MEDICAL PROPERTIES TRUST, INC.
Registration No. 333-121883
As filed with the Securities and Exchange Commission on
March 14, 2006.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective
Amendment No. 5 to
Form S-11
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
Medical Properties Trust, Inc.
(Exact name of registrant as specified in its governing
instruments)
1000 Urban Center Drive, Suite 501, Birmingham, Alabama
35242
(205) 969-3755
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
Edward K. Aldag, Jr.
Chairman, President, Chief Executive Officer and Secretary
Medical Properties Trust, Inc.
1000 Urban Center Drive, Suite 501, Birmingham, Alabama
35242
(205) 969-3755
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
with a copy to:
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Thomas O. Kolb
Matthew S. Heiter
Irene Graves
Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Suite 1600
420 20th Street North
Birmingham, Alabama 35203
(205) 328-0480 |
Approximate date of
commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any securities being registered
on this form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933,
check the following box: þ
If this Form is filed to register
additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering: o
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective
registration statement for the same
offering: o
If this Form is a post-effective
amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective
registration statement for the same
offering: o
If delivery of the prospectus is
expected to be made pursuant to Rule 434, please check the
following box: o
The Registrant hereby amends
this Registration Statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933
or until this Registration Statement shall become effective on
such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
Filed pursuant to Rule 424(b)(3)
Registration No. 333-121883
PROSPECTUS
25,411,039 Shares of Common Stock
This prospectus relates to 25,411,039 shares of common
stock of Medical Properties Trust, Inc. that the selling
stockholders named in this prospectus may offer for resale from
time to time. The registration of these shares does not
necessarily mean the selling stockholders will offer or sell all
or any of these shares of common stock. We will not receive any
of the proceeds from the sale of any shares of common stock by
the selling stockholders, but will incur expenses in connection
with the offering.
The selling stockholders from time to time may offer and resell
the shares held by them directly or through agents or
broker-dealers on terms to be determined at the time of sale. To
the extent required, the names of any agent or broker-dealer and
applicable commissions or discounts and any other required
information with respect to any particular offer will be set
forth in a prospectus supplement that will accompany this
prospectus. A prospectus supplement also may add, update or
change information contained in this prospectus.
Our common stock is listed on the New York Stock Exchange under
the symbol MPW. The last reported sales price on
March 10, 2006 was $10.30.
See Risk Factors beginning on page 17 of
this prospectus for the most significant risks relevant to an
investment in our common stock, including, among others:
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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. |
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We may be unable to acquire or develop the facilities we have
under letter of commitment or contract or facilities we have
identified as potential candidates for acquisition or
development as quickly as we expect or at all, which could harm
our future operating results and adversely affect our ability to
make distributions to our stockholders. |
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Our real estate investments are concentrated in net-leased
healthcare facilities, making us more vulnerable economically
than if our investments were more diversified across several
industries or property types. |
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Our facilities and properties under development are currently
leased to eight tenants, five of which were recently organized
and have limited or no operating histories, and the failure of
any of these tenants to meet its obligations to us, including
payment of rent, payment of commitment and other fees and
repayment of loans we have made or intend to make to them, would
have a material adverse effect on our revenues and our ability
to make distributions to our stockholders. |
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Development and construction risks, including delays in
construction, exceeding original estimates and failure to obtain
financing, could adversely affect our ability to make
distributions to our stockholders. |
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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 or loan
payments to us. |
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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 or loan payments to us. |
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Loss of our tax status as a REIT would have significant adverse
consequences to us and the value of our common stock. |
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Our loans to Vibra could be recharacterized as equity, in which
case our rental income from Vibra would not be qualifying income
under the REIT rules and we could lose our REIT status. |
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Common stock eligible for future sale, including up to
25,411,039 shares of common stock that may be resold by our
existing stockholders upon effectiveness of the resale
registration statement of which this prospectus is a part, may
result in increased selling which may have an adverse effect on
our stock price. |
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus is March 14, 2006.
TABLE OF CONTENTS
SUMMARY
The following summary highlights information contained
elsewhere in this prospectus. You should read the entire
prospectus, including Risk Factors and our financial
statements and pro forma financial information and related notes
appearing elsewhere in this prospectus, before making a decision
to invest in our common stock. In this prospectus, unless the
context suggests otherwise, references to MPT,
the company, we, us and
our mean Medical Properties Trust, Inc., including
our operating partnership, MPT Operating Partnership, L.P., its
general partner and our wholly-owned limited liability company,
Medical Properties Trust, LLC, as well as our other direct and
indirect subsidiaries.
Our Company
We are a self-advised real estate company that acquires,
develops and leases 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. From time to time, we also make loans to our tenants
and other parties. We were formed in August 2003 and
completed a private placement of our common stock in
April 2004 in which we raised net proceeds of approximately
$233.5 million. In July 2005 we completed the initial
public offering of our common stock in which we raised net
proceeds of approximately $125.7 million, after deducting
the underwriting discount and offering expenses. Our current
portfolio consists of 14 facilities that are in operation
and three facilities that are under development.
We focus on acquiring and developing rehabilitation hospitals,
long-term acute care hospitals, regional and community
hospitals, womens and childrens hospitals, skilled
nursing facilities and ambulatory surgery centers as well as
other specialized single-discipline and ancillary facilities. We
believe that these types of facilities will capture an
increasing share of expenditures for healthcare services. We
believe that our strategy for acquisition and development of
these types of net-leased facilities, which generally require a
physicians order for patient admission, distinguishes us
as a unique investment alternative among real estate investment
trusts, or REITs.
We believe that the U.S. healthcare delivery system is becoming
decentralized and is evolving away from the traditional
one stop, large-scale acute care hospital. We
believe that this change is the result of a number of trends,
including increasing specialization and technological innovation
within the healthcare industry and the desire of both physicians
and patients to utilize more convenient facilities. We also
believe that demographic trends in the U.S., including, in
particular, an aging population, will result in continued growth
in the demand for healthcare services, which in turn will lead
to an increasing need for a greater supply of modern healthcare
facilities. In response to these trends, we believe that
healthcare operators increasingly prefer to conserve their
capital for investment in operations and new technologies rather
than investing in real estate and, therefore, increasingly
prefer to lease, rather than own, their facilities. Given these
trends and the size, scope and growth of this dynamic industry,
we believe that there are significant opportunities to acquire
and develop net-leased healthcare facilities at attractive,
risk-adjusted returns.
Our management team has extensive experience in acquiring,
owning, developing, managing and leasing healthcare facilities;
managing investments in healthcare facilities; acquiring
healthcare companies; and managing real estate companies. Our
management team also has substantial experience in healthcare
operations and administration, which includes many years of
service in executive positions for hospitals and other
healthcare providers, as well as in physician practice
management and hospital/physician relations. We believe that our
managements ability to combine traditional real estate
investment expertise with an understanding of healthcare
operations enables us to successfully implement our strategy.
We have made an election to be taxed as a REIT under the
Internal Revenue Code, or the Code, commencing with our taxable
year that began on April 6, 2004 and ended on December 31,
2004.
1
Our principal executive offices are located at 1000 Urban Center
Drive, Suite 501, Birmingham, Alabama 35242. Our telephone
number is (205) 969-3755. Our Internet address is
www.medicalpropertiestrust.com. The information on our website
does not constitute a part of this prospectus.
Our Portfolio
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Our Current Portfolio of Facilities |
Our current portfolio of facilities consists of 17 healthcare
facilities, 14 of which are in operation and three of which are
under development. Four rehabilitation hospitals and two
long-term acute care hospitals that are in operation were
acquired in 2004 and are leased to subsidiaries of Vibra
Healthcare, LLC, or Vibra, formerly known as Highmark
Healthcare, LLC, a recently formed specialty healthcare
provider with operations in six states. We refer to these
facilities in this prospectus as the Vibra Facilities. A seventh
facility in operation, a community hospital which has an
integrated medical office building, is leased to Desert Valley
Hospital, Inc., or DVH. We refer to this facility in this
prospectus as the Desert Valley Facility. Another facility in
operation, a long-term acute care hospital facility, is leased
to Gulf States Long Term Acute Care of Covington, L.L.C., or
Gulf States of Covington. We refer to this facility in this
prospectus as the Covington Facility. Our ninth facility in
operation, a rehabilitation hospital, is leased to Northern
California Rehabilitation Hospital, LLC, a Vibra subsidiary. We
refer to this facility in this prospectus as the Redding
Facility. Our tenth facility in operation, a long-term acute
care hospital, is leased to Gulf States Long Term Acute Care of
Denham Springs, L.L.C., or Gulf States of Denham Springs. We
refer to this facility in this prospectus as the Denham Springs
Facility. Our eleventh facility in operation, a community
hospital, is leased to an affiliate of DVH, Veritas Health
Services, Inc., or Veritas. We refer to this facility in this
prospectus as the Chino Facility. Our twelfth facility in
operation, a community hospital, is leased to another affiliate
of DVH, Prime Healthcare Services II, LLC, or
Prime II. We refer to this facility in this prospectus as
the Sherman Oaks Facility. All of the leases for the hospitals
described above have initial terms of 15 years.
Our current portfolio of facilities also includes a community
hospital, which we refer to in this prospectus as the West
Houston Hospital, and an adjacent medical office building, which
we refer to in this prospectus as the West Houston MOB, each of
which we developed. We refer to the West Houston Hospital and
the West Houston MOB together in this prospectus as the West
Houston Facilities. The West Houston Facilities are leased to
Stealth, L.P., or Stealth, a recently organized healthcare
facility operator. The initial lease term for the West Houston
Hospital began when construction commenced in July 2004 and will
end in November 2020. The initial lease term for the West
Houston MOB began when construction commenced in July 2004 and
will end in October 2015.
One facility under development is a womens hospital with
an integrated medical office building, which we refer to in this
prospectus as the Bucks County Facility, and is leased to Bucks
County Oncoplastic Institute, LLC, or BCO, a recently organized
healthcare facility operator. The initial lease term for the
Bucks County Facility began in November 2005 and will end
15 years after completion of construction. We target
completion of construction for the Bucks County Facility for
August 2006. Our second facility under development is a
community hospital, which we refer to in this prospectus as the
Monroe Facility, and is leased to Monroe Hospital, LLC, or
Monroe Hospital, a recently organized healthcare facility
operator. The initial lease term for the Monroe Facility began
when construction commenced in October 2005 and will end
15 years after completion of construction. We target
completion of construction for the Monroe Facility for October
2006. With respect to our third facility under development, we
have entered into a ground sublease with, and an agreement to
provide a construction loan to, North Cypress Medical Center
Operating Company, Ltd., or North Cypress, a recently-organized
healthcare facility operator, for the development of a community
hospital. The facility will be developed on property in which we
currently have a ground lease interest. We refer to this
facility in this prospectus as the North Cypress Facility. We
expect to acquire the land we are ground leasing after the
hospital has been partially completed. Upon completion of
construction, subject to certain limited conditions, we will
purchase the facility for an amount equal to the cost of
construction and lease the facility to the operator
2
for a 15 year lease term. In the event we do not purchase the
facility, the ground sublease will continue and the construction
loan will become due. In that event, we expect to seek to
convert the construction loan to a 15 year term loan
secured by the facility. We anticipate the North Cypress
Facility will be completed in December 2006. The leases for all
of the facilities in our current portfolio provide for
contractual base rent and an annual rent escalator. The leases
for the Vibra Facilities and the Bucks County Facility also
provide for percentage rent, which means that, in
addition to base rent, we will receive periodic rent payments
based on an agreed percentage of the tenants gross revenue.
The following tables set forth information, as of the date of
this prospectus, regarding our current portfolio of facilities:
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Gross | |
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Operating Facilities |
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2005 | |
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2006 | |
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Purchase | |
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2004 | |
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Contractual | |
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Contractual | |
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Price or | |
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Number of | |
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Annualized | |
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Base | |
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Base | |
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Development | |
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Lease |
Location |
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Type |
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Tenant |
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Beds(1) | |
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Base Rent | |
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Rent(2) | |
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Rent(2) | |
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Cost(3) | |
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Expiration |
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Houston, Texas
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Community hospital |
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Stealth, L.P. |
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105 |
(4) |
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$ |
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$ |
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(5) |
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$ |
4,594,979 |
(5) |
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$ |
39,400,503 |
(6) |
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November
2020(7) |
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Bowling Green, Kentucky
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Rehabilitation hospital |
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Vibra Healthcare,
LLC(8) |
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60 |
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3,916,695 |
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4,294,990 |
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4,790,118 |
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38,211,658 |
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July 2019 |
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Marlton, New
Jersey(9)
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Rehabilitation
(10)
hospital |
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Vibra Healthcare,
LLC(8) |
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76 |
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3,401,791 |
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3,730,354 |
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4,160,390 |
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32,267,622 |
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July 2019 |
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Victorville, California
(11)
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Community hospital/medical office building |
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Desert Valley Hospital, Inc. |
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83 |
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2,341,005 |
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2,879,800 |
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28,031,270 |
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February 2020 |
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New Bedford, Massachusetts
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Long-term acute care hospital |
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Vibra Healthcare,
LLC(8) |
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90 |
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2,262,979 |
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2,443,158 |
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2,767,624 |
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22,077,847 |
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August 2019 |
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Chino, California
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Community hospital |
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Veritas Health Services, Inc. |
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126 |
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180,753 |
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2,100,000 |
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21,059,479 |
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November 2020 |
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Houston, Texas
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Medical office building |
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Stealth, L.P. |
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n/a |
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348,358 |
(5) |
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1,634,447 |
(5) |
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17,008,874 |
(6) |
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October 2015
(7) |
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Redding,
California(12)
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Rehabilitation hospital |
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Vibra Healthcare,
LLC(8) |
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88 |
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950,250 |
(13) |
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1,921,680 |
(13) |
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20,750,000 |
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June 2020 |
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Sherman Oaks, California
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Community hospital |
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Prime Healthcare Services II, LLC |
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153 |
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11,667 |
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2,100,000 |
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20,032,151 |
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December 2020 |
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Fresno, California
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Rehabilitation hospital |
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Vibra Healthcare,
LLC(8) |
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62 |
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1,914,829 |
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2,099,773 |
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2,341,835 |
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18,681,255 |
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July 2019 |
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Covington, Louisiana
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Long-term acute care hospital |
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Gulf States Long-Term Acute Care of Covington, L.L.C. |
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58 |
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674,188 |
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1,232,073 |
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11,510,737 |
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June 2020 |
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Thornton, Colorado
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Rehabilitation hospital |
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Vibra Healthcare,
LLC(8) |
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117 |
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870,377 |
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941,087 |
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1,064,471 |
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8,491,481 |
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August 2019 |
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Kentfield, California
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Long-term acute care hospital |
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Vibra Healthcare,
LLC(8) |
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60 |
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783,339 |
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858,998 |
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958,024 |
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7,642,332 |
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July 2019 |
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Denham Springs, Louisiana
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Long-term acute care hospital |
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Gulf States Long Term Acute Care of Denham Springs, L.L.C. |
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59 |
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105,000 |
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642,821 |
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6,024,099 |
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October 2020 |
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Total
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1,137 |
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$ |
13,150,010 |
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$ |
18,979,580 |
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$ |
33,188,262 |
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$ |
291,189,308 |
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3
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(1)
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Based on the number of licensed beds. |
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(2)
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Based on leases in place as of the date of this prospectus. |
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(3)
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Includes acquisition costs. |
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(4)
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Seventy-one of the 105 beds will be acute care beds operated by
Stealth, L.P. and the remaining 34 beds will be long-term acute
care beds operated by Triumph Southwest, L.P. |
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(5)
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Based on leases in place as of the date of this prospectus and
estimated total development costs. Does not include rents that
accrued during the construction period and are payable over the
remaining lease term following the completion of construction. |
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(6)
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Estimated total development costs. |
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(7)
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At any time during the term of the lease, the tenant has the
right to terminate the lease and purchase the facility from us
at a purchase price equal to the greater of (i) that amount
determined under a formula which would provide us an internal
rate of return of at least 18% or (ii) appraised value
assuming the lease is still in place. |
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(8)
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The tenant in each case is a separate, wholly-owned subsidiary
of Vibra Healthcare, LLC. |
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(9)
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Our interest in this facility is held through a ground lease on
the property. The purchase price shown for this facility does
not include our payment obligations under the ground lease, the
present value of which we have calculated to be $920,579. The
calculation of the base rent to be received from Vibra for this
facility takes into account the present value of the ground
lease payments. |
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(10)
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Thirty of the 76 beds are pediatric rehabilitation beds
operated by HBA Management, Inc. |
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(11)
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At any time after February 28, 2007, the tenant has the
option to purchase the facility at a purchase price equal to the
sum of (i) the purchase price of the facility, and
(ii) that amount determined under a formula that would
provide us an internal rate of return of 10% per year, increased
by 2% of such percentage each year, taking into account all
payments of base rent received by us. |
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(12)
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Our interest in this facility is held in part through a ground
lease on the property. During the term of the ground lease, the
tenant will pay the ground lease rent directly to the ground
lessor or, at our request, directly to us. |
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(13)
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Of the $20,750,000 million purchase price for this
facility, payment of $2.0 million is being deferred pending
completion, to our satisfaction, of a conversion of certain beds
at the facility to long-term acute care beds and an additional
$750,000 of the purchase price is being deferred and will be
paid out of a special reserve account to cover the cost of
renovations. The 2005 contractual base rent and the 2006
contractual base rent are calculated based on a purchase price
of $18.0 million. |
Facilities Under
Development
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2004 | |
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2005 | |
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2006 | |
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Projected | |
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Number of | |
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Annualized | |
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Contractual | |
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Contractual | |
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Development | |
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Lease | |
Location |
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Type |
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Tenant |
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Beds(1) | |
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Base Rent | |
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Base Rent | |
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Base Rent | |
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Cost(2) | |
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Expiration | |
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Houston, Texas
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Community hospital |
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North Cypress Medical Center Operating Company, Ltd. |
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64 |
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$ |
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$ |
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(3) |
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$ |
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(3) |
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$ |
64,028,000 |
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(4) |
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Bensalem, Pennsylvania
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Womens hospital/medical office building
(5) |
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Bucks County Oncoplastic Institute, LLC |
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30 |
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(6) |
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1,627,820 |
(6) |
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38,000,000 |
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August 2021(7) |
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Bloomington, Indiana
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|
Community
Hospital(8) |
|
Monroe Hospital LLC |
|
|
32 |
|
|
|
|
(9) |
|
|
|
(9) |
|
|
954,063 |
|
|
|
35,500,000 |
|
|
|
October 2021 (10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
126 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,581,883 |
|
|
$ |
137,528,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Based on the number of proposed beds. |
|
(2)
|
|
Includes acquisition costs. |
|
(3)
|
|
During construction of the North Cypress Facility, interest will
accrue on the construction loan at a rate of 10.5%. The interest
accruing during the construction period will be added to the
principal balance of the construction loan. In addition, during
the term of the ground sublease, North Cypress will pay us
monthly ground sublease rent in an annual amount equal to our
ground lease rent plus 10.5% of funds advanced by us under the
construction loan. |
|
(4)
|
|
Expected to be completed in December 2006. If we purchase the
facility upon completion of construction, we will lease it back
to North Cypress for an initial term of 15 years. |
|
(5)
|
|
Expected to be completed in October 2006. |
|
(6)
|
|
Based on the lease in place as of the date of this prospectus,
estimated total development costs and estimated date of
completion. Assumes completion of construction in October 2006. |
|
(7)
|
|
Following completion, the lease term will extend for a period of
15 years. |
|
(8)
|
|
Expected to be completed in October 2006. |
|
(9)
|
|
Based on the lease in place as of the date of this prospectus,
estimated total development costs and estimated date of
completion. Assumes completion of construction in October 2006. |
|
(10)
|
|
Following completion, the lease term will extend for a period of
15 years. |
|
|
|
Our Current Loans and Fees Receivable |
On December 23, 2005, we made a $40.0 million mortgage
loan to Alliance Hospital, Ltd., or Alliance, an unrelated third
party. We refer to this mortgage loan in this prospectus as the
Alliance Loan. The Alliance Loan is secured by a community
hospital facility located in Odessa, Texas, which is
approximately 20 miles from Midland, Texas. The facility is
licensed for 78 beds, 28 of which are operated by
HEALTHSOUTH Rehabilitation Hospital of Odessa, Inc. The Alliance
Loan has a term of 15 years and is payable interest only
during the term of the loan, with the full principal amount due
at the end of
4
the 15 year term. The aggregate annual base interest is set
at an initial annual rate of ten percent. Beginning on
January 1, 2007 and on each January 1 thereafter,
Alliance will be required to pay additional interest equal to
the greater of (i) 3.5% or (ii) the rate of the CPI
increase for the prior year multiplied by the previous
years annualized base interest. As security for
Alliances obligations under the mortgage loan, all
principal, base interest and additional interest on the first
$30.0 million of the loan amount is guaranteed on a pro
rata basis by the shareholders of
SRI-SAI Enterprises,
Inc., the general partner of Alliance, until such time as
Alliance meets certain financial conditions. Additionally, we
have received a first mortgage on the facility and a first or
second priority security interest in all of Alliances
personal property other than accounts receivable, along with
other security. The Alliance Loan is cross-defaulted with all
other agreements between us or our affiliates, on one hand, and
Alliance or its affiliates on the other hand. The Alliance Loan
also contains representations, financial and other affirmative
and negative covenants, events of default and remedies typical
for this type of loan. As consideration for entering into this
arrangement, Alliance paid us a commitment fee equal to one half
of one percent of the loan amount on the closing date.
At the time we acquired the Vibra Facilities, we made a secured
acquisition loan to Vibra, the parent entity of our current
tenants in those facilities, to enable Vibra to acquire the
healthcare operations at these locations. The principal balance
of this loan is approximately $41.4 million and is to be
repaid over 15 years. Payment of the acquisition loan is
secured by pledges of membership interests in Vibra and its
subsidiaries. In addition, we have obtained guaranty agreements
from Brad E. Hollinger, the principal owner of Vibra, Vibra
Management, LLC and Senior Real Estate Holdings, LLC, D/B/A The
Hollinger Group, or The Hollinger Group, that obligate them to
make loan payments in the event that Vibra fails to do so.
However, we do not believe that these parties have sufficient
financial resources to satisfy a material portion of the loan
obligations. Mr. Hollingers guaranty is limited to
$5.0 million, and Vibra Management, LLC and The Hollinger
Group do not have substantial assets. Vibra pays interest on
this loan at an annual rate of 10.25% with interest only for the
first three years and the principal balance amortizes over the
remaining 12 year period. The acquisition loan may be
prepaid at any time without penalty. In connection with the
Vibra transactions, Vibra agreed to pay us commitment fees of
approximately $1.5 million. We also made secured loans
totaling approximately $6.2 million to Vibra and its
subsidiaries for working capital purposes. The commitment fees
were paid, and the working capital loans were repaid, on
February 9, 2005.
On June 9, 2005, in connection with our acquisition of the
Denham Springs Facility, we made a loan of $6.0 million to
Denham Springs Healthcare Properties, L.L.C., $500,000 of which
was held in escrow pending the resolution of certain
environmental issues related to the facility. The loan accrued
interest at a rate of 10.5% per year, adjusted each January
1 by an amount equal to the greater of (i) 2.5% or
(ii) the percentage by which the CPI increases from
November to November, provided that the increase in CPI for 2005
was to be prorated. The loan was to be repaid over 15 years
with interest only during the 15 years and a balloon
payment due and payable at the expiration of the 15 years.
On October 31, 2005, upon favorable resolution of the
environmental issues related to the facility, we purchased the
facility for a purchase price of $6.0 million, which was
paid by delivering the note evidencing the loan and releasing to
Denham Springs Healthcare Properties. L.L.C. the remaining
balance of all funds escrowed under the loan.
In connection with the development of the West Houston
Facilities, Stealth has agreed to pay us a commitment fee of
approximately $932,125, to be paid over 15 years beginning
in November 2005. The commitment fee is based on a percentage of
total development costs and may be adjusted upon determination
of actual development costs. We have agreed to make a working
capital loan to Stealth of up to $1.62 million, to be
repaid over 15 years. Stealth has borrowed the full amount
under this loan as of the date of this prospectus. The
promissory notes evidencing the loan and commitment fee provide
for interest at an annual rate of 10.75% and are unsecured, but
the promissory notes are cross-defaulted with our related
facility leases with Stealth. Stealth is obligated to pay us a
project inspection fee for construction coordination services of
$100,000 in the case of the West Houston Hospital and $50,000 in
the case of the adjacent West Houston MOB. These fees are to be
paid, with interest at the rate of
5
10.75% per year, over a 15 year period beginning in
November 2005. The obligation to pay these fees is evidenced by
promissory notes and is unsecured, but the promissory notes are
cross-defaulted with our related facility leases with Stealth.
Any of the fees or the working capital loan may be prepaid at
any time without penalty, except that a minimum prepayment of
$500,000 is required for the working capital loan.
In connection with our development of the Bucks County Facility,
BCO has agreed to pay us a commitment fee of $345,000. The
commitment fee is to be paid interest only beginning with the
first calendar month following the completion of construction,
with a balloon payment 15 years later. BCO is also
obligated to pay us a $75,000 construction inspection fee, which
will be paid interest only beginning with the first calendar
month following the completion of construction, with a balloon
payment 15 years later. Interest on these fees is set at
10.75% per annum. We also loaned BCO approximately
$4.0 million, the loan proceeds of which we hold in a
separate account as security for repayment of the loan and
BCOs obligations under the lease. This loan is to be
repaid no later than the date BCO receives a certificate of
occupancy for the Bucks County Facility, and bears interest at
the rate of 20% per annum, which interest is due monthly.
The obligation to pay these fees is unsecured and the obligation
to repay the loan is secured by the loan proceeds which we hold
in a separate account. The promissory notes evidencing the fees
and the loan are cross defaulted with our lease with BCO. These
fees and loans may be prepaid at any time without penalty.
In connection with our development of the Monroe Facility,
Monroe Hospital has agreed to pay us a commitment fee of
$177,500. The commitment fee is to be paid interest only
beginning with the first calendar month following the completion
of construction, with a balloon payment 15 years later.
Monroe Hospital is also obligated to pay us a $55,000 inspection
fee, which will be paid interest only beginning with the first
calendar month following the completion of construction, with a
balloon payment 15 years later. Interest on these fees is
set at 10.50% per annum. The obligation to pay these fees is
unsecured, but the promissory notes evidencing the fees are
cross defaulted with our lease with Monroe Hospital.
We intend to expand our portfolio by acquiring an additional
net-leased healthcare facility that we have under letter of
commitment and consider to be a probable acquisition as of the
date of this prospectus, which we refer to in this prospectus as
our Pending Acquisition Facility. Under the terms of the letter
of commitment relating to this facility, we expect the lease for
this facility to provide for contractual base rent and an annual
rent escalator. Letters of commitment constitute agreements of
the parties to consummate the acquisition transactions and enter
into leases on the terms set forth in the letters of commitment
subject to the satisfaction of certain conditions, including the
execution of mutually-acceptable definitive agreements. The
following table contains information regarding our Pending
Acquisition Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year One | |
|
|
|
|
|
|
|
|
|
|
Number of | |
|
Contractual | |
|
Loan | |
|
Lease | |
Location |
|
Type | |
|
Tenant | |
|
Beds(1) | |
|
Interest | |
|
Amount | |
|
Expiration | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Hammond,
Louisiana*(2)
|
|
Long-term acute care hospital |
|
Hammond Rehabilitation Hospital, LLC |
|
|
40 |
|
|
$ |
840,000 |
(3) |
|
$ |
8,000,000 |
|
|
|
June 2021 |
|
|
|
|
* |
|
Under letter of commitment. |
|
(1) |
|
Based on the number of licensed beds. |
|
(2) |
|
On April 1, 2005, we entered into a letter of commitment
with Hammond Healthcare Properties, LLC, or Hammond Properties,
and Hammond Rehabilitation Hospital, LLC, or Hammond Hospital,
pursuant to which we have agreed to lend Hammond Properties
$8.0 million and have agreed to a put-call option pursuant
to which, during the 90 day period commencing on the first
anniversary of the date of the loan closing, we expect to
purchase from Hammond Properties a long-term acute care hospital
located in Hammond, Louisiana for a purchase price between
$10.3 million and $11.0 million. If we purchase the
facility, we will lease it back to Hammond Hospital for an
initial term of 15 years. The lease would be a net lease
and would provide for contractual base rent and, beginning
January 1, 2007, an annual rent escalator. |
|
(3) |
|
Based on one year contractual interest at the rate of
10.5% per year on the $8.0 million mortgage loan to
Hammond Properties. We expect to exercise our option to purchase
the Hammond Facility in 2006. For the one year period following
our purchase of the facility, contractual base rent would equal
$1,079,925, based on 10.5% of an estimated purchase price of
$10,285,000. |
6
|
|
|
Our Acquisition and Development Pipeline |
We have also identified a number of opportunities to acquire or
develop additional healthcare facilities. In some cases, we are
actively negotiating agreements or letters of intent with the
owners or prospective tenants. In other instances, we have only
identified the potential opportunity and had preliminary
discussions with the owner or prospective tenant. We cannot
assure you that we will complete any of these potential
acquisitions or developments.
We employ leverage in our capital structure in amounts we
determine from time to time. At present, we intend to limit our
debt to approximately 50-60% of the aggregate cost of our
facilities, although we may exceed those levels from time to
time. We expect our borrowings to be a combination of long-term,
fixed-rate, non-recourse mortgage loans, variable-rate secured
term and revolving credit facilities, and other fixed and
variable-rate short to medium-term loans.
In October 2005, we entered into a credit agreement with Merrill
Lynch Capital which replaced the loan agreement dated
December 31, 2004 between us and Merrill Lynch Capital. The
credit agreement provides for secured revolving loans of up to
$100.0 million in aggregate principal amount. The principal
amount may be increased to $175.0 million at our request.
The amounts borrowed are secured by mortgages on real property
owned by certain of our subsidiaries and are guaranteed by us.
The facilities that we use to secure the amounts under the
credit agreement make up the borrowing base. The
borrowing base, and therefore borrowings, are limited based on
(i) the appraised value of the borrowing base and
(ii) rent income from and financial performance of the
operator lessees of the borrowing base. Interest on borrowings
under the credit agreement will accrue monthly at one month
LIBOR (4.74% at March 10, 2006), plus a spread which
increases as amounts borrowed increase as a percentage of the
borrowing base. We must also pay certain fees based on the
amount borrowed in any monthly period. The credit agreement
expires in October 2009, and may be extended by us for one
additional year upon payment of a fee. The credit agreement
contains representations, financial and other affirmative and
negative covenants, events of default and remedies typical for
this type of facility.
We have also entered into construction loan agreements with
Colonial Bank pursuant to which we can borrow up to
$43.4 million to fund construction costs for the West
Houston Facilities. Each construction loan has a term of up to
18 months and an option on our part to convert the loan to
a 30-month term loan upon completion of construction of the West
Houston Facility securing that loan. Construction of the West
Houston MOB was completed in October 2005, and construction of
the West Houston Hospital was completed in November 2005. We
have not yet exercised the option to convert the construction
loans to term loans. The loans are secured by mortgages on the
West Houston Facilities, as well as assignments of rents and
leases on those facilities, and require us to comply with
certain financial covenants. The loans bear interest at one
month LIBOR plus 225 basis points during the construction
period and one month LIBOR plus 250 basis points
thereafter. The Colonial Bank loans are cross-defaulted. As of
the date of this prospectus, there is $35.5 million
outstanding under the Colonial Bank loans.
Competitive Strengths
We believe that the following competitive strengths will enable
us to execute our business strategy successfully:
|
|
|
|
|
Experienced Management Team. Our management teams
experience enables us to offer innovative acquisition and
net-lease structures that we believe will appeal to a variety of
healthcare operators. We believe that our managements
depth of experience in both traditional real estate investment
and healthcare operations positions us favorably to take
advantage of the available opportunities in the healthcare real
estate market. |
|
|
|
Comprehensive Underwriting Process. Our underwriting
process focuses on both real estate investment and healthcare
operations. Our acquisition and development selection process
includes a |
7
|
|
|
|
|
comprehensive analysis of a targeted healthcare facilitys
profitability, cash flow, occupancy and patient and payor mix,
financial trends in revenues and expenses, barriers to
competition, the need in the market for the type of healthcare
services provided by the facility, the strength of the location
and the underlying value of the facility, as well as the
financial strength and experience of the tenant and the
tenants management team. Through our detailed underwriting
of healthcare acquisitions, which includes an analysis of both
the underlying real estate and ongoing or expected healthcare
operations at the property, we expect to deliver attractive
risk-adjusted returns to our stockholders. |
|
|
|
Active Asset Management. We actively monitor the
operating results of our tenants by reviewing periodic financial
reporting and operating data, as well as visiting each facility
and meeting with the management of our tenants on a regular
basis. Integral to our asset management philosophy is our desire
to build long-term relationships with our tenants and,
accordingly, we have developed a partnering approach which we
believe results in the tenant viewing us as a member of its team. |
|
|
|
Favorable Lease Terms. We lease our facilities to
healthcare operators pursuant to long-term net-lease agreements.
A net-lease requires the tenant to bear most of the costs
associated with the property, including property taxes,
utilities, insurance and maintenance. Our current net-leases are
for terms of at least 10 years, provide for annual base
rental increases and, in the case of the Vibra Facilities and
the Bucks County Facility, percentage rent. Similarly, we
anticipate that our future leases will generally provide for
base rent with annual escalators, tenant payment of operating
costs and, when feasible and in compliance with applicable
healthcare laws and regulations, percentage rent. |
|
|
|
Diversified Portfolio Strategy. We focus on a portfolio
of several different types of healthcare facilities in a variety
of geographic regions. We also intend to diversify our tenant
base as we acquire and develop additional healthcare facilities. |
|
|
|
Access to Investment Opportunities. We believe our
network of relationships in both the real estate and healthcare
industries provides us access to a large volume of potential
acquisition and development opportunities. The net proceeds of
our initial public offering will enhance our ability to
capitalize on these and other investment opportunities. |
|
|
|
Local Physician Investment. When feasible and in
compliance with applicable healthcare laws and regulations, we
expect to offer physicians an opportunity to invest in the
facilities that we own, thereby strengthening our relationship
with the local physician community. |
Summary Risk Factors
You should carefully consider the matters discussed in the
section Risk Factors beginning on page 17 prior
to deciding whether to invest in our common stock. Some of these
risks include:
|
|
|
|
|
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 may be unable to acquire the Pending Acquisition Facility or
facilities we have identified as potential candidates for
acquisition or development as quickly as we expect or at all,
which could harm our future operating results and adversely
affect our ability to make distributions to our stockholders. |
|
|
|
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 expect to acquire and develop
without unanticipated disruption or expense. |
|
|
|
Our real estate investments will be concentrated in net-leased
healthcare facilities, making us more vulnerable economically
than if our investments were more diversified across several
industries or property types. |
8
|
|
|
|
|
Failure by our tenants or other parties to whom we make loans to
repay loans currently outstanding or loans we are obligated to
make, or to pay us commitment and other fees that they are
obligated to pay, in an aggregate amount of approximately
$152.7 million, would have a material adverse effect on our
revenues and our ability to make distributions to our
stockholders. |
|
|
|
Our facilities and properties under development are currently
leased to only eight tenants, five of which were recently
organized and have limited or no operating histories, and the
failure of any of these tenants to meet its obligations to us,
including payment of rent, payment of commitment and other fees
and repayment of loans we have made or intend to make to them,
would have a material adverse effect on our revenues and our
ability to make distributions to our stockholders. |
|
|
|
Development and construction risks, including delays in
construction, exceeding original estimates and failure to obtain
financing, could adversely affect our ability to make
distributions to our stockholders. |
|
|
|
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 or loan
payments to us. |
|
|
|
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 or loan payments to us. |
|
|
|
|
Our use of debt financing will subject us to significant risks,
including foreclosure and refinancing risks and the risk that
debt service obligations will reduce the amount of cash
available for distribution to our stockholders. We have entered
into loan agreements pursuant to which we may borrow up to
$143.4 million, approximately $71.8 million of which
was outstanding as of the date of this prospectus. Our charter
and other organizational documents do not limit the amount of
debt we may incur. |
|
|
|
|
Provisions of Maryland law, our charter and our bylaws may
prevent or deter changes in management and third-party
acquisition proposals that you may believe to be in our best
interest, depress our stock price or cause dilution. |
|
|
|
We depend on key personnel, the loss of any one of whom could
threaten our ability to operate our business successfully. |
|
|
|
Loss of our tax status as a REIT would have significant adverse
consequences to us and the value of our common stock. |
|
|
|
Our loans to Vibra could be recharacterized as equity, in which
case our rental income from Vibra would not be qualifying income
under the REIT rules and we could lose our REIT status. |
|
|
|
Common stock eligible for future sale, including up to
25,411,039 shares that may be resold by our existing
stockholders upon effectiveness of the resale registration
statement of which this prospectus is a part, may result in
increased selling which may have an adverse effect on our stock
price. |
Market Opportunity
According to the United States Department of Commerce,
Bureau of Economic Analysis, healthcare is one of the largest
industries in the U.S., and was responsible for approximately
15.3% of U.S. gross domestic product in 2003. Healthcare
spending has consistently grown at rates greater than overall
spending growth and inflation. We expect this trend to continue.
According to the United States Department of Health and
Human Services, Centers for Medicare and Medicaid Services, or
CMS, healthcare expenditures are projected to increase by more
than 7% in 2004 and 2005 to $1.8 trillion and
$1.9 trillion, respectively, and are expected to reach
$3.1 trillion by 2012.
To satisfy this growing demand for healthcare services, a
significant amount of new construction of healthcare facilities
has been undertaken, and we expect significant construction of
additional healthcare
9
facilities in the future. In 2003 alone, $24.5 billion was
spent on the construction of healthcare facilities, according to
CMS. This represented more than a 9% increase over the
$22.4 billion in healthcare construction spending for 2002.
We believe that a significant part of this healthcare
construction spending was for the types of facilities that we
target.
Our Target Facilities
The market for healthcare real estate is extensive and includes
real estate owned by a variety of healthcare operators. We focus
on acquiring, developing and net leasing to healthcare operators
facilities that are designed to address what we view as the
latest trends in healthcare delivery methods. These facilities
include:
|
|
|
|
|
Rehabilitation Hospitals: Rehabilitation hospitals
provide inpatient and outpatient rehabilitation services for
patients recovering from multiple traumatic injuries, organ
transplants, amputations, cardiovascular surgery, strokes, and
complex neurological, orthopedic, and other conditions. In
addition to Medicare certified rehabilitation beds,
rehabilitation hospitals may also operate Medicare certified
skilled nursing, psychiatric, long-term or acute care beds.
These hospitals are often the best medical alternative to
traditional acute care hospitals where under the Medicare
prospective payment system there is pressure to discharge
patients after relatively short stays. |
|
|
|
Long-term Acute Care Hospitals: Long-term acute care
hospitals focus on extended hospital care, generally at least
25 days, for the medically-complex patient. Long-term acute
care hospitals have arisen from a need to provide care to
patients in acute care settings, including daily physician
observation and treatment, before they are able to move to a
rehabilitation hospital or return home. These facilities are
reimbursed in a manner more appropriate for a longer length of
stay than is typical for an acute care hospital. |
|
|
|
Regional and Community Hospitals: We define regional and
community hospitals as general medical/surgical hospitals whose
practicing physicians generally serve a market specific area,
whether urban, suburban or rural. We intend to limit our
ownership of these facilities to those with market, ownership,
competitive or technological characteristics that provide
barriers to entry for potential competitors. |
|
|
|
Womens and Childrens Hospitals: These
hospitals serve the specialized areas of obstetrics and
gynecology, other womens healthcare needs, neonatology and
pediatrics. We anticipate substantial development of facilities
designed to meet the needs of women and children and their
physicians as a result of the decentralization and
specialization trends described above. |
|
|
|
Ambulatory Surgery Centers: Ambulatory surgery centers
are freestanding facilities designed to allow patients to have
outpatient surgery, spend a short time recovering at the center,
then return home to complete their recoveries. Ambulatory
surgery centers offer a lower cost alternative to general
hospitals for many surgical procedures in an environment that is
more convenient for both patients and physicians. Outpatient
procedures commonly performed include those related to
gastrointestinal, general surgery, plastic surgery, ear, nose
and throat/audiology, as well as orthopedics and sports medicine. |
|
|
|
Other Single-Discipline Facilities: The decentralization
and specialization trends in the healthcare industry are also
creating demands and opportunities for physicians to practice in
hospital facilities in which the design, layout and medical
equipment are specifically developed, and healthcare
professional staff are educated, for medical specialties. These
facilities include heart hospitals, ophthalmology centers,
orthopedic hospitals and cancer centers. |
|
|
|
Medical Office Buildings: Medical office buildings are
office and clinic facilities occupied and used by physicians and
other healthcare providers in the provision of healthcare
services to their patients. The medical office buildings that we
target generally are or will be master-leased and adjacent to or
integrated with our other targeted healthcare facilities. |
10
|
|
|
|
|
Skilled Nursing Facilities. Skilled nursing facilities
are healthcare facilities that generally provide more
comprehensive services than assisted living or residential care
homes. They are primarily engaged in providing skilled nursing
care for patients who require medical or nursing care or
rehabilitation services. Typically these services involve
managing complex and serious medical problems such as wound
care, coma care or intravenous therapy. They offer both short
and long-term care options for patients with serious illnesses
and medical conditions. Skilled nursing facilities also provide
rehabilitation services that are typically utilized on a
short-term basis after hospitalization for injury or illness. |
Our Formation Transactions
The following is a summary of our formation transactions:
|
|
|
|
|
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 certain
of our founders in December 2002. In connection with our
formation, we issued our founders 1,630,435 shares of our common
stock in exchange for nominal cash consideration and the
membership interests of Medical Properties Trust, LLC. Upon
completion of our private placement in April 2004,
1,108,527 shares of the 1,630,435 shares of common
stock held by our founders were redeemed for nominal value and
they now collectively hold 1,047,088 shares of our common
stock. |
|
|
|
Our operating partnership, MPT Operating Partnership, L.P.,
was formed in September 2003. Our wholly-owned subsidiary,
Medical Properties Trust, LLC, is the sole general partner
of our operating partnership. We currently own all of the
limited partnership interests in our operating partnership. |
|
|
|
MPT Development Services, Inc., a Delaware corporation that we
formed in January 2004, operates as our wholly-owned taxable
REIT subsidiary. |
|
|
|
In April 2004 we completed a private placement of
25,300,000 shares of common stock at an offering price of
$10.00 per share. Friedman, Billings, Ramsey &
Co., Inc., which served as a lead underwriter in our initial
public offering, acted as the initial purchaser and sole
placement agent. The total net proceeds to us, after deducting
fees and expenses of the offering, were approximately
$233.5 million. |
|
|
|
On July 13, 2005, we completed an initial public offering
of 12,066,823 shares of common stock, priced at $10.50 per
share. Of these shares of common stock, 701,823 shares were
sold by selling stockholders and 11,365,000 shares were
sold by us. Friedman, Billings, Ramsey & Co., Inc. served as
the sole book-running manager and J.P. Morgan Securities Inc.
served as co-lead manager for the offering. Wachovia Capital
Markets, LLC and Stifel, Nicolaus & Company, Incorporated
served as co-managers for the offering. The underwriters
exercised an option to purchase an additional
1,810,023 shares of common stock to cover over-allotments
on August 5, 2005. We raised net proceeds of approximately
$125.7 million pursuant to the offering, after deducting
the underwriting discount and offering expenses. |
|
|
|
|
The net proceeds of our private placement and initial public
offering, together with borrowed funds, have been or will be
used to acquire our current portfolio of 17 facilities. Thus
far, we have spent approximately $234.6 million for the 12
existing facilities that we acquired, and funded approximately
$59.0 million of a projected total of $63.1 million of
development costs for the West Houston Facilities, approximately
$10.5 million of a projected total of $38.0 million of
development costs for the Bucks County Facility, approximately
$13.6 million of a projected total of $35.5 million of
development costs for the Monroe Facility and approximately
$34.3 million pursuant to the North Cypress construction
loan. In addition, we have loaned approximately
$47.6 million to Vibra to acquire the operations at the
Vibra Facilities and for working capital purposes,
$6.2 million of which has been repaid. |
|
11
Our Structure
We conduct our business through a traditional umbrella
partnership REIT, or UPREIT, in which our facilities are owned
by our operating partnership, MPT Operating
Partnership, L.P., and limited partnerships, limited
liability companies or other subsidiaries of our operating
partnership. Through our wholly-owned limited liability company,
Medical Properties Trust, LLC, we are the sole general partner
of our operating partnership and we presently own all of the
limited partnership units of our operating partnership. In the
future, we may issue limited partnership units to third parties
from time to time in connection with facility acquisitions or
developments. In addition, we may sell equity interests in
subsidiaries of our operating partnership in connection with
facility acquisitions or developments.
MPT Development Services, Inc., our taxable REIT subsidiary, is
authorized to engage in development, management, lending,
including but not limited to acquisition and working capital
loans to our tenants, and other activities that we are unable to
engage in directly under applicable REIT tax rules. The
following chart illustrates our structure upon completion of our
initial public offering:
|
|
(1) |
We own and in the future expect to own interests in our
facilities through wholly owned or majority owned subsidiaries
of our operating partnership, MPT Operating Partnership, L.P.
Our operating partnership is a limited partner of MPT West
Houston MOB, L.P. and MPT West Houston Hospital, L.P., which
own, respectively, the West Houston MOB and the West Houston
Hospital. MPT West Houston MOB, LLC and MPT West Houston
Hospital, LLC, both of which are wholly-owned by our operating
partnership, are, respectively, the general partners of these
entities. Physicians and others associated with our tenant or
subtenants of the West Houston MOB own approximately 24% of the
aggregate equity interests in MPT West Houston MOB, L.P.
Stealth, the tenant of the West Houston Hospital, owns a 6%
limited partnership interest in MPT West Houston Hospital, L.P. |
12
Registration Rights Agreement and Resale Blackout Periods
In connection with a registration rights agreement we entered
into in April 2004 with the purchasers of common stock in our
April 2004 private placement, we agreed to file the registration
statement of which this prospectus is a part. We will be
permitted to suspend the use, from time to time, of this
prospectus (and therefore suspend sales of common stock under
this prospectus), for periods referred to as blackout
periods, if a majority of the independent members of our
board of directors determines in good faith that it is in our
best interests to suspend the use and we provide selling
stockholders written notice of the suspension. The cumulative
blackout periods in any rolling 12-month period may not exceed
an aggregate of 90 days and furthermore may not exceed 60 days
in any rolling 90-day period.
Restrictions on Ownership of Our Common Stock
The Code imposes limitations on the concentration of ownership
of REIT shares. Our charter generally prohibits any stockholder
from actually or constructively owning more than 9.8% of our
outstanding shares of common stock. The ownership limitation in
our charter is more restrictive than the restrictions on
ownership of our common stock imposed by the Code. Our board
may, in its sole discretion, waive this ownership limitation
with respect to particular stockholders if our board is
presented with evidence satisfactory to it that the ownership
will not then or in the future jeopardize our status as a REIT.
Distribution Policy
We intend to distribute to our stockholders each year all or
substantially all of our REIT taxable income so as to avoid
paying corporate income tax and excise tax on our REIT income
and to qualify for the tax benefits afforded to REITs under the
Code. The actual amount and timing of distributions, if any,
will be at the discretion of our board of directors and will
depend upon our actual results of operations and a number of
other factors discussed in the section Distribution
Policy.
The table below is a summary of our distributions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution per Share | |
Declaration Date |
|
Record Date |
|
Date of Distribution |
|
of Common Stock | |
|
|
|
|
|
|
| |
February 16, 2006
|
|
March 15, 2006 |
|
April 12, 2006 |
|
$ |
0.21 |
|
November 18, 2005
|
|
December 15, 2005 |
|
January 19, 2006 |
|
$ |
0.18 |
|
August 18, 2005
|
|
September 15, 2005 |
|
September 29, 2005 |
|
$ |
0.17 |
|
May 19, 2005
|
|
June 20, 2005 |
|
July 14, 2005 |
|
$ |
0.16 |
|
March 4, 2005
|
|
March 16, 2005 |
|
April 15, 2005 |
|
$ |
0.11 |
|
November 11, 2004
|
|
December 16, 2004 |
|
January 11, 2005 |
|
$ |
0.11 |
|
September 2, 2004
|
|
September 16, 2004 |
|
October 11, 2004 |
|
$ |
0.10 |
|
The two distributions declared in 2004, aggregating
$0.21 per share, were comprised of approximately
$0.13 per share in ordinary income and $0.08 per share
in return of capital. For federal income tax purposes, our
distributions were limited in 2004 to our tax basis earnings and
profits of $0.13 per share. Accordingly, for tax purposes,
$0.08 per share of the distributions we paid in January
2005 will be treated as a 2005 distribution; the tax character
of this amount, along with that of the April 15, 2005,
July 14, 2005 and September 29, 2005 distributions,
will be determined subsequent to determination of our 2005
taxable income.
Tax Status
As long as we maintain our REIT status, we will generally not
incur federal income tax on our income to the extent that we
distribute this income to our stockholders. However, we will be
subject to tax at normal corporate rates on net income or
capital gains not distributed to stockholders. Moreover, our
taxable REIT subsidiary will be subject to federal and state
income taxation on its taxable income.
13
Summary Financial Information
You should read the following pro forma and historical
information in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our historical and pro forma consolidated
financial statements and related notes thereto included
elsewhere in this prospectus.
The following table sets forth our summary financial and
operating data on an historical and pro forma basis. Our summary
historical balance sheet information as of December 31,
2004, and the historical statement of operations and other data
for the year ended December 31, 2004, have been derived
from our historical financial statements audited by KPMG LLP,
independent registered public accounting firm, whose report with
respect thereto is included elsewhere in this prospectus. The
historical balance sheet information as of September 30,
2005 and the historical statement of operations and other data
for the nine months ended September 30, 2005 have been
derived from our unaudited historical balance sheet as of
September 30, 2005 and from our unaudited statement of
operations for the nine months ended September 30, 2005
included elsewhere in this prospectus. The unaudited historical
financial statements include all adjustments, consisting of
normal recurring adjustments, that we consider necessary for a
fair presentation of our financial condition and results of
operations as of such dates and for such periods under
accounting principles generally accepted in the U.S.
The unaudited pro forma consolidated balance sheet data as of
September 30, 2005 are presented as if completion of our
probable acquisition had occurred on September 30, 2005.
The unaudited pro forma consolidated statement of operations and
other data for the nine months ended September 30, 2005 are
presented as if acquisition of the Desert Valley Facility, the
Covington Facility, the Chino Facility, the Denham Springs
Facility and the Redding Facility along with the completion of
our probable acquisitions had occurred on January 1, 2005,
and our December 31, 2004 unaudited pro forma consolidated
statement of operations are presented as if our acquisition of
the current portfolio of facilities (the six Vibra Facilities,
the Desert Valley Facility, the Covington Facility, the Chino
Facility, the Denham Springs Facility and the Redding Facility),
our making of the Vibra loans and completion of our probable
acquisitions had occurred on January 1, 2004. The pro forma
information does not give effect to any of our facilities under
development or probable development transactions. The pro forma
information is not necessarily indicative of what our actual
financial position or results of operations would have been as
of the dates or for the periods indicated, nor does it purport
to represent our future financial position or results of
operations.
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended | |
|
For the Year Ended | |
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Pro Forma | |
|
Historical | |
|
Pro Forma | |
|
Historical | |
|
|
| |
|
| |
|
| |
|
| |
Operating information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent income
|
|
$ |
26,273,517 |
|
|
$ |
18,364,389 |
|
|
$ |
32,808,106 |
|
|
$ |
8,611,344 |
|
|
|
Interest income from loans
|
|
|
6,368,607 |
|
|
|
3,562,857 |
|
|
|
9,037,049 |
|
|
|
2,282,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
32,642,124 |
|
|
|
21,927,246 |
|
|
|
41,845,155 |
|
|
|
10,893,459 |
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,645,242 |
|
|
|
2,986,790 |
|
|
|
6,193,653 |
|
|
|
1,478,470 |
|
|
|
General and administrative
|
|
|
5,595,416 |
|
|
|
5,595,416 |
|
|
|
5,057,284 |
|
|
|
5,057,284 |
|
|
|
Total operating expenses
|
|
|
10,357,499 |
|
|
|
8,699,047 |
|
|
|
12,023,286 |
|
|
|
7,214,601 |
|
|
|
Operating income
|
|
|
22,284,625 |
|
|
|
13,228,199 |
|
|
|
29,821,869 |
|
|
|
3,678,858 |
|
|
|
Net other income (expense)
|
|
|
(2,132,363 |
) |
|
|
(32,363 |
) |
|
|
(1,902,509 |
) |
|
|
897,491 |
|
|
Net income
|
|
|
20,152,262 |
|
|
|
13,195,836 |
|
|
|
27,919,360 |
|
|
|
4,576,349 |
|
|
Net income per share, basic
|
|
|
0.67 |
|
|
|
0.44 |
|
|
|
1.45 |
|
|
|
0.24 |
|
|
Net income per share, diluted
|
|
|
0.67 |
|
|
|
0.44 |
|
|
|
1.45 |
|
|
|
0.24 |
|
|
Weighted average shares outstanding basic
|
|
|
29,975,971 |
|
|
|
29,975,971 |
|
|
|
19,310,833 |
|
|
|
19,310,833 |
|
|
Weighted average shares outstanding diluted
|
|
|
29,999,381 |
|
|
|
29,999,381 |
|
|
|
19,312,634 |
|
|
|
19,312,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
As of September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Pro Forma | |
|
Historical | |
|
Historical | |
|
|
| |
|
| |
|
| |
Balance Sheet information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment in real estate assets
|
|
$ |
328,342,475 |
|
|
$ |
266,106,299 |
|
|
$ |
151,690,293 |
|
|
Net investment in real estate
|
|
|
323,877,215 |
|
|
|
261,641,039 |
|
|
|
150,211,823 |
|
|
Construction in progress
|
|
|
78,435,280 |
|
|
|
78,484,104 |
|
|
|
24,318,098 |
|
|
Cash and cash equivalents
|
|
|
36,896,094 |
|
|
|
100,826,702 |
|
|
|
97,543,677 |
|
|
Loans receivable
|
|
|
86,895,611 |
|
|
|
52,895,611 |
|
|
|
50,224,069 |
(1) |
|
Total assets
|
|
|
463,898,155 |
|
|
|
431,592,587 |
|
|
|
306,506,063 |
|
|
Total debt
|
|
|
80,366,667 |
|
|
|
40,366,667 |
|
|
|
56,000,000 |
|
|
Total liabilities
|
|
|
111,633,245 |
|
|
|
72,133,245 |
|
|
|
73,777,619 |
|
|
Total stockholders equity
|
|
|
350,127,410 |
|
|
|
357,321,842 |
|
|
|
231,728,444 |
|
|
Total liabilities and stockholders equity
|
|
|
463,898,155 |
|
|
|
431,592,587 |
|
|
|
306,506,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended | |
|
For the Year Ended | |
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Pro Forma | |
|
Historical | |
|
Pro Forma | |
|
Historical | |
|
|
| |
|
| |
|
| |
|
| |
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from
operations(2)
|
|
$ |
24,797,504 |
|
|
$ |
16,182,626 |
|
|
$ |
34,113,013 |
|
|
$ |
6,054,819 |
|
|
Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided by operating activities
|
|
|
|
|
|
|
16,094,005 |
|
|
|
|
|
|
|
9,918,898 |
|
|
|
Used for investing activities
|
|
|
|
|
|
|
(107,692,381 |
) |
|
|
|
|
|
|
(195,600,642 |
) |
|
|
Provided by financing activities
|
|
|
|
|
|
|
94,881,401 |
|
|
|
|
|
|
|
283,125,421 |
|
|
|
(1) |
Includes $1.5 million in commitment fees payable to us by
Vibra. |
|
(2) |
Funds from operations, or FFO, represents net income (computed
in accordance with GAAP), excluding gains (or losses) from sales
of property, plus real estate related depreciation and
amortization (excluding amortization of loan origination costs)
and after adjustments for unconsolidated partnerships and joint
ventures. Management considers funds from operations a useful
additional measure of performance for an equity REIT because it
facilitates an understanding of the operating performance of our
properties without giving effect to real estate depreciation and
amortization, which assumes that the value of real estate assets
diminishes predictably over time. Since real estate values have
historically risen or fallen with market conditions, we believe
that funds from operations provides a meaningful supplemental
indication of our performance. We compute funds from operations
in accordance with standards established by the Board of
Governors of the National Association of Real Estate Investment
Trusts, or NAREIT, in its March 1995 White Paper (as amended in
November 1999 and April 2002), which may differ from the |
15
|
|
|
methodology for calculating funds
from operations utilized by other equity REITs and, accordingly,
may not be comparable to such other REITs. FFO does not
represent amounts available for managements discretionary
use because of needed capital replacement or expansion, debt
service obligations, or other commitments and uncertainties, nor
is it indicative of funds available to fund our cash needs,
including our ability to make distributions. Funds from
operations should not be considered as an alternative to net
income (loss) (computed in accordance with GAAP) as indicators
of our financial performance or to cash flow from operating
activities (computed in accordance with GAAP) as an indicator of
our liquidity.
|
|
|
The following table presents a
reconciliation of FFO to net income for the nine months ended
September 30, 2005 and for the year ended December 31,
2004 on an actual and pro forma basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months | |
|
For the Year Ended | |
|
|
Ended September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Funds from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
20,152,262 |
|
|
$ |
13,195,836 |
|
|
$ |
27,919,360 |
|
|
$ |
4,576,349 |
|
Depreciation and amortization
|
|
|
4,645,242 |
|
|
|
2,986,790 |
|
|
|
6,193,653 |
|
|
|
1,478,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations FFO
|
|
$ |
24,797,504 |
|
|
$ |
16,182,626 |
|
|
$ |
34,113,013 |
|
|
$ |
6,054,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
RISK FACTORS
An investment in our common stock involves a number of risks.
Before making an investment decision, you should carefully
consider all of the risks described below and the other
information contained in this prospectus. If any of the risks
discussed in this prospectus actually occurs, our business,
financial condition and results of operations could be
materially adversely affected. If this were to occur, the value
of our common stock could decline and you may lose all or part
of your investment.
Risks Relating 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 have only recently been organized and have a limited
operating history. We are subject to the risks generally
associated with the formation of any new business, including
unproven business models, untested plans, 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 may not be successful in deploying the net proceeds of our
initial public offering for their intended uses as quickly as we
intend or at all, which could harm our cash flow and ability to
make distributions to our stockholders.
Upon completion of our initial public offering, we experienced a
capital infusion from the net offering proceeds, which we have
used or intend to use to develop additional net-leased
facilities and to make a loan to an affiliate of one of our
prospective tenants. If we are unable to use the net proceeds in
this manner, we will have no specific designated use for a
substantial portion of the net proceeds from our initial public
offering. In that case, or in the event we allocate a portion of
the net proceeds to other uses during the pendency of the
developments, you would be unable to evaluate the manner in
which we invest the net proceeds or the economic merits of the
assets acquired with the proceeds. We may not be able to invest
this capital on acceptable terms or timeframes, or at all, which
may harm our cash flow and ability to make distributions to our
stockholders.
We may be unable to acquire or develop the Pending
Acquisition Facility, which could harm our future operating
results and adversely affect our ability to make distributions
to our stockholders.
Our future success depends in large part on our ability to
continue to grow our business through the acquisition or
development of additional facilities. We cannot assure you that
we will acquire or develop the Pending Acquisition Facility on
the terms described, or at all, because the transaction is
subject to a variety of conditions, including execution of
mutually-acceptable definitive agreements, our satisfactory
completion of due diligence, receipt of appraisals and other
third-party reports, receipt of government and third-party
approvals and consents, approval by our board of directors and
other customary closing conditions. We have incurred losses of
approximately $600,000 in connection with acquisitions that we
were unable to complete, consisting primarily of legal fees,
costs of third-party reports and travel expenses. If we are
unsuccessful in completing the acquisition or development of
additional facilities in the future, we will incur similar costs
without achieving corresponding revenues, our future operating
results will not meet expectations and our ability to make
distributions to our stockholders will be adversely affected.
We may not consummate the transactions contemplated by our
other arrangements, which could adversely affect our ability to
make distributions to our stockholders.
We have entered into letter agreements with DVH to fund a
$20.0 million expansion of the Desert Valley Facility and
with DSI to fund $50.0 million of acquisitions and
development facilities. Our funding of the expansion of the
Desert Valley Facility is subject to receipt of a development
agreement from DVH
17
which we may not receive until January 30, 2007. DVH is not
obligated to present us with a development agreement, and, if it
does not, we have no obligation to provide funding to DVH for
the expansion. If we enter into a development agreement, we may
not begin construction on the expansion for several months after
that time and the expansion could take up to approximately one
year to complete. Any acquisition or development of facilities
pursuant to the DSI commitment is subject to DSIs
identification, and our approval, of acquisition or development
facilities. DSI is not required to identify facilities for
acquisition or development and, if it does not, we have no
obligation to provide funding to DSI. We have also entered into
an arrangement to acquire and leaseback a facility in
Pennsylvania and to make related loans for certain improvements
to the real estate and for working capital purposes for an
estimated total cost of $9.2 million, subject to
adjustment. This transaction is subject to our completion of due
diligence and a number of additional conditions. Thus we may not
engage in any of these transactions in the near future, or at
all, and may not in the near future, or ever, generate any
revenues from these arrangements.
We may be unable to acquire or develop any of the facilities
we have identified as potential candidates for acquisition or
development, which could harm our future operating results and
adversely affect our ability to make distributions to our
stockholders.
We have identified numerous other facilities that we believe
would be suitable candidates for acquisition or development;
however, we cannot assure you that we will be successful in
completing the acquisition or development of any of these
facilities. Consummation of any of these acquisitions or
developments is subject to, among other things, the willingness
of the parties to proceed with a contemplated transaction,
negotiation of mutually acceptable definitive agreements,
satisfactory completion of due diligence and satisfaction of
customary closing conditions. If we are unsuccessful in
completing the acquisition or development of additional
facilities in the future, our future operating results will not
meet expectations and our ability to make distributions to our
stockholders will be adversely affected.
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
developments of facilities. As a REIT, we are required to make
cash distributions which reduces 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.
18
Dependence on our tenants for rent may adversely impact our
ability to make distributions to our stockholders.
We expect 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 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, could have a material
adverse effect on our ability to collect rent 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 to us. 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. However, we then would be required
to find another tenant-operator.
On March 31, 2005, the leases for the Vibra Facilities were
amended to provide (i) that the testing of certain
financial covenants will be deferred until the quarter beginning
July 1, 2006 and ending September 30, 2006,
(ii) that these same financial covenants will be tested on
a consolidated basis for all of the Vibra Facilities,
(iii) that the reduction, based on loan principal
reductions, in the rate of percentage rent will be made on a
monthly rather than annual basis and (iv) that Vibra will escrow
insurance premiums and taxes at our request. Prior to execution
of this amendment, Vibra was not in compliance with certain of
the financial covenants in all of its leases with us.
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.
Failure by our tenants or other parties to whom we make loans
to repay loans currently outstanding or loans we are obligated
to make, or to pay us commitment or other fees that they are
obligated to pay, in an aggregate amount of approximately
$152.7 million, would have a material adverse effect on our
revenues and our ability to make distributions to our
stockholders.
In connection with the acquisition of the Vibra Facilities, our
taxable REIT subsidiary made a secured loan to Vibra of
approximately $41.4 million to acquire the operations at
the Vibra Facilities. Payment of this loan is secured by pledges
of equity interests in Vibra and its subsidiaries that are
tenants of ours. All leases and other agreements between us, or
our affiliates, on the one hand, and the tenant and
Mr. Hollinger, or their affiliates, on the other hand,
including leases for the Vibra Facilities, the lease for the
Redding Facility and the Vibra loan, are cross-defaulted. If
Vibra defaulted on this loan, our primary recourse would be to
foreclose on the equity interests in Vibra and its affiliates.
This recourse may be impractical because of limitations imposed
by the REIT tax rules on our ability to own these interests.
Failure to adhere to these limitations could cause us to lose
our REIT status. We have obtained guaranty agreements for the
Vibra loan from Mr. Hollinger, Vibra Management, LLC and
The Hollinger Group that obligate them to make loan payments in
the event that Vibra fails to do so. However, we do not believe
that these parties have sufficient financial resources to
satisfy a material portion of the loan obligations.
Mr. Hollingers guaranty is limited to
$5.0 million and Vibra Management, LLC and The Hollinger
Group do not have substantial assets. Vibra has entered into a
$20.0 million credit facility with Merrill Lynch, and that
loan is secured by an interest in Vibras receivables.
There was approximately
19
$12.9 million outstanding under the facility on
September 30, 2005. At March 31, 2005, Vibra was not
in compliance with a facility rent coverage covenant under its
Merrill Lynch credit facility. The Merrill Lynch credit facility
documents were subsequently amended to retroactively change the
rent coverage covenant from a by-facility rent coverage to a
consolidated rent coverage calculation, so that Vibra was in
compliance with the amended covenant at March 31, 2005. Our
loan is subordinate to Merrill Lynch with respect to
Vibras receivables.
We have also agreed to make a working capital loan to Stealth of
up to $1.62 million. Stealth has borrowed the full amount
under this loan as of the date of this prospectus. Stealth also
owes us commitment and other fees of approximately
$1.1 million. Payment of these fees and loan amounts is
unsecured. We have also agreed to make a construction loan to
North Cypress for approximately $64.0 million to fund the
construction of a community hospital in Houston, Texas, secured
by the hospital improvements, $18.7 million of which has
been loaned to North Cypress as of the date of this prospectus.
BCO owes us commitment and other fees of $420,000. BCO also owes
us approximately $4.0 million in connection with a loan we
made to BCO, the loan proceeds of which we have retained in a
separate bank account as security for BCOs loan repayment
obligations and its obligations under the lease for the Bucks
County Facility. Monroe Hospital owes us commitment and other
fees of approximately $232,500.
On December 23, 2005, we made a $40.0 million mortgage
loan to Alliance. As security for Alliances obligations
under the mortgage loan, all principal, base interest and
additional interest on the first $30.0 million of the loan
amount is guaranteed on a pro rata basis by the shareholders of
SRI-SAI Enterprises, Inc., the general partner of Alliance,
until such time as Alliance meets certain financial conditions.
Additionally, we have received a first mortgage on the facility
and a first or second priority security interest in all of
Alliances personal property other than accounts
receivable, along with other security. We are dependent upon the
ability of Vibra, Stealth, North Cypress, BCO, Monroe Hospital
and Alliance to repay these loans and fees, and their failure to
meet these obligations would have a material adverse effect on
our revenues and our ability to make distributions to our
stockholders.
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.
Five of our tenants, North Cypress, Stealth, BCO, 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
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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 eight tenants, five 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 Healthcare
Services, Inc., or Prime, Gulf States, North Cypress, BCO,
Monroe Hospital and Stealth 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, Monroe Hospital and Stealth were recently
organized, have limited or no operating histories and Vibra was
dependent on us for an aggregate amount of $47.6 million in
loans to acquire operations at the Vibra Facilities, for the
funds to purchase the Redding Facility which it sold to us at
the same time that it purchased that facility and for its
initial working capital needs. As of September 30, 2005,
Vibra had total assets of approximately $84.4 million (of
which approximately $29.7 million was goodwill and other
intangible assets), total liabilities of approximately
$92.6 million, a deficit in owners capital of
approximately $8.2 million, and for the nine months ended
September 30, 2005 had a loss from operations of
approximately $6.0 million and a net loss of approximately
$4.4 million. Each lease for the Vibra Facilities is
guaranteed by Brad E. Hollinger, chief executive officer of
The Hollinger Group, Vibra, Vibra Management, LLC and The
Hollinger Group. The lease for the Redding Facility is
guaranteed by Vibra, Vibra Management, LLC and The Hollinger
Group. However, we do not believe that these parties have
sufficient financial resources to satisfy a material portion of
the total lease obligations. Mr. Hollinger has not
guaranteed the Redding Facility lease and
Mr. Hollingers guaranty of the leases for the Vibra
Facilities is limited to $5.0 million, Vibra Management,
LLC and The Hollinger Group do not have substantial assets, and
Vibras assets are substantially comprised of the
operations at the Vibra Facilities and at the Redding Facility.
Stealth has provided to us unaudited financial statements
reflecting that, as of September 30, 2005, it had tangible
assets of approximately $7.7 million, including cash of
approximately $4.7 million, liabilities of approximately
$1.7 million and owners equity of approximately
$6.0 million. Stealth incurred substantial pre-opening and
start-up costs upon completion of construction of its
facilities. We cannot assure you that, should Stealths
equity be insufficient to cover its costs, it could access
additional debt or equity financing.
The lease for the Desert Valley Facility is guaranteed by Prime,
Desert Valley Medical Group, Inc., or DVMG, and Prime A
Investments, LLC, or Prime A. The Chino Facility lease is
guaranteed by Prime, Prime Healthcare Services, LLC, DVH and
DVMG. The Sherman Oaks Facility lease is fully guaranteed by
Prime, DVH, DVMG and Prime A until two years after the
commencement of the lease term, at which time the guarantee will
be limited to $5.0 million. This guaranty will be
terminated if Prime II achieves certain financial targets
for two consecutive fiscal years. DVH has provided to us
unaudited financial statements reflecting that, as of
September 30, 2005, it had tangible assets of approximately
$20.1 million, liabilities of approximately
$19.4 million and stockholders equity of
approximately $0.7 million, and for the nine months ended
September 30, 2005, had net income of approximately
$14.1 million. Prime has provided to us unaudited financial
statements showing that, as of September 30, 2005, it had
consolidated tangible assets of approximately
$53.8 million, consolidated liabilities of approximately
$23.2 million, and consolidated tangible net worth of
approximately $30.6 million and for the nine months ended
September 30, 2005, had consolidated net income of
approximately $15.1 million.
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The leases for the Covington Facility and the Denham Springs
Facility are guaranteed by Gulf States and Team Rehab, L.L.C.,
or Team Rehab. Gulf States has provided to us unaudited
financial statements reflecting that, as of September 30,
2005, it had tangible assets of approximately
$19.1 million, liabilities of approximately
$9.9 million and stockholders equity of approximately
$9.2 million, and for the nine months ended
September 30, 2005 had net income of approximately
$0.8 million. Team Rehab has provided to us unaudited
financial statements reflecting that, as of September 30,
2005, it had tangible assets of approximately
$13.5 million, liabilities of approximately
$3.1 million and owners equity of approximately
$10.4 million, and for the nine months ended
September 30, 2005 had net income of approximately
$7.3 million. Guarantors of our leases with DVH and Gulf
States may not have sufficient assets for us to recover amounts
due to us under those leases. The failure of our tenants and
their guarantors to meet their obligations to us would have a
material adverse effect on our revenues and our ability to make
distributions to our stockholders. North Cypress is newly formed
and has had no significant operations to date. The ground
sublease and the facility leases related to the North Cypress
Facility require that, as of the commencement date of each
lease, the tenant shall have received from its equity owners at
least $15.0 million in cash equity. Until the necessary
letter of credit in an amount equal to one years base rent
is posted, our lease for the Bucks County Facility is
guaranteed to the extent of $5.0 million by 14 guarantors.
The guarantors have delivered financial statements which we
believe reflect the necessary financial wherewithal to satisfy
their guaranty obligations. Monroe Hospital has provided to us
unaudited financial statements reflecting that, as of
September 30, 2005, it had tangible assets of
$12.2 million, including cash of approximately
$3.2 million, liabilities of approximately
$3.4 million and owners equity of approximately
$8.9 million. The treasurer of Monroe Hospital also
certified at closing that the equity owners of Monroe Hospital
contributed to Monroe Hospital cash or cash equivalents in a
total amount of $9.75 million.
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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financial institutions; and |
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local developers. |
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, including other REITs,
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.
22
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.
Our charter and other organizational documents do not limit the
amount of debt we may incur. We have targeted our debt level at
up to approximately 50-60% of our aggregate facility acquisition
and development costs. However, we may modify our target debt
level at any time without stockholder or board of director
approval. We cannot assure you that our use of financial
leverage will prove to be beneficial. In October 2005 we entered
into a $100.0 million credit agreement with Merrill Lynch
Capital, the principal amount of which may be increased to
$175.0 million at our request. We have also entered into
construction loan agreements with Colonial Bank pursuant to
which we can borrow up to $43.4 million. As of the date of
this prospectus, we had $71.8 million of long-term debt
outstanding.
We may borrow from other lenders in the future, or we may issue
corporate debt securities in public or private offerings. The
loans from Merrill Lynch Capital and Colonial Bank are secured
by the Vibra Facilities and the West Houston Facilities,
respectively. Some of our other borrowings in the future may be
secured by additional facilities we may acquire or develop. In
addition, in connection with debt financing from Merrill Lynch
Capital and Colonial Bank we are, and in connection with other
debt financing in the future we may be, subject to covenants
that may restrict our operations. We cannot assure you that we
will be able to meet our debt payment obligations or restrictive
covenants and, to the extent that we cannot, we risk the loss of
some or all of our facilities to foreclosure. In addition, debt
service obligations will reduce the amount of cash available for
distribution to our stockholders.
We anticipate that much of our 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 the date of this prospectus, we had approximately
$71.8 million in variable interest rate debt. 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. At the expiration of each lease for the Vibra Facilities,
each tenant will have the option to purchase the facility at a
purchase price equal to the greater of (i) the appraised
value of the facility, determined assuming the lease is still in
place, or (ii) the purchase price we paid for the facility,
including acquisition costs, increased by 2.5% per year from the
date of purchase. At any time after February 28, 2007, so
long as DVH and its affiliates are not in default under any
lease with us or any of the leases with its subtenants, DVH will
have the option, upon 90 days prior written notice,
to purchase the Desert Valley Facility at a purchase price equal
to the sum of (i) the purchase price of the facility, and
(ii) that amount determined under a formula that would
provide us an internal rate of return of 10% per year, increased
by 2% of such percentage each year, taking into account all
payments of base rent received by us. These same purchase rights
also apply if we provide DVH with notice of the exercise of
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our right to change management as a result of a default,
provided DVH gives us notice within five days following receipt
of such notice. If during the term of the lease we receive from
the previous owner or any of its affiliates, a written offer to
purchase the Desert Valley Facility and we are willing to accept
the offer, so long as DVH and its affiliates are not in default
under any lease with us or any of the subleases with its
subtenants, we must first present the offer to DVH and allow DVH
the right to purchase the facility upon the same price, terms
and conditions as set forth in the offer; however, if the offer
is made after February 28, 2007, in lieu of exercising its
right of first refusal, DVH may exercise its option to purchase
as provided above. So long as Gulf States is not in default
under any lease with us or in default under any sublease, Gulf
States will have the option to purchase the Covington Facility
or the Denham Springs Facility (i) at the expiration of the
initial term and each extension term of the respective lease, to
be exercised by 60 days written notice prior to the
expiration of the initial term and each extension term, and
(ii) within five days of written notification from us
exercising our right to terminate the engagement of the
tenants or its affiliates management company as the
management company for the facility as a result of an event of
default under the respective lease. The purchase price for
either of the Covington Facility or the Denham Springs Facility
purchase options will be equal to the greater of (i) the
appraised value of the facility based on a 15 year lease in
place, or (ii) the purchase price paid by us for the
facility, increased annually by an amount equal to the greater
of (A) 2.5% per annum from the date of the lease, or
(B) the rate of increase in the CPI on each January 1.
If we elect to purchase the North Cypress Facility upon
completion of construction, at the expiration of the facility
lease the tenant will have the option, so long as no event of
default has occurred, to purchase our interest in the property
leased pursuant to the facility lease at a purchase price equal
to the greater of (i) the appraised value of the leased
property or (ii) the purchase price paid by us to tenant
pursuant to the purchase and sale agreement relating to the
hospital improvements plus our interest in any capital additions
funded by us, as increased by the amount equal to the greater of
(A) 2.5% from the date of the facility lease execution or
(B) the rate of increase in the CPI as of each
January 1 which has passed during the lease term; provided
that in no event shall the purchase price be less than the fair
market value of the property leased. After the first full
12 month period after construction of the West Houston MOB
and the West Houston Hospital, respectively, as long as Stealth
is not in default under either of its leases with us or any of
the leases with its physician subtenants, it has the right to
purchase the West Houston MOB or the West Houston Hospital at a
price equal to the greater of (i) that amount determined
under a formula that would provide us an internal rate of return
of at least 18% and (ii) the appraised value based on a
15 year lease in place. Upon written notice to us within
90 days of the expiration of the applicable lease, as long
as Stealth is not in default under either of its leases with us
or any of the leases with its physician subtenants, Stealth will
have the option to purchase the West Houston MOB or the West
Houston Hospital at a price equal to the greater of (i) the
total development costs (including any capital additions funded
by us, but excluding any capital additions funded by Stealth)
increased by 2.5% per year, and (ii) the appraised value
based on a 15 year lease in place. The Stealth leases also
provide that under certain limited circumstances, Stealth will
have the right to present us with a choice of one out of three
proposed exchange facilities to be substituted for the leased
facility. At the expiration of the lease for the Bucks County
Facility, BCO will have the option, upon 60 days prior
written notice, to purchase the facility at a purchase price
equal to the greater of (i) the appraised value of the
facility, which assumes the lease remains in effect for
15 years, or (ii) the total development costs,
including any capital additions funded by us, as increased by an
amount equal to the greater of (A) 2.5% per annum from the
date of the lease, or (B) the rate of increase in the CPI
on each January 1. If we do not approve a change of control
transaction involving BCO, BCO will also have the option,
exercisable for 30 days after our failure to approve the
change of control, to purchase the facility at the greater of
(i) the above formula for the
end-of-lease-term
purchase option or (ii) an amount that would provide us an
internal rate of return of 13%. At the expiration of the lease
for the Monroe Facility, Monroe Hospital will have the option,
upon 60 days prior written notice, to purchase the facility
at a purchase price equal to the greater of (i) the
appraised value of the facility, which assumes the lease remains
in effect for 15 years, or (ii) the total development
costs, including any capital additions funded by us, as
increased by an amount equal to the greater of (A) 2.5% per
annum from the date of the lease, or (B) the rate of
increase in the CPI on each January 1. At any time after
November 30, 2008, so long as Veritas and its affiliates
are not in default under any lease with us or any of the leases
with its
24
subtenants, Veritas or Prime Healthcare Services, LLC will have
the option, upon 90 days prior written notice, to
purchase the Chino Facility at a purchase price equal to the sum
of (i) the purchase price of the facility, and
(ii) that amount determined under a formula that would
provide us an internal rate of return of 11% per year,
taking into account all payments of base rent received by us. In
addition, if we receive notice that the lease for the parking
lot adjacent to the Chino Facility will not be renewed beyond
December 2013, that our rights under the parking lot lease are
or will be terminated, or that the parking lot may not be used
for parking for the facility, we have the right, upon
90 days prior written notice, or the put notice, to
cause Veritas to purchase the Chino Facility and our interest in
the parking lot lease at a purchase price equal to the sum of
(i) the purchase price of the facility, and (ii) that
amount determined under a formula that would provide us an
internal rate of return of 11% per year, taking into
account all payments of base rent received by us. Upon receipt
of the put notice, however, Veritas has the right, within
30 days following the put notice, to substitute one or more
properties to be used for parking for the facility. We are not
obligated to accept any substitute property which does not
satisfy applicable zoning and use laws, ordinances, rules or
regulations or which, in our sole discretion, would create an
undue burden or inconvenience for parking at the facility. At
any time after the tenth anniversary of the commencement of the
lease term for the Sherman Oaks Facility, so long as
Prime II and its affiliates are not in default under any
lease with us or any of the leases with its subtenants,
Prime A will have the option, upon 90 days prior
written notice, to purchase the facility at a purchase price
equal to the sum of (i) the purchase price of the facility
(including any additional financing by us) and (ii) that
amount determined under a formula that would provide us an
internal rate of return of 11% per year, taking into account all
payments of base rent received by us, but in no event would this
amount be less than the purchase price. Prime A also has
the right at any time while the guaranty is outstanding to
petition to purchase the facility for the same purchase price,
and we would then have the option to release the guaranty or
sell the property. Finally, if there is a non-monetary default,
other than an intentional default, that occurs before the tenth
anniversary of the lease date, and we desire to terminate the
lease, Prime A would also have the option to purchase the
facility, but at an internal rate of return to us of 12.5%.
All of our arrangements which provide or will provide tenants
the option to purchase the facilities we lease to them are
subject to regulatory requirements that such purchases be at
fair market value. We cannot assure you that the formulas we
have developed for setting the purchase price will yield 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. Any of these purchases
would disrupt our cash flow by eliminating lease payments from
these tenants. 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.
Property owned in limited liability companies and
partnerships in which we are not the sole equity holder may
limit our ability to act exclusively in our interests.
We own, and in the future expect to own, interests in our
facilities through wholly or majority owned subsidiaries of our
operating partnership. Stealth, L.P., the tenant of our West
Houston Hospital, owns a 6% limited partnership interest in MPT
West Houston Hospital, L.P., which owns the West Houston
Hospital. Physicians and others associated with our tenant or
subtenants of the West Houston MOB own approximately 24% of the
aggregate equity interests in MPT West Houston MOB, L.P., the
entity that owns our West Houston MOB. We may offer limited
liability company and limited partnership interests to tenants,
subtenants and physicians in the future. Investments in
partnerships, limited liability companies or other entities with
co-owners may, under certain circumstances, involve risks not
present were a co-owner not involved, including the possibility
that partners or other co-owners might become bankrupt or fail
to fund their share of required capital contributions. Partners
or other co-owners may have economic or other business interests
or goals that are inconsistent with our business interests or
goals, and may be in a
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position to take actions contrary to our policies or objectives.
Such investments may also have potential risks pertaining to
healthcare regulatory compliance, particularly when partners or
other co-owners are physicians, and of impasses on major
decisions, such as sales or mergers, because neither we nor our
partners or other co-owners would have full control over the
partnership, limited liability company or other entity. Disputes
between us and our partners or other co-owners may result in
litigation or arbitration that would increase our expenses and
prevent our officers and directors from focusing their time and
effort on our business. Consequently, actions by or disputes
with our partners or other co-owners might result in subjecting
facilities owned by the partnership, limited liability company
or other entity to additional risk. In addition, we may in
certain circumstances be liable for the actions of our partners
or other co-owners. The occurrence of any of the foregoing
events could have a material adverse effect on our results of
operations and our ability to make distributions to our
stockholders.
Terrorist attacks, such as the attacks that occurred in New
York and Washington, D.C. on September 11, 2001,
U.S. military action and the publics reaction to the
threat of terrorism or military action could adversely affect
our results of operations and the market on which our common
stock will trade.
There may be future terrorist threats or attacks against the
United States or U.S. businesses. These attacks may
directly impact the value of our facilities through damage,
destruction, loss or increased security costs. Losses due to
wars or terrorist attacks may be uninsurable, or insurance may
not be available at a reasonable price. More generally, any of
these events could cause consumer confidence and spending to
decrease or result in increased volatility in the United States
and worldwide financial markets and economies.
Risks Relating to Real Estate Investments
Our real estate investments are and will continue to be
concentrated in net-leased healthcare facilities, making us more
vulnerable economically than if our investments were more
diversified.
We have acquired and are developing and expect to continue
acquiring and developing net-leased 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 net-leased 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 net-leased facilities and targeted net-leased 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 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.
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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 which we expect to be
completed in August 2006, developing a community hospital in
Bloomington, Indiana which we expect to be completed in October
2006 and financing the development of a community hospital in
Houston, Texas which we expect to be completed in December 2006.
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. |
We expect to fund our development projects over time.
Additionally, the time frame required for development and
construction of these facilities means that we may have to wait
years for a significant cash return. 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
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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,
that 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.
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.
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Our performance and the price of our common stock will be
affected by risks associated with the real estate industry.
Factors that may adversely affect the economic performance and
price of our common stock include:
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changes in the national, regional and local economic climate,
including but not limited to changes in interest rates; |
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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. |
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attractiveness of our facilities to healthcare providers and
other types of tenants; and |
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competition from other rehabilitation hospitals, long-term acute
care facilities, medical office buildings, outpatient treatment
facilities, ambulatory surgery centers and specialty hospitals,
skilled nursing facilities, regional and community hospitals,
womens and childrens hospitals and other
single-discipline facilities. |
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 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 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 violation of environmental laws
could have a material adverse affect on us. In addition,
environmental and occupational health and safety laws constantly
are evolving, and changes in laws, regulations or policies, or
changes in interpretations of the foregoing, could create
liabilities where none exists today.
Costs associated with complying with the Americans with
Disabilities Act of 1993 may adversely affect our financial
condition and operating results.
Under the Americans with Disabilities Act of 1993, all public
accommodations are required to meet certain federal requirements
related to access and use by disabled persons. While our
facilities are generally in compliance with these requirements,
a determination that we are not in compliance with the Americans
with Disabilities Act of 1993 could result in imposition of
fines or an award of damages to private litigants. In addition,
changes in governmental rules and regulations or enforcement
policies
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affecting the use and operation of the facilities, including
changes to building codes and fire and life-safety codes, may
occur. If we are required to make substantial modifications at
our facilities to comply with the Americans with Disabilities
Act of 1993 or other changes in governmental rules and
regulations, this may have a material adverse effect on our
financial condition and results of operations and could
adversely affect our ability to make distributions to our
stockholders.
Our facilities may contain or develop harmful mold or suffer
from other air quality issues, which could lead to liability for
adverse health effects and costs of remediating the problem.
When excessive moisture accumulates in buildings or on building
materials, mold growth may occur, particularly if the moisture
problem remains undiscovered or is not addressed over a period
of time. Some molds may produce airborne toxins or irritants.
Indoor air quality issues can also stem from inadequate
ventilation, chemical contamination from indoor or outdoor
sources and other biological contaminants such as pollen,
viruses and bacteria. Indoor exposure to airborne toxins or
irritants above certain levels can be alleged to cause a variety
of adverse health effects and symptoms, including allergic or
other reactions. As a result, the presence of significant mold
or other airborne contaminants at any of our facilities could
require us to undertake a costly remediation program to contain
or remove the mold or other airborne contaminants from the
affected facilities or increase indoor ventilation. In addition,
the presence of significant mold or other airborne contaminants
could expose us to liability from our tenants, employees of our
tenants and others if property damage or health concerns arise.
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 two of our facilities, at least in
part, and one facility under development, 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 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
Redding Facility 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. 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
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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 reliant 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.
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 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.
Adverse trends in healthcare provider operations may
negatively affect our lease revenues and our ability to make
distributions to our stockholders.
We believe that the healthcare industry is currently
experiencing:
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changes in the demand for and methods of delivering healthcare
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changes in third-party reimbursement policies; |
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significant unused capacity in certain areas, which has created
substantial competition for patients among healthcare providers
in those areas; |
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continuing pressure by private and governmental payors to reduce
payments to providers of services; and |
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increased scrutiny by federal and state authorities of billing,
referral and other practices. |
These factors may adversely affect the economic performance of
some or all of our tenants and, in turn, our revenues.
Accordingly, these factors 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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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.
We cannot assure you that we will meet all the conditions for
the safe harbor for space rental in structuring lease
arrangements involving facilities in which local physicians are
investors and tenants, 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 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.
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 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 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 strategic and implementing plan for
physician investment in specialty hospitals that addresses the
issues of proportionality of investment return,
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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
6 months after enactment of the DRA. 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, our charter and our 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 our stock price or cause dilution.
Our charter contains ownership limitations that may restrict
business combination opportunities, inhibit change of control
transactions and reduce the value of our stock. To qualify
as a REIT under the Code, no more than 50% in value of our
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, other than
our first REIT taxable year. Our 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 our common stock. Generally, common stock owned by
affiliated owners will be aggregated for purposes of the
ownership limitation. Any transfer of our common stock that
would violate the ownership limitation will be null and void,
and the intended transferee will acquire no rights in such
stock. Instead, such common stock will be designated as
shares-in-trust and transferred automatically to a
trust effective on the day before the purported transfer of such
stock. The beneficiary of that trust will be one or more
charitable organizations named by us. 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 our 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
our common stock. Our board of directors, in its sole
discretion, may waive or modify, subject to limitations, the
ownership limit with respect to one or more stockholders if it
is satisfied that ownership in excess of their limit will not
jeopardize our status as a REIT. See Description of
Capital Stock Restrictions on Ownership and
Transfer.
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Certain provisions of Maryland law may limit the ability of a
third party to acquire control of our company. Certain
provisions of the Maryland General Corporation Law, or the MGCL,
could have the effect of inhibiting a third party from making a
proposal to acquire us or of impeding a change of control under
circumstances that otherwise could provide the holders of shares
of our common stock with the opportunity to realize a premium
over the then-prevailing market price of such shares, including:
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business combination provisions that, subject to
limitations, prohibit certain business combinations between us
and an interested stockholder (defined generally as
a person who beneficially owns 10% or more of the voting power
of our shares or an affiliate thereof) for five years after the
most recent date on which the stockholder becomes an interested
stockholder, and thereafter imposes special appraisal rights and
special stockholder voting requirements on these combinations;
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control share provisions that provide that
control shares of our company (defined as shares
which, when aggregated with other shares controlled by the
stockholder, entitle the stockholder to exercise one of three
increasing ranges of voting power in electing directors)
acquired in a control share acquisition (defined as
the direct or indirect acquisition of ownership or control of
control shares) have no voting rights except to the
extent approved by our stockholders by the affirmative vote of
the holders of at least two-thirds of all the votes entitled to
be cast on the matter, excluding all interested shares. |
We have opted out of these provisions of the MGCL pursuant to
provisions in our charter. However, we may, by amendment to our
charter with approval of our stockholders, opt in to the
business combination and control share provisions of the MGCL in
the future.
Additionally, Title 8, Subtitle 3 of the MGCL permits
our board of directors, without stockholder approval and
regardless of what is currently provided in our charter and our
amended and restated bylaws, or bylaws, to implement takeover
defenses, some of which (for example, a classified board) we do
not presently have. These provisions may have the effect of
inhibiting a third party from making an acquisition proposal for
our company or of delaying, deferring or preventing a change of
control of our company under circumstances that otherwise could
provide the holders of our common stock with the opportunity to
realize a premium over the then-current market price of our
common stock.
Maryland law does not impose heightened standards or greater
scrutiny on directors in takeover situations. The MGCL provides
that an act of a director relating to or affecting an
acquisition or potential acquisition of control of a corporation
may not be subject to a higher duty or greater scrutiny than is
applied to any other act of a director. Therefore, directors of
a Maryland corporation are not required to act in the same
manner as directors of a Delaware corporation in takeover
situations.
Our charter and bylaws contain provisions that may impede
third-party acquisition proposals that may be in your best
interests. Our charter and bylaws also provide that our
directors may only be removed by the affirmative vote of the
holders of two-thirds of our 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 our 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.
Our board of directors may issue additional shares that may
cause dilution and could deter change of control transactions
that you may believe to be in your best interest. Our
charter authorizes our board, without stockholder approval, to:
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issue up to 10,000,000 shares of preferred stock, having
preferences, conversion or other rights, voting powers,
restrictions, limitations as to distribution, qualifications, or
terms or conditions of redemption as determined by the board; |
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amend the charter to increase or decrease the aggregate number
of shares of capital stock or the number of shares of stock of
any class or series that we have the authority to issue; |
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cause us to issue additional authorized but unissued shares of
common stock or preferred stock; and |
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classify or reclassify any unissued shares of common or
preferred stock by setting or changing in any one or more
respects, from time to time before the issuance of such shares,
the preferences, conversion or other rights and other terms of
such classified or reclassified shares, including the issuance
of additional shares of common stock or preferred stock that
have preference rights over the common stock with respect to
dividends, liquidation, voting and other matters. |
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, Emmett E. McLean, R. Steven Hamner 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.
We may experience conflicts of interest with our officers and
directors, which could result in our officers and directors
acting other than in our best interest.
As described below, our officers and directors may have
conflicts of interest in connection with their duties to us and
the limited partners of our operating partnership and with
allocation of their time between our business and affairs and
their other business interests. In addition, from time to time,
we may acquire or develop facilities in transactions involving
prospective tenants in which our directors or officers have an
interest. In transactions of this nature, there will be
conflicts between our interests and the interests of the
director or officer involved, and that director or officer may
be in a position to influence the terms of those transactions.
In the event we purchase properties from executive officers or
directors in exchange for units of limited partnership in our
operating partnership, the interests of those persons with the
interests of the company may conflict. Where a unitholder has
unrealized gains associated with his limited partnership
interests in our operating partnership, these holders may incur
adverse tax consequences in the event of a sale or refinancing
of those properties. Therefore the interest of these executive
officers or directors of our company could be different from the
interests of the company in connection with the disposition or
refinancing of a property. Conflicts of interest with our
officers and directors could result in our officers and
directors acting other than in our best interest.
The MGCL provides that a transaction between a corporation and
any of its directors is not void solely because of a conflict of
interest so long as (i) the material facts are made known
to the other directors and the transaction is approved by a
majority of disinterested directors, even if less than a quorum;
(ii) the material facts are made known to stockholders and
the transaction is approved by a majority of votes cast by
disinterested stockholders; or (iii) the transaction is
fair and reasonable to the corporation.
Our executive officers have agreements that provide them with
benefits in the event their employment is terminated by us
without cause, by the executive for good reason, or under
certain circumstances following a change of control transaction
that you may believe to be in your best interest.
We have entered into agreements with certain of our executive
officers that provide them with severance benefits if their
employment is terminated by us without cause, by them for good
reason (which includes, among other reasons, failure to be
elected to the board for Mr. Aldag and failure to have their
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agreements automatically renewed for Messrs. Aldag, McLean,
Hamner, McKenzie and Stewart), or under certain circumstances
following a change of control of our company. Certain of these
benefits and the related tax indemnity could prevent or deter a
change of control of our company that might involve a premium
price for our common stock or otherwise be in the best interests
of our stockholders.
The vice chairman of our board of directors, William G.
McKenzie, has other business interests that may hinder his
ability to allocate sufficient time to the management of our
operations, which could jeopardize our ability to execute our
business plan.
Our employment agreement with the vice chairman of our board of
directors, Mr. McKenzie, permits him to continue to own,
operate and control facilities that he owned as of the date of
his employment agreement and requires that he only provide a
limited amount of his time per month to our company. In
addition, the terms of Mr. McKenzies employment
agreement permit him to compete against us with respect to these
previously owned healthcare facilities.
All management rights are vested in our board of directors
and our stockholders have limited rights.
Our board of directors is responsible for our management and
strategic business direction, and management is responsible for
our day-to-day operations. Our major policies, including our
policies with respect to REIT qualification, acquisitions and
developments, leasing, financing, growth, operations, debt
limitation and distributions, are determined by our board of
directors. Our board of directors may amend or revise these and
other policies from time to time without a vote of our
stockholders. Investment and operational policy changes could
adversely affect the market price of our common stock and our
ability to make distributions to our stockholders.
The ability of our board of directors to revoke our REIT
status without stockholder approval may cause adverse
consequences to our stockholders.
Our charter provides that our board of directors may revoke or
otherwise terminate our REIT election, without the approval of
our stockholders, if it determines that it is no longer in our
best interest to continue to qualify as a REIT. If we cease to
be a REIT, we would become subject to federal income tax on our
taxable income and would no longer be required to distribute
most of our taxable income to our stockholders, which may have
adverse consequences on total return to our stockholders.
Our rights and the rights of our stockholders to take action
against our directors and officers are limited.
