MEDICAL PROPERTIES TRUST, INC. The following discussion and analysis of the consolidated financial condition and consolidated results of operations are presented on a combined basis forMedical Properties Trust, Inc. andMPT Operating Partnership, L.P. as there are no material differences between these two entities. Such discussion and analysis should be read together with the condensed consolidated financial statements and notes thereto contained in this Form 10-Q and the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . As the economy continues to recover from the downturn caused by COVID-19 and vaccines continue to roll out, we expect to receive substantially all rent and interest payments in the future, and we are collecting rent, as expected, that we previously deferred in 2020, with interest. However, no assurances can be made that if the pandemic continues for an extended period of time that our rent and interest payments will not be delayed into the future until our tenants can recover. Forward-Looking Statements. This Quarterly Report on Form 10-Q contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or future performance, achievements or transactions or events to be materially different from those expressed or implied by such forward-looking statements, including, but not limited to, the risks described in our Annual Report on Form 10-K and as updated in our quarterly reports on Form 10-Q for future periods, and current reports on Form 8-K as we file them with theSEC under the Exchange Act. Such factors include, among others, the following:
• the political, economic, business, real estate, and other market
conditions in the
the
jurisdictions where we may own healthcare facilities or transact business,
which may have a negative effect on the following, among other things:
o the financial condition of our tenants, our lenders, or institutions
that hold our cash balances or are counterparties to certain hedge
agreements, which may expose us to increased risks of default by these
parties;
o our ability to obtain equity or debt financing on attractive terms or
at all, which may adversely impact our ability to pursueacquisition
and development opportunities, refinance existing debt, and our future
interest expense; and
o the value of our real estate assets, which may limit our ability to
dispose of assets at attractive prices or obtain or maintain debt
financing secured by our real estate assets or on an unsecured basis.
• the impact of COVID-19 on our business, our joint ventures, and thebusiness of our tenants/borrowers and the economy in general, as well as
other factors that may affect our business, our joint ventures or that of
our tenants/borrowers that are beyond our control, including natural
disasters, health crises, or other pandemics and subsequent government
actions in reaction to such matters;
• the risk that a condition to closing under the agreements governing any or
all of our pending transactions (including the transactions disclosed in
Note 3 and Note 10 ) that have not closed as of the date hereof may
not be satisfied;
• the possibility that the anticipated benefits from any or all of the
transactions we enter into will take longer to realize than expected or
will not be realized at all;
• the competitive environment in which we operate;
• the execution of our business plan;
• financing risks;
• acquisition and development risks;
• potential environmental contingencies and other liabilities;
• adverse developments affecting the financial health of one or more of our
tenants, including insolvency;
• other factors affecting the real estate industry generally or the
healthcare real estate industry in particular;
• our ability to maintain our status as a REIT for income tax purposes;
• our ability to attract and retain qualified personnel;
• changes in foreign currency exchange rates;
• changes in federal, state, or local tax laws in the U.S. , Europe ,Australia ,South America , or other jurisdictions in which we may own healthcare facilities or transact business; and 28
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• healthcare and other regulatory requirements of the U.S. , Europe ,
Australia , South America , and other foreign countries.
Key Factors that May Affect Our Operations
Our revenue is derived from rents we earn pursuant to the lease agreements with our tenants, from interest income from loans to our tenants and other facility owners, and from profits or equity interests in certain of our tenants' operations. Our tenants operate in the healthcare industry, generally providing medical, surgical, rehabilitative, and behavioral health care to patients. The capacity of our tenants to pay our rents and interest is dependent upon their ability to conduct their operations at profitable levels. We believe that the business environment of the industry segments in which our tenants operate is generally positive for efficient operators. However, our tenants' operations are subject to economic, regulatory, market, and other conditions (such as the impact of the COVID-19 pandemic) that may affect their profitability, which could impact our results. Accordingly, we monitor certain key performance indicators that we believe provide us with early indications of conditions that could affect the level of risk in our portfolio.
Key factors that we consider in underwriting prospective tenants and in our ongoing monitoring of our tenants' (and guarantors') performance include the following:
• admission levels and surgery/procedure/diagnosis volumes by type;
• the current, historical, and prospective operating profit (measured by
earnings before interest, taxes, depreciation, amortization, and facility
rent) of each tenant or borrower and at each facility;
• the ratio of our tenants' or borrowers' operating profit both to facility
rent and to facility rent plus other fixed costs, including debt costs;
• changes in sources of our tenants' or borrowers' revenue, including the
relative mix of public payors (including Medicare, Medicaid/MediCal, and
managed care in the
Services in the
insurance and private pay patients);
• trends in tenants' cash collections, including comparison to recorded net
patient service revenues;
• tenants' free cash flows;
• the potential impact of healthcare pandemics/epidemics, legislation, and
other regulations (including changes in reimbursement) on our tenants' or
borrowers' profitability and liquidity; and
• the competition and demographics of the local and surrounding areas in
which our tenants or borrowers operate.
