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MPW > SEC Filings for MPW > Form 10-Q on 9-Aug-2012All Recent SEC Filings

Show all filings for MEDICAL PROPERTIES TRUST INC

Form 10-Q for MEDICAL PROPERTIES TRUST INC


9-Aug-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the consolidated financial condition and consolidated results of operations are presented on a combined basis for Medical Properties Trust, Inc. and MPT Operating Partnership, L.P. as there are no material differences between these two entities.

The discussion and analysis of the consolidated financial condition and consolidated results of operations should be read together with the condensed consolidated financial statements and notes thereto contained in this Form 10-Q and the financial statements and notes thereto contained in our Annual Report on Form 10-K (as amended) for the year ended December 31, 2011.

Forward-Looking Statements.

This report on Form 10-Q contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or future performance, achievements or

transactions or events to be materially different from those expressed or implied by such forward-looking statements, including, but not limited to, the risks described in our Annual Report on Form 10-K for the year ended December 31, 2011, as amended, filed with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. Such factors include, among others, the following:

national and local economic, business, real estate and other market conditions;

the competitive environment in which we operate;

the execution of our business plan;

financing risks;

acquisition and development risks;

potential environmental contingencies and other liabilities;

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

our ability to maintain our status as a REIT for federal and state income tax purposes;

our ability to attract and retain qualified personnel;

federal and state healthcare regulatory requirements; and

the continuing impact of the recent economic recession, which may have a negative effect on the following, among other things:

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

our ability to obtain equity and debt financing on attractive terms or at all, which may adversely impact our ability to pursue acquisition and development opportunities and our future interest expense; and

the value of our real estate assets, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing secured by our properties or on an unsecured basis.

Key Factors that May Affect Our Operations

Our revenues are derived primarily from rents we earn pursuant to the lease agreements with our tenants and from interest income from loans to our tenants and other facility owners. Our tenants operate in the healthcare industry, generally providing medical, surgical and rehabilitative care to patients. The capacity of our tenants to pay our rents and interest is dependent upon their ability to conduct their operations at profitable levels. We believe that the business environment of the industry segments in which our tenants operate is generally positive for efficient operators. However, our tenants' operations are subject to economic, regulatory and market conditions that may affect their profitability. Accordingly, we monitor certain key factors, changes to which we believe may provide early indications of conditions that may affect the level of risk in our lease and loan portfolio.

Key factors that we consider in underwriting prospective tenants and borrowers and in monitoring the performance of existing tenants and borrowers include the following:


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

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

trends in the source of our tenants' or borrowers' revenue, including the relative mix of Medicare, Medicaid/MediCal, managed care, commercial insurance, and private pay patients; and

the effect of evolving healthcare regulations on our tenants' and borrowers' profitability, including recent healthcare reform and legislation.

Certain business factors, in addition to those described above that directly affect our tenants and borrowers, will likely materially influence our future results of operations. These factors include:

trends in the cost and availability of capital, including market interest rates, that our prospective tenants may use for their real estate assets instead of financing their real estate assets through lease structures;

changes in healthcare regulations that may limit the opportunities for physicians to participate in the ownership of healthcare providers and healthcare real estate;

reductions in reimbursements from Medicare, state healthcare programs, and commercial insurance providers that may reduce our tenants' profitability and our lease rates;

competition from other financing sources; and

the ability of our tenants and borrowers to access funds in the credit markets.

CRITICAL ACCOUNTING POLICIES

Refer to our 2011 Annual Report on Form 10-K, as amended, for a discussion of our critical accounting policies, which include revenue recognition, investment in real estate, purchase price allocation, loans, losses from rent receivables, stock-based compensation, exchangeable senior notes, and our accounting policy on consolidation. During the six months ended June 30, 2012, there were no material changes to these policies, except we began using direct finance lease ("DFL") accounting with the acquisition and lease of the real estate of Ernest. Under DFL accounting, future minimum lease payments are recorded as a receivable. Unearned income, which represents the net investment in the DFL less the sum of minimum lease payments receivable and the estimated residual values of the leased properties, is deferred and amortized to income over the lease term to provide a constant yield when collectability of the lease payments is reasonably assured. Investments in DFLs are presented net of unamortized and unearned income. DFLs are placed on non-accrual status when management determines that the collectability of contractual amounts is not reasonably assured. While on non-accrual status, DFLs are accounted for on a cash basis, in which income is recognized only upon receipt of cash.

