MEDICAL PROPERTIES TRUST, INC.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2005
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number
001-32559
Medical Properties Trust,
Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Maryland
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20-0191742
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(State or Other Jurisdiction of
Incorporation or Organization)
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(IRS Employer Identification
No.)
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1000 Urban Center Drive,
Suite 501
Birmingham, AL
(Address of Principal
Executive Offices)
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35242
(Zip Code)
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(205) 969-3755
(Registrants Telephone
Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common Stock, par value
$0.001 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment of this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of shares of the Registrants
common stock, par value $0.001 per share (Common
Stock), held by non-affiliates of the Registrant as of
March 24, 2006 was approximately $416,572,666. For purposes
of the foregoing calculation only, all directors and executive
officers of the Registrant have been deemed affiliates.
As of March 24, 2006, 40,055,064 shares of the
Registrants Common Stock were outstanding.
Portions of the Registrants definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on May 18,
2006 are incorporated by reference into Part III,
Items 10 through 14 of this Annual Report on
Form 10-K.
TABLE OF CONTENTS
A WARNING
ABOUT FORWARD LOOKING STATEMENTS
We make forward-looking statements in this Annual Report on
Form 10-K
that are subject to risks and uncertainties. These
forward-looking statements include information about possible or
assumed future results of our business, financial condition,
liquidity, results of operations, plans and objectives.
Statements regarding the following subjects, among others, are
forward-looking by their nature:
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our business strategy;
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our projected operating results;
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our ability to acquire or develop net-leased facilities;
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availability of suitable facilities to acquire or develop;
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our ability to enter into, and the terms of, our prospective
leases;
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our ability to use effectively the proceeds of our initial
public offering;
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our ability to obtain future financing arrangements;
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estimates relating to, and our ability to pay, future
distributions;
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our ability to compete in the marketplace;
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market trends;
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projected capital expenditures; and
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the impact of technology on our facilities, operations and
business.
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The forward-looking statements are based on our beliefs,
assumptions and expectations of our future performance, taking
into account all information currently available to us. These
beliefs, assumptions and expectations can change as a result of
many possible events or factors, not all of which are known to
us. If a change occurs, our business, financial condition,
liquidity and results of operations may vary materially from
those expressed in our forward-looking statements. You should
carefully consider these risks before you make an investment
decision with respect to our common stock, along with, among
others, the following factors that could cause actual results to
vary from our forward-looking statements:
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the factors referenced in this Annual Report on
Form 10-K,
including those set forth under the sections captioned
Risk Factors, Managements Discussion and
Analysis of Financial Condition and Results of Operations;
and Our Business.
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general volatility of the capital markets and the market price
of our common stock;
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changes in our business strategy;
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changes in healthcare laws and regulations;
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availability, terms and development of capital;
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availability of qualified personnel;
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changes in our industry, interest rates or the general economy;
and
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the degree and nature of our competition.
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When we use the words believe, expect,
may, potential, anticipate,
estimate, plan, will,
could, intend or similar expressions, we
are identifying forward-looking statements. You should not place
undue reliance on these forward-looking statements. We are not
obligated to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise.
(i)
PART I
Overview
We are a self-advised real estate investment trust that
acquires, develops, leases and makes other investments in
healthcare facilities providing
state-of-the-art
healthcare services. We lease our facilities to healthcare
operators pursuant to long-term net-leases, which require the
tenant to bear most of the costs associated with the property.
We also make long-term, interest only mortgage loans to
healthcare operators, and from time to time, we also make
operating, working capital and acquisition loans to our tenants.
We were formed as a Maryland corporation on August 27, 2003
to succeed to the business of Medical Properties Trust, LLC, a
Delaware limited liability company, which was formed by one of
our founders in December 2002. We conduct substantially all of
our business through our wholly-owned subsidiaries, MPT
Operating Partnership, L.P., MPT Development Services, Inc, and
MPT Finance Company LLC. References in this Annual Report on
Form 10-K
to we, us, and our include
Medical Properties Trust, Inc. and our wholly-owned subsidiaries.
In April 2004 we completed a private placement of
25,600,000 shares of common stock at an offering price of
$10.00 per share. The total net proceeds to us, after
deducting fees and expenses of the offering, were approximately
$233.5 million. Until that time, our founders (Edward K.
Aldag, Jr., William G. McKenzie, Emmett E. McLean and R.
Steven Hamner) personally funded the cash requirements necessary
to create a pipeline of potential acquisitions and to prepare
MPT for its private offering. Between April 2004 and June 2005,
we invested and committed to invest approximately
$468 million in healthcare assets.
On July 13, 2005, we completed an initial public offering
of 12,066,823 shares of common stock, priced at
$10.50 per share. Of these shares of common stock,
701,823 shares were sold by selling stockholders (none of
which were founders or officers of the Company) and
11,365,000 shares were sold by us. On August 5, 2005,
the underwriters exercised an option to purchase an additional
1,810,023 shares of common stock to cover over-allotments.
In total, we raised net proceeds of approximately
$125.7 million pursuant to the offering after deducting the
underwriting discount and offering expenses. As of
December 31, 2005, we used net proceeds from the private
and initial public offerings, together with borrowed funds, to
invest and commit to invest a total of approximately
$563 million in healthcare assets.
Our investment in healthcare real estate, including mortgage
loans and other loans to certain of our tenants, is considered a
single reportable segment as further discussed in our
Consolidated Financial Statements,
Note 2 Summary of Significant
Accounting Policies, in Part II, Item 8 of this Annual
Report on
Form 10-K.
All of our investments are located in the United States, and we
do not expect to invest in
non-U.S. markets
in the foreseeable future.
Portfolio
of Properties
As of December 31, 2005, we owned 14 facilities which were
being operated by four tenants; we had three facilities that
were under development and leased to three additional tenants;
and we had a mortgage loan to another operator.
Outlook
and Strategy
We believe that the United States healthcare delivery system is
becoming decentralized and is evolving away from the traditional
one stop, large-scale acute care hospital. We
believe that these changes are the results of a number of
trends, including increasing specialization and technological
innovation and the desire of both physicians and patients to
utilize more convenient facilities. We also believe that
demographic trends in the United States, including in particular
an aging population, will result in continued growth in the
demand for healthcare services, which in turn will lead to an
increasing need for a greater supply of modern healthcare
facilities. In response to these trends, we believe that
healthcare operators increasingly prefer to conserve their
capital for investment in operations and new technologies rather
than investing in real estate and, therefore, increasingly
prefer to lease, rather than own, their facilities.
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Our strategy is to lease the facilities that we acquire or
develop to experienced healthcare operators pursuant to
long-term net-leases. Alternatively, we have structured certain
of our investments as long-term, interest only mortgage loans to
healthcare operators, and we may make similar investments in the
future. The market for healthcare real estate is extensive and
includes real estate owned by a variety of healthcare operators.
We focus on acquiring and developing those net-leased facilities
that are specifically designed to reflect the latest trends in
healthcare delivery methods. These facilities include:
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Rehabilitation Hospitals: Rehabilitation
hospitals provide inpatient and outpatient rehabilitation
services for patients recovering from multiple traumatic
injuries, organ transplants, amputations, cardiovascular
surgery, strokes, and complex neurological, orthopedic, and
other conditions. In addition to Medicare certified
rehabilitation beds, rehabilitation hospitals may also operate
Medicare certified skilled nursing, psychiatric, long-term, or
acute care beds. These hospitals are often the best medical
alternative to traditional acute care hospitals where under the
Medicare prospective payment system there is pressure to
discharge patients after relatively short stays.
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Long-Term Acute Care Hospitals: Long-term
acute care hospitals focus on extended hospital care, generally
at least 25 days, for the medically-complex patient.
Long-term acute care hospitals have arisen from a need to
provide care to patients in acute care settings, including daily
physician observation and treatment, before they are able to
move to a rehabilitation hospital or return home. These
facilities are reimbursed in a manner more appropriate for a
longer length of stay than is typical for an acute care hospital.
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Regional and Community Hospitals: We define
regional and community hospitals as general medical/surgical
hospitals whose practicing physicians generally serve a market
specific area, whether urban, suburban or rural. We intend to
limit our ownership of these facilities to those with market,
ownership, competitive and technological characteristics that
provide barriers to entry for potential competitors.
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Womens and Childrens
Hospitals: These hospitals serve the specialized
areas of obstetrics and gynecology, other womens
healthcare needs, neonatology and pediatrics. We anticipate
substantial development of facilities designed to meet the needs
of women and children and their physicians as a result of the
decentralization and specialization trends described above.
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Ambulatory Surgery Centers: Ambulatory surgery
centers are freestanding facilities designed to allow patients
to have outpatient surgery, spend a short time recovering at the
center, then return home to complete their recoveries.
Ambulatory surgery centers offer a lower cost alternative to
general hospitals for many surgical procedures in an environment
that is more convenient for both patients and physicians.
Outpatient procedures commonly performed include those related
to gastrointestinal, general surgery, plastic surgery, ear, nose
and throat/audiology, as well as orthopedics and sports medicine.
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Other Single-Discipline Facilities: The
decentralization and specialization trends in the healthcare
industry are also creating demands and opportunities for
physicians to practice in hospital facilities in which the
design, layout and medical equipment are specifically developed,
and healthcare professional staff are educated, for medical
specialties. These facilities include heart hospitals,
ophthalmology centers, orthopedic hospitals and cancer centers.
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Medical Office Buildings: Medical office
buildings are office and clinic facilities occupied and used by
physicians and other healthcare providers in the provision of
outpatient healthcare services to their patients. The medical
office buildings that we target generally are or will be
master-leased and adjacent to or integrated with our other
targeted healthcare facilities.
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Skilled Nursing Facilities: Skilled nursing
facilities are healthcare facilities that generally provide more
comprehensive services than assisted living or residential care
homes. They are primarily engaged in providing skilled nursing
care for patients who require medical or nursing care or
rehabilitation services. Typically these services involve
managing complex and serious medical problems such as wound
care, coma care or intravenous therapy. They offer both short
and long-term care options for patients with serious illness and
medical conditions. Skilled nursing facilities also provide
rehabilitation services that are typically utilized on a
short-term basis after hospitalization for injury or illness.
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Our
Leases
The leases for our facilities are net leases with
terms requiring the tenant to pay all ongoing operating and
maintenance expenses of the facility, including property,
casualty, general liability and other insurance coverages,
utilities and other charges incurred in the operation of the
facilities, as well as real estate taxes, ground lease rent and
the costs of capital expenditures, repairs and maintenance. Our
leases also provide that our tenants will indemnify us for
environmental liabilities. Our current leases range from 10 to
15 years and provide for annual rent escalation and, in
some cases percentage rent.
Significant
Tenants
We have leases with seven hospital operating companies
(including the three properties currently under development)
covering 17 facilities and we have one mortgage loan to another
hospital operating company. Vibra Healthcare, LLC
(Vibra) has leases on seven of our facilities that
represent 50% of the original total cost of our operating
facilities and mortgage loan as of December 31, 2005. Total
revenue from Vibra in 2005, including rent, percentage rent and
interest on our acquisition loan to Vibra was approximately
$26.2 million, or 83% of total revenue in 2005. We expect
that the percentage of revenue we earn from Vibra in 2006 will
be substantially less than that in 2005 because we expect
Vibras interest and percentage rent to decline as the
acquisition loan is repaid and because our recent and
anticipated near-term future acquisitions and investments do not
include transactions with Vibra.
Notwithstanding our plans to reduce the percentage of our
revenue earned from Vibra, its financial performance and
resulting ability to satisfy its lease and loan obligations to
us are material to our financial results and our ability to
service our debt and make distributions to our stockholders. We
discuss the risks related to our Vibra relationship in
Item 1.A of this Annual Report on
Form 10-K Risk
Factors.
Environmental
Matters
Under various federal, state and local environmental laws and
regulations, a current or previous owner, operator or tenant of
real estate may be required to investigate and clean up
hazardous or toxic substances or petroleum product releases or
threats of releases at such property and may be held liable to a
government entity or to third parties for property damage and
for investigation,
clean-up and
monitoring costs incurred by such parties in connection with the
actual or threatened contamination, including substances
currently unknown, that may have been released on the real
estate. These laws may impose
clean-up
responsibility and liability without regard to fault, or whether
or not the owner, operator or tenant knew of or caused the
presence of the contamination. The liability under these laws
may be joint and several for the full amount of the
investigation,
clean-up and
monitoring costs incurred or to be incurred or actions to be
undertaken, although a party held jointly and severally liable
might be able to obtain contributions from other identified,
solvent, responsible parties of their fair share toward these
costs. Investigation,
clean-up and
monitoring costs may be substantial and can exceed the value of
the property. The presence of contamination, or the failure to
properly remediate contamination, on a property may adversely
affect the ability of the owner, operator or tenant to sell or
rent that property or to borrow funds using such property as
collateral and may adversely impact our investment in that
property. In addition, if hazardous substances are located on or
released from our properties, we could incur substantial
liabilities through a private party personal injury claim, a
property damage claim by an adjacent property owner, or claims
by a governmental entity or others for other damages, such as
natural resource damages. This liability may be imposed under
environmental laws or common-law principles.
Federal regulations require building owners and those exercising
control over a buildings management to identify and warn,
via signs and labels, of potential hazards posed by workplace
exposure to installed asbestos-containing materials and
potentially asbestos-containing materials in their building. The
regulations also set forth employee training, record keeping and
due diligence requirements pertaining to asbestos-containing
materials and potentially asbestos-containing materials.
Government entities can assess significant fines for violation
of these regulations. Building owners and those exercising
control over a buildings management may be subject to an
increased risk of personal injury lawsuits by workers and others
exposed to asbestos-containing materials and potentially
asbestos-containing materials as a result of these regulations.
The regulations may affect the value of a
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building containing asbestos-containing materials and
potentially asbestos-containing materials in which we have
invested. Federal, state and local laws and regulations also
govern the removal, encapsulation, disturbance, handling and
disposal of asbestos-containing materials and potentially
asbestos-containing materials when such materials are in poor
condition or in the event of construction, remodeling,
renovation or demolition of a building. Such laws and
regulations may impose liability for improper handling or a
release to the environment of asbestos-containing materials and
potentially asbestos-containing materials and may provide for
fines to, and for third parties to seek recovery from, owners or
operators of real property for personal injury or improper work
exposure associated with asbestos-containing materials and
potentially asbestos-containing materials.
Prior to closing any facility acquisition, we obtain
Phase I environmental assessments in order to attempt to
identify potential environmental concerns at the facilities.
These assessments are carried out in accordance with an
appropriate level of due diligence and generally include a
physical site inspection, a review of relevant federal, state
and local environmental and health agency database records, one
or more interviews with appropriate site-related personnel,
review of the propertys chain of title and review of
historic aerial photographs and other information on past uses
of the property. We may also conduct limited subsurface
investigations and test for substances of concern where the
results of the Phase I environmental assessments or other
information indicates possible contamination or where our
consultants recommend such procedures.
While we may purchase many of our facilities on an as
is basis, we intend for all of our purchase contracts to
contain an environmental contingency clause, which permits us to
reject a facility because of any environmental hazard at the
facility.
Competition
We compete in acquiring and developing facilities with financial
institutions, institutional pension funds, real estate
developers, other REITs, other public and private real estate
companies and private real estate investors. Among the factors
adversely affecting our ability to compete are the following:
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we may have less knowledge than our competitors of certain
markets in which we seek to purchase or develop facilities;
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many of our competitors have greater financial and operational
resources than we have; and
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our competitors or other entities may determine to pursue a
strategy similar to ours.
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To the extent that we experience vacancies in our facilities, we
will also face competition in leasing those facilities to
prospective tenants. The actual competition for tenants varies
depending on the characteristics of each local market. Virtually
all of our facilities operate in a competitive environment, and
patients and referral sources, including physicians, may change
their preferences for a healthcare facilities from time to time.
Healthcare
Regulatory Matters
The following discussion describes certain material federal
healthcare laws and regulations that may affect our operations
and those of our tenants. However, the discussion does not
address state healthcare laws and regulations, except as
otherwise indicated. These state laws and regulations, like the
federal healthcare laws and regulations, could affect our
operations and those of our tenants. Moreover, the discussion
relating to reimbursement for healthcare services addresses
matters that are subject to frequent review and revision by
Congress and the agencies responsible for administering federal
payment programs. Consequently, predicting future reimbursement
trends or changes is inherently difficult.
Ownership and operation of hospitals and other healthcare
facilities are subject, directly and indirectly, to substantial
federal, state and local government healthcare laws and
regulations. Our tenants failure to comply with these laws
and regulations could adversely affect their ability to meet
their lease obligations. Physician investment in us or in our
facilities also will be subject to such laws and regulations. We
intend for all of our business activities and operations to
conform in all material respects with all applicable laws and
regulations.
Anti-Kickback Statute. 42 U.S.C.
§1320a-7b(b),
or the Anti-Kickback Statute, prohibits, among other things, the
offer, payment, solicitation or acceptance of remuneration
directly or indirectly in return for referring an
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individual to a provider of services for which payment may be
made in whole or in part under a federal healthcare program,
including the Medicare or Medicaid programs. Violation of the
Anti-Kickback Statute is a crime and is punishable by criminal
fines of up to $25,000 per violation, five years
imprisonment or both. Violations may also result in civil
sanctions, including civil penalties of up to $50,000 per
violation, exclusion from participation in federal healthcare
programs, including Medicare and Medicaid, and additional
monetary penalties in amounts treble to the underlying
remuneration.
The Anti-Kickback Statute defines the term
remuneration very broadly and, accordingly, local
physician investment in our facilities could trigger scrutiny of
our lease arrangements under the Anti-Kickback Statute. In
addition to certain statutory exceptions, the Office of
Inspector General of the Department of Health and Human
Services, or OIG, has issued Safe Harbor Regulations
that describe practices that will not be considered violations
of the Anti-Kickback Statute. These include a safe harbor for
space rental arrangements which protects payments made by a
tenant to a landlord under a lease arrangement meeting certain
conditions. We intend to use our commercially reasonable efforts
to structure lease arrangements involving facilities in which
local physicians are investors and tenants so as to satisfy, or
meet as closely as possible, the conditions for the safe harbor
for space rental. We cannot assure you, however, that we will
meet all the conditions for the safe harbor, and it is unlikely
that we will meet all conditions for the safe harbor in those
instances in which percentage rent is contemplated and we have
physician investors. In addition, federal regulations require
that our tenants with purchase options pay fair market value
purchase prices for facilities in which we have physician
investment. We intend our lease agreement purchase option prices
to be fair market value; however, we cannot assure you that all
of our purchase options will be at fair market value. Any
purchase not at fair market value may present risks of challenge
from healthcare regulatory authorities. The fact that a
particular arrangement does not fall within a statutory
exception or safe harbor does not mean that the arrangement
violates the Anti-Kickback Statute. The statutory exception and
Safe Harbor Regulations simply provide a guaranty that
qualifying arrangements will not be prosecuted under the
Anti-Kickback Statute. The implication of the Anti-Kickback
Statute could limit our ability to include local physicians as
investors or tenants or restrict the types of leases into which
we may enter if we wish to include such physicians as investors
having direct or indirect ownership interests in our facilities.
