) lease 22 facilities, including one under development, pursuant to a master lease agreement and two stand-alone lease agreements. The original master lease agreement entered into in 2012, covering 20 properties, had a 20-year initial fixed term with three five-year extension options and provides for consumer price-indexed increases, limited to a 2% floor and 5% ceiling annually. At December 31, 2016, these facilities had a remaining initial fixed lease term of 15.2 years. This master lease includes purchase options that allow the lessee to purchase the leased property at on option price equal to the greater of fair market value of the lease property or the lease base increased by an amount equal to the annual rate of increase in the CPI on each adjustment date. All leases and loans are cross-defaulted, including the mortgage loans. In addition to the original master lease, Ernest affiliates lease the remaining properties, including one property that is currently under development, pursuant to two separate stand-alone leases that have terms generally similar to the original master lease agreement. Furthermore, we hold a mortgage loan on four facilities owned by affiliates of Ernest that will mature in 2032. The terms and provisions of these loans are generally equivalent to the terms and provisions of the original master lease agreement.

Affiliates of RCCH Healthcare Partners (“RCCH”) (formally Capella Healthcare Inc.) lease six facilities (four of which are leased pursuant to a master lease agreement). The master lease agreement has an initial fixed 13.5-year term with four five-year extension options, plus consumer price-indexed increases, limited to a 2% floor and a 4% ceiling annually. The extension options may be exercised with respect to any or all of the properties. At the end of the fixed term, and during any exercised extension options, the lessee will have the right of first refusal to purchase the leased property. At December 31, 2016, these facilities had an average remaining initial fixed lease term of 12.2 years. In addition to the master lease, two facilities are leased pursuant to stand-alone leases with a weighted average remaining fixed term of 12.3 years. The terms and provisions of these leases are generally equivalent to the terms and provisions of the master lease agreement.

No other tenant accounted for more than 7% of our total gross assets at December 31, 2016.

Environmental Matters

Under various federal, state and local environmental laws and regulations, a current or previous owner, operator or tenant of real estate may be required to remediate hazardous or toxic substance releases or threats of releases. There may also be certain obligations and liabilities on property owners with respect to asbestos containing materials. Investigation, remediation and monitoring costs may be substantial. The confirmed presence of contamination or the failure to properly remediate contamination on a property may adversely affect our ability to sell or rent that property or to borrow funds using such property as collateral and may adversely impact our investment in that property. Generally, prior to completing any acquisition or closing any mortgage loan, we obtain Phase I environmental assessments (or their equivalent studies outside the U.S.) in order to attempt to identify potential environmental concerns at the facilities. These assessments are carried out in accordance with an appropriate level of due diligence and generally include a physical site inspection, a review of relevant environmental and health agency database records, one or more interviews with appropriate site-related personnel, review of the property’s chain of title and review of historic aerial photographs and other information on past uses of the property. We may also conduct limited subsurface investigations and test for substances of concern where the results of the Phase I environmental assessments or other information indicates possible contamination or where our consultants recommend such procedures. Upon closing and for the remainder of the lease or loan term, our transaction documents require our tenants to repair and remediate any environmental concern at the applicable facility, and to comply in full with all environmental laws and regulations.

 

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California Seismic Standards

California’s Alfred E. Alquist Hospital Facilities Seismic Safety Act of 1973 (the “Alquist Act”) established a seismic safety building standards program under the Office of Statewide Health Planning and Development (“OSHPD”) jurisdiction for hospitals built on or after March 7, 1973. It required the California Building Standards Commission to adopt earthquake performance categories, seismic evaluation procedures, standards and timeframes for upgrading certain facilities, and seismic retrofit building standards. These regulations required hospitals to meet certain seismic performance standards to ensure that they are capable of providing medical services to the public after an earthquake or other disaster. This legislation was adopted to avoid the loss of life and the disruption of operations and the provision of emergency medical services that may result from structural damage sustained to hospitals resulting from an earthquake.

The Building Standards Commission completed its adoption of evaluation criteria and retrofit standards in 1998. The Alquist Act required the Building Standards Commission to adopt certain evaluation criteria and retrofit standards such as:

 

    hospitals in California must conduct seismic evaluations and submit these evaluations to the OSHPD, Facilities Development Division for its review and approval;

 

    hospitals in California must identify the most critical nonstructural systems that represent the greatest risk of failure during an earthquake and submit timetables for upgrading these systems to the OSHPD, Facilities Development Division for its review and approval; and

 

    hospitals in California must prepare a plan and compliance schedule for each regulated building demonstrating the steps a hospital will take to bring the hospital buildings into substantial compliance with the regulations and standards.

Since the Alquist Act, subsequent legislation has modified requirements of seismic safety standards and deadlines for compliance. Originally, hospital buildings considered hazardous and at risk of collapse in the event of an earthquake must have been retrofitted, replaced or removed from providing acute care services by January 1, 2008; however, provisions were made to allow this deadline to be extended to January 1, 2013.

Senate Bill 499 was signed into law that provided for a number of seismic relief measures, including criteria for reclassifying buildings into a lower seismic risk category. These buildings would have until January 1, 2030 to comply with structural seismic safety standards. Buildings denied reclassification must have met seismic compliance standards by January 1, 2013, unless further extensions were granted.

California’s AB 306 legislation permitted OSHPD to grant extensions to acute care hospitals that lacked the financial capacity to meet the January 1, 2013, retrofit deadline, and instead, requires them to replace those buildings by January 1, 2020. More recently, California SB 90 allows a hospital to seek an extension for seismic compliance up to seven years based on three elements:

 

    the structural integrity of the building;

 

    the loss of essential hospital services to the community if the hospital is closed; and

 

    financial hardship.

As of December 31, 2016, we have 13 hospitals in California totaling investments of $542.9 million. Exclusive of four hospitals granted extensions by OSHPD, all of our California buildings are seismically compliant through 2030 as determined by OSHPD. For our hospitals that were granted extensions, three (representing a total investment of $173.3 million) completed their seismic retro upgrades in 2016 and are currently awaiting final OSHPD reclassification. Our fourth hospital (with a total investment of $20 million) that was granted an extension began retrofit planning this year, and we expect full compliance by their 2020 deadline.

Under our current agreements, our tenants are responsible for capital expenditures in connection with seismic laws. We do not expect California seismic standards to have a negative impact on our financial condition

 

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or cash flows. We also do not expect compliance with California seismic standards to materially impact the financial condition of our tenants.

Competition

We compete in acquiring and developing facilities with financial institutions, other lenders, real estate developers, healthcare operators, other REITs, other public and private real estate companies, and private real estate investors. Among the factors that may adversely affect our ability to compete are the following:

 

    we may have less knowledge than our competitors of certain markets in which we seek to invest in or develop facilities;

 

    some of our competitors may have greater financial and operational resources than we have;

 

    some of our competitors may have lower costs of capital than we do;

 

    our competitors or other entities may pursue a strategy similar to ours; and

 

    some of our competitors may have existing relationships with our potential customers.

To the extent that we experience vacancies in our facilities, we will also face competition in leasing those facilities to prospective tenants. The actual competition for tenants varies depending on the characteristics of each local market. Virtually all of our facilities operate in highly competitive environments, and patients and referral sources, including physicians, may change their preferences for healthcare facilities from time to time. The operators of our properties compete on a local and regional basis with operators of properties that provide comparable services. Operators compete for patients and residents based on a number of factors including quality of care, reputation, physical appearance of a facility, location, services offered, physicians, staff, and price. We also face competition from other health care facilities for tenants, such as physicians and other health care providers that provide comparable facilities and services.

For additional information, see “Risk Factors” in Item 1A of this Annual Report on Form 10-K.

Insurance

Our leases and mortgage loans require our tenants to carry property, loss of income, general liability, professional liability, and other insurance coverages in order to protect our interests. We monitor the adequacy of such coverages on an ongoing basis. In addition, we maintain separate insurance that provides coverage for bodily injury and property damage to third parties arising from our ownership of the healthcare facilities that are leased to and occupied by our tenants, as well as contingent business interruption insurance. At December 31, 2016, we believe that the policy specifications and insured limits are appropriate given the relative risk of loss, the cost of the coverage, and standard industry practice.

Healthcare Regulatory Matters

The following discussion describes certain material federal healthcare laws and regulations that may affect our operations and those of our tenants. The discussion, however, does not address all applicable federal healthcare laws, and does not address state healthcare laws and regulations, except as otherwise indicated. These state laws and regulations, like the federal healthcare laws and regulations, could affect the operations of our tenants and, accordingly, our operations. In addition, in some instances we own a minority interest in our tenants’ operations and, in addition to the effect on our tenant’s ability to meet its financial obligations to us, our ownership and investment returns may also be negatively impacted by such laws and regulations. Moreover, the discussion relating to reimbursement for healthcare services addresses matters that are subject to frequent review and revision by Congress and the agencies responsible for administering federal payment programs. Consequently, predicting future reimbursement trends or changes, along with the potential impact to us, is inherently difficult.

 

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Ownership and operation of hospitals and other healthcare facilities are subject, directly and indirectly, to substantial federal, state, and local government healthcare laws, rules, and regulations. Our tenants’ failure to comply with these laws and regulations could adversely affect their ability to meet their obligations to us. Physician investment in us or in our facilities also will be subject to such laws and regulations. Although we are not a healthcare provider or in a position to influence the referral of patients or ordering of items and services reimbursable by the federal government, to the extent that a healthcare provider engages in transactions with our tenants, such as sublease or other financial arrangements, the Anti-Kickback Statute and the Stark Law (both discussed in this section) could be implicated. Our leases and mortgage loans require the tenants to comply with all applicable laws, including healthcare laws. We intend for all of our business activities and operations to conform in all material respects with all applicable laws, rules, and regulations, including healthcare laws, rules, and regulations.

Applicable Laws

Anti-Kickback Statute. The federal Anti-Kickback Statute (codified at 42 U.S.C. § 1320a-7b(b)) prohibits, among other things, the offer, payment, solicitation, or acceptance of remuneration, directly or indirectly, in return for referring an individual to a provider of items or services for which payment may be made in whole, or in part, under a federal healthcare program, including the Medicare or Medicaid programs. Violation of the Anti-Kickback Statute is a crime, punishable by fines of up to $25,000 per violation, five years imprisonment, or both. Violations may also result in civil sanctions, including civil monetary penalties of up to $50,000 per violation, exclusion from participation in federal healthcare programs, including Medicare and Medicaid, and additional monetary penalties in amounts treble to the underlying remuneration.

The Office of Inspector General of the Department of Health and Human Services (“OIG”) has issued “Safe Harbor Regulations” that describe practices that will not be considered violations of the Anti-Kickback Statute. Nonetheless, the fact that a particular arrangement does not meet safe harbor requirements does not also mean that the arrangement violates the Anti-Kickback Statute. Rather, the safe harbor regulations simply provide a guaranty that qualifying arrangements will not be prosecuted under the Anti-Kickback Statute. We intend to use commercially reasonable efforts to structure our arrangements involving facilities, so as to satisfy, or meet as closely as possible, all safe harbor conditions. We cannot assure you, however, that we will meet all the conditions for an applicable safe harbor.

Physician Self-Referral Statute (“Stark Law”). Any physicians investing in us or our subsidiary entities could also be subject to the Ethics in Patient Referrals Act of 1989, or the Stark Law (codified at 42 U.S.C. § 1395nn). Unless subject to an exception, the Stark Law prohibits a physician from making a referral to an “entity” furnishing “designated health services,” including certain inpatient and outpatient hospital services, clinical laboratory services, and radiology services, paid by Medicare or Medicaid if the physician or a member of his immediate family has a “financial relationship” with that entity. A reciprocal prohibition bars the entity from billing Medicare or Medicaid for any services furnished pursuant to a prohibited referral. Sanctions for violating the Stark Law include denial of payment, refunding amounts received for services provided pursuant to prohibited referrals, civil monetary penalties of up to $15,000 per prohibited service provided, and exclusion from the participation in federal healthcare programs. The statute also provides for a penalty of up to $100,000 for a circumvention scheme.

There are exceptions to the self-referral prohibition for many of the customary financial arrangements between physicians and providers, including employment contracts, leases, and recruitment agreements. Unlike safe harbors under the Anti-Kickback Statute, the Stark Law imposes strict liability on the parties to an arrangement and an arrangement must comply with every requirement of a Stark Law exception or the arrangement is in violation of the Stark Law.

The CMS has issued multiple phases of final regulations implementing the Stark Law and continues to make changes to these regulations. While these regulations help clarify the exceptions to the Stark Law, it is unclear

 

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how the government will interpret many of these exceptions for enforcement purposes. Although our lease agreements require lessees to comply with the Stark Law, and we intend for facilities to comply with the Stark Law where we own an interest in our tenants’ operations, we cannot offer assurance that the arrangements entered into by us and our facilities will be found to be in compliance with the Stark Law, as it ultimately may be implemented or interpreted. In addition, changes to the Stark Law could require our tenants to restructure certain arrangements with physicians, which could impact the business of our tenants.

False Claims Act. The federal False Claims Act prohibits the making or presenting of any false claim for payment to the federal government; it is the civil equivalent to federal criminal provisions prohibiting the submission of false claims to federally funded programs. Additionally, qui tam, or whistleblower, provisions of the federal False Claims Act allow private individuals to bring actions on behalf of the federal government alleging that the defendant has defrauded the federal government. Whistleblowers may collect a portion of the federal government’s recovery — an incentive which increases the frequency of such actions. A successful federal False Claims Act case may result in a penalty of three times the actual damages, plus additional civil penalties payable to the government, plus reimbursement of the fees of counsel for the whistleblower. Many states have enacted similar statutes preventing the presentation of a false claim to a state government, and we expect more to do so because the Social Security Act provides a financial incentive for states to enact statutes establishing state level liability.

The Civil Monetary Penalties Law. Among other things, the Civil Monetary Penalties law prohibits the knowing presentation of a claim for certain healthcare services that is false or fraudulent, the presentation of false or misleading information in connection with claims for payment, and other acts involving fraudulent conduct. Penalties include a monetary civil penalty of up to $10,000 for each item or service, $15,000 for each individual with respect to whom false or misleading information was given, as well as treble damages for the total amount of remuneration claimed.

Licensure. Our tenants are subject to extensive federal, state, and local licensure, certification, and inspection laws and regulations including, in some cases, certificate of need laws. Further, various licenses and permits are required to dispense narcotics, operate pharmacies, handle radioactive materials, and operate equipment. Failure to comply with any of these laws could result in loss of licensure, certification or accreditation, denial of reimbursement, imposition of fines, and suspension or decertification from federal and state healthcare programs.

EMTALA. Our tenants that provide emergency care are subject to the Emergency Medical Treatment and Active Labor Act (“EMTALA”). This federal law requires such healthcare facilities to conduct an appropriate medical screening examination of every individual who presents to the hospital’s emergency room for treatment and, if the individual is suffering from an emergency medical condition, to either stabilize the condition or make an appropriate transfer of the individual to a facility able to handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of an individual’s ability to pay for treatment. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer an individual or if the hospital delays appropriate treatment in order to first inquire about the individual’s ability to pay. Liability for violations of EMTALA includes, among other things, civil monetary penalties and exclusion from participation in the federal healthcare programs. Our lease and mortgage loan agreements require our tenants to comply with EMTALA, and we believe our tenants conduct business in substantial compliance with EMTALA.

Reimbursement Pressures. Healthcare facility operating margins continue to face significant pressure due to the deterioration in pricing flexibility and payor mix, a shift toward alternative payment models, increases in operating expenses that exceed increases in payments under the Medicare program, reductions in levels of Medicaid funding due to state budget shortfalls, and other similar cost pressures on our tenants. More specifically, LTACHs continue to face reimbursement pressures including those resulting from the passage of the SGR Reform Act of 2013, and CMS is also implementing regulatory restrictions on reimbursement for hospital outpatient departments, which could lead to decreased reimbursement for our tenants. We cannot predict how and

 

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to what extent these or other initiatives will impact the business of our tenants or whether our business will be adversely impacted.

Healthcare Reform. Generally, the Patient Protection and Affordable Care Act ( the “Reform Law”) provides expanded health insurance coverage through tax subsidies and federal health insurance programs, individual and employer mandates for health insurance coverage, and health insurance exchanges. The Reform Law also includes various cost containment initiatives, including quality control and payment system refinements for federal programs, such as pay-for-performance criteria and value-based purchasing programs, bundled provider payments, accountable care organizations, geographic payment variations, comparative effectiveness research, and lower payments for hospital readmissions. The Reform Law also increases health information technology standards for healthcare providers in an effort to improve quality and reduce costs. The Reform Law has led, and will continue to lead, to significant changes in the healthcare system. There are, however, continuing efforts to repeal and replace the Reform Law. We cannot predict the continued impact of the Reform Law, or the impact of its possible repeal and replacement, on our business, as some aspects benefit the operations of our tenants, while other aspects present challenges.

Employees

We have 54 employees as of February 24, 2017. As we continue to grow, we expect our head count to increase as well. However, we do not believe that any adjustments to the number of employees will have a material effect on our operations or to general and administrative expenses as a percent of revenues. We believe that our relations with our employees are good. None of our employees are members of any union.

Available Information

Our website address is www.medicalpropertiestrust.com and provides access in the “Investor Relations” section, free of charge, to our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including exhibits, and all amendments to these reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Also available on our website, free of charge, are our Corporate Governance Guidelines, the charters of our Ethics, Nominating and Corporate Governance, Audit and Compensation Committees and our Code of Ethics and Business Conduct. If you are not able to access our website, the information is available in print free of charge to any stockholder who should request the information directly from us at (205) 969-3755. Information on or connected to our website is neither part of nor incorporated by reference into this Annual Report or any other SEC filings.

 

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ITEM 1A. Risk Factors

The risks and uncertainties described herein are not the only ones facing us and there may be additional risks that we do not presently know of or that we currently consider not likely to have a significant impact on us. All of these risks could adversely affect our business, results of operations and financial condition. Some statements in this report including statements in the following risk factors constitute forward-looking statements. Please refer to the section entitled “Cautionary Language Regarding Forward Looking Statements” at the beginning of this Annual Report.

RISKS RELATED TO OUR BUSINESS AND GROWTH STRATEGY (Including Financing Risks)

Limited access to capital may restrict our growth.

Our business plan contemplates growth through acquisitions and development of facilities. As a REIT, we are required to make cash distributions, which reduce our ability to fund acquisitions and developments with retained earnings. We are dependent on acquisition financing and access to the capital markets for cash to make investments in new facilities. Due to market or other conditions, we may have limited access to capital from the equity and debt markets. We may not be able to obtain additional equity or debt capital or dispose of assets on favorable terms, if at all, at the time we need additional capital to acquire healthcare properties or to meet our obligations, which could have a material adverse effect on our results of operations and our ability to make distributions to our stockholders.

Our indebtedness could adversely affect our financial condition and may otherwise adversely impact our business operations and our ability to make distributions to stockholders.

As of February 24, 2017, we had $3.0 billion of debt outstanding, which excludes the €200 million 5.750% Senior Notes due 2020 to be redeemed on March 4, 2017.

Our indebtedness could have significant effects on our business. For example, it could:

 

    require us to use a substantial portion of our cash flow from operations to service our indebtedness, which would reduce the available cash flow to fund working capital, development projects and other general corporate purposes and reduce cash for distributions;

 

    require payments of principal and interest that may be greater than our cash flow from operations;

 

    force us to dispose of one or more of our properties, possibly on disadvantageous terms, to make payments on our debt;

 

    increase our vulnerability to general adverse economic and industry conditions; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

    restrict us from making strategic acquisitions or exploiting other business opportunities;

 

    make it more difficult for us to satisfy our obligations; and

 

    place us at a competitive disadvantage compared to our competitors that have less debt.

Our future borrowings under our loan facilities may bear interest at variable rates in addition to the $0.8 billion in variable interest rate debt that we had outstanding as of February 24, 2017. If interest rates increase significantly, our operating results would decline along with the cash available for distributions to our stockholders.

In addition, most of our current debt is, and we anticipate that much of our future debt will be, non-amortizing and payable in balloon payments. Therefore, we will likely need to refinance at least a portion of that debt as it matures. There is a risk that we may not be able to refinance debt maturing in future years or that

 

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the terms of any refinancing will not be as favorable as the terms of the then-existing debt. If principal payments due at maturity cannot be refinanced, extended or repaid with proceeds from other sources, such as new equity capital or sales of facilities, our cash flow may not be sufficient to repay all maturing debt in years when significant balloon payments come due. Additionally, we may incur significant penalties if we choose to prepay the debt. See Item 7 of Part II of this Annual Report on Form 10-K for further information on our current debt maturities.

Covenants in our debt instruments limit our operational flexibility, and a breach of these covenants could materially affect our financial condition and results of operations.

The terms of our unsecured credit facility (“Credit Facility”) and the indentures governing our outstanding unsecured senior notes, and other debt instruments that we may enter into in the future are subject to customary financial and operational covenants. For example, our Credit Facility imposes 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; and change our business. In addition, the agreements governing our unsecured credit facility limit the amount of dividends we can pay as a percentage of normalized adjusted funds from operations, as defined, on a rolling four quarter basis. Through the quarter ending December 31, 2016, the dividend restriction was 95% of normalized adjusted funds from operations (“FFO”). The indentures governing our senior unsecured notes also limit the amount of dividends we can pay based on the sum of 95% of FFO, proceeds of equity issuances and certain other net cash proceeds. Finally, our senior unsecured notes require us to maintain total unencumbered assets (as defined in the related indenture) of not less than 150% of our unsecured indebtedness.