Maryland law provides that a director or officer has no
liability in that capacity if he or she performs his or her
duties in good faith, in a manner he or she reasonably believes
to be in our best interests and with the care that an ordinarily
prudent person in a like position would use under similar
circumstances. In addition, our charter eliminates our
directors and officers liability to us and our
stockholders for money damages except for liability resulting
from actual receipt of an improper benefit in money, property or
services or active and deliberate dishonesty established by a
final judgment and which is material to the cause of action. Our
bylaws and indemnification agreements require us to indemnify
our directors and officers for liability resulting from actions
taken by them in those capacities to the maximum extent
permitted by Maryland law. As a result, we and our stockholders
may have more limited rights against our directors and officers
than might otherwise exist under common law. In addition, we may
be obligated to fund the defense costs incurred by our directors
and officers. See Certain Provisions of Maryland Law and
of Our Charter and Bylaws Indemnification and
Limitation of Directors and Officers
Liability. Directors may be removed with or without cause
by the affirmative vote of the holders of two-thirds of the
votes entitled to be cast in the election of directors.
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Our UPREIT structure may result in conflicts of interest
between our 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 general partner of our operating
partnership, we have fiduciary duties to the limited partners of
our operating partnership that may conflict with fiduciary
duties our officers and directors owe to our stockholders. These
conflicts may result in decisions that are not in your best
interest.
Through a wholly-owned subsidiary, we are the general partner
of our operating partnership and our operating partnership,
through wholly-owned subsidiaries, is the general partner of
other subsidiaries which own our facilities and, should any of
these wholly-owned general partners be disregarded, then we or
our operating partnership could become liable for the debts and
other obligations of our subsidiaries beyond the amount of our
investment.
Through our wholly-owned subsidiary, Medical Properties Trust,
LLC, we are the sole general partner of our operating
partnership, and also currently own 100% of the limited
partnership interests in the operating partnership. In addition,
our operating partnership, through other wholly-owned
subsidiaries, is the general partner of other subsidiaries which
own our facilities. If any of our wholly-owned subsidiaries
which act as general partner were disregarded, we would be
liable for the debts and other obligations of the subsidiaries
that own our facilities. In such event, if any of these
subsidiaries were unable to pay their debts and other
obligations, we would be liable for such debts and other
obligations beyond the amount of our investment in these
subsidiaries. These obligations could include unforeseen
contingent liabilities.
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 our 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.
Our qualification as a REIT depends on our ability to meet
various requirements concerning, among other things, the
ownership of our outstanding common stock, the nature of our
assets, the sources of our income and the amount of our
distributions to our stockholders. 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 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. |
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:
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85% of our ordinary income for that year; |
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95% of our capital gain net income for that year; and |
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100% of our undistributed taxable income from prior years. |
We intend to pay out our income to our stockholders in a manner
that satisfies the distribution requirement and avoids corporate
income tax and the 4% excise tax. 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.
We will pay some taxes and therefore may have less cash
available for distribution to our stockholders.
We will be required to pay some U.S. federal, state and
local taxes on the income from the operations of our taxable
REIT subsidiary, MPT Development Services, Inc. A taxable REIT
subsidiary is a fully taxable corporation and may be limited in
its ability to deduct interest payments made to us. In addition,
we will be subject to a 100% penalty tax on certain amounts if
the economic arrangements among our tenants, our taxable REIT
subsidiary and us are not comparable to similar arrangements
among unrelated parties. To the extent that we are or our
taxable REIT subsidiary is required to pay U.S. federal,
state or local taxes, we will have less cash available for
distribution to stockholders.
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.
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Our loan to Vibra could be recharacterized as equity, in
which case our rental income from Vibra would 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. 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%.
The Internal Revenue Service, or IRS, may take the position that
the loans to Vibra should be treated as equity interests in
Vibra rather than debt, and that our rental income from Vibra
should not be treated as qualifying income for purposes of the
REIT gross income tests. If the IRS were to successfully treat
the loans to Vibra as equity interests in Vibra, Vibra would be
a related party tenant with respect to our company
and the rent that we receive from Vibra 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 the loans to Vibra as interests held by our
operating partnership rather than by our taxable REIT subsidiary
and to treat the loans as other than straight debt, we would
fail the 10% asset test with respect to such interests and, as a
result, 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 Relating to an Investment in Our Common Stock
The market price and trading volume of our common stock may
be volatile.
On July 13, 2005, we completed an initial public offering
of our common stock, which is listed on the New York Stock
Exchange. While there has been significant trading in our common
stock since the initial public offering, we cannot assure you
that an active trading market in our common stock will be
sustained. Even if active trading of our common stock continues,
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; |
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additions or departures of key management personnel; |
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actions by institutional stockholders; |
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speculation in the press or investment community; and |
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general market and economic conditions. |
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Broad market fluctuations could negatively impact the market
price of our common stock.
In addition, the stock market has experienced extreme price and
volume fluctuations that have affected the market price of many
companies in industries similar or related to ours and that have
been unrelated to these companies operating performances.
These broad market fluctuations could reduce the market price of
our common stock. Furthermore, our operating results and
prospects may be below the expectations of public market
analysts and investors or may be lower than those of companies
with comparable market capitalizations, which could lead to a
material decline in the market price of our common stock.
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 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.
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A WARNING ABOUT FORWARD LOOKING STATEMENTS
We make forward-looking statements in this prospectus 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:
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our business strategy; |
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our projected operating results; |
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our ability to acquire or develop net-leased facilities; |
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availability of suitable facilities to acquire or develop; |
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our ability to enter into, and the terms of, our prospective
leases; |
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our ability to use effectively the proceeds of our initial
public offering; |
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our ability to obtain future financing arrangements; |
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estimates relating to, and our ability to pay, future
distributions; |
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our ability to compete in the marketplace; |
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market trends; |
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projected capital expenditures; and |
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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 all 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, 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 prospectus, including those set
forth under the sections captioned Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations; Our
Business and Our Portfolio; |
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general volatility of the capital markets and the market price
of our common stock; |
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changes in our business strategy; |
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changes in healthcare laws and regulations; |
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availability, terms and development of capital; |
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availability of qualified personnel; |
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changes in our industry, interest rates or the general economy;
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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.
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USE OF PROCEEDS
We will not receive any proceeds from the sale by the selling
stockholders of the shares of common stock offered by this
prospectus.
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CAPITALIZATION
The following table sets forth:
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|
|
|
our actual capitalization as of September 30, 2005; and |
|
|
|
our pro forma capitalization, as adjusted to give effect to
(i) a distribution of $0.18 per share declared on
November 18, 2005 and payable on January 19, 2006 to
stockholders of record on December 15, 2005; and
(ii) a loan funded through the Companys revolving
credit facility which was entered into in October 2005. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
September 30, 2005 | |
|
|
| |
|
|
|
|
Pro Forma, | |
|
|
Historical | |
|
As Adjusted | |
|
|
| |
|
| |
Long term debt
|
|
$ |
40,366,667 |
|
|
$ |
80,366,667 |
|
Minority interests
|
|
|
2,137,500 |
|
|
|
2,137,500 |
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 10,000,000 shares authorized;
no shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 100,000,000 shares authorized;
39,292,885 shares issued and outstanding at September 30,
2005
|
|
|
39,293 |
|
|
|
39,293 |
(1) |
|
|
Additional paid in capital
|
|
|
359,866,949 |
|
|
|
359,866,949 |
|
|
|
Accumulated deficit
|
|
|
(2,584,400 |
) |
|
|
(9,778,832 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
357,321,842 |
|
|
|
350,127,410 |
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
399,826,009 |
|
|
$ |
432,631,577 |
|
|
|
|
|
|
|
|
|
|
(1) |
Excludes (i) 79,500 shares of restricted common stock
awarded to one of our executive officers and employees in April
2005, 106,000 shares of restricted common stock awarded to our
founders in July 2005, 490,680 shares of restricted common stock
awarded to our executive officers and directors in August 2005
and 88,449 shares of restricted common stock awarded to
certain of our executive officers in March 2006, all such awards
under our equity incentive plan; (ii) 100,000 shares of
common stock issuable upon the exercise of stock options granted
to our independent directors under our equity incentive plan,
options for 46,664 shares of which are vested;
(iii) 5,000 shares of common stock issuable in October
2007, 7,500 shares of common stock issuable in March 2008 and
10,000 shares of common stock issuable in October 2008
pursuant to deferred stock units awarded under our equity
incentive plan to our independent directors; and
(iv) 3,803,332 shares of common stock available for
future awards under our equity incentive plan. |
43
DISTRIBUTION POLICY
We intend to make regular quarterly distributions to our
stockholders so that we distribute each year all or
substantially all of our REIT taxable income, if any, so as to
avoid paying corporate level income tax and excise tax on our
REIT income and to qualify for the tax benefits accorded to
REITs under the Code. In order to maintain our status as a REIT,
we must distribute to our stockholders an amount at least equal
to 90% of our REIT taxable income, excluding net capital gain.
See United States Federal Income Tax Considerations.
The distributions will be authorized by our board of directors
and declared by us based upon a number of factors, including:
|
|
|
|
|
our actual results of operations; |
|
|
|
the rent received from our tenants; |
|
|
|
the ability of our tenants to meet their other obligations under
their leases and their obligations under their loans from us; |
|
|
|
debt service requirements; |
|
|
|
capital expenditure requirements for our facilities; |
|
|
|
our taxable income; |
|
|
|
the annual distribution requirement under the REIT provisions of
the Code; and |
|
|
|
other factors that our board of directors may deem relevant. |
To the extent not inconsistent with maintaining our REIT status,
we may retain accumulated earnings of our taxable REIT
subsidiaries in those subsidiaries. Our ability to make
distributions to our stockholders will depend on our receipt of
distributions from our operating partnership.
The table below is a summary of our distributions. We cannot
assure you that we will have cash available for future quarterly
distributions at these levels, or at all. See Risk
Factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution per Share | |
Declaration Date |
|
Record Date |
|
Date of Distribution |
|
of Common Stock | |
|
|
|
|
|
|
| |
February 16, 2006
|
|
March 15, 2006 |
|
April 12, 2006 |
|
$ |
0.21 |
|
November 18, 2005
|
|
December 15, 2005 |
|
January 29, 2006 |
|
$ |
0.18 |
|
August 18, 2005
|
|
September 15, 2005 |
|
September 29, 2005 |
|
$ |
0.17 |
|
May 19, 2005
|
|
June 20, 2005 |
|
July 14, 2005 |
|
$ |
0.16 |
|
March 4, 2005
|
|
March 16, 2005 |
|
April 15, 2005 |
|
$ |
0.11 |
|
November 11, 2004
|
|
December 16, 2004 |
|
January 11, 2005 |
|
$ |
0.11 |
|
September 2, 2004
|
|
September 16, 2004 |
|
October 11, 2004 |
|
$ |
0.10 |
|
The two distributions declared in 2004, aggregating
$0.21 per share, were comprised of approximately
$0.13 per share in ordinary income and $0.08 per share
in return of capital. For federal income tax purposes, our
distributions were limited in 2004 to our tax basis earnings and
profits of $0.13 per share. Accordingly, for tax purposes,
$0.08 per share of the distributions we paid in January
2005 will be treated as a 2005 distribution; the tax character
of this amount, along with that of the April 15, 2005,
July 14, 2005 and September 29, 2005 distributions,
will be determined subsequent to determination of our 2005
taxable income.
44
SELECTED FINANCIAL INFORMATION
You should read the following pro forma and historical
information in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our historical and pro forma consolidated
financial statements and related notes thereto included
elsewhere in this prospectus.
The following table sets forth our selected financial and
operating data on an historical and pro forma basis. Our
selected historical balance sheet information as of
December 31, 2004, and the historical statement of
operations and other data for the year ended December 31,
2004, have been derived from our historical financial statements
audited by KPMG LLP, independent registered public accounting
firm, whose report with respect thereto is included elsewhere in
this prospectus. The historical balance sheet information as of
September 30, 2005 and the historical statement of
operations and other data for the nine months ended
September 30, 2005 have been derived from our unaudited
historical balance sheet as of September 30, 2005 and from
our unaudited statement of operations for the nine months ended
September 30, 2005 included elsewhere in this prospectus.
The unaudited historical financial statements include all
adjustments, consisting of normal recurring adjustments, that we
consider necessary for a fair presentation of our financial
condition and results of operations as of such dates and for
such periods under accounting principles generally accepted in
the U.S.
The unaudited pro forma consolidated balance sheet data as of
September 30, 2005, are presented as if completion of our
probable acquisition had occurred on September 30, 2005.
The unaudited pro forma consolidated statement of operations and
other data for the nine months ended September 30, 2005 are
presented as if our acquisition of the Desert Valley Facility,
the Covington Facility, the Chino Facility, the Denham Springs
Facility and the Redding Facility along with the completion of
our probable acquisitions had occurred on January 1, 2005,
and our December 31, 2004 unaudited pro forma consolidated
statement of operations are presented as if our acquisition of
the current portfolio of facilities (the six Vibra Facilities,
the Desert Valley Facility, the Covington Facility, the Chino
Facility, the Denham Springs Facility and the Redding Facility),
our making of the Vibra loans and completion of our probable
acquisitions had occurred on January 1, 2004. The pro forma
information does not give effect to any of our facilities under
development or probable development transactions. The pro forma
information is not necessarily indicative of what our actual
financial position or results of operations would have been as
of the dates or for the periods indicated, nor does it purport
to represent our future financial position or results of
operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended | |
|
For the Year Ended | |
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Pro Forma | |
|
Historical | |
|
Pro Forma | |
|
Historical | |
|
|
| |
|
| |
|
| |
|
| |
Operating information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent income
|
|
$ |
26,273,517 |
|
|
$ |
18,364,389 |
|
|
$ |
32,808,106 |
|
|
$ |
8,611,344 |
|
|
|
Interest income from loans
|
|
|
6,368,607 |
|
|
|
3,562,857 |
|
|
|
9,037,049 |
|
|
|
2,282,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
32,642,124 |
|
|
|
21,927,246 |
|
|
|
41,845,155 |
|
|
|
10,893,459 |
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,645,242 |
|
|
|
2,986,790 |
|
|
|
6,193,653 |
|
|
|
1,478,470 |
|
|
|
General and administrative
|
|
|
5,595,416 |
|
|
|
5,595,416 |
|
|
|
5,057,284 |
|
|
|
5,057,284 |
|
|
|
Total operating expenses
|
|
|
10,357,499 |
|
|
|
8,699,047 |
|
|
|
12,023,286 |
|
|
|
7,214,601 |
|
|
|
Operating income
|
|
|
22,284,625 |
|
|
|
13,228,199 |
|
|
|
29,821,869 |
|
|
|
3,678,858 |
|
|
|
Net other income (expense)
|
|
|
(2,132,363 |
) |
|
|
(32,363 |
) |
|
|
(1,902,509 |
) |
|
|
897,491 |
|
|
Net income
|
|
|
20,152,262 |
|
|
|
13,195,836 |
|
|
|
27,919,360 |
|
|
|
4,576,349 |
|
|
Net income per share, basic
|
|
|
0.67 |
|
|
|
0.44 |
|
|
|
1.45 |
|
|
|
0.24 |
|
|
Net income per share, diluted
|
|
|
0.67 |
|
|
|
0.44 |
|
|
|
1.45 |
|
|
|
0.24 |
|
|
Weighted average shares outstanding basic
|
|
|
29,975,971 |
|
|
|
29,975,971 |
|
|
|
19,310,833 |
|
|
|
19,310,833 |
|
|
Weighted average shares outstanding diluted
|
|
|
29,999,381 |
|
|
|
29,999,381 |
|
|
|
19,312,634 |
|
|
|
19,312,634 |
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
As of September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Pro Forma | |
|
Historical | |
|
Historical | |
|
|
| |
|
| |
|
| |
Balance Sheet information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment in real estate assets
|
|
$ |
328,342,475 |
|
|
$ |
266,106,299 |
|
|
$ |
151,690,293 |
|
|
Net investment in real estate
|
|
|
323,877,215 |
|
|
|
261,641,039 |
|
|
|
150,211,823 |
|
|
Construction in progress
|
|
|
78,435,280 |
|
|
|
78,484,104 |
|
|
|
24,318,098 |
|
|
Cash and cash equivalents
|
|
|
36,896,094 |
|
|
|
100,826,702 |
|
|
|
97,543,677 |
|
|
Loans receivable
|
|
|
86,895,611 |
|
|
|
52,895,611 |
|
|
|
50,224,069 |
(1) |
|
Total assets
|
|
|
463,898,155 |
|
|
|
431,592,587 |
|
|
|
306,506,063 |
|
|
Total debt
|
|
|
80,366,667 |
|
|
|
40,366,667 |
|
|
|
56,000,000 |
|
|
Total liabilities
|
|
|
111,633,245 |
|
|
|
72,133,245 |
|
|
|
73,777,619 |
|
|
Total stockholders equity
|
|
|
350,127,410 |
|
|
|
357,321,842 |
|
|
|
231,728,444 |
|
|
Total liabilities and stockholders equity
|
|
|
463,898,155 |
|
|
|
431,592,587 |
|
|
|
306,506,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended | |
|
For the Year Ended | |
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Pro Forma | |
|
Historical | |
|
Pro Forma | |
|
Historical | |
|
|
| |
|
| |
|
| |
|
| |
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from
operations(2)
|
|
$ |
24,797,504 |
|
|
$ |
16,182,626 |
|
|
$ |
34,113,013 |
|
|
$ |
6,054,819 |
|
|
Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided by operating activities
|
|
|
|
|
|
|
16,094,005 |
|
|
|
|
|
|
|
9,918,898 |
|
|
|
Used for investing activities
|
|
|
|
|
|
|
(107,692,381 |
) |
|
|
|
|
|
|
(195,600,642 |
) |
|
|
Provided by financing activities
|
|
|
|
|
|
|
94,881,401 |
|
|
|
|
|
|
|
283,125,421 |
|
|
|
|
(1) |
|
Includes $1.5 million in commitment fees payable to us by
Vibra. |
|
(2) |
|
Funds from operations, or FFO, represents net income (computed
in accordance with GAAP), excluding gains (or losses) from sales
of property, plus real estate related depreciation and
amortization (excluding amortization of loan origination costs)
and after adjustments for unconsolidated partnerships and joint
ventures. Management considers funds from operations a useful
additional measure of performance for an equity REIT because it
facilitates an understanding of the operating performance of our
properties without giving effect to real estate depreciation and
amortization, which assumes that the value of real estate assets
diminishes predictably over time. Since real estate values have
historically risen or fallen with market conditions, we believe
that funds from operations provides a meaningful supplemental
indication of our performance. We compute funds from operations
in accordance with standards established by the Board of
Governors of the National Association of Real Estate Investment
Trusts, or NAREIT, in its March 1995 White Paper (as amended in
November 1999 and April 2002), which may differ from the
methodology for calculating funds from operations utilized by
other equity REITs and, accordingly, may not be comparable to
such other REITs. FFO does not represent amounts available for
managements discretionary use because of needed capital
replacement or expansion, debt service obligations, or other
commitments and uncertainties, nor is it indicative of funds
available to fund our cash needs, including our ability to make
distributions. Funds from operations should not be considered as
an alternative to net income (loss) (computed in accordance with
GAAP) as indicators of our financial performance or to cash flow
from operating activities (computed in accordance with GAAP) as
an indicator of our liquidity. |
|
|
|
The following table presents a reconciliation of FFO to net
income for the nine months ended September 30, 2005 and for
the year ended December 31, 2004 on an actual and pro forma
basis. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months | |
|
For the Year Ended | |
|
|
Ended September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Pro Forma | |
|
Historical | |
|
Pro Forma | |
|
Historical | |
|
|
| |
|
| |
|
| |
|
| |
Funds from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
20,152,262 |
|
|
$ |
13,195,836 |
|
|
$ |
27,919,360 |
|
|
$ |
4,576,349 |
|
Depreciation and amortization
|
|
|
4,645,242 |
|
|
|
2,986,790 |
|
|
|
6,193,653 |
|
|
|
1,478,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations FFO
|
|
$ |
24,797,504 |
|
|
$ |
16,182,626 |
|
|
$ |
34,113,013 |
|
|
$ |
6,054,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
We were recently formed and did not commence revenue
generating operations until June 2004. Please see Risk
Factors Risks Relating to Our Business and Growth
Strategy for a discussion of risks relating to our limited
operating history. The following discussion should be read in
conjunction with our audited financial statements and the
related notes thereto included elsewhere in this prospectus.
Overview
We were incorporated under Maryland law 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 of at least 10 years with a series of shorter
renewal terms at the option of our tenants and borrowers. We
also have included and intend to include annual contractual rate
increases that in the current market range from 1.5% to 3.0%.
Our existing portfolio escalators range from 2.0% to 2.5%. In
addition to the base rent, our leases require our tenants to pay
all operating costs and expenses associated with the facility.
We acquire and develop healthcare facilities and lease the
facilities to healthcare operating companies under long-term net
leases. We also make mortgage loans to healthcare operators
secured by their real estate assets. We selectively make loans
to certain of our operators through our taxable REIT subsidiary,
the proceeds of which are used 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
Standard No. 131, Disclosures about Segments of an
Enterprise and Related Information, we conduct business
operations in one segment.
At September 30, 2005, we owned nine operating healthcare
facilities and held a mortgage loan secured by another. In
addition, we were in the process of developing four additional
healthcare facilities that were 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 13 facilities we owned and the one facility on which we had
made a mortgage loan were in nine states, had a carrying cost of
approximately $267.6 million and comprised approximately
62.0% of our total assets. Our acquisition and other loans of
approximately $46.9 million represented approximately 10.9%
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 $100.8 million that
represented approximately 23.4% of our assets. Subsequent to
September 30, 2005, we used $25.7 million of cash to
pay down debt and approximately $13.8 million for
development expenditures. We expect to use a significant amount
of additional cash to acquire properties in the fourth quarter
of 2005 and the first quarter of 2006, after which we intend to
utilize borrowings under our existing revolving credit facility
and construction loan for additional acquisitions and
development expenditures.
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
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
47
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; |
|
|
|
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 December 31, 2005, we had 18 employees. Over the next
12 months, we expect to add five to 10 additional
employees as we acquire new properties and manage our existing
properties and loans.
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 data 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
48
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 for us to earn what we
term construction period rent. Construction period
rent accrues to us during the construction period based on the
funds which we invest in the facility. During the construction
period, the unfinished facility does not generate any earnings
for the lessee/operator which can be used to pay us for our
funds used to build the facility. In such cases, the
lessee/operator pays the accumulated construction period rent
over the term of the lease beginning when the lessee/operator
takes physical possession of the facility. We record the accrued
construction period rent as deferred revenue during the
construction period, and recognize earned revenue as the
construction period rent is paid to us by the lessee/operator.
We make loans to our 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 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 Statement of Financial Accounting Standards
(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 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
49
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 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 range primarily
from 10 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.
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
50
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. We are not currently a party to
any derivatives contracts.
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. We currently apply 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. In this regard, we anticipate that a substantial
portion of our options will be granted to individuals who are
our officers or directors. Accordingly, because the grants are
expected to be at exercise prices that represent fair value of
the stock at the date of grant, we do not currently record any
expense related to the issuance of these options under the
intrinsic value method. If the actual terms vary from the
expected, the impact to our compensation expense could differ.
In December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment, which is a revision of
SFAS No. 123, Accounting for Stock Based
Compensation. SFAS No. 123(R) establishes
standards for accounting for transactions in which an entity
exchanges its equity instruments for goods or services. The
Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires that the fair
value of such equity instruments be recognized as expense in the
historical financial statements as services are performed. The
impact of SFAS No. 123(R) will also be affected by the
types of stock-based awards that our board of directors chooses
to grant. Prior to SFAS No. 123(R), only certain pro
forma disclosures of fair value were required, which primarily
applies to stock options granted at the then current market
price per share of stock. Our existing equity incentive plan
allows for stock-based awards to be in the form of options,
restricted stock, restricted stock units and deferred stock
units. Currently, we expect that our board of directors will
make awards in the form of restricted stock, restricted stock
units and deferred stock units. The SEC has ruled that both
SFAS No. 123 and SFAS 123(R) are acceptable GAAP
until SFAS No. 123(R) becomes effective for our annual
and interim periods beginning January 1, 2006. However, we
have elected to continue following the guidelines of
SFAS No. 123 to account for our awards of restricted
stock. During the three and nine month periods ended
September 30, 2005, we recorded $555,409 and $602,403 of
expense for restricted shares issued to employees, officers and
directors.
51
Liquidity and Capital Resources
As of March 6, 2006, after the loan transactions described
below, we have approximately $8.4 million in cash and
temporary liquid investments. In October 2005, we entered into a
four-year $100.0 million secured revolving credit facility,
using proceeds to replace our existing $75.0 million term
loan, which had a balance of approximately $40.0 million.
We have borrowed approximately $36.0 million under the
revolving credit facility. The loan is secured by a collateral
pool comprised of several of our properties. The six properties
currently in the collateral pool provide available borrowing
capacity of approximately $68.5 million. We believe we have
sufficient value in our other properties to increase the
availability under the credit facility to its present maximum of
$100.0 million. Under the terms of the credit agreement, we
may increase the maximum commitment to $175.0 million
subject to adequate collateral valuation and payment of
customary commitment fees. In addition to availability under the
revolving credit facility, we have approximately
$43.0 million available under a construction/term facility
with a bank.
At September 30, 2005, we had remaining commitments to
complete the funding of four development projects aggregating
approximately $123.5 million as described below (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original | |
|
Cost | |
|
Remaining | |
|
|
Commitment | |
|
Incurred | |
|
Commitment | |
|
|
| |
|
| |
|
| |
North Cypress community hospital
|
|
$ |
64.0 |
|
|
$ |
12.2 |
|
|
$ |
51.8 |
|
West Houston community hospital and medical office building
|
|
|
64.0 |
|
|
|
54.2 |
|
|
|
9.8 |
|
Bucks County womens hospital and medical office building
|
|
|
38.0 |
|
|
|
11.4 |
|
|
|
26.6 |
|
Monroe County community hospital
|
|
|
35.5 |
|
|
|
0.2 |
|
|
|
35.3 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
201.5 |
|
|
$ |
78.0 |
|
|
$ |
123.5 |
|
|
|
|
|
|
|
|
|
|
|
We also have a commitment of approximately $9.2 million to
acquire and leaseback an existing healthcare facility and to
make related loans for certain improvements to the real estate
and for working capital purposes. This possible transaction is
subject to various contingencies that must be satisfied before
definitive agreements are executed. Accordingly, there is no
assurance that this transaction will be consummated.
We believe that our existing cash and temporary investments,
funds available under our existing loan agreements and cash flow
from operations will be sufficient for us to complete the
acquisitions and developments described above, provide for
working capital, and make distributions to our stockholders. We
also believe that additional capital resources will be available
to us to continue to execute our business plan of increasing our
healthcare real estate assets. We expect these resources will
include various types of additional debt, including long-term,
fixed-rate mortgage loans, variable-rate term loans, and
construction financing facilities. 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.
In the first nine months of 2005, we raised $126.2 million,
net of offering costs and expenses, from our IPO. We also
borrowed an additional $19.0 million on our term loan, for
a total of $75.0 million of loan proceeds on the term loan,
and subsequently repaid the term loan with proceeds from our
recently executed $100.0 million secured revolving credit
facility. The facility, and our expectations concerning future
financing activities are further described above under Liquidity
and Capital Resources. We also sold $1.1 million in limited
partnership units in our West Houston medical office building
partnership (a subsidiary of our Operating Partnership). Our
sale of such interests in certain of our healthcare facilities
is based on a strategy of encouraging physicians and other
parties to locate their practices in or near our healthcare
facilities; however, we do not consider this strategy integral
to our capital raising process.
52
In the first nine months of 2005, we made investments in four
existing healthcare facilities with an aggregate investment
value of $66.3 million, and net cash outlays of
$61.4 million, after subtracting contingent payments and
facility improvement reserves, and including a $6.0 million
first mortgage loan that was converted to a sale-leaseback
arrangement subsequent to September 30, 2005. We also
invested $53.8 million in our development projects. In
February 2005, Vibra 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
Our historical operations are generated substantially by
investments we have made since we completed our private offering
and raised approximately $233.5 million in common equity in
the second quarter of 2004 and since we completed our IPO and
raised approximately $125.6 million in common equity in the
third quarter of 2005. We also are in the process of developing
additional healthcare facilities that have not yet begun
generating revenue, and we expect to acquire additional existing
healthcare facilities in the foreseeable future. Accordingly, we
expect that future results of operations will vary materially
from our historical results.
|
|
|
Three Months Ended September 30, 2005 Compared to
Three Months Ended September 30, 2004 |
Net income for the three months ended September 30, 2005,
was $5,256,091 compared to net income of $2,628,938 for the
three months ended September 30, 2004, a 99.9% increase. We
completed our private offering of common equity early in the
second quarter of 2004, prior to which we had no revenues and
limited operations. At September 30, 2004, we had six
operating properties, one development property in the early
stages of construction and 10 employees. At September 30,
2005, we had nine operating properties, three development
properties (the Monroe County development project commenced in
October, 2005), and 17 employees.
A comparison of revenues for the three month periods ended
September 30, 2005 and 2004, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
|
|
2004 | |
|
|
|
Change | |
|
|
| |
|
|
|
| |
|
|
|
| |
Base rents
|
|
$ |
5,320,454 |
|
|
|
64.8 |
% |
|
$ |
2,874,033 |
|
|
|
57.0 |
% |
|
$ |
2,446,421 |
|
Straight-line rents
|
|
|
1,007,062 |
|
|
|
12.3 |
% |
|
|
1,142,186 |
|
|
|
22.7 |
% |
|
|
(135,124 |
) |
Percentage rents
|
|
|
643,757 |
|
|
|
7.9 |
% |
|
|
|
|
|
|
|
|
|
|
643,757 |
|
Interest from loans
|
|
|
1,218,785 |
|
|
|
14.8 |
% |
|
|
1,022,853 |
|
|
|
20.3 |
% |
|
|
195,932 |
|
Fee income
|
|
|
14,883 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
14,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
8,204,941 |
|
|
|
100.0 |
% |
|
$ |
5,039,072 |
|
|
|
100.0 |
% |
|
$ |
3,165,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue of $8,204,941 in the three months ended
September 30, 2005, was comprised of rents (85.0%) and
interest and fee income from loans (15.0%). All of this revenue
was derived from properties that we have acquired since
July 1, 2004. During the three month period ended
September 30, 2005, we received percentage rents of
approximately $644,000 from Vibra pursuant to provisions in our
leases that did not become effective until January 2005. Also,
the Desert Valley Victorville, Vibra
Redding and Gulf States Covington facilities, which
we acquired in the first six months of 2005, provided three
months of base rent revenue as compared to no revenue in 2004.
Straight-line rents decreased by approximately $135,000 in the
three months ended September 30, 2005 compared to the same
period of 2005 as a result of scheduled base rent increases
related to six Vibra properties. Interest income from loans in
the three months ended September 30, 2005 compared to the
same period in 2004 increased due to the Denham Springs mortgage
loan, which originated in the second quarter of 2005. Vibra
accounted for 83.8% and 100.0% of our gross revenues during the
three months ended September 30, 2005 and 2004,
53
respectively. The relative size of our Vibra revenue decreased
as a result of our diversification of tenants and will continue
to decrease as we acquire additional properties and lease them
to other tenants.
We expect our revenue to continue to increase in future quarters
as a result of expected acquisitions, completion of projects
currently under development, and lease rate escalations that
will become effective on January 1, 2006. We also expect
that the relative portion of our revenue that is paid by Vibra
will continue to decline as a result of continued tenant
diversification. Of the expected rental and other revenue
increases, none other than a 2.5% increase in Vibras
rental rate is expected from Vibra.
Depreciation and amortization during the three months ended
September 30, 2005, was $1,170,387, compared to $928,356,
during the three months ended September 30, 2004, a 26.1%
increase. All of the increased depreciation and amortization is
related to property acquisitions. We expect our depreciation and
amortization expense to continue to increase commensurate with
our acquisition and development activity.
General and administrative expenses in the three months ended
September 30, 2005 and 2004 totaled $1,990,971, and
$1,631,600, respectively, an increase of 22.0%. The increase is
due primarily to an increase in general office expenses as the
number of employees increased from ten to 17 since
September 30, 2004. We do not expect our general and
administrative expense to increase commensurate with our asset
growth. All of our leases are structured as net leases, such
that we are not responsible for property management or
maintenance. Accordingly, we believe that subsequent to our
adding five to ten employees over the next 12 months, we
will have sufficient human resources to sustain substantial
additional asset growth. During the three months ended
September 30, 2005, we also recorded $555,409 of share
based compensation expense related to restricted shares granted
to employees, officers and directors during the second and third
quarters of 2005.
Interest income (other than from loans) for the three months
ended September 30, 2005 and 2004, totaled $767,917 and
$188,568, respectively. Interest income increased primarily due
to higher cash balances in the three months ended
September 30, 2005, as a result of temporary investment of
proceeds from our IPO which closed in July, 2005, and the
underwriters exercise of their over-allotment option in
August, 2005. We expect earnings on our temporary investments to
decline substantially as we invest these proceeds in real estate
and other assets.
We recorded no interest expense in the three months ended
September 30, 2005, because the capitalized cost of our
developments exceeded our outstanding loan balances during the
period. Capitalized interest was approximately $915,000 during
the three months ended September 30, 2005.
|
|
|
Nine Months Ended September 30, 2005 Compared to the
Nine Months Ended September 30, 2004 |
Net income for the nine months ended September 30, 2005,
was $13,195,836 compared to net income of $1,065,322 for the
nine months ended September 30, 2004.
A comparison of revenues for the nine month periods ended
September 30, 2005 and 2004, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
|
|
2004 | |
|
|
|
Change | |
|
|
| |
|
|
|
| |
|
|
|
| |
Base rents
|
|
$ |
12,936,876 |
|
|
|
59.0 |
% |
|
$ |
2,874,033 |
|
|
|
57.0 |
% |
|
$ |
10,062,843 |
|
Straight-line rents
|
|
|
3,784,801 |
|
|
|
17.3 |
% |
|
|
1,142,186 |
|
|
|
22.7 |
% |
|
|
2,642,615 |
|
Percentage rents
|
|
|
1,642,712 |
|
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
1,642,712 |
|
Interest from loans
|
|
|
3,463,894 |
|
|
|
15.8 |
% |
|
|
1,022,853 |
|
|
|
20.3 |
% |
|
|
2,441,041 |
|
Fee income
|
|
|
98,963 |
|
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
98,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
21,927,246 |
|
|
|
100.0 |
% |
|
$ |
5,039,072 |
|
|
|
100.0 |
% |
|
$ |
16,888,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue of $21,927,246 in the nine months ended
September 30, 2005, was comprised of rents (83.8%) and
interest and fee income from loans (16.2%). 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 owning
54
the initial six Vibra properties for a full nine months of 2005,
plus the addition of the three new facilities in 2005. During
the nine month period ended September 30, 2005, we received
percentage rents of approximately $1.6 million. Pursuant to
our lease terms with Vibra, we were not eligible to receive
percentage rent in 2004. Interest income from loans in the nine
month period ended September 30, 2005, increased 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 88.4% and 100.0% of our gross
revenues during the nine months ended September 30, 2005
and 2004, respectively. See the discussion of future expected
results under the three month comparison above.
Depreciation and amortization during the nine months ended
September 30, 2005, was $2,986,790, compared to $928,356,
during the nine months ended September 30, 2004. All of the
increased depreciation and amortization is related to property
acquisitions. We expect our depreciation and amortization
expense to continue to increase commensurate with our
acquisition and development activity.
General and administrative expenses in the nine months ended
September 30, 2005, and 2004 totaled $5,109,854, and
$3,329,559, respectively, an increase of 53.5%. The increase is
due primarily to an increase in general office and compensation
expenses as the number of employees has increased from ten to 17
since September 30, 2004. See the discussion of future
expected results under the three month comparison above. During
the nine months ended September 30, 2005, we also recorded
$602,403 of share based compensation expense as a result of
restricted shares granted to employees, officers and directors
during the second and third quarters of 2005.
Interest income (other than from loans) for the nine months
ended September 30, 2005, and 2004, totaled $1,509,903 and
$667,857, respectively. Interest income increased due to the
amount of offering proceeds temporarily invested in short term,
cash equivalent instruments and to higher interest rates in 2005.
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 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 three and nine months ended September 30,
2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net income
|
|
$ |
5,256,091 |
|
|
$ |
2,628,938 |
|
|
$ |
13,195,836 |
|
|
$ |
1,065,322 |
|
Depreciation and amortization
|
|
|
1,170,387 |
|
|
|
928,356 |
|
|
|
2,986,790 |
|
|
|
928,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations FFO
|
|
$ |
6,426,478 |
|
|
$ |
3,557,294 |
|
|
$ |
16,182,626 |
|
|
$ |
1,993,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
Per diluted share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
For the Nine | |
|
|
Months Ended | |
|
Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net income
|
|
$ |
.14 |
|
|
$ |
.10 |
|
|
$ |
.44 |
|
|
$ |
.06 |
|
Depreciation and amortization
|
|
|
.03 |
|
|
|
.04 |
|
|
|
.10 |
|
|
|
.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations FFO
|
|
$ |
.17 |
|
|
$ |
.14 |
|
|
$ |
.54 |
|
|
$ |
.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 in the nine months ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Declaration Date |
|
Record Date |
|
Date of Distribution | |
|
Distribution per Share | |
|
|
|
|
| |
|
| |
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 tax on undistributed income.
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 $718,000 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
$718,000 per year. This assumes that the amount outstanding
under our variable rate debt remains approximately
$71.8 million, the balance as of the date of this
prospectus.
We currently have no assets denominated in a foreign currency,
nor do we have any assets located outside of the United States.
We also have no exposure to derivative financial instruments.
56
OUR BUSINESS
Our Company
We are a self-advised real estate company that acquires,
develops and leases 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. From time to time, we also make loans to our tenants.
We believe that the United States healthcare delivery
system is becoming decentralized and is evolving away from the
traditional one stop, large-scale acute care
hospital. We believe that this change is the result of a number
of trends, including increasing specialization and technological
innovation and the desire of both physicians and patients to
utilize more convenient facilities. We also believe that
demographic trends in the United States, including in particular
an aging population, will result in continued growth in the
demand for healthcare services, which in turn will lead to an
increasing need for a greater supply of modern healthcare
facilities. In response to these trends, we believe that
healthcare operators increasingly prefer to conserve their
capital for investment in operations and new technologies rather
than investing in real estate and, therefore, increasingly
prefer to lease, rather than own, their facilities. Given these
trends and the size, scope and growth of this dynamic industry,
we believe there are significant opportunities to acquire and
develop net-leased healthcare facilities that are integral
components of local healthcare delivery systems.
Our strategy is to lease the facilities that we acquire or
develop to experienced healthcare operators pursuant to
long-term net-leases. We focus on acquiring and developing
rehabilitation hospitals, long-term acute care hospitals,
ambulatory surgery centers, cancer hospitals, womens and
childrens hospitals, skilled nursing facilities and
regional and community hospitals, as well as other specialized
single-discipline facilities and ancillary facilities. We
believe that these types of facilities will capture an
increasing share of expenditures for healthcare services. We
believe that our strategy for acquisition and development of
these types of net-leased facilities, which generally require a
physicians order for patient admission, distinguish us as
a unique investment alternative among REITs.
Our management team has extensive experience in acquiring,
owning, developing, managing and leasing healthcare facilities;
managing investments in healthcare facilities; acquiring
healthcare companies; and managing real estate companies. Our
management team also has substantial experience in healthcare
operations and administration, which includes many years of
service in executive positions for hospitals and other
healthcare providers, as well as in physician practice
management and hospital/physician relations. Therefore, in
addition to understanding investment characteristics and risk
levels typically important to real estate investors, our
management understands the changing healthcare delivery
environment, including changes in healthcare regulations,
reimbursement methods and patient demographics, as well as the
technological innovations and other advances in healthcare
delivery generally. We believe that this experience gives us the
specialized knowledge necessary to select attractively-located
net-leased facilities, underwrite our tenants, analyze
facility-level operations and understand the issues and
potential problems that may affect the healthcare industry
generally and the tenant service area and facility in
particular. We believe that our managements experience in
healthcare operations and real estate management and finance
will enable us to take advantage of numerous attractive
opportunities to acquire, develop and lease healthcare
facilities.
We completed a private placement of our common stock in April
2004 in which we raised net proceeds of approximately
$233.5 million. Shortly after completion of our private
placement, we began to acquire our current portfolio of 17
facilities, consisting of 14 facilities that are in
operation and three facilities that are under development. Five
of the facilities that are in operation are rehabilitation
hospitals, four are long-term acute care hospitals, one is a
community hospital with an integrated medical office building,
one is a community hospital with an adjacent medical office
building and two are community hospitals. One facility under
development is a womens hospital with an integrated
medical office building. Our second facility under development
is a community hospital. With respect to our third facility
under development, we have entered into a ground sublease with,
and an agreement to provide a construction loan to, North
Cypress for the development of a community hospital. The
facility will be developed on
57
property in which we currently have a ground lease interest. We
expect to acquire the land we are ground leasing after the
hospital has been partially completed. Upon completion of
construction, subject to certain limited conditions, we will
purchase the facility for an amount equal to the cost of
construction and lease the facility to the operator for a
15 year lease term. In the event we do not purchase the
facility, the ground sublease will continue and the construction
loan will become due. In that event, we expect to seek to
convert the construction loan to a 15 year term loan
secured by the facility.
We completed an initial public offering of our common stock in
July 2005 in which, with the overallotment option that was
exercised in August 2005, we raised net proceeds of
approximately $125.7 million. With the net proceeds of our
initial public offering, along with our available cash and cash
equivalents, we intend to expand our portfolio of facilities by
acquiring or developing additional net-leased healthcare
facilities.
We employ leverage in our capital structure in amounts
determined from time to time by our board of directors. At
present, we intend to limit our debt to approximately 50-60% of
the aggregate costs of our facilities, although we may
temporarily exceed those levels from time to time. We expect our
borrowings to be a combination of long-term, fixed-rate,
non-recourse mortgage loans, variable-rate secured term and
revolving credit facilities, and other fixed and variable-rate
short to medium-term loans.
In October 2005, we entered into a credit agreement with Merrill
Lynch Capital which replaced the loan agreement dated
December 31, 2004 between us and Merrill Lynch Capital. The
credit agreement provides for secured revolving loans of up to
$100.0 million in aggregate principal amount. The principal
amount may be increased to $175.0 million at our request.
The amounts borrowed are secured by mortgages on real property
owned by certain of our subsidiaries and are guaranteed by us.
The facilities that we use to secure the amounts under the
credit agreement make up the borrowing base. The
borrowing base, and therefore borrowings, are limited based on
(i) the appraised value of the borrowing base and
(ii) rent income from and financial performance of the
operator lessees of the borrowing base. Interest on borrowings
under the credit agreement will accrue monthly at one month
LIBOR (4.74% at March 10, 2006), plus a spread which
increases as amounts borrowed increase as a percentage of the
borrowing base. We must also pay certain fees based on the
amount borrowed in any monthly period. The credit agreement
expires in October 2009, and may be extended by us for one
additional year upon payment of a fee. The credit agreement
contains representations, financial and other affirmative and
negative covenants, events of default and remedies typical for
this type of facility.
We have also entered into construction loan agreements with
Colonial Bank pursuant to which we can borrow up to
$43.4 million to fund construction costs for our West
Houston Facilities. Each construction loan has a term of
18 months and an option on our part to convert the loan to
a 30-month term loan upon completion of construction of the West
Houston Facility securing that loan. Construction of the West
Houston MOB was completed in October 2005, and construction of
the West Houston Hospital was completed in November 2005. We
have not yet exercised the option to convert the construction
loans to term loans. The construction loans are secured by
mortgages on the West Houston Facilities, as well as assignments
of rents and leases on those facilities. The terms of the
construction loan agreements prevent us from allowing the net
operating income of the facility used as collateral for any
calendar quarter to be less than 1.25 times the principal and
interest payments then due and payable under the promissory note
for the designated period until the loan is paid in full. In the
event that our net operating income falls below the minimum debt
service requirement, we must prepay a portion of the principal
balance of the promissory note so that the debt service
requirement is satisfied and maintained within 10 days of
our non-compliance. The construction loans bear interest at the
one month LIBOR plus 225 basis points during the
construction period and one month LIBOR plus 250 basis
points thereafter. The Colonial Bank loans are cross-defaulted.
As of the date of this prospectus, there is $35.8 million
outstanding under the Colonial Bank loans.
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.
58
Market Opportunity
According to the United States Department of Commerce, Bureau of
Economic Analysis, healthcare is one of the largest industries
in the United States, and was responsible for approximately
15.3% of United States gross domestic product in 2003.
Healthcare spending has consistently grown at rates greater than
overall spending growth and inflation. As the chart below
reflects, healthcare expenditures are projected to increase by
more than 7% in 2004 and 2005 to $1.8 trillion and
$1.9 trillion, respectively, and are expected to reach $3.1
trillion by 2012.
We believe that the fundamental reasons for this growth in the
demand for healthcare services include the aging and growth of
the United States population, the advances in medical
technology and treatments, and the increase in life expectancy.
As illustrated by the chart below, the projected compound annual
growth rate (or CAGR), from 2000 to 2030 of the population of
senior citizens is three times the rate projected for the total
United States population. This demographic trend is projected to
result in an increase in the percentage of United States
citizens who are age 65 or older from 12.4% in 2000 to 19.6% in
2030.
Source: United States Bureau of the Census
59
To satisfy this growing demand for healthcare services, there is
a significant amount of new construction of healthcare
facilities. In 2003 alone, $24.5 billion was spent on the
construction of healthcare facilities, according to CMS. This
represented more than a 9% increase over the $22.4 billion
in healthcare construction spending for 2002. The following
chart reflects the growth and expected growth in healthcare
construction expenditures over the period that began in 1990 and
ends in 2012:
We believe that the United States healthcare delivery
system is evolving away from reliance on the traditional
one-stop, large-scale acute care hospital to one
that relies on specialty hospitals and healthcare facilities
that focus on single disciplines. We believe that there will be
an increasing demand for more accessible, specialized and
technologically-advanced healthcare delivery services as the
population grows and ages. We own and have targeted for
acquisition and development net-leased healthcare facilities
providing state-of-the-art healthcare services because we
believe these types of facilities represent the future of
healthcare delivery.
We believe that United States healthcare operators are in the
early stages of a long-term evolution from a model that favors
ownership of healthcare facilities to one that favors long-term
net leasing of these facilities. We see two primary reasons for
this:
|
|
|
|
|
First, in our experience, financial arrangements such as bond
financing gave non-profit healthcare providers access to
inexpensive capital, usually at 100% of the building cost.
However, budget constraints on local governments and tighter
underwriting standards have greatly reduced the availability of
this very inexpensive capital. |
|
|
|
Second, in our experience, healthcare providers were reimbursed
on cost-based reimbursement plans (calculated in part by
reference to a providers total cost in plant and
equipment) which provided no incentive for healthcare providers
to make efficient use of their capital. With the evolution of
the prospective payment reimbursement system, which reimburses
healthcare providers for specific procedures or diagnoses and
thus rewards the most efficient providers, healthcare providers
are no longer assured of returns on investments in non-revenue
producing assets such as the real estate where they operate.
Accordingly, in recent years, healthcare providers have begun to
convert their owned facilities to long-term lease arrangements
thereby accessing substantial amounts of previously unproductive
capital to invest in high margin operations and assets. |
In summary, the following market trends have shaped our
investment strategy:
|
|
|
|
|
Decentralization: We believe that healthcare services are
increasingly delivered through smaller, more accessible
facilities that are designed for specific treatments and medical
conditions and that are located near physicians and their
patients. Based upon our experience, more healthcare services
are delivered in specialized facilities than in acute care
hospitals. |
60
|
|
|
|
|
Specialization: In our experience, the percentage of
physicians and other healthcare professionals who practice in a
recognized specialty or subspecialty has been increasing for
many years. We believe that this creates opportunities for
development of additional specialized healthcare facilities as
advances in technologies and recognition of new practice
specialties result in new treatments for difficult medical
conditions. |
|
|
|
Convenient Patient Care: We believe that healthcare
service providers are increasingly seeking to provide specific
services in a single location for the convenience of both
patients and physicians. These single-discipline centers are
primarily located in suburban areas, near patients and
physicians, as opposed to the traditional urban hospital setting. |
|
|
|
Aging Population: We believe that demographic trends in
the United States, including in particular an aging population,
will result in continued growth in the demand for healthcare
services, which in turn will lead to an increasing need for a
greater supply of modern healthcare facilities. |
|
|
|
Use of Capital: We believe that healthcare operators
increasingly prefer to conserve their capital for investment in
their operations and for new technologies rather than investing
it in real estate. |
Our Target Facilities
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:
|
|
|
|
|
Rehabilitation Hospitals: Rehabilitation hospitals
provide inpatient and outpatient rehabilitation services for
patients recovering from multiple traumatic injuries, organ
transplants, amputations, cardiovascular surgery, strokes, and
complex neurological, orthopedic, and other conditions. In
addition to Medicare certified rehabilitation beds,
rehabilitation hospitals may also operate Medicare certified
skilled nursing, psychiatric, long-term, or acute care beds.
These hospitals are often the best medical alternative to
traditional acute care hospitals where under the Medicare
prospective payment system there is pressure to discharge
patients after relatively short stays. |
|
|
|
Long-term Acute Care Hospitals: Long-term acute care
hospitals focus on extended hospital care, generally at least
25 days, for the medically-complex patient. Long-term acute
care hospitals have arisen from a need to provide care to
patients in acute care settings, including daily physician
observation and treatment, before they are able to move to a
rehabilitation hospital or return home. These facilities are
reimbursed in a manner more appropriate for a longer length of
stay than is typical for an acute care hospital. |
|
|
|
Regional and Community Hospitals: We define regional and
community hospitals as general medical/surgical hospitals whose
practicing physicians generally serve a market specific area,
whether urban, suburban or rural. We intend to limit our
ownership of these facilities to those with market, ownership,
competitive and technological characteristics that provide
barriers to entry for potential competitors. |
|
|
|
Womens and Childrens Hospitals: These
hospitals serve the specialized areas of obstetrics and
gynecology, other womens healthcare needs, neonatology and
pediatrics. We anticipate substantial development of facilities
designed to meet the needs of women and children and their
physicians as a result of the decentralization and
specialization trends described above. |
|
|
|
Ambulatory Surgery Centers: Ambulatory surgery centers
are freestanding facilities designed to allow patients to have
outpatient surgery, spend a short time recovering at the center,
then return home to complete their recoveries. Ambulatory
surgery centers offer a lower cost alternative to general
hospitals for many surgical procedures in an environment that is
more convenient for both patients and physicians. Outpatient
procedures commonly performed include those related to |
61
|
|
|
|
|
gastrointestinal, general surgery, plastic surgery, ear, nose
and throat/audiology, as well as orthopedics and sports medicine. |
|
|
|
Other Single-Discipline Facilities: The decentralization
and specialization trends in the healthcare industry are also
creating demands and opportunities for physicians to practice in
hospital facilities in which the design, layout and medical
equipment are specifically developed, and healthcare
professional staff are educated, for medical specialties. These
facilities include heart hospitals, ophthalmology centers,
orthopedic hospitals and cancer centers. |
|
|
|
Medical Office Buildings: Medical office buildings are
office and clinic facilities occupied and used by physicians and
other healthcare providers in the provision of outpatient
healthcare services to their patients. The medical office
buildings that we target generally are or will be master-leased
and adjacent to or integrated with our other targeted healthcare
facilities. |
|
|
|
Skilled Nursing Facilities: Skilled nursing facilities
are healthcare facilities that generally provide more
comprehensive services than assisted living or residential care
homes. They are primarily engaged in providing skilled nursing
care for patients who require medical or nursing care or
rehabilitation services. Typically these services involve
managing complex and serious medical problems such as wound
care, coma care or intravenous therapy. They offer both short
and long-term care options for patients with serious illness and
medical conditions. Skilled nursing facilities also provide
rehabilitation services that are typically utilized on a
short-term basis after hospitalization for injury or illness. |
Underwriting Process
Our real estate and loan underwriting process focuses on
healthcare operations and real estate investment. This process
is described in a written policy that requires, among other
things, completion of specific elements of due diligence at the
appropriate stages, including appraisals, engineering
evaluations and environmental assessments, all provided by
qualified and independent third parties. All of our executive
officers are involved in the acquisition and due diligence
process.
Our acquisition and development selection process includes a
comprehensive analysis of the targeted healthcare
facilitys profitability, financial trends in revenues and
expenses, barriers to competition, the need in the market for
the type of healthcare services provided by the facility, the
strength of the location and the underlying value of the
facility, as well as the financial strength and experience of
the prospective tenant and the tenants management team. We
also analyze the operating history of the specific facility,
including the facilitys earnings, cash flow, occupancy and
patient and payor mix, in order to evaluate its financial and
operating strength.
When we identify an attractive acquisition or development
opportunity based on historical operations and market
conditions, we determine the financial value of a potential
long-term net-lease arrangement based on our target long-term
net-lease capitalization rates, which currently range from 9.5%
to 11%, and fixed charge coverage ratios. We compare that
financial value to the replacement costs that we estimate by
consulting with major healthcare construction contractors,
engaging construction engineers or facility assessment
consultants as appropriate, and reviewing recent cost studies.
In addition, our due diligence process includes obtaining and
evaluating title, environmental and other customary third-party
reports. In certain instances we have acquired or may acquire a
facility from a tenant or proposed tenant at a purchase price in
excess of what our tenant or proposed tenant recently paid or
expects to pay for that same facility. The investment committee
of our board of directors has the authority to approve
acquisitions or developments of facilities that exceed
$10.0 million.
We seek to build tenant relationships with healthcare operators
that we believe are positioned to prosper in the changing
healthcare environment. We seek tenant relationships with
operators who, based on our financial and operating analyses,
have demonstrated the ability to manage in good and bad economic
conditions. In certain cases, we lend funds to prospective
tenants to assist them with their acquisition of the operations
at the facilities that we intend to acquire and lease to them
and for initial
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working capital needs. See Our Portfolio Our
Current Portfolio of Facilities. In these instances, where
feasible and in compliance with applicable healthcare laws and
regulations, we seek to obtain percentage rents based on the
prospective tenants revenues in addition to our base rent.
Through our detailed underwriting of healthcare operations and
real estate, we expect to deliver attractive risk-adjusted
returns to our stockholders.
Asset Management
We actively monitor our facilities, including reviewing periodic
financial reporting and operating data, as well as visiting each
facility and meeting with the management of our tenants on a
regular basis. Integral to our asset management philosophy is
our desire to build long-term relationships with the tenants
and, accordingly, we have developed a partnering approach which
we believe results in the tenant viewing us as a member of its
team. We understand that in order to maximize the value of our
investments, our tenants must prosper. Therefore, we expect to
work closely with our tenants throughout the terms of our leases
in order to foster a long-term working relationship and to
maximize the possibility of new business opportunities. For
example, we and our prospective tenants typically conduct due
diligence in a coordinated manner and share with each other the
results of our respective due diligence investigations. During
the lease term, we conduct joint evaluations of local facility
operations and participate in discussions about strategic plans
that may ultimately require our approval pursuant to the terms
of our lease agreements. Our chief executive officer, chief
financial officer and chief operating officer also communicate
frequently with their counterparts at our tenants in order to
maintain knowledge about changing regulatory and business
conditions. We believe this knowledge equips us to anticipate
changes in our tenants operations in sufficient time to
strategically and financially plan for, rather than react to,
changing conditions.
In addition to our ongoing analyses of our tenants
operations, our management team actively monitors and researches
each healthcare segment in which we own and lease facilities in
order to help us recognize changing economic, market and
regulatory conditions. Our senior management is not only
involved in the underwriting of each asset upon acquisition or
development, but is also involved in the asset management
process during the entire period in which we own the facility.
Our Formation Transactions
The following is a summary of our formation transactions:
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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 certain
of our founders in December 2002. In connection with our
formation, we issued our founders 1,630,435 shares of our
common stock in exchange for nominal cash consideration, the
membership interests of Medical Properties Trust, LLC were
transferred to us and Medical Properties Trust, LLC became our
wholly-owned subsidiary. Upon its formation in September 2003,
our operating partnership assumed certain obligations of Medical
Properties Trust, LLC. Upon completion of our private placement
in April 2004, 1,108,527 shares of the
1,630,435 shares of common stock held by our founders were
redeemed and they now collectively hold 1,047,088 shares of
our common stock. Our founders agreed to the redemption of a
portion of their shares of our common stock for nominal
consideration primarily in order to facilitate the completion of
our April 2004 private placement. |
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Our operating partnership, MPT Operating Partnership, L.P., was
formed in September 2003. Through our wholly-owned subsidiary,
Medical Properties Trust, LLC, we are the sole general partner
of our operating partnership. We currently own all of the
limited partnership interests in our operating partnership. |
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MPT Development Services, Inc., a Delaware corporation that we
formed in January 2004, operates as our wholly-owned taxable
REIT subsidiary. |
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In April 2004 we completed a private placement of
25,300,000 shares of common stock at an offering price of
$10.00 per share. Friedman, Billings, Ramsey & Co.,
Inc. acted as the initial |
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purchaser and sole placement agent. The total net proceeds to
us, after deducting fees and expenses of the offering, were
approximately $233.5 million. |
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On July 13, 2005, we completed an initial public offering
of 12,066,823 shares of common stock, priced at $10.50 per
share. Of these shares of common stock, 701,823 shares were sold
by selling stockholders and 11,365,000 shares were sold by us.
Friedman, Billings, Ramsey & Co., Inc. served as the sole
book-running manager and J.P. Morgan Securities Inc. served as
co-lead manager for the offering. Wachovia Capital Markets, LLC
and Stifel, Nicolaus & Company, Incorporated served as
co-managers for the offering. The underwriters exercised an
option to purchase an additional 1,810,023 shares of common
stock to cover over-allotments on August 5, 2005. We raised
net proceeds of approximately $125.7 million pursuant to
the offering after deducting the underwriting discount and
offering expenses. |
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The net proceeds of our private placement and initial public
offering, together with borrowed funds, have been or will be
used to acquire our current portfolio of 17 facilities. Thus
far, we have spent approximately $234.6 million for the 12
existing facilities that we acquired, and funded approximately
$59.0 million of a projected total of $63.1 million of
development costs for the West Houston Facilities, approximately
$10.5 million of a projected total of $38.0 million of
development costs for the Bucks County Facility, approximately
$13.6 million of a projected total of $35.5 million of
development costs for the Monroe Facility and approximately
$34.3 million pursuant to the North Cypress construction
loan. In addition, we have loaned approximately
$47.6 million to Vibra to acquire the operations at the
Vibra Facilities and for working capital purposes,
$6.2 million of which has been repaid. |
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Edward K. Aldag, Jr., William G. McKenzie, Emmett E.
McLean, R. Steven Hamner and James P. Bennett may be
considered our founders. Mr. Aldag is serving as chairman
of our board of directors and as our president and chief
executive officer. Mr. McKenzie is serving as our vice
chairman of the board. Mr. McLean is serving as our
executive vice president, chief operating officer, treasurer and
assistant secretary. Mr. Hamner is serving as our executive
vice president and chief financial officer. Mr. Bennett
formerly was an owner, officer, director of and consultant to
the companys predecessor, Medical Properties Trust, LLC,
but has not been affiliated with us since August 2003.
Our Operating Partnership
We own our facilities and conduct substantially all of our
business through our operating partnership, MPT Operating
Partnership, L.P., and its subsidiaries. MPT Operating
Partnership, L.P. is a Delaware limited partnership organized by
us in September 2003. Our wholly-owned limited liability
company, Medical Properties Trust, LLC, serves as the sole
general partner of, and holds a 1% interest in, our operating
partnership. We also currently own all of the limited
partnership interests in our operating partnership, constituting
a 99% partnership interest, but may issue limited partnership
units from time to time in connection with facility acquisitions
and developments. Where permitted by applicable law, we intend
to sell equity interests in subsidiaries of our operating
partnership in connection with, or subsequent to, the
acquisition and development of facilities.
Holders of limited partnership units of our operating
partnership, other than us, would be entitled to redeem their
partnership units for shares of our common stock on a
one-for-one basis, subject to adjustments for stock splits,
dividends, recapitalizations and similar events. At our option,
in lieu of issuing shares of common stock upon redemption of
limited partnership units, we may redeem the partnership units
tendered for cash in an amount equal to the then-current value
of the shares of common stock. Holders of limited partnership
units would be entitled to receive distributions equivalent to
the dividends we pay to holders of our shares of common stock.
As the sole owner of the general partner of our operating
partnership, we have the power to manage and conduct our
operating partnerships business, subject to the
limitations described in the first amended and restated
agreement of limited partnership of our operating partnership.
See Partnership Agreement.
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MPT Operating Partnership, L.P. is a limited partner of MPT West
Houston MOB, L.P. and MPT West Houston Hospital, L.P., which
respectively own the West Houston MOB and the West Houston
Hospital. MPT West Houston MOB, LLC and MPT West Houston
Hospital, LLC, our wholly-owned subsidiaries, are the respective
general partners of these entities. Physicians and others
associated with our tenant or subtenants of the West Houston MOB
own approximately 24% of the aggregate equity interests in MPT
West Houston MOB, L.P. Stealth, L.P., the tenant of the West
Houston Hospital and an entity majority-owned by physicians,
owns a 6% limited partnership interest in MPT West Houston
Hospital, L.P.
In general, the management and control of the limited
partnerships or limited liability companies that own our
properties, such as MPT West Houston MOB, L.P. and MPT West
Houston Hospital, L.P., rests with our operating partnership or
its subsidiaries. The limited partners or other minority owners
in these entities will not participate in the management or
control of the business of the partnership or other entity.
Although the partnership agreements or limited liability company
agreements for future limited partnerships or limited liability
companies may vary, our current limited partnership agreements
require approval of the limited partners holding a majority of
the units in the partnership other than the general partner and
its affiliates to:
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amend the partnership agreement in a manner that would: |
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adversely affect the financial or other rights of the limited
partners who are not affiliates of the general partner or
positively affect the financial rights or other rights of the
general partner or reduce the general partners obligations
and responsibilities under the limited partnership agreement; |
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impose on the limited partners who are not affiliates of the
general partner any obligation to make additional capital
contributions to the partnership; |
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adversely affect the rights of certain limited partners without
similarly affecting the rights of other limited partners; |
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merge, consolidate or combine with another entity; or |
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determine the terms and the amount of consideration payable for
any issuances of additional partnership units to our operating
partnership, the general partner or any of their respective
affiliates. |
In general, each partner or other equity owner will share in the
partnerships profits, losses and available cash flow pro
rata based upon his percentage interest in the partnership. We
may hold properties we develop or acquire in the future through
structures similar to the structure through which we hold the
West Houston Facilities.
MPT Development Services, Inc.
MPT Development Services, Inc., our taxable REIT subsidiary, was
incorporated in January 2004 as a Delaware corporation. MPT
Development Services, Inc. is authorized to provide third-party
facility planning, project management, medical equipment
planning and implementation services, medical office building
management services, lending services, including but not limited
to acquisition and working capital loans to our tenants, and
other services that neither we nor our operating partnership can
undertake directly under applicable REIT tax rules. 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.
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MPT Development Services, Inc. will pay federal, state and local
income taxes at regular corporate rates on its taxable income.
MPT Development Services, Inc. has made, and from time to time
may make, loans to tenants or prospective tenants to assist them
with the acquisition of the operations at facilities leased or
to be leased to them and for initial working capital needs.
There are currently approximately $46.7 million in such
loans outstanding. See Our Portfolio Our
Current Portfolio of Facilities.
Depreciation
Generally, the federal tax basis for our facilities used to
determine depreciation for federal income tax purposes will be
our acquisition costs for such facilities. To the extent
facilities are acquired with units of our operating partnership
or its subsidiaries, we will acquire a carryover basis in the
facilities. For federal income tax purposes, depreciation with
respect to the real property components of our facilities, other
than land, generally will be computed using the straight-line
method over a useful life of 40 years, for a depreciation
rate of 2.50% per year.
Our Leases
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. Our
leases also provide that our tenants will indemnify us for
environmental liabilities. Our current leases range from 11 to
16 years and provide for annual rent escalation and, in the
case of the Vibra Facilities and the Bucks County Facility,
percentage rent. Our leases require periodic reports and
financial statements from our tenants. In addition, our leases
contain customary default, termination, and subletting and
assignment provisions. See Our Portfolio Our
Current Portfolio of Facilities. We anticipate that our
future leases will have similar terms, including percentage rent
where feasible and in compliance with applicable healthcare laws
and regulations.
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 clean up
hazardous or toxic substances or petroleum product releases or
threats of releases at such property and may be held liable to a
government entity or to third parties for property damage and
for investigation, clean-up and monitoring costs incurred by
such parties in connection with the actual or threatened
contamination, including substances currently unknown, that may
have been released on the real estate. These laws may impose
clean-up 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. The liability under
these laws may be joint and several for the full amount of the
investigation, clean-up and monitoring costs incurred or to be
incurred or actions to be undertaken, although a party held
jointly and severally liable might be able to obtain
contributions from other identified, solvent, responsible
parties of their fair share toward these costs. Investigation,
clean-up 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. In addition, if hazardous substances are
located on or released from our properties, we could incur
substantial liabilities through a private party personal injury
claim, a property damage claim by an adjacent property owner, or
claims by a governmental entity or others for other damages,
such as natural resource damages. This liability may be imposed
under environmental laws or common-law principles.
Federal regulations require building owners and those exercising
control over a buildings management to identify and warn,
via signs and labels, of potential hazards posed by workplace
exposure to installed asbestos-containing materials and
potentially asbestos-containing materials in their building. The
regulations also set forth employee training, record keeping and
due diligence requirements pertaining to
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asbestos-containing materials and potentially
asbestos-containing materials. Government entities can assess
significant fines for violation of these regulations. Building
owners and those exercising control over a buildings
management may be subject to an increased risk of personal
injury lawsuits by workers and others exposed to
asbestos-containing materials and potentially
asbestos-containing materials as a result of these regulations.
The regulations may affect the value of a building containing
asbestos-containing materials and potentially
asbestos-containing materials in which we have invested.
Federal, state and local laws and regulations also govern the
removal, encapsulation, disturbance, handling and disposal of
asbestos-containing materials and potentially
asbestos-containing materials when such materials are in poor
condition or in the event of construction, remodeling,
renovation or demolition of a building. Such laws and
regulations may impose liability for improper handling or a
release to the environment of asbestos-containing materials and
potentially asbestos-containing materials and may provide for
fines to, and for third parties to seek recovery from, owners or
operators of real property for personal injury or improper work
exposure associated with asbestos-containing materials and
potentially asbestos-containing materials.
Prior to closing any facility acquisition, we obtain Phase I
environmental assessments in order to attempt to identify
potential environmental concerns at the facilities. These
assessments will be carried out in accordance with an
appropriate level of due diligence and will 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.
While we may purchase many of our facilities on an as
is basis, we intend for all of our purchase contracts to
contain an environmental contingency clause, which permits us to
reject a facility because of any environmental hazard at the
facility.
Competition
We compete in acquiring and developing facilities with financial
institutions, institutional pension funds, 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. |
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 a 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.
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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 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,
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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, 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 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.
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 the portions of
the DRA.
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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
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
70
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 is 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 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.
71
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 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
72
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.
Employees
We employ 17 full-time employees and one part-time employee as
of the date of this prospectus. We anticipate hiring
approximately five to 10 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 is a member of any union.
73
Legal Proceedings
We are not involved in any material litigation nor, to our
knowledge, is any material litigation pending or threatened
against us.
OUR PORTFOLIO
Our Current Portfolio
Our current portfolio of facilities consists of 17 healthcare
facilities, 14 of which are in operation and three of which are
under development. The Vibra Facilities consist of four
rehabilitation hospitals and two long-term acute care hospitals.
The Desert Valley Facility is a community hospital with an
integrated medical office building. The Covington Facility is a
long-term acute care hospital facility. The Redding Facility is
a rehabilitation hospital. The Denham Springs Facility is a
long-term acute care hospital. The Chino Facility is a community
hospital. The Sherman Oaks Facility is a community hospital. All
of the leases for the hospitals described above have initial
terms of 15 years. Our current portfolio of facilities also
includes the West Houston Hospital and the adjacent West Houston
MOB, each of which we developed. The initial lease term for the
West Houston Hospital began when construction commenced in July
2004 and will end in November 2020. The initial lease term for
the West Houston MOB began when construction commenced in July
2004 and will end in October 2015. One facility under
development is the Bucks County Facility. The initial lease term
for the Bucks County Facility began in November 2005 and will
end 15 years after completion of construction. We target
completion of construction for the Bucks County Facility for
August 2006. Our second facility under development is the
Monroe Facility. The initial lease term for the Monroe Facility
began when construction commenced in October 2005 and will end
15 years after completion of construction. We target
completion of construction for the Monroe Facility for October
2006. With respect to the third facility under development, we
have entered into a ground sublease with, and an agreement to
provide a construction loan to, North Cypress for the
development of a community hospital. The facility will be
developed on property in which we currently have a ground lease
interest. We expect to acquire the land we are ground leasing
after the hospital has been partially completed. Upon completion
of construction, subject to certain limited conditions, we will
purchase the facility for an amount equal to the cost of
construction and lease the facility to the operator for a
15 year lease term. In the event we do not purchase the
facility, the ground sublease will continue and the construction
loan will become due. In that event, we expect to seek to
convert the construction loan to a 15 year term loan
secured by the facility. We anticipate the North Cypress
Facility will be completed in December 2006. The leases for
all of the facilities in our current portfolio provide for
contractual base rent and an annual rent escalator. The leases
for the Vibra Facilities and the Bucks County Facility also
provide for percentage rent based on an agreed percentage of the
tenants gross revenue. The following tables set forth
information as of the date of this prospectus regarding our
current portfolio of facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
|
Operating Facilities |
|
|
|
|
|
|
|
2005 | |
|
2006 | |
|
Purchase | |
|
|
|
|
|
|
|
|
2004 | |
|
Contractual | |
|
Contractual | |
|
Price or | |
|
|
|
|
|
|
Number of | |
|
Annualized | |
|
Base | |
|
Base | |
|
Development | |
|
Lease | |
Location |
|
Type |
|
Tenant |
|
Beds(1) | |
|
Base Rent | |
|
Rent(2) | |
|
Rent(2) | |
|
Cost(3) | |
|
Expiration | |
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Houston, Texas
|
|
Community hospital |
|
Stealth, L.P. |
|
|
105 |
(4) |
|
$ |
|
|
|
$ |
|
(5) |
|
$ |
4,594,979 |
(5) |
|
$ |
39,400,503 |
(6) |
|
November 2020(7) |
Bowling Green, Kentucky
|
|
Rehabilitation hospital |
|
Vibra Healthcare,
LLC(8) |
|
|
60 |
|
|
|
3,916,695 |
|
|
|
4,294,990 |
|
|
|
4,790,118 |
|
|
|
38,211,658 |
|
|
|
July 2019 |
|
Marlton, New
Jersey(9)
|
|
Rehabilitation
(10)
hospital |
|
Vibra Healthcare,
LLC(8) |
|
|
76 |
|
|
|
3,401,791 |
|
|
|
3,730,354 |
|
|
|
4,160,390 |
|
|
|
32,267,622 |
|
|
|
July 2019 |
|
Victorville,
California(11)
|
|
Community hospital/medical office building |
|
Desert Valley
Hospital, Inc. |
|
|
83 |
|
|
|
|
|
|
|
2,341,005 |
|
|
|
2,879,800 |
|
|
|
28,031,270 |
|
|
|
February 2020 |
|
New Bedford, Massachusetts
|
|
Long-term acute care hospital |
|
Vibra Healthcare,
LLC(8) |
|
|
90 |
|
|
|
2,262,979 |
|
|
|
2,443,158 |
|
|
|
2,767,624 |
|
|
|
22,077,847 |
|
|
|
August 2019 |
|
Chino, California
|
|
Community hospital |
|
Veritas Health Services, Inc. |
|
|
126 |
|
|
|
|
|
|
|
180,753 |
|
|
|
2,100,000 |
|
|
|
21,059,479 |
|
|
|
November 2020 |
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
|
Operating Facilities |
|
|
|
|
|
|
|
2005 | |
|
2006 | |
|
Purchase | |
|
|
|
|
|
|
|
|
2004 | |
|
Contractual | |
|
Contractual | |
|
Price or | |
|
|
|
|
|
|
Number of | |
|
Annualized | |
|
Base | |
|
Base | |
|
Development | |
|
Lease | |
Location |
|
Type |
|
Tenant |
|
Beds(1) | |
|
Base Rent | |
|
Rent(2) | |
|
Rent(2) | |
|
Cost(3) | |
|
Expiration | |
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Houston, Texas
|
|
Medical office building |
|
Stealth, L.P. |
|
|
n/a |
|
|
|
|
|
|
|
348,358 |
(5) |
|
|
1,634,447 |
(5) |
|
|
17,008,874 |
(6) |
|
|
October 2015 (7) |
|
Redding,
California(12)
|
|
Rehabilitation hospital |
|
Vibra Healthcare,
LLC(8) |
|
|
88 |
|
|
|
|
|
|
|
950,250(13 |
) |
|
|
1,921,680 |
(13) |
|
|
20,750,000 |
|
|
|
June 2020 |
|
Sherman Oaks, California
|
|
Community hospital |
|
Prime Healthcare Services II, LLC |
|
|
153 |
|
|
|
|
|
|
|
11,667 |
|
|
|
2,100,000 |
|
|
|
20,032,151 |
|
|
|
December 2020 |
|
Fresno, California
|
|
Rehabilitation hospital |
|
Vibra Healthcare,
LLC(8) |
|
|
62 |
|
|
|
1,914,829 |
|
|
|
2,099,773 |
|
|
|
2,341,835 |
|
|
|
18,681,255 |
|
|
|
July 2019 |
|
Covington, Louisiana
|
|
Long-term acute care hospital |
|
Gulf States Long-Term Acute Care of Covington, L.L.C. |
|
|
58 |
|
|
|
|
|
|
|
674,188 |
|
|
|
1,232,073 |
|
|
|
11,510,737 |
|
|
|
June 2020 |
|
Thornton, Colorado
|
|
Rehabilitation hospital |
|
Vibra Healthcare,
LLC(8) |
|
|
117 |
|
|
|
870,377 |
|
|
|
941,087 |
|
|
|
1,064,471 |
|
|
|
8,491,481 |
|
|
|
August 2019 |
|
Kentfield, California
|
|
Long-term acute care hospital |
|
Vibra Healthcare,
LLC(8) |
|
|
60 |
|
|
|
783,339 |
|
|
|
858,998 |
|
|
|
958,024 |
|
|
|
7,642,332 |
|
|
|
July 2019 |
|
Denham Springs, Louisiana
|
|
Long-term acute care hospital |
|
Gulf States Long Term Acute Care of Denham Springs, L.L.C. |
|
|
59 |
|
|
|
|
|
|
|
150,000 |
|
|
|
642,821 |
|
|
|
6,024,099 |
|
|
|
October 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
1,137 |
|
|
$ |
13,150,010 |
|
|
$ |
18,979,580 |
|
|
$ |
33,188,262 |
|
|
$ |
291,189,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Based on the number of licensed beds. |
|
|
(2) |
Based on leases in place as of the date of this prospectus. |
|
|
(3) |
Includes acquisition costs. |
|
|
(4) |
Seventy-one of the 105 beds will be acute care beds operated by
Stealth, L.P. and the remaining 34 beds will be long-term acute
care beds operated by Triumph Southwest, L.P. |
|
|
(5) |
Based on leases in place as of the date of this prospectus and
estimated total development costs. Does not include rents that
accrued during the construction period and are payable over the
remaining lease term following the completion of construction. |
|
|
(6) |
Estimated total development costs. |
|
|
(7) |
At any time during the term of the lease, the tenant has the
right to terminate the lease and purchase the facility from us
at a purchase price equal to the greater of (i) that amount
determined under a formula which would provide us an internal
rate of return of at least 18% or (ii) appraised value
assuming the lease is still in place. |
|
|
(8) |
The tenant in each case is a separate, wholly-owned subsidiary
of Vibra Healthcare, LLC. |
|
|
(9) |
Our interest in this facility is held through a ground lease on
the property. The purchase price shown for this facility does
not include our payment obligations under the ground lease, the
present value of which we have calculated to be $920,579. The
calculation of the base rent to be received from Vibra for this
facility takes into account the present value of the ground
lease payments. |
|
|
(10) |
Thirty of the 76 beds are pediatric rehabilitation beds
operated by HBA Management, Inc. |
|
(11) |
At any time after February 28, 2007, the tenant has the
option to purchase the facility at a purchase price equal to the
sum of (i) the purchase price of the facility, and
(ii) that amount determined under a formula that would
provide us an internal rate of return of 10% per year, increased
by 2% of such percentage each year, taking into account all
payments of base rent received by us. |
|
(12) |
Our interest in this facility is held in part through a ground
lease on the property. During the term of the ground lease, the
tenant will pay the ground lease rent directly to the ground
lessor or, at our request, directly to us. |
|
(13) |
Of the $20,750,000 million purchase price for this facility,
payment of $2.0 million is being deferred pending
completion, to our satisfaction, of a conversion of certain beds
at the facility to long-term acute care beds and an additional
$750,000 of the purchase price is being deferred and will be
paid out of a special reserve account to cover the cost of
renovations. The 2005 contractual base rent and the 2006
contractual base rent are calculated based on a purchase price
of $18.0 million. |
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
|
|
|
|
|
Number of | |
|
Annualized | |
Location |
|
Type |
|
Tenant |
|
Beds(1) | |
|
Base Rent | |
|
|
|
|
|
|
| |
|
| |
Houston, Texas
|
|
Community hospital |
|
North Cypress Medical Center Operating Company, Ltd. |
|
|
64 |
|
|
$ |
|
|
Bensalem, Pennsylvania
|
|
Womens hospital/medical office building
(5) |
|
Bucks County Oncoplastic Institute, LLC |
|
|
30 |
|
|
|
|
|
Bloomington, Indiana
|
|
Community
hospital(8) |
|
Monroe Hospital, LLC |
|
|
32 |
|
|
|
|
(9) |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
126 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
[Additional columns below]
[Continued from above table, first column(s) repeated]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2006 | |
|
Projected | |
|
|
|
|
Contractual | |
|
Contractual | |
|
Development | |
|
Lease | |
Location |
|
Base Rent | |
|
Base Rent | |
|
Cost(2) | |
|
Expiration | |
|
|
| |
|
| |
|
| |
|
| |
Houston, Texas
|
|
$ |
|
(3) |
|
$ |
|
(3) |
|
$ |
64,028,000 |
|
|
|
|
(4) |
Bensalem, Pennsylvania
|
|
|
|
(6) |
|
|
1,627,820 |
(6) |
|
|
38,000,000 |
|
|
|
August 2021(7) |
|
Bloomington, Indiana
|
|
|
|
(9) |
|
|
954,063 |
|
|
|
35,500,000 |
|
|
|
October 2021(10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
2,581,883 |
|
|
$ |
137,528,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Based on the number of proposed beds. |
|
(2) |
Includes acquisition costs. |
|
(3) |
During construction of the North Cypress Facility, interest will
accrue on the construction loan at a rate of 10.5%. The interest
accruing during the construction period will be added to the
principal balance of the construction loan. In addition, during
the term of the ground sublease, North Cypress will pay us
monthly ground sublease rent in an annual amount equal to our
ground lease rent plus 10.5% of funds advanced by us under the
construction loan. |
|
(4) |
Expected to be completed in December 2006. If we purchase this
facility upon completion of construction, we will lease it back
to North Cypress for an initial term of 15 years. |
|
(5) |
Expected to be completed in October 2006. |
|
(6) |
Based on the lease in place as of the date of this prospectus,
estimated total development costs and estimated date of
completion. Assumes completion of construction in
October 2006. |
|
(7) |
Following completion, the lease term will extend for a period of
15 years. |
|
(8) |
Expected to be completed in October 2006. |
|
(9) |
Based on the lease in place as of the date of this prospectus,
estimated total development costs and estimated date of
completion. Assumes completion of construction in October 2006. |
|
|
(10) |
Following completion, the lease term will extend for a period of
15 years. |
|
|
|
Vibra Facilities and Loans |
General. We own or ground lease the six Vibra Facilities
located in Bowling Green, Kentucky; Marlton, New Jersey; Fresno,
California; Kentfield, California; Thornton, Colorado; and New
Bedford, Massachusetts. We acquired these facilities from Care
Ventures, Inc., an unaffiliated third party, in July and August
2004 for an aggregate purchase price of approximately
$127.4 million, including acquisition costs. The purchase
price was arrived at through arms-length negotiations with Care
Ventures, Inc., based upon our analysis of various factors.
These factors included the demographics of the area in which the
facility is located, the capabilities of the tenant to operate
the facility, healthcare spending trends in the geographic area,
the structural integrity of the facility, governmental
regulatory trends which may impact the services provided by the
tenant, and the financial and economic returns which we require
for making an investment. The Vibra Facilities are leased to
subsidiaries of Vibra. Our leases of the Vibra Facilities
require the tenant to carry customary insurance which is
adequate to satisfy our underwriting standards.
Vibra is an affiliate of The Hollinger Group. Vibra has been
recently formed and had engaged in no meaningful operations
prior to entering into the leases for the Vibra Facilities in
July and August 2004. The principals of The Hollinger Group have
extensive experience in developing, acquiring, managing and
operating specialty healthcare facilities and senior care
facilities. Mr. Hollinger, the principal owner of Vibra and
the founder and chief executive officer of The Hollinger Group,
has 18 years experience in all phases of senior care and
healthcare activities. For financial information respecting
Vibra and its subsidiaries, see the audited financial statements
included elsewhere in this prospectus.
Vibra Loans and Fees Receivable. At the time we acquired
the Vibra Facilities, MPT Development Services, Inc., our
taxable REIT subsidiary, made a loan of approximately
$41.4 million to Vibra to acquire the operations at these
locations. We refer to this loan as the acquisition loan. The
acquisition loan accrues interest at the rate of 10.25% per year
and is to be repaid over 15 years with interest only for
the first three years and the principal balance amortizing over
the remaining 12 year period. The acquisition loan may be
prepaid at any time without penalty. In connection with the
Vibra transactions, Vibra agreed to pay us commitment fees of
approximately $1.5 million. MPT Development Services, Inc.
also made
76
secured loans totaling approximately $6.2 million to Vibra
and its subsidiaries for working capital purposes. The
commitment fees were paid, and the working capital loans were
repaid, on February 9, 2005.
As security for the acquisition loan, Vibra has pledged to us
all of its interests in each of the tenants of the Vibra
Facilities, and Mr. Hollinger has pledged to us his entire
interest in Vibra. In addition, Mr. Hollinger, The
Hollinger Group and Vibra Management, LLC, another affiliate of
Mr. Hollinger, have guaranteed the repayment of the
acquisition loan; however, The Hollinger Group and Vibra
Management, LLC do not have substantial assets and the liability
of Mr. Hollinger under his guaranty is limited to
$5.0 million. See Lease Guaranties and
Security.
Vibra has entered into a $20.0 million credit facility with
Merrill Lynch, and that loan is secured by an interest in
Vibras receivables related to the Vibra Facilities. There
was approximately $12.9 million outstanding under the
facility on September 30, 2005. Our loan to Vibra is
subordinate to Merrill Lynch with respect to Vibras
receivables. At March 31, 2005, Vibra was not in compliance
with a facility rent coverage covenant under its Merrill Lynch
credit facility. The Merrill Lynch credit facility documents
were subsequently amended to retroactively change the rent
coverage covenant from a by facility rent coverage to a
consolidated rent coverage calculation, such that Vibra was in
compliance with the amended covenant at March 31, 2005.
Leases. Each lease for the Vibra Facilities provides
that, so long as the acquisition loan is outstanding, after
January 1, 2005, and beginning with the calendar month
after the month in which aggregate gross revenues for the Vibra
Facilities exceed a revenue threshold, the tenant will pay, in
addition to base rent, percentage rent in an amount equal to 2%
of revenues for the preceding month. The percentage rent will be
paid on a quarterly basis. Each calendar month thereafter during
the term of each lease, the percentage rent will be decreased
pro rata based on the amount of the principal reduction of the
acquisition loan during the previous calendar month; however,
the percentage rent will not be decreased below 1% of revenues.
On March 31, 2005, the leases for the Vibra Facilities were
amended to provide (i) that the testing of certain
financial covenants will be deferred until the quarter beginning
July 1, 2006 and ending September 30, 2006,
(ii) that these same financial covenants will be tested on
a consolidated basis for all of the Vibra Facilities,
(iii) that the reduction in the rate of percentage rent
will be made on a monthly rather than annual basis and
(iv) that Vibra will escrow insurance premiums and taxes
related to the Vibra Facilities at our request. Prior to
execution of this amendment, Vibra did not meet the fixed charge
coverage ratios required by the lease agreements for the Vibra
Facilities. One covenant required that each Vibra Facility
maintain a ratio of earnings before interest expense, income tax
expense, depreciation expense, amortization expense and base
rent (EBITDAR) to total debt payments plus base rent,
measured at the end of each quarter, in excess of 125%. The
second covenant required that each Vibra Facility maintain a
ratio of EBITDAR to base rent, measured at the end of each
quarter, in excess of 150%. In the event that either ratio for
any Vibra Facility was below the required level for two
consecutive fiscal quarters, an event of default would have
occurred.
Capital Improvements. The tenant under each lease for the
Vibra Facilities is responsible for all capital expenditures
required to keep the facility in compliance with applicable laws
and regulations. Beginning on July 1, 2005, each tenant was
required to begin making quarterly deposits into a capital
improvement reserve account for the particular facility in the
amount of $1,500 per bed per year, except that the first
deposit will be pro-rated based on one-half of a year. On each
January 1 thereafter, the payment of $1,500 per bed per year
into the capital improvement reserve will be increased by 2.5%.
All capital expenditures made in each year during the term of
the lease will be funded first from the capital improvement
reserve, and the tenant is required to pay into its respective
capital improvement reserve such funds as necessary for all
replacements and repairs.
Lease and Loan Guaranties and Security. We have obtained
guaranty agreements from Mr. Hollinger, Vibra, Vibra
Management, LLC and The Hollinger Group that obligate them to
make loan and lease payments in the event that Vibra or the
tenants for the Vibra Facilities fail to do so. We believe that
these agreements are important elements of our underwriting of
newly-formed healthcare operating
77
companies because they create incentives for their owners and
managements to successfully operate our tenants. However, we do
not believe that these parties have sufficient financial
resources to satisfy a material portion of the total lease or
loan obligations. Mr. Hollingers guaranty is limited
to $5.0 million, Vibra Management, LLC and The Hollinger
Group do not have substantial assets and Vibras assets are
substantially comprised of operations at the Vibra Facilities.
The guaranties of Vibra, Vibra Management and The Hollinger
Group relating to the leases for the Vibra Facilities and the
Vibra loan are of equal priority with the guaranties relating to
the lease for the Redding Facility.
Each lease for the Vibra Facilities is cross-defaulted with all
other leases and other agreements between us, or our affiliates,
on the one hand, and the tenant and Mr. Hollinger, or their
affiliates, on the other hand, including the lease for the
Redding Facility and the Vibra loan. In addition, Vibra has
pledged to us all of its interests in each of the tenants, and
Mr. Hollinger has pledged to us his interest in Vibra. As
security for the leases for the Vibra Facilities, each of the
tenants for the Vibra Facilities has granted us a security
interest in all personal property, other than receivables,
located at the Vibra Facilities. The management fees that the
tenants for the Vibra Facilities pay to Vibra Management, LLC
are subordinated to the rents payable to us under the leases for
the Vibra Facilities.
We have included the audited and unaudited consolidated
financial statements for Vibra as of and for the year ended
December 31, 2004 and as of and for the nine months ended
September 30, 2005. We believe that the financial
statements of Vibra are the most meaningful financial
information respecting the ability of Vibra to make the lease
and loan payments which it is obligated to make to us. We do not
believe that historical financial information on the Vibra
Facilities prior to our acquisition of those facilities would be
meaningful because the facilities had three different owners in
the year prior to our acquisition. Also during that time, the
owners did not lease those facilities to lessees but operated
the facilities themselves, and the facilities were not operated
in the same manner as they are currently being operated. We also
believe that the financial statements of the guarantors provide
limited financial information due to the limited resources which
those guarantors possess. We do not believe the financial
statements of the Vibra guarantors other than Vibra would be
helpful to prospective investors. Therefore, we have provided
the financial statements of Vibra Healthcare, LLC, which
includes consolidated financial information on the actual
lessees of the Vibra Facilities and the parent entity, which is
one of the guarantors of the leases and the borrower under the
Vibra loan.
Purchase Option. At the expiration of each lease for the
Vibra Facilities, each tenant will have the option to purchase
the facility at a purchase price equal to the greater of
(i) the appraised value of the facility, determined
assuming the lease is still in place, or (ii) the purchase
price we paid for the facility, including acquisition costs,
increased by 2.5% per annum from the date of purchase.
Depreciation and Real Estate Taxes. The following table
sets forth information, as of December 31, 2004, regarding
the depreciation and real estate taxes for the Vibra Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation | |
|
|
|
|
Federal Tax Basis | |
|
| |
|
2004 Real Estate | |
|
|
| |
|
Annual | |
|
|
|
| |
|
|
Land | |
|
Buildings | |
|
Rate | |
|
Method | |
|
Life in Years | |
|
Taxes | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Bowling Green, KY
|
|
$ |
3,070,000 |
|
|
$ |
35,141,658 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
$ |
24,750 |
|
|
|
0.07 |
% |
Thornton, CO
|
|
|
2,130,000 |
|
|
|
6,361,481 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
|
186,188 |
|
|
|
2.18 |
% |
Fresno, CA
|
|
|
1,550,000 |
|
|
|
17,131,255 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
|
102,359 |
|
|
|
0.61 |
% |
Kentfield, CA
|
|
|
2,520,000 |
|
|
|
5,122,332 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
|
91,201 |
|
|
|
1.28 |
% |
Marlton, NJ
|
|
|
|
|
|
|
32,267,622 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
|
321,903 |
|
|
|
1.00 |
% |
New Bedford, NJ
|
|
|
1,400,000 |
|
|
|
20,677,847 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
|
251,476 |
|
|
|
1.14 |
% |
General. This facility, licensed for 60 beds, is an
approximately 62,500 gross square foot rehabilitation
hospital located in Bowling Green, Kentucky, which is
approximately 60 miles from Nashville, Tennessee.
Construction of the facility was completed in 1992. We acquired
a fee simple
78
interest in this facility on July 1, 2004 for a purchase
price of approximately $38.2 million including acquisition
costs.
Lease. This facility is 100% leased to 1300 Campbell
Lane Operating Company, LLC, a wholly-owned subsidiary of Vibra,
pursuant to a 15-year net-lease with the tenant responsible for
all costs of the facility, including, but not limited to, taxes,
utilities, insurance and maintenance. The tenant has three
options to renew for five years each. Beginning on July 1,
2005, the per annum base rent is equal to 12.23% of the purchase
price, including acquisition costs. On January 1, 2006 and
on each January 1 thereafter, the base rent will be
increased by 2.5%.
General. This facility, licensed for 76 beds, is an
approximately 89,139 gross square foot rehabilitation
hospital located in Marlton, New Jersey, which is approximately
15 miles from Philadelphia, Pennsylvania. Construction of
the facility was completed in 1994. We acquired a ground lease
interest in this facility on July 1, 2004 for a purchase
price of approximately $32.3 million including acquisition
costs. We ground lease the property on which the facility is
located from Virtua West Jersey Health System, a New Jersey
non-profit corporation, pursuant to a ground lease dated
July 15, 1993. The initial term of the ground lease expires
in 2030. We have the right to renew the ground lease for an
additional term of 35 years upon the satisfaction of
certain conditions as set forth in the ground lease.
Lease. This facility is 100% leased to 92 Brick Road
Operating Company, LLC, a wholly-owned subsidiary of Vibra,
pursuant to a 15 year net-lease with the tenant responsible
for all costs of the facility, including, but not limited to,
taxes, utilities, insurance and maintenance. The tenant has
three options to renew for five years each. Beginning on
July 1, 2005, the per annum base rent is equal to 12.23% of
the purchase price, including acquisition costs. On
January 1, 2006 and on each January 1 thereafter, the
base rent will be increased by 2.5%.
HBA Management, Inc., or HBA, has subleased the entire
third floor of the hospital facility, approximately
26,896 square feet, for the operation of a
30-bed pediatric
comprehensive rehabilitation unit and related office use,
together with certain fixtures, furnishings and equipment
located in the subleased premises. The current term of the
sublease expires on August 31, 2013. HBA has the option to
extend the sublease term for two additional terms of five years
each. Base annual rent due under the sublease through
September 30, 2005 is approximately $1,112,980 per annum,
with adjustments annually thereafter. In addition to base annual
rent, HBA is required to pay its proportionate share of all
reimbursable expenses.
General. This facility, licensed for 62 beds, is an
approximately 78,258 gross square foot rehabilitation
hospital located in Fresno, California. Construction of the
facility was completed in 1990. We acquired a fee simple
interest in this facility on July 1, 2004 for approximately
$18.7 million including acquisition costs.
Lease. This facility is 100% leased to 7173 North
Sharon Avenue Operating Company, LLC, a wholly-owned subsidiary
of Vibra, pursuant to a 15 year net-lease with the tenant
responsible for all costs of the facility, including, but not
limited to, taxes, utilities, insurance and maintenance. The
tenant has three options to renew for five years each. Beginning
on July 1, 2005, the per annum base rent is equal to 12.23%
of the purchase price, including acquisition costs. On
January 1, 2006 and on each January 1 thereafter, the
base rent will be increased by 2.5%.
General. This facility is an approximately
141,388 gross square foot rehabilitation hospital located
in Thornton, Colorado, which is approximately 10 miles from
Denver, Colorado. The facility is licensed for 70 rehabilitation
beds, 24 long-term care beds and 23 psychiatric beds.
Construction of the original facility was completed in 1962 with
additions completed as recently as 1975. We acquired a fee
simple interest in
79
this facility on August 17, 2004 for a purchase price of
approximately $8.5 million including acquisition costs.
Lease. This facility is 100% leased to 8451 Pearl
Street Operating Company, LLC, a wholly-owned subsidiary of
Vibra, pursuant to a 15 year net-lease with the tenant
responsible for all costs of the facility, including, but not
limited to, taxes, utilities, insurance and maintenance. The
tenant has three options to renew for five years each. Beginning
on August 17, 2005, the per annum base rent is equal to
12.23% of the purchase price, including acquisition costs. On
January 1, 2006 and on each January 1 thereafter, the
base rent will be increased by 2.5%.
|
|
|
New Bedford, Massachusetts |
General. This facility, licensed for 90 beds, is an
approximately 70,657 gross square foot long-term acute care
hospital located in New Bedford, Massachusetts, which is
approximately 45 miles from Boston, Massachusetts.
Construction of the original facility was completed in 1942 with
additions completed as recently as 1995. We acquired a fee
simple interest in this facility on August 17, 2004 for a
purchase price of approximately $22.0 million including
acquisition costs.
Lease. This facility is 100% leased to 4499 Acushnet
Avenue Operating Company, LLC, a wholly-owned subsidiary of
Vibra, pursuant to a 15 year net-lease with the tenant
responsible for all costs of the facility, including, but not
limited to, taxes, utilities, insurance and maintenance. The
tenant has three options to renew for five years each. Beginning
on August 17, 2005, the per annum base rent is equal to
12.23% of the purchase price, including acquisition costs. On
January 1, 2006 and on each January 1 thereafter, the
base rent will be increased by 2.5%.
General. This facility, licensed for 60 beds, is an
approximately 43,500 gross square foot long-term acute care
hospital located in Kentfield, California, which is
approximately 15 miles from San Francisco, California.
Construction of the facility was completed in 1963 with the last
renovations in 1988. We acquired a fee simple interest in this
facility on July 1, 2004 for a purchase price of
approximately $7.6 million including acquisition costs.
Lease. This facility is 100% leased to 1125 Sir
Francis Drake Boulevard Operating Company, LLC, a wholly-owned
subsidiary of Vibra, pursuant to a 15 year net-lease with
the tenant responsible for all costs of the facility, including,
but not limited to, taxes, utilities, insurance and maintenance.
