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

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Form 10-Q for MEDICAL PROPERTIES TRUST INC


9-Nov-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 and as updated in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, 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:

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;


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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 nine months ended September 30, 2012, there were no material changes to these policies, except we began using direct financing lease ("DFL") accounting with the acquisition and lease of the real estate of Ernest along with that of the Reno and Roxborough facilities. 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 September 30, 2012, our portfolio consisted of 81 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 three operators. Our facilities consisted of 30 general acute care hospitals, 26 long-term acute care hospitals, 17 inpatient rehabilitation hospitals, two medical office buildings, and six wellness centers.


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

Revenue by property type:

                                          For the Three                        For the Three
                                          Months Ended                         Months Ended
                                          September 30,         % of           September 30,       % of
                                              2012              Total              2011            Total
General Acute Care Hospitals             $        29,219          54.5 %      $        21,987        63.5 %
Long-term Acute Care Hospitals                    13,576          25.3 %                8,257        23.8 %
Rehabilitation Hospitals                           9,947          18.5 %                3,540        10.2 %
Medical Office Buildings                             498           0.9 %                  433         1.3 %
Wellness Centers                                     415           0.8 %                  415         1.2 %

Total revenue                            $        53,655         100.0 %      $        34,632       100.0 %


                                          For the Nine                         For the Nine
                                          Months Ended                         Months Ended
                                          September 30,         % of           September 30,       % of
                                              2012              Total              2011            Total
General Acute Care Hospitals             $        79,410          54.8 %      $        65,020        63.7 %
Long-term Acute Care Hospitals                    37,307          25.7 %               23,937        23.4 %
Rehabilitation Hospitals                          25,685          17.7 %               10,617        10.4 %
Medical Office Buildings                           1,390           1.0 %                1,298         1.3 %
Wellness Centers                                   1,246           0.8 %                1,246         1.2 %

Total revenue                            $       145,038         100.0 %      $       102,118       100.0 %

We have 33 employees as of November 5, 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 labor union.

Results of Operations

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

Net income for the three months ended September 30, 2012 was $31.5 million, compared to $0.4 million for the three months ended September 30, 2011. This increase was primarily the result of acquisitions made subsequent to September 2011 and the refinancing charges that were incurred in 2011. Funds from operations ("FFO"), after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $33.4 million, or $0.25 per diluted share for the 2012 third quarter as compared to $19.5 million, or $0.18 per diluted share for the 2011 third quarter. These increases were primarily the result of the acquisitions made subsequent to September 2011.

A comparison of revenues for the three month periods ended September 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                                    $ 30,599        57.0 %    $ 27,283        78.8 %           12.2 %
Straight-line rents                              2,762         5.1 %       1,643         4.7 %           68.1 %
Percentage rents                                   484         0.9 %         477         1.4 %            1.5 %
Fee income                                         187        0.4  %          21         0.1 %          790.4 %
Income from direct financing leases              5,773        10.8 %          -           -  %          100.0 %
Interest from loans                             13,850        25.8 %       5,208        15.0 %          165.9 %

Total revenue                                 $ 53,655       100.0 %    $ 34,632       100.0 %           54.9 %

Base rents for the 2012 third quarter increased 12.2% versus the prior year as a result of the additional rent generated from annual escalation provisions in our leases and $2.8 million of incremental revenue from properties acquired or completed since September 2011. Income from direct financing leases is related to the Ernest Transaction and the Roxborough and Reno facilities.


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Interest from loans is higher than the prior year due to the $5.7 million and $2.6 million of additional interest related to the Ernest and Centinela loans, respectively.

Real estate depreciation and amortization during the third quarter of 2012 increased to $8.5 million from $7.7 million in the same period of 2011, due to the incremental depreciation from the properties acquired since September 2011.

General and administrative expenses totaled $7.1 million for the 2012 third quarter, which is 13.1% of total revenues, down from 16.6% of revenues in the prior year third 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. On a dollar basis, our general and administrative costs are up over the 2011 third quarter primarily due to higher travel costs.

In the 2012 third quarter, we recognized $1.1 million of earnings from equity and other interests in certain of our tenants, which is a substantial increase from the 2011 third quarter. This increase is primarily related to having a full three months of returns from certain equity investees along with improved results from each of our profit and equity interests.

Interest expense (including debt refinancing costs) for the quarters ended September 30, 2012 and 2011 totaled $15.0 million and $22.4 million, respectively. This decrease is primarily related to the debt refinancing costs in 2011 of $10.4 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 third quarter 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.

Nine Months Ended September 30, 2012 Compared to September 30, 2011

Net income for the nine months ended September 30, 2012, was $61.3 million compared to net income of $13.8 million for the nine months ended September 30, 2011. This increase was primarily related to acquisitions made subsequent to September 2011 and the debt refinancing charges that were incurred in 2011, partially offset by higher interest expense due to additional debt incurred in 2012. FFO, after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $85.5 million, or $0.65 per diluted share for the first nine months in 2012 as compared to $57.5 million, or $0.52 per diluted share for the first nine months of 2011. These increases are primarily the result of the acquisitions made since September 2011.

