MEDICAL PROPERTIES TRUST, INC.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number
001-32559
Medical Properties Trust,
Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Maryland
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20-0191742
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(State or Other Jurisdiction of
Incorporation or Organization)
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(IRS Employer Identification
No.)
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1000 Urban Center Drive,
Suite 501
Birmingham, AL
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35242
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(Address of Principal Executive
Offices)
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(Zip Code)
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(205) 969-3755
(Registrants Telephone
Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value
$0.001 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment of this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of shares of the Registrants
common stock, par value $0.001 per share (Common
Stock), held by non-affiliates of the Registrant as of
March 15, 2007 was approximately $704,228,219. For purposes
of the foregoing calculation only, all directors and executive
officers of the Registrant have been deemed affiliates.
As of March 15, 2007, 49,195,564 shares of the
Registrants Common Stock were outstanding.
Portions of the Registrants definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on May 17,
2007 are incorporated by reference into Part III,
Items 10 through 14 of this Annual Report on
Form 10-K.
TABLE OF CONTENTS
A WARNING ABOUT FORWARD LOOKING STATEMENTS
We make forward-looking statements in this Annual Report on
Form 10-K
that are subject to risks and uncertainties. These
forward-looking statements include information about possible or
assumed future results of our business, financial condition,
liquidity, results of operations, plans and objectives.
Statements regarding the following subjects, among others, are
forward-looking by their nature:
our business strategy;
our projected operating results;
our ability to acquire or develop net-leased
facilities;
availability of suitable facilities to acquire or
develop;
our ability to enter into, and the terms of, our
prospective leases and loans;
our ability to obtain future financing arrangements;
estimates relating to, and our ability to pay,
future distributions;
our ability to compete in the marketplace;
lease rates and interest rates;
market trends;
projected capital expenditures; and
the impact of technology on our facilities,
operations and business.
The forward-looking statements are based on our beliefs,
assumptions and expectations of our future performance, taking
into account information currently available to us. These
beliefs, assumptions and expectations can change as a result of
many possible events or factors, not all of which are known to
us. If a change occurs, our business, financial condition,
liquidity and results of operations may vary materially from
those expressed in our forward-looking statements. You should
carefully consider these risks before you make an investment
decision with respect to our common stock and other securities,
along with, among others, the following factors that could cause
actual results to vary from our forward-looking statements:
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the factors referenced in this Annual Report on
Form 10-K,
including those set forth under the sections captioned
Risk Factors, Managements Discussion and
Analysis of Financial Condition and Results of Operations;
and Our Business.
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general volatility of the capital markets and the
market price of our common stock;
changes in our business strategy;
changes in healthcare laws and regulations;
availability, terms and development of capital;
availability of qualified personnel;
changes in our industry, interest rates or the
general economy; and
the degree and nature of our competition.
When we use the words believe, expect,
may, potential, anticipate,
estimate, plan, will,
could, intend or similar expressions, we
are identifying forward-looking statements. You should not place
undue reliance on these forward-looking statements. We are not
obligated to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise.
(i)
Overview
We are a self-advised real estate investment trust that
acquires, develops, leases and makes other investments in
healthcare facilities providing
state-of-the-art
healthcare services. We lease our facilities to healthcare
operators pursuant to long-term net-leases, which require the
tenant to bear most of the costs associated with the property.
We also make long-term, interest only mortgage loans to
healthcare operators, and from time to time, we also make
operating, working capital and acquisition loans to our tenants.
We were formed as a Maryland corporation on August 27, 2003
to succeed to the business of Medical Properties Trust, LLC, a
Delaware limited liability company, which was formed by one of
our founders in December 2002. We conduct substantially all of
our business through our wholly-owned subsidiaries, MPT
Operating Partnership, L.P., and MPT Development Services, Inc.
References in this Annual Report on
Form 10-K
to Medical Properties Trust, Medical
Properties, we, us, and
our include Medical Properties Trust, Inc. and our
wholly-owned subsidiaries.
Since April 2004, we have sold at various times approximately
47.8 million shares of common stock for net proceeds of
approximately $496.5 million. We have committed to issue
3 million shares of common stock before February 28,
2008, for approximately $14.82 per share adjusted for
certain activities. We used these proceeds generally to fund
investments in healthcare real estate. At March 1, 2007, we
have approximately $736.3 million invested in healthcare
real estate and related assets.
Our investment in healthcare real estate, including mortgage
loans and other loans to certain of our tenants, is considered a
single reportable segment as further discussed in our
Consolidated Financial Statements, Note 2
Summary of Significant Accounting Policies, in Part II,
Item 8 of this Annual Report on
Form 10-K.
All of our investments are located in the United States, and we
do not expect to invest in
non-U.S. markets
in the foreseeable future.
In 2006, we continued to execute our business plan to create the
preeminent provider of real estate capital to healthcare
companies. During 2006, we:
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Invested approximately $213 million in new healthcare real
estate assets;
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Completed the development and construction of two general acute
care hospitals with an aggregate investment of approximately
$100 million; and
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Issued fixed rate term loans aggregating approximately
$125 million and exchangeable notes of $138 million.
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Subsequent to December 31, 2006, we:
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Sold our Houston Town and Country Hospital and Medical Office
Building real estate for a gain in excess of $5.0 million;
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Added approximately $91 million in investments in
healthcare real estate and related assets; and
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Completed an offering of 12 million shares of common stock
(of which 3 million shares will be issued prior to
February 28, 2008).
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Portfolio
of Properties
As of December 31, 2006, we owned 21 facilities which were
being operated by six tenants; we had two facilities that were
under development and leased to two tenants; and we had three
mortgage loans to two operators. In 2006, we had the following
acquisition, investment and development activities:
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We acquired 8 existing healthcare facilities for a total cost of
approximately $115.5 million;
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We made two mortgage loans totaling $65.0 million to the
operator of two hospitals located in southern California;
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Our facilities under development in Houston, TX (North Cypress)
and Bloomington, IN (Monroe) began operations; and
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We invested an additional approximately $8.5 million in
facilities which we owned at December 31, 2005.
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Outlook
and Strategy
Our strategy is to lease the facilities that we acquire or
develop to experienced healthcare operators pursuant to
long-term net leases. Alternatively, we have structured certain
of our investments as long-term, interest only mortgage loans to
healthcare operators, and we may make similar investments in the
future. The market for healthcare real estate is extensive and
includes real estate owned by a variety of healthcare operators.
We focus on acquiring and developing those net-leased facilities
that are specifically designed to reflect the latest trends in
healthcare delivery methods. These facilities include: physical
rehabilitation hospitals, long-term acute care hospitals, and
regional and community hospitals.
Our
Leases and Loans
The leases for our facilities are net leases with
terms requiring the tenant to pay all ongoing operating and
maintenance expenses of the facility, including property,
casualty, general liability and other insurance coverages,
utilities and other charges incurred in the operation of the
facilities, as well as real estate taxes, ground lease rent and
the costs of capital expenditures, repairs and maintenance.
Similarly, borrowers under our mortgage loan arrangements retain
the responsibilities of ownership, including physical
maintenance and improvements and all costs and expenses. Our
leases and loans also provide that our tenants will indemnify us
for environmental liabilities. Our current leases and loans have
initial terms of 10 to 15 years and provide for annual rent
or interest escalation and, in some cases, percentage rent.
Significant
Tenants
At March 1, 2007, we have leases with seven hospital
operating companies (including the two properties currently
under development) covering 21 facilities and we have five
mortgage loans to three hospital operating companies. Vibra
Healthcare, LLC (Vibra) leases eight of our
facilities. Total revenue from Vibra in 2006 was approximately
$27.8 million, or 55.0% of total revenue. We expect that
the percentage of revenue we earn from Vibra in 2007 will be
substantially less than that in 2006 because we expect
Vibras interest and percentage rent to decline and because
our anticipated near-term future acquisitions and investments do
not include transactions with Vibra. However, there is a
reasonable likelihood that we will make additional investments
in Vibra-operated properties in the foreseeable future.
At March 1, 2007, affiliates of Prime Healthcare Services,
Inc. (Prime) lease five of our facilities and we
have mortgage loans on two facilities owned by affiliates of
Prime. Total revenue from Prime affiliates in 2006 was
approximately $9.8 million, or 19.4% of total revenue.
There is a reasonable likelihood that we will make additional
investments in Prime affiliated properties in the foreseeable
future.
Environmental
Matters
Under various federal, state and local environmental laws and
regulations, a current or previous owner, operator or tenant of
real estate may be required to investigate and remediate
hazardous or toxic substances or petroleum product releases or
threats of releases. Such laws also impose certain obligations
and liabilities on property owners with respect to asbestos
containing materials. These laws may impose remediation
responsibility and liability without regard to fault, or whether
or not the owner, operator or tenant knew of or caused the
presence of the contamination. Investigation, remediation and
monitoring costs may be substantial and can exceed the value of
the property. The presence of contamination or the failure to
properly remediate contamination on a property may adversely
affect the ability of the owner, operator or tenant to sell or
rent that property or to borrow funds using such property as
collateral and may adversely impact our investment in that
property.
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Generally, prior to completing any acquisition or closing any
mortgage loan, we obtain Phase I environmental assessments
in order to attempt to identify potential environmental concerns
at the facilities. These assessments are carried out in
accordance with an appropriate level of due diligence and
generally include a physical site inspection, a review of
relevant federal, state and local environmental and health
agency database records, one or more interviews with appropriate
site-related personnel, review of the propertys chain of
title and review of historic aerial photographs and other
information on past uses of the property. We may also conduct
limited subsurface investigations and test for substances of
concern where the results of the Phase I environmental
assessments or other information indicates possible
contamination or where our consultants recommend such procedures.
Competition
We compete in acquiring and developing facilities with financial
institutions, other lenders, real estate developers, other
REITs, other public and private real estate companies and
private real estate investors. Among the factors adversely
affecting our ability to compete are the following:
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we may have less knowledge than our competitors of certain
markets in which we seek to purchase or develop facilities;
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many of our competitors have greater financial and operational
resources than we have; and
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our competitors or other entities may determine to pursue a
strategy similar to ours.
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To the extent that we experience vacancies in our facilities, we
will also face competition in leasing those facilities to
prospective tenants. The actual competition for tenants varies
depending on the characteristics of each local market. Virtually
all of our facilities operate in a competitive environment, and
patients and referral sources, including physicians, may change
their preferences for healthcare facilities from time to time.
Healthcare
Regulatory Matters
The following discussion describes certain material federal
healthcare laws and regulations that may affect our operations
and those of our tenants. However, the discussion does not
address state healthcare laws and regulations, except as
otherwise indicated. These state laws and regulations, like the
federal healthcare laws and regulations, could affect our
operations and those of our tenants. Moreover, the discussion
relating to reimbursement for healthcare services addresses
matters that are subject to frequent review and revision by
Congress and the agencies responsible for administering federal
payment programs. Consequently, predicting future reimbursement
trends or changes is inherently difficult.
Ownership and operation of hospitals and other healthcare
facilities are subject, directly and indirectly, to substantial
federal, state and local government healthcare laws and
regulations. Our tenants failure to comply with these laws
and regulations could adversely affect their ability to meet
their lease obligations. Physician investment in us or in our
facilities also will be subject to such laws and regulations. We
intend for all of our business activities and operations to
conform in all material respects with all applicable laws and
regulations.
Anti-Kickback Statute. 42 U.S.C.
§1320a-7b(b),
or the Anti-Kickback Statute, prohibits, among other things, the
offer, payment, solicitation or acceptance of remuneration
directly or indirectly in return for referring an individual to
a provider of services for which payment may be made in whole or
in part under a federal healthcare program, including the
Medicare or Medicaid programs. Violation of the Anti-Kickback
Statute is a crime and is punishable by criminal fines of up to
$25,000 per violation, five years imprisonment or both.
Violations may also result in civil sanctions, including civil
penalties of up to $50,000 per violation, exclusion from
participation in federal healthcare programs, including Medicare
and Medicaid, and additional monetary penalties in amounts
treble to the underlying remuneration.
The Anti-Kickback Statute defines the term
remuneration very broadly and, accordingly, local
physician investment in our facilities could trigger scrutiny of
our lease arrangements under the Anti-Kickback Statute. In
addition to certain statutory exceptions, the Office of
Inspector General of the Department of Health and Human
Services, or OIG, has issued Safe Harbor Regulations
that describe practices that will not be considered violations
of the Anti-Kickback Statute. These include a safe harbor for
space rental arrangements which protects payments
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made by a tenant to a landlord under a lease arrangement meeting
certain conditions. We intend to use our commercially reasonable
efforts to structure lease arrangements involving facilities in
which local physicians are investors and tenants so as to
satisfy, or meet as closely as possible, the conditions for the
safe harbor for space rental. We cannot assure you, however,
that we will meet all the conditions for the safe harbor, and it
is unlikely that we will meet all conditions for the safe harbor
in those instances in which percentage rent is contemplated and
we have physician investors. In addition, federal regulations
require that our tenants with purchase options pay fair market
value purchase prices for facilities in which we have physician
investment. We intend our lease agreement purchase option prices
to be fair market value; however, we cannot assure you that all
of our purchase options will be at fair market value. Any
purchase not at fair market value may present risks of challenge
from healthcare regulatory authorities. The fact that a
particular arrangement does not fall within a statutory
exception or safe harbor does not mean that the arrangement
violates the Anti-Kickback Statute. The statutory exception and
Safe Harbor Regulations simply provide a guaranty that
qualifying arrangements will not be prosecuted under the
Anti-Kickback Statute. The implication of the Anti-Kickback
Statute could limit our ability to include local physicians as
investors or tenants or restrict the types of leases into which
we may enter if we wish to include such physicians as investors
having direct or indirect ownership interests in our facilities.
Federal Physician Self-Referral Statute. Any
physicians investing in our company or its subsidiary entities
could also be subject to the Ethics in Patient Referrals Act of
1989, or the Stark Law (codified at 42 U.S.C.
§1395nn). Unless subject to an exception, the Stark Law
prohibits a physician from making a referral to an
entity furnishing designated health
services paid by Medicare or Medicaid if the physician or
a member of his immediate family has a financial
relationship with that entity. A reciprocal prohibition
bars the entity from billing Medicare or Medicaid for any
services furnished pursuant to a prohibited referral. Financial
relationships are defined very broadly to include relationships
between a physician and an entity in which the physician or the
physicians family member has (i) a direct or indirect
ownership or investment interest that exists in the entity
through equity, debt or other means and includes an interest in
an entity that holds a direct or indirect ownership or
investment interest in any entity providing designated health
services; or (ii) a direct or indirect compensation
arrangement with the entity.
The Stark Law as originally enacted in 1989 only applied to
referrals for clinical laboratory tests reimbursable by
Medicare. However, the law was amended in 1993 and 1994 and,
effective January 1, 1995, became applicable to referrals
for an expanded list of designated health services reimbursable
under Medicare or Medicaid.
The Stark Law specifies a number of substantial sanctions that
may be imposed upon violators. Payment is to be denied for
Medicare claims related to designated health services referred
in violation of the Stark Law. Further, any amounts collected
from individual patients or third-party payors for such
designated health services must be refunded on a timely basis. A
person who presents or causes to be presented a claim to the
Medicare program in violation of the Stark Law is also subject
to civil monetary penalties of up to $15,000 per claim, civil
money penalties of up to $100,000 per arrangement and
possibly even exclusion from participation in the Medicare and
Medicaid programs.
Final regulations applicable only to physician referrals for
clinical laboratory services were published in August 1995. A
proposed rule applicable to physician referrals for all
designated health services was published in January 1998. In
January 2001, the Centers for Medicare & Medicaid
Services (CMS) published the Phase I final
rule, which finalized a significant portion of the 1998 proposed
rule. On March 26, 2004, CMS issued the second phase of its
final regulations addressing physician referrals to entities
with which they have a financial relationship (the
Phase II rule). The Phase II rule
addresses and interprets a number of exceptions for ownership
and compensation arrangements involving physicians, including
the exceptions for space and equipment rentals and the exception
for indirect compensation arrangements. The Phase II rule
also includes exceptions for physician ownership and investment,
including physician ownership of rural providers and hospitals.
The new regulation revised the hospital ownership exception to
reflect the
18-month
moratorium that began December 8, 2003 on physician
ownership or investment in specialty hospitals, which was
enacted in Section 507 of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003. The Phase II
rule became effective on July 26, 2004. The moratorium
imposed by the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 expired on June 8, 2005. However,
that moratorium was retroactively extended by the passage of the
Deficit Reduction Act of 2005 (the DRA) which
requires the Secretary of Health and Human Services to develop a
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strategic and implementing plan for physician investment in
specialty hospitals that addresses the issues of The report is
due six months after the date of enactment, but this deadline
may be extended by two months. The DRA also directs CMS to
continue the moratorium on enrollment of specialty hospitals
until the earlier of the date the report is submitted or six
months after enactment of the DRA.
In those cases where physicians invest in our subsidiaries or
our facilities, we intend to fashion our lease arrangements with
healthcare providers to meet the applicable indirect
compensation exceptions under the Stark Law, however, no
assurance can be given that our leases will satisfy these Stark
Law exception requirements. Unlike the Anti-Kickback Statute
Safe Harbor Regulations, a financial arrangement which
implicates the Stark Law must meet the requirements of an
applicable exception to avoid a violation of the Stark Law. This
may lead to obstacles in permitting local physicians to invest
in our facilities or restrict the types of lease arrangements we
may enter into if we wish to include such physicians as
investors.
State Self-Referral Laws. In addition to the
Anti-Kickback Statute and the Stark Law, state anti-kickback and
self-referral laws could limit physician ownership or investment
in us, restrict the types of leases we may enter into if such
physician investment is permitted or require physician
disclosure of our ownership or financial interest to patients
prior to referrals.
Recent Regulatory and Legislative
Developments. The DRA was signed by President
Bush on February 8, 2006, and is expected to reduce
Medicare spending by $6.0 billion over the next five years
and cut Medicaid spending by $5.0 billion over the same
time frame. A clerical error during the legislative process,
however, raises some concerns over the validity of the DRA
because the United States House of Representatives never voted
on the version approved by the Senate and ultimately signed by
the President. Legal challenges may arise as a result of this
technicality, challenging the DRA. Nonetheless, CMS has already
begun implementing portions of the DRA. Medicare Part A
pays for hospital inpatient operating and capital related costs
associated with acute care hospital inpatient stays on a
prospective basis. Pursuant to this inpatient prospective
payment system, or IPPS, CMS categorizes each patient case
according to a list of diagnosis-related groups, or DRGs. Each
DRG has an assigned payment that is based upon the expected
amount of hospital resources necessary to treat a patient in
that DRG. On August 12, 2005, CMS published a Final Rule
for IPPS for fiscal year 2006. The Final Rule includes a 3.7%
increase in payment rates, a number of changes to the DRGs and
enhancements to the voluntary quality reporting program.
Hospitals are required to submit certain clinical data on ten
quality measures in order to receive full payment for fiscal
year 2006. CMS expects aggregate payments to IPPS hospitals to
increase by $3.3 billion over the previous year.
On August 1, 2003, CMS published the fiscal year 2004 Final
Rule for inpatient rehabilitation facilities, or IRFs. Under the
Final Rule, all IRFs have received an increase in their
prospective payment system rate for fiscal year 2004 due to an
across the board 3.2% IRF market basket increase. On
August 15, 2005, CMS published the fiscal year 2006 Final
Rule for inpatient rehabilitation facilities, or IRFs. The Final
Rule adopts a number of refinements to the IRF prospective
payment system, including an
across-the-board
1.9% decrease in the standard payment amount based on evidence
that coding increases instead of increases in patient acuity
have led to increased payments to IRFs. The Final Rule also
includes a 3.6% market basket increase and increases from 19.1%
to 21.3% the payment rate adjustment for IRFs located in rural
areas. Further, the Final Rule reduces the outlier threshold for
cases with unusually high costs from $11,211 to $5,132. In
addition, the Final Rule contains policy changes including the
adoption of new labor market area definitions which are based on
the new Core Based Statistical Areas announced by the Office of
Management and Budget, or OMB, late in 2000. These increases are
expected to benefit those tenants of ours who operate IRFs.
These increases benefit those tenants of ours who operate IRFs.
On May 7, 2004, CMS issued a Final Rule to revise the
classification criterion, commonly known as the
75 percent rule, used to classify a hospital or
hospital unit as an IRF. The compliance threshold is used to
distinguish an IRF from an acute care hospital for purposes of
payment under the Medicare IRF prospective payment system. The
Final Rule implements a three-year period to analyze claims and
patient assessment data to determine whether CMS will continue
to use a compliance threshold that is lower than 75% or not. For
cost reporting periods beginning on or after July 1, 2004,
and before July 1, 2005, the compliance threshold will be
50% of the IRFs total patient population. The compliance
threshold will increase to 60% of the IRFs total patient
population for cost reporting periods beginning on or after
July 1, 2005 and before July 1, 2006, to 65% for cost
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reporting periods beginning on or after July 1, 2006 and
before July 1, 2007, and to 75% for cost reporting periods
after July 1, 2007. The Deficit Reduction Act of 2005
extends the phase-in period of the 75 percent
rule for one additional year. The 60% threshold remains in
effect until June 30, 2007. In fiscal year 2007, the
threshold is 65% and beginning in fiscal year 2008, the
threshold is 75%.
On December 8, 2003, President Bush signed into law the
Medicare Prescription Drug, Improvement, and Modernization Act
of 2003, or the Act, which contains sweeping changes to the
federal health insurance program for the elderly and disabled.
The Act includes provisions affecting program payment for
inpatient and outpatient hospital services. In total, the
Congressional Budget Office estimates that hospitals will
receive $24.8 billion over ten years in additional funding
due to the Act.
Rural hospitals, which may include regional or community
hospitals, one of our targeted types of facilities, will benefit
most from the reimbursement changes in the Act. Some examples of
these reimbursement changes include (i) providing that
payment for all hospitals, regardless of geographic location,
will be based on the same, higher standardized amount which was
previously available only for hospitals located in large urban
areas, (ii) reducing the labor share of the standardized
amount from 71% to 62% for hospitals with an applicable wage
index of less than 1.0, (iii) giving hospitals the ability
to seek a higher wage index based on the number of hospital
employees who take employment out of the county in which the
hospital is located with an employer in a neighboring county
with a higher wage index, and (iv) improving critical
access hospital program conditions of participation requirements
and reimbursement. Medicare disproportionate share hospital, or
DSH, payment adjustments for hospitals that are not large urban
or large rural hospitals will be calculated using the DSH
formula for large urban hospitals, up to a 12% cap in 2004 for
all hospitals other than rural referral centers, which are not
subject to the cap. The Act provides that sole community
hospitals, as defined in 42 U.S.C. § 1395
ww(d)(5)(D)(iii), located in rural areas, rural hospitals with
100 or fewer beds, and certain cancer and childrens
hospitals shall receive Transitional Outpatient Payments, or
TOPs, such that these facilities will be paid as much under the
Medicare outpatient prospective payment system, or OPPS, as they
were paid prior to implementation of OPPS. As of January 1,
2004 all TOPs for community mental health centers and all other
hospitals were otherwise discontinued. The hold
harmless TOPs provided for under the Act will continue for
qualifying rural hospitals for services furnished through
December 31, 2005 and for sole community hospitals for cost
reporting periods beginning on or after January 1, 2004 and
ending on December 31, 2005. Hold harmless TOPs payments
continue permanently for cancer and childrens hospitals.
The Act also requires CMS to provide supplemental payments to
acute care hospitals that are located more than 25 road miles
from another acute care hospital and have low inpatient volumes,
defined to include fewer than 800 discharges per fiscal year,
effective on or after October 1, 2004. Total supplemental
payments may not exceed 25% of the otherwise applicable
prospective payment rate.
Finally, the Act assures inpatient hospitals that submit certain
quality measure data a full inflation update equal to the
hospital market basket percentage increase for fiscal years 2005
through 2007. The market basket percentage increase refers to
the anticipated rate of inflation for goods and services used by
hospitals in providing services to Medicare patients. For fiscal
year 2005, the market basket percentage increase for hospitals
paid under the inpatient prospective payment system is 3.3%. For
those inpatient hospitals that do not submit such quality data,
the Act provides for an update of market basket minus
0.4 percentage points. The DRA expands the provision of the
Act tying inpatient reimbursement to hospitals reporting
on certain quality measures. Hospitals not submitting the data
will not receive the full market basket update. The DRA requires
the Secretary of Health and Human Services to add other quality
measures to be reported on by hospitals. Beginning in fiscal
year 2007, the market basket updates for hospitals that fail to
provide the quality data will be reduced by 2%.
The Act also imposed an 18 month moratorium limiting the
availability of the whole hospital exception, or
Whole Hospital Exception, under the Stark Law for specialty
hospitals and prohibited physicians investing in rural specialty
hospitals from invoking an alternative Stark Law exception for
physician ownership or investment in rural providers. The
moratorium began upon enactment of the Act and expired
June 8, 2005. Under the Whole Hospital Exception, the Stark
Law permits a physician to refer a Medicare or Medicaid patient
to a hospital in which the physician has an ownership or
investment interest so long as the physician maintains staff
privileges at the hospital and the physicians ownership or
investment interest is in the hospital as a whole, rather than a
subdivision of the
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facility. Following expiration of the moratorium, CMS issued a
statement that it will not issue provider agreements for new
specialty hospitals or authorize initial state surveys of new
specialty hospitals while it undertakes a review of its
procedures for enrolling such facilities in the Medicare
program. CMS anticipates completing this review by January 2006.
The suspension on enrollment does not apply to specialty
hospitals that submitted enrollment applications prior to
June 9, 2005 or requested an advisory opinion about the
applicability of the moratorium.
The moratorium imposed by the Act expired on June 8, 2005.
However, that moratorium was retroactively extended by the
passage of the DRA which requires the Secretary of Health and
Human Services to develop a strategic and implementing plan for
physician investment in specialty hospitals that addresses the
issues of proportionality of investment return, bona fide
investment, annual disclosure of investments, and the provision
of medical assistance (Medicaid) and charity care. The report is
due six months after the date of enactment, but this deadline
may be extended by two months. The DRA also directs CMS to
continue the moratorium on enrollment of specialty hospitals
until the earlier of the date the report is submitted or six
months after enactment of the DRA.
Any acquisition or development of specialty hospitals must
comply with the current application and interpretation of the
Stark Law. CMS may clarify or modify its definition of specialty
hospital, which may result in physicians who own interests in
our tenants being forced to divest their ownership or the
enrollment of the hospital for participation in the Medicare
Program may be delayed. Although the specialty hospital
moratorium under the Act limited, and the proposed Budget
Reconciliation Conference Agreement would have limited physician
ownership or investment in specialty hospitals as
defined by CMS, they do not limit a physicians ability to
hold an ownership or investment interest in facilities which may
be leased to hospital operators or other healthcare providers,
assuming the lease arrangement conforms to the requirements of
an applicable exception under the Stark Law. We intend to
structure all of our leases, including leases containing
percentage rent arrangements, to comply with applicable
exceptions under the Stark Law and to comply with the
Anti-Kickback Statute. We believe that strong arguments can be
made that percentage rent arrangements, when structured
properly, should be permissible under the Stark Law and the
Anti-Kickback Statute; however, these laws are subject to
continued regulatory interpretation and there can be no
assurance that such arrangements will continue to be
permissible. Accordingly, although we do not currently have any
percentage rent arrangements where physicians own an interest in
our facilities, we may be prohibited from entering into
percentage rent arrangements in the future where physicians own
an interest in our facilities. In the event we enter into such
arrangements at some point in the future and later find the
arrangements no longer comply with the Stark Law or
Anti-Kickback Statute, we or our tenants may be subject to
penalties under the statutes.
The California Department of Health Services recently adopted
regulations, codified as Sections 70217, 70225 and 70455 of
Title 22 of the California Code of Regulations, or CCR,
which establish minimum, specific, numerical licensed
nurse-to-patient
ratios for specified units of general acute care hospitals.
These regulations are effective January 1, 2004. The
minimum staffing ratios set forth in 22 CCR 70217(a) co-exist
with existing regulations requiring that hospitals have a
patient classification system in place. 22 CCR, 70053.2 and
70217. The licensed
nurse-to-patient
ratios constitute the minimum number of registered nurses,
licensed vocational nurses, and, in the case of psychiatric
units, licensed psychiatric technicians, who shall be assigned
to direct patient care and represent the maximum number of
patients that can be assigned to one licensed nurse at any one
time. Over the past several years many hospitals have, in
response to managed care reimbursement contracts, cut costs by
reducing their licensed nursing staff. The California
Legislature responded to this trend by requiring a minimum
number of licensed nurses at the bedside. Due to this new
regulatory requirement, any acute care facilities we target for
acquisition or development in California may be required to
increase their licensed nursing staff or decrease their
admittance rates as a result. Governor Schwarzenegger issued two
emergency regulations in an attempt to suspend the ratios in
emergency rooms and delay for three years staffing requirements
in general medical units. However, this action was appealed and
on June 7, 2005, the Superior Court overturned the two
emergency regulations. The Schwarzenegger administration
appealed that ruling; however, the Governor withdrew the appeal
in November 2005.
On May 7, 2004, CMS issued a Final Rule to update the
annual payment rates for the Medicare prospective payment system
for services provided by long term care hospitals. The rule
increased the Medicare payment rate for long-term care hospitals
by 3.1% starting July 1, 2004. On May 6, 2005, CMS
issued a Final Rule to update the annual payment rates for 2006.
Beginning July 1, 2005, the Medicare payment rate for
long-term care hospitals will
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increase by 3.4% for patient discharges through June 30,
2006. Medicare expects aggregate payment to these hospitals to
increase by $169 million during the 2006 long-term care
hospital rate year compared with the 2005 rate year. Long-term
care hospitals, one of the types of facilities we are targeting,
are defined generally as hospitals that have an average Medicare
inpatient length of stay greater than 25 days. In addition,
the final rule contains policy changes including the adoption of
new labor market area definitions for long-term care hospitals
which are based on the new Core Based Statistical Areas
announced by the Office of Management and Budget, or OMB, late
in 2000. On January 27, 2006, CMS published a proposed rule
provides for no increase in the Medicare payment rates for
long-term care hospitals for patient discharges between
July 1, 2006 and June 30, 2007. CMS is also proposing
to adopt the Rehabilitation, Psychiatric and Long-Term Care
(RPL) market basket to replace the excluded hospital
with capital market basket that is currently used as the measure
of inflation for calculating the annual update to the long-term
care hospital prospective payment rate. The RPL market basket is
based on the operating and capital costs of inpatient
rehabilitation facilities, inpatient psychiatric facilities, and
long-term care hospitals. CMS is also proposing to revise the
labor-related share based on the RPL market basket from 72.855%
(based on the excluded hospital with capital market basket) to
75.923%. CMS is accepting comments on the proposed rule until
March 20, 2006. We do not know whether the proposed rule
will be adopted without change.