The tenant has three options to renew for five years each.
Beginning on July 1, 2005, the per annum base rent is equal
to 12.23% of the purchase price, including acquisition costs. On
January 1, 2006 and on each January 1 thereafter, the
base rent will be increased by 2.5%.
West Houston Facilities
General. In June 2004, we entered into agreements with
Stealth and GPMV to develop the West Houston Hospital and the
adjacent West Houston MOB in Houston, Texas. GPMV completed
development of the 105 bed, 121,884 gross square foot West
Houston Hospital in November 2005. Seventy-one beds are acute
care beds operated by Stealth and 34 are long-term acute care
beds operated by Triumph Southwest, L.P., or Triumph, a tenant
of Stealth. A third-party developer completed development of the
adjacent 120,000 gross square foot West Houston MOB on the
property in October 2005. Pursuant to the agreements with
Stealth and GPMV, we have formed two Delaware limited
partnerships, MPT West Houston Hospital, or the hospital limited
partnership, which owns the West Houston Hospital, and MPT West
Houston MOB, L.P., or the MOB limited partnership, which owns
the adjoining West Houston MOB. Stealth will be required to
maintain insurance that is adequate to satisfy our underwriting
standards.
West Houston GP, L.P., an affiliate of GPMV, holds a 25% general
partnership interest in Stealth. The limited partners of
Stealth, which currently hold a 75% interest, consist of 85
physicians. The sole
80
business of Stealth is the operation of the West Houston
Hospital offering multi-specialty services and the West Houston
MOB. Because those facilities are still in the construction
phase, Stealth has had no meaningful operations to date. Our
operating partnership owns an approximate 94% limited
partnership interest in the hospital limited partnership and
Stealth owns an approximate 6% limited partnership interest. MPT
West Houston Hospital, LLC. a wholly-owned limited liability
company of our operating partnership, owns the 0.32% general
partnership interest in the hospital limited partnership.
Currently, our operating partnership owns approximately 76% of
the limited partnership interests in the MOB limited partnership
and MPT West Houston MOB, LLC, a wholly-owned subsidiary of our
operating partnership, owns the 0.1% general partnership
interest. Physicians and others associated with our tenant or
subtenants of the West Houston MOB own approximately 24% of the
aggregate equity interests in the MOB limited partnership.
The hospital limited partnership and MOB limited partnership
each own a fee simple interest in the land on which the
facilities were constructed, as well as adjacent undeveloped
land. In addition, Stealth has an option, exercisable until
November 2010, to reacquire approximately 14.5 acres of
land owned by the hospital limited partnership, which land is
located adjacent to the land on which the facilities are being
constructed. The option price for this parcel is equal to the
original cost, plus any amounts subsequently paid by us with
respect to this parcel. Stealth also has a right of first offer,
exercisable until November 2010, to purchase this parcel should
we determine to sell it to a third party. In consideration for
Stealths agreement to limit the term of the foregoing
option and right of first offer, we have agreed to pay Stealth
up to $3.5 million, upon its request and in $500,000
increments, which amount will be payable over such period as may
be requested by Stealth. Any additional amounts paid will be
included in total development costs, will increase the rental
payable to us and will be added to the purchase price if Stealth
elects to purchase the parcel. We have no further obligation to
honor any payment requests after August 31, 2006. We have
paid Stealth $2.0 million pursuant to this arrangement to
date.
In connection with the development of the West Houston
Facilities, we are entitled to a commitment fee of approximately
$932,125. This fee is to be paid 15 years from the date of
completion of the hospital facility, with interest thereon at
the rate of 10.75% per year, and is unsecured but is
cross-defaulted with the leases we have with Stealth at the West
Houston Facilities. Stealth is to commence making monthly
interest payments beginning in December 2005.
In addition, MPT Development Services, Inc., our taxable REIT
subsidiary, has agreed to make a working capital loan to Stealth
in an amount up to $1.62 million. Stealth has borrowed the
full amount under this loan as of the date of this prospectus.
This loan is to be repaid 15 years from the date of
completion of the West Houston Hospital, with interest at the
rate of 10.75% per year, and is unsecured but
cross-defaulted with the leases we have with Stealth at the West
Houston Facilities. The loans are not guaranteed. The leases
contain certain debt coverage ratio and other financial
covenants, the default of which would constitute a default under
the loans. Stealth is obligated to commence making monthly
interest payments beginning the first month after completion of
the West Houston Hospital. Either the fee or the working capital
loan may be prepaid at any time without penalty, except that a
minimum prepayment of $500,000 is required for the working
capital loan.
If either we or Stealth determine in good faith, after
consultation with healthcare counsel, that healthcare law
prohibitions or restrictions require the physician-limited
partners to divest their ownership interests in Stealth, we have
agreed to issue up to $6.0 million of limited partnership
interests in the hospital limited partnership to Stealth to be
used as part of the consideration to completely redeem the
physician-limited partners ownership interests in Stealth.
We have agreed to lend Stealth the $6.0 million to purchase
the limited partnership interests in the hospital limited
partnership, which loan would accrue interest at the rate of not
less than 10.75% per year, and would be paid over
10 years. We do not expect this transaction to be necessary.
Development Agreements. The hospital limited partnership
has paid GPMV $594,245 of a development fee of approximately
$700,000 and $199,922 of a construction management fee of
approximately $200,000. The hospital limited partnership has
also agreed to pay GPMV a contingent funds
81
fee of approximately $450,000. The MOB limited partnership has
paid the developer $440,000 of a development fee of
approximately $550,000 and $240,000 of a construction management
fee of approximately $300,000. The MOB limited partnership has
also agreed to pay the developer a contingent funds fee of
approximately $350,000.
Stealth is obligated to pay MPT Development Services, Inc., our
taxable REIT subsidiary, a project inspection fee for
construction coordination services of $100,000 in the case of
the West Houston Hospital and $50,000 in the case of the
adjacent West Houston MOB. These fees are being paid, with
interest at the rate of 10.75% per year, over a
15 year period beginning in November 2005. The total
development costs for the facilities, including acquisition
cost, development services fee, commitment fee, project
management fee, and construction costs, are estimated to be
$42.6 million for the hospital facility and
$20.5 million for the medical office building. During the
construction period, we advanced funds pursuant to requests made
in accordance with the terms of the development agreements
between us and the developers. We have agreed to fund 100% of
the total development costs for the West Houston Hospital and
the adjacent West Houston MOB. Our agreement with Stealth
provides that $17,006,803 of this funding will be in the form of
an equity contribution for the West Houston Hospital, with the
remaining funding being in the form of debt, and for the
adjoining West Houston MOB, our agreement with Stealth provides
that $5.0 million of the funding will be in the form of an
equity contribution or subordinated debt, with the remaining
funding being in the form of debt. If we obtain third-party
construction financing, some portion of the development costs
will be provided by the third-party lender.
Leases. The facilities were leased to Stealth during the
construction phase with rent accruing until the completion dates
and the accrued rent to be paid over the remaining lease term.
Following the completion dates, the lease term will extend for a
period of 15 years for the West Houston Hospital and
10 years for the West Houston MOB. Stealth will have three
options to renew each lease for a period of five years each. On
January 1, 2006 and on each January 1 thereafter, the base
rent for the West Houston Hospital will increase 2.5% and the
base rent for the West Houston MOB will increase 2.0%. The
leases are net-leases with Stealth responsible for all costs and
expenses associated with the operation, maintenance and repair
of the facilities. Triumph has subleased an entire floor of the
West Houston Hospital in order to operate 34 long-term acute
care beds. The sublease is for a term of 180 months
following the completion of the construction of the West Houston
Hospital. The sublease grants to Triumph options to extend the
term of the sublease for three additional periods of five years
each. The sublease requires Triumph to pay rent in an amount
equal to 12% of all rent and other charges payable by Stealth to
us under our lease with Stealth, with certain exclusions. The
sublease provides that Stealths obligations under the
sublease are conditioned upon the execution of a guaranty by
Triumph HealthCare of Texas, L.L.C. and Triumph HealthCare,
L.L.P. The sublease grants Stealth the right to relocate Triumph
to a new facility to be constructed adjacent to and attached to
the West Houston Hospital. In order to exercise the relocation
right, Stealth must give Triumph at least 270 days
notice prior to the date of such relocation. Triumph must vacate
the subleased premises on or before the relocation date
specified in the notice from Stealth, which cannot be earlier
than 270 days after the date of the relocation notice.
Triumph has subleased 9,726 square feet of net rentable
area in the West Houston MOB for use as a medical office
exclusively for the practice of medicine, the operation of a
medical office and the provision of related administrative
services, or medical related use. The sublease is for a term of
120 months following the earlier of the date of final
completion of the leasehold improvements, or the date on which
Triumph commences business in the subleased premises. The
sublease grants to Triumph options to extend the term of the
sublease for four additional periods of five years each. The
sublease requires Triumph to pay annual base rent for years one
through ten calculated at $20 per net rentable square foot.
Beginning on the first anniversary of the lease and on each
anniversary date thereafter, base rent is increased to an amount
equal to 1.02 times or 102% of the base rent payable in the
previous year. The lease also requires Triumph to pay its pro
rata share of annual operating expenses, taxes and insurance
relating to the West Houston MOB. The sublease provides that
Stealths obligations under the sublease are conditioned
upon the execution of a guaranty by Triumph HealthCare of Texas,
L.L.C. and Triumph HealthCare, L.L.P.
82
The West Houston MOB sublease with Triumph also runs
concurrently with Stealths lease with us. In the event our
lease with Stealth is terminated, the sublease on the hospital
with Triumph is also terminated.
Purchase Option. After the first full 12 month
period after construction of each of the West Houston Facilities
is completed, as long as Stealth is not in default under either
of its leases with us or any of the leases with its physician
subtenants, Stealth has the right to purchase the West Houston
MOB and the West Houston Hospital at a purchase price equal to
the greater of (i) that amount determined under a formula
that would provide us an internal rate of return of at least 18%
or (ii) the appraised value based on a 15 year lease
in place. To arrive at the appraised value, each of the parties
chooses an appraiser. If the appraisals obtained are not
materially different, (meaning a 10% or more variance), 50% of
the sum of each appraised value is used as the option price, if
the two appraisals are materially different, then the two
appraisers appoint a third appraiser and the appraisers
valuation which differs greatest from the other two appraisers
is excluded and 50% of the sum of the two remaining
determinations is used as the option price. The costs of the
appraisal process are borne equally by the parties. Upon written
notice to us within 90 days of the expiration of the
applicable lease, as long as Stealth is not in default under
either of its leases with us or any of the leases with its
physician subtenants, Stealth will have the option to purchase
the West Houston MOB or the West Houston Hospital at a price
equal to the greater of (i) the total development costs
(including any capital additions funded by us, but excluding any
capital additions funded by Stealth) increased by 2.5% per
year, or (ii) the appraised value based on a 15 year
lease in place. To arrive at the appraised value, each of the
parties chooses an appraiser. if the appraisals obtained are not
materially different, (meaning a 10% or more variance), 50% of
the sum of each appraised value is used as the option price. If
the two appraisals are materially different, then the two
appraisers appoint a third appraiser and the appraisers
valuation which differs greatest from the other two appraisers
is excluded and 50% of the sum of the two remaining
determinations is used as the option price. The costs of the
appraisal process are borne equally by the parties.
The leases also provide that under certain limited
circumstances, the tenant will have the right to present us with
a choice of one out of three proposed exchange facilities to be
substituted for the leased facility. The tenant will have the
right to propose substitute facilities, if not in default, at
any time prior to the expiration of the term, if (i) in the
good faith judgment of the tenant the facility becomes
uneconomic or unsuitable for its primary intended use,
(ii) there is an eviction or interference caused by any
claim of paramount title, or (iii) if for other prudent
business reasons, the tenant desires to terminate the lease. The
tenant will have the obligation to substitute facilities if it
has discontinued use of the facility for a period in excess of
one year, and we have not exercised our right to terminate the
lease. Each proposed substitution facility must:
(i) provide us with an annual return on our equity in such
facility, or yield, substantially equivalent to our yield from
the original facility (ii) provide us with rent with a
substantially equivalent yield taking into account any cash
adjustment paid or received by us and any other relevant
factors, and (iii) have a fair market value in an amount
equal to the fair market value of the original facility, taking
into account any cash adjustment paid or received by us. If we
elect to consummate the exchange, the existing lease would
terminate and the parties would enter into a new lease for the
substituted facility. If we elect not to proceed with the
exchange. the tenant would have the right to terminate the lease
and purchase the leased facility for appraised value, determined
assuming the lease is still in place.
Right of First Offer to Purchase. At any time during the
term of the applicable lease for either of the West Houston
Facilities, as long as Stealth is not in default under either of
its leases with us or any of the leases with its physician
subtenants, we are required to notify Stealth if we intend to
sell either facility to a third party. If Stealth wishes to
offer to purchase the facility, it must notify us in writing
within 15 days, setting forth the terms and conditions of
the proposed purchase. if we accept Stealths offer,
Stealth must close the purchase within 45 days of the date
of our acceptance.
Security. The leases for the West Houston Facilities are
cross-defaulted and are guaranteed by West Houston G.P., L.P.
and West Houston Joint Ventures, Inc., affiliates of Stealth. To
secure its performance of its lease obligations under the West
Houston Hospital lease, Stealth has obtained a letter of credit
in the amount of approximately $1.3 million. The sublease
between Stealth and Triumph requires Triumph to
83
obtain a letter of credit in the amount of $1.0 million to
secure the performance of its obligations under its sublease
with Stealth. The sublease has been assigned to us as collateral
security for Stealths performance under its lease. The
lease further provides that the Stealth letter of credit may be
released in two increments of 50% of the total amount of the
letter of credit over a two year period following the date on
which Stealth generates a total rent, excluding additional
charges, coverage from EBITDAR of at least 200% for 12
consecutive months. The sublease also provides for a reduction
in the Triumph letter of credit if Triumph achieves certain
financial performance targets. Any reduction in the Triumph
letter of credit shall result in an increase in the Stealth
letter of credit, subject to the release provisions.
Stealth has provided to us unaudited financial statements
reflecting that, as of September 30, 2005, it had tangible
assets of approximately $7.7 million, including cash of
approximately $4.7 million, liabilities of approximately
$1.7 million and owners equity of approximately $6.0
million. Neither of the guarantors has any substantial assets,
other than its interest in Stealth.
Capital Improvements. Stealth is responsible for all
capital expenditures required to keep the West Houston
Facilities in compliance with applicable laws and regulations.
Beginning on January 1, 2005, Stealth is required to make
monthly deposits into a capital improvement reserve in the
amount of $3,000 per year in the case of the West Houston
MOB and $2,500 per bed per annum in the case of the West
Houston Hospital. On each January 1 thereafter, the payment into
the capital improvement reserve will be increased by 2.0% in the
case of the West Houston MOB and by 2.25% in the case of the
West Houston Hospital. All capital expenditures made in each
year during the term of the lease will be funded first from the
capital improvement reserve, and the tenant will pay into its
respective capital improvement reserve such funds as necessary
for all replacements and repairs.
Depreciation and Real Estate Taxes. The following table
sets forth information, as of December 31, 2005, regarding
the estimated depreciation and real estate taxes for the Houston
Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated | |
|
|
|
Estimated | |
|
|
Federal Tax Basis | |
|
Depreciation | |
|
2005 Real Estate | |
|
|
| |
|
| |
|
| |
|
|
Land | |
|
Buildings | |
|
Annual Rate | |
|
Method | |
|
Life in Years | |
|
Taxes | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
West Houston Hospital
|
|
$ |
8,039,948 |
|
|
$ |
31,360,555 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
$ |
1,324,860 |
|
|
|
3.11 |
% |
West Houston MOB
|
|
|
1,534,727 |
|
|
|
15,474,146 |
|
|
|
2.5 |
|
|
|
Straight-line |
|
|
|
40 |
|
|
|
637,550 |
|
|
|
3.11 |
|
Chino Facility
General. On November 30, 2005, Prime Healthcare
Services, LLC exercised a purchase option assigned to it by
Veritas, and purchased a fee simple interest in the Chino
Facility from Kasirer Family Holdings #4, LLC, or KFH. On
the same date, Prime Healthcare Services, LLC sold the Chino
Facility to us for a purchase price of approximately
$21.0 million. The purchase price for the facility was
determined through arms-length negotiations with Prime based
upon our analysis of various factors. These factors included the
demographics of the area in which the facility is located, the
capability of the tenant to operate the facility, healthcare
spending trends in the geographic area, the structural integrity
of the facility, governmental regulatory trends which may impact
the services provided by the tenant, and the financial and
economic returns which we require for making an investment. Also
on November 30, 2005, Prime Healthcare Services, LLC
assigned to us all of its right, title and interest in a lease
for a parking lot adjacent to the facility, or the parking lot
lease. The parking lot lease expires in December 2013.
The Chino Facility, located in Chino, California, which is
approximately 35 miles from Los Angeles, California, is an
approximately 113,388 square foot community hospital
facility, built in 1972. The facility is currently licensed for
126 beds.
Lease. This facility is 100% leased to Veritas, an
affiliate of Prime, and the prior operator of the facility. The
principals of Prime have experience in developing, acquiring,
managing and operating hospital facilities. The lease is a
15 year net-lease with the tenant responsible for all costs
of the facility, including, but not limited to, taxes,
utilities, insurance and maintenance. Veritas has three options
to renew for five years each. Currently, the annual base rent is
equal to 10% of the purchase price, or the annual rate of
84
$2.1 million. On January 1, 2007, and on each
January 1 thereafter, the base rent will be increased by an
amount equal to the greater of (i) 2% per year of the
prior years base rent or (ii) the percentage by which
the CPI as published by the United States Department of Labor,
Bureau of Labor Statistics on January 1 shall have increased
over the CPI figure in effect on the immediately preceding
January 1, annualized based on the highest annual rate
effective during the preceding year if the previous years
base rent is for a partial year. The lease requires Veritas to
carry customary insurance which is adequate to satisfy our
underwriting standards.
Lease Guaranties and Security. The Chino Facility lease
is guaranteed by Prime, Prime Healthcare Services, LLC, DVH and
DVMG. The guaranty is an absolute and irrevocable guaranty. The
lease is cross-defaulted with any other leases or other
agreements between us or any of our affiliates and Veritas, any
guarantor and any of their affiliates, excluding any lease
related to the Sherman Oaks facility. In addition, as security
for the lease, Veritas has granted us a security interest in all
personal property, other than receivables, located at the Chino
Facility, subject to purchase money liens on equipment. Prime
Healthcare Services, LLC has also granted us a security interest
in certain of its personal property leased or subleased to
Veritas and located at the Chino facility. Prime, an affiliate
of Veritas and a guarantor of the lease, has provided to us
unaudited financial statements showing that, as of
September 30, 2005, it had consolidated tangible assets of
approximately $53.8 million, consolidated liabilities of
approximately $23.2 million, and consolidated tangible net worth
of approximately $30.6 million and for the nine months ended
September 30, 2005, had consolidated net income of
approximately $15.1 million.
Reserve for Extraordinary Repairs. Veritas is responsible
for all maintenance and repairs and all extraordinary repairs
required to keep the facility in compliance with all applicable
laws and regulations and as required under the lease. Veritas is
required to make quarterly deposits into a reserve account in
the amount of $2,500 per bed per year. Beginning on
January 1, 2007 and on each January 1 thereafter, the
payment of $2,500 per bed per year into the improvement
reserve will be increased by 2%. Amounts drawn from the reserve
are to be replenished at the rate of
1/12th of
the total drawn per month until completely replenished.
Purchase Options. At any time after November 30,
2008, so long as Veritas and its affiliates are not in default
under any lease with us or any of the leases with its
subtenants, Veritas or Prime Healthcare Services, LLC will have
the option, upon 90 days prior written notice, to
purchase the facility at a purchase price equal to the sum of
(i) the purchase price of the facility, and (ii) that
amount determined under a formula that would provide us an
internal rate of return of 11% per year, taking into
account all payments of base rent received by us.
If we receive notice that the parking lot lease will not be
renewed beyond December 2013, that our rights under the parking
lot lease are or will be terminated, or that the parking lot may
not be used for parking for the facility, we have the right,
upon 90 days prior written notice, or the put notice,
to cause Veritas to purchase the Chino Facility and our interest
in the parking lot lease at a purchase price equal to the sum of
(i) the purchase price of the facility, and (ii) that
amount determined under a formula that would provide us an
internal rate of return of 11% per year, taking into
account all payments of base rent received by us. Upon receipt
of the put notice, however, Veritas has the right, within
30 days following the put notice, to substitute one or more
properties to be used for parking for the facility. We are not
obligated to accept any substitute property which does not
satisfy applicable zoning and use laws, ordinances, rules or
regulations or which, in our sole discretion, would create an
undue burden or inconvenience for parking at the facility.
Commitment Fee. We were paid a commitment fee of $105,000
in connection with this transaction.
Depreciation and Real Estate Taxes. The following table
sets forth information, as of December 31, 2005, regarding
the depreciation and real estate taxes for the Chino Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Tax Basis | |
|
Depreciation | |
|
|
|
2005 Real Estate | |
|
|
| |
|
| |
|
Life | |
|
| |
|
|
Land | |
|
Buildings | |
|
Annual Rate | |
|
Method | |
|
in Years | |
|
Taxes | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Chino, California
|
|
$ |
2,220,000 |
|
|
$ |
18,086,610 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
$ |
103,927 |
|
|
|
1.05 |
% |
85
Redding Facility
General. On June 30, 2005, Ocadian Care Centers,
LLC, or Ocadian, assigned a long-term ground lease for land
located in Redding, California to Northern California
Rehabilitation Hospital, LLC, a subsidiary of Vibra. On the same
date, Ocadian sold the facility located on the land, which we
refer to in this prospectus as the Redding Facility, to the
Vibra subsidiary, subject to the ground lease. Also on
June 30, 2005, the Vibra subsidiary assigned this ground
lease interest to us and we purchased the Redding Facility. On
the same date, we subleased the land and leased the Redding
Facility back to the Vibra subsidiary. The term of the ground
lease expires on November 16, 2075. See Lease
below for more detail. The Vibra subsidiary has subleased the
operations and the right to occupy the Redding Facility back to
Ocadian during a transition term until the Vibra subsidiary
obtains certain healthcare licenses necessary to operate the
Redding Facility. The Vibra subsidiary will manage the facility
on behalf of Ocadian during this transition term. Upon receipt
of the healthcare licenses, the sublease and management
agreement between the Vibra subsidiary and Ocadian will
terminate. The Vibra subsidiary expects this sublease and
management arrangement to continue for about 30 to 60 days from
the date of this prospectus.
The Redding Facility contains approximately 70,000 square feet
of space and is currently licensed for a total of 88 beds
including 14 acute care beds, 24 rehabilitation beds and 50
skilled nursing beds. The Vibra subsidiary intends to convert a
portion of the Redding Facilitys licensed skilled nursing,
general acute care and rehabilitation beds to long-term acute
care beds.
Our purchase price for assignment of the ground lease interest
and for the Redding Facility was $20,750,000 million; however,
payment of $2.0 million of the purchase price is being
deferred pending completion, to our satisfaction, of the
conversion of certain beds to long-term acute care beds, and an
additional $750,000 of the purchase price is being deferred and
will be paid out of a special reserve account to pay for
renovations. The Vibra subsidiary used and will use the proceeds
from the concurrent sale and assignment to us to acquire the
Redding Facility and the operations at the facility, upgrade
equipment, make certain renovations, convert certain beds to
long-term acute care beds and for working capital. The purchase
price for the Redding Facility was arrived at through
arms-length negotiations based upon our analysis of various
factors, including the demographics of the area in which the
facility is located, the capability of the tenant to operate the
facility, healthcare spending trends in the geographic area, the
structural integrity of the facility, governmental regulatory
trends which may impact the services provided by the tenant, and
the financial and economic returns which we require for making
an investment.
The Redding Facility is owned by MPT of Redding, LLC. Currently,
our operating partnership owns all of the membership interests
in this limited liability company; however, we have agreed,
subject to applicable healthcare regulations, to offer up to 20%
of the interests in the limited liability company to local
physicians and other persons.
Lease. The Redding Facility is 100% leased to Northern
California Rehabilitation Hospital, LLC, a Vibra subsidiary, for
a 15-year term, with three options to renew for five years each.
The lease is a net-lease with the tenant responsible for all
costs of the facility, including, but not limited to, taxes,
utilities, insurance and maintenance. Currently, the annual base
rent is equal to 10.5% per year of the purchase price actually
paid. On each January 1, beginning on January 1, 2006,
the base rent will be increased by an amount equal to the
greater of (A) 2.5% per year of the prior years base
rent, or (B) the percentage by which the CPI on
January 1 shall have increased over the CPI in effect on
the then just previous January 1. The lease requires the
tenant to pay an annual inspection fee of $5,000. The annual
inspection fee will increase by 2.5% each January 1 during
the lease term. The lease also requires the tenant to carry
customary insurance which is adequate to satisfy our
underwriting standards.
Reserve for Extraordinary Repairs. Beginning on
January 1, 2006, the tenant will be required to make
deposits into a reserve account equal to $1,500 per bed,
increasing on each subsequent January 1 by the greater of
2.5% or the increase in CPI for the previous year. Any amounts
drawn from the reserve would be replenished 1/12th of the amount
drawn per month, until completely replenished.
86
Lease Guaranty and Security. The lease is guaranteed by
Vibra, Vibra Management, LLC and The Hollinger Group, and is
cross-defaulted with all other leases and other agreements
between us, or our affiliates, on the one hand, and the tenant
and Mr. Hollinger, or their affiliates, on the other hand,
including the leases for the Vibra Facilities and the Vibra
loan. The guaranties of Vibra, Vibra Management and The
Hollinger Group of the lease for the Redding Facility are of
equal priority with the guaranties relating to the leases for
the Vibra Facilities and the Vibra loan. We believe that these
agreements are important elements of our underwriting of
newly-formed healthcare operating companies because they create
incentives for their owners and managements to successfully
operate our tenants. However, we do not believe that these
parties have sufficient financial resources to satisfy a
material portion of the total lease obligations. We have
included the audited and unaudited consolidated financial
statements for Vibra Healthcare, LLC as of and for the year
ended December 31, 2004 and as of and for the six months
ended June 30, 2005, respectively.
In addition, as security for the lease, the tenant has granted
us a security interest in all personal property other than
receivables, and subject to the prior lien of any purchase money
lender, with respect to tangible personal property, located at
and to be located at the facility, and an assignment of rents
and leases. The tenant has also made a cash deposit with us in
an amount equal to three months base rent under the lease.
Commitment Fee. We received a commitment fee equal to
0.5% of the purchase price.
Depreciation and Real Estate Taxes. The following table
sets forth information, as of December 31, 2005, regarding
the depreciation and real estate taxes for the Redding Facility:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Tax Basis | |
|
Depreciation | |
|
|
|
2005 Real Estate | |
|
|
| |
|
| |
|
Life | |
|
| |
|
|
Land |
|
Buildings | |
|
Annual Rate | |
|
Method | |
|
in Years | |
|
Taxes | |
|
Rate | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Redding, California
|
|
$ |
|
|
|
$ |
20,750,000 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
$ |
49,681 |
|
|
|
1.1 |
% |
General. On December 30, 2005, we acquired a fee simple
interest in the Sherman Oaks Facility from Prime II and Prime A
for a purchase price of approximately $20.0 million.
The purchase price for the facility was determined through
arms-length
negotiations with Prime and its affiliates based upon our
analysis of various factors, including the demographics of the
area in which the facility is located, the capability of the
tenant to operate the facility, healthcare spending trends in
the geographic area, the structural integrity of the facility,
governmental regulatory trends which may impact the services
provided by the tenant, and the financial and economic returns
which we require for making an investment. The Sherman Oaks
Facility is located in Sherman Oaks, California, which is
approximately 14 miles from Los Angeles, California.
The facility is an approximately 135,000 square foot
community hospital facility, currently licensed for 153 beds.
Construction of the original facility was completed in 1956 with
additions completed as recently as 1980. Also on December 30,
2005, Prime A assigned to us all of its right, title and
interest in an air rights agreement which gave G&L Realty
Partnership, L.P., an unrelated third party, air rights, support
rights, access rights and other rights for the construction, use
and maintenance of a parking structure building adjacent to the
Sherman Oaks Facility. The air rights agreement gives us the
right to use a portion of the parking areas on the parking
structure.
Lease. The facility is 100% leased to Prime II, an
affiliate of Prime. The principals of Prime have experience in
developing, acquiring, managing and operating hospital
facilities. The lease is a 15 year net-lease with the tenant
responsible for all costs of the facility, including, but not
limited to, taxes, utilities, insurance and maintenance. Prime
II has three options to renew for five years each. The initial
annual base rent is equal to 10.5% of the purchase price, or the
annual rate of $2.1 million. On January 1, 2007, and on each
January 1 thereafter, the base rent will be increased by an
amount equal to the greater of (i) 2% per year of the prior
years base rent or (ii) the percentage by which the CPI on
January 1 shall have increased over the CPI figure in
effect on the immediately preceding January 1, annualized
based on the highest annual rate effective during the preceding
year if the previous years base rent is for a partial
87
year. The lease requires Prime II to carry customary
insurance which is adequate to satisfy our underwriting
standards.
Lease Guaranties and Security. The Sherman Oaks Facility
lease is unconditionally and irrevocably guaranteed by Prime,
DVH, DVMG and Prime A until two years after the commencement of
the lease term, and that after that date, Prime, DVH, DVMG and
Prime A will guaranty the obligations under the Sherman Oaks
lease for up to $5.0 million. When Prime II satisfies
certain financial conditions under the lease, the lease guaranty
will terminate. As security for the lease, Prime II has
granted us a security interest in all personal property, other
than receivables and inventory located at the Sherman Oaks
Facility, subject to purchase money liens on equipment. Prime
has provided to us unaudited financial statements showing that,
as of September 30, 2005, it had consolidated tangible
assets of approximately $53.8 million, consolidated
liabilities of approximately $23.2 million, and
consolidated tangible net worth of approximately
$30.6 million and for the nine months ended
September 30, 2005, had consolidated net income of
approximately $15.1 million.
Reserve for Extraordinary Repairs. Prime II is
responsible for all maintenance and repairs and all
extraordinary repairs required to keep the facility in
compliance with all applicable laws and regulations and as
required under the lease. Prime II is required to make
quarterly deposits into a reserve account in the amount of
$2,500 per bed per year. Beginning on January 1, 2007
and on each January 1 thereafter, the payment of $2,500 per
bed per year into the improvement reserve will be increased
by 2%, and that amounts drawn from the reserve are to be
replenished at the rate of 1/12th of the total drawn per month
until completely replenished.
Purchase Options. The letter of commitment provides that
at any time after the tenth anniversary of the commencement of
the lease term, so long as Prime II and its affiliates are
not in default under any lease with us or any of the leases with
its subtenants, Prime A will have the option, upon
90 days prior written notice, to purchase the
facility at a purchase price equal to the sum of (i) the
purchase price of the facility (including any additional
financing by us), and (ii) that amount determined under a
formula that would provide us an internal rate of return of
11% per year, taking into account all payments of base rent
received by us, but in no event would this amount be less than
the purchase price (including any additional financing by us).
Prime A also has the right at any time while the guaranty
is outstanding, and providing there is no existing default, to
petition to purchase the facility for the same purchase price,
and we would then have the option to release the guaranty or
sell the property. Finally, if there is a non-monetary default,
other than an intentional default, that occurs before the tenth
anniversary of the lease date, and we desire to terminate the
lease, Prime A would also have the option to purchase the
facility, but at an internal rate of return to us of 12.5%.
Commitment Fee. We have been paid a commitment fee of
$100,000 in connection with this transaction.
Depreciation and Real Estate Taxes. The following table
sets forth information, as of December 31, 2005, regarding
the depreciation and real estate taxes for the Sherman Oaks
Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Tax Basis | |
|
Depreciation | |
|
|
|
2005 Real Estate | |
|
|
| |
|
| |
|
Life | |
|
| |
|
|
Land | |
|
Buildings | |
|
Annual Rate | |
|
Method | |
|
in Years | |
|
Taxes | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Sherman Oaks, California
|
|
$ |
5,290,000 |
|
|
$ |
14,742,151 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
$ |
210,200 |
|
|
|
1.05 |
% |
Facility Expansion. We have agreed to fund up to
$5.0 million for the purpose of expanding our Sherman Oaks
Facility. The lease provides that the parties will use their
commercially reasonable efforts to enter into an agreement
respecting the timing and terms of this funding. Upon execution
of a definitive development agreement,, Prime II will be
obligated to pay us a fee in cash equal to 0.5% of the maximum
amount that can be funded. The expansion amount will be treated
as a capital addition under the lease and, accordingly as such
expansion costs are funded, the annual rent payable under the
lease will increase by an amount equal to the
then-current lease rate
multiplied by the amount of expansion cost incurred. Such
additional rent will continue to be payable for the remaining
term of the lease. For purposes of the repurchase options
contained in the lease, the purchase price will be increased by
the total cost of the
88
addition. We will not generate any revenues from this
transaction until Prime II begins drawing the committed
funds.
General. On February 28, 2005, we acquired a fee
simple interest in the Desert Valley Facility located in
Victorville, California, which is approximately 75 miles
from Los Angeles, California. The approximately
122,140 square foot community hospital facility, built in
1994, is licensed for 83 beds and has an integrated medical
office building comprising approximately 50,000 square
feet. We acquired the facility from Prime A, an
unaffiliated third party but an affiliate of Prime, for a
purchase price of approximately $28.0 million. The purchase
price was determined through arms-length negotiations with Prime
based upon our analysis of various factors. These factors
included the demographics of the area in which the facility is
located, the capability of the tenant to operate the facility,
healthcare spending trends in the geographic area, the
structural integrity of the facility, governmental regulatory
trends which may impact the services provided by the tenant, and
the financial and economic returns which we require for making
an investment.
Lease. This facility is 100% leased to DVH, an affiliate
of Prime. The principals of DVH have experience in developing,
acquiring, managing and operating acute care hospital
facilities. The lease is a 15 year net-lease with the
tenant responsible for all costs of the facility, including, but
not limited to, taxes, utilities, insurance and maintenance. DVH
has three options to renew for five years each. Currently, the
annual base rent is equal to 10% of the purchase price, or the
annual rate of $2.8 million. On January 1, 2006, and
on each January 1 thereafter, the base rent will be increased by
an amount equal to the greater of (i) 2% per year of
the prior years base rent or (ii) the percentage by
which the CPI as published by the United States Department of
Labor, Bureau of Labor Statistics on January 1 shall have
increased over the CPI figure in effect on the immediately
preceding January 1, annualized based on the highest annual
rate effective during the preceding year if the previous
years base rent is for a partial year. The lease requires
DVH to carry customary insurance which is adequate to satisfy
our underwriting standards.
DVH has subleased approximately 40,110 square feet of space
in the medical office portion of the facility to its affiliate,
Desert Valley Medical Group, Inc., or DVMG, for office use. The
DVMG lease requires DVMG to pay rent of $50,138 per month,
to be adjusted commencing on January 1, 2006 by changes in
the CPI. The DVMG sublease expires on December 31, 2011.
DVH has also subleased approximately 500 square feet of
space in the facility to Network Pharmaceuticals, Inc. for the
operation of a pharmacy. The pharmacy sublease requires the
tenant to pay rent of $2,000 per month. The pharmacy
sublease currently expires on May 15, 2007, subject to the
pharmacys option to renew for a term of 10 years.
Lease Guaranties and Security. The Desert Valley lease is
guaranteed by Prime A, Prime and DVMG. The guaranty is an
absolute and irrevocable guaranty. The lease is cross-defaulted
with any other leases between us or any of our affiliates and
DVH, any guarantor and any of their affiliates, excluding any
lease related to the Sherman Oaks Facility. In addition, as
security for the lease, DVH has granted us a security interest
in all personal property, other than receivables, located at the
Desert Valley Facility, subject to purchase money liens on
equipment. Desert Valley Hospital, Inc. has provided to us
unaudited financial statements reflecting that, as of
September 30, 2005, it had tangible assets of approximately
$20.1 million, liabilities of approximately
$19.4 million and stockholders equity of
approximately $0.7 million, and for the three months ended
September 30, 2005, had net income of approximately
$14.1 million.
Prime, the parent of DVH and a guarantor of the lease, has
provided to us unaudited financial statements showing that, as
of September 30, 2005, it had consolidated tangible assets
of approximately $53.8 million, consolidated liabilities of
approximately $23.2 million, and consolidated tangible net
worth of approximately $30.6 million and for the nine month
period ended September 30, 2005, had consolidated net
income of approximately $15.1 million.
89
Reserve for Extraordinary Repairs. DVH is responsible for
all maintenance and repairs and all extraordinary repairs
required to keep the facility in compliance with all applicable
laws and regulations and as required under the lease. DVH is
required to make quarterly deposits into a reserve account in
the amount of $2,500 per bed per year. Beginning on
January 1, 2006 and on each January 1 thereafter, the
payment of $2,500 per bed per year into the improvement
reserve will be increased by 2%. All extraordinary repair
expenditures made in each year during the term of the lease are
to be funded first from the reserve, and DVH is to pay into the
reserve such funds as necessary for all extraordinary repairs.
Purchase Options. At any time after February 28,
2007, so long as DVH and its affiliates are not in default under
any lease with us or any of the leases with its subtenants, DVH
will have the option, upon 90 days prior written
notice, to purchase the facility at a purchase price equal to
the sum of (i) the purchase price of the facility, and
(ii) that amount determined under a formula that would
provide us an internal rate of return of 10% per year,
increased by 2% of such percentage each year, taking into
account all payments of base rent received by us. These same
purchase rights also apply if we provide DVH with notice of the
exercise of our right to change management as a result of a
default, provided DVH gives us notice within five days following
receipt of such notice. If during the term of the lease we
receive from the previous owner or any of its affiliates a
written offer to purchase the Desert Valley Facility and we are
willing to accept the offer, so long as DVH and its affiliates
are not in default under any lease with us or any of the
subleases with its subtenants, we must first present the offer
to DVH and allow DVH the right to purchase the facility upon the
same price, terms and conditions as set forth in the offer;
however, if the offer is made after February 28, 2007, in
lieu of exercising its right of first refusal, DVH may exercise
its option to purchase as provided above.
Depreciation and Real Estate Taxes. The following table
sets forth information, as of December 31, 2005, regarding
the depreciation and real estate taxes for the Desert Valley
Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Tax Basis | |
|
Depreciation | |
|
|
|
2005 Real Estate | |
|
|
| |
|
| |
|
Life | |
|
| |
|
|
Land | |
|
Buildings | |
|
Annual Rate | |
|
Method | |
|
in Years | |
|
Taxes | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Victorville, California
|
|
$ |
2,000,000 |
|
|
$ |
26,031,270 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
$ |
220,682 |
|
|
|
1.07 |
% |
Facility Expansion. We have also entered into a letter
agreement with DVH pursuant to which, subject to certain
conditions, we have agreed to fund up to $20.0 million for
the purpose of expanding our Desert Valley Facility. Subject to
DVH providing us a development agreement, which it is not
obligated to do, we have agreed to begin funding and DVH has
agreed to begin drawing funds before February 28, 2007, in
accordance with a disbursement schedule to be provided in the
development agreement at the time of the first draw. Upon
receipt and approval of the development agreement, DVH is
obligated to pay us a fee in cash equal to 0.5% of the maximum
amount that can be funded. This fee will be adjusted following
the full and final funding of the expansion to a sum equal to
0.5% of the actual amount funded. Except for any adjustments to
the fee that may result from funding less than the maximum
amount, the fee is non-refundable. If DVH fails to use its best
efforts to provide a form of development agreement to us by
January 30, 2007, we will have no further liability or
obligation to provide the funding. The $20.0 million
expansion amount will be treated as a capital addition under the
lease and, accordingly, as such expansion costs are funded, the
annual rent payable under the lease will increase by an amount
equal to the then-current lease rate multiplied by the amount of
expansion cost incurred. Such additional rent will continue to
be payable for the remaining term of the lease. For purposes of
the repurchase options contained in the lease, the purchase
price will be increased by the total cost of the addition. DVH
is not obligated to present us with a development agreement,
and, if it does not, we have no obligation to provide funding to
DVH for the expansion. We will not generate any revenues from
this transaction unless and until we and DVH execute a
definitive development agreement and DVH begins drawing the
committed funds.
Covington, Louisiana
General. On June 9, 2005, we acquired a fee simple
interest in a long-term acute care facility located in
Covington, Louisiana, which is approximately 35 miles from New
Orleans, Louisiana. The
90
purchase agreement also provided for us to make a
$6.0 million loan to Denham Springs Healthcare Properties,
L.L.C., as well as our prospective purchase of a long-term acute
facility in Denham Springs, Louisiana. We acquired the facility
in Covington, Louisiana, which we refer to as the Covington
Facility, from Covington Healthcare Properties, L.L.C., an
unaffiliated third party. The Covington Facility contains
approximately 43,250 square feet of space and is licensed
for 58 beds.
The purchase price for the Covington Facility was
$11.5 million. This purchase price was arrived at through
arms-length negotiations based upon our analysis of various
factors. These factors included the demographics of the area in
which the facility is located, the capability of the tenant to
operate the facility, healthcare spending trends in the
geographic area, the structural integrity of the facility,
governmental regulatory trends which may impact the services
provided by the tenant, and the financial and economic returns
which we require for making an investment.
The Covington Facility is owned by MPT of Covington, LLC.
Currently, our operating partnership owns all of the membership
interests in this limited liability company; however, we have
agreed that, subject to applicable healthcare regulations, we
will offer up to 30% of the equity interests in this limited
liability company to local physicians.
Lease. The Covington Facility is 100% leased to Gulf
States Long Term Acute Care of Covington, L.L.C. for a 15-year
term, with three options to renew for five years each. The lease
is a net-lease with the tenant responsible for all costs of the
facility, including, but not limited to, taxes, utilities,
insurance, maintenance and capital improvements. Currently, the
annual base rent is equal to 10.5% of the purchase price plus
any costs and charges that may be capitalized. On each
January 1, the base rent will increase by an amount equal
to the greater of (A) 2.5% per year of the prior
years base rent, or (B) the percentage by which the
CPI for November shall have increased over the CPI in effect for
the then just previous November; provided, however, on
January 1, 2006, the adjustment shall be prorated. The
lease requires the tenant to carry customary insurance which is
adequate to satisfy our underwriting standards.
Lease Guaranty and Security. The lease is guaranteed by
Gulf States and Team Rehab. The lease is cross-defaulted with
our lease of the Denham Springs Facility. In addition, as
security for the lease, the tenant has granted us a security
interest in all personal property, other than receivables and
operating licenses, located and to be located at the facility.
Pursuant to the lease, the tenant has obtained and delivered to
us an unconditional and irrevocable letter of credit, naming us
beneficiary, in an amount equal to $598,500. At such time as the
operations in the facility have generated EBITDAR coverage of at
least two times the base rent for eight consecutive fiscal
quarters, the letter of credit may be reduced to an amount equal
to three months of the base rent then in effect. If, however,
after satisfying the conditions necessary to reduce the letter
of credit to three months base rent, EBITDAR coverage
subsequently drops below two times base rent for two consecutive
fiscal quarters, the amount of the letter of credit is to be
increased to six months base rent.
Gulf States has provided to us unaudited financial statements
reflecting that, as of September 30 2005, it had tangible
assets of approximately $19.1 million, liabilities of
approximately $9.9 million and stockholders equity of
approximately $9.2 million, and for the year ended
September 30, 2005 had net income of approximately
$0.8 million. Team Rehab has provided to us unaudited
financial statements reflecting that, as of September 30,
2005, it had tangible assets of approximately
$13.5 million, liabilities of approximately
$3.1 million and owners equity of approximately
$10.4 million, and for the year ended September 30,
2005 had net income of approximately $7.3 million.
The lease requires that, as of the commencement date of the
lease and at all times during the lease term, the tenant and its
affiliates, Team Rehab, Gulf States and Gulf States of Denham
Springs, L.L.C., will maintain an aggregate net worth of
$9.0 million.
Repair and Replacement Reserve. The tenant is responsible
for all maintenance, repairs and capital improvements at the
facility. To secure this obligation, the tenant has deposited
with us $34,000 in a regular reserve account. In addition, the
tenant has deposited with us $150,247 in a special reserve
account
91
for immediate repairs, which repairs are to be undertaken as
soon as practicable. In the event amounts in the regular reserve
are utilized, the tenant must replenish the reserve to the
$34,000 level.
Purchase Options. The lease provides that so long as the
tenant is not in default under the lease, our lease for the
Denham Springs Facility, if we purchase that facility, or any
sublease, and no event has occurred which with the giving of
notice or the passage of time or both would constitute such a
default, the tenant will have the option to purchase the
facility (i) at the expiration of the initial term and each
extension term of the lease, to be exercised by
60 days written notice prior to the expiration of the
initial term and each extension term, and (ii) within
five days of written notification from us exercising our
right to terminate the engagement of the tenants or its
affiliates management company as the management company
for the facility as a result of an event of default under the
lease. The purchase price for those options shall be equal to
the greater of (i) the appraised value of the facility,
assuming the lease remains in effect for 15 years and not
taking into account any purchase options contained therein, or
(ii) the purchase price paid by us for the facility,
increased annually by an amount equal to the greater of
(A) 2.5% per year from the date of the lease, or
(B) the rate of increase in the CPI on each January 1.
Commitment Fee. We received a commitment fee at the
closing of the purchase of the Covington Facility of $90,000.
Depreciation and Real Estate Taxes. The following table
sets forth information, as of December 31, 2005, regarding
the depreciation and real estate taxes for the Covington
Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Tax Basis | |
|
Depreciation | |
|
|
|
2005 Real Estate | |
|
|
| |
|
| |
|
Life | |
|
| |
|
|
Land | |
|
Buildings | |
|
Annual Rate | |
|
Method | |
|
in Years | |
|
Taxes | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Covington, Louisiana
|
|
$ |
821,429 |
|
|
$ |
10,689,308 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
$ |
36,625 |
|
|
|
0.32 |
% |
Denham Springs, Louisiana
General. On June 9, 2005, we entered into a
definitive purchase, sale and loan agreement, or purchase
agreement, relating to the acquisition of the Covington Facility
and the making of a $6.0 million loan to Denham Springs
Healthcare Properties, L.L.C., an unrelated third party. The
purchase agreement also provided for the purchase and leaseback
of the Denham Springs Facility, for a purchase price of
$6.0 million and on substantially the same terms as applied
to our purchase of the Covington Facility. The Denham Springs
Facility is located in Denham Springs, Louisiana, which is
approximately 10 miles from Baton Rouge, Louisiana, The
Denham Springs Facility contains approximately
36,000 square feet of space and is licensed for 59 beds.
On June 9, 2005 we made a loan of $6.0 million to
Denham Springs Healthcare Properties, L.L.C., $500,000 of which
was held in escrow pending the resolution of certain
environmental issues related to the facility. The loan accrued
interest at a rate of 10.5% per year, adjusted each January
1 by an amount equal to the greater of (i) 2.5% or
(ii) the percentage by which the CPI increases from
November to November, provided that the increase in CPI for 2005
was to be prorated. The loan was to be repaid over 15 years
with interest only during the 15 years and a balloon
payment due and payable at the expiration of the 15 years.
The loan could be prepaid at any time without penalty.
On October 31, 2005, upon favorable resolution of the
environmental issues related to the facility, we purchased the
facility for a purchase price of $6.0 million, which was
paid by delivering the note evidencing the loan and releasing to
Denham Springs Healthcare Properties. L.L.C. the remaining
balance of all funds escrowed under the loan. The purchase price
for the Denham Springs Facility was arrived at through
arms-length negotiations based upon our analysis of various
factors, including the demographics of the area in which the
facility is located, the capability of the tenant to operate the
facility, healthcare spending trends in the geographic area, the
structural integrity of the facility, governmental regulatory
trends which may impact the services provided by the tenant, and
the financial and economic returns which we require for making
an investment.
We have formed a Delaware limited liability company, MPT of
Denham Springs, LLC, which made the $6.0 million loan and
owns the Denham Springs Facility. Our operating partnership
currently owns all
92
of the membership interests in this limited liability company;
however, we have agreed, subject to applicable healthcare
regulations, to offer up to 30% of the interests in this limited
liability company to local physicians.
Lease. At the time we purchased the Denham Springs
Facility, we leased 100% of the facility to Gulf States Long
Term Acute Care of Denham Springs, L.L.C. for a
15-year term, with
three options to renew for five years each. The lease is a
net-lease with the tenant responsible for all costs of the
facility, including but not limited to taxes, utilities,
insurance, maintenance and capital improvements. The lease
requires the tenant to pay base rent in an amount equal to
10.5% per annum of the purchase price plus any costs and
charges that may be capitalized. On each January 1, the
base rent will be increased by an amount equal to the greater of
(A) 2.5% per annum of the prior years base rent,
or (B) the percentage by which the CPI on November 1
shall have increased over the CPI in effect on the immediately
preceding November 1; provided, however, on January 1,
2006, the adjustment shall be prorated. The lease will also
require the tenant to carry customary insurance which is
adequate to satisfy our underwriting standards.
Guaranty, Security. The lease is guaranteed by Gulf
States and Team Rehab. As security for the lease, the tenant has
granted us a security interest in all personal property, other
than receivables and operating licenses, located and to be
located at the facility. The lease is cross-defaulted with the
lease for the Covington Facility. The lease also required the
tenant to obtain and deliver to us an unconditional and
irrevocable letter of credit from a bank acceptable to us,
naming us beneficiary thereunder, in an amount equal to
$315,000, and provides that at such time as the operations in
the facility have generated EBITDAR coverage of at least two
times the base rent for eight consecutive fiscal quarters, the
letter of credit may be reduced to an amount equal to three
months of the base rent then in effect. If, however, after
satisfying the conditions necessary to reduce the letter of
credit to three months base rent, EBITDAR coverage
subsequently drops below two times base rent for two consecutive
fiscal quarters, the letter of credit will be increased to six
months base rent.
Gulf States has provided to us unaudited financial statements
reflecting that, as of December 31, 2004, it had tangible
assets of approximately $11.1 million, liabilities of
approximately $9.3 million and stockholders equity of
approximately $1.8 million, and for the year ended
December 31, 2004 had net income of approximately
$2.0 million. Team Rehab has provided to us unaudited
financial statements reflecting that, as of December 31,
2004, it had tangible assets of approximately
$21.3 million, liabilities of approximately
$9.2 million and owners equity of approximately
$12.1 million, and for the year ended December 31,
2004 had net income of approximately $1.7 million.
The lease for the Denham Springs Facility will require that, as
of the commencement date of the lease and at all times during
the lease, the tenant and its affiliates, Team Rehab, Gulf
States and Gulf States Long Term Acute Care of Covington,
L.L.C., will maintain an aggregate net worth of
$9.0 million.
Repair and Replacement Reserve. The lease required the
tenant, on the commencement date of the lease, to deposit
$56,000 into a reserve account as security for the tenants
obligation to make certain repairs under the lease. In the event
amounts in the regular reserve are utilized, the tenant will be
required to replenish the reserve to restore it to the $56,000
level. The tenant was also required under the lease to make a
deposit of $398,590 into a special reserve account for use in
making certain immediate repairs to the facility, which are to
be made as soon as practicable.
Purchase Options. The lease provides that so long as the
tenant is not in default, and no event has occurred which with
the giving of notice or the passage of time or both would
constitute a default under the lease, the lease for the
Covington Facility, or any sublease, the tenant will have the
option to purchase the facility (i) at the expiration of
the initial term and each extension term of the lease, to be
exercised by 60 days written notice prior to the
expiration of the initial term and each extension term, and
(ii) within five days of written notification from us
exercising our right to terminate the engagement of the
tenants or its affiliates management company as the
management company for the facility as a result of an event of
default under the lease. The option purchase price shall be
equal to the greater of (i) the appraised value of the
facility, assuming the lease remains in effect for 15 years
and not taking into account any purchase
93
options contained therein, or (ii) the purchase price paid
by us for the facility, increased annually by an amount equal to
the greater of (A) 2.5% per annum from the date of the
lease, or (B) the rate of increase in the CPI on each
January 1.
Commitment Fee. We received a commitment fee at closing
in the amount of $60,000.
Depreciation and Real Estate Taxes. The following table
sets forth information, as of December 31, 2005, regarding
the depreciation and real estate taxes for the Denham Springs
Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Tax Basis | |
|
Depreciation | |
|
|
|
2005 Real Estate | |
|
|
| |
|
| |
|
Life | |
|
| |
|
|
Land | |
|
Buildings | |
|
Annual Rate | |
|
Method | |
|
in Years | |
|
Taxes | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Denham Springs, Louisiana
|
|
$ |
428,571 |
|
|
$ |
5,595,528 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
$ |
24,723 |
|
|
|
0.41 |
% |
North Cypress Facility
General. On June 13, 2005, we closed a series of
transactions, effective as of June 1, 2005, with North
Cypress, an unaffiliated third party, pursuant to which North
Cypress is to develop a community hospital in Houston, Texas. We
ground lease two parcels of land, the hospital tract and the
parking area tract, from the owners of those tracts pursuant to
two separate ground leases. Also, we and the owner of the
hospital tract entered into a purchase and sale agreement
pursuant to which we can acquire the hospital tract for
approximately $4.7 million. We then subleased the hospital
tract and the parking area tract to North Cypress, which
sublease requires North Cypress to construct the hospital
improvements. We refer to this sublease as the ground sublease.
The ground sublease has a term of 99 years. We agreed to make a
construction loan, secured by the hospital improvements, to
North Cypress for approximately $64.0 million, the amount
necessary for construction of the improvements, with interest at
10.5% per annum, which interest is deferred and added to the
principal balance of the loan during the construction period,
and for a term ending upon completion of construction. Subject
to certain limited conditions, we will purchase from and lease
to North Cypress the hospital improvements upon completion
pursuant to a second purchase and sale agreement and a
post-construction lease. In the event we do not purchase the
improvements upon completion of construction, the ground
sublease will continue and the construction loan will become
due. In that event, we expect to seek to convert the
construction loan to a 15 year term loan with interest at
10.5% per annum, secured by a mortgage on the hospital
improvements. If we purchase the improvements, the ground
sublease will terminate and be replaced with the
post-construction lease, which is a lease of the hospital tract,
the land, the hospital improvements and a sublease of the
parking area tract. We refer to this lease as the facility lease.
Commitment Fee. In connection with the transaction, North
Cypress paid us a commitment fee in the amount of $640,280,
$100,000 of which was paid in cash and $540,280 of which was
added to the principal balance of the construction loan.
Leases. We entered into two ground leases, one for the
hospital tract and one for a parking area tract, with the
current owners of that land. We then ground subleased the two
tracts to North Cypress. If we purchase the hospital tract, the
ground lease for the hospital tract will terminate. If we
purchase the hospital improvements at the end of the
construction term, the ground sublease will terminate and be
replaced by the facility lease which will have a term of
15 years with three options to renew for five years each.
The ground sublease and the facility lease are each a net-lease
with the tenant responsible for all costs of the facility,
including, but not limited to, all rent and other costs and
expenses due and payable under the ground lease, taxes,
utilities, insurance, maintenance and capital improvements. Rent
pursuant to the ground sublease during the construction period
is a monthly amount equal to the sum of (A) the product of
(i) 10.5% multiplied by (ii) the total amount of funds
disbursed under the construction loan as of the date this
payment is due divided by 12 plus (B) the sum of all rents
paid under the ground leases. Subsequent to the completion of
construction of the hospital improvements, base rent under the
ground sublease will be an amount equal to 10.5% multiplied by
the total amount of funds disbursed under the construction loan
plus the sum of all rents paid pursuant to the ground leases.
The facility lease requires the tenant to pay monthly rent in an
annual amount equal to 10.5% multiplied by the total amount of
the funds disbursed under the construction loan plus the sum of
all rents paid pursuant to the ground leases.
94
On January 1, 2006, and on each January 1 thereafter,
the base rent will increase by an amount equal to the greater of
(A) 2.5% per year of the prior years base rent,
excluding the ground lease rent component, or (B) the
percentage by which the CPI on January 1 shall have
increased over the CPI figure in effect on the then just
previous January 1. The leases require the tenant to carry
customary insurance which is adequate to satisfy our
underwriting standards. The facility lease requires the tenant
to pay us, commencing on the commencement date of the facility
lease and on each January 1 during the term thereof, an
amount equal to $7,500 to cover the cost of the physical
inspections of the facility, which fee will, on each
January 1, be increased by 2.5% per annum. In addition to
this ongoing inspection fee, the MPT lender is entitled to
receive an inspection fee of $75,000 to cover the lenders
inspection costs during the construction period.
Capital Improvement Reserve. The ground sublease and the
facility lease require the tenant, beginning on the date that
construction of the facility has been completed, to make annual
deposits into a reserve account in the amount of $2,500 per bed
per year. These leases also provide that on each January 1
thereafter, the payment of $2,500 per bed per year into the
capital improvement reserve will be increased by 2.5%.
Capital Contributions and Net Worth Covenant. The ground
sublease and the facility lease require that, as of the
commencement date of each lease, the tenant shall have received
from its equity owners at least $15.0 million in cash
equity. So long as tenant maintains the consolidated net worth
required under each lease, such cash equity may be used for
acquisition, pre-opening and operating expenses of the facility
and shall not be distributed to tenants equity owners. The
ground sublease and the facility sublease contain net worth
covenants which tenant must satisfy.
Security. The tenant must deliver to us upon execution of
the ground sublease a security deposit in the approximate amount
of $6.7 million. The security deposit can be cash or a
letter of credit. At the execution of the facility lease the
security deposit amount shall be equal to 10.5% times the total
development costs of the hospital improvements. At the time that
the operations from the facility have sustained EBITDAR coverage
of at least two times the then current base rent for two
consecutive fiscal years, the amount of the security deposit can
be reduced by one half.
Management. North Cypress is newly formed and has had no
significant operations to date. North Cypress has executed a
contract with Surgical Development Partners, LLC, a hospital
management company, to manage the day-to-day operations of the
hospital, including staffing, scheduling, billing and
collections, governmental compliance and relations, and other
functions. Surgical Development Partners, LLC has made a
substantial equity investment in North Cypress. We have the
right to require North Cypress to replace the management company
under certain conditions.
Purchase Options. Pursuant to the terms of the facility
lease, so long as no event of default has occurred, at the
expiration of the facility lease the tenant will have the option
to purchase our interest in the property leased pursuant to the
facility lease at a purchase price equal to the greater of
(i) the fair market value of the leased property or
(ii) the purchase price paid by us to tenant pursuant to
the purchase and sale agreement relating to the hospital
improvements plus our interest in any capital additions funded
by us, as increased by the amount equal to the greater of
(A) 2.5% from the date of the facility lease execution or
(B) the rate of increase in the CPI as of each January 1
which has passed during the lease term; provided no event shall
the purchase price be less than the fair market value of the
property leased.
Sale Proceeds Distributions or Syndication. The facility
lease also provides that if during the term of the facility
lease we sell our interest in the property, then the net sales
proceeds from the sales shall be distributed as follows:
(A) to us in the amount equal to the purchase price paid by
us to the tenant pursuant to the purchase and sale agreement
relating to the hospital improvements plus an amount which will
provide us with an internal rate of return of 15% and
(B) the balance of the net proceeds shall be divided
equally between us and the tenant. In addition, subject to
applicable healthcare regulations, we will offer to tenant and
any physician which owns an interest in tenant the opportunity
to purchase up to an aggregate 49% of the limited partnership
interest in MPT of North Cypress, L.P., our subsidiary that owns
95
the property. The right to purchase is applicable during the
period which is not less than six months or more than nine
months subsequent to the commencement date of the facility
lease. The price for the limited partnership interest shall be
determined on the basis of the historical cost of our assets.
General. On September 16, 2005, we acquired a fee
simple interest in 15 acres of land located in Bucks
County, Pennsylvania, which is approximately 15 miles from
Philadelphia, Pennsylvania, for a purchase price of
approximately $5.4 million pursuant to an agreement with
Glenview Corporate Center Limited Partnership. On the same date,
we entered into an agreement with Bucks County Oncoplastic
Institute, LLC, or BCO, and DSI Facility Development, LLC, or
the developer, each an unaffiliated third party, to develop a
womens hospital facility with an integrated medical office
building on the land. The total development costs to develop the
facility, including the cost of the land, are estimated at
approximately $38.0 million. To date, including the
acquisition costs of the land, we have incurred approximately
$10.5 million of the total development costs.
Lease. We have formed a Delaware limited partnership, MPT
of Bucks County, L.P., to own the facility. We have entered into
a lease with BCO for both the land and the improvements. The
lease will extend for the construction term and 15 years
thereafter with BCO having two five-year renewal options and a
third option to renew the lease until August 15, 2035. The
lease is a net-lease with BCO responsible for all costs of the
facility, including, but not limited to, taxes, utilities,
insurance and maintenance. The lease will require BCO to pay
monthly rent in a per annum amount equal to 10.75% multiplied by
the total amount of the funds disbursed under the development
agreement. The lease provides that on January 1, 2007, and
on each January 1 thereafter, the base rent will be
increased by an amount equal to the greater of (A) 2.5% per
annum of the prior years base rent, or (B) the
percentage by which the CPI has increased over the CPI figure in
effect on the previous January 1. The lease further
provides that, upon completion of construction, and beginning
with the calendar month after the completion date, BCO will pay,
in addition to base rent, percentage rent in an amount equal to
1.75% of revenues for the preceding month. The lease also
requires BCO to carry customary insurance which is adequate to
satisfy our underwriting standards. The lease requires BCO to
pay us on January 1, 2006 an amount equal to $7,500 to
cover the cost of the physical inspections of the facility,
which fee will, beginning on January 1, 2007, and
continuing on each January 1 thereafter, be increased by
2.5% per annum. In addition to the inspection fee, the total
development costs also include a fee equal to $75,000 to cover
our inspection of the facility during the construction period.
This fee is being paid on a deferred basis with interest
accruing at a rate of 10.75%.
Capital Improvement Reserve. The lease requires BCO to be
responsible for all maintenance and repairs and all
extraordinary repairs required to keep the facility in
compliance with all applicable laws and regulations and as
required under the lease. The lease will also require BCO,
beginning on the completion of construction of the facility, to
make annual deposits into a reserve account in the amount of
$2,500 per bed per year. The lease provides that beginning on
the first January 1 after the completion of construction,
the payment of $2,500 per bed per year into the improvement
reserve will be increased by 2.5%. The lease provides that all
extraordinary repair expenditures made in each year during the
term of the lease will be funded first from the reserve, and
that BCO will pay into the reserve such funds as necessary for
all extraordinary repairs.
Development Agreements. We have agreed to pay DSI
Facility Development, LLC, an affiliate of BCO, a developer fee
of $515,000, a construction management fee of $687,500 and a
developer bonus based upon the cost savings if the facility is
completed for less than the estimated total development costs.
Security. As security for the lease, BCO has granted us a
security interest in all personal property, other than
receivables, located and to be located at the facility, which
security interest is subject to any lien of any purchase money
equipment lender. The lease requires BCO to obtain and deliver
to us an unconditional and irrevocable letter of credit from a
bank acceptable to us, naming us beneficiary thereunder, in an
amount equal to one years base rent under the lease. BCO
substituted a cash deposit for
96
the letter of credit, which we will continue to hold until a
certificate of occupancy is issued, and we loaned BCO the funds
for this cash deposit, which loan bears interest at the rate of
20% per annum. At the time the letter of credit is delivered, we
will retain the cash deposit and it shall be applied toward the
promissory note. As a condition to closing and as a continuing
covenant under the lease, BCO is required to achieve a tangible
net worth of $5.0 million, which may be satisfied by an
equity injection, operating earnings or approved line of credit.
Until BCO satisfies such covenant, our lease for the Bucks
County Facility is guaranteed to the extent of $5.0 million
by 14 guarantors. The guarantors have delivered financial
statements which we believe reflect the necessary financial
resources to satisfy their guaranty obligations. The lease will
be cross-defaulted to any other lease or agreement between the
parties. BCO is newly formed and has had no significant
operations to date.
Purchase Options. The lease provides that so long as BCO
is not in default under any lease with us or any of the leases
with its subtenants, at the expiration of the lease BCO will
have the option, upon 60 days prior written notice, to purchase
the facility at a purchase price equal to the greater of
(i) the appraised value of the facility, which assumes the
lease remains in effect for 15 years, or (ii) the
total development costs, including any capital additions funded
by us, as increased by an amount equal to the greater of
(A) 2.5% per annum from the date of the lease, or
(B) the rate of increase in the CPI on each January 1.
If we do not approve a change of control transaction involving
BCO, BCO shall also have the option, exercisable for
30 days after our failure to approve the change of control,
to purchase the facility at the greater of (i) the above
formula for the end-of-lease-term purchase option or
(ii) an amount that would provide us an internal rate of
return of 13%.
Commitment Fee. At closing, BCO executed a promissory
note in favor of us for the $345,000 commitment fee, which note
bears interest at a rate of 10.75% and is payable interest only
with a balloon payment approximately 15 years following
completion of construction.
Bloomington, Indiana
General. On October 7, 2005, we purchased
12 acres of land in Bloomington, Indiana, which is
approximately 50 miles from Indianapolis, Indiana, from
SIMP II. As an accommodation to SIMP II, we also
agreed to hold title to an additional 34 acres to be
retransferred to SIMP II for nominal consideration upon the
approval of the subdivision of the land. That land has now been
retransferred. We also entered into funding and development
agreements with Monroe Hospital, LLC, or Monroe Hospital, and
Monroe Hospital Development, LLC, or Monroe Development, an
affiliate of Surgical Development Partners, LLC, to develop a
community hospital on the 12 acre parcel. The total
development costs to develop the facility, including the cost of
the land, will be approximately $35.5 million. To date,
including the acquisition costs of the land, we have incurred
approximately $13.6 million of the total development costs.
Lease. We have formed a Delaware limited liability
company, MPT of Bloomington, LLC, to own the facility. We are
leasing 100% of the land and all improvements to be constructed
thereon to Monroe Hospital for the construction period.
Following construction, the lease will continue for a term of
15 years with three options to renew for five years each.
The lease is a net-lease with the tenant responsible for all
costs of the facility, including, but not limited to, taxes,
utilities, insurance, maintenance and capital improvements. The
lease requires the tenant to pay monthly rent in a per annum
amount equal to 10.50% multiplied by the purchase price of the
land and the total amount of the funds disbursed under the
funding and development agreements. During the construction
period, the rent will be deferred and will be paid after the
construction period over the 15 year lease term. On
January 1, 2007, and on each January 1 thereafter, the base
rent will be increased by an amount equal to the greater of
(A) 2.5% per annum of the prior years base rent,
or (B) the percentage by which the CPI on January 1 shall
have increased over the CPI figure in effect on the then just
previous January 1. The lease also requires the tenant to carry
customary insurance which is adequate to satisfy our
underwriting standards. The lease requires the tenant to pay, on
the commencement date and on each January 1 thereafter, an
amount equal to $5,000 to cover the cost of the physical
inspections of the facility, which fee will, beginning on
January 1, 2006, and continuing on each January 1
thereafter, be increased by 2.5% per annum. In addition, to
the inspection fee, we are entitled to a fee equal to $50,000 to
cover our inspection of the facility during the construction
97
period. This fee is payable on a deferred basis with interest
accruing at a rate of 10.5% per annum. The fee is payable
interest only following the completion date and matures
15 years thereafter.
Repair and Replacement Reserve. The lease requires Monroe
Hospital to be responsible for all maintenance and repairs and
all extraordinary repairs required to keep the facility in
compliance with all applicable laws and regulations and as
required under the lease. The lease also requires that the
tenant, beginning on the completion of construction of the
facility, to make annual deposits into a reserve account in the
amount of $2,500 per bed per year. The lease also provides
that beginning on the first January 1 after the completion of
construction, and on each January 1 thereafter, the payment of
$2,500 per bed per year into the improvement reserve will
be increased by 2.5%.
Development Agreements. We have agreed to pay Monroe
Development a developer fee of $750,000 and an additional fee of
$250,000 for post-construction services.
Security. As security for the lease, Monroe Hospital has
granted us a security interest in all personal property, other
than receivables, located and to be located at the facility. As
further security for the Lease, Monroe Hospital has caused its
wholly owned subsidiary, Monroe Hospital Outpatient ASC, LLC to
grant us a security interest in all its personal property, other
than receivables, located or to be located at the facility. The
tenant also obtained and delivered to us an unconditional and
irrevocable letter of credit from a bank acceptable to us,
naming us beneficiary thereunder in an amount equal to one
years base rent under the lease. Monroe Hospital is newly
formed and has had no significant operations to date. As a
condition to closing, Monroe Hospital was required to achieve,
and as a continuing covenant under the lease Monroe Hospital is
required to maintain, a tangible net worth of $6.0 million.
Monroe Hospital has provided to us unaudited financial
statements reflecting that, as of September 30, 2005, it
had tangible assets of $12.2 million, including cash of
approximately $3.2 million, liabilities of approximately
$3.4 million and owners equity of approximately
$8.9 million. The treasurer of Monroe Hospital also
certified at closing that the equity owners of Monroe Hospital
contributed to Monroe Hospital cash or cash equivalents in a
total amount of $9.75 million.
Management Agreement. Monroe Hospital has executed a
contract with Surgical Development Partners, LLC, a hospital
management company, to manage the
day-to-day operations
of the hospital, including staffing, scheduling, billing and
collections, governmental compliance and relations, and other
functions. Surgical Development Partners, LLC made a
$3.0 million cash equity investment in Monroe Hospital. We
have the right to require Monroe Hospital to replace the
management company under certain conditions.
Purchase Options. The lease provides that so long as
Monroe Hospital is not in default under any lease with us or any
of the leases with its subtenants, at the expiration of the
lease Monroe Hospital will have the option, upon 60 days
prior written notice, to purchase the facility at a purchase
price equal to the greater of (i) the appraised value of
the facility, which assumes the lease remains in effect for
15 years, or (ii) the total development costs,
including any capital additions funded by us, as increased by an
amount equal to the greater of (A) 2.5% per annum from
the date of the lease, or (B) the rate of increase in the
CPI on each January 1.
Commitment Fee. At closing, Monroe Hospital executed a
promissory note in favor of us for $177,500 commitment fee,
which note bears interest at a rate of 10.5% and is payable
interest only with a balloon payment approximately 15 years
following completion of construction.
Our Current Loan
On December 23, 2005, we made a $40.0 million mortgage
loan to Alliance, an unrelated third party. We refer to this
mortgage loan in this prospectus as the Alliance Loan. The
Alliance Loan is secured by a community hospital facility
located in Odessa, Texas, which is approximately 20 miles
from Midland, Texas. The facility is licensed for 78 beds, 28 of
which are operated by HEALTHSOUTH Rehabilitation Hospital of
Odessa, Inc. The Alliance Loan has a term of 15 years
and is payable interest only during the term of the loan, with
the full principal amount due at the end of the 15 year
term. The aggregate annual base interest is set at an initial
annual rate of ten percent. Beginning on January 1, 2007
and on each January 1 thereafter, Alliance will be required
to pay additional interest equal to the greater of (i) 3.5%
or
98
(ii) the rate of the CPI increase for the prior year
multiplied by the previous years annualized base interest.
Absent a third partys bona fide offer to acquire a
majority of Alliances equity interest or substantially all
of Alliances assets, Alliance may not prepay the Alliance
Loan prior to the eighth loan year. In the event that Alliance
prepays the Alliance Loan following such a bona fide offer or
during the eight, ninth, or tenth loan years, Alliance must pay
us a yield maintenance premium. Following the tenth loan year,
Alliance may prepay the Alliance Loan without penalty or
premium. As security for Alliances obligations under the
mortgage loan, all principal, base interest and additional
interest on the first $30.0 million of the loan amount is
guaranteed on a pro rata basis by the shareholders of SRI-SAI
Enterprises, Inc., the general partner of Alliance, until such
time as Alliance meets certain financial conditions.
SRI-SAI Enterprises, Inc. also pledged all of its general
partnership interest in Alliance to us as security for
Alliances obligations. Additionally, we have received a
first mortgage on the facility and a first or second priority
security interest in all of Alliances personal property
other than accounts receivable, along with other security. The
Alliance Loan is cross-defaulted with all other agreements
between us or our affiliates, on one hand, and Alliance or its
affiliates on the other hand. The Alliance Loan also contains
representations, financial and other affirmative and negative
covenants, events of default and remedies typical for this type
of loan. As consideration for entering into this arrangement,
Alliance paid us a commitment fee equal to one half of one
percent of the loan amount on the closing date.
We intend to expand our portfolio by acquiring our Pending
Acquisition Facility, which we consider to be a probable
acquisition as of the date of this prospectus, under the terms
of the letter of commitment relating to this facility. The lease
for this facility will provide for contractual base rent and an
annual rent escalator. Letters of commitment constitute
agreements of the parties to consummate the acquisition
transactions and enter into leases on the terms set forth in the
letters of commitment subject to the satisfaction of certain
conditions, including the execution of mutually-acceptable
definitive agreements. The following table contains information
regarding our Pending Acquisition Facility as of the date of
this prospectus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year One | |
|
|
|
|
|
|
|
|
|
|
Number of | |
|
Contractual | |
|
Loan | |
|
Lease | |
Location |
|
Type | |
|
Tenant | |
|
Beds(1) | |
|
Interest | |
|
Amount | |
|
Expiration | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Hammond,
Louisiana*(2)
|
|
Long-term acute care hospital |
|
Hammond Rehabilitation Hospital, LLC |
|
|
40 |
|
|
$ |
840,000 |
(3) |
|
$ |
8,000,000 |
|
|
|
June 2021 |
|
|
|
* |
Under letter of commitment. |
(1) |
Based on the number of licensed beds. |
(2) |
On April 1, 2005, we entered into a letter of commitment
with Hammond Healthcare Properties, LLC, or Hammond Properties,
and Hammond Rehabilitation Hospital, LLC, or Hammond Hospital,
pursuant to which we have agreed to lend Hammond Properties
$8.0 million and have agreed to a put-call option pursuant
to which, during the 90 day period commencing on the first
anniversary of the date of the loan closing, we expect to
purchase from Hammond Properties a long-term acute care hospital
located in Hammond, Louisiana for a purchase price between
$10.3 million and $11.0 million. If we purchase the
facility, we will lease it back to Hammond Hospital for an
initial term of 15 years. The lease would be a net lease
and would provide for contractual base rent and, beginning
January 1, 2007, an annual rent escalator. |
(3) |
Based on one year contractual interest at the rate of
10.5% per year on the $8.0 million mortgage loan to
Hammond Properties. We expect to exercise our option to purchase
the Hammond Facility in 2006. For the one year period following
our purchase of the facility, contractual base rent would equal
$1,079,925, based on 10.5% of an estimated purchase price of
$10,285,000. |
General. On April 1, 2005, we entered into a letter
of commitment with Hammond Healthcare Properties, LLC, the
current owner of the property, or Hammond Properties, and
Hammond Rehabilitation Hospital, LLC, the current tenant of the
property, or Hammond Hospital, both unaffiliated third parties,
to provide a mortgage loan to Hammond Properties and enter into
a put-call option arrangement relating to our purchase of the
facility from Hammond Properties and our leaseback of the
facility to Hammond Hospital or its affiliates.
The facility is a long-term acute care hospital located in
Hammond, Louisiana, which is approximately 45 miles from
New Orleans, Louisiana. The facility contains approximately
23,835 square feet of space and is licensed for
40 beds.
99
The letter of commitment provides that, under the mortgage loan
transaction, we will lend to Hammond Properties the sum of
$8.0 million, which will bear interest at the rate of 10.5%
per year and be payable interest only on a monthly basis with a
balloon payment due and payable at the expiration of the
put-call option period described below or, if the put-call
option is exercised, at closing of our purchase of the facility.
The letter of commitment provides that the loan will be secured
by a first mortgage on the facility and by the other collateral
and guaranteed as described below.
The letter of commitment provides that, at the time of the
mortgage loan closing, we will enter into a put-call option
agreement with Hammond Properties providing that either party
will have the option, exercisable within 90 days following
the one year anniversary of the loan closing, to cause the
purchase and sale of the facility, subject to applicable
conditions, for a purchase price of the greater of
(i) $10,285,714 or (ii) the quotient determined by
dividing the annual rental payments by .105 (but not to exceed
$11.0 million). The purchase price was arrived at through
arms-length negotiations based upon our analysis of
various factors, including the demographics of the area in which
the facility is located, the capability of the tenant to operate
the facility, healthcare spending in the geographic area, the
structural integrity of the facility, governmental regulatory
trends which may impact the services provided by the facility,
and the financial and economic returns which we require for
making an investment.
If the put-call option is exercised, we will form a Delaware
limited liability company, MPT of Hammond, LLC, which will own
the facility. Initially, our operating partnership will own all
of the membership interests in this limited liability company;
however, the letter of commitment provides that, at some point
following closing, we have agreed, subject to applicable
healthcare regulations, to offer up to 30% of the interests in
this limited liability company to local physicians.
Lease. The letter of commitment provides that, if the
put-call option is exercised, we will lease 100% of the facility
to Hammond Hospital or its affiliate for a
15-year term, with
three options to renew for five years each. The letter of
commitment provides that the lease will be a net-lease with the
tenant responsible for all costs of the facility, including, but
not limited to, taxes, utilities, insurance, maintenance and
capital improvements. The letter of commitment provides that the
lease will require the tenant to pay base rent in an amount
equal to 10.50% per annum of the purchase price plus any
costs and charges that may be capitalized, which base rent will
be payable in monthly installments. The letter of commitment
provides that, on each January 1 beginning January 1,
2007, the base rent will be increased by an amount equal to the
greater of (A) 2.5% per annum of the prior years
base rent, or (B) the percentage by which the CPI on
January 1 shall have increased over the CPI figure in effect on
the then just previous January 1. The letter of commitment
provides that the lease will require the tenant to carry
customary insurance which is adequate to satisfy our
underwriting standards.
Repair and Replacement Reserve. The letter of commitment
provides that the tenant, commencing on the date we purchase the
facility, will make annual deposits into a reserve account. We
expect that the lease will provide that on each January 1
following the date we purchase the facility, the payment into
the reserve account will be increased, and that all
extraordinary repair expenditures made in each year during the
term of the lease will be funded first from the reserve, and the
tenant will pay into the reserve such funds as necessary for all
extraordinary repairs.
Security. The letter of commitment provides that, as
security for the mortgage loan and the lease, Hammond Properties
or the tenant, as the case may be, will grant us a security
interest in all personal property, other than receivables,
located and to be located at the facility. The letter of
commitment requires Hammond Properties and the tenant to obtain
and deliver to us an unconditional and irrevocable letter of
credit from a bank acceptable to us, naming us beneficiary
thereunder, in an amount equal to six months debt service
or base rent under the lease, as the case may be, and that at
such time as the operations in the facility have generated
EBITDAR coverage of at least two times the base rent for eight
consecutive fiscal quarters, the letter of credit may be reduced
to an amount equal to three months of the base rent then in
effect. If, however, after satisfying the conditions necessary
to reduce the letter of credit to three months base rent,
EBITDAR coverage subsequently drops below two times base rent
for two consecutive fiscal quarters, the letter of credit will
be increased to six months base rent. The letter of
commitment provides that the lease will be cross-defaulted with
any other lease or agreement between the
100
parties. The letter of commitment provides that the loan and
lease will be jointly and severally guaranteed by Hammond
Properties, certain affiliates of Hammond Properties and Gulf
States Health Services, Inc. For information about the financial
condition of Gulf States Health Services, Inc., see the
description of the Covington and Denham Springs facilities above.
Purchase Options. The letter of commitment provides that
the lease will provide that so long as the tenant is not in
default, and no event has occurred which with the giving of
notice or the passage of time or both would constitute a default
under its (and its affiliates) leases with us or any of our
affiliates or any of the leases with its subtenants, the tenant
will have the option to purchase the facility at the expiration
of the initial term and each extension term of the lease. The
letter of commitment provides that the purchase price shall be
equal to the greater of (i) the appraised value of the
facility, assuming the lease remains in effect for 15 years
and not taking into account any purchase options contained
therein, or (ii) the purchase price paid by us for the
facility, increased annually by an amount equal to the greater
of (A) 2.5% per annum from the date of the lease, or
(B) the rate of increase in the CPI on each January 1. The
parties will agree upon the notice and closing periods
applicable to these purchase options.
Net Worth Covenant. The letter of commitment provides
that the loan and lease documents will require that, as of the
loan closing and throughout the loan and lease terms, Hammond
Properties, Hammond Hospital and Gulf States Health Services,
Inc. must maintain an aggregate tangible net worth in an amount
to be mutually agreed upon with us.
Commitment Fee. The letter of commitment provides that we
will be entitled to a commitment fee at the closing of the loan
equal to $80,000, $25,000 of which has already been paid. The
letter of commitment further provides that we will be entitled
to a commitment fee at the closing of the sale transaction equal
to 1% of the purchase price, less the amount of all commitment
fees previously paid.
We cannot assure you that we will acquire or develop the Pending
Acquisition Facility on the terms described in this prospectus
or at all, because the transaction is subject to a variety of
conditions, including negotiation and execution of
mutually-acceptable definitive agreements, our satisfactory
completion of due diligence, receipt of appraisals that support
the purchase price set forth in the commitment letter and other
third party reports, obtaining of government and third party
approvals and consents and approval by our board of directors,
as well as satisfaction of customary closing conditions.
Our Acquisition and Development Pipeline
We have also entered into the following arrangements which,
because of the various contingencies that must be satisfied
before these transactions can be completed, we do not consider
to be probable acquisitions or developments as of the date of
this prospectus.
|
|
|
Diversified Specialty Institutes, Inc. Acquisition and
Development Funding |
General. On March 3, 2005, we entered into a letter
agreement with Diversified Specialty Institutes, Inc., or DSI.
An affiliate of DSI is the proposed tenant of the womens
hospital and medical office building in Bensalem, Pennsylvania
that we have contracted with to develop and leaseback. The
letter agreement provides that, subject to DSI identifying
facilities for acquisition or development, which it is not
required to do, and subject to certain other conditions set
forth in the letter agreement, we have agreed to make available
to DSI or its affiliates acquisition and development funding in
the total amount of $50.0 million to be used to finance the
potential future acquisition or development of healthcare
facilities, in each case subject to our due diligence and
approval. The arrangement will remain outstanding until
May 1, 2006 or such later date as provided in the
definitive documents, and be available to finance any
acquisition facility or development facility that is subject to
definitive agreements as of this outside date, notwithstanding
that the closing or completion of the acquisition facility or
development facility may not have occurred by then. We have
agreed that the definitive documents relating to the arrangement
must close by May 1, 2006.
DSI is not required to identify facilities for acquisition or
development and, if it does not, we have no obligation to
provide funding to DSI. If funds are drawn from the arrangement
to fund an acquisition or development facility, as applicable,
we expect to enter into definitive documents with DSI. With
respect to
101
any development facility, we expect to enter into a development
agreement with a developer, which may be an affiliate of DSI, to
develop the development facility.
Commitment Fee. The letter agreement provides that we are
entitled to a fee equal to 1% of the aggregate purchase price or
development costs of any facilities we acquire pursuant to this
arrangement, $100,000 of which was paid when the letter
agreement was signed. The remainder of the fee will be due and
payable at the closing of future projects, with the fee on each
project being equal to 1% of that projects purchase price.
We have agreed to give DSI a credit on future payments of fees
for the $100,000 paid at the execution of the letter agreement.
Lease. We expect to form a Delaware limited liability
company or a limited partnership to own each facility acquired
or developed pursuant to the commitment. The letter of
commitment provides that, at the time of our purchase of any
acquisition or development facility, we intend to lease back to
the applicable tenant 100% of the land and all improvements,
including improvements to be constructed in the case of a
development facility, for a
15-year term, with
three options to renew for five years each, so long as the
options are exercised at least six months prior to the
expiration of the lease or the applicable extended term. The
letter of commitment provides that each lease will be a
net-lease with the tenant responsible for all costs of the
facility, including, but not limited to, taxes, utilities,
insurance and maintenance.
For each development facility, the letter agreement provides
that the tenant will pay monthly rent during the construction
period in a per year amount equal to 10.75% multiplied by the
total amount of the funds disbursed under the development
agreement. The letter agreement also provides that the lease
relating to a development facility to require the tenant to pay,
following the completion of construction of the facility, base
rent in an amount equal to 10.75% per year of the total
development costs, payable in monthly installments. For an
acquisition facility, we expect the lease to require the tenant
to pay us base rent equal to 10.75% of the purchase price of the
facility. The letter agreement provides that each lease will
provide that commencing on the first January 1 following
the commencement of the lease with respect to an acquisition
facility, and on the first January 1 following the
construction completion date with respect to a development
facility, and on each January 1 thereafter, the base rent
will be increased by an amount equal to the greater of
(A) 2.5% per year of the prior years base rent,
or (B) the percentage by which the CPI on January 1
has increased over the CPI figure in effect on the then just
previous January 1. The letter of commitment also provides
that each lease for an acquisition facility and a development
facility will require the tenant to carry customary insurance
which is adequate to satisfy our underwriting standards.
The letter agreement provides that each lease will require the
tenant to pay us on the commencement date of the lease an amount
equal to $7,500 to cover the cost of the physical inspections of
the facility. The letter agreement also provides that this
inspection fee will increase at the rate of 2.5% per year
starting on the first January 1 following the commencement
date of the lease, in the case of an acquisition facility, or
the completion date, in the case of a development facility. In
addition to the inspection fee, we also expect the tenant to pay
us a fee equal to $75,000 per development facility to cover
our inspection of the development facility during the
construction period.
Capital Improvement Reserve. The letter agreement
provides that each lease will require, commencing on the date
that construction has been completed with respect to a
development facility, or on the date of commencement of the
lease with respect to an acquisition facility, the tenant to
make annual deposits into a reserve account in the amount of
$2,500 per bed per year. The letter agreement also provides
that each lease is expected to provide that on each
January 1 thereafter, the payment of $2,500 per bed
per year into the improvement reserve will be increased by 2.5%.
We expect that the lease will require all extraordinary repair
expenditures made in each year during the term of the lease will
be funded first from the reserve, and the tenant will pay into
the reserve such funds as necessary for all extraordinary
repairs.
Security. The letter agreement provides that, as security
for each lease, the tenant will grant us a security interest in
all personal property, other than receivables, located and to be
located at the facility. The letter agreement provides that each
lease will be cross-defaulted with any other leases between the
tenant, or its affiliates, and us, or our affiliates. The letter
agreement provides that each lease will require the tenant to
102
obtain and deliver to us an unconditional and irrevocable letter
of credit from a bank acceptable to us, naming us beneficiary
thereunder, in an amount equal to one years base rent
under the lease.
The letter agreement provides that each lease will require that,
as of the commencement date of the lease, the tenant to have a
tangible net worth of no less than $5.0 million in cash
equity or shall have access to a working capital line of no less
than $5.0 million that is personally guaranteed by
Dr. Tannenbaum and such other persons as may be approved by
us.
Purchase Options. The letter agreement provides that each
lease will provide that so long as tenant is not in default, and
no event has occurred which with the giving of notice or the
passage of time or both would constitute a default under its,
and its affiliates, leases with us or any of our affiliates or
any of the leases with its subtenants, at the expiration of the
initial term of the lease, and at the expiration of each
extended term thereafter, upon at least 60 days prior
written notice, tenant will have the option to purchase the
facility at a purchase price equal to the greater of
(i) the appraised value of the facility, or, in the case of
a development facility (ii) the total development costs
(including any capital additions funded by us), as increased by
an amount equal to the greater of (A) 2.5% per year
from the date of the lease, or (B) the rate of increase in
the CPI on each January 1, or, in the case of an
acquisition facility, (ii) the amount of (A) the
purchase price paid for the facility, including costs of third
party reports, legal fees and all other acquisition costs.
On December 27, 2005, we entered into a letter of
commitment to acquire and leaseback a facility in Pennsylvania
and to make related loans for certain improvements to the real
estate and for working capital purposes for an estimated total
cost of $9.2 million, subject to adjustment. This
transaction is subject to our completion of due diligence.
We cannot assure you that we will acquire or develop any of the
facilities in our acquisition and development pipeline on the
terms described in this prospectus or at all, because each of
these transactions is subject to a variety of conditions,
including negotiation and execution of mutually-acceptable
definitive agreements, our satisfactory completion of due
diligence, receipt of appraisals that support the purchase price
set forth in the letter agreements and other third party
reports, obtaining of government and third party approvals and
consents, approval by our board of directors, and in certain
cases our proposed tenants acquisition of the facility
from the current owner, as well as satisfaction of customary
closing conditions.
We have also identified a number of opportunities to acquire or
develop additional healthcare facilities. In some cases, we are
actively negotiating agreements or letters of intent with the
owners or prospective tenants. In other instances, we have only
identified the potential opportunity and had preliminary
discussions with the owner or prospective tenant. We cannot
assure you that we will complete any of these potential
acquisitions or developments.
103
MANAGEMENT
Our Directors and Executive Officers
Our business and affairs are managed under the direction of our
board of directors, which consists of eight members, three of
whom are members of our senior management team and five of whom
our board of directors has determined to be independent in
accordance with the listing standards established by the New
York Stock Exchange, or NYSE. Each director is elected to serve
until the next annual meeting of stockholders and until his
successor is elected and qualified. The current terms of our
present directors will expire at our 2006 annual meeting of
stockholders. The following table sets forth certain information
regarding our executive officers and directors:
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
Edward K. Aldag, Jr.
|
|
|
42 |
|
|
Chairman of the Board, President and Chief Executive Officer |
R. Steven Hamner
|
|
|
49 |
|
|
Director, Executive Vice President and Chief Financial Officer |
William G. McKenzie
|
|
|
47 |
|
|
Vice Chairman of the Board |
Emmett E. McLean
|
|
|
50 |
|
|
Executive Vice President, Chief Operating Officer, Treasurer and
Assistant Secretary |
Michael G. Stewart
|
|
|
50 |
|
|
Executive Vice President, General Counsel and Secretary |
Virginia A. Clarke
|
|
|
47 |
|
|
Director |
G. Steven Dawson
|
|
|
48 |
|
|
Director |
Bryan L. Goolsby
|
|
|
55 |
|
|
Director |
Robert E. Holmes, Ph.D.
|
|
|
64 |
|
|
Director* |
L. Glenn Orr, Jr.
|
|
|
65 |
|
|
Director |
|
|
|
* |
|
Mr. Holmes has been designated as our lead independent
director. |
The following is a summary of certain biographical information
concerning our directors and executive officers:
Edward K. Aldag, Jr. is one of our founders and has
served as our president and chief executive officer since August
2003, and as chairman of the board since March 2004.
Mr. Aldag served as our vice chairman of the board from
August 2003 until March 2004 and as our secretary from August
2003 until March 2005. Prior to that, Mr. Aldag served as
an executive officer and director with our predecessor from its
inception in August 2002 until August 2003. From 1986 to 2001,
Mr. Aldag managed two private real estate companies,
Guilford Capital Corporation and Guilford Medical Properties,
Inc., that had aggregate assets valued at more than
$500 million. Mr. Aldag played an integral role in the
formation of investor groups, structuring the financing, and
closing the transactions. Guilford Medical Properties, Inc.
owned numerous rehabilitation hospitals across the country and
net-leased them to four different national healthcare providers.
Mr. Aldag served as president and a member of the board of
directors of Guilford Medical Properties, Inc. from its
inception until selling his interest in the company in 2001.
Mr. Aldag was the president and a member of the board of
directors of Guilford Capital Corporation from 1998 to 2001 and
from 1990 to 1998 served as executive vice president, chief
operating officer and a member of the board of directors.
Mr. Aldag received his B.S. in Commerce & Business
from the University of Alabama with a major in corporate finance.
R. Steven Hamner is one of our founders and has
served as our executive vice president and chief financial
officer since September 2003 and as a director since February
2005. In August and September 2003, Mr. Hamner served as
our executive vice president and chief accounting officer. From
October 2001 through March 2004, he was the managing director of
Transaction Analysis LLC, a company that provided interim and
project-oriented accounting and consulting services to
commercial real estate owners
104
and their advisors. From June 1998 to September 2001, he was
vice president and chief financial officer of United Investors
Realty Trust, a publicly-traded REIT. For the 10 years
prior to becoming an officer of United Investors Realty Trust,
he was employed by the accounting and consulting firm of
Ernst & Young LLP and its predecessors. Mr. Hamner
received a B.S. in Accounting from Louisiana State University.
Mr. Hamner is a certified public accountant.
William G. McKenzie is one of our founders and has served
as the vice chairman of our board of directors since September
2003. Mr. McKenzie has served as a director since our
formation and served as the executive chairman of our board of
directors in August and September 2003. From May 2003 to August
2003, he was an executive officer and director of our
predecessor. From 1998 to the present, Mr. McKenzie has
served as president, chief executive officer and a board member
of Gilliard Health Services, Inc., a privately-held owner and
operator of acute care hospitals. From 1996 to 1998, he was
executive vice president and chief operating officer of the
Mississippi Hospital Association/ Diversified Services, Inc. and
the Health Insurance Exchange, a mutual company and HMO. From
1994 to 1996, Mr. McKenzie was senior vice president of
Managed Care and executive vice president of Physician
Solutions, Inc., a subsidiary of Vaughan HealthCare, a private
healthcare company in Alabama. From 1981 to 1994,
Mr. McKenzie was hospital administrator and chief financial
officer and held other management positions with several private
acute care organizations. Mr. McKenzie received a Masters
of Science in Health Administration from the University of
Colorado and a B.S. in Business Administration from Troy State
University. He has served in numerous capacities with the
Alabama Hospital Association.
Emmett E. McLean is one of our founders and has served as
our executive vice president, chief operating officer and
treasurer since September 2003. Mr. McLean has served as
assistant secretary since April 2004. In August and September
2003, Mr. McLean also served as our chief financial
officer. Mr. McLean was one of our directors from September
2003 until April 2004. From June to September, 2003,
Mr. McLean served as executive vice president, chief
financial officer, and treasurer and board member of our
predecessor. From 2000 to 2003, Mr. McLean was a private
investor and, for part of that period, served as a consultant to
a privately held company. From 1995 to 2000, Mr. McLean
served as senior vice president development,
secretary, treasurer and a board member of PsychPartners,
L.L.C., a healthcare services and practice management company.
From 1992 to 1994, he was senior vice president, chief financial
officer and secretary of Diagnostic Health Corporation, a
healthcare services company. From 1984 to 1992, he worked for
Dean Witter Reynolds, Inc., now Morgan Stanley, and Smith
Barney, now Citigroup, in the corporate finance departments of
their respective investment banking businesses. From 1977 to
1982, Mr. McLean worked as a commercial banker for SunTrust
Banks, Inc. Mr. McLean received an MBA from the University
of Virginia and a B.A. in Economics from The University of North
Carolina.
Michael G. Stewart has served as our general counsel
since October 2004 and as our executive vice president and
secretary since March 2005. Prior to October 2004,
Mr. Stewart worked as a private investor, healthcare
consultant and novelist. He advised physician and surgery groups
on emerging healthcare issues for four years before publishing
three novels. From 1993 until 1995, he served as vice president
and general counsel of Complete Health Services, Inc., a managed
care company, and its successor corporation, United Healthcare
of the South, a division of United Healthcare, Inc. (NYSE: UNH).
Mr. Stewart was engaged in the private practice of law
between 1988 and 1993. Mr. Stewart holds a J.D. degree from
Cumberland School of Law of Samford University and a B.S. in
Business Administration from Auburn University.
Virginia A. Clarke has served as a member of our board of
directors since February 2005. Ms. Clarke has been a search
consultant in the global executive search firm of Spencer
Stuart & Associates since 1997. Ms. Clarke was
with DHR International, an executive search firm, during 1996.
