Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization
Medical Properties
Trust, Inc., a Maryland corporation, was formed on August 27, 2003, under the Maryland General Corporation Law for the purpose of engaging in the business of investing in, owning, and leasing commercial real estate. Our operating partnership
subsidiary, MPT Operating Partnership, L.P., (the Operating Partnership) through which we conduct all of our operations, was formed in September 2003. Through another wholly-owned subsidiary, Medical Properties Trust, LLC, we are the
sole general partner of the Operating Partnership. At present, we directly own substantially all of the limited partnership interests in the Operating Partnership and have elected to report our required disclosures and that of the Operating
Partnership on a combined basis except where material differences exist.
We have operated as a real estate investment trust
(REIT) since April 6, 2004 and elected REIT status upon the filing in September 2005 of the calendar year 2004 federal income tax return. Accordingly, we will generally not be subject to federal income tax in the United States
(U.S.), provided that we continue to qualify as a REIT and our distributions to our stockholders equal or exceed our taxable income. Certain activities we undertake must be conducted by entities which we elected to be treated as taxable
REIT subsidiaries (TRS). Our TRS entities are subject to both U.S. federal and state income taxes. For our properties located outside the U.S., we are subject to local taxes; however, we do not expect to incur additional taxes in the
U.S. as such income will flow through our REIT.
Our primary business strategy is to acquire and develop real estate and improvements,
primarily for long-term lease to providers of healthcare services such as operators of general acute care hospitals, inpatient physical rehabilitation hospitals, long-term acute care hospitals, surgery centers, centers for treatment of specific
conditions such as cardiac, pulmonary, cancer, and neurological hospitals, and other healthcare-oriented facilities. We also make mortgage and other loans to operators of similar facilities. In addition, we may obtain profits or equity interests in
our tenants, from time to time, in order to enhance our overall return. We manage our business as a single business segment. Our properties are located in the U.S. and Europe.
2. Summary of Significant Accounting Policies
Unaudited Interim Condensed Consolidated Financial Statements
: The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information, including rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they
do not include all of the information and footnotes required by generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
The condensed consolidated balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in
the U.S. for complete financial statements.
For information about significant accounting policies, refer to the consolidated financial
statements and footnotes thereto included in our Annual Report on Form
10-K
for the year ended December 31, 2016. During the three months ended March 31, 2017, there were no material changes to these
policies.
Recent Accounting Developments:
Clarifying the Definition of a Business
In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2017-01,
Clarifying the Definition of a Business (ASU
2017-01).
The amendments in ASU
2017-01
provide
an initial screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, in which case, the transaction would be accounted for as an
asset acquisition rather than as a business combination. In addition, ASU
2017-01
clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. A
reporting entity must apply the amendments in ASU
2017-01
using a prospective approach. We expect to adopt ASU
2017-01
on January 1, 2018 for our 2018 fiscal year.
Upon adoption, we expect to recognize a majority of our real estate acquisitions as asset transactions rather than business combinations, which will result in the capitalization of third party transaction costs that are directly related to an
acquisition. Indirect and internal transaction costs will continue to be expensed but
11
we do not expect to include these costs as an adjustment in deriving normalized funds from operations in the future. We expect this change in accounting, once adopted, may decrease our normalized
funds from operations by $1.5 million per quarter.
Reclassifications and Revisions
Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to the current period
presentation.
Variable Interest Entities
At March 31, 2017, we had loans to and/or equity investments in certain variable interest entities (VIEs), which are also
tenants of our facilities. We have determined that we are not the primary beneficiary of these VIEs. The carrying value and classification of the related assets and maximum exposure to loss as a result of our involvement with these VIEs are
presented below at March 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
VIE Type
|
|
Maximum Loss
Exposure(1)
|
|
|
Asset Type
Classification
|
|
Carrying
Amount(2)
|
|
Loans, net
|
|
$
|
320,668
|
|
|
Mortgage and other loans
|
|
$
|
234,821
|
|
Equity investments
|
|
$
|
13,114
|
|
|
Other assets
|
|
$
|
|
|
(1)
|
Our maximum loss exposure related to loans with VIEs represents our current aggregate gross carrying value of the loan plus accrued interest and any other related assets (such as rent receivables), less any liabilities.