The Balanced Budget Act of 1997, or BBA, mandated implementation
of a prospective payment system for skilled nursing facilities.
Under this prospective payment system, and for cost reporting
periods beginning on or after July 1, 1998, skilled nursing
facilities are paid a prospective payment rate adjusted for case
mix and geographic variation in wages formulated to cover all
costs, including routine, ancillary and capital costs. In 1999
and 2000 the BBA was refined to provide for, among other
revisions, a 20% add-on for 12 high acuity non-therapy Resource
Utilization Grouping categories, or RUG categories, and a 6.7%
add-on for all 14 rehabilitation RUG categories. These
categories may expire when CMS releases its refinements to the
current RUG payment system. On August 4, 2005, CMS
published a Final Rule updating skilled nursing facility payment
rates for fiscal year 2006. The Final Rule eliminates the
temporary add-on payments that Congress directed in the Balanced
Budget Refinement Act of 1999 and introduces nine (9) new
payment categories. The Final Rule also permanently increases
rates for all RUGs to reflect variations in non-therapy
ancillary costs. Further, fiscal year 2006 payment rates include
a market basket update increase of 3.1%, a slight increase over
what had been anticipated in the Proposed Rule. In addition, the
Final Rule contains policy changes including the adoption of new
labor market area definitions which are based on the new Core
Based Statistical Areas announced by the Office of Management
and Budget, or OMB, late in 2000. The Deficit Reduction Act of
2005 reduces payments to skilled nursing faculties for certain
bad debt attributable to Medicare coinsurance for beneficiaries
who are not dual eligibles.
Beginning January 1, 2007, the Deficit Reduction Act of
2005 caps payment rates for services provided in ambulatory
surgery centers at the amounts paid for the same services in
hospital outpatient departments under the OPPS. This provision
is effective until the Secretary of Health and Human Services
establishes a revised payment system for ambulatory surgery
centers as required by the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003.
In addition to the legislation and regulations discussed above,
on January 12, 2005, the Medicare Payment Advisory
Committee, or MedPAC, made extensive recommendations to Congress
and the Secretary of HHS including proposing revisions to DRG
payments to more fully capture differences in severity of
illnesses in an attempt to more equally pay for care provided at
general acute care hospitals as compared to specialty hospitals.
Furthermore, MedPAC made significant recommendations regarding
paying healthcare providers relative to their performance and to
the outcomes of the care they provided. MedPAC recommendations
have historically provided strong indications regarding future
directions of both the regulatory and legislative process.
Insurance
We have purchased general liability insurance (lessors
risk) that provides coverage for bodily injury and property
damage to third parties resulting from our ownership of the
healthcare facilities that are leased to and occupied by our
tenants. Our leases with tenants also require the tenants to
carry general liability, professional liability, all risks, loss
of earnings and other insurance coverages and to name us as an
additional insured under these policies. We expect that the
policy specifications and insured limits will be appropriate
given the relative risk of loss, the cost of the coverage and
industry practice.
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Employees
We have 20 employees as of March 1, 2007. We anticipate
hiring approximately four to six additional full-time employees
during the next 12 months, commensurate with our growth. We
believe that our relations with our employees are good. None of
our employees are members of any union.
Available
Information
Our website address is www.medicalpropertiestrust.com and
provides access in the Investor Relations section,
free of charge, to our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to these reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission. Also
available on our website, free of charge, are our Corporate
Governance Guidelines, the charters of our Ethics, Nominating
and Corporate Governance, Audit and Compensation Committees and
our Code of Ethics and Business Conduct. If you are not able to
access our website, the information is available in print free
of charge to any shareholder who should request the information
directly from us at
(205) 969-3755.
RISKS
RELATED TO OUR BUSINESS AND GROWTH STRATEGY
We
were formed in August 2003 and have a limited operating history;
our management has a limited history of operating a REIT and a
public company and may therefore have difficulty in successfully
and profitably operating our business.
We were organized in 2003 and thus have a limited operating
history. We first elected REIT status for our taxable year ended
December 31, 2004. We are subject to the risks generally
associated with the formation of any new business, including
unproven business models, uncertain market acceptance and
competition with established businesses. Our management has
limited experience in operating a REIT and a public company.
Therefore, you should be especially cautious in drawing
conclusions about the ability of our management team to execute
our business plan.
We
expect to continue to experience rapid growth and may not be
able to adapt our management and operational systems to
integrate the net-leased facilities we have acquired and are
developing or those that we may acquire or develop in the future
without unanticipated disruption or expense.
We are currently experiencing a period of rapid growth. We
cannot assure you that we will be able to adapt our management,
administrative, accounting and operational systems, or hire and
retain sufficient operational staff, to integrate and manage the
facilities we have acquired and are developing and those that we
may acquire or develop. Our failure to successfully integrate
and manage our current portfolio of facilities or any future
acquisitions or developments could have a material adverse
effect on our results of operations and financial condition and
our ability to make distributions to our stockholders.
We may
be unable to access capital, which would slow our
growth.
Our business plan contemplates growth through acquisitions and
development of facilities. As a REIT, we are required to make
cash distributions, which reduce our ability to fund
acquisitions and developments with retained earnings. We are
dependent on acquisition financings and access to the capital
markets for cash to make investments in new facilities. Due to
market or other conditions, there will be times when we will
have limited access to capital from the equity and debt markets.
During such periods, virtually all of our available capital will
be required to meet existing commitments and to reduce existing
debt. We may not be able to obtain additional equity or debt
capital or dispose of assets on favorable terms, if at all, at
the time we need additional capital to acquire healthcare
properties on a competitive basis or to meet our obligations.
Our ability to grow through acquisitions and developments will
be limited if we are unable to obtain debt or equity financing,
which could have a material adverse effect on our results of
operations and our ability to make distributions to our
stockholders.
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Dependence
on our tenants for payments of rent and interest may adversely
impact our ability to make distributions to our
stockholders.
We expect to continue to qualify as a REIT and, accordingly, as
a REIT operating in the healthcare industry, we are not
permitted by current tax law to operate or manage the businesses
conducted in our facilities.
Accordingly, we rely almost exclusively on rent payments from
our tenants under leases or interest payments from our tenants
under mortgage loans we have made to them for cash with which to
make distributions to our stockholders. We have no control over
the success or failure of these tenants businesses.
Significant adverse changes in the operations of any facility,
or the financial condition of any tenant or a guarantor, could
have a material adverse effect on our ability to collect rent
and interest payments and, accordingly, on our ability to make
distributions to our stockholders. Facility management by our
tenants and their compliance with state and federal healthcare
laws could have a material impact on our tenants operating
and financial condition and, in turn, their ability to pay rent
and interest to us.
It may
be costly to replace defaulting tenants and we may not be able
to replace defaulting tenants with suitable replacements on
suitable terms.
Failure on the part of a tenant to comply materially with the
terms of a lease could give us the right to terminate our lease
with that tenant, repossess the applicable facility, cross
default certain other leases with that tenant and enforce the
payment obligations under the lease. The process of terminating
a lease with a defaulting tenant and repossessing the applicable
facility may be costly and require a disproportionate amount of
managements attention. In addition, defaulting tenants or
their affiliates may initiate litigation in connection with a
lease termination or repossession against us or our
subsidiaries. For example, in connection with our termination of
leases relating to the Houston Town and Country Hospital and
Medical Office Building in late 2006, our relevant subsidiaries
were subsequently named as one of a number of defendants in
lawsuits filed by various affiliates of the defaulting tenant.
Resolution of these types of lawsuits in a manner materially
adverse to us may adversely affect our financial condition and
results of operations. If a tenant-operator defaults and we
choose to terminate our lease, we then would be required to find
another tenant-operator. The transfer of most types of
healthcare facilities is highly regulated, which may result in
delays and increased costs in locating a suitable replacement
tenant. The sale or lease of these properties to entities other
than healthcare operators may be difficult due to the added cost
and time of refitting the properties. If we are unable to re-let
the properties to healthcare operators, we may be forced to sell
the properties at a loss due to the repositioning expenses
likely to be incurred by non-healthcare purchasers.
Alternatively, we may be required to spend substantial amounts
to adapt the facility to other uses. There can be no assurance
that we would be able to find another tenant in a timely
fashion, or at all, or that, if another tenant were found, we
would be able to enter into a new lease on favorable terms.
Defaults by our tenants under our leases may adversely affect
the timing of and our ability to make distributions to our
stockholders.
Our
revenues are dependent upon our relationship with, and success
of, Vibra and Prime.
As of December 31, 2006, we owned 21 facilities which were
being operated by six operators, we had two facilities that were
under development and leased to two operators, and we had three
mortgage loans to two operators. Vibra Healthcare, LLC, or
Vibra, leased seven of our facilities, representing 33.4% of the
original total cost of our operating facilities and mortgage
loans as of December 31, 2006, and affiliates of Prime
Healthcare Services, Inc. leased seven of our facilities,
representing 21.6% of the original total cost of our operating
facilities and mortgage loans as of December 31, 2006.
Total revenue from Vibra and Prime, including rent, percentage
rent and interest, was approximately $27.8 million and
$9.8 million, respectively, or 55.0% and 19.4%,
respectively, of total revenue from continuing operations in the
year ended December 31, 2006. The financial performance and
resulting ability of each of Vibra and Prime to satisfy its
lease and loan obligations to us are material to our financial
results and our ability to service our debt and make
distributions to our stockholders.
In the first quarter of 2007, we completed additional
transactions with Prime for approximately $140.0 million.
We may pursue additional transactions with Vibra or Prime in the
future. Our relationship with Vibra and Prime, and their
respective financial performance and resulting ability to
satisfy its lease and loan obligations to us are material to our
financial results and our ability to service our debt and make
distributions to our stockholders. We are
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dependent upon the ability of Vibra and Prime to make rent and
loan payments to us, and its failure or delay to meet these
obligations would have a material adverse effect on our
financial condition and results of operations.
Accounting
rules may require consolidation of entities in which we invest
and other adjustments to our financial statements.
The Financial Accounting Standards Board, or FASB, issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities, an interpretation of Accounting Research
Bulletin No. 51 (ARB No. 51), in January
2003, and a further interpretation of FIN 46 in December
2003
(FIN 46-R,
and collectively FIN 46). FIN 46 clarifies the
application of ARB No. 51, Consolidated Financial
Statements, to certain entities in which equity investors
do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated
financial support from other parties, referred to as variable
interest entities. FIN 46 generally requires consolidation
by the party that has a majority of the risk
and/or
rewards, referred to as the primary beneficiary. FIN 46
applies immediately to variable interest entities created after
January 31, 2003. Under certain circumstances, generally
accepted accounting principles may require us to account for
loans to thinly capitalized companies such as Vibra as equity
investments. The resulting accounting treatment of certain
income and expense items may adversely affect our results of
operations, and consolidation of balance sheet amounts may
adversely affect any loan covenants.
The
bankruptcy or insolvency of our tenants under our leases could
seriously harm our operating results and financial
condition.
Some of our tenants, including North Cypress Medical Center
Operating Company, Bucks County Oncoplastic Institute, Monroe
Hospital and Vibra, are and some of our prospective tenants may
be, newly organized, have limited or no operating history and
may be dependent on loans from us to acquire the facilitys
operations and for initial working capital. Any bankruptcy
filings by or relating to one of our tenants could bar us from
collecting pre-bankruptcy debts from that tenant or their
property, unless we receive an order permitting us to do so from
the bankruptcy court. A tenant bankruptcy could delay our
efforts to collect past due balances under our leases and loans,
and could ultimately preclude collection of these sums. If a
lease is assumed by a tenant in bankruptcy, we expect that all
pre-bankruptcy balances due under the lease would be paid to us
in full. However, if a lease is rejected by a tenant in
bankruptcy, we would have only a general unsecured claim for
damages. Any secured claims we have against our tenants may only
be paid to the extent of the value of the collateral, which may
not cover any or all of our losses. Any unsecured claim we hold
against a bankrupt entity may be paid only to the extent that
funds are available and only in the same percentage as is paid
to all other holders of unsecured claims. We may recover none or
substantially less than the full value of any unsecured claims,
which would harm our financial condition.
Our
facilities and properties under development are currently leased
to only seven tenants, four of which were recently organized and
have limited or no operating histories, and failure of any of
these tenants and the guarantors of their leases to meet their
obligations to us would have a material adverse effect on our
revenues and our ability to make distributions to our
stockholders.
Our existing facilities and the properties we have under
development are currently leased to Vibra, Prime, Gulf States,
North Cypress, Bucks County Oncoplastic Institute
(BCO) and Monroe Hospital or their subsidiaries or
affiliates. If any of our tenants were to experience financial
difficulties, the tenant may not be able to pay its rent. Vibra,
North Cypress, BCO and Monroe Hospital were recently organized
and have limited or no operating histories.
Our
business is highly competitive and we may be unable to compete
successfully.
We compete for development opportunities and opportunities to
purchase healthcare facilities with, among others:
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private investors;
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healthcare providers, including physicians;
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other REITs;
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real estate partnerships;
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financial institutions; and
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local developers.
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Many of these competitors have substantially greater financial
and other resources than we have and may have better
relationships with lenders and sellers. Competition for
healthcare facilities from competitors may adversely affect our
ability to acquire or develop healthcare facilities and the
prices we pay for those facilities. If we are unable to acquire
or develop facilities or if we pay too much for facilities, our
revenue and earnings growth and financial return could be
materially adversely affected. Certain of our facilities and
additional facilities we may acquire or develop will face
competition from other nearby facilities that provide services
comparable to those offered at our facilities and additional
facilities we may acquire or develop. Some of those facilities
are owned by governmental agencies and supported by tax
revenues, and others are owned by tax-exempt corporations and
may be supported to a large extent by endowments and charitable
contributions. Those types of support are not available to our
facilities and additional facilities we may acquire or develop.
In addition, competing healthcare facilities located in the
areas served by our facilities and additional facilities we may
acquire or develop may provide healthcare services that are not
available at our facilities and additional facilities we may
acquire or develop. From time to time, referral sources,
including physicians and managed care organizations, may change
the healthcare facilities to which they refer patients, which
could adversely affect our rental revenues.
Our
use of debt financing will subject us to significant risks,
including refinancing risk and the risk of insufficient cash
available for distribution to our stockholders.
As of December 31, 2006, we had $305.0 million of debt
outstanding, which excludes $43.2 million, which was paid
off in January 2007 with proceeds from the sale of our Houston
Town and Country Hospital and Medical Office Building. As of
March 1, 2007, we have approximately $274.0 million of
debt outstanding. We may borrow from other lenders in the
future, or we may issue corporate debt securities in public or
private offerings and our organizational documents do not limit
the amount of debt we may incur.
Most of our current debt is, and we anticipate that much of our
future debt will be,
non-amortizing
and payable in balloon payments. Therefore, we will likely need
to refinance at least a portion of that debt as it matures.
There is a risk that we may not be able to refinance
then-existing debt or that the terms of any refinancing will not
be as favorable as the terms of the then-existing debt. If
principal payments due at maturity cannot be refinanced,
extended or repaid with proceeds from other sources, such as new
equity capital or sales of facilities, our cash flow may not be
sufficient to repay all maturing debt in years when significant
balloon payments come due. Additionally, we may incur
significant penalties if we choose to prepay the debt.
Failure
to hedge effectively against interest rate changes may adversely
affect our results of operations and our ability to make
distributions to our stockholders.
As of December 31, 2006, we had approximately
$46.0 million in variable interest rate debt
($15.0 million at March 1, 2007). We may seek to
manage our exposure to interest rate volatility by using
interest rate hedging arrangements that involve risk, including
the risk that counterparties may fail to honor their obligations
under these arrangements, that these arrangements may not be
effective in reducing our exposure to interest rate changes and
that these arrangements may result in higher interest rates than
we would otherwise have. Moreover, no hedging activity can
completely insulate us from the risks associated with changes in
interest rates. Failure to hedge effectively against interest
rate changes may materially adversely affect results of
operations and our ability to make distributions to our
stockholders.
Most
of our current tenants have, and prospective tenants may have,
an option to purchase the facilities we lease to them which
could disrupt our operations.
Most of our current tenants have, and some prospective tenants
will have, the option to purchase the facilities we lease to
them. We cannot assure you that the formulas we have developed
for setting the purchase price will yield
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a fair market value purchase price. Any purchase not at fair
market value may present risks of challenge from healthcare
regulatory authorities.
In the event our tenants and prospective tenants determine to
purchase the facilities they lease either during the lease term
or after their expiration, the timing of those purchases will be
outside of our control and we may not be able to re-invest the
capital on as favorable terms, or at all. Our inability to
effectively manage the turn-over of our facilities could
materially adversely affect our ability to execute our business
plan and our results of operations.
RISKS
RELATING TO REAL ESTATE INVESTMENTS
Our
real estate and mortgage investments are and will continue to be
concentrated in healthcare facilities, making us more vulnerable
economically than if our investments were more
diversified.
We have acquired and are developing and have made mortgage
investments in and expect to continue acquiring and developing
and making mortgage investments in healthcare facilities. We are
subject to risks inherent in concentrating investments in real
estate. The risks resulting from a lack of diversification
become even greater as a result of our business strategy to
invest in healthcare facilities. A downturn in the real estate
industry could materially adversely affect the value of our
facilities. A downturn in the healthcare industry could
negatively affect our tenants ability to make lease or
loan payments to us and, consequently, our ability to meet debt
service obligations or make distributions to our stockholders.
These adverse effects could be more pronounced than if we
diversified our investments outside of real estate or outside of
healthcare facilities.
Our
facilities may not have efficient alternative uses, which could
impede our ability to find replacement tenants in the event of
termination or default under our leases.
All of the facilities in our current portfolio are and all of
the facilities we expect to acquire or develop in the future
will be net-leased healthcare facilities. If we or our tenants
terminate the leases for these facilities or if these tenants
lose their regulatory authority to operate these facilities, we
may not be able to locate suitable replacement tenants to lease
the facilities for their specialized uses. Alternatively, we may
be required to spend substantial amounts to adapt the facilities
to other uses. Any loss of revenues or additional capital
expenditures occurring as a result could have a material adverse
effect on our financial condition and results of operations and
could hinder our ability to meet debt service obligations or
make distributions to our stockholders.
Illiquidity
of real estate investments could significantly impede our
ability to respond to adverse changes in the performance of our
facilities and harm our financial condition.
Real estate investments are relatively illiquid. Our ability to
quickly sell or exchange any of our facilities in response to
changes in economic and other conditions will be limited. No
assurances can be given that we will recognize full value for
any facility that we are required to sell for liquidity reasons.
Our inability to respond rapidly to changes in the performance
of our investments could adversely affect our financial
condition and results of operations.
Development
and construction risks could adversely affect our ability to
make distributions to our stockholders.
We are developing a womens hospital and integrated medical
office building in Bensalem, Pennsylvania and renovating a
long-term acute care facility in Portland, Oregon. We expect to
develop additional facilities in the future. Our development and
related construction activities may subject us to the following
risks:
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we may have to compete for suitable development sites;
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our ability to complete construction is dependent on there being
no title, environmental or other legal proceedings arising
during construction;
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we may be subject to delays due to weather conditions, strikes
and other contingencies beyond our control;
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we may be unable to obtain, or suffer delays in obtaining,
necessary zoning, land-use, building, occupancy healthcare
regulatory and other required governmental permits and
authorizations, which could result in increased costs, delays in
construction, or our abandonment of these projects;
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we may incur construction costs for a facility which exceed our
original estimates due to increased costs for materials or labor
or other costs that we did not anticipate; and
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we may not be able to obtain financing on favorable terms, which
may render us unable to proceed with our development activities.
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We expect to fund our development projects over time. The time
frame required for development and construction of these
facilities means that we may have to wait years for a
significant cash return. In addition, our tenants may not be
able to obtain managed care provider contracts in a timely
manner or at all. Because we are required to make cash
distributions to our stockholders, if the cash flow from
operations or refinancings is not sufficient, we may be forced
to borrow additional money to fund distributions. We cannot
assure you that we will complete our current construction
projects on time or within budget or that future development
projects will not be subject to delays and cost overruns. Risks
associated with our development projects may reduce anticipated
rental revenue which could affect the timing of, and our ability
to make, distributions to our stockholders.
Our
facilities may not achieve expected results or we may be limited
in our ability to finance future acquisitions, which may harm
our financial condition and operating results and our ability to
make the distributions to our stockholders required to maintain
our REIT status.
Acquisitions and developments entail risks that investments will
fail to perform in accordance with expectations and that
estimates of the costs of improvements necessary to acquire and
develop facilities will prove inaccurate, as well as general
investment risks associated with any new real estate investment.
We anticipate that future acquisitions and developments will
largely be financed through externally generated funds such as
borrowings under credit facilities and other secured and
unsecured debt financing and from issuances of equity
securities. Because we must distribute at least 90% of our REIT
taxable income, excluding net capital gain, each year to
maintain our qualification as a REIT, our ability to rely upon
income from operations or cash flow from operations to finance
our growth and acquisition activities will be limited.
Accordingly, if we are unable to obtain funds from borrowings or
the capital markets to finance our acquisition and development
activities, our ability to grow would likely be curtailed,
amounts available for distribution to stockholders could be
adversely affected and we could be required to reduce
distributions, thereby jeopardizing our ability to maintain our
status as a REIT.
Newly-developed or newly-renovated facilities do not have the
operating history that would allow our management to make
objective pricing decisions in acquiring these facilities
(including facilities that may be acquired from certain of our
executive officers, directors and their affiliates). The
purchase prices of these facilities will be based in part upon
projections by management as to the expected operating results
of the facilities, subjecting us to risks that these facilities
may not achieve anticipated operating results or may not achieve
these results within anticipated time frames.
If we
suffer losses that are not covered by insurance or that are in
excess of our insurance coverage limits, we could lose
investment capital and anticipated profits.
We have purchased general liability insurance (lessors
risk) that provides coverage for bodily injury and property
damage to third parties resulting from our ownership of the
healthcare facilities that are leased to and occupied by our
tenants. Our leases generally require our tenants to carry
general liability, professional liability, loss of earnings, all
risk and extended coverage insurance in amounts sufficient to
permit the replacement of the facility in the event of a total
loss, subject to applicable deductibles. However, there are
certain types of losses, generally of a catastrophic nature,
such as earthquakes, floods, hurricanes and acts of terrorism,
which may be uninsurable or not insurable at a price we or our
tenants can afford. Inflation, changes in building codes and
ordinances, environmental considerations and other factors also
might make it impracticable to use insurance proceeds to replace
a facility after it has been damaged or destroyed. Under such
circumstances, the insurance proceeds we receive might not be
adequate to restore our economic position with respect to the
affected facility. If any of these or similar events occur, it
may reduce our return from the facility and the value of our
investment.
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Capital
expenditures for facility renovation may be greater than
anticipated and may adversely impact rent payments by our
tenants and our ability to make distributions to
stockholders.
Facilities, particularly those that consist of older structures,
have an ongoing need for renovations and other capital
improvements, including periodic replacement of furniture,
fixtures and equipment. Although our leases require our tenants
to be primarily responsible for the cost of such expenditures,
renovation of facilities involves certain risks, including the
possibility of environmental problems, construction cost
overruns and delays, uncertainties as to market demand or
deterioration in market demand after commencement of renovation
and the emergence of unanticipated competition from other
facilities. All of these factors could adversely impact rent and
loan payments by our tenants, could have a material adverse
effect on our financial condition and results of operations and
could adversely effect our ability to make distributions to our
stockholders.
All of
our healthcare facilities are subject to property taxes that may
increase in the future and adversely affect our
business.
Our facilities are subject to real and personal property taxes
that may increase as property tax rates change and as the
facilities are assessed or reassessed by taxing authorities. Our
leases generally provide that the property taxes are charged to
our tenants as an expense related to the facilities that they
occupy. As the owner of the facilities, however, we are
ultimately responsible for payment of the taxes to the
government. If property taxes increase, our tenants may be
unable to make the required tax payments, ultimately requiring
us to pay the taxes. If we incur these tax liabilities, our
ability to make expected distributions to our stockholders could
be adversely affected.
As the
owner and lessor of real estate, we are subject to risks under
environmental laws, the cost of compliance with which and any
violation of which could materially adversely affect
us.
Our operating expenses could be higher than anticipated due to
the cost of complying with existing and future environmental and
occupational health and safety laws and regulations. Various
environmental laws may impose liability on a current or prior
owner or operator of real property for removal or remediation of
hazardous or toxic substances. Current or prior owners or
operators may also be liable for government fines and damages
for injuries to persons, natural resources and adjacent
property. These environmental laws often impose liability
whether or not the owner or operator knew of, or was responsible
for, the presence or disposal of the hazardous or toxic
substances. The cost of complying with environmental laws could
materially adversely affect amounts available for distribution
to our stockholders and could exceed the value of all of our
facilities. In addition, the presence of hazardous or toxic
substances, or the failure of our tenants to properly manage,
dispose of or remediate such substances, including medical waste
generated by physicians and our other healthcare tenants, may
adversely affect our tenants or our ability to use, sell or rent
such property or to borrow using such property as collateral
which, in turn, could reduce our revenue and our financing
ability. We have obtained on all facilities we have acquired and
are developing and intend to obtain on all future facilities we
acquire Phase I environmental assessments. However, even if
the Phase I environmental assessment reports do not reveal
any material environmental contamination, it is possible that
material environmental contamination and liabilities may exist
of which we are unaware.
Although the leases for our facilities generally require our
tenants to comply with laws and regulations governing their
operations, including the disposal of medical waste, and to
indemnify us for certain environmental liabilities, the scope of
their obligations may be limited. We cannot assure you that our
tenants would be able to fulfill their indemnification
obligations and, therefore, any material violation of
environmental laws could have a material adverse affect on us.
In addition, environmental and occupational health and safety
laws are constantly evolving, and changes in laws, regulations
or policies, or changes in interpretations of the foregoing,
could create liabilities where none exists today.
Our
interests in facilities through ground leases expose us to the
loss of the facility upon breach or termination of the ground
lease and may limit our use of the facility.
We have acquired interests in four of our facilities, at least
in part, by acquiring leasehold interests in the land on which
the facility is or the facility under development will be
located rather than an ownership interest in the property, and
we may acquire additional facilities in the future through
ground leases. As lessee under ground
15
leases, we are exposed to the possibility of losing the property
upon termination, or an earlier breach by us, of the ground
lease. Ground leases may also restrict our use of facilities.
Our current ground lease in Marlton, New Jersey limits use of
the property to operation of a 76 bed rehabilitation hospital.
Our current ground lease for the facility in Redding, California
limits use of the property to operation of a hospital offering
the following services: skilled nursing; physical
rehabilitation; occupational therapy; speech pathology; social
services; assisted living; day health programs; long-term acute
care services; psychiatric services; geriatric clinic services;
outpatient services related to the foregoing service categories;
and other post-acute services. Our current ground lease for the
facility in San Antonio limits use of the property to
operation of a comprehensive rehabilitation hospital, medical
research and education and other medical uses and uses
reasonably incidental thereto. These restrictions and any
similar future restrictions in ground leases will limit our
flexibility in renting the facility and may impede our ability
to sell the property.
RISKS
RELATING TO THE HEALTHCARE INDUSTRY
Reductions
in reimbursement from third-party payors, including Medicare and
Medicaid, could adversely affect the profitability of our
tenants and hinder their ability to make rent payments to
us.
Sources of revenue for our tenants and operators may include the
federal Medicare program, state Medicaid programs, private
insurance carriers and health maintenance organizations, among
others. Efforts by such payors to reduce healthcare costs will
likely continue, which may result in reductions or slower growth
in reimbursement for certain services provided by some of our
tenants. In addition, the failure of any of our tenants to
comply with various laws and regulations could jeopardize their
ability to continue participating in Medicare, Medicaid and
other government-sponsored payment programs.
The healthcare industry continues to face various challenges,
including increased government and private payor pressure on
healthcare providers to control or reduce costs. We believe that
our tenants will continue to experience a shift in payor mix
away from
fee-for-service
payors, resulting in an increase in the percentage of revenues
attributable to managed care payors, government payors and
general industry trends that include pressures to control
healthcare costs. Pressures to control healthcare costs and a
shift away from traditional health insurance reimbursement have
resulted in an increase in the number of patients whose
healthcare coverage is provided under managed care plans, such
as health maintenance organizations and preferred provider
organizations. In addition, due to the aging of the population
and the expansion of governmental payor programs, we anticipate
that there will be a marked increase in the number of patients
relying on healthcare coverage provided by governmental payors.
These changes could have a material adverse effect on the
financial condition of some or all of our tenants, which could
have a material adverse effect on our financial condition and
results of operations and could negatively affect our ability to
make distributions to our stockholders.
A significant number of our tenants operate long-term care
hospitals, or LTACHs. The United States Department of Health and
Human Services, Centers for Medicare and Medicaid Services, or
CMS, recently proposed a 0.71 percent increase to the LTACH
prospective payment system rates for 2008. However, in light of
concerns raised by an analysis of recent LTACH case mix data,
CMS also proposed a budget neutrality requirement for annual
payment updates.
In addition to the proposed payment changes, CMS is proposing
changes to its policy known as the 25 percent
rule. That rule takes into account the percentage of
patients that were admitted to the LTACH from its co-located
host hospital (usually a general acute care hospital). Under the
current policy, if an LTACH that is a hospital-within-a-hospital
or satellite facility that has more than a certain percentage
(generally 25 percent) of its discharges admitted from the
co-located host hospital for the cost reporting period, then the
payment to the LTACH would be adjusted downward. CMS is now
proposing to extend the 25 percent threshold to situations
not contemplated by the existing regulations. Under the proposed
policy, the downward payment adjustment would apply to virtually
all LTACHs if more than 25 percent (or the applicable
percentage in certain special circumstances) of its discharged
patients were admitted from an individual hospital, regardless
of where that hospital is located. If adopted as proposed, these
changes could have a material adverse effect on the financial
condition of some of our tenants, which could have a material
adverse effect on our financial condition and results of
operations and could negatively affect our ability to make
distributions to our stockholders.
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The
healthcare industry is heavily regulated and existing and new
laws or regulations, changes to existing laws or regulations,
loss of licensure or certification or failure to obtain
licensure or certification could result in the inability of our
tenants to make lease payments to us.