Prior to that, Ms. Clarke spent 10 years in the real
estate investment management business with La Salle
Partners and Prudential Real Estate Investors, where her
activities included asset management, portfolio management,
capital raising and client service, and two years with First
National Bank of Chicago. Ms. Clarke is a member of the
Pension Real Estate Association. Ms. Clarke graduated from
the University of California at
105
Davis and received a masters degree in management from the
J.L. Kellogg Graduate School of Management at Northwestern
University.
G. Steven Dawson has served as a member of our board
of directors since April 2004. He is currently a private
investor and serves on the boards of five other real estate
investment trusts in addition to his service for us, as follows:
American Campus Communities (NYSE: ACC), AmREIT, Inc. (AMEX:
AMY), Desert Capital REIT (a non-listed public mortgage
company), Sunset Financial Resource, Inc. (NYSE: SFO), and
Trustreet Properties, Inc. (NYSE: TSY). Mr. Dawson is
chairman of the audit committees for each of these companies
except Sunset Financial Resource, Inc. and Trustreet Properties,
Inc. From July 1990 to September 2003, he was chief financial
officer and senior vice president-finance of Camden Property
Trust (NYSE: CPT) and its predecessors, a REIT engaged in the
development, ownership, management, financing and sale of
multi-family properties throughout the southern United States.
Mr. Dawson is involved in various charitable, non-profit
and educational organizations, including serving on the board of
His Grace Foundation, a charity providing services to the
families of children in the Bone Marrow Transplant Unit of Texas
Childrens Hospital, and as a member of the Real Estate
Roundtable at the Mays Graduate School of Business at Texas
A&M University. Mr. Dawson received a degree in
business from Texas A&M University.
Bryan L. Goolsby has served as a member of our board of
directors since February 2005. Mr. Goolsby is the managing
partner of the law firm Locke Liddell & Sapp LLP.
Mr. Goolsby is an associate board member of the Board of
Governors of the National Association of Real Estate Investment
Trusts. He is also a member of the National Multi-Family Housing
Association and the Pension Real Estate Association, and an
associate board member of the Edwin L. Cox School of Business at
Southern Methodist University. He serves as a director of Desert
Capital REIT, Inc. and AmREIT, Inc. Mr. Goolsby received a
J.D. degree from the University of Texas, and is a Certified
Public Accountant.
Robert E. Holmes, Ph.D., has served as a member of
our board of directors since April 2004. Mr. Holmes, our
lead independent director, is the Dean and Professor of
Management of the School of Business at the University of
Alabama at Birmingham, positions he has held since 1999. From
1995 to 1999, he was Dean of the Olin Graduate School of
Business at Babson College in Wellesley, Massachusetts. Prior to
that, he was Dean of the James Madison University College of
Business in Harrisonburg, Virginia for 12 years. He is the
author of more than 20 scholarly publications, is past
president of the Southern Business Administration Association,
and is actively involved in the International Association for
Management Education. Mr. Holmes received a bachelors
degree from the University of Texas at Austin, an MBA from
University of North Texas, and received his Ph.D. from the
University of Arkansas with an emphasis on management strategy.
L. Glenn Orr, Jr. has served as a member of our
board of directors since February 2005. Mr. Orr has been
president and chief executive officer of The Orr Group, which
provides investment banking and consulting services for
middle-market companies, since 1995. Prior to that, he was
chairman of the board of directors, president and chief
executive officer of Southern National Corporation from 1990
until its merger with Branch Banking & Trust in 1995.
Mr. Orr is member of the board of directors, chairman of
the governance/compensation committee and a member of the
executive committee of Highwoods Properties, Inc. (NYSE: HIW).
He is also a member of the boards of directors of General Parts,
Inc., Village Tavern, Inc. and Broyhill Management Fund, Inc.
Mr. Orr previously served as president and chief executive
officer of Forsyth Bank and Trust Co., president of Community
Bank in Greenville, South Carolina and president of the North
Carolina Bankers Association. He is a trustee of Wake Forest
University.
Corporate Governance Board of Directors and
Committees
Our board of directors has adopted a code of ethics and business
conduct relating to the conduct of our business by our
employees, officers and directors, and has also adopted
corporate governance guidelines to assist the board of directors
in the administration of its duties. Our corporate governance
guidelines and the listing standards of the NYSE require that a
majority of the members of our board of directors be
106
independent. Board members are recommended for nomination by our
ethics, nominating and corporate governance committee.
Nominations must satisfy the standards established by that
committee for membership on our board of directors.
Our directors generally meet quarterly or more frequently if
necessary. The directors are regularly kept informed about our
business at meetings of the board of directors and its
committees and through supplemental reports and communications.
Our independent directors meet regularly in executive sessions
without the presence of any corporate officers. Mr. Holmes
has been selected by the board of directors to serve as lead
independent director and in that capacity presides at meetings
of the non-management directors, coordinates the preparation for
meetings of the board of directors with our chief executive
officer, and serves as the liaison between the board of
directors and our chief executive officer.
Our board of directors has established audit, compensation,
ethics, nominating and corporate governance and investment
committees, the principal functions and membership of which are
briefly described below. The charters of the audit, compensation
and ethics, nominating and corporate governance committees,
along with our code of ethics and business conduct and our
corporate governance guidelines, are available on our website at
www.medicalpropertiestrust.com. Information on our website
should not be considered a part of this prospectus.
In February 2005, we expanded the size of our board of directors
from seven to 11 directors and elected four new directors,
Messrs. Goolsby, Hamner and Orr and Ms. Clarke. In
connection with the election of these new directors, our board
reconstituted our audit, compensation and ethics, nominating and
corporate governance committees and established the investment
committee of our board. On April 6, 2005, three of our
independent directors who had become members of our board in
April 2004 resigned as directors.
Audit Committee
Our board of directors has established an audit committee, which
is comprised of three independent directors, Messrs. Dawson
and Orr and Ms. Clarke. Mr. Dawson serves as the
chairperson of the audit committee and also serves on the audit
committees of three other public companies. Our board of
directors has determined that Mr. Dawsons service on
the audit committees of other public companies does not impair
his ability to serve on our audit committee. The audit committee
oversees (i) our accounting and financial reporting
processes; (ii) the integrity and audits of our financial
statements; (iii) our compliance with legal and regulatory
requirements; (iv) the qualifications and independence of
our independent auditors; and (v) the performance of our
internal and independent auditors. The audit committee also:
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has sole authority to appoint or replace our independent
auditors; |
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has sole authority to approve in advance all audit and non-audit
services by our independent auditors; |
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monitors compliance of our employees with our standards of
business conduct and conflict of interest policies; and |
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meets at least quarterly with our senior executive officers,
internal audit staff and our independent auditors in separate
executive sessions. |
The specific functions and responsibilities of the audit
committee are set forth in the audit committees charter.
Our board of directors has determined that each of the members
of the audit committee is financially literate, as such term is
interpreted by our board of directors. In addition, our board of
directors has determined that Mr. Dawson qualifies as an
audit committee financial expert under the current
SEC regulations. Our management has primary responsibility for
the financial statements and internal control over financial
reporting. The audit committee engages an independent registered
public accounting firm to conduct an annual audit of the
Companys financial statements in accordance with the
standards of the Public Company Accounting Oversight Board.
107
Compensation
Committee
Our board of directors has established a compensation committee,
which is comprised of three independent directors,
Messrs. Dawson, Goolsby and Orr. Mr. Orr serves as the
chairperson of the compensation committee. The principal
functions of the compensation committee are to:
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evaluate the performance of our executive officers; |
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review and approve the compensation for our executive officers; |
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review and make recommendation to the board with respect to our
incentive compensation plans and equity-based plans; and |
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administer our equity incentive plan. |
The compensation committee also reviews and approves corporate
goals and objectives relevant to the chief executive
officers compensation, evaluates the chief executive
officers performance in light of those goals and
objectives, and establishes the chief executive officers
compensation levels based on its evaluation. The compensation
committee has the authority to retain and terminate any
compensation consultant to be used to assist in the evaluation
of the compensation of the chief executive officer or any other
executive officer or director. The specific functions and
responsibilities of the compensation committee are set forth in
more detail in the compensation committees charter.
Ethics, Nominating and
Corporate Governance Committee
Our board of directors has established an ethics, nominating and
corporate governance committee. Membership of the committee is
comprised of three independent directors, Messrs. Dawson,
Goolsby and Holmes. Mr. Holmes serves as the chairperson of
this committee. The ethics, nominating and corporate governance
committee is responsible for, among other things, recommending
the nomination of qualified individuals to become directors,
recommending the composition of committees of our board,
periodically reviewing the boards performance and
effectiveness as a body, recommending proposed changes to the
board of directors, and periodically reviewing our corporate
governance guidelines and policies. The specific functions and
duties of the ethics, nominating and corporate governance
committee are set forth in the committees charter.
Investment Committee
Our board of directors has established an investment committee.
Membership of the committee is comprised of all of our current
directors. Mr. Aldag serves as the chairperson of this
committee. The investment committee is authorized to, among
other things, consider and take action with respect to all
acquisitions, developments and leasing of healthcare facilities
in which our aggregate investment will exceed $10.0 million.
Vacancies on Our Board of
Directors
Any director may resign at any time and may be removed with or
without cause by the stockholders upon the affirmative vote of
the holders of at least two-thirds of all of our common stock
outstanding and entitled to vote generally for the election of
directors. Unless filled by a vote of the stockholders in the
event a director is removed as permitted by Maryland law, a
vacancy created by death, resignation, removal, adjudicated
incompetence or other incapacity of a director may be filled by
a vote of a majority of the remaining directors although less
than a quorum. Vacancies created by an increase in the number of
directors must be filled by a vote of majority of the entire
board.
Limited Liability and Indemnification
The MGCL permits a Maryland corporation to include in its
charter a provision limiting the liability of its directors and
officers to the corporation and its stockholder for money
damages except for liability resulting from actual receipt of an
improper benefit or profit in money, property or services or
active and
108
deliberate dishonesty established by a final judgment as being
material to the cause of action. Our charter limits the personal
liability of our directors and officers for money damages to the
fullest extent permitted under Maryland law.
The MGCL requires a corporation, unless its charter provides
otherwise, which our charter does not, to indemnify a director
or officer who has been successful on the merits or otherwise,
in the defense of any proceeding to which he or she is made a
party by reason of his or her service in that capacity. See
Certain Provisions of Maryland Law and of Our Charter and
Bylaws Indemnification and Limitation of
Directors and Officers Liability.
We maintain a directors and officers liability insurance policy.
We have also entered into indemnification agreements with each
of our directors and executive officers, which we refer to in
this context as indemnitees. The indemnification agreements
provide that we will, to the fullest extent permitted by
Maryland law, indemnify and defend each indemnitee against all
losses and expenses incurred as a result of his current or past
service as our director or officer, or incurred by reason of the
fact that, while he was our director or officer, he was serving
at our request as a director, officer, partners, trustee,
employee or agent of a corporation, partnership, joint venture,
trust, other enterprise or employee benefit plan. We have agreed
to pay expenses incurred by an indemnitee before the final
disposition of a claim provided that he provides us with a
written affirmation that he has met the standard of conduct
required for indemnification and a written undertaking to repay
the amount we pay or reimburse if it is ultimately determined
that he has not met the standard of conduct required for
indemnification. We are to pay expenses within 20 days of
receiving the indemnitees written request for such an
advance. Indemnitees are entitled to select counsel to defend
against indemnifiable claims.
The general effect to investors of any arrangement under which
any person who controls us or any of our directors, officers or
agents is insured or indemnified against liability is a
potential reduction in distributions to our stockholders
resulting from our payment of premiums associated with liability
insurance and payment of indemnifiable expenses and losses.
The SEC takes the position that indemnification against
liabilities arising under the Securities Act is against public
policy and unenforceable. As a result, indemnification of our
directors and officers may not be allowed for liabilities
arising from or out of a violation of state or federal
securities laws.
Director Compensation
As compensation for serving on our board of directors, each of
our independent directors receives an annual fee of $20,000 and
an additional $1,000 for each board of directors meeting
attended. In addition, each independent director is paid $1,000
for attendance at each meeting of a committee on which he
serves. Committee chairmen receive an additional $5,000 per
year except that the audit committee chairman receives an
additional $10,000 per year. In addition, we reimburse our
directors for their reasonable
out-of-pocket expenses
incurred in attending board of directors and committee meetings.
Directors who are also officers or employees of our company
receive no additional compensation for their service as
directors. At the time of each annual meeting of our
stockholders following his or her election to the board of
directors, each independent director will receive
2,000 shares of our common stock, restricted as to transfer
for three years, or a comparable number of deferred stock units.
Our compensation committee may change the compensation of our
independent directors in its discretion.
Upon joining our board of directors, each independent director
received a non-qualified option to
purchase 20,000 shares of our common stock with an
exercise price of $10.00 per share. One-third of these
options vested upon grant. One-half of the remaining options
will vest on each of the first and second anniversaries of the
date of grant. In addition to this option to purchase stock,
each of our independent directors has been awarded 2,500
deferred stock units, which represent the right to receive
2,500 shares of common stock at no cost in October 2007 for
Messrs. Dawson and Holmes and 2,500 shares of common
stock at no cost in March 2008 for Ms. Clarke and
Messrs. Goolsby and Orr.
109
Executive Compensation
The following table sets forth the compensation paid or earned
by our chief executive officer and our other executive officers
for 2003 and 2004:
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Other Annual | |
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All Other | |
Name and Position |
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Year | |
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Salary | |
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Bonus | |
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Compensation | |
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Compensation | |
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Edward K. Aldag, Jr.
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2004 |
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$ |
350,000 |
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$ |
350,000 |
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$ |
50,462 |
(1) |
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$ |
30,769 |
(2) |
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Chairman, Chief Executive
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2003 |
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145,833 |
(3) |
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145,833 |
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10,492 |
(4) |
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9,249 |
(5) |
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Officer and President |
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Emmett E. McLean
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2004 |
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$ |
250,000 |
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$ |
250,000 |
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$ |
24,385 |
(6) |
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15,385 |
(2) |
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Executive Vice President,
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2003 |
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104,167 |
(3) |
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104,167 |
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10,896 |
(7) |
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Chief Operating Officer, Treasurer and Assistant Secretary |
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R. Steven Hamner
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2004 |
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$ |
250,000 |
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$ |
250,000 |
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$ |
24,385 |
(6) |
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$ |
15,385 |
(2) |
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Executive Vice President
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2003 |
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104,167 |
(3) |
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104,167 |
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5,918 |
(8) |
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and Chief Financial Officer |
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William G. McKenzie
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2004 |
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$ |
175,000 |
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175,000 |
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Vice Chairman of the Board |
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2003 |
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72,917 |
(3) |
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72,917 |
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Michael G. Stewart
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2004 |
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$ |
43,527 |
(9) |
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42,188 |
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$ |
1,700 |
(10) |
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Executive Vice President,
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2003 |
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Secretary and General Counsel |
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(1) |
Represents a $12,000 automobile allowance and $25,000 payable to
Mr. Aldag to reimburse him for the cost of tax preparation
and financial planning services and $13,462 to reimburse
Mr. Aldag for his tax liabilities associated with such
payment. |
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Represents reimbursement for life insurance premiums of $20,000
for Mr. Aldag and $10,000 for each of Messrs. McLean
and Hamner and reimbursement of $10,769 for Mr. Aldag and
$5,385 for each of Messrs. McLean and Hamner for tax
liabilities associated with such premium reimbursements, but
does not include any matching contributions under the 401(k)
plan that we adopted in 2005. |
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(3) |
For the partial year period from our inception in August 2003
until December 31, 2003. |
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Represents a $7,000 automobile allowance and $3,492 payable to
Mr. Aldag to reimburse him for the cost of tax preparation
and financial planning services. |
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Represents reimbursement for life insurance premiums of $9,249. |
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(6) |
Represents a $9,000 automobile allowance and $10,000 for the
named executive officers to reimburse them for the cost of tax
preparation services and $5,385 for the named executive officers
to reimburse them for their tax liabilities associated with such
tax preparation cost reimbursement. |
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Represents reimbursement for life insurance premiums of $10,896. |
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(8) |
Represents reimbursement for life insurance premiums of $5,918. |
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For the partial year period from October 25, 2004, Mr.
Stewarts date of hire, to December 31, 2004. Had Mr.
Stewart been employed for the full year 2004, he would have been
entitled to a base salary of $225,000 during 2004.
Mr. Stewarts employment agreement was amended
effective April 28, 2005. The amended employment agreement
provides for an annual base salary of $250,000. |
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(10) |
Represents automobile allowance. |
Employment Agreements
We have employment agreements with each of the named executive
officers. These employment agreements provide the following
annual base salaries: Edward K. Aldag, Jr., $350,000;
Emmett E. McLean, $250,000; R. Steven Hamner, $250,000; Michael
G. Stewart, $250,000; and William G. McKenzie, $175,000. The
base salaries for Messrs. Aldag, McLean and Hamner were
increased by 5% effective January 1, 2005. On each January
1 hereafter, each of the executive officers is to receive a
minimum increase in his base salary equal to the increase in the
Consumer Price Index. These agreements provide that the
executive officers, other than Mr. McKenzie, agree to
devote substantially all of their business time to our
operation. The employment agreement for each of the named
executive officers is for a three year term which is
automatically extended at the end of each year within such term
for an additional one year period, unless either party gives
notice of non-renewal as provided in the agreement. These
employment agreements permit us to terminate each
executives employment with appropriate notice for or
without cause. Cause is generally
defined to mean:
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conviction of, or the entry of a plea of guilty or nolo
contendere to, a felony (excluding any felony relating to the
negligent operation of a motor vehicle or a conviction or plea
of guilty or nolo contendere arising under a statutory provision
imposing per se criminal liability due to the position |
110
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held by the executive with us, provided the act or omission of
the executive or officer with respect to such matter was not
taken or omitted to be taken in contravention of any applicable
policy or directive of the board of directors); |
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a willful breach of the executives duty of loyalty which
is materially detrimental to us; |
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a willful failure to perform or adhere to explicitly stated
duties that are consistent with the executives employment
agreement, or the reasonable and customary guidelines of
employment or reasonable and customary corporate governance
guidelines or policies, including, without limitation, the
business code of ethics adopted by the board of directors, or
the failure to follow the lawful directives of the board of
directors provided such directives are consistent with the terms
of the executives employment agreement, which continues
for a period of 30 days after written notice to the
executive; and |
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gross negligence or willful misconduct in the performance of the
executives duties. |
Each of the named executive officers has the right under his
employment agreement to resign for good reason. The
following constitute good reason under the employment
agreements: (i) the employment agreement is not
automatically renewed by the company; (ii) the termination
of certain incentive compensation programs; (iii) the
termination or diminution of certain employee benefit plans,
programs or material fringe benefits (other than for
Mr. McKenzie); (iv) the relocation of our principal
office outside of a 100 mile radius of Birmingham, Alabama
(in the case of Mr. Aldag); or (v) our breach of the
employment agreement which continues uncured for 30 days.
In addition, in the case of Mr. Aldag, the following
constitute good reason: (i) his removal from the board of
directors without cause or his failure to be nominated or
elected to the board of directors; or (ii) any material
reduction in duties, responsibilities or reporting requirements,
or the assignment of any duties, responsibilities or reporting
requirements that are inconsistent with his positions with us.
The executive employment agreements provide a monthly car
allowance of $1,000 for Mr. Aldag and $750 for each of
Messrs. McLean, Hamner and Stewart. Messrs. Aldag, McLean,
Hamner and Stewart are also reimbursed for the cost of tax
preparation and financial planning services, up to $25,000
annually for Mr. Aldag and $10,000 annually for each of
Messrs. McLean, Hamner and Stewart. We also reimburse each
executive for the income tax he incurs on the receipt of these
tax preparation and financial planning services. In addition,
the employment agreements provide for annual paid vacation of
six weeks for Mr. Aldag and three weeks for
Messrs. McLean, Hamner and Stewart and various other
customary benefits. The employment agreements also provide that
Mr. Aldag will receive up to $20,000 per year in
reimbursement for life insurance premiums, which amount is to
increase annually based on the increase in the CPI for such
year, and that Messrs. McLean, Hamner and Stewart will
receive up to $10,000 per year in reimbursement for life
insurance premiums which amount is to increase annually based on
the increase in the CPI for such year. We also reimburse each
executive for the income tax he incurs on the receipt of these
premium reimbursements.
We have the right to obtain a key man life insurance policy for
the benefit of the company on the life of each of our executives
with a death benefit equal to the death benefit of such
executives whole life policy.
The employment agreements referred to above provide that the
executive officers are eligible to receive the same benefits,
including medical insurance coverage and retirement plan
benefits in a 401(k) plan to the same extent as other similarly
situated employees, and such other benefits as are commensurate
with their position. Participation in employee benefit plans is
subject to the terms of said benefit plans as in effect from
time to time.
If the named executive officers employment ends for any
reason, we will pay accrued salary, bonuses and incentive
payments already determined, and other existing obligations. In
addition, if we terminate the named executive officers
employment without cause or if any of them terminates his
employment for good reason, we will be obligated to pay
(i) a lump sum payment of severance equal to the sum of (x)
the product of three and the sum of the salary in effect at the
time of termination plus the average cash bonus
111
(or the highest cash bonus, in the case of Mr. Aldag) paid
to such executive during the preceding three years, grossed up
for taxes in the case of Mr. Aldag, and (y) the
incentive bonus prorated for the year in which the termination
occurred, (ii) other than for Mr. McKenzie, the cost
of the executives continued participation in the
companys benefit and welfare plans (other than the 401(k)
plan) for a three year period (or for a five year period in the
case of Mr. Aldag), and (iii) certain other benefits
as provided for in the employment agreement. Additionally, in
the event of a termination by us for any reason other than cause
or by the executive for good reason, all of the options and
restricted stock granted to the executive will become fully
vested, and the executive will have whatever period remains
under the options in which to exercise all vested options.
In the event of a termination of the employment of our
executives as a result of death, then in addition to the accrued
salary, bonus and incentive payments due to them, they shall
become fully vested in their options and restricted stock, and
their respective beneficiaries will have whatever period remains
under the options to exercise such options. In addition, the
executives would be entitled to their prorated incentive bonuses.
In the event the employment of our executives ends as a result
of a termination by us for cause or by the executives without
good reason, then in addition to the accrued salary, bonuses and
incentive payments due to them, the executives would be entitled
to exercise their vested stock options pursuant to the terms of
the grant, but all other unvested options and restricted stock
would be forfeited.
Upon a change of control, the named executive officers will
become fully vested in their options and restricted stock and
will have whatever period remains under the option in which to
exercise their options. In addition, if any executives
employment is terminated by us for cause or by the executive
without good reason in connection with a change of control, the
executive will be entitled to receive an amount equal to the
largest cash compensation paid to the executive for any twelve
month period during his tenure multiplied by three. In general
terms, a change of control occurs:
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if a person, entity or affiliated group (with certain
exceptions) acquires more than 50% of our then-outstanding
voting securities; |
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if we merge into or complete a share exchange, consolidation or
other business combination transaction with another entity
unless the holders of our voting stock immediately prior to the
merger have at least 50% of the combined voting power of the
securities in the merged entity or its parent; or |
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upon the liquidation, dissolution, sale or disposition of all or
substantially all of our assets such that after that transaction
the holders of our voting stock immediately prior to the
transaction own less than 50% of the voting securities of the
acquiror or its parent. |
If payments become due as a result of a change in control and
the excise tax imposed by Code Section 4999 applies, the
terms of the employment agreements require us to gross up the
amount payable to the executive by the amount of this excise tax
plus the amount of income and other taxes due as a result of the
gross up payment.
For an 18 month period after termination of an
executives employment for any reason other than
(i) termination by us without cause or
(ii) termination by the executive for good reason, each of
the executives under these employment agreements has agreed not
to compete with us by working with or investing in, subject to
certain limited exceptions, any enterprise engaged in a business
substantially similar to our business as it was conducted during
the period of the executives employment with us.
The employment agreements provide that these named executive
officers are eligible to participate in our equity incentive
plan, as described in the section below titled Equity
Incentive Plan. The employment agreements also provide
that the named executive officers are eligible to receive annual
bonuses under our bonus policy. See Annual Incentive Bonus
Policy.
112
Benefit Plans
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Annual Incentive Bonus Policy |
Our compensation committee has adopted an incentive bonus policy
for 2005. This policy provides that our executive officers will
receive cash bonuses of not less than 40% nor more than 100% of
their base salaries for 2005 if certain targets or objectives
are met. At the election of the executive officer, any portion
of the bonus for 2005 may be taken in our common stock. Our
compensation committee will reevaluate the incentive bonus
policy for our executive officers on an annual basis, subject to
those provisions in our executive officers employment
agreements that provide that the executives will receive not
less than 40% nor more than 100% of their base salaries under
the policy. In addition, the compensation committee may approve
any additional bonus awards to any executive officer.
Our board of directors has approved the adoption of a
Section 401(k) plan covering our eligible employees. The
plan will be a safe harbor plan providing that each participant
must complete one year of service before becoming eligible for
profit sharing contributions, we will match each dollar, dollar
for dollar for the first 3%, then 50% for each dollar of the
next 2%, of each participants salary, participants
elective contributions and safe harbor contributions will be
fully vested when made, and profit sharing contributions will
vest over six years.
We have adopted the Amended and Restated Medical Properties
Trust, Inc. 2004 Equity Incentive Plan, or equity incentive
plan, for the purpose of attracting and retaining directors,
executive officers and other key employees and consultants,
including officers and employees of our operating partnership.
The equity incentive plan provides that the aggregate number of
shares of common stock as to which awards can be made pursuant
to the equity incentive plan is 4,691,180. On April 25,
2005, our compensation committee awarded 82,000 shares of
restricted stock to Mr. Stewart and certain non-management
employees. The shares awarded to the non-management employees
will vest 20% per year over five years beginning on July 7,
2006, provided they remain our employees. On October 6,
2004, our compensation committee awarded 106,000 shares of
restricted stock to Messrs. Aldag, Hamner, McKenzie and
McLean effective July 14, 2005. The shares granted to
Messrs. Aldag, Hamner, McKenzie, McLean and Stewart vest at
a rate of 8.33% per quarter beginning on September 30,
2005, so long as each executive officer remains an employee of
ours. In addition, upon a change in control or if any of these
executive officers is terminated for certain reasons, the shares
will vest 100%. On August 18, 2005, our compensation
committee awarded 490,680 shares of restricted stock to our
executive officers and members of our board of directors. These
shares vest at a rate of 8.33% per quarter beginning in the
third quarter of 2005, so long as each executive officer remains
an employee of ours and each director remains a member of our
board of directors. In addition, upon a change in control or if
any of the executive officers is terminated for certain reasons,
or a director dies or becomes permanently disabled, the shares
will vest 100%. On October 12, 2005, our compensation
committee awarded 10,000 deferred stock units to our independent
directors. In March 2006, three of our executive officers
elected to receive an aggregate of 88,499 shares of
restricted stock in lieu of their 2005 cash bonuses. These
shares vested 25% in March 2006 and will vest at a rate of 37.5%
on each of the first and second anniversaries of the date of the
election. As of the date of this prospectus, there remain
3,803,332 shares available for awards under the equity
incentive plan.
Awards. The equity incentive plan authorizes the issuance
of options to purchase shares of common stock, restricted stock
awards, restricted stock units, deferred stock units, stock
appreciation rights and performance units. The equity incentive
plan contains an award limit on the maximum number of shares of
common stock that may be awarded to an individual in any fiscal
year of 300,000 shares.
Vesting. Our compensation committee will determine the
vesting of options and restricted stock and restricted stock
units granted under the equity incentive plan, subject to any
different vesting provisions agreed upon in a participants
employment agreement. In addition, our compensation committee
will
113
establish a standard vesting schedule for options, restricted
stock and restricted stock units subject to any different
vesting schedule which is agreed upon in a participants
employment or award agreement.
Options. Each option granted pursuant to the equity
incentive plan is designated at the time of grant as either an
option intended to qualify as an incentive stock option under
Section 422 of the Code, referred to as a qualified
incentive option, or as an option that is not intended to so
qualify, referred to as a non-qualified option. The equity
incentive plan authorizes our compensation committee to grant
incentive stock options for common stock in an amount and at an
exercise price to be determined by it, provided that the price
cannot be less than 100% of the fair market value of the common
stock on the date on which the option is granted. If an
incentive stock option is granted to a 10% stockholder,
additional requirements will apply to the option. The exercise
price of non-qualified options will be equal to 100% of the fair
market value of common stock on the date the option is granted
unless otherwise determined by our compensation committee. The
exercise price for any option is generally payable in cash or,
in certain circumstances, by the surrender, at the fair market
value on the date on which the option is exercised, of shares of
our common stock having a value equal to the exercise price. The
equity incentive plan provides that exercise may be delayed or
prohibited if it would adversely affect our status as a REIT. In
addition, the equity incentive plan permits optionholders to
exercise their options prior to the date on which the options
will vest, subject to Committee action. In such case, the
optionholder will, upon payment for the shares, receive
restricted stock having vesting terms on transferability that
are identical to the vesting terms under the original option and
subject to repurchase by us while the restrictions on vesting
are in effect.
In connection with certain extraordinary events, the
compensation committee may make adjustments in the aggregate
number and kind of shares of capital stock reserved for
issuance, the number and kind of shares of capital stock covered
by outstanding awards and the exercise prices specified therein
as may be determined to be appropriate.
Restricted Stock. The equity incentive plan also provides
for the grant of restricted stock awards. A restricted stock
award is an award of shares of common stock that is subject to
restrictions on transferability and other restrictions, if any,
as our compensation committee may impose at the date of grant.
Shares of restricted common stock are subject to vesting as our
compensation committee may approve or as may otherwise be agreed
upon in a participants employment or other award
agreement. The restrictions may lapse separately or in
combination at the times and under the circumstances, including
without limitation, a specified period of employment or the
satisfaction of pre-established criteria, in installments or
otherwise, as our compensation committee may determine. Except
to the extent restricted under the award agreement, a
participant granted shares of restricted stock will have all of
the rights of a stockholder, including, without limitation, the
right to vote and the right to receive dividends on the
restricted stock.
Restricted Stock Units and Deferred Stock Units. Under
the equity incentive plan, the compensation committee may award
restricted stock units and deferred stock units, each for the
duration that it determines in its discretion. Each restricted
stock unit and each deferred stock unit is equivalent in value
to one share of common stock and entitles the participant
receiving the award to receive one share of common stock for
each restricted stock unit at the end of the vesting period
applicable to such restricted stock unit and for each deferred
stock unit at the end of the deferral period. Participants are
not required to pay any additional consideration in connection
with the settlement of restricted stock units or deferred stock
units. A holder of restricted stock units or deferred stock
units has no voting rights, right to receive cash distributions
or other rights as a stockholder until shares of common stock
are issued to the holder in settlement of the stock units.
However, participants holding restricted stock units or deferred
stock units will be entitled to receive dividend equivalents
with respect to any payment of cash dividends on an equivalent
number of shares of common stock. Such dividend equivalents will
be credited in the form of additional stock units.
Performance Units. The equity incentive plan also
provides for the grant of performance shares and performance
units. Holders of performance units will be entitled to receive
payment in cash or shares of our common stock (or in some
combination of cash and shares) if the performance goals
established by
114
the compensation committee are achieved or the awards otherwise
vest. Each performance unit will have an initial value
established by the compensation committee. The compensation
committee will set performance objectives, and such performance
objectives may be based upon the achievement of company-wide,
divisional or individual goals.
Stock Appreciation Rights. The equity incentive plan also
authorizes our compensation committee to grant stock
appreciation rights. Stock appreciation rights are awards that
give the recipient the right to receive an amount equal to
(1) the number of shares exercised under the right,
multiplied by (2) the amount by which our stock price
exceeds the exercise price. Payment may be in cash, in shares of
our common stock with equivalent value, or in some combination,
as determined by the administrator. The compensation committee
will determine the exercise price, vesting schedule and other
terms and conditions of stock appreciation rights; however,
stock appreciation rights expire under the same rules that apply
to stock options.
Administration of the Plan. The equity incentive plan is
administered by our compensation committee. Mr. Aldag is to
make recommendations to the compensation committee as to which
consultants, employees, and executive officers, other than
himself, will be eligible to participate, subject to
compensation committee review and approval. The compensation
committee, in its absolute discretion, will determine the effect
of all matters and questions relating to an employees
termination of employment, subject to the participants
employment agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION
There are no compensation committee interlocks and none of our
employees participates on the compensation committee.
MARKET PRICE OF OUR COMMON STOCK
Our common stock is listed on the NYSE under the symbol
MPW. The following table shows the high and low
sales prices for our common stock since our common stock became
eligible for trading on the NYSE:
|
|
|
|
|
|
|
|
|
|
|
High Sales | |
|
Low Sales | |
|
|
Price | |
|
Price | |
|
|
| |
|
| |
July 8, 2005 to September 30, 2005
|
|
$ |
11.20 |
|
|
$ |
9.62 |
|
October 1, 2005 to December 30, 2005
|
|
$ |
10.09 |
|
|
$ |
7.60 |
|
January 3, 2006 to March 10, 2006
|
|
$ |
10.80 |
|
|
$ |
9.40 |
|
Before our common stock was listed on the New York Stock
Exchange, shares of our common stock were eligible for trading
in the Private Offering, Resales and Trading through Automated
Linkages Market of the National Association of Securities
Dealers, Inc., or the PORTAL Market. Individuals and
institutions that sold shares of our common stock before our
common stock was listed on the New York Stock Exchange were not
obligated to report their sales to the PORTAL Market. Therefore,
the last sales price that was reported on the PORTAL Market may
not have been reflective of sales of our common stock that
occurred and were not reported. The table below reflects the
high and low prices for trades of our shares on the PORTAL
Market known to us for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
High Sales | |
|
Low Sales | |
|
|
Price | |
|
Price | |
|
|
| |
|
| |
April 6, 2004 to June 30, 2004
|
|
$ |
10.50 |
|
|
$ |
10.00 |
|
July 1, 2004 to September 30, 2004
|
|
|
10.00 |
|
|
|
10.00 |
|
October 1, 2004 to December 31, 2004
|
|
|
10.25 |
|
|
|
10.00 |
|
January 1, 2005 to March 31, 2005
|
|
|
10.25 |
|
|
|
10.00 |
|
April 1, 2005 to May 25, 2005
|
|
|
10.25 |
|
|
|
10.00 |
|
115
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our
common stock as of December 31, 2005, unless otherwise
indicated, by (i) each of our directors, (ii) each of
our executive officers, (iii) all of our directors and
executive officers as a group and (iv) each person known to
us who is the beneficial owner of more than 5% of our common
stock. The SEC has defined beneficial ownership of a
security to mean the possession, directly or indirectly, of
voting power or investment power. A stockholder is also deemed
to be, as of any date, the beneficial owner of all securities
that such stockholder has the right to acquire within
60 days after that date through (a) the exercise of
any option, warrant or right, (b) the conversion of a
security, (c) the power to revoke a trust, discretionary
account or similar arrangement, or (d) the automatic
termination of a trust, discretionary account or similar
arrangement. Each beneficial owner named in the table has the
sole voting and investment power with respect to all of the
shares of our common stock shown as beneficially owned by such
person, except as otherwise set forth in the notes to the table.
Unless otherwise indicated, the address of each named beneficial
owner is Medical Properties Trust, Inc., 1000 Urban Center
Drive, Suite 501, Birmingham, Alabama, 35242.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of | |
|
|
Number of Shares | |
|
All Shares of | |
Name of Beneficial Owner |
|
Beneficially Owned | |
|
Common Stock(1) | |
|
|
| |
|
| |
Edward K. Aldag, Jr
|
|
|
499,022 |
(2) |
|
|
1.25 |
% |
R. Steven Hamner
|
|
|
199,022 |
(3) |
|
|
* |
|
William G. McKenzie
|
|
|
150,022 |
(4) |
|
|
* |
|
Emmett E. McLean
|
|
|
199,022 |
(5) |
|
|
* |
|
Michael G. Stewart
|
|
|
50,000 |
(6) |
|
|
* |
|
Virginia A. Clarke
|
|
|
24,166 |
(7) |
|
|
* |
|
G. Steven Dawson
|
|
|
50,833 |
(8) |
|
|
* |
|
Bryan L. Goolsby
|
|
|
24,166 |
(7) |
|
|
* |
|
Robert E. Holmes, Ph.D.
|
|
|
31,833 |
(8) |
|
|
* |
|
L. Glenn Orr, Jr.
|
|
|
24,166 |
(7) |
|
|
* |
|
|
All executive officers and directors as a group (10 persons)
|
|
|
1,300,752 |
(9) |
|
|
3.25 |
% |
Jeffrey L. Feinberg
|
|
|
2,399,300 |
(10) |
|
|
6.00 |
% |
c/o JLF Asset Management, L.L.C.
|
|
|
|
|
|
|
|
|
2775 Via de la Valle, Suite 204
|
|
|
|
|
|
|
|
|
Del Mar, CA 92014
|
|
|
|
|
|
|
|
|
|
|
* |
Represents less than 1% of the number of shares of common stock
outstanding. |
|
(1) |
Based on 39,969,065 shares of common stock outstanding as
of December 31, 2005. Shares of common stock that are
deemed to be beneficially owned by a stockholder within
60 days after December 31, 2005 are deemed outstanding
for purposes of computing such stockholders percentage
ownership but are not deemed outstanding for the purpose of
computing the percentage ownership of any other stockholder. |
|
(2) |
Includes 217,805 shares of restricted common stock. |
|
(3) |
Includes 125,218 shares of restricted common stock. |
|
(4) |
Includes 52,342 shares of restricted common stock. |
|
(5) |
Includes 93,815 shares of restricted common stock. |
|
(6) |
Includes 50,000 shares of restricted common stock. |
|
(7) |
Includes 6,666 shares of common stock issuable upon
exercise of a vested stock option and 17,500 shares of
restricted common stock. |
|
(8) |
Includes 13,333 shares of common stock issuable upon exercise of
a vested stock option and 17,500 shares of restricted common
stock. |
|
(9) |
See notes (1)-(8) above. |
|
|
(10) |
Based on a Schedule 13G filed on July 25, 2005.
Includes shares of common stock held by Jeffrey L. Feinberg,
individually, JLF Partners I., L.P., JLF Partners II,
L.P. and JLF Offshore Fund, Ltd. to which JLF Asset Management,
L.L.C. serves as the management company and/or investment
manager. Jeffrey L. Feinberg is the managing member of JLF Asset
Management, L.L.C. Jeffrey L. Feinberg and JLF Asset Management,
L.L.C. share investment and voting power over these shares of
common stock. |
The 521,908 shares of our common stock held by our founders
that were issued in connection with our formation, which
excludes the 36,000 shares in the aggregate that they
purchased in our April 2004 private placement, vested on
July 7, 2005.
116
SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of our
common stock by the selling stockholders as of June 30,
2005 and the number of shares that may be offered for resale by
this prospectus. The percentages of all shares of common stock
beneficially owned before and after resale of the shares of
common stock by the selling stockholders is based on
39,969,065 shares of common stock outstanding as of
December 31, 2005. The SEC has defined
beneficial ownership of a security to mean the
possession, directly or indirectly, of voting power and/or
investment power. A stockholder is also deemed to be, as of any
date, the beneficial owner of all securities that the
stockholder has the right to acquire within 60 days after
that date through (a) the exercise of any option, warrant
or right, (b) the conversion of a security, (c) the
power to revoke a trust, discretionary account or similar
arrangement, or (d) the automatic termination of a trust,
discretionary account or similar arrangement. Except as
otherwise noted, the beneficial owners named in the table have
sole voting and investment power with respect to all shares of
our common stock shown as beneficially owned by them, subject to
community property laws, where applicable.
The selling stockholders may offer all, a portion or none of the
shares owned by them and covered by this prospectus. In
preparing the table below, we have assumed that the selling
stockholders will sell all of the common stock covered by this
prospectus. Shares of common stock may also be sold by donees,
pledgees or other transferees or successors in interest of the
selling stockholders. Except as described below, to our
knowledge, none of the selling stockholders has had a material
relationship with us or any of our affiliates within the past
three years.
Any selling stockholder that is identified as a broker-dealer
will be deemed to be an underwriter within the
meaning of Section 2(11) of the Securities Act, unless such
selling stockholder obtained the stock as compensation for
services. In addition, any affiliate of a broker-dealer will be
deemed to be an underwriter within the meaning of
Section 2(11) of the Securities Act, unless such selling
stockholder purchased in the ordinary course of business and, at
the time of its purchase of the stock to be resold, did not have
any agreements or understandings, directly or indirectly, with
any person to distribute the stock. As a result, any profits on
the sale of the common stock by selling stockholders who are
deemed to be underwriters and any discounts,
commissions or concessions received by any such broker-dealers
who are deemed to be underwriters will be deemed to
be underwriting discounts and commissions under the Securities
Act. Selling stockholders who are deemed to be
underwriters will be subject to prospectus delivery
requirements of the Securities Act and to certain statutory
liabilities, including, but not limited to, those under
Sections 11, 12 and 17 of the Securities Act and
Rule 10b-5 under
the Exchange Act.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum | |
|
|
|
Beneficial Ownership | |
|
|
|
|
Number of | |
|
Percentage of | |
|
After Resale of Shares | |
|
|
Number of | |
|
Shares of | |
|
All Shares of | |
|
of Common Stock(1) | |
|
|
Shares of | |
|
Common Stock | |
|
Common Stock | |
|
| |
|
|
Common Stock | |
|
Offered by This | |
|
Beneficially | |
|
Number of | |
|
|
|
|
Beneficially | |
|
Prospectus for | |
|
Owned Before | |
|
Shares of | |
|
|
Selling Stockholder |
|
Owned | |
|
Resale | |
|
Resale(2) | |
|
Common Stock | |
|
Percentage | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Unaffiliated(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3M(4)
|
|
|
265,225 |
|
|
|
265,225 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Aetna Services, Inc. Small Cap Equity
(5)
|
|
|
25,800 |
|
|
|
25,800 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
AG Arb Partners,
L.P.(6)(7)
|
|
|
88,000 |
|
|
|
88,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
AG CNG Fund,
L.P.(6)(7)
|
|
|
45,000 |
|
|
|
45,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
AG Funds,
L.P.(6)(7)
|
|
|
50,000 |
|
|
|
50,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
AG MM,
L.P.(6)(7)
|
|
|
28,000 |
|
|
|
28,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
AG Princess,
L.P.(6)(7)
|
|
|
22,000 |
|
|
|
22,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
AG Super Fund,
L.P.(6)(7)
|
|
|
275,000 |
|
|
|
275,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Allan Rothstein
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Atlas
Capital(8)
|
|
|
150,000 |
|
|
|
150,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum | |
|
|
|
Beneficial Ownership | |
|
|
|
|
Number of | |
|
Percentage of | |
|
After Resale of Shares | |
|
|
Number of | |
|
Shares of | |
|
All Shares of | |
|
of Common Stock(1) | |
|
|
Shares of | |
|
Common Stock | |
|
Common Stock | |
|
| |
|
|
Common Stock | |
|
Offered by This | |
|
Beneficially | |
|
Number of | |
|
|
|
|
Beneficially | |
|
Prospectus for | |
|
Owned Before | |
|
Shares of | |
|
|
Selling Stockholder |
|
Owned | |
|
Resale | |
|
Resale(2) | |
|
Common Stock | |
|
Percentage | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Anita U.
Schorsch(6)
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Alpha US Sub Fund I,
LLC(10)
|
|
|
8,254 |
|
|
|
8,254 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Anthony Bruno and Kathleen Bruno JTWROS
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Anthony V. Bruno and Christina S. Bruno JTWROS
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Arkansas Teachers Retirement System
(5)
|
|
|
45,000 |
|
|
|
45,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Augustus V.L. Brokaw III TTEE Augustus V.L. Brokaw III
Revocable Trust Dated
10/14/1993(13)
|
|
|
1,300 |
|
|
|
1,300 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Australian Retirement Fund Global Small Companies
Portfolio(9)
|
|
|
42,300 |
|
|
|
42,300 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Axia Offshore Partners,
Ltd.(10)
|
|
|
31,874 |
|
|
|
31,874 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Axia Partners,
L.P.(10)
|
|
|
16,460 |
|
|
|
16,460 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Axia Partners Qualified,
L.P.(10)
|
|
|
66,412 |
|
|
|
66,412 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Bel Air Opportunistic Fund,
L.P.(11)
|
|
|
40,000 |
|
|
|
40,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Bert Fingerhut Roth
IRA(12)
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Bill
Ham(13)
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Bill Ham IRA
Rollover(13)
|
|
|
8,000 |
|
|
|
8,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Black
Foundation(13)
|
|
|
1,800 |
|
|
|
1,800 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Bonnie Paley Minzer Revocable Trust
(14)
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Brian C.
Porter(15)
|
|
|
334 |
|
|
|
334 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Brunswick Master
Trust(4)
|
|
|
33,150 |
|
|
|
33,150 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Burke F.
Hayes(15)
|
|
|
334 |
|
|
|
334 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Caroline Hicks Roth
IRA(16)
|
|
|
2,500 |
|
|
|
2,500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Carrhae &
Co.(19)
|
|
|
36,250 |
|
|
|
36,250 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Case Western Reserve
University(9)
|
|
|
16,200 |
|
|
|
16,200 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Central States Southeast & Southwest Areas Pension
Fund(19)
|
|
|
57,250 |
|
|
|
57,250 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Charles Affron and Mirella Affron JTWROS
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Charles F. Wedel
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Clearpond &
Co.(18)
|
|
|
525,500 |
|
|
|
525,500 |
|
|
|
1.3 |
% |
|
|
0 |
|
|
|
* |
|
Condor Partners
L.P.(20)
|
|
|
61,300 |
|
|
|
61,300 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Connection Machine Services,
Inc.(11)
|
|
|
4,000 |
|
|
|
4,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Continental Casualty
Company(6)(21)
|
|
|
100,000 |
|
|
|
100,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Cotran Investments,
Ltd.(22)
|
|
|
50,000 |
|
|
|
50,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Cynthia Rothstein
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Daniel W. Huthwaite & Constance R. Huthwaite
|
|
|
2,250 |
|
|
|
2,250 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
David M. Golush
|
|
|
4,600 |
|
|
|
4,600 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
David A.
Todd(13)
|
|
|
5,200 |
|
|
|
5,200 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum | |
|
|
|
Beneficial Ownership | |
|
|
|
|
Number of | |
|
Percentage of | |
|
After Resale of Shares | |
|
|
Number of | |
|
Shares of | |
|
All Shares of | |
|
of Common Stock(1) | |
|
|
Shares of | |
|
Common Stock | |
|
Common Stock | |
|
| |
|
|
Common Stock | |
|
Offered by This | |
|
Beneficially | |
|
Number of | |
|
|
|
|
Beneficially | |
|
Prospectus for | |
|
Owned Before | |
|
Shares of | |
|
|
Selling Stockholder |
|
Owned | |
|
Resale | |
|
Resale(2) | |
|
Common Stock | |
|
Percentage | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Delaware Dividend Income Fund, a Series of Delaware Group Equity
Funds(6)(17)
|
|
|
19,700 |
|
|
|
19,700 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Delaware Investments Dividend and Income Fund,
Inc.(6)(17)
|
|
|
35,000 |
|
|
|
35,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Delaware Investments Global Dividend and Income Fund,
Inc.(6)(17)
|
|
|
9,400 |
|
|
|
9,400 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Dennis M. Langley
|
|
|
50,000 |
|
|
|
50,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
DNB NOR Globalspar
(I)(23)
|
|
|
172,105 |
|
|
|
172,105 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
DNB NOR Globalspar
(II)(23)
|
|
|
481,895 |
|
|
|
481,895 |
|
|
|
1.2 |
% |
|
|
0 |
|
|
|
* |
|
Donald P. and Jean M. McDougall
|
|
|
2,250 |
|
|
|
2,250 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Dorothy S. Rasplicka
|
|
|
2,450 |
|
|
|
2,450 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Douglas Woloshin
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Emergency Services Superannuation Board Global
Smaller Companies
Portfolio(9)
|
|
|
29,300 |
|
|
|
29,300 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Emerson
Electric(4)
|
|
|
45,500 |
|
|
|
45,500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Emily L.
Todd(13)
|
|
|
6,500 |
|
|
|
6,500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Endeavor Capital Offshore Fund, Ltd.
(18)
|
|
|
180,700 |
|
|
|
180,700 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Endeavor Capital Partners,
L.P.(18)
|
|
|
60,700 |
|
|
|
60,700 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Endeavor Capital Partners II, L.P.
(18)
|
|
|
12,300 |
|
|
|
12,300 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Eric J.
Gaaserud(15)
|
|
|
334 |
|
|
|
334 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Evan L. Julber
|
|
|
14,900 |
|
|
|
14,900 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Evelyn Berry Spousal Rollover
IRA(19)
|
|
|
1,525 |
|
|
|
1,525 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
First Financial Fund,
Inc.(9)
|
|
|
419,500 |
|
|
|
419,500 |
|
|
|
1.0 |
% |
|
|
0 |
|
|
|
* |
|
Francesca V. Ozdoba Pension & Profit Sharing
Plan(24)
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Francis and Cynthia
OConnor(15)
|
|
|
7,214 |
|
|
|
7,214 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Fred G. Neuwirth
|
|
|
2,500 |
|
|
|
2,500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Friedman, Billings, Ramsey & Co.,
Inc.(25)
|
|
|
52,388 |
|
|
|
52,388 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
FBR Ashton Income Fund,
LLC(26)
|
|
|
50,000 |
|
|
|
50,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
FBR Ashton Limited
Partnership(26)
|
|
|
500,000 |
|
|
|
500,000 |
|
|
|
1.25 |
% |
|
|
0 |
|
|
|
* |
|
FBR Ashton Special Situations Fund,
L.P.(26)
|
|
|
445,000 |
|
|
|
445,000 |
|
|
|
1.11 |
% |
|
|
0 |
|
|
|
* |
|
Friedman Billings Ramsey Group, Inc.
(26)
|
|
|
1,795,571 |
|
|
|
1,795,571 |
|
|
|
4.5 |
% |
|
|
0 |
|
|
|
* |
|
Frorer Partners,
L.P.(27)
|
|
|
25,000 |
|
|
|
25,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
GLG North American Opportunity Fund
(28)
|
|
|
300,000 |
|
|
|
300,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
GLG Partners (Financials
Fund)(29)
|
|
|
290,000 |
|
|
|
220,000 |
|
|
|
* |
|
|
|
70,000 |
|
|
|
* |
|
GMI Investment
Trust(4)
|
|
|
47,075 |
|
|
|
47,075 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum | |
|
|
|
Beneficial Ownership | |
|
|
|
|
Number of | |
|
Percentage of | |
|
After Resale of Shares | |
|
|
Number of | |
|
Shares of | |
|
All Shares of | |
|
of Common Stock(1) | |
|
|
Shares of | |
|
Common Stock | |
|
Common Stock | |
|
| |
|
|
Common Stock | |
|
Offered by This | |
|
Beneficially | |
|
Number of | |
|
|
|
|
Beneficially | |
|
Prospectus for | |
|
Owned Before | |
|
Shares of | |
|
|
Selling Stockholder |
|
Owned | |
|
Resale | |
|
Resale(2) | |
|
Common Stock | |
|
Percentage | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Goldman Sachs Asset Management
Foundation(19)
|
|
|
3,175 |
|
|
|
3,175 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Goldman Sachs Asset Management, L.P.
(9)
|
|
|
112,000 |
|
|
|
112,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Goldman Sachs JB Were Investment Management Pty.,
Ltd.(9)
|
|
|
3,000 |
|
|
|
3,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Greenlight Capital,
L.P.(30)
|
|
|
165,600 |
|
|
|
165,600 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Greenlight Capital Offshore,
Ltd.(30)
|
|
|
598,000 |
|
|
|
598,000 |
|
|
|
1.5 |
% |
|
|
0 |
|
|
|
* |
|
Greenlight Capital Qualified, L.P.
(30)
|
|
|
469,600 |
|
|
|
469,600 |
|
|
|
1.2 |
% |
|
|
0 |
|
|
|
* |
|
Greenlight Reinsurance,
Ltd.(30)
|
|
|
185,000 |
|
|
|
185,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Guggenheim Portfolio Company III, LLC
(6)(18)
|
|
|
33,100 |
|
|
|
33,100 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Henry Ripp
IRA(31)
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Hillel & Elaine Weinberger
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Indiana State Teachers Retirement Fund
(5)
|
|
|
41,900 |
|
|
|
41,900 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Iprofile US Equity
Pool(5)
|
|
|
1,500 |
|
|
|
1,500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Institutional Benchmarks Master Fund,
Ltd.(32)
|
|
|
3,562 |
|
|
|
3,562 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Invesco Perpetual Asset Management
(33)
|
|
|
220,000 |
|
|
|
220,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Investors of America,
L.P.(34)
|
|
|
301,400 |
|
|
|
301,400 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
J&S Black
F.L.P.(13)
|
|
|
5,900 |
|
|
|
5,900 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
J. Rock
Tonkel, Jr.(15)
|
|
|
1,666 |
|
|
|
1,666 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
JB Were Global Small Companies Fund
(9)
|
|
|
203,500 |
|
|
|
203,500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Jack Sear Revocable
Trust(35)
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Jack Barish
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
James V. Kimsey
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
James Locke and Susan Locke Tenants by their Entirety
|
|
|
8,000 |
|
|
|
8,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
James C.
Neuhauser(15)
|
|
|
1,666 |
|
|
|
1,666 |
|
|
|
|
|
|
|
0 |
|
|
|
* |
|
Jay Rasplicka
|
|
|
5,450 |
|
|
|
5,450 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Jean C. Brokaw Revocable Trust Dated
10/14/1993(13)
|
|
|
1,300 |
|
|
|
1,300 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Jed Hart
|
|
|
2,500 |
|
|
|
2,500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Jeffrey & Stacey
Feinberg(36)
|
|
|
354,000 |
|
|
|
354,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Jeffrey C. Kahn
|
|
|
500 |
|
|
|
500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Jeffry L.
Lacy(13)
|
|
|
1,800 |
|
|
|
1,800 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Jody Irwin, Separate
Property(13)
|
|
|
2,600 |
|
|
|
2,600 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
JLF Partners I,
L.P.(36)
|
|
|
697,901 |
|
|
|
697,901 |
|
|
|
1.7 |
% |
|
|
0 |
|
|
|
* |
|
JLF Partners II,
L.P.(36)
|
|
|
45,279 |
|
|
|
45,279 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
JLF Offshore Deferred
Account(36)
|
|
|
300,000 |
|
|
|
300,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
JLF Offshore Fund,
Ltd.(36)
|
|
|
1,002,120 |
|
|
|
1,002,120 |
|
|
|
2.5 |
% |
|
|
0 |
|
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum | |
|
|
|
Beneficial Ownership | |
|
|
|
|
Number of | |
|
Percentage of | |
|
After Resale of Shares | |
|
|
Number of | |
|
Shares of | |
|
All Shares of | |
|
of Common Stock(1) | |
|
|
Shares of | |
|
Common Stock | |
|
Common Stock | |
|
| |
|
|
Common Stock | |
|
Offered by This | |
|
Beneficially | |
|
Number of | |
|
|
|
|
Beneficially | |
|
Prospectus for | |
|
Owned Before | |
|
Shares of | |
|
|
Selling Stockholder |
|
Owned | |
|
Resale | |
|
Resale(2) | |
|
Common Stock | |
|
Percentage | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
John A. Hartford Foundation
Inc.(19)
|
|
|
11,250 |
|
|
|
11,250 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
John A. Johnston & Robin L. Johnston
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
AG Sav & Inv Plan FBO Jed A.
Hart(7)
|
|
|
2,500 |
|
|
|
2,500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
John Black, IRA
Rollover(13)
|
|
|
3,800 |
|
|
|
3,800 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
John William Edgemond
|
|
|
3,000 |
|
|
|
3,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
John F. Syburg
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Judith S. Roth
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
John M. Weaver
|
|
|
3,000 |
|
|
|
3,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Julian E. Gillespie and Heather A.
Gillespie(15)
|
|
|
4,000 |
|
|
|
4,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Kayne Anderson REIT Fund,
L.P.(6)(37)
|
|
|
125,000 |
|
|
|
125,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Kensington Strategic Realty
Fund(20)
|
|
|
1,336,600 |
|
|
|
1,096,100 |
|
|
|
3.34 |
% |
|
|
240,500 |
|
|
|
* |
|
Kensington Real Estate Securities Fund
(20)
|
|
|
142,900 |
|
|
|
142,900 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Kensington Realty Income Fund, L.P.
(20)
|
|
|
86,100 |
|
|
|
76,600 |
|
|
|
* |
|
|
|
9,500 |
|
|
|
* |
|
Kristin Junkin
IRA(38)
|
|
|
1,500 |
|
|
|
1,500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Lawrence Chimerine
|
|
|
400 |
|
|
|
400 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
LG&E Energy
Corp.(5)
|
|
|
12,300 |
|
|
|
12,300 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Liebro Partners
LLC(39)
|
|
|
3,000 |
|
|
|
3,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Louis Scowcroft Peery Charitable
Foundation(13)
|
|
|
1,800 |
|
|
|
1,800 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Loyola University
Endowment(4)
|
|
|
11,870 |
|
|
|
11,870 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Loyola University
Retirement(4)
|
|
|
11,750 |
|
|
|
11,750 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Lucie Wray
Todd(13)
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Lupa Family Partners,
L.P.(40)
|
|
|
38,910 |
|
|
|
38,910 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Lyxor/ Third Point
Fund Limited(41)
|
|
|
109,128 |
|
|
|
109,128 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
M&M Arbitrage
LLC(32)
|
|
|
19,973 |
|
|
|
19,973 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
M&M Arbitrage Fund II,
LLC(32)
|
|
|
21,520 |
|
|
|
21,520 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
M&M Arbitrage Offshore
Ltd.(32)
|
|
|
53,122 |
|
|
|
53,122 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Magnolia Charitable Trust, Emily L. Todd and David A. Todd,
TTEEs(13)
|
|
|
4,300 |
|
|
|
4,300 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Marcy A. Newberger Revocable Trust
(42)
|
|
|
2,250 |
|
|
|
2,250 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Mary L.G. Theroux, Trustee Mary L.G. Theroux Charitable
Remainder Unitrust
5-14-96(13)
|
|
|
6,200 |
|
|
|
6,200 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Mary L.G. Theroux, TTEE of the Mary L.G. Theroux Revocable
Living Trust U/A
9/30/68(13)
|
|
|
4,800 |
|
|
|
4,800 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Maritime Life Discovery
Fund(9)
|
|
|
40,600 |
|
|
|
40,600 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Mark Bruno and Martha Bruno JTWROS
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum | |
|
|
|
Beneficial Ownership | |
|
|
|
|
Number of | |
|
Percentage of | |
|
After Resale of Shares | |
|
|
Number of | |
|
Shares of | |
|
All Shares of | |
|
of Common Stock(1) | |
|
|
Shares of | |
|
Common Stock | |
|
Common Stock | |
|
| |
|
|
Common Stock | |
|
Offered by This | |
|
Beneficially | |
|
Number of | |
|
|
|
|
Beneficially | |
|
Prospectus for | |
|
Owned Before | |
|
Shares of | |
|
|
Selling Stockholder |
|
Owned | |
|
Resale | |
|
Resale(2) | |
|
Common Stock | |
|
Percentage | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Mark J. Roach
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Martin Hirschhorn
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Massachusetts Pension Reserves Investment Management Board REIT
Portfolio(9)
|
|
|
103,900 |
|
|
|
103,900 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Mavian,
LLC(19)
|
|
|
575 |
|
|
|
575 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Mercury Real Estate Advisors
LLC(43)
|
|
|
34,000 |
|
|
|
34,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Miami University
Endowment(19)
|
|
|
1,675 |
|
|
|
1,675 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Miami University
Foundation(19)
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Michael A. Claggett, IRA
Rollover(13)
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Michael C. Bruno
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Millennium Partners,
L.P.(6)(44)
|
|
|
2,200,000 |
|
|
|
1,500,000 |
|
|
|
5.5 |
% |
|
|
700,000 |
|
|
|
1.8 |
% |
Murray Gorin
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Munder Micro-Cap Equity
Fund(6)(45)
|
|
|
190,600 |
|
|
|
190,600 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Munder Real Estate Equity Investment
Fund(6)(45)
|
|
|
104,400 |
|
|
|
104,400 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Mutual of America Institutional Funds, Inc. All American
Fund(6)(46)
|
|
|
3,940 |
|
|
|
3,940 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Mutual of America Institutional Funds, Inc. Aggressive Equity
Fund(6)(46)
|
|
|
5,740 |
|
|
|
5,740 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Mutual of America Investment Corporation All American
Fund(6)(46)
|
|
|
34,720 |
|
|
|
34,720 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Mutual of America Investment Corporation Aggressive Equity Fund
(6)(46)
|
|
|
130,600 |
|
|
|
130,600 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
NCR Pension Trust-REIT Concentrated Sector
Portfolio(9)
|
|
|
45,400 |
|
|
|
45,400 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Neese Family Equity Investments Ltd.
(19)
|
|
|
2,250 |
|
|
|
2,250 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Nutmeg Partners,
L.P.(6)(7)
|
|
|
60,000 |
|
|
|
60,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Optimix Investment Management Limited
(9)
|
|
|
17,000 |
|
|
|
17,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Pacific Credit
Corp.(11)
|
|
|
8,000 |
|
|
|
8,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Pennant Offshore Partners
Ltd.(47)
|
|
|
374,850 |
|
|
|
374,850 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Pennant Onshore Partners,
L.P.(47)
|
|
|
80,080 |
|
|
|
80,080 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Pennant Onshore Qualified,
L.P.(47)
|
|
|
245,070 |
|
|
|
245,070 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Peter A. Gallagher
|
|
|
2,250 |
|
|
|
2,250 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Peter A. Kirsch
|
|
|
300 |
|
|
|
300 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Phillip
Caplan(15)
|
|
|
3,667 |
|
|
|
3,667 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
PHS Bay Colony Fund,
L.P.(6)(7)
|
|
|
22,000 |
|
|
|
22,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
PHS Patriot Fund,
L.P.(6)(7)
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Pinnacle Oil
Company(48)
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Pitney Bowes Pension
Plan(5)
|
|
|
16,700 |
|
|
|
16,700 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum | |
|
|
|
Beneficial Ownership | |
|
|
|
|
Number of | |
|
Percentage of | |
|
After Resale of Shares | |
|
|
Number of | |
|
Shares of | |
|
All Shares of | |
|
of Common Stock(1) | |
|
|
Shares of | |
|
Common Stock | |
|
Common Stock | |
|
| |
|
|
Common Stock | |
|
Offered by This | |
|
Beneficially | |
|
Number of | |
|
|
|
|
Beneficially | |
|
Prospectus for | |
|
Owned Before | |
|
Shares of | |
|
|
Selling Stockholder |
|
Owned | |
|
Resale | |
|
Resale(2) | |
|
Common Stock | |
|
Percentage | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Producer-Writers
Guild(4)
|
|
|
16,350 |
|
|
|
16,350 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Prudential Real Estate Securities Fund
(9)
|
|
|
36,100 |
|
|
|
36,100 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Public Employees Retirement System of Mississippi-REIT
Portfolio(9)
|
|
|
33,500 |
|
|
|
33,500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
PWB Value Partners,
L.P.(49)
|
|
|
387,666 |
|
|
|
387,666 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Quota Rabbico
N.V.(40)
|
|
|
48,424 |
|
|
|
48,424 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Ralph Pasture Pension
Plan(50)
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Raytheon Master Pension TrustReal Estate Hedged
Portfolio(9)
|
|
|
60,500 |
|
|
|
60,500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
The Real Estate Investment
Trust Series(6)(17)
|
|
|
849,735 |
|
|
|
425,935 |
|
|
|
2.1 |
% |
|
|
423,800 |
|
|
|
1 |
% |
The Real Estate Investment
Trust Portfolio(6)(17)
|
|
|
587,165 |
|
|
|
293,865 |
|
|
|
1.5 |
% |
|
|
293,300 |
|
|
|
* |
|
The Real Estate Investment Trust II
Portfolio(6)(17)
|
|
|
66,800 |
|
|
|
33,900 |
|
|
|
* |
|
|
|
32,900 |
|
|
|
* |
|
Realty Enterprise
Fund LLC(6)(51)
|
|
|
30,000 |
|
|
|
30,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Retail Employees Superannuation Trust
(9)
|
|
|
55,100 |
|
|
|
55,100 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Retirement Plan for Hospital Employees
(5)
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Richard Feinberg
|
|
|
7,500 |
|
|
|
7,500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
RNR II, LP
|
|
|
118,000 |
|
|
|
118,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Robeco Boston Partners All Cap Value
Fund(4)
|
|
|
2,225 |
|
|
|
2,225 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Robeco Boston Partners Small Cap II Value
Fund(4)
|
|
|
195,900 |
|
|
|
87,500 |
|
|
|
* |
|
|
|
108,400 |
|
|
|
* |
|
Robert Feinberg
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Richard A. Kraemer & Gail G. Kraemer TIC
|
|
|
10,000 |
|
|
|
10,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Richard J.
Hendrix(15)
|
|
|
5,333 |
|
|
|
5,333 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Ron Clarke, IRA
Rollover(13)
|
|
|
500 |
|
|
|
500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Royal Capital Management/Seneca Capital Managed
Account(52)
|
|
|
7,900 |
|
|
|
7,900 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Royal Capital Value Fund,
Ltd.(52)
|
|
|
220,700 |
|
|
|
220,700 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Royal Capital Value Fund,
LP(52)
|
|
|
52,200 |
|
|
|
52,200 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Royal Capital Value Fund (QP),
LP(52)
|
|
|
504,200 |
|
|
|
504,200 |
|
|
|
1.3 |
% |
|
|
0 |
|
|
|
* |
|
SAC Strategic Investments,
LLC(18)
|
|
|
73,200 |
|
|
|
73,200 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Sarah P. Fleischer Family
Trust No. 1(53)
|
|
|
2,500 |
|
|
|
2,500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Satellite Fund I,
L.P.(54)
|
|
|
1,770 |
|
|
|
1,770 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Satellite Fund II,
L.P.(54)
|
|
|
23,230 |
|
|
|
23,230 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Savannah
ILA(4)
|
|
|
14,375 |
|
|
|
14,375 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
SCCM Financial
Inc.(55)
|
|
|
3,000 |
|
|
|
3,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum | |
|
|
|
Beneficial Ownership | |
|
|
|
|
Number of | |
|
Percentage of | |
|
After Resale of Shares | |
|
|
Number of | |
|
Shares of | |
|
All Shares of | |
|
of Common Stock(1) | |
|
|
Shares of | |
|
Common Stock | |
|
Common Stock | |
|
| |
|
|
Common Stock | |
|
Offered by This | |
|
Beneficially | |
|
Number of | |
|
|
|
|
Beneficially | |
|
Prospectus for | |
|
Owned Before | |
|
Shares of | |
|
|
Selling Stockholder |
|
Owned | |
|
Resale | |
|
Resale(2) | |
|
Common Stock | |
|
Percentage | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
SEI Institutional Trust Small Cap
Fund(9)
|
|
|
55,500 |
|
|
|
55,500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
SEI Institutional Investments Trust Small Cap
Fund(9)
|
|
|
128,000 |
|
|
|
128,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
SEI Institutional Managed Trust Real Estate
Fund(9)
|
|
|
11,400 |
|
|
|
11,400 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
SEI Institutional Managed Trust Small Cap Growth
Fund(9)
|
|
|
169,000 |
|
|
|
169,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
SEI Institutional Managed Trust Small Cap Value
Fund(9)
|
|
|
39,400 |
|
|
|
39,400 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
SEI US Small Companies
Fund(9)
|
|
|
14,700 |
|
|
|
14,700 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Seligman Global Fund Series, Inc.-Global Smaller Companies
Fund(9)
|
|
|
73,200 |
|
|
|
73,200 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Sisters of St. Joseph
Carondelet(4)
|
|
|
6,675 |
|
|
|
6,675 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Small Capitalization Equity
Fund(5)
|
|
|
9,000 |
|
|
|
9,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Small Capitalization Equity Fund Collective
Trust(5)
|
|
|
41,600 |
|
|
|
41,600 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
South Ferry #2,
LP(56)
|
|
|
300,000 |
|
|
|
300,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Steven H.
Goldberg(15)
|
|
|
2,214 |
|
|
|
2,214 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Steven Rothstein
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Steven Vartan
|
|
|
500 |
|
|
|
500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
SVS Asset Management,
LLC(19)
|
|
|
1,275 |
|
|
|
1,275 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
TALVEST Global Small Cap
Fund(9)
|
|
|
24,400 |
|
|
|
24,400 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Telstra Super Pty LTD-Super Global Smaller
Companies(9)
|
|
|
35,600 |
|
|
|
35,600 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Terrebonne Investors (Bermuda) L.P.
(9)
|
|
|
21,300 |
|
|
|
21,300 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Terrebonne Partners,
L.P.(9)
|
|
|
18,600 |
|
|
|
18,600 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Texas County and District Retirement
System-REIT(9)
|
|
|
182,300 |
|
|
|
182,300 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
The Church Pension Fund Real Estate Securities
Portfolio(9)
|
|
|
30,900 |
|
|
|
30,900 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Third Point Partners,
L.P.(41)
|
|
|
174,945 |
|
|
|
174,945 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Third Point Ultra,
Ltd.(41)
|
|
|
48,634 |
|
|
|
48,634 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Third Point Offshore
Fund Ltd.(41)
|
|
|
357,208 |
|
|
|
357,208 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Third Point Resources
Ltd.(41)
|
|
|
32,320 |
|
|
|
32,320 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Third Point Resources
L.P.(41)
|
|
|
27,765 |
|
|
|
27,765 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Thomas B. Parsons
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Timothy B. Matz and Jane F. Matz
JTWROS(6)
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Timothy P.
OBrien(15)
|
|
|
3,334 |
|
|
|
3,334 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Thomas D. & Elizabeth G. Eckert
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Tombstone Limited
Partnership(57)
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
United Capital Management,
Inc.(58)
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum | |
|
|
|
Beneficial Ownership | |
|
|
|
|
Number of | |
|
Percentage of | |
|
After Resale of Shares | |
|
|
Number of | |
|
Shares of | |
|
All Shares of | |
|
of Common Stock(1) | |
|
|
Shares of | |
|
Common Stock | |
|
Common Stock | |
|
| |
|
|
Common Stock | |
|
Offered by This | |
|
Beneficially | |
|
Number of | |
|
|
|
|
Beneficially | |
|
Prospectus for | |
|
Owned Before | |
|
Shares of | |
|
|
Selling Stockholder |
|
Owned | |
|
Resale | |
|
Resale(2) | |
|
Common Stock | |
|
Percentage | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
United Congregations
Mesora(59)
|
|
|
100,000 |
|
|
|
100,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
University of
Delaware(9)
|
|
|
18,600 |
|
|
|
18,600 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
University of Richmond
Endowment(4)
|
|
|
14,725 |
|
|
|
14,725 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
University of Southern California
Endowment(4)
|
|
|
32,375 |
|
|
|
32,375 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Vantagepoint Aggressive Opportunities
Fund(9)
|
|
|
176,000 |
|
|
|
176,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Verizon Investment Management Corp.
(4)
|
|
|
174,955 |
|
|
|
172,555 |
|
|
|
* |
|
|
|
2,400 |
|
|
|
* |
|
Vestal Venture
Capital(60)
|
|
|
63,000 |
|
|
|
63,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Wellington Management Portfolios (Dublin)-Global Smaller
Companies
Equity(9)
|
|
|
36,000 |
|
|
|
36,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Wichita Retirement
Systems(5)
|
|
|
9,900 |
|
|
|
9,900 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Wildlife Conservation
Society(4)
|
|
|
8,150 |
|
|
|
8,150 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
William A. Hazel Revocable
Trust(61)
|
|
|
4,500 |
|
|
|
4,500 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
William & Flora Hewlette Foundation-Real Estate
Securities
Portfolio(9)
|
|
|
23,800 |
|
|
|
23,800 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
William S. McLeod BSSC Master Def. Contrib. P/ S
Plan(62)
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Wray & Todd Interests,
Ltd.(13)
|
|
|
15,000 |
|
|
|
15,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
WTC-CIF Real Asset
Portfolio(9)
|
|
|
49,200 |
|
|
|
49,200 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
WTC-CTF Real Asset
Portfolio(9)
|
|
|
153,600 |
|
|
|
153,600 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Y&H Soda
Foundation(19)
|
|
|
5,475 |
|
|
|
5,475 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Yaupon
Fund LTD(63)
|
|
|
5,042 |
|
|
|
5,042 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Yaupon Partners
LP(63)
|
|
|
19,958 |
|
|
|
19,958 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
York Capital Management,
L.P.(64)
|
|
|
24,452 |
|
|
|
24,452 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
York Credit Opportunities Fund, L.P.
(64)
|
|
|
90,000 |
|
|
|
90,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
York Investment
Limited(64)
|
|
|
195,548 |
|
|
|
195,548 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Subtotal:
|
|
|
24,358,332 |
|
|
|
22,477,532 |
|
|
|
60 |
% |
|
|
1,880,800 |
|
|
|
4.7 |
% |
Affiliated Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles Carpenter and Laura L. Pitts
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Edward K.
Aldag, Jr.(65)
|
|
|
499,022 |
|
|
|
281,217 |
|
|
|
* |
|
|
|
217,805 |
|
|
|
* |
|
Emmett E.
McLean(66)
|
|
|
199,022 |
|
|
|
105,207 |
|
|
|
* |
|
|
|
93,815 |
|
|
|
* |
|
G. Steven
Dawson(67)
|
|
|
50,833 |
|
|
|
20,000 |
|
|
|
* |
|
|
|
30,833 |
|
|
|
* |
|
Keith T. Ghezzi
|
|
|
5,000 |
|
|
|
5,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Michael G.
Stewart(68)
|
|
|
50,000 |
|
|
|
30,000 |
|
|
|
* |
|
|
|
20,000 |
|
|
|
* |
|
Patricia W. Green
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
Richard S. Hamner IRA Rollover
(69)
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
* |
|
R. Steven and Glenda R. Hamner JTWROS
(69)
|
|
|
199,022 |
|
|
|
71,804 |
|
|
|
* |
|
|
|
127,218 |
|
|
|
* |
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum | |
|
|
|
Beneficial Ownership | |
|
|
|
|
Number of | |
|
Percentage of | |
|
After Resale of Shares | |
|
|
Number of | |
|
Shares of | |
|
All Shares of | |
|
of Common Stock(1) | |
|
|
Shares of | |
|
Common Stock | |
|
Common Stock | |
|
| |
|
|
Common Stock | |
|
Offered by This | |
|
Beneficially | |
|
Number of | |
|
|
|
|
Beneficially | |
|
Prospectus for | |
|
Owned Before | |
|
Shares of | |
|
|
Selling Stockholder |
|
Owned | |
|
Resale | |
|
Resale(2) | |
|
Common Stock | |
|
Percentage | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Robert E. Holmes,
PhD.(67)
|
|
|
31,833 |
|
|
|
1,000 |
|
|
|
* |
|
|
|
30,833 |
|
|
|
* |
|
William G.
McKenzie(70)
|
|
|
150,022 |
|
|
|
97,680 |
|
|
|
* |
|
|
|
52,342 |
|
|
|
* |
|
Subtotal:
|
|
|
1,189,754 |
|
|
|
616,908 |
|
|
|
1.5 |
% |
|
|
572,846 |
|
|
|
1.43 |
% |
Other Selling
Stockholders(71)
|
|
|
(69 |
) |
|
|
2,316,599 |
|
|
|
6.7 |
% |
|
|
0 |
|
|
|
* |
|
Total:
|
|
|
25,548,086 |
|
|
|
25,411,039 |
|
|
|
63 |
% |
|
|
2,453,646 |
|
|
|
6.1 |
% |
* Holdings
represent less than 1% of all shares of common stock outstanding.
|
|
|
|
(1) |
Assumes that each named selling stockholder sells all of the
shares of our common stock that it holds that are covered by
this prospectus and neither acquires nor disposes of any other
shares of common stock, or right to purchase other shares of
common stock subsequent to the date as of which it provided
information to us regarding its holdings. Because the selling
stockholders are not obligated to sell all or any portion of the
shares of our common stock shown as offered by them, we cannot
estimate the actual number of shares of our common stock that
will be held by any selling stockholder upon completion of this
offering. |
|
|
(2) |
Based on 39,969,065 shares of common stock outstanding as
of December 31, 2005. |
|
|
(3) |
Except as otherwise indicated in Note 14, holders of our
shares of common stock that are unaffiliated with us were
subject to lock-up
agreements that expired on September 6, 2005. |
|
|
(4) |
This selling stockholder represented to us that Boston Partners
Asset Management, LLC serves as its investment adviser, and that
Harry Rosenbluth and David Dabora exercise voting and investment
power over these shares. |
|
|
(5) |
This selling stockholder represented to us that ING Investment
Management Co. has sole voting power and sole investment power
over the shares of common stock held by this stockholder, and
that William E. Bartol is a Vice President of ING
Investment Management Co., and in that role exercises voting and
investment power over the shares of common stock held by this
stockholder. |
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(6) |
This selling stockholder is an affiliate of a broker-dealer. The
selling stockholder represented that it purchased the shares in
the ordinary course of business and, at the time of purchase of
the shares to be resold, the selling stockholder did not have
any agreement or understandings, directly, or indirectly, with
any person to distribute the shares. |
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(7) |
This selling stockholder represented to us that Angelo,
Gordon & Co., L.P. serves as its investment manager,
and that John M. Angelo and Michael L. Gordon, as Partners of
Angelo, Gordon & Co., L.P. have voting and investment
authority over these shares. |
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(8) |
This selling stockholder represented to us that Atlas Capital
Management, L.P. is the general partner of Atlas Capital
(QP) L.P. Atlas Capital, LP. and Atlas Capital Offshore
Fund, Ltd. are the general partners of Atlas Capital Master
Fund, L.P. The shares of common stock held by Atlas Capital
(QP) L.P. and Atlas Capital Master Fund, L.P. are being
presented on a group basis. Robert Alpert exercises voting and
investment power over these shares. |
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(9) |
This selling stockholder represented to us that Wellington
Management Company, LLP is an investment adviser registered
under the Investment Advisers Act of 1940, as amended
(Wellington), and that in its capacity as an
investment adviser, Wellington is deemed to share beneficial
ownership over the shares of common stock held by this
stockholder. |
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(10) |
This selling stockholder represented to us that Axia Capital
Management serves as its investment manager, and that Raymond
Garea, as Chief Executive Officer of Axia Capital Management,
has voting and investment authority over these shares. |
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(11) |
This selling stockholder represented to us that Bel Air
Investment Advisors LLC has sole voting power and sole
investment power with respect to the shares of common stock held
by this stockholder, and that Michael Powers is a Portfolio
Manager of Bel Air Investment Advisors LLC, and in that role
exercises voting and investment power over the shares of common
stock held by this stockholder. |
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(12) |
This selling stockholder represented to us that Bert Fingerhut
has voting and investment authority over these shares. |
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(13) |
This selling stockholder represented to us that Roger E. King,
President of King Investment Advisors, Inc. is the investment
advisor for this stockholder and has voting power over the
shares of common stock held by this stockholder. |
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(14) |
This selling stockholder represented to us that Bonnie Paley
Minzer has voting and investment authority over these shares. |
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(15) |
This selling stockholder is an employee of Friedman, Billings,
Ramsey & Co., Inc., a broker-dealer. The selling stockholder
represented to us that it obtained the shares in the ordinary
course of business and, at the time of purchase of the shares to
be resold, the selling stockholder did not have any agreement or
understandings, directly, or indirectly, with any person to
distribute the shares. Friedman, Billings, Ramsey &
Co., Inc. served as the initial purchaser and placement agent
for our April 2004 private placement. In addition, Friedman,
Billings, Ramsey & Co., Inc. served as the sole
book-running manager of our initial public offering. |
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(16) |
This selling stockholder represented to us that Caroline Hicks
has voting and investment authority over these shares. |
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(17) |
This selling stockholder represented to us that Damon Andres has
investment discretion and voting authority over these shares. |
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(18) |
This selling stockholder represented to us that Endeavour
Capital Advisors has investment discretion over the shares of
common stock held by this stockholder, and that Laurence Austin
and Mitchell Katz exercise voting and investment power over the
shares of common stock held by this stockholder. |
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(19) |
This selling stockholder represented to us that Wasatch Advisors
has sole voting power and sole investment power over the shares
of common stock held by this stockholder, and that John Mazanec
is a Portfolio Manager of Wasatch Advisors, and in that role
exercises voting and investment power over the shares of commons
stock held by this stockholder. |
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(20) |
This selling stockholder represented to us that John Kramer has
voting and investment authority over these shares. |
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(21) |
This selling stockholder represented to us that Dennis Hemme has
voting and investment authority over these shares. |
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(22) |
This selling stockholder represented to us that Camille Cotran
has voting and investment authority over these shares. |
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(23) |
This selling stockholder represented to us that Oyvind Birkeland
has voting authority over these shares, and that Espen Lundstrom
and Kjell Morten Hamre have investment authority over these
shares. |
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(24) |
This selling stockholder represented to us that Francesca V.
Ozdoba has voting and investment authority over these shares. |
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(25) |
This selling stockholder is a registered broker-dealer, and
received these shares as compensation for financial advisory
services. Friedman, Billings, Ramsey & Co., Inc. served
as the initial purchaser and placement agent for our April 2004
private placement. In addition, Friedman, Billings,
Ramsey & Co., Inc. served as the sole book-running
manager of our initial public offering. Eric Billings is the
Chairman and Chief Executive Officer of Friedman, Billings,
Ramsey & Co., and in that role exercises voting and
investment power over the shares of common stock held by this
stockholder. |
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(26) |
This selling stockholder is an affiliate of a broker-dealer. The
selling stockholder represented to us that it purchased the
shares in the ordinary course of business and, at the time of
purchase of the shares to be resold, the selling stockholder did
not have any agreement or understandings, directly or
indirectly, with any person to distribute the shares. Eric
Billings is the Chairman and Chief Executive Officer of Friedman
Billings Ramsey Group, Inc., and in that role exercises voting
and investment power over the shares of common stock held by
this stockholder. |
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(27) |
This selling stockholder represented to us that Peter Frorer is
the general partner of Frorer Partners, L.P., and has sole
voting power and sole investment power with respect to the
shares of common stock held by Frorer Partners, L.P. |
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(28) |
This selling stockholder represented to us that John Gisond has
voting and investment authority over these shares. |
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(29) |
This selling stockholder represented to us that Robert Murphy
has voting and investment authority over these shares. |
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(30) |
This selling stockholder represented to us that Greenlight
Capital, Inc. serves as its investment manager, and that David
Einhorn, as President of Greenlight Capital, Inc., has voting
and investment authority over these shares. |
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(31) |
This selling stockholder represented to us that Henry Ripp has
voting and investment authority over these shares. |
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(32) |
This selling stockholder represented to us that sole voting and
investment power is held by Mangan & McColl Partners, LLC,
and that John F. Mangan, Jr. role exercises voting and
investment power over the shares of common stock held by this
stockholder. |
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(33) |
This selling stockholder represented to us that Ian Brady has
voting and investment authority over these shares. |
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(34) |
This selling stockholder represented to us that James Dierberg
has voting and investment authority over these shares. |
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(35) |
This selling stockholder represented to us that Jack Sear has
voting and investment authority over these shares. |
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(36) |
This selling stockholder represented to us that JLF Asset
Management, L.L.C. serves as the management company and/or
investment manager to JLF Partners I, L.P., JLF
Partners II, L.P. JLF Offshore Deferred Account and JLF
Offshore Fund, Ltd. Jeffrey L. Feinberg is the managing member
of JLF Asset Management, L.L.C., and has voting and investment
authority over these shares. |
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(37) |
This selling stockholder represented to us that Richard Kayne
has voting and investment authority over these shares. |
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(38) |
This selling stockholder represented to us that Kristen Junkin
has voting and investment authority over these shares. |
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(39) |
This selling stockholder represented to us that Ronald Liebowitz
has voting and investment authority over these shares. |
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(40) |
This selling stockholder represented to us that
Blavin & Company, Inc. has sole voting power and sole
investment power over the shares of common stock held by this
stockholder. Paul Blavin is the Chief Executive Officer of
Blavin & Company, Inc., and in that role exercises
voting and investment power over the shares of common stock held
by this stockholder. |
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(41) |
This selling stockholder represented to us that Third Point LLC
is the investment manager for Third Point Partners, L.P., Third
Point Ultra, Ltd., Third Point Offshore Fund Ltd., Third
Point Resources Ltd., Third Point Resources, L.P. and Lyxor/
Third Point Fund Limited. Daniel S. Loeb is the
Managing Member of Third Point LLC, and in that role exercises
voting and investment power over the shares of common stock held
by this stockholder. |
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(42) |
This selling stockholder represented to us that Marcy A.
Newberger has voting and investment authority over these shares. |
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(43) |
This selling stockholder represented to us that David R. Jarvis
and Malcolm F. MacLean have voting and investment authority over
these shares. |
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(44) |
This selling stockholder represented to us that the
2,200,000 shares of common stock beneficially owned by this
stockholder includes 700,000 shares of common stock held by
its affiliate, Millenco, L.P. The general partner of this
stockholder is Millennium Management, L.L.C., a Delaware limited
liability company (Millennium Management).
Millennium Management may be deemed to have voting control and
investment discretion over securities owned by this stockholder.
Israel A. Englander is the managing member of Millennium
Management, and exercises voting and investment authority over
these shares, and may be deemed to be the beneficial owner of
any shares deemed to be owned by Millennium Management. This
stockholder has advised us that the foregoing should not be
construed as an admission by either Millennium Management or
Mr. Englander as to beneficial ownership of the shares of
common stock owned by this stockholder. |
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(45) |
This selling stockholder represented to us that Munder Capital
Management, an affiliate of Comerica Securities, Inc., is the
investment adviser to Munder Real Estate Equity Investment Fund
and Munder Micro-Cap Equity Fund. The Munder Capital Management
Proxy Committee exercises voting and investment authority over
these shares. The Munder Capital Management Proxy Committee
consists of the following members: Mary Ann Shumaker
(non-voting), Andrea Leistra, Debbie Leich, Thomas Mudie and
Stephen Shenkenberg (non-voting). |
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(46) |
This selling stockholder represented to us that Stephen Rich has
voting and investment authority over these shares. |
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(47) |
This selling stockholder represented to us that Pennant Capital
Management, LLC serves as the management company to Pennant
Onshore Partners, L.P., Pennant Offshore Partners, Ltd, and
Pennant Onshore Qualified, L.P. Alan Fournier is the Managing
Member of Pennant Capital Management, and in that role exercises
voting and investment power over the shares of common stock held
by this stockholder. |
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(48) |
This selling stockholder represented to us that Guy Dove has
voting and investment authority over these shares. |
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(49) |
This selling stockholder represented to us that Michael Spalter
has voting and investment authority over these shares. |
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(50) |
This selling stockholder represented to us that Ralph Pasture
has voting and investment authority over these shares. |
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(51) |
This selling stockholder represented to us that John Wells has
voting and investment authority over these shares. |
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(52) |
This selling stockholder represented to us that Yale M. Fergang
has voting and investment authority over these shares. |
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(53) |
This selling stockholder represented to us that James S.
Fleischer has voting and investment authority over these shares. |
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(54) |
This selling stockholder represented to us that the General
Partner of each of Satellite Fund I, L.P. and Satellite Fund II,
L.P. is Satellite Advisors, L.L.C. (Advisors). The
senior members of Advisors are Lief Rosenblatt, Gabriel
Nechamkin and Mark Sonnino, each have voting and investment
authority over the shares held by this selling stockholder. Each
of Advisors and Messrs. Rosenblatt, Nechamkin and Sonnino
disclaim beneficial ownership of these shares.. |
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(55) |
This selling stockholder represented to us that Robert Slayton
has voting and investment authority over these shares. |
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(56) |
This selling stockholder represented to us that Morris Wolfson
has voting and investment authority over these shares. |
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(57) |
This selling stockholder represented to us that Nathan Brand has
voting and investment authority over these shares. |
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(58) |
This selling stockholder represented to us that James A. Lustig
has voting and investment authority over these shares. |
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(59) |
This selling stockholder represented to us that Aaron Wolfson
has voting and investment authority over these shares. |
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(60) |
This selling stockholder represented to us that Allan R. Lyons
has voting and investment authority over these shares. |
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(61) |
This selling stockholder represented to us that William A. Hazel
has voting and investment authority over these shares. |
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(62) |
This selling stockholder represented to us that William S.
McLeod has voting and investment authority over these shares. |
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(63) |
This selling stockholder represented to us that Robert Lietzow
has voting and investment authority over these shares. |
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(64) |
This selling stockholder represented to us that James G. Dinen
has voting and investment authority over these shares. |
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(65) |
Mr. Aldag is our Chairman, President and Chief Executive
Officer. |
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(66) |
Mr. McLean is our Executive Vice President, Chief Financial
Officer and Treasurer. |
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(67) |
Mr. Dawson and Mr. Holmes are members of our board of
directors. |
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(68) |
Mr. Stewart is our Executive Vice President, General
Counsel and Secretary. |
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(69) |
Mr. Hamner is our Executive Vice President and Chief
Financial Officer and a member of our board of directors. |
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(70) |
Mr. McKenzie is our Vice Chairman of the Board of Directors. |
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(71) |
The number of shares of common stock included in these columns
represents shares of common stock owned by stockholders who have
not yet been specifically identified. Only those selling
stockholders specifically identified above may sell their shares
pursuant to this prospectus. Information concerning other
stockholders who wish to become selling stockholders will be set
forth in post-effective amendments to the registration statement
of which this prospectus forms a part from time to time, if and
when required. |
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REGISTRATION RIGHTS AGREEMENT
At the time of our April 2004 private placement, we entered into
a registration rights agreement with Friedman, Billings, Ramsey
& Co., Inc. and various holders of our common stock. The
summary of the registration rights agreement is subject to and
qualified in its entirety by reference to the registration
rights agreement, a copy of which is filed as an exhibit to the
registration statement of which this prospectus is a part. See
Where You Can Find More Information.
Piggy-Back Rights. Under the terms of the registration
rights agreement, if we proposed to file a registration
statement providing for the initial public offering of shares of
our common stock, the holders of our common stock purchased in
the April 2004 private placement had a right to include their
shares in that registration statement and participate in the
initial public offering, subject to certain limitations.
Pursuant to the registration statement relating to our initial
public offering, we registered, and purchasers in our April 2004
private placement sold, 701,823 shares of our common stock
held by them.
Demand Rights. Pursuant to the registration rights
agreement, we also agreed for the benefit of the holders of
shares of common stock sold in our April 2004 private placement
or issued to Friedman, Billings, Ramsey & Co., Inc. in
connection with our April 2004 private placement, that we would,
at our expense, file with the SEC the resale registration
statement of which this prospectus is a part registering
24,859,131 shares of our common stock issued in connection
with our April 2004 private placement. Pursuant to the
registration rights agreement, we are required to pay most
expenses in connection with the registration of the shares of
common stock purchased in the April 2004 private placement. In
addition, we will reimburse selling stockholders in an aggregate
amount of up to $50,000, for the fees and expenses of one
counsel and one accounting firm, as selected by Friedman,
Billings, Ramsey & Co., Inc. for the selling
stockholders to review this registration statement. Each selling
stockholder participating in this offering will bear a
proportionate share based on the total number of shares of
common stock sold in this offering of all discounts and
commissions payable to the underwriters, all transfer taxes and
transfer fees and any other expense of the selling stockholders
not allocated to us in the registration rights agreement.
In addition, we agreed to use our reasonable best efforts to
cause this resale registration statement to become effective
under the Securities Act as promptly as practicable after the
filing and to maintain this resale registration statement
continuously effective under the Securities Act until the first
to occur of (1) such time as all of the shares of common
stock covered by this resale registration statement have been
128
sold pursuant to the registration statement or pursuant to
Rule 144 (or any successor or analogous rule) under the
Securities Act, (2) such time as all of the common stock
not held by affiliates of us, and covered by this resale
registration statement, are eligible for sale pursuant to
Rule 144(k) (or any successor or analogous rule) under the
Securities Act, (3) such time as the shares of common stock
have been otherwise transferred, new certificates for them not
bearing a legend restricting further transfer have been
delivered by us and subsequent public distribution of such
shares does not require registration, or (4) the second
annual anniversary of the initial effective date of this resale
registration statement.
Notwithstanding the foregoing, we will be permitted, under
limited circumstances, to suspend the use, from time to time, of
this prospectus, and therefore suspend sales under the
registration statement, for certain periods, referred to as
blackout periods, if a majority of the independent
directors of our board, in good faith, determines that we are in
compliance with the terms of the registration rights agreement,
that it is in our best interest to suspend the use of the
registration statement, and:
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that the offer or sale of any registrable shares would
materially impede, delay or interfere with any material proposed
acquisition, merger, tender offer, business combination,
corporate reorganization, consolidation or similar material
transaction; |
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after the advice of counsel, sale of the registrable shares
would require disclosure of non-public material information not
otherwise required to be disclosed under applicable law; and |
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disclosure would have a material adverse effect on us or on our
ability to close the applicable transaction. |
In addition, we may effect a blackout if a majority of
independent directors of our board, in good faith, determines
that we are in compliance with the terms of the registration
rights agreement, that it is in our best interest to suspend the
use of the registration statement, and, after advice of counsel,
that it is required by law, rule or regulation to supplement the
registration statement or file a post-effective amendment for
the purposes of:
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including in the registration statement any prospectus required
under Section 10(a)(3) of the Securities Act; |
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reflecting any facts or events arising after the effective date
of the registration statement that represents a fundamental
change in information set forth therein; or |
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including any material information with respect to the plan of
distribution or change to the plan of distribution not set forth
therein. |
The cumulative blackout periods in any 12 month period
commencing on the closing of the offering may not exceed an
aggregate of 90 days and furthermore may not exceed
60 days in any 90 day period. We may not institute a
blackout period more than three times in any 12 month
period. Upon the occurrence of any blackout period, we are to
use our reasonable best efforts to take all action necessary to
promptly permit resumed use of the registration statement.
If, among other matters, we fail to maintain the effectiveness
of this resale registration statement, or, if our board of
directors suspends the effectiveness of the resale registration
statement in excess of the permitted blackout periods described
above, the holders of registrable shares (other than our
affiliates) will be entitled to receive liquidated damages from
us for the period during which such failures or excess
suspensions are continuing. The liquidated damages will accrue
daily during the first 90 days of any such period at a rate
of $0.25 per registrable share per year and will escalate
by $0.25 per registrable share per year at the end of each
90 day period within any such period up to a maximum rate
of $1.00 per registrable share per year. The liquidated
damages will be payable quarterly, in arrears within ten days
after the end of each applicable quarter.
In connection with the registration of the shares sold in the
April 2004 private placement, we agreed to use our reasonable
best efforts to list our common stock on the NYSE or the Nasdaq
National Market and thereafter to maintain the listing.
129
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Formation
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 certain
of our founders in December 2002. In connection with our
formation, we issued our founders 1,630,435 shares of our
common stock in exchange for nominal cash consideration and the
membership interests of Medical Properties Trust, LLC. Upon
completion of our private placement in April 2004,
1,108,527 shares of the 1,630,435 shares of common
stock held by our founders were redeemed for nominal value and
they now collectively hold 557,908 shares of our common
stock, including shares purchased in our April 2004 private
placement.
James P. Bennett was formerly an owner, officer, director and
consultant of the companys predecessor, Medical Properties
Trust, LLC, but has not been affiliated with us since August
2003. Our predecessor had a consulting agreement with
Mr. Bennett pursuant to which he was to be paid a monthly
consulting fee, certain fringe benefits and, under certain
circumstances, a fee based upon the completion of specified
acquisition transactions. We believe we owe Mr. Bennett
$411,238. Mr. Bennett disputes this amount and has notified
us that he believes he is entitled to be paid consulting fees of
approximately $1.6 million. On August 26, 2005,
Mr. Bennett filed a lawsuit against us, certain of our
directors, Friedman, Billings, Ramsey & Co., Inc. and KPMG
LLP in the Circuit Court of Jefferson County, Alabama, alleging,
among other things, breach of contract and tortious interference
with a contract or business relationship, and demanding
compensatory and punitive damages in an unspecified amount. We
intend to vigorously defend against this lawsuit.