Our maximum loss exposure related to our equity investment in VIEs represents the current carrying values of such investment plus any other related assets (such as rent receivables), less any liabilities.
|
(2)
|
Carrying amount reflects the net book value of our loan or equity interest only in the VIE.
|
For the VIE types above, we do not consolidate the VIE because we do not have the ability to control the activities (such as the
day-to-day
healthcare operations of our borrowers or investees) that most significantly impact the VIEs economic performance. As of March 31, 2017, we were not
required to provide financial support through a liquidity arrangement or otherwise to our unconsolidated VIEs, including circumstances in which it could be exposed to further losses (e.g., cash short falls).
Typically, our loans are collateralized by assets of the borrower (some assets of which are on the premises of facilities owned by us) and
further supported by limited guarantees made by certain principals of the borrower.
See Note 3 and Note 5 for additional description of
the nature, purpose and activities of our more significant VIEs and interests therein (such as Ernest Health Inc. (Ernest)).
3. Real
Estate and Lending Activities
Acquisitions
We acquired the following assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Assets Acquired
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,081
|
|
|
$
|
|
|
Building
|
|
|
7,050
|
|
|
|
|
|
Intangible
|
|
|
873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
9,004
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The purchase price allocations attributable to this first quarter 2017 acquisition are preliminary. When all
relevant information is obtained, resulting changes, if any, to our provisional purchase price allocation will be retrospectively adjusted to reflect new information obtained about the facts and circumstances that existed as of the respective
acquisition dates that, if known, would have affected the measurement of the amounts recognized as of those dates.
On January 30,
2017, we acquired an inpatient rehabilitation hospital in Germany for 8.4 million. This acquisition was the final property to close as part of the six hospital portfolio that we agreed to buy in September 2016 for an aggregate amount of
44.1 million. This property is leased to affiliates of Median Kliniken S.à r.l. (MEDIAN) pursuant to the existing long-term master lease agreement reached with MEDIAN in 2015.
12
Development Activities
During the 2017 first quarter, we completed construction on the following facilities:
|
|
|
Adeptus Health, Inc. (Adeptus Health) We completed two acute care facilities for this tenant and began recording rental income in the quarter. These facilities are leased pursuant to an existing
long-term master lease.
|
|
|
|
IMED Group (IMED) Our general acute facility located in Valencia, Spain opened on March 31, 2017, and is being leased to IMED pursuant to a long-term master lease. Our ownership in this facility is
effected through a joint venture between us and clients of AXA Real Estate, in which we own a 50% interest. Our share of the aggregate purchase and development cost of this facility is approximately 21 million.
|
See table below for a status update on our current development projects (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
Operator
|
|
Commitment
|
|
|
Costs
Incurred
as of
March 31, 2017
|
|
|
Estimated
Completion
Date
|
|
Adeptus Health
|
|
$
|
12,220
|
|
|
$
|
7,939
|
|
|
|
2Q 2017
|
|
Ernest
|
|
|
28,067
|
|
|
|
5,231
|
|
|
|
4Q 2017
|
|
Adeptus Health
|
|
|
7,804
|
|
|
|
1,771
|
|
|
|
1Q 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,091
|
|
|
$
|
14,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposals
On March 31, 2017, we sold the EASTAR Health System real estate located in Muskogee, Oklahoma, which was leased to RCCH Healthcare
Partners (RCCH). Total proceeds from this transaction were approximately $64 million resulting in a gain of $7.4 million, partially offset by a $0.6 million
non-cash
charge to
revenue to
write-off
related straight-line rent receivables on this property.
Leasing Operations
All of our leases are accounted for as operating leases, except we are accounting for 15 Ernest facilities and 10 Prime Healthcare Services,
Inc. (Prime) facilities as direct financing leases (DFLs). The components of our net investment in DFLs consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
2017
|
|
|
As of December 31,
2016
|
|
Minimum lease payments receivable
|
|
$
|
2,192,020
|
|
|
$
|
2,207,625
|
|
Estimated residual values
|
|
|
407,647
|
|
|
|
407,647
|
|
Less: Unearned income
|
|
|
(1,949,279
|
)
|
|
|
(1,967,170
|
)
|
|
|
|
|
|
|
|
|
|
Net investment in direct financing leases
|
|
$
|
650,388
|
|
|
$
|
648,102
|
|
|
|
|
|
|
|
|
|
|
Adeptus Health
On March 2, 2017, Adeptus Health, currently our sixth largest tenant, advised in a filing with the SEC that it would be delayed in the
filing of its Annual Report on Form
10-K
for the fiscal year ended December 31, 2016. In the filing, Adeptus Health further advised that it had identified material weaknesses with respect to internal
control over financial reporting in certain areas and disclosed that there is substantial doubt about its ability to continue as a going concern absent its securing committed long-term financing. On April 4, 2017, we announced an agreement in
principle with Deerfield Management Company, L.P. (Deerfield) to the restructuring in bankruptcy of Adeptus Health, including the assumption of our master leases of facilities in Texas, Colorado, Arizona and Ohio. Adeptus Health and
certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code on April 19, 2017. Deerfield has purchased Adeptus Healths outstanding bank debt and expects to provide additional financing,
along with operational and managerial support, to Adeptus Health during the bankruptcy process. Our agreement with Deerfield provides for the pre-bankruptcy payment of all rent, the assumption of all of our master leases subject to their existing
terms, pre-bankruptcy severance from our master leases of three New Orleans area facilities representing about 5% of our Adeptus Health investment and re-leasing them to Ochsner Clinic Foundation (Ochsner), and the post-bankruptcy
severance from our master leases of 13 facilities in Texas representing about 15% of our Adeptus Health investment. We also agreed to a $3.1 million concession that will reduce our rental revenue by approximately $220 thousand annually over the
remaining 14-year initial lease term.