From time-to-time, the lenders of our Credit Facility may adjust certain covenants to give us more flexibility to complete a transaction; however, such modified covenants are temporary, and we must be in a position to meet the lowered reset covenants in the future. Our continued ability to incur debt and operate our business is subject to compliance with the covenants in our debt instruments, which limit operational flexibility. Breaches of these covenants could result in defaults under applicable debt instruments and other debt instruments due to cross-default provisions, even if payment obligations are satisfied. Financial and other covenants that limit our operational flexibility, as well as defaults resulting from a breach of any of these covenants in our debt instruments, could have a material adverse effect on our financial condition and results of operations.

Failure to hedge effectively against interest rate changes may adversely affect our results of operations and our ability to make distributions to our stockholders.

As of February 24, 2017, we had approximately $0.8 billion in variable interest rate debt, which constitutes 26.5% of our overall indebtedness and subjects us to interest rate volatility. We may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as when we entered into the $125 million of interest rate swaps in 2010 to fix the interest rate on our 2006 Senior Unsecured Notes due 2016, which were paid in full on October 31, 2016. However, even these hedging arrangements involve risk, including the risk that counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes and that these arrangements may result in higher interest rates than we would otherwise have. Moreover, no hedging activity can completely insulate us from the risks associated with changes in interest rates. Failure to hedge effectively against interest rate changes may materially adversely affect our results of operations and our ability to make distributions to our stockholders.

Dependence on our tenants for payments of rent and interest may adversely impact our ability to make distributions to our stockholders.

We expect to continue to qualify as a REIT and, accordingly, as a REIT operating in the healthcare industry, we are severely limited by current tax law with respect to our ability to operate or manage the businesses conducted in our facilities.

 

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Accordingly, we rely heavily on rent payments from our tenants under leases or interest payments from operators under mortgage or other loans for cash with which to make distributions to our stockholders. We have no control over the success or failure of these tenants’ businesses. Significant adverse changes in the operations of our facilities, or the financial condition of our tenants, operators or guarantors, could have a material adverse effect on our ability to collect rent and interest payments and, accordingly, on our ability to make distributions to our stockholders. Facility management by our tenants and their compliance with healthcare and other laws could have a material impact on our tenants’ operating and financial condition and, in turn, their ability to pay rent and interest to us.

It may be costly to replace defaulting tenants and we may not be able to replace defaulting tenants with suitable replacements on suitable terms.

Failure on the part of a tenant to comply materially with the terms of a lease could give us the right to terminate our lease with that tenant, repossess the applicable facility, cross default certain other leases and loans with that tenant and enforce the payment obligations under the lease. The process of terminating a lease with a defaulting tenant and repossessing the applicable facility may be costly and require a disproportionate amount of management’s attention. In addition, defaulting tenants or their affiliates may initiate litigation in connection with a lease termination or repossession against us or our subsidiaries. If a tenant-operator defaults and we choose to terminate our lease, we are then required to find another tenant-operator, such as the case was with our Monroe facility in 2014. The transfer of most types of healthcare facilities is highly regulated, which may result in delays and increased costs in locating a suitable replacement tenant. The sale or lease of these properties to entities other than healthcare operators may be difficult due to the added cost and time of refitting the properties. If we are unable to re-let the properties to healthcare operators, we may be forced to sell the properties at a loss due to the repositioning expenses likely to be incurred by non-healthcare purchasers. Alternatively, we may be required to spend substantial amounts to adapt the facility to other uses. There can be no assurance that we would be able to find another tenant in a timely fashion, or at all, or that, if another tenant were found, we would be able to enter into a new lease on favorable terms. Defaults by our tenants under our leases may adversely affect our results of operations, financial condition, and our ability to make distributions to our stockholders. Defaults by our significant tenants under master leases (like Steward, Prime, MEDIAN, Ernest, and RCCH) will have an even greater effect.

It may be costly to find new tenants when lease terms end and we may not be able to replace such tenants with suitable replacements on suitable terms.

Failure on the part of a tenant to renew or extend the lease at the end of its fixed term on one of our facilities could result in us having to search for, negotiate with and execute new lease agreements, such was the case with our two South Carolina facilities — Bennettsville and Cheraw in 2015. The process of finding and negotiating with a new tenant along with costs (such as maintenance, property taxes, utilities, etc.) that we will incur while the facility is untenanted may be costly and require a disproportionate amount of management’s attention. There can be no assurance that we would be able to find another tenant in a timely fashion, or at all, or that, if another tenant were found, we would be able to enter into a new lease on favorable terms. If we are unable to re-let the properties to healthcare operators, we may be forced to sell the properties at a loss due to the repositioning expenses likely to be incurred by non-healthcare purchasers. Alternatively, we may be required to spend substantial amounts to adapt the facility to other uses. Thus, the non-renewal or extension of leases may adversely affect our results of operations, financial condition, and our ability to make distributions to our stockholders. This risk is even greater for those properties under master leases (like Steward, Prime, MEDIAN, Ernest, and RCCH) because several properties have the same lease ending dates.

 

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We have made investments in the operators of certain of our healthcare facilities and the cash flows (and related returns) from these investments are subject to more volatility than our properties with the traditional net leasing structure.

At December 31, 2016, we have 11 investments in the operations of certain of our healthcare facilities by utilizing RIDEA (or similar investments). These investments include profits interest, equity investments, and equity like loans that generate returns dependent upon the operator’s performance. As a result, the cash flow and returns from these investments may be more volatile than that of our traditional triple-net leasing structure. Our business, results of operations, and financial condition may be adversely affected if the related operators fail to successfully operate the facilities efficiently and in a manner that is in our best interest.

We have limited experience with healthcare facilities in Germany, the United Kingdom, Italy, and Spain or anywhere else outside the U.S.

We have limited experience investing in healthcare properties or other real estate-related assets located outside the U.S. Investing in real estate located in foreign countries, including Germany, the United Kingdom, Italy, and Spain, creates risks associated with the uncertainty of foreign laws and markets including, without limitation, laws respecting foreign ownership, the enforceability of loan and lease documents and foreclosure laws. German real estate and tax laws are complex and subject to change, and we cannot assure you we will always be in compliance with those laws or that compliance will not expose us to additional expense. The properties we acquired in connection with the MEDIAN acquisition (as more fully described in Note 3 to Item 8 of this Form 10-K) will also face risks in connection with unexpected changes in German or European regulatory requirements, political and economic instability, potential imposition of adverse or confiscatory taxes, possible challenges to the anticipated tax treatment of the structures that allow us to acquire and hold investments, possible currency transfer restrictions, the difficulty in enforcing obligations in other countries and the burden of complying with a wide variety of foreign laws. In addition, to qualify as a REIT, we generally will be required to operate any non-U.S. investments in accordance with the rules applicable to U.S. REITs, which may be inconsistent with local practices. We may also be subject to fluctuations in local real estate values or markets or the European economy as a whole, which may adversely affect our European investments.

In addition, the rents payable under our leases of foreign assets are payable in either euros or British pounds, which could expose us to losses resulting from fluctuations in exchange rates to the extent we have not hedged our position, which in turn could adversely affect our revenues, operating margins and dividends, and may also affect the book value of our assets and the amount of stockholders’ equity. Further, any international currency gain recognized with respect to changes in exchange rates may not qualify under the 75% gross income test that we must satisfy annually in order to qualify and maintain our status as a REIT. Although we expect to hedge some of our foreign currency risk, we may not be able to do so successfully and may incur losses on our investments as a result of exchange rate fluctuations. Furthermore, we are subject to laws and regulations, such as the Foreign Corrupt Practices Act and similar local anti-bribery laws, that generally prohibit companies and their employees, agents and contractors from making improper payments to governmental officials for the purpose of obtaining or retaining business. Failure to comply with these laws could subject us to civil and criminal penalties that could materially adversely affect our results of operations, the value of our international investments, and our ability to make distributions to our stockholders.

Our revenues are dependent upon our relationships with, and success of, our largest tenants, Steward, Prime, MEDIAN, Ernest, RCCH and Adeptus Health.

For the year ended December 31, 2016, our top tenants were Steward, Prime, MEDIAN, Ernest, RCCH, and Adeptus Health representing 4.8% (based on fourth quarter revenue only when we closed the Steward acquisition), 22.3%, 17.3%, 12.5%, 9.7% and 7.0 %, respectively, of our total revenues. Our relationships with these operators and their financial performance and resulting ability to satisfy their lease and loan obligations to us are material to our financial results and our ability to service our debt and make distributions to our stockholders. We are dependent

 

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upon the ability of these operators to make rent and loan payments to us, and any failure to meet these obligations could have a material adverse effect on our financial condition and results of operations.

Our tenants operate in the healthcare industry that is highly regulated by federal, state, and local laws and changes in regulations may negatively impact our tenants’ operations until they are able to make the appropriate adjustments to their business. For example, recent modifications to regulations concerning patient criteria and reimbursement for LTACHs have resulted in volume and profitability declines in certain facilities operated by Ernest.

We are aware of various federal and state inquiries, investigations and other proceedings currently affecting several of our tenants and would expect such government compliance and enforcement activities to be ongoing at any given time with respect to one or more of our tenants, either on a confidential or public basis. During the second quarter of 2016, the Department of Justice joined a lawsuit against Prime alleging irregular admission practices intended to increase the number of inpatient care admissions of Medicare patients, including unnecessarily classifying some patients as “inpatient” rather than “observation”. Other large acute hospital operators have also recently defended similar allegations, sometimes resulting in financial settlements and agreements with regulators to modify admission policies, resulting in lower reimbursements for those patients.

In November 2016, Adeptus Health disclosed that it raised approximately $57 million in liquidity in order to address a cash shortfall that it reported was a result of inattention to revenue collection and expense controls and changes in its business model. Adeptus Health is a rapidly expanding company and has, during the second half of 2016, replaced its Chief Executive Officer, Chief Financial Officer and Corporate Controller.

An adverse result to Ernest, Prime, Adeptus Health, or one of our larger tenants in regulatory proceedings or financial or operational setbacks may have a material adverse effect on the relevant tenant’s operations and financial condition and on its ability to make required lease and loan payments to us, which could negatively affect our ability to service our debt and make distributions to our stockholders. The protections that we have in place to protect against such failure or delay, which can include letters of credit, cross default provisions, parent guarantees, repair reserves and the right to exercise remedies including the termination of the lease and replacement of the operator, may prove to be insufficient, in whole or in part, or may entail further delays. In instances where we have an equity investment in our tenant’s operations, in addition to the effect on these tenants’ ability to meet their financial obligation to us, our ownership and investment interests may also be negatively impacted.

We have now, and may have in the future, exposure to contingent rent escalators, which could hinder our growth and profitability.

We receive a significant portion of our revenues by leasing assets under long-term net leases that generally provide for fixed rental rates subject to annual escalations. These annual escalations may be contingent on changes in CPI, typically with specified caps and floors. Certain of our other leases may provide for additional rents contingent upon a percentage of the tenant’s revenues in excess of specified threshold. If, as a result of weak economic conditions or other factors, the CPI does not increase or the properties subject to these leases do not generate sufficient revenue to achieve the specified threshold, our growth and profitability may be hindered by these leases. In addition, if strong economic conditions result in significant increases in CPI, but the escalations under our leases are capped, our growth and profitability may be limited.

The bankruptcy or insolvency of our tenants or investees could harm our operating results and financial condition.

Some of our tenants/investees are, and some of our prospective tenants/investees may be, newly organized, have limited or no operating history and may be dependent on loans from us to acquire the facility’s operations and for initial working capital. Any bankruptcy filings by or relating to one of our tenants/investees could bar us

 

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from collecting pre-bankruptcy debts from that tenant or their property, unless we receive an order permitting us to do so from the bankruptcy court. A tenant bankruptcy can be expected to delay our efforts to collect past due balances under our leases and loans, and could ultimately preclude collection of these sums. If a lease is assumed by a tenant in bankruptcy, we expect that all pre-bankruptcy balances due under the lease would be paid to us in full. However, if a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any secured claims we have against our tenants may only be paid to the extent of the value of the collateral, which may not cover any or all of our losses. Any unsecured claim (such as our equity interests in our tenants) we hold against a bankrupt entity may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. We may recover none or substantially less than the full value of any unsecured claims, which would harm our financial condition.

Our business is highly competitive and we may be unable to compete successfully.

We compete for development opportunities and opportunities to purchase healthcare facilities with, among others:

 

    private investors, including large private equity funds;

 

    healthcare providers, including physicians;

 

    other REITs;

 

    real estate developers;

 

    government-sponsored and/or not-for-profit agencies;

 

    financial institutions; and

 

    other lenders.

Some of these competitors may have substantially greater financial and other resources than we have and may have better relationships with lenders and sellers. Competition for healthcare facilities from competitors may adversely affect our ability to acquire or develop healthcare facilities and the prices we pay for those facilities. If we are unable to acquire or develop facilities or if we pay too much for facilities, our revenue, earnings growth and financial return could be materially adversely affected. Certain of our facilities, or facilities we may acquire or develop in the future will face competition from other nearby facilities that provide services comparable to those offered at our facilities. Some of those facilities are owned by governmental agencies and supported by tax revenues, and others are owned by tax-exempt corporations and may be supported to a large extent by endowments and charitable contributions. Those types of support are not generally available to our facilities. In addition, competing healthcare facilities located in the areas served by our facilities may provide healthcare services that are not available at our facilities and additional facilities we may acquire or develop. From time to time, referral sources, including physicians and managed care organizations, may change the healthcare facilities to which they refer patients, which could adversely affect our tenants and thus our rental revenues, interest income, and/or our earnings from equity investments.

Most of our current tenants have, and prospective tenants may have, an option to purchase the facilities we lease to them which could disrupt our operations.

Most of our current tenants have, and some prospective tenants will have, the option to purchase the facilities we lease to them. There is no assurance that the formulas we have developed for setting the purchase price will yield a fair market value purchase price.

In the event our tenants and prospective tenants determine to purchase the facilities they lease either during the lease term or after their expiration, the timing of those purchases may be outside of our control and we may not be able to re-invest the capital on as favorable terms, or at all. Our inability to effectively manage the turnover of our facilities could materially adversely affect our ability to execute our business plan and our results of operations.

 

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We have 131 leased properties that are subject to purchase options as of December 31, 2016. For 104 of these properties, the purchase option generally allows the lessee to purchase the real estate at the end of the lease term, as long as no default has occurred, at a price equivalent to the greater of (i) fair market value or (ii) our original purchase price (increased, in some cases, by a certain annual rate of return from lease commencement date). The lease agreements provide for an appraisal process to determine fair market value. For 17 of these properties, the purchase option generally allows the lessee to purchase the real estate at the end of the lease term, as long as no default has occurred, at our purchase price (increased, in some cases, by a certain annual rate of return from lease commencement date). For the remaining 10 leases, the purchase options approximate fair value. At December 31, 2016, none of our leases contained any bargain purchase options.

In certain circumstances, a prospective purchaser of our hospital real estate may be deemed to be subject to Anti-Kickback and Stark statutes, which are described on in the “Healthcare Regulatory Matters” section in Item 1 of this Annual Report on Form 10-K. In such event, it may not be practicable for us to sell property to such prospective purchasers at prices other than fair market value.

We may not be able to adapt our management and operational systems to manage the net-leased facilities we have acquired or are developing or those that we may acquire or develop in the future without unanticipated disruption or expense.

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, including those properties located in Europe or any future investments outside the U.S. Our failure to successfully manage our current portfolio of facilities or any future acquisitions or developments could have a material adverse effect on our results of operations and financial condition and our ability to make distributions to our stockholders.

Merger and acquisition activity or consolidation in the healthcare industry may result in a change of control of, or a competitor’s investment in, one or more of our tenants or operators, which could have a material adverse effect on us.

The healthcare industry has recently experienced increased consolidation, including among owners of real estate and healthcare providers. We compete with other healthcare REITs, healthcare providers, healthcare lenders, real estate partnerships, banks, insurance companies, private equity firms and other investors that pursue a variety of investments, which may include investments in our tenants or operators. We have historically developed strong, long-term relationships with many of our tenants and operators. A competitor’s investment in one of our tenants or operators, any change of control of a tenant or operator, or a change in the tenant’s or operator’s management team could enable our competitor to influence or control that tenant’s or operator’s business and strategy. This influence could have a material adverse effect on us by impairing our relationship with the tenant or operator, negatively affecting our interest, or impacting the tenant’s or operator’s financial and operational performance, including their ability to pay us rent or interest. Depending on our contractual agreements and the specific facts and circumstances, we may have consent rights, termination rights, remedies upon default or other rights and remedies related to a competitor’s investment in, a change of control of, or other transactions impacting a tenant or operator. In deciding whether to exercise our rights and remedies, including termination rights or remedies upon default, we assess numerous factors, including legal, contractual, regulatory, business and other relevant considerations.

We depend on key personnel, the loss of any one of whom may threaten our ability to operate our business successfully.

We depend on the services of Edward K. Aldag, Jr., R. Steven Hamner, and Emmett E. McLean to carry out our business and investment strategy. If we were to lose any of these executive officers, it may be more difficult for us to locate attractive acquisition targets, complete our acquisitions and manage the facilities that we have

 

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acquired or developed. Additionally, as we expand, we will continue to need to attract and retain additional qualified officers and employees. The loss of the services of any of our executive officers, or our inability to recruit and retain qualified personnel in the future, could have a material adverse effect on our business and financial results.

The market price and trading volume of our common stock may be volatile.

The market price of our common stock may be highly volatile and be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above your purchase price.

We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

 

    actual or anticipated variations in our quarterly operating results or distributions;

 

    changes in our funds from operations or earnings estimates or publication of research reports about us or the real estate industry;

 

    increases in market interest rates that lead purchasers of our shares of common stock to demand a higher yield;

 

    changes in market valuations of similar companies;

 

    adverse market reaction to any increased indebtedness we incur in the future;

 

    additions or departures of key management personnel;

 

    actions by institutional stockholders;

 

    local conditions such as an oversupply of, or a reduction in demand for, inpatient rehabilitation hospitals, LTACHs, ambulatory surgery centers, medical office buildings, specialty hospitals, skilled nursing facilities, regional and community hospitals, women’s and children’s hospitals and other single-discipline facilities;

 

    speculation in the press or investment community; and

 

    general market and economic conditions.

Future sales of common stock may have adverse effects on our stock price.

We cannot predict the effect, if any, of future sales of common stock, or the availability of shares for future sales, on the market price of our common stock. Sales of substantial amounts of common stock, or the perception that these sales could occur, may adversely affect prevailing market prices for our common stock. We may issue from time to time additional common stock or units of our operating partnership in connection with the acquisition of facilities and we may grant additional demand or piggyback registration rights in connection with these issuances. Sales of substantial amounts of common stock or the perception that these sales could occur may adversely affect the prevailing market price for our common stock. In addition, the sale of these shares could impair our ability to raise future capital through a sale of additional equity securities.

Downgrades in our credit ratings could have a material adverse effect on our cost and availability of capital.

As of February 24, 2017, our corporate credit rating from Standard and Poor’s Ratings Service was BB+, and our corporate family rating from Moody’s Investors Service was Ba1. There can be no assurance that we will

 

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be able to maintain our current credit ratings. Any downgrades in terms of ratings or outlook by any or all of the rating agencies could have a material adverse effect on our cost and availability of capital, which could in turn have a material adverse effect on our financial condition and results of operations.

An increase in market interest rates may have an adverse effect on the market price of our securities.

One of the factors that investors may consider in deciding whether to buy or sell our securities is our distribution rate as a percentage of our price per share of common stock, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher distribution on our securities or seek securities paying higher distributions. The market price of our common stock likely will be based primarily on the earnings that we derive from rental and interest income with respect to our facilities and our related distributions to stockholders, and not from the underlying appraised value of the facilities themselves. As a result, interest rate fluctuations and capital market conditions can affect the market price of our common stock. In addition, rising interest rates would result in increased interest expense on our variable-rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and make distributions.

Changes in currency exchange rates may subject us to risk.

As our operations have expanded internationally where the U.S. dollar is not the denominated currency, currency exchange rate fluctuations could affect our results of operations and financial position. A significant change in the value of the foreign currency of one or more countries where we have a significant investment may have a material adverse effect on our financial position, debt covenant ratios, results of operations and cash flow.

Although we may enter into foreign exchange agreements with financial institutions and/or obtain local currency mortgage debt in order to reduce our exposure to fluctuations in the value of foreign currencies, we cannot assure you that foreign currency fluctuations will not have a material adverse effect on us.

The United Kingdom’s exit from the European Union could adversely affect us.

On June 23, 2016, the United Kingdom held a referendum in which a majority of voters voted to exit the European Union, known as Brexit. Negotiations have commenced to determine the future terms of the United Kingdom’s relationship with the European Union, including, among other things, the terms of trade between the United Kingdom and the European Union. The effects of Brexit will depend on any agreements the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. Brexit could adversely affect European and global economic or market conditions and could contribute to instability in global financial markets. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replace or replicate. Any of these effects of Brexit, and others we cannot anticipate, may adversely affect us.

We currently hold, and may acquire additional, interests in healthcare facilities located in the United Kingdom and Europe, as well as other investments that are denominated in British pounds and euros. In addition, our operating partnership has issued, and may issue in the future, senior unsecured notes denominated in euros. Any of the effects of Brexit described above, and others we cannot anticipate, could have a material adverse effect on our business, the value of our real estate and other investments, and our potential growth in Europe, and could amplify the currency risks faced by us.