Federal Physician Self-Referral Statute. Any
physicians investing in our company or its subsidiary entities
could also be subject to the Ethics in Patient Referrals Act of
1989, or the Stark Law (codified at
42 U.S.C. §1395nn). Unless subject to an
exception, the Stark Law prohibits a physician from making a
referral to an entity furnishing designated
health services paid by Medicare or Medicaid if the
physician or a member of his immediate family has a
financial relationship with that entity. A
reciprocal prohibition bars the entity from billing Medicare or
Medicaid for any services furnished pursuant to a prohibited
referral. Financial relationships are defined very broadly to
include relationships between a physician and an entity in which
the physician or the physicians family member has
(i) a direct or indirect ownership or investment interest
that exists in the entity through equity, debt or other means
and includes an interest in an entity that holds a direct or
indirect ownership or investment interest in any entity
providing designated health services; or (ii) a direct or
indirect compensation arrangement with the entity.
The Stark Law as originally enacted in 1989 only applied to
referrals for clinical laboratory tests reimbursable by
Medicare. However, the law was amended in 1993 and 1994 and,
effective January 1, 1995, became applicable to referrals
for an expanded list of designated health services reimbursable
under Medicare or Medicaid.
The Stark Law specifies a number of substantial sanctions that
may be imposed upon violators. Payment is to be denied for
Medicare claims related to designated health services referred
in violation of the Stark Law. Further, any amounts collected
from individual patients or third-party payors for such
designated health services must be refunded on a timely basis. A
person who presents or causes to be presented a claim to the
Medicare program in violation of the Stark Law is also subject
to civil monetary penalties of up to $15,000 per claim, civil
money penalties of up to $100,000 per arrangement and
possibly even exclusion from participation in the Medicare and
Medicaid programs.
Final regulations applicable only to physician referrals for
clinical laboratory services were published in August 1995. A
proposed rule applicable to physician referrals for all
designated health services was published in January 1998. In
January 2001, CMS published the Phase I final
rule, which finalized a significant portion of the 1998 proposed
rule. On March 26, 2004, CMS issued the second phase of its
final regulations addressing physician
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referrals to entities with which they have a financial
relationship (the Phase II rule). The
Phase II rule addresses and interprets a number of
exceptions for ownership and compensation arrangements involving
physicians, including the exceptions for space and equipment
rentals and the exception for indirect compensation
arrangements. The Phase II rule also includes exceptions
for physician ownership and investment, including physician
ownership of rural providers and hospitals. The new regulation
revised the hospital ownership exception to reflect the
18-month
moratorium that began December 8, 2003 on physician
ownership or investment in specialty hospitals, which was
enacted in Section 507 of the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003. The Phase II
rule became effective on July 26, 2004. The moratorium
imposed by the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 expired on June 8, 2005. However,
that moratorium was retroactively extended by the passage of the
Deficit Reduction Act of 2005 (the DRA) which
requires the Secretary of Health and Human Services to develop a
strategic and implementing plan for physician investment in
specialty hospitals that addresses the issues of proportionality
of investment return, bona fide investment, annual disclosure of
investments, and the provision of medical assistance (Medicaid)
and charity care. The report is due six months after the date of
enactment, but this deadline may be extended by two months. The
DRA also directs CMS to continue the moratorium on enrollment of
specialty hospitals until the earlier of the date the report is
submitted or six months after enactment of the DRA.
In those cases where physicians invest in our subsidiaries or
our facilities, we intend to fashion our lease arrangements with
healthcare providers to meet the applicable indirect
compensation exceptions under the Stark Law, however, no
assurance can be given that our leases will satisfy these Stark
Law exception requirements. Unlike the Anti-Kickback Statute
Safe Harbor Regulations, a financial arrangement which
implicates the Stark Law must meet the requirements of an
applicable exception to avoid a violation of the Stark Law. This
may lead to obstacles in permitting local physicians to invest
in our facilities or restrict the types of lease arrangements we
may enter into if we wish to include such physicians as
investors.
State Self-Referral Laws. In addition to the
Anti-Kickback Statute and the Stark Law, state anti-kickback and
self-referral laws could limit physician ownership or investment
in us, restrict the types of leases we may enter into if such
physician investment is permitted or require physician
disclosure of our ownership or financial interest to patients
prior to referrals.
Recent Regulatory and Legislative
Developments. The DRA was signed by President
Bush on February 8, 2006, and is expected to reduce
Medicare spending by $6.0 billion over the next five years
and cut Medicaid spending by $5.0 billion over the same
time frame. A clerical error during the legislative process,
however, raises some concerns over the validity of the DRA
because the United States House of Representatives never voted
on the version approved by the Senate and ultimately signed by
the President. Legal challenges may arise as a result of this
technicality, challenging the DRA. Nonetheless, CMS has already
begun implementing portions of the DRA. Medicare Part A
pays for hospital inpatient operating and capital related costs
associated with acute care hospital inpatient stays on a
prospective basis. Pursuant to this inpatient prospective
payment system, or IPPS, CMS categorizes each patient case
according to a list of diagnosis-related groups, or DRGs. Each
DRG has an assigned payment that is based upon the expected
amount of hospital resources necessary to treat a patient in
that DRG. On August 12, 2005, CMS published a Final Rule
for IPPS for fiscal year 2006. The Final Rule includes a 3.7%
increase in payment rates, a number of changes to the DRGs and
enhancements to the voluntary quality reporting program.
Hospitals are required to submit certain clinical data on ten
quality measures in order to receive full payment for fiscal
year 2006. CMS expects aggregate payments to IPPS hospitals to
increase by $3.3 billion over the previous year.
On August 1, 2003, CMS published the fiscal year 2004 Final
Rule for inpatient rehabilitation facilities, or IRFs. Under the
Final Rule, all IRFs have received an increase in their
prospective payment system rate for fiscal year 2004 due to an
across the board 3.2% IRF market basket increase. On
August 15, 2005, CMS published the fiscal year 2006 Final
Rule for inpatient rehabilitation facilities, or IRFs. The Final
Rule adopts a number of refinements to the IRF prospective
payment system, including an
across-the-board
1.9% decrease in the standard payment amount based on evidence
that coding increases instead of increases in patient acuity
have led to increased payments to IRFs. The Final Rule also
includes a 3.6% market basket increase and increases from 19.1%
to 21.3% the payment rate adjustment for IRFs located in rural
areas. Further, the Final Rule reduces the outlier threshold for
cases with unusually high costs from $11,211 to $5,132. In
addition, the Final Rule contains policy changes
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including the adoption of new labor market area definitions
which are based on the new Core Based Statistical Areas
announced by the Office of Management and Budget, or OMB, late
in 2000. These increases are expected to benefit those tenants
of ours who operate IRFs. These increases benefit those tenants
of ours who operate IRFs.
On May 7, 2004, CMS issued a Final Rule to revise the
classification criterion, commonly known as the
75 percent rule, used to classify a hospital or
hospital unit as an IRF. The compliance threshold is used to
distinguish an IRF from an acute care hospital for purposes of
payment under the Medicare IRF prospective payment system. The
Final Rule implements a three-year period to analyze claims and
patient assessment data to determine whether CMS will continue
to use a compliance threshold that is lower than 75% or not. For
cost reporting periods beginning on or after July 1, 2004,
and before July 1, 2005, the compliance threshold will be
50% of the IRFs total patient population. The compliance
threshold will increase to 60% of the IRFs total patient
population for cost reporting periods beginning on or after
July 1, 2005 and before July 1, 2006, to 65% for cost
reporting periods beginning on or after July 1, 2006 and
before July 1, 2007, and to 75% for cost reporting periods
after July 1, 2007. The Deficit Reduction Act of 2005
extends the phase-in period of the 75 percent
rule for one additional year. The 60% threshold remains in
effect until June 30, 2007. In fiscal year 2007, the
threshold is 65% and beginning in fiscal year 2008, the
threshold is 75%.
On December 8, 2003, President Bush signed into law the
Medicare Prescription Drug, Improvement, and Modernization Act
of 2003, or the Act, which contains sweeping changes to the
federal health insurance program for the elderly and disabled.
The Act includes provisions affecting program payment for
inpatient and outpatient hospital services. In total, the
Congressional Budget Office estimates that hospitals will
receive $24.8 billion over ten years in additional funding
due to the Act.
Rural hospitals, which may include regional or community
hospitals, one of our targeted types of facilities, will benefit
most from the reimbursement changes in the Act. Some examples of
these reimbursement changes include (i) providing that
payment for all hospitals, regardless of geographic location,
will be based on the same, higher standardized amount which was
previously available only for hospitals located in large urban
areas, (ii) reducing the labor share of the standardized
amount from 71% to 62% for hospitals with an applicable wage
index of less than 1.0, (iii) giving hospitals the ability
to seek a higher wage index based on the number of hospital
employees who take employment out of the county in which the
hospital is located with an employer in a neighboring county
with a higher wage index, and (iv) improving critical
access hospital program conditions of participation requirements
and reimbursement. Medicare disproportionate share hospital, or
DSH, payment adjustments for hospitals that are not large urban
or large rural hospitals will be calculated using the DSH
formula for large urban hospitals, up to a 12% cap in 2004 for
all hospitals other than rural referral centers, which are not
subject to the cap. The Act provides that sole community
hospitals, as defined in 42 U.S.C. § 1395
ww(d)(5)(D)(iii), located in rural areas, rural hospitals with
100 or fewer beds, and certain cancer and childrens
hospitals shall receive Transitional Outpatient Payments, or
TOPs, such that these facilities will be paid as much under the
Medicare outpatient prospective payment system, or OPPS, as they
were paid prior to implementation of OPPS. As of January 1,
2004 all TOPs for community mental health centers and all other
hospitals were otherwise discontinued. The hold
harmless TOPs provided for under the Act will continue for
qualifying rural hospitals for services furnished through
December 31, 2005 and for sole community hospitals for cost
reporting periods beginning on or after January 1, 2004 and
ending on December 31, 2005. Hold harmless TOPs payments
continue permanently for cancer and childrens hospitals.
The Act also requires CMS to provide supplemental payments to
acute care hospitals that are located more than 25 road miles
from another acute care hospital and have low inpatient volumes,
defined to include fewer than 800 discharges per fiscal year,
effective on or after October 1, 2004. Total supplemental
payments may not exceed 25% of the otherwise applicable
prospective payment rate.
Finally, the Act assures inpatient hospitals that submit certain
quality measure data a full inflation update equal to the
hospital market basket percentage increase for fiscal years 2005
through 2007. The market basket percentage increase refers to
the anticipated rate of inflation for goods and services used by
hospitals in providing services to Medicare patients. For fiscal
year 2005, the market basket percentage increase for hospitals
paid under the inpatient prospective payment system is 3.3%. For
those inpatient hospitals that do not submit such quality data,
the Act provides for an update of market basket minus
0.4 percentage points. The DRA expands the provision of the
Act
7
tying inpatient reimbursement to hospitals reporting on
certain quality measures. Hospitals not submitting the data will
not receive the full market basket update. The DRA requires the
Secretary of Health and Human Services to add other quality
measures to be reported on by hospitals. Beginning in fiscal
year 2007, the market basket updates for hospitals that fail to
provide the quality data will be reduced by 2%.
The Act also imposed an 18 month moratorium limiting the
availability of the whole hospital exception, or
Whole Hospital Exception, under the Stark Law for specialty
hospitals and prohibited physicians investing in rural specialty
hospitals from invoking an alternative Stark Law exception for
physician ownership or investment in rural providers. The
moratorium began upon enactment of the Act and expired
June 8, 2005. Under the Whole Hospital Exception, the Stark
Law permits a physician to refer a Medicare or Medicaid patient
to a hospital in which the physician has an ownership or
investment interest so long as the physician maintains staff
privileges at the hospital and the physicians ownership or
investment interest is in the hospital as a whole, rather than a
subdivision of the facility. Following expiration of the
moratorium, CMS issued a statement that it will not issue
provider agreements for new specialty hospitals or authorize
initial state surveys of new specialty hospitals while it
undertakes a review of its procedures for enrolling such
facilities in the Medicare program. CMS anticipates completing
this review by January 2006. The suspension on enrollment does
not apply to specialty hospitals that submitted enrollment
applications prior to June 9, 2005 or requested an advisory
opinion about the applicability of the moratorium.
The moratorium imposed by the Act expired on June 8, 2005.
However, that moratorium was retroactively extended by the
passage of the DRA which requires the Secretary of Health and
Human Services to develop a strategic and implementing plan for
physician investment in specialty hospitals that addresses the
issues of proportionality of investment return, bona fide
investment, annual disclosure of investments, and the provision
of medical assistance (Medicaid) and charity care. The report is
due six months after the date of enactment, but this deadline
may be extended by two months. The DRA also directs CMS to
continue the moratorium on enrollment of specialty hospitals
until the earlier of the date the report is submitted or six
months after enactment of the DRA.
Any acquisition or development of specialty hospitals must
comply with the current application and interpretation of the
Stark Law. CMS may clarify or modify its definition of specialty
hospital, which may result in physicians who own interests in
our tenants being forced to divest their ownership or the
enrollment of the hospital for participation in the Medicare
Program may be delayed. Although the specialty hospital
moratorium under the Act limited, and the proposed Budget
Reconciliation Conference Agreement would have limited physician
ownership or investment in specialty hospitals as
defined by CMS, they do not limit a physicians ability to
hold an ownership or investment interest in facilities which may
be leased to hospital operators or other healthcare providers,
assuming the lease arrangement conforms to the requirements of
an applicable exception under the Stark Law. We intend to
structure all of our leases, including leases containing
percentage rent arrangements, to comply with applicable
exceptions under the Stark Law and to comply with the
Anti-Kickback Statute. We believe that strong arguments can be
made that percentage rent arrangements, when structured
properly, should be permissible under the Stark Law and the
Anti-Kickback Statute; however, these laws are subject to
continued regulatory interpretation and there can be no
assurance that such arrangements will continue to be
permissible. Accordingly, although we do not currently have any
percentage rent arrangements where physicians own an interest in
our facilities, we may be prohibited from entering into
percentage rent arrangements in the future where physicians own
an interest in our facilities. In the event we enter into such
arrangements at some point in the future and later find the
arrangements no longer comply with the Stark Law or
Anti-Kickback Statute, we or our tenants may be subject to
penalties under the statutes.
The California Department of Health Services recently adopted
regulations, codified as Sections 70217, 70225 and 70455 of
Title 22 of the California Code of Regulations, or CCR,
which establish minimum, specific, numerical licensed
nurse-to-patient
ratios for specified units of general acute care hospitals.
These regulations are effective January 1, 2004. The
minimum staffing ratios set forth in 22 CCR 70217(a) co-exist
with existing regulations requiring that hospitals have a
patient classification system in place. 22 CCR, 70053.2 and
70217. The licensed
nurse-to-patient
ratios constitute the minimum number of registered nurses,
licensed vocational nurses, and, in the case of psychiatric
units, licensed psychiatric technicians, who shall be assigned
to direct patient care and represent the maximum number of
patients that can be assigned to one licensed nurse at any one
time. Over the past several years many hospitals have, in
response to managed care reimbursement contracts, cut costs by
reducing their licensed nursing staff. The California
Legislature responded to this trend by requiring a minimum
number of
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licensed nurses at the bedside. Due to this new regulatory
requirement, any acute care facilities we target for acquisition
or development in California may be required to increase their
licensed nursing staff or decrease their admittance rates as a
result. Governor Schwarzenegger issued two emergency regulations
in an attempt to suspend the ratios in emergency rooms and delay
for three years staffing requirements in general medical units.
However, this action was appealed and on June 7, 2005, the
Superior Court overturned the two emergency regulations. The
Schwarzenegger administration appealed that ruling; however, the
Governor withdrew the appeal in November 2005.
On May 7, 2004, CMS issued a Final Rule to update the
annual payment rates for the Medicare prospective payment system
for services provided by long term care hospitals. The rule
increased the Medicare payment rate for long-term care hospitals
by 3.1% starting July 1, 2004. On May 6, 2005, CMS
issued a Final Rule to update the annual payment rates for 2006.
Beginning July 1, 2005, the Medicare payment rate for
long-term care hospitals will increase by 3.4% for patient
discharges through June 30, 2006. Medicare expects
aggregate payment to these hospitals to increase by
$169 million during the 2006 long-term care hospital rate
year compared with the 2005 rate year. Long-term care hospitals,
one of the types of facilities we are targeting, are defined
generally as hospitals that have an average Medicare inpatient
length of stay greater than 25 days. In addition, the final
rule contains policy changes including the adoption of new labor
market area definitions for long-term care hospitals which are
based on the new Core Based Statistical Areas announced by the
Office of Management and Budget, or OMB, late in 2000. On
January 27, 2006, CMS published a proposed rule provides
for no increase in the Medicare payment rates for long-term care
hospitals for patient discharges between July 1, 2006 and
June 30, 2007. CMS is also proposing to adopt the
Rehabilitation, Psychiatric and Long-Term Care (RPL)
market basket to replace the excluded hospital with capital
market basket that is currently used as the measure of inflation
for calculating the annual update to the long-term care hospital
prospective payment rate. The RPL market basket is based on the
operating and capital costs of inpatient rehabilitation
facilities, inpatient psychiatric facilities, and long-term care
hospitals. CMS is also proposing to revise the labor-related
share based on the RPL market basket from 72.855% (based on the
excluded hospital with capital market basket) to 75.923%. CMS is
accepting comments on the proposed rule until March 20,
2006. We do not know whether the proposed rule will be adopted
without change.
The Balanced Budget Act of 1997, or BBA, mandated implementation
of a prospective payment system for skilled nursing facilities.
Under this prospective payment system, and for cost reporting
periods beginning on or after July 1, 1998, skilled nursing
facilities are paid a prospective payment rate adjusted for case
mix and geographic variation in wages formulated to cover all
costs, including routine, ancillary and capital costs. In 1999
and 2000 the BBA was refined to provide for, among other
revisions, a 20% add-on for 12 high acuity non-therapy Resource
Utilization Grouping categories, or RUG categories, and a 6.7%
add-on for all 14 rehabilitation RUG categories. These
categories may expire when CMS releases its refinements to the
current RUG payment system. On August 4, 2005, CMS
published a Final Rule updating skilled nursing facility payment
rates for fiscal year 2006. The Final Rule eliminates the
temporary add-on payments that Congress directed in the Balanced
Budget Refinement Act of 1999 and introduces nine (9) new
payment categories. The Final Rule also permanently increases
rates for all RUGs to reflect variations in non-therapy
ancillary costs. Further, fiscal year 2006 payment rates include
a market basket update increase of 3.1%, a slight increase over
what had been anticipated in the Proposed Rule. In addition, the
Final Rule contains policy changes including the adoption of new
labor market area definitions which are based on the new Core
Based Statistical Areas announced by the Office of Management
and Budget, or OMB, late in 2000. The Deficit Reduction Act of
2005 reduces payments to skilled nursing faculties for certain
bad debt attributable to Medicare coinsurance for beneficiaries
who are not dual eligibles.
Beginning January 1, 2007, the Deficit Reduction Act of
2005 caps payment rates for services provided in ambulatory
surgery centers at the amounts paid for the same services in
hospital outpatient departments under the OPPS. This provision
is effective until the Secretary of Health and Human Services
establishes a revised payment system for ambulatory surgery
centers as required by the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003.
In addition to the legislation and regulations discussed above,
on January 12, 2005, the Medicare Payment Advisory
Committee, or MedPAC, made extensive recommendations to Congress
and the Secretary of HHS including proposing revisions to DRG
payments to more fully capture differences in severity of
illnesses in an attempt to more equally pay for care provided at
general acute care hospitals as compared to specialty hospitals.