We expect to sell or re-lease to other operators the 13 Texas facilities during transition periods
ending in the fourth quarter of 2018. During the transition periods, Adeptus Health is obligated to pay contractual rent until the earlier of (a) transition to a new operator is complete or (b) an agreed future date. The agreed future date
for approximately 60 percent of the facilities is one year following bankruptcy exit and the remainder have agreed future dates of 90 days post-bankruptcy exit.
13
As noted above, our New Orleans free standing emergency facilities (with a total budgeted
investment of up to approximately $24.5 million) have been
re-leased
to Ochsner as of March 31, 2017. The Ochsner leases provide for
15-year
initial terms with a
9.2% average minimum lease rate based on our total development and construction cost. Under these leases, Ochsner has the right to purchase the freestanding emergency facilities (i) at our cost within two years of rent commencement or
(ii) for the greater of fair market value or our cost after such
two-year
period. With this transaction, we incurred a
non-cash
charge of $0.5 million to
write-off
the straight-line rent receivables associated with the previous Adeptus Health lease on these properties.
Adeptus Health is current on its rent obligations to us through May 2017. In addition, we currently hold letters of credit approximating
$12.4 million to cover defaults in rent payments. These letters of credit would cover approximately four months of rent. At March 31, 2017, our investment in Adeptus Health facilities represents less than 6% of our total gross assets. We
believe this investment is fully recoverable at March 31, 2017; however, no assurances can be made that we will not have any impairment charges related to this investment in the future.
Loans
The following is a summary of our
loans (in thousands):
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|
|
|
|
|
|
|
|
|
As of
March 31, 2017
|
|
|
As of
December 31, 2016
|
|
Mortgage loans
|
|
$
|
1,060,397
|
|
|
$
|
1,060,400
|
|
Acquisition loans
|
|
|
120,766
|
|
|
|
121,464
|
|
Working capital and other loans
|
|
|
33,266
|
|
|
|
34,257
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,214,429
|
|
|
$
|
1,216,121
|
|
|
|
|
|
|
|
|
|
|
Our
non-mortgage
loans typically consist of loans to our tenants for
acquisitions and working capital purposes. At March 31, 2017, acquisition loans includes $114.8 million in loans to Ernest.
Concentrations
of Credit Risk
Our revenue concentration for the three months ended March 31, 2017 as compared to the prior year is as follows
(dollars in thousands):
Revenue by Operator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Operators
|
|
Total
Revenue
|
|
|
Percentage of
Total Revenue
|
|
|
Total
Revenue
|
|
|
Percentage of
Total Revenue
|
|
Prime
|
|
$
|
31,511
|
|
|
|
20.1
|
%
|
|
$
|
28,897
|
|
|
|
21.4
|
%
|
Steward
|
|
|
26,584
|
|
|
|
17.0
|
%
|
|
|
|
|
|
|
|
|
MEDIAN
|
|
|
23,450
|
|
|
|
15.0
|
%
|
|
|
23,510
|
|
|
|
17.4
|
%
|
Ernest
|
|
|
17,520
|
|
|
|
11.2
|
%
|
|
|
16,406
|
|
|
|
12.2
|
%
|
RCCH
|
|
|
9,306
|
|
|
|
6.0
|
%
|
|
|
21,477
|
|
|
|
15.9
|
%
|
Other operators
|
|
|
48,026
|
|
|
|
30.7
|
%
|
|
|
44,709
|
|
|
|
33.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
156,397
|
|
|
|
100.0
|
%
|
|
$
|
134,999
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Revenue by U.S. State and Country
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
U.S. States and Other Countries
|
|
Total
Revenue
|
|
|
Percentage of
Total Revenue
|
|
|
Total
Revenue
|
|
|
Percentage of
Total Revenue
|
|
Massachusetts
|
|
$
|
26,584
|
|
|
|
17.0
|
%
|
|
$
|
|
|
|
|
|
|
Texas
|
|
|
24,737
|
|
|
|
15.8
|
%
|
|
|
24,472
|
|
|
|
18.1
|
%
|
California
|
|
|
16,565
|
|
|
|
10.6
|
%
|
|
|
16,597
|
|
|
|
12.3
|
%
|
New Jersey
|
|
|
10,943
|
|
|
|
7.0
|
%
|
|
|
8,612
|
|
|
|
6.4
|
%
|
Arizona
|
|
|
7,332
|
|
|
|
4.7
|
%
|
|
|
5,797
|
|
|
|
4.3
|
%
|
All other states
|
|
|
43,056
|
|
|
|
27.5
|
%
|
|
|
54,906
|
|
|
|
40.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S.
