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 the business 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
29 --------------------------------------------------------------------------------
•
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.
30 -------------------------------------------------------------------------------- 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;
•
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 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 nine months endedSeptember 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, typically in conjunction with larger real estate transactions with the tenant, that give 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 recapitalizations, 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.
At
AtSeptember 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 September 30, % of December 31, % of 2022 Total 2021 Total Real estate assets - at cost$ 15,353,817 80.6 %$ 17,425,765 84.9 % Accumulated real estate depreciation and amortization (1,088,912 ) -5.7 % (993,100 ) -4.8 % Cash and cash equivalents 299,171 1.6 % 459,227 2.2 % Investments in unconsolidated real estate joint ventures 1,422,010 7.5 % 1,152,927 5.6 % Investments in unconsolidated operating entities 1,428,061 7.5 % 1,289,434 6.3 % Other 1,629,269 8.5 % 1,185,548 5.8 % Total assets$ 19,043,416 100.0 %$ 20,519,801 100.0 % 31
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Additional Concentration Details
On an adjusted 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 ofSeptember 30, 2022 as compared toDecember 31, 2021 is as follows (dollars in thousands):
Total Adjusted Gross Assets by Operator
As of September 30, 2022 As of December 31, 2021 Percentage of Percentage of Total Adjusted Total Adjusted Total Adjusted Total Adjusted Operators Gross Assets Gross Assets Gross Assets Gross Assets Steward Florida market$ 1,379,515 6.5 %$ 1,304,353 5.8 % Utah market(1) 1,311,322 6.2 % 1,310,645 5.9 % Massachusetts market 1,166,357 5.5 % 1,145,493 5.1 % Texas/Arkansas/Louisiana market 1,143,074 5.4 % 1,112,664 5.0 % Arizona market 354,681 1.7 % 330,880 1.5 % Ohio/Pennsylvania market 138,345 0.7 % 138,274 0.6 % Circle 2,044,259 9.7 % 2,481,001 11.1 % LifePoint(2) 1,405,194 6.7 % 658,084 2.9 % Prospect(2) 1,266,565 6.0 % 1,631,691 7.3 % Swiss Medical Network 1,215,813 5.8 % 1,300,431 5.8 % Other operators 8,049,413 38.1 % 9,995,248 44.9 % Other assets 1,615,504 7.7 % 920,573 4.1 % Total$ 21,090,042 100.0 %$ 22,329,337 100.0 % (1)
The 2021 columns reflect Steward's concentration post termination of their agreement with HCA as discussed in Note 10 to Item 1 of this Form 10-Q.
(2)
See Note 10 and Note 11 to Item 1 of this Form 10-Q along with the footnotes to the total adjusted gross assets reconciliation table on page 39 for additional information on expected transactions that have resulted in adjustments made in this table for this operator.
Total Adjusted Gross Assets by
As of September 30, 2022 As of December 31, 2021 Percentage of Percentage of Total Adjusted Total Adjusted Total Adjusted Total Adjusted U.S. States and Other Countries Gross Assets Gross Assets Gross Assets Gross Assets Texas$ 2,119,353 10.1 %$ 2,158,797 9.7 % California 1,524,532 7.2 % 1,650,038 7.4 % Florida 1,379,515 6.5 % 1,304,353 5.8 % Utah 1,346,968 6.4 % 1,346,372 6.0 % Massachusetts 1,171,757 5.6 % 1,150,893 5.3 % All other states 4,250,059 20.1 % 5,117,756 22.9 % Other domestic assets 1,240,358 5.9 % 692,280 3.1 % Total U.S.$ 13,032,542 61.8 %$ 13,420,489 60.2 % United Kingdom$ 3,709,224 17.6 %$ 4,492,918 20.1 % Switzerland 1,215,813 5.8 % 1,300,431 5.8 % Germany 1,098,247 5.2 % 1,257,482 5.6 % Australia 857,766 4.1 % 1,043,399 4.7 % Spain 304,960 1.4 % 264,965 1.2 % All other countries 496,344 2.3 % 321,360 1.4 % Other international assets 375,146 1.8 % 228,293 1.0 % Total international$ 8,057,500 38.2 %$ 8,908,848 39.8 % Grand total$ 21,090,042 100.0 %$ 22,329,337 100.0 %
On an individual property basis, we had no investment in any single property
greater than 3% of our total adjusted gross assets as of
32 -------------------------------------------------------------------------------- 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, 2022 as compared to the prior year is as follows (dollars in thousands):