The healthcare industry is highly regulated by federal, state
and local laws, and is directly affected by federal conditions
of participation, state licensing requirements, facility
inspections, state and federal reimbursement policies,
regulations concerning capital and other expenditures,
certification requirements and other such laws, regulations and
rules. In addition, establishment of healthcare facilities and
transfers of operations of healthcare facilities are subject to
regulatory approvals not required for establishment of or
transfers of other types of commercial operations and real
estate. Sanctions for failure to comply with these regulations
and laws include, but are not limited to, loss of or inability
to obtain licensure, fines and loss of or inability to obtain
certification to participate in the Medicare and Medicaid
programs, as well as potential criminal penalties. The failure
of any tenant to comply with such laws, requirements and
regulations could affect its ability to establish or continue
its operation of the facility or facilities and could adversely
affect the tenants ability to make lease payments to us
which could have a material adverse effect on our financial
condition and results of operations and could negatively affect
our ability to make distributions to our stockholders. In
addition, restrictions and delays in transferring the operations
of healthcare facilities, in obtaining new third-party payor
contracts including Medicare and Medicaid provider agreements,
and in receiving licensure and certification approval from
appropriate state and federal agencies by new tenants may affect
our ability to terminate lease agreements, remove tenants that
violate lease terms, and replace existing tenants with new
tenants. Furthermore, these matters may affect a new
tenants ability to obtain reimbursement for services
rendered, which could adversely affect their ability to pay rent
to us and to pay principal and interest on their loans from us.
Our
tenants are subject to fraud and abuse laws, the violation of
which by a tenant may jeopardize the tenants ability to
make lease and loan payments to us.
The federal government and numerous state governments have
passed laws and regulations that attempt to eliminate healthcare
fraud and abuse by prohibiting business arrangements that induce
patient referrals or the ordering of specific ancillary
services. In addition, the Balanced Budget Act of 1997
strengthened the federal anti-fraud and abuse laws to provide
for stiffer penalties for violations. Violations of these laws
may result in the imposition of criminal and civil penalties,
including possible exclusion from federal and state healthcare
programs. Imposition of any of these penalties upon any of our
tenants could jeopardize any tenants ability to operate a
facility or to make lease and loan payments, thereby potentially
adversely affecting us.
In the past several years, federal and state governments have
significantly increased investigation and enforcement activity
to detect and eliminate fraud and abuse in the Medicare and
Medicaid programs. In addition, legislation has been adopted at
both state and federal levels which severely restricts the
ability of physicians to refer patients to entities in which
they have a financial interest. It is anticipated that the trend
toward increased investigation and enforcement activity in the
area of fraud and abuse, as well as self-referrals, will
continue in future years and could adversely affect our
prospective tenants and their operations, and in turn their
ability to make lease and loan payments to us.
Vibra has accepted, and prospective tenants may accept, an
assignment of the previous operators Medicare provider
agreement. Vibra and other new-operator tenants that take
assignment of Medicare provider agreements might be subject to
federal or state regulatory, civil and criminal investigations
of the previous owners operations and claims submissions.
While we conduct due diligence in connection with the
acquisition of such facilities, these types of issues may not be
discovered prior to purchase. Adverse decisions, fines or
recoupments might negatively impact our tenants financial
condition.
Certain
of our lease arrangements may be subject to fraud and abuse or
physician self-referral laws.
Local physician investment in our operating partnership or our
subsidiaries that own our facilities could subject our lease
arrangements to scrutiny under fraud and abuse and physician
self-referral laws. Under the federal Ethics in Patient
Referrals Act of 1989, or Stark Law, and regulations adopted
thereunder, if our lease arrangements do not satisfy the
requirements of an applicable exception, that noncompliance
could adversely affect the ability of our
17
tenants to bill for services provided to Medicare beneficiaries
pursuant to referrals from physician investors and subject us
and our tenants to fines, which could impact their ability to
make lease and loan payments to us. On March 26, 2004, CMS
issued Phase II final rules under the Stark Law, which,
together with the 2001 Phase I final rules, set forth
CMS current interpretation and application of the Stark
Law prohibition on referrals of designated health services, or
DHS. These rules provide us additional guidance on application
of the Stark Law through the implementation of
bright-line tests, including additional regulations
regarding the indirect compensation exception, but do not
eliminate the risk that our lease arrangements and business
strategy of physician investment may violate the Stark Law.
Finally, the Phase II rules implemented an
18-month
moratorium on physician ownership or investment in specialty
hospitals imposed by the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003. The moratorium
imposed by the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, or MMA, expired on June 8, 2005.
However, that moratorium was retroactively extended by the
passage of the Deficit Reduction Act of 2005, or the DRA, which
requires the Secretary of Health and Human Services to develop a
strategic and implementing plan for physician investment in
specialty hospitals that addresses the issues of proportionality
of investment return, bona fide investment, annual disclosure of
investments, and the provision of medical assistance (Medicaid)
and charity care. The final report was published on
August 8, 2006, at which time the moratorium expired.
However, we expect that specialty hospitals will continue to be
closely scrutinized by Congress and various federal and state
agencies. Further, despite the expiration of the specialty
hospital moratorium, in its final report, CMS expressed its
intention to (i) revise the Medicare Payment system to
address incentives to physician investors; (ii) require
disclosure of physician investment and compensation
arrangements; (iii) continue to enforce the fraud and abuse
laws; and (iv) continue to enforce prior violations of the
MMA moratorium. We intend to use our good faith efforts to
structure our lease arrangements to comply with these laws;
however, if we are unable to do so, this failure may restrict
our ability to permit physician investment or, where such
physicians do participate, may restrict the types of lease
arrangements into which we may enter, including our ability to
enter into percentage rent arrangements.
State
certificate of need laws may adversely affect our development of
facilities and the operations of our tenants.
Certain healthcare facilities in which we invest may also be
subject to state laws which require regulatory approval in the
form of a certificate of need prior to initiation of certain
projects, including, but not limited to, the establishment of
new or replacement facilities, the addition of beds, the
addition or expansion of services and certain capital
expenditures. State certificate of need laws are not uniform
throughout the United States and are subject to change. We
cannot predict the impact of state certificate of need laws on
our development of facilities or the operations of our tenants.
In addition, certificate of need laws often materially impact
the ability of competitors to enter into the marketplace of our
facilities. Finally, in limited circumstances, loss of state
licensure or certification or closure of a facility could
ultimately result in loss of authority to operate the facility
and require re-licensure or new certificate of need
authorization to re-institute operations. As a result, a portion
of the value of the facility may be related to the limitation on
new competitors. In the event of a change in the certificate of
need laws, this value may markedly decrease.
RISKS
RELATING TO OUR ORGANIZATION AND STRUCTURE
Maryland
law and Medical Properties charter and bylaws contain
provisions which may prevent or deter changes in management and
third-party acquisition proposals that you may believe to be in
your best interest, depress the price of Medical Properties
common stock or cause dilution.
Medical Properties charter contains ownership limitations
that may restrict business combination opportunities, inhibit
change of control transactions and reduce the value of Medical
Properties common stock. To qualify as a REIT under the Internal
Revenue Code of 1986, as amended, or the Code, no more than 50%
in value of Medical Properties outstanding stock, after
taking into account options to acquire stock, may be owned,
directly or indirectly, by five or fewer persons during the last
half of each taxable year. Medical Properties charter
generally prohibits direct or indirect ownership by any person
of more than 9.8% in value or in number, whichever is more
restrictive, of outstanding shares of any class or series of our
securities, including Medical Properties common
18
stock. Generally, Medical Properties common stock owned by
affiliated owners will be aggregated for purposes of the
ownership limitation. The ownership limitation could have the
effect of delaying, deterring or preventing a change in control
or other transaction in which holders of common stock might
receive a premium for their common stock over the then-current
market price or which such holders otherwise might believe to be
in their best interests. The ownership limitation provisions
also may make Medical Properties common stock an unsuitable
investment vehicle for any person seeking to obtain, either
alone or with others as a group, ownership of more than 9.8% of
either the value or number of the outstanding shares of Medical
Properties common stock.
Medical Properties charter and bylaws contain provisions
that may impede third-party acquisition proposals that may be in
your best interests. Medical Properties charter and bylaws
also provide that our directors may only be removed by the
affirmative vote of the holders of two-thirds of Medical
Properties common stock, that stockholders are required to give
us advance notice of director nominations and new business to be
conducted at our annual meetings of stockholders and that
special meetings of stockholders can only be called by our
president, our board of directors or the holders of at least 25%
of stock entitled to vote at the meetings. These and other
charter and bylaw provisions may delay or prevent a change of
control or other transaction in which holders of Medical
Properties common stock might receive a premium for their common
stock over the then-current market price or which such holders
otherwise might believe to be in their best interests.
We
depend on key personnel, the loss of any one of whom may
threaten our ability to operate our business
successfully.
We depend on the services of Edward K. Aldag, Jr., William
G. McKenzie, R. Steven Hamner, Emmett E. McLean and Michael G.
Stewart to carry out our business and investment strategy. If we
were to lose any of these executive officers, it may be more
difficult for us to locate attractive acquisition targets,
complete our acquisitions and manage the facilities that we have
acquired or are developing. Additionally, as we expand, we will
continue to need to attract and retain additional qualified
officers and employees. The loss of the services of any of our
executive officers, or our inability to recruit and retain
qualified personnel in the future, could have a material adverse
effect on our business and financial results.
Our
UPREIT structure may result in conflicts of interest between
Medical Properties stockholders and the holders of our
operating partnership units.
We are organized as an UPREIT, which means that we hold our
assets and conduct substantially all of our operations through
an operating limited partnership, and may in the future issue
limited partnership units to third parties. Persons holding
operating partnership units would have the right to vote on
certain amendments to the partnership agreement of our operating
partnership, as well as on certain other matters. Persons
holding these voting rights may exercise them in a manner that
conflicts with the interests of our stockholders. Circumstances
may arise in the future, such as the sale or refinancing of one
of our facilities, when the interests of limited partners in our
operating partnership conflict with the interests of our
stockholders. As the sole member of the general partner of the
operating partnership, Medical Properties has fiduciary duties
to the limited partners of the operating partnership that may
conflict with fiduciary duties Medical Properties officers
and directors owe to its stockholders. These conflicts may
result in decisions that are not in your best interest.
TAX RISKS
ASSOCIATED WITH OUR STATUS AS A REIT
Loss
of our tax status as a REIT would have significant adverse
consequences to us and the value of Medical Properties common
stock.
We believe that we qualify as a REIT for federal income tax
purposes and have elected to be taxed as a REIT under the
federal income tax laws commencing with our taxable year that
began on April 6, 2004 and ended on December 31, 2004.
The REIT qualification requirements are extremely complex, and
interpretations of the federal income tax laws governing
qualification as a REIT are limited. Accordingly, there is no
assurance that we will be successful in operating so as to
qualify as a REIT. At any time, new laws, regulations,
interpretations or court decisions may change the federal tax
laws relating to, or the federal income tax consequences of,
qualification as a
19
REIT. It is possible that future economic, market, legal, tax or
other considerations may cause our board of directors to revoke
the REIT election, which it may do without stockholder approval.
If we lose or revoke our REIT status, we will face serious tax
consequences that will substantially reduce the funds available
for distribution because:
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we would not be allowed a deduction for distributions to
stockholders in computing our taxable income; therefore we would
be subject to federal income tax at regular corporate rates and
we might need to borrow money or sell assets in order to pay any
such tax;
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we also could be subject to the federal alternative minimum tax
and possibly increased state and local taxes; and
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unless we are entitled to relief under statutory provisions, we
also would be disqualified from taxation as a REIT for the four
taxable years following the year during which we ceased to
qualify.
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As a result of all these factors, a failure to achieve or a loss
or revocation of our REIT status could have a material adverse
effect on our financial condition and results of operations and
would adversely affect the value of our common stock.
Failure
to make required distributions would subject us to
tax.
In order to qualify as a REIT, each year we must distribute to
our stockholders at least 90% of our REIT taxable income,
excluding net capital gain. To the extent that we satisfy the
distribution requirement, but distribute less than 100% of our
taxable income, we will be subject to federal corporate income
tax on our undistributed income. In addition, we will incur a 4%
nondeductible excise tax on the amount, if any, by which our
distributions in any year are less than the sum of (1) 85%
of our ordinary income for that year; (2) 95% of our
capital gain net income for that year; and (3) 100% of our
undistributed taxable income from prior years.
We may be required to make distributions to stockholders at
disadvantageous times or when we do not have funds readily
available for distribution. Differences in timing between the
recognition of income and the related cash receipts or the
effect of required debt amortization payments could require us
to borrow money or sell assets to pay out enough of our taxable
income to satisfy the distribution requirement and to avoid
corporate income tax and the 4% excise tax in a particular year.
In the future, we may borrow to pay distributions to our
stockholders and the limited partners of our operating
partnership. Any funds that we borrow would subject us to
interest rate and other market risks.
Complying
with REIT requirements may cause us to forego otherwise
attractive opportunities.
To qualify as a REIT for federal income tax purposes, we must
continually satisfy tests concerning, among other things, the
sources of our income, the nature and diversification of our
assets, the amounts we distribute to our stockholders and the
ownership of our stock. In order to meet these tests, we may be
required to forego attractive business or investment
opportunities. Overall, no more than 20% of the value of our
assets may consist of securities of one or more taxable REIT
subsidiaries, and no more than 25% of the value of our assets
may consist of securities that are not qualifying assets under
the test requiring that 75% of a REITs assets consist of
real estate and other related assets. Further, a taxable REIT
subsidiary may not directly or indirectly operate or manage a
healthcare facility. For purposes of this definition a
healthcare facility means a hospital, nursing
facility, assisted living facility, congregate care facility,
qualified continuing care facility, or other licensed facility
which extends medical or nursing or ancillary services to
patients and which is operated by a service provider that is
eligible for participation in the Medicare program under
Title XVIII of the Social Security Act with respect to the
facility. Thus, compliance with the REIT requirements may limit
our flexibility in executing our business plan.
Loans
to our tenants could be recharacterized as equity, in which case
our rental income from that tenant might not be qualifying
income under the REIT rules and we could lose our REIT
status.
In connection with the acquisition of the Vibra Facilities, our
taxable REIT subsidiary made a loan to Vibra in an aggregate
amount of approximately $41.4 million to acquire the
operations at the Vibra Facilities. As of March 1,
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2007, that loan had been reduced to approximately
$29.9 million. Our taxable REIT subsidiary also made a loan
of approximately $6.2 million to Vibra and its subsidiaries
for working capital purposes, which has been paid in full. The
acquisition loan bears interest at an annual rate of 10.25%. Our
operating partnership loaned the funds to our taxable REIT
subsidiary to make these loans. The loan from our operating
partnership to our taxable REIT subsidiary bears interest at an
annual rate of 9.25%.
Our taxable REIT subsidiary has made and will make loans to
tenants to acquire operations or for other purposes. The
Internal Revenue Service, or IRS, may take the position that
certain loans to tenants should be treated as equity interests
rather than debt, and that our rental income from such tenant
should not be treated as qualifying income for purposes of the
REIT gross income tests. If the IRS were to successfully treat a
loan to a particular tenant as equity interests, the tenant
would be a related party tenant with respect to our
company and the rent that we receive from the tenant would not
be qualifying income for purposes of the REIT gross income
tests. As a result, we could lose our REIT status. In addition,
if the IRS were to successfully treat a particular loan as
interests held by our operating partnership rather than by our
taxable REIT subsidiary, we could fail the 5% asset test, and if
the IRS further successfully treated the loan as other than
straight debt, we could fail the 10% asset test with respect to
such interest. As a result of the failure of either test, could
lose our REIT status, which would subject us to corporate level
income tax and adversely affect our ability to make
distributions to our stockholders.
RISKS
RELATED TO AN INVESTMENT IN OUR COMMON STOCK
The
market price and trading volume of our common stock may be
volatile.
The market price of our common stock may be highly volatile and
be subject to wide fluctuations. In addition, the trading volume
in our common stock may fluctuate and cause significant price
variations to occur. If the market price of our common stock
declines significantly, you may be unable to resell your shares
at or above your purchase price.
We cannot assure you that the market price of our common stock
will not fluctuate or decline significantly in the future. Some
of the factors that could negatively affect our share price or
result in fluctuations in the price or trading volume of our
common stock include:
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actual or anticipated variations in our quarterly operating
results or distributions;
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changes in our funds from operations or earnings estimates or
publication of research reports about us or the real estate
industry
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increases in market interest rates that lead purchasers of our
shares of common stock to demand a higher yield;
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changes in market valuations of similar companies;
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adverse market reaction to any increased indebtedness we incur
in the future;
|
|
|
|
additions or departures of key management personnel;
|
|
|
|
actions by institutional stockholders;
|
|
|
|
local conditions such as an oversupply of, or a reduction in
demand for, rehabilitation hospitals, long-term acute care
hospitals, ambulatory surgery centers, medical office buildings,
specialty hospitals, skilled nursing facilities, regional and
community hospitals, womens and childrens hospitals
and other single-discipline facilities;
|
|
|
|
speculation in the press or investment community; and
|
|
|
|
general market and economic conditions.
|
Future
sales of common stock may have adverse effects on our stock
price.
We cannot predict the effect, if any, of future sales of common
stock, or the availability of shares for future sales, on the
market price of our common stock. Sales of substantial amounts
of common stock, or the perception
21
that these sales could occur, may adversely affect prevailing
market prices for our common stock. We may issue from time to
time additional common stock or units of our operating
partnership in connection with the acquisition of facilities and
we may grant additional demand or piggyback registration rights
in connection with these issuances. Sales of substantial amounts
of common stock or the perception that these sales could occur
may adversely effect the prevailing market price for our common
stock. In addition, the sale of these shares could impair our
ability to raise capital through a sale of additional equity
securities.
An
increase in market interest rates may have an adverse effect on
the market price of our securities.
One of the factors that investors may consider in deciding
whether to buy or sell our securities is our distribution rate
as a percentage of our price per share of common stock, relative
to market interest rates. If market interest rates increase,
prospective investors may desire a higher distribution or
interest rate on our securities or seek securities paying higher
distributions or interest. The market price of our common stock
likely will be based primarily on the earnings that we derive
from rental income with respect to our facilities and our
related distributions to stockholders, and not from the
underlying appraised value of the facilities themselves. As a
result, interest rate fluctuations and capital market conditions
can affect the market price of our common stock. In addition,
rising interest rates would result in increased interest expense
on our variable-rate debt, thereby adversely affecting cash flow
and our ability to service our indebtedness and make
distributions.
22
|
|
ITEM 1B.
|
Unresolved
Staff Comments
|
None
At December 31, 2006, our portfolio consisted of 21 owned
properties and three mortgage loans with an aggregate of
approximately 2.4 million square feet and 2,349 licensed
beds. We also own two properties under construction that we
expect to comprise in the aggregate approximately
252,000 square feet and 63 licensed beds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Percentage of
|
|
|
Total
|
|
State
|
|
Revenue
|
|
|
Total Revenue
|
|
|
Investment
|
|
|
California
|
|
$
|
20,042,283
|
|
|
|
39.7
|
%
|
|
$
|
251,203,954
|
|
Colorado
|
|
|
2,172,695
|
|
|
|
4.3
|
%
|
|
|
13,538,836
|
|
Indiana
|
|
|
1,756,375
|
|
|
|
3.5
|
%
|
|
|
34,959,038
|
|
Kentucky
|
|
|
6,870,200
|
|
|
|
13.6
|
%
|
|
|
48,401,136
|
|
Louisiana
|
|
|
2,220,515
|
|
|
|
4.4
|
%
|
|
|
17,588,305
|
|
Massachusetts
|
|
|
4,425,549
|
|
|
|
8.8
|
%
|
|
|
29,650,220
|
|
New Jersey
|
|
|
6,099,064
|
|
|
|
12.1
|
%
|
|
|
41,690,663
|
|
Oregon
|
|
|
5,000
|
|
|
|
|
|
|
|
17,098,481
|
|
Pennsylvania
|
|
|
1,027,521
|
|
|
|
2.0
|
%
|
|
|
40,173,078
|
|
Texas
|
|
|
5,852,230
|
|
|
|
11.6
|
%
|
|
|
150,669,105
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,471,432
|
|
|
|
100.0
|
%
|
|
$
|
644,972,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Number of
|
|
Type of Property
|
|
Properties
|
|
|
Square Feet
|
|
|
Licensed Beds
|
|
|
Community Hospital
|
|
|
13
|
|
|
|
1,674,674
|
|
|
|
1,582
|
(1)
|
Long-term Acute Care Hospital
|
|
|
9
|
|
|
|
594,268
|
|
|
|
567
|
|
Rehabilitation Hospital
|
|
|
4
|
|
|
|
335,492
|
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
2,604,434
|
|
|
|
2,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes a hospital and MOB which were sold in January, 2007,
with a book value of approximately $63.3 million, shown as
real estate held for sale in the consolidated financial
statements at December 31, 2006. |
|
|
ITEM 3.
|
Legal
Proceedings
|
None.
|
|
ITEM 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
PART II
|
|
ITEM 5.
|
Market
for Registrants Common Equity and Related Stockholder
Matters
|
Medical Properties common stock is traded on the New York
Stock Exchange under the symbol MPW. The following
table sets forth the high and low sales prices for the common
stock for each quarter from the initial public
23
offering to the period ending December 31, 2006, as
reported by the New York Stock Exchange Composite Tape, and the
distributions declared by us with respect to each such period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Distribution
|
|
|
Year ended December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
$
|
11.20
|
|
|
$
|
9.62
|
|
|
$
|
0.17
|
|
Fourth Quarter
|
|
|
10.09
|
|
|
|
7.60
|
|
|
|
0.18
|
|
Year ended December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
11.23
|
|
|
|
9.40
|
|
|
|
0.21
|
|
Second Quarter
|
|
|
12.50
|
|
|
|
10.25
|
|
|
|
0.25
|
|
Third Quarter
|
|
|
13.93
|
|
|
|
11.25
|
|
|
|
0.26
|
|
Fourth Quarter
|
|
|
15.65
|
|
|
|
13.12
|
|
|
|
0.27
|
|
On March 15, 2007, the closing price for our common stock,
as reported on the New York Stock Exchange, was $14.74. As of
March 15, 2007, there were 52 holders of record of our
common stock. This figure does not reflect the beneficial
ownership of shares held in nominee name.
24
|
|
ITEM 6.
|
Selected
Financial Data
|
The following table sets forth selected financial and operating
information on a historical basis for the years ended
December 31, 2006, 2005 and 2004, and for the period from
inception (August 27, 2003) to December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
Period from Inception
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
(August 27, 2003) to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
OPERATING DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
50,471,432
|
|
|
$
|
30,452,545
|
|
|
$
|
10,893,459
|
|
|
$
|
|
|
Depreciation and amortization
|
|
|
6,704,924
|
|
|
|
4,182,731
|
|
|
|
1,478,470
|
|
|
|
|
|
General and administrative expenses
|
|
|
10,190,850
|
|
|
|
8,016,992
|
|
|
|
5,150,786
|
|
|
|
992,418
|
|
Interest expense
|
|
|
4,417,955
|
|
|
|
1,521,169
|
|
|
|
32,769
|
|
|
|
|
|
Income from continuing operations
|
|
|
29,672,741
|
|
|
|
18,822,785
|
|
|
|
4,576,349
|
|
|
|
(1,023,276
|
)
|
Income from discontinued operations
|
|
|
486,957
|
|
|
|
817,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
30,159,698
|
|
|
|
19,640,347
|
|
|
|
4,576,349
|
|
|
|
(1,023,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
per diluted common share
|
|
|
0.75
|
|
|
|
0.58
|
|
|
|
0.24
|
|
|
|
(0.63
|
)
|
Income from discontinued
operations per diluted common share
|
|
|
0.01
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted common share
|
|
|
0.76
|
|
|
|
0.61
|
|
|
|
0.24
|
|
|
|
(0.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares diluted
|
|
|
39,701,976
|
|
|
|
32,370,089
|
|
|
|
19,312,634
|
|
|
|
1,630,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
30,159,698
|
|
|
$
|
19,640,347
|
|
|
$
|
4,576,349
|
|
|
$
|
(1,023,276
|
)
|
Depreciation and amortization
|
|
|
6,704,924
|
|
|
|
4,182,731
|
|
|
|
1,478,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations
|
|
|
36,864,622
|
|
|
|
23,823,078
|
|
|
|
6,054,819
|
|
|
|
(1,023,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations per diluted
common share
|
|
|
0.93
|
|
|
|
0.74
|
|
|
|
0.31
|
|
|
|
(0.63
|
)
|
Dividends declared per diluted
common share
|
|
|
0.99
|
|
|
|
0.62
|
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
BALANCE SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate assets at
cost
|
|
$
|
558,124,367
|
|
|
$
|
337,102,392
|
|
|
$
|
151,690,293
|
|
|
$
|
166,301
|
|
Other loans and investments
|
|
|
150,172,830
|
|
|
|
85,813,486
|
|
|
|
50,224,069
|
|
|
|
|
|
Cash and equivalents
|
|
|
4,102,873
|
|
|
|
59,115,832
|
|
|
|
97,543,677
|
|
|
|
100,000
|
|
Total assets
|
|
|
744,756,745
|
|
|
|
495,452,717
|
|
|
|
306,506,063
|
|
|
|
468,133
|
|
Debt
|
|
|
304,961,898
|
|
|
|
65,010,178
|
|
|
|
56,000,000
|
|
|
|
100,000
|
|
Other liabilities
|
|
|
95,021,876
|
|
|
|
71,991,531
|
|
|
|
17,777,619
|
|
|
|
1,389,779
|
|
Minority interests
|
|
|
1,051,835
|
|
|
|
2,173,866
|
|
|
|
1,000,000
|
|
|
|
|
|
Total stockholders equity
|
|
|
343,721,136
|
|
|
|
356,277,142
|
|
|
|
231,728,444
|
|
|
|
(1,021,646
|
)
|
Total liabilities and
stockholders equity
|
|
|
744,756,745
|
|
|
|
495,452,717
|
|
|
|
306,506,063
|
|
|
|
468,133
|
|
25
|
|
ITEM 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We were incorporated in Maryland on August 27, 2003
primarily for the purpose of investing in and owning net-leased
healthcare facilities across the United States. We also make
real estate mortgage loans and other loans to our tenants. We
have operated as a real estate investment trust
(REIT) since April 6, 2004, and accordingly,
elected REIT status upon the filing in September 2005 of our
calendar year 2004 Federal income tax return. Our existing
tenants are, and our prospective tenants will generally be,
healthcare operating companies and other healthcare providers
that use substantial real estate assets in their operations. We
offer financing for these operators real estate through
100% lease and mortgage financing and generally seek lease and
loan terms typically for 15 years with a series of shorter
renewal terms at the option of our tenants and borrowers. We
also have included and intend to include in our lease and loan
agreements annual contractual rate increases that in the current
market range from 1.5% to 3.5%. Our existing portfolio
escalators range from 0% to 3.5%. Most of our leases and loans
also include rate increases based on the general rate of
inflation if greater than the minimum contractual increases. In
addition to the base rent, our leases require our tenants to pay
all operating costs and expenses associated with the facility.
Some leases also require our tenants to pay percentage rents
which are based on the level of those tenants net revenues
from their operations.
We selectively make loans to certain of our operators through
our taxable REIT subsidiary, which they use for acquisitions and
working capital. We consider our lending business an important
element of our overall business strategy for two primary
reasons: (1) it provides opportunities to make
income-earning investments that yield attractive risk-adjusted
returns in an industry in which our management has expertise,
and (2) by making debt capital available to certain
qualified operators, we believe we create for our company a
competitive advantage over other buyers of, and financing
sources for, healthcare facilities. For purpose of Statement of
Financial Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related
Information, we conduct business operations in one segment.
At December 31, 2006, we owned 21 operating healthcare
facilities and held three mortgage loans secured by three other
properties. In addition, we are developing two additional
healthcare facilities that are not yet in operation. We had one
acquisition loan outstanding, the proceeds of which our tenant
used for the acquisition of six hospital operating companies.
The 23 facilities we owned and the three facilities that secured
our mortgage loans were in ten states, had a carrying cost of
approximately $650.7 million (including the balances of our
mortgage loans) and comprised approximately 87.4% of our total
assets. Our acquisition and other loans of approximately
$45.2 million represented approximately 6.1% of our total
assets. We do not expect such loan assets at any time to exceed
20% of our total assets. We also had cash and temporary
investments of approximately $4.1 million that represented
less than one percent of our assets.
Our revenues are derived 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 and
borrowers 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 in monitoring the performance of existing tenants include
the following:
|
|
|
|
|
the historical and prospective operating margins (measured by a
tenants earnings before interest, taxes, depreciation,
amortization and facility rent) of each tenant and at each
facility;
|
|
|
|
the ratio of our tenants operating earnings both to
facility rent and to facility rent plus other fixed costs,
including debt costs;
|
26
|
|
|
|
|
trends in the source of our tenants 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 profitability.
|
Certain business factors, in addition to those described above
that directly affect our tenants, 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;
|
|
|
|
unforeseen 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; and
|
|
|
|
competition from other financing sources.
|
At March 1, 2007, we had 20 employees. Over the next
12 months, we expect to add four to six additional
employees.
Critical
Accounting Policies
In order to prepare financial statements in conformity with
accounting principles generally accepted in the United States,
we must make estimates about certain types of transactions and
account balances. We believe that our estimates of the amount
and timing of lease revenues, credit losses, fair values and
periodic depreciation of our real estate assets, stock
compensation expense, and the effects of any derivative and
hedging activities will have significant effects on our
financial statements. Each of these items involves estimates
that require us to make subjective judgments. We intend to rely
on our experience, collect historical and current market data,
and develop relevant assumptions to arrive at what we believe to
be reasonable estimates. Under different conditions or
assumptions, materially different amounts could be reported
related to the accounting policies described below. In addition,
application of these accounting policies involves the exercise
of judgment on the use of assumptions as to future uncertainties
and, as a result, actual results could materially differ from
these estimates. Our accounting estimates will include the
following:
Revenue Recognition. Our revenues, which are
comprised largely of rental income, include rents that each
tenant pays in accordance with the terms of its respective lease
reported on a straight-line basis over the initial term of the
lease. Since some of our leases provide for rental increases at
specified intervals, straight-line basis accounting requires us
to record as an asset, and include in revenues, straight-line
rent that we will only receive if the tenant makes all rent
payments required through the expiration of the term of the
lease.
Accordingly, our management must determine, in its judgment, to
what extent the straight-line rent receivable applicable to each
specific tenant is collectible. We review each tenants
straight-line rent receivable on a quarterly basis and take into
consideration the tenants payment history, the financial
condition of the tenant, business conditions in the industry in
which the tenant operates, and economic conditions in the area
in which the facility is located. In the event that the
collectibility of straight-line rent with respect to any given
tenant is in doubt, we are required to record an increase in our
allowance for uncollectible accounts or record a direct
write-off of the specific rent receivable, which would have an
adverse effect on our net income for the year in which the
reserve is increased or the direct write-off is recorded and
would decrease our total assets and stockholders equity.
At that time, we stop accruing additional straight-line rent
income.
