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 accordingly, elected REIT status upon the filing in September 2005 of the calendar year 2004 federal income tax return. Accordingly, we will generally not be subject to federal income tax in the
United States (“U.S.”), provided that we continue to qualify as a REIT and our distributions to our stockholders equal or exceed our taxable income. Certain activities we undertake must be conducted by entities which we elected to be
treated as taxable REIT subsidiaries (“TRSs”). Our TRSs are subject to both U.S. federal and state income taxes. For our properties located outside the U.S., we are subject to local taxes; however, we do not expect to incur additional
taxes in the U.S. as such income will flow through our REIT.
Our primary business strategy is to acquire and develop real estate and
improvements, primarily for long-term lease to providers of healthcare services such as operators of general acute care hospitals, inpatient physical rehabilitation hospitals, long-term acute care hospitals, surgery centers, centers for treatment of
specific conditions such as cardiac, pulmonary, cancer, and neurological hospitals, and other healthcare-oriented facilities. We also make mortgage and other loans to operators of similar facilities. In addition, we may obtain profits or equity
interests in our tenants, from time to time, in order to enhance our overall return. We manage our business as a single business segment. All of our properties are located in the U.S. and Europe.
2. Summary of Significant Accounting Policies
Unaudited Interim Condensed Consolidated Financial Statements
: The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information, including rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The
condensed consolidated balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the
U.S. for complete financial statements.
For information about significant accounting policies, refer to the consolidated financial
statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016. During the nine months ended September 30, 2017, there were no material changes to these policies.
12
Recent Accounting Developments:
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
“Revenue from Contracts with Customers.” Under the new standard, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. This standard is
effective for us beginning January 1, 2018, and we plan to adopt under the modified retrospective approach. We do not expect this standard to have a significant impact on our financial results upon adoption, as a substantial portion of our
revenue consists of rental income from leasing arrangements and interest income from loans, which are specifically excluded from ASU No. 2014-09. Under ASU No. 2014-09, we do expect more transactions to qualify as sales of real estate with
gains on sales being recognized earlier than under current accounting guidance, as the new guidance is based on transfer of control versus whether or not the seller has continuing involvement. Thus, we expect to record an approximate $2 million
adjustment to retained earnings upon adoption of ASU No. 2014-09 to fully recognize a gain on real estate sold in prior years that was required to be deferred under existing accounting guidance.
Clarifying the Definition of a Business
In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business” (“ASU 2017-01”). The
amendments in ASU 2017-01 provide an initial screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, in which case, the
transaction would be accounted for as an asset acquisition rather than as a business combination. In addition, ASU 2017-01 clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. A
reporting entity must apply the amendments in ASU 2017-01 using a prospective approach. We will adopt ASU 2017-01 on January 1, 2018 for our 2018 fiscal year. Upon adoption, we expect to recognize a majority of our real estate acquisitions as
asset transactions rather than business combinations, which will result in the capitalization of third party transaction costs that are directly related to an acquisition. Indirect and internal transaction costs will continue to be expensed, but we
do not expect to include these costs as an adjustment in deriving normalized funds from operations in the future. We expect this change in accounting, once adopted, may decrease our normalized funds from operations by $1 million to $2 million per
quarter.
Leases
In
February 2016, the FASB issued ASU 2016-02, “Leases”, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard
requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease
expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months
regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is
substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.
We expect to adopt
this new standard on January 1, 2019. We are continuing to evaluate this standard and the impact to us from both a lessor and lessee perspective. However, we do have leases in which we are the lessee, including ground leases, on which certain
of our facilities reside, along with corporate office and equipment leases, that will be required to be recorded on our balance sheet upon adoption of this standard. From a lessor perspective, we do expect certain non-lease components (including
property taxes, insurance and other operating expenses that the tenants of our facilities are required to pay pursuant to our “triple-net” leases) to be recorded gross versus net of the respective expenses upon adoption of this standard in
2019 in accordance with ASU No. 2014-09.
13
Variable Interest Entities
At September 30, 2017, we had loans to and/or equity investments in certain variable interest entities (“VIEs”), which are also
tenants of our facilities. We have determined that we are not the primary beneficiary of these VIEs. The carrying value and classification of the related assets and maximum exposure to loss as a result of our involvement with these VIEs at
September 30, 2017 are presented below (in thousands):
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VIE Type
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Maximum Loss
Exposure(1)
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Asset Type
Classification
|
|
Carrying
Amount(2)
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|
Loans, net
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$
|
331,857
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|
|
Mortgage and other loans
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|
$
|
235,287
|
|
|
Equity investments
|
|
$
|
13,242
|
|
|
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.
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(2)
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Carrying amount reflects the net book value of our loan or equity interest only in the VIE.
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For the VIE types above, we do not consolidate the VIE because we do not have the ability to control the activities (such as the day-to-day
healthcare operations of our borrower or investees) that most significantly impact the VIE’s economic performance. As of September 30, 2017, we were not required to provide any material financial support through a liquidity arrangement or
otherwise to our unconsolidated VIEs, including circumstances in which it could be exposed to further losses (e.g., cash short falls).
Typically, our loans are collateralized by assets of the borrower (some assets of which are on the premises of facilities owned by us) and
further supported by limited guarantees made by certain principals of the borrower.
See Note 3 and 7 for additional description of the
nature, purpose and activities of our more significant VIEs and interests therein, such as Ernest Health, Inc. (“Ernest”).