9
Furthermore, MedPAC made significant recommendations regarding
paying healthcare providers relative to their performance and to
the outcomes of the care they provided. MedPAC recommendations
have historically provided strong indications regarding future
directions of both the regulatory and legislative process.
Insurance
We have purchased general liability insurance (lessors
risk) that provides coverage for bodily injury and property
damage to third parties resulting from our ownership of the
healthcare facilities that are leased to and occupied by our
tenants. Our leases with tenants also require the tenants to
carry general liability, professional liability, all risks, loss
of earnings and other insurance coverages and to name us as an
additional insured under these policies. We expect that the
policy specifications and insured limits will be appropriate
given the relative risk of loss, the cost of the coverage and
industry practice.
Employees
We employ 19 full-time employees and one part-time employee
as of March 15, 2006. We anticipate hiring approximately
four to six additional full-time employees during the next
12 months, commensurate with our growth. We believe that
our relations with our employees are good. None of our employees
is a member of any union.
Risks
Relating to Our Business and Growth Strategy
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We
were formed in August 2003 and have a limited operating history;
our management has a limited history of operating a REIT and a
public company and may therefore have difficulty in successfully
and profitably operating our business.
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We have only recently been organized and have a limited
operating history. We are subject to the risks generally
associated with the formation of any new business, including
unproven business models, untested plans, uncertain market
acceptance and competition with established businesses. Our
management has limited experience in operating a REIT and a
public company. Therefore, you should be especially cautious in
drawing conclusions about the ability of our management team to
execute our business plan.
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We may
not be successful in deploying the net proceeds of our initial
public offering for their intended uses as quickly as we intend
or at all, which could harm our cash flow and ability to make
distributions to our stockholders.
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Upon completion of our initial public offering, we experienced a
capital infusion from the net offering proceeds, which we have
used or intend to use to develop additional net-leased
facilities and to make a loan to an affiliate of one of our
prospective tenants. If we are unable to use the net proceeds in
this manner, we will have no specific designated use for a
substantial portion of the net proceeds from our initial public
offering. In that case, or in the event we allocate a portion of
the net proceeds to other uses during the pendency of the
developments, you would be unable to evaluate the manner in
which we invest the net proceeds or the economic merits of the
assets acquired with the proceeds. We may not be able to invest
this capital on acceptable terms or timeframes, or at all, which
may harm our cash flow and ability to make distributions to our
stockholders.
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We may
be unable to acquire or develop any of the facilities we have
identified as potential candidates for acquisition or
development, which could harm our future operating results and
adversely affect our ability to make distributions to our
stockholders.
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We have identified numerous other facilities that we believe
would be suitable candidates for acquisition or development;
however, we cannot assure you that we will be successful in
completing the acquisition or development of any of these
facilities. Consummation of any of these acquisitions or
developments is subject to, among other things, the willingness
of the parties to proceed with a contemplated transaction,
negotiation of mutually acceptable definitive agreements,
satisfactory completion of due diligence and satisfaction of
customary
10
closing conditions. If we are unsuccessful in completing the
acquisition or development of additional facilities in the
future, our future operating results will not meet expectations
and our ability to make distributions to our stockholders will
be adversely affected.
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We
expect to continue to experience rapid growth and may not be
able to adapt our management and operational systems to
integrate the net-leased facilities we have acquired and are
developing or those that we may acquire or develop in the future
without unanticipated disruption or expense.
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We are currently experiencing a period of rapid growth. We
cannot assure you that we will be able to adapt our management,
administrative, accounting and operational systems, or hire and
retain sufficient operational staff, to integrate and manage the
facilities we have acquired and are developing and those that we
may acquire or develop. Our failure to successfully integrate
and manage our current portfolio of facilities or any future
acquisitions or developments could have a material adverse
effect on our results of operations and financial condition and
our ability to make distributions to our stockholders.
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We may
be unable to access capital, which would slow our
growth.
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Our business plan contemplates growth through acquisitions and
developments of facilities. As a REIT, we are required to make
cash distributions which reduces our ability to fund
acquisitions and developments with retained earnings. We are
dependent on acquisition financings and access to the capital
markets for cash to make investments in new facilities. Due to
market or other conditions, there will be times when we will
have limited access to capital from the equity and debt markets.
During such periods, virtually all of our available capital will
be required to meet existing commitments and to reduce existing
debt. We may not be able to obtain additional equity or debt
capital or dispose of assets, on favorable terms, if at all, at
the time we need additional capital to acquire healthcare
properties on a competitive basis or to meet our obligations.
Our ability to grow through acquisitions and developments will
be limited if we are unable to obtain debt or equity financing,
which could have a material adverse effect on our results of
operations and our ability to make distributions to our
stockholders.
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Dependence
on our tenants for rent may adversely impact our ability to make
distributions to our stockholders.
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We expect to continue to qualify as a REIT and, accordingly, as
a REIT operating in the healthcare industry, we are not
permitted by current tax law to operate or manage the businesses
conducted in our facilities. Accordingly, we rely almost
exclusively on rent payments from our tenants for cash with
which to make distributions to our stockholders. We have no
control over the success or failure of these tenants
businesses. Significant adverse changes in the operations of any
facility, or the financial condition of any tenant or a
guarantor, could have a material adverse effect on our ability
to collect rent payments and, accordingly, on our ability to
make distributions to our stockholders. Facility management by
our tenants and their compliance with state and federal
healthcare laws could have a material impact on our
tenants operating and financial condition and, in turn,
their ability to pay rent to us. Failure on the part of a tenant
to comply materially with the terms of a lease could give us the
right to terminate our lease with that tenant, repossess the
applicable facility, cross default certain other leases with
that tenant and enforce the payment obligations under the lease.
However, we then would be required to find another
tenant-operator.
The transfer of most types of healthcare facilities is highly
regulated, which may result in delays and increased costs in
locating a suitable replacement tenant. The sale or lease of
these properties to entities other than healthcare operators may
be difficult due to the added cost and time of refitting the
properties. If we are unable to re-let the properties to
healthcare operators, we may be forced to sell the properties at
a loss due to the repositioning expenses likely to be incurred
by non-healthcare purchasers. Alternatively, we may be required
to spend substantial amounts to adapt the facility to other
uses. There can be no assurance that we would be able to find
another tenant in a timely fashion, or at all, or that, if
another tenant were found, we would be able to enter into a new
lease on favorable terms. Defaults by our tenants under our
leases may adversely affect the timing of and our ability to
make distributions to our stockholders.
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Failure
by our tenants or other parties to whom we make loans to repay
loans currently outstanding or loans we are obligated to make,
or to pay us commitment or other fees that they are obligated to
pay, in an aggregate amount of approximately
$152.7 million, would have a material adverse effect on our
revenues and our ability to make distributions to our
stockholders.
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In connection with the acquisition of the Vibra Facilities, our
taxable REIT subsidiary made a secured loan to Vibra of
approximately $41.4 million to acquire the operations at
the Vibra Facilities. Payment of this loan is secured by pledges
of equity interests in Vibra and its subsidiaries that are
tenants of ours. All leases and other agreements between us, or
our affiliates, on the one hand, and the tenant and
Mr. Hollinger, or their affiliates, on the other hand,
including leases for the Vibra Facilities, the lease for the
facility located in Redding, California, or the Redding
Facility, and the Vibra loan, are cross-defaulted. If Vibra
defaulted on this loan, our primary recourse would be to
foreclose on the equity interests in Vibra and its affiliates.
This recourse may be impractical because of limitations imposed
by the REIT tax rules on our ability to own these interests.
Failure to adhere to these limitations could cause us to lose
our REIT status. We have obtained guaranty agreements for the
Vibra loan from Mr. Hollinger, Vibra Management, LLC and
The Hollinger Group that obligate them to make loan payments in
the event that Vibra fails to do so. However, we do not believe
that these parties have sufficient financial resources to
satisfy a material portion of the loan obligations.
Mr. Hollingers guaranty is limited to
$5.0 million and Vibra Management, LLC and The Hollinger
Group do not have substantial assets. Vibra has entered into a
$20.0 million credit facility with Merrill Lynch, and that
loan is secured by an interest in Vibras receivables.
There was approximately $10.2 million outstanding under the
facility on December 31, 2005. Our loan is subordinate to
Merrill Lynch with respect to Vibras receivables.
We have also agreed to make a working capital loan to Stealth,
L.P., or Stealth, of up to $1.62 million. Stealth has
borrowed $1.62 million under this loan as of March 24,
2006. Stealth also owes us commitment and other fees of
approximately $1.1 million. Payment of these fees and loan
amounts is unsecured. We have also agreed to make a construction
loan to North Cypress Medical Center Operating Company, Ltd., or
North Cypress, for approximately $64.0 million to fund the
construction of a community hospital in Houston, Texas, secured
by the hospital improvements, $18.7 million of which has
been loaned to North Cypress as of March 24, 2006. Bucks
County Oncoplastic Institute, LLC, or BCO, owes us commitment
and other fees of $420,000. BCO also owes us approximately
$4.0 million in connection with a loan we made to BCO, the
loan proceeds of which we have retained in a separate bank
account as security for BCOs loan repayment obligations
and its obligations under the lease for the facility we are
developing in Bensalem, Pennsylvania, or the Bucks County
Facility. Monroe Hospital LLC, or Monroe Hospital, owes us
commitment and other fees of approximately $232,500.
On December 23, 2005, we made a $40.0 million mortgage
loan to Alliance Hospital, Ltd., or Alliance. As security for
Alliances obligations under the mortgage loan, all
principal, base interest and additional interest on the first
$30.0 million of the loan amount is guaranteed on a pro
rata basis by the shareholders of SRI-SAI Enterprises, Inc., the
general partner of Alliance, until such time as Alliance meets
certain financial conditions. Additionally, we have received a
first mortgage on the facility and a first or second priority
security interest in all of Alliances personal property
other than accounts receivable, along with other security. We
are dependent upon the ability of Vibra, Stealth, North Cypress,
BCO, Monroe Hospital and Alliance to repay these loans and fees,
and their failure to meet these obligations would have a
material adverse effect on our revenues and our ability to make
distributions to our stockholders.
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Accounting
rules may require consolidation of entities in which we invest
and other adjustments to our financial statements.
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The Financial Accounting Standards Board, or FASB, issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities, an interpretation of Accounting Research
Bulletin No. 51 (ARB No. 51), in January
2003, and a further interpretation of FIN 46 in December
2003
(FIN 46-R,
and collectively FIN 46). FIN 46 clarifies the
application of ARB No. 51, Consolidated Financial
Statements, to certain entities in which equity investors
do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated
financial support from other parties, referred to as variable
interest entities. FIN 46 generally requires consolidation
by the party that has a majority of the risk
and/or
rewards, referred to as the primary beneficiary. FIN 46
applies immediately to variable interest entities created after
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January 31, 2003. Under certain circumstances, generally
accepted accounting principles may require us to account for
loans to thinly capitalized companies such as Vibra as equity
investments. The resulting accounting treatment of certain
income and expense items may adversely affect our results of
operations, and consolidation of balance sheet amounts may
adversely affect any loan covenants.
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The
bankruptcy or insolvency of our tenants under our leases could
seriously harm our operating results and financial
condition.
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Five of our tenants, North Cypress, Stealth, BCO, Monroe
Hospital and Vibra are, and some of our prospective tenants may
be, newly organized, have limited or no operating history and
may be dependent on loans from us to acquire the facilitys
operations and for initial working capital. Any bankruptcy
filings by or relating to one of our tenants could bar us from
collecting pre-bankruptcy debts from that tenant or their
property, unless we receive an order permitting us to do so from
the bankruptcy court. A tenant bankruptcy could delay our
efforts to collect past due balances under our leases and loans,
and could ultimately preclude collection of these sums. If a
lease is assumed by a tenant in bankruptcy, we expect that all
pre-bankruptcy balances due under the lease would be paid to us
in full. However, if a lease is rejected by a tenant in
bankruptcy, we would have only a general unsecured claim for
damages. Any secured claims we have against our tenants may only
be paid to the extent of the value of the collateral, which may
not cover any or all of our losses. Any unsecured claim we hold
against a bankrupt entity may be paid only to the extent that
funds are available and only in the same percentage as is paid
to all other holders of unsecured claims. We may recover none or
substantially less than the full value of any unsecured claims,
which would harm our financial condition.
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Our
facilities and properties under development are currently leased
to only eight tenants, five of which were recently organized and
have limited or no operating histories, and failure of any of
these tenants and the guarantors of their leases to meet their
obligations to us would have a material adverse effect on our
revenues and our ability to make distributions to our
stockholders.
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Our existing facilities and the properties we have under
development are currently leased to Vibra, Prime Healthcare
Services, Inc., or Prime, Gulf States, North Cypress, BCO,
Monroe Hospital and Stealth or their subsidiaries or affiliates.
If any of our tenants were to experience financial difficulties,
the tenant may not be able to pay its rent. Vibra, North
Cypress, BCO, Monroe Hospital and Stealth were recently
organized and have limited or no operating histories.
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Our
business is highly competitive and we may be unable to compete
successfully.
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We compete for development opportunities and opportunities to
purchase healthcare facilities with, among others:
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private investors;
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healthcare providers, including physicians;
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other REITs;
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real estate partnerships;
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financial institutions; and
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local developers.
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Many of these competitors have substantially greater financial
and other resources than we have and may have better
relationships with lenders and sellers. Competition for
healthcare facilities from competitors may adversely affect our
ability to acquire or develop healthcare facilities and the
prices we pay for those facilities. If we are unable to acquire
or develop facilities or if we pay too much for facilities, our
revenue and earnings growth and financial return could be
materially adversely affected. Certain of our facilities and
additional facilities we may acquire or develop will face
competition from other nearby facilities that provide services
comparable to those offered at our facilities and additional
facilities we may acquire or develop. Some of those facilities
are owned by governmental agencies and supported by tax
revenues, and others are owned by tax-exempt corporations and
may be supported to
13
a large extent by endowments and charitable contributions. Those
types of support are not available to our facilities and
additional facilities we may acquire or develop. In addition,
competing healthcare facilities located in the areas served by
our facilities and additional facilities we may acquire or
develop may provide healthcare services that are not available
at our facilities and additional facilities we may acquire or
develop. From time to time, referral sources, including
physicians and managed care organizations, may change the
healthcare facilities to which they refer patients, which could
adversely affect our rental revenues.
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Our
use of debt financing will subject us to significant risks,
including refinancing risk and the risk of insufficient cash
available for distribution to our stockholders.
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Our charter and other organizational documents do not limit the
amount of debt we may incur. We have targeted our debt level at
up to approximately 50-60% of our aggregate facility acquisition
and development costs. However, we may modify our target debt
level at any time without stockholder or board of director
approval. In October 2005 we entered into a $100.0 million
credit agreement with Merrill Lynch Capital, the principal
amount of which may be increased to $175.0 million at our
request. We have also entered into construction loan agreements
with Colonial Bank pursuant to which we can borrow up to
$43.4 million. As of March 24, 2006, we have
$71.9 million of long-term debt outstanding. We may borrow
from other lenders in the future, or we may issue corporate debt
securities in public or private offerings.
We anticipate that much of our debt will be
non-amortizing
and payable in balloon payments. Therefore, we will likely need
to refinance at least a portion of that debt as it matures.
There is a risk that we may not be able to refinance
then-existing debt or that the terms of any refinancing will not
be as favorable as the terms of the then-existing debt. If
principal payments due at maturity cannot be refinanced,
extended or repaid with proceeds from other sources, such as new
equity capital or sales of facilities, our cash flow may not be
sufficient to repay all maturing debt in years when significant
balloon payments come due. Additionally, we may incur
significant penalties if we choose to prepay the debt.
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Failure
to hedge effectively against interest rate changes may adversely
affect our results of operations and our ability to make
distributions to our stockholders.
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As of March 24, 2006, we had approximately
$71.9 million in variable interest rate debt. We may seek
to manage our exposure to interest rate volatility by using
interest rate hedging arrangements that involve risk, including
the risk that counterparties may fail to honor their obligations
under these arrangements, that these arrangements may not be
effective in reducing our exposure to interest rate changes and
that these arrangements may result in higher interest rates than
we would otherwise have. Moreover, no hedging activity can
completely insulate us from the risks associated with changes in
interest rates. Failure to hedge effectively against interest
rate changes may materially adversely affect results of
operations and our ability to make distributions to our
stockholders.
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Most
of our current tenants have, and prospective tenants may have,
an option to purchase the facilities we lease to them which
could disrupt our operations.
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Most of our current tenants have, and some prospective tenants
will have, the option to purchase the facilities we lease to
them. All of our arrangements which provide or will provide
tenants the option to purchase the facilities we lease to them
are subject to regulatory requirements that such purchases be at
fair market value. We cannot assure you that the formulas we
have developed for setting the purchase price will yield a fair
market value purchase price. Any purchase not at fair market
value may present risks of challenge from healthcare regulatory
authorities.
In the event our tenants and prospective tenants determine to
purchase the facilities they lease either during the lease term
or after their expiration, the timing of those purchases will be
outside of our control and we may not be able to re-invest the
capital on as favorable terms, or at all. Our inability to
effectively manage the turn-over of our facilities could
materially adversely affect our ability to execute our business
plan and our results of operations.
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Property
owned in limited liability companies and partnerships in which
we are not the sole equity holder may limit our ability to act
exclusively in our interests.
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We own, and in the future expect to own, interests in our
facilities through wholly or majority owned subsidiaries of our
operating partnership. We may offer limited liability company
and limited partnership interests to tenants, subtenants and
physicians in the future. Investments in partnerships, limited
liability companies or other entities with co-owners may, under
certain circumstances, involve risks not present were a co-owner
not involved, including the possibility that partners or other
co-owners might become bankrupt or fail to fund their share of
required capital contributions. Partners or other co-owners may
have economic or other business interests or goals that are
inconsistent with our business interests or goals, and may be in
a position to take actions contrary to our policies or
objectives. Such investments may also have potential risks
pertaining to healthcare regulatory compliance, particularly
when partners or other co-owners are physicians, and of impasses
on major decisions, such as sales or mergers, because neither we
nor our partners or other co-owners would have full control over
the partnership, limited liability company or other entity.
Disputes between us and our partners or other co-owners may
result in litigation or arbitration that would increase our
expenses and prevent our officers and directors from focusing
their time and effort on our business. Consequently, actions by
or disputes with our partners or other co-owners might result in
subjecting facilities owned by the partnership, limited
liability company or other entity to additional risk. In
addition, we may in certain circumstances be liable for the
actions of our partners or other co-owners. The occurrence of
any of the foregoing events could have a material adverse effect
on our results of operations and our ability to make
distributions to our stockholders.
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Terrorist
attacks, such as the attacks that occurred in New York and
Washington, D.C. on September 11, 2001,
U.S. military action and the publics reaction to the
threat of terrorism or military action could adversely affect
our results of operations and the market on which our common
stock will trade.
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There may be future terrorist threats or attacks against the
United States or U.S. businesses. These attacks may
directly impact the value of our facilities through damage,
destruction, loss or increased security costs. Losses due to
wars or terrorist attacks may be uninsurable, or insurance may
not be available at a reasonable price. More generally, any of
these events could cause consumer confidence and spending to
decrease or result in increased volatility in the United States
and worldwide financial markets and economies.
Risks
Relating to Real Estate Investments
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Our
real estate investments are and will continue to be concentrated
in net-leased healthcare facilities, making us more vulnerable
economically than if our investments were more
diversified.