Total Adjusted Revenues by Operator
For the Three Months Ended September 30, 2022 2021 Percentage of Percentage of Total Adjusted Total Adjusted Total Adjusted Total Adjusted Operators Revenues Revenues Revenues Revenues Steward Utah market $ 34,192 8.6 % $ 31,879 7.5 % Florida market 26,079 6.6 % 16,929 4.0 % Massachusetts market 22,688 5.7 % 35,965 8.5 % Texas/Arkansas/Louisiana market 22,027 5.5 % 21,740 5.1 % Arizona market 8,826 2.2 % 8,126 1.9 % Ohio/Pennsylvania market 3,589 0.9 % 3,236 0.8 % Circle 45,531 11.5 % 52,612 12.4 % Prospect 44,505 11.2 % 37,864 8.9 % Springstone 21,960 5.5 % - - MEDIAN 20,605 5.2 % 23,689 5.6 % Other operators 147,334 37.1 % 191,868 45.3 % Total$ 397,336 100.0 %$ 423,908 100.0 %
Total Adjusted Revenues by
For the Three Months Ended September 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 Texas $ 41,572 10.5 % $ 38,007 9.0 % Utah 34,701 8.7 % 32,837 7.7 % Florida 25,572 6.4 % 17,479 4.1 % Massachusetts 22,776 5.7 % 36,123 8.5 % Pennsylvania 19,450 4.9 % 19,972 4.7 % All other states 116,871 29.5 % 128,038 30.3 % Total U.S.$ 260,942 65.7 %$ 272,456 64.3 % United Kingdom $ 76,191 19.2 % $ 90,141 21.3 % Germany 22,414 5.6 % 25,755 6.1 % All other countries 37,789 9.5 % 35,556 8.3 % Total international$ 136,394 34.3 %$ 151,452 35.7 % Grand total$ 397,336 100.0 %$ 423,908 100.0 % 33
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Total Adjusted Revenues by Facility Type
For the Three
Months Ended
2022 2021 Percentage of Percentage of Total Adjusted Total
Adjusted Total Adjusted Total Adjusted Facility Types
Revenues Revenues Revenues Revenues General acute care hospitals$ 290,627 73.1 %$ 334,239 78.8 % Behavioral health facilities 50,243 12.7 % 32,843 7.8 % Inpatient rehabilitation facilities 42,566 10.7 % 44,825 10.6 % Long-term acute care hospitals 7,950 2.0 % 8,120 1.9 % Freestanding ER/urgent care facilities 5,950 1.5 % 3,881 0.9 % Total$ 397,336 100.0 %$ 423,908 100.0 % Results of Operations
Three Months Ended
Net income for the three months endedSeptember 30, 2022 , was$221.8 million ($0.37 per diluted share) compared to$171.1 million ($0.29 per diluted share) for the three months endedSeptember 30, 2021 . This 30% increase in net income is primarily due to the gain on sale of real estate from the Prime repurchase transaction, net of straight-line rent write-offs; theWatsonville Community Hospital recovery, net of income tax expense; reduced interest expense, and increased earnings from equity interests. 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$272.3 million for the 2022 third quarter, or$0.45 per diluted share, as compared to$262.8 million , or$0.44 per diluted share, for the 2021 third quarter. This 4% increase in Normalized FFO is primarily due to increased earnings in equity interests and reduced interest expense.
A comparison of revenues for the three month periods ended
Year over % of % of Year 2022 Total 2021 Total Change Rent billed$ 232,418 66.0 %$ 242,211 62.0 % -4.0 % Straight-line rent 26,552 7.5 % 64,637 16.5 % -58.9 % Income from financing leases 51,011 14.5 % 50,667 13.0 % 0.7 % Interest and other income 42,358 12.0 % 33,264 8.5 % 27.3 % Total revenues$ 352,339 100.0 %$ 390,779 100.0 % -9.8 %
Our total revenues for the 2022 third quarter are down
•
Operating lease revenue (includes rent billed and straight-line rent) - down$47.9 million over the prior year of which approximately$72.7 million of lower revenues is from disposals in 2021 and the first nine months of 2022 (including a$31.1 million decrease from the properties disposed of in the Macquarie Transaction as described in Note 3 to the condensed consolidated financial statements, along with lower revenues due to Prime's repurchase transaction, including approximately$35 million of straight-line rent and other write-offs) and$13.9 million of unfavorable foreign currency fluctuations. This decrease is partially offset by approximately$29 million in incremental revenue from acquisitions made in 2021 (including approximately$17.5 million fromSpringstone ) and 2022 (primarily ourFinland acquisition). In addition, rent revenues are up approximately$7 million quarter-over-quarter from increases in CPI above the contractual minimum escalations in our leases,$0.2 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.
