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, 2021 .
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 theU.S. (both national and local),Europe (in particular theUnited Kingdom ,Germany ,Switzerland ,Spain ,Italy ,Finland , andPortugal ),Australia ,South America (in particularColombia ), and other foreign 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 pursue acquisition 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 the business of our tenants/borrowers and the economy in general, as well as the impact of 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 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 have entered into or will enter into may 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, including due to rising inflation;
•
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
•
our ability to attract and retain qualified personnel;
•
changes in foreign currency exchange rates;
•
changes in federal, state, or local tax laws in theU.S. ,Europe ,Australia ,South America , or other jurisdictions in which we may own healthcare facilities or transact business;
•
healthcare and other regulatory requirements of the
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the accuracy of our methodologies and estimates regarding environmental, social,
and governance ("ESG") metrics and targets, tenant willingness and ability to
collaborate towards reporting ESG metrics and meeting ESG goals and targets, and
the impact of governmental regulation on our and our tenants' ESG efforts.
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, rising inflation, etc.) 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 may consider in underwriting prospective deals and in our ongoing monitoring of our tenants' (and guarantors') performance, as well as the condition of our properties, include, but are not limited to, the following:
•
the scope and breadth of clinical services and programs, including utilization trends (both inpatient and outpatient) by service type;
•
the size and composition of medical staff and physician leadership at our facilities, including specialty, tenure, and number of procedures performed and/or referrals;
•
an evaluation of our operators' administrative team, as applicable, including background and tenure within the healthcare industry;
•
staffing trends, including ratios, turnover metrics, recruitment and retention strategies at corporate and individual facility levels;
•
facility operating performance measured by current, historical, and prospective operating margins (measured by a tenant's earnings before interest, taxes, depreciation, amortization, management fees, and facility rent) of each tenant and at each facility;
•
the ratio of our tenants' operating earnings to facility rent and to other fixed costs, including debt costs;
•
changes in revenue sources of our tenants, including the relative mix of public payors (including Medicare, Medicaid/MediCal, and managed care in theU.S. , as well as equivalent payors inEurope ,Australia , andSouth America ) and private payors (including commercial insurance and private pay patients);
•
historical support (financial or otherwise) from governments and/or other public payor systems during major economic downturns/depressions;
•
trends in tenants' cash collections, including comparison to recorded net patient service revenues;
• tenants' free cash flow;
•
the potential impact of healthcare pandemics/epidemics, legislation, and other regulations (including changes in reimbursement) on our tenants' or borrowers' profitability and liquidity;
•
the potential impact of any legal, regulatory, or compliance proceedings with our tenants;
•
an ongoing assessment of the operating environment of our tenants, including demographics, competition, market position, status of compliance, accreditation, quality performance, and health outcomes as measured by TheCenters for Medicare and Medicaid Services , Joint Commission, and other governmental bodies in which our tenants operate;
•
the level of investment in the hospital infrastructure and health IT systems; and
•
physical real estate due diligence, typically including property condition and Phase 1 environmental assessments, along with annual property inspections thereafter.
Certain business factors, in addition to those described above that may directly affect our tenants and borrowers, will likely materially influence our future results of operations. These factors include:
•
trends in interest rates and other costs due to general inflation and availability and increased costs from labor shortages could adversely impact the operations of our tenants and their ability to meet their lease obligations;
28
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changes in healthcare regulations that may limit the opportunities for physicians to participate in the ownership of healthcare providers and healthcare real estate;
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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 2021 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, investments accounted for under the fair value option election, and our accounting policy on consolidation. During the six months endedJune 30, 2022 , there were no material changes to these policies.