Our development projects normally allow us to earn what we term
construction period rent. We record the accrued
construction period rent as a receivable and as deferred revenue
during the construction period. We recognize earned revenue on
the straight-line method as the construction period rent is paid
to us by the lessee/operator, usually beginning when the
lessee/operator takes physical possession of the facility.
We make loans to certain tenants and from time to time may make
construction or mortgage loans to facility owners or other
parties. We recognize interest income on loans as earned based
upon the principal amount
27
outstanding. These loans are generally secured by interests in
real estate, receivables, the equity interests of a tenant, or
corporate and individual guarantees. As with straight-line rent
receivables, our management must also periodically evaluate
loans to determine what amounts may not be collectible.
Accordingly, a provision for losses on loans receivable is
recorded when it becomes probable that the loan will not be
collected in full. The provision is an amount which reduces the
loan to its estimated net receivable value based on a
determination of the eventual amounts to be collected either
from the debtor or from the collateral, if any. At that time, we
discontinue recording interest income on the loan to the tenant.
Investments in Real Estate. We record
investments in real estate at cost, and we capitalize
improvements and replacements when they extend the useful life
or improve the efficiency of the asset. While our tenants are
generally responsible for all operating costs at a facility, to
the extent that we incur costs of repairs and maintenance, we
expense those costs as incurred. We compute depreciation using
the straight-line method over the estimated useful life of
40 years for buildings and improvements, five to seven
years for equipment and fixtures, and the shorter of the useful
life or the remaining lease term for tenant improvements and
leasehold interests.
We are required to make subjective assessments as to the useful
lives of our facilities for purposes of determining the amount
of depreciation expense to record on an annual basis with
respect to our investments in real estate improvements. These
assessments have a direct impact on our net income because, if
we were to shorten the expected useful lives of our investments
in real estate improvements, we would depreciate these
investments over fewer years, resulting in more depreciation
expense and lower net income on an annual basis.
We have adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which
establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued
operations. SFAS No. 144 requires that the operations
related to facilities that have been sold, or that we intend to
sell, be presented as discontinued operations in the statement
of operations for all periods presented, and facilities and
related assets we intend to sell be designated as held for
sale on our balance sheet.
When circumstances such as adverse market conditions indicate a
possible impairment of the value of a facility, we review the
recoverability of the facilitys carrying value. The review
of recoverability is based on our estimate of the future
undiscounted cash flows, excluding interest charges, from the
facilitys use and eventual disposition. Our forecast of
these cash flows considers factors such as expected future
operating income, market and other applicable trends, and
residual value, as well as the effects of leasing demand,
competition and other factors. If impairment exists due to the
inability to recover the carrying value of a facility, an
impairment loss is recorded to the extent that the carrying
value exceeds the estimated fair value of the facility. We are
required to make subjective assessments as to whether there are
impairments in the values of our investments in real estate.
Purchase Price Allocation. We record
above-market and below-market in-place lease values, if any, for
the facilities we own which are based on the present value
(using an interest rate which reflects the risks associated with
the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the in-place leases
and (ii) managements estimate of fair market lease
rates for the corresponding in-place leases, measured over a
period equal to the remaining non-cancelable term of the lease.
We amortize any resulting capitalized above-market lease values
as a reduction of rental income over the remaining
non-cancelable terms of the respective leases. We amortize any
resulting capitalized below-market lease values as an increase
to rental income over the initial term and any fixed-rate
renewal periods in the respective leases. Because our strategy
to a large degree involves the origination of long term lease
arrangements at market rates, we do not expect the above-market
and below-market in-place lease values to be significant for
many of our anticipated transactions.
We measure the aggregate value of other intangible assets to be
acquired based on the difference between (i) the property
valued with existing leases adjusted to market rental rates and
(ii) the property valued as if vacant. Managements
estimates of value are made using methods similar to those used
by independent appraisers (e.g., discounted cash flow
analysis). Factors considered by management in its analysis
include an estimate of carrying costs during hypothetical
expected
lease-up
periods considering current market conditions, and costs to
execute similar leases. We also consider information obtained
about each targeted facility as a result of our pre-acquisition
due diligence, marketing, and leasing activities in estimating
the fair value of the tangible and intangible assets acquired.
In estimating carrying costs, management also includes real
estate taxes, insurance and other operating expenses and
estimates of lost rentals at market rates during the expected
lease-up
periods, which we expect to range
28
primarily from three to 18 months, depending on specific
local market conditions. Management also estimates costs to
execute similar leases including leasing commissions, legal
costs, and other related expenses to the extent that such costs
are not already incurred in connection with a new lease
origination as part of the transaction.
The total amount of other intangible assets to be acquired, if
any, is further allocated to in-place lease values and customer
relationship intangible values based on managements
evaluation of the specific characteristics of each prospective
tenants lease and our overall relationship with that
tenant. Characteristics to be considered by management in
allocating these values include the nature and extent of our
existing business relationships with the tenant, growth
prospects for developing new business with the tenant, the
tenants credit quality, and expectations of lease
renewals, including those existing under the terms of the lease
agreement, among other factors.
We amortize the value of in-place leases to expense over the
initial term of the respective leases, which are typically
15 years. The value of customer relationship intangibles is
amortized to expense over the initial term and any renewal
periods in the respective leases, but in no event will the
amortization period for intangible assets exceed the remaining
depreciable life of the building. Should a tenant terminate its
lease, the unamortized portion of the in-place lease value and
customer relationship intangibles would be charged to expense.
Accounting for Derivative Financial Investments and Hedging
Activities. We expect to account for our
derivative and hedging activities, if any, using
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 137
and SFAS No. 149, which requires all derivative
instruments to be carried at fair value on the balance sheet.
Derivative instruments designated in a hedge relationship to
mitigate exposure to variability in expected future cash flows,
or other types of forecasted transactions, are considered cash
flow hedges. We expect to formally document all relationships
between hedging instruments and hedged items, as well as our
risk-management objective and strategy for undertaking each
hedge transaction. We plan to review periodically the
effectiveness of each hedging transaction, which involves
estimating future cash flows. Cash flow hedges, if any, will be
accounted for by recording the fair value of the derivative
instrument on the balance sheet as either an asset or liability,
with a corresponding amount recorded in other comprehensive
income within stockholders equity. Amounts will be
reclassified from other comprehensive income to the income
statement in the period or periods the hedged forecasted
transaction affects earnings. Derivative instruments designated
in a hedge relationship to mitigate exposure to changes in the
fair value of an asset, liability, or firm commitment
attributable to a particular risk, which we expect to affect the
Company primarily in the form of interest rate risk or
variability of interest rates, are considered fair value hedges
under SFAS No. 133.
In 2006, we entered into derivative contracts as part of our
offering of Exchangeable Senior Notes (the exchangeable
notes). The contracts are generally termed capped
call or call spread contracts. These contracts
are financial instruments which are separate from the
exchangeable notes themselves, but affect the overall potential
number of shares which will be issued by us to satisfy the
conversion feature in the exchangeable notes. The exchangeable
notes can be exchanged into shares of our common stock when our
stock price exceeds $16.57 per share, which is the
equivalent of 60.3346 shares per $1,000 note. The number of
shares actually issued upon conversion will be equivalent to the
amount by which our stock price exceeds $16.57 times the 60.3346
conversion rate. The capped call transaction allows
us to effectively increase that exchange price from $16.57 to
$18.94. Therefore, our shareholders will not experience dilution
of their shares from any settlement or conversion of the
exchangeable notes until the price of our stock exceeds
$18.94 per share rather than $16.57 per share. When
evaluating this transaction, we have followed the guidance in
Emerging Issues Task Force (EITF)
No. 00-19
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own
Stock. EITF
No. 00-19
requires that contracts such as this capped call
which meet certain conditions must be accounted for as permanent
adjustments to equity rather than periodically adjusted to their
fair value as assets or liabilities. We have evaluated the terms
of these contracts and have determined that this capped
call must be recorded as a permanent adjustment to
stockholders equity. We have therefore shown the premium
paid in this transaction as a one-time adjustment in the
statement of stockholders equity.
The exchangeable notes themselves also contain the conversion
feature described above. SFAS No. 133 also states that
certain embedded derivative contracts must follow
the guidance of EITF
No. 00-19
and be evaluated as though they also were a
freestanding derivative contract. Embedded
derivative contracts such the conversion
29
feature in the notes should not be treated as a financial
instrument separate from the note if it meets certain conditions
in EITF
No. 00-19.
We have evaluated the conversion feature in the exchangeable
notes and have determined that it should not be reported
separately from the debt.
Variable Interest Entities. In January 2003,
the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. In December
2003, the FASB issued a revision to FIN 46, which is termed
FIN 46(R). FIN 46(R) clarifies the application of
Accounting Research Bulletin No. 51, Consolidated
Financial Statements, and provides guidance on the
identification of entities for which control is achieved through
means other than voting rights, guidance on how to determine
which business enterprise should consolidate such an entity, and
guidance on when it should do so. This model for consolidation
applies to an entity in which either (1) the equity
investors (if any) do not have a controlling financial interest
or (2) the equity investment at risk is insufficient to
finance that entitys activities without receiving
additional subordinated financial support from other parties. An
entity meeting either of these two criteria is a variable
interest entity, or VIE. A VIE must be consolidated by any
entity which is the primary beneficiary of the VIE. If an entity
is not the primary beneficiary of the VIE, the VIE is not
consolidated. We periodically evaluate the terms of our
relationships with our tenants and borrowers to determine
whether we are the primary beneficiary and would therefore be
required to consolidate any tenants or borrowers that are VIEs.
Our evaluations of our transactions indicate that we have loans
receivable from two entities which we classify as VIEs. However,
because we are not the primary beneficiary of these VIEs, we do
not consolidate these entities in our financial statements.
Stock-Based Compensation. Prior to 2006, we
used the intrinsic value method to account for the issuance of
stock options under our equity incentive plan in accordance with
APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS No. 123(R) became effective for
our annual and interim periods beginning January 1, 2006,
but had no material effect on the results of our operations.
During the years ended December 31, 2006 and 2005, we
recorded approximately $2.9 million and $1.2 million,
respectively, of expense for share based compensation related to
grants of restricted common stock and deferred stock units. In
2006, we also granted performance based restricted share awards.
Because these awards will vest based on the Companys
performance, we must evaluate and estimate the probability of
achieving those performance targets. Any changes in these
estimates and probabilities must be recorded in the period when
they are changed. During 2006, we awarded 105,375 shares of
restricted stock which are based solely on performance criteria
over the next five years.
Disclosure
of Contractual Obligations
The following table summarizes known material contractual
obligations associated with investing and financing activities
as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
Contractual Obligations(1)
|
|
1 Year
|
|
|
2-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
Construction contracts
|
|
$
|
10,547,453
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,547,453
|
|
Senior notes
|
|
|
9,630,775
|
|
|
|
19,261,550
|
|
|
|
19,198,672
|
|
|
|
169,769,670
|
|
|
|
217,860,667
|
|
Exchangeable notes
|
|
|
8,660,918
|
|
|
|
16,905,000
|
|
|
|
153,816,596
|
|
|
|
|
|
|
|
179,382,514
|
|
Revolving credit facility(2)
|
|
|
4,164,786
|
|
|
|
53,978,865
|
|
|
|
|
|
|
|
|
|
|
|
58,143,651
|
|
Operating lease commitments(3)
|
|
|
743,248
|
|
|
|
1,509,011
|
|
|
|
1,201,917
|
|
|
|
38,911,660
|
|
|
|
42,365,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
33,747,180
|
|
|
$
|
91,654,426
|
|
|
$
|
174,217,185
|
|
|
$
|
208,681,330
|
|
|
$
|
508,300,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the term loan of $43.2 million which was paid off
on January 17, 2007. |
|
(2) |
|
Assumes the balance and interest rates are those in effect at
December 31, 2006 and no principal payments are made until
the expiration of the facility in 2009. |
|
(3) |
|
Some of our contractual obligations to make operating lease
payments are related to ground leases for which we are
reimbursed by our tenants. |
30
The Company also has outstanding
letters-of-credit
which total $2.2 million at December 31, 2006 and
which expire in 2007.
Liquidity
and Capital Resources
As of March 1, 2007, we have approximately
$36.4 million in cash and temporary liquid investments.
From the time of our initial capitalization in April 2004
through completion of our February 28, 2007 follow-on
offering, we have issued approximately 47.8 million shares
of common stock and realized net proceeds of approximately
$496.5 million. We have also issued $125.0 million in
fixed rate term notes and $138.0 million in fixed rate
exchangeable notes. At March 1, 2007, we have in place a
$150.0 million secured revolving credit facility with an
available borrowing base of approximately $90.1 million.
We have substantially used this equity and debt capital to
acquire and develop healthcare real estate, fund mortgage loans
and fund other loans to healthcare operators. In addition, we
believe our present capitalization provides sufficient liquidity
and resources to continue executing our business plan for the
foreseeable future.
At December 31, 2006, we had remaining commitments to
complete the funding of two development projects as described
below (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
|
|
|
Cost
|
|
|
Remaining
|
|
|
|
Commitment
|
|
|
Incurred
|
|
|
Commitment
|
|
|
Bucks County womens hospital
and medical office building
|
|
$
|
38.0
|
|
|
$
|
35.8
|
|
|
$
|
2.2
|
|
Portland long-term acute care
hospital
|
|
|
21.8
|
|
|
|
17.1
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
59.8
|
|
|
$
|
52.9
|
|
|
$
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We expect these two developments to begin operation in the
second quarter of 2007. We have no new development projects
under commitment at March 1, 2007, which will reduce our
need for cash to fund projects which produce no revenue during
construction and development.
Short-term Liquidity Requirements: We believe
that our existing cash and temporary investments, funds
available under our existing loan agreements, additional
financing arrangements and cash from operations will be
sufficient for us to complete the developments described above,
acquire in excess of $200 million in additional assets,
provide for working capital, and make distributions to our
stockholders through 2007. We expect that such additional
financing arrangements will include various types of new debt
and proceeds from the sale of up to 3 million shares of
common stock pursuant to forward sale agreements between us and
certain investment banking firms (described below). Generally,
we believe we will be able to finance up to approximately
50-60% of
the cost of our healthcare facilities; however, there is no
assurance that we will be able to obtain or maintain those
levels of debt on our portfolio of real estate assets on
favorable terms in the future.
Long-term Liquidity Requirements: We believe
that cash flow from operating activities subsequent to 2007 will
be sufficient to provide adequate working capital and make
distributions to our stockholders in compliance with our
requirements as a REIT. However, in order to continue
acquisition and development of healthcare facilities during and
after 2007 at our goals of $200-300 million annually, we
will require access to more permanent external capital, possibly
including preferred and common equity capital. If equity capital
is not available at a price that we consider appropriate, we may
increase our debt, utilize other forms of capital, if available,
or reduce our acquisition activity.
In February 2007, we sold 9 million shares of common stock
and realized net proceeds of $133.4 million. Concurrently,
the underwriters borrowed from third parties and sold
3 million shares of our common stock in connection with
forward sale agreements between us and affiliates of the
underwriters. We did not receive any proceeds from the sale of
shares of our common stock by the forward purchasers. We expect
to settle the forward sale agreements and receive proceeds,
subject to certain adjustments, from the sale of those shares
upon one or more future physical settlements of the forward sale
agreements on a date or dates specified by us by
February 28, 2008. The forward sale arrangements allow us
to take down the proceeds as needed over the next year at a
pre-determined price, but without immediately diluting our
existing shares.
31
In addition, at March 1, 2007, we have immediate
availability under our secured revolving credit arrangement of
approximately $75.1 million and we may access up to
approximately $44.4 million pursuant to our forward sale
arrangement (described below) prior to February 28, 2008.
We also expect to enter into another secured credit arrangement
in the near future that we expect will provide approximately
$42.0 million in availability. At March 1, 2007, we
had unused proceeds of approximately $28.0 million from our
sale of shares of our common stock in February 2007.
Investing
Activities
During the year ended December 31, 2006, we made
investments in eight existing healthcare facilities with an
aggregate investment value of $115.5 million, and net cash
outlays of $112.9 million, after subtracting contingent
payments and facility improvement reserves. We invested an
additional $8.5 million in properties owned at
December 31, 2005. We also invested $114.4 million in
our development projects. In 2006, we made loans with a total
principal value of $68.1 million, and net cash outlays of
$66.4 million, after subtracting contingent payments and
facility improvement reserves. Our primary loans in 2006 were
two first mortgage loans of $65.0 million. In September
2006, Vibra reduced the principal amount of its loans by
$3.8 million following the repurchase of one of its
properties. In January 2007, Vibra further reduced the principal
amount of its loans by $7.7 million. Our expectations about
future investing activities are described above under
Liquidity and Capital Resources.
Results
of Operations
We began operations during the second quarter of 2004. Since
then, we have substantially increased our income earning
investments each year, and we expect to continue to materially
add to our investment portfolio. Accordingly, we expect that
future results of operations will vary materially from our
historical results. The results of operations presented below
for the year ended December 31, 2005, have been adjusted to
reflect the operations of two facilities which are recorded as
discontinued operations at December 31, 2006.
Year
Ended December 31, 2006 Compared to the Year Ended
December 31, 2005
Net income for the year ended December 31, 2006 was
$30,159,698 compared to net income of $19,640,347 for the year
ended December 31, 2005.
A comparison of revenues for the years ended December 31,
2006 and 2005 is as follows:
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
2006
|
|
|
|
|
|
2005
|
|
|
|
|
|
Change
|
|
|
Base rents
|
|
$
|
29,806,171
|
|
|
|
59.1
|
%
|
|
$
|
18,608,236
|
|
|
|
61.1
|
%
|
|
$
|
11,197,935
|
|
Straight-line rents
|
|
|
5,952,442
|
|
|
|
11.8
|
%
|
|
|
4,764,527
|
|
|
|
15.7
|
%
|
|
|
1,187,915
|
|
Percentage rents
|
|
|
2,384,601
|
|
|
|
4.7
|
%
|
|
|
2,259,230
|
|
|
|
7.4
|
%
|
|
|
125,371
|
|
Interest from loans
|
|
|
11,893,339
|
|
|
|
23.6
|
%
|
|
|
4,704,369
|
|
|
|
15.4
|
%
|
|
|
7,188,970
|
|
Fee income
|
|
|
434,879
|
|
|
|
0.8
|
%
|
|
|
116,183
|
|
|
|
0.4
|
%
|
|
|
318,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
50,471,432
|
|
|
|
100.0
|
%
|
|
$
|
30,452,545
|
|
|
|
100.0
|
%
|
|
$
|
20,018,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the year ended December 31, 2006, was comprised
of rents (75.6%) and interest and fee income from loans (24.4%).
All of this revenue was derived from properties that we have
acquired since July 1, 2004. Our base and straight-line
rents increased in 2006 due to the acquisition of 10 facilities
and opening of two developments in 2006. Interest income from
loans in the year ended December 31, 2006, increased
primarily based on the timing and amount of the Alliance
mortgage loan made in 2005, and on the two mortgage loans made
in 2006.
Vibra accounted for 55.0% and 86.2% of our gross revenues in
2006 and 2005, respectively, This includes percentage rents of
approximately $2.4 million and $2.3 million in 2006
and 2005, respectively. In 2006, Vibra accounted for 61.5% of
our total rent revenues. We expect that the portion of our total
revenues attributable to Vibra will decline in relation to our
total revenue. At December 31, 2006, assets leased and
loaned to Vibra comprised 29.0% of our total assets. In January,
2007, Vibra reduced its acquisition loan balance by
approximately $7.7 million to approximately
$29.9 million. This payment allows Vibra to reduce its
annual percentage rent payments to us from 2% of net revenues to
1% of net revenues.
32
Depreciation and amortization during the year ended
December 31, 2006 was $6,704,924, compared to $4,182,731
during the year ended December 31, 2005. The increase is
due to the timing and amount of acquisitions and developments in
2006 and 2005. We expect our depreciation and amortization
expense to continue to increase commensurate with our
acquisition and development activity.
General and administrative expenses during the years ended
December 31, 2006 and 2005, totaled $10,190,850 and
$8,016,992, respectively, which represents an increase of 27.1%.
The increase is due primarily to approximately $3.1 million
of non-cash share based compensation expense from restricted
shares and deferred stock units granted to employees, officers
and directors during 2006. We expect non-cash share based
compensation to increase in 2007 because shares that were
awarded in 2006 but do not vest until certain performance
hurdles are met must nonetheless be expensed beginning in the
year of the award based on our estimate of the likelihood of
achieving those performance hurdles.
Interest income (other than from loans) for the years ended
December 31, 2006 and 2005, totaled $515,038 and
$2,091,132, respectively. Interest income decreased due to the
timing and amount of offering proceeds temporarily invested in
short-term cash equivalent instruments in 2005.
Interest expense for the years ended December 31, 2006 and
2005 totaled $4,417,955 and $1,521,169, respectively. Interest
expense in 2006 and 2005 excludes interest of approximately
$6.2 million and $3.1 million, respectively, which has
been capitalized as part of the cost of development projects
under construction during 2006 and 2005. We expect interest
expense to increase during 2007 due to the issuance of
$263.0 million in fixed rate notes in the second half of
2006 and the cessation of capitalization of interest on
approximately $155.3 million in development projects that
were placed in service in 2006 and that we expect to be placed
in service in 2007.
Year
Ended December 31, 2005 Compared to the Year Ended
December 31, 2004
Net income for the year ended December 31, 2005 was
$19,640,347 compared to net income of $4,576,349 for the year
ended December 31, 2004.
A comparison of revenues for the years ended December 31,
2005 and 2004, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
2004
|
|
|
|
|
|
Change
|
|
|
Base rents
|
|
$
|
18,608,236
|
|
|
|
61.1
|
%
|
|
$
|
6,162,278
|
|
|
|
56.6
|
%
|
|
$
|
12,445,958
|
|
Straight-line rents
|
|
|
4,764,527
|
|
|
|
15.7
|
%
|
|
|
2,449,065
|
|
|
|
22.5
|
%
|
|
|
2,315,462
|
|
Percentage rents
|
|
|
2,259,230
|
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
2,259,230
|
|
Interest from loans
|
|
|
4,704,369
|
|
|
|
15.4
|
%
|
|
|
2,282,116
|
|
|
|
20.9
|
%
|
|
|
2,422,253
|
|
Fee income
|
|
|
116,183
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
116,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
30,452,545
|
|
|
|
100.0
|
%
|
|
$
|
10,893,459
|
|
|
|
100.0
|
%
|
|
$
|
19,559,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the year ended December 31, 2005, was comprised
of rents (84.2%) and interest and fee income from loans (15.8%).
All of this revenue was derived from properties that we have
acquired since July 1, 2004. Our base and straight-line
rents increased in 2005 due to the timing of 2004 acquisitions,
plus the acquisition and development of seven new facilities in
2005. In 2005, we received percentage rents of approximately
$2.3 million from Vibra. Pursuant to our lease terms with
Vibra, we were not eligible to receive percentage rent in 2004.
Interest income from loans in the year ended December 31,
2005, increased primarily based on the timing and amount of
Vibra loan advances and repayments in 2004 and 2005, and on the
origination of the Denham Springs loan in 2005. Vibra accounted
for 86.2% and 100.0% of our gross revenues in 2005 and 2004,
respectively. In 2005, Vibra accounted for 85.1% of our total
rent revenues. We expect that the portion of our total revenues
attributable to Vibra will decline in relation to our
acquisition of properties leased to tenants other than Vibra. At
December 31, 2005, assets leased and loaned to Vibra
comprised 38.3% of our total assets.
Depreciation and amortization during the year ended
December 31, 2005 was $4,182,731, compared to $1,478,470
during the year ended December 31, 2004. The increase is
due to the timing and amount of acquisitions and developments in
2004 (six properties owned for less than six months) and 2005
(six properties owned for a full
33
year and eight properties placed in service throughout the
year). We expect our depreciation and amortization expense to
continue to increase commensurate with our acquisition and
development activity.
General and administrative expenses during the years ended
December 31, 2005 and 2004, totaled $8,016,992 and
$5,150,786, respectively, which represents an increase of 55.6%.
The increase is due primarily to approximately $1.2 million
of share based compensation expense (42% of the increase in
general and administrative expenses) as a result of restricted
shares granted to employees, officers and directors during 2005.
In addition, we incurred incremental legal and professional
expenses in 2005 related to our reporting and other compliance
requirements as a public company. During 2005 we also incurred
additional compensation expense related to the increased number
of employees in 2005.
Interest income (other than from loans) for the years ended
December 31, 2005 and 2004, totaled $2,091,132 and
$930,260, respectively. Interest income increased due to the
timing and amount of offering proceeds temporarily invested in
short-term cash equivalent instruments and to higher interest
rates in 2005.
Interest expense for the years ended December 31, 2005 and
2004 totaled $1,521,169 and $32,769, respectively. Interest
expense in 2005 excludes interest of approximately
$3.1 million which has been capitalized as part of the cost
of development projects under construction during 2005.
Discontinued
Operations
We entered into a contract for the disposition of two assets in
2006. On October 22, 2006, two of our subsidiaries
terminated their respective leases with Stealth, L.P.
(Stealth). The leases were for the hospital and
medical office building (MOB), respectively, operated together
by Stealth as Houston Town and County Hospital in Houston,
Texas. The leases were originally entered into in 2004, with the
lease for the hospital scheduled to expire in 2021 and that for
the MOB to expire in 2016. The leases required Stealth to make
monthly payments of rent, including annual escalations of rent,
and payments to fund repairs and improvements. The leases also
required Stealth to pay all operating expenses of the
facilities, including ad valorem taxes, insurance and utilities.
In 2006, we recorded revenue of approximately $7.4 million
from the leases and loans with Stealth. In connection with
entering into the leases with Stealth, we also made working
capital loans to Stealth in an aggregate amount, including
accrued interest and after applying offsetting credits, of
approximately $3.2 million. Subsequent to the lease
termination, we received the full proceeds of a letter of credit
issued to us by Stealth in the amount of $1.3 million,
which was used to reduce the amount outstanding under the loans.
Stealth had not obtained managed care provider contracts that we
believed were necessary for profitable operation of the
hospital. Accordingly, and pursuant to our rights under the
leases, we terminated the leases and began negotiations directly
with other hospital systems to lease or sell the facilities.
These negotiations resulted in the ultimate sale of the hospital
and MOB in January, 2007, for a sales price of approximately
$71.7 million. During the period from the lease termination
to the date of sale, the hospital was operated by a new third
party operator under contract to the hospital. We also made
loans to the operating company in amount of approximately
$5.5 million, which we expect to recover from the net
revenues which the hospital and the MOB generated during the
interim period. The revenues and expenses from our leases and
loans to Stealth for the Houston Town and Country Hospital are
shown in the accompanying consolidated financial statements as
discontinued operations.
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. While we believe net income available to
common stockholders, as defined by generally accepted accounting
principles (GAAP), is the most appropriate measure, our
management considers FFO an appropriate supplemental measure
given its wide use by and relevance to investors and analysts.
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 assume that the value of real estate diminishes
predictably over time.
As defined by the National Association of Real Estate Investment
Trusts, or NAREIT, FFO represents net income (loss) (computed in
accordance with GAAP), excluding gains (losses) on sales of real
estate, plus real estate
34
related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. We compute FFO
in accordance with the NAREIT definition. FFO should not be
viewed as a substitute measure of the Companys operating
performance since it does 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 are significant economic costs that could
materially impact our results of operations.
The following table presents a reconciliation of FFO to net
income for the years ended December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Net income
|
|
$
|
30,159,698
|
|
|
$
|
19,640,347
|
|
Depreciation and amortization
|
|
|
6,704,924
|
|
|
|
4,182,731
|
|
|
|
|
|
|
|
|
|
|
Funds from operations
FFO
|
|
$
|
36,864,622
|
|
|
$
|
23,823,078
|
|
|
|
|
|
|
|
|
|
|
Per
diluted share
amounts:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
.76
|
|
|
$
|
.61
|
|
Depreciation and amortization
|
|
|
.17
|
|
|
|
.13
|
|
|
|
|
|
|
|
|
|
|
Funds from operations
FFO
|
|
$
|
.93
|
|
|
$
|
.74
|
|
|
|
|
|
|
|
|
|
|
Distribution
Policy
We have elected to be taxed as a REIT commencing with our
taxable year that began on April 6, 2004 and ended on
December 31, 2004. To qualify as a REIT, we must meet a
number of organizational and operational requirements, including
a requirement that we distribute at least 90% of our REIT
taxable income, excluding net capital gain, to our stockholders.
It is our current intention to comply with these requirements
and maintain such status going forward.
The table below is a summary of our distributions paid or
declared since January 1, 2005:
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Date of Distribution
|
|
Distribution per Share
|
|
|
February 15, 2007
|
|
March 29, 2007
|
|
April 12, 2007
|
|
$
|
.27
|
|
November 16, 2006
|
|
December 14, 2006
|
|
January 11, 2007
|
|
$
|
.27
|
|
August 18, 2006
|
|
September 14, 2006
|
|
October 12, 2006
|
|
$
|
.26
|
|
May 18, 2006
|
|
June 15, 2006
|
|
July 13, 2006
|
|
$
|
.25
|
|
February 16, 2006
|
|
March 15, 2006
|
|
April 12, 2006
|
|
$
|
.21
|
|
November 18, 2005
|
|
December 15, 2005
|
|
January 19, 2006
|
|
$
|
.18
|
|
August 18, 2005
|
|
September 15, 2005
|
|
September 29, 2005
|
|
$
|
.17
|
|
May 19, 2005
|
|
June 20, 2005
|
|
July 14, 2005
|
|
$
|
.16
|
|
March 4, 2005
|
|
March 16, 2005
|
|
April 15, 2005
|
|
$
|
.11
|
|
November 11, 2004
|
|
December 16, 2004
|
|
January 11, 2005
|
|
$
|
.11
|
|
We intend to pay to our stockholders, within the time periods
prescribed by the 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.
35
|
|
ITEM 7.A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market risk includes risks that arise from changes in interest
rates, foreign currency exchange rates, commodity prices, equity
prices and other market changes that affect market sensitive
instruments. In pursuing our business plan, we expect that the
primary market risk to which we will be exposed is interest rate
risk.
In addition to changes in interest rates, the value of our
facilities will be subject to fluctuations based on changes in
local and regional economic conditions and changes in the
ability of our tenants to generate profits, all of which may
affect our ability to refinance our debt if necessary. The
changes in the value of our facilities would be reflected also
by changes in cap rates, which is measured by the
current base rent divided by the current market value of a
facility.
If market rates of interest on our variable rate debt increase
by 1%, the increase in annual interest expense on our variable
rate debt would decrease future earnings and cash flows by
approximately $150,000 per year. If market rates of
interest on our variable rate debt decrease by 1%, the decrease
in interest expense on our variable rate debt would increase
future earnings and cash flows by approximately
$150,000 per year. This assumes that the amount outstanding
under our variable rate debt remains approximately
$15.0 million, the balance at March 1, 2007.