RISKS RELATING TO REAL ESTATE INVESTMENTS

Our real estate, mortgage, and equity investments are and are expected to continue to be concentrated in a single industry segment, making us more vulnerable economically than if our investments were more diversified.

We acquire, develop, and make mortgage investments in healthcare real estate. In addition, we selectively make RIDEA investments in healthcare operators. We are subject to risks inherent in concentrating investments

 

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in real estate. The risks resulting from a lack of diversification become even greater as a result of our business strategy to invest solely in healthcare facilities. A downturn in the real estate industry could materially adversely affect the value of our facilities. A downturn in the healthcare industry could negatively affect our tenants’ ability to make lease or loan payments to us as well as our return on our equity investments. Consequently, our ability to meet debt service obligations or make distributions to our stockholders are dependent on the real estate and healthcare industries. These adverse effects could be more pronounced than if we diversified our investments outside of real estate or outside of healthcare facilities.

Our facilities may not have efficient alternative uses, which could impede our ability to find replacement tenants in the event of termination or default under our leases.

All of the facilities in our current portfolio are and all of the facilities we expect to acquire or develop in the future will be net-leased healthcare facilities. If we, or our tenants, terminate the leases for these facilities, or if these tenants lose their regulatory authority to operate these facilities, we may not be able to locate suitable replacement tenants to lease the facilities for their specialized uses. Alternatively, we may be required to spend substantial amounts to adapt the facilities to other uses. Any loss of revenues or additional capital expenditures occurring as a result could have a material adverse effect on our financial condition and results of operations and could hinder our ability to meet debt service obligations or make distributions to our stockholders.

Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our facilities and harm our financial condition.

Real estate investments are relatively illiquid. Additionally, the real estate market is affected by many factors beyond our control, including adverse changes in global, national, and local economic and market conditions and the availability, costs and terms of financing. Our ability to quickly sell or exchange any of our facilities in response to changes in economic and other conditions will be limited. No assurances can be given that we will recognize full value for any facility that we are required to sell for liquidity reasons. Our inability to respond rapidly to changes in the performance of our investments could adversely affect our financial condition and results of operations.

Development and construction risks could adversely affect our ability to make distributions to our stockholders.

We have developed and constructed facilities in the past and are currently developing six facilities. We will develop additional facilities in the future as opportunities present themselves. Our development and related construction activities may subject us to the following risks:

 

    we may have to compete for suitable development sites;

 

    our ability to complete construction is dependent on there being no title, environmental or other legal proceedings arising during construction;

 

    we may be subject to delays due to weather conditions, strikes and other contingencies beyond our control;

 

    we may be unable to obtain, or suffer delays in obtaining, necessary zoning, land-use, building, occupancy healthcare regulatory and other required governmental permits and authorizations, which could result in increased costs, delays in construction, or our abandonment of these projects;

 

    we may incur construction costs for a facility which exceed our original estimates due to increased costs for materials or labor or other costs that we did not anticipate; and

 

    we may not be able to obtain financing on favorable terms, which may render us unable to proceed with our development activities.

 

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We expect to fund our development projects over time. The time frame required for development and construction of these facilities means that we may have to wait for some time to earn significant cash returns. In addition, our tenants may not be able to obtain managed care provider contracts in a timely manner or at all. Finally, there is no assurance that future development projects will occur without delays and cost overruns. Risks associated with our development projects may reduce anticipated rental revenue which could affect the timing of, and our ability to make, distributions to our stockholders.

We may be subject to risks arising from future acquisitions of real estate.

We may be subject to risks in connection with our acquisition of healthcare real estate, including without limitation the following:

 

    we may have no previous business experience with the tenants at the facilities acquired, and we may face difficulties in managing them;

 

    underperformance of the acquired facilities due to various factors, including unfavorable terms and conditions of the existing lease agreements relating to the facilities, disruptions caused by the management of our tenants or changes in economic conditions;

 

    diversion of our management’s attention away from other business concerns;

 

    exposure to any undisclosed or unknown potential liabilities relating to the acquired facilities; and

 

    potential underinsured losses on the acquired facilities.

We cannot assure you that we will be able to manage the new properties without encountering difficulties or that any such difficulties will not have a material adverse effect on us.

Our facilities may not achieve expected results or we may be limited in our ability to finance future acquisitions, which may harm our financial condition and operating results and our ability to make the distributions to our stockholders required to maintain our REIT status.

Acquisitions and developments entail risks that investments will fail to perform in accordance with expectations and that estimates of the costs of improvements necessary to acquire and develop facilities will prove inaccurate, as well as general investment risks associated with any new real estate investment. Newly-developed or newly-renovated facilities may not have operating histories that are helpful in making objective pricing decisions. The purchase prices of these facilities will be based in part upon projections by management as to the expected operating results of the facilities, subjecting us to risks that these facilities may not achieve anticipated operating results or may not achieve these results within anticipated time frames.

We anticipate that future acquisitions and developments will largely be financed through externally generated funds such as borrowings under credit facilities and other secured and unsecured debt financing and from issuances of equity securities. Because we must distribute at least 90% of our REIT taxable income, excluding net capital gains, each year to maintain our qualification as a REIT, our ability to rely upon income from operations or cash flows from operations to finance our growth and acquisition activities will be limited.

If our facilities do not achieve expected results and generate ample cash flows from operations or if we are unable to obtain funds from borrowings or the capital markets to finance our acquisition and development activities, amounts available for distribution to stockholders could be adversely affected and we could be required to reduce distributions, thereby jeopardizing our ability to maintain our status as a REIT.

If we suffer losses that are not covered by insurance or that are in excess of our insurance coverage limits, we could lose investment capital and anticipated profits.

Our leases generally require our tenants to carry property, general liability, professional liability, loss of earnings, all risk and extended coverage insurance in amounts sufficient to permit the replacement of the facility

 

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in the event of a total loss, subject to applicable deductibles. We carry general liability insurance and loss of earnings coverage on all of our properties as a contingent measure in case our tenant’s coverage is not sufficient. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes and acts of terrorism, which may be uninsurable or not insurable at a price we or our tenants can afford. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it impracticable to use insurance proceeds to replace a facility after it has been damaged or destroyed. Under such circumstances, the insurance proceeds we receive might not be adequate to restore our economic position with respect to the affected facility. If any of these or similar events occur, it may reduce our return from the facility and the value of our investment. We continually review the insurance maintained by our tenants and operators and believe the coverage provided to be adequate and customary for similarly situated companies in our industry. However, we cannot provide any assurances that such insurance will be available at a reasonable cost in the future. Also, we cannot assure you that material uninsured losses, or losses in excess of insurance proceeds, will not occur in the future.

Our capital expenditures for facility renovation may be greater than anticipated and may adversely impact rent payments by our tenants and our ability to make distributions to stockholders.

Facilities, particularly those that consist of older structures, have an ongoing need for renovations and other capital improvements, including periodic replacement of fixtures and fixed equipment. Although our leases require our tenants to be primarily responsible for the cost of such expenditures, renovation of facilities involves certain risks, including the possibility of environmental problems, regulatory requirements, construction cost overruns and delays, uncertainties as to market demand or deterioration in market demand after commencement of renovation and the emergence of unanticipated competition from other facilities. All of these factors could adversely impact rent and loan payments by our tenants and returns on our equity investments, which in turn could have a material adverse effect on our financial condition and results of operations along with our ability to make distributions to our stockholders.

All of our healthcare facilities are subject to property taxes that may increase in the future and adversely affect our business.

Our facilities are subject to real and personal property taxes that may increase as property tax rates change and as the facilities are assessed or reassessed by taxing authorities. Our leases generally provide that the property taxes are charged to our tenants as an expense related to the facilities that they occupy. As the owner of the facilities, however, we are ultimately responsible for payment of the taxes to the government. If property taxes increase, our tenants may be unable to make the required tax payments, ultimately requiring us to pay the taxes. If we incur these tax liabilities, our ability to make expected distributions to our stockholders could be adversely affected. In addition, if such taxes increase on properties in which we have an equity investment in the tenant, our return on investment maybe negatively affected.

As the owner and lessor of real estate, we are subject to risks under environmental laws, the cost of compliance with which and any violation of which could materially adversely affect us.

Our operating expenses could be higher than anticipated due to the cost of complying with existing and future environmental laws and regulations. Various environmental laws may impose liability on the current or prior owner or operator of real property for removal or remediation of hazardous or toxic substances. Current or prior owners or operators may also be liable for government fines and damages for injuries to persons, natural resources and adjacent property. These environmental laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence or disposal of the hazardous or toxic substances. The cost of complying with environmental laws could materially adversely affect amounts available for distribution to our stockholders and could exceed the value of all of our facilities. In addition, the presence of hazardous or toxic substances, or the failure of our tenants to properly manage, dispose of or remediate such substances, including medical waste generated by physicians and our other healthcare tenants, may adversely affect our tenants or our

 

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ability to use, sell or rent such property or to borrow using such property as collateral which, in turn, could reduce our revenue and our financing ability. We typically obtain Phase I environmental assessments (or similar studies) on facilities we acquire or develop or on which we make mortgage loans, and intend to obtain on future facilities we acquire. However, even if the Phase I environmental assessment reports do not reveal any material environmental contamination, it is possible that material environmental contamination and liabilities may exist, of which we are unaware.

Although the leases for our facilities and our mortgage loans generally require our operators to comply with laws and regulations governing their operations, including the disposal of medical waste, and to indemnify us for certain environmental liabilities, the scope of their obligations may be limited. We cannot assure you that our tenants would be able to fulfill their indemnification obligations and, therefore, any material violation of environmental laws could have a material adverse affect on us. In addition, environmental laws are constantly evolving, and changes in laws, regulations or policies, or changes in interpretations of the foregoing, could create liabilities where none exist today.

Our interests in facilities through ground leases expose us to the loss of the facility upon breach or termination of the ground lease and may limit our use of the facility.

We have acquired interests in 33 of our facilities, at least in part, by acquiring leasehold interests in the land on which the facility is located rather than an ownership interest in the property, and we may acquire additional facilities in the future through ground leases. As lessee under ground leases, we are exposed to the possibility of losing the property upon termination, or an earlier breach by us, of the ground lease. Ground leases may also restrict our use of facilities, which may limit our flexibility in renting the facility and may impede our ability to sell the property.

Our acquisitions may not prove to be successful.

We are exposed to the risk that some of our acquisitions may not prove to be successful. We could encounter unanticipated difficulties and expenditures relating to any acquired properties, including contingent liabilities, and acquired properties might require significant management attention that would otherwise be devoted to our ongoing business. In addition, we might be exposed to undisclosed and unknown liabilities related to any acquired properties. If we agree to provide construction funding to an operator/tenant and the project is not completed, we may need to take steps to ensure completion of the project. Moreover, if we issue equity securities or incur additional debt, or both, to finance future acquisitions, it may reduce our per share financial results. These costs may negatively affect our results of operations.

RISKS RELATING TO THE HEALTHCARE INDUSTRY

Reductions in reimbursement from third-party payors and shift towards alternative payment models, could adversely affect the profitability of our tenants and hinder their ability to make payments to us.

Sources of revenue for our tenants and operators may include the Medicare and Medicaid programs, private insurance carriers, and health maintenance organizations, among others. Efforts by such payors to reduce healthcare costs could continue, which may result in reductions or slower growth in reimbursement for certain services provided by some of our tenants. In addition, the failure of any of our tenants to comply with various laws and regulations could jeopardize their ability to continue participating in Medicare, Medicaid, and other government-sponsored payment programs.

The U.S. healthcare industry continues to face various challenges, including increased government and private payor pressure on healthcare providers to control or reduce costs. For example, we believe that our tenants will continue to experience a shift in payor mix away from fee-for-service payors, which would result in an increase in the percentage of revenues attributable to alternative payment models implemented by private and

 

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government payors. CMS is particularly focused on transitioning Medicare from its traditional fee-for-service model to models that employ one or more capitated, value-based, or bundled payment approaches, and private payors are continuing to explore and implement similar types of alternative payment models. Such efforts from private and government payors, in addition to general industry trends, continue to place pressures on our tenants to control healthcare costs. Furthermore, pressures to control healthcare costs and a shift away from traditional health insurance reimbursement have resulted in an increase in the number of patients whose healthcare coverage is provided under managed care plans, such as health maintenance organizations and preferred provider organizations. These shifts place further cost pressures on our tenants. We also continue to believe that, due to the aging of the population and the expansion of governmental payor programs, there will be a marked increase in the number of patients relying on healthcare coverage provided by governmental payors. All of these changes could have a material adverse effect on the financial condition of some or all of our tenants, which could have a material adverse effect on our financial condition and results of operations and could negatively affect our ability to make distributions to our stockholders. In instances where we have an equity investment in our tenants’ operations, in addition to the effect on these tenants’ ability to meet their financial obligations to us, our ownership and investment interests may also be negatively impacted.

CMS’s increased regulatory restrictions on reimbursement for LTACH and inpatient rehabilitation facilities (“IRFs”), has reduced reimbursement for some tenants that operate LTACHs and IRFs, and CMS has also begun to implement regulatory restrictions on reimbursement for hospital outpatient departments (“HOPD”), which may also lead to reduced to reimbursement for our tenants that operate HOPDs. CMS is likely to continue exploring other restrictions on LTACH, IRF, and HOPD reimbursement and possibly develop more restrictive facility and patient level criteria for these types of facilities or departments. These changes could have a material adverse effect on the financial condition of some of our tenants, which could have a material adverse effect on our financial condition and results of operations and could negatively affect our ability to make distributions to our stockholders.

The Reform Law represented a major shift in the U.S. healthcare industry by, among other things, allowing millions of formerly uninsured individuals to obtain health insurance coverage and by significantly expanding Medicaid. The Reform Law, however, remains controversial, and there are continuing efforts to repeal and replace the Reform Law. In the event the Reform Law is repealed, this could have a material adverse effect on the financial condition of some or all of our tenants.

The U.S. healthcare industry is heavily regulated and loss of licensure or certification or failure to obtain licensure or certification could negatively impact our financial condition and results of operations.

The U.S. healthcare industry is highly regulated by federal, state, and local laws (as discussed on pages 10-13) and is directly affected by federal conditions of participation, state licensing requirements, facility inspections, state and federal reimbursement policies, regulations concerning capital and other expenditures, certification requirements and other such laws, regulations, and rules. We are aware of various federal and state inquiries, investigations, and other proceedings currently affecting several of our tenants and would expect such governmental compliance and enforcement activities to be ongoing at any given time with respect to one or more of our tenants, either on a confidential or public basis. As discussed in further detail below, an adverse result to our tenants in one or more such governmental proceedings may have a material adverse effect on the relevant tenant’s operations and financial condition and on its ability to make required lease and/or mortgage payments to us. In instances where we have an equity investment in our tenants’ operations, in addition to the effect on these tenants’ ability to meet their financial obligation to us, our ownership and investment interests may also be negatively impacted.

Licensed health care facilities must comply with minimum health and safety standards and are subject to survey and inspection by state and federal agencies and their agents or affiliates, including CMS, the Joint Commission, and state departments of health. CMS develops Conditions of Participation and Conditions for Coverage that health care organizations must meet in order to begin and continue participating in the Medicare

 

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and Medicaid programs and receive payment under such programs. These minimum health and safety standards are aimed at improving quality and protecting the health and safety of beneficiaries, and there are several common criteria that exist across health entities. The failure to comply with any of these standards could jeopardize a healthcare organization’s Medicare certification and, in turn, its right to receive payment under the Medicare and Medicaid programs.

Further, many hospitals and other institutional providers are accredited by accrediting agencies such as the Joint Commission, a national healthcare accrediting organization. The Joint Commission was created to accredit healthcare organizations that meet its minimum health and safety standards. A national accrediting organization, such as the Joint Commission, enforces standards that meet or exceed such requirements. Surveyors for the Joint Commission, prior to the opening of a facility and approximately every three years thereafter, conduct on site surveys of facilities for compliance with a multitude of patient safety, treatment, and administrative requirements. Facilities may lose accreditation for failure to meet such requirements, which in turn may result in the loss of license or certification including under the Medicare and Medicaid programs. For example, a facility may lose accreditation for failing to maintain proper medication in the operating room to treat potentially fatal reactions to anesthesia or for failure to maintain safe and sanitary medical equipment.

Finally, healthcare facility reimbursement practices and quality of care issues may result in loss of license or certification. For instance, the practice of “upcoding,” whereby services are billed for higher procedure codes than were actually performed, may lead to the revocation of a hospital’s license. An event involving poor quality of care, such as that which leads to the serious injury or death of a patient, may also result in loss of license or certification. Prime continues certain litigation against the Service Employees International Union (“SEIU”) relating to allegations that SEIU and other defendants conspired to drive Prime out of certain markets, primarily by lobbying for governmental action relating to alleged fraudulent billing practices. Prime has addressed these fraudulent billing practice allegations publicly and has provided clinical and other data to us refuting these allegations. Prime has also informed us that SEIU regularly attempts to organize certain Prime employees. Prime has also disclosed a complaint filed against it by the U.S. Department of Justice relating to alleged improper admitting practices. Prime has addressed this complaint publicly and denied the allegations.

The failure of any tenant to comply with such laws, requirements, and regulations resulting in a loss of its license would affect its ability to continue its operation of the facility and would adversely affect the tenant’s ability to make lease and/or principal and interest payments to us. This, in turn, could have a material adverse effect on our financial condition and results of operations and could negatively affect our ability to make distributions to our stockholders. In instances where we have an equity investment in our tenants’ operations, in addition to the effects on these tenants’ ability to meet their financial obligations to us, our ownership and investment interests would be negatively impacted.

In addition, establishment of healthcare facilities and transfers of operations of healthcare facilities are subject to regulatory approvals not required for establishment, or transfers, of other types of commercial operations and real estate including, but not limited to, state certificate of need laws. Restrictions and delays in transferring the operations of healthcare facilities, in obtaining new third-party payor contracts, including Medicare and Medicaid provider agreements, and in receiving licensure and certification approval from appropriate state and federal agencies by new tenants, may affect our ability to terminate lease agreements, remove tenants that violate lease terms, and replace existing tenants with new tenants. Furthermore, these matters may affect a new tenant’s ability to obtain reimbursement for services rendered, which could adversely affect their ability to pay rent to us and/or to pay principal and interest on their loans from us. In instances where we have an equity investment in our tenants’ operations, in addition to the effect on these tenants’ ability to meet their financial obligations to us, our ownership and investment interests may also be negatively impacted.

 

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Our tenants are subject to fraud and abuse laws, the violation of which by a tenant may jeopardize the tenant’s ability to make payments to us and adversely affect their profitability.

As noted earlier, the federal government and numerous state governments have passed laws and regulations that attempt to eliminate healthcare fraud and abuse by prohibiting business arrangements that induce patient referrals or the ordering of specific ancillary services. In addition, federal and state governments continue to investigate and conduct enforcement activity to detect and eliminate fraud and abuse in the Medicare and Medicaid programs. It is anticipated that the trend toward increased investigation and enforcement activity in the areas of fraud and abuse and patient self-referrals will continue in future years. Violations of these laws may result in the imposition of criminal and civil penalties, including possible exclusion from federal and state healthcare programs. Imposition of any of these penalties upon any of our tenants could jeopardize a tenant’s ability to operate a facility or to make lease and/or loan payments, thereby potentially adversely affecting us. In instances where we have an equity investment in our tenants’ operations, in addition to the effect on the tenants’ ability to meet their financial obligations to us, our ownership and investment interests may also be negatively impacted.

Some of our tenants have accepted, and prospective tenants may accept, an assignment of the previous operator’s Medicare provider agreement. Such operators and other new-operator tenants that take assignment of Medicare provider agreements might be subject to liability for federal or state regulatory, civil, and criminal investigations of the previous owner’s operations and claims submissions. While we conduct due diligence in connection with the acquisition of such facilities, these types of issues may not be discovered prior to purchase. Adverse decisions, fines, or recoupments might negatively impact our tenants’ financial condition, and in turn their ability to make lease and/or loan payments to us. In instances where we have an equity investment in our tenants’ operations, in addition to the effect on these tenants’ ability to meet their financial obligations to us, our ownership and investment interests may also be negatively impacted.

Certain of our lease arrangements may be subject to fraud and abuse or physician self-referral laws.

Although no such investment exists today, physician investment in our operating partnership or our subsidiaries that own our facilities could subject our lease arrangements to scrutiny under fraud and abuse and physician self-referral laws. Under the Stark Law, and its implementing regulations, if our lease arrangements do not satisfy the requirements of an applicable exception, the ability of our tenants to bill for services provided to Medicare beneficiaries pursuant to referrals from physician investors could be adversely impacted and subject us and our tenants to fines, which could impact our tenants’ ability to make lease and loan payments to us. In instances where we have an equity investment in our tenants’ operations, in addition to the effect on the tenants’ ability to meet their financial obligations to us, our ownership and investment interests may also be negatively impacted.

We intend to use our good faith efforts to structure our lease arrangements to comply with these laws; however, if we are unable to do so, this failure may restrict our ability to permit physician investment or, where such physicians do participate, may restrict the types of lease arrangements into which we may enter, including our ability to enter into percentage rent arrangements.

We may be required to incur substantial renovation costs to make certain of our healthcare properties suitable for other operators and tenants.