|
|
$
|
129,217
|
|
|
|
82.6
|
%
|
|
$
|
110,384
|
|
|
|
81.8
|
%
|
Germany
|
|
$
|
26,190
|
|
|
|
16.7
|
%
|
|
$
|
23,510
|
|
|
|
17.4
|
%
|
United Kingdom, Italy, and Spain
|
|
|
990
|
|
|
|
0.7
|
%
|
|
|
1,105
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
$
|
27,180
|
|
|
|
17.4
|
%
|
|
$
|
24,615
|
|
|
|
18.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Total
|
|
$
|
156,397
|
|
|
|
100.0
|
%
|
|
$
|
134,999
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On a gross asset basis, which is total assets before accumulated depreciation/amortization and assumes all
real estate binding commitments on new investments and unfunded amounts on development deals and commenced capital improvement projects are fully funded (see Notes 7 and 8 of Item 1 on this Form 10-Q), our concentration as of March 31, 2017 as
compared to December 31, 2016 is as follows (dollars in thousands):
Gross Assets by Operator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
|
As of December 31, 2016
|
|
Operators
|
|
Total
Gross Assets
|
|
|
Percentage of
Total Gross Assets
|
|
|
Total
Gross Assets
|
|
|
Percentage of
Total Gross Assets
|
|
Steward (1)
|
|
$
|
1,551,292
|
|
|
|
20.8
|
%
|
|
$
|
1,250,000
|
|
|
|
17.5
|
%
|
Prime
|
|
|
1,115,356
|
|
|
|
15.0
|
%
|
|
|
1,144,055
|
|
|
|
16.0
|
%
|
MEDIAN
|
|
|
1,006,432
|
|
|
|
13.5
|
%
|
|
|
993,677
|
|
|
|
13.9
|
%
|
Ernest
|
|
|
627,971
|
|
|
|
8.4
|
%
|
|
|
627,906
|
|
|
|
8.8
|
%
|
RCCH
|
|
|
506,265
|
|
|
|
6.8
|
%
|
|
|
566,600
|
|
|
|
7.9
|
%
|
Other operators
|
|
|
2,313,871
|
|
|
|
31.1
|
%
|
|
|
2,259,980
|
|
|
|
31.7
|
%
|
Other assets
|
|
|
324,635
|
|
|
|
4.4
|
%
|
|
|
300,903
|
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,445,822
|
|
|
|
100.0
|
%
|
|
$
|
7,143,121
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes $600 million of mortgage loans.
|
Gross Assets by U.S. State and Country
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
|
As of December 31, 2016
|
|
U.S. States and Other Countries
|
|
Total
Gross Assets
|
|
|
Percentage of
Total Gross Assets
|
|
|
Total
Gross Assets
|
|
|
Percentage of
Total Gross Assets
|
|
Massachusetts
|
|
$
|
1,250,000
|
|
|
|
16.8
|
%
|
|
$
|
1,250,000
|
|
|
|
17.5
|
%
|
Texas
|
|
|
893,749
|
|
|
|
12.0
|
%
|
|
|
947,443
|
|
|
|
13.3
|
%
|
California
|
|
|
542,886
|
|
|
|
7.3
|
%
|
|
|
542,889
|
|
|
|
7.6
|
%
|
New Jersey
|
|
|
416,490
|
|
|
|
5.6
|
%
|
|
|
447,436
|
|
|
|
6.3
|
%
|
Arizona
|
|
|
331,833
|
|
|
|
4.5
|
%
|
|
|
331,834
|
|
|
|
4.6
|
%
|
All other states
|
|
|
2,175,466
|
|
|
|
29.2
|
%
|
|
|
1,894,047
|
|
|
|
26.5
|
%
|
Other domestic assets
|
|
|
284,070
|
|
|
|
3.8
|
%
|
|
|
264,215
|
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S.