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We have acquired and are developing and expect to continue
acquiring and developing net-leased healthcare facilities. We
are subject to risks inherent in concentrating investments in
real estate. The risks resulting from a lack of diversification
become even greater as a result of our business strategy to
invest in net-leased healthcare facilities. A downturn in the
real estate industry could materially adversely affect the value
of our facilities. A downturn in the healthcare industry could
negatively affect our tenants ability to make lease or
loan payments to us and, consequently, our ability to meet debt
service obligations or make distributions to our stockholders.
These adverse effects could be more pronounced than if we
diversified our investments outside of real estate or outside of
healthcare facilities.
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Our
net-leased facilities and targeted net-leased facilities may not
have efficient alternative uses, which could impede our ability
to find replacement tenants in the event of termination or
default under our leases.
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All of the facilities in our current portfolio are and all of
the facilities we expect to acquire or develop in the future
will be net-leased healthcare facilities. If we or our tenants
terminate the leases for these facilities or if these tenants
lose their regulatory authority to operate these facilities, we
may not be able to locate suitable replacement tenants to lease
the facilities for their specialized uses. Alternatively, we may
be required to spend substantial amounts to adapt the facilities
to other uses. Any loss of revenues or additional capital
expenditures occurring as a
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result could have a material adverse effect on our financial
condition and results of operations and could hinder our ability
to meet debt service obligations or make distributions to our
stockholders.
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Illiquidity
of real estate investments could significantly impede our
ability to respond to adverse changes in the performance of our
facilities and harm our financial condition.
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Real estate investments are relatively illiquid. Our ability to
quickly sell or exchange any of our facilities in response to
changes in economic and other conditions will be limited. No
assurances can be given that we will recognize full value for
any facility that we are required to sell for liquidity reasons.
Our inability to respond rapidly to changes in the performance
of our investments could adversely affect our financial
condition and results of operations.
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Development
and construction risks could adversely affect our ability to
make distributions to our stockholders.
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We are developing a womens hospital and integrated medical
office building in Bensalem, Pennsylvania, developing a
community hospital in Bloomington, Indiana and financing the
development of a community hospital in Houston, Texas. We expect
to develop additional facilities in the future. Our development
and related construction activities may subject us to the
following risks:
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we may have to compete for suitable development sites;
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our ability to complete construction is dependent on there being
no title, environmental or other legal proceedings arising
during construction;
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we may be subject to delays due to weather conditions, strikes
and other contingencies beyond our control;
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we may be unable to obtain, or suffer delays in obtaining,
necessary zoning, land-use, building, occupancy healthcare
regulatory and other required governmental permits and
authorizations, which could result in increased costs, delays in
construction, or our abandonment of these projects;
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we may incur construction costs for a facility which exceed our
original estimates due to increased costs for materials or labor
or other costs that we did not anticipate; and
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we may not be able to obtain financing on favorable terms, which
may render us unable to proceed with our development activities.
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We expect to fund our development projects over time.
Additionally, the time frame required for development and
construction of these facilities means that we may have to wait
years for a significant cash return. Because we are required to
make cash distributions to our stockholders, if the cash flow
from operations or refinancings is not sufficient, we may be
forced to borrow additional money to fund distributions. We
cannot assure you that we will complete our current construction
projects on time or within budget or that future development
projects will not be subject to delays and cost overruns. Risks
associated with our development projects may reduce anticipated
rental revenue which could affect the timing of, and our ability
to make, distributions to our stockholders.
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Our
facilities may not achieve expected results or we may be limited
in our ability to finance future acquisitions, which may harm
our financial condition and operating results and our ability to
make the distributions to our stockholders required to maintain
our REIT status.
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Acquisitions and developments entail risks that investments will
fail to perform in accordance with expectations and that
estimates of the costs of improvements necessary to acquire and
develop facilities will prove inaccurate, as well as general
investment risks associated with any new real estate investment.
We anticipate that future acquisitions and developments will
largely be financed through externally generated funds such as
borrowings under credit facilities and other secured and
unsecured debt financing and from issuances of equity
securities. Because we must distribute at least 90% of our REIT
taxable income, excluding net capital gain, each year to
maintain our qualification as a REIT, our ability to rely upon
income from operations or cash flow from operations to finance
our growth and acquisition activities will be limited.
Accordingly, if we are unable to obtain funds from borrowings or
the capital markets to finance our acquisition and development
activities, our ability to
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grow would likely be curtailed, amounts available for
distribution to stockholders could be adversely affected and we
could be required to reduce distributions, thereby jeopardizing
our ability to maintain our status as a REIT.
Newly-developed or newly-renovated facilities do not have the
operating history that would allow our management to make
objective pricing decisions in acquiring these facilities
(including facilities that may be acquired from certain of our
executive officers, directors and their affiliates). The
purchase prices of these facilities will be based in part upon
projections by management as to the expected operating results
of the facilities, subjecting us to risks that these facilities
may not achieve anticipated operating results or may not achieve
these results within anticipated time frames.
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If we
suffer losses that are not covered by insurance or that are in
excess of our insurance coverage limits, we could lose
investment capital and anticipated profits.
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We have purchased general liability insurance (lessors
risk) that provides coverage for bodily injury and property
damage to third parties resulting from our ownership of the
healthcare facilities that are leased to and occupied by our
tenants. Our leases generally require our tenants to carry
general liability, professional liability, loss of earnings, all
risk, and extended coverage insurance in amounts sufficient to
permit the replacement of the facility in the event of a total
loss, subject to applicable deductibles. However, there are
certain types of losses, generally of a catastrophic nature,
such as earthquakes, floods, hurricanes and acts of terrorism,
that may be uninsurable or not insurable at a price we or our
tenants can afford. Inflation, changes in building codes and
ordinances, environmental considerations and other factors also
might make it impracticable to use insurance proceeds to replace
a facility after it has been damaged or destroyed. Under such
circumstances, the insurance proceeds we receive might not be
adequate to restore our economic position with respect to the
affected facility. If any of these or similar events occur, it
may reduce our return from the facility and the value of our
investment.
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Capital
expenditures for facility renovation may be greater than
anticipated and may adversely impact rent payments by our
tenants and our ability to make distributions to
stockholders.
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Facilities, particularly those that consist of older structures,
have an ongoing need for renovations and other capital
improvements, including periodic replacement of furniture,
fixtures and equipment. Although our leases require our tenants
to be primarily responsible for the cost of such expenditures,
renovation of facilities involves certain risks, including the
possibility of environmental problems, construction cost
overruns and delays, uncertainties as to market demand or
deterioration in market demand after commencement of renovation
and the emergence of unanticipated competition from other
facilities. All of these factors could adversely impact rent and
loan payments by our tenants, could have a material adverse
effect on our financial condition and results of operations and
could adversely effect our ability to make distributions to our
stockholders.
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All of
our healthcare facilities are subject to property taxes that may
increase in the future and adversely affect our
business.
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Our facilities are subject to real and personal property taxes
that may increase as property tax rates change and as the
facilities are assessed or reassessed by taxing authorities. Our
leases generally provide that the property taxes are charged to
our tenants as an expense related to the facilities that they
occupy. As the owner of the facilities, however, we are
ultimately responsible for payment of the taxes to the
government. If property taxes increase, our tenants may be
unable to make the required tax payments, ultimately requiring
us to pay the taxes. If we incur these tax liabilities, our
ability to make expected distributions to our stockholders could
be adversely affected.
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Our
performance and the price of our common stock will be affected
by risks associated with the real estate industry.
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Factors that may adversely affect the economic performance and
price of our common stock include:
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changes in the national, regional and local economic
climate, including but not limited to changes in interest rates;
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local conditions such as an oversupply of, or a reduction in
demand for, rehabilitation hospitals, long-term acute care
hospitals, ambulatory surgery centers, medical office buildings,
specialty hospitals, skilled nursing facilities, regional and
community hospitals, womens and childrens hospitals
and other single-discipline facilities.
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attractiveness of our facilities to healthcare providers and
other types of tenants; and
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competition from other rehabilitation hospitals, long-term acute
care facilities, medical office buildings, outpatient treatment
facilities, ambulatory surgery centers and specialty hospitals,
skilled nursing facilities, regional and community hospitals,
womens and childrens hospitals and other
single-discipline facilities.
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As the
owner and lessor of real estate, we are subject to risks under
environmental laws, the cost of compliance with which and any
violation of which could materially adversely affect
us.
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Our operating expenses could be higher than anticipated due to
the cost of complying with existing and future environmental and
occupational health and safety laws and regulations. Various
environmental laws may impose liability on a current or prior
owner or operator of real property for removal or remediation of
hazardous or toxic substances. Current or prior owners or
operators may also be liable for government fines and damages
for injuries to persons, natural resources and adjacent
property. These environmental laws often impose liability
whether or not the owner or operator knew of, or was responsible
for, the presence or disposal of the hazardous or toxic
substances. The cost of complying with environmental laws could
materially adversely affect amounts available for distribution
to our stockholders and could exceed the value of all of our
facilities. In addition, the presence of hazardous or toxic
substances, or the failure of our tenants to properly dispose of
or remediate such substances, including medical waste generated
by physicians and our other healthcare tenants, may adversely
affect our tenants or our ability to use, sell or rent such
property or to borrow using such property as collateral which,
in turn, could reduce our revenue and our financing ability. We
have obtained on all facilities we have acquired and are
developing and intend to obtain on all future facilities we
acquire Phase I environmental assessments. However, even if
the Phase I environmental assessment reports do not reveal
any material environmental contamination, it is possible that
material environmental liabilities may exist of which we are
unaware.
Although the leases for our facilities generally require our
tenants to comply with laws and regulations governing their
operations, including the disposal of medical waste, and to
indemnify us for certain environmental liabilities, the scope of
their obligations may be limited. We cannot assure you that our
tenants would be able to fulfill their indemnification
obligations and, therefore, any violation of environmental laws
could have a material adverse affect on us. In addition,
environmental and occupational health and safety laws constantly
are evolving, and changes in laws, regulations or policies, or
changes in interpretations of the foregoing, could create
liabilities where none exists today.
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Costs
associated with complying with the Americans with Disabilities
Act of 1993 may adversely affect our financial condition and
operating results.
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Under the Americans with Disabilities Act of 1993, all public
accommodations are required to meet certain federal requirements
related to access and use by disabled persons. While our
facilities are generally in compliance with these requirements,
a determination that we are not in compliance with the Americans
with Disabilities Act of 1993 could result in imposition of
fines or an award of damages to private litigants. In addition,
changes in governmental rules and regulations or enforcement
policies affecting the use and operation of the facilities,
including changes to building codes and fire and life-safety
codes, may occur. If we are required to make substantial
modifications at our facilities to comply with the Americans
with Disabilities Act of 1993 or other changes in governmental
rules and regulations, this may have a material adverse effect
on our financial condition and results of operations and could
adversely affect our ability to make distributions to our
stockholders.
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Our
facilities may contain or develop harmful mold or suffer from
other air quality issues, which could lead to liability for
adverse health effects and costs of remediating the
problem.
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When excessive moisture accumulates in buildings or on building
materials, mold growth may occur, particularly if the moisture
problem remains undiscovered or is not addressed over a period
of time. Some molds
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may produce airborne toxins or irritants. Indoor air quality
issues can also stem from inadequate ventilation, chemical
contamination from indoor or outdoor sources and other
biological contaminants such as pollen, viruses and bacteria.
Indoor exposure to airborne toxins or irritants above certain
levels can be alleged to cause a variety of adverse health
effects and symptoms, including allergic or other reactions. As
a result, the presence of significant mold or other airborne
contaminants at any of our facilities could require us to
undertake a costly remediation program to contain or remove the
mold or other airborne contaminants from the affected facilities
or increase indoor ventilation. In addition, the presence of
significant mold or other airborne contaminants could expose us
to liability from our tenants, employees of our tenants and
others if property damage or health concerns arise.
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Our
interests in facilities through ground leases expose us to the
loss of the facility upon breach or termination of the ground
lease and may limit our use of the facility.
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We have acquired interests in two of our facilities, at least in
part, and one facility under development, by acquiring leasehold
interests in the land on which the facility is or the facility
under development will be located rather than an ownership
interest in the property, and we may acquire additional
facilities in the future through ground leases. As lessee under
ground leases, we are exposed to the possibility of losing the
property upon termination, or an earlier breach by us, of the
ground lease. Ground leases may also restrict our use of
facilities. Our current ground lease in Marlton, New Jersey
limits use of the property to operation of a 76 bed
rehabilitation hospital. Our current ground lease for the
Redding Facility limits use of the property to operation of a
hospital offering the following services: skilled nursing;
physical rehabilitation; occupational therapy; speech pathology;
social services; assisted living; day health programs; long-term
acute care services; psychiatric services; geriatric clinic
services; outpatient services related to the foregoing service
categories; and other post-acute services. These restrictions
and any similar future restrictions in ground leases will limit
our flexibility in renting the facility and may impede our
ability to sell the property.
Risks
Relating to the Healthcare Industry
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Reductions
in reimbursement from third-party payors, including Medicare and
Medicaid, could adversely affect the profitability of our
tenants and hinder their ability to make rent payments to
us.
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Sources of revenue for our tenants and operators may include the
federal Medicare program, state Medicaid programs, private
insurance carriers and health maintenance organizations, among
others. Efforts by such payors to reduce healthcare costs will
likely continue, which may result in reductions or slower growth
in reimbursement for certain services provided by some of our
tenants. In addition, the failure of any of our tenants to
comply with various laws and regulations could jeopardize their
ability to continue participating in Medicare, Medicaid and
other government-sponsored payment programs.
The healthcare industry continues to face various challenges,
including increased government and private payor pressure on
healthcare providers to control or reduce costs. We believe that
our tenants will continue to experience a shift in payor mix
away from
fee-for-service
payors, resulting in an increase in the percentage of revenues
attributable to managed care payors, government payors and
general industry trends that include pressures to control
healthcare costs. Pressures to control healthcare costs and a
shift away from traditional health insurance reimbursement have
resulted in an increase in the number of patients whose
healthcare coverage is provided under managed care plans, such
as health maintenance organizations and preferred provider
organizations. In addition, due to the aging of the population
and the expansion of governmental payor programs, we anticipate
that there will be a marked increase in the number of patients
reliant on healthcare coverage provided by governmental payors.
These changes could have a material adverse effect on the
financial condition of some or all of our tenants, which could
have a material adverse effect on our financial condition and
results of operations and could negatively affect our ability to
make distributions to our stockholders.
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The
healthcare industry is heavily regulated and existing and new
laws or regulations, changes to existing laws or regulations,
loss of licensure or certification or failure to obtain
licensure or certification could result in the inability of our
tenants to make lease payments to us.
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The healthcare industry is highly regulated by federal, state
and local laws, and is directly affected by federal conditions
of participation, state licensing requirements, facility
inspections, state and federal reimbursement policies,
regulations concerning capital and other expenditures,
certification requirements and other such laws, regulations and
rules. In addition, establishment of healthcare facilities and
transfers of operations of healthcare facilities are subject to
regulatory approvals not required for establishment of or
transfers of other types of commercial operations and real
estate. Sanctions for failure to comply with these regulations
and laws include, but are not limited to, loss of or inability
to obtain licensure, fines and loss of or inability to obtain
certification to participate in the Medicare and Medicaid
programs, as well as potential criminal penalties. The failure
of any tenant to comply with such laws, requirements and
regulations could affect its ability to establish or continue
its operation of the facility or facilities and could adversely
affect the tenants ability to make lease payments to us
which could have a material adverse effect on our financial
condition and results of operations and could negatively affect
our ability to make distributions to our stockholders. In
addition, restrictions and delays in transferring the operations
of healthcare facilities, in obtaining new third-party payor
contracts including Medicare and Medicaid provider agreements,
and in receiving licensure and certification approval from
appropriate state and federal agencies by new tenants may affect
our ability to terminate lease agreements, remove tenants that
violate lease terms, and replace existing tenants with new
tenants. Furthermore, these matters may affect new tenants
ability to obtain reimbursement for services rendered, which
could adversely affect their ability to pay rent to us and to
pay principal and interest on their loans from us.
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Our
tenants are subject to fraud and abuse laws, the violation of
which by a tenant may jeopardize the tenants ability to
make lease and loan payments to us.
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The federal government and numerous state governments have
passed laws and regulations that attempt to eliminate healthcare
fraud and abuse by prohibiting business arrangements that induce
patient referrals or the ordering of specific ancillary
services. In addition, the Balanced Budget Act of 1997
strengthened the federal anti-fraud and abuse laws to provide
for stiffer penalties for violations. Violations of these laws
may result in the imposition of criminal and civil penalties,
including possible exclusion from federal and state healthcare
programs. Imposition of any of these penalties upon any of our
tenants could jeopardize any tenants ability to operate a
facility or to make lease and loan payments, thereby potentially
adversely affecting us.
In the past several years, federal and state governments have
significantly increased investigation and enforcement activity
to detect and eliminate fraud and abuse in the Medicare and
Medicaid programs. In addition, legislation has been adopted at
both state and federal levels which severely restricts the
ability of physicians to refer patients to entities in which
they have a financial interest. It is anticipated that the trend
toward increased investigation and enforcement activity in the
area of fraud and abuse, as well as self-referrals, will
continue in future years and could adversely affect our
prospective tenants and their operations, and in turn their
ability to make lease and loan payments to us.
Vibra has accepted, and prospective tenants may accept, an
assignment of the previous operators Medicare provider
agreement. Vibra and other new-operator tenants that take
assignment of Medicare provider agreements might be subject to
federal or state regulatory, civil and criminal investigations
of the previous owners operations and claims submissions.
While we conduct due diligence in connection with the
acquisition of such facilities, these types of issues may not be
discovered prior to purchase. Adverse decisions, fines or
recoupments might negatively impact our tenants financial
condition.
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Certain
of our lease arrangements may be subject to fraud and abuse or
physician self-referral laws.
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Local physician investment in our operating partnership or our
subsidiaries that own our facilities could subject our lease
arrangements to scrutiny under fraud and abuse and physician
self-referral laws. Under the federal Ethics in Patient
Referrals Act of 1989, or Stark Law, and regulations adopted
thereunder, if our lease arrangements do not satisfy the
requirements of an applicable exception, that noncompliance
could adversely affect the ability of our
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tenants to bill for services provided to Medicare beneficiaries
pursuant to referrals from physician investors and subject us
and our tenants to fines, which could impact their ability to
make lease and loan payments to us. On March 26, 2004, CMS
issued Phase II final rules under the Stark Law, which,
together with the 2001 Phase I final rules, set forth
CMS current interpretation and application of the Stark
Law prohibition on referrals of designated health services, or
DHS. These rules provide us additional guidance on application
of the Stark Law through the implementation of
bright-line tests, including additional regulations
regarding the indirect compensation exception, but do not
eliminate the risk that our lease arrangements and business
strategy of physician investment may violate the Stark Law.