Healthcare facilities are typically highly customized and may not be easily adapted to non-healthcare-related uses. The improvements generally required to conform a property to healthcare use can be costly and at times tenant-specific. A new or replacement operator or tenant may require different features in a property, depending on that operator’s or tenant’s particular business. If a current operator or tenant is unable to pay rent and/or vacates a property, we may incur substantial expenditures to modify a property before we are able to secure another operator or tenant. Also, if the property needs to be renovated to accommodate multiple operators or tenants, we may incur substantial expenditures before we are able to re-lease the space. These expenditures or renovations may have a material adverse effect on our business, results of operations, and financial condition.

 

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State certificate of need laws may adversely affect our development of facilities and the operations of our tenants.

Certain healthcare facilities in which we invest may also be subject to state laws which require regulatory approval in the form of a certificate of need prior to the transfer of a healthcare facility or prior to initiation of certain projects, including, but not limited to, the establishment of new or replacement facilities, the addition of beds, the addition or expansion of services and certain capital expenditures. State certificate of need laws are not uniform throughout the U.S., are subject to change, and may delay developments of facilities or acquisitions or certain other transfers of ownership of facilities. We cannot predict the impact of state certificate of need laws on any of the preceding activities or on the operations of our tenants. Certificate of need laws often materially impact the ability of competitors to enter into the marketplace of our facilities. In addition, in limited circumstances, loss of state licensure or certification or closure of a facility could ultimately result in loss of authority to operate the facility and require re-licensure or new certificate of need authorization to re-institute operations. As a result, a portion of the value of the facility may be related to the limitation on new competitors. In the event of a change in the certificate of need laws, this value may markedly change.

RISKS RELATING TO OUR ORGANIZATION AND STRUCTURE

Maryland law and our charter and bylaws contain provisions which may prevent or deter changes in management and third-party acquisition proposals that you may believe to be in your best interest, depress the price of Medical Properties common stock or cause dilution.

Our charter contains ownership limitations that may restrict business combination opportunities, inhibit change of control transactions and reduce the value of our common stock. To qualify as a REIT under the Internal Revenue Code of 1986, as amended, or the Code, no more than 50% in value of our outstanding stock, after taking into account options to acquire stock, may be owned, directly or indirectly, by five or fewer persons during the last half of each taxable year. Our charter generally prohibits direct or indirect ownership by any person of more than 9.8% in value or in number, whichever is more restrictive, of outstanding shares of any class or series of our securities, including our common stock. Generally, our common stock owned by affiliated owners will be aggregated for purposes of the ownership limitation. The ownership limitation could have the effect of delaying, deterring or preventing a change in control or other transaction in which holders of common stock might receive a premium for their common stock over the then-current market price or which such holders otherwise might believe to be in their best interests. The ownership limitation provisions also may make our common stock an unsuitable investment vehicle for any person seeking to obtain, either alone or with others as a group, ownership of more than 9.8% of either the value or number of the outstanding shares of our common stock.

Our charter and bylaws contain provisions that may impede third-party acquisition proposals that may be in the best interests of our stockholders. Our charter and bylaws also provide that our directors may only be removed by the affirmative vote of the holders of two-thirds of our common stock, that stockholders are required to give us advance notice of director nominations and new business to be conducted at our annual meetings of stockholders and that special meetings of stockholders can only be called by our president, our board of directors or the holders of at least 25% of stock entitled to vote at the meetings. These and other charter and bylaw provisions may delay or prevent a change of control or other transaction in which holders of our common stock might receive a premium for their common stock over the then-current market price or which such holders otherwise might believe to be in their best interests.

Our UPREIT structure may result in conflicts of interest between our stockholders and the holders of our operating partnership units.

We are organized as an umbrella partnership real estate investment trust, “UPREIT”, which means that we hold our assets and conduct substantially all of our operations through an operating limited partnership, and may issue operating partnership units to employees and/or third parties. Persons holding operating partnership units

 

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would have the right to vote on certain amendments to the partnership agreement of our operating partnership, as well as on certain other matters. Persons holding these voting rights may exercise them in a manner that conflicts with the interests of our stockholders. Circumstances may arise in the future, such as the sale or refinancing of one of our facilities, when the interests of limited partners in our operating partnership conflict with the interests of our stockholders. As the sole member of the general partner of the operating partnership, we have fiduciary duties to the limited partners of the operating partnership that may conflict with fiduciary duties that our officers and directors owe to its stockholders. These conflicts may result in decisions that are not in the best interest of our stockholders.

We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.

We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, and maintaining personal identifying information and tenant and lease data. We purchase or license some of our information technology from vendors, on whom our systems depend. We rely on commercially available systems, software, tools and monitoring to provide security for the processing, transmission and storage of confidential tenant data. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not prevent the systems’ improper functioning or the improper access or disclosure of our or our tenant’s information such as in the event of cyber-attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. The risk of security breaches has generally increased as the number, intensity and sophistication of attacks have increased. In some cases, it may be difficult to anticipate or immediately detect such incidents and the damage they cause. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a materially adverse effect on our business, financial condition and results of operations.

Changes in accounting pronouncements could adversely affect our operating results, in addition to the reported financial performance of our tenants.

Uncertainties posed by various initiatives of accounting standard-setting by the Financial Accounting Standards Board (“FASB”) and the Securities and Exchange Commission (“SEC”), which create and interpret applicable accounting standards for U.S. companies, may change the financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of our financial statements. Proposed changes include, but are not limited to, changes in lease accounting, revenue recognition and the adoption of accounting standards likely to require the increased use of “fair-value” measures.

These changes could have a material impact on our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in potentially material restatements of prior period financial statements. Similarly, these changes could have a material impact on our tenants’ reported financial condition or results of operations or could affect our tenants’ preferences regarding leasing real estate.

TAX RISKS ASSOCIATED WITH OUR STATUS AS A REIT

Loss of our tax status as a REIT would have significant adverse consequences to us and the value of our common stock.

We believe that we qualify as a REIT for federal income tax purposes and have elected to be taxed as a REIT under the federal income tax laws commencing with our taxable year that began on April 6, 2004, and

 

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ended on December 31, 2004. The REIT qualification requirements are extremely complex, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Accordingly, there is no assurance that we will be successful in operating so as to qualify as a REIT. At any time, new laws, regulations, interpretations or court decisions may change the federal tax laws relating to, or the federal income tax consequences of, qualification as a REIT. It is possible that future economic, market, legal, tax or other considerations may cause our board of directors to revoke the REIT election, which it may do without stockholder approval.

If we lose or revoke our REIT status, we will face serious tax consequences that will substantially reduce the funds available for distribution because:

 

    we would not be allowed a deduction for distributions to stockholders in computing our taxable income; therefore, we would be subject to federal income tax at regular corporate rates, and we might need to borrow money or sell assets in order to pay any such tax;

 

    we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and

 

    unless we are entitled to relief under statutory provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify.

As a result of all these factors, a failure to achieve or a loss or revocation of our REIT status could have a material adverse effect on our financial condition and results of operations and would adversely affect the value of our common stock.

Failure to make required distributions would subject us to tax.

In order to qualify as a REIT, each year we must distribute to our stockholders at least 90% of our REIT taxable income, excluding net capital gains. To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any year are less than the sum of (1) 85% of our ordinary income for that year; (2) 95% of our capital gain net income for that year; and (3) 100% of our undistributed taxable income from prior years.

We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Differences in timing between the recognition of income and the related cash receipts or the effect of required debt amortization payments could require us to borrow money or sell assets to pay out enough of our taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. In the future, we may borrow to pay distributions to our stockholders and the limited partners of our operating partnership. Any funds that we borrow would subject us to interest rate and other market risks.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. In order to meet these tests, we may be required to forego attractive business or investment opportunities. Currently, no more than 25% of the value of our assets may consist of securities of one or more TRSs and no more than 25% of the value of our assets may consist of securities that are not qualifying assets under the test requiring that 75% of a REIT’s assets consist of real estate and other related assets. In addition, at least 75% of our gross income must be generated from either rents from real estate or interest on loans secured by real estate (i.e. mortgage loans). Further, a TRS may not directly or indirectly operate or manage a healthcare facility. For purposes of this definition a “healthcare facility” means a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or

 

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other licensed facility which extends medical or nursing or ancillary services to patients and which is operated by a service provider that is eligible for participation in the Medicare program under Title XVIII of the Social Security Act with respect to the facility. Compliance with current and future changes to REIT requirements may limit our flexibility in executing our business plan.

If certain sale-leaseback transactions are not characterized by the Internal Revenue Service (“IRS”) as “true leases,” we may be subject to adverse tax consequences.

We have purchased certain properties and leased them back to the sellers of such properties, and we may enter into similar transactions in the future. We intend for any such sale-leaseback transaction to be structured in a manner that the lease will be characterized as a “true lease,” thereby allowing us to be treated as the owner of the property for U.S. federal income tax purposes. However, depending on the terms of any specific transaction, the IRS might take the position that the transaction is not a “true lease” but is more properly treated in some other manner. In the event any sale-leaseback transaction is challenged and successfully re-characterized, we might fail to satisfy the REIT asset tests or income test and, consequently could lose our REIT status effective with the year of re-characterizations.

Transactions with TRSs may be subject to excise tax.

We have historically entered into lease and other transactions with our TRSs and their subsidiaries and expect to continue to do so in the future. Under applicable rules, transactions such as leases between our TRSs and their parent REIT that are not conducted on a market terms basis may be subject to a 100% excise tax. While we believe that all of our transactions with our TRSs are at arm’s length, imposition of a 100% excise tax could have a material adverse effect on our financial condition and results of operations and could adversely affect the trading price of our common stock.

Loans to our tenants could be characterized as equity, in which case our income from that tenant might not be qualifying income under the REIT rules and we could lose our REIT status.

In connection with the acquisition in 2004 of certain Vibra Healthcare, LLC (“Vibra”) facilities, one of our TRSs made a loan to Vibra to acquire the operations at those Vibra facilities. The acquisition loan bore interest at an annual rate of 10.25%. Our operating partnership loaned the funds to the TRS to make this loan. The loan from our operating partnership to the TRS bore interest at an annual rate of 9.25%.

Like the Vibra loan discussed above, our TRSs have made and will make loans to tenants in our facilities to acquire operations or for working capital purposes. The IRS may take the position that certain loans to tenants should be treated as equity interests rather than debt, and that our interest income from such tenant should not be treated as qualifying income for purposes of the REIT gross income tests. If the IRS were to successfully treat a loan to a particular tenant as equity interests, the tenant would be a “related party tenant” with respect to our company and the rent that we receive from the tenant would not be qualifying income for purposes of the REIT gross income tests. As a result, we could be in jeopardy of failing the 75% income test discussed above, which if we did would cause us to lose our REIT status. In addition, if the IRS were to successfully treat a particular loan as interests held by our operating partnership rather than by our TRSs, we could fail the 5% asset test, and if the IRS further successfully treated the loan as other than straight debt, we could fail the 10% asset test with respect to such interest. As a result of the failure of either test, we could lose our REIT status, which would subject us to corporate level income tax and adversely affect our ability to make distributions to our stockholders.

Certain property transfers may generate prohibited transaction income, resulting in a penalty tax on gain attributable to the transaction.

From time to time, we may transfer or otherwise dispose of some of our properties, including by contributing properties to our co-investment ventures. Under the Code, any gain resulting from transfers of

 

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properties we hold as inventory or primarily for sale to customers in the ordinary course of business is treated as income from a prohibited transaction subject to a 100% penalty tax. We do not believe that our transfers or disposals of property or our contributions of properties into our co-investment ventures are prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The IRS may contend that certain transfers or dispositions of properties by us or contributions of properties into our co-investment ventures are prohibited transactions. While we believe that the IRS would not prevail in any such dispute, if the Code were to argue successfully that a transfer, disposition or contribution of property constituted a prohibited transaction, we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction. In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a REIT.

Changes in U.S. or foreign tax laws, regulations, including changes to tax rates, may adversely affect our results of operations.

We are headquartered in the U.S. with subsidiaries and investments globally and are subject to income taxes in these jurisdictions. Significant judgment is required in determining our provision for income taxes. Although we believe that we have adequately assessed and accounted for our potential tax liabilities, and that our tax estimates are reasonable, there can be no assurance that additional taxes will not be due upon audit of our tax returns or as a result of changes to applicable tax laws. The U.S. government (particularly with the recent presidential election coupled with a Republican-controlled Congress) as well as the governments of many of the countries in which we operate (such as Germany, the United Kingdom, and Luxembourg, which is where our Europe entities are domiciled) are actively discussing changes to the corporate recognition and taxation of worldwide income. The nature and timing of any changes to each jurisdiction’s tax laws and the impact on our future tax liabilities both in the U.S. and abroad cannot be predicted with any accuracy but could materially and adversely impact our results of operations and cash flows.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

Income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates are generally subject to tax at preferential rates. Dividends payable by REITs, however, generally are not eligible for the preferential tax rates applicable to qualified dividend income. Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, to the extent that the preferential rates continue to apply to regular corporate qualified dividends, investors who are individuals, trusts and estates may perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could materially and adversely affect the value of the shares of REITs, including the per share trading price of our capital stock.

 

ITEM 1B. Unresolved Staff Comments

None.

 

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ITEM 2. Properties

At December 31, 2016, our portfolio consisted of 231 properties: 213 facilities (of the 219 facilities that we owned) were in operation and leased to 30 operators, 12 assets were in the form of first mortgage loans to four operators, and six properties were under construction. Our owned facilities consisted of 125 general acute care hospitals, 75 inpatient rehabilitation hospitals, 16 LTACHs, and three medical office buildings. The 12 non-owned facilities consisted of eight general acute care facilities, three inpatient rehabilitation hospitals, and one LTACH.

 

     Total
Properties
     Total 2016
Revenue
     Total
Assets (A)
 
     (Dollars in thousands)  

United States:

        

Alabama

     2      $ 763      $ 8,614  

Arizona

     13        23,798        286,847 (B) 

Arkansas

     1        14,457        90,335 (F) 

California

     13        66,197        542,889  

Colorado

     13        12,684        100,298  

Connecticut

     —          90        1,500 (D) 

Florida

     1        2,250        25,810  

Idaho

     4        12,581        103,059  

Indiana

     2        4,806        52,003  

Kansas

     3        11,177        98,356  

Louisiana

     5        11,124        128,687 (E) 

Massachusetts

     9        26,098        1,250,000  

Michigan

     2        4,367        40,743  

Missouri

     4        19,621        210,921  

Montana

     1        2,589        21,821  

Nevada

     1        9,949        84,601  

New Jersey

     8        39,084        417,436  

New Mexico

     2        6,027        55,960  

Ohio

     2        1,936        20,388 (B) 

Oklahoma

     1        12,283        58,743 (F) 

Oregon

     2        15,146        133,503  

Pennsylvania

     1        4,492        38,204  

South Carolina

     6        15,618        172,996  

Texas

     58        96,992        877,315 (B)(C)(E) 

Utah

     3        9,943        107,151  

Virginia

     1        1,072        10,915  

Washington

     1        5,942        103,168  

West Virginia

     1        2,756        23,792  

Wisconsin

     1        2,936        29,062  

Wyoming

     1        2,754        23,229  

Other Assets

     —          —          27,623  
  

 

 

    

 

 

    

 

 

 

Total United States

     162      $ 439,532      $ 5,145,969  

International:

        

Germany

     59      $ 97,382      $ 1,098,002  

United Kingdom

     1        3,871        34,861  

Italy

     8        —          89,511 (G) 

Spain

     1        352        18,800  

Other Assets

     —          —          31,393  
  

 

 

    

 

 

    

 

 

 

Total International

     69      $ 101,605      $ 1,272,567  
  

 

 

    

 

 

    

 

 

 

Total

     231      $ 541,137      $ 6,418,536  
  

 

 

    

 

 

    

 

 

 

 

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(A) Represents total assets at December 31, 2016.
(B) Includes development projects still under construction at December 31, 2016.
(C) Includes our Twelve Oaks facility that is 55% occupied. Our total gross investment in the facility is $63 million.
(D) We do not own any property in this state as of December 31, 2016; however, we hold a $1.5 million note related to a property disposed of in 2015.
(E) Includes revenue in the amount of $10.9 million related to properties that were disposed during 2016.
(F) Includes revenue in the amount of $7.3 million related to mortgage loans repaid during 2016.
(G) Includes our equity investment in eight facilities that is included in other assets on the balance sheet at December 31, 2016.

 

Type of Property

(includes properties subject to leases and mortgage loans)

   Number of
Properties
     Number of
Square

Feet
     Number of
Licensed
Beds(C)
 

General Acute Care Hospitals(A)

     136        20,216,265        11,646  

Inpatient Rehabilitation Hospitals(B)

     78        8,831,567        12,018  

Long-Term Acute Care Hospitals

     17        1,002,664        1,043  
  

 

 

    

 

 

    

 

 

 
     231        30,050,496        24,707  
  

 

 

    

 

 

    

 

 

 

 

(A) One of our general acute care hospitals, currently under development, with 387,500 square feet and 183 beds, is located in Spain. One of our general acute care hospitals, with 69,965 square feet and 28 beds, is located in the United Kingdom. Eight of our general acute care hospitals, with 822,000 square feet and 807 beds, are located in Italy. Two of our general acute care hospitals, with 238,732 square feet and 233 beds, are located in Germany.
(B) 57 of our rehabilitation facilities, with 7.8 million square feet and 11,097 beds, are located in Germany.
(C) Excludes our six facilities that are under development.

The following table shows lease and mortgage loan expirations, for the next 10 years and thereafter, assuming that none of the tenants/borrowers exercise any of their renewal options (dollars in thousands):

 

Total Lease and Mortgage Loan Portfolio(2)

   Total
Leases/Mortgage
Loans
     Base
Rent/
Interest(1)
     % of Total
Base

Rent/Interest
    Total
Square
Footage
     Total
Licensed
Beds
 

2017

     —        $ —          —         —          —    

2018

     1        2,016        0.4     66,459        62  

2019

     2        5,017        0.9     307,706        306  

2020

     5        10,662        1.9     1,205,908        590  

2021

     3        13,125        2.3     422,679        338  

2022

     15        72,532        12.9     3,543,907        2,571  

2023

     4        12,630        2.2     912,652        851  

2024

     1        2,237        0.4     183,545        204  

2025

     7        21,927        3.9     1,293,953        812  

2026

     5        24,598        4.4     969,349        892  

Thereafter

     188        396,662        70.7     21,050,715        19,453  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

     231      $ 561,406        100.0     29,956,873        26,079  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) The most recent monthly base rent and mortgage loan interest annualized. This does not include tenant recoveries, additional rents and other lease/loan-related adjustments to revenue (i.e., straight-line rents and deferred revenues).
(2)

Excludes six of our facilities that are under development, our Twelve Oaks facility that is not fully occupied, and the nine properties that we own through joint venture arrangements. In addition, the schedule

 

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  reflects post December 31, 2016 transactions and commitments, including the acquisition of two RCCH facilities and the remaining 14 facilities in Germany — see Note 8 to Item 8 of the Annual Report on Form 10-K for details of our commitments at December 31, 2016.

 

ITEM 3. Legal Proceedings

From time to time, there are various legal proceedings pending to which we are a party or to which some of our properties are subject to arising in the normal course of business. At this time, we do not believe that the ultimate resolution of these proceedings will have a material adverse effect on our consolidated financial position or results of operations.

 

ITEM 4. Mine Safety Disclosures

None.

 

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PART II

 

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

(a) Medical Properties’ common stock is traded on the New York Stock Exchange under the symbol “MPW.” The following table sets forth the high and low sales prices for the common stock for the periods indicated, as reported by the New York Stock Exchange Composite Tape, and the dividends per share declared by us with respect to each such period.

 

     High      Low      Dividends  

Year ended December 31, 2016

        

First Quarter

   $ 13.29      $ 9.61      $ 0.22  

Second Quarter

     15.50        12.61        0.23  

Third Quarter

     15.92        13.64        0.23  

Fourth Quarter

     15.04        11.54        0.23  

Year ended December 31, 2015

        

First Quarter

   $ 15.62      $ 13.81      $ 0.22  

Second Quarter

     15.42        13.04        0.22  

Third Quarter

     13.98        10.79        0.22  

Fourth Quarter

     12.21        10.59        0.22  

On February 24, 2017, the closing price for our common stock, as reported on the New York Stock Exchange, was $13.36 per share. As of February 24, 2017, there were 75 holders of record of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee name.

To qualify as a REIT, we must distribute at least 90% of our REIT taxable income, excluding net capital gain, as dividends to our stockholders. If dividends are declared in a quarter, those dividends will be paid during the subsequent quarter. We expect to continue the policy of distributing our taxable income through regular cash dividends on a quarterly basis, although there is no assurance as to future dividends because they depend on future earnings, capital requirements, and our financial condition. In addition, our Credit Facility limits the amounts of dividends we can pay — see Note 4 of Item 8 of this Annual Report on Form 10-K for more information.

Recent Sales of Unregistered Securities

As previously disclosed, we issued an aggregate of 10.3 shares of common stock in a private placement on October 7, 2016, in connection with our acquisition of the Steward portfolio, for total proceeds of $150 million. The shares were issued pursuant to a Stock Purchase Agreement between us and an affiliate of Cerberus Capital Management (“Cerberus”), the controlling member of Steward. Prior to issuance, Cerberus assigned a portion of its rights to acquire the shares under the Stock Purchase Agreement to certain members of the management of Steward. The private placement was conducted in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.

(b) Not applicable.

(c) None.