From time to time, we may acquire or develop facilities in
transactions involving prospective tenants in which our
directors or executive officers have an interest. In accordance
with our written conflicts of interest policy, we do not intend
to engage in these transactions without the approval of a
majority of our disinterested directors.
Our Structure
Conflicts of interest could arise in the future as a result of
the relationships between us and our affiliates, on the one
hand, and our operating partnership or any limited partner
thereof, on the other. Our directors and officers have duties to
our company and our stockholders under applicable Maryland law
in connection with their management of our company. At the same
time, we, through our wholly owned subsidiary, have fiduciary
duties, as a general partner, to our operating partnership and
to the limited partners under Delaware law in connection with
the management of our operating partnership. Our duties, through
our wholly owned subsidiary, as a general partner to our
operating partnership and its partners may come into conflict
with the duties of our directors and officers to our company and
our stockholders. The partnership agreement of our operating
partnership requires us to resolve such conflicts in favor of
our stockholders.
Pursuant to Maryland law, a contract or other transaction
between us and a director or between us and any other
corporation or other entity in which any of our directors is a
director or has a material financial interest is not void or
voidable solely on the grounds of such common directorship or
interest, the presence of such director at the meeting at which
the contract or transaction is authorized, approved or ratified
or the counting of the directors vote in favor thereof.
However, such transaction will not be void or voidable only if:
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the material facts relating to the common directorship or
interest and as to the transaction are disclosed to our board of
directors or a committee of our board, and our board or
committee authorizes, approves or ratifies the transaction or
contract by the affirmative vote of a majority of disinterested
directors, even if the disinterested directors constitute less
than a quorum; |
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the material facts relating to the common directorship or
interest and as to the transaction are disclosed to our
stockholders entitled to vote thereon, and the transaction is
authorized, approved or ratified by a majority of the votes cast
by the stockholders entitled to vote (other than the votes of
shares owned of record or beneficially by the interested
director); or |
130
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the transaction or contract is fair and reasonable to us at the
time it is authorized, ratified or approved. |
Furthermore, under Delaware law, where our operating partnership
is formed, we, acting through the general partner, have a
fiduciary duty to our operating partnership and, consequently,
such transactions are also subject to the duties of care and
loyalty that we, as a general partner, owe to limited partners
in our operating partnership (to the extent such duties have not
been eliminated pursuant to the terms of the partnership
agreement). Where appropriate, in the judgment of the
disinterested directors, our board of directors may obtain a
fairness opinion, or engage independent counsel to represent the
interests of non-affiliated security holders, although our board
of directors will have no obligation to do so.
Relationship with One of the Underwriters of Our Initial
Public Offering
On November 13, 2003, we entered into an engagement letter
agreement with Friedman, Billings, Ramsey & Co., Inc.,
one of the underwriters of our initial public offering. The
engagement letter gives Friedman, Billings, Ramsey & Co.,
Inc. the right to serve in the following capacities until April
2006:
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as our financial advisor with respect to any future mergers,
acquisitions or other business combinations; |
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as the sole book running and lead underwriter or sole placement
agent in connection with any public or private offering of
equity or any public offering of debt securities; and |
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as our agent in connection with the exercise of our warrants or
options, other than warrants or options held by management or by
Friedman, Billings, Ramsey & Co., Inc. |
On March 31, 2004, we entered into a Purchase/Placement
Agreement with Friedman, Billings, Ramsey & Co., Inc.,
pursuant to which Friedman, Billings, Ramsey & Co.,
Inc. acted as initial purchaser and sole placement agent for our
April 2004 private placement and received aggregate initial
purchaser discounts and placement fees of $17.7 million. In
addition, we issued 260,954 shares of our common stock to
Friedman, Billings, Ramsey & Co., Inc. as payment for
financial advisory services. As of November 30, 2005,
Friedman Billings Ramsey Group, Inc., an affiliate of Friedman,
Billings, Ramsey & Co., Inc., beneficially owned,
directly or indirectly through affiliates, 1,897,959 shares
of our common stock or approximately 4.75% of our outstanding
common stock.
Other Relationships
In December 2004 and January 2005, the law firm of Locke,
Liddell & Sapp LLP, of which Mr. Goolsby is a partner,
provided certain legal services to our Ethics, Nominating and
Corporate Governance Committee and received legal fees of
approximately $14,000. This amount is not material to Locke,
Liddell & Sapp LLP, Mr. Goolsby or us.
131
INVESTMENT POLICIES AND POLICIES
WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of our investment policies and our
policies with respect to certain other activities, including
financing matters and conflicts of interest. These policies may
be amended or revised from time to time at the discretion of our
board of directors, without a vote of our stockholders. Any
change to any of these policies by our board of directors,
however, would be made only after a thorough review and analysis
of that change, in light of then-existing business and other
circumstances, and then only if, in the exercise of its business
judgment, our board of directors believes that it is advisable
to do so in our and our stockholders best interests. We
cannot assure you that our investment objectives will be
attained.
Investments in Real Estate or Interests in Real Estate
We conduct our investment activities through our operating
partnership and other subsidiaries. Our policy is to acquire or
develop assets primarily for current income generation. In
general, our investment strategy consists of the following
elements:
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Integral Healthcare Real Estate: We acquire and develop
net-leased healthcare facilities providing
state-of-the-art
healthcare services. In our experience, healthcare service
providers, including physicians and hospital operating
companies, choose to remain in an established location for
relatively long periods since changing the location of their
physical facilities does not assure that other critical
components of the healthcare delivery system, such as laboratory
support, access to specialized equipment, patient referral
sources, nursing and other professional support, and patient
convenience, will continue to be available at the same level of
quality and efficiency. Consequently, we believe market
conditions will remain favorable for long-term net-leased
healthcare facilities, and we do not presently expect high
levels of tenant turnover. Moreover, we believe that our
partnering approach will afford us the opportunity to play an
integral role in the strategic planning process for the
financing of replacement facilities and the development of
alternative uses for existing facilities. |
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Net-lease Strategy: Our healthcare facilities are leased
to healthcare operators pursuant to long-term net-lease
agreements under which our tenants are responsible for virtually
all costs of occupancy, including property taxes, utilities,
insurance and maintenance. We believe an important investment
consideration is that our leases to healthcare operators provide
a means for us to participate in the anticipated growth of the
healthcare sector of the United States economy. Our leases
generally provide for either contractual annual rent increases
ranging from 1.0% to 3.0% and, where feasible and in compliance
with applicable healthcare laws and regulations, percentage
rent. We expect that such rental rate adjustments will provide
us with significant internal growth. |
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Diversified Investment Strategy: Our facilities and the
Pending Acquisition Facility are diversified geographically, by
service type within the healthcare industry and by types of
operator. We have invested and intend to invest in a portfolio
of net-leased healthcare facilities providing
state-of-the-art
healthcare services. Our facilities and Pending Acquisition
Facility include new and established facilities, both small and
large facilities, including rehabilitation hospitals, long-term
acute care hospitals, ambulatory surgical centers, regional and
community hospitals, medical office buildings, skilled nursing
facilities and specialized single-discipline facilities. Our
facilities are and we expect will continue to be located across
the country. In addition, our tenants and prospective tenants
are diversified across many healthcare service areas. Because of
the expected diversity of our facilities in terms of facility
type, geographic location and tenant, we believe that our
financial performance is less likely to be materially affected
by changes in reimbursement or payment rates by private or
public insurers or by changes in local or regional economies. |
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Financing Strategy: We intend to employ leverage in our
capital structure in amounts we determine from time to time. At
present, we intend to limit our debt to approximately 50-60% of
the aggregate costs of our facilities, although we may
temporarily exceed that level from time to |
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time. We expect our borrowings to be a combination of long-term,
fixed-rate, non-recourse mortgage loans, variable-rate secured
term and revolving credit facilities, and other fixed and
variable-rate short to medium-term loans. |
There are no limitations on the amount or percentage of our
total assets that may be invested in any one facility.
Additionally, no limits have been set on the concentration of
investments in any one location or facility type or with any one
tenant. Our current policy requires the approval of the
investment committee of our board of directors for acquisitions
or developments of facilities which exceed $10.0 million.
We believe that adherence to the investment strategy outlined
above will allow us to achieve the following objectives:
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increase in our stock value through increases in the cash flows
and values of our facilities; |
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achievement of long-term capital appreciation, and preservation
and protection of the value of our interest in our
facilities; and |
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providing regular cash distributions to our stockholders, a
portion of which may constitute a nontaxable return of capital
because it will exceed our current and accumulated earnings and
profits, as well as providing growth in distributions over time. |
Investments in Securities of or Interests in Persons
Primarily Engaged in Real Estate Activities and Other Issuers
Generally speaking, we do not expect to engage in any
significant investment activities with other entities, although
we may consider joint venture investments with other investors
or with healthcare service providers. We may also invest in the
securities of other issuers in connection with acquisitions of
indirect interests in facilities (normally general or limited
partnership interests in special purpose partnerships owning
facilities). We may in the future acquire some, all or
substantially all of the securities or assets of other REITs or
similar entities where that investment would be consistent with
our investment policies and the REIT qualification requirements.
There are no limitations on the amount or percentage of our
total assets that may be invested in any one issuer, other than
those imposed by the gross income and asset tests that we must
satisfy to qualify as a REIT. However, we do not anticipate
investing in other issuers of securities for the purpose of
exercising control or acquiring any investments primarily for
sale in the ordinary course of business or holding any
investments with a view to making short-term profits from their
sale. In any event, we do not intend that our investments in
securities will require us to register as an investment
company under the Investment Company Act, and we intend to
divest securities before any registration would be required.
We do not intend to engage in trading, underwriting, agency
distribution or sales of securities of other issuers.
Dispositions
Although we have no current plans to dispose of any of our
facilities, we will consider doing so, subject to REIT
qualification rules and prohibited transaction tax, if our
management determines that a sale of a facility would be in our
best interests based on the price being offered for the
facility, the operating performance of the facility, the tax
consequences of the sale and other factors and circumstances
surrounding the proposed sale. In addition, our tenants have,
and we expect that some or all of our prospective tenants will
have, the option to acquire the facilities at the end of or, in
some cases, during the lease term.
Financing Policies
We intend to employ leverage in our capital structure in amounts
we determine from time to time. At present, we intend to limit
our debt to approximately 50-60% of the aggregate costs of our
facilities,
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although we may temporarily exceed those levels from time to
time. We expect our borrowings to be a combination of long-term,
fixed-rate, non-recourse mortgage loans, variable-rate secured
term and revolving credit facilities, and other fixed and
variable-rate short to medium-term loans. Our board of directors
considers a number of factors when evaluating our level of
indebtedness and when making decisions regarding the incurrence
of indebtedness, including the purchase price of facilities to
be acquired, the estimated market value of our facilities and
the ability of particular facilities, and our company as a
whole, to generate cash flow to cover expected debt service.
Any of this indebtedness may be unsecured or may be secured by
mortgages or other interests in our facilities, and may be
recourse, non-recourse or cross-collateralized and, if recourse,
that recourse may include our general assets and, if
non-recourse, may be limited to the particular facility to which
the indebtedness relates. In addition, we may invest in
facilities subject to existing loans secured by mortgages or
similar liens on the facilities, or may refinance facilities
acquired on a leveraged basis. We may use the proceeds from any
borrowings for working capital, to purchase additional interests
in partnerships or joint ventures in which we participate, to
refinance existing indebtedness or to finance acquisitions,
expansion, redevelopment of existing facilities or development
of new facilities. We may also incur indebtedness for other
purposes when, in the opinion of our board of directors, it is
advisable to do so. In addition, we may need to borrow to meet
the taxable income distribution requirements under the Code if
we do not have sufficient cash available to meet those
distribution requirements.
Lending Policies
We do not have a policy limiting our ability to make loans to
persons other than our executive officers. We may consider
offering purchase money financing in connection with the sale of
facilities where the provision of that financing will increase
the value to be received by us for the facility sold. We may
make loans to joint ventures in which we may participate in the
future. Although we do not intend to engage in significant
lending activities in the future, we have and may in the future
make acquisition and working capital loans to prospective
tenants as well as mortgage loans to other facility owners and
other parties. See Summary Loans and Fees
Receivable.
Equity Capital Policies
Subject to applicable law, our board of directors has the
authority, without further stockholder approval, to issue
additional shares of authorized common stock and preferred stock
or otherwise raise capital, including through the issuance of
senior securities, in any manner and on the terms and for the
consideration it deems appropriate, including in exchange for
property. Existing stockholders will have no preemptive right to
additional shares issued in any offering, and any offering might
cause a dilution of investment. We may in the future issue
common stock in connection with acquisitions. We also may issue
limited partnership units in our operating partnership or equity
interests in other subsidiaries in connection with acquisitions
of facilities or otherwise.
Our board of directors may authorize the issuance of preferred
stock with terms and conditions that could have the effect of
delaying, deterring or preventing a transaction or a change in
control in us that might involve a premium price for holders of
our common stock or otherwise might be in their best interests.
Additionally, any shares of preferred stock could have dividend,
voting, liquidation and other rights and preferences that are
senior to those of our common stock.
We may, under certain circumstances, purchase our common stock
in the open market or in private transactions with our
stockholders, if those purchases are approved by our board of
directors. Our board of directors has no present intention of
causing us to repurchase any shares, and any action would only
be taken in conformity with applicable federal and state laws
and the applicable requirements for qualifying as a REIT.
In the future we may institute a dividend reinvestment plan,
which would allow our stockholders to acquire additional common
stock by automatically reinvesting their cash distributions.
Shares would be acquired pursuant to the plan at a price equal
to the then prevailing market price, without payment of
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brokerage commissions or service charges. Stockholders who do
not participate in the plan will continue to receive cash
distributions as declared and paid.
Code of Ethics and Conflict of Interest Policy
We have adopted written policies that are intended to minimize
actual or potential conflicts of interest. However, we cannot
assure you that these policies will be successful in eliminating
the influence of these conflicts. Our code of ethics and
business conduct, or code of ethics, requires our directors,
officers and employees to conduct themselves in a manner that
avoids even the appearance of a conflict of interest, and to
discuss any transaction or relationship that reasonably could be
expected to give rise to a conflict of interest with our code of
ethics contact person. Our code of ethics also addresses insider
trading, company funds and property, corporate opportunities and
fair dealing.
In addition, we have adopted a policy that requires that all
contracts and transactions between us, our operating partnership
or any of our subsidiaries, on the one hand, and any of our
directors or executive officers or any entity in which such
director or executive officer is a director or has a material
financial interest, on the other hand, must be approved by the
affirmative vote of a majority of our disinterested directors.
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DESCRIPTION OF CAPITAL STOCK
The following summary of the material provisions of our
capital stock is subject to and qualified in its entirety by
reference to the Maryland General Corporation Law, or MGCL, and
our charter and bylaws. Copies of our charter and bylaws are
filed as exhibits to the registration statement of which this
prospectus is a part. We recommend that you review these
documents. See Where You Can Find More
Information.
Authorized Stock
Our charter authorizes us to issue up to 100,000,000 shares
of common stock, par value $.001 per share, and
10,000,000 shares of preferred stock, par value
$.001 per share. As of the date of this prospectus, we have
39,969,065 shares of common stock issued and outstanding
and no shares of preferred stock issued and outstanding. Our
charter authorizes our board of directors to increase the
aggregate number of authorized shares or the number of shares of
any class or series without stockholder approval. Under Maryland
law, stockholders generally are not liable for the
corporations debts or obligations.
Common Stock
All shares of our common stock offered hereby will be duly
authorized, fully paid and nonassessable. Subject to the
preferential rights of any other class or series of stock and to
the provisions of our charter regarding the restrictions on
transfer of stock, holders of shares of our common stock are
entitled to receive dividends on such stock when, as and if
authorized by our board of directors out of funds legally
available therefor and declared by us and to share ratably in
the assets of our company legally available for distribution to
our stockholders in the event of our liquidation, dissolution or
winding up after payment of or adequate provision for all known
debts and liabilities of our company, including the preferential
rights on dissolution of any class or classes of preferred stock.
Subject to the provisions of our charter regarding the
restrictions on transfer of stock, each outstanding share of our
common stock entitles the holder to one vote on all matters
submitted to a vote of stockholders, including the election of
directors and, except as provided with respect to any other
class or series of stock, the holders of such shares will
possess the exclusive voting power. There is no cumulative
voting in the election of our board of directors. Our directors
are elected by a plurality of the votes cast at a meeting of
stockholders at which a quorum is present.
Holders of shares of our common stock have no preference,
conversion, exchange, sinking fund, redemption or appraisal
rights and have no preemptive rights to subscribe for any
securities of our company. Subject to the provisions of our
charter regarding the restrictions on transfer of stock, shares
of our common stock will have equal dividend, liquidation and
other rights.
Under the MGCL, a Maryland corporation generally cannot
dissolve, amend its charter, merge, consolidate, sell all or
substantially all of its assets, engage in a share exchange or
engage in similar transactions outside the ordinary course of
business unless approved by the corporations board of
directors and by the affirmative vote of stockholders holding at
least two-thirds of the shares entitled to vote on the matter
unless a lesser percentage (but not less than a majority of all
of the votes entitled to be cast on the matter) is set forth in
the corporations charter. Our charter does not provide for
a lesser percentage for these matters. However, Maryland law
permits a corporation to transfer all or substantially all of
its assets without the approval of the stockholders of the
corporation to one or more persons if all of the equity
interests of the person or persons are owned, directly or
indirectly, by the corporation. Because operating assets may be
held by a corporations subsidiaries, as in our situation,
this may mean that a subsidiary of a corporation can transfer
all of its assets without a vote of the corporations
stockholders.
Our charter authorizes our board of directors to reclassify any
unissued shares of our common stock into other classes or series
of classes of stock and to establish the number of shares in
each class or series and to set the preferences, conversion and
other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications or terms or
conditions of redemption for each such class or series.
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Preferred Stock
Our charter authorizes our board of directors to classify any
unissued shares of preferred stock and to reclassify any
previously classified but unissued shares of any series. Prior
to issuance of shares of each series, our board of directors is
required by the MGCL and our charter to set the terms,
preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other
distributions, qualifications and terms and conditions of
redemption for each such series. Thus, our board of directors
could authorize the issuance of shares of preferred stock with
terms and conditions which could have the effect of delaying,
deferring or preventing a change of control transaction that
might involve a premium price for holders of our common stock or
which holders might believe to otherwise be in their best
interest. As of the date hereof, no shares of preferred stock
are outstanding, and we have no current plans to issue any
preferred stock.
Power to Increase Authorized Stock and Issue Additional
Shares of Our Common Stock and Preferred Stock
We believe that the power of our board of directors, without
stockholder approval, to increase the number of authorized
shares of stock, issue additional authorized but unissued shares
of our common stock or preferred stock and to classify or
reclassify unissued shares of our common stock or preferred
stock and thereafter to cause us to issue such classified or
reclassified shares of stock will provide us with flexibility in
structuring possible future financings and acquisitions and in
meeting other needs which might arise. The additional classes or
series, as well as the common stock, will be available for
issuance without further action by our stockholders, unless
stockholder consent is required by applicable law or the rules
of any national securities exchange or automated quotation
system on which our securities may be listed or traded.
Restrictions on Ownership and Transfer
In order for us to qualify as a REIT under the Code, not more
than 50% of the value of the outstanding shares of our stock may
be owned, actually or constructively, by five or fewer
individuals (as defined in the Code to include certain entities)
during the last half of a taxable year (other than the first
year for which an election to be a REIT has been made by us). In
addition, if we, or one or more owners (actually or
constructively) of 10% or more of our stock, actually or
constructively owns 10% or more of a tenant of ours (or a tenant
of any partnership in which we are a partner), the rent received
by us (either directly or through any such partnership) from
such tenant will not be qualifying income for purposes of the
REIT gross income tests of the Code. Our stock must also be
beneficially owned by 100 or more persons during at least
335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year (other than the
first year for which an election to be a REIT has been made by
us).
Our charter contains restrictions on the ownership and transfer
of our capital stock that are intended to assist us in complying
with these requirements and continuing to qualify as a REIT. The
relevant sections of our charter provide that, effective upon
completion of our initial public offering and subject to the
exceptions described below, no person or persons acting as a
group may own, or be deemed to own by virtue of the attribution
provisions of the Code, more than (i) 9.8% of the number or
value, whichever is more restrictive, of the outstanding shares
of our common stock or (ii) 9.8% of the number or value,
whichever is more restrictive, of the issued and outstanding
preferred or other shares of any class or series of our stock.
We refer to this restriction as the ownership limit.
The ownership limitation in our charter is more restrictive than
the restrictions on ownership of our common stock imposed by the
Code.
The ownership attribution rules under the Code are complex and
may cause stock owned actually or constructively by a group of
related individuals or entities to be owned constructively by
one individual or entity. As a result, the acquisition of less
than 9.8% of our common stock (or the acquisition of an interest
in an entity that owns, actually or constructively, our common
stock) by an individual or entity could nevertheless cause that
individual or entity, or another individual or entity, to own
constructively in excess of 9.8% of our outstanding common stock
and thereby subject the common stock to the ownership limit.
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Our board of directors may, in its sole discretion, waive the
ownership limit with respect to one or more stockholders if it
determines that such ownership will not jeopardize our status as
a REIT (for example, by causing any tenant of ours to be
considered a related party tenant for purposes of
the REIT qualification rules).
As a condition of our waiver, our board of directors may require
an opinion of counsel or IRS ruling satisfactory to our board of
directors and representations or undertakings from the applicant
with respect to preserving our REIT status.
In connection with the waiver of the ownership limit or at any
other time, our board of directors may decrease the ownership
limit for all other persons and entities; provided, however,
that the decreased ownership limit will not be effective for any
person or entity whose percentage ownership in our capital stock
is in excess of such decreased ownership limit until such time
as such person or entitys percentage of our capital stock
equals or falls below the decreased ownership limit, but any
further acquisition of our capital stock in excess of such
percentage ownership of our capital stock will be in violation
of the ownership limit. Additionally, the new ownership limit
may not allow five or fewer individuals (as defined
for purposes of the REIT ownership restrictions under the Code)
to beneficially own more than 49.5% of the value of our
outstanding capital stock.
Our charter generally prohibits:
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any person from actually or constructively owning shares of our
capital stock that would result in us being closely
held under Section 856(h) of the Code; and |
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any person from transferring shares of our capital stock if such
transfer would result in shares of our stock being beneficially
owned by fewer than 100 persons (determined without
reference to any rules of attribution). |
Any person who acquires or attempts or intends to acquire
beneficial or constructive ownership of shares of our common
stock that will or may violate any of the foregoing restrictions
on transferability and ownership will be required to give notice
immediately to us and provide us with such other information as
we may request in order to determine the effect of such transfer
on our status as a REIT. The foregoing provisions on
transferability and ownership will not apply if our board of
directors determines that it is no longer in our best interests
to attempt to qualify, or to continue to qualify, as a REIT.
Pursuant to our charter, if any purported transfer of our
capital stock or any other event would otherwise result in any
person violating the ownership limits or the other restrictions
in our charter, then any such purported transfer will be void
and of no force or effect with respect to the purported
transferee or owner (collectively referred to hereinafter as the
purported owner) as to that number of shares in
excess of the ownership limit (rounded up to the nearest whole
share). The number of shares in excess of the ownership limit
will be automatically transferred to, and held by, a trust for
the exclusive benefit of one or more charitable organizations
selected by us. The trustee of the trust will be designated by
us and must be unaffiliated with us and with any purported
owner. The automatic transfer will be effective as of the close
of business on the business day prior to the date of the
violative transfer or other event that results in a transfer to
the trust. Any dividend or other distribution paid to the
purported owner, prior to our discovery that the shares had been
automatically transferred to a trust as described above, must be
repaid to the trustee upon demand for distribution to the
beneficiary of the trust and all dividends and other
distributions paid by us with respect to such excess
shares prior to the sale by the trustee of such shares shall be
paid to the trustee for the beneficiary. If the transfer to the
trust as described above is not automatically effective, for any
reason, to prevent violation of the applicable ownership limit,
then our charter provides that the transfer of the excess shares
will be void. Subject to Maryland law, effective as of the date
that such excess shares have been transferred to the trust, the
trustee shall have the authority (at the trustees sole
discretion and subject to applicable law) (i) to rescind as
void any vote cast by a purported owner prior to our discovery
that such shares have been transferred to the trust and
(ii) to recast such vote in accordance with the desires of
the trustee acting for the benefit of the beneficiary of
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the trust, provided that if we have already taken irreversible
action, then the trustee shall not have the authority to rescind
and recast such vote.
Shares of our capital stock transferred to the trustee are
deemed offered for sale to us, or our designee, at a price per
share equal to the lesser of (i) the price paid by the
purported owner for the shares (or, if the event which resulted
in the transfer to the trust did not involve a purchase of such
shares of our capital stock at market price, the market price on
the day of the event which resulted in the transfer of such
shares of our capital stock to the trust) and (ii) the
market price on the date we, or our designee, accepts such
offer. We have the right to accept such offer until the trustee
has sold the shares of our capital stock held in the trust
pursuant to the provisions discussed below. Upon a sale to us,
the interest of the charitable beneficiary in the shares sold
terminates and the trustee must distribute the net proceeds of
the sale to the purported owner and any dividends or other
distributions held by the trustee with respect to such capital
stock will be paid to the charitable beneficiary.
If we do not buy the shares, the trustee must, within
20 days of receiving notice from us of the transfer of
shares to the trust, sell the shares to a person or entity
designated by the trustee who could own the shares without
violating the ownership limits. After that, the trustee must
distribute to the purported owner an amount equal to the lesser
of (i) the net price paid by the purported owner for the
shares (or, if the event which resulted in the transfer to the
trust did not involve a purchase of such shares at market price,
the market price on the day of the event which resulted in the
transfer of such shares of our capital stock to the trust) and
(ii) the net sales proceeds received by the trust for the
shares. Any proceeds in excess of the amount distributable to
the purported owner will be distributed to the beneficiary.
All persons who own, directly or by virtue of the attribution
provisions of the Code, more than 5% (or such other percentage
as provided in the regulations promulgated under the Code) of
the lesser of the number or value of the shares of our
outstanding capital stock must give written notice to us within
30 days after the end of each calendar year. In addition,
each stockholder will, upon demand, be required to disclose to
us in writing such information with respect to the direct,
indirect and constructive ownership of shares of our stock as
our board of directors deems reasonably necessary to comply with
the provisions of the Code applicable to a REIT, to comply with
the requirements or any taxing authority or governmental agency
or to determine any such compliance.
All certificates representing shares of our capital stock will
bear a legend referring to the restrictions described above.
These ownership limits could delay, defer or prevent a
transaction or a change of control of our company that might
involve a premium price over the then prevailing market price
for the holders of some, or a majority, of our outstanding
shares of common stock or which such holders might believe to be
otherwise in their best interest.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is
American Stock Transfer and Trust Co.
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MATERIAL PROVISIONS OF MARYLAND LAW AND OF
OUR CHARTER AND BYLAWS
The following is a summary of certain provisions of Maryland
law and of our charter and bylaws. For a complete description,
we refer you to the applicable provisions of Maryland law and to
our charter and bylaws, copies of which are exhibits to the
registration statement of which this prospectus is a part. See
Where You Can Find More Information.
The Board of Directors
Our charter and bylaws provide that the number of our directors
is to be established by our board of directors but may not be
fewer than one nor more than 15. Currently, our board is
comprised of eight directors. Any vacancy, other than one
resulting from an increase in the number of directors, may be
filled, at any regular meeting or at any special meeting called
for that purpose, by a majority of the remaining directors,
though less than a quorum. Any vacancy resulting from an
increase in the number of our directors must be filled by a
majority of the entire board of directors. A director elected to
fill a vacancy shall be elected to serve until the next election
of directors and until his successor shall be elected and
qualified.
Pursuant to our charter, each member of our board of directors
is elected until the next annual meeting of stockholders and
until his successor is elected, with the current members
terms expiring at the annual meeting of stockholders to be held
in 2006. Holders of shares of our common stock have no right to
cumulative voting in the election of directors. Consequently, at
each annual meeting of stockholders, all of the members of our
board of directors will stand for election and our directors
will be elected by a plurality of votes cast. Directors may be
removed with or without cause by the affirmative vote of
two-thirds of the votes entitled to be cast in the election of
directors.
Business Combinations
Maryland law prohibits business combinations between
a Maryland corporation and an interested stockholder or an
affiliate of an interested stockholder for five years after the
most recent date on which the interested stockholder becomes an
interested stockholder. These business combinations include a
merger, consolidation, share exchange, or, in circumstances
specified in the statute, certain transfers of assets, certain
stock issuances and reclassifications. Maryland law defines an
interested stockholder as:
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any person who beneficially owns 10% or more of the voting power
of the corporations voting stock; or |
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an affiliate or associate of the corporation who, at any time
within the two-year period prior to the date in question, was
the beneficial owner of 10% or more of the voting power of the
then-outstanding voting stock of the corporation. |
A person is not an interested stockholder if the board of
directors approves in advance the transaction by which the
person otherwise would have become an interested stockholder.
However, in approving the transaction, the board of directors
may provide that its approval is subject to compliance, at or
after the time of approval, with any terms and conditions
determined by the board of directors.
After the five year prohibition, any business combination
between a corporation and an interested stockholder generally
must be recommended by the board of directors and approved by
the affirmative vote of at least:
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80% of the votes entitled to be cast by holders of the then
outstanding shares of voting stock; and |
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two-thirds of the votes entitled to be cast by holders of the
voting stock other than shares held by the interested
stockholder with whom or with whose affiliate the business
combination is to be effected or shares held by an affiliate or
associate of the interested stockholder. |
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These super-majority vote requirements do not apply if
stockholders receive a minimum price, as defined under Maryland
law, for their shares in the form of cash or other consideration
in the same form as previously paid by the interested
stockholder for its shares.
The statute permits various exemptions from its provisions,
including business combinations that are approved by the board
of directors before the time that the interested stockholder
becomes an interested stockholder.
As permitted by Maryland law, our charter includes a provision
excluding our company from these provisions of the MGCL and,
consequently, the five-year prohibition and the super-majority
vote requirements will not apply to business combinations
between us and any interested stockholder of ours unless we
later amend our charter, with stockholder approval, to modify or
eliminate this exclusion provision. We believe that our
ownership restrictions will substantially reduce the risk that a
stockholder would become an interested stockholder
within the meaning of the Maryland business combination statute.
There can be no assurance, however, that we will not opt into
the business combination provisions of the MGCL at a future date.
Control Share Acquisitions
The MGCL provides that control shares of a Maryland
corporation acquired in a control share acquisition
have no voting rights except to the extent approved at a special
meeting by the affirmative vote of two-thirds of the votes
entitled to be cast on the matter. Shares owned by the acquiror
or by officers or directors who are our employees are excluded
from shares entitled to vote on the matter. Control
shares are voting shares which, if aggregated with all
other shares previously acquired by the acquirer or in respect
of which the acquirer is able to exercise or direct the exercise
of voting power except solely by virtue of a revocable proxy,
would entitle the acquirer to exercise voting power in electing
directors within one of the following ranges of voting power:
(i) one-tenth or more but less than one-third,
(ii) one-third or more but less than a majority, or
(iii) a majority or more of all voting power. Control
shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained
stockholder approval. A control share acquisition
means the acquisition of control shares, subject to certain
exceptions.
A person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions, including
an undertaking to pay expenses, may compel a corporations
board of directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the
corporation may itself present the question at any stockholders
meeting.
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement
as required by Maryland law, then, subject to certain conditions
and limitations, the corporation may redeem any or all of the
control shares, except those for which voting rights have
previously been approved, for fair value determined, without
regard to the absence of voting rights for the control shares,
as of the date of the last control share acquisition by the
acquirer or of any meeting of stockholders at which the voting
rights of such shares are considered and not approved. If voting
rights for control shares are approved at a stockholders meeting
and the acquirer becomes entitled to vote a majority of the
shares entitled to vote, then all other stockholders are
entitled to demand and receive fair value for their stock, or
provided for in the dissenters rights provisions of
the MGCL may exercise appraisal rights. The fair value of the
shares as determined for purposes of such appraisal rights may
not be less than the highest price per share paid by the
acquirer in the control share acquisition.
The control share acquisition statute does not apply (i) to
shares acquired in a merger, consolidation or share exchange if
the corporation is a party to the transaction or (ii) to
acquisitions approved or exempted by the charter or bylaws of
the corporation.
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Our charter contains a provision exempting from the control
share acquisition statute any and all acquisitions by any person
of our stock. There can be no assurance that we will not opt
into the control share acquisition provisions of the MGCL in the
future.
Maryland Unsolicited Takeovers Act
Maryland law also permits Maryland corporations that are subject
to the Exchange Act and have at least three outside directors to
elect by resolution of the board of directors or by provision in
its charter or bylaws to be subject to some corporate governance
provisions that may be inconsistent with the corporations
charter and bylaws. Under the applicable statute, a board of
directors may classify itself without the vote of stockholders.
A board of directors classified in that manner cannot be altered
by amendment to the charter of the corporation. Further, the
board of directors may, by electing into applicable statutory
provisions and notwithstanding the charter or bylaws:
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provide that a special meeting of the stockholders will be
called only at the request of stockholders entitled to cast at
least a majority of the votes entitled to be cast at the meeting; |
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reserve for itself the right to fix the number of directors; |
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provide that a director may be removed only by the vote of the
holders of two-thirds of the stock entitled to vote; |
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retain for itself sole authority to fill vacancies created by
the death, removal or resignation of a director; and |
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provide that all vacancies on the board of directors may be
filled only by the affirmative vote of a majority of the
remaining directors, in office, even if the remaining directors
do not constitute a quorum for the remainder of the full term of
the class of directors in which the vacancy occurred. |
A board of directors may implement all or any of these
provisions without amending the charter or bylaws and without
stockholder approval. A corporation may be prohibited by its
charter or by resolution of its board of directors from electing
any of the provisions of the statute. We are not prohibited from
implementing any or all of these provisions. While certain of
these provisions are already addressed by our charter and
bylaws, the law would permit our board of directors to override
further changes to the charter or bylaws. If implemented, these
provisions could discourage offers to acquire our stock and
could increase the difficulty of completing an offer.
Amendment to Our Charter
Our charter may be amended only if declared advisable by the
board of directors and approved by the affirmative vote of the
holders of at least two-thirds of all of the votes entitled to
be cast on the matter, except that our board of directors is
able, without stockholder approval, to amend our charter to
change our corporate name or the name or designation or par
value of any class or series of stock.
Dissolution of Our Company
A voluntary dissolution of our company must be declared
advisable by a majority of the entire board of directors and
approved by the affirmative vote of the holders of at least
two-thirds of all of the votes entitled to be cast on the matter.
Advance Notice of Director Nominations and New Business
Our bylaws provide that:
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with respect to an annual meeting of stockholders, the only
business to be considered and the only proposals to be acted
upon will be those properly brought before the annual meeting: |
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pursuant to our notice of the meeting; |
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by, or at the direction of, a majority of our board of
directors; or |
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by a stockholder who is entitled to vote at the meeting and has
complied with the advance notice procedures set forth in our
bylaws; |
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with respect to special meetings of stockholders, only the
business specified in our companys notice of meeting may
be brought before the meeting of stockholders unless otherwise
provided by law; and |
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nominations of persons for election to our board of directors at
any annual or special meeting of stockholders may be made only: |
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by, or at the direction of, our board of directors; or |
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by a stockholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in our
bylaws. |
Generally, under our bylaws, a stockholder seeking to nominate a
director or bring other business before our annual meeting of
stockholders must deliver a notice to our secretary not later
than the close of business on the 90th day nor earlier than the
close of business on the 120th day prior to the first
anniversary of the date of mailing of the notice to stockholders
for the prior years annual meeting. For a stockholder
seeking to nominate a candidate for our board of directors, the
notice must describe various matters regarding the nominee,
including name, address, occupation and number of shares of
common stock held, and other specified matters. For a
stockholder seeking to propose other business, the notice must
include a description of the proposed business, the reasons for
the proposal and other specified matters.
Indemnification and Limitation of Directors and
Officers Liability
The MGCL permits a Maryland corporation to include in its
charter a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money
damages except for liability resulting from actual receipt of an
improper benefit or profit in money, property or services or
active and deliberate dishonesty established by a final judgment
as being material to the cause of action. Our charter limits the
personal liability of our directors and officers for monetary
damages to the fullest extent permitted under current Maryland
law, and our charter and bylaws provide that a director or
officer shall be indemnified to the fullest extent required or
permitted by Maryland law from and against any claim or
liability to which such director or officer may become subject
by reason of his or her status as a director or officer of our
company. Maryland law allows directors and officers to be
indemnified against judgments, penalties, fines, settlements,
and expenses actually incurred in connection with any proceeding
to which they may be made a party by reason of their service on
those or other capacities unless the following can be
established:
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the act or omission of the director or officer was material to
the cause of action adjudicated in the proceeding and was
committed in bad faith or was the result of active and
deliberate dishonesty; |
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the director or officer actually received an improper personal
benefit in money, property or services; or |
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with respect to any criminal proceeding, the director or officer
had reasonable cause to believe his or her act or omission was
unlawful. |
The MGCL requires a corporation (unless its charter provides
otherwise, which our charter does not) to indemnify a director
or officer who has been successful on the merits or otherwise,
in the defense of any claim to which he or she is made a party
by reason of his or her service in that capacity.
However, under the MGCL, a Maryland corporation may not
indemnify for an adverse judgment in a suit by or in the right
of the corporation or for a judgment of liability on the basis
that personal benefit was improperly received, unless in either
case a court orders indemnification and then only for expenses.
In
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addition, the MGCL permits a corporation to advance reasonable
expenses to a director or officer upon the corporations
receipt of:
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a written affirmation by the director or officer of his or her
good faith belief that he or she has met the standard of conduct
necessary for indemnification by the corporation; and |
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a written undertaking by the director or on the directors
behalf to repay the amount paid or reimbursed by the corporation
if it is ultimately determined that the director did not meet
the standard of conduct. |
Our charter authorizes us to obligate ourselves to indemnify and
our bylaws do obligate us, to the fullest extent permitted by
Maryland law in effect from time to time, to indemnify and,
without requiring a preliminary determination of the ultimate
entitlement to indemnification, pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to:
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any present or former director or officer who is made a party to
the proceeding by reason of his or her service in that capacity;
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any individual who, while a director or officer of our company
and at our request, serves or has served another corporation,
real estate investment trust, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, real estate
investment trust, partnership, joint venture, trust, employee
benefit plan or other enterprise and who is made a party to the
proceeding by reason of his or her service in that capacity. |
Our charter and bylaws also permit us to indemnify and advance
expenses to any person who served a predecessor of ours in any
of the capacities described above.
Our stockholders have no personal liability for indemnification
payments or other obligations under any indemnification
agreements or arrangements. However, indemnification could
reduce the legal remedies available to us and our stockholders
against the indemnified individuals.
This provision for indemnification of our directors and officers
does not limit a stockholders ability to obtain injunctive
relief or other equitable remedies for a violation of a
directors or an officers duties to us or to our
stockholders, although these equitable remedies may not be
effective in some circumstances.
In addition to any indemnification to which our directors and
officers are entitled pursuant to our charter and bylaws and the
MGCL, our charter and bylaws provide that, with the approval of
our board of directors, we may indemnify other employees and
agents to the fullest extent permitted under Maryland law,
whether they are serving us or, at our request, any other entity.
We have entered into indemnification agreements with each of our
directors and executive officers, and we maintain a directors
and officers liability insurance policy. See
Management Limited Liability and
Indemnification.
Insofar as the foregoing provisions permit indemnification of
directors, officers or persons controlling us for liability
arising under the Securities Act, we have been informed that, in
the opinion of the SEC, this indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
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PARTNERSHIP AGREEMENT
The following is a summary of the material terms of the first
amended and restated agreement of limited partnership of our
operating partnership. This summary is subject to and qualified
in its entirety by reference to the first amended and restated
agreement of limited partnership of our operating partnership, a
copy of which is an exhibit to the registration statement of
which this prospectus is a part. See Where You Can Find
More Information.
Management of Our Operating Partnership
MPT Operating Partnership, L.P., our operating partnership, was
organized as a Delaware limited partnership on
September 10, 2003. The initial partnership agreement was
entered into on that date and amended and restated on
March 1, 2004. Pursuant to the partnership agreement, as
the owner of the sole general partner of the operating
partnership, Medical Properties Trust, LLC, we have, subject to
certain protective rights of limited partners described below,
full, exclusive and complete responsibility and discretion in
the management and control of the operating partnership. We have
the power to cause the operating partnership to enter into
certain major transactions, including acquisitions,
dispositions, refinancings and selection of tenants, and to
cause changes in the operating partnerships line of
business and distribution policies. However, any amendment to
the partnership agreement that would affect the redemption
rights of the limited partners or otherwise adversely affect the
rights of the limited partners requires the consent of limited
partners, other than us, holding more than 50% of the units of
our operating partnership held by such partners.
Transferability of Interests
We may not voluntarily withdraw from the operating partnership
or transfer or assign our interest in the operating partnership
or engage in any merger, consolidation or other combination, or
sale of substantially all of our assets, in a transaction which
results in a change of control of our company unless:
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we receive the consent of limited partners holding more than 50%
of the partnership interests of the limited partners, other than
those held by our company or its subsidiaries; |
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as a result of such transaction, all limited partners will have
the right to receive for each partnership unit an amount of
cash, securities or other property equal in value to the
greatest amount of cash, securities or other property paid in
the transaction to a holder of one share of our common stock,
provided that if, in connection with the transaction, a
purchase, tender or exchange offer shall have been made to and
accepted by the holders of more than 50% of the outstanding
shares of our common stock, each holder of partnership units
shall be given the option to exchange its partnership units for
the greatest amount of cash, securities or other property that a
limited partner would have received had it (i) exercised
its redemption right (described below) and (ii) sold,
tendered or exchanged pursuant to the offer shares of our common
stock received upon exercise of the redemption right immediately
prior to the expiration of the offer; or |
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we are the surviving entity in the transaction and either
(i) our stockholders do not receive cash, securities or
other property in the transaction or (ii) all limited
partners receive for each partnership unit an amount of cash,
securities or other property having a value that is no less than
the greatest amount of cash, securities or other property
received in the transaction by our stockholders. |
We also may merge with or into or consolidate with another
entity if immediately after such merger or consolidation
(i) substantially all of the assets of the successor or
surviving entity, other than partnership units held by us, are
contributed, directly or indirectly, to the partnership as a
capital contribution in exchange for partnership units with a
fair market value equal to the value of the assets so
contributed as determined by the survivor in good faith and
(ii) the survivor expressly agrees to assume all of our
obligations under the partnership agreement and the partnership
agreement shall be amended after any such merger or
consolidation so as to arrive at a new method of calculating the
amounts payable upon
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exercise of the redemption right that approximates the existing
method for such calculation as closely as reasonably possible.
We also may (i) transfer all or any portion of our general
partnership interest to (A) a wholly-owned subsidiary or
(B) a parent company, and following such transfer may
withdraw as general partner and (ii) engage in a
transaction required by law or by the rules of any national
securities exchange or automated quotation system on which our
securities may be listed or traded.
Capital Contribution
We contributed to our operating partnership substantially all
the net proceeds of our April 2004 private placement as a
capital contribution in exchange for units of the operating
partnership. The partnership agreement provides that if the
operating partnership requires additional funds at any time in
excess of funds available to the operating partnership from
borrowing or capital contributions, we may borrow such funds
from a financial institution or other lender and lend such funds
to the operating partnership on the same terms and conditions as
are applicable to our borrowing of such funds. Under the
partnership agreement, we are obligated to contribute the
proceeds of any offering of shares of our companys stock
as additional capital to the operating partnership. We are
authorized to cause the operating partnership to issue
partnership interests for less than fair market value if we have
concluded in good faith that such issuance is in both the
operating partnerships and our best interests. If we
contribute additional capital to the operating partnership, we
will receive additional partnership units and our percentage
interest will be increased on a proportionate basis based upon
the amount of such additional capital contributions and the
value of the operating partnership at the time of such
contributions. Conversely, the percentage interests of the
limited partners will be decreased on a proportionate basis in
the event of additional capital contributions by us. In
addition, if we contribute additional capital to the operating
partnership, we will revalue the property of the operating
partnership to its fair market value, as determined by us, and
the capital accounts of the partners will be adjusted to reflect
the manner in which the unrealized gain or loss inherent in such
property, that has not been reflected in the capital accounts
previously, would be allocated among the partners under the
terms of the partnership agreement if there were a taxable
disposition of such property for its fair market value, as
determined by us, on the date of the revaluation. The operating
partnership may issue preferred partnership interests, in
connection with acquisitions of property or otherwise, which
could have priority over common partnership interests with
respect to distributions from the operating partnership,
including the partnership interests that our wholly-owned
subsidiary owns as general partner.
Redemption Rights
Pursuant to Section 8.04 of the partnership agreement, the
limited partners, other than us, will receive redemption rights,
which will enable them to cause the operating partnership to
redeem their limited partnership units in exchange for cash or,
at our option, shares of our common stock on a
one-for-one basis,
subject to adjustment for stock splits, dividends,
recapitalization and similar events. Currently, we own 100% of
the issued limited partnership units of our operating
partnership. Under Section 8.04 of our partnership
agreement, holders of limited partnership units will be
prohibited from exercising their redemption rights for
12 months after they are issued, unless this waiting period
is waived or shortened by our board of directors.
Notwithstanding the foregoing, a limited partner will not be
entitled to exercise its redemption rights if the delivery of
common stock to the redeeming limited partner would:
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result in any person owning, directly or indirectly, common
stock in excess of the stock ownership limit in our charter; |
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result in our shares of stock being owned by fewer than 100
persons (determined without reference to any rules of
attribution); |
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result in our being closely held within the meaning
of Section 856(h) of the Code; |
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cause us to own, actually or constructively, 10% or more of the
ownership interests in a tenant of our or the partnerships
real property, within the meaning of Section 856(d)(2)(B)
of the Code; or |
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cause the acquisition of common stock by such redeeming limited
partner to be integrated with any other distribution
of common stock for purposes of complying with the registration
provisions of the Securities Act. |
We may, in our sole and absolute discretion, waive any of these
restrictions.
With respect to the partnership units issuable in connection
with the acquisition or development of our facilities, the
redemption rights may be exercised by the limited partners at
any time after the first anniversary of our acquisition of these
facilities; provided, however, unless we otherwise agree:
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a limited partner may not exercise the redemption right for
fewer than 1,000 partnership units or, if such limited partner
holds fewer than 1,000 partnership units, the limited partner
must redeem all of the partnership units held by such limited
partner; |
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a limited partner may not exercise the redemption right for more
than the number of partnership units that would, upon
redemption, result in such limited partner or any other person
owning, directly or indirectly, common stock in excess of the
ownership limitation in our charter; and |
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a limited partner may not exercise the redemption right more
than two times annually. |
We currently hold all the outstanding interests in our operating
partnership and, accordingly, there are currently no units of
our operating partnership subject to being redeemed in exchange
for shares of our common stock. The number of shares of common
stock issuable upon exercise of the redemption rights will be
adjusted to account for stock splits, mergers, consolidations or
similar pro rata stock transactions.
The partnership agreement requires that the operating
partnership be operated in a manner that enables us to satisfy
the requirements for being classified as a REIT, to avoid any
federal income or excise tax liability imposed by the Code
(other than any federal income tax liability associated with our
retained capital gains) and to ensure that the partnership will
not be classified as a publicly traded partnership
taxable as a corporation under Section 7704 of the Code.
In addition to the administrative and operating costs and
expenses incurred by the operating partnership, the operating
partnership generally will pay all of our administrative costs
and expenses, including:
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all expenses relating to our continuity of existence; |
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all expenses relating to offerings and registration of
securities; |
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all expenses associated with the preparation and filing of any
of our periodic reports under federal, state or local laws or
regulations; |
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all expenses associated with our compliance with laws, rules and
regulations promulgated by any regulatory body; and |
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all of our other operating or administrative costs incurred in
the ordinary course of business on behalf of the operating
partnership. |
Distributions
The partnership agreement provides that the operating
partnership will distribute cash from operations, including net
sale or refinancing proceeds, but excluding net proceeds from
the sale of the operating partnerships property in
connection with the liquidation of the operating partnership, at
such time and in such amounts as determined by us in our sole
discretion, to us and the limited partners in accordance with
their respective percentage interests in the operating
partnership.
Upon liquidation of the operating partnership, after payment of,
or adequate provision for, debts and obligations of the
partnership, including any partner loans, any remaining assets
of the partnership will be
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distributed to us and the limited partners with positive capital
accounts in accordance with their respective positive capital
account balances.
Allocations
Profits and losses of the partnership, including depreciation
and amortization deductions, for each fiscal year generally are
allocated to us and the limited partners in accordance with the
respective percentage interests in the partnership. All of the
foregoing allocations are subject to compliance with the
provisions of Sections 704(b) and 704(c) of the Code and
Treasury regulations promulgated thereunder. The operating
partnership expects to use the traditional method
under Section 704(c) of the Code for allocating items with
respect to contributed property acquired in connection with the
offering for which the fair market value differs from the
adjusted tax basis at the time of contribution.
Term
The operating partnership will have perpetual existence, or
until sooner dissolved upon:
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our bankruptcy, dissolution, removal or withdrawal, unless the
limited partners elect to continue the partnership; |
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the passage of 90 days after the sale or other disposition
of all or substantially all the assets of the
partnership; or |
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an election by us in our capacity as the owner of the sole
general partner of the operating partnership. |
Tax Matters
Pursuant to the partnership agreement, the general partner is
the tax matters partner of the operating partnership.
Accordingly, through our ownership of the general partner of the
operating partnership, we have authority to handle tax audits
and to make tax elections under the Code on behalf of the
operating partnership.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
This section summarizes the current material federal income tax
consequences to our company and to our stockholders generally
resulting from the treatment of our company as a REIT. Because
this section is a general summary, it does not address all of
the potential tax issues that may be relevant to you in light of
your particular circumstances. Baker, Donelson, Bearman,
Caldwell & Berkowitz, P.C., or Baker Donelson, has
acted as our counsel, has reviewed this summary, and is of the
opinion that the discussion contained herein fairly summarizes
the federal income tax consequences that are material to a
holder of shares of our common stock. The discussion does not
address all aspects of taxation that may be relevant to
particular stockholders in light of their personal investment or
tax circumstances, or to certain types of stockholders that are
subject to special treatment under the federal income tax laws,
such as insurance companies, tax-exempt organizations (except to
the limited extent discussed in Taxation of
Tax-Exempt Stockholders), financial institutions or
broker-dealers, and
non-United
States individuals and foreign corporations (except to the
limited extent discussed in Taxation of
Non-United
States Stockholders).
The statements in this section and the opinion of Baker
Donelson, referred to as the Tax Opinion, are based on the
current federal income tax laws governing qualification as a
REIT. We cannot assure you that new laws, interpretations of law
or court decisions, any of which may take effect retroactively,
will not cause any statement in this section to be inaccurate.
You should be aware that opinions of counsel are not binding on
the IRS, and no assurance can be given that the IRS will not
challenge the conclusions set forth in those opinions.
This section is not a substitute for careful tax planning. We
urge you to consult your own tax advisors regarding the specific
federal state, local, foreign and other tax consequences to you,
in light of your own particular circumstances, of the purchase,
ownership and disposition of shares of our common stock, our
election to be taxed as a REIT and the effect of potential
changes in applicable tax laws.
Taxation of Our Company
We were previously taxed as a subchapter S corporation. We
revoked our subchapter S election on April 6, 2004 and we
have elected to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with our taxable year that
began on April 6, 2004 and ended on December 31, 2004.
Our counsel has opined that, for federal income tax purposes, we
are and have been organized in conformity with the requirements
for qualification to be taxed as a REIT under the Code
commencing with our initial short taxable year ended
December 31, 2004, and that our current and proposed method
of operations as described in this prospectus and as represented
to our counsel by us satisfies currently, and will enable us to
continue to satisfy in the future, the requirements for such
qualification and taxation as a REIT under the Code for future
taxable years. This opinion, however, is based upon factual
assumptions and representations made by us.
We believe that our proposed future method of operation will
enable us to continue to qualify as a REIT. However, no
assurances can be given that our beliefs or expectations will be
fulfilled, as such qualification and taxation as a REIT depends
upon our ability to meet, for each taxable year, various tests
imposed under the Code as discussed below. Those qualification
tests involve the percentage of income that we earn from
specified sources, the percentage of our assets that falls
within specified categories, the diversity of our stock
ownership, and the percentage of our earnings that we
distribute. Baker Donelson will not review our compliance with
those tests on a continuing basis. Accordingly, with respect to
our current and future taxable years, no assurance can be given
that the actual results of our operation will satisfy such
requirements. For a discussion of the tax consequences of our
failure to maintain our qualification as a REIT, see
Failure to Qualify.
The sections of the Code relating to qualification and operation
as a REIT, and the federal income taxation of a REIT and its
stockholders, are highly technical and complex. The following
discussion sets forth only the material aspects of those
sections. This summary is qualified in its entirety by the
applicable Code provisions and the related rules and regulations.
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We generally will not be subject to federal income tax on the
taxable income that we distribute to our stockholders. The
benefit of that tax treatment is that it avoids the double
taxation, or taxation at both the corporate and
stockholder levels, that generally results from owning stock in
a corporation. However, we will be subject to federal tax in the
following circumstances:
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We are subject to the corporate federal income tax on taxable
income, including net capital gain, that we do not distribute to
stockholders during, or within a specified time period after,
the calendar year in which the income is earned. |
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We are subject to the corporate alternative minimum
tax on any items of tax preference that we do not
distribute or allocate to stockholders. |
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We are subject to tax, at the highest corporate rate, on: |
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net income from the sale or other disposition of property
acquired through foreclosure (foreclosure property)
that we hold primarily for sale to customers in the ordinary
course of business, and |
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other non-qualifying income from foreclosure property. |
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We are subject to a 100% tax on net income from sales or other
dispositions of property, other than foreclosure property, that
we hold primarily for sale to customers in the ordinary course
of business. |
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If we fail to satisfy the 75% gross income test or the 95% gross
income test, as described below under
Requirements for Qualification
Gross Income Tests, but nonetheless continue to qualify as
a REIT because we meet other requirements, we will be subject to
a 100% tax on: |
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the greater of (i) the amount by which we fail the 75%
test, or (ii) the excess of 90% (95% for taxable years
beginning on and after January 1, 2005) of our gross income
over the amount of gross income attributable to sources that
qualify under the 95% test, multiplied by |
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a fraction intended to reflect our profitability. |
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If we fail to distribute during a calendar year at least the sum
of: (i) 85% of our REIT ordinary income for the year,
(ii) 95% of our REIT capital gain net income for the year,
and (iii) any undistributed taxable income from earlier
periods, then we will be subject to a 4% excise tax on the
excess of the required distribution over the amount we actually
distributed. |
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If we fail to satisfy one or more requirements for REIT
qualification during a taxable year beginning on or after
January 1, 2005, other than a gross income test or an asset
test, we will be required to pay a penalty of $50,000 for each
such failure. |
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We may elect to retain and pay income tax on our net long-term
capital gain. In that case, a United States stockholder
would be taxed on its proportionate share of our undistributed
long-term capital gain (to the extent that we make a timely
designation of such gain to the stockholder) and would receive a
credit or refund for its proportionate share of the tax we paid. |
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We may be subject to a 100% excise tax on certain transactions
with a taxable REIT subsidiary that are not conducted at
arms-length. |
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If we acquire any asset from a C corporation
(that is, a corporation generally subject to the full
corporate-level tax) in a transaction in which the basis of the
asset in our hands is determined by reference to the basis of
the asset in the hands of the C corporation, and we
recognize gain on the disposition of the asset during the
10 year period beginning on the date that we acquired the
asset, then the assets built-in gain will be
subject to tax at the highest regular corporate rate. |
Requirements for Qualification
To continue to qualify as a REIT, we must meet various
(i) organizational requirements, (ii) gross income
tests, (iii) asset tests, and (iv) annual distribution
requirements.
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Organizational Requirements. A REIT is a corporation,
trust or association that meets each of the following
requirements:
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(1) it is managed by one or more trustees or directors; |
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(2) its beneficial ownership is evidenced by transferable
stock, or by transferable certificates of beneficial interest; |
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(3) it would be taxable as a domestic corporation, but for
its election to be taxed as a REIT under Sections 856
through 860 of the Code; |
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(4) it is neither a financial institution nor an insurance
company subject to special provisions of the federal income tax
laws; |
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(5) at least 100 persons are beneficial owners of its stock
or ownership certificates (determined without reference to any
rules of attribution); |
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(6) not more than 50% in value of its outstanding stock or
ownership certificates is owned, directly or indirectly, by five
or fewer individuals, which the federal income tax laws define
to include certain entities, during the last half of any taxable
year; and |
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(7) it elects to be a REIT, or has made such election for a
previous taxable year, and satisfies all relevant filing and
other administrative requirements established by the IRS that
must be met to elect and maintain REIT status. |
We must meet requirements one through four during our entire
taxable year and must meet requirement five during at least
335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than
12 months. If we comply with all the requirements for
ascertaining information concerning the ownership of our
outstanding stock in a taxable year and have no reason to know
that we violated requirement six, we will be deemed to have
satisfied requirement six for that taxable year. We do not have
to satisfy requirements five and six for our taxable year ending
December 31, 2004. After the issuance of common stock
pursuant to our April 2004 private placement we had issued
common stock with enough diversity of ownership to satisfy
requirements five and six as set forth above. Our charter
provides for restrictions regarding the ownership and transfer
of our shares of common stock so that we should continue to
satisfy these requirements. The provisions of our charter
restricting the ownership and transfer of our shares of common
stock are described in Description of Capital
Stock Restrictions on Ownership and Transfer.
For purposes of determining stock ownership under requirement
six, an individual generally includes a supplemental
unemployment compensation benefits plan, a private foundation,
or a portion of a trust permanently set aside or used
exclusively for charitable purposes. An individual,
however, generally does not include a trust that is a qualified
employee pension or profit sharing trust under the federal
income tax laws, and beneficiaries of such a trust will be
treated as holding our shares in proportion to their actuarial
interests in the trust for purposes of requirement six.
A corporation that is a qualified REIT subsidiary,
or QRS, is not treated as a corporation separate from its parent
REIT. All assets, liabilities, and items of income, deduction
and credit of a QRS are treated as assets, liabilities, and
items of income, deduction and credit of the REIT. A QRS is a
corporation, all of the capital stock of which is owned by the
REIT. Thus, in applying the requirements described herein, any
QRS that we own will be ignored, and all assets, liabilities,
and items of income, deduction and credit of such subsidiary
will be treated as our assets, liabilities, and items of income,
deduction and credit.
An unincorporated domestic entity, such as a partnership, that
has a single owner, generally is not treated as an entity
separate from its parent for federal income tax purposes. An
unincorporated domestic entity with two or more owners is
generally treated as a partnership for federal income tax
purposes. In the case of a REIT that is a partner in a
partnership that has other partners, the REIT is treated as
owning its proportionate share of the assets of the partnership
and as earning its allocable share of the gross income
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of the partnership for purposes of the applicable REIT
qualification tests. Thus, our proportionate share of the
assets, liabilities and items of income of our operating
partnership and any other partnership, joint venture, or limited
liability company that is treated as a partnership for federal
income tax purposes in which we acquire an interest, directly or
indirectly, is treated as our assets and gross income for
purposes of applying the various REIT qualification requirements.
A REIT is permitted to own up to 100% of the stock of one or
more taxable REIT subsidiaries. A taxable REIT
subsidiary is a fully taxable corporation that may earn income
that would not be qualifying income if earned directly by the
parent REIT. The subsidiary and the REIT must jointly file an
election with the IRS to treat the subsidiary as a taxable REIT
subsidiary. A taxable REIT subsidiary will pay income tax at
regular corporate rates on any income that it earns. In
addition, the taxable REIT subsidiary rules limit the
deductibility of interest paid or accrued by a taxable REIT
subsidiary to its parent REIT to assure that the taxable REIT
subsidiary is subject to an appropriate level of corporate
taxation. Further, the rules impose a 100% excise tax on certain
types of transactions between a taxable REIT subsidiary and its
parent REIT or the REITs tenants that are not conducted on
an arms-length basis. We may engage in activities
indirectly through a taxable REIT subsidiary as necessary or
convenient to avoid obtaining the benefit of income or services
that would jeopardize our REIT status if we engaged in the
activities directly. In particular, we would likely engage in
activities through a taxable REIT subsidiary if we wished to
provide services to unrelated parties which might produce income
that does not qualify under the gross income tests described
below. We might also dispose of an unwanted asset through a
taxable REIT subsidiary as necessary or convenient to avoid the
100% tax on income from prohibited transactions. See description
below under Prohibited Transactions. A taxable REIT
subsidiary may not 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 which is eligible for participation in the
Medicare program under Title XVIII of the Social Security
Act with respect to such facility. We have formed and made a
taxable REIT subsidiary election with respect to MPT Development
Services, Inc., a Delaware corporation formed in January 2004.
We may form or acquire one or more additional taxable REIT
subsidiaries in the future. See Federal Income Tax
Considerations Income Taxation of the Partnerships
and the Partners Taxable REIT Subsidiaries.
Gross Income Tests. We must satisfy two gross income
tests annually to maintain our qualification as a REIT. First,
at least 75% of our gross income for each taxable year must
consist of defined types of income that we derive, directly or
indirectly, from investments relating to real property or
mortgages on real property or qualified temporary investment
income. Qualifying income for purposes of that 75% gross income
test generally includes:
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rents from real property; |
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interest on debt secured by mortgages on real property, or on
interests in real property; |
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dividends or other distributions on, and gain from the sale of,
shares in other REITs; |
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gain from the sale of real estate assets; |
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income derived from the temporary investment of new capital that
is attributable to the issuance of our shares of common stock or
a public offering of our debt with a maturity date of at least
five years and that we receive during the one year period
beginning on the date on which we received such new
capital; and |
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gross income from foreclosure property. |
Second, in general, at least 95% of our gross income for each
taxable year must consist of income that is qualifying income
for purposes of the 75% gross income test, other types of
interest and dividends, gain from the sale or disposition of
stock or securities, income from certain hedging instruments or
any combination of these. Gross income from our sale of property
that we hold primarily for sale to customers
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in the ordinary course of business is excluded from both the
numerator and the denominator in both income tests. In addition,
for taxable years beginning on and after January 1, 2005,
income and gain from hedging transactions that we
enter into to hedge indebtedness incurred or to be incurred to
acquire or carry real estate assets and that are clearly and
timely identified as such also will be excluded from both the
numerator and the denominator for purposes of the 95% gross
income test (but not the 75% gross income test). The following
paragraphs discuss the specific application of the gross income
tests to us.
Rents from Real Property. Rent that we receive from our
real property will qualify as rents from real
property, which is qualifying income for purposes of the
75% and 95% gross income tests, only if the following conditions
are met.
First, the rent must not be based in whole or in part on the
income or profits of any person. Participating rent, however,
will qualify as rents from real property if it is
based on percentages of receipts or sales and the percentages:
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are fixed at the time the leases are entered into; |
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are not renegotiated during the term of the leases in a manner
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conform with normal business practice. |
More generally, the rent will not qualify as rents from
real property if, considering the relevant lease and all
the surrounding circumstances, the arrangement does not conform
with normal business practice, but is in reality used as a means
of basing the rent on income or profits. We have represented to
Baker Donelson that we intend to set and accept rents which are
fixed dollar amounts or a fixed percentage of gross revenue, and
not determined to any extent by reference to any persons
income or profits, in compliance with the rules above.
Second, we must not own, actually or constructively, 10% or more
of the stock or the assets or net profits of any tenant,
referred to as a related party tenant, other than a taxable REIT
subsidiary. Failure to adhere to this limitation would cause the
rental income from the related party tenant to not be treated as
qualifying income for purposes of the REIT gross income tests.
The constructive ownership rules generally provide that, if 10%
or more in value of our stock is owned, directly or indirectly,
by or for any person, we are considered as owning the stock
owned, directly or indirectly, by or for such person. We do not
own any stock or any assets or net profits of any tenant
directly. In addition, our charter prohibits transfers of our
shares that would cause us to own, actually or constructively,
10% or more of the ownership interests in a tenant. We should
not own, actually or constructively, 10% or more of any tenant
other than a taxable REIT subsidiary. We have represented to
counsel that we will not rent any facility to a related-party
tenant. However, because the constructive ownership rules are
broad and it is not possible to monitor continually direct and
indirect transfers of our shares, no absolute assurance can be
given that such transfers or other events of which we have no
knowledge will not cause us to own constructively 10% or more of
a tenant other than a taxable REIT subsidiary at some future
date. MPT Development Services, Inc., our taxable REIT
subsidiary, has made loans to Vibra Healthcare, LLC, the parent
entity of our tenants, in an aggregate amount of approximately
$41.4 million to acquire the operations at certain
facilities. MPT Development Services, Inc. also made a loan of
approximately $6.2 million to Vibra and its subsidiaries
for working capital purposes which was repaid in February 2005.
We believe that the loans to Vibra will be treated as debt
rather than equity interests in Vibra, and that our rental
income from Vibra will be treated as qualifying income for
purposes of the REIT gross income tests. However, there can be
no assurance that the IRS will not take a contrary position. If
the IRS were to successfully treat the loans to Vibra as equity
interests in Vibra, Vibra would be a related party tenant with
respect to our company, the rent that we receive from Vibra
would not be qualifying income for purposes of the REIT gross
income tests, and we could lose our REIT status. However, as
stated above, we believe that the loans to Vibra will be treated
as debt rather than equity interests in Vibra.
As described above, we currently own 100% of the stock of MPT
Development Services, Inc., a taxable REIT subsidiary, and may
in the future own up to 100% of the stock of one or more
additional
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taxable REIT subsidiaries. Under an exception to the
related-party tenant rule described in the preceding paragraph,
rent that we receive from a taxable REIT subsidiary will qualify
as rents from real property as long as (i) the
taxable REIT subsidiary is a qualifying taxable REIT subsidiary
(among other things, it does not operate or manage a healthcare
facility), (ii) at least 90% of the leased space in the
facility is leased to persons other than taxable REIT
subsidiaries and related party tenants, and (iii) the
amount paid by the taxable REIT subsidiary to rent space at the
facility is substantially comparable to rents paid by other
tenants of the facility for comparable space. If in the future
we receive rent from a taxable REIT subsidiary, we will seek to
comply with this exception.
Third, the rent attributable to the personal property leased in
connection with a lease of real property must not be greater
than 15% of the total rent received under the lease. The rent
attributable to personal property under a lease is the amount
that bears the same ratio to total rent under the lease for the
taxable year as the average of the fair market values of the
leased personal property at the beginning and at the end of the
taxable year bears to the average of the aggregate fair market
values of both the real and personal property covered by the
lease at the beginning and at the end of such taxable year (the
personal property ratio). With respect to each of
our leases, we believe that the personal property ratio
generally will be less than 15%. Where that is not, or may in
the future not be, the case, we believe that any income
attributable to personal property will not jeopardize our
ability to qualify as a REIT. There can be no assurance,
however, that the IRS would not challenge our calculation of a
personal property ratio, or that a court would not uphold such
assertion. If such a challenge were successfully asserted, we
could fail to satisfy the 75% or 95% gross income test and thus
lose our REIT status.
Fourth, we cannot furnish or render noncustomary services to the
tenants of our facilities, or manage or operate our facilities,
other than through an independent contractor who is adequately
compensated and from whom we do not derive or receive any
income. However, we need not provide services through an
independent contractor, but instead may provide
services directly to our tenants, if the services are
usually or customarily rendered in connection with
the rental of space for occupancy only and are not considered to
be provided for the tenants convenience. In addition, we
may provide a minimal amount of noncustomary
services to the tenants of a facility, other than through an
independent contractor, as long as our income from the services
does not exceed 1% of our income from the related facility.
Finally, we may own up to 100% of the stock of one or more
taxable REIT subsidiaries, which may provide noncustomary
services to our tenants without tainting our rents from the
related facilities. We do not intend to perform any services
other than customary ones for our tenants, other than services
provided through independent contractors or taxable REIT
subsidiaries. We have represented to Baker Donelson that we will
not perform noncustomary services which would jeopardize our
REIT status.
Finally, in order for the rent payable under the leases of our
properties to constitute rents from real property,
the leases must be respected as true leases for federal income
tax purposes and not treated as service contracts, joint
ventures, financing arrangements, or another type of
arrangement. We generally treat our leases with respect to our
properties as true leases for federal income tax purposes. We
believe that our lease of the Desert Valley Facility is a true
lease; however, because of the nature of the lessees
purchase option thereunder, there can be no assurance that the
IRS would not consider this lease a financing arrangement
instead of a true lease for federal income tax purposes. In that
case, our income from the lease of the Desert Valley Facility
would be interest income rather than rent and would be
qualifying income for purposes of the 75% gross income test to
the extent that our loan does not exceed the fair
market value of the real estate assets associated with the
Desert Valley Facility. All of the interest income from our loan
would be qualifying income for purposes of the 95% gross income
test. We believe that the characterization of the Desert Valley
Facility lease as a financing arrangement would not adversely
affect our ability to qualify as a REIT.
If a portion of the rent we receive from a facility does not
qualify as rents from real property because the rent
attributable to personal property exceeds 15% of the total rent
for a taxable year, the portion of the rent attributable to
personal property will not be qualifying income for purposes of
either the 75% or 95% gross income test. If rent attributable to
personal property, plus any other income that is nonqualifying
income for purposes of the 95% gross income test, during a
taxable year exceeds 5% of our
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gross income during the year, we would lose our REIT status. By
contrast, in the following circumstances, none of the rent from
a lease of a facility would qualify as rents from real
property: (i) the rent is considered based on the
income or profits of the tenant; (ii) the tenant is a
related party tenant or fails to qualify for the exception to
the related-party tenant rule for qualifying taxable REIT
subsidiaries; or (iii) we furnish more than a de minimis
amount of noncustomary services to the tenants of the facility,
or manage or operate the facility, other than through a
qualifying independent contractor or a taxable REIT subsidiary.
In any of these circumstances, we could lose our REIT status
because we would be unable to satisfy either the 75% or 95%
gross income test.
Tenants may be required to pay, besides base rent,
reimbursements for certain amounts we are obligated to pay to
third parties (such as a tenants proportionate share of a
facilitys operational or capital expenses), penalties for
nonpayment or late payment of rent or additions to rent. These
and other similar payments should qualify as rents from
real property.
Interest. The term interest generally does
not include any amount received or accrued, directly or
indirectly, if the determination of the amount depends in whole
or in part on the income or profits of any person. However, an
amount received or accrued generally will not be excluded from
the term interest solely because it is based on a
fixed percentage or percentages of receipts or sales.
Furthermore, to the extent that interest from a loan that is
based upon the residual cash proceeds from the sale of the
property securing the loan constitutes a shared
appreciation provision, income attributable to such
participation feature will be treated as gain from the sale of
the secured property.
Fee Income. We may receive various fees in connection
with our operations. The fees will be qualifying income for
purposes of both the 75% and 95% gross income tests if they are
received in consideration for entering into an agreement to make
a loan secured by real property and the fees are not determined
by income and profits. Other fees are not qualifying income for
purposes of either gross income test. Any fees earned by MPT
Development Services, Inc., our taxable REIT subsidiary, will
not be included for proposes of the gross income tests. We
anticipate that MPT Development Services, Inc. will receive most
of the management fees, inspection fees, and construction fees
in connection with our operations.
Prohibited Transactions. A REIT will incur a 100% tax on
the net income derived from any sale or other disposition of
property, other than foreclosure property, that the REIT holds
primarily for sale to customers in the ordinary course of a
trade or business. We believe that none of our assets will be
held primarily for sale to customers and that a sale of any of
our assets will not be in the ordinary course of our business.
Whether a REIT holds an asset primarily for sale to
customers in the ordinary course of a trade or business
depends, however, on the facts and circumstances in effect from
time to time, including those related to a particular asset.
Nevertheless, we will attempt to comply with the terms of
safe-harbor provisions in the federal income tax laws
prescribing when an asset sale will not be characterized as a
prohibited transaction. We cannot assure you, however, that we
can comply with the safe-harbor provisions or that we will avoid
owning property that may be characterized as property that we
hold primarily for sale to customers in the ordinary
course of a trade or business. We may form or acquire a
taxable REIT subsidiary to hold and dispose of those facilities
we conclude may not fall within the safe-harbor provisions.
Foreclosure Property. We will be subject to tax at the
maximum corporate rate on any income from foreclosure property,
other than income that otherwise would be qualifying income for
purposes of the 75% gross income test, less expenses directly
connected with the production of that income. However, gross
income from foreclosure property will qualify under the 75% and
95% gross income tests. Foreclosure property is any real
property, including interests in real property, and any personal
property incident to such real property acquired by a REIT as
the result of the REITs having bid on the property at
foreclosure, or having otherwise reduced such property to
ownership or possession by agreement or process of law after
actual or imminent default on a lease of the property or on
indebtedness secured by the property, or a Repossession
Action. Property acquired by a Repossession Action will
not be considered foreclosure property if
(i) the REIT held or acquired the property subject to a
lease or securing
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indebtedness for sale to customers in the ordinary course of
business or (ii) the lease or loan was acquired or entered
into with intent to take Repossession Action or in circumstances
where the REIT had reason to know a default would occur. The
determination of such intent or reason to know must be based on
all relevant facts and circumstances. In no case will property
be considered foreclosure property unless the REIT
makes a proper election to treat the property as foreclosure
property.
Foreclosure property includes any qualified healthcare property
acquired by a REIT as a result of a termination of a lease of
such property (other than a termination by reason of a default,
or the imminence of a default, on the lease). A qualified
healthcare property means any real property, including
interests in real property, and any personal property incident
to such real property which is a healthcare facility or is
necessary or incidental to the use of a healthcare facility. For
this purpose, 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, immediately before the termination,
expiration, default, or breach of the lease secured by such
facility, was operated by a provider of such services which was
eligible for participation in the Medicare program under Title
XVIII of the Social Security Act with respect to such facility.
However, a REIT will not be considered to have foreclosed on a
property where the REIT takes control of the property as a
mortgagee-in-possession
and cannot receive any profit or sustain any loss except as a
creditor of the mortgagor. Property generally ceases to be
foreclosure property at the end of the third taxable year
following the taxable year in which the REIT acquired the
property (or, in the case of a qualified healthcare property
which becomes foreclosure property because it is acquired by a
REIT as a result of the termination of a lease of such property,
at the end of the second taxable year following the taxable year
in which the REIT acquired such property) or longer if an
extension is granted by the Secretary of the Treasury. This
period (as extended, if applicable) terminates, and foreclosure
property ceases to be foreclosure property on the first day:
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on which a lease is entered into for the property that, by its
terms, will give rise to income that does not qualify for
purposes of the 75% gross income test, or any amount is received
or accrued, directly or indirectly, pursuant to a lease entered
into on or after such day that will give rise to income that
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on which any construction takes place on the property, other
than completion of a building or any other improvement, where
more than 10% of the construction was completed before default
became imminent; or |
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which is more than 90 days after the day on which the REIT
acquired the property and the property is used in a trade or
business which is conducted by the REIT, other than through an
independent contractor from whom the REIT itself does not derive
or receive any income. For this purpose, in the case of a
qualified healthcare property, income derived or received from
an independent contractor will be disregarded to the extent such
income is attributable to (i) a lease of property in effect
on the date the REIT acquired the qualified healthcare property
(without regard to its renewal after such date so long as such
renewal is pursuant to the terms of such lease as in effect on
such date) or (ii) any lease of property entered into after
such date if, on such date, a lease of such property from the
REIT was in effect and, under the terms of the new lease, the
REIT receives a substantially similar or lesser benefit in
comparison to the prior lease. |
Hedging Transactions. From time to time, we may enter
into hedging transactions with respect to one or more of our
assets or liabilities. Our hedging activities may include
entering into interest rate swaps, caps, and floors, options to
purchase such items, and futures and forward contracts. For
taxable years beginning prior to January 1, 2005, any
periodic income or gain from the disposition of any financial
instrument for these or similar transactions to hedge
indebtedness we incur to acquire or carry real estate
assets should be qualifying income for purposes of the 95%
gross income test, but not the 75% gross income test. For
taxable years beginning on and after January 1, 2005,
income and gain from hedging transactions will be
excluded from gross income for purposes of the 95% gross income
test (but not the 75% gross income test). For those taxable
years, a hedging transaction will mean any
transaction entered
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into in the normal course of our trade or business primarily to
manage the risk of interest rate or price changes, or currency
fluctuations with respect to borrowings made or to be made, or
ordinary obligations incurred or to be incurred, to acquire or
carry real estate assets. We will be required to clearly
identify any such hedging transaction before the close of the
day on which it was acquired, originated, or entered into. Since
the financial markets continually introduce new and innovative
instruments related to risk-sharing or trading, it is not
entirely clear which such instruments will generate income which
will be considered qualifying income for purposes of the gross
income tests. We intend to structure any hedging or similar
transactions so as not to jeopardize our status as a REIT.
Failure to Satisfy Gross Income Tests. If we fail to
satisfy one or both of the gross income tests for our 2004
taxable year, we nevertheless may qualify as a REIT for that
year if we qualify for relief under certain provisions of the
federal income tax laws. Those relief provisions generally will
be available if:
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our failure to meet these tests is due to reasonable cause and
not to willful neglect; |
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we attach a schedule of the sources of our income to our tax
return; and |
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any incorrect information on the schedule is not due to fraud
with intent to evade tax. |
For taxable years beginning on and after January 1, 2005,
those relief provisions will be available if:
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our failure to meet those tests is due to reasonable cause and
not to willful neglect, and |
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following our identification of such failure for any taxable
year, a schedule of the sources of our income is filed in
accordance with regulations prescribed by the Secretary of the
Treasury. |
We cannot with certainty predict whether any failure to meet
these tests will qualify for the relief provisions. As discussed
above in Taxation of Our Company, even
if the relief provisions apply, we would incur a 100% tax on the
gross income attributable to the greater of the amounts by which
we fail the 75% and 95% gross income tests, multiplied by a
fraction intended to reflect our profitability.
Asset Tests. To maintain our qualification as a REIT, we
also must satisfy the following asset tests at the end of each
quarter of each taxable year.
First, at least 75% of the value of our total assets must
consist of:
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cash or cash items, including certain receivables; |
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government securities; |
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real estate assets, which includes interest in real property,
leaseholds, options to acquire real property or leaseholds,
interests in mortgages on real property and shares (or
transferable certificates of beneficial interest) in other REITs; |
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stock in other REITs; and |
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investments in stock or debt instruments attributable to the
temporary investment (i.e., for a period not exceeding
12 months) of new capital that we raise through equity
offerings or offerings of debt with at least a five year term. |
With respect to investments not included in the 75% asset class,
we may not hold securities of any one issuer (other than a
taxable REIT subsidiary) that exceed 5% of the value of our
total assets; nor may we hold securities of any one issuer
(other than a taxable REIT subsidiary) that represent more than
10% of the voting power of all outstanding voting securities of
such issuer, or more than 10% of the value of all outstanding
securities of such issuer.
In addition, we may not hold securities of one or more taxable
REIT subsidiaries that represent in the aggregate more than 20%
of the value of our total assets, irrespective of whether such
securities may also be included in the 75% asset class (e.g., a
mortgage loan issued to a taxable REIT subsidiary). Furthermore,
no more than 25% of our total assets may be represented by
securities that are not included
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in the 75% asset class, but this requirement will necessarily be
satisfied if the 75% asset class requirement is satisfied.
For purposes of the 5% and 10% asset tests, the term
securities does not include stock in another REIT,
equity or debt securities of a qualified REIT subsidiary or
taxable REIT subsidiary, mortgage loans that constitute real
estate assets, or equity interests in a partnership. The term
securities, however, generally includes debt
securities issued by a partnership or another REIT, except that
for purposes of the 10% value test, the term
securities does not include:
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Straight debt, defined as a written unconditional
promise to pay on demand or on a specified date a sum certain in
money if (i) the debt is not convertible, directly or
indirectly, into stock, and (ii) the interest rate and
interest payment dates are not contingent on profits, the
borrowers discretion, or similar factors. Straight
debt securities do not include any securities issued by a
partnership or a corporation in which we or any controlled TRS
(i.e., a TRS in which we own directly or indirectly more than
50% of the voting power or value of the stock) holds
non-straight debt securities that have an aggregate
value of more than 1% of the issuers outstanding
securities. However, straight debt securities
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a contingency relating to the time of payment of interest or
principal, as long as either (i) there is no change to the
effective yield of the debt obligation, other than a change to
the annual yield that does not exceed the greater of 0.25% or 5%
of the annual yield, or (ii) neither the aggregate issue
price nor the aggregate face amount of the issuers debt
obligations held by us exceeds $1 million and no more than
12 months of unaccrued interest on the debt obligations can
be required to be prepaid; and |
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a contingency relating to the time or amount of payment upon a
default or prepayment of a debt obligation, as long as the
contingency is consistent with customary commercial practice; |
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Any loan to an individual or an estate; |
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Any section 467 rental agreement, other than an
agreement with a related party tenant; |
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Any obligation to pay rents from real property; |
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Any security issued by a state or any political subdivision
thereof, the District of Columbia, a foreign government of any
political subdivision thereof, or the Commonwealth of Puerto
Rico, but only if the determination of any payment thereunder
does not depend in whole or in part on the profits of any entity
not described in this paragraph or payments on any obligation
issued by an entity not described in this paragraph; |
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Any security issued by a REIT; |
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Any debt instrument of an entity treated as a partnership for
federal income tax purposes to the extent of our interest as a
partner in the partnership; |
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Any debt instrument of an entity treated as a partnership for
federal income tax purposes not described in the preceding
bullet points if at least 75% of the partnerships gross
income, excluding income from prohibited transactions, is
qualifying income for purposes of the 75% gross income test
described above in Requirements for
Qualification Income Tests. |
For purposes of the 10% value test, our proportionate share of
the assets of a partnership is our proportionate interest in any
securities issued by the partnership, without regard to
securities described in the last two bullet points above.
In connection with the acquisition of the facilities in our
current portfolio, MPT Development Services, Inc., our taxable
REIT subsidiary, has made loans to Vibra Healthcare, LLC, the
parent entity of our tenants, in an aggregate amount of
approximately $41.4 million to acquire the operations at
those facilities. MPT Development Services, Inc. also made a
loan of approximately $6.2 million to Vibra and its
subsidiaries for working capital purposes which was repaid in
February 2005. Those loans bear interest at
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an annual rate of 10.25%. Our operating partnership loaned the
funds to MPT Development Services, Inc. to make these loans. The
loans from our operating partnership to MPT Development
Services, Inc. bear interest at an annual rate of 9.25%.
Baker Donelson is of the opinion that the loans to Vibra will be
treated as debt rather than equity interests in Vibra, and that
our rental income from Vibra will be treated as qualifying
income for purposes of the REIT gross income tests. However,
there can be no assurance that the IRS will not take a contrary
position. If the IRS were to successfully treat the loans to
Vibra as equity interests in Vibra, Vibra would be a
related party tenant with respect to our company and
the rent that we receive from Vibra 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 the loans to Vibra as interests held by our
operating partnership rather than by MPT Development Services,
Inc. and to treat the loans as other than straight debt, we
would fail the 10% asset test with respect to such interests
and, as a result, could lose our REIT status. Baker Donelson is
of the opinion that the loans to Vibra will be treated as
straight debt for federal income tax purposes.
We will monitor the status of our assets for purposes of the
various asset tests and will manage our portfolio in order to
comply at all times with such tests. If we fail to satisfy the
asset tests at the end of a calendar quarter, we will not lose
our REIT status if:
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we satisfied the asset tests at the end of the preceding
calendar quarter; and |
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the discrepancy between the value of our assets and the asset
test requirements arose from changes in the market values of our
assets and was not wholly or partly caused by the acquisition of
one or more non- qualifying assets. |
If we did not satisfy the condition described in the second
item, above, we still could avoid disqualification by
eliminating any discrepancy within 30 days after the close
of the calendar quarter in which it arose.
In the event that, at the end of any calendar quarter in a
taxable year beginning on or after January 1, 2005, we
violate the 5% or 10% test described above, we will not lose our
REIT status if (1) the failure is de minimis (up to the
lesser of 1% of our assets or $10 million) and (2) we
dispose of assets or otherwise comply with the asset tests
within six months after the last day of the quarter in which we
identified the failure of the asset test. In the event of a more
than de minimis failure of the 5% or 10% tests, or a failure of
the other assets test, at the end of any calendar quarter in a
taxable year beginning on or after January 1, 2005, as long
as the failure was due to reasonable cause and not to willful
neglect, we will not lose our REIT status if we (1) dispose
of assets or otherwise comply with the asset tests within six
months after the last day of the quarter in which we identified
the failure of the asset test and (2) pay a tax equal to
the greater of $50,000 or 35% of the net income from the
nonqualifying assets during the period in which we failed to
satisfy the asset tests.
Distribution Requirements. Each taxable year, we must
distribute dividends, other than capital gain dividends and
deemed distributions of retained capital gain, to our
stockholders in an aggregate amount not less than:
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90% of our REIT taxable income, computed without
regard to the dividends-paid deduction or our net capital gain
or loss, and |
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90% of our after-tax net income, if any, from foreclosure
property, |
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the sum of certain items of non-cash income. |
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We must pay such distributions in the taxable year to which they
relate, or in the following taxable year if we declare the
distribution before we timely file our federal income tax return
for the year and pay the distribution on or before the first
regular dividend payment date after such declaration.
We will pay federal income tax on taxable income, including net
capital gain, that we do not distribute to stockholders. In
addition, we will incur a 4% nondeductible excise tax on the
excess of a specified required distribution over amounts we
actually distribute if we distribute an amount less than the
required distribution during a calendar year, or by the end of
January following the calendar year in the case of distributions
with declaration and record dates falling in the last three
months of the calendar year. The required distribution must not
be less than the sum of:
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85% of our REIT ordinary income for the year; |
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95% of our REIT capital gain income for the year; and |
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any undistributed taxable income from prior periods. |
We may elect to retain and pay income tax on the net long-term
capital gain we receive in a taxable year. See
Taxation of Taxable United
States Stockholders. If we so elect, we will be
treated as having distributed any such retained amount for
purposes of the 4% excise tax described above. We intend to make
timely distributions sufficient to satisfy the annual
distribution requirements and to avoid corporate income tax and
the 4% excise tax.
It is possible that, from time to time, we may experience timing
differences between the actual receipt of income and actual
payment of deductible expenses and the inclusion of that income
and deduction of such expenses in arriving at our REIT taxable
income. For example, we may not deduct recognized capital losses
from our REIT taxable income. Further, it is
possible that, from time to time, we may be allocated a share of
net capital gain attributable to the sale of depreciated
property that exceeds our allocable share of cash attributable
to that sale. As a result of the foregoing, we may have less
cash than is necessary to distribute all of our taxable income
and thereby avoid corporate income tax and the excise tax
imposed on certain undistributed income. In such a situation, we
may need to borrow funds or issue additional shares of common or
preferred stock.
Under certain circumstances, we may be able to correct a failure
to meet the distribution requirement for a year by paying
deficiency dividends to our stockholders in a later
year. We may include such deficiency dividends in our deduction
for dividends paid for the earlier year. Although we may be able
to avoid income tax on amounts distributed as deficiency
dividends, we will be required to pay interest based upon the
amount of any deduction we take for deficiency dividends.
Recordkeeping Requirements. We must maintain certain
records in order to qualify as a REIT. In addition, to avoid
paying a penalty, we must request on an annual basis information
from our stockholders designed to disclose the actual ownership
of our shares of outstanding capital stock. We intend to comply
with these requirements.
Failure to Qualify. If we failed to qualify as a REIT in
any taxable year and no relief provision applied, we would have
the following consequences. We would be subject to federal
income tax and any applicable alternative minimum tax at rates
applicable to regular C corporations on our taxable income,
determined without reduction for amounts distributed to
stockholders. We would not be required to make any distributions
to stockholders, and any distributions to stockholders would be
taxable as ordinary income to the extent of our current and
accumulated earnings and profits. Corporate stockholders could
be eligible for a dividends-received deduction if certain
conditions are satisfied. Unless we qualified for relief under
specific statutory provisions, we would not be permitted to
elect taxation as a REIT for the four taxable years following
the year during which we ceased to qualify as a REIT.
For taxable years beginning on and after January 1, 2005,
if we fail to satisfy one or more requirements for REIT
qualification, other than the gross income tests and the asset
tests, we could avoid disqualification if the failure is due to
reasonable cause and not to willful neglect and we pay a penalty
of
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$50,000 for each such failure. In addition, there are relief
provisions for a failure of the gross income tests and asset
tests, as described above in Income
Tests and Asset Tests.
Taxation of Taxable United States Stockholders. As
long as we qualify as a REIT, a taxable United
States stockholder will be required to take into
account as ordinary income distributions made out of our current
or accumulated earnings and profits that we do not designate as
capital gain dividends or retained long-term capital gain. A
United States stockholder will not qualify for the
dividends-received deduction generally available to
corporations. The term United
States stockholder means a holder of shares of common
stock that, for United States federal income tax purposes,
is:
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a citizen or resident of the United States; |
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a corporation or partnership (including an entity treated as a
corporation or partnership for United States federal income
tax purposes) created or organized under the laws of the United
States or of a political subdivision of the United States; |
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an estate whose income is subject to United States federal
income taxation regardless of its source; or |
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any trust if (i) a United States court is able to
exercise primary supervision over the administration of such
trust and one or more United States persons have the
authority to control all substantial decisions of the trust or
(ii) it has a valid election in place to be treated as a
United States person. |
Distributions paid to a United States stockholder generally
will not qualify for the new 15% tax rate for qualified
dividend income. The Jobs and Growth Tax Relief
Reconciliation Act of 2003 reduced the maximum tax rate for
qualified dividend income from 38.6% to 15% for tax years
through 2008. Without future congressional action, the maximum
tax rate on qualified dividend income will move to 35% in 2009
and 39.6% in 2011. Qualified dividend income generally includes
dividends paid by domestic C corporations and certain
qualified foreign corporations to most United
States noncorporate stockholders. Because we are not
generally subject to federal income tax on the portion of our
REIT taxable income distributed to our stockholders, our
dividends generally will not be eligible for the new 15% rate on
qualified dividend income. As a result, our ordinary REIT
dividends will continue to be taxed at the higher tax rate
applicable to ordinary income. Currently, the highest marginal
individual income tax rate on ordinary income is 35%. However,
the 15% tax rate for qualified dividend income will apply to our
ordinary REIT dividends, if any, that are (i) attributable
to dividends received by us from non-REIT corporations, such as
our taxable REIT subsidiary, and (ii) attributable to
income upon which we have paid corporate income tax (e.g., to
the extent that we distribute less than 100% of our taxable
income). In general, to qualify for the reduced tax rate on
qualified dividend income, a stockholder must hold our common
stock for more than 60 days during the
120-day period
beginning on the date that is 60 days before the date on
which our common stock becomes ex-dividend.
Distributions to a United States stockholder which we
designate as capital gain dividends will generally be treated as
long-term capital gain, without regard to the period for which
the United States stockholder has held its common stock. We
generally will designate our capital gain dividends as either
15%, 20% or 25% rate distributions. A corporate United
States stockholder, however, may be required to treat up to
20% of certain capital gain dividends as ordinary income.
We may elect to retain and pay income tax on the net long-term
capital gain that we receive in a taxable year. In that case, a
United States stockholder would be taxed on its
proportionate share of our undistributed long-term capital gain.
The United States stockholder would receive a credit or
refund for its proportionate share of the tax we paid. The
United States stockholder would increase the basis in its
shares of common stock by the amount of its proportionate share
of our undistributed long-term capital gain, minus its share of
the tax we paid.
A United States stockholder will not incur tax on a
distribution in excess of our current and accumulated earnings
and profits if the distribution does not exceed the adjusted
basis of the United States stockholders shares.
Instead, the distribution will reduce the adjusted basis of the
shares, and any
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amount in excess of both our current and accumulated earnings
and profits and the adjusted basis will be treated as capital
gain, long-term if the shares have been held for more than one
year, provided the shares are a capital asset in the hands of
the United States stockholder. In addition, any
distribution we declare in October, November, or December of any
year that is payable to a United States stockholder of
record on a specified date in any of those months will be
treated as paid by us and received by the United
States stockholder on December 31 of the year,
provided we actually pay the distribution during January of the
following calendar year.
Stockholders may not include in their individual income tax
returns any of our net operating losses or capital losses.
Instead, these losses are generally carried over by us for
potential offset against our future income. Taxable
distributions from us and gain from the disposition of shares of
common stock will not be treated as passive activity income;
stockholders generally will not be able to apply any
passive activity losses, such as losses from certain
types of limited partnerships in which the stockholder is a
limited partner, against such income. In addition, taxable
distributions from us and gain from the disposition of common
stock generally will be treated as investment income for
purposes of the investment interest limitations. We will notify
stockholders after the close of our taxable year as to the
portions of the distributions attributable to that year that
constitute ordinary income, return of capital, and capital gain.
Taxation of United States Stockholders on the
Disposition of Shares of Common Stock. In general, a United
States stockholder who is not a dealer in securities must
treat any gain or loss realized upon a taxable disposition of
our shares of common stock as long-term capital gain or loss if
the United States stockholder has held the stocks for more
than one year, and otherwise as short-term capital gain or loss.
However, a United States stockholder must treat any loss
upon a sale or exchange of common stock held for six months or
less as a long-term capital loss to the extent of capital gain
dividends and any other actual or deemed distributions from us
which the United States stockholder treats as long-term
capital gain. All or a portion of any loss that a United
States stockholder realizes upon a taxable disposition of
common stock may be disallowed if the United
States stockholder purchases other shares of our common
stock within 30 days before or after the disposition.
Capital Gains and Losses. The tax-rate differential
between capital gain and ordinary income for non-corporate
taxpayers may be significant. A taxpayer generally must hold a
capital asset for more than one year for gain or loss derived
from its sale or exchange to be treated as long-term capital
gain or loss. The highest marginal individual income tax rate is
currently 35%. The maximum tax rate on long-term capital gain
applicable to individuals is 15% for sales and exchanges of
assets held for more than one year and occurring on or after
May 6, 2003 through December 31, 2008. The maximum tax
rate on long-term capital gain from the sale or exchange of
section 1250 property (i.e., generally,
depreciable real property) is 25% to the extent the gain would
have been treated as ordinary income if the property were
section 1245 property (i.e., generally,
depreciable personal property). We generally may designate
whether a distribution we designate as capital gain dividends
(and any retained capital gain that we are deemed to distribute)
is taxable to non-corporate stockholders at a 15% or 25% rate.
The characterization of income as capital gain or ordinary
income may affect the deductibility of capital losses. A
non-corporate taxpayer may deduct capital losses not offset by
capital gains against its ordinary income only up to a maximum
of $3,000 annually. A non-corporate taxpayer may carry unused
capital losses forward indefinitely. A corporate taxpayer must
pay tax on its net capital gain at corporate ordinary-income
rates. A corporate taxpayer may deduct capital losses only to
the extent of capital gains, with unused losses carried back
three years and forward five years.
Information Reporting Requirements and Backup
Withholding. We will report to our stockholders and to the
IRS the amount of distributions we pay during each calendar year
and the amount of tax we withhold, if any. A stockholder may be
subject to backup withholding at a rate of up to 28% with
respect to distributions unless the holder:
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is a corporation or comes within certain other exempt categories
and when required, demonstrates this fact; or |
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provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise
complies with the applicable requirements of the backup
withholding rules. |
A stockholder who does not provide us with its correct taxpayer
identification number also may be subject to penalties imposed
by the IRS. Any amount paid as backup withholding will be
creditable against the stockholders income tax liability.
