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MPW > SEC Filings for MPW > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for MEDICAL PROPERTIES TRUST INC

Form 10-Q for MEDICAL PROPERTIES TRUST INC


12-May-2014

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 and MPT Operating Partnership, L.P. as there are no material differences between these two entities.

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, 2013.

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 and as updated in our quarterly reports on Form 10-Q for future periods, and current reports on Form 8-K as we file them with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. Such factors include, among others, the following:

U.S. (both national and local) and European (in particular Germany) 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;

changes in foreign currency exchange rates;

U.S. (both federal and state) and European (in particular Germany) healthcare, and other regulatory requirements; and

U.S. national and local economic conditions, as well as conditions in Europe and other foreign jurisdictions where we own or will own healthcare facilities, 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 or debt financing on attractive terms or at all, which may adversely impact our ability to pursue acquisition and development opportunities and reference existing debt 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.

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 2013 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, 2014, there were no material changes to these policies, except as noted in Note 2 to the condensed consolidated financial statements with respect to discontinued operations.

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 and selectively in foreign jurisdictions. 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, 2014, our portfolio consisted of 117 properties: 94 facilities (of the 108 facilities that we own, of which two are subject to long-term ground leases) are leased to 25 tenants, 14 are under development, and the remaining nine assets are in the form of mortgage loans to four operators. Our facilities consisted of 54 general acute care hospitals, 24 long-term acute care hospitals, 31 inpatient rehabilitation hospitals, two medical office buildings, and six wellness centers.

All of our investments are currently located in the United States and Europe.

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
                                               2014              Total              2013            Total
General Acute Care Hospitals              $        41,389          56.6 %      $        33,583        58.3 %
Long-term Acute Care Hospitals                     13,757          18.8 %               13,467        23.4 %
Rehabilitation Hospitals                           17,528          24.0 %               10,149        17.6 %
Wellness Centers                                      415           0.6 %                  414         0.7 %

Total revenue                             $        73,089         100.0 %      $        57,613       100.0 %

We have 39 employees as of May 8, 2014. 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.


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Results of Operations

Three Months Ended March 31, 2014 Compared to March 31, 2013

Net income for the three months ended March 31, 2014, was $7.3 million, compared to $26.2 million for the three months ended March 31, 2013. This decline is due to the $20.5 million impairment charge taken on our Monroe loan in the 2014 first quarter. Funds from operations ("FFO"), after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $42.7 million, or $0.26 per diluted share for the 2014 first quarter as compared to $34.8 million, or $0.25 per diluted share for the 2013 first quarter. This 23% increase in FFO is primarily due to the increase in revenue from acquisitions made in 2013.

A comparison of revenues for the three month periods ended March 31, 2014 and 2013 is as follows, as adjusted in 2013 for discontinued operations (dollar amounts in thousands):

                                                                                                   Year over
                                                            % of                      % of           Year
                                                2014        Total         2013        Total         Change
Base rents                                    $ 42,957        58.8 %    $ 31,531        54.7 %           36.2 %
Straight-line rents                              2,148         2.9 %       2,651         4.6 %          (19.0 %)
Income from direct financing leases             12,215        16.7 %       8,756        15.2 %           39.5 %
Interest from loans                             15,541        21.3 %      14,532        25.2 %            6.9 %
Other                                              228         0.3 %         143         0.3 %           59.4 %

Total revenue                                 $ 73,089       100.0 %    $ 57,613       100.0 %           26.9 %

Our total revenue for the 2014 first quarter is up $15.5 million or 26.9% over the prior year. This increase is made up of the following:

Base rents - up $11.4 million over the prior year of which $0.9 million is from our annual escalation provisions in our leases, $10.6 million is from incremental revenue from acquisitions made in 2013, and $1.2 million is incremental revenue from development properties that were completed and put into service in 2013 and 2014. Approximately $1 million of base rents were recorded in the 2013 first quarter related to our Monroe property but none was recorded in the current year.

Straight-line rents - down ($0.5) million primarily due to the write-off of unbilled rent related to our Gilbert property - see Note 3 to Item 1 of this Form 10-Q for further details.

Income from direct financing leases - up $3.5 million over the prior year of which $0.1 million is from our annual escalation provisions in our leases and $3.4 million is from incremental revenue from acquisitions made in 2013.

Interest from loans - up $1.0 million over the prior year of which $0.2 million is from our annual escalation provisions in our loans and $0.7 million is from new loans made in 2013.

Real estate depreciation and amortization during the first quarter of 2014 increased to $13.7 million from $8.5 million in 2013, due to the incremental depreciation from the properties acquired in 2013 and the development properties completed in 2013 and the first quarter of 2014.

During the 2014 first quarter, we recorded a $20.5 million impairment charge on our Monroe loan - see Note 3 to Item 1 of this Form 10-Q for further details.

General and administrative expenses totaled $9.0 million for the 2014 first quarter, which is 12.3% of total revenues, down from 13.5% of total 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 $1.2 million from the prior year first quarter due to higher compensation expense and international administrative expenses, which are up as a result of the growth and expansion of our company since the 2013 first quarter.