Overview

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

At June 30, 2012, our portfolio consisted of 79 properties: 67 facilities (of the 73 facilities that we own, of which two are subject to long-term ground leases) are leased to 21 tenants, one was not under lease as it is under re-development, five were under development, and the remaining assets are in the form of first mortgage loans to two operators. Our owned and ground leased facilities consisted of 27 general acute care hospitals, 27 long-term acute care hospitals, 17 inpatient rehabilitation hospitals, two medical office buildings, and six wellness centers. The non-owned facilities on which we have made mortgage loans consisted of general acute care facilities.

All of our investments are currently located in the United States. The following is our revenue by operating type (dollar amounts in thousands):


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Revenue by property type:

                                           For the Three                        For the Three
                                           Months Ended                         Months Ended
                                             June 30,            % of             June 30,          % of
                                               2012              Total              2011            Total
General Acute Care Hospitals              $        25,566          50.1 %      $        22,536        64.5 %
Long-term Acute Care Hospitals                     14,003          27.4 %                8,032        23.0 %
Rehabilitation Hospitals                           10,640          20.8 %                3,540        10.1 %
Medical Office Buildings                              446           0.9 %                  433         1.2 %
Wellness Centers                                      415           0.8 %                  415         1.2 %

Total revenue                             $        51,070         100.0 %      $        34,956       100.0 %


                                           For the Six                           For the Six
                                           Months Ended                         Months Ended
                                             June 30,            % of             June 30,          % of
                                               2012              Total              2011            Total
General Acute Care Hospitals              $        50,191          53.4 %      $        43,032        62.5 %
Long-term Acute Care Hospitals                     26,292          28.0 %               17,057        24.8 %
Rehabilitation Hospitals                           15,739          16.7 %                7,077        10.3 %
Medical Office Buildings                              891           1.0 %                  866         1.2 %
Wellness Centers                                      830           0.9 %                  830         1.2 %

Total revenue                             $        93,943         100.0 %      $        68,862       100.0 %

We have 30 employees as of August 4, 2012. We believe that any currently anticipated increase in the number of our employees will have only immaterial effects on our operations and general and administrative expenses. We believe that our relations with our employees are good. None of our employees are members of any union.

Results of Operations

Three Months Ended June 30, 2012 Compared to June 30, 2011

Net income for the three months ended June 30, 2012 was $19.3 million, compared to $2.6 million for the three months ended June 30, 2011. Funds from operations ("FFO"), after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $29.7 million, or $0.22 per diluted share for the 2012 second quarter as compared to $17.5 million, or $0.16 per diluted share for the 2011 second quarter. These increases were primarily the result of the acquisitions made subsequent to June 2011, partially offset by higher interest costs to fund such acquisitions.

A comparison of revenues for the three month periods ended June 30, 2012 and 2011 is as follows, as adjusted in 2011 for discontinued operations (dollar amounts in thousands):

                                                                                                   Year over
                                                            % of                      % of           Year
                                                2012        Total         2011        Total         Change
Base rents                                    $ 31,835        62.4 %    $ 26,825        76.7 %           18.7 %
Straight-line rents                              1,428         2.8 %       2,045         5.9 %          (30.2 )%
Percentage rents                                   888         1.7 %         817         2.3 %            8.7 %
Fee income                                          22          -  %          36         0.1 %          (38.9 )%
Income from direct financing leases              5,371        10.5 %          -           -  %          100.0 %
Interest from loans                             11,526        22.6 %       5,233        15.0 %          120.3 %

Total revenue                                 $ 51,070       100.0 %    $ 34,956       100.0 %           46.1 %

Base rents for the 2012 second quarter increased 18.7% versus the prior year as a result of the additional rent generated from annual escalation provisions in our leases and $2.2 million of incremental revenue from properties acquired in 2011. In addition, we had a $1.5 million adjustment to reserve for outstanding receivables on our Denham Springs facility in 2011. Income from direct financing leases is solely related to the Ernest Transaction. Interest from loans is higher than the prior year due to the $6 million and $0.5 million of additional interest related to the Ernest and Hoboken loans, respectively.

Real estate depreciation and amortization during the second quarter of 2012 increased to $8.8 million from $7.9 million in 2011, due to the incremental depreciation from the properties acquired since June 2011.