 

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The following graph provides comparison of cumulative total stockholder return for the period from December 31, 2011 through December 31, 2016, among us, the Russell 2000 Index, NAREIT All Equity REIT Index, and SNL US REIT Healthcare Index. The stock performance graph assumes an investment of $100 in us and the three indices, and the reinvestment of dividends. The historical information below is not indicative of future performance.

 

 

LOGO

 

     Period Ending  

Index

   12/31/11      12/31/12      12/31/13      12/31/14      12/31/15      12/31/16  

Medical Properties Trust, Inc.

     100.00        131.19        142.19        170.84        153.28        175.50  

Russell 2000

     100.00        116.35        161.52        169.43        161.95        196.45  

NAREIT All Equity REIT Index

     100.00        119.70        123.12        157.63        162.08        176.07  

SNL US REIT Healthcare

     100.00        120.06        112.53        149.86        138.96        149.27  

The graph and accompanying text shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended.

 

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ITEM 6. Selected Financial Data

The following tables set forth are selected consolidated financial and operating data for Medical Properties Trust, Inc. and MPT Operating Partnership, L.P. and their respective subsidiaries. You should read the following selected financial data in conjunction with the consolidated historical financial statements and notes thereto of each of Medical Properties Trust, Inc. and MPT Operating Partnership, L.P. and their respective subsidiaries included in Item 8, in this Annual Report on Form 10-K, along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7, in this Annual Report on Form 10-K.

Medical Properties Trust, Inc.

The consolidated operating data and balance sheets have been derived from our audited consolidated financial statements. As of December 31, 2016, Medical Properties Trust, Inc. had a 99.9% equity ownership interest in the Operating Partnership. Medical Properties Trust, Inc. has no significant operations other than as the sole member of its wholly owned subsidiary, Medical Properties Trust, LLC, which is the sole general partner of the Operating Partnership, and no material assets, other than its direct and indirect investment in the Operating Partnership.

 

     2016(1)     2015(1)     2014(1)     2013(1)     2012(1)  
     (In thousands except per share data)  

OPERATING DATA

          

Total revenue

   $ 541,137     $ 441,878     $ 312,532     $ 242,523     $ 198,125  

Real estate depreciation and amortization (expense)

     (94,374     (69,867     (53,938     (36,978     (32,815

Property-related and general and administrative (expenses)

     (51,623     (47,431     (39,125     (32,513     (30,039

Acquisition expenses(2)

     (46,273     (61,342     (26,389     (19,494     (5,420

Impairment (charge)

     (7,229     —         (50,128     —         —    

Gain on sale of real estate and other asset dispositions, net

     61,224       3,268       2,857       7,659       16,369  

Interest and other (expense) income

     (1,618     175       5,183       (4,424     (15,088

Unutilized financing fees/ debt refinancing costs

     (22,539     (4,367     (1,698     —         —    

Interest (expense)

     (159,597     (120,884     (98,156     (66,746     (58,243

Income tax benefit (expense)(3)

     6,830       (1,503     (340     (726     (19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     225,938       139,927       50,798       89,301       72,870  

Income (loss) from discontinued operations

     (1     —         (2     7,914       17,207  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     225,937       139,927       50,796       97,215       90,077  

Net income attributable to non-controlling interests

     (889     (329     (274     (224     (177
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to MPT common stockholders

   $ 225,048     $ 139,598     $ 50,522     $ 96,991     $ 89,900  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations attributable to MPT common stockholders per diluted share

   $ 0.86     $ 0.63     $ 0.29     $ 0.58     $ 0.54  

Income from discontinued operations attributable to MPT common stockholders per diluted share

     —         —         —         0.05       0.13  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to MPT common stockholders per diluted share

   $ 0.86     $ 0.63     $ 0.29     $ 0.63     $ 0.67  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares — diluted

     261,072       218,304       170,540       152,598       132,333  

OTHER DATA

          

Dividends declared per common share

   $ 0.91     $ 0.88     $ 0.84     $ 0.81     $ 0.80  

 

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     December 31,  
     2016(1)     2015(1)     2014(1)     2013(1)     2012(1)  
     (In thousands)  

BALANCE SHEET DATA

          

Real estate assets — at cost

   $ 4,965,968     $ 3,924,701     $ 2,612,291     $ 2,296,479     $ 1,591,189  

Real estate accumulated depreciation/amortization

     (325,125     (257,928     (202,627     (159,776     (122,796

Mortgage and other loans

     1,216,121       1,422,403       970,761       549,746       527,893  

Cash and equivalents

     83,240       195,541       144,541       45,979       37,311  

Other assets

     478,332       324,634       195,364       147,915       128,393  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 6,418,536     $ 5,609,351     $ 3,720,330     $ 2,880,343     $ 2,161,990  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Debt, net

   $ 2,909,341     $ 3,322,541     $ 2,174,648     $ 1,397,329     $ 1,008,264  

Other liabilities

     255,967       179,545       163,635       138,806       103,912  

Total Medical Properties Trust, Inc. Stockholders’ Equity

     3,248,378       2,102,268       1,382,047       1,344,208       1,049,814  

Non-controlling interests

     4,850       4,997       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     3,253,228       2,107,265       1,382,047       1,344,208       1,049,814  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 6,418,536     $ 5,609,351     $ 3,720,330     $ 2,880,343     $ 2,161,990  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Cash paid for acquisitions and other related investments totaled $1.5 billion, $1.8 billion, $767.7 million, $654.9 million, and $621.5 million in 2016, 2015, 2014, 2013, and 2012, respectively. The results of operations resulting from these investments are reflected in our consolidated financial statements from the dates invested. See Note 3 in Item 8 of this Annual Report on Form 10-K for further information on acquisitions of real estate, new loans, and other investments. We funded these investments generally from issuing common stock, utilizing additional amounts of our revolving facility, incurring additional debt, or from the sale of facilities. See Notes 4, 9, and 3, in Item 8 on this Annual Report on Form 10-K for further information regarding our debt, common stock and property disposals, respectively.
(2) Includes $30.1 million, $37.0 million, $5.8 million and $12.0 million in transfer and capital gains taxes in 2016, 2015, 2014 and 2013, respectively, related to our property acquisitions in foreign jurisdictions.
(3) Includes $9.1 million tax benefit generated from the reversal of foreign valuation allowances and acquisition expenses incurred by certain international subsidiaries in 2016.

 

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MPT Operating Partnership, L.P.

The consolidated operating data and balance sheets presented below have been derived from the Operating Partnership’s audited consolidated financial statements.

 

     2016(4)     2015(4)     2014(4)     2013(4)     2012(4)  
     (In thousands except per unit data)  

OPERATING DATA

          

Total revenue

   $ 541,137     $ 441,878     $ 312,532     $ 242,523     $ 198,125  

Real estate depreciation and amortization (expense)

     (94,374     (69,867     (53,938     (36,978     (32,815

Property-related and general and administrative (expenses)

     (51,623     (47,431     (39,125     (32,513     (30,039

Acquisition expenses(5)

     (46,273     (61,342     (26,389     (19,494     (5,420

Impairment (charge)

     (7,229     —         (50,128     —         —    

Gain on sale of real estate and other asset dispositions, net

     61,224       3,268       2,857       7,659       16,369  

Interest and other (expense) income

     (1,618     175       5,183       (4,424     (15,088

Unutilized financing fees/ debt refinancing costs

     (22,539     (4,367     (1,698     —         —    

Interest (expense)

     (159,597     (120,884     (98,156     (66,746     (58,243

Income tax benefit (expense)(6)

     6,830       (1,503     (340     (726     (19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     225,938       139,927       50,798       89,301       72,870  

Income (loss) from discontinued operations

     (1     —         (2     7,914       17,207  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     225,937       139,927       50,796       97,215       90,077  

Net income attributable to non-controlling interests

     (889     (329     (274     (224     (177
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to MPT Operating Partnership, L.P. partners

   $ 225,048     $ 139,598     $ 50,522     $ 96,991     $ 89,900  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations attributable to MPT Operating Partnership, L.P. partners per diluted unit

   $ 0.86     $ 0.63     $ 0.29     $ 0.58     $ 0.54  

Income from discontinued operations attributable to MPT Operating Partnership, L.P. partners per diluted unit

     —         —         —         0.05       0.13  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income, attributable to MPT Operating Partnership, L.P. partners per diluted unit

   $ 0.86     $ 0.63     $ 0.29     $ 0.63     $ 0.67  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of units — diluted

     261,072       218,304       170,540       152,598       132,333  

OTHER DATA

          

Dividends declared per unit

   $ 0.91     $ 0.88     $ 0.84     $ 0.81     $ 0.80  

 

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Index to Financial Statements
     December 31,  
     2016(4)     2015(4)     2014(4)     2013(4)     2012(4)  
     (In thousands)  

BALANCE SHEET DATA

          

Real estate assets — at cost

   $ 4,965,968     $ 3,924,701     $ 2,612,291     $ 2,296,479     $ 1,591,189  

Real estate accumulated depreciation/amortization

     (325,125     (257,928     (202,627     (159,776     (122,796

Mortgage and other loans

     1,216,121       1,422,403       970,761       549,746       527,893  

Cash and equivalents

     83,240       195,541       144,541       45,979       37,311  

Other assets

     478,332       324,634       195,364       147,915       128,393  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 6,418,536     $ 5,609,351     $ 3,720,330     $ 2,880,343     $ 2,161,990  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Debt, net

   $ 2,909,341     $ 3,322,541     $ 2,174,648     $ 1,397,329     $ 1,008,264  

Other liabilities

     255,577       179,155       163,245       138,416       103,522  

Total MPT Operating Partnership, L.P. capital

     3,248,768       2,102,658       1,382,437       1,344,598       1,050,204  

Non-controlling interests

     4,850       4,997       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total capital

     3,253,618       2,107,655       1,382,437       1,344,598       1,050,204  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and capital

   $ 6,418,536     $ 5,609,351     $ 3,720,330     $ 2,880,343     $ 2,161,990  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(4) Cash paid for acquisitions and other related investments totaled $1.5 billion, $1.8 billion, $767.7 million, $654.9 million, and $621.5 million in 2016, 2015, 2014, 2013, and 2012, respectively. The results of operations resulting from these investments are reflected in our consolidated financial statements from the dates invested. See Note 3 in Item 8 of this Annual Report on Form 10-K for further information on acquisitions of real estate, new loans, and other investments. We funded these investments generally from issuing units, utilizing additional amounts of our revolving facility, incurring additional debt, or from the sale of facilities. See Notes 4, 9, and 3, in Item 8 on this Annual Report on Form 10-K for further information regarding our debt, partners’ capital and property disposals, respectively.
(5) Includes $30.1 million, $37.0 million, $5.8 million and $12.0 million in transfer and capital gains taxes in 2016, 2015, 2014 and 2013, respectively, related to our property acquisitions in foreign jurisdictions.
(6) Includes $9.1 million tax benefit generated from the reversal of foreign valuation allowances and acquisition expenses incurred by certain international subsidiaries in 2016.

 

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Index to Financial Statements
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless otherwise indicated, references to “our,” “we” and “us” in this management’s discussion and analysis of financial condition and results of operations refer to Medical Properties Trust, Inc. and its consolidated subsidiaries, including MPT Operating Partnership, L.P.

Overview

We were incorporated in Maryland on August 27, 2003, primarily for the purpose of investing in and owning net-leased healthcare facilities. We also make real estate mortgage loans and other loans to our tenants. We conduct our business operations in one segment. We have healthcare investments in the U.S. and Europe. We have operated as a REIT since April 6, 2004, and accordingly, elected REIT status upon the filing of our calendar year 2004 U.S. federal income tax return. Our existing tenants are, and our prospective tenants will generally be, healthcare operating companies and other healthcare providers that use substantial real estate assets in their operations. We offer financing for these operators’ real estate through 100% lease and mortgage financing and generally seek lease and loan terms on a long-term basis ranging from 10 to 15 years with a series of shorter renewal terms at the option of our tenants and borrowers. We also have included and intend to include in our lease and loan agreements annual contractual minimum rate increases. Our existing portfolio’s minimum escalators range from 0.5% to 5%, while a limited number of our properties do not have an escalator. Most of our leases and loans also include rate increases based on the general rate of inflation if greater than the minimum contractual increases. In addition to rent or mortgage interest, our leases and loans typically require our tenants to pay all operating costs and expenses associated with the facility. Some leases also may require our tenants to pay percentage rents, which are based on the tenant’s revenues from their operations. Finally, we may acquire a profits or other equity interest in our tenants that gives us a right to share in the tenant’s income or loss.

We selectively make loans to certain of our operators through our TRSs, which the operators use for acquisitions and working capital. We consider our lending business an important element of our overall business strategy for two primary reasons: (1) it provides opportunities to make income-earning investments that yield attractive risk-adjusted returns in an industry in which our management has expertise, and (2) by making debt capital available to certain qualified operators, we believe we create for our company a competitive advantage over other buyers of, and financing sources for, healthcare facilities.

At December 31, 2016, our portfolio consisted of 231 properties leased or loaned to 30 operators, of which six are under development and 12 are in the form of mortgage loans.

2016 Highlights

In 2016, we invested or committed to invest approximately $1.8 billion in healthcare real estate assets. These significant investments enhanced the size and quality of our healthcare portfolio, while improving our tenant concentration and expanding our geographic footprint in the U.S. Furthermore, we strategically sold assets for proceeds totaling more than $800 million, refinanced $1 billion of debt, and sold 82.7 million shares generating proceeds of approximately $1.2 billion in order to strengthen our balance sheet, reduce leverage, and fund acquisitions.

A summary of our 2016 highlights is as follows:

 

    Acquired real estate assets (or committed to acquire real estate assets), entered into development agreements, entered into leases and made new loan investments, totaling more than $1.8 billion as noted below:

 

    Acquired a portfolio of five acute care hospitals and completed mortgage financing on four acute care hospitals in Massachusetts and invested in a minority equity contribution in Steward for an aggregate investment of $1.25 billion;

 

    Acquired 12 inpatient rehabilitation hospitals in Germany for a combined purchase price of €85.2 million and committed €174.6 million to acquire 14 additional inpatient rehabilitation hospitals. These facilities are leased or will be leased to MEDIAN or its affiliates;

 

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    Acquired an acute care hospital in Newark, New Jersey, from Prime for an aggregate purchase price of $63.0 million and committed to advance an additional $30 million to Prime over a three-year period to be used solely for capital additions to the real estate; any such addition will be added to the basis upon which the lessee will pay us rents;

 

    Closed on the final MEDIAN property, as part of the initial MEDIAN transaction, for a purchase price of €41.6 million. See “2015 Activity” for a description of the initial MEDIAN Transaction;

 

    Completed the sale leaseback transaction with Prime converting our existing mortgage loan on three general acute care hospitals and one free-standing emergency department in New Jersey to real estate, for an aggregate investment of $115 million;

 

    Completed the sale leaseback transaction converting the remaining $93.3 million RCCH acquisition loan on the Olympia, Washington property to real estate, including funding an additional $7 million; and

 

    Committed to purchase two acute care hospitals in Washington and Idaho for an aggregate purchase price of $105 million, which will be leased to RCCH.

After these new investments, our largest tenant made up 17.5% of our gross assets as of December 31, 2016, slightly down from 17.6% as of December 31, 2015.

 

    Sold investments in real estate and equity interests and received payments in full on loans for proceeds of more than $800 million as noted below:

 

    Completed the Capella Healthcare, Inc. (“Capella”) Disposal Transaction (as fully described in Note 3 to Item 8 of this Annual Report on Form 10-K) in which we sold our equity investment, received $395 million to settle outstanding acquisition loans and received $210 million in prepayment of two mortgage loans for hospitals in Russellville, Arkansas and Lawton, Oklahoma, resulting in net proceeds of approximately $600 million;

 

    Sold the real estate of five properties (three of which were in Texas and two in Louisiana), received payment in full for outstanding loans, and recovered our investment in operations for proceeds of $71 million, resulting in a net gain of approximately $15 million;

 

    Sold the real estate of a long-term acute care facility in Corinth, Texas, for proceeds of $28 million; and

 

    Sold the real estate of three inpatient rehabilitation hospitals located in Texas, for proceeds of $111.5 million, resulting in a net gain of approximately $45 million.

 

    Refinanced $1 billion of debt and sold 82.7 million shares generating proceeds of approximately $1.2 billion:

 

    Completed a $500 million senior unsecured notes offering in February 2016 and used the proceeds to reduce our outstanding balance on our revolving credit facility;

 

    Completed a $500 million senior unsecured notes offering in July 2016 and used the proceeds to redeem our $450 million 6.875% Senior Unsecured Notes due 2021;

 

    Sold the remaining 14.9 million shares under our January 2014 at-the-market equity offering program resulting in net proceeds of approximately $224 million;

 

    Completed an underwritten public offering of 57.5 million shares of our common stock, resulting in net proceeds of $799.5 million, after deducting estimated offering expenses; and

 

    Sold 10.3 million shares of common stock in a private placement, generating total proceeds of $150 million.

With these transactions, our net debt to gross assets at December 31, 2016, improved to 43.1% versus 56.6% at December 31, 2015.

 

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2015 Highlights

In 2015, we invested or committed to invest approximately $1.8 billion in healthcare real estate assets. These significant investments greatly strengthened our portfolio through geographic, tenant and property type diversification. We expanded total assets by 51%, increased revenues by 41%, and lowered our general and administrative expense as a percentage of revenue to less than 10%.

A summary of our 2015 highlights is as follows:

 

    Acquired (or committed to acquire) real estate assets, entered into development agreements, entered into leases and made new loan investments, totaling more than $1.8 billion as noted below:

 

    Acquired the original Capella hospital portfolio (now RCCH) including seven acute care hospitals throughout the U.S. and obtained a stake in their operations for a combined total of approximately $900 million. Also, acquired an eighth facility (Kershaw) for $35 million later in the year.

 

    Completed the sale-leaseback transaction (step 2 of the initial transaction in 2014) of 31 MEDIAN facilities in Germany for an aggregate purchase price of €646 million;

 

    Initiated long term relationship with AXA Real Estate Investment Managers to co-invest with AXA-advised accounts for the acquisition of acute care hospitals in Spain and Italy via a joint venture arrangement;

 

    Executed a $19 million agreement to develop an inpatient rehabilitation hospital in Toledo, Ohio, acquired an inpatient rehabilitation facility and a long-term acute care hospital in Lubbock, Texas for an aggregate purchase price of $31.5 million, and acquired an inpatient rehabilitation hospital in Weslaco, Texas for $10.7 million all leased to Ernest;

 

    Completed $30 million mortgage financing to Prime for a general acute care hospital in Port Huron, Michigan and subsequently converted a portion of the loan to real estate for $20 million, which reduced the mortgage loan accordingly;

 

    Provided $100 million mortgage financing to Prime for three general acute care hospitals and one free-standing emergency department in New Jersey and acquired two general acute care hospitals in the Kansas City area for $110 million;

 

    Acquired a 266-bed outpatient rehabilitation clinic located in Hannover, Germany from MEDIAN for €18.7 million;

 

    Executed an additional $250 million agreement with Adeptus Health for the development of acute care hospitals and free-standing emergency departments; and

 

    Completed construction and began recording rental income on 17 acute care facilities in Texas, Arizona, and Colorado with Adeptus Health totaling approximately $102.6 million and an acute care facility and a medical office building in Birmingham, Alabama with UAB Medical West totaling $8.6 million.

 

    Sold the real estate of a long-term acute care facility in Luling, Texas, and real estate of six wellness centers in the U.S. for a net gain; and

 

    Increased our senior Credit Facility to $1.95 billion comprised of a $1.3 billion senior unsecured revolving credit facility and a $250 million senior unsecured term loan facility along with a $400 million accordion feature, issued €500 million of unsecured notes, and raised $817 million in equity to fund the acquisition activity mentioned above.

2014 Highlights

In 2014, we invested or committed to invest approximately $1.4 billion in healthcare real estate assets. These significant investments greatly strengthened our portfolio through geographic, tenant and property type diversification.

 

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A summary of our 2014 highlights is as follows:

 

    Acquired (or committed to acquire) real estate assets, entered into development agreements, entered into leases and made new loan investments, totaling more than $1.4 billion as noted below:

 

    Completed Step 1 of the two step acquisition of 32 MEDIAN facilities for €688 million by loaning €425 million to Waterland Private Equity Fund VC.V.(“Waterland”) and MEDIAN;

 

    Completed the acquisition of three MEDIAN (formally RHM) facilities located in Germany for a transaction valued at approximately €64 million incurring approximately €3 million of transfer and other taxes that have been expensed as acquisition costs;

 

    Acquired an acute care hospital in Fairmont, West Virginia for an aggregate purchase price of $15 million from Alecto Healthcare Services (“Alecto”), made a $5 million working capital loan to the tenant and a commitment to fund up to $5 million in capital improvements;

 

    Acquired an acute care hospital in Sherman, Texas for an aggregate purchase price of $32.5 million from Alecto and funded a $7.5 million working capital loan to the tenant;

 

    Entered the United Kingdom healthcare market by acquiring an acute care hospital in Peasedown St. John, United Kingdom from Circle Health Ltd., through its subsidiary Circle Hospital (Bath) Ltd. valued at approximately £28.3 million incurring approximately £1.1 million of transfer and other taxes that have been expensed as acquisition costs;

 

    Acquired a general acute care hospital and an adjacent parcel of land for an aggregate purchase price of $115 million from a joint venture of LHP Hospital Group, Inc. and Hackensack University Medical Center Mountainside;

 

    Executed an additional $150 million agreement with Adeptus Health for the development of acute care hospitals and free-standing emergency departments; and

 

    Completed construction and began recording rental income on the following facilities:

 

    Northern Utah Rehabilitation Hospital — $19 million inpatient rehabilitation facility located in South Ogden, Utah leased to Ernest;

 

    Oakleaf Surgical Hospital — $30.5 million acute care facility located in Altoona, Wisconsin leased to National Surgical Hospitals; and

 

    Adeptus Health — Completed 17 acute care facilities totaling approximately $80.3 million.

