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 2004. Accordingly, we will generally not be subject to federal income tax in the United States (“U.S.”), provided that we continue to qualify as a REIT and our distributions to our stockholders equal or exceed our taxable income. Certain non-real estate activities we undertake are conducted by entities which we elected to be treated as taxable REIT subsidiaries (“TRS”). Our TRS entities are subject to both U.S. federal and state income taxes. For our properties located outside the U.S., we are subject to local taxes; however, we do not expect to incur additional taxes in the U.S. as such real estate related income currently flows through our REIT.
Our primary business strategy is to acquire and develop real estate and improvements, primarily for long-term lease to providers of healthcare services, such as operators of general acute care hospitals, inpatient physical rehabilitation hospitals, 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 and nine months ended September 30, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The condensed consolidated balance sheet at December 31, 2017 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, 2017, and as updated in our Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018. There have been no material changes to these significant accounting policies.
Recent Accounting Developments:
Leases
In February 2016, the Financial Accounting Standards Board (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 financing or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method 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 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. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”), allowing companies to record a cumulative adjustment to retained earnings in the period of adoption rather than requiring the restatement of prior periods.
11
We
will
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. 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
.
Although we do not expect any c
hange in the current
operating lease
classification of these leases, we
will record a right-of-use asset and a lease liability
on our balance sheet upon adoption of this standard
, with any difference recorded as a cumulative adjustment in equity
. From a le
ssor perspective,
we do not expect any change in the current classification and accounting of our
existing
leases.
However,
we do expect certain non-lease components (
such as
certain operating expenses that
we pay and our tenants reimburse us for
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
, “
Revenue from Contracts with Customers (Topic 606)
”
.
For those operating expenses that our ten
ants pay directly to third parties pursuant to our leases, we will continue to present on a net basis.
Reclassifications
Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to the current period presentation.
Variable Interest Entities
At September 30, 2018, 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 September 30, 2018 (in thousands):
VIE Type
|
|
Maximum Loss
Exposure(1)
|
|
|
Asset Type
Classification
|
|
Carrying
Amount(2)
|
|
Loans, net
|
|
$
|
329,340
|
|
|
Mortgage and other loans
|
|
$
|
228,960
|
|
Equity investments
|
|
$
|
14,616
|
|
|
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 VIE’s economic performance. As of September 30, 2018, we were not required to provide financial support through a liquidity arrangement or otherwise to our unconsolidated VIEs, including circumstances in which they 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, Note 7 and Note 10 for additional description of the nature, purpose and activities of our more significant VIEs and interests therein, including Ernest Health Inc. (“Ernest”), which makes up $329 million of the maximum loss exposure above at September 30, 2018.
12
3. Real Estate and Lending Activities
Acquisitions
We acquired the following assets (in thousands):
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Assets Acquired
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
$
|
57,452
|
|
|
$
|
220,864
|
|
Building
|
|
|
467,164
|
|
|
|
928,687
|
|
Intangible lease assets — subject to amortization (weighted average useful
life 27.8 years for 2018 and 27.2 years for 2017)
|
|
|
60,277
|
|
|
|
162,946
|
|
Net investments in direct financing leases
|
|
|
-
|
|
|
|
40,450
|
|
Other loans
|
|
|
336,458
|
|
|
|
-
|
|
Mortgage loans
|
|
|
-
|
|
|
|
700,000
|
|
Equity investments
|
|
|
245,267
|
|
|
|
100,000
|
|
Liabilities assumed
|
|
|
-
|
|
|
|
(878
|
)
|
Total assets acquired
|
|
$
|
1,166,618
|
|
|
$
|
2,152,069
|
|
Loans repaid
|
|
|
(525,426
|
)
|
|
|
-
|
|
Total net assets acquired
|
|
$
|
641,192
|
|
|
$
|
2,152,069
|
|
2018 Activity
Joint Venture Transaction
On August 31, 2018, we completed a joint venture arrangement with Primotop Holdings S.à.r.l. (“Primotop”) pursuant to which we contributed 71 of our post-acute hospitals in Germany, with an aggregate fair value of €1.635 billion, for a 50% interest, while Primotop contributed cash for its 50% interest in the joint venture. As part of the transaction, we received an aggregate amount of approximately €1.14 billion, from the proceeds of the cash contributed by Primotop and the secured debt financing placed on the joint venture’s real estate (as more fully discussed in Note 4), and we recognized an approximate €500 million gain on sale. Our interest in the joint venture is made up of a 50% equity investment valued at approximately €211 million (included in “Other assets” on the condensed consolidated balance sheets), which is being accounted for under the equity method of accounting, and a €290 million shareholder loan (with terms identical to Primotop’s shareholder loan).