3. Real Estate
and Lending Activities
Acquisitions
We acquired the following assets (in thousands):
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Nine Months
Ended September 30,
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2017
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2016
|
|
|
Assets Acquired
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|
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|
|
|
|
|
|
Land and land improvements
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|
$
|
196,094
|
|
|
$
|
13,602
|
|
|
Building
|
|
|
987,442
|
|
|
|
125,744
|
|
|
Intangible lease assets — subject to amortization (weighted average useful life 28.7 years
for 2017 and 19.4 years for 2016)
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|
|
128,961
|
|
|
|
10,754
|
|
|
Net investments in direct financing leases
|
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|
40,450
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|
|
|
63,000
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|
Mortgage loans
|
|
|
700,000
|
|
|
|
—
|
|
|
Equity investments
|
|
|
100,000
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|
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—
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Liabilities assumed
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|
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(878
|
)
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—
|
|
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|
|
|
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|
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Total assets acquired
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$
|
2,152,069
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|
|
$
|
213,100
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Loans repaid (1)
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—
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(93,262
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)
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Total net assets acquired
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$
|
2,152,069
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|
|
$
|
119,838
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(1)
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$93.3 million loans advanced to Capella (now RCCH Healthcare Partners (“RCCH”)) in 2015 and repaid in 2016 as a part of the Capella Transaction discussed below.
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14
The purchase price allocations attributable to the 2017 acquisitions and certain acquisitions
made in the last quarter of 2016 are preliminary. When all relevant information is obtained, resulting changes, if any, to our provisional purchase price allocation will be 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.
2017 Activity
Steward Transactions
On September 29, 2017, we acquired from IASIS Healthcare LLC (“IASIS”) a portfolio of ten acute care hospitals and one
behavioral health facility, along with ancillary land and buildings, that are located in Arizona, Utah, Texas, and Arkansas. The portfolio is now operated by Steward Health Care System LLC (“Steward”), which separately completed its
acquisition of IASIS on September 29, 2017. Our investment in the portfolio includes the acquisition of eight acute care hospitals and one behavioral health facility for approximately $700 million, the making of $700 million in mortgage loans
on two acute care hospitals, and a $100 million minority equity contribution in Steward, for a combined investment of approximately $1.5 billion. The nine facilities acquired are being leased to Steward pursuant to the original long-term master
lease agreement entered into in October 2016 that had an initial 15-year term with three 5-year extension options, plus annual inflation-based escalators. The terms of the mortgage loan are substantially similar to the master lease.
On May 1, 2017, we acquired eight hospitals previously affiliated with Community Health Systems, Inc. in Florida, Ohio, and Pennsylvania
for an aggregate purchase price of $301.3 million. These facilities are leased to Steward, pursuant to the original long-term master lease with Steward.
MEDIAN Transactions
During the third
quarter of 2017, we acquired two rehabilitation hospitals in Germany for an aggregate purchase price of €39.2 million, in addition to 11 rehabilitation hospitals in Germany that we acquired in the second quarter of 2017 for an aggregate
purchase price of €127 million. These 13 properties are leased to affiliates of Median Kliniken S.a.r.l. (“MEDIAN”), pursuant to a third master lease that has a fixed term ending in August 2043 with annual escalators at the greater of
one percent or 70% of German consumer price index. These acquisitions are the final properties of the portfolio of 20 properties in Germany that we agreed to acquire in July 2016 for €215.7 million, of which seven properties totaling
€49.5 million closed in December 2016.
On June 22, 2017, we acquired an acute care hospital in Germany for a purchase
price of €19.4 million of which €18.6 million was paid upon closing with the remainder being paid over four years. This property is leased to affiliates of MEDIAN, pursuant to an existing master lease agreement that ends in
December 2042 with annual escalators at the greater of one percent or 70% of the German consumer price index.
On January 30, 2017,
we acquired an inpatient rehabilitation hospital in Germany for €8.4 million. This acquisition was the final property to close as part of the six hospital portfolio that we agreed to buy in September 2016 for an aggregate amount of €44.1
million. This property is leased to affiliates of MEDIAN pursuant to the original long-term master lease agreement reached with MEDIAN in 2015.
Other
Transactions
On June 1, 2017, we acquired the real estate assets of Ohio Valley Medical Center, a 218-bed acute care hospital
located in Wheeling, West Virginia, and the East Ohio Regional Hospital, a 139-bed acute care hospital in Martins Ferry, Ohio, from Ohio Valley Health Services, a not-for-profit entity in West Virginia, for an aggregate purchase price of
approximately $40 million. We simultaneously leased the facilities to Alecto Healthcare Services LLC (“Alecto”), the current operator of three facilities in our portfolio, pursuant to a lease with a 15-year initial term with 2% annual
minimum rent increases and three 5-year extension options. The facilities are cross-defaulted and cross-collateralized with our other hospitals currently operated by Alecto. We also agreed to provide up to $20.0 million in capital improvement
funding on these two facilities - none of which has been funded to date. With these acquisitions, we also obtained a 20% interest in the operator of these facilities.
On May 1, 2017, we acquired the real estate of St. Joseph Regional Medical Center, a 145-bed acute care hospital in Lewiston, Idaho for
$87.5 million. This facility is leased to RCCH, pursuant to the existing long-term master lease entered into with RCCH in April 2016.
15
From the respective acquisition dates, the properties acquired in 2017 contributed $16.7 million
of revenue and $12.7 million of income (excluding related acquisition expenses and taxes) for the three months ended September 30, 2017, and $25.1 million of revenue and $18.8 million of income (excluding related acquisition expenses and taxes)
for the nine months ended September 30, 2017. In addition, we expensed $5.4 million and $15.6 million of acquisition-related costs on these 2017 acquisitions for the three and nine months ended September 30, 2017, respectively.
2016 Activity
On July 22, 2016, we
acquired an acute care facility in Olympia, Washington in exchange for a $93.3 million loan and an additional $7 million in cash. The property has been leased to RCCH on terms substantially similar to those of the existing long-term master lease
entered into with RCCH in April 2016.
On June 22, 2016, we closed on the last property of the €688 million MEDIAN
transaction, that was announced on April 29, 2015, for a purchase price of €41.6 million. Upon acquisition, this property became subject to an existing master lease between us and affiliates of MEDIAN that has a lease term ending December
2042 and annual escalators at the greater of one percent or 70% of the German consumer price index.
On May 2, 2016, we acquired an
acute care hospital in Newark, New Jersey for an aggregate purchase price of $63 million leased to Prime Healthcare Services, Inc. (“Prime”) pursuant to a new fifth master lease, which had a 15-year term with three five-year extension
options, plus consumer price-indexed increases, limited to a 2% floor. Furthermore, we committed to advance an additional $30 million to Prime over a three-year period to be used solely for capital additions to the real estate; any such additions
will be added to the basis upon which the lessee will pay us rents. None of the additional $30 million has been funded to date.