We currently have no assets denominated in a foreign currency,
nor do we have any assets located outside of the United States.
Our exchangeable notes are exchangeable into 60.3346 shares
of our stock for each $1,000 note. This equates to a conversion
price of $16.57 per share. This conversion price adjusts
based on a formula which considers increases to our dividend
subsequent to the issuance of the notes in November, 2007. Our
dividend declared in November, 2006, went ex-dividend on
December 12, 2006, at which time our conversion price
adjusted to $16.56 per share. Future changes to the
conversion price will depend on our level of dividends which
cannot be predicted at this time. We have declared a dividend of
$.27 cents per share to stockholders of record on March 29,
2007. Any adjustments for dividend increases until the notes are
settled in 2011 will affect the price of the notes and the
number of shares for which they will eventually be settled.
At the time we issued the exchangeable notes, we also entered
into a capped call or call spread transaction. The effect of
this transaction was to increase the conversion price from
$16.57 to $18.94. As a result, our shareholders will not
experience any dilution until our share price exceeds $18.94. If
our share price exceeds that price, the result would be that we
would issue additional shares of common stock. At a price of
$20 per share, we would be required to issue an additional
434,000 shares. At $25 per share, we would be required
to issue an additional two million shares.
36
|
|
ITEM 8.
|
Financial
Statements and Supplementary Data
|
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Medical Properties Trust, Inc.:
We have audited the accompanying consolidated balance sheets of
Medical Properties Trust, Inc. and subsidiaries as of
December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders equity (deficit),
and cash flows for each of the years in the three-year period
ended December 31, 2006. In connection with our audits of
the consolidated financial statements, we also have audited
financial statement schedules III and IV. These
consolidated financial statements and financial statement
schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Medical Properties Trust, Inc. and subsidiaries as
of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles. Also in
our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Medical Properties Trust, Inc.s internal
control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 15, 2007 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
/s/ KPMG LLP
Birmingham, Alabama
March 15, 2007
37
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Real estate assets
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
33,809,594
|
|
|
$
|
21,430,000
|
|
Buildings and improvements
|
|
|
387,770,513
|
|
|
|
203,905,369
|
|
Construction in progress
|
|
|
57,432,264
|
|
|
|
45,913,085
|
|
Intangible lease assets
|
|
|
15,787,615
|
|
|
|
9,666,192
|
|
Mortgage loans
|
|
|
105,000,000
|
|
|
|
40,000,000
|
|
Real estate held for sale
|
|
|
63,324,381
|
|
|
|
56,187,747
|
|
|
|
|
|
|
|
|
|
|
Gross investment in real estate
assets
|
|
|
663,124,367
|
|
|
|
377,102,392
|
|
Accumulated depreciation
|
|
|
(10,758,514
|
)
|
|
|
(5,260,219
|
)
|
Accumulated amortization
|
|
|
(1,297,908
|
)
|
|
|
(622,612
|
)
|
|
|
|
|
|
|
|
|
|
Net investment in real estate
assets
|
|
|
651,067,945
|
|
|
|
371,219,561
|
|
Cash and cash equivalents
|
|
|
4,102,873
|
|
|
|
59,115,832
|
|
Interest and rent receivable
|
|
|
11,893,513
|
|
|
|
2,236,732
|
|
Straight-line rent receivable
|
|
|
12,686,976
|
|
|
|
7,213,591
|
|
Other loans
|
|
|
45,172,830
|
|
|
|
45,813,486
|
|
Other assets of discontinued
operations
|
|
|
6,890,919
|
|
|
|
2,224,295
|
|
Other assets
|
|
|
12,941,689
|
|
|
|
7,629,220
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
744,756,745
|
|
|
$
|
495,452,717
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
Liabilities
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
304,961,898
|
|
|
$
|
65,010,178
|
|
Debt real estate held
for sale
|
|
|
43,165,650
|
|
|
|
35,474,342
|
|
Accounts payable and accrued
expenses
|
|
|
30,045,642
|
|
|
|
17,611,195
|
|
Liabilities of discontinued
operations
|
|
|
341,216
|
|
|
|
2,317,705
|
|
Deferred revenue
|
|
|
14,615,609
|
|
|
|
5,201,488
|
|
Lease deposits and other
obligations to tenants
|
|
|
6,853,759
|
|
|
|
11,386,801
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
399,983,774
|
|
|
|
137,001,709
|
|
Minority interests
|
|
|
1,051,835
|
|
|
|
2,173,866
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par
value. Authorized 10,000,000 shares; no shares outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par
value. Authorized 100,000,000 shares; issued and
outstanding 39,585,510 shares at
December 31, 2006 and 39,345,105 shares at
December 31, 2005, and
|
|
|
39,586
|
|
|
|
39,345
|
|
Additional paid-in capital
|
|
|
356,678,018
|
|
|
|
359,588,362
|
|
Distributions in excess of net
income
|
|
|
(12,996,468
|
)
|
|
|
(3,350,565
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
343,721,136
|
|
|
|
356,277,142
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
744,756,745
|
|
|
$
|
495,452,717
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
38
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent billed
|
|
$
|
32,190,772
|
|
|
$
|
20,867,466
|
|
|
$
|
6,162,278
|
|
Straight-line rent
|
|
|
5,952,442
|
|
|
|
4,764,527
|
|
|
|
2,449,066
|
|
Interest income from loans
|
|
|
12,328,218
|
|
|
|
4,820,552
|
|
|
|
2,282,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
50,471,432
|
|
|
|
30,452,545
|
|
|
|
10,893,459
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate depreciation and
amortization
|
|
|
6,704,924
|
|
|
|
4,182,731
|
|
|
|
1,478,470
|
|
General and administrative
|
|
|
10,190,850
|
|
|
|
8,016,992
|
|
|
|
5,150,786
|
|
Costs of terminated acquisitions
|
|
|
|
|
|
|
|
|
|
|
585,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
16,895,774
|
|
|
|
12,199,723
|
|
|
|
7,214,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
33,575,658
|
|
|
|
18,252,822
|
|
|
|
3,678,858
|
|
Other income
(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
515,038
|
|
|
|
2,091,132
|
|
|
|
930,260
|
|
Interest expense
|
|
|
(4,417,955
|
)
|
|
|
(1,521,169
|
)
|
|
|
(32,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other (expense) income
|
|
|
(3,902,917
|
)
|
|
|
569,963
|
|
|
|
897,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
|
29,672,741
|
|
|
|
18,822,785
|
|
|
|
4,576,349
|
|
Income from discontinued operations
|
|
|
486,957
|
|
|
|
817,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
30,159,698
|
|
|
$
|
19,640,347
|
|
|
$
|
4,576,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.75
|
|
|
$
|
0.58
|
|
|
$
|
0.24
|
|
Income from discontinued operations
|
|
|
0.01
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.76
|
|
|
$
|
0.61
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding basic
|
|
|
39,537,877
|
|
|
|
32,343,019
|
|
|
|
19,310,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
share diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.75
|
|
|
$
|
0.58
|
|
|
$
|
0.24
|
|
Income from discontinued operations
|
|
|
0.01
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.76
|
|
|
$
|
0.61
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding diluted
|
|
|
39,701,976
|
|
|
|
32,370,089
|
|
|
|
19,312,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
39
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
(Deficit)
For the Years Ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Additional
|
|
|
Distributions
|
|
|
Total
|
|
|
|
|
|
|
Par
|
|
|
|
|
|
Par
|
|
|
Paid-in
|
|
|
in Excess
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
of Net Income
|
|
|
Equity (Deficit)
|
|
|
Balance at December 31,
2003
|
|
|
|
|
|
|
|
|
|
|
1,630,435
|
|
|
|
1,630
|
|
|
|
|
|
|
|
(1,023,276
|
)
|
|
|
(1,021,646
|
)
|
Redemption of founders shares
|
|
|
|
|
|
|
|
|
|
|
(1,108,527
|
)
|
|
|
(1,108
|
)
|
|
|
1,108
|
|
|
|
|
|
|
|
|
|
Issuance of common stock (net of
offering costs)
|
|
|
|
|
|
|
|
|
|
|
25,560,954
|
|
|
|
25,561
|
|
|
|
233,476,082
|
|
|
|
|
|
|
|
233,501,643
|
|
Value of warrants issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,500
|
|
|
|
|
|
|
|
24,500
|
|
Deferred stock units issued to
directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
|
|
|
|
|
|
125,000
|
|
Distributions declared
($.21 per common share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,477,402
|
)
|
|
|
(5,477,402
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,576,349
|
|
|
|
4,576,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
26,082,862
|
|
|
|
26,083
|
|
|
|
233,626,690
|
|
|
|
(1,924,329
|
)
|
|
|
231,728,444
|
|
Deferred stock units issued to
directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182,603
|
|
|
|
(10,852
|
)
|
|
|
171,751
|
|
Retirement of deferred stock units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
(75,000
|
)
|
Restricted shares issued to
employees
|
|
|
|
|
|
|
|
|
|
|
52,220
|
|
|
|
52
|
|
|
|
1,174,952
|
|
|
|
|
|
|
|
1,175,004
|
|
Proceeds from exercise of warrant
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
|
35
|
|
|
|
325,465
|
|
|
|
|
|
|
|
325,500
|
|
Issuance of common stock (net of
offering costs)
|
|
|
|
|
|
|
|
|
|
|
13,175,023
|
|
|
|
13,175
|
|
|
|
124,353,652
|
|
|
|
|
|
|
|
124,366,827
|
|
Distributions declared
($.62 per common share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,055,731
|
)
|
|
|
(21,055,731
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,640,347
|
|
|
|
19,640,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
39,345,105
|
|
|
|
39,345
|
|
|
|
359,588,362
|
|
|
|
(3,350,565
|
)
|
|
|
356,277,142
|
|
Dividends declared ($.99 per
common share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,761,220
|
)
|
|
|
(39,761,220
|
)
|
Deferred stock units issued to
directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311,631
|
|
|
|
(44,381
|
)
|
|
|
267,250
|
|
Restricted shares issued to
employees in lieu of cash bonus
|
|
|
|
|
|
|
|
|
|
|
22,125
|
|
|
|
22
|
|
|
|
219,680
|
|
|
|
|
|
|
|
219,702
|
|
Restricted shares issued to
employees and directors
|
|
|
|
|
|
|
|
|
|
|
218,280
|
|
|
|
219
|
|
|
|
2,848,335
|
|
|
|
|
|
|
|
2,848,554
|
|
Cost of call spread transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,289,990
|
)
|
|
|
|
|
|
|
(6,289,990
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,159,698
|
|
|
|
30,159,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2006
|
|
|
|
|
|
$
|
|
|
|
|
39,585,510
|
|
|
$
|
39,586
|
|
|
$
|
356,678,018
|
|
|
$
|
(12,996,468
|
)
|
|
$
|
343,721,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
40
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
30,159,698
|
|
|
$
|
19,640,347
|
|
|
$
|
4,576,349
|
|
Adjustments to reconcile net income
to net cash provided by (used for) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
8,318,303
|
|
|
|
4,567,675
|
|
|
|
1,517,530
|
|
Amortization of deferred financing
costs
|
|
|
1,068,770
|
|
|
|
932,249
|
|
|
|
|
|
Straight-line rent revenue
|
|
|
(6,876,051
|
)
|
|
|
(5,460,148
|
)
|
|
|
(2,449,066
|
)
|
Share based payments
|
|
|
3,115,804
|
|
|
|
1,346,755
|
|
|
|
125,000
|
|
Deferred revenue and fee income
|
|
|
(1,192,231
|
)
|
|
|
(270,727
|
)
|
|
|
|
|
Provision for uncollectible
receivables and loans
|
|
|
3,313,061
|
|
|
|
|
|
|
|
|
|
Interest cost recorded as addition
to debt
|
|
|
1,253,236
|
|
|
|
|
|
|
|
|
|
Other adjustments
|
|
|
(419,469
|
)
|
|
|
(96,677
|
)
|
|
|
(734,887
|
)
|
Increase in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and rent receivable
|
|
|
(285,717
|
)
|
|
|
(486,521
|
)
|
|
|
(419,776
|
)
|
Other assets
|
|
|
(2,407,394
|
)
|
|
|
(2,312,681
|
)
|
|
|
(309,769
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
|
6,982,887
|
|
|
|
4,700,558
|
|
|
|
6,644,130
|
|
Deferred revenue
|
|
|
107,390
|
|
|
|
1,420,030
|
|
|
|
210,000
|
|
Lease deposits and other
obligations to tenants
|
|
|
(1,054.946
|
)
|
|
|
174,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
42,083,341
|
|
|
|
24,155,387
|
|
|
|
9,159,511
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate acquired
|
|
|
(121,408,474
|
)
|
|
|
(97,667,724
|
)
|
|
|
(127,372,195
|
)
|
Proceeds from sale of real estate
|
|
|
7,642,332
|
|
|
|
|
|
|
|
|
|
Principal received on loans
receivable
|
|
|
|
|
|
|
7,890,958
|
|
|
|
|
|
Investment in loans receivable
|
|
|
(67,597,349
|
)
|
|
|
(45,999,178
|
)
|
|
|
(44,317,263
|
)
|
Construction in progress
|
|
|
(114,362,232
|
)
|
|
|
(78,778,843
|
)
|
|
|
(23,151,797
|
)
|
Other investments
|
|
|
(1,135,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing
activities
|
|
|
(296,861,522
|
)
|
|
|
(214,554,787
|
)
|
|
|
(194,841,255
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt
|
|
|
362,128,450
|
|
|
|
104,474,342
|
|
|
|
56,200,000
|
|
Payments of debt
|
|
|
(118,607,528
|
)
|
|
|
(60,645,833
|
)
|
|
|
(300,000
|
)
|
Deferred financing costs
|
|
|
(1,237,947
|
)
|
|
|
(1,461,342
|
)
|
|
|
(3,869,767
|
)
|
Distributions paid
|
|
|
(36,105,732
|
)
|
|
|
(16,730,414
|
)
|
|
|
(2,608,286
|
)
|
Proceeds from sale of common
shares, net of offering costs
|
|
|
|
|
|
|
125,272,302
|
|
|
|
233,703,474
|
|
Sale of partnership units
|
|
|
|
|
|
|
1,137,500
|
|
|
|
|
|
Cost of call spread transactions
|
|
|
(6,289,990
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(122,031
|
)
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
199,765,222
|
|
|
|
151,971,555
|
|
|
|
283,125,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and
cash equivalents for the year
|
|
|
(55,012,959
|
)
|
|
|
(38,427,845
|
)
|
|
|
97,443,677
|
|
Cash and cash equivalents at
beginning of year
|
|
|
59,115,832
|
|
|
|
97,543,677
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
4,102,873
|
|
|
$
|
59,115,832
|
|
|
$
|
97,543,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, including
capitalized interest of $6,220,427 in 2006 and $3,107,966 in 2005
|
|
$
|
5,351,450
|
|
|
$
|
3,461,654
|
|
|
$
|
|
|
Supplemental schedule of non-cash
investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction period rent and
interest receivable recorded as deferred revenue
|
|
$
|
9,083,201
|
|
|
$
|
5,259,006
|
|
|
$
|
757,787
|
|
Real estate acquisitions and new
loans receivable recorded as lease and loan deposits
|
|
|
218,257
|
|
|
|
8,603,075
|
|
|
|
5,906,807
|
|
Real estate acquisitions and new
loans receivable recorded as deferred revenue
|
|
|
1,184,000
|
|
|
|
577,500
|
|
|
|
|
|
Construction and acquisition costs
charged to loans and real estate
|
|
|
1,455,395
|
|
|
|
774,479
|
|
|
|
|
|
Lease deposit applied to loan
receivable
|
|
|
3,768,864
|
|
|
|
|
|
|
|
|
|
Loan receivable settled by
acquisition of real estate
|
|
|
|
|
|
|
6,000,000
|
|
|
|
|
|
Construction in progress
transferred to land and building
|
|
|
94,660,739
|
|
|
|
56,409,377
|
|
|
|
|
|
Supplemental schedule of non-cash
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred offering costs charged to
proceeds from sale of common stock
|
|
$
|
|
|
|
$
|
579,975
|
|
|
$
|
201,832
|
|
Distributions declared and paid in
the following year
|
|
|
10,849,920
|
|
|
|
7,194,432
|
|
|
|
2,869,116
|
|
Minority interest granted for
contribution of land to development project
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
Other common stock transactions
|
|
|
264,302
|
|
|
|
10,904
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
41
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
Medical Properties Trust, Inc., a Maryland corporation (the
Company), was formed on August 27, 2003 under the General
Corporation Law of Maryland for the purpose of engaging in the
business of investing in and owning commercial real estate. The
Companys operating partnership subsidiary, MPT Operating
Partnership, L.P. (the Operating Partnership) through which it
conducts all of its operations, was formed in September 2003.
Through another wholly owned subsidiary, Medical Properties
Trust, LLC, the Company is the sole general partner of the
Operating Partnership. The Company presently owns directly all
of the limited partnership interests in the Operating
Partnership.
The Companys primary business strategy is to acquire and
develop real estate and improvements, primarily for long term
lease to providers of healthcare services such as operators of
general acute care hospitals, inpatient physical rehabilitation
hospitals, long term acute care hospitals, surgery
centers, centers for treatment of specific conditions such as
cardiac, pulmonary, cancer, and neurological hospitals, and
other healthcare-oriented facilities. The Company also makes
mortgage and other loans to operators of similar facilities. The
Company manages its business as a single business segment as
defined in Statement of Financial Accounting Standards (SFAS)
No. 131, Disclosures about Segments of an Enterprise and
Related Information.
From the time of the Companys initial capitalization in
April 2004 through completion of the February 28, 2007,
follow-on offering, the Company has issued approximately
47.8 million shares of common stock and realized net
proceeds of approximately $496.5 million. The Company has
also issued $125.0 million in fixed rate term notes and
$138.0 million in fixed rate exchangeable notes. At
March 1, 2007, the Company has in place a
$150.0 million secured revolving credit facility with an
available borrowing base of approximately $90.1 million.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of Estimates: The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Principles of Consolidation: Property holding
entities and other subsidiaries of which the Company owns 100%
of the equity or has a controlling financial interest evidenced
by ownership of a majority voting interest are consolidated. All
inter-company balances and transactions are eliminated. For
entities in which the Company owns less than 100% of the equity
interest, the Company consolidates the property if it has the
direct or indirect ability to make decisions about the
entities activities based upon the terms of the respective
entities ownership agreements. For these entities, the
Company records a minority interest representing equity held by
minority interests. For entities in which the Company owns less
than 100% and does not have the direct or indirect ability to
make decisions but does exert significant influence over the
entities activities, the Company records its ownership in
the entity using the equity method of accounting.
The Company periodically evaluates all of its transactions and
investments to determine if they represent variable interests in
a variable interest entity as defined by FASB Interpretation
No. 46 (revised December 2003)
(FIN 46-R),
Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements. If the Company
determines that it has a variable interest in a variable
interest entity, the Company determines if it is the primary
beneficiary of the variable interest entity. The Company
consolidates each variable interest entity in which the Company,
by virtue of its transactions with or investments in the entity,
is considered to be the primary beneficiary. The Company
re-evaluates its status as primary beneficiary when a variable
interest entity or potential variable interest entity has a
material change in its variable interests.
42
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes To
Consolidated
Financial Statements (Continued)
Cash and Cash Equivalents: Certificates of
deposit and short-term investments with original maturities of
three months or less and money-market mutual funds are
considered cash equivalents. Cash and cash equivalents which
have been pledged as security for letters of credit are recorded
in other assets.
Deferred Costs: Costs incurred prior to the
completion of offerings of stock or other capital instruments
that directly relate to the offering are deferred and netted
against proceeds received from the offering. Costs incurred in
connection with anticipated financings and refinancing of debt
are capitalized as deferred financing costs in other assets and
amortized over the lives of the related loans as an addition to
interest expense. For debt with defined principal re-payment
terms, the deferred costs are amortized to produce a constant
effective yield on the loan (interest method). For debt without
defined principal repayment terms, such as revolving credit
agreements, the deferred costs are amortized on the
straight-line method over the term of the debt. Costs that are
specifically identifiable with, and incurred prior to the
completion of, probable acquisitions are deferred and, to the
extent not collected from the sellers proceeds at
acquisition, capitalized upon closing. The Company begins
deferring costs when the Company and the seller have executed a
letter of intent (LOI), commitment letter or similar document
for the purchase of the property by the Company. Deferred
acquisition costs are expensed when management determines that
the acquisition is no longer probable. Leasing commissions and
other leasing costs directly attributable to tenant leases are
capitalized as deferred leasing costs and amortized on the
straight-line method over the terms of the related lease
agreements. Costs identifiable with loans made to lessees are
recognized as a reduction in interest income over the life of
the loan by the interest method.
Revenue Recognition: The Company receives
income from operating leases based on the fixed, minimum
required rents (base rents) and from additional rent based on a
percentage of tenant revenues once the tenants revenue has
exceeded an annual threshold (percentage rents). Rent revenue
from base rents is recorded on the straight-line method over the
terms of the related lease agreements for new leases and the
remaining terms of existing leases for acquired properties. The
straight-line method records the periodic average amount of base
rent earned over the term of a lease, taking into account
contractual rent increases over the lease term. The
straight-line method has the effect of recording more rent
revenue from a lease than a tenant is required to pay during the
first half of the lease term. During the last half of a lease
term, this effect reverses with less rent revenue recorded than
a tenant is required to pay. Rent revenue as recorded on the
straight-line method in the consolidated statement of operations
is shown as two amounts. Billed rent revenue is the amount of
base rent actually billed to the customer each period as
required by the lease. Unbilled rent revenue is the difference
between base rent revenue earned based on the straight-line
method and the amount recorded as billed base rent revenue. The
Company records the difference between base rent revenues earned
and amounts due per the respective lease agreements, as
applicable, as an increase or decrease to unbilled rent
receivable. Percentage rents are recognized in the period in
which revenue thresholds are met. Rental payments received prior
to their recognition as income are classified as rent received
in advance. The Company may also receive additional rent
(contingent rent) under some leases when the
U.S. Department of Labor consumer price index exceeds the
annual minimum percentage increase in the lease. Contingent
rents are recorded as billed rent revenue in the period received.
The Company begins recording base rent income from its
development projects when the lessee takes physical possession
of the facility, which may be different from the stated start
date of the lease. Also, during construction of its development
projects, the Company is generally entitled to accrue rent based
on the cost paid during the construction period (construction
period rent). The Company accrues construction period rent as a
receivable and deferred revenue during the construction period.
When the lessee takes physical possession of the facility, the
Company begins recognizing the accrued construction period rent
on the straight-line method over the remaining term of the lease.
Fees received from development and leasing services for lessees
are initially recorded as deferred revenue and recognized as
income over the initial term of an operating lease to produce a
constant effective yield on the lease (interest method). Fees
from lending services are recorded as deferred revenue and
recognized as income over the life of the loan using the
interest method.
43
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes To
Consolidated
Financial Statements (Continued)
Acquired Real Estate Purchase Price
Allocation: The Company allocates the purchase
price of acquired properties to net tangible and identified
intangible assets acquired based on their fair values in
accordance with the provisions of SFAS No. 141,
Business Combinations. In making estimates of fair values
for purposes of allocating purchase prices, the Company utilizes
a number of sources, including independent appraisals that may
be obtained in connection with the acquisition or financing of
the respective property and other market data. The Company also
considers information obtained about each property as a result
of its pre-acquisition due diligence, marketing and leasing
activities in estimating the fair value of the tangible and
intangible assets acquired.
The Company records above-market and below-market in-place lease
values, if any, for its facilities which are based on the
present value (using an interest rate which reflects the risks
associated with the leases acquired) of the difference between
(i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) managements estimate of fair
market lease rates for the corresponding in-place leases,
measured over a period equal to the remaining non-cancelable
term of the lease. The Company amortizes any resulting
capitalized above-market lease values as a reduction of rental
income over the remaining non-cancelable terms of the respective
leases. The Company amortizes any resulting capitalized
below-market lease values as an increase to rental income over
the initial term and any fixed-rate renewal periods in the
respective leases. Because the Companys strategy largely
involves the origination of long-term lease arrangements at
market rates, management does not expect the above-market and
below-market in-place lease values to be significant for many
anticipated transactions.
The Company measures the aggregate value of other intangible
assets acquired based on the difference between (i) the
property valued with existing in-place leases adjusted to market
rental rates and (ii) the property valued as if vacant.
Managements estimates of value are expected to be made
using methods similar to those used by independent appraisers
(e.g., discounted cash flow analysis). Factors considered by
management in its analysis include an estimate of carrying costs
during hypothetical expected
lease-up
periods considering current market conditions, and costs to
execute similar leases. Management also considers information
obtained about each targeted facility as a result of
pre-acquisition due diligence, marketing and leasing activities
in estimating the fair value of the tangible and intangible
assets acquired. In estimating carrying costs, management also
includes real estate taxes, insurance and other operating
expenses and estimates of lost rentals at market rates during
the expected
lease-up
periods, which are expected to range primarily from three to
eighteen months, depending on specific local market conditions.
Management also estimates costs to execute similar leases
including leasing commissions, legal and other related expenses
to the extent that such costs are not already incurred in
connection with a new lease origination as part of the
transaction.
The total amount of other intangible assets acquired, if any, is
further allocated to in-place lease values and customer
relationship intangible values based on managements
evaluation of the specific characteristics of each prospective
tenants lease and our overall relationship with that
tenant. Characteristics to be considered by management in
allocating these values include the nature and extent of our
existing business relationships with the tenant, growth
prospects for developing new business with the tenant, the
tenants credit quality and expectations of lease renewals,
including those existing under the terms of the lease agreement,
among other factors.
The Company amortizes the value of in-place leases, if any, to
expense over the initial term of the respective leases, which
range primarily from ten to 15 years. The value of customer
relationship intangibles is amortized to expense over the
initial term and any renewal periods in the respective leases,
but in no event will the amortization period for intangible
assets exceed the remaining depreciable life of the building.
Should a tenant terminate its lease, the unamortized portion of
the in-place lease value and customer relationship intangibles
would be charged to expense.
44
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes To
Consolidated
Financial Statements (Continued)
Real Estate and Depreciation: Depreciation is
calculated on the straight-line method over the estimated useful
lives of the related assets, as follows:
|
|
|
Buildings and improvements
|
|
40 years
|
Tenant origination costs
|
|
Remaining terms of the related
leases
|
Tenant improvements
|
|
Term of related leases
|
Furniture and equipment
|
|
3-7 years
|
Real estate is carried at depreciated cost. Expenditures for
ordinary maintenance and repairs are expensed to operations as
incurred. Significant renovations and improvements which improve
and/or
extend the useful life of the asset are capitalized and
depreciated over their estimated useful lives. In accordance
with SFAS No. 144, Accounting for the Impairment of
Long-Lived Assets and for Long- Lived Assets to Be Disposed Of
the Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate that
the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets, including an
estimated liquidation amount, during the expected holding
periods are less than the carrying amounts of those assets.
Impairment losses are measured as the difference between
carrying value and fair value of assets. For assets held for
sale, impairment is measured as the difference between carrying
value and fair value, less cost of disposal. Fair value is based
on estimated cash flows discounted at a risk-adjusted rate of
interest. The Company classifies real estate assets as held for
sale when the Company has commenced an active program to sell
the assets, and in the opinion of the Companys management,
it is probable the asset will be sold within the next
12 months. The Company records the results of operations
from material property sales or planned sales (which include
real property, loans and any receivables) as discontinued
operations in the consolidated statements of operations for all
periods presented. Results of discontinued operations include
interest expense from debt which secures the property sold or
held for sale or which the company can otherwise reasonably
allocate to the property.
Construction in progress includes the cost of land, the cost of
construction of buildings, improvements and equipment, and costs
for design and engineering. Other costs, such as interest,
legal, property taxes and corporate project supervision, which
can be directly associated with the project during construction,
are also included in construction in progress.
Loans: Loans consists of mortgage loans,
working capital loans and other long-term loans. Interest income
from loans is recognized as earned based upon the principal
amount outstanding. The mortgage loans are secured by interests
in real property. The working capital and other long-term loans
are generally secured by interests in receivables and corporate
and individual guarantees.
Losses from Rent Receivables and Loans: A
provision for losses on rent receivables and loans is recorded
when it becomes probable that the receivable or loan will not be
collected in full. The provision is an amount which reduces the
rent or loan to its estimated net realizable value based on a
determination of the eventual amounts to be collected either
from the debtor or from the collateral, if any. At that time,
the Company discontinues recording interest income on the loan
or rent receivable from the tenant.
Net Income Per Share: The Company reports
earnings per share pursuant to SFAS No. 128,
Earnings Per Share. Basic net income per share is
computed by dividing the net income (loss) to common
stockholders by the weighted average number of common shares and
contingently issuable common shares outstanding during the
period. Diluted net income per share is computed by dividing the
net income available to common shareholders by the weighted
average number of common shares outstanding during the period,
adjusted for the assumed conversion of all potentially dilutive
outstanding shares, warrants and options.
Income Taxes: For the period from
January 1, 2004 through April 5, 2004, the Company had
elected
Sub-chapter S
status for income tax purposes, at which time the Company filed
its final tax returns as a
Sub-chapter S
company. Since April 6, 2004, the Company has conducted its
business as a real estate investment trust (REIT) under
Sections 856 through 860 of the Internal Revenue Code. In
2005, the Company filed its initial tax
45
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes To
Consolidated
Financial Statements (Continued)
return as a REIT for the period from April 6, 2004, through
December 31, 2004, at which time it formally made an
election to be taxed as a REIT. To qualify as a REIT, the
Company must meet certain organizational and operational
requirements, including a requirement to currently distribute to
shareholders at least 90% of its ordinary taxable income. As a
REIT, the Company generally is not subject to federal income tax
on taxable income that it distributes to its shareholders. If
the Company fails to qualify as a REIT in any taxable year, it
will then be subject to federal income taxes on its taxable
income at regular corporate rates and will not be permitted to
qualify for treatment as a REIT for federal income tax purposes
for four years following the year during which qualification is
lost, unless the Internal Revenue Service grants the Company
relief under certain statutory provisions. Such an event could
materially adversely affect the Companys net income and
net cash available for distribution to shareholders. However,
the Company intends to operate in such a manner so that the
Company will remain qualified as a REIT for federal income tax
purposes.
The Companys financial statements include the operations
of a taxable REIT subsidiary, MPT Development Services, Inc.
(MDS) that is not entitled to a dividends paid deduction and is
subject to federal, state and local income taxes. MDS is
authorized to provide property development, leasing and
management services for third-party owned properties and makes
loans to lessees and operators.