Certain business factors, in addition to those described above that directly affect our tenants and borrowers, will likely materially influence our future results of operations. These factors include:
• trends in the cost and availability of capital, including market interest
rates, that our prospective tenants may use for their real estate assets
instead of financing their real estate assets through lease structures;
• changes in healthcare regulations that may limit the opportunities for
physicians to participate in the ownership of healthcare providers and
healthcare real estate;
• reductions in reimbursements from Medicare, state healthcare programs, and
commercial insurance providers that may reduce our tenants' or borrowers'
profitability and our revenues;
• competition from other financing sources; and
• the ability of our tenants and borrowers to access funds in the credit
markets.
CRITICAL ACCOUNTING POLICIES
Refer to our 2020 Annual Report on Form 10-K for a discussion of our critical
accounting policies, which include investments in real estate, purchase price
allocation, loans, credit losses, losses from rent and interest receivables, and
our accounting policy on consolidation. During the nine months ended
September 30, 2021 , there were no material changes to these policies.
29
--------------------------------------------------------------------------------Overview
We are a self-advised REIT focused on investing in and owning net-leased healthcare facilities across theU.S. and selectively in foreign jurisdictions.Medical Properties Trust, Inc. was incorporated underMaryland law onAugust 27, 2003 , andMPT Operating Partnership, L.P. was formed underDelaware law onSeptember 10, 2003 . We conduct substantially all of our business throughMPT Operating Partnership, L.P. We acquire and develop healthcare facilities and lease the facilities to healthcare operating companies under long-term net leases, which require the tenant to bear most of the costs associated with the property. We also make mortgage loans to healthcare operators collateralized by their real estate assets. In addition, we selectively make loans to certain of our operators through our taxable REIT subsidiaries, the proceeds of which are typically used for acquisitions and working capital. Finally, from time-to-time, we acquire a profits or other equity interest in our tenants that gives us a right to share in such tenant's profits and losses.
At
Our investments in healthcare real estate, including mortgage loans, as well as any loans made to and equity investments in our tenants are considered a single reportable segment. AtSeptember 30, 2021 , all of our investments are located in theU.S. ,Europe ,Australia , andSouth America . Our total assets are made up of the following (dollars in thousands): As of As of September 30, % of December 31, % of 2021 Total 2020 Total Real estate assets - at cost$ 16,583,748 84.1 %$ 14,337,929 85.2 % Accumulated real estate depreciation and amortization (936,289 ) -4.7 % (833,529 ) -5.0 % Cash and cash equivalents 349,652 1.8 % 549,884 3.3 % Equity investments 1,170,171 5.9 % 1,123,623 6.7 % Other loans 1,502,677 7.6 % 858,368 5.1 % Other 1,042,028 5.3 % 792,739 4.7 % Total assets$ 19,711,987 100.0 %$ 16,829,014 100.0 %
Additional Concentration Details
On a pro forma gross asset basis (as defined in the "Reconciliation of
Non-GAAP Financial Measures" section of Item 2 of this Quarterly Report on
Form 10-Q), our concentration as of
Total Pro Forma Gross Assets by Operator
As of September 30, 2021 As of December 31, 2020
Percentage of Percentage of
Total Pro Forma Total Pro Forma Total Pro Forma Total Pro Forma
Operators Gross Assets Gross Assets Gross Assets Gross Assets
Steward
Florida market $ 1,260,206 5.7 % $ 215,105 1.1 %
Massachusetts market 1,162,101 5.3 % 1,500,915 7.3 %
Texas/Arkansas/Louisiana market 1,060,506 4.8 % 1,045,982 5.1 %
Arizona market 319,760 1.4 % 332,239 1.6 %
Ohio/Pennsylvania market 133,751 0.6 % 151,785 0.7 %
Utah market(1) - - 1,260,147 6.2 %
Circle 2,470,658 11.2 % 2,520,019 12.3 %
Prospect 1,623,254 7.3 % 1,597,950 7.8 %
Swiss Medical Network 1,242,022 5.6 % 1,177,520 5.8 %
HCA 1,235,498 5.6 % 8,844 -
Other operators 10,508,227 47.5 % 9,826,336 48.2 %
Other assets 1,110,337 5.0 % 792,739 3.9 %
Total $ 22,126,320 100.0 % $ 20,429,581 100.0 %
(1) 2021 column is shown pro forma for the transaction discussed in Note
10 to Item 1 of this Form 10-Q.