In addition, we may be required to withhold a portion of capital
gain distributions to any stockholders who fail to certify their
non-foreign status to us. For a discussion of the backup
withholding rules as applied to
non-United
States stockholders, see Taxation of
Non-United
States Stockholders.
Taxation of Tax-Exempt Stockholders. Tax-exempt entities,
including qualified employee pension and profit sharing trusts
and individual retirement accounts, referred to as pension
trusts, generally are exempt from federal income taxation.
However, they are subject to taxation on their unrelated
business taxable income. While many investments in real
estate generate unrelated business taxable income, the IRS has
issued a ruling that dividend distributions from a REIT to an
exempt employee pension trust do not constitute unrelated
business taxable income so long as the exempt employee pension
trust does not otherwise use the shares of the REIT in an
unrelated trade or business of the pension trust. Based on that
ruling, amounts we distribute to tax-exempt stockholders
generally should not constitute unrelated business taxable
income. However, if a tax-exempt stockholder were to finance its
acquisition of common stock with debt, a portion of the income
it received from us would constitute unrelated business taxable
income pursuant to the debt-financed property rules.
Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts and
qualified group legal services plans that are exempt from
taxation under special provisions of the federal income tax laws
are subject to different unrelated business taxable income
rules, which generally will require them to characterize
distributions they receive from us as unrelated business taxable
income. Finally, in certain circumstances, a qualified employee
pension or profit-sharing trust that owns more than 10% of our
shares of common stock must treat a percentage of the dividends
it receives from us as unrelated business taxable income. The
percentage is equal to the gross income we derive from an
unrelated trade or business, determined as if we were a pension
trust, divided by our total gross income for the year in which
we pay the dividends. This rule applies to a pension trust
holding more than 10% of our shares only if:
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the percentage of our dividends which the tax-exempt trust must
treat as unrelated business taxable income is at least 5%; |
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we qualify as a REIT by reason of the modification of the rule
requiring that no more than 50% of our shares of common stock be
owned by five or fewer individuals, which modification allows
the beneficiaries of the pension trust to be treated as holding
shares in proportion to their actual interests in the pension
trust; and |
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either of the following applies: |
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one pension trust owns more than 25% of the value of our shares
of common stock; or |
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a group of pension trusts individually holding more than 10% of
the value of our shares of common stock collectively owns more
than 50% of the value of our shares of common stock. |
Taxation of
Non-United
States Stockholders. The rules governing United
States federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and
other foreign stockholders are complex. This section is only a
summary of such rules. We urge
non-United
States stockholders to consult their own tax advisors to
determine the impact of federal, state, and local income tax
laws on ownership of shares of common stock, including any
reporting requirements.
A non-United
States stockholder that receives a distribution which
(i) is not attributable to gain from our sale or exchange
of United States real property interests
(defined below) and (ii) we do not designate a capital gain
dividend (or retained capital gain) will recognize ordinary
income to the extent of our current or accumulated earnings and
profits. A withholding tax equal to 30% of the gross amount of
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the distribution ordinarily will apply unless an applicable tax
treaty reduces or eliminates the tax. However, a
non-United
States stockholder generally will be subject to federal
income tax at graduated rates on any distribution treated as
effectively connected with the
non-United
States stockholders conduct of a United
States trade or business, in the same manner as United
States stockholders are taxed on distributions. A corporate
non-United
States stockholder may, in addition, be subject to the 30%
branch profits tax. We plan to withhold United
States income tax at the rate of 30% on the gross amount of
any distribution paid to a
non-United
States stockholder unless:
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a lower treaty rate applies and the
non-United
States stockholder files an IRS
Form W-8BEN
evidencing eligibility for that reduced rate with us; or |
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the non-United
States stockholder files an IRS
Form W-8ECI with
us claiming that the distribution is effectively connected
income. |
A non-United
States stockholder will not incur tax on a distribution in
excess of our current and accumulated earnings and profits if
the excess portion of the distribution does not exceed the
adjusted basis of the stockholders shares of common stock.
Instead, the excess portion of the distribution will reduce the
adjusted basis of the shares. A
non-United
States stockholder will be subject to tax on a distribution
that exceeds both our current and accumulated earnings and
profits and the adjusted basis of its shares, if the
non-United
States stockholder otherwise would be subject to tax on
gain from the sale or disposition of shares of common stock, as
described below. Because we generally cannot determine at the
time we make a distribution whether or not the distribution will
exceed our current and accumulated earnings and profits, we
normally will withhold tax on the entire amount of any
distribution at the same rate as we would withhold on a
dividend. However, a
non-United
States stockholder may obtain a refund of amounts we
withhold if we later determine that a distribution in fact
exceeded our current and accumulated earnings and profits.
We must withhold 10% of any distribution that exceeds our
current and accumulated earnings and profits. We will,
therefore, withhold at a rate of 10% on any portion of a
distribution not subject to withholding at a rate of 30%.
For any year in which we qualify as a REIT, a
non-United
States stockholder will incur tax on distributions
attributable to gain from our sale or exchange of United
States real property interests under the
FIRPTA provisions of the Code. The term United
States real property interests includes interests in
real property and stocks in corporations at least 50% of whose
assets consist of interests in real property. Under the FIRPTA
rules, a non-United
States stockholder is taxed on distributions attributable
to gain from sales of United States real property interests
as if the gain were effectively connected with the conduct of a
United States business of the
non-United
States stockholder. A
non-United States
stockholder thus would be taxed on such a distribution at the
normal capital gain rates applicable to United
States stockholders, subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of
a nonresident alien individual. A
non-United
States corporate stockholder not entitled to treaty relief
or exemption also may be subject to the 30% branch profits tax
on such a distribution. We must withhold 35% of any distribution
that we could designate as a capital gain dividend. A
non-United
States stockholder may receive a credit against our tax
liability for the amount we withhold.
For taxable years beginning on and after January 1, 2005,
for non-U.S. stockholders of our publicly-traded shares, capital
gain distributions that are attributable to our sale of real
property will not be subject to FIRPTA and therefore will be
treated as ordinary dividends rather than as gain from the sale
of a United States real property interest, as long as the
non-U.S. stockholder did not own more than 5% of the class of
our stock on which the distributions are made during the taxable
year. As a result, non-U.S. stockholders generally would be
subject to withholding tax on such capital gain distributions in
the same manner as they are subject to withholding tax on
ordinary dividends.
A non-United
States stockholder generally will not incur tax under
FIRPTA with respect to gain on a sale of shares of common stock
as long as, at all times,
non-United
States persons hold, directly or indirectly, less than 50%
in value of the outstanding common stock. We cannot assure you
that this test
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will be met. In addition, a
non-United
States stockholder that owned, actually or constructively,
5% or less of the outstanding common stock at all times during a
specified testing period will not incur tax under FIRPTA on gain
from a sale of common stock if the stock is regularly
traded on an established securities market. Any gain
subject to tax under FIRPTA will be treated in the same manner
as it would be in the hands of United States stockholders
subject to alternative minimum tax, but under a special
alternative minimum tax in the case of nonresident alien
individuals.
A non-United
States stockholder generally will incur tax on gain from
the sale of common stock not subject to FIRPTA if:
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the gain is effectively connected with the conduct of the
non-United
States stockholders United States trade or
business, in which case the
non-United
States stockholder will be subject to the same treatment as
United States stockholders with respect to the gain; or |
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the non-United
States stockholder is a nonresident alien individual who
was present in the United States for 183 days or more
during the taxable year and has a tax home in the
United States, in which case the
non-United
States stockholder will incur a 30% tax on capital gains. |
Other Tax Consequences
Tax Aspects of Our Investments in the Operating
Partnership. The following discussion summarizes certain
federal income tax considerations applicable to our direct or
indirect investment in our operating partnership and any
subsidiary partnerships or limited liability companies we form
or acquire, each individually referred to as a Partnership and,
collectively, as Partnerships. The following discussion does not
cover state or local tax laws or any federal tax laws other than
income tax laws.
Classification as Partnerships. We are entitled to
include in our income our distributive share of each
Partnerships income and to deduct our distributive share
of each Partnerships losses only if such Partnership is
classified for federal income tax purposes as a partnership (or
an entity that is disregarded for federal income tax purposes if
the entity has only one owner or member), rather than as a
corporation or an association taxable as a corporation. An
organization with at least two owners or members will be
classified as a partnership, rather than as a corporation, for
federal income tax purposes if it:
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is treated as a partnership under the Treasury regulations
relating to entity classification (the
check-the-box
regulations); and |
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is not a publicly traded partnership. |
Under the check-the-box
regulations, an unincorporated entity with at least two owners
or members may elect to be classified either as an association
taxable as a corporation or as a partnership. If such an entity
does not make an election, it generally will be treated as a
partnership for federal income tax purposes. We intend that each
Partnership will be classified as a partnership for federal
income tax purposes (or else a disregarded entity where there
are not at least two separate beneficial owners).
A publicly traded partnership is a partnership whose interests
are traded on an established securities market or are readily
tradable on a secondary market (or a substantial equivalent). A
publicly traded partnership is generally treated as a
corporation for federal income tax purposes, but will not be so
treated for any taxable year for which at least 90% of the
partnerships gross income consists of specified passive
income, including real property rents, gains from the sale or
other disposition of real property, interest, and dividends (the
90% passive income exception).
Treasury regulations, referred to as PTP regulations, provide
limited safe harbors from treatment as a publicly traded
partnership. Pursuant to one of those safe harbors, or private
placement exclusion, interests in a partnership will not be
treated as readily tradable on a secondary market or the
substantial equivalent thereof if (i) all interests in the
partnership were issued in a transaction or transactions that
were not required to be registered under the Securities Act, and
(ii) the partnership does not have more than 100 partners
at any time during the partnerships taxable year. For the
determination of the number of partners in a partnership, a
person owning an interest in a partnership, grantor trust, or
S corporation that owns an interest in the partnership is
treated as a partner in the partnership only if
(i) substantially all of the value
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of the owners interest in the entity is attributable to
the entitys direct or indirect interest in the partnership
and (ii) a principal purpose of the use of the entity is to
permit the partnership to satisfy the 100-partner limitation.
Each Partnership should qualify for the private placement
exclusion.
We have not requested, and do not intend to request, a ruling
from the Internal Revenue Service that the Partnerships will be
classified as partnerships for federal income tax purposes. If
for any reason a Partnership were taxable as a corporation,
rather than as a partnership, for federal income tax purposes,
we likely would not be able to qualify as a REIT. See
Requirements for Qualification
Income Tests and Requirements for
Qualification Asset Tests. In addition, any
change in a Partnerships status for tax purposes might be
treated as a taxable event, in which case we might incur tax
liability without any related cash distribution. See
Requirements for Qualification
Distribution Requirements. Further, items of income and
deduction of such Partnership would not pass through to its
partners, and its partners would be treated as stockholders for
tax purposes. Consequently, such Partnership would be required
to pay income tax at corporate rates on its net income, and
distributions to its partners would constitute dividends that
would not be deductible in computing such Partnerships
taxable income.
Income Taxation of the Partnerships and Their Partners
Partners, Not the Partnerships, Subject to Tax. A
partnership is not a taxable entity for federal income tax
purposes. We will therefore take into account our allocable
share of each Partnerships income, gains, losses,
deductions, and credits for each taxable year of the Partnership
ending with or within our taxable year, even if we receive no
distribution from the Partnership for that year or a
distribution less than our share of taxable income. Similarly,
even if we receive a distribution, it may not be taxable if the
distribution does not exceed our adjusted tax basis in our
interest in the Partnership.
Partnership Allocations. Although a partnership agreement
generally will determine the allocation of income and losses
among partners, allocations will be disregarded for tax purposes
if they do not comply with the provisions of the federal income
tax laws governing partnership allocations. If an allocation is
not recognized for federal income tax purposes, the item subject
to the allocation will be reallocated in accordance with the
partners interests in the partnership, which will be
determined by taking into account all of the facts and
circumstances relating to the economic arrangement of the
partners with respect to such item. Each Partnerships
allocations of taxable income, gain, and loss are intended to
comply with the requirements of the federal income tax laws
governing partnership allocations.
Tax Allocations With Respect to Contributed Properties.
Income, gain, loss, and deduction attributable to appreciated or
depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated in
a manner such that the contributing partner is charged with, or
benefits from, respectively, the unrealized gain or unrealized
loss associated with the property at the time of the
contribution. Similar rules apply with respect to property
revalued on the books of a partnership. The amount of such
unrealized gain or unrealized loss, referred to as built-in gain
or built-in loss, is generally equal to the difference between
the fair market value of the contributed or revalued property at
the time of contribution or revaluation and the adjusted tax
basis of such property at that time, referred to as a book-tax
difference. Such allocations are solely for federal income tax
purposes and do not affect the book capital accounts or other
economic or legal arrangements among the partners. The United
States Treasury Department has issued regulations requiring
partnerships to use a reasonable method for
allocating items with respect to which there is a book-tax
difference and outlining several reasonable allocation methods.
Our operating partnership generally intends to use the
traditional method for allocating items with respect to which
there is a book-tax difference.
Basis in Partnership Interest. Our adjusted tax
basis in any partnership interest we own generally will be:
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the amount of cash and the basis of any other property we
contribute to the partnership; |
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increased by our allocable share of the partnerships
income (including tax-exempt income) and our allocable share of
indebtedness of the partnership; and |
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reduced, but not below zero, by our allocable share of the
partnerships loss, the amount of cash and the basis of
property distributed to us, and constructive distributions
resulting from a reduction in our share of indebtedness of the
partnership. |
Loss allocated to us in excess of our basis in a partnership
interest will not be taken into account until we again have
basis sufficient to absorb the loss. A reduction of our share of
partnership indebtedness will be treated as a constructive cash
distribution to us, and will reduce our adjusted tax basis.
Distributions, including constructive distributions, in excess
of the basis of our partnership interest will constitute taxable
income to us. Such distributions and constructive distributions
normally will be characterized as long-term capital gain.
Depreciation Deductions Available to Partnerships. The
initial tax basis of property is the amount of cash and the
basis of property given as consideration for the property. A
partnership in which we are a partner generally will depreciate
property for federal income tax purposes under the modified
accelerated cost recovery system of depreciation, referred to as
MACRS. Under MACRS, the partnership generally will depreciate
furnishings and equipment over a seven year recovery period
using a 200% declining balance method and a half-year
convention. If, however, the partnership places more than 40% of
its furnishings and equipment in service during the last three
months of a taxable year, a mid-quarter depreciation convention
must be used for the furnishings and equipment placed in service
during that year. Under MACRS, the partnership generally will
depreciate buildings and improvements over a 39 year
recovery period using a straight line method and a mid-month
convention. The operating partnerships initial basis in
properties acquired in exchange for units of the operating
partnership should be the same as the transferors basis in
such properties on the date of acquisition by the partnership.
Although the law is not entirely clear, the partnership
generally will depreciate such property for federal income tax
purposes over the same remaining useful lives and under the same
methods used by the transferors. The partnerships tax
depreciation deductions will be allocated among the partners in
accordance with their respective interests in the partnership,
except to the extent that the partnership is required under the
federal income tax laws governing partnership allocations to use
a method for allocating tax depreciation deductions attributable
to contributed or revalued properties that results in our
receiving a disproportionate share of such deductions.
For property placed in service prior to January 1, 2005, a
first-year bonus depreciation of 50% may be available for
certain tenant improvements. In addition, certain qualified
leasehold improvement property placed in service before
January 1, 2006 will be depreciated over a 15-year recovery
period using a straight method and a half-year convention.
Sale of a Partnerships Property. Generally, any
gain realized by a Partnership on the sale of property held for
more than one year will be long-term capital gain, except for
any portion of the gain treated as depreciation or cost recovery
recapture. Any gain or loss recognized by a Partnership on the
disposition of contributed or revalued properties will be
allocated first to the partners who contributed the properties
or who were partners at the time of revaluation, to the extent
of their built-in gain or loss on those properties for federal
income tax purposes. The partners built-in gain or loss on
contributed or revalued properties is the difference between the
partners proportionate share of the book value of those
properties and the partners tax basis allocable to those
properties at the time of the contribution or revaluation. Any
remaining gain or loss recognized by the Partnership on the
disposition of contributed or revalued properties, and any gain
or loss recognized by the Partnership on the disposition of
other properties, will be allocated among the partners in
accordance with their percentage interests in the Partnership.
Our share of any Partnership gain from the sale of inventory or
other property held primarily for sale to customers in the
ordinary course of the Partnerships trade or business will
be treated as income from a prohibited transaction subject to a
100% tax. Income from a prohibited transaction may have an
adverse effect on our ability to satisfy the gross income tests
for REIT status. See Requirements for
Qualification Income Tests. We do not
presently intend to acquire or hold, or to allow any Partnership
167
to acquire or hold, any property that is likely to be treated as
inventory or property held primarily for sale to customers in
the ordinary course of our, or the Partnerships, trade or
business.
Taxable REIT Subsidiaries. As described above, we have
formed and have made a timely election to treat MPT Development
Services, Inc. as a taxable REIT subsidiary and may form or
acquire additional taxable REIT subsidiaries in the future. A
taxable REIT subsidiary may provide services to our tenants and
engage in activities unrelated to our tenants, such as
third-party management, development, and other independent
business activities.
We and any corporate subsidiary in which we own stock must make
an election for the subsidiary to be treated as a taxable REIT
subsidiary. If a taxable REIT subsidiary directly or indirectly
owns shares of a corporation with more than 35% of the value or
voting power of all outstanding shares of the corporation, the
corporation will automatically also be treated as a taxable REIT
subsidiary. Overall, no more than 20% of the value of our assets
may consist of securities of one or more taxable REIT
subsidiaries, irrespective of whether such securities may also
qualify under the 75% assets test, and no more than 25% of the
value of our assets may consist of the securities that are not
qualifying assets under the 75% test, including, among other
things, certain securities of a taxable REIT subsidiary, such as
stock or non-mortgage debt.
Rent we receive from our taxable REIT subsidiaries will qualify
as rents from real property as long as at least 90%
of the leased space in the property is leased to persons other
than taxable REIT subsidiaries and related party tenants, and
the amount paid by the taxable REIT subsidiary to rent space at
the property is substantially comparable to rents paid by other
tenants of the property for comparable space. The taxable REIT
subsidiary rules limit the deductibility of interest paid or
accrued by a taxable REIT subsidiary to us to assure that the
taxable REIT subsidiary is subject to an appropriate level of
corporate taxation. Further, the rules impose a 100% excise tax
on certain types of transactions between a taxable REIT
subsidiary and us or our tenants that are not conducted on an
arms-length basis.
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 which is
eligible for participation in the Medicare program under Title
XVIII of the Social Security Act with respect to such facility.
State and Local Taxes. We and our stockholders may be
subject to taxation by various states and localities, including
those in which we or a stockholder transacts business, owns
property or resides. The state and local tax treatment may
differ from the federal income tax treatment described above.
Consequently, stockholders should consult their own tax advisors
regarding the effect of state and local tax laws upon an
investment in our common stock.
PLAN OF DISTRIBUTION
We are registering the resale of the shares of common stock
offered by this prospectus in accordance with the terms of a
registration rights agreement that we entered into with the
selling stockholders in connection with our April 2004 private
placement. We are also registering the resale of
521,908 shares of common stock held by our founders, and
30,000 shares of restricted common stock held by one of our
executive officers who is not one of our founders. The
registration of these shares, however, does not necessarily mean
that any of the shares will be offered or sold by the selling
stockholders or their respective donees, pledgees or other
transferees or successors in interest. We will not receive any
proceeds from the sale of the common stock offered by this
prospectus.
The sale of the shares of common stock by any selling
stockholder, including any donee, pledgee or other transferee
who receives shares from a selling stockholder, may be effected
from time to time by selling them directly to purchasers or to
or through broker-dealers. In connection with any sale, a
broker-dealer may act as agent for the selling stockholder or
may purchase from the selling stockholder all or a
168
portion of the shares as principal. These sales may be made on
the NYSE or other exchanges on which our common stock is then
traded, in the over-the-counter market or in private
transactions.
The shares may be sold in one or more transactions at:
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fixed prices; |
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prevailing market prices at the time of sale; |
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prices related to the prevailing market prices; or |
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otherwise negotiated prices. |
The shares of common stock may be sold in one or more of the
following transactions:
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ordinary brokerage transactions and transactions in which a
broker-dealer solicits purchasers; |
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block trades (which may involve crosses or transactions in which
the same broker acts as an agent on both sides of the trade) in
which a broker-dealer may sell all or a portion of such shares
as agent but may position and resell all or a portion of the
block as principal to facilitate the transaction; |
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purchases by a broker-dealer as principal and resale by the
broker-dealer for its own account pursuant to this prospectus; |
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a special offering, an exchange distribution or a secondary
distribution in accordance with applicable rules promulgated by
the National Association of Securities Dealers, Inc. or stock
exchange rules; |
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sales at the market to or through a market maker or
into an existing trading market, on an exchange or otherwise,
for the shares; |
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sales in other ways not involving market makers or established
trading markets, including privately-negotiated direct sales to
purchasers; |
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any other legal method; and |
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any combination of these methods. |
In effecting sales, broker-dealers engaged by a selling
stockholder may arrange for other broker-dealers to participate.
Broker-dealers will receive commissions or other compensation
from the selling stockholder in the form of commissions,
discounts or concessions. Broker-dealers may also receive
compensation from purchasers of the shares for whom they act as
agents or to whom they sell as principals or both. Compensation
as to a particular broker-dealer may be in excess of customary
commissions and will be in amounts to be negotiated.
The distribution of the shares of common stock also may be
effected from time to time in one or more underwritten
transactions. Any underwritten offering may be on a best
efforts or a firm commitment basis. In
connection with any underwritten offering, underwriters or
agents may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders or from
purchasers of the shares. Underwriters may sell the shares to or
through dealers, and dealers may receive compensation in the
form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom
they may act as agents.
The selling stockholders may also sell shares under
Rule 144 of the Securities Act of 1933, if available,
rather than under this prospectus.
The selling stockholders have advised us that they have not
entered into any agreements, understandings or arrangements with
any underwriters or broker-dealers regarding the sale of their
securities, nor is there any underwriter or coordinating
broker-dealer acting in connection with any proposed sale of
shares by the selling stockholders. We will file a supplement to
this prospectus, if required, under Rule 424(b) under the
Securities Act upon being notified by the selling stockholders
that any material arrangement has been entered into with a
broker-dealer for the sale of shares through a block
169
trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer. This
supplement will disclose:
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the name of the selling stockholders and of participating
brokers and dealers; |
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the number of shares involved; |
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the price at which the shares are to be sold; |
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the commissions paid or the discounts or concessions allowed to
the broker-dealers, where applicable; |
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that the broker-dealers did not conduct any investigation to
verify the information set out or incorporated by reference in
this prospectus; and |
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other facts material to the transaction. |
The selling stockholders and any underwriters, or
brokers-dealers or agents that participate in the distribution
of the shares may be deemed to be underwriters
within the meaning of the Securities Act, and any profit on the
sale of the shares by them and any discounts, commissions or
concessions received by any underwriters, dealers, or agents may
be deemed to be underwriting compensation under the Securities
Act. Because the selling stockholders may be deemed to be
underwriters under the Securities Act, the selling
stockholders will be subject to the prospectus delivery
requirements of the Securities Act. The selling stockholders and
any other person participating in a distribution will be subject
to the applicable provisions of the Exchange Act and its rules
and regulations. For example, the anti-manipulative provisions
of Regulation M may limit the ability of the selling
stockholders or others to engage in stabilizing and other market
making activities.
We may be required to file a post-effective amendment to the
registration statement of which this prospectus is a part in
order to include the names of additional selling stockholders or
make other required updates to this prospectus. During the time
required for filing, notice will be delivered to the selling
stockholders that sales of common stock covered by this
prospectus will not be permitted.
From time to time, the selling stockholders may pledge their
shares of common stock pursuant to the margin provisions of
their customer agreements with their brokers. Upon default by a
selling stockholder, the broker may offer and sell such pledged
shares from time to time. Upon a sale of the shares, the selling
stockholders intend to comply with the prospectus delivery
requirements under the Securities Act by delivering a prospectus
to each purchaser in the transaction. We intend to file any
amendments or other necessary documents in compliance with the
Securities Act that may be required in the event the selling
stockholders default under any customer agreement with brokers.
In order to comply with the securities laws of certain states,
if applicable, the shares of common stock may be sold only
through registered or licensed broker-dealers. We have agreed to
pay all expenses incident to the offering and sale of the
shares, other than commissions, discounts and fees of
underwriters, broker-dealers or agents. We have agreed to
indemnify the selling stockholders against certain losses,
claims, damages, actions, liabilities, costs and expenses,
including liabilities under the Securities Act.
The selling stockholders have agreed to indemnify us, our
officers and directors and each person who controls (within the
meaning of the Securities Act) or is controlled by us, against
any losses, claims, damages, liabilities and expenses arising
under the securities laws in connection with this offering with
respect to written information furnished to us by the selling
stockholders.
LEGAL MATTERS
The validity of the common stock and certain tax matters,
including REIT qualification and debt characterization, will be
passed upon for us by Baker, Donelson, Bearman,
Caldwell & Berkowitz, P.C. The summary of legal matters
contained in the section of this prospectus under the heading
United States Federal Income Tax Considerations is
based on the opinion of Baker Donelson.
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EXPERTS
Our consolidated financial statements and the accompanying
financial statement schedule as of December 31, 2004, and
2003, and for the year ended December 31, 2004 and for the
period from inception (August 27, 2003) through
December 31, 2003, included herein, have been audited by
KPMG LLP, independent registered public accounting firm, as
stated in their report included herein.
The consolidated financial statements of Vibra as of
December 31, 2004 and for the period from inception
(May 14, 2004) through December 31, 2004 included
herein have been audited by Parente Randolph, LLC, independent
registered public accounting firm, as stated in their report
included herein.
The consolidated financial statements of Prime Health Care
Services, Inc., or Prime, as of December 31, 2004 and 2003,
and for the years ended December 31, 2004 and 2003 have
been audited by Moss Adams, LLP, independent registered public
accounting firm, as stated in their report included herein.
The consolidated income statement and statement of cash flows of
Prime for the year ended December 31, 2002 are unaudited.
Prime did not request an audit for that period. The company has
no current financial management which was employed by Prime
during that time period and has declined to perform an audit due
to the time and expense involved.
The independent registered public accounting firms have not
examined, compiled or otherwise applied procedures to any
financial forecast, projection or anticipated results presented
herein and, accordingly, do not express an opinion or any other
form of assurance on such.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on
Form S-11,
including exhibits, schedules and amendments filed with, or
incorporated by reference in, this registration statement, under
the Securities Act with respect to the shares of our common
stock to be sold in this offering. This prospectus does not
contain all of the information set forth in the registration
statement and exhibits and schedules to the registration
statement. For further information with respect to our company
and the shares of our common stock to be sold in this offering,
reference is made to the registration statement, including the
exhibits to the registration statement. Statements contained in
this prospectus as to the contents of any contract or other
document referred to in, or incorporated by reference in, this
prospectus are not necessarily complete and, where that contract
is an exhibit to the registration statement, each statement is
qualified in all respects by the exhibit to which the reference
relates. Copies of the registration statement, including the
exhibits and schedules to the registration statement, may be
examined without charge at the public reference room of the
Securities and Exchange Commission, 100 F Street, N.E.,
Room 1580, Washington, DC 20549. Information about the
operation of the public reference room may be obtained by
calling the Securities and Exchange Commission at
1-800-SEC-0300. Copies
of all or a portion of the registration statement can be
obtained from the public reference room of the Securities and
Exchange Commission upon payment of prescribed fees. Our
Securities and Exchange Commission filings, including our
registration statement, are also available to you on the
Securities and Exchange Commissions website, www.sec.gov.
We are subject to the information and reporting requirements of
the Securities Exchange Act, and will file periodic reports,
proxy statements and will make available to our stockholders
annual reports containing audited financial information for each
year, and quarterly reports for the first three quarters of each
fiscal year containing unaudited interim financial information.
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INDEX TO FINANCIAL STATEMENTS
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
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Medical Properties Trust, Inc. and Subsidiaries
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F-4 |
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F-5 |
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F-6 |
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F-7 |
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HISTORICAL FINANCIAL INFORMATION
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Medical Properties Trust, Inc. and Subsidiaries
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F-17 |
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F-18 |
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F-19 |
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F-20 |
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F-25 |
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F-26 |
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F-27 |
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F-28 |
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F-29 |
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F-30 |
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F-41 |
Vibra Healthcare, LLC
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F-42 |
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F-43 |
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F-44 |
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F-45 |
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F-55 |
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F-56 |
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F-57 |
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F-58 |
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F-59 |
Prime Healthcare Services, Inc.
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F-68 |
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F-69 |
F-1
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F-71 |
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F-72 |
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F-78 |
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F-79 |
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F-80 |
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F-82 |
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F-83 |
F-2
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial
information sets forth:
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the historical financial information derived from our audited
consolidated financial statements for the year ended
December 31, 2004 and the nine months ended
September 30, 2005 as adjusted to: |
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give effect to acquisition of our facilities acquired and leased
to Vibra, Desert Valley, Gulf States and Veritas as if we owned
them from the inception of each period presented; |
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give effect to our loans made to Vibra; |
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give effect to our probable acquisitions; |
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give effect to our initial public offering; and |
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our pro forma, unaudited consolidated balance sheet as of
September 30, 2005 as adjusted for the effect of dividends,
to give effect to our initial portfolio and our probable
acquisition. |
This section contains forward-looking statements, which are
projections of future performance and the assumptions upon which
the forward-looking statements are based. Our actual results
could differ materially from those expressed in our
forward-looking statements as a result of various risks,
including those set forth in Risk Factors and
elsewhere in this prospectus. You should read the information
below along with all other financial information and analysis
presented in this prospectus, including the sections captioned
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our historical
financial statements and related notes.
The unaudited pro forma consolidated financial information is
presented for informational purposes only. We do not expect that
this information will reflect our future results of operations
or financial position. The unaudited pro forma adjustments and
eliminations are based on available information and upon
assumptions that we believe are reasonable. The unaudited pro
forma financial information assumes that the above described
transactions were completed as of September 30, 2005, for
purposes of the unaudited pro forma consolidated balance sheet
and as of the first day of the period presented for purposes of
the unaudited pro forma consolidated statements of operations.
F-3
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Balance Sheet
September 30, 2005
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Probable | |
|
|
|
|
|
|
Dividends | |
|
Completed Acquisition Transactions | |
|
Pro Forma | |
|
Acquisition | |
|
|
|
|
|
|
Declared in | |
|
| |
|
Effect of | |
|
Transaction | |
|
|
|
|
|
|
November | |
|
Gulf States- | |
|
Desert Valley- | |
|
|
|
Desert Valley- | |
|
Completed | |
|
Gulf States- | |
|
Company Pro | |
|
|
Historical | |
|
2005 | |
|
Denham | |
|
Chino | |
|
Alliance | |
|
Sherman Oaks | |
|
Transactions | |
|
Hammond | |
|
Forma | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
13,491,429 |
|
|
$ |
|
|
|
$ |
428,571 |
(2) |
|
$ |
2,220,000 |
(3) |
|
$ |
|
|
|
$ |
1,785,714 |
(5) |
|
$ |
17,925,714 |
|
|
$ |
734,643 |
(6) |
|
$ |
18,660,357 |
|
|
|
Buildings and improvements
|
|
|
166,572,054 |
|
|
|
|
|
|
|
5,339,532 |
(2) |
|
|
18,027,131 |
(3) |
|
|
|
|
|
|
22,263,508 |
(5) |
|
|
212,202,225 |
|
|
|
9,152,846 |
(6) |
|
|
221,355,071 |
|
|
|
Construction in progress
|
|
|
78,484,104 |
|
|
|
|
|
|
|
(34,268 |
)(2) |
|
|
(14,556 |
)(3) |
|
|
|
|
|
|
|
|
|
|
78,435,280 |
|
|
|
|
|
|
|
78,435,280 |
|
|
|
Intangible lease assets
|
|
|
7,558,712 |
|
|
|
|
|
|
|
231,897 |
(2) |
|
|
752,869 |
(3) |
|
|
|
|
|
|
950,778 |
(5) |
|
|
9,494,256 |
|
|
|
397,511 |
(6) |
|
|
9,891,7 67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment in real estate assets
|
|
|
266,106,299 |
|
|
|
|
|
|
|
5,965,732 |
|
|
|
20,985,444 |
|
|
|
|
|
|
|
25,000,000 |
|
|
|
318,057,475 |
|
|
|
10,285,000 |
|
|
|
328,342,475 |
|
|
|
Accumulated depreciation and amortization
|
|
|
(4,465,260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,465,260 |
) |
|
|
|
|
|
|
(4,465,260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment in real estate assets
|
|
|
261,641,039 |
|
|
|
|
|
|
|
5,965,732 |
|
|
|
20,985,444 |
|
|
|
|
|
|
|
25,000,000 |
|
|
|
313,592,215 |
|
|
|
10,285,000 |
|
|
|
323,877,215 |
|
|
Cash and cash equivalents
|
|
|
100,826,702 |
|
|
|
(7,194,432 |
) (1) |
|
|
(465,732 |
) (2) |
|
|
(20,985,444 |
) (3) |
|
|
|
|
|
|
(25,000,000 |
) (5) |
|
|
47,181,094 |
|
|
|
(10,285,000 |
) (6) |
|
|
36,896,094 |
|
|
Interest and rent receivable
|
|
|
1,273,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,273,472 |
|
|
|
|
|
|
|
1,273,472 |
|
|
Unbilled rent receivable
|
|
|
9,979,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,979,241 |
|
|
|
|
|
|
|
9,979,241 |
|
|
Loans
|
|
|
52,895,611 |
|
|
|
|
|
|
|
(6,000,000 |
) (2) |
|
|
|
|
|
|
40,000,000 |
(4) |
|
|
|
|
|
|
86,895,611 |
|
|
|
|
|
|
|
86,895,611 |
|
|
Other assets
|
|
|
4,976,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,976,522 |
|
|
|
|
|
|
|
4,976,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
431,592,587 |
|
|
$ |
(7,194,432 |
) |
|
$ |
(500,000 |
) |
|
$ |
|
|
|
$ |
40,000,000 |
|
|
$ |
|
|
|
$ |
463,898,155 |
|
|
$ |
|
|
|
$ |
463,898,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$ |
40,366,667 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
40,000,000 |
(4) |
|
$ |
|
|
|
$ |
80,366,667 |
|
|
$ |
|
|
|
$ |
80,366,667 |
|
|
|
Accounts payable and accrued expenses
|
|
|
11,537,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,537,838 |
|
|
|
|
|
|
|
11,537,838 |
|
|
|
Deferred revenue
|
|
|
8,465,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,465,676 |
|
|
|
|
|
|
|
8,465,676 |
|
|
|
Obligations to tenants
|
|
|
11,763,064 |
|
|
|
|
|
|
|
(500,000 |
) (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,263,064 |
|
|
|
|
|
|
|
11,263,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
72,133,245 |
|
|
|
|
|
|
|
(500,000 |
) |
|
|
|
|
|
|
40,000,000 |
|
|
|
|
|
|
|
111,633,245 |
|
|
|
|
|
|
|
111,633,245 |
|
|
Minority interest
|
|
|
2,137,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,137,500 |
|
|
|
|
|
|
|
2,137,500 |
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock,
|
|
|
39,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,293 |
|
|
|
|
|
|
|
39,293 |
|
|
|
Additional paid in capital
|
|
|
359,866,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
359,866,949 |
|
|
|
|
|
|
|
359,866,949 |
|
|
|
Accumulated deficit
|
|
|
(2,584,400 |
) |
|
|
(7,194,432 |
) (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,778,832 |
) |
|
|
|
|
|
|
(9,778,832 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
357,321,842 |
|
|
|
(7,194,432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,127,410 |
|
|
|
|
|
|
|
350,127,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$ |
431,592,587 |
|
|
$ |
(7,194,432 |
) |
|
$ |
(500,000 |
) |
|
$ |
|
|
|
$ |
40,000,000 |
|
|
$ |
|
|
|
$ |
463,898,155 |
|
|
$ |
|
|
|
$ |
463,898,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma consolidated
financial statements.
F-4
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Statement of Operations
For the Nine Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completed Acquisition Transactions | |
|
|
|
Probable | |
|
|
|
|
|
|
| |
|
|
|
Acquisition | |
|
|
|
|
|
|
|
|
Gulf | |
|
|
|
Desert | |
|
Pro Forma | |
|
Transaction | |
|
|
|
|
|
|
Desert | |
|
Gulf | |
|
|
|
States- | |
|
Desert | |
|
|
|
Valley- | |
|
Effect of | |
|
Gulf States | |
|
|
|
|
|
|
Valley- | |
|
States- | |
|
Vibra- | |
|
Denham | |
|
Valley- | |
|
|
|
Sherman | |
|
Completed | |
|
Health- | |
|
Company | |
|
|
Historical | |
|
Victorville | |
|
Covington | |
|
Redding | |
|
Springs | |
|
Chino | |
|
Alliance | |
|
Oaks | |
|
Transactions | |
|
Hammond | |
|
Pro Forma | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent income
|
|
$ |
18,364,389 |
|
|
$ |
524,069 |
(7) |
|
$ |
643,278 |
(8) |
|
$ |
1,123,098 |
(9) |
|
$ |
564,856 |
(10) |
|
$ |
1,815,809 |
(11) |
|
$ |
|
|
|
$ |
2,269,761 |
(13) |
|
$ |
25,305,260 |
|
|
$ |
968,257 |
(14) |
|
$ |
26,273,517 |
|
|
Interest income from loans
|
|
|
3,562,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(194,250 |
) (10) |
|
|
|
|
|
|
3,000,000 |
(12) |
|
|
|
|
|
|
6,368,607 |
|
|
|
|
|
|
|
6,368,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
21,927,246 |
|
|
|
524,069 |
|
|
|
643,278 |
|
|
|
1,123,098 |
|
|
|
370,606 |
|
|
|
1,815,809 |
|
|
|
3,000,000 |
|
|
|
2,269,761 |
|
|
|
31,673,867 |
|
|
|
968,257 |
|
|
|
32 ,642,124 |
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,986,790 |
|
|
|
115,315 |
(7) |
|
|
124,896 |
(8) |
|
|
274,405 |
(9) |
|
|
111,711 |
(10) |
|
|
375,652 |
(11) |
|
|
|
|
|
|
464,980 |
(13) |
|
|
4,453,749 |
|
|
|
191,493 |
(14) |
|
|
4,645,242 |
|
|
Property expenses
|
|
|
116,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,841 |
|
|
|
|
|
|
|
116,841 |
|
|
General and administrative
|
|
|
5,595,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,595,416 |
|
|
|
|
|
|
|
5,595,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8,699,047 |
|
|
|
115,315 |
|
|
|
124,896 |
|
|
|
274,405 |
|
|
|
111,711 |
|
|
|
375,652 |
|
|
|
|
|
|
|
464,980 |
|
|
|
10,166,006 |
|
|
|
191,493 |
|
|
|
10,357,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
13,228,199 |
|
|
|
408,754 |
|
|
|
518,382 |
|
|
|
848,693 |
|
|
|
258,895 |
|
|
|
1,440,157 |
|
|
|
3,000,000 |
|
|
|
1,804,781 |
|
|
|
21,507,861 |
|
|
|
776,764 |
|
|
|
22,284,625 |
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,509,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,509,903 |
|
|
|
|
|
|
|
1,509,903 |
|
|
Interest expense
|
|
|
(1,542,266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,100,000 |
) (12) |
|
|
|
|
|
|
(3,642,266 |
) |
|
|
|
|
|
|
(3,642,266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other expense
|
|
|
(32,363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,100,000 |
) |
|
|
|
|
|
|
(2,132,363 |
) |
|
|
|
|
|
|
(2,132,363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
13,195,836 |
|
|
$ |
408,754 |
|
|
$ |
518,382 |
|
|
$ |
848,693 |
|
|
$ |
258,895 |
|
|
$ |
1,440,157 |
|
|
$ |
900,000 |
|
|
$ |
1,804,781 |
|
|
$ |
19,375,498 |
|
|
$ |
776,764 |
|
|
$ |
20,152,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.67 |
|
|
|
|
Net income per share diluted
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.67 |
|
|
|
|
Weighted average shares outstanding basic
|
|
|
29,975,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,975,971 |
|
|
|
|
Weighted average shares outstanding diluted
|
|
|
29,999,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,999,381 |
|
See accompanying notes to unaudited pro forma consolidated
financial statements.
F-5
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completed Acquisition Transactions | |
|
|
|
|
| |
|
|
|
|
|
|
Desert | |
|
|
|
|
|
|
Vibra | |
|
Valley- | |
|
Gulf States- | |
|
Vibra- | |
|
|
Historical | |
|
Facilities | |
|
Victorville | |
|
Covington | |
|
Redding | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent income
|
|
$ |
8,611,344 |
|
|
$ |
9,774,139 |
(15) |
|
$ |
3,228,104 |
(16) |
|
$ |
1,443,520 |
(17) |
|
$ |
2,259,422 |
(18) |
|
Interest income from loans
|
|
|
2,282,115 |
|
|
|
2,754,934 |
(15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
10,893,459 |
|
|
|
12,529,073 |
|
|
|
3,228,104 |
|
|
|
1,443,520 |
|
|
|
2,259,422 |
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,478,470 |
|
|
|
1,660,526 |
(15) |
|
|
691,894 |
(16) |
|
|
285,484 |
(17) |
|
|
552,166 |
(18) |
|
Property expenses
|
|
|
93,502 |
|
|
|
93,502 |
(15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
5,057,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of terminated acquisitions
|
|
|
585,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
7,214,601 |
|
|
|
1,754,028 |
|
|
|
691,894 |
|
|
|
285,484 |
|
|
|
552,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3,678,858 |
|
|
|
10,775,045 |
|
|
|
2,536,210 |
|
|
|
1,158,036 |
|
|
|
1,707,256 |
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
930,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(32,769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other income
|
|
|
897,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
4,576,349 |
|
|
$ |
10,775,045 |
|
|
$ |
2,536,210 |
|
|
$ |
1,158,036 |
|
|
$ |
1,707,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
19,310,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted
|
|
|
19,312,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[Additional columns below]
[Continued from above table, first column(s) repeated]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completed Acquisition Transactions | |
|
|
|
Probable | |
|
|
|
|
| |
|
Pro Forma | |
|
Acquisition | |
|
|
|
|
Gulf States- | |
|
Desert | |
|
|
|
Desert | |
|
Effect of | |
|
Transaction | |
|
|
|
|
Denham | |
|
Valley- | |
|
|
|
Valley- | |
|
Completed | |
|
Gulf States- | |
|
Company | |
|
|
Springs | |
|
Chino | |
|
Alliance | |
|
Sherman Oaks | |
|
Transactions | |
|
Hammond | |
|
Pro Forma | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent income
|
|
$ |
753,141 |
(19) |
|
$ |
2,421,079 |
(20) |
|
$ |
|
|
|
$ |
3,026,348 |
(22) |
|
$ |
31,517,097 |
|
|
$ |
1,291,009 |
(23) |
|
$ |
32,808,106 |
|
|
Interest income from loans
|
|
|
|
|
|
|
|
|
|
|
4,000,000 |
(21) |
|
|
|
|
|
|
9,037,049 |
|
|
|
|
|
|
|
9,037,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
753,141 |
|
|
|
2,421,079 |
|
|
|
4,000,000 |
|
|
|
3,026,348 |
|
|
|
40,554,146 |
|
|
|
1,291,009 |
|
|
|
41,845,155 |
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
148,948 |
(19) |
|
|
500,869 |
(20) |
|
|
|
|
|
|
619,973 |
(22) |
|
|
5,938,330 |
|
|
|
255,323 |
(23) |
|
|
6,193,653 |
|
|
Property expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187,004 |
|
|
|
|
|
|
|
187,004 |
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,057,284 |
|
|
|
|
|
|
|
5,057,284 |
|
|
Costs of terminated acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
585,345 |
|
|
|
|
|
|
|
585,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
148,948 |
|
|
|
500,869 |
|
|
|
|
|
|
|
619,973 |
|
|
|
11,767,963 |
|
|
|
255,323 |
|
|
|
12,023,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
604,193 |
|
|
|
1,920,210 |
|
|
|
4,000,000 |
|
|
|
2,406,375 |
|
|
|
28,786,183 |
|
|
|
1,035,686 |
|
|
|
29,821,869 |
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
930,260 |
|
|
|
|
|
|
|
930,260 |
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(2,800,000 |
) (21) |
|
|
|
|
|
|
(2,832,769 |
) |
|
|
|
|
|
|
(2,832,769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other income
|
|
|
|
|
|
|
|
|
|
|
(2,800,000 |
) |
|
|
|
|
|
|
(1,902,509 |
) |
|
|
|
|
|
|
(1,902,509 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
604,193 |
|
|
$ |
1,920,210 |
|
|
$ |
1,200,000 |
|
|
$ |
2,406,375 |
|
|
$ |
26,883,674 |
|
|
$ |
1,035,686 |
|
|
$ |
27,919,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.45 |
|
|
|
|
Net income per share diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.45 |
|
|
|
|
Weighted average shares outstanding basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,310,833 |
|
|
|
|
Weighted average shares outstanding diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,312,634 |
|
See accompanying notes to unaudited pro forma consolidated
financial statements.
F-6
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Unaudited Pro Forma Consolidated Financial
Statements
Adjustments for Unaudited Pro Forma Consolidated Balance
Sheet as of September 30, 2005
(1) Record the $0.18 per share distribution declared
in November 2005, payable in January 2006.
|
|
|
|
|
Shares of common stock outstanding at September 30, 2005
|
|
|
39,292,885 |
|
Restricted shares issued to employees in April 2005
|
|
|
676,180 |
|
|
|
|
|
Total shares
|
|
|
39,969,065 |
|
Cash distribution per share
|
|
$ |
0.18 |
|
|
|
|
|
Total cash distribution
|
|
$ |
7,194,432 |
|
|
|
|
|
(2) Completed Acquisition: Records the acquisition of the
Gulf States Denham Springs facility as though we
acquired it on January 1, 2005. This facility was actually
acquired on November 1, 2005.
|
|
|
|
|
|
|
Cost | |
|
|
| |
Land
|
|
$ |
428,571 |
|
Building
|
|
|
5,339,532 |
|
Intangible lease assets
|
|
|
231,897 |
|
|
|
|
|
Total cost
|
|
$ |
6,000,000 |
|
|
|
|
|
At September 30, 2005, there was a mortgage loan on the
Gulf States Denham Springs facility in the amount of
$6 million. We acquired the facility by exchanging the
mortgage loan for the facility. Upon acquisition, we paid
$500,000, less closing costs of $34,268, which had been withheld
from the mortgage loan pending resolution of environmental
issues at the facility.
(3) Completed Acquisition: Records the acquisition of the
Desert Valley Chino facility as though we acquired
it on September 30, 2005. This facility was actually
acquired on November 30, 2005.
|
|
|
|
|
|
|
Cost | |
|
|
| |
Land
|
|
$ |
2,220,000 |
|
Building
|
|
|
18,027,131 |
|
Intangible lease assets
|
|
|
752,869 |
|
|
|
|
|
Total cost
|
|
$ |
21,000,000 |
|
|
|
|
|
(4) Completed Transaction: Records the mortgage loan to
Alliance Hospital as though the loan was made on
September 30, 2005. This loan was actually made on
December 23, 2005. This loan was funded through the
Companys revolving credit facility which was entered into
in October, 2005.
|
|
|
|
|
Mortgage loan amount
|
|
$ |
40,000,000 |
|
|
|
|
|
(5) Completed Acquisition: Records the acquisition of the
Desert Valley Sherman Oaks facility as though we
acquired it on September 30, 2005. This facility was
actually acquired on December 30, 2005.
|
|
|
|
|
|
|
Cost | |
|
|
| |
Land
|
|
$ |
1,785,714 |
|
Building
|
|
|
22,263,508 |
|
Intangible lease assets
|
|
|
950,778 |
|
|
|
|
|
Total cost
|
|
$ |
25,000,000 |
|
|
|
|
|
The total cost of $25 million consists of $20 million
paid at closing of the acquisition on December 30, 2005,
plus the Companys commitment of $5 million for
expansion of the facility.
F-7
(6) Probable Acquisition: Records the acquisition of the
Gulf States Hammond facility as though we acquired
it on September 30, 2005. The Company has not closed on the
acquisition of this facility, but the Company believes that the
acquisition is probable.
|
|
|
|
|
|
|
Gulf States Health | |
|
|
Hammond | |
|
|
| |
Land
|
|
$ |
734,643 |
|
Building
|
|
|
9,152,846 |
|
Intangible lease assets
|
|
|
397,511 |
|
|
|
|
|
Total cost
|
|
$ |
10,285,000 |
|
|
|
|
|
Adjustments for Unaudited Pro Forma Consolidated Statement of
Operations for the Six Months Ended September 30, 2005:
(7) Completed Acquisition: Records six months of rent
income for the Desert Valley Victorville facility as
though we owned it from January 1, 2005, to
September 30, 2005. This facility was acquired on
February 28, 2005. Rent income is based on the
straight-line rent (as required by SFAS No. 13) in the
lease agreements between the Company and the lessee. Pro forma
rent income for the Desert Valley Victorville for
the nine months ended September 30, 2005 consists of the
following:
|
|
|
|
|
|
|
Rent | |
|
|
| |
Annual rent income
|
|
$ |
3,228,104 |
|
Rent income for nine months of the first year
|
|
|
2,421,078 |
|
Historical rent for the period February 28 - September 30,
2005
|
|
|
(1,897,009 |
) |
|
|
|
|
Pro forma rent income
|
|
$ |
524,069 |
|
|
|
|
|
Depreciation of buildings (straight line using a 40 year
life) and amortization of intangible lease assets (straight line
using a fifteen year life) for the nine months ended
September 30, 2005 as though the properties were occupied
on January 1, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
|
|
|
|
|
|
|
|
|
Depreciation and | |
|
|
|
|
|
|
Annual | |
|
Depreciation and | |
|
Amortization for | |
|
Pro Forma | |
|
|
|
|
Depreciation and | |
|
Amortization for | |
|
February 28 - | |
|
Depreciation and | |
|
|
Cost | |
|
Amortization | |
|
Nine Months | |
|
September 30, 2005 | |
|
Amortization | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Land
|
|
$ |
2,000,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Buildings
|
|
|
24,994,553 |
|
|
|
624,864 |
|
|
|
468,648 |
|
|
|
364,504 |
|
|
|
104,144 |
|
Intangible lease assets
|
|
|
1,005,447 |
|
|
|
67,030 |
|
|
|
50,273 |
|
|
|
39,102 |
|
|
|
11,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
28,000,000 |
|
|
$ |
691,894 |
|
|
$ |
518,921 |
|
|
$ |
403,606 |
|
|
$ |
115,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8) Completed Acquisition: Records nine months of rent
income for the Gulf States Covington facility as
though we owned it from January 1, 2005, to
September 30, 2005. This facility was acquired on
June 9, 2005. Rent income is based on the straight-line
rent (as required by SFAS No. 13) in the lease agreements
between the Company and the lessee. Pro forma rent income for
the facility for the nine months ended September 30, 2005
consists of the following:
|
|
|
|
|
|
|
Rent | |
|
|
| |
Annual rent income
|
|
$ |
1,443,520 |
|
Rent income for nine months of the first year
|
|
|
1,082,640 |
|
Historical rent from June 9 to September 30, 2005
|
|
|
(439,362 |
) |
|
|
|
|
Pro forma rent income
|
|
$ |
643,278 |
|
|
|
|
|
F-8
Depreciation of the building (straight line using a 40-year
life) and amortization of the intangible lease assets
(straight-line using a 15 year life) for the nine months
ended September 30, 2005 as though the property was
occupied on January 1, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
|
|
|
|
|
|
|
|
|
Depreciation and | |
|
|
|
|
|
|
|
|
|
|
Amortization for | |
|
Additional | |
|
|
|
|
Annual | |
|
Depreciation and | |
|
June 9- | |
|
Pro Forma | |
|
|
|
|
Depreciation and | |
|
Amortization for | |
|
September 30, | |
|
Depreciation and | |
|
|
Cost | |
|
Amortization | |
|
Nine Months | |
|
2005 | |
|
Amortization | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Land
|
|
$ |
821,429 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Buildings
|
|
|
10,234,101 |
|
|
|
255,853 |
|
|
|
191,890 |
|
|
|
78,210 |
|
|
|
113,680 |
|
Intangible lease assets
|
|
|
444,470 |
|
|
|
29,631 |
|
|
|
22,223 |
|
|
|
11,007 |
|
|
|
11,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,500,000 |
|
|
$ |
285,484 |
|
|
$ |
214,113 |
|
|
$ |
89,217 |
|
|
$ |
124,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9) Completed Acquisition: Records nine months of rent
income for the Vibra Redding facility as though we
owned it from January 1, 2005, to September 30, 2005.
This facility was acquired on June 30, 2005. Rent income is
based on the straight-line rent (as required by
SFAS No. 13) in the lease agreements between the
Company and the lessee. Pro forma rent income for the
facility for the nine months ended September 30, 2005
consists of the following:
|
|
|
|
|
Annual rent income
|
|
$ |
2,259,422 |
|
Rent income for nine months of the first year
|
|
|
1,694,567 |
|
Historical rent from June 30 to September 30, 2005
|
|
|
(571,469 |
) |
|
|
|
|
Pro forma rent income
|
|
$ |
1,123,098 |
|
|
|
|
|
Depreciation of buildings (straight line using a 40 year
life) and amortization of intangible lease assets (straight line
using a fifteen year life) for the nine months ended
September 30, 2005 as though the property was occupied on
January 1, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
|
|
|
|
|
|
|
|
|
Depreciation and | |
|
|
|
|
|
|
|
|
|
|
Amortization for | |
|
|
|
|
|
|
Annual | |
|
Depreciation and | |
|
June 30, 2005- | |
|
Pro Forma | |
|
|
|
|
Depreciation and | |
|
Amortization for | |
|
September 30, | |
|
Depreciation and | |
|
|
Cost | |
|
Amortization | |
|
Nine Months | |
|
2005 | |
|
Amortization | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Land
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Buildings
|
|
|
19,948,022 |
|
|
|
498,701 |
|
|
|
374,026 |
|
|
|
126,087 |
|
|
|
247,939 |
|
Intangible lease assets
|
|
|
801,978 |
|
|
|
53,465 |
|
|
|
40,099 |
|
|
|
13,633 |
|
|
|
26,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,750,000 |
|
|
$ |
552,166 |
|
|
$ |
414,125 |
|
|
$ |
139,720 |
|
|
$ |
274,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10) Completed Acquisition: Records nine months of rent
income for the Gulf States Denham Springs facility
as though we owned it from January 1, 2005, to
September 30, 2005. This facility was actually acquired on
November 1, 2005. Rent income is based on the straight-line
rent (as required by SFAS No. 13) in the lease agreements
between the Company and the lessee. Pro forma rent income for
the facility for the nine months ended September 30, 2005
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Annual Rent | |
|
Nine Months Rent | |
|
|
| |
|
| |
Rent income
|
|
$ |
753,141 |
|
|
$ |
564,856 |
|
Prior to its acquisition on November 1, 2005, the Company
had a mortgage loan receivable on the Gulf States
Denham Spring facility. The loan was made on June 9, 2005,
and was paid off by the borrower upon acquisition by the
Company. The historical income statement for September 30,
2005, includes interest income from the date of the mortgage
loan. Assuming the pro forma effect of owning the
F-9
facility on January 1, 2005 the amount of interest income
which would not have been recorded on the mortgage loan is as
follows:
|
|
|
|
|
Historical interest income from June 9
September 30, 2005
|
|
$ |
194,250 |
|
Depreciation of the building (straight line using a 40 year
life) and amortization of the intangible (straight-line using a
15 year life) for the nine months ended September 30,
2005 as though the property was occupied on January 1, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual | |
|
Depreciation and | |
|
|
|
|
Depreciation and | |
|
Amortization for | |
|
|
Cost | |
|
Amortization | |
|
Nine Months | |
|
|
| |
|
| |
|
| |
Land
|
|
$ |
428,571 |
|
|
$ |
|
|
|
$ |
|
|
Building
|
|
|
5,339,532 |
|
|
|
133,488 |
|
|
|
100,116 |
|
Intangible lease assets
|
|
|
231,897 |
|
|
|
15,460 |
|
|
|
11,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,000,000 |
|
|
$ |
148,948 |
|
|
$ |
111,711 |
|
|
|
|
|
|
|
|
|
|
|
(11) Completed Acquisition: Records nine months of rent
income for the Desert Valley Chino facility as
though we owned it from January 1, 2005, to
September 30, 2005. The facility was actually acquired on
November 30, 2005. Rent income is based on the
straight-line rent (as required by SFAS No. 13) in the
lease agreements between the Company and the lessee. Pro forma
rent income for the facility for the nine months ended
September 30, 2005 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Annual Rent | |
|
Nine Months Rent | |
|
|
| |
|
| |
Rent income
|
|
$ |
2,421,079 |
|
|
$ |
1,815,809 |
|
Depreciation of the building (straight line using 40 year
life) and amortization of the intangible (straight-line using a
15 year life) for the nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual | |
|
Depreciation and | |
|
|
|
|
Depreciation and | |
|
Amortization for | |
|
|
Cost | |
|
Amortization | |
|
Nine Months | |
|
|
| |
|
| |
|
| |
Land
|
|
$ |
2,220,000 |
|
|
$ |
|
|
|
$ |
|
|
Building
|
|
|
18,027,131 |
|
|
|
450,678 |
|
|
|
338,009 |
|
Intangible lease assets
|
|
|
752,869 |
|
|
|
50,191 |
|
|
|
37,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,000,000 |
|
|
$ |
500,869 |
|
|
$ |
375,652 |
|
|
|
|
|
|
|
|
|
|
|
(12) Completed Transaction: Records nine months of interest
income from the Alliance mortgage loan as though we made the
loan on January 1, 2005, and it was outstanding at
September 30, 2005. This loan was actually made on
December 23, 2005. The loan carries a 10% interest rate in
its first year. The loan was funded by borrowings on our
revolving credit agreement entered into on October 27, 2005. For
purposes of this pro forma presentation, we have assumed that we
borrowed the funds on January 1, 2005 at an interest rate
of 7% for the period presented:
|
|
|
|
|
Mortgage loan amount
|
|
$ |
40,000,000 |
|
Annual interest rate
|
|
|
10.00 |
% |
|
|
|
|
Annual interest income
|
|
$ |
4,000,000 |
|
|
|
|
|
Interest income for nine months
|
|
$ |
3,000,000 |
|
|
|
|
|
Revolving credit line borrowing
|
|
$ |
40,000,000 |
|
Annual interest rate
|
|
|
7.00 |
% |
|
|
|
|
Annual interest expense
|
|
$ |
2,800,000 |
|
|
|
|
|
Interest expense for nine months
|
|
$ |
2,100,000 |
|
|
|
|
|
F-10
(13) Completed Acquisition: Records nine months of rent
income for the Desert Valley Sherman Oaks facility
as though we owned it from January 1, 2005, to
September 30, 2005. This facility was actually acquired on
December 30, 2005. Rent income is based on the
straight-line rent (as required by SFAS No. 13) in the
lease agreements between the Company and the lessee. Pro forma
rent income for the facility for the nine months ended
September 30, 2005 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Annual Rent | |
|
Nine Months Rent | |
|
|
| |
|
| |
Rent income
|
|
$ |
3,026,348 |
|
|
$ |
2,269,761 |
|
Depreciation of the building (straight line using 40 year
life) and amortization of the intangible (straight-line using a
15 year life) for the nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual | |
|
Depreciation and | |
|
|
|
|
Depreciation and | |
|
Amortization for | |
|
|
Cost | |
|
Amortization | |
|
Nine Months | |
|
|
| |
|
| |
|
| |
Land
|
|
$ |
1,785,714 |
|
|
$ |
|
|
|
$ |
|
|
Building
|
|
|
22,263,508 |
|
|
|
556,588 |
|
|
|
417,441 |
|
Intangible lease assets
|
|
|
950,778 |
|
|
|
63,385 |
|
|
|
47,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,000,000 |
|
|
$ |
619,973 |
|
|
$ |
464,980 |
|
|
|
|
|
|
|
|
|
|
|
(14) Probable Acquisition: Records nine months of rent
income for the Gulf States Hammond facility as though we owned
it from January 1, 2005, to September 30, 2005. Rent
income is based on the straight-line rent (as required by
SFAS No. 13) in the lease agreements between the
Company and the lessee. Pro forma rent income for the two Gulf
States Health facilities for the nine months ended
September 30, 2005 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Annual Rent | |
|
Nine Months Rent | |
|
|
| |
|
| |
Rent income
|
|
$ |
1,291,009 |
|
|
$ |
968,257 |
|
Depreciation of buildings (straight line using a 40 year
life) and amortization of intangibles (straight-line using a
15 year life) for the nine months ended September 30,
2005 as though the properties were occupied on January 1,
2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual | |
|
Depreciation and | |
|
|
|
|
Depreciation and | |
|
Amortization for | |
|
|
Cost | |
|
Amortization | |
|
Nine Months | |
|
|
| |
|
| |
|
| |
Land
|
|
$ |
734,643 |
|
|
$ |
|
|
|
$ |
|
|
Buildings
|
|
|
9,152,846 |
|
|
|
228,822 |
|
|
|
171,617 |
|
Intangible lease assets
|
|
|
397,511 |
|
|
|
26,501 |
|
|
|
19,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,285,000 |
|
|
$ |
255,323 |
|
|
$ |
191,493 |
|
|
|
|
|
|
|
|
|
|
|
F-11
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Unaudited Pro Forma Consolidated Financial
Statements
Adjustments for Unaudited Pro Forma Consolidated Statement of
Operations for the Year Ended December 31, 2004:
(15) Completed Acquisition: Records year of rent income for
the six Vibra initial property purchases as though we owned them
from January 1, 2004, to December 31, 2004. These
facilities were acquired in July and August, 2004. Rent income
is based on the monthly straight-line rent (as required by SFAS
No. 13) for each property. Rent income from the Vibra
properties is as follows:
|
|
|
|
|
|
|
|
Annual Rent | |
|
|
| |
Bowling Green
|
|
$ |
5,471,964 |
|
Fresno
|
|
|
2,675,182 |
|
Kentfield
|
|
|
1,094,393 |
|
Marlton
|
|
|
4,752,598 |
|
New Bedford
|
|
|
3,171,528 |
|
Denver
|
|
|
1,219,818 |
|
|
|
|
|
|
TOTAL
|
|
|
18,385,483 |
|
Historical rent income for July 1 December 31,
2004
|
|
|
(8,611,344 |
) |
|
|
|
|
Pro forma rent income
|
|
$ |
9,774,139 |
|
|
|
|
|
Records interest income from loans to Vibra entities as though
the loans were made on January 1, 2004 and interest income
was earned for the year ended December 31, 2004, at the
stated rate of 10.25%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Interest | |
|
|
Loans | |
|
Income | |
|
|
| |
|
| |
Bowling Green
|
|
$ |
11,771,389 |
|
|
$ |
1,206,567 |
|
Fresno
|
|
|
6,561,308 |
|
|
|
672,534 |
|
Kentfield
|
|
|
5,422,387 |
|
|
|
555,795 |
|
Marlton
|
|
|
11,203,366 |
|
|
|
1,148,345 |
|
New Bedford
|
|
|
8,361,930 |
|
|
|
857,098 |
|
Denver
|
|
|
5,821,564 |
|
|
|
596,710 |
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$ |
49,141,944 |
|
|
|
5,037,049 |
|
|
|
|
|
|
|
|
Historical interest income for July 1 December 31,
2004
|
|
|
|
|
|
|
(2,282,115 |
) |
|
|
|
|
|
|
|
Pro forma interest income
|
|
|
|
|
|
$ |
2,754,934 |
|
|
|
|
|
|
|
|
F-12
Depreciation of buildings (straight line using a 40 year
life) and amortization of intangible lease assets (straight line
using a fifteen year life) for the year ended December 31,
2004 as though the properties were acquired on January 1,
2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
|
Annual | |
|
Annual | |
|
Depreciation and | |
|
|
Depreciation | |
|
Amortization | |
|
Amortization | |
|
|
| |
|
| |
|
| |
Bowling Green
|
|
$ |
839,268 |
|
|
$ |
104,736 |
|
|
$ |
944,004 |
|
Fresno
|
|
|
409,080 |
|
|
|
51,204 |
|
|
|
460,284 |
|
Kentfield
|
|
|
119,124 |
|
|
|
23,808 |
|
|
|
142,932 |
|
Marlton
|
|
|
772,572 |
|
|
|
90,972 |
|
|
|
863,544 |
|
New Bedford
|
|
|
494,304 |
|
|
|
60,384 |
|
|
|
554,688 |
|
Denver
|
|
|
150,324 |
|
|
|
23,220 |
|
|
|
173,544 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
2,784,672 |
|
|
|
354,324 |
|
|
|
3,138,996 |
|
Historical depreciation and amortization for
July 1 December 31, 2004
|
|
|
1,311,757 |
|
|
|
166,713 |
|
|
|
1,478,470 |
|
|
|
|
|
|
|
|
|
|
|
Pro forma depreciation and amortization
|
|
$ |
1,472,915 |
|
|
$ |
187,611 |
|
|
$ |
1,660,526 |
|
|
|
|
|
|
|
|
|
|
|
Property expenses consist primarily of payments for the ground
lease at Marlton for the year ended December 31, 2004.
(16) Completed Acquisition: Records one year of rent income
for the Desert Valley Victorville facility as though
we owned it from January 1, 2004, to December 31,
2004. This facility was acquired on February 28, 2005. Rent
income is based on the straight-line rent (as required by SFAS
No. 13) in the lease agreements between the Company and the
lessee. Pro forma rent income for the Desert Valley
Victorville for the year ended December 31, 2004 consists
of the following:
|
|
|
|
|
|
|
Annual Rent | |
|
|
| |
Desert Valley Victorville
|
|
$ |
3,228,104 |
|
Depreciation of buildings (straight line using a 40 year
life) and amortization of intangible lease assets (straight line
using a fifteen year life) for the year ended December 31,
2004 as though the properties were occupied on January 1,
2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual | |
|
|
|
|
Depreciation and | |
|
|
Cost | |
|
Amortization | |
|
|
| |
|
| |
Land
|
|
$ |
2,000,000 |
|
|
$ |
|
|
Buildings
|
|
|
24,994,553 |
|
|
|
624,864 |
|
Intangible lease assets
|
|
|
1,005,447 |
|
|
|
67,030 |
|
|
|
|
|
|
|
|
|
|
$ |
28,000,000 |
|
|
$ |
691,894 |
|
|
|
|
|
|
|
|
(17) Completed Acquisition: Records one year of rent income
for the Gulf States Covington facility as though we
owned it from January 1, 2004, to December 31, 2004.
This facility was acquired on June 9, 2005. Rent income is
based on the straight-line rent (as required by
SFAS No. 13) in the lease agreements between the
Company and the lessee. Pro forma rent income for the
facility for the year ended December 31, 2004 consists of
the following:
|
|
|
|
|
|
|
Annual Rent | |
|
|
| |
Gulf States Covington
|
|
$ |
1,443,520 |
|
F-13
Depreciation of the building (straight line using a 40 year
life) and amortization of the intangible lease asset
(straight-line using a fifteen year life) for the year ended
December 31, 2004 as though the properties were acquired on
January 1, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual | |
|
|
|
|
Depreciation and | |
|
|
Cost | |
|
Amortization | |
|
|
| |
|
| |
Land
|
|
$ |
821,429 |
|
|
$ |
|
|
Buildings
|
|
|
10,234,101 |
|
|
|
255,853 |
|
Intangible lease assets
|
|
|
444,470 |
|
|
|
29,631 |
|
|
|
|
|
|
|
|
|
|
$ |
11,500,000 |
|
|
$ |
285,484 |
|
|
|
|
|
|
|
|
(18) Completed Acquisition: Records one year of rent income
for the Vibra Redding facility as though we owned it
from January 1, 2004, to December 31, 2004. This
facility was acquired on June 30, 2005. Rent income is
based on the straight-line rent (as required by SFAS No. 13) in
the lease agreements between the Company and the lessee. Pro
forma rent income for the facility for the year ended
December 31, 2004 consists of the following:
|
|
|
|
|
|
|
Annual Rent | |
|
|
| |
Vibra Redding
|
|
$ |
2,259,422 |
|
Depreciation of the building (straight line using a 40 year
life) and amortization of the intangible lease asset
(straight-line using a fifteen year life) for the year ended
December 31, 2004 as though the properties were acquired on
January 1, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual | |
|
|
|
|
Depreciation and | |
|
|
Cost | |
|
Amortization | |
|
|
| |
|
| |
Buildings
|
|
$ |
19,948,022 |
|
|
$ |
498,701 |
|
Intangible lease assets
|
|
|
801,978 |
|
|
|
53,465 |
|
|
|
|
|
|
|
|
|
|
$ |
20,750,000 |
|
|
$ |
552,166 |
|
|
|
|
|
|
|
|
(19) Completed Acquisition: Records one year of rent income
for the Gulf States Denham Springs facility as
though we owned it from January 1, 2004, to
December 31, 2004. This facility was acquired on
November 1, 2005. Rent income is based on the straight-line
rent (as required by SFAS No. 13) in the lease agreements
between the Company and the lessee. Pro forma rent income for
the facility for the year ended December 31, 2004 consists
of the following:
|
|
|
|
|
|
|
Annual Rent | |
|
|
| |
Gulf States Denham Springs
|
|
$ |
753,141 |
|
Depreciation of the building (straight line using a 40 year
life) and amortization of the intangible lease asset (straight
line using a fifteen year life) for the year ended
December 31, 2004 as though the properties were acquired on
January 1, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual | |
|
|
|
|
Depreciation and | |
|
|
Cost | |
|
Amortization | |
|
|
| |
|
| |
Land
|
|
$ |
428,571 |
|
|
$ |
|
|
Buildings
|
|
|
5,339,532 |
|
|
|
133,488 |
|
Intangible lease assets
|
|
|
231,897 |
|
|
|
15,460 |
|
|
|
|
|
|
|
|
|
|
$ |
6,000,000 |
|
|
$ |
148,948 |
|
|
|
|
|
|
|
|
F-14
(20) Completed Acquisition: Records one year of rent income
for the Desert Valley Chino facility as though we
owned it from January 1, 2004, to December 31, 2004.
This facility was acquired on November 30, 2005. Rent
income is based on the straight-line rent (as required by SFAS
No. 13) in the lease agreements between the Company and the
lessee. Pro forma rent income for the facility for the year
ended December 31, 2004 consists of the following:
|
|
|
|
|
|
|
Annual Rent | |
|
|
| |
Desert Valley Chino
|
|
$ |
2,421,079 |
|
Depreciation of the building (straight line using a 40 year
life) and amortization of the intangible lease asset (straight
line using a fifteen year life) for the year ended
December 31, 2004 as though the properties were acquired on
January 1, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual | |
|
|
|
|
Depreciation and | |
|
|
Cost | |
|
Amortization | |
|
|
| |
|
| |
Land
|
|
$ |
2,220,000 |
|
|
$ |
|
|
Buildings
|
|
|
18,027,131 |
|
|
|
450,678 |
|
Intangible lease assets
|
|
|
752,869 |
|
|
|
50,191 |
|
|
|
|
|
|
|
|
|
|
$ |
21,000,000 |
|
|
$ |
500,869 |
|
|
|
|
|
|
|
|
(21) Completed Transaction: Records nine months of interest
income from the Alliance mortgage loan as though we made the
loan on January 1, 2004, and it was outstanding at
December 31, 2004. This loan was actually made on
December 23, 2005. The loan carries a 10% interest rate in
its first year. The loan was funded by borrowings on our
revolving credit agreement entered into on October 27,
2005. For purposes of this pro forma presentation, we have
assumed that we borrowed the funds on January 1, 2004 at an
interest rate of 7% for the period presented:
|
|
|
|
|
Mortgage loan amount
|
|
$ |
40,000,000 |
|
Annual interest rate
|
|
|
10.00% |
|
|
|
|
|
Annual interest income
|
|
$ |
4,000,000 |
|
|
|
|
|
Revolving credit line borrowing
|
|
$ |
40,000,000 |
|
Annual interest rate
|
|
|
7.00% |
|
|
|
|
|
Annual interest expense
|
|
$ |
2,800,000 |
|
|
|
|
|
(22) Completed Acquisition: Records one year of rent income
for the Desert Valley Sherman Oaks facility as
though we owned it from January 1, 2004, to
December 31, 2004. This facility was actually acquired on
December 30, 2005. Rent income is based on the
straight-line rent (as required by SFAS No. 13) in the
lease agreements between the Company and the lessee. Pro forma
rent income for the facility for the year ended
December 31, 2004 consists of the following:
|
|
|
|
|
|
|
Annual Rent | |
|
|
| |
Desert Valley Sherman Oaks
|
|
$ |
3,026,348 |
|
Depreciation of the building (straight line using a 40 year
life) and amortization of the intangible lease asset (straight
line using a fifteen year life) for the year ended
December 31, 2004 as though the properties were acquired on
January 1, 2004.
F-15
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual | |
|
|
|
|
Depreciation and | |
|
|
Cost | |
|
Amortization | |
|
|
| |
|
| |
Land
|
|
$ |
1,785,714 |
|
|
$ |
|
|
Buildings
|
|
|
22,263,508 |
|
|
|
556,588 |
|
Intangible lease assets
|
|
|
950,778 |
|
|
|
63,385 |
|
|
|
|
|
|
|
|
|
|
$ |
25,000,000 |
|
|
$ |
619,973 |
|
|
|
|
|
|
|
|
(23) PROBABLE ACQUISITION: Records one year of rent income
for the Gulf States Hammond facility as though we
owned it from January 1, 2004, to December 31, 2004.
Rent income is based on the straight-line rent (as required by
SFAS No. 13) in the lease agreement between the Company and
the lessee. Pro forma rent income for the Gulf States Health
facilities for the year ended December 31, 2004 consists of
the following:
|
|
|
|
|
|
|
Annual Rent | |
|
|
| |
Gulf States Hammond
|
|
$ |
1,291,009 |
|
Depreciation of buildings (straight-line using a 40 year life)
and amortization of intangible lease assets (straight-line using
a fifteen year life) for the year ended December 31, 2004
as though the properties were occupied on January 1, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual | |
|
|
|
|
Depreciation and | |
|
|
Cost | |
|
Amortization | |
|
|
| |
|
| |
Land
|
|
$ |
734,643 |
|
|
$ |
|
|
Buildings
|
|
|
9,152,846 |
|
|
|
228,822 |
|
Intangible lease assets
|
|
|
397,511 |
|
|
|
26,501 |
|
|
|
|
|
|
|
|
|
|
$ |
10,285,000 |
|
|
$ |
255,323 |
|
|
|
|
|
|
|
|
F-16
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2005 and December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
Assets
|
|
|
|
|
|
|
|
|
Real estate assets
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
13,491,429 |
|
|
$ |
10,670,000 |
|
|
Buildings and improvements
|
|
|
166,572,054 |
|
|
|
111,387,232 |
|
|
Construction in progress
|
|
|
78,484,104 |
|
|
|
24,318,098 |
|
|
Intangible lease assets
|
|
|
7,558,712 |
|
|
|
5,314,963 |
|
|
|
|
|
|
|
|
|
|
Gross investment in real estate assets
|
|
|
266,106,299 |
|
|
|
151,690,293 |
|
|
Accumulated depreciation
|
|
|
(3,969,062 |
) |
|
|
(1,311,757 |
) |
|
Accumulated amortization
|
|
|
(496,198 |
) |
|
|
(166,713 |
) |
|
|
|
|
|
|
|
|
|
Net investment in real estate assets
|
|
|
261,641,039 |
|
|
|
150,211,823 |
|
Cash and cash equivalents
|
|
|
100,826,702 |
|
|
|
97,543,677 |
|
Interest and rent receivable
|
|
|
1,273,472 |
|
|
|
419,776 |
|
Straight-line rent receivable
|
|
|
9,979,241 |
|
|
|
3,206,853 |
|
Loans receivable
|
|
|
52,895,611 |
|
|
|
50,224,069 |
|
Other assets
|
|
|
4,976,522 |
|
|
|
4,899,865 |
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
431,592,587 |
|
|
$ |
306,506,063 |
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$ |
40,366,667 |
|
|
$ |
56,000,000 |
|
|
Accounts payable and accrued expenses
|
|
|
11,537,838 |
|
|
|
10,903,025 |
|
|
Deferred revenue
|
|
|
8,465,676 |
|
|
|
3,578,229 |
|
|
Obligations to tenants
|
|
|
11,763,064 |
|
|
|
3,296,365 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
72,133,245 |
|
|
|
73,777,619 |
|
Minority interests
|
|
|
2,137,500 |
|
|
|
1,000,000 |
|
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
39,292,885 shares at September 30, 2005, and
26,082,862 shares at December 31, 2004
|
|
|
39,293 |
|
|
|
26,083 |
|
|
Additional paid in capital
|
|
|
359,866,949 |
|
|
|
233,626,690 |
|
|
Accumulated deficit
|
|
|
(2,584,400 |
) |
|
|
(1,924,329 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
357,321,842 |
|
|
|
231,728,444 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$ |
431,592,587 |
|
|
$ |
306,506,063 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-17
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended | |
|
For the Nine Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent billed
|
|
$ |
5,964,211 |
|
|
$ |
2,874,033 |
|
|
$ |
14,579,588 |
|
|
$ |
2,874,033 |
|
|
Straight-line rent
|
|
|
1,007,062 |
|
|
|
1,142,186 |
|
|
|
3,784,801 |
|
|
|
1,142,186 |
|
|
Interest income from loans
|
|
|
1,233,668 |
|
|
|
1,022,853 |
|
|
|
3,562,857 |
|
|
|
1,022,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
8,204,941 |
|
|
|
5,039,072 |
|
|
|
21,927,246 |
|
|
|
5,039,072 |
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate depreciation and amortization
|
|
|
1,170,387 |
|
|
|
928,356 |
|
|
|
2,986,790 |
|
|
|
928,356 |
|
|
General and administrative
|
|
|
1,990,971 |
|
|
|
1,631,600 |
|
|
|
5,109,854 |
|
|
|
3,329,559 |
|
|
Stock-based compensation
|
|
|
555,409 |
|
|
|
|
|
|
|
602,403 |
|
|
|
|
|
|
Costs of terminated acquisitions
|
|
|
|
|
|
|
14,199 |
|
|
|
|
|
|
|
350,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,716,767 |
|
|
|
2,574,155 |
|
|
|
8,699,047 |
|
|
|
4,608,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,488,174 |
|
|
|
2,464,917 |
|
|
|
13,228,199 |
|
|
|
430,234 |
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
767,917 |
|
|
|
188,568 |
|
|
|
1,509,903 |
|
|
|
667,857 |
|
|
Interest expense
|
|
|
|
|
|
|
(24,547 |
) |
|
|
(1,542,266 |
) |
|
|
(32,769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other (expense) income
|
|
|
767,917 |
|
|
|
164,021 |
|
|
|
(32,363 |
) |
|
|
635,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
5,256,091 |
|
|
$ |
2,628,938 |
|
|
$ |
13,195,836 |
|
|
$ |
1,065,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, basic
|
|
$ |
0.14 |
|
|
$ |
0.10 |
|
|
$ |
0.44 |
|
|
$ |
0.06 |
|
Weighted average shares outstanding basic
|
|
|
37,606,480 |
|
|
|
26,082,862 |
|
|
|
29,975,971 |
|
|
|
17,033,911 |
|
Net income per share, diluted
|
|
$ |
0.14 |
|
|
$ |
0.10 |
|
|
$ |
0.44 |
|
|
$ |
0.06 |
|
Weighted average shares outstanding diluted
|
|
|
37,654,576 |
|
|
|
26,085,312 |
|
|
|
29,999,381 |
|
|
|
17,035,494 |
|
See accompanying notes to consolidated financial statements.
F-18
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Operating activities
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
13,195,836 |
|
|
$ |
1,065,322 |
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,104,131 |
|
|
|
934,548 |
|
|
|
|
Amortization of deferred financing costs
|
|
|
687,730 |
|
|
|
|
|
|
|
|
Straight-line rent revenue
|
|
|
(3,784,801 |
) |
|
|
(1,142,186 |
) |
|
|
|
Share-based payments
|
|
|
684,085 |
|
|
|
|
|
|
|
|
Other adjustments
|
|
|
(139,015 |
) |
|
|
24,500 |
|
|
|
Increase in:
|
|
|
|
|
|
|
|
|
|
|
|
Interest and rent receivable
|
|
|
(703,903 |
) |
|
|
(383,413 |
) |
|
|
|
Other assets
|
|
|
(1,279,962 |
) |
|
|
(164,648 |
) |
|
|
Increase in:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
3,503,928 |
|
|
|
1,812,503 |
|
|
|
|
Deferred revenue
|
|
|
703,750 |
|
|
|
|
|
|
|
|
Obligations to tenants
|
|
|
122,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
16,094,005 |
|
|
|
2,146,626 |
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
Real estate acquired
|
|
|
(56,513,944 |
) |
|
|
(127,372,195 |
) |
|
|
Principal received on loans receivable
|
|
|
7,725,958 |
|
|
|
|
|
|
|
Investment in loans receivable
|
|
|
(4,934,772 |
) |
|
|
(42,317,079 |
) |
|
|
Construction in progress
|
|
|
(53,834,985 |
) |
|
|
(15,059,606 |
) |
|
|
Equipment acquired
|
|
|
(134,638 |
) |
|
|
(492,762 |
) |
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(107,692,381 |
) |
|
|
(185,241,642 |
) |
Financing activities
|
|
|
|
|
|
|
|
|
|
|
Addition to debt
|
|
|
19,000,000 |
|
|
|
|
|
|
|
Proceeds from loan payable
|
|
|
|
|
|
|
200,000 |
|
|
|
Payment of loan payable
|
|
|
|
|
|
|
(300,000 |
) |
|
|
Payments of debt
|
|
|
(34,633,333 |
) |
|
|
|
|
|
|
Deferred financing and offering costs
|
|
|
(47,103 |
) |
|
|
(190,245 |
) |
|
|
Repurchase of deferred stock units
|
|
|
(75,000 |
) |
|
|
|
|
|
|
Distributions paid
|
|
|
(16,725,022 |
) |
|
|
|
|
|
|
Proceeds from sale of common shares, net of offering costs
|
|
|
126,224,359 |
|
|
|
233,703,474 |
|
|
|
Sale of partnership units
|
|
|
1,137,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
94,881,401 |
|
|
|
233,413,229 |
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents for period
|
|
|
3,283,025 |
|
|
|
50,318,213 |
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
97,543,677 |
|
|
|
100,000 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
100,826,702 |
|
|
$ |
50,418,213 |
|
|
|
|
|
|
|
|
Interest paid, including capitalized interest of $1,918,458 in
2005
|
|
$ |
2,772,994 |
|
|
$ |
|
|
Supplemental schedule of non-cash investing activities
|
|
|
|
|
|
|
|
|
|
Straight-line rent receivables recorded as deferred revenue
|
|
|
3,137,380 |
|
|
|
|
|
|
Real estate and loans receivable recorded as obligations to
tenants
|
|
|
8,338,837 |
|
|
|
3,296,365 |
|
|
Real estate and loans receivable recorded as deferred revenue
|
|
|
1,110,280 |
|
|
|
2,610,441 |
|
|
Construction and acquisition costs charged to loans and real
estate
|
|
|
209,259 |
|
|
|
|
|
Supplemental schedule of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
Deferred costs charged to proceeds from sale of common stock
|
|
$ |
579,975 |
|
|
$ |
|
|
|
Distributions declared, unpaid
|
|
|
|
|
|
|
2,608,286 |
|
|
Minority interest granted for contribution of land to
development project
|
|
|
|
|
|
|
1,000,000 |
|
See accompanying notes to consolidated financial statements.
F-19
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and 2004
(Unaudited)
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), 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 Company succeeded to the business of Medical Properties
Trust, LLC, a Delaware limited liability company, which was
formed in December 2002. On the day of formation, the Company
issued 1,630,435 shares of common stock, and the membership
interests of Medical Properties Trust, LLC were transferred to
the Company. Medical Properties Trust, LLC had no assets, but
had incurred liabilities for costs and expenses related to
acquisition due diligence, a planned offering of common stock,
consulting fees and office overhead in an aggregate amount of
approximately $423,000, which was assumed by 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 considers this to be
a single business segment as defined in Statement of Financial
Accounting Standards (SFAS) No. 131, Disclosures
about Segments of an Enterprise and Related Information.
On April 7, 2004, the Company completed the sale of
25.6 million shares of common stock in a private placement
to qualified institutional buyers and accredited investors. The
Company received $233.5 million after deducting offering
costs. On July 7, 2005, the Company completed the sale of
11,365,000 shares of common stock in an initial public
offering (IPO) at a price of $10.50 per share. On
August 5, 2005, the underwriters purchased an additional
1,810,023 shares at the same offering price, less an
underwriting commission of seven percent and expenses, pursuant
to their over-allotment option. The proceeds are being used to
purchase properties, make mortgage loans, to pay debt and
accrued expenses, for working capital, and general corporate
purposes. (See Note 7).
|
|
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 entities in which the
Company owns less than 100% and
F-20
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and
2004 (Continued)
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 Financial Accounting
Standards Board (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.
Unaudited Interim Consolidated Financial Statements: The
accompanying unaudited interim consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial
information, including rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three month and
nine month periods ended September 30, 2005, are not
necessarily indicative of the results that may be expected for
the year ending December 31, 2005. These financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the
Companys Prospectus dated October 20, 2005, and filed
with the Securities and Exchange Commission pursuant to
Rule 424(b) under the Securities Act of 1933, as amended.
|
|
3. |
Real Estate and Lending Activities |
In 2004, the Company entered into six leases with Vibra
Healthcare, LLC (Vibra) and made loans to Vibra totaling
approximately $49.1 million. In February 2005, Vibra paid
$7.8 million of principal and interest on two loans from
the Company, leaving a $41.4 million loan payable to the
Company by Vibra. The Company has no commitments to make
additional loans to Vibra.
In February 2005, the Company purchased a general acute care
hospital (Victorville) for $28.0 million. The purchase
price was paid from loan proceeds and from the proceeds of the
Companys private placement. Upon closing the purchase of
the hospital, the Company and the seller entered into a
15-year lease of the
hospital back to the seller, with renewal options for three
additional five year terms.
In June 2005, the Company completed two transactions with the
owner of two long-term acute care hospitals. In one transaction,
the Company purchased a long-term acute care hospital
(Covington) for $11.5 million. The purchase price was paid
from loan proceeds and from the proceeds of the Companys
private placement. Upon closing the purchase of Covington, the
Company and the facility operator entered into a
15-year lease of the
hospital, with renewal options for three additional five year
terms. In a second transaction, in connection with our proposed
acquisition of another long-term acute care hospital (Denham
Springs) from an affiliate of the same owner, the Company made a
15-year, interest only
mortgage loan of $6.0 million, $500,000 of which was held
in escrow pending the resolution of certain environmental issues
regarding the facility. In October 2005, these environmental
issues were resolved to the Companys satisfaction. In
November 2005, the Company exchanged the mortgage loan for the
Denham Springs facility, at which time the escrowed funds were
also released. Upon completing the acquisition of Denham
F-21
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and
2004 (Continued)
Springs, the Company and the facility operator entered into a
15-year lease of the
hospital, with renewal options for three additional five year
terms.
In June, 2005, the Company purchased a rehabilitation hospital
(Vibra-Redding) for $20.75 million from Vibra. The purchase
price was paid from loan proceeds and from the proceeds of the
Companys private placement. Upon closing the purchase of
Vibra-Redding, the Company and Vibra entered into a
15-year lease of the
hospital back to Vibra, with renewal options for three
additional five year terms. The lease is cross-defaulted with
the Companys other Vibra leases and the Vibra loan.
In June 2005, the Company entered into a loan with a local
operator to fund the construction and development of a community
hospital (North Cypress) in Houston, Texas. The total loan
commitment is approximately $64.0 million. The Company has
the option to purchase North Cypress at the end of construction
at which time the Company will enter into a
15-year lease with the
operator, with renewal options for three additional five year
terms. During the construction phase, the Company also plans to
purchase the land, currently being subleased by the Company, on
which North Cypress is being built. During the construction
period, the Company is accruing interest based on the funded
balance during the construction period. The Company will
recognize the accrued construction period interest as income
over the 15-year term
of the lease. The Company has included this transaction in
construction in progress in its consolidated balance sheet at
September 30, 2005.
In September 2005, the Company began development of a
$38.0 million womens hospital and medical office
building in Bucks County, Pennsylvania (Bucks County). The
Company has entered into a
15-year lease with the
operator, which begins when construction of the hospital is
completed, with renewal options for two additional five year
terms and a third term ending August 15, 2035. During the
construction period, the Company will accrue rent based on the
funded balance during the construction period. The Company will
recognize the accrued construction period rent as income over
the 15-year term of the
lease.
In October 2005, the Company began development of a
$35.5 million community hospital in Bloomington, Indiana
(Monroe County). The Company has entered into a
15-year lease with a
local operator, which begins when construction of the hospital
is completed, with renewal options for three additional five
year terms. During the construction period, the Company will
accrue rent based on the funded balance during the construction
period. The Company will recognize the accrued construction
period rent as income over the
15-year term of the
lease.
The Company has recorded the following assets for acquisitions
and development projects during the nine month period ending
September 30, 2005:
|
|
|
|
|
Land
|
|
$ |
2,821,429 |
|
Buildings
|
|
|
55,184,822 |
|
Intangible lease assets
|
|
|
2,243,749 |
|
Construction in progress
|
|
|
54,166,006 |
|
|
|
|
|
|
|
$ |
114,416,006 |
|
|
|
|
|
At September 30, 2005, the Company had outstanding
borrowings of approximately $40.4 million pursuant to a
term loan agreement. The loan agreement requires monthly
payments based on a
20-year amortization
schedule and interest at the one month London Interbank Offered
Rate (LIBOR) plus 300 basis points (6.88% at
September 30, 2005). The loan is secured by six Vibra
facilities, which have a
F-22
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and
2004 (Continued)
book value of $123.5 million, and requires the Company to
meet financial coverage, ratio and total debt covenants typical
of such loans.
Maturities of debt at September 30, 2005, for each
successive twelve month period are as follows:
|
|
|
|
|
2006
|
|
$ |
3,750,000 |
|
2007
|
|
|
3,750,000 |
|
2008
|
|
|
32,866,667 |
|
|
|
|
|
|
|
$ |
40,366,667 |
|
|
|
|
|
In October 2005, the Company entered into a Credit Agreement
with the same lender that provides for up to $100.0 million
in revolving loans to replace the term loan. Borrowings under
the agreement are secured by certain of the Companys real
estate assets. The agreement has a four-year term and is payable
interest only at a rate equivalent to one month LIBOR plus a
spread ranging between 235 and 275 basis points, depending
on the Companys overall leverage ratio. The agreement also
requires the Company to pay certain fees and meet financial
covenants which are typical of this type of credit agreement.
The present availability under the agreement is approximately
$62.5 million. The Company may ask to increase the maximum
availability under the agreement to $175.0 million, subject
to adequate collateral valuation and payment of additional fees.
In February 2005, the Company awarded 7,500 deferred stock units
valued at $10.00 per unit to three independent directors.
The total value of $75,000 was recorded as additional
paid-in-capital in the
consolidated balance sheet and as an expense in the consolidated
income statement on the date of the awards. The Company also
awarded 60,000 stock options to the same directors, of which
one-third vested immediately, one-third vest one year from the
date of grant, and one-third vest two years from the date of
grant. In October 2005, the Company awarded 10,000 deferred
stock units valued at $9.68 per unit to the five
independent directors. The Company follows Accounting Principles
Board (APB) Opinion No. 25 and related Interpretations
to account for stock options. In accordance with APB
No. 25, no compensation expense has been recorded for the
stock options. Stock option expense that would be recorded based
on the options fair value at the time of issuance would
not be material to the consolidated income statements.
In April 2005, the Company awarded to employees
82,000 shares of restricted common stock valued at
$10.00 per share. Fifty-two thousand of these shares vest
over a period of five years beginning one year from the date of
the Companys IPO (July 7, 2005). Thirty thousand of
these shares vest quarterly over a three-year period beginning
September 30, 2005. In August 2005, the Company awarded to
officers and directors 490,680 shares of restricted common
stock valued at $10.00 per share. These shares vest
quarterly over a three-year period beginning September 30,
2005. In the three and nine month periods ended
September 30, 2005, the Company recorded $555,000 and
$604,000, respectively, of non-cash compensation expense for
these restricted shares. The Company is recording the expense
over the vesting periods using the straight-line method.
F-23
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 2005 and
2004 (Continued)
The following is a reconciliation of the weighted average shares
used in net income per common share to the weighted average
shares used in net income per common share assuming
dilution for the three months and nine months ended September
2005 and 2004, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended | |
|
For the Nine Months Ended | |
|
|
September 30 | |
|
September 30 | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Weighted average number of shares issued and outstanding
|
|
|
37,593,311 |
|
|
|
26,082,862 |
|
|
|
29,961,841 |
|
|
|
17,033,911 |
|
Vested deferred stock units
|
|
|
13,169 |
|
|
|
|
|
|
|
14,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic
|
|
|
37,606,480 |
|
|
|
26,082,862 |
|
|
|
29,975,971 |
|
|
|
17,033,911 |
|
Common stock warrants and options
|
|
|
48,096 |
|
|
|
2,450 |
|
|
|
23,410 |
|
|
|
1,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted
|
|
|
37,654,576 |
|
|
|
26,085,312 |
|
|
|
29,999,381 |
|
|
|
17,035,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. |
Initial Public Offering and Issuance of Common Stock |
On July 7, 2005, the Company completed the sale of
11,365,000 shares of common stock in its IPO at a price of
$10.50 per share, less underwriters discount and
expenses. On August 5, 2005, the underwriters exercised
their option to purchase up to an additional
1,810,023 shares at the same offering price, less
underwriters discount and expenses. Net proceeds from the
IPO and exercise of the over-allotment option are as follows:
|
|
|
|
|
Gross proceeds
|
|
$ |
138,337,742 |
|
Underwriters commission
|
|
|
(9,851,291 |
) |
Expenses
|
|
|
(3,167,567 |
) |
|
|
|
|
Net proceeds
|
|
$ |
125,318,884 |
|
|
|
|
|
In July 2005, a third party exercised a warrant for
35,000 shares of common stock from which the Company
received proceeds of $325,500.
|
|
8. |
Commitments and Contingencies |
In June 2005, the Company entered into ground leases on two
tracts of land for its North Cypress development project. Under
the ground lease covering the larger tract, the Company has the
right to purchase the land during the construction phase, and
currently intends to exercise its purchase rights. Under the
ground lease covering the smaller tract, the Company may
terminate the lease when certain specified improvements are made
to the larger land tract. The Company currently intends to make
such improvements during the construction phase of the project.
The ground leases are for 99 years and require payments of
approximately $502,000 during each of the first five years of
the leases. The Company is subleasing the land to the tenant in
an amount and for a term equal to the lease payments which the
Company makes to the owners of the land.
Upon the acquisition of the Vibra-Redding facility, the Company
assumed a ground lease with a remaining term of approximately
70 years. The Companys lease of the facility to Vibra
requires that Vibra make all ground lease payments to the ground
lessor. The ground lease payments are approximately
$21,000 per year, escalating at four percent per year for
the remaining term of the ground lease.