From the
respective acquisition dates, the properties acquired during the nine months ended September 30, 2016, contributed $4.6 million and $3.8 million of revenue and income (excluding related acquisition expenses), respectively, for the three months
ended September 30, 2016. From the respective acquisition dates, the properties acquired during the nine months ended September 30, 2016 contributed $5.7 million and $4.9 million of revenue and income (excluding related acquisition
expenses), respectively, for the nine months ended September 30, 2016. In addition, we incurred $2.4 million of acquisition-related costs on the 2016 acquisitions for the nine months ended September 30, 2016.
Pro Forma Information
The following unaudited supplemental pro forma operating data is presented for the three and nine months ended September 30, 2017 and
2016, as if each acquisition was completed on January 1, 2016 and January 1, 2015 for the period ended September 30, 2017 and 2016, respectively. Supplemental pro forma earnings were adjusted to exclude acquisition-related costs on consummated
deals incurred. The unaudited supplemental pro forma operating data is not necessarily indicative of what the actual results of operations would have been assuming the transactions had been completed as set forth above, nor do they purport to
represent our results of operations for future periods (in thousands, except per share/unit amounts).
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For the Three Months
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For the Nine Months
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|
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Ended September 30,
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|
Ended September 30,
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|
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2017
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|
|
2016
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|
|
2017
|
|
|
2016
|
|
|
Total revenues
|
|
$
|
209,368
|
|
|
$
|
207,898
|
|
|
$
|
623,635
|
|
|
$
|
622,798
|
|
|
Net income
|
|
$
|
102,112
|
|
|
$
|
107,863
|
|
|
$
|
311,306
|
|
|
$
|
307,645
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|
|
Net income per share/unit — diluted
|
|
$
|
0.28
|
|
|
$
|
0.30
|
|
|
$
|
0.85
|
|
|
$
|
0.84
|
|
16
Development Activities
During the first nine months of 2017, we completed construction on the following facilities:
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|
•
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|
Adeptus Health, Inc. (“Adeptus Health”) – We completed four acute care facilities for this tenant during 2017 totaling approximately $68 million in development costs. These facilities are leased pursuant
to an existing long-term master lease.
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|
•
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|
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 30-year lease that provides for quarterly fixed rent
payments beginning six months from the lease start date with annual increases of 1% beginning April 1, 2020. 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.
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In
April 2017, we completed the acquisition of the long leasehold interest of a development site in Birmingham, England from the Circle Health Group (“Circle”) (the tenant of our existing site in Bath, England) for a purchase price of
£2.7 million. Simultaneously with the acquisition, we entered into contracts with the property landlord and the Circle committing us to construct an acute care hospital on the site. Our total development costs are anticipated to be
approximately £30 million. Circle is contracted to enter into a lease of the hospital following completion of construction for an initial 15-year term with rent to be calculated based on our total development costs.
See table below for a status update on our current development projects (in thousands):
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Property
|
|
Commitment
|
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Costs
Incurred
as of
September 30, 2017
|
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Estimated
Completion
Date
|
|
|
Ernest (Flagstaff, Arizona)
|
|
$
|
28,067
|
|
|
$
|
16,619
|
|
|
|
1Q 2018
|
|
|
Circle (Birmingham, England)
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|
|
43,221
|
|
|
|
11,389
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|
|
|
1Q 2019
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
71,288
|
|
|
$
|
28,008
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|
|
|
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Disposals
2017
Activity
On March 31, 2017, we sold the EASTAR Health System real estate located in Muskogee, Oklahoma, which was leased to RCCH.
Total proceeds from this transaction were approximately $64 million resulting in a gain of $7.4 million, partially offset by a $0.6 million non-cash charge to revenue to write-off related straight-line rent receivables on this property.
2016 Activity
Capella Transaction
Effective April 30, 2016, our investment in the operator of Capella Healthcare, Inc. (“Capella”) merged with Regional Care
Hospital Partners, Inc. (“Regional Care”) (an affiliate of certain funds managed by affiliates of Apollo Global Management, LLC. (“Apollo”)) to form RCCH. As part of the transaction, we received net proceeds of approximately $550
million including approximately $492 million for our equity investment and loans made as part of the original Capella transaction that closed on August 31, 2015. In addition, we received $210 million in prepayment of two mortgage loans for
hospitals in Russellville, Arkansas, and Lawton, Oklahoma, that we made in connection with the original Capella transaction. We made a new $93.3 million loan for a hospital property in Olympia, Washington that was subsequently converted to real
estate on July 22, 2016. Additionally, we and an Apollo affiliate invested $50 million each in unsecured senior notes issued by RegionalCare, which we sold to a large institution on June 20, 2016 at par. The proceeds from this transaction
represented the recoverability of our investment in full, except for transaction costs incurred of $6.3 million.
We maintained our
ownership of five hospitals in Hot Springs, Arkansas; Camden, South Carolina; Hartsville, South Carolina; Muskogee, Oklahoma; and McMinnville, Oregon. Pursuant to the transaction described above, the underlying leases, one of which is a master lease
covering all but one property, was amended to shorten the initial fixed lease term, increase the security deposit, and
17
eliminate the lessees’ purchase option provisions. Due to this lease amendment, we reclassified the lease of the properties under the master lease from a direct finance lease
(“DFL”) to an operating lease. This reclassification resulted in a write-off of $2.6 million in unbilled DFL rent in the 2016 second quarter.
Post Acute Transaction
On May 23,
2016, we sold five properties (three of which were in Texas and two in Louisiana) that were leased and operated by Post Acute Medical (“Post Acute”). As part of this transaction, our outstanding loans of $4 million were paid in full, and
we recovered our investment in the operations. Total proceeds from this transaction were $71 million resulting in a net gain of approximately $15 million.