30
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Total Pro Forma Gross Assets by
As of September 30, 2021 As of December 31, 2020
Percentage of Percentage of
Total Pro Forma Total Pro Forma Total Pro Forma Total Pro Forma
U.S. States and Other Countries Gross Assets Gross Assets Gross Assets Gross Assets
Texas $ 2,178,399 9.8 % $ 1,923,440 9.4 %
California 1,656,353 7.5 % 1,382,663 6.8 %
Florida 1,286,016 5.8 % 240,915 1.2 %
Utah 1,255,468 5.7 % 1,295,329 6.4 %
Massachusetts 1,167,501 5.3 % 1,506,315 7.4 %
All other states 5,024,965 22.7 % 4,607,471 22.5 %
Other domestic assets 725,314 3.3 % 680,678 3.3 %
Total U.S. $ 13,294,016 60.1 % $ 11,636,811 57.0 %
United Kingdom $ 4,352,007 19.7 % $ 4,636,634 22.7 %
Germany 1,279,598 5.8 % 1,361,019 6.6 %
Switzerland 1,242,022 5.6 % 1,177,520 5.7 %
Australia 1,038,165 4.6 % 997,878 4.9 %
Spain 214,566 1.0 % 221,134 1.1 %
All other countries 320,923 1.5 % 286,524 1.4 %
Other international assets 385,023 1.7 % 112,061 0.6 %
Total international $ 8,832,304 39.9 % $ 8,792,770 43.0 %
Grand total $ 22,126,320 100.0 % $ 20,429,581 100.0 %
On an individual property basis, we had no investment in any single property
greater than 3% of our total pro forma gross assets as of
On an adjusted revenues basis (as defined in the "Reconciliation of Non-GAAP Financial Measures" section of Item 2 of this Quarterly Report on Form 10-Q), concentration for the three months endedSeptember 30, 2021 as compared to the prior year is as follows (dollars in thousands):
Total Adjusted Revenues by Operator
For the Three Months Ended September 30,
2021 2020
Percentage of Percentage of
Total Adjusted Total Adjusted Total Adjusted Total Adjusted
Operators Revenues Revenues Revenues Revenues
Steward
Massachusetts market $ 35,965 8.5 % $ 34,521 9.7 %
Utah market 31,879 7.5 % 31,333 8.8 %
Texas/Arkansas/Louisiana market 21,740 5.1 % 15,700 4.4 %
Florida market 16,929 4.0 % 3,632 1.0 %
Arizona market 8,126 1.9 % 8,193 2.3 %
Ohio/Pennsylvania market 3,236 0.8 % 3,260 0.9 %
Circle 52,612 12.4 % 48,145 13.5 %
Prospect 37,864 8.9 % 38,676 10.8 %
Prime 29,035 6.8 % 36,032 10.1 %
Priory 27,238 6.4 % - -
Other operators 159,284 37.7 % 137,465 38.5 %
Total $ 423,908 100.0 % $ 356,957 100.0 %
31
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Total Adjusted Revenues by
For the Three Months Ended September 30,
2021 2020
Percentage of Percentage of
Total Adjusted Total Adjusted Total Adjusted Total Adjusted
U.S. States and Other Countries Revenues Revenues Revenues Revenues
California $ 40,850 9.6 % $ 39,768 11.1 %
Texas 38,007 9.0 % 29,948 8.4 %
Massachusetts 36,123 8.5 % 34,680 9.7 %
Utah 32,837 7.7 % 32,283 9.1 %
Pennsylvania 19,972 4.7 % 20,101 5.6 %
All other states 104,667 24.8 % 94,327 26.4 %
Total U.S. $ 272,456 64.3 % $ 251,107 70.3 %
United Kingdom $ 90,141 21.3 % $ 54,745 15.4 %
Germany 25,755 6.1 % 25,294 7.1 %
All other countries 35,556 8.3 % 25,811 7.2 %
Total international $ 151,452 35.7 % $ 105,850 29.7 %
Grand total $ 423,908 100.0 % $ 356,957 100.0 %
Total Adjusted Revenues by Facility Type
For the Three
Months Ended
2021 2020
Percentage of Percentage of
Total Adjusted TotalAdjusted Total Adjusted Total Adjusted Facility Types
Revenues Revenues Revenues Revenues
General acute care hospitals $ 334,239 78.8 % $ 299,090 83.8 %
Inpatient rehabilitation hospitals 44,825 10.6 % 42,463 11.9 %
Behavioral health facilities 32,843 7.8 % 2,978 0.8 %
Long-term acute care hospitals 8,120 1.9 % 8,604 2.4 %
Freestanding ER/urgent care facilities 3,881 0.9 % 3,822 1.1 %
Total $ 423,908 100.0 % $ 356,957 100.0 %
Results of Operations
Three Months Ended
Net income for the three months endedSeptember 30, 2021 , was$171.1 million ($0.29 per diluted share), compared to$131.1 million ($0.25 per diluted share) for the three months endedSeptember 30, 2020 . This 30% increase in net income is primarily due to incremental revenue from new investments made in the second half of 2020 and the first nine months of 2021, partially offset by higher interest expense (from additional debt to partially finance these new investments), depreciation expense, and general and administrative costs due to the growth of the company. In addition, our gain on sale of real estate was greater in the 2021 third quarter compared to the prior year; while, income taxes were lower in the 2021 third quarter due to the tax rate increase in theUnited Kingdom in the 2020 third quarter. Normalized funds from operations ("FFO"), after adjusting for certain items (as more fully described in the "Reconciliation of Non-GAAP Financial Measures"), was$262.8 million for the 2021 third quarter, or$0.44 per diluted share, as compared to$220.7 million , or$0.41 per diluted share, for the 2020 third quarter. Similar to net income, this 19% increase in Normalized FFO is primarily due to incremental revenue from new investments made in the second half of 2020 and the first nine months of 2021. 32
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A comparison of revenues for the three month periods ended
Year over
% of % of Year
2021 Total 2020 Total Change
Rent billed $ 242,211 62.0 % $ 192,953 58.6 % 25.5 %
Straight-line rent 64,637 16.5 % 51,125 15.5 % 26.4 %
Income from financing leases 50,667 13.0 % 52,544 15.9 % -3.6 %
Interest and other income 33,264 8.5 % 32,836 10.0 % 1.3 %
Total revenues $ 390,779 100.0 % $ 329,458 100.0 % 18.6 %
Our total revenue for the 2021 third quarter is up
• Operating lease revenue (includes rent billed and straight-line rent) - up
incremental revenue from acquisitions made in 2020 and 2021 (including
to
the condensed consolidated financial statements),
reclassification of properties from deferred financing leases to operating
leases due to certain lease modifications in the fourth quarter of 2020,
commencement of rent on two development properties, and approximately
million is from favorable foreign currency fluctuations. This increase is
partially offset by lower revenues from disposals.