•
Income from financing leases - up$0.3 million as 2022 annual rent escalations exceeded lease contractual minimums due to the increase in CPI, partially offset by$1.2 million of lower revenues from the disposal of two financing leases related to the Prime repurchase transaction. 34 --------------------------------------------------------------------------------
•
Interest and other income - up
o Interest from loans - up$7.5 million over the prior year due to$14.1 million of incremental revenue earned on new investments, includingSpringstone in the 2021 fourth quarter, the Priory syndicated loan inFebruary 2022 , and the Prospect and Steward loans made in the 2022 second quarter, along with annual escalations due to increases in CPI. This increase is partially offset by$5.0 million from loan payoffs, including 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 to the condensed consolidated financial statements, and$1.8 million of unfavorable foreign currency fluctuations. o
Other income - up
Interest expense for the quarters endedSeptember 30, 2022 and 2021 totaled$88.1 million and$94.1 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%, the payoff of ourJuly 2021 Interim Credit Facility (which resulted in$1.6 million of interest expense in the 2021 third quarter) inMarch 2022 with proceeds from the Macquarie Transaction, and foreign currency fluctuations, partially offset by an increase in interest rates on our Credit Facility compared to the prior year. Our weighted-average interest rate of 3.4% for the quarter endedSeptember 30, 2022 is similar to the weighted-average interest rate for the same period in 2021. Real estate depreciation and amortization during the third quarter of 2022 decreased to$81.9 million from$85.0 million in 2021 due to foreign currency fluctuations and property sales in 2022 as described in Note 3 to the condensed consolidated financial statements, partially offset by new investments made afterSeptember 30, 2021 . Property-related expenses totaled$8.3 million and$7.1 million for the quarters endedSeptember 30, 2022 and 2021, respectively. Of the property expenses in the third quarter of 2022 and 2021, approximately$5.6 million and$4.0 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 10.6% for the 2022 third quarter, slightly higher than 9.4% in the prior year due to lower revenues from the property sales in 2022 (including$35 million of write-offs of straight-line rent) as described in Note 3 to the condensed consolidated financial statements. On a dollar basis, general and administrative expenses totaled$37.3 million for the 2022 third quarter, basically flat with the prior year third quarter.
During the three months ended
Earnings from equity interests was$11.5 million for the quarter endedSeptember 30, 2022 , up$4.3 million from the same period in 2021, primarily due to$3.6 million of income generated on ourMassachusetts -based partnership with MAM entered into duringMarch 2022 (part of the Macquarie Transaction) and approximately$2.0 million of dividend income we received in the third quarter of 2022 from our equity interest inSwiss Medical Network . These earnings were partially offset by 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.
Other income for the 2022 third quarter included a credit loss recovery of
approximately
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$18.6 million income tax expense for the three months endedSeptember 30, 2022 is primarily based on the income generated by our investments in theUnited Kingdom ,Colombia , andAustralia , as well as approximately$5 million of income tax expense associated with the Watsonville loan repayment in the third quarter of 2022 (see Note 3 and Note 5 to the condensed consolidated financial statements for more detail). In comparison, we incurred$10.6 million in income tax expense in the third quarter 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 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$74.1 million should be reflected against certain of our international and domestic net deferred tax assets atSeptember 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.
Nine Months Ended
Net income for the nine months endedSeptember 30, 2022 , was$1.0 billion ($1.74 per diluted share) compared to$449.5 million ($0.76 per diluted share) for the nine months endedSeptember 30, 2021 . This 132% increase in net income is primarily due to gains on sales of real estate in 2022 (including 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$829.5 million for the first nine months of 2022, or$1.38 per diluted share, as compared to$757.3 million , or$1.29 per diluted share, for the first nine months of 2021. This 10% increase in Normalized FFO is primarily due to incremental revenue from new investments made in 2021 and the first nine months of 2022.