|
|
$
|
5,894,494
|
|
|
|
79.2
|
%
|
|
$
|
5,677,864
|
|
|
|
79.5
|
%
|
Germany
|
|
$
|
1,320,487
|
|
|
|
17.7
|
%
|
|
$
|
1,281,649
|
|
|
|
17.9
|
%
|
United Kingdom, Italy, and Spain
|
|
|
190,276
|
|
|
|
2.5
|
%
|
|
|
146,920
|
|
|
|
2.1
|
%
|
Other international assets
|
|
|
40,565
|
|
|
|
0.6
|
%
|
|
|
36,688
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
$
|
1,551,328
|
|
|
|
20.8
|
%
|
|
$
|
1,465,257
|
|
|
|
20.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Total
|
|
$
|
7,445,822
|
|
|
|
100.0
|
%
|
|
$
|
7,143,121
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
On an individual property basis, we had no investment of any single property greater than 3.2% of
our total gross assets as of March 31, 2017.
4. Debt
The following is a summary of debt (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
|
As of December 31, 2016
|
|
Revolving credit facility
|
|
$
|
380,000
|
|
|
$
|
290,000
|
|
Term loans
|
|
|
213,020
|
|
|
|
263,101
|
|
6.375% Senior Unsecured Notes due 2022:
|
|
|
|
|
|
|
|
|
Principal amount
|
|
|
350,000
|
|
|
|
350,000
|
|
Unamortized premium
|
|
|
1,726
|
|
|
|
1,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
351,726
|
|
|
|
351,814
|
|
5.750% Senior Unsecured Notes due 2020(A)
|
|
|
|
|
|
|
210,340
|
|
4.000% Senior Unsecured Notes due 2022(A)
|
|
|
532,600
|
|
|
|
525,850
|
|
5.500% Senior Unsecured Notes due 2024
|
|
|
300,000
|
|
|
|
300,000
|
|
6.375% Senior Unsecured Notes due 2024
|
|
|
500,000
|
|
|
|
500,000
|
|
3.325% Senior Unsecured Notes due 2025(A)
|
|
|
532,600
|
|
|
|
|
|
5.250% Senior Unsecured Notes due 2026
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,309,946
|
|
|
$
|
2,941,105
|
|
Debt issue costs, net
|
|
|
(31,960
|
)
|
|
|
(31,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,277,986
|
|
|
$
|
2,909,341
|
|
|
|
|
|
|
|
|
|
|
(A)
|
These notes are euro-denominated and reflect the exchange rate at March 31, 2017 and December 31, 2016, respectively.
|
As of March 31, 2017, principal payments due on our debt (which exclude the effects of any discounts, premiums, or debt issue costs recorded) are as
follows (in thousands):
|
|
|
|
|
2017
|
|
$
|
239
|
|
2018
|
|
|
12,781
|
|
2019
|
|
|
|
|
2020
|
|
|
|
|
2021
|
|
|
380,000
|
|
Thereafter
|
|
|
2,915,200
|
|
|
|
|
|
|
Total
|
|
$
|
3,308,220
|
|
|
|
|
|
|
2017 Activity
On February 1, 2017, we replaced our unsecured credit facility with a new revolving credit and term loan agreement (Credit
Facility). The new agreement includes a $1.3 billion unsecured revolving loan facility, a $200 million unsecured term loan facility, and a 200 million unsecured term loan facility. The new unsecured revolving loan facility
matures in February 2021 and can be extended for an additional 12 months at our option. The $200 million unsecured term loan facility matures on February 1, 2022, and the 200 million unsecured term loan facility had a maturity
date of January 31, 2020; however, it was paid off on March 30, 2017 see below. The commitment fee on the revolving loan facility is paid at a rate of 0.25%. The term loan and/or revolving loan commitments may be increased in an
aggregate amount not to exceed $500 million.