 

    Sold the real estate of La Palma Community Hospital to Prime recognizing a gain on sale of $2.9 million;

 

    Sold the real estate of our Bucks facility pursuant to a purchase option, resulting in a $3.1 million impairment charge;

 

    Restructured our investment in Monroe Hospital by entering into a lease with an affiliate of Prime which had acquired the operations of the facility;

 

    Completed a $1.15 billion senior unsecured credit facility comprised of a $1.025 billion senior unsecured revolving credit facility and a $125 million senior unsecured term loan facility, issued $300 million of unsecured notes, and raised $138 million in equity to fund the acquisition activity mentioned above; and

 

    Received investment grade rating on our unsecured debt of BBB- and a corporate credit rating upgrade from Standard & Poor’s Ratings Services to BB+.

Critical Accounting Policies

In order to prepare financial statements in conformity with generally accepted accounting principles (“GAAP”) in the U.S., we must make estimates about certain types of transactions and account balances. We

 

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believe that our estimates of the amount and timing of our revenues, credit losses, fair values (either as part of a purchase price allocation, impairment analysis or in valuing certain of our equity investments), periodic depreciation of our real estate assets, and stock compensation expense, along with our assessment as to whether an entity that we do business with should be consolidated with our results, have significant effects on our financial statements. Each of these items involves estimates that require us to make subjective judgments. We rely on our experience, collect historical and current market data, and develop relevant assumptions to arrive at what we believe to be reasonable estimates. Under different conditions or assumptions, materially different amounts could be reported related to the critical accounting policies described below. In addition, application of these critical accounting policies involves the exercise of judgment on the use of assumptions as to future uncertainties and, as a result, actual results could materially differ from these estimates. See Note 2 to Item 8 of this Annual Report on Form 10-K for more information regarding our critical accounting policies and recent accounting developments. Our accounting estimates include the following:

Revenue Recognition: We receive income from operating leases based on the fixed, minimum required rents (base rents) per the lease agreements. Rent revenue from base rents is recorded on the straight-line method over the terms of the related lease agreements for new leases and the remaining terms of existing leases for those acquired as part of a property acquisition. The straight-line method records the periodic average amount of base rent earned over the term of a lease, taking into account contractual rent adjustments over the lease term. The straight-line method typically has the effect of recording more rent revenue from a lease than a tenant is required to pay early in the term of the lease. During the later parts of a lease term, this effect reverses with less rent revenue recorded than a tenant is required to pay. Rent revenue, as recorded on the straight-line method, in the consolidated statements of income is presented as two amounts: rent billed revenue and straight-line revenue. Rent billed revenue is the amount of base rent actually billed to the customer each period as required by the lease. Straight-line rent revenue is the difference between rent revenue earned based on the straight-line method and the amount recorded as rent billed revenue. We record the difference between base rent revenues earned and amounts due per the respective lease agreements, as applicable, as an increase or decrease to straight-line rent receivable.

Certain leases may provide for additional rents contingent upon a percentage of the tenant’s revenues in excess of specified base amount/threshold (percentage rents). Percentage rents are recognized in the period in which revenue thresholds are met. Rental payments received prior to their recognition as income are classified as deferred revenue. We also receive additional rent (contingent rent) under some leases based on increases in the CPI or where the CPI exceeds the annual minimum percentage increase in the lease. Contingent rents are recorded as rent billed revenue in the period earned.

We use direct financing lease (“DFL”) accounting to record rent on certain leases deemed to be financing leases, per accounting rules, rather than operating leases. For leases accounted for as DFLs, future minimum lease payments are recorded as a receivable. The difference between the future minimum lease payments and the estimated residual values less the cost of the properties is recorded as unearned income. Unearned income is deferred and amortized to income over the lease terms to provide a constant yield when collectability of the lease payments is reasonably assured. Investments in DFLs are presented net of unearned income.

In instances where we have a profits or equity interest in our tenants’ operations, we record income equal to our percentage interest of the tenants’ profits, as defined in the lease or tenants’ operating agreements, once annual thresholds, if any, are met.

We begin recording base rent income from our development projects when the lessee takes physical possession of the facility, which may be different from the stated start date of the lease. Also, during construction of our development projects, we are generally entitled to accrue rent based on the cost paid during the construction period (construction period rent). We accrue construction period rent as a receivable with a corresponding offset to deferred revenue during the construction period. When the lessee takes physical possession of the facility, we begin recognizing the deferred construction period revenue on the straight-line method over the remaining term of the lease.

 

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We receive interest income from our tenants/borrowers on mortgage loans, working capital loans, and other long-term loans. Interest income from these loans is recognized as earned based upon the principal outstanding and terms of the loans.

Commitment fees received from lessee for development and leasing services are initially recorded as deferred revenue and recognized as income over the initial term of a lease to produce a constant effective yield on the lease (interest method). Commitment and origination fees from lending services are also recorded as deferred revenue initially and recognized as income over the life of the loan using the interest method.

Investments in Real Estate: We maintain our investments in real estate at cost, and we capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. While our tenants are generally responsible for all operating costs at a facility, to the extent that we incur costs of repairs and maintenance, we expense those costs as incurred. We compute depreciation using the straight-line method over the weighted-average useful life of approximately 38.8 years for buildings and improvements.

When circumstances indicate a possible impairment of the value of our real estate investments, we review the recoverability of the facility’s carrying value. The review of the recoverability is generally based on our estimate of the future undiscounted cash flows, excluding interest charges, from the facility’s use and eventual disposition. Our forecast of these cash flows considers factors such as expected future operating income, market and other applicable trends, and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a facility on an undiscounted basis, such as was the case with our Monroe and Bucks facilities in 2014, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the facility. We do not believe that the value of any of our facilities was impaired at December 31, 2016; however, given the highly specialized aspects of our properties no assurance can be given that future impairment charges will not be taken.

Acquired Real Estate Purchase Price Allocation: For existing properties acquired for leasing purposes, we account for such acquisitions based on business combination accounting rules. We allocate the purchase price of acquired properties to net tangible and identified intangible assets acquired based on their fair values. In making estimates of fair values for purposes of allocating purchase prices of acquired real estate, we may utilize a number of sources, including available real estate broker data, independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, internal data from previous acquisitions or developments, and other market data. We also consider information obtained about each property as a result of our pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired.

We record above-market and below-market in-place lease values, if any, for the facilities we own which are based on the present value of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. We amortize any resulting capitalized above-market lease values as a reduction of rental income over lease term. We amortize any resulting capitalized below-market lease values as an increase to rental income over the lease term. Because our strategy to a large degree involves the origination and acquisition of long-term lease arrangements at market rates with independent parties, we do not expect the above-market and below-market in-place lease values to be significant for many of our transactions.

We measure the aggregate value of other lease intangible assets to be acquired based on the difference between (i) the property valued with new or in-place leases adjusted to market rental rates and (ii) the property valued as if vacant when acquired. Management’s estimates of value are made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors considered by management in our analysis include an estimate of carrying costs during hypothetical expected lease-up periods, considering current market conditions, and costs to execute similar leases. We also consider information obtained about each targeted

 

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facility as a result of our pre-acquisition due diligence, marketing, and leasing activities in estimating the fair value of the intangible assets acquired. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, which we expect to be about six months (based on experience) depending on specific local market conditions. Management also estimates costs to execute similar leases including leasing commissions, legal costs, and other related expenses to the extent that such costs are not already incurred in connection with a new lease origination as part of the transaction.

Other intangible assets acquired may include customer relationship intangible values, which are based on management’s evaluation of the specific characteristics of each prospective tenant’s lease and our overall relationship with that tenant. Characteristics to be considered by management in allocating these values include the nature and extent of our existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality, and expectations of lease renewals, including those existing under the terms of the lease agreement, among other factors. At December 31, 2016, we have assigned no value to customer relationship intangibles.

We amortize the value of lease intangibles to expense over the term of the respective leases, which have a weighted average useful life of 17.9 years at December 31, 2016. If a lease is terminated, the unamortized portion of the lease intangible is charged to expense as was the case with our Twelve Oaks property in 2015.

Losses from Rent Receivables: For all leases, we continuously monitor the performance of our existing tenants including, but not limited to: admission levels and surgery/procedure volumes by type; current operating margins; ratio of our tenants’ operating margins both to facility rent and to facility rent plus other fixed costs; trends in revenue and patient mix; and the effect of evolving healthcare regulations on tenants’ profitability and liquidity.

Losses from Operating Lease Receivables: We utilize the information above along with the tenants’ payment and default history in evaluating (on a property-by-property basis) whether or not a provision for losses on outstanding rent receivables is needed. A provision for losses on rent receivables (including straight-line rent receivables) is ultimately recorded when it becomes probable that the receivable will not be collected in full. The provision is an amount which reduces the receivable to its estimated net realizable value based on a determination of the eventual amounts to be collected either from the debtor or from existing collateral, if any.

Losses on DFL Receivables: Allowances are established for DFLs based upon an estimate of probable losses on a property-by-property basis. DFLs are impaired when it is deemed probable that we will be unable to collect all amounts due in accordance with the contractual terms of the lease. Like operating lease receivables, the need for an allowance is based upon our assessment of the lessee’s overall financial condition; economic resources and payment record; the prospects for support from any financially responsible guarantors; and, if appropriate, the realizable value of any collateral. These estimates consider all available evidence including the expected future cash flows discounted at the DFL’s effective interest rate, fair value of collateral, and other relevant factors, as appropriate. DFLs are placed on non-accrual status when we determine that the collectability of contractual amounts is not reasonably assured. If on non-accrual status, we generally account for the DFLs on a cash basis, in which income is recognized only upon receipt of cash.

Loans: Loans consist of mortgage loans, working capital loans and other long-term loans. Mortgage loans are collateralized by interests in real property. Working capital and other long-term loans are generally collateralized by interests in receivables and corporate and individual guarantees. We record loans at cost. We evaluate the collectability of both interest and principal on a loan-by-loan basis (using the same process as we do for assessing the collectability of rents as discussed above) to determine whether they are impaired. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is considered to be impaired, the amount of the allowance is calculated by comparing the recorded investment to either the value determined by

 

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discounting the expected future cash flows using the loans effective interest rate or to the fair value of the collateral, if the loan is collateral dependent.

Stock-Based Compensation: During the years ended December 31, 2016, 2015, and 2014, we recorded $7.9 million, $11.1 million, and $9.2 million, respectively, of expense for share-based compensation related to grants of restricted common stock and other stock-based awards. Starting in 2010, we granted annual performance-based restricted share awards that vest based on the achievement of certain market conditions as defined by the accounting rules. Typical market conditions for our awards are based on our total shareholder return (factoring in stock price appreciation and dividends paid) including comparisons of our total shareholder returns to an index of other REIT stocks. Because these awards are earned based on the achievement of these market conditions, we must initially evaluate and estimate the probability of achieving these market conditions in order to determine the fair value of the award and over what period we should recognize stock compensation expense. Because of the complexities inherently involved with these awards, we work with an independent consultant to assist us in modeling both the value of the award and the various periods over which each tranche of an award will be earned. We use what is termed a Monte Carlo simulation model, which determines a value and earnings periods based on multiple outcomes and their probabilities. We record expense over the expected or derived vesting periods using the calculated value of the awards. We record expense over these vesting periods even though the awards have not yet been earned and, in fact, may never be earned — such as was the case with our 2014 performance awards in which 500,000 shares were forfeited because the related market conditions were not achieved for the period of January 1, 2014 through December 31, 2016. If awards vest faster than our original estimate, we will record a catch-up of expense, which we did in the 2014 and 2013 fourth quarters due to our 2012 and 2011 stock awards being earned earlier than expected.

Fair Value Option Election: We elected to account for certain investments acquired on February 29, 2012, as part of the Ernest transaction, using the fair value option method, which means we mark these investments to fair market value on a recurring basis. Any changes in the fair value of these investments are non-cash adjustments that will not impact our financial condition or cash flows unless we decided to liquidate these investments.

These investments include the following at December 31, 2016 (in thousands):

 

Asset (Liability)

   Total
Fair Value
 

Mortgage loans

   $ 112,836  

Acquisition and other loans

     116,298  

Equity investment

     3,300  
  

 

 

 

Total

   $ 232,434  
  

 

 

 

We measure the estimated fair value of most of these investments utilizing Level 2 and 3 of the fair value hierarchy. Under current accounting guidance, Level 3 represents fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Our mortgage and acquisition loans with Ernest are recorded at fair value based on Level 2 inputs by discounting the estimated cash flows using the market rates which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities. Our equity investment in Ernest is recorded at fair value based on Level 3 inputs, by using a discounted cash flow model, which requires significant estimates of our investee such as projected revenue and expenses and appropriate consideration of the underlying risk profile of the forecasted assumptions associated with the investee. We classify the equity investment as Level 3, as we use certain unobservable inputs to the valuation methodology that are significant to the fair value measurement, and the valuation requires management judgment due to the absence of quoted market prices. For the cash flow model, our observable inputs include use of a capitalization rate, discount rate (which is based on a weighted-

 

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average cost of capital), and market interest rates, and our unobservable input includes an adjustment for a marketability discount (“DLOM”) on our equity investment of 40% at December 31, 2016.

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

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

 

Basis Point

Change in

Marketability Discount

   Estimated Increase (Decrease)
In Fair Value
 

+100 basis points

   $ (49

- 100 basis points

     49  

Because the fair value of Ernest investments noted above approximate their original cost, we did not recognize any unrealized gains/losses during 2016.

In 2015, we held an equity investment in Capella (now RCCH) similar to our Ernest equity investment. We accounted for this investment under the fair value option election as well. Similar to Ernest, we recorded no unrealized gain/loss on this investment in 2015 and through April 2016. In April 2016, we sold our Capella equity investment at cost resulting in no recognized gain/loss.

Principles of Consolidation: Property holding entities and other subsidiaries of which we own 100% of the equity or have a controlling financial interest evidenced by ownership of a majority voting interest are consolidated. All inter-company balances and transactions are eliminated. For entities in which we own less than 100% of the equity interest, we consolidate the property if we have the direct or indirect ability to control the entities’ activities based upon the terms of the respective entities’ ownership agreements. For these entities, we record a non-controlling interest representing equity held by non-controlling interests.

We continually evaluate all of our transactions and investments to determine if they represent variable interests in a variable interest entity. If we determine that we have a variable interest in a variable interest entity, we then evaluate if we are the primary beneficiary of the variable interest entity. The evaluation is a qualitative assessment as to whether we have the ability to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance. We consolidate each variable interest entity in which we, by virtue of or transactions with our investments in the entity, are considered to be the primary beneficiary. At December 31, 2016 and 2015, we determined that we were not the primary beneficiary of any of our variable interest entities because we do not control the activities (such as the day-to-day operations of the hospital) that most significantly impact the economic performance of these entities.

 

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Disclosure of Contractual Obligations

The following table summarizes known material contractual obligations (including interest) as of December 31, 2016, excluding the impact of subsequent events (amounts in thousands):

 

Contractual Obligations

   Less Than
1 Year
     1-3 Years      3-5 Years      After
5 Years
     Total  

6.375% Senior Unsecured Notes due 2022

   $ 22,313      $ 44,625      $ 44,625      $ 361,156      $ 472,719  

5.750% Senior Unsecured Notes due 2020(1)

     12,095        24,189        220,419        —          256,703  

4.000% Senior Unsecured Notes due 2022(1)

     21,034        42,047        42,089        539,104        644,274  

5.500% Senior Unsecured Notes due 2024

     16,500        33,000        33,000        341,250        423,750  

6.375% Senior Unsecured Notes due 2024

     31,875        63,750        63,750        579,688        739,063  

5.250% Senior Unsecured Notes due 2026

     26,906        52,500        52,500        631,250        763,156  

Revolving credit facility(2)

     10,190        294,755        —          —          304,945  

Term loans

     7,117        271,617        —          —          278,734  

Operating lease commitments(3)

     7,328        14,176        12,968        251,982        286,454  

Purchase obligations(4)

     464,592        43,638        —          —          508,230  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 619,950      $ 884,297      $ 469,351      $ 2,704,430      $ 4,678,028  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Our 5.750% Senior Unsecured Notes due 2020 and 4.000% Senior Unsecured Notes due 2022 are euro-denominated. We used the exchange rate at December 31, 2016, (or 1.0517) in preparing this table.
(2) As of December 31, 2016, we have a $1.3 billion revolving credit facility. However, this table assumes the balance outstanding under the revolver and rate in effect at December 31, 2016 (which was $290 million as of December 31, 2016) remains in effect through maturity.
(3) Most of our contractual obligations to make operating lease payments are related to ground leases for which we are reimbursed by our tenants along with corporate office and equipment leases.
(4) Includes approximately $95.5 million of future expenditures related to development projects.

Off Balance Sheet Arrangements

We own interests in certain unconsolidated joint ventures as described under Note 3 to Item 8 of this Annual Report on Form 10-K. Except in limited circumstances, our risk of loss is limited to our investment in the joint venture and any outstanding receivables. We have no other material off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources except those described above under “Disclosure of Contractual Obligations”.

Liquidity and Capital Resources

2016 Cash Flow Activity

We generated cash of $264.7 million from operating activities during 2016, 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 $218.4 million and certain investing activities including the additional funding of our development activities.

In regards to other financing activities in which we used such net proceeds to ultimately fund our approximate $1.5 billion of acquisitions in 2016 and the remainder of our development activities, we did the following:

 

  a) On February 22, 2016, we completed a senior unsecured notes offering for $500 million.

 

  b)

On March 1, 2016, we updated our at-the-market equity program, which gave us the ability to sell up to $227 million of stock with a commission rate of 1.25%. During 2016, we sold approximately 15 million shares of our common stock under this program, resulting in net proceeds of approximately

 

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  $224 million, after deducting expenses of approximately $2.8 million of commissions. We have no capacity to sell additional shares under this at-the-market equity offering program.

 

  c) On April 30, 2016, we closed on the Capella Disposal Transaction (as further discussed in Note 3 to Item 8 of this Annual Report on Form 10-K) resulting in net proceeds of $550 million along with an additional $50 million once we sold our investment in RegionalCare Hospital Partners, Inc. (“RegionalCare”) bonds in June 2016.

 

  d) On May 23, 2016, we sold our investment in five properties leased and operated by Post Acute Medical (“Post Acute”) for $71 million.

 

  e) On June 17, 2016, we sold our investment in one property leased and operated by Corinth Investor Holdings for $28 million.

 

  f) On July 13, 2016, we completed a new $500 million senior unsecured notes offering. We used the net proceeds from this offering to redeem our $450 million 6.875% Senior Unsecured Notes due 2021, which was completed on August 12, 2016. Net proceeds from the notes offering and redemption approximated $19 million, and we incurred a one-time charge of $22.5 million related to the redemption (see Note 4 to Item 8 of this Annual Report on Form 10-K for further details).

 

  g) On July 20, 2016, we sold three facilities leased to HealthSouth Corporation (“HealthSouth”) for $111.5 million.

 

  h) On September 30, 2016, we completed a public offering of 57.5 million shares of our common stock, resulting in net proceeds of $799.5 million, after deducting offering expenses.

 

  i) On October 7, 2016, we sold 10.3 million shares of common stock in a private placement to Cerberus, and certain members of Steward management. We sold these shares at a price per share of $14.50, equal to the public offering price of our September 2016 equity offering, generating total proceeds of $150 million.

 

  j) Subsequent to December 31, 2016, we replaced our credit facility with a new credit facility that includes a $1.3 billion unsecured revolving loan facility, a $200 million unsecured term loan facility, and a €200 million unsecured term loan facility. We plan to use the proceeds of the €200 million unsecured notes along with cash on hand to redeem the 5.750% Senior Unsecured Notes due 2020 in the same principal amounts. On February 2, 2017, we delivered an irrevocable notice of full redemption to the holders of these notes and set a redemption date of March 4, 2017. With the new credit facility and bond redemption, we expect to incur a one-time charge of approximately $13 million in the 2017 first quarter of which $9 million relates to a prepayment penalty. See Note 13 to Item 8 of this Annual Report on Form 10-K for further discussion of the subsequent event activities.

2015 Cash Flow Activity

We generated cash of $207.0 million from operating activities during 2015, 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 $183.0 million and certain investing activities including the additional funding of our development activities.

In regards to other financing activities in which we used such net proceeds to ultimately fund our approximate $1.8 billion of acquisitions in 2015 and the remainder of our development activities, we did the following:

 

  a) On August 19, 2015, we completed a public offering of €500 million aggregate principal amount of 4.00% senior unsecured notes. In addition, on September 30, 2015, we entered into an amendment to our amended and restated revolving credit and term loan agreement, dated as of June 19, 2014. The amendment, among other things, increased our revolver availability to $1.3 billion and increased borrowings under our term loan by $125 million.

 

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  b) On August 11, 2015, we completed an underwritten public offering of 28.75 million shares of our common stock, resulting in net proceeds of approximately $337 million, after deducting estimated offering expenses.