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. From time-to-time, we may make noncontrolling investments in our tenants that gives us a right to share in such tenant's profits and losses and provide for certain minority rights and protections. Our business model facilitates acquisitions and recapitalization, and allows operators of healthcare facilities to unlock the value of their real estate assets to fund facility improvements, technology upgrades, and other investments in operations. AtJune 30, 2022 , our portfolio consisted of 447 properties leased or loaned to 54 operators, of which six are under development and four are in the form of mortgage loans. We manage our business as a single business segment. AtJune 30, 2022 , 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 June 30, % of December 31, % of 2022 Total 2021 Total Real estate assets - at cost$ 16,088,175 81.5 %$ 17,425,765 84.9 % Accumulated real estate depreciation and amortization (1,109,592 ) -5.6 % (993,100 ) -4.8 % Cash and cash equivalents 257,269 1.3 % 459,227 2.2 % Investments in unconsolidated real estate joint ventures 1,460,373 7.4 % 1,152,927 5.6 % Investments in unconsolidated operating entities 1,439,910 7.3 % 1,289,434 6.3 % Other 1,606,949 8.1 % 1,185,548 5.8 % Total assets$ 19,743,084 100.0 %$ 20,519,801 100.0 % 29
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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 ofJune 30, 2022 as compared toDecember 31, 2021 is as follows (dollars in thousands):
Total Pro Forma Gross Assets by Operator
As of June 30, 2022 As of December 31, 2021
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 $ 1,377,996 6.2 % $ 1,304,353 5.8 %
Utah market(1) 1,310,776 5.9 % 1,310,645 5.9 %
Massachusetts market 1,152,118 5.1 % 1,145,493 5.1 %
Texas/Arkansas/Louisiana market 1,115,557 5.0 % 1,112,664 5.0 %
Arizona market 352,325 1.6 % 330,880 1.5 %
Ohio/Pennsylvania market 138,345 0.6 % 138,274 0.6 %
Circle 2,228,804 10.0 % 2,481,001 11.1 %
Prospect 1,751,440 7.9 % 1,631,691 7.3 %
Swiss Medical Network 1,272,123 5.7 % 1,300,431 5.8 %
MEDIAN 1,079,940 4.8 % 1,165,927 5.2 %
Other operators 9,263,644 41.6 % 9,487,405 42.6 %
Other assets 1,241,351 5.6 % 920,573 4.1 %
Total $ 22,284,419 100.0 % $ 22,329,337 100.0 %
(1)
See Note 10 to Item 1 of this Form 10-Q for additional information about
this market.
Total Pro Forma Gross Assets by
As of June 30, 2022 As of December 31, 2021
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 $ 2,090,829 9.4 % $ 2,158,797 9.7 %
California 1,753,744 7.9 % 1,650,038 7.4 %
Florida 1,377,996 6.2 % 1,304,353 5.8 %
Utah 1,346,356 6.0 % 1,346,372 6.0 %
Massachusetts 1,157,518 5.2 % 1,150,893 5.3 %
All other states 5,088,441 22.8 % 5,117,756 22.9 %
Other domestic assets 875,487 3.9 % 692,280 3.1 %
Total U.S. $ 13,690,371 61.4 % $ 13,420,489 60.2 %
United Kingdom $ 4,041,683 18.1 % $ 4,492,918 20.1 %
Switzerland 1,272,123 5.7 % 1,300,431 5.8 %
Germany 1,164,361 5.2 % 1,257,482 5.6 %
Australia 916,603 4.1 % 1,043,399 4.7 %
Spain 323,935 1.5 % 264,965 1.2 %
All other countries 509,479 2.3 % 321,360 1.4 %
Other international assets 365,864 1.7 % 228,293 1.0 %
Total international $ 8,594,048 38.6 % $ 8,908,848 39.8 %
Grand total $ 22,284,419 100.0 % $ 22,329,337 100.0 %
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
30