Finally, the Phase II rules implemented an
18-month
moratorium on physician ownership or investment in specialty
hospitals imposed by the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003. The moratorium
imposed by the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 expired on June 8, 2005. However,
that moratorium was retroactively extended by the passage of the
Deficit Reduction Act of 2005 (the DRA) which
requires the Secretary of Health and Human Services to develop a
strategic and implementing plan for physician investment in
specialty hospitals that addresses the issues of proportionality
of investment return, bona fide investment, annual disclosure of
investments, and the provision of medical assistance (Medicaid)
and charity care. The report is due six months after the date of
enactment, but this deadline may be extended by two months. The
DRA also directs CMS to continue the moratorium on enrollment of
specialty hospitals until the earlier of the date the report is
submitted or 6 months after enactment of the DRA. We intend
to use our good faith efforts to structure our lease
arrangements to comply with these laws; however, if we are
unable to do so, this failure may restrict our ability to permit
physician investment or, where such physicians do participate,
may restrict the types of lease arrangements into which we may
enter, including our ability to enter into percentage rent
arrangements.
|
|
|
State
certificate of need laws may adversely affect our development of
facilities and the operations of our tenants.
|
Certain healthcare facilities in which we invest may also be
subject to state laws which require regulatory approval in the
form of a certificate of need prior to initiation of certain
projects, including, but not limited to, the establishment of
new or replacement facilities, the addition of beds, the
addition or expansion of services and certain capital
expenditures. State certificate of need laws are not uniform
throughout the United States and are subject to change. We
cannot predict the impact of state certificate of need laws on
our development of facilities or the operations of our tenants.
In addition, certificate of need laws often materially impact
the ability of competitors to enter into the marketplace of our
facilities. Finally, in limited circumstances, loss of state
licensure or certification or closure of a facility could
ultimately result in loss of authority to operate the facility
and require re-licensure or new certificate of need
authorization to re-institute operations. As a result, a portion
of the value of the facility may be related to the limitation on
new competitors. In the event of a change in the certificate of
need laws, this value may markedly decrease.
Risks
Relating to Our Organization and Structure
|
|
|
Maryland
law, our charter and our bylaws contain provisions which may
prevent or deter changes in management and third-party
acquisition proposals that you may believe to be in your best
interest, depress our stock price or cause
dilution.
|
Our charter contains ownership limitations that may restrict
business combination opportunities, inhibit change of control
transactions and reduce the value of our
stock. To qualify as a REIT under the Revenue
Code of 1986, as amended (the Code), no more than 50% in value
of our outstanding stock, after taking into account options to
acquire stock, may be owned, directly or indirectly, by five or
fewer persons during the last half of each taxable year, other
than our first REIT taxable year. Our charter generally
prohibits direct or indirect ownership by any person of more
than 9.8% in value or in number, whichever is more restrictive,
of outstanding shares of any class or series of our securities,
including our common stock. Generally, common stock owned by
affiliated owners will be aggregated for purposes of the
ownership limitation. The ownership limitation could have the
effect of delaying, deterring or preventing a change in control
or other transaction in which holders of common stock might
receive a premium for their common stock over the then-current
market price or which such holders otherwise might believe
21
to be in their best interests. The ownership limitation
provisions also may make our common stock an unsuitable
investment vehicle for any person seeking to obtain, either
alone or with others as a group, ownership of more than 9.8% of
either the value or number of the outstanding shares of our
common stock.
Our charter and bylaws contain provisions that may impede
third-party acquisition proposals that may be in your best
interests. Our charter and bylaws also provide
that our directors may only be removed by the affirmative vote
of the holders of two-thirds of our stock, that stockholders are
required to give us advance notice of director nominations and
new business to be conducted at our annual meetings of
stockholders and that special meetings of stockholders can only
be called by our president, our board of directors or the
holders of at least 25% of stock entitled to vote at the
meetings. These and other charter and bylaw provisions may delay
or prevent a change of control or other transaction in which
holders of our common stock might receive a premium for their
common stock over the then-current market price or which such
holders otherwise might believe to be in their best interests.
|
|
|
We
depend on key personnel, the loss of any one of whom may
threaten our ability to operate our business
successfully.
|
We depend on the services of Edward K. Aldag, Jr., William
G. McKenzie, Emmett E. McLean, R. Steven Hamner and Michael G.
Stewart to carry out our business and investment strategy. If we
were to lose any of these executive officers, it may be more
difficult for us to locate attractive acquisition targets,
complete our acquisitions and manage the facilities that we have
acquired or are developing. Additionally, as we expand, we will
continue to need to attract and retain additional qualified
officers and employees. The loss of the services of any of our
executive officers, or our inability to recruit and retain
qualified personnel in the future, could have a material adverse
effect on our business and financial results.
|
|
|
We may
experience conflicts of interest with our officers and
directors, which could result in our officers and directors
acting other than in our best interest.
|
Our officers and directors may have conflicts of interest in
connection with their duties to us and the limited partners of
our operating partnership and with allocation of their time
between our business and affairs and their other business
interests. In addition, from time to time, we may acquire or
develop facilities in transactions involving prospective tenants
in which our directors or officers have an interest. In
transactions of this nature, there will be conflicts between our
interests and the interests of the director or officer involved,
and that director or officer may be in a position to influence
the terms of those transactions.
In the event we purchase properties from executive officers or
directors in exchange for units of limited partnership in our
operating partnership, the interests of those persons with the
interests of the company may conflict. Where a unitholder has
unrealized gains associated with his limited partnership
interests in our operating partnership, these holders may incur
adverse tax consequences in the event of a sale or refinancing
of those properties. Therefore the interest of these executive
officers or directors of our company could be different from the
interests of the company in connection with the disposition or
refinancing of a property. Conflicts of interest with our
officers and directors could result in our officers and
directors acting other than in our best interest.
|
|
|
The
vice chairman of our board of directors, William G. McKenzie,
has other business interests that may hinder his ability to
allocate sufficient time to the management of our operations,
which could jeopardize our ability to execute our business
plan.
|
Our employment agreement with the vice chairman of our board of
directors, Mr. McKenzie, permits him to continue to own,
operate and control facilities that he owned as of the date of
his employment agreement and requires that he only provide a
limited amount of his time per month to our company. In
addition, the terms of Mr. McKenzies employment
agreement permit him to compete against us with respect to these
previously owned healthcare facilities.
22
|
|
|
Our
UPREIT structure may result in conflicts of interest between our
stockholders and the holders of our operating partnership
units.
|
We are organized as an UPREIT, which means that we hold our
assets and conduct substantially all of our operations through
an operating limited partnership, and may in the future issue
limited partnership units to third parties. Persons holding
operating partnership units would have the right to vote on
certain amendments to the partnership agreement of our operating
partnership, as well as on certain other matters. Persons
holding these voting rights may exercise them in a manner that
conflicts with the interests of our stockholders. Circumstances
may arise in the future, such as the sale or refinancing of one
of our facilities, when the interests of limited partners in our
operating partnership conflict with the interests of our
stockholders. As the general partner of our operating
partnership, we have fiduciary duties to the limited partners of
our operating partnership that may conflict with fiduciary
duties our officers and directors owe to our stockholders. These
conflicts may result in decisions that are not in your best
interest.
Tax Risks
Associated With Our Status as a REIT
|
|
|
Loss
of our tax status as a REIT would have significant adverse
consequences to us and the value of our common
stock.
|
We believe that we qualify as a REIT for federal income tax
purposes and have elected to be taxed as a REIT under the
federal income tax laws commencing with our taxable year that
began on April 6, 2004 and ended on December 31, 2004.
The REIT qualification requirements are extremely complex, and
interpretations of the federal income tax laws governing
qualification as a REIT are limited. Accordingly, there is no
assurance that we will be successful in operating so as to
qualify as a REIT. At any time, new laws, regulations,
interpretations or court decisions may change the federal tax
laws relating to, or the federal income tax consequences of,
qualification as a REIT. It is possible that future economic,
market, legal, tax or other considerations may cause our board
of directors to revoke the REIT election, which it may do
without stockholder approval.
If we lose or revoke our REIT status, we will face serious tax
consequences that will substantially reduce the funds available
for distribution because:
|
|
|
|
|
we would not be allowed a deduction for distributions to
stockholders in computing our taxable income; therefore we would
be subject to federal income tax at regular corporate rates and
we might need to borrow money or sell assets in order to pay any
such tax;
|
|
|
|
we also could be subject to the federal alternative minimum tax
and possibly increased state and local taxes; and
|
|
|
|
unless we are entitled to relief under statutory provisions, we
also would be disqualified from taxation as a REIT for the four
taxable years following the year during which we ceased to
qualify.
|
As a result of all these factors, a failure to achieve or a loss
or revocation of our REIT status could have a material adverse
effect on our financial condition and results of operations and
would adversely affect the value of our common stock.
|
|
|
Failure
to make required distributions would subject us to
tax.
|
In order to qualify as a REIT, each year we must distribute to
our stockholders at least 90% of our REIT taxable income,
excluding net capital gain. To the extent that we satisfy the
distribution requirement, but distribute less than 100% of our
taxable income, we will be subject to federal corporate income
tax on our undistributed income. In addition, we will incur a 4%
nondeductible excise tax on the amount, if any, by which our
distributions in any year are less than the sum of (1) 85%
of our ordinary income for that year; (2) 95% of our
capital gain net income for that year; and (3) 100% of our
undistributed taxable income from prior years.
We may be required to make distributions to stockholders at
disadvantageous times or when we do not have funds readily
available for distribution. Differences in timing between the
recognition of income and the related cash receipts or the
effect of required debt amortization payments could require us
to borrow money or sell assets to pay out enough of our taxable
income to satisfy the distribution requirement and to avoid
corporate income tax and
23
the 4% excise tax in a particular year. In the future, we may
borrow to pay distributions to our stockholders and the limited
partners of our operating partnership. Any funds that we borrow
would subject us to interest rate and other market risks.
|
|
|
Complying
with REIT requirements may cause us to forego otherwise
attractive opportunities.
|
To qualify as a REIT for federal income tax purposes, we must
continually satisfy tests concerning, among other things, the
sources of our income, the nature and diversification of our
assets, the amounts we distribute to our stockholders and the
ownership of our stock. In order to meet these tests, we may be
required to forego attractive business or investment
opportunities. Overall, no more than 20% of the value of our
assets may consist of securities of one or more taxable REIT
subsidiaries, and no more than 25% of the value of our assets
may consist of securities that are not qualifying assets under
the test requiring that 75% of a REITs assets consist of
real estate and other related assets. Further, a taxable REIT
subsidiary may not directly or indirectly operate or manage a
healthcare facility. For purposes of this definition a
healthcare facility means a hospital, nursing
facility, assisted living facility, congregate care facility,
qualified continuing care facility, or other licensed facility
which extends medical or nursing or ancillary services to
patients and which is operated by a service provider that is
eligible for participation in the Medicare program under
Title XVIII of the Social Security Act with respect to the
facility. Thus, compliance with the REIT requirements may limit
our flexibility in executing our business plan.
|
|
|
Our
loan to Vibra could be recharacterized as equity, in which case
our rental income from Vibra would not be qualifying income
under the REIT rules and we could lose our REIT
status.
|
In connection with the acquisition of the Vibra Facilities, our
taxable REIT subsidiary made a loan to Vibra in an aggregate
amount of approximately $41.4 million to acquire the
operations at the Vibra Facilities. Our taxable REIT subsidiary
also made a loan of approximately $6.2 million to Vibra and
its subsidiaries for working capital purposes, which has been
paid in full. The acquisition loan bears interest at an annual
rate of 10.25%. Our operating partnership loaned the funds to
our taxable REIT subsidiary to make these loans. The loan from
our operating partnership to our taxable REIT subsidiary bears
interest at an annual rate of 9.25%.
The Internal Revenue Service, or IRS, may take the position that
the loans to Vibra should be treated as equity interests in
Vibra rather than debt, and that our rental income from Vibra
should not be treated as qualifying income for purposes of the
REIT gross income tests. If the IRS were to successfully treat
the loans to Vibra as equity interests in Vibra, Vibra would be
a related party tenant with respect to our company
and the rent that we receive from Vibra would not be qualifying
income for purposes of the REIT gross income tests. As a result,
we could lose our REIT status. In addition, if the IRS were to
successfully treat the loans to Vibra as interests held by our
operating partnership rather than by our taxable REIT subsidiary
and to treat the loans as other than straight debt, we would
fail the 10% asset test with respect to such interests and, as a
result, could lose our REIT status, which would subject us to
corporate level income tax and adversely affect our ability to
make distributions to our stockholders.
24
At December 31, 2005, our portfolio consisted of 14
properties with an aggregate of approximately one million square
feet and 1,030 licensed beds. We also own three land parcels
containing three buildings in various stages of completion that
we believe can support up to approximately 432,000 square
feet and 128 licensed beds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Percentage of
|
|
|
Total
|
|
State
|
|
Revenue
|
|
|
Total Revenue
|
|
|
Investment
|
|
|
California
|
|
$
|
9,701,292
|
|
|
|
30.7
|
%
|
|
$
|
116,196,486
|
|
Colorado
|
|
|
2,175,235
|
|
|
|
6.9
|
%
|
|
|
8,491,481
|
|
Kentucky
|
|
|
6,876,806
|
|
|
|
21.8
|
%
|
|
|
38,211,658
|
|
Louisiana
|
|
|
1,169,679
|
|
|
|
3.7
|
%
|
|
|
17,534,836
|
|
Massachusetts
|
|
|
4,386,374
|
|
|
|
13.9
|
%
|
|
|
22,077,847
|
|
New Jersey
|
|
|
6,043,017
|
|
|
|
19.2
|
%
|
|
|
32,267,622
|
|
Texas
|
|
|
1,196,796
|
|
|
|
3.8
|
%
|
|
|
56,409,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,549,199
|
|
|
|
100.0
|
%
|
|
$
|
291,189,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Number of
|
|
Type of Property
|
|
Properties
|
|
|
Square Feet
|
|
|
Licensed Beds
|
|
|
Community Hospital
|
|
|
4
|
|
|
|
434,247
|
|
|
|
360
|
|
Long-term Acute Care Hospital
|
|
|
5
|
|
|
|
248,699
|
|
|
|
355
|
|
Medical Office Building
|
|
|
1
|
|
|
|
122,325
|
|
|
|
|
|
Rehabilitation Hospital
|
|
|
4
|
|
|
|
362,880
|
|
|
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
1,168,151
|
|
|
|
1,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 3.
|
Legal
Proceedings
|
None.
|
|
ITEM 4.
|
Submission
of Matters to a Vote of Security Holders
|
Our annual meeting of stockholders was held on October 12,
2005.
Proxies for the annual meeting were solicited pursuant to
Regulation 14A under the Exchange Act. There were no
solicitations in opposition to managements nominees for
the board of directors or other proposals listed in our proxy
statement. All nominees listed in the proxy statement were
elected and all proposals listed in the proxy statement were
approved.
The election of seven directors for the ensuing year was voted
upon at the annual meeting. The number of votes cast for and
withheld for each nominee for director is set forth below:
|
|
|
|
|
|
|
|
|
Nominee:
|
|
For:
|
|
|
Withheld:
|
|
|
Edward K. Aldag, Jr.
|
|
|
32,859,227
|
|
|
|
3,839,050
|
|
Virginia A. Clarke
|
|
|
33,031,667
|
|
|
|
3,666,610
|
|
G. Steven Dawson
|
|
|
32,956,013
|
|
|
|
3,742,264
|
|
Bryan L. Goolsby
|
|
|
33,644,757
|
|
|
|
3,053,520
|
|
R. Steven Hamner
|
|
|
32,939,027
|
|
|
|
3,759,250
|
|
Robert E. Holmes, Ph.D.
|
|
|
34,107,972
|
|
|
|
2,590,305
|
|
William G. McKenzie
|
|
|
32,946,427
|
|
|
|
3,751,850
|
|
L. Glenn Orr, Jr.
|
|
|
33,023,467
|
|
|
|
3,674,810
|
|
25
A proposal to amend our charter regarding transfer or ownership
restrictions on our common stock. The number of votes that were
cast for and against this proposal and the number of abstentions
and broker non-votes are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abstentions and
|
|
For:
|
|
Against:
|
|
|
Broker Non-Votes:
|
|
|
35,526,816
|
|
|
1,159,160
|
|
|
|
12,300
|
|
A proposal to adopt the Amended and Restated Medical Properties
Trust, Inc. 2004 Equity Incentive Plan was voted upon at the
Annual Meeting. The number of votes that were cast for and
against this proposal and the number of abstentions and broker
non-votes are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abstentions and
|
|
For:
|
|
Against:
|
|
|
Broker Non-Votes:
|
|
|
20,476,994
|
|
|
4,846,100
|
|
|
|
766,410
|
|
PART II
|
|
ITEM 5.
|
Market
for Registrants Common Equity and Related Stockholder
Matters
|
Our common stock is traded on the New York Stock Exchange under
the symbol MPW. The following sets forth the high
and low sales prices for the common stock for each quarter from
the initial public offering to the period ending
December 31, 2005, as reported by the New York Stock
Exchange Composite Tape, and the distributions declared by us
with respect to each such period.
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar Period
|
|
High
|
|
|
Low
|
|
|
Distribution
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
11.20
|
|
|
|
9.62
|
|
|
|
0.17
|
|
Fourth Quarter
|
|
|
10.09
|
|
|
|
7.60
|
|
|
|
0.18
|
|
On March 24, 2006, the last reported sale price of the
common shares on the New York Stock Exchange was $10.40. On
March 24, we had approximately 31 shareholders of
record.
The table below is a summary of our distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
|
Date of Distribution
|
|
|
Distribution per Share
|
|
|
February 16, 2006
|
|
|
March 15, 2006
|
|
|
|
April 12, 2006
|
|
|
$
|
.21
|
|
November 18, 2005
|
|
|
December 15, 2005
|
|
|
|
January 19, 2006
|
|
|
$
|
.18
|
|
August 18, 2005
|
|
|
September 15, 2005
|
|
|
|
September 29, 2005
|
|
|
$
|
.17
|
|
May 19, 2005
|
|
|
June 20, 2005
|
|
|
|
July 14, 2005
|
|
|
$
|
.16
|
|
March 4, 2005
|
|
|
March 16, 2005
|
|
|
|
April 15, 2005
|
|
|
$
|
.11
|
|
November 11, 2004
|
|
|
December 16, 2004
|
|
|
|
January 11, 2005
|
|
|
$
|
.11
|
|
September 2, 2004
|
|
|
September 16, 2004
|
|
|
|
October 11, 2004
|
|
|
$
|
.10
|
|
26
|
|
ITEM 6.
|
Selected
Financial Data
|
The following table sets forth selected financial and operating
information on a historical basis for the years ended
December 31, 2005 and 2004, and for the period from
inception (August 27, 2003) to December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
Period from Inception
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
(August 27, 2003) to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
OPERATING DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
31,549,199
|
|
|
$
|
10,893,459
|
|
|
$
|
|
|
Depreciation and amortization
|
|
|
4,404,361
|
|
|
|
1,478,470
|
|
|
|
|
|
General and administrative expenses
|
|
|
8,016,992
|
|
|
|
5,150,786
|
|
|
|
992,418
|
|
Interest expense
|
|
|
1,542,266
|
|
|
|
32,769
|
|
|
|
|
|
Net income
|
|
|
19,640,347
|
|
|
|
4,576,349
|
|
|
|
(1,023,276
|
)
|
Net income per diluted common share
|
|
|
0.61
|
|
|
|
0.24
|
|
|
|
(0.63
|
)
|
Weighted average number of common
shares diluted
|
|
|
32,370,089
|
|
|
|
19,312,634
|
|
|
|
1,630,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,640,347
|
|
|
$
|
4,576,349
|
|
|
$
|
(1,023,276
|
)
|
Depreciation and amortization
|
|
|
4,404,361
|
|
|
|
1,478,470
|
|
|
|
|
|
Funds from operations
|
|
|
24,044,708
|
|
|
|
6,054,819
|
|
|
|
(1,023,276
|
)
|
Funds from operations per diluted
common share
|
|
|
0.74
|
|
|
|
0.31
|
|
|
|
(0.63
|
)
|
Dividends declared per diluted
common share
|
|
|
0.62
|
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
December 31, 2005
|
|
|
2004
|
|
|
2003
|
|
|
BALANCE SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
assets at cost
|
|
$
|
337,102,392
|
|
|
$
|
151,690,293
|
|
|
$
|
166,301
|
|
Other loans and investments
|
|
|
88,205,611
|
|
|
|
50,224,069
|
|
|
|
|
|
Cash and equivalents
|
|
|
59,115,832
|
|
|
|
97,543,677
|
|
|
|
100,000
|
|
Total assets
|
|
|
501,173,546
|
|
|
|
306,506,063
|
|
|
|
468,133
|
|
Debt
|
|
|
100,484,520
|
|
|
|
56,000,000
|
|
|
|
100,000
|
|
Other liabilities
|
|
|
42,238,018
|
|
|
|
17,777,619
|
|
|
|
1,389,779
|
|
Minority interests
|
|
|
2,173,866
|
|
|
|
1,000,000
|
|
|
|
|
|
Total stockholders equity
|
|
|
356,277,142
|
|
|
|
231,728,444
|
|
|
|
(1,021,646
|
)
|
Total liabilities and
stockholders equity
|
|
|
501,173,546
|
|
|
|
306,506,063
|
|
|
|
468,133
|
|
27
|
|
ITEM 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We were incorporated in Maryland on August 27, 2003
primarily for the purpose of investing in and owning net-leased
healthcare facilities across the United States. We also make
real estate mortgage loans and other loans to our tenants. We
have operated as a real estate investment trust
(REIT) since April 6, 2004, and accordingly,
elected REIT status upon the filing in September 2005 of our
calendar year 2004 Federal income tax return. Our existing
tenants are, and our prospective tenants will generally be,
healthcare operating companies and other healthcare providers
that use substantial real estate assets in their operations. We
offer financing for these operators real estate through
100% lease and mortgage financing and generally seek lease and
loan terms of at least 10 years with a series of shorter
renewal terms at the option of our tenants and borrowers. We
also have included and intend to include in our lease agreements
annual contractual rate increases that in the current market
range from 1.5% to 3.5%. Our existing portfolio escalators range
from 2.0% to 3.5%. In addition to the base rent, our leases
require our tenants to pay all operating costs and expenses
associated with the facility.
