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MPW > SEC Filings for MPW > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for MEDICAL PROPERTIES TRUST INC

Form 10-Q for MEDICAL PROPERTIES TRUST INC


11-Aug-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 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 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 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;

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;


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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 six months ended June 30, 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 June 30, 2014, our portfolio consisted of 118 properties: 100 facilities (of the 110 facilities that we own, of which two are subject to long-term ground leases) are leased to 25 tenants, 10 are under development, and the remaining eight assets are in the form of mortgage loans to three operators. Our facilities consisted of 56 general acute care hospitals, 23 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           % of           Months Ended         % of
                                          June 30, 2014         Total           June 30, 2013       Total
General Acute Care Hospitals (A)         $        45,599           59.6 %      $        33,237         58.2 %
Long-term Acute Care Hospitals                    13,338           17.4 %               13,406         23.5 %
Rehabilitation Hospitals                          17,208           22.5 %               10,065         17.6 %
Wellness Centers                                     415            0.5 %                  416          0.7 %


Total revenue                            $        76,560          100.0 %      $        57,124        100.0 %

                                           For the Six                           For the Six
                                          Months Ended           % of           Months Ended         % of
                                          June 30, 2014         Total           June 30, 2013       Total
General Acute Care Hospitals (A)         $        86,986           58.1 %      $        66,820         58.3 %
Long-term Acute Care Hospitals                    27,096           18.1 %               26,873         23.4 %
Rehabilitation Hospitals                          34,736           23.2 %               20,214         17.6 %
Wellness Centers                                     831            0.6 %                  830          0.7 %


Total revenue                            $       149,649          100.0 %      $       114,737        100.0 %

(A) Includes two medical office buildings associated with two of our general acute care hospitals.


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We have 39 employees as of August 6, 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.

Results of Operations

Three Months Ended June 30, 2014 Compared to June 30, 2013

Net income (loss) for the three months ended June 30, 2014, was ($0.2) million, compared to $27.3 million for the three months ended June 30, 2013. This decline is due to the $26.5 million impairment charge taken on our Monroe loan and other assets along with a $3.1 million real estate impairment charge taken on our Bucks County facility in the 2014 second quarter. Funds from operations ("FFO"), after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $44.5 million, or $0.26 per diluted share for the 2014 second quarter as compared to $35.9 million, or $0.24 per diluted share for the 2013 second quarter. This 24% increase in FFO is primarily due to the increase in revenue from acquisitions made since June 2013 along with the completion of the First Choice development properties in 2014.

A comparison of revenues for the three month periods ended June 30, 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                                     $ 45,928        60.0 %   $ 31,024        54.3 %          48.0 %
Straight-line rents                               3,178         4.2 %      2,777         4.9 %          14.4 %
Income from direct financing leases              12,263        16.0 %      9,230        16.2 %          32.9 %
Interest from loans and fee income               15,191        19.8 %     14,093        24.6 %           7.6 %


Total revenue                                  $ 76,560       100.0 %   $ 57,124       100.0 %          34.0 %

Our total revenue for the 2014 second quarter is up $19.4 million or 34.0% over the prior year. This increase is made up of the following:

Base rents - up $14.9 million over the prior year of which $0.9 million is from our annual escalation provisions in our leases, $12.5 million is from incremental revenue from acquisitions made in 2013, and $1.5 million is incremental revenue from development properties that were completed and put into service in 2013 and 2014.

Straight-line rents - up $0.4 million primarily due to incremental revenue from acquisitions made in 2013 partially offset by 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 $3.0 million over the prior year of which $0.1 million is from our annual escalation provisions in our leases and $2.9 million is from incremental revenue from acquisitions made in 2013.

Interest from loans - up $1.1 million over the prior year of which $0.4 million is from our annual escalation provisions in our loans and $0.7 million is from new loans made since June 2013.

Real estate depreciation and amortization during the second quarter of 2014 increased to $12.4 million from $8.6 million in 2013, due to the incremental depreciation from the properties acquired since June 30, 2013 and the development properties completed in 2013 and 2014.

During the 2014 second quarter, we recorded a $3.1 million real estate impairment charge on our Bucks facility and a $26.5 million impairment charge on our Monroe facility - see Note 3 to Item 1 of this Form 10-Q for further details.

Acquisition expenses increased from $2.1 million in 2013 to $2.5 million in 2014 primarily as a result of the acquisition in the first quarter of 2014 and continued activity to pursue potential deals.


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General and administrative expenses totaled $8.2 million for the 2014 second quarter, which is 10.7% of total revenues, down from 12.4% of total 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 revenue significantly without increasing our head count and related expense at the same rate. On a dollar basis, general and administrative expenses were up $1.1 million from the prior year second quarter due to travel and international administrative expenses, which are up as a result of the growth and expansion of our company since the 2013 second quarter.

Interest expense, for the quarters ended June 30, 2014 and 2013, totaled $24.7 million and $14.6 million, respectively. This increase is primarily related to higher average debt balances in the current year quarter associated with our 2014 and 2013 Senior Unsecured Notes, the $150 million tack on offering to our 2012 Senior Unsecured Notes and our new Credit Facility - all of which closed after the 2013 second quarter. In addition, we recorded a $0.3 million refinancing charge in the 2014 second quarter related to the replacement of our old credit facility. Our weighted average interest rates was 5.9% for the quarter ended June 30, 2014, which is a slight decline from 6% in 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 second 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.