Interest expense, for the quarters ended March 31, 2014 and 2013, totaled $21.6 million and $15.4 million, respectively. This increase is related to higher average debt balances in the current year quarter associated with our 2013 Senior Unsecured Notes and the $150 million tack on offering to our 2012 Senior Unsecured Notes that closed after the 2013 first quarter. Our weighted average interest rates are slightly lower period over period - 5.9% for the first quarter 2014 and 6.1% for the first quarter of 2013. 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 related to property disposals prior to 2014. See Note 8 to our Condensed Consolidated Financial Statements in Item 1 to this Form 10-Q for further information.


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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, 2014 and 2013 (dollar amounts in thousands except per share data):

                                                           For the Three Months Ended
                                                         March 31,              March 31,
                                                           2014                    2013
FFO information:
Net income attributable to MPT common
stockholders                                           $       7,241            $   26,156
Participating securities' share in earnings                     (209 )                (193 )

Net income, less participating securities' share
in earnings                                            $       7,032            $   25,963
Depreciation and amortization:
Continuing operations                                         13,690                 8,469
Discontinued operations                                           -                    178

Funds from operations                                  $      20,722            $   34,610
Acquisition costs                                                512                   191
Write-off of straight line rent                                  950                    -
Loan impairment charge                                        20,496                    -

Normalized funds from operations                       $      42,680            $   34,801

Per diluted share data:
Net income, less participating securities' share
in earnings                                            $        0.04            $     0.18
Depreciation and amortization:
Continuing operations                                           0.09                  0.06
Discontinued operations                                           -                     -

Funds from operations                                  $        0.13            $     0.24
Acquisition costs                                                 -                   0.01
Write-off of straight line rent                                 0.01                    -
Loan impairment charge                                          0.12                    -

Normalized funds from operations                       $        0.26            $     0.25

LIQUIDITY AND CAPITAL RESOURCES

2014 Cash Flow Activity

During the 2014 first quarter, we generated $18.3 million of cash flow from operating activities, primarily consisting of rent and interest from mortgage and other loans. We used these operating cash flows along with cash on-hand and $12.3 million of proceeds from our at-the-market equity offering program to fund our dividends of $35.8 million and certain investing activities including the additional funding of our development activities.

On March 11, 2014, we completed an underwritten public offering of 7.7 million shares of our common stock, resulting in net proceeds of approximately $100.2 million, after deducting estimated offering expenses. We used the net proceeds from this stock offering to pay down our revolving credit facility.
Subsequently, we used proceeds from our revolving credit facility to finance the $115 million property acquisition on March 31, 2014.


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2013 Cash Flow Activity

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 12.7 million shares of our common stock (including 1.7 million 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.

Short-term Liquidity Requirements: As of March 31, 2014, we have less than $0.2 million in debt principal payments due in 2014 - see debt maturity schedule below. At May 8, 2014 and after the underwriters exercised their option to purchase an additional 1.2 million shares of common stock and the completion of our senior notes offering in April 2014 (see Note 5 and 11 of Item 1 to this Form 10-Q for details), our availability under our revolving credit facility plus cash on-hand approximated $550 million. In addition, we established an at-the-market equity offering program in January 2014 under which we may sell up to $250 million in shares (of which $12.5 million has been sold through May 8, 2014) which may be used for general corporate purposes as needed. We believe that the liquidity available to us, our current monthly cash receipts from rent and loan interest, and the availability under our at-the-market equity offering program is sufficient to fund our operations, debt and interest obligations, our firm commitments (including capital expenditures, if any, and expected funding requirements on our development projects), dividends in order to comply with REIT requirements, and our current investment strategies for the next twelve months.

Long-term Liquidity Requirements: As of March 31, 2014, we have less than $0.5 million in debt principal payments due between now and when our revolving credit facility is set to expire in October 2015. With our liquidity at May 8, 2014 of approximately $550 million along with our current monthly cash receipts from rent and loan interest and with the availability under our at-the-market equity offering program, 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, and firm commitments (including capital expenditures, if any, and expected funding requirements on our development projects) for the next several years. We also believe such liquidity is sufficient to cover our current investment goals.

However, if such liquidity is not enough or if we engage in acquisitions at levels significantly greater than our current plan, we may need additional capital, which we believe is currently available in the market such as the following:

expanding and extending our current revolving credit facility,

amending or entering into new bank term loans,

issuance of new debt securities, including senior unsecured notes,

sale of equity securities,

entering into joint venture arrangements, and/or

proceeds from strategic property sales,

However, there is no assurance that conditions will remain favorable for such possible transactions or that our plans will be successful.

As of March 31, 2014, principal payments due on our debt (which excludes the effects of any premium recorded) are as follows (in thousands):

                             2014         $       198
                             2015             155,283
                             2016             225,299
                             2017                 320
                             2018              12,781
                             Thereafter     1,075,379

                             Total        $ 1,469,260


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Distribution Policy

The table below is a summary of our distributions declared during the two year
period ended March 31, 2014:



Declaration Date       Record Date       Date of Distribution    Distribution per Share
February 21, 2014   March 14, 2014       April 11, 2014         $                   0.21
November 7, 2013    December 3, 2013     January 7, 2014        $                   0.21
August 15, 2013     September 12, 2013   October 10, 2013       $                   0.20
May 23, 2013        June 13, 2013        July 11, 2013          $                   0.20
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

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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