We acquire and develop healthcare facilities and lease the
facilities to healthcare operating companies under long-term net
leases. We also make mortgage loans to healthcare operators
secured by their real estate assets. We selectively make loans
to certain of our operators through our taxable REIT subsidiary,
the proceeds of which are used for acquisitions and working
capital. We consider our lending business an important element
of our overall business strategy for two primary reasons:
(1) it provides opportunities to make income-earning
investments that yield attractive risk-adjusted returns in an
industry in which our management has expertise, and (2) by
making debt capital available to certain qualified operators, we
believe we create for our company a competitive advantage over
other buyers of, and financing sources for, healthcare
facilities. For purpose of Statement of Financial Accounting
Standards (SFAS) No. 131, Disclosures about Segments of
an Enterprise and Related Information, we conduct business
operations in one segment.
At December 31, 2005, we owned 14 operating healthcare
facilities and held a mortgage loan secured by another. In
addition, we were in process of developing three additional
healthcare facilities that were not yet in operation. We had one
acquisition loan outstanding, the proceeds of which our tenant
used for the acquisition of six hospital operating companies.
The 17 facilities we owned and the one facility that secured our
mortgage loan were in nine states, had a carrying cost of
approximately $331.2 million (including the balance of our
mortgage loan) and comprised approximately 66.1% of our total
assets. Our acquisition and other loans of approximately
$48.2 million represented approximately 9.6% of our total
assets. We do not expect such loan assets at any time to exceed
20% of our total assets. We also had cash and temporary
investments of approximately $59.1 million that represented
approximately 11.8% of our assets. Subsequent to
December 31, 2005, we used $29.0 million of cash to
pay down debt and $7.2 million for distributions to
shareholders.
Our revenues are derived from rents we earn pursuant to the
lease agreements with our tenants and from interest income from
loans to our tenants and other facility owners. Our tenants
operate in the healthcare industry, generally providing medical,
surgical and rehabilitative care to patients. The capacity of
our tenants to pay our rents and interest is dependent upon
their ability to conduct their operations at profitable levels.
We believe that the business environment of the industry
segments in which our tenants operate is generally positive for
efficient operators. However, our tenants operations are
subject to economic, regulatory and market conditions that may
affect their profitability. Accordingly, we monitor certain key
factors, changes to which we believe may provide early
indications of conditions that may affect the level of risk in
our lease and loan portfolio.
Key factors that we consider in underwriting prospective tenants
and in monitoring the performance of existing tenants include
the following:
|
|
|
|
|
the historical and prospective operating margins (measured by a
tenants earnings before interest, taxes, depreciation,
amortization and facility rent) of each tenant and at each
facility;
|
|
|
|
the ratio of our tenants operating earnings both to
facility rent and to facility rent plus other fixed costs,
including debt costs;
|
28
|
|
|
|
|
trends in the source of our tenants revenue, including the
relative mix of Medicare, Medicaid/MediCal, managed care,
commercial insurance, and private pay patients; and
|
|
|
|
the effect of evolving healthcare regulations on our
tenants profitability.
|
Certain business factors, in addition to those described above
that directly affect our tenants, will likely materially
influence our future results of operations. These factors
include:
|
|
|
|
|
trends in the cost and availability of capital, including market
interest rates, that our prospective tenants may use for their
real estate assets instead of financing their real estate assets
through lease structures;
|
|
|
|
unforeseen changes in healthcare regulations that may limit the
opportunities for physicians to participate in the ownership of
healthcare providers and healthcare real estate;
|
|
|
|
reductions in reimbursements from Medicare, state healthcare
programs, and commercial insurance providers that may reduce our
tenants profitability and our lease rates, and;
|
|
|
|
competition from other financing sources.
|
At March 15, 2006, we had 20 employees. Over the next
12 months, we expect to add four to six additional
employees.
Critical
Accounting Policies
In order to prepare financial statements in conformity with
accounting principles generally accepted in the United States,
we must make estimates about certain types of transactions and
account balances. We believe that our estimates of the amount
and timing of lease revenues, credit losses, fair values and
periodic depreciation of our real estate assets, stock
compensation expense, and the effects of any derivative and
hedging activities will have significant effects on our
financial statements. Each of these items involves estimates
that require us to make subjective judgments. We intend to rely
on our experience, collect historical and current market data,
and develop relevant assumptions to arrive at what we believe to
be reasonable estimates. Under different conditions or
assumptions, materially different amounts could be reported
related to the accounting policies described below. In addition,
application of these accounting policies involves the exercise
of judgment on the use of assumptions as to future uncertainties
and, as a result, actual results could materially differ from
these estimates. Our accounting estimates will include the
following:
Revenue Recognition. Our revenues, which are
comprised largely of rental income, include rents that each
tenant pays in accordance with the terms of its respective lease
reported on a straight-line basis over the initial term of the
lease. Since some of our leases provide for rental increases at
specified intervals, straight-line basis accounting requires us
to record as an asset, and include in revenues, straight-line
rent that we will only receive if the tenant makes all rent
payments required through the expiration of the term of the
lease.
Accordingly, our management must determine, in its judgment, to
what extent the straight-line rent receivable applicable to each
specific tenant is collectible. We review each tenants
straight-line rent receivable on a quarterly basis and take into
consideration the tenants payment history, the financial
condition of the tenant, business conditions in the industry in
which the tenant operates, and economic conditions in the area
in which the facility is located. In the event that the
collectibility of straight-line rent with respect to any given
tenant is in doubt, we are required to record an increase in our
allowance for uncollectible accounts or record a direct
write-off of the specific rent receivable, which would have an
adverse effect on our net income for the year in which the
reserve is increased or the direct write-off is recorded and
would decrease our total assets and stockholders equity.
At that time, we stop accruing additional straight-line rent
income.
Our development projects normally allow for us to earn what we
term construction period rent. We record the accrued
construction period rent as a receivable and as deferred revenue
during the construction period. We recognize earned revenue on
the straight-line method as the construction period rent is paid
to us by the lessee/operator, usually beginning when the
lessee/operator takes physical possession of the facility.
We make loans to certain tenants and from time to time may make
construction or mortgage loans to facility owners or other
parties. We recognize interest income on loans as earned based
upon the principal amount
29
outstanding. These loans are generally secured by interests in
real estate, receivables, the equity interests of a tenant, or
corporate and individual guarantees. As with straight-line rent
receivables, our management must also periodically evaluate
loans to determine what amounts may not be collectible.
Accordingly, a provision for losses on loans receivable is
recorded when it becomes probable that the loan will not be
collected in full. The provision is an amount which reduces the
loan to its estimated net receivable value based on a
determination of the eventual amounts to be collected either
from the debtor or from the collateral, if any. At that time, we
discontinue recording interest income on the loan to the tenant.
Investments in Real Estate. We record
investments in real estate at cost, and we capitalize
improvements and replacements when they extend the useful life
or improve the efficiency of the asset. While our tenants are
generally responsible for all operating costs at a facility, to
the extent that we incur costs of repairs and maintenance, we
expense those costs as incurred. We compute depreciation using
the straight-line method over the estimated useful life of
40 years for buildings and improvements, five to seven
years for equipment and fixtures, and the shorter of the useful
life or the remaining lease term for tenant improvements and
leasehold interests.
We are required to make subjective assessments as to the useful
lives of our facilities for purposes of determining the amount
of depreciation expense to record on an annual basis with
respect to our investments in real estate improvements. These
assessments have a direct impact on our net income because, if
we were to shorten the expected useful lives of our investments
in real estate improvements, we would depreciate these
investments over fewer years, resulting in more depreciation
expense and lower net income on an annual basis.
We have adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which
establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued
operations. SFAS No. 144 requires that the operations
related to facilities that have been sold, or that we intend to
sell, be presented as discontinued operations in the statement
of operations for all periods presented, and facilities we
intend to sell be designated as held for sale on our
balance sheet.
When circumstances such as adverse market conditions indicate a
possible impairment of the value of a facility, we review the
recoverability of the facilitys carrying value. The review
of recoverability is based on our estimate of the future
undiscounted cash flows, excluding interest charges, from the
facilitys use and eventual disposition. Our forecast of
these cash flows considers factors such as expected future
operating income, market and other applicable trends, and
residual value, as well as the effects of leasing demand,
competition and other factors. If impairment exists due to the
inability to recover the carrying value of a facility, an
impairment loss is recorded to the extent that the carrying
value exceeds the estimated fair value of the facility. We are
required to make subjective assessments as to whether there are
impairments in the values of our investments in real estate.
Purchase Price Allocation. We record
above-market and below-market in-place lease values, if any, for
the facilities we own which are based on the present value
(using an interest rate which reflects the risks associated with
the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the in-place leases
and (ii) managements estimate of fair market lease
rates for the corresponding in-place leases, measured over a
period equal to the remaining non-cancelable term of the lease.
We amortize any resulting capitalized above-market lease values
as a reduction of rental income over the remaining
non-cancelable terms of the respective leases. We amortize any
resulting capitalized below-market lease values as an increase
to rental income over the initial term and any fixed-rate
renewal periods in the respective leases. Because our strategy
to a large degree involves the origination of long term lease
arrangements at market rates, we do not expect the above-market
and below-market in-place lease values to be significant for
many of our anticipated transactions.
We measure the aggregate value of other intangible assets to be
acquired based on the difference between (i) the property
valued with existing leases adjusted to market rental rates and
(ii) the property valued as if vacant. Managements
estimates of value are made using methods similar to those used
by independent appraisers (e.g., discounted cash flow
analysis). Factors considered by management in its analysis
include an estimate of carrying costs during hypothetical
expected
lease-up
periods considering current market conditions, and costs to
execute similar leases. We also consider information obtained
about each targeted facility as a result of our pre-acquisition
due diligence, marketing, and leasing activities in estimating
the fair value of the tangible and intangible assets acquired.
In estimating carrying costs, management also includes real
estate taxes, insurance and other operating expenses and
estimates of lost rentals at market rates during the expected
lease-up
periods, which we expect to range
30
primarily from three to 18 months, depending on specific
local market conditions. Management also estimates costs to
execute similar leases including leasing commissions, legal
costs, and other related expenses to the extent that such costs
are not already incurred in connection with a new lease
origination as part of the transaction.
The total amount of other intangible assets to be acquired, if
any, is further allocated to in-place lease values and customer
relationship intangible values based on managements
evaluation of the specific characteristics of each prospective
tenants lease and our overall relationship with that
tenant. Characteristics to be considered by management in
allocating these values include the nature and extent of our
existing business relationships with the tenant, growth
prospects for developing new business with the tenant, the
tenants credit quality, and expectations of lease
renewals, including those existing under the terms of the lease
agreement, among other factors.
We amortize the value of in-place leases to expense over the
initial term of the respective leases, which range primarily
from 10 to 15 years. The value of customer relationship
intangibles is amortized to expense over the initial term and
any renewal periods in the respective leases, but in no event
will the amortization period for intangible assets exceed the
remaining depreciable life of the building. Should a tenant
terminate its lease, the unamortized portion of the in-place
lease value and customer relationship intangibles would be
charged to expense.
Accounting for Derivative Financial Investments and Hedging
Activities. We expect to account for our
derivative and hedging activities, if any, using
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 137
and SFAS No. 149, which requires all derivative
instruments to be carried at fair value on the balance sheet.
Derivative instruments designated in a hedge relationship to
mitigate exposure to variability in expected future cash flows,
or other types of forecasted transactions, are considered cash
flow hedges. We expect to formally document all relationships
between hedging instruments and hedged items, as well as our
risk-management objective and strategy for undertaking each
hedge transaction. We plan to review periodically the
effectiveness of each hedging transaction, which involves
estimating future cash flows. Cash flow hedges, if any, will be
accounted for by recording the fair value of the derivative
instrument on the balance sheet as either an asset or liability,
with a corresponding amount recorded in other comprehensive
income within stockholders equity. Amounts will be
reclassified from other comprehensive income to the income
statement in the period or periods the hedged forecasted
transaction affects earnings. Derivative instruments designated
in a hedge relationship to mitigate exposure to changes in the
fair value of an asset, liability, or firm commitment
attributable to a particular risk, which we expect to affect the
Company primarily in the form of interest rate risk or
variability of interest rates, are considered fair value hedges
under SFAS No. 133. We are not currently a party to
any derivatives contracts.
Variable Interest Entities. In January 2003,
the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. In December
2003, the FASB issued a revision to FIN 46, which is termed
FIN 46(R). FIN 46(R) clarifies the application of
Accounting Research Bulletin No. 51, Consolidated
Financial Statements, and provides guidance on the
identification of entities for which control is achieved through
means other than voting rights, guidance on how to determine
which business enterprise should consolidate such an entity, and
guidance on when it should do so. This model for consolidation
applies to an entity in which either (1) the equity
investors (if any) do not have a controlling financial interest
or (2) the equity investment at risk is insufficient to
finance that entitys activities without receiving
additional subordinated financial support from other parties. An
entity meeting either of these two criteria is a variable
interest entity, or VIE. A VIE must be consolidated by any
entity which is the primary beneficiary of the VIE. If an entity
is not the primary beneficiary of the VIE, the VIE is not
consolidated. We periodically evaluate the terms of our
relationships with our tenants and borrowers to determine
whether we are the primary beneficiary and would therefore be
required to consolidate any tenants or borrowers that are VIEs.
Our evaluations of our transactions indicate that we have loans
receivable from two entities which we classify as VIEs. However,
because we are not the primary beneficiary of these VIEs, we do
not consolidate these entities in our financial statements.
Stock-Based Compensation. We currently apply
the intrinsic value method to account for the issuance of stock
options under our equity incentive plan in accordance with APB
Opinion No. 25, Accounting for Stock Issued to
Employees. In this regard, we anticipate that a substantial
portion of our options will be granted to individuals who are
our officers or directors. Accordingly, because the grants are
expected to be at exercise prices that represent fair value of
the stock at the date of grant, we do not currently record any
expense related to the issuance of these
31
options under the intrinsic value method. If the actual terms
vary from the expected, the impact to our compensation expense
could differ.
In December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment, which is a revision of
SFAS No. 123, Accounting for Stock Based
Compensation. SFAS No. 123(R) establishes
standards for accounting for transactions in which an entity
exchanges its equity instruments for goods or services. The
Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires that the fair
value of such equity instruments be recognized as expense in the
historical financial statements as services are performed. The
impact of SFAS No. 123(R) will also be affected by the
types of stock-based awards that our board of directors chooses
to grant. Prior to SFAS No. 123(R), only certain pro
forma disclosures of fair value were required, which primarily
applies to stock options granted at the then current market
price per share of stock. Our existing equity incentive plan
allows for stock-based awards to be in the form of options,
restricted stock, restricted stock units and deferred stock
units. Currently, we expect that our board of directors will
make awards in the form of restricted stock, restricted stock
units and deferred stock units. The SEC has ruled that both
SFAS No. 123 and SFAS 123(R) are acceptable GAAP
until SFAS No. 123(R) becomes effective for our annual
and interim periods beginning January 1, 2006. However, we
have elected to continue following the guidelines of
SFAS No. 123 to account for our awards of restricted
stock in 2005. During the year ended December 31, 2005, we
recorded a $1.2 million non-cash expense for restricted
shares issued to employees, officers and directors.
Disclosure
of Contractual Obligations
The following table summarizes known material contractual
obligations associated with investing and financing activities
as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations
|
|
Less Than 1 Year
|
|
|
2-3 Years
|
|
|
4-5 Years
|
|
|
After 5 Years
|
|
|
Total
|
|
|
Construction contracts
|
|
$
|
55,790,115
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
55,790,115
|
|
Construction loans (1)
|
|
|
1,538,899
|
|
|
|
40,703,502
|
|
|
|
|
|
|
|
|
|
|
|
42,242,401
|
|
Revolving credit facility (2)
|
|
|
4,839,232
|
|
|
|
9,678,464
|
|
|
|
69,446,141
|
|
|
|
|
|
|
|
83,963,837
|
|
Operating lease
commitments (3)
|
|
|
424,790
|
|
|
|
871,989
|
|
|
|
838,010
|
|
|
|
22,639,194
|
|
|
|
24,773,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
62,593,036
|
|
|
$
|
51,253,955
|
|
|
$
|
70,284,151
|
|
|
$
|
22,639,194
|
|
|
$
|
206,770,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Assumes the Company exercises its option to convert the
construction loans to term loans in June 2006, and the balance
and interest rates are those at December 31, 2005. |
|
(2) |
|
Assumes the balance and interest rates are those in effect at
December 31, 2005 and no principal payments are made until
the expiration of the facility in 2009. The Company did make a
principal reduction of $29.0 million in January, 2006. |
|
(3) |
|
Substantially all of our contractual obligations to make
operating lease payments are related to ground leases for which
we are reimbursed by our tenants. |
The Company also has outstanding
letters-of-credit
which total $2.2 million at December 31, 2005 and
which expire in 2007.
Liquidity
and Capital Resources
As of March 24, 2006, we have approximately
$4.3 million in cash and temporary liquid investments.