Corinth Transaction
On June 17,
2016, we sold the Atrium Medical Center real estate located in Corinth, Texas, which was leased and operated by Corinth Investor Holdings. Total proceeds from the transaction were $28 million resulting in a gain on real estate of approximately $8
million. This gain on real estate was offset by approximately $9 million of non-cash charges that included the write-off of our investment in the operations of the facility, straight-line rent receivables, and a lease intangible.
HealthSouth Transaction
On July 20,
2016, we sold three inpatient rehabilitation hospitals located in Texas and operated by HealthSouth Corporation (“HealthSouth”) for $111.5 million, resulting in a net gain of approximately $45 million.
The sales in 2017 and 2016 were not strategic shifts in our operations, and therefore the results of operations related to these facilities
were not reclassified as discontinued operations.
Summary of Operations for Assets Disposed in 2016
The following represents the operating results (excluding gain on sale, transaction costs, and impairment or other non-cash charges) from the
properties which sold during 2016 (excluding loans repaid in the Capella Transaction) for the periods presented (in thousands):
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|
|
|
|
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|
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For the Three Months
Ended September 30,
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|
For the Nine Months
Ended September 30,
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|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
244
|
|
|
$
|
—
|
|
|
$
|
7,851
|
|
|
Real estate depreciation and amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,754
|
)
|
|
Property-related expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(114
|
)
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|
Other income (expense)
|
|
|
—
|
|
|
|
45
|
|
|
|
—
|
|
|
|
(23
|
)
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|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Income from real estate dispositions, net
|
|
$
|
—
|
|
|
$
|
289
|
|
|
$
|
—
|
|
|
$
|
5,960
|
|
|
|
|
|
|
|
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|
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Leasing Operations
At September 30, 2017, leases on two Alecto facilities, 15 Ernest facilities and 10 Prime facilities are accounted for as DFLs. The
components of our net investment in DFLs consisted of the following (in thousands):
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|
|
As of September 30,
2017
|
|
|
As of December 31,
2016
|
|
|
Minimum lease payments receivable
|
|
$
|
2,312,621
|
|
|
$
|
2,207,625
|
|
|
Estimated residual values
|
|
|
448,098
|
|
|
|
407,647
|
|
|
Less: Unearned income
|
|
|
(2,064,890
|
)
|
|
|
(1,967,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net investment in direct financing leases
|
|
$
|
695,829
|
|
|
$
|
648,102
|
|
|
|
|
|
|
|
|
|
|
|
18
Adeptus Health
On April 4, 2017, we announced that we had agreed in principle with Deerfield Management Company, L.P. (“Deerfield”), a
healthcare-only investment firm, to the restructuring in bankruptcy of Adeptus Health, a current tenant and operator of facilities representing less than 5% of our total gross assets. In furtherance of the restructuring, Adeptus Health and certain
of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code on April 19, 2017. Funds advised by Deerfield acquired Adeptus Health’s outstanding bank debt and Deerfield agreed to provide
additional financing, along with operational and managerial support, to Adeptus Health as part of the restructuring.
The Adeptus Health
restructuring and terms of our agreement with Deerfield provided for the payment to us of 100% of the rent payable during the restructuring and the assumption by Deerfield of all our master leases and related agreements with Adeptus Health at
current rental rates. Through November 3, 2017, Adeptus Health is current on its rent obligations to us.
On September 29, 2017,
the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, entered an order confirming the Debtors’ Third Amended Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code (the “Plan”). The Plan
became effective on October 2, 2017 (the “Confirmation Effective Date”). In connection with the confirmation of the Plan, Deerfield agreed that it would assume all of the master leases and related agreements between us and Adeptus
Health, cure all defaults that had arisen prior to the commencement of the bankruptcy proceedings with respect to all properties, and continue to pay rent with respect to all but 16 of the 56 Adeptus Health properties according to the terms of the
master leases and related agreements. Rent will remain the same, and a previously disclosed rent concession was removed from the terms. We plan to re-lease or sell the remaining 16 properties, and Adeptus Health will continue to pay rent with
respect to those 16 properties until the earlier of (a) transition to a new operator is complete, (b) two years following the Confirmation Effective Date (for one facility), (c) one year following the Confirmation Effective Date (for
seven facilities), (d) six months following the Confirmation Effective Date (for three facilities), and (e) three months following the Confirmation Effective Date (for five facilities). These lease or sale transactions are expected to be
completed by the end of 2019. Although no assurances can be made that we will not recognize a loss in the future, we believe the sale or re-leasing of the assets related to these 16 facilities will not result in any material loss or impairment.
On April 4, 2017, we announced that our Louisiana freestanding emergency facilities then-operated by Adeptus Health (with a total
budgeted investment of approximately $24.5 million) had been re-leased to Ochsner Clinic Foundation (“Ochsner”), a health care system in the New Orleans area. 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. On October 18, 2017, Ochsner agreed to an amended and restated lease that provided for initial terms of 15 years with a 9.2% average minimum lease rate
based on our total development and construction cost, as well as the addition of three five-year renewal options.
Hoboken Facility
In the first half of 2017, a subsidiary of the operator of our Hoboken facility acquired 20% of our subsidiary that owns the real estate for
$10 million, which increased its interest in our real estate entity to 30%. This transaction is reflected in the non-controlling interest line of our condensed consolidated balance sheets.
Loans
The following is a summary of our
loans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
September 30, 2017
|
|
|
As of
December 31, 2016
|
|
|
Mortgage loans
|
|
$
|
1,777,555
|
|
|
$
|
1,060,400
|
|
|
Acquisition loans
|
|
|
119,256
|
|
|
|
121,464
|
|
|
Working capital and other loans
|
|
|
32,453
|
|
|
|
34,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,929,264
|
|
|
$
|
1,216,121
|
|
|
|
|
|
|
|
|
|
|
|
19
As of September 30, 2017, our mortgage loans consist of loans made to four operators that
are secured by the real estate of 14 properties, and include the $700 million investment made on September 29, 2017, as part of the Steward Transaction. Our non-mortgage loans typically consist of loans to our tenants for acquisitions and
working capital purposes. At September 30, 2017, acquisition loans includes $114.4 million in loans to Ernest.