A comparison of revenues for the nine month periods ended
Year over % of % of Year 2022 Total 2021 Total Change Rent billed$ 737,029 63.4 %$ 672,425 59.2 % 9.6 % Straight-line rent 146,114 12.6 % 174,975 15.4 % -16.5 % Income from financing leases 154,660 13.3 % 151,898 13.4 % 1.8 % Interest and other income 124,562 10.7 % 136,038 12.0 % -8.4 % Total revenues$ 1,162,365 100.0 %$ 1,135,336 100.0 % 2.4 %
Our total revenues for the first nine months of 2022 are up
•
Operating lease revenue (includes rent billed and straight-line rent) - up$35.7 million over the prior year of which approximately$160 million is incremental revenue from acquisitions made in 2021 (including approximately$50 million fromSpringstone ) and the first nine months of 2022 (primarily ourFinland acquisition). In addition, rent revenues are up approximately$18 million period-over-period from increases in CPI above the contractual minimum escalations in our leases,$1.2 million from capital additions in 2022, and$3.3 million from the commencement of rent on a development property in the first quarter of 2022. This increase is partially offset by approximately$127.4 million of lower revenues from disposals in 2021 and the first nine months of 2022 (including a$65.7 million decrease from the properties disposed of in the Macquarie Transaction as described in Note 3 to the condensed consolidated financial statements and approximately$42 million of straight-line rent and other write-offs associated with non-Macquarie Transaction disposals in the first nine months of 2022) and$23.6 million of unfavorable foreign currency fluctuations.
•
Income from financing leases - up$2.8 million as 2022 annual rent escalations exceeded lease contractual minimums due to the increase in CPI, partially offset by$1.2 million of lower revenues from the disposal of two financing leases related to the Prime repurchase transaction in the 2022 third quarter.
•
Interest and other income - down
o Interest from loans - down$18.7 million over the prior year due to approximately$40.4 million from loan payoffs, including$36.7 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 , and approximately$6 million of unfavorable foreign currency fluctuations. This decrease is partially offset by$27.2 million of incremental 36 --------------------------------------------------------------------------------
revenue earned on new investments including
o
Other income - up
Interest expense for the nine months endedSeptember 30, 2022 and 2021 totaled$267.0 million and$273.4 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, partially offset by increasing interest rates on our Credit Facility during 2022. Overall, our weighted-average interest rate of 3.3% for the nine months endedSeptember 30, 2022 is lower than the 3.4% in the same period in 2021. Real estate depreciation and amortization during the first nine months of 2022 increased to$251.5 million from$237.1 million in the same period of 2021 due to new investments made afterSeptember 30, 2021 , partially offset by a decrease due to property sales in 2022 as described in Note 3 to the condensed consolidated financial statements and foreign currency fluctuations. Property-related expenses totaled$38.0 million and$31.3 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Of the property expenses in the first nine months of 2022 and 2021, approximately$30.2 million and$23.1 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 10.1% for the first nine months of 2022, slightly higher than 9.5% in the prior year. On a dollar basis, general and administrative expenses totaled$117.6 million for the first nine months of 2022, which is a$10.3 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-executive headcount and benefits were more than offset by a reduction in stock compensation expense from adjusting our payout expectations on certain performance awards. During the nine months endedSeptember 30, 2022 , we realized$536.8 million from the sales of real estate, including the completion of 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 11 facilities related to the Prime repurchase transaction, resulting in a gain on real estate of approximately$67 million . In addition, we disposed of four other facilities and five ancillary properties, resulting in a net gain of$33 million . During the nine months endedSeptember 30, 2021 , we sold nine facilities and one ancillary property resulting in a net gain of$9.0 million . Earnings from equity interests was$33.6 million for the nine months endedSeptember 30, 2022 , up$12.0 million from the same period in 2021. This increase is primarily due to$10.1 million of income generated on ourMassachusetts -based partnership with MAM entered into duringMarch 2022 (part of the Macquarie Transaction) and approximately$4 million of dividend income we received in 2022 from ourSwitzerland investments, partially offset by 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$9.5 million and$2.3 million for the nine months endedSeptember 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). Other income for the first nine months of 2022 was$35.5 million and included a credit loss