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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 ended June 30, 2022 as compared to the prior
year is as follows (dollars in thousands):
Total Adjusted Revenues by Operator
For the Three Months Ended June 30,
2022 2021
Percentage of Percentage of
Total Adjusted Total Adjusted Total Adjusted Total Adjusted
Operators Revenues Revenues Revenues Revenues
Steward
Utah market $ 35,808 8.0 % $ 32,693 7.9 %
Florida market 28,263 6.3 % 6,211 1.5 %
Massachusetts market 27,012 6.0 % 37,903 9.1 %
Texas/Arkansas/Louisiana market 21,103 4.7 % 25,240 6.1 %
Arizona market 9,185 2.0 % 8,532 2.0 %
Ohio/Pennsylvania market 3,698 0.8 % 3,799 0.9 %
Circle 47,539 10.6 % 53,584 12.9 %
Prospect 42,364 9.4 % 41,197 9.9 %
Prime 30,131 6.7 % 29,541 7.1 %
MEDIAN 21,728 4.8 % 24,158 5.8 %
Other operators 182,337 40.7 % 152,572 36.8 %
Total $ 449,168 100.0 % $ 415,430 100.0 %
Total Adjusted Revenues by
For the Three Months Ended June 30,
2022 2021
Percentage of Percentage of
Total Adjusted Total Adjusted Total Adjusted Total Adjusted
U.S. States and Other Countries Revenues Revenues Revenues Revenues
California $ 48,109 10.7 % $ 38,305 9.2 %
Texas 41,310 9.2 % 41,868 10.1 %
Utah 36,795 8.2 % 33,701 8.1 %
Florida 28,263 6.3 % 6,786 1.6 %
Massachusetts 27,175 6.0 % 38,062 9.2 %
All other states 125,128 27.9 % 111,546 26.9 %
Total U.S. $ 306,780 68.3 % $ 270,268 65.1 %
United Kingdom $ 79,415 17.7 % $ 82,430 19.8 %
Germany 23,642 5.3 % 26,271 6.3 %
All other countries 39,331 8.7 % 36,461 8.8 %
Total international $ 142,388 31.7 % $ 145,162 34.9 %
Grand total $ 449,168 100.0 % $ 415,430 100.0 %
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Total Adjusted Revenues by Facility Type
For the Three Months Ended June 30,
2022 2021
Percentage of Percentage of
Total Adjusted Total Adjusted Total Adjusted Total Adjusted
Facility Types Revenues Revenues Revenues Revenues
General acute care hospitals $ 339,106 75.5 % $ 330,603 79.6 %
Behavioral health facilities 51,763 11.5 % 25,155 6.0 %
Inpatient rehabilitation facilities 44,201 9.8 % 45,711 11.0 %
Long-term acute care hospitals 8,270 1.9 % 8,302 2.0 %
Freestanding ER/urgent care facilities 5,828 1.3 % 5,659 1.4 %
Total $ 449,168 100.0 % $ 415,430 100.0 %
Results of Operations
Three Months Ended
Net income for the three months endedJune 30, 2022 , was$189.6 million compared to$114.6 million for the three months endedJune 30, 2021 . This 65% increase in net income is primarily due to incremental revenue from new investments made in the second half of 2021 and first half of 2022, gains on the sale of two facilities in the 2022 second quarter, increased earnings from equity interests, and reduced income tax expense due to the unfavorable adjustment in the 2021 second quarter to recognize an increase in theUnited Kingdom corporate income tax rate, partially offset by higher depreciation expense and general and administrative costs. Normalized funds from operations ("FFO"), after adjusting for certain items (as more fully described in the "Reconciliation of Non-GAAP Financial Measures" section of Item 2 of this Quarterly Report on Form 10-Q), was$274.7 million for the 2022 second quarter, or$0.46 per diluted share, as compared to$250.5 million , or$0.43 per diluted share, for the 2021 second quarter. This nearly 10% increase in Normalized FFO is primarily due to incremental revenue from new investments made in 2021 and the first half of 2022.