• Income from financing leases - down
the reclassification of properties from deferred financing leases to
operating leases due to certain lease modifications in the fourth quarter
of 2020, partially offset by revenue from new financing leases in the 2020
fourth quarter as part of the conversion of
simple asset ownership.
• Interest and other income - up
following:
o Interest from loans - up $0.3 million over the prior year due to
$13.9 million of incremental revenue earned on loan
investments in
late 2020 and the first nine months of 2021, including $5.2 million
earned on the £250 million loan made to Priory in 2021 and $2.8
million from the loans made for three Colombia properties in 2020.
This increase is partially offset by $1.1 million of lower interest
revenue related to Steward mortgage loans converted to fee simple
assets in the third quarter of 2020, $3.0 million of lower interest
revenue related to Ernest mortgage loans converted to fee simple
assets in the fourth quarter of 2020, and $9.2 million related to
the repayment of Prime loans in the fourth quarter of 2020.
o Other income - up $0.1 million from the prior year as we received
more direct reimbursements from our tenants for ground lease,
property taxes, and insurance.
Interest expense for the quarters ended September 30, 2021 and 2020 totaled
$94.1 million and $82.3 million , respectively. This increase is primarily
related to new debt issuances in late 2020 and 2021 to fund new investments, as
our weighted-average interest rate of 3.4% for the three months ended September
30, 2021 is lower than the 3.8% in the same period in 2020.
Real estate depreciation and amortization during the third quarter of 2021
increased to
Property-related expenses totaled$7.1 million and$5.9 million for the quarters endedSeptember 30, 2021 and 2020, respectively. Approximately$4.0 million represents costs that were reimbursed by our tenants and included in "Interest and other income" line on our condensed consolidated statements of net income for each quarter endedSeptember 30, 2021 and 2020. As a percentage of revenue, general and administrative expenses represented 9.4% for the 2021 third quarter, slightly lower than 9.6% in the prior year. On a dollar basis, general and administrative expenses totaled$36.7 million for the 2021 third quarter, which is a$5.0 million increase from the prior year third quarter and reflective of the growth of the company, in particular our continued international expansion. During the three months endedSeptember 30, 2021 , we disposed of four facilities resulting in a net gain of$9.3 million . During the three months endedSeptember 30, 2020 , we disposed of four facilities and two ancillary properties resulting in a net loss of$0.9 million . 33 -------------------------------------------------------------------------------- Earnings from equity interests was$7.2 million for the quarter endedSeptember 30, 2021 , up$1.3 million from the same period in 2020, primarily due to$1.1 million more income generated on our equity investment in Infracore, which we increased our ownership in during the 2020 fourth quarter. Income tax expense includesU.S. federal and state income taxes on our domestic TRS entities, as well as non-U.S. income based or withholding taxes on certain investments located in jurisdictions outside theU.S. The$10.6 million income tax expense for the three months endedSeptember 30, 2021 is primarily based on the income generated by our investments in theUnited Kingdom ,Colombia , andAustralia . In comparison, we incurred$16.0 million in income tax expense in the third quarter of 2020, primarily from income generated by our investments in theUnited Kingdom , including an adjustment of approximately$9 million to reflect an increase in theUnited Kingdom corporate tax rate from 17% to 19%. Excluding the one-time adjustment for the increase inUnited Kingdom tax rates, the increase in income tax expense is primarily related to an increase in foreign taxable income as a result of investments made in 2020 and 2021. We utilize the asset and liability method of accounting for income taxes. Deferred tax assets are recorded to the extent we believe these assets will more likely than not be realized. In making such determination, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based upon our review of all positive and negative evidence, including our three-year cumulative pre-tax book loss position in certain entities, we concluded that a valuation allowance of approximately$44 million should be reflected against certain of our international and domestic net deferred tax assets atSeptember 30, 2021 . In the future, if we determine that it is more likely than not that we will realize our net deferred tax assets, we will reverse the applicable portion of the valuation allowance, recognize an income tax benefit in the period in which such determination is made, and incur higher income taxes in future periods as income is earned.