recovery of approximately$20 million related to loans repaid by Watsonville Community Hospital (see Note 3 to the condensed consolidated financial statements for more detail). In addition, we recorded a favorable non-cash fair value adjustment of$12.6 million on our investment in Aevis and other investments marked to fair value during 2022 compared to a$2.8 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$40.6 million income tax expense for the nine months endedSeptember 30, 2022 is primarily based on the income generated by our investments in theUnited Kingdom ,Colombia , andAustralia , as well as tax expense associated with theWatsonville loan repayment (see Note 3 and Note 5 to the condensed consolidated financial statements for more detail). In comparison, we incurred$69.1 million in income tax expense in the same period 37 --------------------------------------------------------------------------------
of 2021, including an adjustment to our net deferred tax liabilities of
approximately
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$74.1 million should be reflected against certain of our international and domestic net deferred tax assets atSeptember 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. 38 --------------------------------------------------------------------------------
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
ended
For the Three Months Ended For the Nine Months Ended September September September 30, September 30, 2022 30, 2021 2022 30, 2021 FFO information: Net income attributable to MPT common stockholders$ 221,793 $ 171,137 $ 1,043,071 $ 449,485 Participating securities' share in earnings (288 ) (328 ) (1,035 ) (1,088 ) Net income, less participating securities' share in earnings$ 221,505 $ 170,809 $ 1,042,036 $ 448,397 Depreciation and amortization 99,296 98,492 300,731 277,089 Gain on sale of real estate and other, net (68,795 ) (9,294 ) (536,788 ) (8,896 ) Funds from operations$ 252,006 $ 260,007 $ 805,979 $ 716,590 Write-off (recovery) of straight-line rent and other, net of tax 23,863 (1) 3,650 27,444 (1,601 ) Non-cash fair value adjustments (3,597 ) (819 ) (12,563 ) (2,763 ) Tax rate changes - - (825 ) 42,746 Debt refinancing and unutilized financing costs 17 - 9,452 2,339
Normalized funds from operations
$ 829,487 $ 757,311 Per diluted share data: Net income, less participating securities' share in earnings$ 0.37 $ 0.29 $ 1.74 $ 0.76 Depreciation and amortization 0.16 0.17 0.50 0.48 Gain on sale of real estate and other, net (0.11 ) (0.02 ) (0.90 ) (0.02 ) Funds from operations$ 0.42 $ 0.44 $ 1.34 $ 1.22 Write-off (recovery) of straight-line rent and other, net of tax 0.04 - 0.04 - Non-cash fair value adjustments (0.01 ) - (0.02 ) - Tax rate changes - - - 0.07 Debt refinancing and unutilized financing costs - - 0.02 -
Normalized funds from operations
(1)
Includes the write-off of non-cash rent related to the Prime repurchase
transaction, partially offset by the credit loss recovery on the loans made to
the
Total Adjusted Gross Assets
Total adjusted gross assets is total assets before accumulated depreciation/amortization (adjusted for our investments in unconsolidated real estate joint ventures), assumes material transaction commitments are completed, and assumes cash on hand at period-end and cash generated from or to be generated from transaction commitments or financing activities subsequent to period-end are either used in these transactions or used to reduce debt. We believe total adjusted 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 adjusted gross assets (in thousands): As of As of September 30, 2022 December 31, 2021 Total assets$ 19,043,416 $ 20,519,801 Add: Accumulated depreciation and amortization 1,088,912
993,100
Add: Incremental gross assets of our Investments in
Unconsolidated Real Estate Joint Ventures (1) 1,604,762
1,713,603
Net: Reclassification between operators(2) - - Less: Gross book value of the transactions, net(3) (686,057 ) (437,940 ) Increase (decrease) in cash from the transactions(4) 39,009 (459,227 ) Total adjusted gross assets$ 21,090,042 $ 22,329,337 (1) Reflects an addition to total assets to present our total share of each joint venture's gross assets. See below for details of the calculation. While we do not control any of our unconsolidated real estate joint venture arrangements and do not have direct legal claim to the underlying assets of the unconsolidated real estate joint ventures, we believe this adjustment allows investors to view certain concentration information on a basis comparable to the remainder of our real estate 39 --------------------------------------------------------------------------------
portfolio. This presentation is also consistent with how our management team reviews our portfolio (dollar amounts in thousands):
As of
As of
September 30, 2022 December 31, 2021 Real estate joint venture total gross real estate and other assets $ 5,519,058 $ 5,898,342 Weighted-average equity ownership percentage 55 % 55 % 3,026,772
3,242,505
Investments inUnconsolidated Real Estate Joint Ventures (including$0.4 billion for the Macquarie Transaction for the 2021 column) (1,422,010 ) (1,528,902 ) Incremental gross assets of our Investments in Unconsolidated Real Estate Joint Ventures $ 1,604,762 $ 1,713,603 (2)