A comparison of revenues for the three month periods ended
Year over
% of % of Year
2022 Total 2021 Total Change
Rent billed $ 241,209 60.3 % $ 216,870 56.8 % 11.2 %
Straight-line rent 58,518 14.6 % 55,465 14.5 % 5.5 %
Income from financing leases 51,873 13.0 % 50,337 13.2 % 3.1 %
Interest and other income 48,626 12.1 % 59,120 15.5 % -17.8 %
Total revenues $ 400,226 100.0 % $ 381,792 100.0 % 4.8 %
Our total revenues for the 2022 second quarter are up
•
Operating lease revenue (includes rent billed and straight-line rent) - up$27.4 million over the prior year of which approximately$67.6 million is incremental revenue from acquisitions made in 2021 (including approximately$18.0 million each fromSpringstone and theSouth Florida properties leased to Steward, along with$16.0 million from the Priory Group Transaction as described in Note 3 to the condensed consolidated financial statements) and early 2022 (primarily ourFinland acquisition). In addition, rent revenues are up approximately$5 million quarter-over-quarter from increases in CPI above the contractual minimum escalations in our leases,$0.8 million from capital additions in 2022, and$1.4 million from the commencement of rent on a development property in the first quarter of 2022. This increase is partially offset by approximately$39.2 million of lower revenues from disposals in 2021 and early 2022 (including a$30.5 million decrease from the properties disposed of in the Macquarie Transaction as described in Note 3 to the condensed consolidated financial statements and$1.8 million of straight-line rent write-offs associated with non-Macquarie Transaction disposals in the second quarter of 2022) and$8.0 million of unfavorable foreign currency fluctuations. 32 --------------------------------------------------------------------------------
•
Income from financing leases - up
•
Interest and other income - down
o Interest from loans - down$13.3 million over the prior year due to$17.3 million of less interest revenue earned on the Priory loans from the conversion of the £800 million mortgage loan to fee simple assets in the second quarter of 2021 and the repayment of the £250 million acquisition loan in the 2021 fourth quarter as described in Note 3 , lower revenues from other loans that were paid off since the second quarter of 2021, and$2.7 million of unfavorable foreign currency fluctuations. This decrease is partially offset by$7.4 million of incremental revenue earned on new investments includingSpringstone in the 2021 fourth quarter and the Priory syndicated loan inFebruary 2022 and$0.2 million of income from annual escalations due to increases in CPI. o
Other income - up
Interest expense for the quarters endedJune 30, 2022 and 2021 totaled$87.7 million and$92.3 million , respectively. This decrease is related to lowering the interest rate on our €500 million senior unsecured notes tranche inOctober 2021 from 4.000% to 0.993% and foreign currency fluctuations. Our weighted-average interest rate of 3.3% for the quarter endedJune 30, 2022 is lower than the 3.5% in the same period in 2021.
Real estate depreciation and amortization during the second quarter of 2022
increased to
Property-related expenses totaled$21.1 million and$18.7 million for the quarters endedJune 30, 2022 and 2021, respectively. Of the property expenses in the second quarter of 2022 and 2021, approximately$18.3 million and$15.5 million , respectively, represents costs that were reimbursed by our tenants and included in the "Interest and other income" line on our condensed consolidated statements of net income. As a percentage of revenue, general and administrative expenses represented 9.7% for the 2022 second quarter, slightly higher than 9.0% in the prior year. On a dollar basis, general and administrative expenses totaled$38.9 million for the 2022 second quarter, which is a$4.3 million increase from the prior year second quarter. This increase is in line with our continued improvements in ESG, including further board diversification, increased charitable giving, and additional benefits to our employees, along with higher professional fees. These higher expenses were partially offset by a reduction in stock compensation expense by approximately$2 million related to adjusting our expectation from maximum payout to target payout on certain performance awards.
During the three months ended
Earnings from equity interests was$14.8 million for the quarter endedJune 30, 2022 , up$7.4 million from the same period in 2021, primarily due to$5.3 million of income generated on ourMassachusetts -based partnership with MAM entered into duringMarch 2022 and$2.0 million of dividend income we received in the second quarter of 2022 from our Aevis investment (see Note 3 to the condensed consolidated financial statements for more detail). Earnings from our other real estate joint ventures were up quarter-over-quarter as well, which offset the loss of equity interest income from the remaining 50% interest of the IMED joint venture that we acquired duringDecember 2021 and the impact from foreign currency fluctuations.