Stock-Based Compensation: The Company
currently sponsors the Amended and Restated Medical Properties
Trust, Inc. 2004 Equity Incentive Plan (the Equity Incentive
Plan) that was established in 2004. The Company accounts for its
stock option plan under the recognition and measurement
provisions of SFAS No. 123(R), Share-Based
Payment, which is a revision of SFAS No. 123,
Accounting for Stock Based Compensation. Awards of
restricted stock and stock options with service conditions are
amortized to compensation expense over the vesting periods which
range from three to five years, using the straight-line method.
Awards of deferred stock units vest when granted and are charged
to expense at the date of grant. Awards of restricted stock
which contain performance criteria are amortized to compensation
expense over the vesting periods, which correspond to the period
over which services are performed, which range from three to
five years, using the straight-line method. Awards of restricted
stock with performance conditions are amortized over the service
period in which the performance conditions are measured,
adjusted for the probability of achieving the performance
conditions.
Derivative Financial Investments and Hedging
Activities. The Company accounts for its
derivative and hedging activities using SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS Nos. 137, 138 and 149
and interpreted, which requires all derivative instruments to be
carried at fair value on the balance sheet.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management
objective and strategy for undertaking the hedge. This process
includes specific identification of the hedging instrument and
the hedge transaction, the nature of the risk being hedged and
how the hedging instruments effectiveness in hedging the
exposure to the hedged transactions variability in cash
flows attributable to the hedged risk will be assessed. Both at
the inception of the hedge and on an ongoing basis, the Company
assesses whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in cash
flows or fair values of hedged items. The Company discontinues
hedge accounting if a derivative is not determined to be highly
effective as a hedge or has ceased to be a highly effective
hedge. We are not currently a party to any derivatives contracts
that require accounting under SFAS No. 133.
Emerging Issues Task Force (EITF)
No. 00-19
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock
provides guidance on the accounting and reporting for
free-standing derivative financial instruments and for embedded
derivatives which are indexed to and settled in the
Companys stock. EITF
No. 00-19
provides criteria by which certain derivative financial
instruments should be reported as liabilities or equity. It also
provides guidance as to when embedded derivatives should be
separated or bifurcated from the host instrument.
The Company follows the provisions of this EITF to account for
the conversion feature and capped call transactions
related to its debt which is exchangeable for shares of the
Companys common stock.
46
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes To
Consolidated
Financial Statements (Continued)
In December 2006, the FASB ratified the consensus reached by the
EITF regarding EITF
00-19-2,
Accounting for Registration Payment Arrangements. The
guidance specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a
registration payment arrangement, whether issued as a separate
agreement or included as a provision of a financial instrument
or other agreement, should be separately recognized and measured
in accordance with SFAS No. 5, Accounting for
Contingencies. The guidance is effective for periods
beginning after December 15, 2006. However, early adoption
is allowed for periods in which financial statements have not
previously been issued.
Fair Value of Financial Instruments: The
Company has various assets and liabilities that are considered
financial instruments. The Company estimates that the carrying
value of cash and cash equivalents, interest receivable and
accounts payable and accrued expenses approximates their fair
values. The Company estimates the fair value of unbilled rent
receivable based on expected payment dates, discounted at a rate
which the Company considers appropriate for such assets
considering their credit quality and maturity. The Company
estimates the fair value of loans based on the present value of
future payments, discounted at a rate which the Company
considers appropriate for such assets considering their credit
quality and maturity. The Company estimates that the carrying
value of the Companys revolving credit facility should
approximate fair value because the debt is variable rate and
adjusts daily with changes in the underlying interest rate
index. The Company determines the fair value of its exchangeable
notes based on quotes from securities dealers and market makers.
The Company estimates the fair value of its senior notes based
on the present value of future payments, discounted at a rate
which the Company considers appropriate for such debt.
Reclassifications: Certain reclassifications
have been made to the 2005 and 2004 consolidated financial
statements to conform to the 2006 consolidated financial
statement presentation. These reclassifications have no impact
on stockholders equity or net income.
New Accounting Pronouncements: The following
is a summary of recently issued accounting pronouncements which
have been issued but not adopted by the Company.
Statement of Financial Accounting Standards No. 157,
Fair Value Measurements,
(SFAS No. 157) defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair
value measurements. The changes to current practice resulting
from the application of SFAS No. 157 relate to the
definition of fair value, the methods used to measure fair
value, and the expanded disclosures about fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. The Company does not expect that this statement will have
a material effect on its financial position and results of
operations.
|
|
3.
|
Real
Estate and Loans Receivable
|
Acquisitions
The Company has recorded the following assets from its
acquisitions in 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
$
|
7,685,622
|
|
|
$
|
10,760,000
|
|
Buildings
|
|
|
101,374,559
|
|
|
|
92,296,506
|
|
Intangible lease assets
|
|
|
6,478,579
|
|
|
|
4,351,229
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
115,538,760
|
|
|
$
|
107,407,735
|
|
|
|
|
|
|
|
|
|
|
In 2006, the Company used funds from its revolving credit
facility as well as Senior and Exchangeable Notes to fund
acquisitions and developments. The Company funded the 2005
acquisitions and developments from its 2004 private placement,
its 2005 IPO and from borrowings on its term loan and revolving
credit facility. The Company entered into 15 year leases
with the operators of the facilities (with the exception of a
10 year lease of the medical
47
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes To
Consolidated
Financial Statements (Continued)
office building), which in certain instances were also the
sellers of the facilities. Each lease has renewal options which
are generally for three five year periods. The leases also
contain base rent escalation provisions based on the greater of
a fixed percentage or general levels of inflation. Some leases
contain provisions for the payment of percentage rents based on
the tenant exceeding a certain level of revenues in their
operations.
The Company recorded amortization expense of approximately
$727,000 and $456,000 in 2006 and 2005, respectively, and
expects to recognize amortization expense from existing lease
intangible assets of approximately $1.1 million in each of
the next five years. Capitalized lease intangibles have a
weighted average remaining life of approximately 14 years.
Development
Projects
In addition to properties acquired and placed in service during
2005 and 2006, the Company has the following development
projects in various stages of completion at December 31,
2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
|
|
|
Cost
|
|
|
Remaining
|
|
|
|
Commitment
|
|
|
Incurred
|
|
|
Commitment
|
|
|
Bucks County, PA womens
hospital and medical office building
|
|
$
|
38.0
|
|
|
$
|
35.8
|
|
|
$
|
2.2
|
|
Portland, OR acute care hospital
|
|
|
21.8
|
|
|
|
17.1
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
59.8
|
|
|
$
|
52.9
|
|
|
$
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In each of these two development projects, the Company has
15 year leases with options to renew. During the
construction period, the Company is accruing and deferring rent
based on the cost paid during the construction period. The
Company will recognize the accrued construction period rent,
including interest on the unpaid amount, over the 15 year
terms of the leases. The Companys commitments include
loans of up to $4.0 million.
Leasing
Operations
Minimum rental payments due in future periods under operating
leases which have non-cancelable terms extending beyond one year
at December 31, 2006, are as follows:
|
|
|
|
|
2007
|
|
$
|
44,824,307
|
|
2008
|
|
|
45,574,139
|
|
2009
|
|
|
46,658,476
|
|
2010
|
|
|
47,768,821
|
|
2011
|
|
|
48,905,803
|
|
Thereafter
|
|
|
487,014,760
|
|
|
|
|
|
|
|
|
$
|
720,746,306
|
|
|
|
|
|
|
For the years ended December 31, 2006 and 2005, Vibra
Healthcare, LLC accounted for approximately 55% and 86%,
respectively, of the Companys total revenues from
continuing operations and affiliates of Prime Healthcare
Services, Inc. accounted for 19% and 10%, respectively of the
Companys total revenues from continuing operations.
Loans
In conjunction with the Companys purchase of six
healthcare facilities in July and August 2004, the Company also
made loans aggregating $49.1 million to Vibra Healthcare,
LLC (Vibra). As of December 31, 2006, Vibra has reduced the
balance of the loans to approximately $37.6 million. In
January, 2007, Vibra further reduced its loan to a balance of
approximately $29.9 million. The Company has determined
that Vibra is a variable interest entity. The
48
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes To
Consolidated
Financial Statements (Continued)
Company has also determined that it is not the primary
beneficiary of Vibra and, therefore, has not consolidated Vibra
in the Companys consolidated financial statements.
In December, 2005, the Company made a $40.0 million
mortgage loan which is secured by a community hospital facility
located in Odessa, Texas. The loan requires payment of interest
only during its 15 year terms with principal due in full at
maturity. Interest is paid monthly and increases each year based
on the greater of a fixed percentage or the annual change in the
consumer price index. The loans may be prepaid under certain
specified conditions.
In July 2006, the Company made two mortgage loans totaling
$65.0 million, each secured by a general acute care
hospital located in California. The loans require the payment of
interest only during their 15 year terms with principal due
in full at maturity. Interest is paid monthly and increases each
year based on the annual change in the consumer price index. The
loans may be prepaid under certain specified conditions.
The following is a summary of debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Balance
|
|
|
Interest Rate
|
|
|
Balance
|
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
45,996,359
|
|
|
7.800%
|
|
|
|
$
|
65,010,178
|
|
|
|
7.14
|
%
|
Senior unsecured notes
fixed rate through July and October, 2011, due July and October,
2016
|
|
|
125,000,000
|
|
|
7.333%
|
-7.871%
|
|
|
|
|
|
|
|
|
|
Exchangeable senior notes due
November, 2011
|
|
|
133,965,539
|
|
|
6.125%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
304,961,868
|
|
|
|
|
|
|
$
|
65,010,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, principal payments due for our
senior unsecured and exchangeable notes were as follows:
|
|
|
|
|
2007
|
|
$
|
|
|
2008
|
|
|
|
|
2009
|
|
|
|
|
2010
|
|
|
|
|
2011
|
|
|
133,965,539
|
|
Thereafter
|
|
|
125,000,000
|
|
|
|
|
|
|
Total
|
|
$
|
258,965,539
|
|
|
|
|
|
|
In October, 2005, the Company signed a Credit Agreement for a
secured revolving credit facility to replace an existing term
loan. The agreement has a four year term and has an interest
rate of the
30-day LIBOR
plus a spread ranging from 235 to 275 basis points (7.80%
at December 31, 2006) depending upon the
Companys overall leverage ratio. Outstanding balances are
secured by properties with a book value of $140.8 million
and a mortgage loan with a book value of $40.0 million at
December 31, 2006. The Company may borrow up to
$150.0 million depending on the value of collateral
properties. The Company currently may borrow up to approximately
$90.1 million, which may be increased to the maximum by
substituting or by adding other properties as the Company may
elect. The Company may also request to increase the available
line of credit to a maximum of $175.0 million, with the
payment of additional fees.
49
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes To
Consolidated
Financial Statements (Continued)
During the third quarter of 2006, the Company issued
$125.0 million of Senior Unsecured Notes (the
Notes). The Notes were placed in private
transactions exempt from registration under the Securities Act
of 1933, as amended, (the Securities Act). Notes
totaling $65.0 million will pay interest quarterly at a
fixed annual rate of 7.871% through July 30, 2011,
thereafter, at a floating annual rate of three-month LIBOR plus
2.30% and may be called at par value by the Company at any time
on or after July 30, 2011. The remaining Notes will pay
interest quarterly at fixed annual rates ranging from 7.333% to
7.715% through October 30, 2011, thereafter, at a floating
annual rate of three-month LIBOR plus 2.30% and may be called at
par value by the Company at any time on or after
October 30, 2011.
In November 2006, the Companys Operating Partnership
issued and sold, in a private offering, $138.0 million of
Exchangeable Senior Notes (the Exchangeable Notes).
The Exchangeable Notes will pay interest semi-annually at a rate
of 6.125% per annum (with an effective yield of 6.86%) and
mature on November 15, 2011. The Exchangeable Notes have an
initial exchange rate of 60.3346 Company common shares per
$1,000 principal amount of the notes, representing an exchange
price of approximately $16.57 per common share. The initial
exchange rate is subject to adjustment under certain
circumstances. The Exchangeable Notes are exchangeable, prior to
the close of business on the second business day immediately
preceding the stated maturity date at any time beginning on
August 15, 2011 and also upon the occurrence of specified
events, for cash up to their principal amount and the
Companys common shares for the remainder of the exchange
value in excess of the principal amount. Net proceeds from the
offering of the Exchangeable Notes were approximately
$134.0 million, after deducting the initial
purchasers discount.
Concurrently with the pricing of the Exchangeable Notes, the
Operating Partnership entered into a capped call
transaction with affiliates of the initial purchasers (the
option counterparties) in order to increase the
effective exchange price of the Exchangeable Notes to
$18.94 per common share. The capped call transaction is
expected to reduce the potential dilution with respect to the
Companys common stock upon exchange of the Exchangeable
Notes to the extent the then market value per share of the
Companys common stock does not exceed $18.94 during the
observation period relating to an exchange. The Company has
reserved approximately 8.3 million shares which may be
issued in the future to settle the Exchangeable Notes. The
premium of $6.3 million paid for the capped
call transaction has been recorded as a permanent
reduction to additional paid in capital in the consolidated
statement of stockholders equity.
In June, 2006, the Company exercised its option to convert the
two construction loans for the West Houston Town and County
Hospital and the adjacent medical office building to
thirty-month term loans. The loans bear interest at the
thirty-day
LIBOR plus 2.50%. The loans require monthly payments of
principal and interest with maturity in December, 2008 and are
secured by mortgages on the hospital and medical office
building. On January 17, 2007, the two properties securing
these loans were sold and the loans were paid in full.
Therefore, these loans are presented as Debt
held-for-sale
real estate as of December 31, 2006 and 2005. The interest
rate on these loans as of December 31, 2006 and 2005 was
7.838% and 6.640%, respectively.
Each of these debt agreements contains financial covenants which
are typical for each of the agreements. The Company was in
compliance with all such covenants at December 31, 2006.
In February, 2007, the Company agreed to the terms of a
$42.0 million secured revolving bank credit facility. The
terms are for five years with interest at the
30-day LIBOR
plus 1.50%. The amount available under the facility will
decrease by $800,000 per year beginning in the third year.
The facility will be secured by real estate with a book value of
approximately $61.7 million at December 31, 2006.
Earnings and profits, which determine the taxability of
distributions to shareholders, will differ from net income
reported for financial reporting purposes due to differences in
cost basis, differences in the estimated useful
50
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes To
Consolidated
Financial Statements (Continued)
lives used to compute depreciation, and differences between the
allocation of the Companys net income and loss for
financial reporting purposes and for tax reporting purposes.
Total common distributions declared were $0.99 per common
share in 2006, $0.62 per common share in 2005 and $0.21 per
common share in 2004. Of the dividends declared in 2004,
$0.129177 per common share is treated as ordinary income
for federal income tax purposes for the year ended
December 31, 2004. The remaining distribution of $0.080823
is treated as ordinary income for federal income tax purposes in
the year ended December 31, 2005. Of the dividends declared
in 2005, $0.536168 per common share is treated as ordinary
income for federal income tax purposes for the year ended
December 31, 2005. The remaining distribution of $.083832
is treated as ordinary income for federal income tax purposes in
the year ending December 31, 2006. Of the dividends
declared in 2006, $0.531249 per common share is treated as
ordinary income for federal income tax purposes for the year
ended December 31, 2006, $0.181671 is treated as a return
of capital and $.007080 will be treated as total capital gain,
all of which is unrecaptured Sec. 1250 gain. The remaining
distribution of $.27 is treated as income for federal income tax
purposes in the year ending December 31, 2007.
The following is a reconciliation of the weighted average shares
used in net income per common share basic to the
weighted average shares used in net income per common
share assuming dilution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Weighted average number of shares
issued and outstanding
|
|
|
39,498,712
|
|
|
|
32,326,939
|
|
|
|
19,308,511
|
|
Vested deferred stock units
|
|
|
39,165
|
|
|
|
16,080
|
|
|
|
2,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares basic
|
|
|
39,537,877
|
|
|
|
32,343,019
|
|
|
|
19,310,833
|
|
Restricted stock awards
|
|
|
164,099
|
|
|
|
26,115
|
|
|
|
|
|
Common stock warrants
|
|
|
|
|
|
|
955
|
|
|
|
1,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares diluted
|
|
|
39,701,976
|
|
|
|
32,370,089
|
|
|
|
19,312,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has adopted the Medical Properties Trust, Inc. 2004
Amended and Restated Equity Incentive Plan (the Equity Incentive
Plan) which authorizes the issuance of common stock options,
restricted stock, restricted stock units, deferred stock units,
stock appreciation rights and performance units. The Equity
Incentive Plan is administered by the Compensation Committee of
the Board of Directors. The Company has reserved
4,631,330 shares of common stock for awards under the
Equity Incentive Plan. The Equity Incentive Plan contains a
limit of 300,000 shares as the maximum number of shares of
common stock that may be awarded to an individual in any fiscal
year. Awards under the Equity Incentive Plan are subject to
forfeiture due to termination of employment prior to vesting. In
the event of a change in control of the Company, all outstanding
and unvested awards will immediately vest. The term of the
awards is set by the Compensation Committee, though Incentive
Stock Options may not have terms of more than ten years.
Forfeited awards are returned to the Equity Incentive Plan and
are then available to be re-issued as future awards.
SFAS No. 123(R), Share-Based Payment, became
effective for annual and interim periods beginning
January 1, 2006. The adoption of SFAS No. 123(R)
had no material effect on the results of operations during the
year ended December 31, 2006, nor in any prior period,
because substantially all of the Companys stock based
compensation is in the form of restricted share and deferred
stock unit awards. The Companys policy for recording
expense from restricted share and deferred stock unit awards was
not affected by SFAS No. 123(R). Under
SFAS No. 123(R), the
51
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes To
Consolidated
Financial Statements (Continued)
additional compensation expense which the Company would have
recorded for stock options in the years ended December 31,
2006, 2005 and 2004 was not material.
The Company awarded 60,000 stock options to three independent
directors in March, 2005, with an estimated grant date fair
value of $1.86 per option. With those awards, the Company
has awarded a total of 100,000 options, all of which were to
independent directors. No options have been awarded since that
date and none have been exercised. All options have an exercise
price of $10 per option (which was the per share value at
date of grant) and vested one-third upon grant. The remainder
vest one-half on each of the first and second anniversaries of
the date of grant, and expire ten years from the date of grant.
No other options have been granted. In May, 2006, the members of
the Compensation Committee of the Board of Directors awarded
each of the five independent directors 5,000 deferred stock
units (DSUs). These DSUs vested immediately upon
grant and will be exchanged for shares of the Companys
common stock at the end of five years. The Company recorded a
non-cash expense of $267,250 on the date of grant based on the
market value of the Companys common stock.
Options exercisable at December 31, 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Exercise Price
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
Contractual Life (years)
|
|
|
$
|
10.00
|
|
|
|
100,000
|
|
|
|
80,000
|
|
|
|
7.8
|
|
The Company uses the Black-Scholes pricing model to calculate
the fair values of the options awarded. In 2005, the following
assumptions were used to derive the fair values: an option term
of four to six years; expected volatility of 27.75%; a weighted
average risk-free rate of return of 4.30%; a dividend yield of
4.80%. At December 31, 2006, the intrinsic value of options
exercisable and outstanding is approximately $424,000 and
$530,000, respectively.
Restricted stock awards vest over periods of three to five
years, valued at the average price per share of common stock on
the date of grant. Certain officers of the Company elected to
receive their 2005 incentive bonus in shares of restricted stock
in lieu of cash. Such shares vest at the rate of 25% on the date
grant, and 37.5% on January 1 in each of the following two
years. Shares granted under this plan are equivalent to 135% of
the amount of cash bonus which the officer would otherwise
receive. The price per share was based on the average market
price per share on the date of approval of the bonuses by the
Compensation Committee. The Compensation Committee awarded
140,500 shares of restricted common stock in May, 2006, to
Company officers. These shares vest over a period of five years
beginning July 1, 2006, based on a combination of service
and performance criteria. The following summarizes restricted
stock activity in 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Value at Award Date
|
|
|
Outstanding at January 1, 2006
|
|
|
621,460
|
|
|
$
|
10.10
|
|
Awarded bonus election
shares
|
|
|
88,499
|
|
|
$
|
9.93
|
|
Awarded other
|
|
|
140,500
|
|
|
$
|
11.60
|
|
Vested
|
|
|
(240,405
|
)
|
|
$
|
10.09
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
610,054
|
|
|
$
|
10.43
|
|
|
|
|
|
|
|
|
|
|
The value of restricted share awards is charged to compensation
expense over the vesting periods. In the year ended
December 31, 2006 and 2005, the Company recorded
approximately $2.9 million and $1.2 million,
respectively, of non-cash compensation expense for restricted
shares. The remaining unrecognized cost from share based
compensation at December 31, 2006, is approximately
$5.1 million and will be recognized over a weighted average
period of approximately 1.5 years. During the year ended
December 31, 2006, restricted shares which vested had a
value of approximately $2.7 million on the vesting dates.
52
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes To
Consolidated
Financial Statements (Continued)
|
|
8.
|
Commitments
and Contingencies
|
The Company has provided approximately $2.2 million of bank
letters of credit to two municipalities as security for its
obligations in two development projects. The Company has
deposited an equal amount of cash in separate accounts with the
bank as security for these letters of credit. The cash deposited
is recorded as other assets in the consolidated balance sheet at
December 31, 2006.
Fixed minimum payments due under operating leases with
non-cancelable terms of more than one year at December 31,
2006 are as follows:
|
|
|
|
|
2007
|
|
|
743,248
|
|
2008
|
|
|
750,741
|
|
2009
|
|
|
758,270
|
|
2010
|
|
|
701,740
|
|
2011
|
|
|
500,177
|
|
Thereafter
|
|
|
38,911,660
|
|
|
|
|
|
|
|
|
$
|
42,365,836
|
|
|
|
|
|
|
The total amount to be received from non-cancellable subleases
at December 31, 2006, is approximately $25.0 million.
The Company is a party to various legal proceedings incidental
to its business. In the opinion of management, after
consultation with legal counsel, the ultimate liability, if any,
with respect to those proceedings is not presently expected to
materially affect the financial position, results of operations
or cash flows of the Company.
On February 22, 2007, the Company completed the sale of
12,000,000 shares of common stock at a price of
$15.60 per shares, less an underwriting commission of five
percent. The underwriters have an option to purchase an
additional 1,800,000 shares at the same price, less an
underwriting commission of five percent, pursuant to their
over-allotment option. Of the 12 million shares being sold,
the underwriters are borrowing from third parties and selling
3,000,000 shares of Company common stock in connection with
forward sale agreements between the Company and affiliates of
the underwriters (the forward purchasers). The
Company will not initially receive any proceeds from the sale of
shares of Company common stock by the forward purchasers. The
Company expects to settle the forward sale agreements and
receive proceeds, subject to certain adjustments, from the sale
of those shares only upon one or more future physical
settlements of the forward sale agreements on a date or dates
specified by the Company by February 28, 2008. The Company
may elect to settle the forward sale agreements in cash, in
which case the Company may not receive any proceeds and may owe
cash to the forward purchasers. Cash settlement is based on the
difference between the then current forward price and the
current market price of the total shares remaining to be settled
under the forward sale agreements.
53
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes To
Consolidated
Financial Statements (Continued)
|
|
10.
|
Fair
Value of Financial Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Book
|
|
|
Fair
|
|
|
Book
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Cash and cash equivalents
|
|
$
|
4,102,873
|
|
|
$
|
4,102,873
|
|
|
$
|
59,115,832
|
|
|
$
|
59,115,832
|
|
Interest and other receivables
|
|
|
11,893,513
|
|
|
|
12,110,029
|
|
|
|
2,236,732
|
|
|
|
2,165,350
|
|
Straight-line rent receivable
|
|
|
12,686,976
|
|
|
|
4,995,269
|
|
|
|
7,213,591
|
|
|
|
2,800,694
|
|
Loans
|
|
|
150,172,830
|
|
|
|
173,597,486
|
|
|
|
85,813,486
|
|
|
|
95,404,391
|
|
Debt
|
|
|
304,961,898
|
|
|
|
319,113,009
|
|
|
|
65,010,178
|
|
|
|
65,010,178
|
|
Accounts payable and accrued
expenses
|
|
|
30,045,642
|
|
|
|
30,045,642
|
|
|
|
17,611,195
|
|
|
|
17,611,195
|
|
|
|
11.
|
Discontinued
Operations
|
The Company entered into a contract for the disposition of two
assets in 2006. On October 22, 2006, two of the
Companys subsidiaries terminated their respective leases
with Stealth, L.P. (Stealth). The leases were for
the hospital and medical office building (MOB), respectively,
operated together by Stealth as Houston Town and County Hospital
in Houston, Texas. The leases were originally entered into in
2004, with the lease for the hospital scheduled to expire in
2021 and that for the MOB to expire in 2016. The leases
required Stealth to make monthly payments of rent, including
annual escalations of rent, and payments to fund repairs and
improvements. The leases also required Stealth to pay all
operating expenses of the facilities, including ad valorem
taxes, insurance and utilities. In 2006, the Company recorded
revenue of approximately $7.4 million or 12.8% of total
revenue from the leases and loans with Stealth. In connection
with entering into the leases with Stealth, the Company also
made working capital loans to Stealth in an aggregate amount,
including accrued interest and after applying offsetting
credits, of approximately $3.2 million. Subsequent to the
lease termination, the Company received the full proceeds of a
letter of credit issued by Stealth in the amount of
$1.3 million, which was used to reduce the amount
outstanding under the loans.
Stealth had not obtained managed care provider contracts that
were necessary for profitable operation of the hospital.
Accordingly, and pursuant to the Companys rights under the
leases, the Company terminated the leases and began negotiations
directly with other hospital systems to lease or sell the
facilities. These negotiations resulted in the ultimate sale of
the hospital and MOB in January, 2007, for a sales price of
approximately $71.7 million. During the period from the
lease termination to the date of sale, the hospital was operated
by a new third party operator under contract to the hospital.
The Company also made loans to that operating company and
incurred other costs in the amount of approximately
$6.9 million, which the Company expects to recover from the
net revenues which the hospital and MOB generated during the
interim period. For the third party operator to repay the loan,
it must collect its accounts receivable and liquidate other
assets. Its accounts receivable are largely claims from Medicare
and commercial payers. As a new operator, the collections from
Medicare depend largely on yet to be determined cost
reimbursement rates. The final reimbursement rates will not be
determined until the operator submits its cost reports and
undergoes an audit by Medicare. As a result, the ability of the
operator to repay its loan from the Company will depend to a
large extent on its final reimbursement rates as determined by
Medicare. The Company has made no provision for any loss on this
loan as of December 31, 2006. However, the Company does
not expect that any loss which could occur would have a material
effect on its financial condition or results of operations as of
December 31, 2006. The revenues and expenses from leases
and loans to Stealth for the Houston Town and Country Hospital
are shown in the accompanying consolidated financial statements
as discontinued operations.
54
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes To
Consolidated
Financial Statements (Continued)
At the time of the termination, the Company had net loans and
receivables, including accrued interest receivable, from Stealth
and has recorded provisions for losses of approximately
$1.9 million, which includes a non-cash charge of
approximately $1.6 million from straight-line rent
receivable. The following table presents the results of
discontinued operations for the years ended December 31,
2006 and 2005 (there were no operations in 2004):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Revenues
|
|
$
|
7,428,770
|
|
|
$
|
1,096,654
|
|
Net profit
|
|
|
486,957
|
|
|
|
817,562
|
|
Earnings per share
basic and diluted
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
|
12.
|
Quarterly
Financial Data (unaudited)
|
The following is a summary of the unaudited quarterly financial
information for the years ended December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Month Periods in 2006 Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Revenues
|
|
$
|
10,757,672
|
|
|
$
|
10,909,814
|
|
|
$
|
12,915,676
|
|
|
$
|
15,888,270
|
|
Income from continuing operations
|
|
$
|
7,059,218
|
|
|
$
|
6,958,362
|
|
|
$
|
7,817,498
|
|
|
$
|
7,837,663
|
|
Income (loss) from discontinued
operations
|
|
$
|
918,392
|
|
|
$
|
956,709
|
|
|
$
|
856,049
|
|
|
$
|
(2,244,193
|
)
|
Net income
|
|
$
|
7,977,610
|
|
|
$
|
7,915,071
|
|
|
$
|
8,673,547
|
|
|
$
|
5,593,470
|
|
Net income per share
basic
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.22
|
|
|
$
|
0.14
|
|
Weighted average shares
outstanding basic
|
|
|
39,428,071
|
|
|
|
39,519,695
|
|
|
|
39,529,687
|
|
|
|
39,634,127
|
|
Net income per share
diluted
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.22
|
|
|
$
|
0.14
|
|
Weighted average shares
outstanding diluted
|
|
|
39,501,723
|
|
|
|
39,757,723
|
|
|
|
39,857,355
|
|
|
|
39,937,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Month Periods in 2005 Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Revenues
|
|
$
|
6,480,528
|
|
|
$
|
7,241,777
|
|
|
$
|
8,204,941
|
|
|
$
|
8,525,299
|
|
Income from continuing operations
|
|
$
|
3,559,934
|
|
|
$
|
4,379,811
|
|
|
$
|
5,256,091
|
|
|
$
|
5,626,949
|
|
Income from discontinued operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
817,562
|
|
Net income
|
|
$
|
3,559,934
|
|
|
$
|
4,379,811
|
|
|
$
|
5,256,091
|
|
|
$
|
6,444,511
|
|
Net income per share
basic
|
|
$
|
0.14
|
|
|
$
|
0.17
|
|
|
$
|
0.14
|
|
|
$
|
0.16
|
|
Weighted average shares
outstanding basic
|
|
|
26,099,195
|
|
|
|
26,096,021
|
|
|
|
37,606,480
|
|
|
|
39,359,578
|
|
Net income per share
diluted
|
|
$
|
0.14
|
|
|
$
|
0.17
|
|
|
$
|
0.14
|
|
|
$
|
0.16
|
|
Weighted average shares
outstanding diluted
|
|
|
26,103,259
|
|
|
|
26,110,119
|
|
|
|
37,654,576
|
|
|
|
39,382,139
|
|
55
|
|
ITEM 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure
|
None.
|
|
ITEM 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We have adopted and maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in our reports under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding required disclosure. In designing
and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls
and procedures.
As required by
Rule 13a-15(b),
under the Securities Exchange Act of 1934, as amended, we have
carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of the end of the period covered by this report. Based on the
foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
are effective in timely alerting them to material information
required to be disclosed by the company in the reports that the
Company files with the SEC.
Changes
in Internal Controls over Financial Reporting
There has been no change in our internal control over financial
reporting during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Managements
Report on Internal Control over Financial Reporting
Management of Medical Properties Trust, Inc. is responsible for
establishing and maintaining adequate internal control over
financial reporting as defined in
Rule 13a-15(f)
of the Securities Exchange Act of 1934. The Companys
internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles.