Other Transactions
On August 31, 2018, we acquired an acute care facility in Pasco, Washington for $17.5 million. The property is leased to RCCH Healthcare Partners (“RCCH”), pursuant to the existing long-term master lease entered into with RCCH in April 2016.
On August 28, 2018, we acquired three inpatient rehabilitation hospitals in Germany for €17.3 million (including real estate transfer taxes). These hospitals are part of a four-hospital portfolio that we agreed to purchase for an aggregate amount of €23 million (including real estate transfer taxes). The final property is expected to close in the fourth quarter of 2018. The properties are leased to affiliates of Median Kliniken S.à.r.l. (“MEDIAN”), pursuant to a new 27-year master lease with annual escalators at the greater of 1% or 70% of the change in German consumer price index (“CPI”).
During the second and third quarters of 2018, we acquired the fee simple real estate of four general acute care hospitals, three of which are located in Massachusetts and one located in Texas, from Steward Health Care System LLC (“Steward”) in exchange for the reduction of $525.4 million of mortgage loans made to Steward in October 2016 and March 2018, along with additional cash consideration. These properties are being leased to Steward pursuant to the original master lease from October 2016 that had an initial 15-year term with three five-year extension options, plus CPI increases.
13
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, which separately completed its acquisition of IASIS on September 29, 2017. Our investment in the portfolio included the acquisition of eight acute care hospitals and one behavioral health facility for approximately $700 million, the origination 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.
The initial term, extension options, and interest rate of the mortgage loans are substantially similar to the initial term, renewal options, and lease rate of 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 entered into in October 2016.
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 MEDIAN, pursuant to a third master lease that has a fixed term ending in August 2043 with annual escalators at the greater of 1% or 70% of the change in German CPI. 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. This property is leased to MEDIAN pursuant to the original master lease agreement effective in 2015 and expiring December 2042 with annual escalators at the greater of 1% or 70% of the change in German CPI.
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 acquire in September 2016 for an aggregate amount of €44.1 million. This property is leased to MEDIAN, pursuant to the original long-term master lease agreement reached with MEDIAN in 2015 and as described above.
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”), 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 operated by Alecto. 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.
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.
Development Activities
During the first nine months of 2018, we completed the construction on Ernest Flagstaff. This $25.5 million inpatient rehabilitation facility located in Flagstaff, Arizona opened on March 1, 2018 and is being leased to Ernest pursuant to a stand-alone lease, with terms similar to the original master lease.
14
See table below for a status update on our curr
ent development projects (in thousands):
Property
|
|
Commitment
|
|
|
Costs Incurred as of
September 30, 2018
|
|
|
Estimated
Rent
Commencement
Date
|
Circle Health (Birmingham, England)
|
|
$
|
44,228
|
|
|
$
|
24,113
|
|
|
1Q 2019
|
Circle Health Rehabilitation (Birmingham, England)
|
|
|
21,973
|
|
|
|
5,304
|
|
|
3Q 2019
|
Surgery Partners (Idaho Falls, Idaho)
|
|
|
113,468
|
|
|
|
30,379
|
|
|
1Q 2020
|
|
|
$
|
179,669
|
|
|
$
|
59,796
|
|
|
|
Disposals
2018 Activity
On August 31, 2018, we completed the previously described joint venture arrangement with Primotop, in which we contributed the real estate of 71 of our post-acute hospitals in Germany, with a fair value of approximately €1.635 billion, resulting in a gain of approximately €500 million. See “Acquisitions” in this Note 3 for further details on this transaction.