Debt refinancing and unutilized financing costs were
In the second quarter of 2022, we recorded a favorable non-cash fair value
adjustment of
Income tax expense includesU.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 theU.S. The$10.7 million income tax expense for the three months endedJune 30, 2022 is primarily based on the income generated by our investments in theUnited Kingdom ,Colombia , andAustralia . In comparison, we incurred$50.2 million in income tax expense in the second quarter of 2021, including an adjustment to our net deferred tax liabilities of approximately$43 million to reflect an increase in theUnited Kingdom corporate tax rate from 19% to 25%. 33 -------------------------------------------------------------------------------- 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$76.7 million should be reflected against certain of our international and domestic net deferred tax assets atJune 30, 2022 . 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 tax expense in future periods as income is earned.
Six Months Ended
Net income for the six months endedJune 30, 2022 , was$821.3 million compared to$278.3 million for the six months endedJune 30, 2021 . This 195% increase in net income is primarily due to the gain on sale of real estate in the 2022 first quarter from the Macquarie Transaction as described in Note 3 to the condensed consolidated financial statements, incremental revenue from new investments, and lower tax expense due to the unfavorable adjustment in the 2021 second quarter to recognize an increase in theUnited Kingdom corporate income tax rate, partially offset by higher depreciation expense and general and administrative costs. Normalized funds from operations ("FFO"), after adjusting for certain items (as more fully described in the "Reconciliation of Non-GAAP Financial Measures" section of Item 2 of this Quarterly Report on Form 10-Q), was$557.2 million for the first six months of 2022, or$0.93 per diluted share, as compared to$494.5 million , or$0.85 per diluted share, for the first six months of 2021. This 13% increase in Normalized FFO is primarily due to incremental revenue from new investments made in 2021 and the first half of 2022.
A comparison of revenues for the six month periods ended
Year over
% of % of Year
2022 Total 2021 Total Change
Rent billed $ 504,611 62.3 % $ 430,214 57.8 % 17.3 %
Straight-line rent 119,562 14.8 % 110,338 14.8 % 8.4 %Income from financing leases 103,649 12.8 % 101,231 13.6 %
2.4 %
Interest and other income 82,204 10.1 % 102,774 13.8 % -20.0 %
Total revenues $ 810,026 100.0 % $ 744,557 100.0 % 8.8 %
Our total revenues for the first six months of 2022 are up
•
Operating lease revenue (includes rent billed and straight-line rent) - up$83.6 million over the prior year of which approximately$135 million is incremental revenue from acquisitions made in 2021 (including approximately$35 million each fromSpringstone and theSouth Florida properties leased to Steward, along with$34 million from the Priory Group Transaction as described in Note 3 to the condensed consolidated financial statements) and the first half of 2022 (primarily ourFinland acquisition). In addition, rent revenues are up approximately$11 million period-over-period from increases in CPI above the contractual minimum escalations in our leases,$1.0 million from capital additions in 2022, and$1.8 million from the commencement of rent on a development property in the first quarter of 2022. This increase is partially offset by approximately$54.5 million of lower revenues from disposals in 2021 and the first half of 2022 (including a$34.6 million decrease from the properties disposed of in the Macquarie Transaction as described in Note 3 to the condensed consolidated financial statements and$6.3 million of straight-line rent write-offs associated with non-Macquarie Transaction disposals in the first half of 2022) and$10.9 million of unfavorable foreign currency fluctuations.