Concentrations of Credit Risk
Our revenue concentration for the nine months ended September 30, 2017 as compared to the prior year is as follows (dollars in
thousands):
Revenue by Operator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
September 30, 2017
|
|
|
For the Nine Months Ended
September 30, 2016
|
|
|
Operators
|
|
Total
Revenue
|
|
|
Percentage of
Total Revenue
|
|
|
Total
Revenue
|
|
|
Percentage of
Total Revenue
|
|
|
Steward (1)
|
|
$
|
114,776
|
|
|
|
23.0
|
%
|
|
$
|
20,969
|
|
|
|
5.4
|
%
|
|
Prime
|
|
|
94,644
|
|
|
|
18.9
|
%
|
|
|
89,389
|
|
|
|
23.1
|
%
|
|
MEDIAN
|
|
|
73,793
|
|
|
|
14.8
|
%
|
|
|
70,242
|
|
|
|
18.1
|
%
|
|
Ernest
|
|
|
53,007
|
|
|
|
10.6
|
%
|
|
|
50,564
|
|
|
|
13.0
|
%
|
|
Adeptus Health
|
|
|
39,638
|
|
|
|
7.9
|
%
|
|
|
25,873
|
|
|
|
6.7
|
%
|
|
RCCH
|
|
|
30,668
|
|
|
|
6.1
|
%
|
|
|
42,776
|
|
|
|
11.0
|
%
|
|
Other operators
|
|
|
93,258
|
|
|
|
18.7
|
%
|
|
|
88,041
|
|
|
|
22.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
499,784
|
|
|
|
100.0
|
%
|
|
$
|
387,854
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes approximately $21.6 million and $21 million of revenue for the nine months ended September 30, 2017 and 2016, respectively, from facilities leased to IASIS prior to it being acquired by Steward on
September 29, 2017.
|
Revenue by U.S. State and Country
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
September 30, 2017
|
|
|
For the Nine Months Ended
September 30, 2016
|
|
|
U.S. States and Other Countries
|
|
Total
Revenue
|
|
|
Percentage of
Total Revenue
|
|
|
Total
Revenue
|
|
|
Percentage of
Total Revenue
|
|
|
Massachusetts
|
|
$
|
79,741
|
|
|
|
16.0
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
Texas
|
|
|
74,489
|
|
|
|
14.9
|
%
|
|
|
72,811
|
|
|
|
18.8
|
%
|
|
California
|
|
|
49,681
|
|
|
|
9.9
|
%
|
|
|
49,724
|
|
|
|
12.8
|
%
|
|
New Jersey
|
|
|
32,756
|
|
|
|
6.6
|
%
|
|
|
28,398
|
|
|
|
7.3
|
%
|
|
Arizona
|
|
|
23,902
|
|
|
|
4.8
|
%
|
|
|
17,678
|
|
|
|
4.6
|
%
|
|
All other states
|
|
|
147,606
|
|
|
|
29.5
|
%
|
|
|
143,289
|
|
|
|
36.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S.
|
|
$
|
408,175
|
|
|
|
81.7
|
%
|
|
$
|
311,900
|
|
|
|
80.4
|
%
|
|
Germany
|
|
$
|
88,525
|
|
|
|
17.7
|
%
|
|
$
|
72,718
|
|
|
|
18.8
|
%
|
|
United Kingdom, Italy, and Spain
|
|
|
3,084
|
|
|
|
0.6
|
%
|
|
|
3,236
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
$
|
91,609
|
|
|
|
18.3
|
%
|
|
$
|
75,954
|
|
|
|
19.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Total
|
|
$
|
499,784
|
|
|
|
100.0
|
%
|
|
$
|
387,854
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
On a total gross asset basis, which is total assets before accumulated depreciation/amortization,
assumes all real estate binding commitments on new investments and unfunded amounts on development deals and commenced capital improvement projects are fully funded (see Notes 9 and 10 of Item 1 on this Form 10-Q), and assumes cash on hand is
fully used in these transactions, our concentration as of September 30, 2017 as compared to December 31, 2016 is as follows (dollars in thousands):
Gross Assets by Operator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 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)
|
|
$
|
3,445,379
|
|
|
|
36.8
|
%
|
|
$
|
1,609,583
|
|
|
|
22.5
|
%
|
|
MEDIAN
|
|
|
1,209,767
|
|
|
|
12.9
|
%
|
|
|
993,677
|
|
|
|
13.9
|
%
|
|
Prime
|
|
|
1,118,070
|
|
|
|
12.0
|
%
|
|
|
1,144,055
|
|
|
|
16.0
|
%
|
|
Ernest
|
|
|
631,501
|
|
|
|
6.7
|
%
|
|
|
627,906
|
|
|
|
8.8
|
%
|
|
RCCH
|
|
|
506,265
|
|
|
|
5.4
|
%
|
|
|
566,600
|
|
|
|
7.9
|
%
|
|
Other operators
|
|
|
1,992,448
|
|
|
|
21.3
|
%
|
|
|
1,900,397
|
|
|
|
26.7
|
%
|
|
Other assets
|
|
|
452,505
|
|
|
|
4.9
|
%
|
|
|
300,903
|
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,355,935
|
|
|
|
100.0
|
%
|
|
$
|
7,143,121
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes approximately $360 million of gross assets as of December 31, 2016 related to facilities leased to IASIS prior to it being acquired by Steward on September 29, 2017.
|
Gross Assets by U.S. State and Country
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 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
|
|
$
|
1,284,156
|
|
|
|
13.7
|
%
|
|
$
|
1,250,000
|
|
|
|
17.5
|
%
|
|
Texas
|
|
|
1,275,784
|
|
|
|
13.6
|
%
|
|
|
947,443
|
|
|
|
13.3
|
%
|
|
Utah
|
|
|
1,035,793
|
|
|
|
11.1
|
%
|
|
|
107,151
|
|
|
|
1.5
|
%
|
|
California
|
|
|
542,879
|
|
|
|
5.8
|
%
|
|
|
542,889
|
|
|
|
7.6
|
%
|
|
Arizona
|
|
|
498,844
|
|
|
|
5.3
|
%
|
|
|
331,834
|
|
|
|
4.6
|
%
|
|
All other states
|
|
|
2,506,538
|
|
|
|
26.8
|
%
|
|
|
2,234,332
|
|
|
|
31.3
|
%
|
|
Other domestic assets
|
|
|
397,850
|
|
|
|
4.3
|
%
|
|
|
264,215
|
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S.