At our election, loans under the Credit Facility may be made as either ABR Loans or
Eurodollar Loans. The applicable margin for term loans that are ABR Loans is adjustable on a sliding scale from 0.00% to 0.95% based on our current credit rating. The
16
applicable margin for term loans that are Eurodollar Loans is adjustable on a sliding scale from 0.90% to 1.95% based on our current credit rating. The applicable margin for revolving loans that
are ABR Loans is adjustable on a sliding scale from 0.00% to 0.65% based on our current credit rating. The applicable margin for revolving loans that are Eurodollar Loans is adjustable on a sliding scale from 0.875% to 1.65% based on our current
credit rating. The commitment fee is adjustable on a sliding scale from 0.125% to 0.30% based on our current credit rating and is payable on the revolving loan facility. At March 31, 2017, the interest rate in effect on our term loan and
revolver was 2.49% and 2.24%, respectively.
On March 4, 2017, we redeemed the 200 million aggregate principal amount of
our 5.750% Senior Unsecured Notes due 2020 and incurred a redemption premium of approximately $9 million. We funded this redemption, including the premium and accrued interest, with the proceeds of the new euro term loan together with cash on
hand.
On March 24, 2017, we completed a 500 million senior unsecured notes offering (3.325% Senior Unsecured Notes
due 2025). Interest on the notes is payable annually on March 24 of each year. The notes pay interest in cash at a rate of 3.325% per year. The notes mature on March 24, 2025. We may redeem some or all of the 3.325% Senior
Unsecured Notes due 2025 at any time. If the notes are redeemed prior to 90 days before maturity, the redemption price will be equal to 100% of their principal amount, plus a make-whole premium, plus accrued and unpaid interest up to, but excluding,
the applicable redemption date. Within the period beginning on or after 90 days before maturity, the notes may be redeemed, in whole or in part, at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest to, but
excluding, the applicable redemption date. The 3.325% Senior Unsecured Notes due 2025 are fully and unconditionally guaranteed on a senior unsecured basis by us. In the event of a change of control, each holder of the notes may require us to
repurchase some or all of our notes at a repurchase price equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest up to, but excluding, the date of the purchase.
On March 30, 2017, we prepaid and extinguished the 200 million of outstanding term loans under the euro term loan facility
portion of our Credit Facility. To fund such prepayment, including accrued and unpaid interest thereon, we used part of the proceeds of the 3.325% Senior Unsecured Notes due 2025.
With the replacement of our old credit facility, the redemption of the 5.750% Senior Unsecured Notes due 2020, and the payoff of our
200 million euro term loan, we incurred a debt refinancing charge of approximately $14 million in the 2017 first quarter.
2016
Activity
On February 22, 2016, we completed a $500 million senior unsecured notes offering (6.375% Senior Unsecured
Notes due 2024). Interest on the notes is payable on March 1 and September 1 of each year. Interest on the notes is paid in cash at a rate of 6.375% per year. The notes mature on March 1, 2024. We may redeem some or all of the
notes at any time prior to March 1, 2019 at a make whole redemption price. On or after March 1, 2019, we may redeem some or all of the notes at a premium that will decrease over time. In addition, at any time prior to
March 1, 2019, we may redeem up to 35% of the notes at a redemption price equal to 106.375% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, using proceeds from one or more equity offerings. In the event of a
change in control, each holder of the notes may require us to repurchase some or all of the notes at a repurchase price equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest to the date of purchase.
Covenants
Our debt facilities impose
certain restrictions on us, including restrictions on our ability to: incur debts; create or incur liens; provide guarantees in respect of obligations of any other entity; make redemptions and repurchases of our capital stock; prepay, redeem or
repurchase debt; engage in mergers or consolidations; enter into affiliated transactions; dispose of real estate or other assets; and change our business. In addition, the credit agreements governing our Credit Facility limit the amount of dividends
we can pay as a percentage of normalized adjusted funds from operations, as defined in the agreements, on a rolling four quarter basis. At March 31, 2017, 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.
In addition to these restrictions, the Credit Facility contains customary financial and operating covenants, including covenants relating to
our total leverage ratio, fixed charge coverage ratio, secured leverage ratio, consolidated adjusted net worth, unsecured leverage ratio, and unsecured interest coverage ratio. This Credit Facility also contains customary events of default,
including among others, nonpayment of principal or interest, material inaccuracy of representations and failure to comply with our covenants. If an event of default occurs and is continuing under the Credit Facility, the entire outstanding balance
may become immediately due and payable. At March 31, 2017, we were in compliance with all such financial and operating covenants.