Six Months Ended June 30, 2014 Compared to June 30, 2013

Net income for the six months ended June 30, 2014, was $7.0 million compared to net income of $53.5 million for the six months ended June 30, 2013 primarily due to the $50.1 million of impairment charges taken in 2014 - See Note 3 to Item 1 of this Form 10-Q for further details. FFO, after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $87.2 million, or $0.52 per diluted share for the first six months in 2014 as compared to $70.7 million, or $0.48 per diluted share for the first six months of 2013. This 23% increase in FFO is primarily due to the increase in revenue from acquisitions made subsequent to June 2013.

A comparison of revenues for the six month periods ended June 30, 2014 and 2013 is as follows (dollar amounts in thousands):

                                                                                                   Year over
                                                           % of                       % of           Year
                                              2014         Total         2013         Total         Change
Base rents                                  $  88,889        59.4 %    $  62,528        54.5 %           42.2  %
Straight-line rents                             5,366         3.6 %        5,468         4.7 %          (-0.2 )%
Income from direct financing leases            24,479        16.3 %       17,986        15.7 %           36.1  %
Interest from loans and fee income             30,915        20.7 %       28,755        25.1 %            7.5  %


Total revenue                               $ 149,649       100.0 %    $ 114,737       100.0 %           30.4  %

Our total revenue for the first six months of 2014 is up $34.9 million or 30.4% over the prior year. This increase is made up of the following:

Base rents - up $26.4 million over the prior year of which $1.6 million is from our annual escalation provisions in our leases, $22.7 million is from incremental revenue from acquisitions made in the second half of 2013, and $3.0 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 first half of 2013 related to our Monroe property but none was recorded in the current year.

Straight-line rents - down ($0.1) million primarily due to the write-off of unbilled rent related to our Gilbert property partially offset by the increase due to acquisitions - see Note 3 to Item 1 of this Form 10-Q for further details.

Income from direct financing leases - up $6.5 million over the prior year of which $0.2 million is from our annual escalation provisions in our leases and $6.3 million is from incremental revenue from acquisitions made in 2013.

Interest from loans - up $2.2 million over the prior year of which $0.8 million is from our annual escalation provisions in our loans and $1.9 million is primarily from new loans made since June 2013 partially offset by the repayment of loans in late 2013 and 2014.


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Real estate depreciation and amortization during the first six months of 2014 was $26.1 million, compared to $17.1 million in the same period of 2013 due to the incremental depreciation from the properties acquired since June 2013 and the development properties completed in 2013 and 2014.

Acquisition expenses increased from $2.3 million in 2013 to $3.0 million in 2014 primarily as a result of the acquisition in the 2014 first quarter and continued activity to pursue potential deals.

General and administrative expenses in the first two quarters of 2014 totaled $17.2 million, which is 11.5% of revenues down from 13.0% of revenues in the prior year as revenues are up over the prior year. 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 $2.3 million from the prior year first six months due to higher compensation expense, travel and international administrative expenses, which are up as a result of the growth and expansion of our company since June 2013.

Interest expense for the first six months of 2014 and 2013 totaled $46.3 million and $30.1 million, respectively. This increase is primarily related to higher average debt balances in the current year associated with our 2014 and 2013 Senior Unsecured Notes, the $150 million tack on offering to our 2012 Senior Unsecured Notes and our new Credit Facility - all of which closed after the 2013 second quarter. In addition, we recorded a $0.3 million refinancing charge in the 2014 second quarter related to the replacement of our old credit facility. Our weighted average interest rates was 5.9% for the first six months of 2014, down slightly from 6% in 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 six months 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.

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 six months ended June 30, 2014 and 2013 ($ amounts in thousands, except per share data):

                                          For the Three Months Ended                      For the Six Months Ended
                                    June 30, 2014            June 30, 2013          June 30, 2014          June 30, 2013
FFO information:
Net income (loss) attributable
to MPT common stockholders          $         (203 )        $        27,348        $         7,038        $        53,504
Participating securities' share
in earnings                                   (195 )                   (179 )                 (404 )                 (372 )


Net income (loss), less
participating securities' share
in earnings                         $         (398 )        $        27,169        $         6,634        $        53,132
Depreciation and amortization:
Continuing operations                       12,442                    8,643                 26,131                 17,112
Discontinued operations                         -                        75                     -                     253
Real estate impairment charges               5,974                       -                   5,974                     -
Loss (gain) on sale of real
estate                                          -                    (2,054 )                   -                  (2,054 )


Funds from operations               $       18,018          $        33,833        $        38,739        $        68,443
Write-off of straight line rent                 -                        -                     950                     -
Loan and other impairment
charge                                      23,657                       -                  44,154                     -
Debt refinancing costs                         290                       -                     290                     -
Acquisition costs                            2,535                    2,088                  3,047                  2,278


Normalized funds from
operations                          $       44,500          $        35,921        $        87,180        $        70,721


Per diluted share data:
Net income (loss), less
participating securities' share
in earnings                         $           -           $          0.18        $          0.04        $          0.36
Depreciation and amortization:
Continuing operations                         0.07                     0.06                   0.16                   0.12
Discontinued operations                         -                        -                      -                      -
Real estate impairment charges                0.03                       -                    0.03                     -
Loss (gain) on sale of real
estate                                          -                     (0.02 )                   -                   (0.01 )


Funds from operations               $         0.10          $          0.22        $          0.23        $          0.47
Write-off of straight line rent                 -                        -                    0.01                     -
Loan and other impairment
charge                                        0.14                       -                    0.26                     -
Debt refinancing costs                          -                        -                      -                      -
Acquisition costs                             0.02                     0.02                   0.02                   0.01


Normalized funds from
operations                          $         0.26          $          0.24        $          0.52        $          0.48

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