On August 31, 2018, we sold a general acute care hospital located in Houston, Texas that was leased and operated by North Cypress for $148 million. The transaction resulted in a gain on sale of $102.4 million, which was partially offset by a net $2.5 million non-cash charge to revenue to write-off related straight-line rent receivables.
On June 4, 2018, we sold three long-term acute care hospitals located in California, Texas, and Oregon, that were leased and operated by Vibra Healthcare, LLC (“Vibra”), which included our equity investment in operations of the Texas facility. Total proceeds from the transaction were $53.3 million in cash, a mortgage loan in the amount of $18.3 million, and a $1.5 million working capital loan. The transaction resulted in a gain on real estate of $24.2 million, which was partially offset by a $5.1 million non-cash charge to revenue to write-off related straight-line rent receivables.
On March 1, 2018, we sold the real estate of St. Joseph Medical Center in Houston, Texas, for approximately $148 million to Steward. In return, we received a mortgage loan equal to the purchase price, with such loan secured by the underlying real estate. The mortgage loan had terms consistent with the other mortgage loans in the Steward portfolio. This transaction resulted in a gain of $1.5 million, offset by a $1.7 million non-cash charge to revenue to write-off related straight-line rent receivables on this property.
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.
Summary of Operations for Disposed Assets in 2018
The properties sold during 2018
do not meet the definition of discontinued operations. However, the following represents the operating results from these properties (excluding the St. Joseph sale in March 2018) for the periods presented (in thousands):
|
|
For the Three Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues(1)
|
|
$
|
20,115
|
|
|
$
|
35,846
|
|
|
$
|
88,838
|
|
|
$
|
95,320
|
|
Real estate depreciation and amortization(2)
|
|
|
(237
|
)
|
|
|
(8,786
|
)
|
|
|
(15,849
|
)
|
|
|
(23,092
|
)
|
Property-related expenses
|
|
|
(265
|
)
|
|
|
(388
|
)
|
|
|
(531
|
)
|
|
|
(394
|
)
|
Other(3)
|
|
|
692,362
|
|
|
|
(3,303
|
)
|
|
|
715,246
|
|
|
|
(11,211
|
)
|
Income from real estate dispositions, net
|
|
$
|
711,975
|
|
|
$
|
23,369
|
|
|
$
|
787,704
|
|
|
$
|
60,623
|
|
|
(1)
|
Includes $2.5 million and $7.6 million of straight-line rent and other write-offs associated with the disposal transactions for the three and nine months ended September 30, 2018, respectively.
|
|
(2)
|
Lower in 2018 as we stopped depreciation on properties once deemed held for sale, such as with the 71 properties on June 30, 2018.
|
|
(3)
|
Includes $695.2 million of gains on sale for the three months ended September 30, 2018 and $719.4 million for the nine months ended September 30, 2018.
|
15
Leasing Operations
At September 30, 2018, leases on 14 Ernest facilities, ten Prime Healthcare Services, Inc. (“Prime”) facilities, and two Alecto facilities are accounted for as direct financing leases (“DFLs”). The components of our net investment in DFLs consisted of the following (in thousands):
|
|
As of September 30, 2018
|
|
|
As of December 31, 2017
|
|
Minimum lease payments receivable
|
|
$
|
2,190,840
|
|
|
$
|
2,294,081
|
|
Estimated residual values
|
|
|
434,769
|
|
|
|
448,339
|
|
Less: Unearned income
|
|
|
(1,934,712
|
)
|
|
|
(2,043,693
|
)
|
Net investment in direct financing leases
|
|
$
|
690,897
|
|
|
$
|
698,727
|
|
On March 15, 2018, we entered into a new lease agreement of our long-term acute care facility in Boise, Idaho with a joint venture formed by Vibra and Ernest. The new lease has an initial 15-year fixed term (ending March 2033) with three extension options of five years each. With this transaction, we incurred a non-cash charge of $1.5 million to write-off DFL unbilled interest associated with the previous lease to Ernest on this property.