5. Fair Value
of Financial Instruments
We have various assets and liabilities that are considered financial instruments. We estimate that the
carrying value of cash and cash equivalents and accounts payable and accrued expenses approximate their fair values. We estimate the fair value of our interest
17
and rent receivables using Level 2 inputs such as discounting the estimated future cash flows using the current rates at which similar receivables would be made to others with similar credit
ratings and for the same remaining maturities. The fair value of our mortgage loans and working capital loans are estimated by using Level 2 inputs such as discounting the estimated future cash flows using the current rates which similar loans
would be made to borrowers with similar credit ratings and for the same remaining maturities. We determine the fair value of our senior unsecured notes using Level 2 inputs such as quotes from securities dealers and market makers. We estimate
the fair value of our revolving credit facility and term loans using Level 2 inputs based on the present value of future payments, discounted at a rate which we consider appropriate for such debt.
Fair value estimates are made at a specific point in time, are subjective in nature, and involve uncertainties and matters of significant
judgment. Settlement of such fair value amounts may not be possible and may not be a prudent management decision. The following table summarizes fair value estimates for our financial instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Asset (Liability)
|
|
Book
Value
|
|
|
Fair
Value
|
|
|
Book
Value
|
|
|
Fair
Value
|
|
Interest and rent receivables
|
|
$
|
61,912
|
|
|
$
|
61,941
|
|
|
$
|
57,698
|
|
|
$
|
57,707
|
|
Loans (1)
|
|
|
985,570
|
|
|
|
1,018,548
|
|
|
|
986,987
|
|
|
|
1,017,428
|
|
Debt, net
|
|
|
(3,277,986
|
)
|
|
|
(3,372,482
|
)
|
|
|
(2,909,341
|
)
|
|
|
(2,966,759
|
)
|
(1)
|
Excludes loans related to Ernest since they are recorded at fair value and discussed below.
|
Items Measured
at Fair Value on a Recurring Basis
Our equity interest in Ernest along with their related loans are measured at fair value on a
recurring basis as we elected to account for these investments using the fair value option method. We have elected to account for these investments at fair value due to the size of the investments and because we believe this method is more
reflective of current values. We have not made a similar election for other existing equity interests or loans.
At March 31, 2017, these amounts
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Type
|
|
Fair
Value
|
|
|
Cost
|
|
|
Asset Type
Classification
|
|
Mortgage loans
|
|
$
|
112,836
|
|
|
$
|
112,836
|
|
|
|
Mortgage loans
|
|
Acquisition and other loans
|
|
|
116,023
|
|
|
|
116,023
|
|
|
|
Other loans
|
|
Equity investments
|
|
|
3,300
|
|
|
|
3,300
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
232,159
|
|
|
$
|
232,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our mortgage and other loans with Ernest are recorded at fair value based on Level 2 inputs by
discounting the estimated cash flows using the market rates which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities. Our equity investment in Ernest is recorded at fair value based on Level 3
inputs, by using a discounted cash flow model, which requires significant estimates of our investee such as projected revenue and expenses and appropriate consideration of the underlying risk profile of the forecast assumptions associated with the
investee. We classify the equity investment as Level 3, as we use certain unobservable inputs to the valuation methodology that are significant to the fair value measurement, and the valuation requires management judgment due to the absence of
quoted market prices. For the cash flow model, our observable inputs include use of a capitalization rate, discount rate (which is based on a weighted-average cost of capital), and market interest rates, and our unobservable input includes an
adjustment for a marketability discount (DLOM) on our equity investment of 40% at March 31, 2017.
In regards to the
underlying projection of revenues and expenses used in the discounted cash flow model, such projections are provided by Ernest. However, we will modify such projections (including underlying assumptions used) as needed based on our review and
analysis of Ernests 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 investees 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
|
|
$
|
(53
|
)
|
- 100 basis points
|
|
|
53
|
|
18
Because the fair value of the Ernest investments noted above approximate their original cost, we did not
recognize any unrealized gains/losses during the first quarter of 2017 or 2016. To date, we have not received any distribution payments from our equity investment in Ernest.
6. Earnings Per Share
Medical Properties Trust, Inc.
Our earnings per share were calculated based on the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
68,185
|
|
|
$
|
58,226
|
|
Non-controlling
interests share in net
income
|
|
|
(215
|
)
|
|
|
(298
|
)
|
Participating securities share in earnings
|
|
|
(125
|
)
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, less participating securities share in earnings
|
|
|
67,845
|
|
|
|
57,784
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Net income, less participating securities share in earnings
|
|
$
|
67,845
|
|
|
$
|
57,783
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares
|
|
|
321,057
|
|
|
|
237,510
|
|
Dilutive potential common shares
|
|
|
366
|
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted-average common shares
|
|
|
321,423
|
|
|
|
237,819
|
|
|
|
|
|
|
|
|
|
|
MPT Operating Partnership, L.P.