•
Income from financing leases - up
•
Interest and other income - down
o Interest from loans - down$26.2 million over the prior year due to approximately$33 million of less interest revenue earned on the Priory loans from the conversion of the £800 million mortgage loan to fee simple assets in the second quarter of 2021 and the repayment of the £250 million acquisition loan in the 2021 fourth quarter as described in Note 3 , lower revenues from other loans that were paid off sinceJune 2021 , and$3.6 million of unfavorable foreign currency fluctuations. This decrease is partially offset by$12.9 million of 34 -------------------------------------------------------------------------------- incremental revenue earned on new investments includingSpringstone in the 2021 fourth quarter and the Priory syndicated loan inFebruary 2022 and higher income from annual escalations due to increases in CPI. o
Other income - up
Interest expense for the six months endedJune 30, 2022 and 2021 totaled$178.9 million and$179.3 million , respectively. This decrease is related to lowering the interest rate on our €500 million senior unsecured notes tranche inOctober 2021 from 4.000% to 0.993% and foreign currency fluctuations. Overall, our weighted-average interest rate of 3.2% for the six months endedJune 30, 2022 is lower than the 3.4% in the same period in 2021. Real estate depreciation and amortization during the first six months of 2022 increased to$169.7 million from$152.0 million in the same period of 2021 due to new investments made afterJune 30, 2021 , partially offset by foreign currency fluctuations. Property-related expenses totaled$29.7 million and$24.1 million for the six months endedJune 30, 2022 and 2021, respectively. Of the property expenses in the first six months of 2022 and 2021, approximately$24.6 million and$19.0 million , respectively, represents costs that were reimbursed by our tenants and included in the "Interest and other income" line on our condensed consolidated statements of net income. As a percentage of revenue, general and administrative expenses represented 9.9% for the first six months of 2022, slightly higher than 9.5% in the prior year. On a dollar basis, general and administrative expenses totaled$80.3 million for the first six months of 2022, which is a$9.7 million increase from the same period in 2021. This increase reflects continued ESG efforts in additional charitable giving, further board diversification, and additional benefits to our employees, along with higher professional expenses. Compensation expense was slightly lower overall compared to 2021 as the cost of additional non-executives headcount and benefits were more than offset by a reduction in stock compensation expense by$2 million from adjusting our payout expectations on certain performance awards. During the six months endedJune 30, 2022 , we completed the partnership with MAM in which we sold the real estate of eightMassachusetts -based general acute care hospitals, resulting in a gain on real estate of approximately$600 million , partially offset by approximately$125 million of write-offs of non-cash straight-line rent receivables. We also disposed of four other facilities and two ancillary properties resulting in a net gain of$31 million . During the six months endedJune 30, 2021 , we sold five facilities and one ancillary property resulting in a net loss of$0.4 million . Earnings from equity interests was$22.1 million for the six months endedJune 30, 2022 , up$7.7 million from the same period in 2021, primarily due to$6.5 million of income generated on ourMassachusetts -based partnership with MAM entered into duringMarch 2022 and$2.0 million of dividend income we received in the second quarter of 2022 from our Aevis investment (see Note 3 to the condensed consolidated financial statements for more detail). Earnings from our other real estate joint ventures were up compared to last year as well, which partially offset the loss of equity interest income from the remaining 50% interest of the IMED joint venture that we acquired duringDecember 2021 and the impact from foreign currency fluctuations. Debt refinancing and unutilized financing costs were$9.4 million and$2.3 million for the six months endedJune 30, 2022 and 2021, respectively. The costs incurred in 2022 were a result of the termination of our$1 billion interim credit facility inMarch 2022 and the amendment of our Credit Facility in the second quarter of 2022 (see Note 4 to the condensed consolidated financial statements for more detail). The costs incurred in 2021 were primarily the result of the early termination of our$900 million interim credit facility (see
Note 4 to the condensed consolidated financial statements for more detail).