In 2005, we completed our initial public offering with the sale
of 13,175,023 shares of common stock at an offering price
of $10.50 per share. After deducting underwriters
discounts and offering expenses, our net proceeds from the
offering totaled approximately $124.4 million. In 2004, we
completed the sale of 25,560,954 shares of common stock in
a private placement at an offering price of $10.00 per
share. After deducting underwriters discounts and offering
expenses, our net proceeds from the private placement totaled
approximately $233.5 million.
32
In October 2005, we entered into a four-year $100.0 million
secured revolving credit facility (the revolver),
using proceeds to replace our existing $75.0 million term
loan, which had a balance of approximately $65.0 million at
December 31, 2005. As of March 24, 2006, the revolver
has an outstanding balance of approximately $36.0 million.
The loan is secured by a collateral pool comprised of several of
our properties. The six properties currently in the collateral
pool provide available borrowing capacity of approximately
$74.2 million. We believe we have sufficient value in our
other properties to increase the availability under the credit
facility to its present maximum of $100.0 million. Under
the terms of the credit agreement, we may increase the maximum
commitment to $175.0 million subject to adequate collateral
valuation and payment of customary commitment fees.
In addition to availability under the revolving credit facility,
we have two construction/term facilities totaling approximately
$43.0 million from a bank to finance our Houston Town and
Country Hospital and Medical Office Building. As of
March 24, 2006, the loans have an aggregate balance
totaling approximately $35.8 million. We have the option,
until June 2006 to convert these loans to 30 month term
loans.
At December 31, 2005, we had remaining commitments to
complete the funding of three development projects as described
below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
|
|
|
Cost
|
|
|
Remaining
|
|
|
|
Commitment
|
|
|
Incurred
|
|
|
Commitment
|
|
|
North Cypress community hospital
|
|
$
|
64.0
|
|
|
$
|
22.1
|
|
|
$
|
41.9
|
|
Bucks County womens hospital
and medical office building
|
|
|
38.0
|
|
|
|
10.0
|
|
|
|
28.0
|
|
Monroe County community hospital
|
|
|
35.5
|
|
|
|
13.2
|
|
|
|
22.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
137.5
|
|
|
$
|
45.3
|
|
|
$
|
92.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term Liquidity Requirements: We believe
that our existing cash and temporary investments, funds
available under our existing loan agreements, additional
financing arrangements and cash from operations will be
sufficient for us to complete the developments described above,
acquire between $200 and $300 million in additional assets,
provide for working capital, and make distributions to our
stockholders through 2006. We expect that such additional
financing arrangements will include various types of new debt,
including long-term, fixed-rate mortgage loans, variable-rate
term loans, and construction financing facilities. Generally, we
believe we will be able to finance up to approximately 50-60% of
the cost of our healthcare facilities; however, there is no
assurance that we will be able to obtain or maintain those
levels of debt on our portfolio of real estate assets on
favorable terms in the future.
Long-term Liquidity Requirements: We believe
that cash flow from operating activities subsequent to 2006 will
be sufficient to provide adequate working capital and make
distributions to our stockholders in compliance with our
requirements as a REIT. However, in order to continue
acquisition and development of healthcare facilities after 2006,
we will require access to more permanent external capital, such
as equity capital. If equity capital is not available at a price
that we consider appropriate, we may increase our debt, utilize
other forms of capital, if available, or reduce our acquisition
activity.
Financing
Activities
During the year ended December 31, 2005, we raised
$124.7 million, net of offering costs and expenses, from
the sale of common stock, primarily from our IPO. We also
borrowed an additional $19.0 million on our term loan, for
a total of $75.0 million of loan proceeds on the term loan.
After reducing the principal balance of the term loan through
principal repayments, we converted the remaining
$40.0 million balance into borrowings on our
$100.0 million secured revolving credit facility. We
borrowed an additional net $25.0 million on the revolver
during the last quarter of 2005. We also borrowed an
$35.5 million on our two Houston construction loans. The
revolver, the construction loans and our expectations concerning
future financing activities are further described above under
Liquidity and Capital Resources. We also sold
$1.1 million in limited partnership units in our West
Houston medical office building partnership (a subsidiary of our
Operating Partnership). Our sale of such interests in certain of
our healthcare facilities is based on a strategy of encouraging
physicians and other parties to locate their practices in or
near our healthcare facilities. We do not consider this strategy
integral to our capital raising process.
33
Investing
Activities
During the year ended December 31, 2005, we made
investments in six existing healthcare facilities with an
aggregate investment value of $107.3 million, and net cash
outlays of $97.7 million, after subtracting contingent
payments and facility improvement reserves, and including a
$6.0 million first mortgage loan that was converted to a
sale-leaseback arrangement. We also invested $78.8 million
in our development projects. In 2005, we made loans with a total
principal value of $47.5 million, and net cash outlays of
$46.0 million, after subtracting contingent payments and
facility improvement reserves. Our primary loan in 2005 was a
first mortgage loan of $40.0 million. In February 2005,
Vibra reduced the principal amount of its loans by
$7.7 million. Our expectations about future investing
activities are described above under Liquidity and Capital
Resources.
Results
of Operations
Our historical operations are generated substantially by
investments we have made since we completed our private offering
and raised approximately $233.5 million in common equity in
the second quarter of 2004 and since we completed our IPO and
raised approximately $124.7 million in common equity in the
third quarter of 2005. We also are in the process of developing
additional healthcare facilities that have not yet begun
generating revenue, and we expect to acquire additional existing
healthcare facilities in the foreseeable future. Accordingly, we
expect that future results of operations will vary materially
from our historical results.
Year
Ended December 31, 2005 Compared to the Year Ended
December 31, 2004
Net income for the year ended December 31, 2005 was
$19,640,347 compared to net income of $4,576,349 for the year
ended December 31, 2004.
A comparison of revenues for the years ended December 31,
2005 and 2004, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
2004
|
|
|
|
|
|
Change
|
|
|
Base rents
|
|
$
|
18,979,580
|
|
|
|
60.2
|
%
|
|
$
|
6,162,278
|
|
|
|
56.6
|
%
|
|
$
|
12,817,302
|
|
Straight-line rents
|
|
|
5,460,148
|
|
|
|
17.3
|
%
|
|
|
2,449,065
|
|
|
|
22.5
|
%
|
|
|
3,011,083
|
|
Percentage rents
|
|
|
2,259,230
|
|
|
|
7.2
|
%
|
|
|
|
|
|
|
|
|
|
|
2,259,230
|
|
Interest from loans
|
|
|
4,726,579
|
|
|
|
14.9
|
%
|
|
|
2,282,116
|
|
|
|
20.9
|
%
|
|
|
2,444,463
|
|
Fee income
|
|
|
123,662
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
123,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
31,549,199
|
|
|
|
100.0
|
%
|
|
$
|
10,893,459
|
|
|
|
100.0
|
%
|
|
$
|
20,655,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for the year ended December 31, 2005, was comprised
of rents (84.7%) and interest and fee income from loans (15.3%).
All of this revenue was derived from properties that we have
acquired since July 1, 2004. Our base and straight-line
rents increased in 2005 due to the timing of 2004 acquisitions,
plus the acquisition and development of seven new facilities in
2005. In 2005, we received percentage rents of approximately
$2.3 million from Vibra. Pursuant to our lease terms with
Vibra, we were not eligible to receive percentage rent in 2004.
Interest income from loans in the year ended December 31,
2005, increased primarily based on the timing and amount of
Vibra loan advances and repayments in 2004 and 2005, and on the
origination of the Denham Springs loan in 2005. Vibra accounted
for 83.2% and 100.0% of our gross revenues in 2005 and 2004,
respectively. In 2005, Vibra accounted for 81.7% of our total
rent revenues. We expect that the portion of our total revenues
attributable to Vibra will decline in relation to our
acquisition of properties leased to tenants other than Vibra. At
December 31, 2005, assets leased and loaned to Vibra
comprised 37.0% of our total assets.
Depreciation and amortization during the year ended
December 31, 2005 was $4,404,361, compared to $1,478,470
during the year ended December 31, 2004. The increase is
due to the timing and amount of acquisitions and developments in
2004 (six properties owned for less than six months) and 2005
(six properties owned for a full year and eight properties
placed in service throughout the year). We expect our
depreciation and amortization expense to continue to increase
commensurate with our acquisition and development activity.
General and administrative expenses during the years ended
December 31, 2005 and 2004, totaled $8,016,992 and
$5,150,786, respectively, which represents an increase of 28.5%.
The increase is due primarily to
34
approximately $1.2 million of share based compensation
expense (52% of the increase in general and administrative
expenses) as a result of restricted shares granted to employees,
officers and directors during 2005. In addition, we incurred
incremental legal and professional expenses in 2005 related to
our reporting and other compliance requirements as a public
company. During 2005 we also incurred additional compensation
expense related to the increased number of employees in 2005.
Interest income (other than from loans) for the years ended
December 31, 2005 and 2004, totaled $2,091,132 and
$930,260, respectively. Interest income increased due to the
timing and amount of offering proceeds temporarily invested in
short-term cash equivalent instruments and to higher interest
rates in 2005.
Interest expense for the years ended December 31, 2005 and
2004, totaled $1,542,266 and $32,769, respectively. Interest
expense in 2005 excludes interest of approximately
$3.1 million which has been capitalized as part of the cost
of development projects under construction during 2005.
Year
Ended December 31, 2004
Net income for the year ended December 31, 2004 was
$4,576,349. Revenue, which was $10,893,459, was comprised
primarily of rents (79%) and interest from loans (21%). Interest
and dividends, primarily from the temporary investment of the
net proceeds of our April 2004 private placement, was $930,260.
We completed our private placement of common stock in April 2004
and received proceeds, net of offering costs and fees, of
approximately $233.5 million. Expenses during the year,
which totaled $7,214,601, were comprised primarily of
compensation of $3,700,442, depreciation and amortization of
$1,517,530, other general and administrative expenses of
$1,336,897 and approximately $585,345 of costs associated with
unsuccessful acquisitions. These costs for the unsuccessful
acquisition, which consisted primarily of legal fees, costs of
third party reports and travel, related to a portfolio of five
facilities that were subject to a letter of intent with a
prospective operator. During the second quarter of 2004, we
declined to pursue the acquisition.
Reconciliation
of Non-GAAP Financial Measures
Investors and analysts following the real estate industry
utilize funds from operations, or FFO, as a supplemental
performance measure. While we believe net income available to
common stockholders, as defined by generally accepted accounting
principles (GAAP), is the most appropriate measure, our
management considers FFO an appropriate supplemental measure
given its wide use by and relevance to investors and analysts.
FFO, reflecting the assumption that real estate asset values
rise or fall with market conditions, principally adjusts for the
effects of GAAP depreciation and amortization of real estate
assets, which assume that the value of real estate diminishes
predictably over time.
As defined by the National Association of Real Estate Investment
Trusts, or NAREIT, FFO represents net income (loss) (computed in
accordance with GAAP), excluding gains (losses) on sales of real
estate, plus real estate related depreciation and amortization
and after adjustments for unconsolidated partnerships and joint
ventures. We compute FFO in accordance with the NAREIT
definition. FFO should not be viewed as a substitute measure of
the Companys operating performance since it does not
reflect either depreciation and amortization costs or the level
of capital expenditures and leasing costs necessary to maintain
the operating performance of our properties, which are
significant economic costs that could materially impact our
results of operations.
The following table presents a reconciliation of FFO to net
income for the years ended December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income
|
|
$
|
19,640,347
|
|
|
$
|
4,576,349
|
|
Depreciation and amortization
|
|
|
4,404,361
|
|
|
|
1,478,470
|
|
|
|
|
|
|
|
|
|
|
Funds from
operations FFO
|
|
$
|
24,044,708
|
|
|
$
|
6,054,819
|
|
|
|
|
|
|
|
|
|
|
35
Per diluted share amounts:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income
|
|
$
|
.61
|
|
|
$
|
.24
|
|
Depreciation and amortization
|
|
|
.13
|
|
|
|
.07
|
|
|
|
|
|
|
|
|
|
|
Funds from
operations FFO
|
|
$
|
.74
|
|
|
$
|
.31
|
|
|
|
|
|
|
|
|
|
|
Distribution
Policy
We have elected to be taxed as a REIT commencing with our
taxable year that began on April 6, 2004 and ended on
December 31, 2004. To qualify as a REIT, we must meet a
number of organizational and operational requirements, including
a requirement that we distribute at least 90% of our REIT
taxable income, excluding net capital gain, to our stockholders.
It is our current intention to comply with these requirements
and maintain such status going forward.
The table below is a summary of our distributions paid or
declared since January 1, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
|
Date of Distribution
|
|
|
Distribution per Share
|
|
|
February 16, 2006
|
|
|
March 15, 2006
|
|
|
|
April 12, 2006
|
|
|
$
|
.21
|
|
November 18, 2005
|
|
|
December 15, 2005
|
|
|
|
January 19, 2006
|
|
|
$
|
.18
|
|
August 18, 2005
|
|
|
September 15, 2005
|
|
|
|
September 29, 2005
|
|
|
$
|
.17
|
|
May 19, 2005
|
|
|
June 20, 2005
|
|
|
|
July 14, 2005
|
|
|
$
|
.16
|
|
March 4, 2005
|
|
|
March 16, 2005
|
|
|
|
April 15, 2005
|
|
|
$
|
.11
|
|
November 11, 2004
|
|
|
December 16, 2004
|
|
|
|
January 11, 2005
|
|
|
$
|
.11
|
|
We intend to pay to our stockholders, within the time periods
prescribed by the Code, all or substantially all of our annual
taxable income, including taxable gains from the sale of real
estate and recognized gains on the sale of securities. It is our
policy to make sufficient cash distributions to stockholders in
order for us to maintain our status as a REIT under the Code and
to avoid corporate income and excise taxes on undistributed
income.
ITEM 7.A.
Quantitative and Qualitative Disclosures about Market
Risk
Market risk includes risks that arise from changes in interest
rates, foreign currency exchange rates, commodity prices, equity
prices and other market changes that affect market sensitive
instruments. In pursuing our business plan, we expect that the
primary market risk to which we will be exposed is interest rate
risk.
In addition to changes in interest rates, the value of our
facilities will be subject to fluctuations based on changes in
local and regional economic conditions and changes in the
ability of our tenants to generate profits, all of which may
affect our ability to refinance our debt if necessary. The
changes in the value of our facilities would be reflected also
by changes in cap rates, which is measured by the
current base rent divided by the current market value of a
facility.
If market rates of interest on our variable rate debt increase
by 1%, the increase in annual interest expense on our variable
rate debt would decrease future earnings and cash flows by
approximately $718,000 per year. If market rates of
interest on our variable rate debt decrease by 1%, the decrease
in interest expense on our variable rate debt would increase
future earnings and cash flows by approximately
$718,000 per year. This assumes that the amount outstanding
under our variable rate debt remains approximately
$71.8 million, the balance at March 10, 2006.
We currently have no assets denominated in a foreign currency,
nor do we have any assets located outside of the United States.
We also have no exposure to derivative financial instruments.
36
|
|
ITEM 8.
|
Financial
Statements and Supplementary Data
|
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Medical Properties Trust, Inc.:
We have audited the accompanying consolidated balance sheets of
Medical Properties Trust, Inc. and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, stockholders equity (deficit),
and cash flows for the years then ended and for the period from
inception (August 27, 2003) to December 31, 2003.
In connection with our audits of the consolidated financial
statements, we have also audited the accompanying financial
statement Schedule III and Schedule IV. These
consolidated financial statements and schedules are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Medical Properties Trust, Inc. and subsidiaries as
of December 31, 2005 and 2004, and the results of their
operations and their cash flows for the years then ended and for
the period from inception (August 27, 2003) to
December 31, 2003 in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related
financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set
forth therein.
/s/ KPMG LLP
Birmingham, Alabama
February 24, 2006
37
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
ASSETS
|
Real estate assets
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
31,004,675
|
|
|
$
|
10,670,000
|
|
Buildings and improvements
|
|
|
250,518,440
|
|
|
|
111,387,232
|
|
Construction in progress
|
|
|
45,913,085
|
|
|
|
24,318,098
|
|
Intangible lease assets
|
|
|
9,666,192
|
|
|
|
5,314,963
|
|
Mortgage loans
|
|
|
40,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment in real estate
assets
|
|
|
377,102,392
|
|
|
|
151,690,293
|
|
Accumulated depreciation
|
|
|
(5,260,219
|
)
|
|
|
(1,311,757
|
)
|
Accumulated amortization
|
|
|
(622,612
|
)
|
|
|
(166,713
|
)
|
|
|
|
|
|
|
|
|
|
Net investment in real estate
assets
|
|
|
371,219,561
|
|
|
|
150,211,823
|
|
Cash and cash equivalents
|
|
|
59,115,832
|
|
|
|
97,543,677
|
|
Interest and rent receivable
|
|
|
1,354,387
|
|
|
|
419,776
|
|
Straight-line rent receivable
|
|
|
13,477,917
|
|
|
|
3,206,853
|
|
Other loans
|
|
|
48,205,611
|
|
|
|
50,224,069
|
|
Other assets
|
|
|
7,800,238
|
|
|
|
4,899,865
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
501,173,546
|
|
|
$
|
306,506,063
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Liabilities
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
100,484,520
|
|
|
$
|
56,000,000
|
|
Accounts payable and accrued
expenses
|
|
|
19,928,900
|
|
|
|
10,903,025
|
|
Deferred revenue
|
|
|
10,922,317
|
|
|
|
3,578,229
|
|
Lease deposits and other
obligations to tenants
|
|
|
11,386,801
|
|
|
|
3,296,365
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
142,722,538
|
|
|
|
73,777,619
|
|
Minority interests
|
|
|
2,173,866
|
|
|
|
1,000,000
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par
value. Authorized 10,000,000 shares; no shares outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par
value. Authorized 100,000,000 shares; issued and
outstanding 39,345,105 shares at
December 31, 2005, and 26,082,862 shares at
December 31, 2004
|
|
|
39,345
|
|
|
|
26,083
|
|
Additional paid-in capital
|
|
|
359,588,362
|
|
|
|
233,626,690
|
|
Distributions in excess of net
income
|
|
|
(3,350,565
|
)
|
|
|
(1,924,329
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
356,277,142
|
|
|
|
231,728,444
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
501,173,546
|
|
|
$
|
306,506,063
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
38
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
from Inception
|
|
|
|
|
|
|
|
|
|
(August 27,
|
|
|
|
|
|
|
|
|
|
2003) to
|
|
|
|
For the Years Ended
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent billed
|
|
$
|
21,238,810
|
|
|
$
|
6,162,278
|
|
|
$
|
|
|
Straight-line rent
|
|
|
5,460,148
|
|
|
|
2,449,066
|
|
|
|
|
|
Interest income from loans
|
|
|
4,850,241
|
|
|
|
2,282,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
31,549,199
|
|
|
|
10,893,459
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate depreciation and
amortization
|
|
|
4,404,361
|
|
|
|
1,478,470
|
|
|
|
|
|
General and administrative
|
|
|
8,016,992
|
|
|
|
5,150,786
|
|
|
|
992,418
|
|
Costs of terminated acquisitions
|
|
|
|
|
|
|
585,345
|
|
|
|
30,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,421,353
|
|
|
|
7,214,601
|
|
|
|
1,023,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
19,127,846
|
|
|
|
3,678,858
|
|
|
|
(1,023,276
|
)
|
Other income
(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,091,132
|
|
|
|
930,260
|
|
|
|
|
|
Interest expense
|
|
|
(1,542,266
|
)
|
|
|
(32,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other income
|
|
|
548,866
|
|
|
|
897,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority
interests
|
|
|
19,676,712
|
|
|
|
4,576,349
|
|
|
|
(1,023,276
|
)
|
Minority interests in consolidated
partnerships
|
|
|
(36,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
19,640,347
|
|
|
$
|
4,576,349
|
|
|
$
|
(1,023,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share,
basic
|
|
$
|
0.61
|
|
|
$
|
0.24
|
|
|
$
|
(0.63
|
)
|
Weighted average shares
outstanding basic
|
|
|
32,343,019
|
|
|
|
19,310,833
|
|
|
|
1,630,435
|
|
Net income (loss) per share,
diluted
|
|
$
|
0.61
|
|
|
$
|
0.24
|
|
|
$
|
(0.63
|
)
|
Weighted average shares
outstanding diluted
|
|
|
32,370,089
|
|
|
|
19,312,634
|
|
|
|
1,630,435
|
|
See accompanying notes to consolidated financial statements.