|
|
$
|
7,541,844
|
|
|
|
80.6
|
%
|
|
$
|
5,677,864
|
|
|
|
79.5
|
%
|
|
Germany
|
|
$
|
1,556,392
|
|
|
|
16.6
|
%
|
|
$
|
1,281,649
|
|
|
|
17.9
|
%
|
|
United Kingdom, Italy, and Spain
|
|
|
203,044
|
|
|
|
2.2
|
%
|
|
|
146,920
|
|
|
|
2.1
|
%
|
|
Other international assets
|
|
|
54,655
|
|
|
|
0.6
|
%
|
|
|
36,688
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
$
|
1,814,091
|
|
|
|
19.4
|
%
|
|
$
|
1,465,257
|
|
|
|
20.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Total
|
|
$
|
9,355,935
|
|
|
|
100.0
|
%
|
|
$
|
7,143,121
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On an individual property basis, we had no investment of any single property greater than 3.8% of our total gross assets as of
September 30, 2017.
21
4. Debt
The following is a summary of our debt (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
|
As of December 31, 2016
|
|
|
Revolving credit facility
(A)
|
|
$
|
445,359
|
|
|
$
|
290,000
|
|
|
Term loans
|
|
|
200,000
|
|
|
|
263,101
|
|
|
6.375% Senior Unsecured Notes due 2022:
|
|
|
|
|
|
|
|
|
|
Principal amount
|
|
|
350,000
|
|
|
|
350,000
|
|
|
Unamortized premium
|
|
|
1,549
|
|
|
|
1,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
351,549
|
|
|
|
351,814
|
|
|
5.750% Senior Unsecured Notes due
2020
(B)
|
|
|
—
|
|
|
|
210,340
|
|
|
4.000% Senior Unsecured Notes due
2022
(B)
|
|
|
590,700
|
|
|
|
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
(B)
|
|
|
590,700
|
|
|
|
—
|
|
|
5.250% Senior Unsecured Notes due 2026
|
|
|
500,000
|
|
|
|
500,000
|
|
|
5.000% Senior Unsecured Notes due 2027
|
|
|
1,400,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,878,308
|
|
|
$
|
2,941,105
|
|
|
Debt issue costs, net
|
|
|
(46,044
|
)
|
|
|
(31,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,832,264
|
|
|
$
|
2,909,341
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Includes £4 million of GBP-denominated borrowings that reflect the exchange rate at September 30, 2017.
|
|
(B)
|
These notes are Euro-denominated and reflect the exchange rate at September 30, 2017 and December 31, 2016, respectively.
|
As of September 30, 2017, principal payments due on our debt (which exclude the effects of any discounts, premiums, or debt issue costs
recorded) are as follows (in thousands):
|
|
|
|
|
|
|
2017
|
|
$
|
350,000
|
(A)
|
|
2018
|
|
|
—
|
|
|
2019
|
|
|
—
|
|
|
2020
|
|
|
—
|
|
|
2021
|
|
|
445,359
|
|
|
Thereafter
|
|
|
4,081,400
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,876,759
|
|
|
|
|
|
|
|
|
(A)
|
The $350 million 6.375% Senior Unsecured Notes due 2022 were redeemed on October 7, 2017 with proceeds from our $1.4 billion 5.000% Senior Unsecured Notes due 2027.
|
2017 Activity
Credit Facility
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
22
the €200 million unsecured term loan facility had a maturity date of January 31, 2020; however, it was paid off on March 30, 2017 – see below. The commitment fee on the
revolving loan facility is paid at a rate of 0.25%. The term loan and/or revolving loan commitments may be increased in an aggregate amount not to exceed $500 million.
At our election, loans under the Credit Facility may be made as either ABR Loans or Eurodollar Loans. The applicable margin for term loans
that are ABR Loans is adjustable on a sliding scale from 0.00% to 0.95% based on our current credit rating. The applicable margin for term loans that are Eurodollar Loans is adjustable on a sliding scale from 0.90% to 1.95% based on our current
credit rating. The applicable margin for revolving loans that are ABR Loans is adjustable on a sliding scale from 0.00% to 0.65% based on our current credit rating. The 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 September 30,
2017, the interest rate in effect on our term loan and revolver was 2.74% and 2.48%, respectively.
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 – see discussion below.
5.750% Senior Unsecured Notes due 2020
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 (see discussion above) together with cash on hand.
3.325% Senior Unsecured Notes due 2025
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.
5.000% Senior Unsecured Notes due 2027
On September 7, 2017, we completed a $1.4 billion senior unsecured notes offering (“5.000% Senior Unsecured Notes due 2027”).
Interest on the notes is payable annually on April 15 and October 15 of each year, commencing on April 15, 2018. The notes pay interest in cash at a rate of 5.000% per year. The notes mature on October 15, 2027. We may
redeem some or all of the notes at any time prior to October 15, 2022 at a “make whole” redemption price. On or after October 15, 2022, we may redeem some or all of the notes at a premium that will decrease over time. In
addition, at any time prior to October 15, 2020, we may redeem up to 40% of the notes at a redemption price equal to 105% 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.
23
We used a portion of the net proceeds from the 5.000% Senior Unsecured Notes due 2027 offering to
redeem the $350 million aggregate principal amount of our 6.375% Senior Unsecured Notes due 2022. The notes were repaid on October 7, 2017, and we will incur a debt refinancing charge of approximately $14 million in the fourth quarter of 2017,
consisting of an $11.2 million redemption premium along with the write-off of the unamortized premium and deferred debt issuance costs associated with the redeemed notes.