Nine Months Ended
Net income for the nine months endedSeptember 30, 2021 , was$449.5 million ($0.76 per diluted share), compared to$321.6 million ($0.61 per diluted share) for the nine months endedSeptember 30, 2020 . This 40% increase in net income is primarily due to incremental revenue from new investments made in late 2020 and the first nine months of 2021, partially offset by higher interest expense (from additional debt to partially finance these new investments), depreciation expense, general and administrative costs, and income taxes due to the growth of the company, including approximately$43 million of income tax expense charged in 2021 related to the increase in corporate tax rates in theUnited Kingdom compared to$9 million in 2020. Normalized FFO, after adjusting for certain items (as more fully described in the "Reconciliation of Non-GAAP Financial Measures"), was$757.3 million for the first nine months of 2021, or$1.29 per diluted share, as compared to$611.5 million , or$1.16 per diluted share, for the first nine months of 2020. Similar to net income, this 24% increase in Normalized FFO is primarily due to incremental revenue from new investments in 2020 and the first half of 2021.
A comparison of revenues for the nine month periods ended
Year over
% of % of Year
2021 Total 2020 Total Change
Rent billed $ 672,425 59.2 % $ 538,277 58.8 % 24.9 %
Straight-line rent 174,975 15.4 % 103,697 11.3 % 68.7 %
Income from financing leases 151,898 13.4 % 157,469 17.2 % -3.5 %
Interest and other income 136,038 12.0 % 115,989 12.7 % 17.3 %
Total revenues $ 1,135,336 100.0 % $ 915,432 100.0 % 24.0 %
Our total revenue for the first nine months of 2021 is up
• Operating lease revenue (includes rent billed and straight-line rent) - up
is incremental revenue from acquisitions made in 2020 and 2021 (including
from proceeds of the mortgage loan conversions in the third quarter of
2020), $23.3 million is from more straight-line rent write-offs in 2020,
of 2020 (as described in Note 3 to the condensed consolidated
financial statements), $19.0 million is from the reclassification of
properties from deferred financing leases to operating leases due to
certain lease modifications in the fourth quarter of 2020,
from capital additions in 2021,
rent on three development properties, and approximately
from favorable foreign currency fluctuations. This increase is partially
offset by lower revenues from disposals and properties vacated since the
2020 third quarter.
34
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• Income from financing leases - down
the reclassification of properties from deferred financing leases to
operating leases due to certain lease modifications in the fourth quarter
of 2020, partially offset by revenue from new financing leases in the 2020
fourth quarter as part of the conversion of
simple asset ownership.
• Interest and other income - up
the following:
o Interest from loans - up $7.9 million over the prior year due to
$73.7 million of incremental revenue earned on loan
investments in
2020 and the first nine months of 2021, including $40.4 million
earned on the two loans made to Priory in 2021 and $15.0 million
from the loans made to the international joint venture and for
three Colombia properties in 2020, along with $0.9 million of
favorable foreign currency fluctuations. This increase ispartially
offset by $30.6 million of lower interest revenue related to
Steward mortgage loans converted to fee simple assets in the third
quarter of 2020, $9.0 million of lower interest revenue related to
Ernest mortgage loans converted to fee simple assets in the fourth quarter of 2020, and$27.6 million related to the repayment of Prime loans in the fourth quarter of 2020. o Other income - up$12.1 million from the prior year as we received more direct reimbursements from our tenants for ground lease, property taxes, and insurance. Additionally, other income is higher in 2021 due to an approximate$1 million write-off of
straight-line
rent related to ground leases on certain Adeptus facilities in the
2020 first quarter.
Interest expense for the nine months ended September 30, 2021 and 2020, totaled
$273.4 million and $243.5 million , respectively. This increase is primarily
related to new debt issuances in 2020 and 2021, as our weighted-average interest
rate of 3.4% for the nine months ended September 30, 2021 was lower than the
3.9% in the same period in 2020.
Real estate depreciation and amortization during the first nine months of 2021
increased to $237.1 million from $192.0 million in the same period of 2020 due
to new investments made after September 30, 2020 .
Property-related expenses totaled $31.3 million and $19.2 million for the nine
months ended September 30, 2021 and 2020, respectively. Of the property expenses
in the first nine months of 2021 and 2020, approximately $23.1 million and $10.9
million , respectively, represents costs that were reimbursed by our tenants and
included in "Interest and other income" line on our condensed consolidated
statements of net income.
As a percentage of revenue, general and administrative expenses represented 9.5%
for the first nine months of 2021, which is lower than the 10.6% in same period
of the prior year. On a dollar basis, general and administrative expenses
totaled $107.3 million for the first nine months of 2021, which is a $10.2
million increase from the same period of the prior year and reflective of the
growth of the company, in particular our continued international expansion.
During the nine months ended September 30, 2021 , we disposed of nine facilities
and one ancillary property resulting in a net gain of $9.0 million . During the
nine months ended September 30, 2020 , we disposed of nine facilities and six
ancillary properties resulting in a net loss of $2.7 million . In addition, we
made a $19.0 million adjustment to lower the carrying value of the real estate
on certain Adeptus properties and one Alecto facility in the first quarter of
2020 (see Note 3 to the condensed consolidated financial statements for
further details).