Adeptus Health – Transition Properties
As noted in previous filings, we have 16 properties transitioning away from Adeptus Health in stages over a two year period as part of Adeptus Health’s confirmed plan of reorganization under Chapter 11 of the Bankruptcy Code. Through October 1, 2018, Adeptus Health vacated and stopped making rent payments on 15 properties. As a result of the shortening of our lease term on these properties, we recorded a $4 million charge to accelerate the amortization of the straight-line rent receivables in the first nine months of 2018. The final property will be transitioned away from Adeptus Health on October 1, 2019.
In August and early October 2018, we re-leased three of the vacant facilities in the Houston market and five in the San Antonio market, respectively, at rates consistent with that of the previous Adeptus Health lease. At September 30, 2018, our investment in the remaining eight transition facilities (that have not been re-leased) approximates less than 1% of our total assets. Although we expect to re-tenant and/or sell the remaining eight facilities in the near future, we lowered the carrying value of the seven remaining vacant facilities by $18 million to fair value in the three months ended September 30, 2018, based on market data received during the 2018 third quarter.
Gilbert and Florence Facilities
In the first quarter of 2018, we terminated the lease at our Gilbert and Florence, Arizona facilities due to the tenant not meeting its rent obligations pursuant to the lease. As a result of the lease terminating, we recorded a charge of $1.1 million to reserve against the straight-line rent receivables in February 2018. On April 25, 2018, this former tenant filed for involuntary bankruptcy. At September 30, 2018, all outstanding receivables were completely reserved. Although no assurances can be made that we will not have any impairment charges in the future, we believe our investment in the Gilbert and Florence facilities of $37.5 million or 0.4% of total assets at September 30, 2018, is fully recoverable.
Alecto Healthcare facilities
At September 30, 2018, we own four acute care facilities that are leased to Alecto and have a mortgage loan on a fifth property. Our total investment in these properties is approximately 1% of our total assets. Through October 2018, Alecto is current on its rent and interest obligations to us. However, we have seen continued softening in their markets through the 2018 third quarter, which could impact their ability to meet future obligations to us. Thus, in the 2018 third quarter, we lowered the carrying value of the four owned properties by $30 million to fair value.
16
Loans
The following is a summary of our loans (in thousands):
|
|
As of September 30, 2018
|
|
|
As of December 31, 2017
|
|
Mortgage loans
|
|
$
|
1,428,069
|
|
|
$
|
1,778,316
|
|
Acquisition loans
|
|
|
117,376
|
|
|
|
118,448
|
|
Working capital and other loans
|
|
|
365,077
|
|
|
|
31,761
|
|
|
|
$
|
1,910,522
|
|
|
$
|
1,928,525
|
|
The decrease in mortgage loans relates to the use of four Steward mortgage loans to fund our acquisition of the related fee simple real estate of the four facilities during 2018, while the increase to working capital and other loans primarily relates to our €290 million shareholder loan to the joint venture with Primotop – see “Acquisitions” in this Note 3 for further information. At September 30, 2018, acquisition loans includes $113.3 million in loans to Ernest; however, as described in Note 10, the full Ernest acquisition loan balance was repaid on October 4, 2018.