Because of inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In connection with the preparation of the Companys annual
financial statements, management has undertaken an assessment of
the effectiveness of the Companys internal control over
financial reporting as of December 31, 2006. The assessment
was based upon the framework described in Integrated
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO). Managements assessment included an
evaluation of the design of internal control over financial
reporting and testing of the operational effectiveness of
internal control over financial reporting. We have reviewed the
results of the assessment with the Audit Committee of our Board
of Directors.
Based on our assessment under the criteria set forth in COSO,
management has concluded that, as of December 31, 2006,
Medical Properties Trust, Inc. maintained effective internal
control over financial reporting.
56
Our managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2006 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in
their report which appears herein.
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Medical Properties Trust, Inc.:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that Medical Properties Trust, Inc. and
subsidiaries maintained effective internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Medical
Properties Trust, Inc.s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Medical
Properties Trust, Inc. and subsidiaries maintained effective
internal control over financial reporting as of
December 31, 2006, is fairly stated, in all material
respects, based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Also, in our opinion, Medical Properties Trust, Inc.
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2006, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Medical Properties Trust, Inc. as
of December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders equity (deficit)
and cash flows for each of the years in the three-year period
ended December 31, 2006 and the related financial statement
schedules, and our
57
report dated March 15, 2007, expressed an unqualified
opinion on those consolidated financial statements and financial
statement schedules.
Birmingham, Alabama
March 15, 2007
58
ITEM 9B. Other
Information
None.
PART III
|
|
ITEM 10.
|
Directors
and Executive Officers of the Registrant
|
The information required by this Item 10 is incorporated by
reference to our definitive Proxy Statement for the 2007 Annual
Meeting of Stockholders, which will be filed by us with the
Commission not later than April 17, 2007.
|
|
ITEM 11.
|
Executive
Compensation
|
The information required by this Item 11 is incorporated by
reference to our definitive Proxy Statement for the 2007 Annual
Meeting of Stockholders, which will be filed by us with the
Commission not later than April 17, 2007.
|
|
ITEM 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this Item 12 is incorporated by
reference to our definitive Proxy Statement for the 2007 Annual
Meeting of Stockholders, which will be filed by us with the
Commission not later than April 17, 2007.
|
|
ITEM 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this Item 13 is incorporated by
reference to our definitive Proxy Statement for the 2007 Annual
Meeting of Stockholders, which will be filed by us with the
Commission not later than April 17, 2007.
|
|
ITEM 14.
|
Principal
Accountant Fees and Services.
|
The information required by this Item 14 is incorporated by
reference to our definitive Proxy Statement for the 2007 Annual
Meeting of Stockholders, which will be filed by us with the
Commission not later than April 17, 2007.
PART IV
|
|
ITEM 15.
|
Exhibits
and Financial Statement Schedules.
|
(a) Financial Statements and Financial Statement
Schedules
|
|
|
|
|
Index of Financial Statements
of Medical Properties Trust, Inc. which are included in
Part II, Item 8 of this Annual Report on
Form 10-K:
|
|
|
|
|
Report of Independent Registered
Public Accounting Firm
|
|
|
37
|
|
Consolidated Balance Sheets as of
December 31, 2006 and 2005
|
|
|
38
|
|
Consolidated Statements of Income
for the Years Ended December 31, 2006, 2005 and 2004
|
|
|
39
|
|
Consolidated Statements of
Stockholders Equity for the Years Ended December 31,
2006, 2005 and 2004
|
|
|
40
|
|
Consolidated Statements of Cash
Flows for the Years Ended December 31, 2006, 2005 and 2004
|
|
|
41
|
|
Notes to Consolidated Financial
Statements
|
|
|
42
|
|
Index of Consolidated Financial
Statement Schedules
|
|
|
|
|
Schedule III Real
Estate and Accumulated Depreciation
|
|
|
65
|
|
Schedule IV
Mortgage Loan on Real Estate
|
|
|
67
|
|
59
(b) Exhibits
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
3.1(1)
|
|
Registrants Second Articles
of Amendment and Restatement
|
3.2(2)
|
|
Registrants Amended and
Restated Bylaws
|
3.3(3)
|
|
Articles of Amendment of
Registrants Second Articles of Amendment and Restatement
|
4.1(1)
|
|
Form of Common Stock Certificate
|
4.2(4)
|
|
Indenture, dated July 14,
2006, among Registrant, MPT Operating Partnership, L.P. and the
Wilmington Trust Company, as trustee
|
4.3(5)
|
|
Indenture, dated November 6,
2006, among Registrant, MPT Operating Partnership, L.P. and the
Wilmington Trust Company, as trustee
|
4.4(5)
|
|
Registration Rights Agreement
among Registrant, MPT Operating Partnership, L.P. and UBS
Securities LLC and J.P. Morgan Securities Inc., as
representatives of the initial purchasers, dated as of
November 6, 2006
|
10.1(1)
|
|
First Amended and Restated
Agreement of Limited Partnership of MPT Operating Partnership,
L.P.
|
10.2(1)
|
|
Amendment to the First Amended and
Restated Agreement of Limited Partnership of MPT Operating
Partnership, L.P.
|
10.3(6)
|
|
Amended and Restated 2004 Equity
Incentive Plan
|
10.4(7)
|
|
Form of Stock Option Award
|
10.5(7)
|
|
Form of Restricted Stock Award
|
10.6(7)
|
|
Form of Deferred Stock Unit Award
|
10.7(1)
|
|
Employment Agreement between
Registrant and Edward K. Aldag, Jr., dated
September 10, 2003
|
10.8(1)
|
|
First Amendment to Employment
Agreement between Registrant and Edward K. Aldag, Jr.,
dated March 8, 2004
|
10.9(1)
|
|
Employment Agreement between
Registrant and R. Steven Hamner, dated September 10, 2003
|
10.10(1)
|
|
Amended and Restated Employment
Agreement between Registrant and William G. McKenzie, dated
September 10, 2003
|
10.11(1)
|
|
Employment Agreement between
Registrant and Emmett E. McLean, dated September 10, 2003
|
10.12(1)
|
|
Employment Agreement between
Registrant and Michael G. Stewart, dated April 28, 2005
|
10.13(1)
|
|
Form of Indemnification Agreement
between Registrant and executive officers and directors
|
10.14(8)
|
|
Credit Agreement dated
October 27, 2005, among MPT Operating Partnership, L.P., as
borrower, and Merrill Lynch Capital, a division of Merrill Lynch
Business Financial Services, Inc., as Administrative Agent and
Lender, and Additional Lenders from Time to Time a Party thereto
|
10.15(1)
|
|
Third Amended and Restated Lease
Agreement between 1300 Campbell Lane, LLC and
1300 Campbell Lane Operating Company, LLC, dated
December 20, 2004
|
10.16(1)
|
|
First Amendment to Third Amended
and Restated Lease Agreement between 1300 Campbell Lane, LLC and
1300 Campbell Lane Operating Company, LLC, dated
December 31, 2004
|
10.17(1)
|
|
Second Amended and Restated Lease
Agreement between 92 Brick Road, LLC and 92 Brick Road,
Operating Company, LLC, dated December 20, 2004
|
10.18(1)
|
|
First Amendment to Second Amended
and Restated Lease Agreement between 92 Brick Road, LLC and 92
Brick Road, Operating Company, LLC, dated December 31, 2004
|
10.19(1)
|
|
Ground Lease Agreement between
West Jersey Health System and West Jersey/Mediplex
Rehabilitation Limited Partnership, dated July 15, 1993
|
10.20(1)
|
|
Third Amended and Restated Lease
Agreement between San Joaquin Health Care Associates
Limited Partnership and 7173 North Sharon Avenue Operating
Company, LLC, dated December 20, 2004
|
10.21(1)
|
|
First Amendment to Third Amended
and Restated Lease Agreement between San Joaquin Health
Care Associates Limited Partnership and 7173 North Sharon Avenue
Operating Company, LLC, dated December 31, 2004
|
60
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
10.22(1)
|
|
Second Amended and Restated Lease
Agreement between 8451 Pearl Street, LLC and 8451 Pearl Street
Operating Company, LLC, dated December 20, 2004
|
10.23(1)
|
|
First Amendment to Second Amended
and Restated Lease Agreement between 8451 Pearl Street, LLC and
8451 Pearl Street Operating Company, LLC, dated
December 31, 2004
|
10.24(1)
|
|
Second Amended and Restated Lease
Agreement between 4499 Acushnet Avenue, LLC and
4499 Acushnet Avenue Operating Company, LLC, dated
December 20, 2004
|
10.25(1)
|
|
First Amendment to Second Amended
and Restated Lease Agreement between 4499 Acushnet Avenue, LLC
and 4499 Acushnet Avenue Operating Company, LLC, dated
December 31, 2004
|
10.26(1)
|
|
Lease Agreement between MPT of
Victorville, LLC and Desert Valley Hospital, Inc., dated
February 28, 2005
|
10.27(1)
|
|
Purchase and Sale Agreement among
MPT Operating Partnership, L.P., MPT of Bucks County Hospital,
L.P., Bucks County Oncoplastic Institute, LLC, Jerome S.
Tannenbaum, M.D., M. Stephen Harrison and DSI Facility
Development, LLC, dated March 3, 2005
|
10.28(1)
|
|
Amendment to Purchase and Sale
Agreement among MPT Operating Partnership, L.P., MPT of Bucks
County Hospital, L.P., Bucks County Oncoplastic Institute, LLC,
DSI Facility Development, LLC, Jerome S. Tannenbaum, M.D.,
M. Stephen Harrison and G. Patrick Maxwell, M.D., dated
April 29, 2005
|
10.29(1)
|
|
Lease Agreement between Bucks
County Oncoplastic Institute, LLC and MPT of Bucks County, L.P.,
dated September 16, 2005
|
10.30(1)
|
|
Development Agreement among DSI
Facility Development, LLC, Bucks County Oncoplastic Institute,
LLC and MPT of Bucks County, L.P., dated September 16, 2005
|
10.31(1)
|
|
Funding Agreement among DSI
Facility Development, LLC, Bucks County Oncoplastic Institute,
LLC and MPT of Bucks County, L.P., dated September 16, 2005
|
10.32(1)
|
|
Purchase and Sale Agreement
between MPT of North Cypress, L.P. and North Cypress Medical
Center Operating Company, Ltd., dated as of June 1, 2005
|
10.33(1)
|
|
Contract for Purchase and Sale of
Real Property between North Cypress Property Holdings, Ltd. and
MPT of North Cypress, L.P., dated as of June 1, 2005
|
10.34(1)
|
|
Sublease Agreement between MPT of
North Cypress, L.P. and North Cypress Medical Center Operating
Company, Ltd., dated as of June 1, 2005
|
10.35(1)
|
|
Net Ground Lease between North
Cypress Property Holdings, Ltd. and MPT of North Cypress, L.P.,
dated as of June 1, 2005
|
10.36(1)
|
|
Lease Agreement between MPT of
North Cypress, L.P. and North Cypress Medical Center Operating
Company, Ltd., dated as of June 1, 2005
|
10.37(1)
|
|
Net Ground Lease between Northern
Healthcare Land Ventures, Ltd. and MPT of North Cypress, L.P.,
dated as of June 1, 2005
|
10.38(1)
|
|
Construction Loan Agreement
between North Cypress Medical Center Operating Company, Ltd. and
MPT Finance Company, LLC, dated June 1, 2005
|
10.39(1)
|
|
Purchase, Sale and Loan Agreement
among MPT Operating Partnership, L.P., MPT of Covington, LLC,
MPT of Denham Springs, LLC, Covington Healthcare Properties,
L.L.C., Denham Springs Healthcare Properties, L.L.C., Gulf
States Long Term Acute Care of Covington, L.L.C. and Gulf States
Long Term Acute Care of Denham Springs, L.L.C., dated
June 9, 2005
|
10.40(1)
|
|
Lease Agreement between MPT of
Covington, LLC and Gulf States Long Term Acute Care of
Covington, L.L.C., dated June 9, 2005
|
10.41(1)
|
|
Promissory Note made by Denham
Springs Healthcare Properties, L.L.C. in favor of MPT of Denham
Springs, LLC, dated June 9, 2005
|
10.42(1)
|
|
Purchase and Sale Agreement among
MPT Operating Partnership, L.P., MPT of Redding, LLC, Vibra
Healthcare, LLC and Northern California Rehabilitation Hospital,
LLC, dated June 30, 2005
|
10.43(1)
|
|
Lease Agreement between Northern
California Rehabilitation Hospital, LLC and MPT of Redding, LLC,
dated June 30, 2005
|
61
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
10.44(1)
|
|
Ground Lease Agreement between
National Medical Specialty Hospital of Redding, Inc. and
Guardian Postacute Services, Inc., dated November 14, 1997
|
10.45(1)
|
|
Amendment No. 1 to Ground
Lease Agreement between National Medical Specialty Hospital of
Redding, Inc. and Ocadian Care Centers, Inc., dated
November 29, 2001
|
10.46(1)
|
|
Purchase and Sale Agreement among
MPT Operating Partnership, L.P., MPT of Bloomington, LLC,
Southern Indiana Medical Park II, LLC and Monroe Hospital,
LLC, dated October 7, 2005
|
10.47(1)
|
|
Lease Agreement between Monroe
Hospital, LLC and MPT of Bloomington, LLC, dated October 7,
2005
|
10.48(1)
|
|
Development Agreement among Monroe
Hospital, LLC, Monroe Hospital Development, LLC and MPT of
Bloomington, LLC, dated October 7, 2005
|
10.49(1)
|
|
Funding Agreement between Monroe
Hospital, LLC and MPT of Bloomington, LLC, dated October 7,
2005
|
10.50(1)
|
|
Purchase and Sale Agreement among
MPT Operating Partnership, L.P., MPT of Chino, LLC, Prime
Healthcare Services, LLC, Veritas Health Services, Inc., Prime
Healthcare Services, Inc., Desert Valley Hospital, Inc. and
Desert Valley Medical Group, Inc., dated November 30, 2005
|
10.51(1)
|
|
Lease Agreement among Veritas
Health Services, Inc., Prime Healthcare Services, LLC and MPT of
Chino, LLC, dated November 30, 2005
|
10.52(1)
|
|
Loan Agreement among MPT Operating
Partnership, L.P., MPT of Odessa Hospital, L.P., Alliance
Hospital, Ltd. and SRI-SAI Enterprises, Inc., dated
December 23, 2005
|
10.53(1)
|
|
Promissory Note by Alliance
Hospital, Ltd. in favor of MPT of Odessa Hospital, L.P., dated
December 23, 2005
|
10.54(1)
|
|
Purchase and Sale Agreement among
MPT Operating Partnership, L.P., MPT of Sherman Oaks, LLC, Prime
A Investments, L.L.C., Prime Healthcare Services II, LLC,
Prime Healthcare Services, Inc., Desert Valley Medical Group,
Inc. and Desert Valley Hospital, Inc., dated December 30,
2005
|
10.55(1)
|
|
Lease Agreement between MPT of
Sherman Oaks, LLC and Prime Healthcare Services II, LLC,
dated December 30, 2005
|
10.56(9)
|
|
Forward Sale Agreement between
Registrant and UBS AG, London Branch, dated February 22,
2007
|
10.57(9)
|
|
Forward Sale Agreement between
Registrant and Wachovia Bank, National Association, dated
February 22, 2007
|
21.1(10)
|
|
Subsidiaries of Registrant
|
23.1(10)
|
|
Consent of KPMG LLP
|
31.1(10)
|
|
Certification of Chief Executive
Officer pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934
|
31.2(10)
|
|
Certification of Chief Financial
Officer pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934
|
32(10)
|
|
Certification of Chief Executive
Officer and Chief Financial Officer pursuant to
Rule 13a-14(b)
under the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350
|
99.1(10)
|
|
Consolidated Financial Statements
of Vibra Healthcare, LLC as of June 30, 2006
|
|
|
|
(1) |
|
Incorporated by reference to Registrants Registration
Statement on
Form S-11
filed with the Commission on October 26, 2004, as amended
(File
No. 333-119957). |
|
(2) |
|
Incorporated by reference to Registrants quarterly report
on
Form 10-Q
for the quarter ended June 30, 2005, filed with the
Commission on July 26, 2005. |
|
(3) |
|
Incorporated by reference to Registrants quarterly report
on
Form 10-Q
for the quarter ended September 30, 2005, filed with the
Commission on November 10, 2005. |
|
(4) |
|
Incorporated by reference to Registrants current report on
Form 8-K,
filed with the Commission on July 20, 2006. |
62
|
|
|
(5) |
|
Incorporated by reference to Registrants current report on
Form 8-K,
filed with the Commission on November 13, 2006. |
|
(6) |
|
Incorporated by reference to Registrants definitive proxy
statement on Schedule 14A, filed with the Commission on
September 13, 2005. |
|
(7) |
|
Incorporated by reference to Registrants current report on
Form 8-K,
filed with the Commission on October 18, 2005. |
|
(8) |
|
Incorporated by reference to Registrants current report on
Form 8-K,
filed with the Commission on November 2, 2005. |
|
(9) |
|
Incorporated by reference to Registrants current report on
Form 8-K,
filed with the Commission on February 28, 2007. |
|
(10) |
|
Included in this
Form 10-K. |
|
(11) |
|
Since Vibra Healthcare, LLC leases more than 20% of our
properties under triple net leases, the financial status of
Vibra may be considered relevant to investors. The most recently
available financial statements for Vibra are attached as
Exhibit 99.1 to this Annual Report on
Form 10-K.
We have not participated in the preparation of Vibras
financial statements nor do we have the right to dictate the
form of any financial statements provided to us by Vibra. |
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MEDICAL PROPERTIES TRUST, INC.
R. Steven Hamner
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: March 15, 2007
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this Report has been signed by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Edward
K. Aldag, Jr.
Edward
K. Aldag, Jr.
|
|
Chairman of the Board, President,
Chief Executive Officer and Director (Principal Executive
Officer)
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Virginia
A. Clarke
Virginia
A. Clarke
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Sherry
A. Kellett
Sherry
A. Kellett
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ R.
Steven Hamner
R.
Steven Hamner
|
|
Executive Vice President, Chief
Financial Officer and Director (Principal Financial and
Accounting Officer)
|
|
March 15, 2007
|
|
|
|
|
|
G.
Steven Dawson
|
|
Director
|
|
|
|
|
|
|
|
/s/ Robert
E. Holmes
Robert
E. Holmes, Ph.D.
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ William
G. McKenzie
William
G. McKenzie
|
|
Vice Chairman of the Board
|
|
March 15, 2007
|
|
|
|
|
|
/s/ L.
Glenn Orr, Jr.
L.
Glenn Orr, Jr.
|
|
Director
|
|
March 15, 2007
|
64
SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions Subsequent to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
Cost at December 31,
|
|
|
|
|
|
|
|
|
Date Acquired
|
|
|
|
|
|
|
|
Initial Costs
|
|
|
|
|
|
Carrying
|
|
|
2006
|
|
|
Accumulated
|
|
|
Date of
|
|
|
or
|
|
Depreciable
|
|
Location
|
|
Type of Property
|
|
Land
|
|
|
Buildings
|
|
|
Improvements
|
|
|
Costs
|
|
|
Land
|
|
|
Buildings(1)
|
|
|
Total
|
|
|
Depreciation
|
|
|
Construction
|
|
|
Placed in Service
|
|
Life (Years)
|
|
|
Bowling Green, KY
|
|
Rehabilitation hospital
|
|
$
|
3,070,000
|
|
|
$
|
33,570,541
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,070,000
|
|
|
$
|
33,570,541
|
|
|
$
|
36,640,541
|
|
|
$
|
2,098,159
|
|
|
|
1991
|
|
|
July 1, 2004
|
|
|
40
|
|
Thornton, CO
|
|
Rehabilitation hospital
|
|
|
2,130,000
|
|
|
|
6,013,142
|
|
|
|
|
|
|
|
|
|
|
|
2,130,000
|
|
|
|
6,013,142
|
|
|
|
8,143,142
|
|
|
|
350,767
|
|
|
|
1962
|
|
|
August 17, 2004
|
|
|
40
|
|
Fresno, CA
|
|
Rehabilitation hospital
|
|
|
1,550,000
|
|
|
|
16,363,153
|
|
|
|
|
|
|
|
|
|
|
|
1,550,000
|
|
|
|
16,363,153
|
|
|
|
17,913,153
|
|
|
|
1,022,697
|
|
|
|
1990
|
|
|
July 1, 2004
|
|
|
40
|
|
Marlton, NJ
|
|
Rehabilitation hospital
|
|
|
|
|
|
|
30,903,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,903,051
|
|
|
|
30,903,051
|
|
|
|
1,931,441
|
|
|
|
1994
|
|
|
July 1, 2004
|
|
|
40
|
|
New Bedford, NJ
|
|
Long term acute care hospital
|
|
|
1,400,000
|
|
|
|
19,772,169
|
|
|
|
|
|
|
|
|
|
|
|
1,400,000
|
|
|
|
19,772,169
|
|
|
|
21,172,169
|
|
|
|
1,153,376
|
|
|
|
1992
|
|
|
August 17, 2004
|
|
|
40
|
|
Victorville, CA
|
|
Acute care general hospital
|
|
|
2,000,000
|
|
|
|
24,994,553
|
|
|
|
|
|
|
|
31,270
|
|
|
|
2,000,000
|
|
|
|
25,025,823
|
|
|
|
27,025,823
|
|
|
|
1,147,016
|
|
|
|
1994
|
|
|
February 28, 2005
|
|
|
40
|
|
Covington, LA
|
|
Long term acute care hospital
|
|
|
821,429
|
|
|
|
10,238,246
|
|
|
|
|
|
|
|
13,843
|
|
|
|
821,429
|
|
|
|
10,252,089
|
|
|
|
11,073,518
|
|
|
|
405,722
|
|
|
|
1985
|
|
|
June 8, 2005
|
|
|
40
|
|
Denham Springs, LA
|
|
Long term acute care hospital
|
|
|
428,571
|
|
|
|
5,340,130
|
|
|
|
|
|
|
|
48,842
|
|
|
|
428,571
|
|
|
|
5,388,972
|
|
|
|
5,817,543
|
|
|
|
145,981
|
|
|
|
1965
|
|
|
June 8, 2005
|
|
|
40
|
|
Redding, CA
|
|
Rehabilitation hospital
|
|
|
|
|
|
|
19,952,023
|
|
|
|
|
|
|
|
8,170
|
|
|
|
|
|
|
|
19,960,193
|
|
|
|
19,960,193
|
|
|
|
748,735
|
|
|
|
1993
|
|
|
June 30, 2005
|
|
|
40
|
|
Sherman Oaks, CA
|
|
Acute care general hospital
|
|
|
5,290,000
|
|
|
|
13,586,688
|
|
|
|
|
|
|
|
30,721
|
|
|
|
5,290,000
|
|
|
|
13,617,409
|
|
|
|
18,907,409
|
|
|
|
341,091
|
|
|
|
1956
|
|
|
December 30, 2005
|
|
|
40
|
|
Chino, CA
|
|
Acute care general hospital
|
|
|
2,220,000
|
|
|
|
18,027,131
|
|
|
|
|
|
|
|
55,514
|
|
|
|
2,220,000
|
|
|
|
18,082,645
|
|
|
|
20,302,645
|
|
|
|
490,799
|
|
|
|
1972
|
|
|
November 30, 2005
|
|
|
40
|
|
Houston, TX
|
|
Acute care general hospital
|
|
|
8,039,948
|
|
|
|
31,360,555
|
|
|
|
5,196,853
|
|
|
|
|
|
|
|
11,547,737
|
|
|
|
33,049,619
|
|
|
|
44,597,356
|
|
|
|
984,235
|
|
|
|
2005
|
|
|
November 8, 2005
|
|
|
40
|
|
Houston, TX
|
|
Medical Office Building
|
|
|
1,534,727
|
|
|
|
15,474,146
|
|
|
|
3,249,170
|
|
|
|
|
|
|
|
1,534,727
|
|
|
|
18,723,317
|
|
|
|
20,258,044
|
|
|
|
546,783
|
|
|
|
2005
|
|
|
November 8, 2005
|
|
|
40
|
|
Bloomington, IN
|
|
Acute care general hospital
|
|
|
2,456,579
|
|
|
|
31,209,055
|
|
|
|
|
|
|
|
|
|
|
|
2,456,579
|
|
|
|
31,209,055
|
|
|
|
33,665,634
|
|
|
|
285,431
|
|
|
|
2006
|
|
|
August 8, 2006
|
|
|
40
|
|
Montclair, CA
|
|
Acute care general hospital
|
|
|
1,500,000
|
|
|
|
17,419,269
|
|
|
|
|
|
|
|
|
|
|
|
1,500,000
|
|
|
|
17,419,269
|
|
|
|
18,919,269
|
|
|
|
181,451
|
|
|
|
1971
|
|
|
August 9, 2006
|
|
|
40
|
|
Dallas, TX
|
|
Long term acute care hospital
|
|
|
1,000,000
|
|
|
|
13,588,870
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
13,588,870
|
|
|
|
14,588,870
|
|
|
|
112,700
|
|
|
|
2006
|
|
|
September 5, 2006
|
|
|
40
|
|
Huntington Beach, CA
|
|
Acute care general hospital
|
|
|
937,500
|
|
|
|
10,906,871
|
|
|
|
|
|
|
|
|
|
|
|
937,500
|
|
|
|
10,906,871
|
|
|
|
11,844,371
|
|
|
|
45,445
|
|
|
|
1965
|
|
|
November 8, 2006
|
|
|
40
|
|
LaPalma, CA
|
|
Acute care general hospital
|
|
|
937,500
|
|
|
|
10,906,871
|
|
|
|
|
|
|
|
|
|
|
|
937,500
|
|
|
|
10,906,871
|
|
|
|
11,844,371
|
|
|
|
45,445
|
|
|
|
1971
|
|
|
November 8, 2006
|
|
|
40
|
|
Anaheim, CA
|
|
Acute care general hospital
|
|
|
1,875,000
|
|
|
|
21,813,742
|
|
|
|
|
|
|
|
|
|
|
|
1,875,000
|
|
|
|
21,813,742
|
|
|
|
23,688,742
|
|
|
|
90,891
|
|
|
|
1964
|
|
|
November 8, 2006
|
|
|
40
|
|
Luling, TX
|
|
Acute care general hospital
|
|
|
811,026
|
|
|
|
9,344,667
|
|
|
|
|
|
|
|
|
|
|
|
811,026
|
|
|
|
9,344,667
|
|
|
|
10,155,693
|
|
|
|
19,468
|
|
|
|
2003
|
|
|
December 1, 2006
|
|
|
40
|
|
San Antonio, TX
|
|
Rehabilitation hospital
|
|
|
|
|
|
|
10,197,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,197,664
|
|
|
|
10,197,664
|
|
|
|
21,245
|
|
|
|
1987
|
|
|
December 1, 2006
|
|
|
40
|
|
Victoria, TX
|
|
Acute care general hospital
|
|
|
624,596
|
|
|
|
7,196,605
|
|
|
|
|
|
|
|
|
|
|
|
624,596
|
|
|
|
7,196,605
|
|
|
|
7,821,201
|
|
|
|
14,993
|
|
|
|
1998
|
|
|
December 1, 2006
|
|
|
40
|
|
Houston, TX
|
|
Acute care general hospital
|
|
|
4,757,393
|
|
|
|
56,237,712
|
|
|
|
|
|
|
|
|
|
|
|
4,757,393
|
|
|
|
56,237,712
|
|
|
|
60,995,105
|
|
|
|
105,661
|
|
|
|
2006
|
|
|
December 1, 2006
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43,384,269
|
|
|
$
|
434,416,854
|
|
|
$
|
8,446,023
|
|
|
$
|
188,360
|
|
|
$
|
46,892,058
|
|
|
$
|
439,543,449
|
|
|
$
|
486,435,507
|
|
|
$
|
12,289,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
COST
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
281,523,115
|
|
|
$
|
122,057,232
|
|
|
$
|
|
|
Acquisitions
|
|
|
109,060,181
|
|
|
|
102,898,770
|
|
|
|
|
|
Transfers from construction in
progress
|
|
|
94,660,739
|
|
|
|
56,409,377
|
|
|
|
|
|
Additions
|
|
|
8,476,648
|
|
|
|
157,736
|
|
|
|
122,057,232
|
|
Dispositions
|
|
|
(7,285,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
486,435,507
|
|
|
$
|
281,523,115
|
|
|
$
|
122,057,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
ACCUMULATED DEPRECIATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
5,260,219
|
|
|
$
|
1,311,757
|
|
|
$
|
|
|
Depreciation
|
|
|
7,287,428
|
|
|
|
3,948,462
|
|
|
|
1,311,757
|
|
Depreciation on disposed properties
|
|
|
(258,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
12,289,532
|
|
|
$
|
5,260,219
|
|
|
$
|
1,311,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The gross cost for federal income tax purposes is $502,223,122. |
66
SCHEDULE IV
MORTGAGE LOAN ON REAL ESTATE
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
Column D
|
|
Column E
|
|
|
Column F
|
|
|
Column G
|
|
|
Column H
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to
|
|
|
|
|
|
|
Final
|
|
Periodic
|
|
|
|
|
Face
|
|
|
Carrying
|
|
|
Delinquent
|
|
|
|
Interest
|
|
|
Maturity
|
|
Payment
|
|
Prior
|
|
|
Amount of
|
|
|
Amount of
|
|
|
Principal or
|
|
Description
|
|
Rate
|
|
|
Date
|
|
Terms
|
|
Liens
|
|
|
Mortgages
|
|
|
Mortgages
|
|
|
Interest
|
|
|
Long-term first mortgage loan:
|
|
|
|
|
|
|
|
Payable in
monthly
installments
of interest
plus
principal
payable in
full at
maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alliance Hospital(1)
|
|
|
10.0
|
%
|
|
2020
|
|
|
|
|
(2
|
)
|
|
$
|
40,000,000
|
|
|
$
|
40,000,000
|
|
|
|
(3
|
)
|
Centinela Hospital
|
|
|
10.0
|
%
|
|
2021
|
|
|
|
|
(2
|
)
|
|
|
25,000,000
|
|
|
|
25,000,000
|
|
|
|
(3
|
)
|
Daniel Freeman Marina Hospital
|
|
|
10.0
|
%
|
|
2021
|
|
|
|
|
(2
|
)
|
|
|
40,000,000
|
|
|
|
40,000,000
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
105,000,000
|
|
|
$
|
105,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to this schedule on the following page.
|
|
|
(1) |
|
Included in eligible properties which serve as collateral for
our revolving credit facility.
|
|
(2) |
|
There were no prior liens on loans as of December 31, 2006.
|
|
(3) |
|
The mortgage loan was not delinquent with respect to principal
or interest.