F-24
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, 2004 and 2003, and the related consolidated
statements of operations, stockholders equity (deficit),
and cash flows for the year ended December 31, 2004 and for
the period from inception (August 27, 2003) to
December 31, 2003. In connection with our audits of the
consolidated financial statements, we have also audited the
accompanying financial statement Schedule III. These
consolidated financial statements and schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements and schedule 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 audits 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, 2004 and 2003, and the results of their
operations and their cash flows for the year ended
December 31, 2004 and for the period from inception
(August 27, 2003) to December 31, 2003 in conformity
with U.S. generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Birmingham, Alabama
March 16, 2005
F-25
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2004 and December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
December 31, 2003 | |
|
|
| |
|
| |
Assets
|
|
|
|
|
|
|
|
|
Real estate assets
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
10,670,000 |
|
|
$ |
|
|
|
Buildings and improvements
|
|
|
111,387,232 |
|
|
|
|
|
|
Construction in progress
|
|
|
24,318,098 |
|
|
|
166,301 |
|
|
Intangible lease assets
|
|
|
5,314,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment in real estate assets
|
|
|
151,690,293 |
|
|
|
166,301 |
|
|
Accumulated depreciation
|
|
|
(1,311,757 |
) |
|
|
|
|
|
Accumulated amortization
|
|
|
(166,713 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment in real estate assets
|
|
|
150,211,823 |
|
|
|
166,301 |
|
Cash and cash equivalents
|
|
|
97,543,677 |
|
|
|
100,000 |
|
Interest receivable
|
|
|
419,776 |
|
|
|
|
|
Unbilled rent receivable
|
|
|
3,206,853 |
|
|
|
|
|
Loans receivable
|
|
|
50,224,069 |
|
|
|
|
|
Other assets
|
|
|
4,899,865 |
|
|
|
201,832 |
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
306,506,063 |
|
|
$ |
468,133 |
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity (Deficit)
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$ |
56,000,000 |
|
|
$ |
|
|
|
Accounts payable and accrued expenses
|
|
|
10,903,025 |
|
|
|
1,389,779 |
|
|
Deferred revenue
|
|
|
3,578,229 |
|
|
|
|
|
|
Lease deposit
|
|
|
3,296,365 |
|
|
|
|
|
|
Loan payable
|
|
|
|
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
73,777,619 |
|
|
|
1,489,779 |
|
Minority interest
|
|
|
1,000,000 |
|
|
|
|
|
Stockholders equity (deficit)
|
|
|
|
|
|
|
|
|
|
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 26,082,862 shares at
December 31, 2004 and 1,630,435 shares at December 31,
2003
|
|
|
26,083 |
|
|
|
1,630 |
|
|
Additional paid in capital
|
|
|
233,626,690 |
|
|
|
|
|
|
Accumulated deficit
|
|
|
(1,924,329 |
) |
|
|
(1,023,276 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
231,728,444 |
|
|
|
(1,021,646 |
) |
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity (Deficit)
|
|
$ |
306,506,063 |
|
|
$ |
468,133 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-26
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For The Year Ended December 31, 2004 and
Period from Inception (August 27, 2003) through
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Period from Inception | |
|
|
December 31, | |
|
(August 27, 2003) | |
|
|
2004 | |
|
through December 31, 2003 | |
|
|
| |
|
| |
Revenues
|
|
|
|
|
|
|
|
|
|
Rent billed
|
|
$ |
6,162,278 |
|
|
$ |
|
|
|
Unbilled rent
|
|
|
2,449,066 |
|
|
|
|
|
|
Interest income from loans
|
|
|
2,282,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
10,893,459 |
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Real estate depreciation
|
|
|
1,311,757 |
|
|
|
|
|
|
Amortization of intangible lease assets
|
|
|
166,713 |
|
|
|
|
|
|
Other property expenses
|
|
|
93,502 |
|
|
|
|
|
|
General and administrative
|
|
|
5,057,284 |
|
|
|
992,418 |
|
|
Costs of terminated acquisitions
|
|
|
585,345 |
|
|
|
30,858 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,214,601 |
|
|
|
1,023,276 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
3,678,858 |
|
|
|
(1,023,276 |
) |
Other income (expense)
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
930,260 |
|
|
|
|
|
|
Interest expense
|
|
|
(32,769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other income
|
|
|
897,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
4,576,349 |
|
|
$ |
(1,023,276 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic
|
|
$ |
0.24 |
|
|
$ |
(0.63 |
) |
|
|
|
Weighted average shares outstanding, basic
|
|
|
19,310,833 |
|
|
|
1,630,435 |
|
|
|
|
Net income (loss) per share, diluted
|
|
$ |
0.24 |
|
|
$ |
(0.63 |
) |
|
|
|
Weighted average shares outstanding, diluted
|
|
|
19,312,634 |
|
|
|
1,630,435 |
|
See accompanying notes to consolidated financial statements.
F-27
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For The Year Ended December 31, 2004 and
Period from Inception (August 27, 2003) through
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from Inception | |
|
|
Year Ended | |
|
(August 27, 2003) through | |
|
|
December 31, 2004 | |
|
December 31, 2003 | |
|
|
| |
|
| |
Operating activities
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
4,576,349 |
|
|
$ |
(1,023,276 |
) |
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,517,530 |
|
|
|
|
|
|
|
|
Unbilled rent revenue
|
|
|
(2,449,066 |
) |
|
|
|
|
|
|
|
Warrant issued to lender
|
|
|
24,500 |
|
|
|
|
|
|
|
|
Deferred stock units issued to directors
|
|
|
125,000 |
|
|
|
|
|
|
|
Increase in:
|
|
|
|
|
|
|
|
|
|
|
|
Interest receivable
|
|
|
(419,776 |
) |
|
|
|
|
|
|
|
Other assets
|
|
|
(309,769 |
) |
|
|
|
|
|
|
Increase in:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
6,644,130 |
|
|
|
1,391,409 |
|
|
|
|
Deferred revenue
|
|
|
210,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
9,918,898 |
|
|
|
368,133 |
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
Real estate acquired
|
|
|
(127,372,195 |
) |
|
|
|
|
|
|
Loans receivable
|
|
|
(44,317,263 |
) |
|
|
|
|
|
|
Construction in progress
|
|
|
(23,151,797 |
) |
|
|
(166,301 |
) |
|
|
Equipment acquired
|
|
|
(759,387 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(195,600,642 |
) |
|
|
(166,301 |
) |
Financing activities
|
|
|
|
|
|
|
|
|
|
|
Addition to long-term debt
|
|
|
56,000,000 |
|
|
|
|
|
|
|
Proceeds from loan payable
|
|
|
200,000 |
|
|
|
100,000 |
|
|
|
Payment of loan payable
|
|
|
(300,000 |
) |
|
|
|
|
|
|
Deferred financing costs
|
|
|
(3,869,767 |
) |
|
|
(201,832 |
) |
|
|
Distributions paid
|
|
|
(2,608,286 |
) |
|
|
|
|
|
|
Sale of common stock, net of offering costs
|
|
|
233,703,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
283,125,421 |
|
|
|
(101,832 |
) |
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents for period
|
|
|
97,443,677 |
|
|
|
100,000 |
|
|
|
Cash at beginning of period
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
97,543,677 |
|
|
$ |
100,000 |
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
Additions to unbilled rent receivables recorded as deferred
revenue
|
|
$ |
757,787 |
|
|
$ |
|
|
|
Additions to loans receivable recorded as lease deposits and
deferred revenue
|
|
|
5,906,807 |
|
|
|
|
|
Supplemental schedule of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
Minority interest granted for contribution of land to
development project
|
|
|
1,000,000 |
|
|
|
|
|
|
|
Distributions declared, not paid
|
|
|
2,869,116 |
|
|
|
|
|
|
|
Deferred offering costs charged to proceeds from sale of common
stock
|
|
|
201,832 |
|
|
|
|
|
|
|
Additional paid in capital from deferred stock units issued to
directors
|
|
|
125,000 |
|
|
|
|
|
|
|
Conversion of accounts payable and accrued expenses to common
stock
|
|
|
|
|
|
|
1,630 |
|
Interest expense paid
|
|
|
32,769 |
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-28
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity (Deficit)
For the Year Ended December 31, 2004
and Period from Inception (August 27, 2003) through
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred |
|
Common | |
|
|
|
|
|
Total | |
|
|
|
|
| |
|
Additional Paid | |
|
Accumulated | |
|
Stockholders | |
|
|
Shares | |
|
Par Value |
|
Shares | |
|
Par Value | |
|
in Capital | |
|
Deficit | |
|
Equity | |
|
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at inception (August 27, 2003)
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
1,630,435 |
|
|
|
1,630 |
|
|
|
|
|
|
|
|
|
|
|
1,630 |
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,023,276 |
) |
|
|
(1,023,276 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 in private placement (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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-29
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Year Ended December 31, 2004 and
Period from Inception (August 27, 2003) through
December 31, 2003
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), 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 Company succeeded to the business of Medical Properties
Trust, LLC, a Delaware limited liability company, which was
formed in December 2002. On the day of formation, the Company
issued 1,630,435 shares of common stock, and the membership
interests of Medical Properties Trust, LLC were transferred to
the Company. Medical Properties Trust, LLC had no assets, but
had incurred liabilities for costs and expenses related to
acquisition due diligence, a planned offering of common stock,
consulting fees and office overhead in an aggregate amount of
approximately $423,000, which was assumed by the Operating
Partnership and has been included in the accompanying
consolidated statement of operations.
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
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 considers this to be a single business
segment as defined in Statement of Financial Accounting Standard
(SFAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information.
On April 6, 2004, the Company completed the sale of
25.6 million shares of common stock in a private placement
to qualified institutional buyers and accredited investors. The
Company received $233.5 million after deducting offering
costs. The proceeds are being used to purchase properties, to
pay debt and accrued expenses and for working capital and
general corporate purposes.
The Company has filed with the Securities and Exchange
Commission (SEC) a Form S-11 registration statement
for an Initial Public Offering (IPO) of common stock. The
Company has not determined the number of shares nor price per
share to be offered in the IPO.
|
|
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 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.
F-30
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Year Ended December 31, 2004 and
Period from Inception (August 27, 2003) through
December 31, 2003 (Continued)
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.
Cash and Cash Equivalents: Certificates of deposit and
short-term investments with remaining maturities of three months
or less when acquired and money-market mutual funds are
considered cash equivalents.
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 to produce a constant effective yield on the loan
(interest method). Costs that are specifically identifiable
with, and incurred prior to the completion of, probable
acquisitions are deferred and 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 rent) and from additional rent based on a percentage of
tenant revenues once the tenants revenue has exceeded an
annual threshold (percentage rent). Rent revenue 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 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 rent actually billed to the customer
each period as required by the lease. Unbilled rent revenue is
the difference between rent revenue earned based on the
straight-line method and the amount recorded as billed rent
revenue. These differences between rental revenues earned and
amounts due per the respective lease agreements are charged, as
applicable, 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.
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.
F-31
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Year Ended December 31, 2004 and
Period from Inception (August 27, 2003) through
December 31, 2003 (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 to be 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 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.
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 10 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
F-32
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Year Ended December 31, 2004 and
Period from Inception (August 27, 2003) through
December 31, 2003 (Continued)
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.
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.
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 Receivable: Real estate related loans consist of
working capital loans and long-term loans. Interest income on
loans is recognized as earned based upon the principal amount
outstanding. The working capital and long-term loans are
generally secured by interests in receivables and corporate and
individual guaranties.
Losses from Rent Receivables and Loans Receivable: A
provision for losses on rent receivables and 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
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 (Loss) Per Share: The Company reports earnings
per share pursuant to SFAS No. 128, Earnings Per
Share. Basic net income (loss) per share is computed by
dividing the net income (loss) to common stockholders by
the weighted average number of common shares and potential
common stock outstanding during the period. Diluted net income
(loss) per share is computed by dividing the net income
(loss) 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 share options.
Income Taxes: For the period from January 1, 2004
through April 5, 2004, the Company has 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 of
1986, as
F-33
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Year Ended December 31, 2004 and
Period from Inception (August 27, 2003) through
December 31, 2003 (Continued)
amended (the Code). The Company will file its initial tax return
as a REIT for the period from April 6, 2004, through
December 31, 2004, at which time it must formally make 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 will not be 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 believes that
it will be organized and operate in such a manner as to qualify
for treatment as a REIT and intends to operate in the
foreseeable future 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
a stock option and restricted stock award plan that was
established in 2004. The Company accounts for its stock option
plan under the recognition and measurement provisions of
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB No. 25) and related
interpretations. Under APB No. 25, no expense is recorded
for options which are exercisable at the price of the
Companys stock at the date the options are granted.
Deferred compensation on restricted stock relates to the
issuance of restricted stock to employees and directors of the
Company. Deferred compensation is amortized to compensation
expense based on the passage of time and certain performance
criteria.
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
fair value of unbilled rent receivable has been estimated based
on expected payment dates and discounted at a rate which the
Company considers appropriate for such assets considering their
credit quality and maturity. The fair value of loans receivable
is estimated 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
long term debt should approximate fair value because the debt is
variable rate and adjusts daily with changes in the underlying
interest rate index.
Reclassifications: Certain reclassifications have been
made to the 2003 consolidated financial statements to conform to
the 2004 consolidated financial statement presentation. These
reclassifications have no impact on shareholders equity or
net income.
New Accounting Pronouncements: The following is a summary
of recently issued accounting pronouncements which have been
issued but not yet adopted by the Company and which could have a
material effect on the Companys financial position and
results of operations.
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123(R), Share-Based
Payment, which is a revision of SFAS No. 123(R),
Accounting for Stock Based
F-34
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Year Ended December 31, 2004 and
Period from Inception (August 27, 2003) through
December 31, 2003 (Continued)
Compensation. SFAS No. 123(R) establishes
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. This
Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires that the fair
value of such equity instruments be recognized as expense in the
historical financial statements as services are performed. Prior
to SFAS No. 123(R), only certain pro-forma disclosures
of fair value were required. SFAS No. 123(R) becomes
effective for public companies with their first annual reporting
period that begins after June 15, 2005. For non-public
companies, the standard becomes effective for their first fiscal
year beginning after December 15, 2005. The Company does
not expect SFAS No. 123(R) to have a material effect
on its financial position or the results of its operations.
3. Property Acquisitions and
Loans
On July 1, 2004, the Company purchased four rehabilitation
facilities at a price of $96.8 million, which were then
leased to a new operator of the facilities, Vibra Healthcare,
LLC and its operating subsidiaries (collectively, Vibra). The
Company also made loans of $33.3 million to Vibra. On
August 18, 2004, the Company purchased two additional
rehabilitation facilities for $30.6 million, which were
then leased to Vibra, and made additional loans to Vibra of
$13.8 million. The Company made an additional
$2 million loan to Vibra on October 1, 2004. Loans
totaling $42.9 million accrue interest at the rate of
10.25% per year and are to be paid over 15 years with
interest only for the first three years and the principal
balance amortizing over the remaining 12 year period. Loans
totaling $6.2 million accrue interest at the rate of 10.25%
per year. Vibra will pay fees of $1.5 million to the
Company for transacting the leases and loans. The Company has
determined that Vibra is a variable interest entity as defined
by FIN 46-R. The 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. For the year ended December 31, 2004, Vibra has
been the only tenant which is required to make payments under
operating leases and loans from the Company.
The Company recorded intangible lease assets of $5,314,963
representing the estimated value of the Vibra leases which were
entered into at the date the Company acquired the facilities.
The Company recorded amortization expense of $166,713 and
expects to recognize amortization expense of $354,324 in each of
the next five years.
As security for the loans, each of the Vibra tenants and Vibra
have granted the Company a security interest in their respective
rights to receive payments, directly or indirectly, for any
goods or services provided to any persons or entities; any
records or data related to those rights; and all cash and
non-cash proceeds resulting from those rights. As additional
security, Vibra has pledged to the Company all of its interests
in each of the tenants. One individual is the majority owner of
Vibra, The Hollinger Group and Vibra Management, LLC. The owner
of Vibra has pledged his interest in Vibra to secure the loans.
In addition, The Hollinger Group and Vibra Management have
guaranteed the loans. The owner of Vibra has also provided a
$5 million personal guarantee.
4. Long-term Debt and Loan
Payable
In 2003, the Company entered into a loan agreement which
provided for maximum borrowings of $300,000 if certain
conditions were met by the Company. Borrowings under the
agreement ($100,000 at December 31, 2003) accrued interest
at 20% per annum and were due upon the earlier of (i) the
third business day following the funding of the Companys
private placement or (ii) March 29, 2004. During the
first three months of 2004, the Company increased its borrowings
on the loan to $300,000, which was paid
F-35
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Year Ended December 31, 2004 and
Period from Inception (August 27, 2003) through
December 31, 2003 (Continued)
in full in April 2004. Contemporaneous with the private
placement, the Company issued to the lender a warrant to
purchase up to 35,000 shares of the Companys common stock
at a price per share equal to 93% of the price at which the
Companys shares were offered to investors in the private
placement. The warrant has been recorded in the consolidated
balance sheet using the intrinsic value method as an addition to
Additional Paid-in Capital and as additional interest expense at
a value of $.70 per warrant ($10.00 per share private placement
price less $9.30 exercise price per warrant) or a total of
$24,500. The Company considers any differences which would
result between the intrinsic method and another fair value
method to not be material to the Companys financial
position, results of its operations or changes in its cash flows.
In December 2004, the Company received $56 million as part
of a $75 million, three year term loan. In February 2005,
the Company received the remaining $19 million of this
loan. The loan requires monthly payments based on a 20 year
amortization schedule and interest at the one month London
Interbank Offered Rate (LIBOR) plus 300 basis points, which
results in an interest rate of 5.42% at December 31, 2004.
The loan is secured by the six Vibra facilities, which have a
book value of $125.9 million, and requires the Company to
meet financial coverage, ratio and total debt covenants typical
of such loans.
In December 2004, the Company closed a $43 million loan
with a bank to finance the construction of the Companys
medical office building and community hospital development
project in Houston, Texas. The loan carries a construction
period term of eighteen months, with the option to convert the
loan into a thirty month term loan thereafter with a twenty-five
year amortization. The loan requires interest payments only
during the initial eighteen month term, and principal and
interest payments during the optional thirty month term. The
loan is secured by mortgages on the development property. The
loan bears interest at a rate of one month LIBOR plus 225 basis
points (4.67% at December 31, 2004) during the construction
period and one month LIBOR plus 250 basis points (4.92% at
December 31, 2004) during the thirty month optional period.
The Company has paid a commitment fee of one per-cent for the
construction loan with an additional .25% per-cent fee due if
the Company exercises the term loan option. Proceeds may be
drawn down by periodically presenting to the lender
documentation of construction and development costs incurred.
The Company has not drawn down any proceeds from this loan as of
December 31, 2004.
Maturities of long-term debt at December 31, 2004, are as
follows:
|
|
|
|
|
2005
|
|
$ |
2,566,663 |
|
2006
|
|
|
2,799,996 |
|
2007
|
|
|
50,633,341 |
|
|
|
|
|
|
|
$ |
56,000,000 |
|
|
|
|
|
5. Commitments and
Contingencies
In June 2004, the Company began construction of a hospital and
medical office building with an expected total cost of
$63.4 million. The Company plans to fund this project with
a combination of its own and borrowed funds. At
December 31, 2004, the Company has funded
$24.2 million of the cost which has been financed with
funds from the April 6, 2004 private placement. The
remaining commitment for construction and development contracts
at December 31, 2004, totals $32.1 million.
F-36
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Year Ended December 31, 2004 and
Period from Inception (August 27, 2003) through
December 31, 2003 (Continued)
Fixed minimum payments due under operating leases with
non-cancellable terms of more than one year at December 31,
2004 are as follows:
|
|
|
|
|
2005
|
|
$ |
275,106 |
|
2006
|
|
|
339,570 |
|
2007
|
|
|
346,158 |
|
2008
|
|
|
352,746 |
|
2009
|
|
|
359,334 |
|
Thereafter
|
|
|
2,133,005 |
|
|
|
|
|
|
|
$ |
3,805,919 |
|
|
|
|
|
A former consultant to the Company has made a claim for 2003 and
2004 consulting compensation under the terms of a now terminated
consulting agreement with the Company. The Company disputes this
claim and has made an offer of settlement based on the terms of
the consulting agreement. The Company has made provision for the
amount (which the Company has determined is not material to the
consolidated financial statements) that it estimates is owed to
the former consultant.
6. Equity Incentive Plan and
Other Stock Awards
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 options to purchase
shares of common stock, restricted stock awards, restricted
stock units, deferred stock units, stock appreciation rights and
performance units. The Company has reserved 791,180 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.
Upon their election to the board in April, 2004, each of our
original independent directors was awarded options to acquire
20,000 shares of our common stock. These options have an
exercise price of $10 per option, vested one-third upon grant
and the remainder will 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. The Company has determined that the
exercise price of these options is equal to the fair value of
the common stock because the options were granted immediately
following the private placement of its common stock in April,
2004. Accordingly, the options have no intrinsic value as that
term is used in SFAS No. 123, Accounting for
Stock-Based Compensation. No other options have been granted.
|
|
|
|
|
|
|
|
|
|
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
Outstanding at January 1, 2004
|
|
|
|
|
|
|
|
|
Granted
|
|
|
100,000 |
|
|
$ |
10.00 |
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
100,000 |
|
|
$ |
10.00 |
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2004
|
|
|
33,333 |
|
|
$ |
10.00 |
|
Weighted-average grant-date fair value of options granted
|
|
$ |
1.21 |
|
|
|
|
|
F-37
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Year Ended December 31, 2004 and
Period from Inception (August 27, 2003) through
December 31, 2003 (Continued)
Options exercisable at December 31, 2004, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options | |
|
Options | |
|
Average Remaining | |
Exercise Price | |
|
Outstanding | |
|
Exercisable | |
|
Contractual Life (years) | |
| |
|
| |
|
| |
|
| |
$ |
10.00 |
|
|
|
100,000 |
|
|
|
33,333 |
|
|
|
9.6 |
|
The Company follows APB No. 25 and related Interpretations
in accounting for the Plan. In accordance with APB 25, no
compensation expense has been recognized for stock options. Had
compensation expense for the Companys stock option plans
been determined based on the fair value at the grant dates for
awards under those plans consistent with the methods prescribed
in SFAS No. 123, the Companys net income and
income per share for the year ended December 31, 2004,
would have been decreased by $67,000 and would have had no per
share effect, respectively.
In addition to these options to purchase common stock, each
independent director was awarded 2,500 deferred stock units in
October, 2004, valued by the Company at $10 per unit, which
represent the right to receive 2,500 shares of common stock in
October, 2007. Beginning in 2005, each independent director will
receive 2,000 shares of restricted common stock annually, which
will be restricted as to transfer for three years. The Company
has recognized expense in the amount of $125,000 for the
deferred stock units awarded to its independent directors
in 2004. The Company has also allocated 114,500 shares of
restricted stock to be awarded to employees upon completion of
its IPO.
The Company uses the Black-Scholes pricing model to calculate
the fair values of the options awarded, which are included in
the pro forma amounts above. The following assumptions were used
to derive the fair values: an option term of four to six years;
no estimated volatility; a weighted average risk-free rate of
return of 3.63%; and a dividend yield of 1.00% for 2004.
7. Leasing Operations
For the properties purchased in July and August, 2004 (see
Note 3), minimum rental payments due in future periods
under operating leases which have non-cancelable terms extending
beyond one year at December 31, 2004, are as follows:
|
|
|
|
|
2005
|
|
$ |
14,343,635 |
|
2006
|
|
|
16,082,461 |
|
2007
|
|
|
16,484,523 |
|
2008
|
|
|
16,896,636 |
|
2009
|
|
|
17,319,052 |
|
Thereafter
|
|
|
188,238,038 |
|
|
|
|
|
|
|
$ |
269,364,345 |
|
|
|
|
|
The leases are with tenants engaged in medical operations in
California (two facilities), Colorado, Kentucky, Massachusetts,
and New Jersey. Each of the six lease agreements are for an
initial term of 15 years with options for the tenant to
renew for three periods of five years each. Lease payments are
calculated based on the total acquisition cost (aggregating
approximately $127,000,000) and an initial lease rate of 10.25%;
the rate increases to 12.23% on the first anniversary of lease
commencement and upon each January 1 thereafter escalates at a
rate of 2.5%. At such time that the tenants aggregate net
revenue exceeds a certain level, the leases further provide that
the tenants will pay additional rent of between 1% and 2% of
total net revenue. All of the leases are cross-defaulted.
F-38
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Year Ended December 31, 2004 and
Period from Inception (August 27, 2003) through
December 31, 2003 (Continued)
In addition, the Company is funding the acquisition and
development costs for a community hospital and adjacent medical
office building in Houston, Texas on land that is leased to the
operator/tenant. During the development and construction period,
the tenant is charged rent (construction period rent) based on
the lease rates (which average 10.4%) and the amount funded,
which aggregated $16,225,907 at December 31, 2004. The
Company has recorded $757,787 of construction period rent as
unbilled rent receivable and as deferred revenue as of
December 31, 2004. Upon completion of development and
occupancy by the tenant, the fixed lease term (15 and
10 years for the hospital and medical office building,
respectively) will commence and any accrued construction period
rent will be paid, with interest calculated at the lease rate,
over the term of the respective lease. Upon occupancy, the
Company will begin recognizing as rent revenue, using the
straight-line method, all construction period rent recorded
during the construction period. The Company expects to complete
the construction of the hospital and the medical office building
in October 2005 and August 2005, respectively.
8. Fair Value of Financial
Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
December 31, 2003 | |
|
|
| |
|
| |
|
|
Book Value | |
|
Fair Value | |
|
Book Value | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
Cash and cash equivalents
|
|
$ |
97,543,677 |
|
|
$ |
97,543,677 |
|
|
$ |
100,000 |
|
|
$ |
100,000 |
|
Interest receivable
|
|
|
419,776 |
|
|
|
419,776 |
|
|
|
|
|
|
|
|
|
Unbilled rent receivable
|
|
|
3,206,853 |
|
|
|
1,679,450 |
|
|
|
|
|
|
|
|
|
Loans
|
|
|
50,224,069 |
|
|
|
50,646,695 |
|
|
|
100,000 |
|
|
|
100,000 |
|
Long-term debt
|
|
|
56,000,000 |
|
|
|
56,000,000 |
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
10,903,025 |
|
|
|
10,903,025 |
|
|
|
1,389,779 |
|
|
|
1,389,779 |
|
9. Income Taxes
The following table reconciles the Companys net income as
reported in its consolidated statement of operations prepared in
accordance with generally accepted accounting principles with
its taxable income under the REIT income tax regulations for the
year ended December 31, 2004:
|
|
|
|
|
Net income as reported
|
|
$ |
4,576,349 |
|
Less: Net income of the taxable REIT subsidiary
|
|
|
(63,905 |
) |
|
|
|
|
Net income from REIT operations
|
|
|
4,512,444 |
|
Unbilled rent receivable
|
|
|
(2,449,066 |
) |
GAAP depreciation and amortization in excess of tax depreciation
|
|
|
198,266 |
|
Expenses deductible in future tax periods
|
|
|
2,434,535 |
|
Other
|
|
|
289,759 |
|
|
|
|
|
Taxable income subject to REIT distribution requirements
|
|
$ |
4,985,938 |
|
|
|
|
|
The Company paid distributions of $2,608,286 ($.10 per share) on
October 10, 2004, and $2,869,115 ($.11 per share) on
January 11, 2005. All of the October distribution and
$755,546 of the January 2005, distribution will be subject
to federal incomes taxes by the Companys stockholders in
2004. The remainder of the January, 2005, distribution will be
subject to federal income taxes by the Companys
stockholders in 2005. All of the distributions are taxable to
the Companys shareholders at ordinary income federal tax
rates.
F-39
MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Year Ended December 31, 2004 and
Period from Inception (August 27, 2003) through
December 31, 2003 (Continued)
10. Subsequent Events
On February 9, 2005, Vibra made a $7.8 million payment
of principal and interest on its transaction fee and working
capital loans from the Company. The payments left a
$41.4 million loan payable to the Company by Vibra. The
Company has no commitments to make additional loans to Vibra.
In February, 2005, the Company purchased a community hospital
for $28 million. The purchase price was paid from loan
proceeds and from the proceeds of the Companys private
placement. Upon closing the purchase of the hospital, the
Company and the seller entered into a fifteen year lease of the
hospital back to the seller, with renewal options for three
additional five year terms.
11. Earnings Per Share
The following is a reconciliation of the weighted average shares
used in net income (loss) per common share to the weighted
average shares used in net income (loss) per common
share assuming dilution for the year ended December
31, 2004, and for the period from Inception (August 27, 2003)
through December 31, 2003, respectively:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Weighted average number of shares issued and outstanding
|
|
|
19,308,511 |
|
|
|
1,630,435 |
|
Vested deferred stock units
|
|
|
2,322 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic
|
|
|
19,310,833 |
|
|
|
1,630,435 |
|
Common stock warrants
|
|
|
1,801 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted
|
|
|
19,312,634 |
|
|
|
1,630,435 |
|
|
|
|
|
|
|
|
12. Related Parties
The Companys lead underwriter for its IPO and private
placement is the largest stockholder, including shares owned
directly and indirectly through funds it manages. In connection
with services provided for its managing and underwriting of the
private placement, the underwriter received approximately
261,000 shares of the Companys common stock. The
Company also manages its cash and cash equivalents
(approximately $96.1 million at December 31, 2004)
through the underwriter.
13. Pro Forma Earnings Per Share
(Unaudited)
Staff Accounting Bulletin (SAB) Topic 1.B.3 requires that
basic and diluted earnings per share must be calculated based on
the pro forma effect of shares assumed to be issued in an
initial public offering when dividends are paid in excess of
earnings. As of June 30, 2005, cumulative net income for
2004 and the six months ended June 30, 2005, totaled
$12,516,094. Cumulative distributions, including the
distributions declared May 20, 2005, and August 18,
2005 totaled $19,327,636, resulting in excess distributions
during this period of $6,811,542. The pro forma weighted average
shares in the table below assumes the issuance of
648,718 shares at an offering price of $10.50 per share, or
proceeds of $6,811,542 to pay these distributions in excess of
net income.
|
|
|
|
|
|
|
|
|
|
|
|
Basic | |
|
Diluted | |
|
|
| |
|
| |
Pro forma weighted average shares for the year ended
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
Historical from above
|
|
|
19,310,833 |
|
|
|
19,312,634 |
|
|
Pro forma effect of assumed additional shares
|
|
|
648,718 |
|
|
|
648,718 |
|
|
|
|
|
|
|
|
|
Pro forma weighted average shares
|
|
|
19,959,551 |
|
|
|
19,961,352 |
|
|
|
|
|
|
|
|
Pro forma earnings per share
|
|
$ |
0.23 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
F-40
SCHEDULE III REAL ESTATE AND ACCUMULATED
DEPRECIATION
December 31, 2004 and December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions Subsequent to |
|
|
|
|
Initial Costs | |
|
Acquisition |
|
|
|
|
| |
|
|
Location |
|
Type of Property |
|
Land | |
|
Buildings | |
|
Improvements |
|
Carrying Costs |
|
|
|
|
| |
|
| |
|
|
|
|
Bowling Green, KY
|
|
Rehabilitation hospital |
|
$ |
3,070,000 |
|
|
$ |
33,570,541 |
|
|
$ |
|
|
|
$ |
|
|
Thornton, CO
|
|
Rehabilitation hospital |
|
|
2,130,000 |
|
|
|
6,013,142 |
|
|
|
|
|
|
|
|
|
Fresno, CA
|
|
Rehabilitation hospital |
|
|
1,550,000 |
|
|
|
16,363,153 |
|
|
|
|
|
|
|
|
|
Kentfield, CA
|
|
Long term acute care hospital |
|
|
2,520,000 |
|
|
|
4,765,176 |
|
|
|
|
|
|
|
|
|
Marlton, NJ
|
|
Rehabilitation hospital |
|
|
|
|
|
|
30,903,051 |
|
|
|
|
|
|
|
|
|
New Bedford, NJ
|
|
Long term acute care hospital |
|
|
1,400,000 |
|
|
|
19,772,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
10,670,000 |
|
|
$ |
111,387,232 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost at December 31, 2004 | |
|
|
|
|
|
|
|
|
|
|
| |
|
Accumulated | |
|
Date of | |
|
Date | |
|
Depreciable | |
Location |
|
Land | |
|
Buildings(1) | |
|
Total | |
|
Depreciation | |
|
Construction | |
|
Acquired | |
|
Life (Years) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Bowling Green, KY
|
|
$ |
3,070,000 |
|
|
$ |
33,570,541 |
|
|
$ |
36,640,541 |
|
|
$ |
419,634 |
|
|
|
1992 |
|
|
|
July 1, 2004 |
|
|
|
40 |
|
Thornton, CO
|
|
|
2,130,000 |
|
|
|
6,013,142 |
|
|
|
8,143,142 |
|
|
|
56,371 |
|
|
|
1962, 1975 |
|
|
|
August 17, 2004 |
|
|
|
40 |
|
Fresno, CA
|
|
|
1,550,000 |
|
|
|
16,363,153 |
|
|
|
17,913,153 |
|
|
|
204,540 |
|
|
|
1990 |
|
|
|
July 1, 2004 |
|
|
|
40 |
|
Kentfield, CA
|
|
|
2,520,000 |
|
|
|
4,765,176 |
|
|
|
7,285,176 |
|
|
|
59,562 |
|
|
|
1963 |
|
|
|
July 1, 2004 |
|
|
|
40 |
|
Marlton, NJ
|
|
|
|
|
|
|
30,903,051 |
|
|
|
30,903,051 |
|
|
|
386,286 |
|
|
|
1994 |
|
|
|
July 1, 2004 |
|
|
|
40 |
|
New Bedford, NJ
|
|
|
1,400,000 |
|
|
|
19,772,169 |
|
|
|
21,172,169 |
|
|
|
185,364 |
|
|
|
1962, 1975, 1992 |
|
|
|
August 17, 2004 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$ |
10,670,000 |
|
|
$ |
111,387,232 |
|
|
$ |
122,057,232 |
|
|
$ |
1,311,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
December 31, 2003 |
|
|
| |
|
|
COST
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$ |
|
|
|
$ |
|
|
|
|
Additions during the period
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
122,057,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
122,057,232 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
December 31, 2003 |
|
|
| |
|
|
ACCUMULATED DEPRECIATION
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$ |
|
|
|
$ |
|
|
|
|
Additions during the period
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,311,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
1,311,757 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
(1) |
The gross cost for Federal income tax purposes is $116,702,195. |
F-41
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 2005 (Unaudited) and December 31, 2004*
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
December 31, 2004* | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
Assets |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
2,266,306 |
|
|
$ |
2,280,772 |
|
|
Patient accounts receivable, net of allowance for doubtful
collections of $1,499,000 at September 30, 2005 and
$303,000 at December 31, 2004
|
|
|
25,606,710 |
|
|
|
17,319,154 |
|
|
Third party settlements receivable
|
|
|
400,000 |
|
|
|
346,141 |
|
|
Prepaid insurance
|
|
|
1,550,765 |
|
|
|
719,480 |
|
|
Deposit for workers compensation claims
|
|
|
|
|
|
|
1,375,000 |
|
|
Other current assets
|
|
|
846,422 |
|
|
|
518,650 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
30,670,203 |
|
|
|
22,559,197 |
|
Restricted investment
|
|
|
100,000 |
|
|
|
|
|
Property and equipment, net
|
|
|
17,682,999 |
|
|
|
2,662,546 |
|
Goodwill
|
|
|
24,650,801 |
|
|
|
24,510,296 |
|
Intangible assets
|
|
|
5,140,000 |
|
|
|
4,260,000 |
|
Deposits
|
|
|
4,252,756 |
|
|
|
3,485,387 |
|
Deferred financing and lease costs
|
|
|
1,926,899 |
|
|
|
1,543,424 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
84,423,658 |
|
|
$ |
59,020,850 |
|
|
|
|
|
|
|
|
Liabilities and Partners Deficit |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$ |
57,410 |
|
|
$ |
|
|
|
Current maturities of obligations under capital leases
|
|
|
443,212 |
|
|
|
|
|
|
Accounts payable
|
|
|
5,720,881 |
|
|
|
5,142,345 |
|
|
Accounts payable related parties
|
|
|
478,651 |
|
|
|
262,144 |
|
|
Accrued liabilities
|
|
|
5,094,372 |
|
|
|
4,387,292 |
|
|
Accrued insurance claims
|
|
|
2,785,610 |
|
|
|
1,441,516 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
14,580,136 |
|
|
|
11,233,297 |
|
Deferred rent
|
|
|
5,827,972 |
|
|
|
2,460,308 |
|
Long-term debt
|
|
|
54,319,257 |
|
|
|
49,141,945 |
|
Long-term obligations under capital leases
|
|
|
17,919,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
92,646,568 |
|
|
|
62,835,550 |
|
Partners deficit
|
|
|
(8,222,910 |
) |
|
|
(3,814,700 |
) |
|
|
|
|
|
|
|
|
|
Total liabilities and partners deficit
|
|
$ |
84,423,658 |
|
|
$ |
59,020,850 |
|
|
|
|
|
|
|
|
|
|
* |
Derived from December 31, 2004 audited financial statements. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-42
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Consolidated Statement of Operations and Changes in
Partners Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the | |
|
For the Period | |
|
|
For the Three Months Ended | |
|
Nine Months | |
|
May 14, 2004 | |
|
|
| |
|
Ended | |
|
(Date of Inception) | |
|
|
Sept. 30, 2005 | |
|
Sept. 30, 2004 | |
|
Sept. 30, 2005 | |
|
to Sept. 30, 2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenue
|
|
$ |
35,253,794 |
|
|
$ |
20,845,836 |
|
|
$ |
95,170,217 |
|
|
$ |
20,845,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
24,882,413 |
|
|
|
14,738,667 |
|
|
|
66,440,648 |
|
|
|
14,738,667 |
|
|
General and administrative
|
|
|
4,140,760 |
|
|
|
2,487,925 |
|
|
|
11,165,130 |
|
|
|
2,487,925 |
|
|
Rent expense
|
|
|
5,322,799 |
|
|
|
4,175,678 |
|
|
|
15,786,936 |
|
|
|
4,175,678 |
|
|
Interest expense
|
|
|
1,724,801 |
|
|
|
1,025,177 |
|
|
|
4,283,100 |
|
|
|
1,025,177 |
|
|
Management fee Vibra Management, LLC
|
|
|
721,188 |
|
|
|
444,933 |
|
|
|
1,965,247 |
|
|
|
444,933 |
|
|
Depreciation and amortization
|
|
|
458,244 |
|
|
|
155,703 |
|
|
|
873,219 |
|
|
|
155,703 |
|
|
Bad debt expense
|
|
|
376,787 |
|
|
|
123,185 |
|
|
|
722,451 |
|
|
|
123,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
37,626,992 |
|
|
|
23,151,268 |
|
|
|
101,236,731 |
|
|
|
23,151,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,373,198 |
) |
|
|
(2,305,432 |
) |
|
|
(6,066,514 |
) |
|
|
(2,305,432 |
) |
|
Non-operating revenue
|
|
|
610,551 |
|
|
|
584,426 |
|
|
|
1,658,304 |
|
|
|
584,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,762,647 |
) |
|
|
(1,721,006 |
) |
|
|
(4,408,210 |
) |
|
|
(1,721,006 |
) |
|
Partners deficit beginning
|
|
|
(6,460,263 |
) |
|
|
|
|
|
|
(3,814,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners deficit ending
|
|
$ |
(8,222,910 |
) |
|
$ |
(1,721,006 |
) |
|
$ |
(8,222,910 |
) |
|
$ |
(1,721,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-43
VIBRA HEALTHCARE LLC AND SUBSIDIARIES
Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the | |
|
For the Period | |
|
|
Nine Months | |
|
May 14, 2004 | |
|
|
Ended | |
|
(Date of Inception) | |
|
|
Sept. 30, 2005 | |
|
to Sept. 30, 2004 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(4,408,210 |
) |
|
$ |
(1,721,006 |
) |
|
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
873,219 |
|
|
|
155,703 |
|
|
|
|
Provision for bad debts
|
|
|
722,451 |
|
|
|
123,185 |
|
Changes in operating assets and liabilities, net of effects from
acquisition of business:
|
|
|
|
|
|
|
|
|
|
|
|
Patient accounts receivable including third party settlements
|
|
|
(9,204,371 |
) |
|
|
(2,713,071 |
) |
|
|
|
Prepaids and other current assets
|
|
|
(1,059,681 |
) |
|
|
(1,061,467 |
) |
|
|
|
Deposits
|
|
|
1,080,131 |
|
|
|
55,353 |
|
|
|
|
Accounts payable
|
|
|
794,643 |
|
|
|
1,191,780 |
|
|
|
|
Accrued liabilities
|
|
|
2,051,174 |
|
|
|
43,367 |
|
|
|
|
Deferred rent
|
|
|
3,367,664 |
|
|
|
1,151,559 |
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(5,782,980 |
) |
|
|
(2,774,597 |
) |
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of restricted investment
|
|
|
(100,000 |
) |
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(841,860 |
) |
|
|
(52,095 |
) |
|
|
|
Assets acquired in business acquisition
|
|
|
(284,292 |
) |
|
|
|
|
|
|
|
Cash acquired in business acquisition
|
|
|
|
|
|
|
201,280 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(1,226,152 |
) |
|
|
149,185 |
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit facility
|
|
|
82,610,497 |
|
|
|
|
|
|
|
|
Repayments of revolving credit facility
|
|
|
(69,929,295 |
) |
|
|
|
|
|
|
|
Borrowings under capital leases
|
|
|
2,181,898 |
|
|
|
|
|
|
|
|
Repayment of capital leases
|
|
|
(56,389 |
) |
|
|
|
|
|
|
|
Borrowings under other long-term debt
|
|
|
99,000 |
|
|
|
4,050,458 |
|
|
|
|
Repayment of long-term debt
|
|
|
(7,741,082 |
) |
|
|
|
|
|
|
|
Payment of deferred financing costs
|
|
|
(169,963 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
6,994,666 |
|
|
|
4,050,458 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(14,466 |
) |
|
|
1,425,046 |
|
Cash and cash equivalents beginning
|
|
|
2,280,772 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents ending
|
|
$ |
2,266,306 |
|
|
$ |
1,425,046 |
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
4,283,100 |
|
|
$ |
629,028 |
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred financing costs funded by MPT notes payable revolving
credit facility and MPT capital lease
|
|
$ |
352,627 |
|
|
$ |
1,500,000 |
|
|
|
|
|
|
|
|
|
|
|
Business acquisition adjustment of goodwill
|
|
$ |
140,505 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
$ |
3,296,365 |
|
|
|
|
|
|
|
|
|
|
|
Equipment purchases funded by capital leases
|
|
$ |
457,381 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Notes issued relating to acquisition
|
|
$ |
|
|
|
$ |
38,093,842 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-44
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2005
(Unaudited), the Three Months Ended
September 30, 2004, and the Period May 14, 2004
(date of inception) to September 30, 2004
The unaudited consolidated financial statements of Vibra
Healthcare, LLC and Subsidiaries (Vibra and the
Company) as of September 30, 2005, for the
three and nine months ended September 30, 2005, the three
months ended September 30, 2004, and the period
May 14, 2004, (date of inception) to September 30,
2004, have been prepared in accordance with accounting
principles generally accepted in the United States of America.
In the opinion of management, such information contains all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for such
periods. All significant intercompany transactions and balances
have been eliminated. The results of operations for the three
and nine months ended September 30, 2005, are not
necessarily indicative of the results to be expected for the
full fiscal year ending December 31, 2005.
Certain information and disclosures normally included in the
notes to consolidated financial statements have been condensed
or omitted as permitted by the rules and regulations of the
Securities and Exchange Commission, although the Company
believes the disclosure is adequate to make the information
presented not misleading. The accompanying unaudited
consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for
the year ended December 31, 2004, previously included in
filings of Medical Properties Trust, Inc. with the Securities
and Exchange Commission.
|
|
2. |
Organization and Summary of Significant Accounting
Policies |
Vibra was formed May 14, 2004, and commenced operations
with the acquisition of its subsidiaries consisting of four
inpatient rehabilitation hospitals (IRF) and two
long-term acute care hospitals (LTACH) located
throughout the United States on July 1, 2004 and
August 17, 2004, respectively. On June 30, 2005, Vibra
acquired an IRF with the intention of converting the beds to
LTACH by January 1, 2006. Vibra, a Delaware limited
liability company, has an infinite life. The members
liability is limited to the capital contribution. Vibra was
previously named Highmark Healthcare LLC until a name change in
December 2004. Vibras wholly-owned subsidiaries consist of:
|
|
|
|
|
Subsidiaries |
|
Location | |
|
|
| |
92 Brick Road Operating Company LLC
|
|
|
Marlton, NJ |
|
4499 Acushnet Avenue Operating Company LLC
|
|
|
New Bedford, MA |
|
1300 Campbell Lane Operating Company LLC
|
|
|
Bowling Green, KY |
|
8451 Pearl Street Operating Company LLC
|
|
|
Denver, CO |
|
7173 North Sharon Avenue Operating Company LLC
|
|
|
Fresno, CA |
|
1125 Sir Francis Drake Boulevard Operating Company LLC
|
|
|
Kentfield, CA |
|
Northern California Rehabilitation Hospital, LLC
|
|
|
Redding, CA |
|
The Company provides long-term acute care hospital services and
inpatient acute rehabilitative hospital care at its hospitals.
Patients in the Companys LTACHs typically suffer from
serious and often complex medical conditions that require a high
degree of care. Patients in the Companys IRFs typically
suffer from debilitating injuries including traumatic brain and
spinal cord injuries, and require rehabilitation care in the
form of physical, psychological, social and vocational
rehabilitation services. The Company also operates eleven
outpatient clinics affiliated with six of its seven hospitals.
F-45
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2005
(Unaudited), the Three Months Ended
September 30, 2004, and the Period May 14, 2004
(date of inception) to September 30, 2004
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 reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
Property and equipment are stated at cost net of accumulated
depreciation. Depreciation and amortization are computed using
the straight-line method over the lesser of the estimated useful
lives of the assets or the term of the lease, as appropriate.
The general range of useful lives is as follows:
|
|
|
Building under capital lease
|
|
Lesser of 15 years or remaining lease term |
Leasehold improvements
|
|
Lesser of 15 years or remaining lease term |
Furniture and equipment
|
|
2-7 years |
In accordance with Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No 144), the Company reviews
the realizability of long-lived assets whenever events or
circumstances occur which indicate recorded costs may not be
recoverable.
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill and other
intangible assets with indefinite lives are no longer subject to
periodic amortization but are instead reviewed annually or more
frequently if impairment indicators arise. These reviews require
the Company to estimate the fair value of its identified
reporting units and compare those estimates against the related
carrying values. Identifiable assets and liabilities acquired in
connection with business combinations accounted for under the
purchase method are recorded at their respective fair values.
For each of the reporting units, the estimated net realizable
value is determined using current transaction information and
the present value of future cash flows of the units.
Management has allocated the intangible assets between
identifiable intangibles and goodwill. Intangible assets, other
than goodwill, consist of values assigned to certificates of
need (CONs) and licenses. The useful life of each
class of intangible assets is as follows:
|
|
|
|
|
Goodwill
|
|
|
Indefinite |
|
Certificates of Need/ Licenses
|
|
|
Indefinite |
|
|
|
|
Year Ended December 31, 2004 |
In July and August 2004, Vibra entered into agreements with
Medical Properties Trust, Inc. (MPT) to acquire the
operations of six specialty hospitals. MPT, a healthcare real
estate investment trust based in Birmingham, Alabama, acquired
the real estate for approximately $127.4 million and
assigned to Vibra its rights to acquire the operations of the
hospitals from Care One Realty of Hackensack, New Jersey
for approximately $38.1 million net of cash acquired and
$7.5 million of liabilities assumed which was financed by
MPT. The assignment of the LLC interests to Vibra transferred
the operations,
F-46
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2005
(Unaudited), the Three Months Ended
September 30, 2004, and the Period May 14, 2004
(date of inception) to September 30, 2004
assets and liabilities of each LLC. The purchase price of the
operations may be adjusted either upward or downward pursuant to
a post-closing working capital adjustment with the seller. The
purchase price of the operations has been allocated to net
assets acquired, and liabilities assumed based on valuation
studies subject to purchase price adjustments. The excess of the
amount of purchase price over the net asset value, including
identifiable intangible assets, was allocated to goodwill. The
purchase price was negotiated based on managements
evaluation of future operational performance of the hospitals as
a group under Vibra. The results of operations of the hospitals
acquired have been included in the Companys consolidated
financial statements since the date of acquisition. The
following table summarizes the acquisition date and other
relevant information regarding each hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Location |
|
Type | |
|
Beds | |
|
Acquisition Date | |
|
|
| |
|
| |
|
| |
Marlton, NJ
|
|
|
IRF |
|
|
|
46 |
(1) |
|
|
July 1, 2004 |
|
Bowling Green, KY
|
|
|
IRF |
|
|
|
60 |
|
|
|
July 1, 2004 |
|
Fresno, CA
|
|
|
IRF |
|
|
|
62 |
|
|
|
July 1, 2004 |
|
Kentfield, CA
|
|
|
LTACH |
|
|
|
60 |
|
|
|
July 1, 2004 |
|
New Bedford, MA
|
|
|
LTACH |
|
|
|
90 |
|
|
|
August 17, 2004 |
|
Thornton, CO
|
|
|
IRF |
|
|
|
117 |
(2) |
|
|
August 17, 2004 |
|
|
|
(1) |
Vibra subleases a floor of the Marlton building to an
unaffiliated provider which operates 30 pediatric rehabilitation
beds which are in addition to the 46 beds operated by Vibra. |
|
(2) |
Includes beds licensed as skilled nursing and beds licensed as
psychiatric. |
Information with respect to the businesses acquired in these
transactions is as follows:
|
|
|
|
|
|
Notes issued, net of cash acquired
|
|
$ |
38,093,842 |
|
Liabilities assumed
|
|
|
7,477,988 |
|
|
|
|
|
|
|
|
45,571,830 |
|
Fair value of assets acquired:
|
|
|
|
|
|
Accounts receivable
|
|
|
(13,640,825 |
) |
|
Property and equipment
|
|
|
(2,749,840 |
) |
|
CONs/ Licenses
|
|
|
(4,260,000 |
) |
|
Other
|
|
|
(410,869 |
) |
|
|
|
|
Cost in excess of fair value of net assets acquired
(goodwill) at December 31, 2004
|
|
$ |
24,510,296 |
|
|
|
|
|
Based on an analysis of pre-acquisition accounts receivable at
June 30, 2005, the Company estimated the fair value of the
acquired accounts receivable required a downward adjustment of
$140,505. This adjustment increased the goodwill recorded at
June 30, 2005 to $24,650,801.
|
|
|
Nine Months Ended September 30, 2005 |
On June 30, 2005, under the terms of a purchase agreement,
Vibra acquired the building, equipment, inventory and license of
an 88 bed specialty hospital in Redding, California, for
$15.43 million. The hospital currently operates with 24 IRF
beds and 54 skilled nursing beds. The hospital is also licensed
for 14 acute care beds that are currently not in service. Vibra
is in the process of converting approximately 26 of the
skilled nursing beds and all of the IRF beds to LTACH beds.
Under the purchase agreement, Vibra subleased the operations and
the right to occupy the Redding facility back to the seller
during a
F-47
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2005
(Unaudited), the Three Months Ended
September 30, 2004, and the Period May 14, 2004
(date of inception) to September 30, 2004
transition term, until Vibra obtains certain healthcare licenses
necessary to operate the hospital. In the interim, Vibra is
managing the hospital on behalf of the seller during this
transition term. The terms of the management agreement provide
that revenues and expenses during the transition term accrue to
Vibra. Management expects the transition term to last
approximately 180 days. Simultaneously with the closing of
the acquisition, Vibra entered into an agreement with MPT for
the sale of the building associated with this hospital to MPT
and leased it back from MPT under an $18 million capital
lease. An additional $2.75 million can be drawn under the
lease agreement upon the completion of certain building
renovations and the LTACH conversion. The purchase price of the
operations has been allocated to net assets acquired, and
liabilities assumed based on valuation studies. The land on
which the hospital is built is subject to a land lease, which
Vibra assumed from the seller. Vibra is in the process of
obtaining a third party appraisal of the land lease to determine
if any value should be assigned to the lease in the purchase
accounting. Therefore, the allocation of the purchase price is
subject to refinement. The purchase price was negotiated based
on managements evaluation of future operational
performance of the hospital under Vibra. The results of
operations of the hospital acquired have been included in the
Companys consolidated financial statements since the date
of acquisition.
Information with respect to the business acquired in this
transaction is as follows:
|
|
|
|
|
|
Capital lease
|
|
$ |
18,000,000 |
|
Cash paid by Vibra for the building
|
|
|
185,316 |
|
Cash paid by Vibra for the inventory
|
|
|
98,976 |
|
|
|
|
|
|
|
$ |
18,284,292 |
|
Less other assets arising from transaction:
|
|
|
|
|
|
Cash to Vibra
|
|
|
(2,181,898 |
) |
|
Lease deposit funded
|
|
|
(472,500 |
) |
|
Deferred financing costs
|
|
|
(195,602 |
) |
|
|
|
|
Fair value of assets acquired
|
|
$ |
15,434,292 |
|
|
|
|
|
Fair value of assets acquired:
|
|
|
|
|
|
Building
|
|
$ |
14,087,816 |
|
|
Furniture and equipment
|
|
|
367,500 |
|
|
Licenses
|
|
|
880,000 |
|
|
Inventory
|
|
|
98,976 |
|
|
|
|
|
|
|
$ |
15,434,292 |
|
|
|
|
|
F-48
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2005
(Unaudited), the Three Months Ended
September 30, 2004, and the Period May 14, 2004
(date of inception) to September 30, 2004
|
|
4. |
Property and Equipment |
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
| |
|
|
Direct Ownership | |
|
Under Capital Leases | |
|
Total | |
|
|
| |
|
| |
|
| |
Building
|
|
$ |
40,584 |
|
|
$ |
14,087,816 |
|
|
$ |
14,128,400 |
|
Leasehold improvements
|
|
|
351,379 |
|
|
|
|
|
|
|
351,379 |
|
Furniture and equipment
|
|
|
3,727,314 |
|
|
|
465,209 |
|
|
|
4,192,523 |
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(737,627 |
) |
|
|
(251,676 |
) |
|
|
(989,303 |
) |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,381,650 |
|
|
$ |
14,301,349 |
|
|
$ |
17,682,999 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $415,352 for the three months ended
September 30, 2005, $734,104 for the nine months ended
September 30, 2005, and $133,703 for the three months ended
September 30, 2004, and the period May 14, 2004 (date
of inception) to September 30, 2004.
The Company adopted SFAS No. 142, Under
SFAS No. 142, goodwill and other intangible assets
with indefinite lives are not subject to periodic amortization
but are instead reviewed annually as of June 30, or more
frequently if impairment indicators arise. These reviews require
the Company to estimate the fair value of its identified
reporting units and compare those estimates against the related
carrying values. For each of the reporting units, the estimated
net realizable value is determined using current transaction
information and the present value of future cash flows of the
units. The following table summarizes intangible assets:
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
| |
Goodwill
|
|
$ |
24,650,800 |
|
|
|
|
|
CONs/ Licenses
|
|
$ |
5,140,000 |
|
|
|
|
|
The CONs/ Licenses have not been amortized as they have
indefinite lives.
The facility lease agreements with MPT require deposits equal to
three months rent. The funds are on deposit with MPT in
non-interest bearing accounts. Deposits consist of the following:
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
| |
MPT lease deposits
|
|
$ |
3,768,865 |
|
Other deposits
|
|
|
483,891 |
|
|
|
|
|
Total
|
|
$ |
4,252,756 |
|
|
|
|
|
F-49
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2005
(Unaudited), the Three Months Ended
September 30, 2004, and the Period May 14, 2004
(date of inception) to September 30, 2004
The components of long-term debt are shown in the following
table:
|
|
|
|
|
|
|
September 30, 2005 | |
|
|
| |
MPT 10.25% hospital acquisition note
|
|
$ |
41,415,988 |
|
Merrill Lynch $17 million revolving credit facility
|
|
|
12,876,804 |
|
Other
|
|
|
83,875 |
|
|
|
|
|
|
|
$ |
54,376,667 |
|
Less: current maturities
|
|
|
(57,410 |
) |
|
|
|
|
|
|
$ |
54,319,257 |
|
|
|
|
|
At December 31, 2004, MPT had advanced $49,141,945 to Vibra
under four notes for the hospital acquisition and working
capital. Three notes for working capital and transaction fees
totaling $7,725,957 were interest only, with a balloon payment
due on March 31, 2005. Vibra may prepay the notes at any
time without penalty.
The hospital acquisition note is interest only through June
2007, and then amortized over the next 12 years with a
final maturity in 2019. Substantially all of the assets of Vibra
and its subsidiaries, as well as Vibras membership
interests in its subsidiaries, secure the MPT note. In addition
the majority member of Vibra, an affiliated company owned by the
majority member and Vibra Management, LLC have jointly and
severally guaranteed the notes payable to MPT, although the
obligation of the majority member is limited to $5 million
and his membership interest in Vibra. A default in any of the
MPT lease terms will also constitute a default under the notes.
The revolving credit facility has a balloon maturity on
February 8, 2008. Interest is payable monthly at the rate
of 30 day LIBOR plus 3% (6.84% as of September 30,
2005). The loan is secured by a first position in the
Companys accounts receivable through an intercreditor
agreement with MPT. Up to $17 million can be borrowed based
on a formula of qualifying accounts receivable. A portion of the
proceeds were used to pay off $7,725,957 in working capital and
transaction fee notes to MPT which had a maturity of
March 31, 2005. The Company is subject to various financial
and non-financial covenants under the credit facility. A default
in any of the MPT note and lease terms will also constitute a
default under the credit facility. At March 31, 2005, Vibra
was not in compliance with a facility rent coverage covenant.
The Merrill Lynch credit facility documents were amended for no
consideration in June 2005 to retroactively change the rent
coverage covenant from a by facility rent coverage to a
consolidated rent coverage calculation. At September 30,
2005, the Company met the amended covenant. The maximum facility
was increased from $14 million to $17 million in the
June 2005 amendment. The agreement was also amended for no
consideration in September 2005 to exclude the Redding capital
lease from the definition of leased assets.
Other long-term debt consists of a bank loan for equipment,
furniture and fixtures. The equipment purchased is pledged as
collateral for the loan. The loan is payable in monthly
installments of $5,000 plus interest at a fixed rate of 6.7%.
F-50
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2005
(Unaudited), the Three Months Ended
September 30, 2004, and the Period May 14, 2004
(date of inception) to September 30, 2004
Maturities of long-term debt for the next five years are as
follows:
|
|
|
|
|
September 30 |
|
|
|
|
(In thousands) | |
2006
|
|
$ |
57,410 |
|
2007
|
|
|
471,823 |
|
2008
|
|
|
14,776,352 |
|
2009
|
|
|
2,103,662 |
|
2010
|
|
|
2,329,711 |
|
Thereafter
|
|
|
34,637,709 |
|
|
|
|
|
|
|
$ |
54,376,667 |
|
|
|
|
|
|
|
8. |
Obligations Under Capital Leases |
On June 30, 2005, Vibra entered into a triple-net real
estate lease with MPT on the Redding, California property. The
lease is for an initial term of 15 years and contains
renewal options at Vibras option for three additional five
year terms. The initial lease base rate is 10.5% of MPTs
APP. Beginning January 1, 2006, and each January 1
thereafter, the base rate increases by the greater of 2.5% (to
10.76%) or by the increase in the consumer price index from the
previous adjustment date. An additional $2.75 million can
be drawn under the lease agreement upon the completion of
certain building renovations and the conversion of the
operations to a LTACH.
The Redding lease does not contain a purchase option or
percentage rent provisions. Commencing January 1, 2006,
Vibra must make quarterly deposits to a capital improvement
reserve at the rate of $375 per bed per quarter, or $132,000 on
an annual basis. Since Vibras capital expenditures
incurred exceeded the reserve requirement at July 1, 2005,
and October 1, 2005, no funding was required.
Beginning with the quarter ending September 30, 2006, the
Redding lease is subject to a covenant limiting total debt to
100% of the total capitalization of the guarantors (as defined)
or 4.5 times the 12 month total EBITDAR (as defined) of the
guarantors whichever is greater. Redding is also subject to the
following financial covenants relating to EBITDAR coverage:
|
|
|
|
|
|
|
|
|
|
|
Fixed Charge | |
|
Lease Payment | |
12 Month Period Ending |
|
Coverage Required | |
|
Coverage Required | |
|
|
| |
|
| |
June 30, 2006
|
|
|
40% |
|
|
|
50% |
|
September 30, 2006
|
|
|
40% |
|
|
|
50% |
|
December 31, 2006
|
|
|
40% |
|
|
|
50% |
|
March 31, 2007
|
|
|
60% |
|
|
|
75% |
|
June 30, 2007
|
|
|
100% |
|
|
|
120% |
|
September 30, 2007 and thereafter
|
|
|
125% |
|
|
|
150% |
|
Other capital leases consist of equipment financing. The
equipment is pledged as collateral for the lease.
F-51
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2005
(Unaudited), the Three Months Ended
September 30, 2004, and the Period May 14, 2004
(date of inception) to September 30, 2004
The following schedule summarizes the future minimum lease
payments under capital leases together with the net minimum
lease payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MPT | |
|
|
|
|
Sept. 30 |
|
Redding Lease | |
|
Other | |
|
Total | |
|
|
| |
|
| |
|
| |
2006
|
|
$ |
1,925,438 |
|
|
$ |
152,598 |
|
|
$ |
2,078,036 |
|
2007
|
|
|
1,973,573 |
|
|
|
143,883 |
|
|
|
2,117,456 |
|
2008
|
|
|
2,022,913 |
|
|
|
116,175 |
|
|
|
2,139,088 |
|
2009
|
|
|
2,073,486 |
|
|
|
97,185 |
|
|
|
2,170,671 |
|
2010
|
|
|
2,125,323 |
|
|
|
20,680 |
|
|
|
2,146,003 |
|
Thereafter
|
|
|
23,486,041 |
|
|
|
|
|
|
|
23,486,041 |
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
33,606,774 |
|
|
|
530,521 |
|
|
|
34,137,295 |
|
Less amount representing interest (imputed rate 9%)
|
|
|
(15,676,218 |
) |
|
|
(98,662 |
) |
|
|
(15,774,880 |
) |
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
$ |
17,930,556 |
|
|
$ |
431,859 |
|
|
$ |
18,362,415 |
|
|
|
|
|
|
|
|
|
|
|
Substantially, all of the assets of Vibra and its subsidiaries,
as well as Vibras membership interests in its
subsidiaries, secure the MPT leases. In addition the majority
member of Vibra, an affiliated Company owned by the majority
member, and Vibra Management, LLC have jointly and severally
guaranteed the leases to MPT, although the obligation of the
majority member is limited to $5 million and his membership
interest in Vibra.
|
|
9. |
Related Party Transactions |
The Company has entered into agreements with Vibra Management,
LLC (a company affiliated through common ownership) to provide
management services to each hospital. The services include
information system support, legal counsel, accounting/tax, human
resources, program development, quality management and marketing
oversight. The agreements call for management fees equal to 2-3%
of net patient service revenue, and are for an initial term of
five years with automatic one-year renewals. Management fee
expense amounted to $721,188 and $1,965,247 for the three and
nine months ended September 30, 2005, respectively, and
$444,933 for the three months ended September 30, 2004, and
the period May 14, 2004 (date of inception) to
September 30, 2004. At September 30, 2005, $478,651
was payable to Vibra Management, LLC and is included in accounts
payable-related party in the accompanying consolidated balance
sheet.
The spouse of the majority member of the Company provided legal
consulting services to the Company on the hospital acquisition
and on various operational licensing and financing matters.
During the period from inception through December 31, 2004,
legal consulting services from this person totaled $176,187, of
which $98,137 was payable at December 31, 2004. The balance
was paid during the nine months ended September 30, 2005,
and no additional services were provided.
|
|
10. |
Commitments and Contingencies |
The Company is subject to legal proceedings and claims that have
arisen in the ordinary course of its business and have not been
finally adjudicated (including claims against the hospitals
under prior ownership). In the opinion of management, the
outcome of these actions will not have a material effect on
consolidated financial position or results of operations of the
Company.
F-52
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2005
(Unaudited), the Three Months Ended
September 30, 2004, and the Period May 14, 2004
(date of inception) to September 30, 2004
The Company has recently fulfilled change of ownership
requirements imposed by Medi-Cal, the California Medicaid
administrator that date back to the prior owners
acquisition of the California hospitals. Accounts receivable at
September 30, 2005, include $1,972,585 due from Medi-Cal,
including $657,000 prior to the acquisition. The Company is in
the process of submitting bills for services provided from July
2003 to present and expects payment within six months.
|
|
|
California Seismic Upgrade |
For earthquake protection California requires hospitals to
receive an approved Structural Performance Category 2 (SPC-2) by
January 1, 2008, to maintain its license. Hospitals may
request a five year implementation extension. The Fresno and
Redding, CA hospitals are expected to meet the SPC-2 standard by
January 1, 2008, with capital outlays that are not material
to the consolidated financial statements. The Kentfield, CA
hospital has received a five year extension to meet the
requirement. Management is in preliminary consultations with
consulting architects and engineers to develop a plan for
Kentfield to meet the requirements. The capital outlay required
to meet the standards at Kentfield cannot be determined at this
time.
SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information, establishes standards
for reporting information about operating segments and related
disclosures about products and services, geographic areas and
major customers.
The Companys segments consist of (i) IRFs and
(ii) LTACHs. The accounting policies of the segments are
the same as those described in the summary of significant
accounting policies. The Company evaluates performance of the
segments based on loss from operations.
The following table summarizes selected financial data for the
Companys reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended Sept. 30, 2005 | |
|
|
| |
|
|
IRF | |
|
LTACH | |
|
Other | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Net patient service revenue
|
|
$ |
45,508,866 |
|
|
$ |
49,661,351 |
|
|
$ |
|
|
|
$ |
95,170,217 |
|
Net loss from operations
|
|
|
(5,408,996 |
) |
|
|
(239,049 |
) |
|
|
(418,469 |
) |
|
|
(6,066,514 |
) |
Interest expense
|
|
|
2,600,746 |
|
|
|
1,682,354 |
|
|
|
|
|
|
|
4,283,100 |
|
Depreciation and amortization
|
|
|
542,011 |
|
|
|
271,249 |
|
|
|
59,959 |
|
|
|
873,219 |
|
Deferred rent
|
|
|
4,137,137 |
|
|
|
1,690,835 |
|
|
|
|
|
|
|
5,827,972 |
|
Total assets
|
|
|
52,290,934 |
|
|
|
30,900,543 |
|
|
|
832,181 |
|
|
|
84,023,658 |
|
Purchases of property and equipment
|
|
|
300,813 |
|
|
|
536,046 |
|
|
|
5,001 |
|
|
|
841,860 |
|
Goodwill
|
|
|
16,409,877 |
|
|
|
8,240,924 |
|
|
|
|
|
|
|
24,650,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended Sept. 30, 2005 | |
|
|
| |
|
|
IRF | |
|
LTACH | |
|
Other | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Net patient service revenue
|
|
$ |
17,544,000 |
|
|
$ |
17,709,794 |
|
|
$ |
|
|
|
$ |
35,253,794 |
|
Net income (loss) from operations
|
|
|
(2,527,458 |
) |
|
|
334,340 |
|
|
|
(180,080 |
) |
|
|
(2,373,198 |
) |
Interest expense
|
|
|
1,103,319 |
|
|
|
621,482 |
|
|
|
|
|
|
|
1,724,801 |
|
Depreciation and amortization
|
|
|
348,443 |
|
|
|
96,427 |
|
|
|
13,374 |
|
|
|
458,244 |
|
F-53
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2005
(Unaudited), the Three Months Ended
September 30, 2004, and the Period May 14, 2004
(date of inception) to September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2004, and the | |
|
|
Period May 14, 2004 (Date of Inception) to September 30, 2004 | |
|
|
| |
|
|
IRF | |
|
LTACH | |
|
Other | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Net patient service revenue
|
|
$ |
12,074,611 |
|
|
$ |
8,771,224 |
|
|
$ |
|
|
|
$ |
20,845,835 |
|
Net loss from operations
|
|
|
(1,519,116 |
) |
|
|
(747,580 |
) |
|
|
(38,736 |
) |
|
|
(2,305,432 |
) |
Interest expense
|
|
|
724,882 |
|
|
|
300,295 |
|
|
|
|
|
|
|
1,025,177 |
|
Depreciation and amortization
|
|
|
97,048 |
|
|
|
58,655 |
|
|
|
|
|
|
|
155,703 |
|
In October 2005 Vibra amended its revolving credit facility with
Merrill Lynch to include the accounts receivable of the Redding
hospital and to increase the maximum facility to
$20 million. Vibra will pay Merrill a financing fee of
$30,000 plus legal costs of the amendment.
In December 2005 Vibra amended its revolving credit facility
with Merrill Lynch for no consideration to change various
definitions.
In December 2005 Vibra received a payment of $2.75 million
from Care One Realty as full settlement of the post closing
working capital adjustment discussed in Note 2.
F-54
Report of Independent Registered Public Accounting Firm
The Member
Vibra Healthcare, LLC
We have audited the accompanying consolidated balance sheet of
Vibra Healthcare, LLC and subsidiaries (the Company)
as of December 31, 2004, and the related consolidated
statements of operations, changes in partners capital, and
cash flows for the period from inception (May 14, 2004)
through December 31, 2004. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements 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 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 audit provides
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 Vibra Healthcare, LLC and subsidiaries as of
December 31, 2004, and the results of their operations and
their cash flows for the period from inception (May 14,
2004) through December 31, 2004 in conformity with
accounting principles generally accepted in the United States of
America.
|
|
|
/s/ Parente Randolph, LLC |
Harrisburg, Pennsylvania
March 8, 2005, except Note 11,
as to which the date is March 31, 2005
F-55
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2004
|
|
|
|
|
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
2,280,772 |
|
|
Patient accounts receivable, net of allowance for doubtful
collections of $302,988
|
|
|
17,319,154 |
|
|
Third party settlements receivable
|
|
|
346,141 |
|
|
Prepaid insurance
|
|
|
719,480 |
|
|
Deposit for workers compensation claims
|
|
|
1,375,000 |
|
|
Other current assets
|
|
|
518,650 |
|
|
|
|
|
|
|
Total current assets
|
|
|
22,559,197 |
|
Property and equipment, net
|
|
|
2,662,546 |
|
Goodwill
|
|
|
24,510,296 |
|
Intangible assets
|
|
|
4,260,000 |
|
Deposits
|
|
|
3,485,387 |
|
Deferred financing and lease costs
|
|
|
1,543,424 |
|
|
|
|
|
|
|
Total assets
|
|
$ |
59,020,850 |
|
|
|
|
|
|
Liabilities and Partners Capital
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$ |
5,142,345 |
|
|
Accounts payable related parties
|
|
|
262,144 |
|
|
Accrued liabilities
|
|
|
4,387,292 |
|
|
Accrued insurance claims
|
|
|
1,441,516 |
|
|
|
|
|
|
|
Total current liabilities
|
|
|
11,233,297 |
|
Deferred rent
|
|
|
2,460,308 |
|
Long-term debt, net of current maturities
|
|
|
49,141,945 |
|
|
|
|
|
Total liabilities
|
|
|
62,835,550 |
|
|
|
|
|
Partners capital
|
|
|
(3,814,700 |
) |
|
|
|
|
|
|
Total liabilities and partners capital
|
|
$ |
59,020,850 |
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-56
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Consolidated Statements of Operations and Changes in
Partners Capital
For the Period from Inception (May 14, 2004) through
December 31, 2004
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
Net patient service revenue
|
|
$ |
48,266,019 |
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Cost of services
|
|
|
34,528,924 |
|
|
General and administrative
|
|
|
5,631,229 |
|
|
Rent expense
|
|
|
8,859,233 |
|
|
Interest expense
|
|
|
2,293,402 |
|
|
Management fee Vibra Management, LLC
|
|
|
982,668 |
|
|
Depreciation and amortization
|
|
|
302,194 |
|
|
Bad debt expense
|
|
|
776,780 |
|
|
|
|
|
|
|
Total expenses
|
|
|
53,374,430 |
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,108,411 |
) |
|
Non-operating revenue
|
|
|
1,293,711 |
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,814,700 |
) |
|
Partners capital beginning
|
|
|
|
|
|
|
|
|
|
Partners capital ending
|
|
($ |
3,814,700 |
) |
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-57
VIBRA HEALTHCARE LLC AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Period from Inception (May 14, 2004) through
December 31, 2004
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
Net loss
|
|
$ |
(3,814,700 |
) |
|
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
302,194 |
|
|
|
|
Provision for bad debts
|
|
|
776,780 |
|
Changes in operating assets and liabilities, net of effects from
acquisition of business:
|
|
|
|
|
|
|
|
Accounts receivable including third party settlements
|
|
|
(4,801,250 |
) |
|
|
|
Prepaids and other current assets
|
|
|
(2,257,611 |
) |
|
|
|
Deposits
|
|
|
(133,671 |
) |
|
|
|
Accounts payable
|
|
|
1,884,531 |
|
|
|
|
Accounts payable related party
|
|
|
262,144 |
|
|
|
|
Accrued liabilities
|
|
|
1,608,634 |
|
|
|
|
Deferred rent
|
|
|
2,460,308 |
|
|
|
|
|
Net cash used in operating activities
|
|
|
(3,712,641 |
) |
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(167,900 |
) |
|
|
|
Cash acquired in business acquisition
|
|
|
201,280 |
|
|
|
|
|
Net cash provided by investing activities
|
|
|
33,380 |
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
Proceeds of notes payable
|
|
|
6,050,458 |
|
|
|
|
Payment of deferred financing costs
|
|
|
(90,425 |
) |
|
|
|
|
Net cash provided by financing activities
|
|
|
5,960,033 |
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
2,280,772 |
|
Cash and cash equivalents beginning
|
|
|
|
|
|
|
|
|
Cash and cash equivalents ending
|
|
$ |
2,280,772 |
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
2,293,402 |
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
Notes issued relating to acquisition
|
|
$ |
38,093,842 |
|
|
|
|
|
|
|
|
Lease deposits funded by notes payable
|
|
$ |
3,296,365 |
|
|
|
|
|
|
|
|
Deferred financing costs funded by notes payable
|
|
$ |
1,500,000 |
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-58
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Period From Inception (May 14, 2004) through
December 31, 2004
1. Organization and Summary of
Significant Accounting Policies
Organization: Vibra Healthcare LLC (Vibra and
the Company) was formed May 14, 2004, and
commenced operations with the acquisition of its subsidiaries
consisting of four independent rehabilitation hospitals
(IRF) and two long-term acute care hospitals
(LTACH) located throughout the United States on
July 1, 2004, and August 17, 2004. Vibra, a Delaware
limited liability company (LLC), is a single member
LLC with an infinite life. The members liability is limited to
the capital contribution. Vibra was previously named Highmark
Healthcare LLC until a name change in December 2004.
Vibras wholly-owned subsidiaries consist of:
|
|
|
Subsidiaries |
|
Location |
|
|
|
92 Brick Road Operating Company LLC
|
|
Marlton, NJ |
4499 Acushnet Avenue Operating Company LLC
|
|
New Bedford, MA |
1300 Campbell Lane Operating Company LLC
|
|
Bowling Green, KY |
8451 Pearl Street Operating Company LLC
|
|
Denver, CO |
7173 North Sharon Avenue Operating Company LLC
|
|
Fresno, CA |
1125 Sir Francis Drake Boulevard Operating Company LLC
|
|
Kentfield, CA |
The Company provides long-term acute care hospital services and
inpatient acute rehabilitative hospital care at its hospitals.
Patients in the Companys LTACHs typically suffer from
serious and often complex medical conditions that require a high
degree of care. Patients in the Companys IRFs typically
suffer from debilitating injuries including traumatic brain and
spinal cord injuries, and require rehabilitation care in the
form of physical, psychological, social and vocational
rehabilitation services. The Company also operates ten
outpatient clinics affiliated with five of its six hospitals.
Principles of Consolidation: The consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiaries controlled through sole membership interests
in limited liability companies. All significant intercompany
balances and transactions are eliminated in consolidation.
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 reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents: The Company considers all
highly liquid investments with a maturity of three months or
less when purchased to be cash equivalents. Cash equivalents are
stated at cost which approximates market.
Patient Accounts Receivable: Patient accounts receivable
are reported at net realizable value. Accounts are written off
when they are determined to be uncollectible based upon
managements assessment of individual accounts. The
allowance for doubtful collections is estimated based upon a
periodic review of the accounts receivable aging, payor
classifications and application of historical write-off
percentages.
Inventories: Inventories of pharmaceuticals and
pharmaceutical supplies are stated at the lower of cost or
market value. Cost is determined on a first-in, first-out basis.
These inventories totaled $363,720 at December 31, 2004,
and are included in other current assets in the accompanying
consolidated balance sheet.
F-59
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Period From Inception (May 14, 2004) through
December 31, 2004
Property and Equipment: Property and equipment are stated
at cost net of accumulated depreciation. Depreciation and
amortization are computed using the straight-line method over
the estimated useful lives of the assets or the term of the
lease, as appropriate. The general range of useful lives is as
follows:
|
|
|
Leasehold improvements
|
|
15 years |
Furniture and equipment
|
|
2-7 years |
In accordance with Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No 144), the Company reviews
the realizability of long-lived assets whenever events or
circumstances occur which indicate recorded costs may not be
recoverable.
Intangible Assets: The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. Under
SFAS No. 142, goodwill and other intangible assets
with indefinite lives are no longer subject to periodic
amortization but are instead reviewed annually or more
frequently if impairment indicators arise. These reviews require
the Company to estimate the fair value of its identified
reporting units and compare those estimates against the related
carrying values. Identifiable assets and liabilities acquired in
connection with business combinations accounted for under the
purchase method are recorded at their respective fair values.
For each of the reporting units, the estimated net realizable
value is determined using current transaction information and
the present value of future cash flows of the units.
Management has allocated the intangible assets between
identifiable intangibles and goodwill. Intangible assets, other
than goodwill, consist of values assigned to certificates of
need (CONs) and licenses. The useful life of each
class of intangible assets is as follows:
|
|
|
Goodwill
|
|
Indefinite |
Certificates of Need/Licenses
|
|
Indefinite |
Deferred Financing and Lease Costs: Costs and fees
incurred in connection with the MPT loans and leases have been
deferred and are being amortized over the 15 year term of
the loans and leases using the straight-line method, which
approximates the effective interest method. Amortization expense
was $47,000 for the period from inception through
December 31, 2004.
Insurance Risk Programs: Under the Companys
insurance programs, the Company is liable for a portion of its
losses. The Company estimates its liability for losses based on
historical trends that will be incurred in a respective
accounting period and accrues that estimated liability. These
programs are monitored quarterly and estimates are revised as
necessary to take into account additional information. At
December 31, 2004, the Company has accrued $1,441,516
related to these programs. Deposits for workers
compensation claims consist of cash provided to Vibras
insurance carrier to fund workers compensation claims. In
February 2005, Vibra used $1,375,000 of its borrowing base on
the Merrill Lynch loan (see Note 11) to collateralize a
letter of credit for the claims and the cash deposit was
refunded.
Deferred Rent: The excess of straight line rent expense
over each rent paid is credited to deferred rent on a monthly
basis. For the period from inception through December 31,
2004, rent expense exceeded the rent paid in cash by $2,460,308.
Revenue Recognition: Net patient service revenue consists
primarily of charges to patients and are recognized as services
are rendered. Net patient service revenue is reported net of
provisions for contractual allowances from third-party payors
and patients. The Company has agreements with third-party payors
that provide for payments to the Company at amounts different
from its established rates. The differences between the
estimated program reimbursement rates and the standard billing
rates are
F-60
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Period From Inception (May 14, 2004) through
December 31, 2004
accounted for as contractual adjustments, which are deducted
from gross revenues to arrive at net patient service revenues.
Payment arrangements include prospectively determined rates per
discharge, reimbursed costs, discounted charges and per diem
payments. Retroactive adjustments are accrued on an estimated
basis in the period the related services are rendered and
adjusted in future periods as final settlements are determined.
Patient accounts receivable resulting from such payment
arrangements are recorded net of contractual allowances.
A significant portion of the Companys net patient service
revenues are generated directly from the Medicare and Medicaid
programs. Net patient service revenues generated directly from
the Medicare and Medicaid programs represented approximately 63%
and 13%, respectively, of the Companys consolidated net
patient service revenues for the period from inception through
December 31, 2004. Approximately 46% and 21% of the
Companys gross patient accounts receivable at
December 31, 2004, are from Medicare and Medicaid,
respectively. As a provider of services to these programs, the
Company is subject to extensive regulations. The inability of a
hospital to comply with regulations can result in changes in
that hospitals net patient service revenues generated from
these programs.
Concentration of Credit Risk: Financial instruments that
potentially subject the Company to concentration of credit risk
consist primarily of cash balances and patient accounts
receivables. The Company deposits its cash with large banks. The
Company grants unsecured credit to its patients, most of whom
reside in the service area of the Companys facilities and
are insured under third-party payor agreements. Because of the
geographic diversity of the Companys facilities and
non-governmental third-party payors, Medicare and Medicaid
represent the Companys primary concentration of credit
risk.
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
its current assets, current liabilities and long-term debt
approximates their fair value.
Income Taxes: Vibra and its subsidiaries have elected to
be a LLC for federal and state income tax purposes. In lieu of
corporate income taxes, the member of a LLC is taxed on their
proportionate share of the Companys taxable income or
loss. Therefore, no provision or liability for federal or state
income taxes has been provided for in the consolidated balance
sheet or consolidated statement of operations.
2. Acquisitions
In July and August 2004, Vibra entered into agreements with
Medical Properties Trust, Inc. (MPT) to acquire the
operations of six specialty hospitals. MPT, a healthcare real
estate investment trust based in Birmingham, Alabama, acquired
the real estate for approximately $127.4 million and
assigned to Vibra its rights to acquire the operations of the
hospitals from Care One Realty of Hackensack, New Jersey for
approximately $38.1 million net of cash acquired and
$7.5 million of liabilities assumed which was financed by
MPT. The assignment of the LLC interests to Vibra transferred
the operations, assets and liabilities of each LLC. The purchase
price of the operations may be adjusted either upward or
downward pursuant to a post-closing working capital adjustment
with the seller. The purchase price of the operations has been
allocated to net assets acquired, and liabilities assumed based
on valuation studies subject to purchase price adjustments. The
excess of the amount of purchase price over the net asset value,
including identifiable intangible assets, was allocated to
goodwill. The purchase price was negotiated based on
managements evaluation of future operational performance
of the hospitals as a group under Vibra. The results of
operations of the hospitals acquired have been included in the
Companys consolidated financial
F-61
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Period From Inception (May 14, 2004) through
December 31, 2004
statements since the date of acquisition. The following table
summarizes the acquisition date and other relevant information
regarding each hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Location |
|
Type | |
|
Beds | |
|
Acquisition Date | |
|
|
| |
|
| |
|
| |
Marlton, NJ
|
|
|
IRF |
|
|
|
46 |
(1) |
|
|
July 1, 2004 |
|
Bowling Green, KY
|
|
|
IRF |
|
|
|
60 |
|
|
|
July 1, 2004 |
|
Fresno, CA
|
|
|
IRF |
|
|
|
62 |
|
|
|
July 1, 2004 |
|
Kentfield, CA
|
|
|
LTACH |
|
|
|
60 |
|
|
|
July 1, 2004 |
|
New Bedford, MA
|
|
|
LTACH |
|
|
|
90 |
|
|
|
August 17, 2004 |
|
Thornton, CO
|
|
|
IRF |
|
|
|
117 |
(2) |
|
|
August 17, 2004 |
|
|
|
(1) |
Vibra subleases a floor of the Marlton building to an
unaffiliated provider which operates 30 pediatric rehabilitation
beds which are in addition to the 46 beds operated by Vibra. |
|
(2) |
Includes beds licensed as skilled nursing and beds licensed as
psychiatric. |
Information with respect to the businesses acquired in purchase
transactions is as follows:
|
|
|
|
|
|
Notes issued, net of cash acquired
|
|
$ |
38,093,842 |
|
Liabilities assumed
|
|
|
7,477,988 |
|
|
|
|
|
|
|
|
45,571,830 |
|
Fair value of assets acquired:
|
|
|
|
|
|
Accounts receivable
|
|
|
(13,640,825 |
) |
|
Property and equipment
|
|
|
(2,749,840 |
) |
|
CONs/ Licenses
|
|
|
(4,260,000 |
) |
|
Other
|
|
|
(410,869 |
) |
|
|
|
|
Cost in excess of fair value of net assets acquired (goodwill)
|
|
$ |
24,510,296 |
|
|
|
|
|
3. Property and Equipment
Property and equipment at December 31, 2004, consists of
the following:
|
|
|
|
|
Leasehold improvements
|
|
$ |
48,055 |
|
Furniture and equipment
|
|
|
2,869,685 |
|
|
|
|
|
|
|
|
2,917,740 |
|
Less: accumulated depreciation and amortization
|
|
|
255,194 |
|
|
|
|
|
Total
|
|
$ |
2,662,546 |
|
|
|
|
|
Depreciation expense was $255,194 for the period from inception
through December 31, 2004.
F-62
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Period From Inception (May 14, 2004) through
December 31, 2004
4. Deposits
The facility lease agreements with MPT require deposits equal to
three months rent. The funds are on deposit with MPT in
non-interest bearing accounts. Deposits at December 31,
2004, consist of the following:
|
|
|
|
|
MPT lease deposits
|
|
$ |
3,296,365 |
|
Other deposits
|
|
|
189,022 |
|
|
|
|
|
Total
|
|
$ |
3,485,387 |
|
|
|
|
|
5. Intangible Assets
The Company adopted SFAS No. 142. Under
SFAS No. 142, goodwill and other intangible assets
with indefinite lives are not subject to periodic amortization
but are instead reviewed annually as of April 30, or more
frequently if impairment indicators arise. These reviews require
the Company to estimate the fair value of its identified
reporting units and compare those estimates against the related
carrying values. For each of the reporting units, the estimated
net realizable value is determined using current transaction
information and the present value of future cash flows of the
units.
Goodwill in the amount of $24,510,296 and CONs/Licenses of
$4,260,000 have been recorded in connection with the acquisition
of the six hospitals, and have not been amortized as both have
indefinite lives.
6. Notes Payable
As of December 31, 2004, MPT had advanced $49,141,945 to
Vibra under four notes for the hospital acquisition and working
capital. The notes bear interest at 10.25%. Three notes totaling
$7,725,958 are interest only, with a balloon payment due on
March 31, 2005. The remaining note for $41,415,988 is
payable interest only for the first 36 months and then
amortized over the next 12 years with a final maturity in
2019. Vibra may prepay the notes at any time without penalty.
Maturities for the next five years are:
|
|
|
|
|
|
|
(In thousands) | |
|
|
| |
December 31, 2005
|
|
$ |
|
|
2006
|
|
|
|
|
2007
|
|
|
902 |
|
2008
|
|
|
9,675 |
|
2009
|
|
|
2,158 |
|
Thereafter
|
|
|
36,407 |
|
|
|
|
|
|
|
$ |
49,142 |
|
|
|
|
|
Substantially all of the assets of Vibra and its subsidiaries,
as well as Vibras membership interests in its
subsidiaries, secure the loans. In addition the sole member of
Vibra, an affiliated company owned by the sole member and Vibra
Management, LLC have jointly and severally guaranteed the notes
payable to MPT, although the obligation of the sole member is
limited to $5 million and his membership interest in Vibra.
A default in any of the MPT lease terms will also constitute a
default under the notes.
As discussed in Note 11, Vibra used a portion of the
proceeds of a long-term revolving credit facility from Merrill
Lynch Capital to repay the MPT notes due March 31, 2005. As
a result of this refinancing,
F-63
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Period From Inception (May 14, 2004) through
December 31, 2004
the notes due MPT have been classified as long-term at
December 31, 2004 in the accompanying consolidated balance
sheet.
7. Related Party Transactions
The Company has entered into agreements with Vibra Management,
LLC (a company affiliated through common ownership) to provide
management services to each hospital. The services include
information system support, legal counsel, accounting/tax, human
resources, program development, quality management and marketing
oversight. The agreements call for a management fee equal to 2%
of net patient service revenue, and are for an initial term of
five years with automatic one-year renewals. Management fee
expense amounted to $982,668 for the period from inception
through December 31, 2004. At December 31, 2004,
$164,007 was payable to Vibra Management, LLC and is included
accounts payable related party in the accompanying
consolidated balance sheet.
The spouse of the sole member of the Company provided legal
consulting services to the Company on the hospital acquisition
and on various operational licensing and financing matters.
During the period from inception through December 31, 2004,
legal consulting services from this person totaled $176,187, of
which $98,137 was payable at December 31, 2004.
8. Commitments and
Contingencies
Vibra entered into triple-net long-term real estate operating
leases with MPT at each hospital. Each lease is for an initial
term of 15 years and contains renewal options at
Vibras option for three additional five-year terms. Vibra
has the option to purchase the leased property at the end of the
lease term, including any extension periods, for the greater of
the fair market value of the leased property, or the purchase
price increased by 2.5% per annum from the commencement date.
The base rate at commencement is calculated at 10.25% of
MPTs adjusted purchase price of the real estate
(APP). The base rate increases to 12.23% of APP
effective July 1, 2005. Beginning January 1, 2006, and
each January 1, thereafter, the base rate increases by an
inflator of 2.5% (i.e. base rate becomes 12.54% of APP on
January 1, 2006).
Each lease also contains a percentage rent provision
(Percentage Rent). Beginning January 1, 2005,
if the aggregate monthly net patient service revenues of the six
hospitals exceed an annualized net patient service revenue run
rate of $110,000,000, additional rent equal to 2% of monthly net
patient service revenue is triggered. The percentage rent is
payable within ten days after the end of the applicable quarter.
The percentage rent declines from 2% to 1% on a pro rata basis
as Vibra repays the $49.142 million in notes to MPT.
Commencing on July 1, 2005, Vibra must make quarterly
deposits to a capital improvement reserve at the rate of $375
per quarter per bed or $652,500 on an annual basis for all
hospitals leased from MPT. The reserve may be used to fund
capital improvements and repairs as agreed to by the parties.
The MPT leases are subject to various financial covenants
including limitations on total debt to 100% of the total
capitalization of the guarantors (as defined) or 4.5 times the
12 month total EBITDAR of the guarantors, whichever is greater,
coverage ratios of 125% of debt service and 150% of rent (as
defined), and maintenance of average daily patient census. As of
December 31, 2004, Vibra was not in compliance with the
debt service and rent coverage covenants. The MPT lease
agreements were subsequently amended to delay the initial
measurement date with respect to these financial covenants
(Note 11). A default in
F-64
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Period From Inception (May 14, 2004) through
December 31, 2004
any of the loan terms will also constitute a default under the
leases. All of the MPT leases are cross defaulted.
Vibra has entered into operating leases for six outpatient
clinics which expire on various dates through 2008.
Minimum future lease obligations on the leases are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MPT Rent | |
|
Outpatient | |
|
|
|
|
Obligation | |
|
Clinics | |
|
Total | |
|
|
| |
|
| |
|
| |
December 31, 2005
|
|
$ |
14,344 |
|
|
$ |
205 |
|
|
$ |
14,549 |
|
2006
|
|
|
16,082 |
|
|
|
122 |
|
|
|
16,204 |
|
2007
|
|
|
16,485 |
|
|
|
84 |
|
|
|
16,569 |
|
2008
|
|
|
16,897 |
|
|
|
55 |
|
|
|
16,952 |
|
2009
|
|
|
17,319 |
|
|
|
|
|
|
|
17,319 |
|
Thereafter
|
|
|
188,465 |
|
|
|
|
|
|
|
188,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
269,592 |
|
|
$ |
466 |
|
|
$ |
270,058 |
|
|
|
|
|
|
|
|
|
|
|
Substantially, all of the assets of Vibra and its subsidiaries,
as well as Vibras membership interests in its
subsidiaries, secure the MPT leases. In addition the sole member
of Vibra, an affiliated Company owned by the sole member, and
Vibra Management LLC have joint and severally guaranteed the
leases to MPT, although the obligation of the sole member is
limited to $5 million and his membership interest in Vibra.
The Company has sublet a floor of its Marlton, NJ, hospital to
an independent pediatric rehabilitation provider. Three other
hospitals have entered into numerous sublease arrangements.
These subleases generated rental income of $884,913 for the
period from inception through December 31, 2004 and is
included in non-operating revenue in the accompanying
consolidated statement of operations. The following table
summarizes amounts due under sub leases (in thousands):
|
|
|
|
|
December 31, 2005
|
|
$ |
1,119 |
|
2006
|
|
|
1,144 |
|
2007
|
|
|
1,170 |
|
2008
|
|
|
1,197 |
|
2009
|
|
|
1,223 |
|
Thereafter
|
|
|
4,614 |
|
|
|
|
|
|
|
$ |
10,467 |
|
|
|
|
|
The Company is subject to legal proceedings and claims that have
arisen in the ordinary course of its business and have not been
finally adjudicated (including claims against the hospitals
under prior ownership). In the opinion of management, the
outcome of these actions will not have a material effect on the
financial position or results of operations of the Company.
The Company is in the process of fulfilling change of ownership
requirements imposed by Medi-Cal, the California Medicaid
administrator that date back to the prior owners
acquisition of the California
F-65
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Period From Inception (May 14, 2004) through
December 31, 2004
hospitals. Amounts receivable at December 31, 2004, include
$1,015,959 due from Medi-Cal, including $657,000 prior to the
acquisition. Management is continuing to negotiate with
Medi-Cal. The amount that will ultimately be received cannot be
determined at this time.
|
|
|
California Seismic Upgrade |
For earthquake protection California requires hospitals to
receive an approved Structural Performance Category 2
(SPC-2) by
January 1, 2008, to maintain its license. Hospitals may
request a five year implementation extension. The Fresno, CA,
hospital is expected to meet the
SPC-2 standard by
January 1, 2008, with capital outlays that are not material
to the consolidated financial statements. The Kentfield, CA,
hospital has applied for a three year extension to meet the
requirement. Management is in preliminary consultations with
consulting architects and engineers to develop a plan for
Kentfield to meet the requirements. The capital outlay required
to meet the standards at Kentfield cannot be determined at this
time.
|
|
9. |
Retirement Savings Plan |
In November 2004, the Company began sponsorship of a defined
contribution retirement savings plan for substantially all of
its employees. Employees may elect to defer up to 15% of their
salary. The Company matches 25% of the first 3% of compensation
employees contribute to the plan. The employees vest in the
employer contributions over a five-year period beginning on the
employees hire date. The expense incurred by the Company
related to this plan was $21,310 for the period from inception
through December 31, 2004.
SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information, establishes standards
for reporting information about operating segments and related
disclosures about products and services, geographic areas and
major customers.
The Companys segments consist of (i) IRFs and
(ii) LTACHs. The accounting policies of the segments are
the same as those described in the summary of significant
accounting policies. The Company evaluates performance of the
segments based on loss from operations.