Concentrations of Credit Risk
We monitor concentration risk in several ways due to the nature of our real estate assets that are vital to the communities in which they are located and given our history of being able to replace inefficient operators of our facilities if needed, with more effective operators:
|
1)
|
Facility concentration – At September 30, 2018, we had no investment of any single property greater than 4% of our total assets, which is consistent with December 31, 2017.
|
|
2)
|
Operator concentration – For the nine months ended September 30, 2018, revenue from Steward, Prime, MEDIAN, and Ernest represented 37%, 16%, 16% and 9%, respectively. In comparison, these operators represented 23%, 19%, 15% and 11%, respectively, for the first nine months of 2017.
|
|
3)
|
Geographic concentration – At September 30, 2018, investments in the U.S. and Europe represented approximately 80% and 20%, respectively, of our total assets, which is consistent with December 31, 2017.
|
|
4)
|
Facility type concentration – For the nine months ended September 30, 2018, approximately 72% of our revenues are from our general acute care facilities, while rehabilitation and long-term acute care facilities make up 24% and 4%, respectively. These percentages are similar to those for the first nine months of 2017.
|
4. Debt
The following is a summary of our debt (in thousands):
|
|
As of
September 30,
2018
|
|
|
As of
December 31,
2017
|
|
Revolving credit facility(A)
|
|
$
|
22,153
|
|
|
$
|
840,810
|
|
Term loan
|
|
|
200,000
|
|
|
|
200,000
|
|
4.000% Senior Unsecured Notes due 2022(B)
|
|
|
580,200
|
|
|
|
600,250
|
|
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)
|
|
|
580,200
|
|
|
|
600,250
|
|
5.250% Senior Unsecured Notes due 2026
|
|
|
500,000
|
|
|
|
500,000
|
|
5.000% Senior Unsecured Notes due 2027
|
|
|
1,400,000
|
|
|
|
1,400,000
|
|
|
|
$
|
4,082,553
|
|
|
$
|
4,941,310
|
|
Debt issue costs, net
|
|
|
(38,704
|
)
|
|
|
(42,643
|
)
|
|
|
$
|
4,043,849
|
|
|
$
|
4,898,667
|
|
(A)
|
Includes £17 million and £8 million of GBP-denominated borrowings that reflect the exchange rate at September 30, 2018 and December 31, 2017, respectively.
|
(B)
|
These notes are Euro-denominated and reflect the exchange rate at September 30, 2018 and December 31, 2017, respectively.
|
17
As of
September 30, 2018
, principal payments due on our debt (which exclude the effects of any discounts, premiums, or debt issue cost
s recorded) are as follows (in thousands):
2018
|
|
$
|
-
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
2021
|
|
|
22,153
|
|
2022
|
|
|
780,200
|
|
Thereafter
|
|
|
3,280,200
|
|
Total
|
|
$
|
4,082,553
|
|
2018 Activity
In preparation of the joint venture with Primotop described under “Acquisitions” in Note 3, we issued secured debt on August 3, 2018, resulting in gross proceeds of €655 million. Subsequently, on August 31, 2018, the secured debt was contributed along with the related real estate of 71 properties to form the joint venture. Provisions of the secured debt include a term of seven years and a swapped fixed rate of approximately 2.3%.
2017 Activity
On February 1, 2017, we replaced our previous unsecured credit facility with a new revolving credit and term loan agreement (“Credit Facility”). The Credit Facility includes a $1.3 billion unsecured revolving loan facility, a $200 million unsecured term loan facility ($50 million lower than the previous term loan), and a new €200 million unsecured term loan facility.
On March 4, 2017, we redeemed the €200 million aggregate principal amount of our 5.750% Senior Unsecured Notes due 2020.
On March 24, 2017, we completed a €500 million senior unsecured notes offering (“3.325% Senior Unsecured Notes due 2025”). A portion of the proceeds from this offering were used to prepay and extinguish the €200 million term loan facility portion of our Credit Facility on March 30, 2017.
On September 7, 2017, we completed a $1.4 billion senior unsecured notes offering (“5.000% Senior Unsecured Notes due 2027”). 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 on October 7, 2017.
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.
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.