Earnings from equity interests was $21.6 million for the first nine months of
2021, up $6.4 million from the same period of 2020, primarily due to $4.6
million more income generated on our equity investment in Infracore, which we
increased our ownership in during the 2020 fourth quarter.
Debt refinancing and unutilized financing costs were $2.3 million in the first
nine months of 2021 as a result of the early termination of our January 2021
Interim Credit Facility and the amendment to our Credit Facility in the first
quarter of 2021 (see Note 4 to the condensed consolidated financial
statements for more detail). In the first nine months of 2020, we incurred $0.6
million of accelerated commitment fee amortization expense associated with our
British pound sterling term loan.
In the first nine months of 2021, we recorded a favorable non-cash fair value
adjustment of $2.8 million to mark our investment in Aevis Victoria SA stock to
market. This adjustment (reflected in the "Other" line of our condensed
consolidated statements of net income) was a $5.2 million unfavorable adjustment
in the first nine months of 2020, primarily due to the decline of this stock
during 2020 due to the COVID-19 pandemic.
Income tax expense typically includes U.S. federal and state income taxes on our
TRS entities, as well as non-U.S. income based or withholding taxes on certain
investments located in jurisdictions outside the U.S. The $69.1 million income
tax expense for the nine months ended September 30, 2021 , is primarily based on
the income generated by our investments in the United Kingdom , Colombia , and
Australia , including a one-time adjustment to our net deferred tax liabilities
of approximately $43 million to reflect an increase in the United Kingdom
corporate tax rate from 19% to 25% in the second quarter of 2021. In comparison,
we recorded $24.8
35
-------------------------------------------------------------------------------- million of income tax expense in the first nine months of 2020 from income generated by our investments in theUnited Kingdom andAustralia , including tax adjustments of$9 million to reflect corporate tax rate changes in theUnited Kingdom and elsewhere. Excluding the one-time adjustments for the increase in tax rates, the increase in income tax expense is primarily related to higher foreign taxable income earned as a result of investments made in 2020 and the first nine months of 2021. We utilize the asset and liability method of accounting for income taxes. Deferred tax assets are recorded to the extent we believe these assets will more likely than not be realized. In making such determination, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based upon our review of all positive and negative evidence, including our three-year cumulative pre-tax book loss position in certain entities, we concluded that a valuation allowance of approximately$44 million should be reflected against certain of our international and domestic net deferred tax assets atSeptember 30, 2021 . In the future, if we determine that it is more likely than not that we will realize our net deferred tax assets, we will reverse the applicable portion of the valuation allowance, recognize an income tax benefit in the period in which such determination is made, and incur higher income taxes in future periods as income is earned.
Reconciliation of Non-GAAP Financial Measures
Investors and analysts following the real estate industry utilize funds from operations, or FFO, as a supplemental performance measure. FFO, reflecting the assumption that real estate asset values rise or fall with market conditions, principally adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assumes that the value of real estate diminishes predictably over time. We compute FFO in accordance with the definition provided by theNational Association of Real Estate Investment Trusts , or Nareit, which represents net income (loss) (computed in accordance with GAAP), excluding gains (losses) on sales of real estate and impairment charges on real estate assets, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. In addition to presenting FFO in accordance with the Nareit definition, we disclose normalized FFO, which adjusts FFO for items that relate to unanticipated or non-core events or activities or accounting changes that, if not noted, would make comparison to prior period results and market expectations less meaningful to investors and analysts. We believe that the use of FFO, combined with the required GAAP presentations, improves the understanding of our operating results among investors and the use of normalized FFO makes comparisons of our operating results with prior periods and other companies more meaningful. While FFO and normalized FFO are relevant and widely used supplemental measures of operating and financial performance of REITs, they should not be viewed as a substitute measure of our operating performance since the measures do not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, which can be significant economic costs that could materially impact our results of operations. FFO and normalized FFO should not be considered an alternative to net income (loss) (computed in accordance with GAAP) as indicators of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity. 36 -------------------------------------------------------------------------------- The following table presents a reconciliation of net income attributable to MPT common stockholders to FFO and Normalized FFO for the three and nine months endedSeptember 30, 2021 and 2020 (amounts in thousands except per share data): For the Three Months Ended For the Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 FFO information: Net income attributable to MPT common stockholders $ 171,137 $ 131,106 $ 449,485 $ 321,566 Participating securities' share in earnings (328 ) (435 ) (1,088 ) (1,386 ) Net income, less participating securities' share in earnings $ 170,809 $ 130,671 $ 