In the 2011 second quarter, we recognized a $0.6 million real estate impairment charge related to our Denham Springs facility. No such charge was recorded in 2012.


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General and administrative expenses totaled $6.7 million for the 2012 second quarter, which is 13.1% of total revenues, down from 22.4% of revenues in the prior year second quarter. The drop in general and administrative expenses as a percentage of revenue is primarily due to our business model as we can generally increase our revenues substantially without significantly increasing our headcount and related expenses.

In the 2012 second quarter, we recognized $0.9 million of earnings from equity and other interests in certain of our tenants, which is virtually a 100% increase over the prior year.

Interest expense for the quarters ended June 30, 2012 and 2011 totaled $14.9 million and $16.2 million, respectively. This decrease is primarily related to the debt refinancing costs in 2011 of $3.9 million partially offset by higher debt balances associated with our 2012 Senior Unsecured Notes and 2012 Term Loan. See Note 4 to our Condensed Consolidated Financial Statements in Item 1 to this Form 10-Q for further information on our debt activities.

In addition to the items noted above, net income for the second quarter in both years was impacted by discontinued operations. See Note 8 to our Condensed Consolidated Financial Statements in Item 1 to this Form 10-Q for further information.

Six Months Ended June 30, 2012 Compared to June 30, 2011

Net income for the six months ended June 30, 2012, was $29.9 million compared to net income of $13.4 million for the six months ended June 30, 2011. FFO, after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $52.2 million, or $0.40 per diluted share for the first six months in 2012 as compared to $37.9 million, or $0.34 per diluted share for 2011. These increases are primarily the result of the acquisitions made since June 2011, partially offset by higher interest costs to fund such acquisitions.

A comparison of revenues for the six month periods ended June 30, 2012 and 2011 is as follows (dollar amounts in thousands):

                                                                                                   Year over
                                                            % of                      % of           Year
                                                2012        Total         2011        Total         Change
Base rents                                    $ 62,986        67.0 %    $ 53,247        77.3 %           18.3 %
Straight-line rents                              2,876         3.1 %       3,755         5.5 %          (23.4 )%
Percentage rents                                 1,384         1.5 %       1,309         1.9 %            5.7 %
Fee income                                         156         0.2 %         101         0.1 %           54.5 %
Income from direct financing leases              7,206         7.6 %          -           -  %          100.0 %
Interest from loans                             19,335        20.6 %      10,450        15.2 %           85.0 %

Total revenue                                 $ 93,943       100.0 %    $ 68,862       100.0 %           36.4 %

Base rents for the 2012 first two quarters increased 18.3% versus the prior year as a result of the additional rent generated from annual escalation provisions in our leases, and $6.1 million of incremental revenue from the properties acquired in 2011. This more than offset the $1.5 million adjustment to reserve for outstanding receivables on our Denham Springs facility in the 2011 second quarter. Income from direct financing leases is solely related to the Ernest Transaction. Interest from loans is higher than the prior year due to the $7.7 million and $0.9 million of additional interest related to the Ernest and Hoboken loans, respectively.

Acquisition expenses increased from $2.7 million to $3.7 million as a result of the Ernest Transaction in 2012.

Real estate depreciation and amortization during the first six months of 2012 was $17.4 million, compared to $15.3 million in 2011 due to the incremental depreciation from the properties acquired since June 2011.

In the 2011 second quarter, we recognized a $0.6 million real estate impairment charge related to our Denham Springs facility. No similar charges were recorded in the first six months of 2012.


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General and administrative expenses in the first two quarters of 2012 totaled $14.3 million, which is 15.2% of revenues down from 21.3% of revenues in the prior year as revenues are up significantly over the prior year due to the acquisitions.

In the 2012 second quarter, we recognized $0.9 million of earnings from equity and other interests in certain of our tenants, which is up significantly over the 2012 first quarter and the first six months of 2012.

Interest expense (including debt refinancing costs) for the first six months of 2012 and 2011 totaled $27.7 million and $24.3 million, respectively. In 2011, we recorded a charge of $3.9 million related to our debt refinancing activities. This increase is primarily related to higher debt balances associated with our 2012 Senior Unsecured Notes and 2012 Term Loan. See Note 4 to our Condensed Consolidated Financial Statements in Item 1 to this Form 10-Q for further information on our debt activities.