 

  c) On January 14, 2015, we completed an underwritten public offering of 34.5 million shares of our common stock, resulting in net proceeds of approximately $480 million, after deducting estimated offering expenses.

2014 Cash Flow Activity

We generated cash of $150.4 million from operating activities during 2014, primarily consisting of rent and interest from mortgage and other loans, which with cash on-hand, was principally used to fund our dividends of $144.4 million and certain of our investing activities including the additional funding of our development properties.

In regards to other financing activities in which we used such net proceeds to ultimately fund our $767.7 million of acquisitions in 2014 and to fund other investment activities, we did the following:

 

  a) On March 11, 2014, we completed an underwritten public offering of 7.7 million shares of our common stock, resulting in net proceeds of approximately $100 million, after deducting estimated offering expenses. We also granted the underwriters a 30-day option to purchase up to an additional 1.2 million shares of common stock. The option, which was exercised in full, closed on April 8, 2014 and resulted in additional net proceeds of approximately $16 million.

 

  b) On April 17, 2014, we completed a $300 million senior unsecured notes offering.

 

  c) On October 17, 2014, we entered into an amendment to our revolving credit and term loan agreement to increase the aggregate committed size of the facility to $1.15 billion with an additional $400 million accordion available increasing the total aggregate capacity to $1.55 billion. The amendment also increased the alternative currency sublimit under the facility to €500 million and amended certain covenants in order to permit us to consummate and finance the MEDIAN transaction.

 

  d) We established an at-the-market equity offering program in January 2014, which gave us the ability to sell up to $250 million in shares. In 2014, we sold 1.7 million shares resulting in net proceeds of $22.6 million.

Debt Restrictions and Covenants

Our debt facilities impose certain restrictions on us, including, but not limited to, restrictions on our ability to: incur debt; 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 agreement governing our Credit Facility limits the amount of dividends we can pay to 95% of normalized adjusted funds from operations, as defined in the agreements, on a rolling four quarter basis. The indentures governing our senior unsecured notes also limit the amount of dividends we can pay based on the sum of 95% of funds from operations, proceeds of equity issuances and certain other net cash proceeds. Finally, our 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, unsecured leverage ratio, consolidated adjusted net worth, and unsecured interest coverage ratio. This facility also contains customary events of default, including among others, nonpayment of principal or interest, material inaccuracy of representations and failure to comply with our covenants. If an event of default occurs and is continuing under the facility, the entire outstanding balance may become immediately due and payable. At December 31, 2016, we were in compliance with all such financial and operating covenants.

 

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In order for us to continue to qualify as a REIT we are required to distribute annual dividends equal to a minimum of 90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gains. See section titled “Distribution Policy” within this Item 7 of this Annual Report on Form 10-K for further information on our dividend policy along with the historical dividends paid on a per share basis.

Short-term Liquidity Requirements:

As of February 24, 2017, we have less than $0.4 million in debt principal payments due in 2017 — see debt maturity schedule below. At February 24, 2017, our availability under our revolving credit facility plus cash on-hand (after adjusting for the redemption of the €200 million 5.750% Senior Unsecured Notes due 2020) approximated $1.2 billion. We believe this liquidity and our current monthly cash receipts from rent and loan interest is sufficient to fund our operations, debt and interest obligations, our purchase obligations as disclosed in the “Contractual Obligations” schedule earlier, and dividends in order to comply with REIT requirements for the next twelve months.

Long-term Liquidity Requirements:

As of February 24, 2017, after adjusting for the new credit facility and notes redemption discussed above, we have less than $15 million in debt and principal payment due between now and January 2020. With our liquidity as of February 24, 2017 of approximately $1.2 billion, along with our current monthly cash receipts from rent and loan interest, we believe we have the liquidity available for us to fund our operations, debt and interest obligations, dividends in order to comply with REIT requirements, and our purchase obligations included in the “Contractual Obligations” schedule for the foreseeable future.

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

 

    amending or entering into new bank term loans,

 

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

 

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

 

    entering into joint venture arrangements,

 

    proceeds from strategic property sales, and/or

 

    sale of equity securities.

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

Principal payments due on our debt (which is adjusted for the closing of the February 1, 2017 credit facility and the redemption of the €200 million 5.750% Senior Unsecured Notes due 2020 and exclude the effects of any discounts, premiums, or debt issue costs recorded) are as follows (in thousands):

 

2017

   $ 320  

2018

     12,781  

2019

     —    

2020

     210,340  

2021

     340,000  

Thereafter

     2,375,850  
  

 

 

 

Total

   $ 2,939,291  
  

 

 

 

 

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Results of Operations

Our operating results may vary significantly from year-to-year due to a variety of reasons including acquisitions made during the year, incremental revenues and expenses from acquisitions made in the prior year, revenues and expenses from completed development properties, property disposals, annual escalation provisions, foreign currency exchange rate changes, new or amended debt agreements, issuances of shares through an equity offering, etc. Thus, our operating results for the current year are not necessarily indicative of the results that may be expected in future years.

Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015

Net income for the year ended December 31, 2016, was $225.0 million compared to net income of $139.6 million for the year ended December 31, 2015. This increase is primarily due to additional revenue generated from our new investments and from completed development projects, $61.2 million of gains on real estate and other disposals, and a $15 million reduction in acquisition expenses, partially offset by higher debt refinancing costs and interest expense in 2016. FFO, after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $334.8 million, or $1.28 per diluted share for 2016 as compared to $274.8 million, or $1.26 per diluted share for 2015, a 2% increase on a per share basis. This increase in FFO per share is primarily due to additional revenue from new investments, partially offset by the loss of income from properties disposed of in 2016, higher interest costs and an increase in the number of shares outstanding during 2016 to fund such new investments.

A comparison of revenues for the years ended December 31, 2016 and 2015 is as follows (dollar amounts in thousands):

 

     2016            2015            Change  
     (Dollar amounts in thousands)  

Rent billed

   $ 327,269        60.5   $ 247,604        56.0   $ 79,665  

Straight-line rent

     41,067        7.6     23,375        5.3     17,692  

Income from direct financing leases

     64,307        11.9     58,715        13.3     5,592  

Interest and fee income

     108,494        20.0     112,184        25.4     (3,690
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

   $ 541,137        100.0   $ 441,878        100.0   $ 99,259  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Our total revenue for 2016 is up $99.3 million or 22.5% over the prior year. This increase is made up of the following:

 

    Operating lease revenue (including rent billed and straight-line rent) — up $97.4 million over the prior year of which $0.2 million is from our annual escalation provisions in our leases, $69.6 million is from incremental revenue from acquisitions made in 2016 (including $15.0 million related to Steward), $20.2 million is incremental revenue from development properties that were completed and put into service in 2016 and 2015, and $2.1 million is from capital additions at our existing facilities during 2016. The increase is also attributable to $15.0 million earned on our Capella properties after lease reclassification from DFL to operating lease accounting as part of the April 29, 2016 amendments. These increases are partially offset by $10.3 million of lower revenues from the 2016 dispositions.

 

    Income from direct financing leases — up $5.6 million over the prior year of which $0.8 million is from annual escalation provisions in our leases and $6.7 million is from incremental revenue from acquisitions made in 2016. This increase is also attributable to $0.3 million of incremental revenue on the Capella properties prior to lease reclassification. The increase was partially offset by the $2.6 million write-off of DFL non-cash income in connection with the Capella lease reclassification (see Note 3 to Item 8 of this Annual Report on Form 10-K for details).

 

   

Interest and fee income — down $3.7 million over the prior year, which was attributable to $22.9 million in interest earned in 2015 from loans that were converted to real estate on or before December 31, 2016,

 

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in connection with the MEDIAN Transaction and $1.1 million related to loan pay downs in 2016. The decrease was partially offset by $18.0 million of additional interest from other loans made during 2016, including the Prime mortgage loans, $2.1 million of interest on the Capella mortgage and acquisition loans that were outstanding longer in 2016 than in 2015, and $0.4 million in annual escalation provisions of our loans.

Real estate depreciation and amortization during 2016 was $94.4 million compared to $69.9 million in 2015 primarily due to the incremental depreciation/amortization from the facilities acquired in 2016 and the development properties completed in 2015 and 2016. In the 2016 second quarter, we accelerated the amortization of the lease intangible asset related to our Corinth facility resulting in $1.1 million of additional expense. This was offset by a similar $1.1 million of expense in 2015 to accelerate the amortization of lease intangible assets associated with Twelve Oaks, Luling, and Healthtrax properties.

Property expenses for 2016 decreased $1.1 million compared to 2015. This decrease is primarily due to the reimbursement of $0.8 million from the tenant of our Twelve Oaks facility for property expenses incurred in previous periods.

Acquisition expenses decreased from $61.3 million in 2015 to $46.3 million in 2016 primarily as a result of $31.7 million in lower real estate transfer taxes associated with our international acquisitions. This decrease was partially offset by $24.8 million of acquisition expenses incurred in 2016 associated with contingent consideration adjustments involving the seller’s capital gains taxes on our MEDIAN transaction in 2015.

General and administrative expenses in 2016 totaled $48.9 million, which is 9.0% of revenues, down from 9.9% of revenues in the prior year. The decline in general and administrative expenses as a percentage of revenues is primarily due to our business model as we can generally increase our revenues significantly without increasing our headcount and related expense at the same rate. On a dollar basis, general and administrative expenses were up $5.3 million from the prior year due to higher international administrative expenses, and to a lesser extent personnel and travel costs, which are up as a result of the growth and expansion of our company.

Interest expense for 2016 and 2015 totaled $159.6 million and $120.9 million, respectively. This increase is related to higher average debt balances in the current year associated with our 4.000% Senior Unsecured Notes due 2022 entered into in August 2015 and our 6.375% Senior Unsecured Notes due 2024 entered into in February 2016 and our expanded credit facility. In addition, we incurred $1.7 million in additional interest expense in 2016 between the time we issued the $500 million 5.250% Senior Unsecured Notes due 2026 in July 2016 and when we were able to redeem the $450 million 6.875% Senior Unsecured Notes due 2021 in August 2016. Our weighted average interest rate was 4.9% for 2016, up from 4.3% in 2015 due to more permanent debt financing in 2016 and higher LIBOR rates. See Note 4 to our consolidated financial statements in Item 8 to this Annual Report on Form 10-K for further information on our debt activities.

During the year ended December 31, 2016, we had various dispositions resulting in a net gain on sale of real estate and other asset dispositions of $61.2 million and impairment charges of $7.2 million (see Note 3 to Item 8 of this Annual Report on Form 10-K for further details).

Earnings from our equity interests declined from $2.8 million of income in the 2015 to a loss of $1.1 million in 2016. The loss in 2016 includes approximately $5.4 million of one-time acquisition expenses, representing our share of such expenses incurred by our Italian joint venture to acquire its eight hospital properties. Excluding these acquisition expenses, our earnings from our equity interest would have been $4.3 million, an increase over 2015 due to $3.4 million of income from our Italian joint venture (no such income was recorded in 2015).

With the redemption of the $450 million in senior unsecured notes, we incurred $22.5 million in debt refinancing charges ($15.5 million of which was a redemption premium) during 2016. During 2015, we incurred $4.4 million of charges primarily related to structuring and underwriting fees associated with the bridge loan entered into as a back stop on financing the original Capella acquisition.

 

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Income tax expense includes U.S. federal and state income taxes on our TRS entities, as well as non-U.S. income based taxes and withholding taxes on certain investments located in jurisdictions outside the U.S. The provision for income taxes was a benefit of $6.8 million for 2016 compared to expense of $1.5 million for 2015. As discussed in Note 5 to Item 8 of this Annual Report on Form 10-K, the income tax benefit recognized for 2016 was primarily due to acquisition costs associated with our European investments (approximately $5.1 million) and the release of valuation allowances on foreign deferred tax assets of approximately $4 million. The reversal of the valuation allowances on these foreign deferred tax assets is expected to result in higher income tax expense related to our European investments in future periods. We continue to reflect a valuation allowance against our U.S. and certain foreign net deferred tax assets at December 31, 2016.

Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014

Net income for the year ended December 31, 2015, was $139.6 million compared to net income of $50.5 million for the year ended December 31, 2014. This increase is primarily due to additional income generated from our 2015 acquisitions and from completed development projects. In addition, we incurred $50.1 million of impairment charges in 2014 — see Note 3 to Item 8 of this Annual Report on Form 10-K for further details. FFO, after adjusting for certain items (as more fully described in “Reconciliation of Non-GAAP Financial Measures”), was $274.8 million, or $1.26 per diluted share for 2015 as compared to $181.7 million, or $1.06 per diluted share for 2014, a 19% increase on a per share basis. This increase in FFO was primarily due to the increase in revenue from acquisitions and the completion of development projects during 2015.

A comparison of revenues for the years ended December 31, 2015 and 2014 is as follows (dollar amounts in thousands):

 

     2015            2014            Change  
     (Dollar amounts in thousands)  

Rent billed

   $ 247,604        56.0   $ 187,018        59.9   $ 60,586  

Straight-line rent

     23,375        5.3     13,507        4.3     9,868  

Income from direct financing leases

     58,715        13.3     49,155        15.7     9,560  

Interest and fee income

     112,184        25.4     62,852        20.1     49,332  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

   $ 441,878        100.0   $ 312,532        100.0   $ 129,346  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Our total revenue for 2015 is up $129.3 million or 41.4% over the prior year. This increase is made up of the following:

 

    Operating lease revenue (including rent billed and straight-line rent) — up $70.5 million over the prior year of which $0.4 million is from our annual escalation provisions in our leases, $69.6 million is from incremental revenue from acquisitions made in 2015, $16.4 million is incremental revenue from development properties that were completed and put into service in 2015, and $2.0 million is net incremental revenue from properties where we changed operators and began recording straight-line rent on the respective leases. This increase is partially offset by $12.7 million attributable to the decline in the euro and a $3.1 million write-off of straight-line rent related to our Luling and Twelve Oaks properties. In addition, approximately $2.7 million of base rents were recorded in 2014 related to our disposed properties but none was recorded in 2015.

 

    Income from direct financing leases — up $9.6 million over the prior year of which $1.0 million is from annual escalation provisions in our leases and $8.5 million is from incremental revenue from acquisitions made in 2015.

 

    Interest and fee income — up $49.3 million over the prior period of which $1.8 million is from our annual escalation provisions in our loans and $52.6 million is primarily from new loans, partially offset by $0.1 million due to the repayment of loans in 2015 and $5.0 million attributable to the decline in the euro.

 

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Real estate depreciation and amortization during 2015 was $69.9 million compared to $53.9 million in 2014 primarily due to the incremental depreciation/amortization from the facilities acquired in 2015 and the development properties completed in 2014 and 2015. In addition, we accelerated the related lease intangible of our Twelve Oaks, Luling, and Healthtrax properties resulting in an additional $1.1 million of expense in 2015.

During 2014, we recorded a $3.1 million real estate impairment charge on our Bucks facility and a $47.0 million impairment charge on our Monroe facility — see Note 3 to Item 8 of this Annual Report on Form 10-K for further details.

Acquisition expenses increased from $26.4 million in 2014 to $61.3 million in 2015 primarily as a result of the completion of the MEDIAN and Capella acquisitions. Included in the 2015 and 2014 acquisition expenses are $37.0 million and $5.8 million, respectively, of real estate transfer taxes associated with our international properties.

General and administrative expenses in 2015 totaled $43.6 million, which is 9.9% of revenues, down from 11.9% of revenues in the prior year. The decline in general and administrative expenses as a percentage of revenue is primarily due to our business model as we can generally increase our revenue significantly without increasing our headcount and related expense at the same rate. On a dollar basis, general and administrative expenses were up $6.4 million from the prior year due to higher compensation expense, travel and international administrative expenses, which are up as a result of the growth and expansion of our company.

Interest expense for 2015 and 2014 totaled $120.9 million and $98.2 million, respectively. This increase is related to higher average debt balances in the current year associated with our 5.500% Senior Unsecured Notes due 2024 (entered into in April 2014), our 4.000% Senior Unsecured Notes due 2022 and the expansion of our credit facility in 2015. Our weighted average interest rate was 4.3% for 2015, down from 5.4% in 2014, due to the issuance of our 4.000% Senior Unsecured Notes due 2022 and a higher outstanding balance on the revolving credit facility in 2015.

With the expansion of our credit facility in 2015, along with a bridge loan entered into in the 2015 third quarter to fund the Capella transaction, we incurred $4.4 million of unutilized financing fees/debt refinancing costs compared to $1.7 million in 2014.

Gain on sale of real estate increased slightly from 2014 due to the $1.7 million and $1.5 million gains on the Healthrax and Luling property sales in 2015, respectively, compared to the $2.9 million gain on the La Palma property sale in 2014.

Earnings from equity and other interests increased slightly from 2014 due to increased investee earnings, partially offset by lower income from our interest in Bucks as the property was sold in August 2014 — this interest generated about $1 million of income annually.

Other income (expense) was down $5.2 million in 2015 primarily due to $4.9 million of foreign currency transaction gains in 2014.

Income tax expense was $1.5 million for 2015 — up from $0.3 million in 2014, primarily due to the increase in income in certain of our European entities.

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.

 

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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 potentially less meaningful to investors and analysts.

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

 

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The following table presents a reconciliation of net income attributable to MPT common stockholders to FFO and normalized FFO for the years ended December 31, 2016, 2015, and 2014 ($ amounts in thousands except per share data):

 

     For the Year Ended  
     December 31,
2016
    December 31,
2015
    December 31,
2014
 

FFO information:

      

Net income attributable to MPT common stockholders

   $ 225,048     $ 139,598     $ 50,522  

Participating securities’ share in earnings

     (559     (1,029     (895
  

 

 

   

 

 

   

 

 

 

Net income, less participating securities’ share in earnings

   $ 224,489     $ 138,569     $ 49,627  

Depreciation and amortization

     96,157       69,867       53,938  

Gain on sale of real estate

     (67,168     (3,268     (2,857

Real estate impairment charge

     —         —         5,974  
  

 

 

   

 

 

   

 

 

 

Funds from operations

   $ 253,478     $ 205,168     $ 106,682  

Write-off of straight line rent and other

     3,063       3,928       2,818  

Transaction costs from non-real estate dispositions

     5,944       —         —    

Acquisition expenses, net of tax benefit

     46,529       61,342       26,389  

Release of valuation allowance

     (3,956     —         —    

Impairment charges

     7,229       —         44,154  

Unutilized financing fees/ debt refinancing costs

     22,539       4,367       1,698  
  

 

 

   

 

 

   

 

 

 

Normalized funds from operations attributable to MPT common stockholders

   $ 334,826     $ 274,805     $ 181,741  
  

 

 

   

 

 

   

 

 

 

Per diluted share data:

      

Net income, less participating securities’ share in earnings

   $ 0.86     $ 0.63     $ 0.29  

Depreciation and amortization

     0.37       0.32       0.31  

Gain on sale of real estate

     (0.26     (0.01     (0.01

Real estate impairment charge

     —         —         0.04  
  

 

 

   

 

 

   

 

 

 

Funds from operations

   $ 0.97     $ 0.94     $ 0.63  

Write-off of straight line rent and other

     0.01       0.02       0.02  

Transaction costs from non-real estate dispositions

     0.02       —         —    

Acquisition expenses, net of tax benefit

     0.18       0.28       0.15  

Release of valuation allowance

     (0.02     —         —    

Impairment charges

     0.03       —         0.26  

Unutilized financing fees/ debt refinancing costs

     0.09       0.02       —    
  

 

 

   

 

 

   

 

 

 

Normalized funds from operations attributable to MPT common stockholders

   $ 1.28     $ 1.26     $ 1.06  
  

 

 

   

 

 

   

 

 

 

 

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Distribution Policy

We have elected to be taxed as a REIT commencing with our taxable year that began on April 6, 2004 and ended on December 31, 2004. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income, excluding net capital gain, to our stockholders. It is our current intention to comply with these requirements and maintain such status going forward.

The table below is a summary of our distributions declared for the three year period ended December 31, 2016:

 

Declaration Date

  

Record Date

  

Date of Distribution

   Distribution per Share  

November 10, 2016

  

December 8, 2016

  

January 12, 2017

   $ 0.23  

August 18, 2016

  

September 15, 2016

  

October 13, 2016

   $ 0.23  

May 19, 2016

  

June 16, 2016

  

July 14, 2016

   $ 0.23  

February 19, 2016

  

March 17, 2016

  

April 14, 2016

   $ 0.22  

November 12, 2015

  

December 10, 2015

  

January 14, 2016

   $ 0.22  

August 20, 2015

  

September 17, 2015

  

October 15, 2015

   $ 0.22  

May 14, 2015

  

June 11, 2015

  

July 9, 2015

   $ 0.22  

February 23, 2015

  

March 12, 2015

  

April 9, 2015

   $ 0.22  

November 13, 2014

  

December 4, 2014

  

January 8, 2015

   $ 0.21  

August 21, 2014

  

September 18, 2014

  

October 15, 2014

   $ 0.21  

May 15, 2014

  

June 12, 2014

  

July 10, 2014

   $ 0.21  

February 21, 2014

  

March 14, 2014

  

April 11, 2014

   $ 0.21  

On February 16, 2017, we announced that our Board of Directors declared a regular quarterly cash dividend of $0.24 per share of common stock to be paid on April 13, 2017, to stockholders of record on March 16, 2017.