448,397 $ 320,180 Depreciation and amortization 98,492 80,841 277,089 223,166 (Gain) loss on sale of real estate (9,294 ) 927 (8,896 ) 2,703 Real estate impairment charges - - - 19,006 Funds from operations $ 260,007 $ 212,439 $ 716,590 $ 565,055 Write-off (recovery) of straight-line rent and other 3,650 1,266 (1,601 ) 27,098 Non-cash fair value adjustments (819 ) (1,575 ) (2,763 ) 9,030 Tax rate and other changes - 8,535 42,746 9,661 Debt refinancing and unutilized financing costs - - 2,339 611 Normalized funds from operations $ 262,838 $ 220,665 $ 757,311 $ 611,455 Per diluted share data: Net income, less participating securities' share in earnings $ 0.29 $ 0.25 $ 0.76 $ 0.61 Depreciation and amortization 0.17 0.15 0.48 0.42 (Gain) loss on sale of real estate (0.02 ) - (0.02 ) 0.01 Real estate impairment charges - - - 0.03 Funds from operations $ 0.44 $ 0.40 $ 1.22 $ 1.07 Write-off (recovery) of straight-line rent and other - - - 0.05 Non-cash fair value adjustments - - - 0.02 Tax rate and other changes - 0.01 0.07 0.02 Debt refinancing and unutilized financing costs - - - - Normalized funds from operations $ 0.44 $ 0.41 $ 1.29 $ 1.16 Pro Forma Gross Assets Pro forma gross assets is total assets before accumulated depreciation/amortization (adjusted for our unconsolidated joint ventures) and assumes all real estate commitments on new investments and unfunded amounts on development deals and commenced capital improvement projects as of the applicable reporting periods are fully funded, and assumes cash on hand is used in these transactions. We believe total pro forma gross assets is useful to investors as it provides a more current view of our portfolio and allows for a better understanding of our concentration levels as our commitments close and our other commitments are fully funded. The following table presents a reconciliation of total assets to total pro forma gross assets (in thousands): As of As of September 30, 2021 December 31, 2020 Total assets $ 19,711,987$ 16,829,014 Add: Real estate commitments on new investments(1) 990,002 1,901,087 Unfunded amounts on development deals and commenced capital improvement projects(2) 180,529 166,258 Accumulated depreciation and amortization 936,289 833,529
Incremental gross assets of our joint ventures and other(3)
1,752,842 1,287,077
Less:
Cash used for funding the transactions above(4) (1,445,329 ) (587,384 ) Total pro forma gross assets $ 22,126,320$ 20,429,581
(1) The 2021 column reflects investments made or committed to subsequent to
behavioral health platform across nine states and the commitment to acquire
one facility in
investments made in 2021, including the acquisition of 35 facilities in the
United Kingdom onJanuary 19, 2021 . 37
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(2) Includes
development projects and $149.4 million and $100.8 million of unfunded
amounts on capital improvement projects, as of September 30, 2021 and
December 31, 2020 , respectively.
(3) Includes an adjustment to reflect our share of our joint ventures' gross
assets.
(4) Includes cash available on-hand plus cash generated from activities
subsequent to period-end such as loan repayments or dispositions (including
the Macquarie Transaction discussed in Note 3 to Item 1 to this Form
10-Q).
Adjusted revenues
Adjusted revenues are total revenues adjusted for our pro rata portion of
similar revenues in our real estate joint venture arrangements. We believe
adjusted revenues are useful to investors as it provides a more complete view of
revenues across all of our investments and allows for better understanding of
our revenue concentration. The following table presents a reconciliation of
total revenues to total adjusted revenues (in thousands):
For the Three Months Ended September 30,
2021 2020
Total revenues $ 390,779 $ 329,458
Revenues from real estate properties owned through
joint venture
arrangements 33,129 27,499
Total adjusted revenues $ 423,908 $ 356,957
LIQUIDITY AND CAPITAL RESOURCES
2021 Cash Flow Activity
During the first nine months of 2021, we generated approximately$577 million of cash flows from operating activities, primarily consisting of rent and interest from mortgage and other loans. We used these operating cash flows, along with$11 million received from Steward in the first quarter of 2021 as a return of capital distribution, to fund our dividends of$476 million and certain investment activities. In addition, we invested approximately$3.2 billion in real estate and other assets, including the £1.1 billionPriory Group Transaction (as more fully described in Note 3 to Item 1 of this Form 10-Q), using a combination of cash on-hand and cash generated from the$1.0 billion of net proceeds from the sales of stock during the first nine months of 2021, £850 million from the issuance of senior unsecured notes, approximately$140 million in loan principal repayments, and$650 million in borrowings under theJuly 2021 Interim Credit Facility.
See Note 12 to Item 1 of this Form 10-Q for cash flow activity occurring
subsequent to
2020 Cash Flow Activity
During the first nine months of 2020, we generated approximately$442 million of cash flows from operating activities (which did not include approximately$35 million of revenue earned on the Circle Transaction as such rent was prepaid before the acquisition closed), primarily consisting of rent and interest from mortgage and other loans. We used these operating cash flows to fund our dividends of$423 million . In addition, we invested approximately$2.8 billion in real estate and other assets, including the £1.5 billion Circle Transaction (as more fully described in Note 3 to Item 1 of this Form 10-Q), using a combination of cash on-hand, proceeds from a £700 million British pound sterling term loan, the sale of 15.4 million shares of common stock under our at-the-market equity offering program, resulting in net proceeds of approximately$294 million , and$225 million from our revolving portion of the Credit Facility.