|
|
(4) |
|
Reconciliation of Mortgage Loans on Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance at beginning of year
|
|
$
|
40,000,000
|
|
|
$
|
|
|
|
$
|
|
|
Additions during year:
|
|
|
|
|
|
|
|
|
|
|
|
|
New mortgage loans and additional
advances on existing loans
|
|
|
65,000,000
|
|
|
|
46,000,000
|
|
|
|
|
|
Interest income added to principal
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,000,000
|
|
|
|
46,000,000
|
|
|
|
|
|
Deductions during year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Settled through acquisition of
real estate
|
|
|
|
|
|
|
6,000,000
|
|
|
|
|
|
Collection of principal
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
105,000,000
|
|
|
$
|
40,000,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
INDEX TO
EXHIBITS
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
3.1(1)
|
|
Registrants Second Articles
of Amendment and Restatement
|
3.2(2)
|
|
Registrants Amended and
Restated Bylaws
|
3.3(3)
|
|
Articles of Amendment of
Registrants Second Articles of Amendment and Restatement
|
4.1(1)
|
|
Form of Common Stock Certificate
|
4.2(4)
|
|
Indenture, dated July 14,
2006, among Registrant, MPT Operating Partnership, L.P. and the
Wilmington Trust Company, as trustee
|
4.3(5)
|
|
Indenture, dated November 6,
2006, among Registrant, MPT Operating Partnership, L.P. and the
Wilmington Trust Company, as trustee
|
4.4(5)
|
|
Registration Rights Agreement
among Registrant, MPT Operating Partnership, L.P. and UBS
Securities LLC and J.P. Morgan Securities Inc., as
representatives of the initial purchasers, dated as of
November 6, 2006
|
10.1(1)
|
|
First Amended and Restated
Agreement of Limited Partnership of MPT Operating Partnership,
L.P.
|
10.2(1)
|
|
Amendment to the First Amended and
Restated Agreement of Limited Partnership of MPT Operating
Partnership, L.P.
|
10.3(6)
|
|
Amended and Restated 2004 Equity
Incentive Plan
|
10.4(7)
|
|
Form of Stock Option Award
|
10.5(7)
|
|
Form of Restricted Stock Award
|
10.6(7)
|
|
Form of Deferred Stock Unit Award
|
10.7(1)
|
|
Employment Agreement between
Registrant and Edward K. Aldag, Jr., dated
September 10, 2003
|
10.8(1)
|
|
First Amendment to Employment
Agreement between Registrant and Edward K. Aldag, Jr.,
dated March 8, 2004
|
10.9(1)
|
|
Employment Agreement between
Registrant and R. Steven Hamner, dated September 10, 2003
|
10.10(1)
|
|
Amended and Restated Employment
Agreement between Registrant and William G. McKenzie, dated
September 10, 2003
|
10.11(1)
|
|
Employment Agreement between
Registrant and Emmett E. McLean, dated September 10, 2003
|
10.12(1)
|
|
Employment Agreement between
Registrant and Michael G. Stewart, dated April 28, 2005
|
10.13(1)
|
|
Form of Indemnification Agreement
between Registrant and executive officers and directors
|
10.14(8)
|
|
Credit Agreement dated
October 27, 2005, among MPT Operating Partnership, L.P., as
borrower, and Merrill Lynch Capital, a division of Merrill Lynch
Business Financial Services, Inc., as Administrative Agent and
Lender, and Additional Lenders from Time to Time a Party thereto
|
10.15(1)
|
|
Third Amended and Restated Lease
Agreement between 1300 Campbell Lane, LLC and 1300 Campbell
Lane Operating Company, LLC, dated December 20, 2004
|
10.16(1)
|
|
First Amendment to Third Amended
and Restated Lease Agreement between 1300 Campbell Lane, LLC and
1300 Campbell Lane Operating Company, LLC, dated
December 31, 2004
|
10.17(1)
|
|
Second Amended and Restated Lease
Agreement between 92 Brick Road, LLC and 92 Brick Road,
Operating Company, LLC, dated December 20, 2004
|
10.18(1)
|
|
First Amendment to Second Amended
and Restated Lease Agreement between 92 Brick Road, LLC and 92
Brick Road, Operating Company, LLC, dated December 31, 2004
|
10.19(1)
|
|
Ground Lease Agreement between
West Jersey Health System and West Jersey/Mediplex
Rehabilitation Limited Partnership, dated July 15, 1993
|
10.20(1)
|
|
Third Amended and Restated Lease
Agreement between San Joaquin Health Care Associates
Limited Partnership and 7173 North Sharon Avenue Operating
Company, LLC, dated December 20, 2004
|
10.21(1)
|
|
First Amendment to Third Amended
and Restated Lease Agreement between San Joaquin Health
Care Associates Limited Partnership and 7173 North Sharon Avenue
Operating Company, LLC, dated December 31, 2004
|
10.22(1)
|
|
Second Amended and Restated Lease
Agreement between 8451 Pearl Street, LLC and 8451 Pearl Street
Operating Company, LLC, dated December 20, 2004
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
10.23(1)
|
|
First Amendment to Second Amended
and Restated Lease Agreement between 8451 Pearl Street, LLC and
8451 Pearl Street Operating Company, LLC, dated
December 31, 2004
|
10.24(1)
|
|
Second Amended and Restated Lease
Agreement between 4499 Acushnet Avenue, LLC and
4499 Acushnet Avenue Operating Company, LLC, dated
December 20, 2004
|
10.25(1)
|
|
First Amendment to Second Amended
and Restated Lease Agreement between 4499 Acushnet Avenue, LLC
and 4499 Acushnet Avenue Operating Company, LLC, dated
December 31, 2004
|
10.26(1)
|
|
Lease Agreement between MPT of
Victorville, LLC and Desert Valley Hospital, Inc., dated
February 28, 2005
|
10.27(1)
|
|
Purchase and Sale Agreement among
MPT Operating Partnership, L.P., MPT of Bucks County Hospital,
L.P., Bucks County Oncoplastic Institute, LLC, Jerome S.
Tannenbaum, M.D., M. Stephen Harrison and DSI Facility
Development, LLC, dated March 3, 2005
|
10.28(1)
|
|
Amendment to Purchase and Sale
Agreement among MPT Operating Partnership, L.P., MPT of Bucks
County Hospital, L.P., Bucks County Oncoplastic Institute, LLC,
DSI Facility Development, LLC, Jerome S. Tannenbaum, M.D.,
M. Stephen Harrison and G. Patrick Maxwell, M.D., dated
April 29, 2005
|
10.29(1)
|
|
Lease Agreement between Bucks
County Oncoplastic Institute, LLC and MPT of Bucks County, L.P.,
dated September 16, 2005
|
10.30(1)
|
|
Development Agreement among DSI
Facility Development, LLC, Bucks County Oncoplastic Institute,
LLC and MPT of Bucks County, L.P., dated September 16, 2005
|
10.31(1)
|
|
Funding Agreement among DSI
Facility Development, LLC, Bucks County Oncoplastic Institute,
LLC and MPT of Bucks County, L.P., dated September 16, 2005
|
10.32(1)
|
|
Purchase and Sale Agreement
between MPT of North Cypress, L.P. and North Cypress Medical
Center Operating Company, Ltd., dated as of June 1, 2005
|
10.33(1)
|
|
Contract for Purchase and Sale of
Real Property between North Cypress Property Holdings, Ltd. and
MPT of North Cypress, L.P., dated as of June 1, 2005
|
10.34(1)
|
|
Sublease Agreement between MPT of
North Cypress, L.P. and North Cypress Medical Center Operating
Company, Ltd., dated as of June 1, 2005
|
10.35(1)
|
|
Net Ground Lease between North
Cypress Property Holdings, Ltd. and MPT of North Cypress, L.P.,
dated as of June 1, 2005
|
10.36(1)
|
|
Lease Agreement between MPT of
North Cypress, L.P. and North Cypress Medical Center Operating
Company, Ltd., dated as of June 1, 2005
|
10.37(1)
|
|
Net Ground Lease between Northern
Healthcare Land Ventures, Ltd. and MPT of North Cypress, L.P.,
dated as of June 1, 2005
|
10.38(1)
|
|
Construction Loan Agreement
between North Cypress Medical Center Operating Company, Ltd. and
MPT Finance Company, LLC, dated June 1, 2005
|
10.39(1)
|
|
Purchase, Sale and Loan Agreement
among MPT Operating Partnership, L.P., MPT of Covington, LLC,
MPT of Denham Springs, LLC, Covington Healthcare Properties,
L.L.C., Denham Springs Healthcare Properties, L.L.C., Gulf
States Long Term Acute Care of Covington, L.L.C. and Gulf States
Long Term Acute Care of Denham Springs, L.L.C., dated
June 9, 2005
|
10.40(1)
|
|
Lease Agreement between MPT of
Covington, LLC and Gulf States Long Term Acute Care of
Covington, L.L.C., dated June 9, 2005
|
10.41(1)
|
|
Promissory Note made by Denham
Springs Healthcare Properties, L.L.C. in favor of MPT of Denham
Springs, LLC, dated June 9, 2005
|
10.42(1)
|
|
Purchase and Sale Agreement among
MPT Operating Partnership, L.P., MPT of Redding, LLC, Vibra
Healthcare, LLC and Northern California Rehabilitation Hospital,
LLC, dated June 30, 2005
|
10.43(1)
|
|
Lease Agreement between Northern
California Rehabilitation Hospital, LLC and MPT of Redding, LLC,
dated June 30, 2005
|
10.44(1)
|
|
Ground Lease Agreement between
National Medical Specialty Hospital of Redding, Inc. and
Guardian Postacute Services, Inc., dated November 14, 1997
|
10.45(1)
|
|
Amendment No. 1 to Ground
Lease Agreement between National Medical Specialty Hospital of
Redding, Inc. and Ocadian Care Centers, Inc., dated
November 29, 2001
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
10.46(1)
|
|
Purchase and Sale Agreement among
MPT Operating Partnership, L.P., MPT of Bloomington, LLC,
Southern Indiana Medical Park II, LLC and Monroe Hospital,
LLC, dated October 7, 2005
|
10.47(1)
|
|
Lease Agreement between Monroe
Hospital, LLC and MPT of Bloomington, LLC, dated October 7,
2005
|
10.48(1)
|
|
Development Agreement among Monroe
Hospital, LLC, Monroe Hospital Development, LLC and MPT of
Bloomington, LLC, dated October 7, 2005
|
10.49(1)
|
|
Funding Agreement between Monroe
Hospital, LLC and MPT of Bloomington, LLC, dated October 7,
2005
|
10.50(1)
|
|
Purchase and Sale Agreement among
MPT Operating Partnership, L.P., MPT of Chino, LLC, Prime
Healthcare Services, LLC, Veritas Health Services, Inc., Prime
Healthcare Services, Inc., Desert Valley Hospital, Inc. and
Desert Valley Medical Group, Inc., dated November 30, 2005
|
10.51(1)
|
|
Lease Agreement among Veritas
Health Services, Inc., Prime Healthcare Services, LLC and MPT of
Chino, LLC, dated November 30, 2005
|
10.52(1)
|
|
Loan Agreement among MPT Operating
Partnership, L.P., MPT of Odessa Hospital, L.P., Alliance
Hospital, Ltd. and SRI-SAI Enterprises, Inc., dated
December 23, 2005
|
10.53(1)
|
|
Promissory Note by Alliance
Hospital, Ltd. in favor of MPT of Odessa Hospital, L.P., dated
December 23, 2005
|
10.54(1)
|
|
Purchase and Sale Agreement among
MPT Operating Partnership, L.P., MPT of Sherman Oaks, LLC, Prime
A Investments, L.L.C., Prime Healthcare Services II, LLC,
Prime Healthcare Services, Inc., Desert Valley Medical Group,
Inc. and Desert Valley Hospital, Inc., dated December 30,
2005
|
10.55(1)
|
|
Lease Agreement between MPT of
Sherman Oaks, LLC and Prime Healthcare Services II, LLC,
dated December 30, 2005
|
10.56(9)
|
|
Forward Sale Agreement between
Registrant and UBS AG, London Branch, dated February 22,
2007
|
10.57(9)
|
|
Forward Sale Agreement between
Registrant and Wachovia Bank, National Association, dated
February 22, 2007
|
21.1(10)
|
|
Subsidiaries of Registrant
|
23.1(10)
|
|
Consent of KPMG LLP
|
31.1(10)
|
|
Certification of Chief Executive
Officer pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934
|
31.2(10)
|
|
Certification of Chief Financial
Officer pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934
|
32(10)
|
|
Certification of Chief Executive
Officer and Chief Financial Officer pursuant to
Rule 13a-14(b)
under the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350
|
99.1(10)
|
|
Consolidated Financial Statements
of Vibra Healthcare, LLC as of June 30, 2006
|
|
|
|
(1) |
|
Incorporated by reference to Registrants Registration
Statement on
Form S-11
filed with the Commission on October 26, 2004, as amended
(File
No. 333-119957). |
|
(2) |
|
Incorporated by reference to Registrants quarterly report
on
Form 10-Q
for the quarter ended June 30, 2005, filed with the
Commission on July 26, 2005. |
|
(3) |
|
Incorporated by reference to Registrants quarterly report
on
Form 10-Q
for the quarter ended September 30, 2005, filed with the
Commission on November 10, 2005. |
|
(4) |
|
Incorporated by reference to Registrants current report on
Form 8-K,
filed with the Commission on July 20, 2006. |
|
(5) |
|
Incorporated by reference to Registrants current report on
Form 8-K,
filed with the Commission on November 13, 2006. |
|
(6) |
|
Incorporated by reference to Registrants definitive proxy
statement on Schedule 14A, filed with the Commission on
September 13, 2005. |
|
(7) |
|
Incorporated by reference to Registrants current report on
Form 8-K,
filed with the Commission on October 18, 2005. |
|
|
|
(8) |
|
Incorporated by reference to Registrants current report on
Form 8-K,
filed with the Commission on November 2, 2005. |
|
(9) |
|
Incorporated by reference to Registrants current report on
Form 8-K,
filed with the Commission on February 28, 2007. |
|
|
|
(10) |
|
Included in this
Form 10-K. |
|
(11) |
|
Since Vibra Healthcare, LLC leases more than 20% of our
properties under triple net leases, the financial status of
Vibra may be considered relevant to investors. The most recently
available financial statements for Vibra are attached as
Exhibit 99.1 to this Annual Report on
Form 10-K.
We have not participated in the preparation of Vibras
financial statements nor do we have the right to dictate the
form of any financial statements provided to us by Vibra. |
EX-21.1 SUBSIDIARIES OF THE REGISTRANT
Exhibit 21.1
SUBSIDIARIES OF REGISTRANT
|
|
|
|
|
Subsidiary |
|
Jurisdiction of Organization |
|
Jurisdiction(s) in Which Qualified as a Foreign Corporation |
1300 Campbell Lane, LLC
|
|
Delaware
|
|
Kentucky |
4499 Acushnet Avenue, LLC
|
|
Delaware
|
|
Massachusetts |
7173 North Sharon Avenue, LLC
|
|
Delaware
|
|
California |
8451 Pearl Street, LLC
|
|
Delaware
|
|
Colorado |
92 Brick Road, LLC
|
|
Delaware
|
|
New Jersey |
Medical Properties Trust, LLC
|
|
Delaware
|
|
Alabama |
MPT Development Services, Inc.
|
|
Delaware
|
|
Alabama |
MPT Finance Company, LLC
|
|
Delaware |
|
|
MPT of Bloomington, LLC
|
|
Delaware
|
|
Indiana |
MPT of Bucks County, L.P.
|
|
Delaware
|
|
Pennsylvania |
MPT of Bucks County, LLC
|
|
Delaware
|
|
Pennsylvania |
MPT of California, LLC
|
|
Delaware
|
|
California |
MPT of Centinela, L.P.
|
|
Delaware
|
|
California |
MPT of Centinela, LLC
|
|
Delaware
|
|
California |
MPT of Chino, LLC
|
|
Delaware
|
|
California |
MPT of Covington, LLC
|
|
Delaware
|
|
Louisiana |
MPT of Dallas LTACH, L.P.
|
|
Delaware
|
|
Texas |
MPT of Dallas LTACH, LLC
|
|
Delaware
|
|
Texas (as MPT of
Dallas LTACH GP,
LLC) |
MPT of Denham Springs, LLC
|
|
Delaware
|
|
Louisiana |
MPT of Huntington Beach, LLC
|
|
Delaware
|
|
California |
MPT of Huntington Beach, L.P.
|
|
Delaware
|
|
California |
MPT of La Palma, LLC
|
|
Delaware
|
|
California |
MPT of La Palma, L.P.
|
|
Delaware
|
|
California |
MPT of Luling, LLC
|
|
Delaware
|
|
Texas (as Delaware
MPT of Luling, LLC) |
MPT of Luling, L.P.
|
|
Delaware
|
|
Texas |
MPT of Montclair, L.P.
|
|
Delaware
|
|
California |
MPT of Montclair, LLC
|
|
Delaware |
|
|
MPT
of North Cypress, L.P.
|
|
Delaware
|
|
Texas (as Delaware
MPT of North Cypress
Texas, L.P.) |
MPT of North Cypress, LLC
|
|
Delaware
|
|
Texas |
MPT of Odessa Hospital, L.P.
|
|
Delaware
|
|
Texas |
MPT
of Odessa Hospital, LLC
|
|
Delaware
|
|
Texas (as MPT of
Odessa Hospital GP,
LLC) |
MPT of Portland, LLC
|
|
Delaware
|
|
Oregon |
MPT of Redding, LLC
|
|
Delaware
|
|
California |
|
|
|
|
|
Subsidiary |
|
Jurisdiction of Organization |
|
Jurisdiction(s) in Which Qualified as a Foreign Corporation |
MPT of Sherman Oaks, LLC
|
|
Delaware
|
|
California |
MPT of Victoria, LLC
|
|
Delaware
|
|
Texas (as Delaware
MPT of Victoria,
LLC) |
MPT of Victoria, L.P.
|
|
Delaware
|
|
Texas |
MPT of Victorville, LLC
|
|
Delaware
|
|
California |
MPT of Warm Springs, LLC
|
|
Delaware
|
|
Texas (as Delaware
MPT of Warm Springs,
LLC) |
MPT of Warm Springs, L.P.
|
|
Delaware
|
|
Texas |
MPT of West Anaheim, LLC
|
|
Delaware
|
|
California |
MPT of West Anaheim, L.P.
|
|
Delaware
|
|
California |
MPT Operating Partnership, L.P.
|
|
Delaware
|
|
Massachusetts, Alabama |
MPT
West Houston Hospital, LLC
|
|
Delaware
|
|
Texas (as MPT West Houston Hospital GP, LLC) |
MPT West Houston Hospital, L.P.
|
|
Delaware
|
|
Texas |
MPT West Houston MOB, LLC
|
|
Delaware
|
|
Texas (as MPT West Houston MOB GP, LLC) |
MPT West Houston MOB, L.P.
|
|
Delaware
|
|
Texas |
San Joaquin Health Care Associates Limited Partnership
|
|
Delaware
|
|
California |
EX-23.1 CONSENT OF KPMG LLP
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Medical Properties Trust, Inc.
We consent to the incorporation by reference in the registration statements (No. 333-130337)
on Form S-8 and (Nos. 333-121883, 333-140433, and 333-141100) on Form S-3 of Medical Properties
Trust, Inc. of our report dated March 15, 2007, with respect to (i) the consolidated balance sheets
of Medical Properties Trust, Inc. and subsidiaries as of December 31, 2006 and 2005, and the
related consolidated statements of operations, stockholders equity (deficit) and cash flows for
each of the years in the three-year period ended December 31, 2006, and the related financial
statement schedules, (ii) managements assessment of the effectiveness of internal control over
financial reporting as of December 31, 2006; and (iii) the effectiveness of internal control over
financial reporting as of December 31, 2006 which report appears in the December 31, 2006 Annual
Report on Form 10-K of Medical Properties Trust, Inc.
/s/ KPMG, LLP
Birmingham, Alabama
March 15, 2007
EX-31.1 SECTION 302 CERTIFICATION OF CEO
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Edward K. Aldag, Jr., certify that:
1) |
|
I have reviewed this annual report on Form 10-K of Medical Properties Trust, Inc. |
|
2) |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
|
3) |
|
Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
|
4) |
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared; |
|
|
b) |
|
designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles; |
|
|
c) |
|
evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and |
|
|
d) |
|
disclosed in this report any changes in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; and |
5) |
|
The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of registrants board of directors: |
|
a) |
|
all significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and |
|
|
b) |
|
any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting. |
|
|
|
|
|
|
|
|
Date: March 15, 2007 |
/s/ Edward K. Aldag, Jr.
|
|
|
Edward K. Aldag, Jr. |
|
|
Chairman, President and
Chief Executive Officer |
|
|
EX-31.2 SECTION 302 CERTIFICATION OF CFO
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, R. Steven Hamner, certify that:
|
1) |
|
I have reviewed this annual report on Form 10-K of Medical Properties Trust, Inc. |
|
|
2) |
|
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
|
|
3) |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
4) |
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this report is being prepared; |
|
|
b) |
|
designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles; |
|
|
c) |
|
evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and |
|
|
d) |
|
disclosed in this report any changes in the registrants internal control
over financial reporting that occurred during the registrants most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect,
the registrants internal control over financial reporting; and |
|
5) |
|
The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of registrants board of directors: |
|
a) |
|
all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and report
financial information; and |
|
|
b) |
|
any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrants internal control over financial
reporting. |
|
|
|
|
|
|
|
|
Date: March 15, 2007 |
/s/ R. Steven Hamner
|
|
|
R. Steven Hamner |
|
|
Executive Vice President and
Chief Financial Officer |
|
|
EX-32 SECTION 906 CERTIFICATIONS OF CEO AND CFO
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934 AND
18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this annual report on Form 10-K of Medical Properties Trust, Inc. (the
Company) for the year ended December 31, 2006 (the Report), each of the undersigned, Edward K.
Aldag, Jr. and R. Steven Hamner, certifies, pursuant to Section 18 U.S.C. Section 1350, that:
|
1. |
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and |
|
|
2. |
|
The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
|
|
|
|
|
|
|
|
Date: March 15, 2007 |
/s/ Edward K. Aldag, Jr.
|
|
|
Edward K. Aldag, Jr. |
|
|
Chairman, President and
Chief Executive Officer |
|
|
|
|
|
|
/s/ R. Steven Hamner
|
|
|
R. Steven Hamner |
|
|
Executive Vice President and
Chief Financial Officer |
|
|
EX-99.1 CONSOLIDATED FINANCIAL STATEMENTS/VIBRA
Exhibit
99.1
Vibra Healthcare, LLC and Subsidiaries
Consolidated Balance Sheet
June 30, 2006 (Unaudited) and December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
December 31, 2005 |
|
|
|
(unaudited) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,149,305 |
|
|
$ |
3,018,829 |
|
Patient accounts receivable, net of allowance for
doubtful collections of $1,394,000 and $1,689,000
at June 30, 2006 and December 31, 2005,
respectively |
|
|
27,109,685 |
|
|
|
22,751,868 |
|
Third party settlements receivable |
|
|
410,021 |
|
|
|
575,658 |
|
Prepaid insurance |
|
|
1,055,269 |
|
|
|
1,969,240 |
|
Other current assets |
|
|
896,679 |
|
|
|
964,268 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
31,620,959 |
|
|
|
29,279,863 |
|
|
|
|
|
|
|
|
|
|
Restricted investment |
|
|
100,000 |
|
|
|
100,000 |
|
Property and equipment, net |
|
|
17,409,512 |
|
|
|
17,638,222 |
|
Goodwill |
|
|
22,629,663 |
|
|
|
22,629,663 |
|
Intangible assets |
|
|
5,140,000 |
|
|
|
5,140,000 |
|
Deposits |
|
|
4,750,162 |
|
|
|
4,028,604 |
|
Deferred financing and lease costs |
|
|
2,031,630 |
|
|
|
1,970,073 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
83,681,926 |
|
|
$ |
80,786,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Members Deficit |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
107,442 |
|
|
$ |
58,377 |
|
Current maturities of obligations under capital leases |
|
|
775,616 |
|
|
|
471,548 |
|
Accounts payable |
|
|
5,256,090 |
|
|
|
5,080,042 |
|
Accounts payable related parties |
|
|
248,902 |
|
|
|
233,977 |
|
Accrued liabilities |
|
|
6,065,401 |
|
|
|
6,260,283 |
|
Accrued insurance claims |
|
|
1,303,607 |
|
|
|
1,054,202 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
13,757,058 |
|
|
|
13,158,429 |
|
Accrued insurance claims |
|
|
2,470,507 |
|
|
|
2,470,507 |
|
Deferred rent |
|
|
7,664,632 |
|
|
|
6,501,674 |
|
Long-term debt |
|
|
53,866,954 |
|
|
|
51,572,156 |
|
Long-term obligations under capital leases |
|
|
19,519,620 |
|
|
|
17,860,209 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
97,278,771 |
|
|
|
91,562,975 |
|
Members deficit |
|
|
(13,596,845 |
) |
|
|
(10,776,550 |
) |
|
|
|
|
|
|
|
Total liabilities and members deficit |
|
$ |
83,681,926 |
|
|
$ |
80,786,425 |
|
|
|
|
|
|
|
|
Vibra Healthcare, LLC and Subsidiaries
Consolidated Statement of Operations and Changes in Members Deficit
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
June 30 |
|
|
June 30 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenue |
|
$ |
36,913.364 |
|
|
$ |
30,588,335 |
|
|
$ |
72,703.224 |
|
|
$ |
59,916,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services |
|
|
24,783,784 |
|
|
|
21,491,176 |
|
|
|
49,755,420 |
|
|
|
41,558,235 |
|
Rent expense |
|
|
5,412,953 |
|
|
|
3,669,721 |
|
|
|
10,766,593 |
|
|
|
7,024,370 |
|
General and administrative |
|
|
4,866,494 |
|
|
|
5,342,554 |
|
|
|
9,574,660 |
|
|
|
10,464,137 |
|
Interest expense |
|
|
1,914,800 |
|
|
|
1,294,943 |
|
|
|
3,716,548 |
|
|
|
2,558,299 |
|
Management fee Vibra Management, LLC |
|
|
785,038 |
|
|
|
657,466 |
|
|
|
1,525,162 |
|
|
|
1,244,059 |
|
Depreciation and amortization |
|
|
527,647 |
|
|
|
220,682 |
|
|
|
1,035,830 |
|
|
|
414,975 |
|
Bad debt expense |
|
|
209,721 |
|
|
|
178,431 |
|
|
|
397,587 |
|
|
|
345,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
38,500,437 |
|
|
|
32,854,973 |
|
|
|
76,771,800 |
|
|
|
63,609,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(1,587,073 |
) |
|
|
(2,266,638 |
) |
|
|
(4,068,576 |
) |
|
|
(3,693,316 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating revenue |
|
|
648,437 |
|
|
|
514,293 |
|
|
|
1,248,281 |
|
|
|
1,047,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(938,636 |
) |
|
|
(1,752,345 |
) |
|
|
(2,820,295 |
) |
|
|
(2,645,563 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members deficit beginning |
|
|
(12,658,209 |
) |
|
|
(4,707,918 |
) |
|
|
(10,776,550 |
) |
|
|
(3,814,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members deficit ending |
|
$ |
(13,596,845 |
) |
|
$ |
(6,460,263 |
) |
|
$ |
(13,596,845 |
) |
|
$ |
(6,460,263 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vibra Healthcare, LLC and Subsidiaries
Consolidated Statement of Cash Flows
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,820,295 |
) |
|
$ |
(2,645,563 |
) |
Adjustments to reconcile net loss
to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,035,830 |
|
|
|
414,975 |
|
Provision for bad debts |
|
|
397,587 |
|
|
|
345,664 |
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities,
net of effects from acquisition of business: |
|
|
|
|
|
|
|
|
Patient accounts receivable including
third party settlements |
|
|
(4,589,766 |
) |
|
|
(4,679,052 |
) |
Prepaids and other current assets |
|
|
981,560 |
|
|
|
490,081 |
|
Deposits |
|
|
(62,581 |
) |
|
|
1,072,460 |
|
Accounts payable |
|
|
190,973 |
|
|
|
(861,010 |
) |
Accrued liabilities |
|
|
54,523 |
|
|
|
1,207,666 |
|
Deferred rent |
|
|
1,162,958 |
|
|
|
2,617,490 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(3,649,211 |
) |
|
|
(2,037,289 |
) |
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Deposits |
|
|
(658,977 |
) |
|
|
|
|
Purchase of restricted investment |
|
|
|
|
|
|
(100,000 |
) |
Purchases of property and equipment |
|
|
(456,651 |
) |
|
|
(505,408 |
) |
Assets acquired in business acquisition |
|
|
|
|
|
|
(284,292 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,115,628 |
) |
|
|
(889,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Borrowings under revolving credit facility |
|
|
72,558,824 |
|
|
|
50,591,077 |
|
Repayments of revolving credit facility |
|
|
(70,258,916 |
) |
|
|
(40,066,178 |
) |
Borrowings under capital leases |
|
|
2,000,000 |
|
|
|
2,181,898 |
|
Repayment of capital leases |
|
|
(234,981 |
) |
|
|
(11,988 |
) |
Borrowings under other long-term debt |
|
|
125,000 |
|
|
|
99,000 |
|
Repayment of long-term debt |
|
|
(81,045 |
) |
|
|
(7,731,041 |
) |
Payment of deferred financing costs |
|
|
(213,567 |
) |
|
|
(112,201 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
3,895,315 |
|
|
|
4,950,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(869,524 |
) |
|
|
2,023,578 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning |
|
|
3,018,829 |
|
|
|
2,280,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents ending |
|
$ |
2,149,305 |
|
|
$ |
4,304,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
3,716,548 |
|
|
$ |
2,558,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions: |
|
|
|
|
|
|
|
|
Deferred financing costs funded by revolving
credit facility and MPT capital lease |
|
$ |
|
|
|
$ |
352,627 |
|
|
|
|
|
|
|
|
Business acquisition adjustment of goodwill |
|
$ |
|
|
|
$ |
140,504 |
|
|
|
|
|
|
|
|
Building and equipment acquisition funded
by MPT capital lease |
|
$ |
|
|
|
$ |
14,270,000 |
|
|
|
|
|
|
|
|
License acquisition funded by MPT capital lease |
|
$ |
|
|
|
$ |
880,000 |
|
|
|
|
|
|
|
|
Lease deposit funded by MPT capital lease |
|
$ |
|
|
|
$ |
472,500 |
|
|
|
|
|
|
|
|
Equipment purchases funded by capital leases |
|
$ |
198,460 |
|
|
$ |
175,161 |
|
|
|
|
|
|
|
|