We intend to pay to our stockholders, within the time periods prescribed by the Code, all or substantially all of our annual REIT 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 amounts of dividends we can pay — see Note 4 to our consolidated financial statements in Item 8 to this Annual Report on Form 10-K for further information.

 

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Index to Financial Statements
ITEM 7A. 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, 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 December 31, 2016, our outstanding debt totaled $2.9 billion, which consisted of fixed-rate debt of $2.4 billion and variable rate debt of $0.5 billion. If market interest rates increase by one-percent, the fair value of our debt at December 31, 2016 would decrease by approximately $5.8 million. Changes in the fair value of our fixed rate debt will not have any impact on us unless we decided to repurchase the debt in the open markets.

If market rates of interest on our variable rate debt increase by 1%, the increase in annual interest expense on our variable rate debt would decrease future earnings and cash flows by $0.1 million per year. If market rates of interest on our variable rate debt decrease by 1%, the decrease in interest expense on our variable rate debt would increase future earnings and cash flows by $0.1 million per year. This assumes that the average amount outstanding under our variable rate debt for a year is $0.5 billion, the balance of our revolver and term loan at December 31, 2016.

Foreign Currency Sensitivity

With our investments in Germany, the United Kingdom, Spain, and Italy, we are subject to fluctuations in the euro and British pound to U.S. dollar currency exchange rates. Increases or decreases in the value of the euro to U.S. dollar and the British pound to U.S. dollar exchange rates may impact our financial condition and/or our results of operations. Based solely on operating results for 2016 and on an annualized basis, if the euro exchange rate were to change by 5%, our FFO would change by approximately $3.5 million. Based solely on operating results for 2016 and on an annualized basis, if the British pound exchange rate were to change by 5%, our FFO would change by less than $0.2 million.

 

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Index to Financial Statements
ITEM 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

of Medical Properties Trust, Inc.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) present fairly, in all material respects, the financial position of Medical Properties Trust, Inc. and its subsidiaries at December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index under Item 15(a) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9a. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Birmingham, AL

March 1, 2017

 

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Index to Financial Statements

Report of Independent Registered Public Accounting Firm

To the Partners

of MPT Operating Partnership, L.P.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) present fairly, in all material respects, the financial position of MPT Operating Partnership, L.P. and its subsidiaries at December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index under Item 15(a) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9a. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Birmingham, AL

March 1, 2017

 

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Index to Financial Statements

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

     December 31,  
     2016     2015  
     (Amounts in thousands,
except for per share data)
 
ASSETS  

Real estate assets

    

Land

   $ 417,368     $ 315,787  

Buildings and improvements

     3,550,674       2,675,803  

Construction in progress and other

     53,648       49,165  

Intangible lease assets

     296,176       256,950  

Net investment in direct financing leases

     648,102       626,996  

Mortgage loans

     1,060,400       757,581  
  

 

 

   

 

 

 

Gross investment in real estate assets

     6,026,368       4,682,282  

Accumulated depreciation

     (292,786     (232,675

Accumulated amortization

     (32,339     (25,253
  

 

 

   

 

 

 

Net investment in real estate assets

     5,701,243       4,424,354  

Cash and cash equivalents

     83,240       195,541  

Interest and rent receivables

     57,698       46,939  

Straight-line rent receivables

     116,861       82,155  

Other loans

     155,721       664,822  

Other assets

     303,773       195,540  
  

 

 

   

 

 

 

Total Assets

   $ 6,418,536     $ 5,609,351  
  

 

 

   

 

 

 
LIABILITIES AND EQUITY  

Liabilities

    

Debt, net

   $ 2,909,341     $ 3,322,541  

Accounts payable and accrued expenses

     207,711       137,356  

Deferred revenue

     19,933       29,358  

Lease deposits and other obligations to tenants

     28,323       12,831  
  

 

 

   

 

 

 

Total Liabilities

     3,165,308       3,502,086  

Commitments and Contingencies

    

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 — 320,514 shares at December 31, 2016 and 236,744 shares at December 31, 2015

     321       237  

Additional paid-in capital

     3,775,336       2,593,827  

Distributions in excess of net income

     (434,114     (418,650

Accumulated other comprehensive loss

     (92,903     (72,884

Treasury shares, at cost

     (262     (262
  

 

 

   

 

 

 

Total Medical Properties Trust, Inc. Stockholders’ Equity

     3,248,378       2,102,268  

Non-controlling interests

     4,850       4,997  
  

 

 

   

 

 

 

Total Equity

     3,253,228       2,107,265  
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 6,418,536     $ 5,609,351  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Index to Financial Statements

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Net Income

 

     For the Years Ended December 31,  
     2016     2015     2014  
    

(Amounts in thousands,

except for per share data)

 

Revenues

      

Rent billed

   $ 327,269     $ 247,604     $ 187,018  

Straight-line rent

     41,067       23,375       13,507  

Income from direct financing leases

     64,307       58,715       49,155  

Interest and fee income

     108,494       112,184       62,852  
  

 

 

   

 

 

   

 

 

 

Total revenues

     541,137       441,878       312,532  

Expenses

      

Real estate depreciation and amortization

     94,374       69,867       53,938  

Impairment charges

     7,229       —         50,128  

Property-related

     2,712       3,792       1,851  

Acquisition expenses

     46,273       61,342       26,389  

General and administrative

     48,911       43,639       37,274  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     199,499       178,640       169,580  
  

 

 

   

 

 

   

 

 

 

Operating income

     341,638       263,238       142,952  

Other income (expense)

      

Interest expense

     (159,597     (120,884     (98,156

Gain on sale of real estate and other asset dispositions, net

     61,224       3,268       2,857  

Earnings from equity and other interests

     (1,116     2,849       2,559  

Unutilized financing fees/ debt refinancing costs

     (22,539     (4,367     (1,698

Other income (expense)

     (502     (2,674     2,624  

Income tax benefit (expense)

     6,830       (1,503     (340
  

 

 

   

 

 

   

 

 

 

Net other expenses

     (115,700     (123,311     (92,154
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     225,938       139,927       50,798  

Loss from discontinued operations

     (1     —         (2
  

 

 

   

 

 

   

 

 

 

Net income

     225,937       139,927       50,796  

Net income attributable to non-controlling interests

     (889     (329     (274
  

 

 

   

 

 

   

 

 

 

Net income attributable to MPT common stockholders

   $ 225,048     $ 139,598     $ 50,522  
  

 

 

   

 

 

   

 

 

 

Earnings per share — basic

      

Income from continuing operations attributable to MPT common stockholders

   $ 0.86     $ 0.64     $ 0.29  

Income from discontinued operations attributable to MPT common stockholders

     —         —         —    
  

 

 

   

 

 

   

 

 

 

Net income attributable to MPT common stockholders

   $ 0.86     $ 0.64     $ 0.29  
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding — basic

     260,414       217,997       169,999  
  

 

 

   

 

 

   

 

 

 

Earnings per share — diluted

      

Income from continuing operations attributable to MPT common stockholders

   $ 0.86     $ 0.63     $ 0.29  

Income from discontinued operations attributable to MPT common stockholders

     —         —         —    
  

 

 

   

 

 

   

 

 

 

Net income attributable to MPT common stockholders

   $ 0.86     $ 0.63     $ 0.29  
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding — diluted

     261,072       218,304       170,540  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Index to Financial Statements

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

 

     For the Years
Ended December 31,
 
(In thousands)    2016     2015     2014  

Net income

   $ 225,937     $ 139,927     $ 50,796  

Other comprehensive income (loss):

      

Unrealized gain on interest rate swap

     2,904       3,139       2,964  

Foreign currency translation loss

     (22,923     (54,109     (15,937
  

 

 

   

 

 

   

 

 

 

Total comprehensive income

     205,918       88,957       37,823  

Comprehensive income attributable to non-controlling interests

     (889     (329     (274
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to MPT common stockholders

   $ 205,029     $ 88,628     $ 37,549  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Index to Financial Statements

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Equity

For the Years Ended December 31, 2016, 2015 and 2014

(Amounts in thousands, except per share data)

 

    Preferred     Common     Additional
Paid-in
Capital
    Distributions
in Excess
of Net
Income
    Accumulated
Other
Comprehensive
Loss
    Treasury
Stock
    Non-
Controlling
Interests
    Total
Equity
 
    Shares     Par
Value
    Shares     Par
Value
             

Balance at December 31, 2013

    —       $ —         161,310     $ 161     $ 1,618,054     $ (264,804   $ (8,941   $ (262   $ —       $ 1,344,208  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    —         —         —         —         —         50,522       —         —         274       50,796  

Unrealized gain on interest rate swap

    —         —         —         —         —         —         2,964       —         —         2,964  

Foreign currency translation loss

    —         —         —         —         —         —         (15,937     —         —         (15,937

Stock vesting and amortization of stock-based compensation

    —         —         777       —         9,165       —         —         —         —         9,165  

Distributions to non-controlling interests

    —         —         —         —         —         —         —         —         (274     (274

Proceeds from offering (net of offering costs)

    —         —         10,656       11       138,162       —         —         —         —         138,173  

Dividends declared ($0.84 per common share)

    —         —         —         —         —         (147,048     —         —         —         (147,048
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

    —       $ —         172,743     $ 172     $ 1,765,381     $ (361,330   $ (21,914   $ (262   $ —       $ 1,382,047  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    —         —         —         —         —         139,598       —         —         329       139,927  

Sale of non-controlling interests

    —         —         —         —         —         —         —         —         5,000       5,000  

Unrealized gain on interest rate swap

    —         —         —         —         —         —         3,139       —         —         3,139  

Foreign currency translation loss

    —         —         —         —         —         —         (54,109     —         —         (54,109

Stock vesting and amortization of stock-based compensation

    —         —         751       2       11,120       —         —         —         —         11,122  

Distributions to non-controlling interests

    —         —         —         —         —         —         —         —         (332     (332

Proceeds from offering (net of offering costs)

    —         —         63,250       63       817,326       —         —         —         —         817,389  

Dividends declared ($0.88 per common share)

    —         —         —         —         —         (196,918     —         —         —         (196,918
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

    —       $ —         236,744     $ 237     $ 2,593,827     $ (418,650   $ (72,884   $ (262   $ 4,997     $ 2,107,265  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    —         —         —         —         —         225,048       —         —         889       225,937  

Unrealized gain on interest rate swap

    —         —         —         —         —         —         2,904       —         —         2,904  

Foreign currency translation loss

    —         —         —         —         —         —         (22,923     —         —         (22,923

Stock vesting and amortization of stock-based compensation

    —         —         1,021       1       7,941       —         —         —         —         7,942  

Distributions to non-controlling interests

    —         —         —         —         —         —         —         —         (1,036     (1,036

Proceeds from offering (net of offering costs)

    —         —         82,749       83       1,173,568       —         —         —         —         1,173,651  

Dividends declared ($0.91 per common share)

    —         —         —         —         —         (240,512     —         —         —         (240,512
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

    —       $ —         320,514     $ 321     $ 3,775,336     $ (434,114   $ (92,903   $ (262   $ 4,850     $ 3,253,228  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Index to Financial Statements

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

 

    For the Years Ended December 31,  
    2016     2015     2014  
    (Amounts in thousands)  

Operating activities

     

Net income

  $ 225,937     $ 139,927     $ 50,796  

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

     

Depreciation and amortization

    97,601       71,827       55,162  

Amortization of deferred financing costs and debt discount

    7,613       6,085       5,105  

Direct financing lease interest accretion

    (9,120     (8,032     (6,701

Straight-line rent revenue

    (41,567     (26,187     (16,325

Share-based compensation

    7,942       11,122       9,165  

Gain from sale of real estate and other asset dispositions, net

    (61,224     (3,268     (2,857

Impairment charges

    7,229       —         50,128  

Straight-line rent and other write-off

    3,063       2,812       2,818  

Unutilized financing fees/ debt refinancing costs

    22,539       4,367       1,698  

Other adjustments

    3,563       (6,334     (1,178

Decrease (increase) in:

     

Interest and rent receivable

    (13,247     (5,599     (3,856

Other assets

    (18,357     (8,297     764  

Accounts payable and accrued expenses

    41,583       26,540       6,209  

Deferred revenue

    (8,872     2,033       (485
 

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

    264,683       206,996       150,443  

Investing activities

     

Cash paid for acquisitions and other related investments

    (1,682,409     (2,218,869     (767,696

Net proceeds from sale of real estate

    198,767       19,175       34,649  

Principal received on loans receivable

    906,757       771,785       11,265  

Investment in loans receivable

    (109,027     (354,001     (12,782

Construction in progress and other

    (171,209     (146,372     (102,333

Investment in unsecured senior notes

    (50,000     —         —    

Proceeds from sale of unsecured notes

    50,000       —         —    

Other investments, net

    (69,423     (17,339     (13,126
 

 

 

   

 

 

   

 

 

 

Net cash used for investing activities

    (926,544     (1,945,621     (850,023

Financing activities

     

Proceeds from term debt

    1,000,000       681,000       425,000  

Payments of term debt

    (575,299     (283     (100,266

Payment of deferred financing costs

    (15,468     (7,686     (14,496

Revolving credit facilities, net

    (810,000     509,415       490,625  

Distributions paid

    (218,393     (182,980     (144,365

Lease deposits and other obligations to tenants

    14,557       (10,839     7,892  

Proceeds from sale of common shares, net of offering costs

    1,173,651       817,389       138,173  

Other financing activities

    (16,485     (5,326     —    
 

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

    552,563       1,800,690       802,563  
 

 

 

   

 

 

   

 

 

 

Increase in cash and cash equivalents for the year

    (109,298     62,065       102,983  

Effect of exchange rate changes

    (3,003     (11,065     (4,421

Cash and cash equivalents at beginning of year

    195,541       144,541       45,979  
 

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

  $ 83,240     $ 195,541     $ 144,541  
 

 

 

   

 

 

   

 

 

 

Interest paid, including capitalized interest of $2,320 in 2016, $1,425 in 2015, and $1,860 in 2014

  $ 138,770     $ 107,228     $ 91,890  

Supplemental schedule of non-cash investing activities:

     

Mortgage loan issued from sale of real estate

  $ —       $ —       $ 12,500  

Increase in development project construction costs incurred, not paid

    15,857       2,684       —    

Supplemental schedule of non-cash financing activities:

     

Dividends declared, not paid

  $ 74,521     $ 52,402     $ 38,461  

See accompanying notes to consolidated financial statements.

 

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Index to Financial Statements

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Consolidated Balance Sheets

 

     December 31,  
     2016     2015  
     (Amounts in thousands,
except for per unit data)
 
ASSETS  

Real estate assets

    

Land

   $ 417,368     $ 315,787  

Buildings and improvements

     3,550,674       2,675,803  

Construction in progress and other

     53,648       49,165  

Intangible lease assets

     296,176       256,950  

Net investment in direct financing leases

     648,102       626,996  

Mortgage loans

     1,060,400       757,581  
  

 

 

   

 

 

 

Gross investment in real estate assets

     6,026,368       4,682,282  

Accumulated depreciation

     (292,786     (232,675

Accumulated amortization

     (32,339     (25,253
  

 

 

   

 

 

 

Net investment in real estate assets

     5,701,243       4,424,354  

Cash and cash equivalents

     83,240       195,541  

Interest and rent receivables

     57,698       46,939  

Straight-line rent receivables

     116,861       82,155  

Other loans

     155,721       664,822  

Other assets

     303,773       195,540  
  

 

 

   

 

 

 

Total Assets

   $ 6,418,536     $ 5,609,351  
  

 

 

   

 

 

 
LIABILITIES AND CAPITAL  

Liabilities

    

Debt, net

   $ 2,909,341     $ 3,322,541  

Accounts payable and accrued expenses

     132,868       84,628  

Deferred revenue

     19,933       29,358  

Lease deposits and other obligations to tenants

     28,323       12,831  

Payable due to Medical Properties Trust, Inc.

     74,453       52,338  
  

 

 

   

 

 

 

Total Liabilities

     3,164,918       3,501,696  

Commitments and Contingencies

    

Capital

    

General partner — issued and outstanding — 3,204 units at December 31, 2016 and 2,363 units at December 31, 2015

     33,436       21,773  

Limited Partners:

    

Common units — issued and outstanding — 317,310 units at December 31, 2016 and 234,381 units at December 31, 2015

     3,308,235       2,153,769  

LTIP units — issued and outstanding — 292 units at December 31, 2016 and December 31, 2015

     —         —    

Accumulated other comprehensive loss

     (92,903     (72,884
  

 

 

   

 

 

 

Total MPT Operating Partnership, L.P. capital

     3,248,768       2,102,658  

Non-controlling interests

     4,850       4,997  
  

 

 

   

 

 

 

Total Capital

     3,253,618       2,107,655  
  

 

 

   

 

 

 

Total Liabilities and Capital

   $ 6,418,536     $ 5,609,351  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Index to Financial Statements

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Consolidated Statements of Net Income

 

     For the Years Ended December 31,  
     2016     2015     2014  
     (Amounts in thousands,
except for per unit data)
 

Revenues

      

Rent billed

   $ 327,269     $ 247,604     $ 187,018  

Straight-line rent

     41,067       23,375       13,507  

Income from direct financing leases

     64,307       58,715       49,155  

Interest and fee income

     108,494       112,184       62,852  
  

 

 

   

 

 

   

 

 

 

Total revenues

     541,137       441,878       312,532  

Expenses

      

Real estate depreciation and amortization

     94,374       69,867       53,938  

Impairment charges

     7,229       —         50,128  

Property-related

     2,712       3,792       1,851  

Acquisition expenses

     46,273       61,342       26,389  

General and administrative

     48,911       43,639       37,274  
  

 

 

   

 

 

   

 

 

 

Total operating expense

     199,499       178,640       169,580  
  

 

 

   

 

 

   

 

 

 

Operating income

     341,638       263,238       142,952  

Other income (expense)

      

Interest expense

     (159,597     (120,884     (98,156

Gain on sale of real estate and other asset dispositions, net

     61,224       3,268       2,857  

Earnings from equity and other interests

     (1,116     2,849       2,559  

Unutilized financing fees/ debt refinancing costs

     (22,539     (4,367     (1,698

Other income (expense)

     (502     (2,674     2,624  

Income tax benefit (expense)

     6,830       (1,503     (340
  

 

 

   

 

 

   

 

 

 

Net other expenses

     (115,700     (123,311     (92,154
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     225,938       139,927       50,798  

Loss from discontinued operations

     (1     —         (2
  

 

 

   

 

 

   

 

 

 

Net income

     225,937       139,927       50,796  

Net income attributable to non-controlling interests

     (889     (329     (274
  

 

 

   

 

 

   

 

 

 

Net income attributable to MPT Operating Partnership partners

   $ 225,048     $ 139,598     $ 50,522  
  

 

 

   

 

 

   

 

 

 

Earnings per unit — basic

      

Income from continuing operations attributable to MPT Operating Partnership partners

   $ 0.86     $ 0.64     $ 0.29  

Income from discontinued operations attributable to MPT Operating Partnership partners

     —         —         —    
  

 

 

   

 

 

   

 

 

 

Net income attributable to MPT Operating Partnership partners

   $ 0.86     $ 0.64     $ 0.29  
  

 

 

   

 

 

   

 

 

 

Weighted average units outstanding — basic

     260,414       217,997       169,999  
  

 

 

   

 

 

   

 

 

 

Earnings per unit — diluted

      

Income from continuing operations attributable to MPT Operating Partnership partners

   $ 0.86     $ 0.63     $ 0.29  

Income from discontinued operations attributable to MPT Operating Partnership partners

     —         —         —    
  

 

 

   

 

 

   

 

 

 

Net income attributable to MPT Operating Partnership partners

   $ 0.86     $ 0.63     $ 0.29  
  

 

 

   

 

 

   

 

 

 

Weighted average units outstanding — diluted

     261,072       218,304       170,540  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Index to Financial Statements

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

 

     For the Years
Ended December 31,
 
(In thousands)    2016     2015     2014  

Net income

   $ 225,937     $ 139,927     $ 50,796  

Other comprehensive income (loss):

      

Unrealized gain on interest rate swap

     2,904       3,139       2,964  

Foreign currency translation loss

     (22,923     (54,109     (15,937
  

 

 

   

 

 

   

 

 

 

Total comprehensive income

     205,918       88,957       37,823  

Comprehensive income attributable to non-controlling interests

     (889     (329     (274
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to MPT Operating Partnership partners

   $ 205,029     $ 88,628     $ 37,549  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Index to Financial Statements

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Consolidated Statements of Capital

For the Years Ended December 31, 2016, 2015 and 2014

(Amounts in thousands, except per unit data)

 

     General
Partner
    Limited Partners     Accumulated
Other
Comprehensive
Loss
    Non-
Controlling
Interests
    Total
Capital
 
     Common     LTIPs        
     Units      Unit
Value
    Units      Unit
Value
    Units      Unit
Value
       

Balance at December 31, 2013

     1,608      $ 13,541       159,702      $ 1,339,998       292      $ —       $ (8,941   $ —       $ 1,344,598  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     —          508       —          49,769       —          245       —         274       50,796  

Unrealized gain on interest rate swap

     —          —         —          —         —          —         2,964       —         2,964  

Foreign currency translation loss

     —          —         —          —         —          —         (15,937     —         (15,937

Unit vesting and amortization of unit-based compensation

     8        92       769        9,073       —          —         —         —         9,165  

Distributions to non- controlling interests

     —          —         —          —         —          —         —         (274     (274

Proceeds from offering (net of offering costs)

     106