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 September 30, 2018, the dividend restriction was 95% of normalized adjusted funds from operations (“NAFFO”). The indentures governing our senior unsecured notes also limit the amount of dividends we can pay based on the sum of 95% of NAFFO, proceeds of equity issuances and certain other net cash proceeds. Finally, our senior unsecured notes require us to maintain total unencumbered assets (as defined in the related indenture) of not less than 150% of our unsecured indebtedness.
18
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 lev
erage ratio, consolidated adjusted net worth, unsecured leverage ratio, and unsecur
ed interest coverage ratio. The
Credit Facility also contains customary events of default, including among others, nonpayment of principal or interest, material inaccuracy o
f 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, 2018
, we were in compliance with
all such financial and operating covenants.
5. Common Stock/Partners’ Capital
Medical Properties Trust, Inc.
On May 1, 2017, we completed an underwritten public offering of approximately 43.1 million shares (including the exercise of the underwriters’ 30-day option to purchase an additional 5.6 million shares) of our common stock, resulting in net proceeds of approximately $548 million, after deducting offering expenses.
MPT Operating Partnership, L.P.
At September 30, 2018, the Company has a 99.92% ownership interest in the Operating Partnership with the remainder owned by two other partners, who are employees.
During the nine months ended September 30, 2017, the Operating Partnership issued approximately 43.1 million units in direct response to the common stock offerings by Medical Properties Trust, Inc. during the same period.
6. Stock Awards
We adopted the 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, out of which 1,697,002 shares remain available for future stock awards as of September 30, 2018. Share-based compensation expense totaled $11.7 million and $7.1 million for the nine months ended September 30, 2018 and 2017, respectively.
7. Fair Value of Financial Instruments
We have various assets and liabilities that are considered financial instruments. We estimate that the carrying value of cash and cash equivalents and accounts payable and accrued expenses approximate their fair values. We estimate the fair value of our interest and rent receivables using Level 2 inputs such as discounting the estimated future cash flows using the current rates at which similar receivables would be made to others with similar credit ratings and for the same remaining maturities. The fair value of our mortgage loans and 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 loan using Level 2 inputs based on the present value of future payments, discounted at a rate which we consider appropriate for such debt.
Fair value estimates are made at a specific point in time, are subjective in nature, and involve uncertainties and matters of significant judgment. Settlement of such fair value amounts may not be possible and may not be a prudent management decision. The following table summarizes fair value estimates for our financial instruments (in thousands):
|
|
As of
|
|
|
As of
|
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Asset (Liability)
|
|
Book
Value
|
|
|
Fair
Value
|
|
|
Book
Value
|
|
|
Fair
Value
|
|
Interest and rent receivables
|
|
$
|
87,939
|
|
|
$
|
87,067
|
|
|
$
|
78,970
|
|
|
$
|
78,028
|
|
Loans (1)
|
|
|
1,681,562
|
|
|
|
1,700,346
|
|
|
|
1,698,471
|
|
|
|
1,722,101
|
|
Debt, net
|
|
|
(4,043,849
|
)
|
|
|
(4,087,207
|
)
|
|
|
(4,898,667
|
)
|
|
|
(5,073,707
|
)
|
19
|
(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 currently existing equity interests or loans.
At September 30, 2018, these amounts were as follows (in thousands):
Asset Type
|
|
Fair
Value
|
|
|
Original
Cost
|
|
|
Asset Type
Classification
|
Mortgage loans
|
|
$
|
115,000
|
|
|
$
|
115,000
|
|
|
Mortgage loans
|
Equity investment and other loans
|
|
|
108,373
|
|
|
|
117,260
|
|
|
Other loans/other assets
|
|
|
$
|
223,373
|
|
|
$
|
232,260
|
|
|
|
Our equity investment and other loans with Ernest are recorded at fair value using a Level 1 input based on the proceeds of the October 4, 2018 transaction in which such equity investment was sold and such loans were repaid, as more fully described in Note 10 to this Form 10-Q. Our mortgage loans are recorded at fair value based on Level 2 inputs by discounting the estimated future cash flows using the market rates which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities. Because the fair value of the Ernest investments noted above is below our original cost, we recognized an unrealized loss during the nine months of 2018. No unrealized gain/loss on the Ernest investments was recorded in the first nine months of 2017.
