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MPW > SEC Filings for MPW > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for MEDICAL PROPERTIES TRUST INC


10-May-2013

Quarterly Report


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

As used herein, the terms "we," "us," "our", "MPT" and the "Company" refer to Medical Properties Trust, Inc., a Maryland corporation, individually or together with its consolidated subsidiaries.

The following 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 consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

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, 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 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

national and local economic conditions, 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.


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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;

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.

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 2012 Annual Report on Form 10-K, 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, our fair value option election, and our accounting policy on consolidation. During the three months ended March 31, 2013, there were no material changes to these policies.

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 March 31, 2013, our portfolio consisted of 83 properties: 71 facilities (of the 75 facilities that we own, of which three are subject to long-term ground leases) are leased to 23 tenants, four are under development, and the remainder are in the form of mortgage loans to three operators. Our owned facilities consisted of 27 general acute care hospitals, 24 long-term acute care hospitals, 16 inpatient rehabilitation hospitals, two medical office buildings, and six wellness centers. The non-owned facilities on which we have made mortgage loans consisted of three general acute care facilities, two long-term acute care hospitals, and three inpatient rehabilitation hospitals.


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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
                                             March 31,           % of             March 31,         % of
                                               2013              Total              2012            Total
General Acute Care Hospitals              $        33,084          56.6 %      $        24,272        59.7 %
Long-term Acute Care Hospitals                     13,935          23.9 %               11,036        26.3 %
Rehabilitation Hospitals                           10,506          18.0 %                5,098        11.6 %
Medical Office Buildings                              500           0.8 %                  446         1.2 %
Wellness Centers                                      415           0.7 %                  415         1.2 %

Total revenue                             $        58,440         100.0 %      $        41,267       100.0 %

We have 32 employees as of May 4, 2013. We believe that any foreseeable 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 March 31, 2013 Compared to March 31, 2012

Net income for the three months ended March 31, 2013, was $26.2 million, compared to $10.6 million for the three months ended March 31, 2012. Funds from operations ("FFO"), after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $34.8 million, or $0.25 per diluted share for the 2013 first quarter as compared to $22.5 million, or $0.18 per diluted share for the 2012 first quarter. This 39% increase in FFO per share is primarily due to the increase in revenue from acquisitions made in 2012.

A comparison of revenues for the three month periods ended March 31, 2013 and 2012 is as follows, as adjusted in 2012 for discontinued operations (dollar amounts in thousands):

                                                                                                   Year over
                                                            % of                      % of           Year
                                                2013        Total         2012        Total         Change
Base rents                                    $ 32,132        55.0 %    $ 29,656        71.9 %            8.4 %
Straight-line rents                              2,661         4.5 %       1,359         3.3 %           95.8 %
Percentage rents                                   174         0.3 %         496         1.2 %          (64.8 %)
Fee income                                         185         0.3 %         133         0.3 %           39.1 %
Income from direct financing leases              8,756        15.0 %       1,835         4.4 %          377.2 %
Interest from loans                             14,532        24.9 %       7,788        18.9 %           86.6 %

Total revenue                                 $ 58,440       100.0 %    $ 41,267       100.0 %           41.6 %

Base rents for the 2013 first quarter increased 8.4% versus the prior year as a result of $0.5 million of additional rent generated from annual escalation provisions in our leases and $2.0 million of incremental revenue from our Hammond acquisition and the six development properties that were completed and put into service in late 2012 and the first quarter of 2013. The increase in income from direct financing leases is due to $0.1 million of additional rent generated from annual escalation provisions in our leases and $6.8 million of incremental revenue from the acquisition of 12 Ernest facilities and the Reno and Roxborough facilities in 2012. The increase in interest from loans is due to the additional interest from new loans of $3.8 million related to the Ernest mortgage and acquisition loans entered into in 2012 and $2.6 million related to the Centinela mortgage loan. In addition, interest from loans is higher due to the additional interest on the Hoboken convertible note of $0.4 million.

Real estate depreciation and amortization during the first quarter of 2013 increased to $8.6 million from $8.3 million in 2012, due to the incremental depreciation from the development properties completed in 2012 and the first quarter 2013.


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Acquisition expenses decreased from $3.4 million in the first quarter of 2012 to $0.2 million in 2013 as a result of the Ernest Transaction in the first quarter of 2012.

We recognized $0.5 million of earnings from equity and other interests (RIDEA investments) in certain of our tenants in 2013. No such income was recorded in the 2012 first quarter due to the timing of when such investments were made and since we elected to record our share of the investee's earnings on a 90-day lag basis.

General and administrative expenses totaled $7.8 million for the 2013 first quarter, which is 13.4% of total revenues, down from 18.4% of revenues in the prior year first 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 revenue significantly without increasing our head count and related expense at the same rate. On a dollar basis, general and administrative expenses were up slightly from prior year first quarter due to higher travel expenses.

Interest expense for the quarters ended March 31, 2013 and 2012, totaled $15.4 million and $12.8 million, respectively. This increase is related to higher average debt balances in the current year quarter associated with our 2012 Senior Unsecured Notes and 2012 Term Loan. Our weighted average interest rates were consistent at 6% for the first quarter 2013 and 2012. 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 (loss) for the first 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.