In the first six months of 2022, we recorded a favorable non-cash fair value adjustment of$9.0 million on our investment in Aevis and other investments marked to fair value compared to a$1.9 million favorable adjustment for the same period in 2021. Income tax expense includesU.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 theU.S. The$22.0 million income tax expense for the six months endedJune 30, 2022 is primarily based on the income generated by our investments in theUnited Kingdom ,Colombia , andAustralia . In comparison, we incurred$58.5 million in income tax expense in the same period of 2021, including an adjustment to our net deferred tax liabilities of approximately$43 million to reflect an increase in theUnited Kingdom corporate tax rate from 19% to 25%. 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 35 -------------------------------------------------------------------------------- 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$76.7 million should be reflected against certain of our international and domestic net deferred tax assets atJune 30, 2022 . 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 tax expense 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. The following table presents a reconciliation of net income attributable to MPT common stockholders to FFO and Normalized FFO for the three and six months endedJune 30, 2022 and 2021 (amounts in thousands except per share data): For the Three Months Ended For the Six Months Ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 FFO information: Net income attributable to MPT common stockholders$ 189,597 $ 114,565 $ 821,278 $ 278,348 Participating securities' share in earnings (345 ) (390 ) (747 ) (760 ) Net income, less participating securities' share in earnings$ 189,252 $ 114,175 $ 820,531 $ 277,588 Depreciation and amortization 101,976 90,061 201,435 178,597 (Gain) loss on sale of real estate and other, net (16,355 ) 1,387 (467,993 ) 398 Funds from operations$ 274,873 $ 205,623 $ 553,973 $ 456,583 Write-off (recovery) of straight-line rent and other 977 (13 ) 3,581 (5,251 ) Non-cash fair value adjustments (943 ) 2,121 (8,966 ) (1,944 ) Tax rate changes (825 ) 42,746 (825 ) 42,746 Debt refinancing and unutilized financing costs 619 70 9,435 2,339 Normalized funds from operations$ 274,701 $ 250,547 $ 557,198 $ 494,473 Per diluted share data: Net income, less participating securities' share in earnings $ 0.32 $ 0.19 $ 1.37 $ 0.48 Depreciation and amortization 0.17 0.16 0.33 0.30 (Gain) loss on sale of real estate and other, net (0.03 ) - (0.78 ) - Funds from operations $ 0.46 $ 0.35 $ 0.92 $ 0.78 Write-off (recovery) of straight-line rent and other - - - - Non-cash fair value adjustments - - (0.01 ) - Tax rate changes - 0.08 - 0.07 Debt refinancing and unutilized financing costs - - 0.02 -
Normalized funds from operations $ 0.46 $ 0.43 $ 0.93 $ 0.85
36
--------------------------------------------------------------------------------Total Pro Forma Gross Assets
Total pro forma gross assets is total assets before accumulated
depreciation/amortization (adjusted for our unconsolidated joint ventures) and
assumes material real estate commitments on new investments are fully funded,
and assumes cash on-hand at period-end and cash generated from or to be
generated from financing activities subsequent to period-end are either used in
these transactions or used to reduce debt. 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. The following table presents a reconciliation of total
assets to total pro forma gross assets (in thousands):
As of As of
June 30, 2022 December 31, 2021
Total assets $ 19,743,084 $ 20,519,801
Add:
Accumulated depreciation and amortization 1,109,592 993,100
Incremental gross assets of our joint ventures and other(1) 1,689,012 1,713,603 Less: Cash on hand(2) (257,269 ) (897,167 ) Total pro forma gross assets$ 22,284,419 $ 22,329,337 (1) Adjustment to reflect our share of our joint ventures' gross assets and certain lease intangible assets. (2) Includes cash available on-hand plus cash generated from activities subsequent to period-end, if applicable, such as loan repayments, issuances of debt or equity, or dispositions.