8. 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 September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
736,476
|
|
|
$
|
76,881
|
|
Non-controlling interests’ share in net income
|
|
|
(442
|
)
|
|
|
(417
|
)
|
Participating securities’ share in earnings
|
|
|
(290
|
)
|
|
|
(82
|
)
|
Net income, less participating securities’ share in
earnings
|
|
$
|
735,744
|
|
|
$
|
76,382
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares
|
|
|
365,024
|
|
|
|
364,315
|
|
Dilutive potential common shares
|
|
|
1,443
|
|
|
|
731
|
|
Dilutive weighted-average common shares
|
|
|
366,467
|
|
|
|
365,046
|
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
939,536
|
|
|
$
|
218,862
|
|
Non-controlling interests’ share in net income
|
|
|
(1,334
|
)
|
|
|
(1,013
|
)
|
Participating securities’ share in earnings
|
|
|
(808
|
)
|
|
|
(307
|
)
|
Net income, less participating securities’ share in
earnings
|
|
$
|
937,394
|
|
|
$
|
217,542
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares
|
|
|
364,934
|
|
|
|
345,076
|
|
Dilutive potential common shares
|
|
|
850
|
|
|
|
520
|
|
Dilutive weighted-average common shares
|
|
|
365,784
|
|
|
|
345,596
|
|
20
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,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
736,476
|
|
|
$
|
76,881
|
|
Non-controlling interests’ share in net income
|
|
|
(442
|
)
|
|
|
(417
|
)
|
Participating securities’ share in earnings
|
|
|
(290
|
)
|
|
|
(82
|
)
|
Net income, less participating securities’ share in
earnings
|
|
$
|
735,744
|
|
|
$
|
76,382
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted-average units
|
|
|
365,024
|
|
|
|
364,315
|
|
Dilutive potential units
|
|
|
1,443
|
|
|
|
731
|
|
Diluted weighted-average units
|
|
|
366,467
|
|
|
|
365,046
|
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
939,536
|
|
|
$
|
218,862
|
|
Non-controlling interests’ share in net income
|
|
|
(1,334
|
)
|
|
|
(1,013
|
)
|
Participating securities’ share in earnings
|
|
|
(808
|
)
|
|
|
(307
|
)
|
Net income, less participating securities’ share in
earnings
|
|
$
|
937,394
|
|
|
$
|
217,542
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted-average units
|
|
|
364,934
|
|
|
|
345,076
|
|
Dilutive potential units
|
|
|
850
|
|
|
|
520
|
|
Diluted weighted-average units
|
|
|
365,784
|
|
|
|
345,596
|
|
9. Commitments and Contingencies
Commitments
On June 6, 2018, we entered into a definitive agreement to acquire four rehabilitation hospitals in Germany for a purchase price of approximately €23 million (including real estate transfer taxes). We have closed on three of the facilities during the third quarter of 2018, with the remaining facility expected to close in the fourth quarter of 2018 for approximately €5.8 million (including real estate transfer taxes). See Note 3 “Acquisitions” for more details on this transaction.
Contingencies
We are a party to various legal proceedings incidental to our business. In the opinion of management, after consultation with legal counsel, the ultimate liability, if any, with respect to those proceedings is not presently expected to materially affect our financial position, results of operations or cash flows.
10. Subsequent Events
On October 4, 2018, we finalized a recapitalization agreement to sell our investment in the operations of Ernest Health Holdings, LLC and be repaid for our outstanding acquisition loans, working capital loans, and any unpaid interest. Total proceeds received from this transaction approximated $176 million. We will retain ownership of the real estate and secured mortgage loans of our Ernest properties.
21