Furthermore, the completion of the 5.000% Senior Unsecured Notes due 2027 offering resulted in the cancellation of the $1.0 billion term loan
facility commitment from JP Morgan Chase Bank, N.A. that we received to assist in funding the September 2017 Steward transaction. With this commitment, we paid $5.2 million of underwriting and other fees, which we fully expensed upon the
cancellation of the commitment.
Other
On September 29, 2017, we prepaid the principal amount of the mortgage loan on our property in Kansas City, Missouri at par in the amount
of $12.9 million. To fund such prepayment, including accrued and unpaid interest thereon, we used borrowings from the revolving credit facility portion of our Credit Facility.
With the replacement of our old credit facility, the redemption of the 5.750% Senior Unsecured Notes due 2020, the payoff of our
€200 million euro term loan, the cancellation of the $1.0 billion term loan facility commitment, and the payment of our $12.9 million mortgage loan, we incurred a debt refinancing charge of $18.8 million in the first nine months of 2017.
2016 Activity
5.250% Senior
Unsecured Notes due 2026
On July 22, 2016, we completed a $500 million senior unsecured notes offering (“5.250% Senior
Unsecured Notes due 2026”). Interest on the notes is payable on February 1 and August 1 of each year. Interest on the notes is to be paid in cash at a rate of 5.25% per year. The notes mature on August 1, 2026. We may redeem
some or all of the notes at any time prior to August 1, 2021 at a “make whole” redemption price. On or after August 1, 2021, we may redeem some or all of the notes at a premium that will decrease over time. In addition, at any
time prior to August 1, 2019, we may redeem up to 35% of the notes at a redemption price equal to 105.25% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, using proceeds from one or more equity offerings. In
the event of a change in control, each holder of the notes may require us to repurchase some or all of the notes at a repurchase price equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest to the date of
purchase.
We used the net proceeds from the 5.250% Senior Unsecured Notes due 2026 offering to redeem our $450 million 6.875% Senior
Unsecured Notes due 2021. This redemption resulted in a $22.5 million debt refinancing charge during the 2016 third quarter, consisting of a $15.5 million redemption premium along with the write-off of deferred debt issuance costs associated with
the redeemed notes.
6.375% Senior Unsecured Notes due 2024
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.
24
Covenants
Our debt facilities impose certain restrictions on us, including restrictions on our ability to: incur debts; create or incur liens; provide
guarantees in respect of obligations of any other entity; make redemptions and repurchases of our capital stock; prepay, redeem or repurchase debt; engage in mergers or consolidations; enter into affiliated transactions; dispose of real estate or
other assets; and change our business. In addition, the credit agreements governing our Credit Facility limit the amount of dividends we can pay as a percentage of normalized adjusted funds from operations (“FFO”), as defined in the
agreements, on a rolling four quarter basis. At September 30, 2017, the dividend restriction was 95% of normalized adjusted FFO. The indentures governing our senior unsecured notes also limit the amount of dividends we can pay based on the sum
of 95% of FFO, proceeds of equity issuances and certain other net cash proceeds. Finally, our senior unsecured notes require us to maintain total unencumbered assets (as defined in the related indenture) of not less than 150% of our unsecured
indebtedness.
In addition to these restrictions, the Credit Facility contains customary financial and operating covenants, including
covenants relating to our total leverage ratio, fixed charge coverage ratio, secured leverage ratio, consolidated adjusted net worth, unsecured leverage ratio, and unsecured interest coverage ratio. This Credit Facility also contains customary
events of default, including among others, nonpayment of principal or interest, material inaccuracy of representations and failure to comply with our covenants. If an event of default occurs and is continuing under the Credit Facility, the entire
outstanding balance may become immediately due and payable. At September 30, 2017, we were in compliance with all such financial and operating covenants.
5. Common Stock/Partners’ Capital
Medical
Properties Trust, Inc.
2017 Activity
On May 1, 2017, we completed an underwritten public offering of approximately 43.1 million shares (including the exercise of the
underwriters’ 30-day option to purchase an additional 5.6 million shares) of our common stock, resulting in net proceeds of approximately $548 million, after deducting offering expenses.
2016 Activity
On September 30,
2016, we completed an underwritten public offering of 57.5 million shares (including the exercise of the underwriters’ 30-day option to purchase an additional 7.5 million shares) of our common stock, resulting in net proceeds of
$799.5 million, after deducting estimated offering expenses.
During the nine months ended September 30, 2016, we sold approximately
15 million shares of common stock under an
at-the-market
equity offering program, resulting in net proceeds of approximately $224 million, after deducting
approximately $2.8 million of commissions. There is no availability under this equity offering program at September 30, 2017.
MPT Operating
Partnership, L.P.
At September 30, 2017, the Company has a 99.89% ownership interest in the Operating Partnership with the
remainder owned by three other partners, two of whom are employees and one of whom is the estate of a former director. During the nine months ended September 30, 2017 and 2016, the Operating Partnership issued approximately 43.1 million
units and approximately 72.5 million units, respectively, in direct response to the common stock offerings by Medical Properties Trust, Inc.
6.
Stock Awards
We adopted the 2013 Equity Incentive Plan (the “Equity Incentive Plan”) during the second quarter of 2013,
which authorizes the issuance of common stock options, restricted stock, restricted stock units, deferred stock units, stock appreciation rights, performance units and awards of interests in our Operating Partnership. The Equity Incentive Plan is
administered by the Compensation Committee of the Board of Directors. We have reserved 8,196,770 shares of common stock for awards under the Equity Incentive Plan for which 3.3 million shares remain available for future stock awards as of
September 30, 2017. Share-based compensation expense totaled $7.1 million and $5.8 million for the nine months ended September 30, 2017 and 2016, respectively, of which $0.4 million relates to the acceleration of vestings on time-based
awards previously granted to three former board members.