Total Adjusted Revenues
Total adjusted revenues are total revenues adjusted for our pro rata portion of
similar revenues in our real estate joint venture arrangements. We believe total
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 June 30,
2022 2021
Total revenues $ 400,226 $ 381,792
Revenues from real estate properties owned through
joint venture
arrangements 48,942 33,638
Total adjusted revenues $ 449,168 $ 415,430
LIQUIDITY AND CAPITAL RESOURCES
2022 Cash Flow Activity
During the first half of 2022, we generated approximately$344.0 million of cash flows from operating activities (which did not include approximately$27 million of dividends received early in the third quarter of 2022 related to our investments in unconsolidated real estate joint ventures), primarily consisting of rent and interest from mortgage and other loans. We used these operating cash flows along with cash on-hand to fund our dividends of$350.5 million . During the first six months of 2022, we received approximately$1.8 billion of proceeds from disposals (including the Macquarie Transaction as described in Note 3 to Item 1 of this Form 10-Q). We used these proceeds, along with additional advances from our revolver, to pay off ourJuly 2021 Interim Credit Facility, fund$0.8 billion of new acquisitions, and make other investments. We exercised the$500 million accordion feature to our revolving credit facility during the first six months of 2022 and extended the term on both the revolver and term loan portions of our Credit Facility - see Note 4 to Item 1 of this Form 10-Q for additional details.
If the Prime purchase option described in Note 3 to Item 1 of this Form 10-Q
is consummated, we expect to generate approximately
2021 Cash Flow Activity
During the first half of 2021, we generated$365.3 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 as a 37 -------------------------------------------------------------------------------- return of capital distribution, to fund our dividends of$311.1 million and certain investment activities. In addition, we invested approximately$2.0 billion in real estate and other assets, including the £1.1 billionPriory Group Transaction in January 2021 (as more fully described in Note 3 to Item 1 of this Form 10-Q), using a combination of cash on-hand generated from the$900.6 million of net proceeds from the sales of stock during the first half of 2021 and £850 million from the issuance of senior unsecured notes.
Short-term Liquidity Requirements:
AtAugust 5, 2022 , our liquidity approximates$1.1 billion . We believe this liquidity, along with our current monthly cash receipts from rent and loan interest and regular distributions from our joint venture arrangements 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). If Prime were to exercise its purchase option on the 11 properties (as described in Note 3 to Item 1 of this Form 10-Q), we would have$370 million of additional liquidity.
Long-term Liquidity Requirements:
As ofAugust 5, 2022 , our liquidity approximates$1.1 billion . We believe that our liquidity, along with monthly cash receipts from rent and loan interest (of which 99% of such leases and mortgage loans include escalation provisions that compound annually), and regular distributions from our joint venture arrangements 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. If Prime were to exercise its purchase option on the 11 properties (as described in Note 3 to Item 1 of this Form 10-Q), we would have$370 million of additional liquidity. However, in order to make additional investments, to fund debt maturities coming due in 2023 and beyond (as outlined below), 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.
However, there is no assurance that conditions will be favorable for such possible transactions or that our plans will be successful.
Principal payments due on our debt (which exclude the effects of any discounts, premiums, or debt issue costs recorded) as ofAugust 5, 2022 are as follows (in thousands): 2022 $ - 2023 482,920 2024 829,320 2025 1,354,260 2026 2,625,430 Thereafter 4,946,935 Total$ 10,238,865 Contractual Commitments We presented our contractual commitments in our 2021 Annual Report on Form 10-K and provided an update in our Quarterly Report on Form 10-Q for the period endedMarch 31, 2022 . Except for changes to our debt as noted below, there have been no other significant changes throughAugust 5, 2022 .
The following table updates our contractual commitments schedule for these
updates as of
Contractual Commitments 2022(1) 2023 2024 2025
2026 Thereafter Total
Revolving credit facility $ 12,214 $ 30,115 $ 30,115 $ 30,115 $ 1,027,604 $ - $ 1,130,163
Term loan 2,913 7,184 7,204 7,184 7,184 203,563 235,232
38--------------------------------------------------------------------------------
(1)
This column represents obligations post
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 May 26, 2022 June 16, 2022 July 14, 2022 $ 0.29 February 17, 2022 March 17, 2022 April 14, 2022 $ 0.29 November 11, 2021 December 9, 2021 January 13, 2022 $ 0.28 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 It is our policy to make sufficient cash distributions to stockholders in order for us to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended, and to efficiently manage 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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