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

                                                                                                   Year over
                                                           % of                       % of           Year
                                              2012         Total         2011         Total         Change
Base rents                                  $  91,233        62.9 %    $  79,300        77.7 %           15.0 %
Straight-line rents                             5,473         3.8 %        5,318         5.2 %            2.9 %
Percentage rents                                1,867         1.3 %        1,786         1.7 %            4.5 %
Fee income                                        343         0.2 %           99         0.1 %          250.0 %
Income from direct financing leases            12,979         8.9 %           -           -  %          100.0 %
Interest from loans                            33,143        22.9 %       15,615        15.3 %          112.3 %

Total revenue                               $ 145,038       100.0 %    $ 102,118       100.0 %           42.0 %

Base rents for the 2012 first nine months of 2012 increased 15.0% versus the prior year as a result of the additional rent generated from annual escalation provisions in our leases and $10.5 million of incremental revenue from the properties acquired or completed since September 2011. Income from direct financing leases is solely related to the Ernest Transaction and the new Roxborough and Reno facilities. Interest from loans is higher than the prior year due to the $13.5 million, $1.4 million, and $2.6 million of additional interest related to the Ernest, Hoboken, and Centinela loans, respectively.

Acquisition expenses increased from $3.2 million to $4.1 million primarily as a result of the Ernest Transaction in 2012.

Real estate depreciation and amortization during the first nine months of 2012 was $25.4 million, compared to $22.5 million in the same period of 2011 due to the incremental depreciation from the properties acquired since September 2011.

General and administrative expenses in the first three quarters of 2012 totaled $21.3 million, which is 14.7% of revenues down from 20.0% of revenues in the prior year as revenues are up significantly over the prior year due to the acquisitions, while, on a dollar basis, our costs have been basically flat.

We recognized $1.9 million of earnings from equity and other interests in certain of our tenants in the first nine months of 2012, which is up significantly over the 2011 same period due to the timing of when these investments were made in the prior year along with improved results from each of our profit and equity investees during the first nine months of 2012.

Interest expense (including debt refinancing costs) for the first nine months of 2012 and 2011 totaled $42.7 million and $46.7 million, respectively. In 2011, we recorded a charge of $14.2 million related to our debt refinancing activities. This is 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.


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In addition to the items noted above, net income for the nine 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.


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

                                             For the Three Months Ended                   For the Nine Months Ended
                                       September 30,           September 30,         September 30,          September 30,
                                            2012                   2011                  2012                   2011
FFO information:
Net income attributable to MPT
common stockholders                    $       31,464         $           425       $        61,344        $        13,844
Participating securities' share in
earnings                                         (225 )                  (264 )                (715 )                 (860 )

Net income, less participating
securities' share in earnings          $       31,239         $           161       $        60,629        $        12,984
Depreciation and amortization:
Continuing operations                           8,491                   7,700                25,392                 22,508
Discontinued operations                           311                     729                 1,021                  2,169
Loss (gain) on sale of real estate             (8,726 )                    -                 (7,280 )                   (5 )
Real estate impairment charge                      -                       -                     -                     564

Funds from operations                  $       31,315         $         8,590       $        79,762        $        38,220
Write-off of straight line rent                 1,640                      -                  1,640                     -
Acquisition costs                                 410                     530                 4,115                  3,186
Debt refinancing costs                             -                   10,425                    -                  14,214
Write-off of other receivables                     -                       -                     -                   1,846

Normalized funds from operations       $       33,365         $        19,545       $        85,517        $        57,466

Per diluted share data:
Net income, less participating
securities' share in earnings          $         0.23         $            -        $          0.46        $          0.12
Depreciation and amortization:
Continuing operations                            0.06                    0.07                  0.19                   0.20
Discontinued operations                            -                     0.01                  0.01                   0.02
Real estate impairment charge                      -                       -                     -                    0.01
Loss (gain) on sale of real estate              (0.06 )                    -                  (0.05 )                   -

Funds from operations                  $         0.23         $          0.08       $          0.61        $          0.35
Write-off of straight line rent                  0.01                      -                   0.01                     -
Acquisition costs                                0.01                    0.01                  0.03                   0.03
Debt refinancing costs                             -                     0.09                    -                    0.13
Write-off of other receivables                     -                       -                     -                    0.01

Normalized funds from operations       $         0.25         $          0.18       $          0.65        $          0.52

LIQUIDITY AND CAPITAL RESOURCES

During the first nine months of 2012, operating cash flows, which primarily consisted of rent and interest from mortgage and working capital loans, were $74.7 million, which with cash on-hand, were principally used to fund our dividends of $76.8 million and working capital needs.

To fund the Ernest Transaction disclosed in Note 3 to our Condensed Consolidated Financial Statements in Item 1 to this Form 10-Q, on February 7, 2012, we completed an offering of 23,575,000 shares of our common stock (including 3,075,000 shares sold pursuant to the exercise in full of the underwriters' overallotment option), resulting in net proceeds (after underwriting discount) of $220.1 million. In addition, on February 17, 2012, we completed a $200 million offering of senior unsecured notes, resulting in net proceeds, after underwriting discount, of $196.5 million, which we also used to fund the Ernest Transaction. On March 9, 2012, we closed on a $100 million senior unsecured term loan facility and exercised the $70 million accordion feature on . . .

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