25
7. Fair Value of Financial Instruments
We have various assets and liabilities that are considered financial instruments. We estimate that the carrying value of cash and cash
equivalents and accounts payable and accrued expenses approximate their fair values. We estimate the fair value of our interest and rent receivables using Level 2 inputs such as discounting the estimated future cash flows using the current rates at
which similar receivables would be made to others with similar credit ratings and for the same remaining maturities. The fair value of our mortgage loans and 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
Book
|
|
|
Fair
|
|
|
Book
|
|
|
Fair
|
|
|
Asset (Liability)
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Interest and rent receivables
|
|
$
|
105,817
|
|
|
$
|
105,803
|
|
|
$
|
57,698
|
|
|
$
|
57,707
|
|
|
Loans (1)
|
|
|
1,698,866
|
|
|
|
1,722,912
|
|
|
|
986,987
|
|
|
|
1,017,428
|
|
|
Debt, net
|
|
|
(4,832,264
|
)
|
|
|
(5,032,821
|
)
|
|
|
(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 September 30, 2017, these amounts
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Asset Type
|
|
|
Asset Type
|
|
Value
|
|
|
Cost
|
|
|
Classification
|
|
|
Mortgage loans
|
|
$
|
115,000
|
|
|
$
|
115,000
|
|
|
|
Mortgage loans
|
|
|
Acquisition and other loans
|
|
|
115,398
|
|
|
|
115,398
|
|
|
|
Other loans
|
|
|
Equity investments
|
|
|
3,300
|
|
|
|
3,300
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
233,698
|
|
|
$
|
233,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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), market interest rates, and our unobservable input includes an adjustment for a
marketability discount (“DLOM”) on our equity investment of 40% at September 30, 2017.
In regards to the underlying
projection of revenues and expenses used in the discounted cash flow model, such projections are provided by Ernest. However, we will modify such projections (including underlying assumptions used) as needed based on our review and analysis of
Ernest’s historical results, meetings with key members of management, and our understanding of trends and developments within the healthcare industry.
26
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
|
|
$
|
(51
|
)
|
|
- 100 basis points
|
|
|
51
|
|
Because the fair value of Ernest investments noted above approximate their original cost, we did not recognize
any unrealized gains/losses during the first nine months of 2017 or 2016. To date, we have not received any distribution payments from our equity investment in Ernest.
8. Earnings Per Share/Common Unit
Medical Properties
Trust, Inc.
Our earnings per share were calculated based on the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
76,881
|
|
|
$
|
70,543
|
|
|
Non-controlling interests’ share in net income
|
|
|
(417
|
)
|
|
|
(185
|
)
|
|
Participating securities’ share in earnings
|
|
|
(82
|
)
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income, less participating securities’ share in earnings
|
|
$
|
76,382
|
|
|
$
|
70,204
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares
|
|
|
364,315
|
|
|
|
246,230
|
|
|
Dilutive potential common shares
|
|
|
731
|
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted-average common shares
|
|
|
365,046
|
|
|
|
247,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
218,862
|
|
|
$
|
182,693
|
|
|
Non-controlling interests’ share in continuing operations
|
|
|
(1,013
|
)
|
|
|
(683
|
)
|
|
Participating securities’ share in earnings
|
|
|
(307
|
)
|
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, less participating securities’share in earnings
|
|
|
217,542
|
|
|
|
181,580
|
|
|
Loss from discontinued operations attributable to MPT common stockholders
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income, less participating securities’ share in earnings
|
|
$
|
217,542
|
|
|
$
|
181,579
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares
|
|
|
345,076
|
|
|
|
240,607
|
|
|
Dilutive potential common shares
|
|
|
520
|
|
|
|
825
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted-average common shares
|
|
|
345,596
|
|
|
|
241,432
|
|
|
|
|
|
|
|
|
|
|
|
27
MPT Operating Partnership, L.P.
Our earnings per common unit were calculated based on the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
76,881
|
|
|
$
|
70,543
|
|
|
Non-controlling interests’ share in net income
|
|
|
(417
|
)
|
|
|
(185
|
)
|
|
Participating securities’ share in earnings
|
|
|
(82
|
)
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income, less participating securities’ share in earnings
|
|
$
|
76,382
|
|
|
$
|
70,204
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Basic weighted-average units
|
|
|
364,315
|
|
|
|
246,230
|
|
|
Dilutive potential units
|
|
|
731
|
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted-average units
|
|
|
365,046
|
|
|
|
247,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
218,862
|
|
|
$
|
182,693
|
|
|
Non-controlling interests’ share in continuing operations
|
|
|
(1,013
|
)
|
|
|
(683
|
)
|
|
Participating securities’ share in earnings
|
|
|
(307
|
)
|
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, less participating securities’ share in earnings
|
|
|
217,542
|
|
|
|
181,580
|
|
|
Loss from discontinued operations attributable to MPT Operating Partnership partners
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income, less participating securities’ share in earnings
|
|
$
|
217,542
|
|
|
$
|
181,579
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Basic weighted-average units
|
|
|
345,076
|
|
|
|
240,607
|
|
|
Dilutive potential units
|
|
|
520
|
|
|
|
825
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted-average units
|
|
|
345,596
|
|
|
|
241,432
|
|
|
|
|
|
|
|
|
|
|
|
9. Commitments and Contingencies
Commitments
On September 28, 2016,
we entered into a definitive agreement to acquire one acute care hospital in Washington for a purchase price of approximately $17.5 million. Upon closing, this facility will be leased to RCCH, pursuant to the current long-term master lease. Closing
of the transaction, which is expected to be completed no later than the first quarter of 2018, is subject to customary real estate, regulatory and other closing conditions.
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.
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10. Subsequent Events
On October 5, 2017, we entered into definitive agreements to acquire three rehabilitation hospitals in Germany for an aggregate purchase
price to us of approximately €80 million. Upon closing, the facilities will be leased to MEDIAN, pursuant to a new
long-term
master lease. The lease will begin on the day the first property is funded, and
the term will be 27 years from the funding date of the third property. The lease provides for increases of the greater of 1% or 70% of the change in German CPI. Closing of the transaction, which is expected to begin during the fourth quarter of
2017, is subject to customary real estate, regulatory and other closing conditions.
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