The 2022 column reflects a reclass of
to
the condensed consolidated financial statements. (3) Represents the gross book value of assets sold or written off due to the committed transactions, partially offset by the addition of new gross assets from the committed transactions. See detail below (in thousands): As of
As of
September 30, 2022 December 31, 2021 Gross book value of assets in transactions as described in Notes 10 and 11 $ (659,168 ) $ - Book value of Massachusetts assets held-for-sale - (1,096,505 ) Expected book value of our 50% interest in the Massachusetts joint venture - 375,975
Unfunded amounts on development deals and
commenced capital improvement projects - 480,132 Non-cash rent write-offs related to disposals (26,889 )
(197,542 ) Gross book value of the transactions, net $ (686,057 ) $ (437,940 )
(4)
Represents cash expected from the proceeds generated by the transactions along with cash on hand to fund the transactions or reduce debt as detailed below (in thousands): As of As of September 30, 2022 December 31, 2021 Expected cash proceeds generated by the transactions as described in Notes 3, 10 and 11 $ 677,000 $
1,280,000
Paydown ofJuly 2021 Interim Credit Facility - (869,606 ) Reduction of revolver balance (637,991 ) (389,489 ) Unfunded amounts on development deals and commenced capital improvement projects - (480,132 ) Increase (decrease) in cash from the transactions $ 39,009 $ (459,227 ) Total Adjusted Revenues Total adjusted revenues are total revenues adjusted for our pro rata portion of similar revenues in our unconsolidated 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 September 30, 2022 2021 Total revenues$ 352,339 $ 390,779 Revenues from investments in unconsolidated real estate joint ventures 44,997 33,129 Total adjusted revenues$ 397,336 $ 423,908 40
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LIQUIDITY AND CAPITAL RESOURCES
2022 Cash Flow Activity
During the first nine months of 2022, we generated approximately$560 million of cash flows from operating activities, primarily consisting of rent and interest from mortgage and other loans, of which we used$525 million to fund our dividends. In addition, we received approximately$2.2 billion of proceeds from disposals (including the Macquarie Transaction as described in Note 3 to Item 1 of this Form 10-Q) and approximately$360 million from the property sales to Prime. We used these proceeds to pay off ourJuly 2021 Interim Credit Facility, partially pay down the outstanding balance on our Credit Facility, fund$1.0 billion of new acquisitions, and make other investments. We exercised the$500 million accordion feature to our revolving credit facility during the first nine 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. 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 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 billion Priory Group Transaction inJanuary 2021 (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.
Short-term Liquidity Requirements:
AtNovember 4, 2022 , our liquidity approximates$1.2 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), share repurchases, if any, and debt service obligations for the next twelve months (including contractual interest payments). If the LifePoint Transaction (as more fully described in Note 10 to Item 1 of this Form 10-Q) and the sale of three Prospect facilities (as more fully described in Note 11 to Item 1 of this Form 10-Q) are consummated in 2023, we would have approximately$650 million of additional liquidity.
Long-term Liquidity Requirements:
As ofNovember 4, 2022 , our liquidity approximates$1.2 billion . We believe that this 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 (including ourDecember 2023 debt maturity of approximately$450 million ), our firm commitments, share repurchases, if any, 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 after 2023, 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 (including the LifePoint Transaction as described in Note 10 and the sale of three Prospect facilities as described in Note 11 );
• 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.
41 -------------------------------------------------------------------------------- Principal payments due on our debt (which exclude the effects of any discounts, premiums, or debt issue costs recorded) as ofNovember 4, 2022 are as follows (in thousands): 2022 $ - 2023 455,160 2024 776,400 2025 1,294,380 2026 2,388,712 Thereafter 4,881,005 Total$ 9,795,657 Contractual Commitments We presented our contractual commitments in our 2021 Annual Report on Form 10-K and provided an update in our Quarterly Reports on Form 10-Q for the periods endedJune 30, 2022 andMarch 31, 2022 . There have been no other significant changes throughNovember 4, 2022 .
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 18, 2022 September 15, 2022 October 13, 2022 $ 0.29 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 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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