The following table summarizes selected financial data for the
Companys reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period from Inception (May 14, 2004) through | |
|
|
December 31, 2004 | |
|
|
| |
|
|
IRF | |
|
LTACH | |
|
Other | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Net patient service revenue
|
|
$ |
24,741,573 |
|
|
$ |
23,524,446 |
|
|
$ |
|
|
|
$ |
48,266,019 |
|
Net operating loss
|
|
|
(3,649,867 |
) |
|
|
(1,395,339 |
) |
|
|
(63,205 |
) |
|
|
(5,108,411 |
) |
Interest expense
|
|
|
1,493,279 |
|
|
|
800,123 |
|
|
|
|
|
|
|
2,293,402 |
|
Depreciation and amortization
|
|
|
185,746 |
|
|
|
116,448 |
|
|
|
|
|
|
|
302,194 |
|
Deferred rent
|
|
|
1,833,216 |
|
|
|
627,092 |
|
|
|
|
|
|
|
2,460,308 |
|
Total assets
|
|
|
32,175,207 |
|
|
|
26,702,535 |
|
|
|
143,108 |
|
|
|
59,020,850 |
|
Purchases of property and equipment
|
|
|
75,582 |
|
|
|
92,318 |
|
|
|
|
|
|
|
167,900 |
|
Goodwill
|
|
|
16,664,491 |
|
|
|
7,845,805 |
|
|
|
|
|
|
|
24,510,296 |
|
F-66
VIBRA HEALTHCARE, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Period From Inception (May 14, 2004) through
December 31, 2004
On February 9, 2005, Vibra closed on a revolving credit
facility (the Revolver) with Merrill Lynch Capital
secured by a first position in the Companys accounts
receivable through an intercreditor agreement with MPT. Up to
$14 million can be borrowed based on a formula of
qualifying accounts receivable. The terms of the Revolver are
interest only for three years at 30 day LIBOR plus 3% with
a balloon maturity on February 8, 2008. The proceeds were
used to repay $7,725,958 of notes payable to MPT and for general
corporate purposes.
On March 31, 2005, MPT and Vibra amended the hospital
leases for no consideration. The amendments included delaying
the initial measurement date with respect to limitations on
total debt and coverage ratios until the quarter ending
September 30, 2006, aggregating the six hospitals financial
results in calculating the financial covenants, establishing an
escrow for property taxes and insurance, and certain other terms.
F-67
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
ASSETS |
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
31,578,220 |
|
|
$ |
1,513,641 |
|
|
Patient accounts receivable, net of allowance for doubtful
accounts of $3,051,000 and $2,049,000
|
|
|
10,346,773 |
|
|
|
6,343,395 |
|
|
Current portion of notes receivable-related party
|
|
|
533,814 |
|
|
|
1,800,000 |
|
|
Supplies inventory
|
|
|
597,383 |
|
|
|
401,714 |
|
|
Prepaid expenses and other assets
|
|
|
311,599 |
|
|
|
1,503,586 |
|
|
Deposits
|
|
|
373,417 |
|
|
|
749,237 |
|
|
Deferred income taxes
|
|
|
946,000 |
|
|
|
946,000 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
44,687,206 |
|
|
|
13,257,573 |
|
Property and equipment, net of accumulated depreciation and
amortization
|
|
|
10,823,549 |
|
|
|
7,978,111 |
|
Notes receivable-related party, net of current portion
|
|
|
|
|
|
|
19,269,842 |
|
Goodwill
|
|
|
7,646,046 |
|
|
|
7,646,046 |
|
|
|
|
|
|
|
|
|
|
$ |
63,156,801 |
|
|
$ |
48,151,572 |
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
3,711,797 |
|
|
$ |
5,544,848 |
|
|
Accrued expenses
|
|
|
4,549,287 |
|
|
|
2,597,736 |
|
|
Medical claims payable
|
|
|
5,643,401 |
|
|
|
3,390,248 |
|
|
Current portion of Notes payable related party
|
|
|
30,000 |
|
|
|
1,098,941 |
|
|
Income taxes payable
|
|
|
4,280,972 |
|
|
|
160,625 |
|
|
Estimated third-party payor settlements
|
|
|
2,071,632 |
|
|
|
1,606,126 |
|
|
Current portion of capital leases
|
|
|
132,876 |
|
|
|
159,941 |
|
|
Current portion of long-term debt
|
|
|
608,042 |
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
21,028,007 |
|
|
|
15,158,465 |
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
1,424,000 |
|
|
|
1,424,000 |
|
|
Notes payable-related party, net of current portion
|
|
|
|
|
|
|
11,400,000 |
|
|
Accrued professional liability reserve
|
|
|
2,666,667 |
|
|
|
1,500,000 |
|
|
Capital leases, net of current portion
|
|
|
119,522 |
|
|
|
169,779 |
|
|
Long-term debt, net of current portion
|
|
|
5,966,389 |
|
|
|
1,700,000 |
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
10,176,578 |
|
|
|
16,193,779 |
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
5,881,783 |
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 3,000 shares authorized, 100
shares issued and outstanding
|
|
|
1 |
|
|
|
1 |
|
|
Additional paid in capital
|
|
|
2,999 |
|
|
|
2,999 |
|
|
Retained earnings
|
|
|
26,067,433 |
|
|
|
16,796,328 |
|
|
|
|
|
|
|
|
|
|
|
26,070,433 |
|
|
|
16,799,328 |
|
|
|
|
|
|
|
|
|
|
$ |
63,156,801 |
|
|
$ |
48,151,572 |
|
|
|
|
|
|
|
|
See accompanying notes.
F-68
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Revenue
|
|
|
|
|
|
|
|
|
|
Net patient service revenue
|
|
$ |
80,732,005 |
|
|
$ |
43,993,412 |
|
|
Premium revenue
|
|
|
21,460,699 |
|
|
|
8,917,598 |
|
|
Other revenue
|
|
|
972,269 |
|
|
|
1,080,996 |
|
|
|
|
|
|
|
|
|
|
|
103,164,973 |
|
|
|
53,992,006 |
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
29,594,286 |
|
|
|
16,680,891 |
|
|
Provision for doubtful accounts
|
|
|
8,879,317 |
|
|
|
6,866,908 |
|
|
General and administrative
|
|
|
19,712,945 |
|
|
|
11,404,481 |
|
|
Medical supplies
|
|
|
8,842,755 |
|
|
|
4,849,204 |
|
|
Professional services
|
|
|
9,620,509 |
|
|
|
4,008,641 |
|
|
Depreciation and amortization
|
|
|
985,254 |
|
|
|
737,438 |
|
|
Medical claims
|
|
|
1,696,235 |
|
|
|
1,247,404 |
|
|
|
|
|
|
|
|
|
|
|
79,331,301 |
|
|
|
45,794,967 |
|
|
|
|
|
|
|
|
Income from operations
|
|
|
23,833,672 |
|
|
|
8,197,039 |
|
Interest expense
|
|
|
701,890 |
|
|
|
103,175 |
|
Interest income
|
|
|
(748,903 |
) |
|
|
(48,551 |
) |
Gain on sale of assets
|
|
|
(4,030 |
) |
|
|
(918 |
) |
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
23,884,715 |
|
|
|
8,143,333 |
|
Provision for income taxes
|
|
|
6,518,947 |
|
|
|
1,175,875 |
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change
|
|
|
17,365,768 |
|
|
|
6,967,458 |
|
Cumulative effect of accounting change
|
|
|
(712,880 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income before allocation to non-controlling interest
|
|
|
16,652,888 |
|
|
|
6,967,458 |
|
Allocation of earnings to non-controlling interest
|
|
|
(7,381,783 |
) |
|
|
|
|
|
|
|
|
|
|
|
Controlling interest net income
|
|
$ |
9,271,105 |
|
|
$ |
6,967,458 |
|
|
|
|
|
|
|
|
See accompanying notes.
F-69
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
Unaudited Consolidated Statement of Equity
For the Nine Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlling Interest | |
|
|
|
|
| |
|
|
|
|
Common | |
|
Additional | |
|
Retained | |
|
|
|
|
Stock | |
|
Paid-in Capital | |
|
Earnings | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Balance, December 31, 2004
|
|
$ |
1 |
|
|
$ |
2,999 |
|
|
$ |
16,796,328 |
|
|
$ |
16,799,328 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
9,271,105 |
|
|
|
9,271,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005
|
|
$ |
1 |
|
|
$ |
2,999 |
|
|
$ |
26,067,433 |
|
|
$ |
26,070,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-70
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
Controlling interest in net income
|
|
$ |
9,271,105 |
|
|
$ |
6,967,458 |
|
|
|
Noncash items included in controlling interest in net income
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
985,254 |
|
|
|
737,438 |
|
|
|
|
Gain on sale of assets
|
|
|
4,030 |
|
|
|
(918 |
) |
|
|
|
Provision for doubtful accounts
|
|
|
8,879,317 |
|
|
|
6,866,908 |
|
|
|
|
Non-controlling interest in net income
|
|
|
8,094,663 |
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient accounts receivable
|
|
|
(11,030,029 |
) |
|
|
(5,825,691 |
) |
|
|
|
|
Supplies inventory
|
|
|
(82,445 |
) |
|
|
294,604 |
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
1,329,017 |
|
|
|
(527,841 |
) |
|
|
|
|
Deposits
|
|
|
598,220 |
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(3,672,669 |
) |
|
|
683,657 |
|
|
|
|
|
Accrued expenses
|
|
|
249,937 |
|
|
|
(533,069 |
) |
|
|
|
|
Medical claims payable
|
|
|
135,000 |
|
|
|
(2,321,816 |
) |
|
|
|
|
Income taxes payable
|
|
|
4,120,347 |
|
|
|
60 |
|
|
|
|
|
Estimated third-party payor settlements
|
|
|
465,506 |
|
|
|
(26,637 |
) |
|
|
|
|
Other long term liabilities
|
|
|
(333,333 |
) |
|
|
(600,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
19,013,920 |
|
|
|
5,714,153 |
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
|
|
|
|
(2,529,585 |
) |
|
|
Issuance of related party note receivable
|
|
|
(10,521,667 |
) |
|
|
(17,413,587 |
) |
|
|
Amounts received from related party receivables
|
|
|
22,540,968 |
|
|
|
8,444,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
12,019,301 |
|
|
|
(11,498,907 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
Decrease in bank overdraft
|
|
|
(395,728 |
) |
|
|
|
|
|
|
Principal repayments of capital lease obligations
|
|
|
(77,322 |
) |
|
|
(92,492 |
) |
|
|
Issuance of long-term debt
|
|
|
3,750,011 |
|
|
|
3,550,000 |
|
|
|
Principal repayments of long-term debt
|
|
|
(2,745,603 |
) |
|
|
(182,650 |
) |
|
|
Distributions
|
|
|
(1,500,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(968,642 |
) |
|
|
3,274,858 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
30,064,579 |
|
|
|
(2,509,896 |
) |
Cash and cash equivalents, beginning of year
|
|
|
1,513,641 |
|
|
|
8,549,596 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$ |
31,578,220 |
|
|
$ |
6,039,700 |
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
701,890 |
|
|
$ |
104,218 |
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$ |
2,398,510 |
|
|
$ |
1,175,875 |
|
|
|
|
|
|
|
|
Supplemental disclosure of non cash investing and financing
activities
|
|
|
|
|
|
|
|
|
Obligations incurred for the acquisition of property and
equipment
|
|
$ |
3,069,782 |
|
|
$ |
|
|
See accompanying notes.
F-71
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1 |
Nature of Business |
Prime Healthcare Services, Inc. (the Company or
PHSI), formerly Desert Valley Health System, Inc.,
is a Delaware corporation incorporated on March 27, 2000.
The Company is a holding company whose principal activity is the
ownership and management of its wholly owned subsidiaries,
Desert Valley Hospital, Inc. (DVH), Prime Healthcare
Systems, LLC (PHS), Apple Valley Surgery Center
Corporation (AVSCC), and Prime Healthcare
Systems II, LLC (PHS2). DVH operates an 83 bed
acute care hospital located in Victorville, California. AVSCC
operates an ambulatory surgery center located in Apple Valley,
California. PHS provides management and consulting services to
other healthcare organizations. PHS2 was created during the nine
months ended September 30, 2005 for the purpose of
acquiring a hospital (Note 12).
The Company adopted, effective January 1, 2005, Financial
Accounting Standards Board (FASB) Financial Interpretation
No. 46(R) Consolidation of Variable Interest
Entities (FIN 46(R)). The Company determined that
Desert Valley Medical Group, Inc. (DVMG) was a variable
interest as defined by FIN 46(R). See basis of presentation
below. DVMG was incorporated as a California professional
corporation in August 1995 and is headquartered in Victorville,
California. The Company has over 60 board-certified primary care
and specialty physicians, urgent care/walk-in clinics,
on-site imaging,
pharmacy, lab services, and health education. DVMG is affiliated
with DVH, which is adjacent to the main campus of DVMG. DVMG
leases its primary medical office facilities from DVH.
|
|
Note 2 |
Basis of Presentation |
In the opinion of management, the accompanying condensed
consolidated balance sheet and related interim condensed
consolidated statements of income and cash flows include all
adjustments (consisting only of normal recurring items)
necessary for their fair presentation. 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, liabilities, revenues, and expenses
and the disclosure of contingent assets and liabilities. Actual
results could differ from those estimates. Interim results are
not necessarily indicative of results to be expected for the
full year.
Note 3 Organization and Summary of
Significant Accounting Policies
Basis of consolidation The consolidated
financial statements include the accounts of the Company, DVH,
PHS and AVSCC, after the elimination of all material
intercompany transactions and balances. The Company was
determined to have a variable interest in DVMG as defined by
FIN 46(R). As of September 30, 2005, the consolidated
statement of income reflects the membership interest of PHSI.
DVMGs equity has been reflected as a non-controlling
interest. All inter-company accounts and transactions have been
eliminated upon consolidation. The consolidation of these
entities does not change any legal ownership, and does not
change the assets or the liabilities and equity of PHSI as a
stand-alone entity. However, certain creditors of the
non-controlling interest entity have recourse to the general
credit of the Company.
Net patient service revenue Net patient
service revenue is reported at the estimated net realizable
amounts from patients, third-party payors, and others for
services rendered, including estimated retroactive adjustments
under reimbursement agreements with third-party payors. In some
cases, reimbursement is based on formulas which cannot be
determined until cost reports are filed and audited or otherwise
settled by the various programs. Normal estimation differences
between final settlements and amounts accrued in previous years
are reflected in net patient service revenue.
F-72
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Premium revenue and medical claims expense
The Company has agreements with various Health Maintenance
Organizations (HMO) to provide medical services to
enrollees. Under these agreements, the Company receives monthly
capitation revenue based on the number of each HMOs
enrollees, regardless of services actually performed by the
Company. Premium revenue under HMO contracts is recognized
during the period in which the Company is obligated to provide
services. Certain of the HMO contracts also contain shared-risk
provisions whereby the Company can earn additional incentive
revenue or incur penalties based upon the utilization of
inpatient hospital services by assigned HMO enrollees. The
Company records shared-risk revenue and expenses based upon
inpatient utilization on an estimated basis. Differences between
estimated shared-risk revenue or expenses and actual amounts are
recorded upon final settlement with each HMO. Amounts due to
unaffiliated health care providers for out of network claims are
recognized as incurred. The amounts recorded are based upon
projections of historical developments. Such projections are
adjusted and estimates changed when developments of claims
information warrant. Estimation differences are reflected in
medical claims expenses.
Supplies inventory Supplies inventory is
stated at cost, determined by the average cost method, which is
not in excess of market.
Property and equipment Property and equipment
is stated at cost. Depreciation and amortization is computed
using the straight-line method over the estimated useful lives
of the assets, which range from 3 to 15 years. Amortization
of leasehold improvements is computed over the lessor of the
lease term and the estimated useful lives of the assets and is
included in depreciation and amortization expense.
Use of estimates The preparation of
consolidated 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 consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Income taxes Income taxes are accounted for
under the asset and liability method for deferred income taxes.
Under this method, deferred income tax assets and liabilities
result from temporary differences in the financial reporting
bases and the income tax reporting bases of assets and
liabilities. When it appears more likely than not that deferred
taxes will not be realized, a valuation allowance is recorded to
reduce the deferred tax asset to its estimated realizable value.
The Company files consolidated income tax returns with its
subsidiaries.
DVMG has elected to be taxed under the provision of subchapter S
of the Internal Revenue Code and state law. Under these
provisions, DVMG does not pay corporate income taxes on its
taxable income. However, DVMG is subject to California franchise
taxes. In addition, the stockholder of DVMG is liable for
individual federal and state income taxes on DVMGs taxable
income. The Company may disburse funds necessary to satisfy the
stockholders estimated personal tax liability.
Cash and cash equivalents The Company
considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Goodwill Management evaluates goodwill, at a
minimum, on an annual basis and whenever events and changes in
circumstances suggest that the carrying amount may not be
recoverable. Impairment of goodwill is tested at the reporting
unit level by comparing the reporting units carrying
amount, including goodwill, to the fair value of the reporting
unit. The fair values of the reporting units are estimated using
a combination of the income or discounted cash flow approach and
market approach, which uses comparable data. If the carrying
amount of the reporting unit exceeds fair value, goodwill is
considered impaired and a second step is performed to measure
the amount of impairment loss, if any.
F-73
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the nine months ended September 30, 2005, the Company
recorded no impairment of goodwill. However, if estimates or the
related assumptions change in the future, the Company may be
required to record impairment charges to reduce the carrying
amount of this asset.
|
|
Note 4 |
Concentration of Credit Risk |
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of
cash. The Company maintains cash in bank deposit accounts at
high credit quality financial institutions. The balances at
times, may exceed the $100,000 federally insured limit.
Patient accounts receivable at September 30, 2005 are
comprised of the following: government programs, primarily
Medicare 24.20% and Medi-Cal 21.90%, healthcare maintenance and
preferred provider organizations (managed care programs) 0.77%,
and private pay and commercial insurance patients 53.13%.
Management believes there are no credit risks associated with
receivables from government programs. Receivables from managed
care programs and others are from various payors who are subject
to differing economic conditions and do not represent
concentrated risks to the Company. Management continually
monitors and adjusts the reserves associated with receivables,
and does not require collateral. Losses due to bad debts have
been within managements estimates.
Note 5 Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Unaudited | |
|
|
|
|
| |
|
|
Equipment
|
|
$ |
21,872,612 |
|
|
$ |
17,688,707 |
|
Leasehold improvements
|
|
|
1,928,970 |
|
|
|
1,073,736 |
|
Automobiles
|
|
|
1,180,669 |
|
|
|
90,292 |
|
Furniture and fixtures
|
|
|
563,518 |
|
|
|
|
|
Construction in progress (estimated cost to complete at
December 31, 2004 is approximately $632,692)
|
|
|
2,032,842 |
|
|
|
1,167,308 |
|
|
|
|
|
|
|
|
|
|
|
27,578,611 |
|
|
|
20,020,043 |
|
|
Accumulated depreciation and amortization
|
|
|
(16,755,062 |
) |
|
|
12,041,932 |
|
|
|
|
|
|
|
|
|
|
$ |
10,823,549 |
|
|
$ |
7,978,111 |
|
|
|
|
|
|
|
|
Gross property and equipment includes $778,644 of equipment
under capital lease arrangements at September 30, 2005.
Related accumulated amortization totaled approximately $230,000
as of September 30, 2005.
F-74
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 6 Long-Term Debt
Long-term debt consists of the following as of
September 30, 2005:
|
|
|
|
|
Term loan, secured by various equipment, payable in monthly
payments of approximately $60,000, including interest at the
prime rate (6.94% at September 30, 2005), maturing in April
2010
|
|
$ |
3,068,039 |
|
Term loan, secured by equipment, interest payable monthly at
7.25% per annum, maturing in July 2010
|
|
|
3,330,864 |
|
Bank note payable, secured by certain real estate, bearing
interest at 5.75% per annum, payable in monthly payments of
$1,258, maturing in August 2024
|
|
|
172,726 |
|
Other long-term debt
|
|
|
2,802 |
|
|
|
|
|
|
|
|
6,574,431 |
|
Less current portion
|
|
|
(608,042 |
) |
|
|
|
|
|
|
$ |
5,966,389 |
|
|
|
|
|
Note 7 Professional Liability and Workers
Compensation Insurance
The Company purchases commercial malpractice liability insurance
on a claims made basis. The policy coverage is a $30,000,000
general aggregate limit with a nominal deductible. The Company
accrues the deductible for all open claims, and a reserve for
incurred but not reported claims, if any. The Company believes
that their malpractice insurance is adequate to cover all known
claims.
During 2004, the Company entered into an agreement with Desert
Valley Insurance, LTD. (DVIL) and Zurich American
Insurance Company (Zurich) to provide workers
compensation insurance coverage for the Company. DVIL is
affiliated with the Company through common ownership. Under the
terms of the agreement DVIL is obligated to insure each
workers compensation claim up to a maximum of $250,000 per
claim. Losses in excess of $250,000 per claim are insured by
Zurich. DVIL was initially capitalized by capital contributions
totaling $250,000 and initial premiums funded by the Company
totaling $900,000. The Company has terminated all other
insurance coverage for workers compensation claims.
During the nine months ended September 30, 2005, the
Company entered into an agreement with DVIL to provide
commercial malpractice liability insurance on a claims made
basis. Under the policy with DVIL the Company is covered up to a
$10,000,000 general aggregate limit with no amount deductible.
The Company has evaluated whether they are required to
consolidate DVIL in accordance with FIN 46R as of
September 30, 2005, and have determined that DVIL is not
required to be consolidated.
Note 8 Leases
During the period June 1, 2004 through February 28,
2005, the Company leased its facilities under a month to month
arrangement. Effective February 28, 2005, the Company
entered into a new lease which expires on February 28,
2020. The new lease provides for monthly rent payments of
approximately $235,000, which are adjusted annually based on the
consumer price index. The lease also provides the Company with
the option of purchasing the leased facilities at the end of the
lease term based on a formula as defined in the lease agreement.
The Company leases certain equipment under various
non-cancelable operating and capital lease arrangements. The
leases expire on various dates from through 2010. Capital leases
bear interest at rates ranging from 6%-8%.
F-75
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Lease expense consisting primarily of building rent, and
equipment leases, amounted to approximately $4,722,000 for the
nine months ended September 30, 2005.
Note 9 Related Party Transactions
The Company leases certain office buildings and parking
facilities from a related party. The leases are for five year
terms. Rent expense incurred under these leases was $131,269 and
$131,269 for the nine months ended September 30, 2005 and
2004, respectively.
The Company purchases medical supplies from a related party
within the normal course of business. For the nine months ended
September 30, 2005 and 2004, medical supplies purchased
from the related party totaled $21,027 and $6,857, respectively.
Veritas Health Services, Inc. dba Chino Valley Medical Center
(CVMC) is an acute care hospital located in Chino,
California. CVMC operated under Chapter 11 of the United
States Bankruptcy Code until September 2005. During 2004,
the Company entered into an interim financing and consulting
agreement under which the Company provides consulting services,
and has advanced funds to assist CVMC fund their ongoing
operations. The Company has determined that they hold a
significant variable interest in CVMC, but are not the primary
beneficiaries as of September 30, 2005. During the nine
months ended September 30, 2005, the Company received
approximately $1,800,000 in cash to repay substantially all of
the advances discussed above. Interest income received related
to this note totaled $721,372 for the nine months ended
September 30, 2005. See Note 12 for subsequent events
related to CVMC.
The Company from time to time makes advances and short-term
loans to CVMC. The advances are unsecured, non-interest bearing
and are due upon demand. The balance of these notes as of
September 30, 2005 was $190,064.
The Company from time to time makes advances and short-term
loans to various employees. The advances are unsecured,
non-interest bearing and are due upon demand. The balance of
these notes as of September 30, 2005 was $259,524.
In connection with the acquisition of certain physician
practices in 2001, DVMG entered into certain employment
contracts ranging from two to five years, ending in June 2006.
In 2004, the company entered into additional compensation
agreements with physicians with terms ranging from two to three
years, ending on varying dates through 2006. As of
September 30, 2005, the minimum aggregate compensation
under these employment contracts is $325,000 through 2006.
The Company uses the services of a related party collection
agency to collect delinquent patient accounts receivable. For
the nine months ended September 30, 2005, agency fees paid
to the related party totaled $1,260,451.
Note 10 Retirement Savings Plan
The Company has a defined contribution pension plan covering
substantially all of its employees. The Companys
contribution to the plan is at the Companys discretion but
limited to the maximum amount deductible for federal income tax
purposes under the applicable Internal Revenue Code. During the
nine months ended September 30, 2005, the Company made no
contributions to the plan.
Note 11 Contingencies
The Company is aware of certain asserted and unasserted legal
claims. While the outcome cannot be determined at this time, it
is managements opinion that the liability, if any, from
these actions will not have a material adverse effect on the
Companys financial position.
F-76
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The health care industry is subject to numerous laws and
regulations of federal, state, and local governments. Compliance
with such laws and regulations can be subject to future
government review and interpretation, as well as regulatory
actions unknown or asserted at this time. These laws and
regulations include, but are not limited to, accreditation,
licensure, and government health care program participation
requirements, reimbursement for patient services, and Medicare
and Medicaid fraud and abuse. Recently, government activity has
increased with respect to investigations and allegations
concerning possible violations of fraud and abuse statutes and
regulations by health care providers. Violations of these laws
and regulations could result in exclusion from government health
care program participation, together with the imposition of
significant fines and penalties, as well as significant
repayment for past reimbursement for patient services received.
While the Company is subject to similar regulatory review, there
are no reviews currently underway and management believes that
the outcome of any potential regulatory review will not have a
material adverse effect on the Companys financial position.
Management believes that the Company is in compliance with
government law and regulations related to fraud and abuse and
other applicable areas. While no material regulatory inquiries
have been made, compliance with such laws and regulations can be
subject to future governmental review and interpretation, as
well as regulatory actions unknown or unasserted at this time.
Note 12 Subsequent Events
On October 1, 2005, DVMG acquired all of the outstanding
shares of CVMC. As part of this acquisition, CVMC entered into a
15 year operating lease for the hospital facilities in
November 2005 with the same lessor that currently owns the
facilities of DVH. The lease provides for monthly rent of
approximately $175,000 adjusted annually for changes in the
consumer price index. The lease also provides for CVMC to
purchase the facilities at the end of the lease term based on a
formula as defined in the lease agreement.
On December 30, 2005, the Company, through PHS2, acquired
the operations of Sherman Oaks Community Hospital
(SOCH). SOCH is a 153 bed acute care hospital
located in Sherman Oaks, California. As part of this
acquisition, PHS2 entered into a 15 year operating lease
for the SOCH facilities with the same lessor of the DVH and CVMC
facilities. The lease provides for monthly rent of approximately
$175,000, adjusted annually for changes in the consumer price
index. The lease also provides for PHS2 to purchase the
facilities at the end of the lease term based on a formula as
defined in the lease agreement.
F-77
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Prime Healthcare Services, Inc., and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Prime Healthcare Services, Inc., and Subsidiaries (formerly
Desert Valley Health System, Inc., and Subsidiaries), as of
December 31, 2004 and 2003, and the related consolidated
statements of income, stockholders equity, and cash flows
for the years then ended. These consolidated financial
statements are the responsibility of Prime Healthcare Services,
Inc., and Subsidiaries management. Our responsibility is
to express an opinion on these consolidated financial statements
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 audits to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatements. The Company is
not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. Our audits
included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the internal
control over financial reporting of Prime Healthcare Services,
Inc. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall consolidated 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
consolidated financial position of Prime Healthcare Services,
Inc., and Subsidiaries, as of December 31, 2004 and 2003,
and the results of their operations and their cash flows for the
years then ended in conformity with accounting principles
generally accepted in the United States of America.
We have not audited the consolidated balance sheet of Prime
Healthcare Services, Inc and Subsidiaries as of
December 31, 2002, and the related consolidated statements
of income, stockholders equity and cash flows for the year
then ended and do not express an opinion or any other form of
assurance on them.
/s/ Moss Adams LLP
Irvine, California
February 24, 2005
F-78
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
1,513,641 |
|
|
$ |
8,549,596 |
|
|
Patient accounts receivable, net of allowance for doubtful
accounts of $2,049,000 in 2004 and $8,964,000 in 2003
|
|
|
6,343,395 |
|
|
|
7,150,887 |
|
|
Current portion of notes receivable-related party
|
|
|
1,800,000 |
|
|
|
|
|
|
Supplies inventory
|
|
|
401,714 |
|
|
|
1,221,083 |
|
|
Prepaid expenses and other assets
|
|
|
1,503,586 |
|
|
|
241,387 |
|
|
Deposits
|
|
|
749,237 |
|
|
|
|
|
|
Deferred income taxes
|
|
|
946,000 |
|
|
|
1,624,000 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
13,257,573 |
|
|
|
18,786,953 |
|
Property And Equipment, net of accumulated depreciation and
amortization
|
|
|
7,978,111 |
|
|
|
3,776,076 |
|
Notes Receivable Related Party, net of current
portion
|
|
|
19,269,842 |
|
|
|
689,448 |
|
Goodwill
|
|
|
7,646,046 |
|
|
|
7,646,046 |
|
|
|
|
|
|
|
|
|
|
$ |
48,151,572 |
|
|
$ |
30,898,523 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
5,544,848 |
|
|
$ |
2,455,293 |
|
|
Accrued expenses
|
|
|
2,597,736 |
|
|
|
3,126,233 |
|
|
Medical claims payable
|
|
|
3,390,248 |
|
|
|
4,362,533 |
|
|
Current portion of notes payable related party
|
|
|
1,098,941 |
|
|
|
492,011 |
|
|
Income taxes payable
|
|
|
160,625 |
|
|
|
481,390 |
|
|
Estimated third-party payor settlements
|
|
|
1,606,126 |
|
|
|
1,119,347 |
|
|
Current portion of capital leases
|
|
|
159,941 |
|
|
|
110,456 |
|
|
Current portion of long-term debt
|
|
|
600,000 |
|
|
|
795,106 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
15,158,465 |
|
|
|
12,942,369 |
|
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
1,424,000 |
|
|
|
680,000 |
|
|
Notes payable related party, net of current portion
|
|
|
11,400,000 |
|
|
|
|
|
|
Accrued professional liability reserve
|
|
|
1,500,000 |
|
|
|
2,100,000 |
|
|
Capital leases, net of current portion
|
|
|
169,779 |
|
|
|
9,239 |
|
|
Long-term debt, net of current portion
|
|
|
1,700,000 |
|
|
|
2,287,544 |
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
16,193,779 |
|
|
|
5,076,783 |
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
Common stock, .$01 par value, 3,000 shares authorized,
100 shares issued and outstanding
|
|
|
1 |
|
|
|
1 |
|
|
Additional paid in capital
|
|
|
2,999 |
|
|
|
2,999 |
|
|
Retained earnings
|
|
|
16,796,328 |
|
|
|
12,876,371 |
|
|
|
|
|
|
|
|
|
|
|
16,799,328 |
|
|
|
12,879,371 |
|
|
|
|
|
|
|
|
|
|
$ |
48,151,572 |
|
|
$ |
30,898,523 |
|
|
|
|
|
|
|
|
See accompanying notes.
F-79
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(Unaudited) | |
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenue
|
|
$ |
68,099,932 |
|
|
$ |
42,706,762 |
|
|
$ |
30,574,759 |
|
|
Premium revenue
|
|
|
11,841,176 |
|
|
|
15,946,810 |
|
|
|
22,658,549 |
|
|
Other revenue
|
|
|
2,295,152 |
|
|
|
215,268 |
|
|
|
1,349,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,236,260 |
|
|
|
58,868,840 |
|
|
|
54,582,528 |
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
23,050,760 |
|
|
|
19,964,698 |
|
|
|
18,648,007 |
|
|
Provision for doubtful accounts
|
|
|
20,327,798 |
|
|
|
9,293,841 |
|
|
|
3,422,090 |
|
|
General and administrative
|
|
|
14,756,501 |
|
|
|
16,152,374 |
|
|
|
13,272,994 |
|
|
Medical supplies
|
|
|
8,318,781 |
|
|
|
5,956,543 |
|
|
|
5,375,397 |
|
|
Professional services
|
|
|
7,367,140 |
|
|
|
2,009,734 |
|
|
|
1,835,092 |
|
|
Depreciation and amortization
|
|
|
1,108,795 |
|
|
|
996,065 |
|
|
|
883,622 |
|
|
Medical claims
|
|
|
252,001 |
|
|
|
1,419,179 |
|
|
|
9,154,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,181,776 |
|
|
|
55,792,434 |
|
|
|
52,612,174 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
7,054,484 |
|
|
|
3,076,406 |
|
|
|
1,970,354 |
|
Interest expense, net
|
|
|
342,518 |
|
|
|
238,486 |
|
|
|
492,778 |
|
(Gain) loss on sale of assets
|
|
|
(84,991 |
) |
|
|
1,893 |
|
|
|
(828 |
) |
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
6,796,957 |
|
|
|
2,836,027 |
|
|
|
1,478,404 |
|
Provision for income taxes
|
|
|
2,877,000 |
|
|
|
1,335,000 |
|
|
|
(459,505 |
) |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
3,919,957 |
|
|
$ |
1,501,027 |
|
|
$ |
1,937,909 |
|
|
|
|
|
|
|
|
|
|
|
F-80
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements Of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common | |
|
Additional | |
|
Retained | |
|
|
|
|
Stock | |
|
Paid in Capital | |
|
Earnings | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Balance, December 31, 2001 (unaudited)
|
|
$ |
1 |
|
|
$ |
2,999 |
|
|
$ |
9,437,435 |
|
|
$ |
9,440,435 |
|
Net income (unaudited)
|
|
|
|
|
|
|
|
|
|
|
1,937,909 |
|
|
|
1,937,909 |
|
Balance, December 31, 2002
|
|
|
1 |
|
|
|
2,999 |
|
|
|
11,375,344 |
|
|
|
11,378,344 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,501,027 |
|
|
|
1,501,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
1 |
|
|
|
2,999 |
|
|
|
12,876,371 |
|
|
|
12,879,371 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
3,919,957 |
|
|
|
3,919,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
$ |
1 |
|
|
$ |
2,999 |
|
|
$ |
16,796,328 |
|
|
$ |
16,799,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-81
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(Unaudited) | |
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
3,919,957 |
|
|
$ |
1,501,027 |
|
|
$ |
1,937,909 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,108,795 |
|
|
|
997,958 |
|
|
|
883,622 |
|
|
|
Gain on sale of assets
|
|
|
(84,991 |
) |
|
|
|
|
|
|
(828 |
) |
|
|
Provision for doubtful accounts
|
|
|
20,327,798 |
|
|
|
9,293,841 |
|
|
|
3,442,090 |
|
|
|
Deferred income taxes
|
|
|
1,422,000 |
|
|
|
793,000 |
|
|
|
(893,100 |
) |
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient accounts receivable
|
|
|
(19,520,306 |
) |
|
|
(6,889,671 |
) |
|
|
(5,302,899 |
) |
|
|
|
Supplies inventory
|
|
|
819,369 |
|
|
|
75,988 |
|
|
|
(339,340 |
) |
|
|
|
Prepaid expenses and other assets
|
|
|
(1,262,199 |
) |
|
|
26,789 |
|
|
|
1,597,271 |
|
|
|
|
Deposits
|
|
|
(749,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
Due to/from related parties
|
|
|
652,571 |
|
|
|
3,142,627 |
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
3,089,555 |
|
|
|
431,107 |
|
|
|
(25,266 |
) |
|
|
|
Accrued expenses
|
|
|
(528,497 |
) |
|
|
835,435 |
|
|
|
938,944 |
|
|
|
|
Medical claims payable
|
|
|
(972,285 |
) |
|
|
(860,308 |
) |
|
|
1,903,120 |
|
|
|
|
Income taxes payable
|
|
|
(320,765 |
) |
|
|
(796,105 |
) |
|
|
433,595 |
|
|
|
|
Estimated third-party pay or settlements
|
|
|
486,780 |
|
|
|
1,069,348 |
|
|
|
50,000 |
|
|
|
|
Other long term liabilities
|
|
|
(600,000 |
) |
|
|
2,100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
7,788,545 |
|
|
|
11,721,036 |
|
|
|
4,625,118 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(5,278,792 |
) |
|
|
(1,801,874 |
) |
|
|
(447,467 |
) |
|
Proceeds from the sale of assets
|
|
|
401,501 |
|
|
|
|
|
|
|
|
|
|
Issuance of related party note receivable
|
|
|
(20,991,609 |
) |
|
|
|
|
|
|
(5,909,279 |
) |
|
Amounts received from related party receivables
|
|
|
12,183,285 |
|
|
|
2,015,000 |
|
|
|
3,728,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(13,685,615 |
) |
|
|
213,126 |
|
|
|
2,628,275 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt borrowing
|
|
|
|
|
|
|
3,000,000 |
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(921,174 |
) |
|
|
(7,618,096 |
) |
|
|
(241,804 |
) |
|
Payments on related party debt
|
|
|
(217,711 |
) |
|
|
(1,228,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,138,885 |
) |
|
|
(5,846,411 |
) |
|
|
(241,804 |
) |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(7,035,955 |
) |
|
|
6,087,751 |
|
|
|
1,755,039 |
|
Cash and cash equivalents, beginning of year
|
|
|
8,549,596 |
|
|
|
2,461,845 |
|
|
|
706,806 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$ |
1,513,641 |
|
|
$ |
8,549,596 |
|
|
$ |
2,461,845 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
342,518 |
|
|
$ |
228,048 |
|
|
|
513,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$ |
1,775,825 |
|
|
$ |
1,339,705 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non cash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations incurred for the acquisition of property and
equipment
|
|
$ |
348,548 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-82
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 Nature of Business
Prime Healthcare Services, Inc., and subsidiaries (formerly
Desert Valley Health System, Inc., and Subsidiaries) (the
Company) is a Delaware corporation incorporated on
March 27, 2000. The Company is a holding company whose
principal activity is the ownership and management of its wholly
owned subsidiaries, Desert Valley Hospital, Inc.
(DVH), Prime Healthcare Systems, LLC
(PHS) and Apple Valley Surgery Center Corporation
(AVSCC). DVH operates an 83 bed acute care hospital
located in Victorville, California. AVSCC operates an ambulatory
surgery center located in Apple Valley, California. PHS provides
management and consulting services to other healthcare
organizations. The Company is a wholly owned subsidiary of Prime
A Investments, LLC Prime A.
Note 2 Organization and Summary of
Significant Accounting Policies
Basis of consolidation The consolidated
financial statements include the accounts of the Company, DVH,
PHS and AVSCC, after the elimination of all material
intercompany transactions and balances.
Net patient service revenue Net patient
service revenue is reported at the estimated net realizable
amounts from patients, third-party payors, and others for
services rendered, including estimated retroactive adjustments
under reimbursement agreements with third-party payors. In some
cases, reimbursement is based on formulas which cannot be
determined until cost reports are filed and audited or otherwise
settled by the various programs. Normal estimation differences
between final settlements and amounts accrued in previous years
are reflected in net patient service revenue. These differences
decreased net patient service revenue by $369,824, $0 and $0 for
the years ended December 31, 2004, 2003 and 2002,
respectively.
Premium revenue and medical claims expense
The Company has agreements with various Health Maintenance
Organizations (HMO) to provide medical services to
enrollees. Under these agreements, the Company receives monthly
capitation revenue based on the number of each HMOs
enrollees, regardless of services actually performed by the
Company. Premium revenue under HMO contracts is recognized
during the period in which the Company is obligated to provide
services. Certain of the HMO contracts also contain shared-risk
provisions whereby the Company can earn additional incentive
revenue or incur penalties based upon the utilization of
inpatient hospital services by assigned HMO enrollees. The
Company records shared-risk revenue and expenses based upon
inpatient utilization on an estimated basis. Differences between
estimated shared-risk revenue or expenses and actual amounts are
recorded upon final settlement with each HMO. Amounts due to
unaffiliated health care providers for out of network claims are
recognized as incurred. The amounts recorded are based upon
projections of historical developments. Such projections are
adjusted and estimates changed when developments of claims
information warrant. Estimation differences are reflected in
medical claims expenses.
Supplies inventory Supplies inventory is
stated at cost, determined by the average cost method, which is
not in excess of market.
Property and equipment Property and equipment
is stated at cost. Depreciation and amortization is computed
using the straight-line method over the estimated useful lives
of the assets, which range from 5 to 15 years. Amortization
of leasehold improvements is computed over the lessor of the
lease term and the estimated useful lives of the assets and is
included in depreciation and amortization.
Use of estimates The preparation of
consolidated 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 consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-83
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Income taxes Taxes based upon income are
recorded in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires the use
of the asset and liability method for deferred income taxes.
Under this method, deferred income tax assets and liabilities
result from temporary differences in the financial reporting
bases and the income tax reporting bases of assets and
liabilities. When it appears more likely than not that deferred
taxes will not be realized, a valuation allowance is recorded to
reduce the deferred tax asset to its estimated realizable value.
The Company files consolidated income tax returns with its
subsidiaries.
Recent accounting pronouncement In December
2003, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 46R
(FIN 46R), Consolidation of Variable Interest
Entities. FIN 46R clarifies the application of
Accounting Research Bulletin No. 51, consolidated
financial statements, for certain entities that do not have
sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties or in which equity investors do not have the
characteristics of a controlling financial interest
(variable interest entities). Variable interest
entities within the scope of FIN 46R will be required to be
consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be
the party that absorbs a majority of the entitys expected
losses, receives a majority of its expected returns or both.
FIN 46R applies immediately to variable interest entities
created after December 15, 2003, and to variable interest
entities in which a non-public enterprise obtains an interest
after that date. It applies in the first fiscal year beginning
after December 15, 2004, to variable interest entities in
which a non-public enterprise holds a variable interest that it
acquired before February 1, 2003. The potential variable
interest entities with which the Company is associated are
disclosed in Note 10 Related Party Transaction. See
Note 10 for further discussion of the impact of the
adoption of FIN 46R as of December 31, 2004.
Cash and cash equivalents The Company
considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Goodwill Management evaluates goodwill, at a
minimum, on an annual basis and whenever events and changes in
circumstances suggest that the carrying amount may not be
recoverable. Impairment of goodwill is tested at the reporting
unit level by comparing the reporting units carrying
amount, including goodwill, to the fair value of the reporting
unit. The fair values of the reporting units are estimated using
a combination of the income or discounted cash flow approach and
market approach, which uses comparable data. If the carrying
amount of the reporting unit exceeds fair value, goodwill is
considered impaired and a second step is performed to measure
the amount of impairment loss, if any.
For the years ended December 31, 2004, 2003 and 2002, the
Company recorded no impairment of goodwill. However, if
estimates or the related assumptions change in the future, the
Company may be required to record impairment charges to reduce
the carrying amount of this asset.
Reclassification Certain reclassifications
have been made to the 2003 consolidated financial statements to
conform with the 2004 presentation.
|
|
Note 3 |
Concentration of Credit Risk |
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of
cash. The Company maintains cash in bank deposit accounts at
high credit quality financial institutions. The balances at
times, may exceed the $100,000 federally insured limit. As of
December 31, 2004 and 2003, balances of cash at financial
institutions exceeding the federally insured limit of $100,000
totaled $5,640,777 and $7,911,390, respectively.
Patient accounts receivable at December 31, 2004 and 2003
are comprised of the following: government programs, primarily
Medicare 28.24% and 11.94%, respectively, Medi-Cal 18.20% and
31.16%, respectively, Healthcare maintenance and preferred
provider organizations (managed care programs) 0.26%
F-84
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
and 24.61%, respectively, and private pay and commercial
insurance patients 53.30% and 32.29%, respectively. Management
believes there are no credit risks associated with receivables
from government programs. Receivables from managed care programs
and others are from various payors who are subject to differing
economic conditions and do not represent concentrated risks to
the Company. Management continually monitors and adjusts the
reserves associated with receivables, and does not require
collateral. Losses due to bad debts have been within
managements estimates.
|
|
Note 4 |
Notes Receivable Related Party |
Notes receivable from related parties are as follows as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 |
|
|
| |
|
|
Notes receivable from Veritas Health Services, Inc.
dba Chino Valley Medical Center (CVMC), CVMC is
related through a management agreement with PHS, secured by
certain patient accounts receivable, bearing interest at rates
up to 8%, due on demand
|
|
$ |
17,990,135 |
|
|
$ |
|
|
Notes receivable from an affiliate entity, unsecured, non
interest bearing, due on demand
|
|
|
3,000,000 |
|
|
|
|
|
Due from other affiliated entities
|
|
|
79,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,069,842 |
|
|
|
|
|
Less current portion
|
|
|
(1,800,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,269,842 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Note 5 Notes Payable
Related Party
Notes payable to related parties are as follows as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Note payable to DVMG, unsecured, non interest bearing, due on
demand
|
|
$ |
2,098,315 |
|
|
$ |
329,011 |
|
Note payable to officer, unsecured, bearing interest at 6%, due
on demand
|
|
|
7,900,000 |
|
|
|
163,000 |
|
Note payable to an affiliated entity, unsecured, bearing
interest at 6%, due on demand
|
|
|
2,500,000 |
|
|
|
|
|
Other
|
|
|
626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,498,941 |
|
|
|
492,011 |
|
Less current portion
|
|
|
(1,098,941 |
) |
|
|
(492,011 |
) |
|
|
|
|
|
|
|
|
|
$ |
11,400,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
F-85
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Note 6 Property and Equipment
Property and equipment consist of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Building
|
|
$ |
|
|
|
$ |
350,000 |
|
Equipment
|
|
|
17,688,707 |
|
|
|
13,994,760 |
|
Leasehold improvements
|
|
|
1,073,736 |
|
|
|
386,341 |
|
Automobiles
|
|
|
90,292 |
|
|
|
90,292 |
|
Construction in progress (estimated cost to complete at
December 31, 2004 is approximately $632,692
|
|
|
1,167,308 |
|
|
|
1,206,989 |
|
|
|
|
|
|
|
|
|
|
|
20,020,043 |
|
|
|
16,028,382 |
|
Accumulated depreciation and amortization
|
|
|
(12,041,932 |
) |
|
|
(12,252,306 |
) |
|
|
|
|
|
|
|
|
|
$ |
7,978,111 |
|
|
$ |
3,776,076 |
|
|
|
|
|
|
|
|
Gross property and equipment includes $747,823 and $399,275 of
equipment under capital lease arrangements. For the years ended
December 31, 2004 and 2003, accumulated amortization and
amortization expense on equipment under capital lease
arrangements amounted to $224,167 and $177,349, respectively.
Note 7 Long-Term Debt
Long-term debt consists of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Term loan, secured by substantially all assets of the Company,
payable in monthly principal payments of $50,000 plus interest
at the prime rate (4% at December 31, 2004), maturing in
November 2008
|
|
$ |
2,300,000 |
|
|
$ |
2,900,000 |
|
Term loan, secured by equipment, payable in monthly principal
payments of $5,945 plus interest at the prime rate (4% at
December 31, 2003), due in June 2004
|
|
|
|
|
|
|
35,650 |
|
Note payable, secured by certain real estate, payable in annual
principal payments of $49,000 plus interest at 8%, due in May
2006
|
|
|
|
|
|
|
147,000 |
|
|
|
|
|
|
|
|
|
|
|
2,300,000 |
|
|
|
3,082,650 |
|
Less current portion
|
|
|
(600,000 |
) |
|
|
(795,106 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,700,000 |
|
|
$ |
2,287,544 |
|
|
|
|
|
|
|
|
Aggregate annual principal maturities of long-term debt for five
years subsequent to December 31, 2004 are as follows:
|
|
|
|
|
Years ending December 31, |
|
|
|
|
|
2005
|
|
$ |
600,000 |
|
2006
|
|
|
600,000 |
|
2007
|
|
|
600,000 |
|
2008
|
|
|
500,000 |
|
|
|
|
|
|
|
$ |
2,300,000 |
|
|
|
|
|
F-86
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Note 8 Professional Liability and Workers
Compensation Insurance
The Company purchases commercial malpractice liability insurance
on a claims made basis. The policy coverage is a $20,000,000
general aggregate limit with a nominal deductible. The Company
accrues the deductible for all open claims, and a reserve for
incurred but not reported claims, if any. The Company believes
that their malpractice insurance is adequate to cover all known
claims.
During 2004, the Company entered into an agreement with Desert
Valley Insurance, LTD. (DVIL) and Zurich American
Insurance Company (Zurich) to provide workers
compensation insurance coverage for the Company. DVIL is
affiliated with the Company through common ownership. Under the
terms of the agreement DVIL is obligated to insure each
workers compensation claim up to a maximum of $250,000 per
claim. Losses in excess of $250,000 per claim are insured by
Zurich. DVIL was initially capitalized by capital contributions
totaling $250,000 and initial premiums funded by the Company
totaling $900,000. The Company has terminated all other
insurance coverage for workers compensation claims.
Subsequent to December 31, 2004, the Company entered into
an agreement with DVIL to provide commercial malpractice
liability insurance on a claims made basis. Under the policy
with DVIL the Company is covered up to a $10,000,000 general
aggregate limit with no amount deductible.
The Company has evaluated whether they are required to
consolidate DVIL in accordance with FIN 46R as of
December 31, 2004, and have determined that DVIL is not
required to be consolidated.
Note 9 Leases
The Company leases its facilities under a non-cancelable
operating lease arrangement. The term of the facilities
operating lease agreement is for ten years. Lease payments for
the facility include contingent rent payments. These contingent
rent payments are based on net revenues generated by the
Company. The lease term expired on May 31, 2004. During the
period June 1, 2004 through February 28, 2005, the
Company leased its facilities under a month to month
arrangement. Effective February 28, 2005, the Company
entered into a new lease which expires on February 28,
2020. Lease payments under the new lease are approximately
$235,000 per month and are adjusted annually based on the
consumer price index. The lease also provides the Company with
the option of purchasing the leased facilities at the end of the
lease term based on a formula as defined in the lease agreement.
The Company subleases the medical office building portion of its
facilities to Desert Valley Medical Group (DVMG).
The Company leases certain equipment under various
non-cancelable operating and capital lease arrangements. The
leases expire on various dates from 2005 to 2010. Capital leases
bear interest at rates ranging from 6% 8%.
Lease expense consisting primarily of building rent, net of
sublease income, and equipment leases, amounted to $4,008,456
and $3,666,117 for the years ended December 31, 2004 and
2003, respectively. This amount includes contingent rent
payments on the facility lease of $314,163 and $408,435,
respectively, for the years ended December 31, 2004 and
2003.
F-87
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Future annual minimum lease payments net of sublease income
under operating and capital lease obligations as of
December 31, 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating | |
|
Related Party | |
|
|
Years ending |
|
Capital | |
|
Lease | |
|
Sublease | |
|
|
December 31, |
|
Leases | |
|
Commitments | |
|
Income | |
|
Net | |
|
|
| |
|
| |
|
| |
|
| |
2005
|
|
$ |
167,873 |
|
|
$ |
4,368,953 |
|
|
$ |
(688,200 |
) |
|
$ |
3,680,753 |
|
2006
|
|
|
128,900 |
|
|
|
3,904,621 |
|
|
|
(688,200 |
) |
|
|
3,216,421 |
|
2007
|
|
|
42,778 |
|
|
|
3,603,001 |
|
|
|
(688,200 |
) |
|
|
2,914,801 |
|
2008
|
|
|
|
|
|
|
3,303,905 |
|
|
|
(688,200 |
) |
|
|
2,615,705 |
|
2009
|
|
|
|
|
|
|
2,799,996 |
|
|
|
(688,200 |
) |
|
|
2,111,796 |
|
Thereafter
|
|
|
|
|
|
|
28,466,626 |
|
|
|
(6,996,700 |
) |
|
|
21,469,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
339,551 |
|
|
$ |
46,447,102 |
|
|
$ |
(10,437,700 |
) |
|
$ |
36,009,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amounts representing interest
|
|
|
(9,831 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
329,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
(159,941 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
169,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10 Related Party Transactions
Desert Valley Medical Group, Inc (DVMG) is a
multi-specialty medical group with over 60 board-certified
primary care and specialty care physicians, urgent care, on
site-imaging, pharmacy, lab services, and health education.
DVMGs main medical office building is adjacent to the main
campus of the DVH. DVMG is related to the Company through common
senior management and beneficial controlling ownership.
The Company had the following transactions with Desert Valley
Medical Group: The Company has a shared risk agreement, shares
administrative employees, and utilizes lab services provided by
DVMG. DVMG leases its medical office building from the Company.
Shared risk proceeds of $3,906,613 and $4,600,000 were paid to
DVMG during the years ended December 31, 2004 and 2003,
respectively. Compensation and benefits incurred for shared
employees was $1,036,736 and $695,000 for the years ended
December 31, 2004 and 2003, respectively. Lab expenses
incurred were $13,281 and $1,518,000 for the years ended
December 31, 2004 and 2003, respectively. Rent income
earned was $1,114,271 and $1,136,481 for the years ended
December 31, 2004 and 2003, respectively.
The Company has determined that they hold a significant variable
interest in DVMG and are the primary beneficiaries of DVMG.
However, due to the effective date of FIN 46R for entities
formed prior to February 2003, DVMG will not be consolidated
with the Company as of December 31, 2004. In accordance
with FIN 46R the Company will consolidate the balance sheet
and statement of operation of DVMG for the year ended
December 31, 2005.
The company leases certain office buildings and parking
facilities from a related party. The leases are for five year
terms. Rent expense incurred under these leases was $175,025 for
the years ended December 31, 2004 and 2003.
The Company purchases medical supplies from a related party
within the normal course of business. For the years ended
December 31, 2004 and 2003, medical supplies purchased from
the related party totaled $9,142 and $503,677, respectively.
CVMC is an acute care hospital located in Chino, California.
CVMC is currently operating under Chapter 11 of the United
States Bankruptcy Code. During 2004 the Company entered into an
interim
F-88
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
financing and consulting agreement under which the Company
provides consulting services, and has advanced funds to assist
CVMC fund their on going operations. See note 4 for further
discussion of the note receivable related to the advances. The
Company has determined that they hold a significant variable
interest in CVMC, but are not the primary beneficiaries as of
December 31, 2004. The Companys maximum exposure to
loss as a result of its involvement with CVMC is the balance of
the notes receivable from CVMC. Subsequent to December 31,
2004, the Company received approximately $1,800,000 in cash to
repay a portion of the advances discussed above.
The Company sends delinquent patient accounts receivable to a
related party collection agency. For the year ended
December 31, 2004, agency fees paid to the related party
totaled $114,388.0.0.
Note 11 Income taxes
|
|
|
Temporary differences that result in deferred tax assets and
liabilities at December 31, 2004 and 2003 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Deferred tax assets, current
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$ |
308,000 |
|
|
$ |
969,000 |
|
|
Accrued vacation and other accrued liabilities
|
|
|
520,000 |
|
|
|
600,000 |
|
|
State taxes
|
|
|
118,000 |
|
|
|
55,000 |
|
|
|
|
|
|
|
|
|
|
$ |
946,000 |
|
|
$ |
1,624,000 |
|
|
|
|
|
|
|
|
Deferred tax liabilities, non-current
|
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
$ |
1,424,000 |
|
|
$ |
680,000 |
|
|
|
|
|
|
|
|
|
|
|
The components of the provision (benefit) for income taxes for
the years ended December 31, 2004, 2003, and 2002 are as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(unaudited) | |
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
1,003,000 |
|
|
$ |
1,221,000 |
|
|
$ |
113,900 |
|
|
State
|
|
|
452,000 |
|
|
|
150,000 |
|
|
|
319,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,455,000 |
|
|
|
1,371,000 |
|
|
|
433,595 |
|
|
|
|
|
|
|
|
|
|
|
Deferred expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
678,000 |
|
|
|
(27,900 |
) |
|
|
(707,930) |
|
|
State
|
|
|
744,000 |
|
|
|
(8,100 |
) |
|
|
(185,170) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,422,000 |
|
|
|
(36,000 |
) |
|
|
(893,100) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,877,000 |
|
|
$ |
1,335,000 |
|
|
$ |
(459,505) |
|
|
|
|
|
|
|
|
|
|
|
The differences between the statutory federal income tax rate of
35% and the Companys effective income tax rates of 42% in
2004, 47% in 2003 and 31% in 2002 were primarily state income
taxes and nondeductible meals and entertainment.
Note 12 Retirement Savings Plan
The Company has a defined contribution pension plan covering
substantially all of its employees. The Companys
contribution to the plan is at the Companys discretion but
limited to the maximum amount
F-89
PRIME HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
deductible for federal income tax purposes under the applicable
Internal Revenue Code. During the years ended December 31,
2004 and 2003, the Company made no contributions to the plan.
Note 13 Contingencies
The Company is aware of certain asserted and unasserted legal
claims. While the outcome cannot be determined at this time, it
is managements opinion that the liability, if any, from
these actions will not have a material adverse effect on the
Companys financial position.
The health care industry is subject to numerous laws and
regulations of federal, state, and local governments. Compliance
with such laws and regulations can be subject to future
government review and interpretation, as well as regulatory
actions unknown or asserted at this time. These laws and
regulations include, but are not limited to, accreditation,
licensure, and government health care program participation
requirements, reimbursement for patient services, and Medicare
and Medicaid fraud and abuse. Recently, government activity has
increased with respect to investigations and allegations
concerning possible violations of fraud and abuse statutes and
regulations by health care providers. Violations of these laws
and regulations could result in exclusion from government health
care program participation, together with the imposition of
significant fines and penalties, as well as significant
repayment for past reimbursement for patient services received.
While the Company is subject to similar regulatory review, there
are no reviews currently underway and management believes that
the outcome of any potential regulatory review will not have a
material adverse effect on the Companys financial position.
Management believes that the Company is in compliance with
government law and regulations related to fraud and abuse and
other applicable areas. While no material regulatory inquiries
have been made, compliance with such laws and regulations can be
subject to future governmental review and interpretation, as
well as regulatory actions unknown or unasserted at this time.
F-90
No dealer, salesman or other person has been authorized to
give any information or to make any representations other than
those contained in this prospectus, and if given or made such
information or representation must not be relied upon as having
been authorized by us or the underwriters. The statements in
this prospectus are made as of the date hereof, unless another
date is specified, and neither the delivery of this prospectus
nor any sale made hereunder shall, under any circumstances,
create an implication that there has been no change in the facts
set forth herein since the date hereof. This prospectus is not
an offer to sell or solicitation of an offer to buy these shares
of common stock in any circumstances under which the offer or
solicitation is unlawful.
TABLE OF CONTENTS
|
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1 |
|
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17 |
|
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41 |
|
|
|
|
42 |
|
|
|
|
43 |
|
|
|
|
44 |
|
|
|
|
45 |
|
|
|
|
47 |
|
|
|
|
57 |
|
|
|
|
74 |
|
|
|
|
104 |
|
|
|
|
115 |
|
|
|
|
115 |
|
|
|
|
116 |
|
|
|
|
117 |
|
|
|
|
128 |
|
|
|
|
130 |
|
|
|
|
132 |
|
|
|
|
136 |
|
|
|
|
140 |
|
|
|
|
145 |
|
|
|
|
149 |
|
|
|
|
168 |
|
|
|
|
170 |
|
|
|
|
171 |
|
|
|
|
171 |
|
|
|
|
F-1 |
|
25,411,039 Shares
Common Stock
PROSPECTUS
March 14, 2006
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
|
|
Item 31. |
Other Expenses of Issuance and Distribution. |
The following table sets forth the costs and expenses payable by
the Registrant in connection with the sale and distribution of
the common stock being registered. All amounts are estimates.
|
|
|
|
|
|
|
Amount To Be Paid | |
|
|
| |
SEC registration fee
|
|
$ |
28,832 |
|
Transfer agent and registrar fees
|
|
|
100,000 |
|
Legal fees and expenses
|
|
|
500,000 |
|
Accounting fees and expenses
|
|
|
165,000 |
|
Printing and mailing fees
|
|
|
115,000 |
|
Miscellaneous
|
|
|
10,000 |
|
|
|
|
|
Total
|
|
|
918,832 |
|
|
|
|
|
|
|
Item 32. |
Sales to Special Parties. |
Not applicable.
|
|
Item 33. |
Recent Sales of Unregistered Securities. |
On April 6, 2004 and April 7, 2004, we sold in a
private placement 21,857,329 shares of common stock to Friedman,
Billings, Ramsey & Co., Inc., as initial purchaser, pursuant
to the exemptions from registration provided in
Section 4(2) of the Securities Act of 1933, as amended, or
the Securities Act, and Rule 506 of Regulation D
thereunder. Friedman, Billings, Ramsey & Co., Inc. promptly
resold 20,244,426 of these shares to qualified institutional
buyers in accordance the resale exemption provided in
Rule 144A under the Securities Act and to non-U.S. persons
in accordance with the exemption provided in Regulation S
under the Securities Act. Friedman, Billings, Ramsey & Co.,
Inc. paid us a purchase price of $9.30 per share for the
shares it purchased and resold the shares that it resold for a
price of $10.00 per share.
Also on April 7, 2004, the Company sold in a concurrent
private placement 3,442,671 shares of common stock directly
to institutional and individual accredited investors pursuant to
the exemptions from registration provided in Section 4(2)
of the Securities Act and Rule 506 of Regulation D
thereunder. These shares were sold for $10.00 per share;
however, Friedman, Billings, Ramsey & Co., Inc., which acted
as placement agent, received a placement agent fee of
$0.70 per share. In addition, we issued 260,954 shares of
our common stock on April 7, 2004, to Friedman, Billings,
Ramsey & Co., Inc. in a private placement under
Section 4(2) of the Securities Act and Rule 506 of
Regulation D thereunder as payment for financial advisory
services.
Each of the private placements that we made in reliance on the
exemptions from registration provided under Section 4(2) of
the Securities Act and Rule 506 of Regulation D
thereunder, as described in the two proceeding paragraphs, did
not involve any public offering of the common stock. In
addition, each purchaser of privately placed shares provided us
with written representations that it was an accredited investor
within the meaning of Rule 501(e) of Regulation D,
that it was a sophisticated investor and that it had the
knowledge and experience necessary to evaluate the risks and
merits of the investment in our common stock. In addition, each
purchaser of our common stock in the private placements and
resales that occurred on April 6 and April 7, 2004 was
solicited on a private and confidential basis in a manner not
involving any general solicitation or advertising in compliance
with Regulation D.
Pursuant to our Amended and Restated 2004 Equity Incentive Plan,
we have granted options to purchase a total of
160,000 shares of common stock, and awarded
30,000 deferred stock units, to our
II-1
current or former independent directors. In addition, we have
awarded 676,180 shares of restricted common stock to our
employees, officers, and independent directors. In granting
these options to purchase common stock and deferred stock units
and in making these restricted stock awards, we relied upon
exemptions from registration set forth in Section 4(2) of
the Securities Act and Rule 701 under the Securities Act.
In August and September 2003, Mr. Aldag, Mr. McLean,
Mr. McKenzie and Mr. Hamner, or our founders, were
collectively issued 1,630,435 shares of our common stock in
exchange for nominal cash consideration. Upon completion of our
private placement in April 2004, 1,108,527 shares of common
stock held by our senior management were redeemed for nominal
value and they now collectively hold 557,908 shares of our
common stock, including shares purchased in our April 2004
private placement. We relied upon Section 4(2) of the
Securities Act in issuing these shares of common stock to our
founders.
|
|
Item 34. |
Indemnification of Directors and Officers. |
We maintain a directors and officers liability insurance policy.
Our charter limits the personal liability of our directors and
officers for monetary damages to the fullest extent permitted
under current Maryland law, and our charter and bylaws provide
that a director or officer shall be indemnified to the fullest
extent required or permitted by Maryland law from and against
any claim or liability to which such director or officer may
become subject by reason of his or her status as a director or
officer of our company. Maryland law allows directors and
officers to be indemnified against judgments, penalties, fines,
settlements, and expenses actually incurred in a proceeding
unless the following can be established:
|
|
|
|
|
the act or omission of the director or officer was material to
the cause of action adjudicated in the proceeding and was
committed in bad faith or was the result of active and
deliberate dishonesty; |
|
|
|
the director or officer actually received an improper personal
benefit in money, property or services; or |
|
|
|
with respect to any criminal proceeding, the director or officer
had reasonable cause to believe his or her act or omission was
unlawful. |
Our stockholders have no personal liability for indemnification
payments or other obligations under any indemnification
agreements or arrangements. However, indemnification could
reduce the legal remedies available to us and our stockholders
against the indemnified individuals.
This provision for indemnification of our directors and officers
does not limit a stockholders ability to obtain injunctive
relief or other equitable remedies for a violation of a
directors or an officers duties to us or to our
stockholders, although these equitable remedies may not be
effective in some circumstances.
In addition to any indemnification to which our directors and
officers are entitled pursuant to our charter and bylaws and the
MGCL, our charter and bylaws provide that we may indemnify other
employees and agents to the fullest extent permitted under
Maryland law, whether they are serving us or, at our request,
any other entity.
We have entered into indemnification agreements with each of our
directors and executive officers, which we refer to in this
context as indemnitees. The indemnification agreements provide
that we will, to the fullest extent permitted by Maryland law,
indemnify and defend each indemnitee against all losses and
expenses incurred as a result of his current or past service as
our director or officer, or incurred by reason of the fact that,
while he was our director or officer, he was serving at our
request as a director, officer, partners, trustee, employee or
agent of a corporation, partnership, joint venture, trust, other
enterprise or employee benefit plan. We have agreed to pay
expenses incurred by an indemnitee before the final disposition
of a claim provided that he provides us with a written
affirmation that he has met the standard of conduct required for
indemnification and a written undertaking to repay the amount we
pay or reimburse if it is ultimately determined that he has not
met the standard of conduct required for indemnification. We are
to pay expenses within 20 days of receiving the
indemnitees written request for such an advance.
Indemnitees are entitled to select counsel to defend against
indemnifiable claims.
II-2
The general effect to investors of any arrangement under which
any person who controls us or any of our directors, officers or
agents is insured or indemnified against liability is a
potential reduction in distributions to our stockholders
resulting from our payment of premiums associated with liability
insurance.
|
|
Item 35. |
Treatment of Proceeds from Stock Being Registered. |
We will not receive any proceeds from the sale of the securities
covered by this registration statement.
|
|
Item 36. |
Financial Statements and Exhibits. |
(a) See Page F-1 for an index of the financial statements
included in this registration statement.
(b) Exhibits. The following exhibits are filed as
part of this registration statement on
Form S-11.
|
|
|
|
|
Exhibit | |
|
|
Number | |
|
Exhibit Title |
| |
|
|
|
3 |
.1* |
|
Registrants Second Articles of Amendment and Restatement |
|
3 |
.2** |
|
Registrants Amended and Restated Bylaws |
|
3 |
.3**** |
|
Articles of Amendment to Second Amended and Restated Articles of
Incorporation |
|
4 |
.1* |
|
Form of Common Stock Certificate |
|
4 |
.2* |
|
Registration Rights Agreement among Registrant, Friedman,
Billings, Ramsey & Co., Inc. and certain holders of the
Registrants common stock, dated April 7, 2004 |
|
5 |
.1*** |
|
Opinion of Baker, Donelson, Bearman, Caldwell &
Berkowitz, P.C. with respect to the legality of the shares
being registered |
|
8 |
.1*** |
|
Opinion of Baker, Donelson, Bearman, Caldwell &
Berkowitz, P.C. with respect to certain tax matters |
|
10 |
.1* |
|
First Amended and Restated Agreement of Limited Partnership of
MPT Operating Partnership, L.P. |
|
10 |
.2* |
|
Amended and Restated 2004 Equity Incentive Plan |
|
10 |
.3* |
|
Employment Agreement between the Registrant and Edward K.
Aldag, Jr., dated September 10, 2003 |
|
10 |
.4* |
|
First Amendment to Employment Agreement between the Registrant
and Edward K. Aldag, Jr., dated March 8, 2004 |
|
10 |
.5* |
|
Employment Agreement between the Registrant and Emmett E.
McLean, dated September 10, 2003 |
|
10 |
.6* |
|
Employment Agreement between the Registrant and R. Steven
Hamner, dated September 10, 2003 |
|
10 |
.7* |
|
Amended and Restated Employment Agreement between the Registrant
and William G. McKenzie, dated September 10, 2003 |
|
10 |
.8* |
|
Lease Agreement between MPT West Houston MOB, L.P. and Stealth
L.P., dated June 17, 2004 |
|
10 |
.9* |
|
Lease Agreement between MPT West Houston Hospital, L.P. and
Stealth L.P., dated June 17, 2004 |
|
10 |
.10* |
|
Third Amended and Restated Lease Agreement between 1300 Campbell
Lane, LLC and
1300 Campbell Lane Operating Company, LLC, dated
December 20, 2004 |
|
10 |
.11* |
|
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 |
.12* |
|
Second Amended and Restated Lease Agreement between 92 Brick
Road, LLC and 92 Brick Road, Operating Company, LLC, dated
December 20, 2004 |
|
10 |
.13* |
|
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 |
II-3
|
|
|
|
|
Exhibit | |
|
|
Number | |
|
Exhibit Title |
| |
|
|
|
10 |
.14* |
|
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 |
.15* |
|
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 |
.16* |
|
Second Amended and Restated Lease Agreement between 8451 Pearl
Street, LLC and 8451 Pearl Street Operating Company, LLC, dated
December 20, 2004 |
|
10 |
.17* |
|
First Amendment Second Amended and Restated Lease Agreement
between 8451 Pearl Street, LLC and 8451 Pearl Street Operating
Company, LLC, dated December 31, 2004 |
|
10 |
.18* |
|
Second Amended and Restated Lease Agreement between 4499
Acushnet Avenue, LLC and 4499 Acushnet Avenue Operating
Company, LLC, dated December 20, 2004 |
|
10 |
.19* |
|
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 |
.20* |
|
Third Amended and Restated Lease Agreement between Kentfield
THCI Holding Company, LLC and 1125 Sir Francis Drake Boulevard
Operating Company, LLC, dated December 20, 2004 |
|
10 |
.21* |
|
First Amendment to Third Amended and Restated Lease Agreement
between Kentfield THCI Holding Company, LLC and 1125 Sir Francis
Drake Boulevard Operating Company, LLC, dated December 31,
2004 |
|
10 |
.22* |
|
Loan Agreement between Colonial Bank, N.A., and MPT West Houston
MOB, L.P., dated December 17, 2004 |
|
10 |
.23* |
|
Loan Agreement between Colonial Bank, N.A., and MPT West Houston
Hospital, L.P., dated December 17, 2004 |
|
10 |
.24* |
|
Loan Agreement between Merrill Lynch Capital and 4499 Acushnet
Avenue, LLC, 8451 Pearl Street, LLC, 92 Brick Road, LLC, 1300
Campbell Lane, LLC, Kentfield THCI Holding Company, LLC and San
Joaquin Health Care Associates, LP, dated December 31, 2004 |
|
10 |
.25* |
|
Payment Guaranty made by the Registrant and MPT Operating
Partnership, L.P. in favor of Merrill Lynch Capital, dated
December 31, 2004 |
|
10 |
.26* |
|
Purchase Agreement among THCI Company, LLC, THCI of California,
LLC, THCI of Massachusetts, LLC, THCI Mortgage Holding Company,
LLC and MPT Operating Partnership, L.P., dated May 20, 2004 |
|
10 |
.27* |
|
Purchase and Sale Agreement among MPT Operating Partnership,
L.P., MPT of Victorville, LLC, Prime A Investments, L.L.C.,
Desert Valley Health System, Inc., Desert Valley Hospital, Inc.
and Desert Valley Medical Group, Inc., dated February 28,
2005 |
|
10 |
.28* |
|
Lease Agreement between MPT of Victorville, LLC and Desert
Valley Hospital, Inc., dated February 28, 2005 |
|
10 |
.29* |
|
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 |
.30* |
|
Employment Agreement between the Registrant and Michael G.
Stewart, dated April 28, 2005 |
|
10 |
.31* |
|
Letter of Commitment between MPT Operating Partnership, L.P. and
Monroe Hospital Operating Hospital, dated February 28, 2005 |
|
10 |
.32* |
|
Letter of Commitment between MPT Operating Partnership, L.P.,
Covington Healthcare Properties, LLC and Denham Springs
Healthcare Properties, LLC, dated March 14, 2005 |
|
10 |
.33* |
|
Letter of Commitment between MPT Operating Partnership, L.P. and
North Cypress Medical Center Operating Partnership, Ltd., dated
March 16, 2005 |
|
10 |
.34* |
|
Letter of Commitment between MPT Operating Partnership, L.P.,
Hammond Healthcare Properties, LLC and Hammond Rehabilitation
Hospital, LLC, dated April 1, 2005 |
|
10 |
.35* |
|
Letter of Commitment between MPT Operating Partnership, L.P. and
Diversified Specialty Institutes, Inc., dated March 3, 2005 |
II-4
|
|
|
|
|
Exhibit | |
|
|
Number | |
|
Exhibit Title |
| |
|
|
|
10 |
.36* |
|
Amendment to Letter of Commitment between MPT Operating
Partnership, L.P. and Diversified Specialty Institutes, Inc.,
dated March 31, 2005 |
|
10 |
.37* |
|
Letter of Commitment between MPT Operating Partnership, L.P.,
MPT of Victorville, LLC and Desert Valley Hospital, Inc., dated
February 28, 2005 |
|
10 |
.38* |
|
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 |
.39* |
|
Sublease Agreement between MPT of North Cypress, L.P. and North
Cypress Medical Center Operating Company, Ltd., dated as of
June 1, 2005 |
|
10 |
.40* |
|
Net Ground Lease between North Cypress Property Holdings, Ltd.
and MPT of North Cypress, L.P., dated as of June 1, 2005 |
|
10 |
.41* |
|
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 |
.42* |
|
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 |
.43* |
|
Lease Agreement between MPT of North Cypress, L.P. and North
Cypress Medical Center Operating Company, Ltd., dated as of
June 1, 2005 |
|
10 |
.44* |
|
Net Ground Lease between Northern Healthcare Land Ventures, Ltd.
and MPT of North Cypress, L.P., dated as of June 1, 2005 |
|
10 |
.45* |
|
Amendment to the First Amended and Restated Agreement of Limited
Partnership of MPT Operating Partnership, L.P. |
|
10 |
.46* |
|
Construction Loan Agreement between North Cypress Medical Center
Operating Company, Ltd. and MPT Finance Company, LLC, dated
June 1, 2005 |
|
10 |
.47* |
|
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 |
.48* |
|
Lease Agreement between MPT of Covington, LLC and Gulf States
Long Term Acute Care of Covington, L.L.C., dated June 9,
2005 |
|
10 |
.49* |
|
Promissory Note made by Denham Springs Healthcare Properties,
L.L.C. in favor of MPT of Denham Springs, LLC, dated
June 9, 2005 |
|
10 |
.50* |
|
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 |
.51* |
|
Lease Agreement between Northern California Rehabilitation
Hospital, LLC and MPT of Redding, LLC, dated June 30, 2005 |
|
10 |
.52* |
|
Ground Lease Agreement between National Medical Specialty
Hospital of Redding, Inc. and Guardian Postacute Services, Inc.,
dated November 14, 1997 |
|
10 |
.53* |
|
Ground Lease Agreement between West Jersey Health System and
West Jersey/Mediplex Rehabilitation Limited Partnership, dated
July 15, 1993 |
|
10 |
.54* |
|
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 |
.55* |
|
Form of Indemnification Agreement between the Registrant and
executive officers and directors |
|
10 |
.56*** |
|
Lease Agreement between Bucks County Oncoplastic Institute, LLC
and MPT of Bucks County, L.P., dated September 16, 2005, as
corrected. |
|
10 |
.57*** |
|
Development Agreement among DSI Facility Development, LLC, Bucks
County Oncoplastic Institute, LLC and MPT of Bucks County, L.P.,
dated September 16, 2005. |
|
10 |
.58*** |
|
Funding Agreement among DSI Facility Development, LLC, Bucks
County Oncoplastic Institute, LLC and MPT of Bucks County, L.P.,
dated September 16, 2005. |
II-5
|
|
|
|
|
Exhibit | |
|
|
Number | |
|
Exhibit Title |
| |
|
|
|
10 |
.59*** |
|
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 |
.60*** |
|
Lease Agreement between Monroe Hospital, LLC and MPT of
Bloomington, LLC, dated October 7, 2005. |
|
10 |
.61*** |
|
Development Agreement among Monroe Hospital, LLC, Monroe
Hospital Development, LLC and MPT of Bloomington, LLC, dated
October 7, 2005. |
|
10 |
.62*** |
|
Funding Agreement between Monroe Hospital, LLC and MPT of
Bloomington, LLC, dated October 7, 2005. |
|
10 |
.63*** |
|
First Amendment to Lease Agreement between MPT West Houston
Hospital, L.P. and Stealth, L.P., dated September 2, 2005. |
|
10 |
.64***** |
|
Credit Agreement dated October 27, 2005, among MPT
Operating Partnership, L.P., the 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 |
.65*** |
|
Lease Agreement among Veritas Health Services, Inc., Prime
Healthcare Services, LLC and MPT of Chino, LLC, dated
November 30, 2005. |
|
10 |
.66*** |
|
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 |
.67*** |
|
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 |
.68*** |
|
Promissory Note by Alliance Hospital, Ltd. In favor of MPT of
Odessa Hospital, L.P., dated December 23, 2005. |
|
10 |
.69*** |
|
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, as corrected. |
|
10 |
.70*** |
|
Lease Agreement between MPT of Sherman Oaks, LLC and Prime
Healthcare Services II, LLC, dated December 30, 2005, as
corrected. |
|
21 |
.1* |
|
Subsidiaries of the Registrant |
|
23 |
.1 |
|
Consent of KPMG LLP |
|
23 |
.2 |
|
Consent of Parente Randolph, LLC |
|
23 |
.3*** |
|
Consent of Baker, Donelson, Bearman, Caldwell &
Berkowitz, P.C. (included in Exhibits 5.1 and 8.1) |
|
23 |
.4 |
|
Consent of Moss Adams LLP |
|
24 |
.1*** |
|
Power of Attorney, included on signature page of the
Registrants Form S-11 filed with the Commission on
January 6, 2005 |
|
24 |
.2*** |
|
Power of Attorney, included on signature page of the
Registrants Amendment No. 1 to the Registrants
Form S-11 filed with the Commission on July 26, 2005 |
* Incorporated by reference to the Registrants
Registration Statement on
Form S-11 filed
with the Commission on October 26, 2004, as amended (File
No. 333-119957).
** Incorporated by reference to the Registrants
quarterly report on
Form 10-Q for the
quarter ended June 30, 2005, filed with the Commission on
August 22, 2005.
*** Previously filed.
**** Incorporated by reference to the Registrants
quarterly report on Form 10-Q for the quarter ended
September 30, 2005, filed with the Commission on
November 10, 2005.
***** Incorporated by reference to the Registrants
current report on Form 8-K, filed with the Commission on
November 2, 2005.
II-6
(a) The undersigned registrant hereby undertakes:
|
|
|
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement: |
|
|
|
(i) To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933; |
|
|
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in the
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the Calculation of
Registration Fee table in the effective registration
statement; |
|
|
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement. |
|
|
|
(2) That, for the purpose of determining any liability
under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
bona fide offering thereof. |
|
|
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering. |
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(4) that, for the purpose of determining liability under
the Securities Act of 1933 to any purchaser: |
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(i) if the Registrant is relying on Rule 430B: |
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(A) each prospectus filed by the Registrant pursuant to
Rule 424(b)(3) shall be deemed to be part of the
Registration Statement as of the date the filed prospectus was
deemed part of and included in the Registration Statement; and |
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(B) each prospectus required to be filed pursuant to
Rule 424(b)(2), (b)(5), or (b)(7) as part of a Registration
Statement in reliance on Rule 430B relating to an offering
made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the
purpose of providing the information required by
Section 10(a) of the Securities Act of 1933 shall be deemed
to be part of and included in the Registration Statement as of
the earlier of the date such form of prospectus is first used
after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As
provided in Rule 430B, for liability purposes of the issuer
and any person that is at that date an underwriter, such date
shall be deemed to be a new effective date of the Registration
Statement relating to the securities in the Registration
Statement to which that prospectus relates, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof; provided, however, that no statement
made in a Registration Statement or prospectus that is part of
the Registration Statement or made in a document incorporated or
deemed incorporated by reference into the Registration Statement
or prospectus that is part of the Registration Statement will,
as to a purchaser with a time of contract of sale prior to such
effective date, supersede or modify any statement that was made
in the Registration Statement or prospectus that was part of the
Registration Statement or made in any such document immediately
prior to such effective date; or |
II-7
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(ii) if the Registrant is subject to Rule 430C, each
prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement
as of the date it is first used after effectiveness.
Provided, however, that no statement made in a
registration statement or prospectus that is part of the
registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the
registration statement or made in any such document immediately
prior to such date of first use. |
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(5) that, for the purpose of determining liability of the
Registrant under the Securities Act of 1933 to any purchaser in
the initial distribution of the securities, the undersigned
Registrant undertakes that in a primary offering of securities
of the undersigned Registrant pursuant to the Registration
Statement, regardless of the underwriting method used to sell
the securities to the purchaser, if the securities are offered
or sold to such purchaser by means of any of the following
communications, the undersigned Registrant will be a seller to
the purchaser and will be considered to offer or sell such
securities to such purchaser: |
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(i) any preliminary prospectus or prospectus of the
undersigned Registrant relating to the offering required to be
filed pursuant to Rule 424; |
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(ii) any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned Registrant or used
or referred to by the undersigned Registrant; |
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(iii) the portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned Registrant or its securities provided by or on
behalf of the undersigned Registrant; and |
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(iv) any other communication that is an offer in the
offering made by the undersigned Registrant to the purchaser. |
(b) Insofar as indemnification for liabilities arising
under the Securities Act of 1933, as amended, may be permitted
to trustees, officers or controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a trustee,
officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds
to believe that it meets all of the requirements for filing on
Form S-11 and has
duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in
Birmingham, Alabama on March 14, 2006.
|
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Medical Properties Trust,
Inc.
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R. Steven Hamner |
|
Executive Vice President, |
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Chief Financial Officer and Director |
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the
following persons in the capacities and on the dates indicated.
|
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Signature |
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Title |
|
Date |
|
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|
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*
Edward K. Aldag, Jr. |
|
Chairman of the Board, President and Chief Executive Officer |
|
March 14, 2006 |
|
*
Virginia A. Clarke |
|
Director |
|
March 14, 2006 |
|
*
Bryan L. Goolsby |
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Director |
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March 14, 2006 |
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/s/ R. Steven Hamner
R. Steven Hamner |
|
Executive Vice President, Chief Financial Officer and Director |
|
March 14, 2006 |
|
*
G. Steven Dawson |
|
Director |
|
March 14, 2006 |
|
*
Robert E. Holmes, Ph.D. |
|
Director |
|
March 14, 2006 |
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*
William G. McKenzie |
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Vice Chairman of the Board |
|
March 14, 2006 |
|
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*
L. Glenn Orr, Jr. |
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Director |
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March 14, 2006 |
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*By: |
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/s/ R. Steven Hamner
R. Steven Hamner
Attorney-in-Fact |
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March 14, 2006 |
II-9
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Exhibit | |
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Number | |
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Exhibit Title |
| |
|
|
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3 |
.1* |
|
Registrants Second Articles of Amendment and Restatement |
|
3 |
.2** |
|
Registrants Amended and Restated Bylaws |
|
3 |
.3**** |
|
Articles of Amendment to Second Amended and Restated Articles of
Incorporation |
|
4 |
.1* |
|
Form of Common Stock Certificate |
|
4 |
.2* |
|
Registration Rights Agreement among Registrant, Friedman,
Billings, Ramsey & Co., Inc. and certain holders of the
Registrants common stock, dated April 7, 2004 |
|
5 |
.1*** |
|
Opinion of Baker, Donelson, Bearman, Caldwell &
Berkowitz, P.C. with respect to the legality of the shares
being registered |
|
8 |
.1*** |
|
Opinion of Baker, Donelson, Bearman, Caldwell &
Berkowitz, P.C. with respect to certain tax matters |
|
10 |
.1* |
|
First Amended and Restated Agreement of Limited Partnership of
MPT Operating Partnership, L.P. |
|
10 |
.2* |
|
Amended and Restated 2004 Equity Incentive Plan |
|
10 |
.3* |
|
Employment Agreement between the Registrant and Edward K.
Aldag, Jr., dated September 10, 2003 |
|
10 |
.4* |
|
First Amendment to Employment Agreement between the Registrant
and Edward K. Aldag, Jr., dated March 8, 2004 |
|
10 |
.5* |
|
Employment Agreement between the Registrant and Emmett E.
McLean, dated September 10, 2003 |
|
10 |
.6* |
|
Employment Agreement between the Registrant and R. Steven
Hamner, dated September 10, 2003 |
|
10 |
.7* |
|
Amended and Restated Employment Agreement between the Registrant
and William G. McKenzie, dated September 10, 2003 |
|
10 |
.8* |
|
Lease Agreement between MPT West Houston MOB, L.P. and Stealth
L.P., dated June 17, 2004 |
|
10 |
.9* |
|
Lease Agreement between MPT West Houston Hospital, L.P. and
Stealth L.P., dated June 17, 2004 |
|
10 |
.10* |
|
Third Amended and Restated Lease Agreement between 1300 Campbell
Lane, LLC and 1300 Campbell Lane Operating Company, LLC,
dated December 20, 2004 |
|
10 |
.11* |
|
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 |
.12* |
|
Second Amended and Restated Lease Agreement between 92 Brick
Road, LLC and 92 Brick Road, Operating Company, LLC, dated
December 20, 2004 |
|
10 |
.13* |
|
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 |
.14* |
|
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 |
.15* |
|
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 |
.16* |
|
Second Amended and Restated Lease Agreement between 8451 Pearl
Street, LLC and 8451 Pearl Street Operating Company, LLC, dated
December 20, 2004 |
|
10 |
.17* |
|
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 |
.18* |
|
Second Amended and Restated Lease Agreement between 4499
Acushnet Avenue, LLC and 4499 Acushnet Avenue Operating
Company, LLC, dated December 20, 2004 |
|
10 |
.19* |
|
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 |
II-10
|
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|
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Exhibit | |
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Number | |
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Exhibit Title |
| |
|
|
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10 |
.20* |
|
Third Amended and Restated Lease Agreement between Kentfield
THCI Holding Company, LLC and 1125 Sir Francis Drake Boulevard
Operating Company, LLC, dated December 20, 2004 |
|
10 |
.21* |
|
First Amendment to Third Amended and Restated Lease Agreement
between Kentfield THCI Holding Company, LLC and 1125 Sir Francis
Drake Boulevard Operating Company, LLC, dated December 31,
2004 |
|
10 |
.22* |
|
Loan Agreement between Colonial Bank, N.A., and MPT West Houston
MOB, L.P., dated December 17, 2004 |
|
10 |
.23* |
|
Loan Agreement between Colonial Bank, N.A., and MPT West Houston
Hospital, L.P., dated December 17, 2004 |
|
10 |
.24* |
|
Loan Agreement between Merrill Lynch Capital and 4499 Acushnet
Avenue, LLC, 8451 Pearl Street, LLC, 92 Brick Road, LLC, 1300
Campbell Lane, LLC, Kentfield THCI Holding Company, LLC and San
Joaquin Health Care Associates, LP, dated December 31, 2004 |
|
10 |
.25* |
|
Payment Guaranty made by the Registrant and MPT Operating
Partnership, L.P. in favor of Merrill Lynch Capital, dated
December 31, 2004 |
|
10 |
.26* |
|
Purchase Agreement among THCI Company, LLC, THCI of California,
LLC, THCI of Massachusetts, LLC, THCI Mortgage Holding Company,
LLC and MPT Operating Partnership, L.P., dated May 20, 2004 |
|
10 |
.27* |
|
Purchase and Sale Agreement among MPT Operating Partnership,
L.P., MPT of Victorville, LLC, Prime A Investments, L.L.C.,
Desert Valley Health System, Inc., Desert Valley Hospital, Inc.
and Desert Valley Medical Group, Inc., dated February 28,
2005 |
|
10 |
.28* |
|
Lease Agreement between MPT of Victorville, LLC and Desert
Valley Hospital, Inc., dated February 28, 2005 |
|
10 |
.29* |
|
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 |
.30* |
|
Employment Agreement between the Registrant and Michael G.
Stewart, dated April 28, 2005 |
|
10 |
.31* |
|
Letter of Commitment between MPT Operating Partnership, L.P. and
Monroe Hospital Operating Hospital, dated February 28, 2005 |
|
10 |
.32* |
|
Letter of Commitment between MPT Operating Partnership, L.P.,
Covington Healthcare Properties, LLC and Denham Springs
Healthcare Properties, LLC, dated March 14, 2005 |
|
10 |
.33* |
|
Letter of Commitment between MPT Operating Partnership, L.P. and
North Cypress Medical Center Operating Partnership, Ltd., dated
March 16, 2005 |
|
10 |
.34* |
|
Letter of Commitment between MPT Operating Partnership, L.P.,
Hammond Healthcare Properties, LLC and Hammond Rehabilitation
Hospital, LLC, dated April 1, 2005 |
|
10 |
.35* |
|
Letter of Commitment between MPT Operating Partnership, L.P. and
Diversified Specialty Institutes, Inc., dated March 3, 2005 |
|
10 |
.36* |
|
Amendment to Letter of Commitment between MPT Operating
Partnership, L.P. and Diversified Specialty Institutes, Inc.,
dated March 31, 2005 |
|
10 |
.37* |
|
Letter of Commitment between MPT Operating Partnership, L.P.,
MPT of Victorville, LLC and Desert Valley Hospital, Inc., dated
February 28, 2005 |
|
10 |
.38* |
|
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 |
.39* |
|
Sublease Agreement between MPT of North Cypress, L.P. and North
Cypress Medical Center Operating Company, Ltd., dated as of
June 1, 2005 |
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10 |
.40* |
|
Net Ground Lease between North Cypress Property Holdings, Ltd.
and MPT of North Cypress, L.P., dated as of June 1, 2005 |
II-11
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|
|
Exhibit | |
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Number | |
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Exhibit Title |
| |
|
|
|
10 |
.41* |
|
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 |
.42* |
|
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 |
.43* |
|
Lease Agreement between MPT of North Cypress, L.P. and North
Cypress Medical Center Operating Company, Ltd., dated as of
June 1, 2005 |
|
10 |
.44* |
|
Net Ground Lease between Northern Healthcare Land Ventures, Ltd.
and MPT of North Cypress, L.P., dated as of June 1, 2005 |
|
10 |
.45* |
|
Amendment to the First Amended and Restated Agreement of Limited
Partnership of MPT Operating Partnership, L.P. |
|
10 |
.46* |
|
Construction Loan Agreement between North Cypress Medical Center
Operating Company, Ltd. and MPT Finance Company, LLC, dated
June 1, 2005 |
|
10 |
.47* |
|
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 |
.48* |
|
Lease Agreement between MPT of Covington, LLC and Gulf States
Long Term Acute Care of Covington, L.L.C., dated June 9,
2005 |
|
10 |
.49* |
|
Promissory Note made by Denham Springs Healthcare Properties,
L.L.C. in favor of MPT of Denham Springs, LLC, dated
June 9, 2005 |
|
10 |
.50* |
|
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 |
.51* |
|
Lease Agreement between Northern California Rehabilitation
Hospital, LLC and MPT of Redding, LLC, dated June 30, 2005 |
|
10 |
.52* |
|
Ground Lease Agreement between National Medical Specialty
Hospital of Redding, Inc. and Guardian Postacute Services, Inc.,
dated November 14, 1997 |
|
10 |
.53* |
|
Ground Lease Agreement between West Jersey Health System and
West Jersey/Mediplex Rehabilitation Limited Partnership, dated
July 15, 1993 |
|
10 |
.54* |
|
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 |
.55* |
|
Form of Indemnification Agreement between the Registrant and
executive officers and directors |
|
10 |
.56*** |
|
Lease Agreement between Bucks County Oncoplastic Institute, LLC
and MPT of Bucks County, L.P., dated September 16, 2005, as
corrected. |
|
10 |
.57*** |
|
Development Agreement among DSI Facility Development, LLC, Bucks
County Oncoplastic Institute, LLC and MPT of Bucks County, L.P.,
dated September 16, 2005. |
|
10 |
.58*** |
|
Funding Agreement among DSI Facility Development, LLC, Bucks
County Oncoplastic Institute, LLC and MPT of Bucks County, L.P.,
dated September 16, 2005. |
|
10 |
.59*** |
|
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 |
.60*** |
|
Lease Agreement between Monroe Hospital, LLC and MPT of
Bloomington, LLC, dated October 7, 2005. |
|
10 |
.61*** |
|
Development Agreement among Monroe Hospital, LLC, Monroe
Hospital Development, LLC and MPT of Bloomington, LLC, dated
October 7, 2005. |
|
10 |
.62*** |
|
Funding Agreement between Monroe Hospital, LLC and MPT of
Bloomington, LLC, dated October 7, 2005. |
II-12
|
|
|
|
|
Exhibit | |
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|
Number | |
|
Exhibit Title |
| |
|
|
|
10 |
.63*** |
|
First Amendment to Lease Agreement between MPT West Houston
Hospital, L.P. and Stealth, L.P., dated September 2, 2005. |
|
10 |
.64***** |
|
Credit Agreement dated October 27, 2005, among MPT
Operating Partnership, L.P., the 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 |
.65*** |
|
Lease Agreement among Veritas Health Services, Inc., Prime
Healthcare Services, LLC and MPT of Chino, LLC, dated
November 30, 2005. |
|
10 |
.66*** |
|
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 |
.67*** |
|
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 |
.68*** |
|
Promissory Note by Alliance Hospital, Ltd. In favor of MPT of
Odessa Hospital, L.P., dated December 23, 2005. |
|
10 |
.69*** |
|
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, as corrected. |
|
10 |
.70*** |
|
Lease Agreement between MPT of Sherman Oaks, LLC and Prime
Healthcare Services II, LLC, dated December 30, 2005, as
corrected. |
|
21 |
.1* |
|
Subsidiaries of the Registrant |
|
23 |
.1 |
|
Consent of KPMG LLP |
|
23 |
.2 |
|
Consent of Parente Randolph, LLC |
|
23 |
.3*** |
|
Consent of Baker, Donelson, Bearman, Caldwell &
Berkowitz, P.C. (included in Exhibits 5.1 and 8.1) |
|
23 |
.4 |
|
Consent of Moss Adams LLP |
|
24 |
.1*** |
|
Power of Attorney, included on signature page of the
Registrants Form S-11 filed with the Commission on
January 6, 2005 |
|
24 |
.2*** |
|
Power of Attorney included on signature page of the
Registrants Amendment No. 1 to the Registration
Statement on Form S-11 filed with the Commission on
July 26, 2005. |
* Incorporated by reference to the Registrants
Registration Statement on Form S-11 filed with the Commission on
October 26, 2004, as amended (File No. 333-119957).
** Incorporated by reference to the Registrants
quarterly report on
Form 10-Q for the
quarter ended June 30, 2005, filed with the Commission on
July 26, 2005.
*** Previously filed.
**** Incorporated by reference to the Registrants
quarterly report on
Form 10-Q for the
quarter ended September 30, 2005, filed with the Commission
on November 10, 2005.
***** Incorporated by reference to the Registrants
current report on
Form 8-K, filed
with the Commission on November 2, 2005.
II-13
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
The Board of Directors
Medical Properties Trust, Inc.:
We consent to the use of our report included herein and to the references to
our firm under the headings "Experts," "Summary Selected Financial Data," and
"Selected Financial Data" in the Prospectus.
/s/ KPMG LLP
Birmingham, Alabama
March 14, 2006
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Member
Vibra Healthcare, LLC:
We hereby consent to the incorporation in this Post-Effective Amendment No. 5 to
Registration Statement of Medical Properties Trust, Inc. on Form S-11 (No.
333-121883) of our report dated March 8, 2005, except for Note 11, as to which
the date is March 31, 2005, relating to the consolidated financial statements of
Vibra Healthcare, LLC and subsidiaries as of December 31, 2004 and for the
period from inception (May 14, 2004) through December 31, 2004. We also consent
to the references to us under the heading "Experts" in such Registration
Statement.
/s/ Parente Randolph, LLC
Parente Randolph, LLC
Harrisburg, Pennsylvania
March 14, 2006
EXHIBIT 23.4
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the reference to our firm under the heading "Experts" and to the
use in this Amendment No. 5 to the Registration Statement of Medical Properties
Trust, Inc. (Registration No. 333-121883) on Form S-11 of our report dated
February 24, 2005, with respect to the consolidated financial statements of
Prime Healthcare Services, Inc. (formerly Desert Valley Health Systems, Inc.) as
of December 31, 2004 and 2003 and for the years then ended, which appear in such
Registration Statement.
/s/ Moss Adams LLP
Irvine, California
March 14, 2006