Our earnings per common unit were calculated based on the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
68,185
|
|
|
$
|
58,226
|
|
Non-controlling
interests share in net
income
|
|
|
(215
|
)
|
|
|
(298
|
)
|
Participating securities share in earnings
|
|
|
(125
|
)
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, less participating securities share in earnings
|
|
|
67,845
|
|
|
|
57,784
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Net income, less participating securities share in earnings
|
|
$
|
67,845
|
|
|
$
|
57,783
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted-average units
|
|
|
321,057
|
|
|
|
237,510
|
|
Dilutive potential units
|
|
|
366
|
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average units
|
|
|
321,423
|
|
|
|
237,819
|
|
|
|
|
|
|
|
|
|
|
19
7. Commitments and Contingencies
Commitments
On July 20, 2016, we
entered into definitive agreements to acquire 20 rehabilitation hospitals in Germany for an aggregate purchase price to us of approximately 215.7 million. Upon closing, the facilities will be leased to affiliates of MEDIAN, pursuant to a
new master lease with a term of approximately 27 years with annual escalators of the greater of one percent or 70% of the annual percentage change in the German consumer price index. Closing of the transaction, which began during the fourth quarter
of 2016, is subject to customary real estate, regulatory and other closing conditions. As of March 31, 2017, we have closed seven of the 20 facilities in the amount of 49.5 million, and we expect the remaining 13 facilities to close
in the second quarter of 2017.
On September 28, 2016, we entered into a definitive agreement to acquire one acute care hospital in
Washington for a purchase price to us of approximately $17.5 million. Upon closing, this facility will be leased to RCCH, pursuant to the current long-term master lease. Closing of the transaction, which is expected to be completed no later
than the fourth quarter of 2017, is subject to customary real estate, regulatory and other closing conditions.
On March 8, 2017, we
entered into a non-binding agreement to purchase the real estate of two acute care hospitals in West Virginia and Ohio for an aggregate purchase price of $40.0 million and lease them to Alecto, which is the current operator of three facilities
in our portfolio. The lease on these facilities is expected to have a
15-year
initial term with 2% annual minimum increases and three
5-year
extension options. The
facilities will be cross-defaulted and cross collateralized with our other hospitals currently operated by Alecto. With these acquisitions, we will also obtain a 20% interest in the operator of these facilities. We expect to complete this
transaction in the second quarter of 2017.
On March 31, 2017, we entered into a definitive agreement to acquire one acute care hospital
in Germany for a purchase price to us of approximately 20 million. Upon closing, this facility will be leased to affiliates of MEDIAN, pursuant to an existing 27-year master lease with terms similar to the master lease agreement reached
with MEDIAN in 2015. We expect to complete this transaction during the second quarter of 2017.
Contingencies
We are a party to various legal proceedings incidental to our business. In the opinion of management, after consultation with legal counsel,
the ultimate liability, if any, with respect to those proceedings is not presently expected to materially affect our financial position, results of operations or cash flows.
8. Subsequent Events
On May 1,
2017, we completed an underwritten public offering of 43.1 million shares (including the exercise of the underwriters
30-day
option to purchase an additional 5.6 million shares) of our common
stock, resulting in net proceeds of $547.6 million, after deducting estimated offering expenses.
On May 1, 2017, we acquired
the real estate of St. Joseph Regional Medical Center, a
145-bed
acute care hospital in Lewiston, Idaho for $87.5 million. This facility will be leased to RCCH, pursuant to the existing long-term master
lease entered into with RCCH in April 2016.
On May 1, 2017, we acquired eight hospitals previously affiliated with Community Health
Systems, Inc. in Florida, Ohio, and Pennsylvania for an aggregate purchase price of $301.3 million. These facilities will be leased to Steward Health Care System LLC (Steward), pursuant to the existing long-term master lease entered
into with Steward in October 2016.
In April 2017, we completed the acquisition of the long leasehold interest of a development site in
Birmingham, England from the Circle Health Group (the tenant of our existing site in Bath, England) for a purchase price of approximately £2.72 million. Simultaneously with the acquisition, we entered into contracts with the property
freeholder and the Circle Health Group committing us to construct an acute care hospital on the site. Our total development costs are anticipated to be approximately £30 million. Circle Health Group is contracted to enter into a lease of
the hospital following completion of construction for an initial
15-year
term with rent to be calculated based on our total development costs.
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