Short-term Liquidity Requirements:
AtNovember 1, 2021 and including receipt of £250 million repaid by Waterland VII pursuant to the Priory acquisition loan (as described in Note 3 to Item 1 of this Form 10-Q) and borrowings to fund new investments made subsequent to September 30, 2021 (as described in Note 12 to Item 1 of this Form 10-Q), our liquidity approximates$1.0 billion . We believe this liquidity along with our current monthly cash receipts from rent and loan interest, regular distributions from our joint venture arrangements, approximately$250 million of availability under our at-the-market equity program, and expected cash proceeds from the Macquarie Transaction of approximately$1.3 billion (as described in Note 3 to Item 1 of this Form 10-Q) is sufficient to fund our operations, dividends in order to comply with REIT requirements, our current firm commitments (capital expenditures and expected funding requirements on development projects), and debt service obligations for the next twelve months (including contractual interest payments and the repayment of the$990 million principal balance outstanding on theJuly 2021 Interim Credit Facility due inJuly 2022 ). We expect that other capital recycling transactions (that could include sales of single facilities) will further improve our liquidity and our leverage ratio, although no assurances can be given that our capital recycling efforts (including the closing of the Macquarie Transaction) will be successful. 38 --------------------------------------------------------------------------------
Long-term Liquidity Requirements:
As ofNovember 1, 2021 , our liquidity approximates$1.0 billion . We believe that our liquidity, along with our current monthly cash receipts from rent and loan interest, regular distributions from our joint venture arrangements, approximately$250 million of availability under our at-the-market equity program, and expected cash proceeds from the Macquarie Transaction of approximately$1.3 billion , is sufficient to fund our operations, debt and interest obligations, our firm commitments, and dividends in order to comply with REIT requirements for the foreseeable future. However, in order to make additional investments, to fund debt maturities coming due starting in 2022 and beyond, to strategically refinance any existing debt in order to reduce interest rates, or to further improve our leverage ratios, we may need to access one or a combination of the following sources of capital: • strategic property sales or joint ventures; • sale of equity securities; • new bank term loans;
• new USD, EUR, or GBP denominated debt securities, including senior
unsecured notes; and/or
• new secured loans on real estate.
There is no assurance that conditions will be favorable for such possible transactions (particularly in light of the ongoing COVID-19 pandemic) or that our plans (including the closing of the Macquarie Transaction) will be successful.
Principal payments due on our debt (which exclude the effects of any discounts, premiums, or debt issue costs recorded) as ofNovember 1, 2021 are as follows (in thousands): 2021 $ - 2022 990,000 2023 547,280 2024 1,632,160 2025 1,535,640 Thereafter 6,861,790 Total$ 11,566,870 Contractual Commitments We presented our contractual commitments in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 and updated the schedule in the second quarter of 2021. Except for changes to our purchase obligations and debt, as more fully described in Note 12 to Item 1 of this Quarterly Report on Form 10-Q, there have been no other significant changes throughNovember 1, 2021 .
The following table updates our contractual commitments schedule for these
updates as of
Contractual Commitments 2021(1) 2022 2023 2024
2025 Thereafter Total
0.993% Senior Unsecured
Notes due
2026(2) $ - $ 5,880 $ 5,738 $ 5,738 $ 5,739 $ 583,639 $ 606,734
Purchase obligations 47,895 188,347 157,012 111,723 77,248 131,945 714,170
(1) This column represents obligations post November 1, 2021 .
(2) We used the proceeds from this offering to redeem all of our outstanding
€500 million aggregate principal amount of 4.000% Senior Unsecured Notes
due 2022 as more fully described in Note 12 to Item 1 of this
Quarterly Report on Form 10-Q.
39
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Distribution Policy
The table below is a summary of our distributions declared during the two year
period ended
Distribution
Declaration Date Record Date Date of Distribution per Share
August 19, 2021 September 16, 2021 October 14, 2021 $ 0.28
May 26, 2021 June 17, 2021 July 8, 2021 $ 0.28
February 18, 2021 March 18, 2021 April 8, 2021 $ 0.28
November 12, 2020 December 10, 2020 January 7, 2021 $ 0.27
August 13, 2020 September 10, 2020 October 8, 2020 $ 0.27
May 21, 2020 June 18, 2020 July 16, 2020 $ 0.27
February 14, 2020 March 12, 2020 April 9, 2020 $ 0.27
November 21, 2019 December 12, 2019 January 9, 2020 $ 0.26
We intend to pay to our stockholders, within the time periods prescribed by the
Internal Revenue Code of 1986, as amended ("Code"), all or substantially all of
our annual taxable income, including taxable gains from the sale of real estate
and recognized gains on the sale of securities. It is our policy to make
sufficient cash distributions to stockholders in order for us to maintain our
status as a REIT under the Code and to avoid corporate income and excise taxes
on undistributed income. However, our Credit Facility limits the amount of
dividends we can pay - see Note 4 in Item 1 to this Form 10-Q for further
information.
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