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 months ended March 31, 2013 and 2012 (dollar amounts in thousands except per share data):

                                                           For the Three Months Ended
                                                          March 31,            March 31,
                                                            2013                  2012
FFO information:
Net income attributable to MPT common stockholders      $      26,156          $   10,564
Participating securities' share in earnings                      (193 )              (252 )

Net income, less participating securities' share in
earnings                                                $      25,963          $   10,312
Depreciation and amortization:
Continuing operations                                           8,647               8,293
Discontinued operations                                            -                  453

Funds from operations                                   $      34,610          $   19,058
Acquisition costs                                                 191               3,425

Normalized funds from operations                        $      34,801          $   22,483

Per diluted share data:
Net income, less participating securities' share in
earnings                                                $        0.18          $     0.08
Depreciation and amortization:
Continuing operations                                            0.06                0.07
Discontinued operations                                            -                   -

Funds from operations                                   $        0.24          $     0.15
Acquisition costs                                                0.01                0.03

Normalized funds from operations                        $        0.25          $     0.18


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LIQUIDITY AND CAPITAL RESOURCES

During the first three months of 2013, operating cash flows, which primarily consisted of rent and interest from mortgage and other loans, approximated $27.1 million, which with cash on-hand, were principally used to fund our dividends of $27.8 million and our investing activities including the funding of our development activities.

We completed an offering of 12,650,000 shares of our common stock (including 1,650,000 shares sold pursuant to the exercise in full of the underwriters' option to purchase additional shares), resulting in net proceeds (after underwriting discount) of $172.9 million. Proceeds from this offering were used to pay down $125 million on our revolving credit facility, and the remaining proceeds will be used for general corporate purposes, including potential future acquisitions.

During the first three months of 2012, operating cash flows, which primarily consisted of rent and interest from mortgage and working capital loans, approximated $23.4 million, which with cash on-hand, were principally used to fund our dividends of $22.4 million and certain investing activities such as our development activities.

To fund the Ernest Transaction disclosed in Note 3, 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' option to purchase additional shares), resulting in net proceeds (after underwriting discount) of $220.2 million. In addition, on February 17, 2012, we completed a $200 million offering of the 2012 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 the $100 million 2012 Term Loan and exercised the $70 million accordion feature on our revolving credit facility. Proceeds from this new term loan were used for general corporate purposes, including acquisitions.


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Short-term Liquidity Requirements: At May 4, 2013, our availability under our revolving credit facility plus cash on-hand approximated $450 million. We have only nominal principal payments due and no significant maturities in 2013 beyond our $11 million exchangeable senior notes, which were paid in full on April 1, 2013 - see five-year debt maturity schedule below. We believe that the liquidity available to us, along with our current monthly cash receipts from rent and loan interest, is sufficient to provide the resources necessary for operations, debt and interest obligations, our firm commitments (including capital expenditures, if any), dividends in order to comply with REIT requirements and to fund our current investment strategies for the next twelve months.

Long-term Liquidity Requirements: As of March 31, 2013, we had less than $12 million in debt principal payments due before 2016 - see five-year debt maturity schedule below. With our liquidity at May 4, 2013, of $450 million along with our current monthly cash receipts from rent and loan interest, we believe we have the liquidity available to us to fund our operations, debt and interest obligations, dividends in order to comply with REIT requirements, firm commitments (including capital expenditures, if any) and investment strategies for the foreseeable future.

As of March 31, 2013, principal payments due for our debt are as follows (in thousands):

                              2013         $  11,185
                              2014               266
                              2015               283
                              2016           225,299
                              2017               320
                              Thereafter     662,780

                              Total        $ 900,133

Distribution Policy

The table below is a summary of our distributions declared during the two year
period ended March 31, 2013:



                                                                                Distribution
Declaration Date               Record Date           Date of Distribution        per Share
February 14, 2013          March 14, 2013            April 11, 2013                $0.20
October 30, 2012           November 23, 2012         January 5, 2013               $0.20
August 16, 2012            September 13, 2012        October 11, 2012              $0.20
May 17, 2012               June 14, 2012             July 12, 2012                 $0.20
February 16, 2012          March 15, 2012            April 12, 2012                $0.20
November 10, 2011          December 8, 2011          January 5, 2012               $0.20
August 18, 2011            September 15, 2011        October 13, 2011              $0.20
May 19, 2011               June 16, 2011             July 14, 2011                 $0.20

We intend to pay to our stockholders, within the time periods prescribed by the Internal Revenue Code ("Code"), all or substantially all of our annual taxable income, including taxable gains from the sale of real estate and recognized gains on the sale of securities. It is our policy to make sufficient cash distributions to stockholders in order for us to maintain our status as a REIT under the Code and to avoid corporate income and excise taxes on undistributed income. See Note 4 to our condensed consolidated financial statements in Item 1 to this Form 10-Q for any restrictions placed on dividends by our existing credit facility.

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