In addition to the items noted above, net income for the six month periods of 2012 and 2011 was impacted by discontinued operations. See Note 8 to our Condensed Consolidated Financial Statements in Item 1 to this Form 10-Q for further information.

Reconciliation of Non-GAAP Financial Measures

Investors and analysts following the real estate industry utilize funds from operations, or FFO, as a supplemental performance measure. FFO, reflecting the assumption that real estate asset values rise or fall with market conditions, principally adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assumes that the value of real estate diminishes predictably over time. We compute FFO in accordance with the definition provided by the National Association of Real Estate Investment Trusts, or NAREIT, which represents net income (loss) (computed in accordance with GAAP), excluding gains (losses) on sales of real estate and impairment charges on real estate assets, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.

In addition to presenting FFO in accordance with the NAREIT definition, we also disclose normalized FFO, which adjusts FFO for items that relate to unanticipated or non-core events or activities or accounting changes that, if not noted, would make comparison to prior period results and market expectations less meaningful to investors and analysts.

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

The following table presents a reconciliation of FFO to net income attributable to MPT common stockholders for the three and six months ended June 30, 2012 and 2011 ($ amounts in thousands except per share data):

                                           For the Three Months Ended            For the Six Months Ended
                                           June 30,            June 30,          June 30,          June 30,
                                             2012                2011              2012              2011
FFO information:
Net income attributable to MPT common
stockholders                             $      19,316         $   2,640       $     29,880        $  13,419
Participating securities' share in
earnings                                          (238 )            (282 )             (490 )           (597 )

Net income, less participating
securities' share in earnings            $      19,078         $   2,358       $     29,390        $  12,822
Depreciation and amortization:
Continuing operations                            8,788             7,915             17,420           15,346
Discontinued operations                             76               440                191              902
Loss (gain) on sale of real estate               1,446                -               1,446               (5 )
Real estate impairment charge                       -                564                 -               564

Funds from operations                    $      29,388         $  11,277       $     48,447        $  29,629
Acquisition costs                                  279               616              3,704            2,656
Debt refinancing costs                              -              3,789                 -             3,789
Write-off of other receivables                      -              1,846                 -             1,846

Normalized funds from operations         $      29,667         $  17,528       $     52,151        $  37,920

Per diluted share data:
Net income, less participating
securities' share in earnings            $        0.14         $    0.02       $       0.23        $    0.12
Depreciation and amortization:
Continuing operations                             0.07              0.07               0.13             0.14


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                                            For the Three Months Ended              For the Six Months Ended
                                          June 30,              June 30,           June 30,          June 30,
                                            2012                  2011               2012              2011
Discontinued operations                            -                     -                 -                 -
Real estate impairment charge                      -                   0.01                -               0.01
Loss (gain) on sale of real estate               0.01                    -               0.01                -

Funds from operations                   $        0.22         $        0.10       $      0.37       $      0.27
Acquisition costs                                  -                   0.01              0.03              0.02
Debt refinancing costs                             -                   0.03                -               0.03
Write-off of other receivables                     -                   0.02                -               0.02

Normalized funds from operations        $        0.22         $        0.16       $      0.40       $      0.34


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Disclosure of Contractual Obligations

The following table summarizes known material contractual obligations as of
June 30, 2012 (amounts in thousands):



                                        Less Than                                      After
Contractual Obligations                   1 Year       1-3 Years      3-5 Years       5 Years         Total
2006 senior unsecured notes (1)         $    6,985     $   13,969     $  134,555     $      -      $   155,509
Exchangeable senior notes                   12,018             -              -             -           12,018
2011 and 2012 senior unsecured notes        43,688         87,375         87,375       837,500       1,055,938
Revolving credit facility (2)                2,000          4,000            667            -            6,667
Term loans                                   3,669          7,339        104,026        13,417         128,451
Operating lease commitments (3)              2,562          4,077          3,898        47,976          58,513

Purchase obligations (4)                    70,237             -              -             -           70,237

Totals                                  $  141,159     $  116,760     $  330,521     $ 898,893     $ 1,487,333

(1) The interest rates on these notes are currently variable rates, but we entered into interest rate swaps to fix these interest rates until maturity. For $65 million of our $125 million Senior Notes, the rate is 5.507% and for . . .

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