39
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders Equity (Deficit)
For the
Years Ended December 31, 2005 and 2004, and for the Period
from Inception (August 27, 2003) to December 31,
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Additional
|
|
|
Distributions
|
|
|
Total
|
|
|
|
|
|
|
Par
|
|
|
|
|
|
Par
|
|
|
Paid-in
|
|
|
in Excess
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
of Net Income
|
|
|
Equity (Deficit)
|
|
|
Balance at inception
(August 27, 2003)
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
1,630,435
|
|
|
|
1,630
|
|
|
|
|
|
|
|
|
|
|
|
1,630
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,023,276
|
)
|
|
|
(1,023,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2003
|
|
|
|
|
|
|
|
|
|
|
1,630,435
|
|
|
|
1,630
|
|
|
|
|
|
|
|
(1,023,276
|
)
|
|
|
(1,021,646
|
)
|
Redemption of founders shares
|
|
|
|
|
|
|
|
|
|
|
(1,108,527
|
)
|
|
|
(1,108
|
)
|
|
|
1,108
|
|
|
|
|
|
|
|
|
|
Issuance of common stock (net of
offering costs)
|
|
|
|
|
|
|
|
|
|
|
25,560,954
|
|
|
|
25,561
|
|
|
|
233,476,082
|
|
|
|
|
|
|
|
233,501,643
|
|
Value of warrants issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,500
|
|
|
|
|
|
|
|
24,500
|
|
Deferred stock units issued to
directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
|
|
|
|
|
|
125,000
|
|
Distributions declared
($.21 per common share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,477,402
|
)
|
|
|
(5,477,402
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,576,349
|
|
|
|
4,576,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
26,082,862
|
|
|
|
26,083
|
|
|
|
233,626,690
|
|
|
|
(1,924,329
|
)
|
|
|
231,728,444
|
|
Deferred stock units issued to
directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182,603
|
|
|
|
(10,852
|
)
|
|
|
171,751
|
|
Retirement of deferred stock units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
(75,000
|
)
|
Restricted shares issued to
employees
|
|
|
|
|
|
|
|
|
|
|
52,220
|
|
|
|
52
|
|
|
|
1,174,952
|
|
|
|
|
|
|
|
1,175,004
|
|
Proceeds from exercise of warrant
|
|
|
|
|
|
|
|
|
|
|
35,000
|
|
|
|
35
|
|
|
|
325,465
|
|
|
|
|
|
|
|
325,500
|
|
Issuance of common stock (net of
offering costs)
|
|
|
|
|
|
|
|
|
|
|
13,175,023
|
|
|
|
13,175
|
|
|
|
124,353,652
|
|
|
|
|
|
|
|
124,366,827
|
|
Distributions declared
($.62 per common share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,055,731
|
)
|
|
|
(21,055,731
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,640,347
|
|
|
|
19,640,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2005
|
|
|
|
|
|
$
|
|
|
|
|
39,345,105
|
|
|
$
|
39,345
|
|
|
$
|
359,588,362
|
|
|
$
|
(3,350,565
|
)
|
|
$
|
356,277,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
40
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
from Inception
|
|
|
|
|
|
|
|
|
|
(August 27,
|
|
|
|
|
|
|
|
|
|
2003) to
|
|
|
|
For the Years Ended
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
19,640,347
|
|
|
$
|
4,576,349
|
|
|
$
|
(1,023,276
|
)
|
Adjustments to reconcile net
income (loss) to net cash provided by (used for) operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,567,675
|
|
|
|
1,517,530
|
|
|
|
|
|
Amortization of deferred financing
costs
|
|
|
932,249
|
|
|
|
|
|
|
|
|
|
Straight-line rent revenue
|
|
|
(5,460,148
|
)
|
|
|
(2,449,066
|
)
|
|
|
|
|
Share based payments
|
|
|
1,346,755
|
|
|
|
125,000
|
|
|
|
|
|
Deferred revenue and fee income
|
|
|
(270,727
|
)
|
|
|
|
|
|
|
|
|
Other adjustments
|
|
|
49,200
|
|
|
|
24,500
|
|
|
|
|
|
Increase in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and rent receivable
|
|
|
(486,521
|
)
|
|
|
(419,776
|
)
|
|
|
|
|
Other assets
|
|
|
(2,312,681
|
)
|
|
|
(309,769
|
)
|
|
|
|
|
Increase in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
|
4,700,558
|
|
|
|
6,644,130
|
|
|
|
1,391,409
|
|
Deferred revenue
|
|
|
1,420,030
|
|
|
|
210,000
|
|
|
|
|
|
Lease deposits and other
obligations to tenants
|
|
|
174,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
24,301,264
|
|
|
|
9,918,898
|
|
|
|
368,133
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate acquired
|
|
|
(97,667,724
|
)
|
|
|
(127,372,195
|
)
|
|
|
|
|
Principal received on loans
receivable
|
|
|
7,890,958
|
|
|
|
|
|
|
|
|
|
Investment in loans receivable
|
|
|
(45,999,178
|
)
|
|
|
(44,317,263
|
)
|
|
|
|
|
Construction in progress
|
|
|
(78,778,843
|
)
|
|
|
(23,151,797
|
)
|
|
|
(166,301
|
)
|
Equipment acquired
|
|
|
(145,877
|
)
|
|
|
(759,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing
activities
|
|
|
(214,700,664
|
)
|
|
|
(195,600,642
|
)
|
|
|
(166,301
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt
|
|
|
104,474,342
|
|
|
|
56,200,000
|
|
|
|
100,000
|
|
Payments of debt
|
|
|
(60,645,833
|
)
|
|
|
(300,000
|
)
|
|
|
|
|
Deferred financing costs
|
|
|
(1,461,342
|
)
|
|
|
(3,869,767
|
)
|
|
|
(201,832
|
)
|
Retirement of deferred stock units
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
|
|
Distributions paid
|
|
|
(16,730,414
|
)
|
|
|
(2,608,286
|
)
|
|
|
|
|
Proceeds from sale of common
shares, net of offering costs
|
|
|
125,272,302
|
|
|
|
233,703,474
|
|
|
|
|
|
Sale of partnership units
|
|
|
1,137,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for)
financing activities
|
|
|
151,971,555
|
|
|
|
283,125,421
|
|
|
|
(101,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and
cash equivalents for period
|
|
|
(38,427,845
|
)
|
|
|
97,443,677
|
|
|
|
100,000
|
|
Cash and cash equivalents at
beginning of period
|
|
|
97,543,677
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
end of period
|
|
$
|
59,115,832
|
|
|
$
|
97,543,677
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
from Inception
|
|
|
|
|
|
|
|
|
|
(August 27,
|
|
|
|
|
|
|
|
|
|
2003) to
|
|
|
|
For the Years Ended
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Interest paid, including
capitalized interest of $3,107,966 in 2005
|
|
$
|
3,461,654
|
|
|
$
|
|
|
|
$
|
|
|
Supplemental schedule of non-cash
investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction period rent and
interest receivable recorded as deferred revenue
|
|
$
|
5,259,006
|
|
|
$
|
757,787
|
|
|
$
|
|
|
Real estate acquisitions and new
loans receivable recorded as lease and loan deposits
|
|
|
8,603,075
|
|
|
|
5,906,807
|
|
|
|
|
|
Real estate acquisitions and new
loans receivable recorded as deferred revenue
|
|
|
577,500
|
|
|
|
|
|
|
|
|
|
Construction and acquisition costs
charged to loans and real estate
|
|
|
774,479
|
|
|
|
|
|
|
|
|
|
Loan receivable settled by
acquisition of real estate
|
|
|
6,000,000
|
|
|
|
|
|
|
|
|
|
Construction in progress
transferred to land and building
|
|
|
56,409,377
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred offering costs charged to
proceeds from sale of common stock
|
|
$
|
579,975
|
|
|
$
|
201,832
|
|
|
$
|
|
|
Additional paid in capital from
deferred stock units issued in lieu of dividends
|
|
|
10,852
|
|
|
|
|
|
|
|
|
|
Distributions declared and paid in
the following year
|
|
|
7,194,432
|
|
|
|
2,869,116
|
|
|
|
|
|
Minority interest granted for
contribution of land to development project
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
Conversion of accounts payable and
accrued expenses to common stock
|
|
|
|
|
|
|
|
|
|
|
1,630
|
|
Shares issued for vested common
stock
|
|
|
52
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
42
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
Medical Properties Trust, Inc., a Maryland corporation (the
Company), was formed on August 27, 2003 under the General
Corporation Law of Maryland for the purpose of engaging in the
business of investing in and owning commercial real estate. The
Companys operating partnership subsidiary, MPT Operating
Partnership, L.P. (the Operating Partnership) through which it
conducts all of its operations, was formed in September 2003.
Through another wholly owned subsidiary, Medical Properties
Trust, LLC, the Company is the sole general partner of the
Operating Partnership. The Company presently owns directly all
of the limited partnership interests in the Operating
Partnership.
The Company succeeded to the business of Medical Properties
Trust, LLC, a Delaware limited liability company, which was
formed in December 2002. On the day of formation, the Company
issued 1,630,435 shares of common stock, and the membership
interests of Medical Properties Trust, LLC were transferred to
the Company. Medical Properties Trust, LLC had no assets, but
had incurred liabilities for costs and expenses related to
acquisition due diligence, a planned offering of common stock,
consulting fees and office overhead in an aggregate amount of
approximately $423,000, which was assumed by the Operating
Partnership and has been included in the accompanying
consolidated statements of operations.
The Companys primary business strategy is to acquire and
develop real estate and improvements, primarily for long term
lease to providers of healthcare services such as operators of
general acute care hospitals, inpatient physical rehabilitation
hospitals, long term acute care hospitals,
surgery centers, centers for treatment of specific conditions
such as cardiac, pulmonary, cancer, and neurological hospitals,
and other healthcare-oriented facilities. The Company also makes
mortgage and other loans to operators of similar facilities. The
Company manages its business as a single business segment as
defined in Statement of Financial Accounting Standards (SFAS)
No. 131, Disclosures about Segments of an Enterprise and
Related Information.
On April 6, 2004, the Company completed the sale of
25.6 million shares of common stock in a private placement
to qualified institutional buyers and accredited investors. The
Company received $233.5 million after deducting offering
costs. The proceeds have been used to purchase properties, to
pay debt and accrued expenses and for working capital and
general corporate purposes.
On July 7, 2005, the Company completed the sale of
11,365,000 shares of common stock in an initial public
offering (IPO) at a price of $10.50 per share, less an
underwriting commission of seven percent and expenses. On
August 5, 2005, the underwriters purchased an additional
1,810,023 shares at the same offering price, less an
underwriting commission of seven percent and expenses, pursuant
to their over-allotment option.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of Estimates: The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Principles of Consolidation: Property holding
entities and other subsidiaries of which the Company owns 100%
of the equity or has a controlling financial interest evidenced
by ownership of a majority voting interest are consolidated. All
inter-company balances and transactions are eliminated. For
entities in which the Company owns less than 100% of the equity
interest, the Company consolidates the property if it has the
direct or indirect ability to make decisions about the
entities activities based upon the terms of the respective
entities ownership agreements. For these entities, the
Company records a minority interest representing equity held by
minority interests. For entities in which the Company owns less
than 100% and does not have the direct or indirect ability to
make decisions but does exert significant influence over the
entities activities, the Company records its ownership in
the entity using the equity method of accounting.
43
The Company periodically evaluates all of its transactions and
investments to determine if they represent variable interests in
a variable interest entity as defined by FASB Interpretation
No. 46 (revised December 2003)
(FIN 46-R),
Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements. If the
Company determines that it has a variable interest in a variable
interest entity, the Company determines if it is the primary
beneficiary of the variable interest entity. The Company
consolidates each variable interest entity in which the Company,
by virtue of its transactions with or investments in the entity,
is considered to be the primary beneficiary. The Company
re-evaluates its status as primary beneficiary when a variable
interest entity or potential variable interest entity has a
material change in its variable interests.
Cash and Cash Equivalents: Certificates of
deposit and short-term investments with original maturities of
three months or less and money-market mutual funds are
considered cash equivalents. Cash and cash equivalents which
have been pledged as security for letters of credit are recorded
in other assets.
Deferred Costs: Costs incurred prior to the
completion of offerings of stock or other capital instruments
that directly relate to the offering are deferred and netted
against proceeds received from the offering. Costs incurred in
connection with anticipated financings and refinancing of debt
are capitalized as deferred financing costs in other assets and
amortized over the lives of the related loans as an addition to
interest expense. For debt with defined principal re-payment
terms, the deferred costs are amortized to produce a constant
effective yield on the loan (interest method). For debt without
defined principal repayment terms, such as revolving credit
agreements, the deferred costs are amortized on the
straight-line method over the term of the debt. Costs that are
specifically identifiable with, and incurred prior to the
completion of, probable acquisitions are deferred and, to the
extent not collected from the sellers proceeds at
acquisition, capitalized upon closing. The Company begins
deferring costs when the Company and the seller have executed a
letter of intent (LOI), commitment letter or similar document
for the purchase of the property by the Company. Deferred
acquisition costs are expensed when management determines that
the acquisition is no longer probable. Leasing commissions and
other leasing costs directly attributable to tenant leases are
capitalized as deferred leasing costs and amortized on the
straight-line method over the terms of the related lease
agreements. Costs identifiable with loans made to lessees are
recognized as a reduction in interest income over the life of
the loan by the interest method.
Revenue Recognition: The Company receives
income from operating leases based on the fixed, minimum
required rents (base rents) and from additional rent based on a
percentage of tenant revenues once the tenants revenue has
exceeded an annual threshold (percentage rents). Rent revenue
from base rents is recorded on the straight-line method over the
terms of the related lease agreements for new leases and the
remaining terms of existing leases for acquired properties. The
straight-line method records the periodic average amount of base
rent earned over the term of a lease, taking into account
contractual rent increases over the lease term. The
straight-line method has the effect of recording more rent
revenue from a lease than a tenant is required to pay during the
first half of the lease term. During the last half of a lease
term, this effect reverses with less rent revenue recorded than
a tenant is required to pay. Rent revenue as recorded on the
straight-line method in the consolidated statement of operations
is shown as two amounts. Billed rent revenue is the amount of
base rent actually billed to the customer each period as
required by the lease. Unbilled rent revenue is the difference
between base rent revenue earned based on the straight-line
method and the amount recorded as billed base rent revenue. The
Company records the difference between base rent revenues earned
and amounts due per the respective lease agreements, as
applicable, as an increase or decrease to unbilled rent
receivable. Percentage rents are recognized in the period in
which revenue thresholds are met. Rental payments received prior
to their recognition as income are classified as rent received
in advance. The Company may also receive additional rent
(contingent rent) under some leases when the
U.S. Department of Labor consumer price index exceeds the
annual minimum percentage increase in the lease. Contingent
rents are recorded as billed rent revenue in the period received.
The Company begins recording base rent income from its
development projects when the lessee takes physical possession
of the facility, which may be different from the stated start
date of the lease. Also, during construction of its development
projects, the Company is generally entitled to accrue rent based
on the cost paid during the construction period (construction
period rent). The Company accrues construction period rent as a
receivable and deferred revenue during the construction period.
When the lessee takes physical possession of the facility, the
Company begins recognizing the accrued construction period rent
on the straight-line method over the remaining term of the lease.
44
Fees received from development and leasing services for lessees
are initially recorded as deferred revenue and recognized as
income over the initial term of an operating lease to produce a
constant effective yield on the lease (interest method). Fees
from lending services are recorded as deferred revenue and
recognized as income over the life of the loan using the
interest method.
Acquired Real Estate Purchase Price
Allocation: The Company allocates the purchase
price of acquired properties to net tangible and identified
intangible assets acquired based on their fair values in
accordance with the provisions of SFAS No. 141,
Business Combinations. In making estimates of
fair values for purposes of allocating purchase prices, the
Company utilizes a number of sources, including independent
appraisals that may be obtained in connection with the
acquisition or financing of the respective property and other
market data. The Company also considers information obtained
about each property as a result of its pre-acquisition due
diligence, marketing and leasing activities in estimating the
fair value of the tangible and intangible assets acquired.
The Company records above-market and below-market in-place lease
values, if any, for its facilities which are based on the
present value (using an interest rate which reflects the risks
associated with the leases acquired) of the difference between
(i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) managements estimate of fair
market lease rates for the corresponding in-place leases,
measured over a period equal to the remaining non-cancelable
term of the lease. The Company amortizes any resulting
capitalized above-market lease values as a reduction of rental
income over the remaining non-cancelable terms of the respective
leases. The Company amortizes any resulting capitalized
below-market lease values as an increase to rental income over
the initial term and any fixed-rate renewal periods in the
respective leases. Because the Companys strategy largely
involves the origination of long-term lease arrangements at
market rates, management does not expect the above-market and
below-market in-place lease values to be significant for many
anticipated transactions.
The Company measures the aggregate value of other intangible
assets acquired based on the difference between (i) the
property valued with existing in-place leases adjusted to market
rental rates and (ii) the property valued as if vacant.
Managements estimates of value are expected to be made
using methods similar to those used by independent appraisers
(e.g., discounted cash flow analysis). Factors considered by
management in its analysis include an estimate of carrying costs
during hypothetical expected
lease-up
periods considering current market conditions, and costs to
execute similar leases. Management also considers information
obtained about each targeted facility as a result of
pre-acquisition due diligence, marketing and leasing activities
in estimating the fair value of the tangible and intangible
assets acquired. In estimating carrying costs, management also
includes real estate taxes, insurance and other operating
expenses and estimates of lost rentals at market rates during
the expected
lease-up
periods, which are expected to range primarily from three to
eighteen months, depending on specific local market conditions.
Management also estimates costs to execute similar leases
including leasing commissions, legal and other related expenses
to the extent that such costs are not already incurred in
connection with a new lease origination as part of the
transaction.
The total amount of other intangible assets acquired, if any, is
further allocated to in-place lease values and customer
relationship intangible values based on managements
evaluation of the specific characteristics of each prospective
tenants lease and our overall relationship with that
tenant. Characteristics to be considered by management in
allocating these values include the nature and extent of our
existing business relationships with the tenant, growth
prospects for developing new business with the tenant, the
tenants credit quality and expectations of lease renewals,
including those existing under the terms of the lease agreement,
among other factors.
The Company amortizes the value of in-place leases, if any, to
expense over the initial term of the respective leases, which
range primarily from ten to 15 years. The value of customer
relationship intangibles is amortized to expense over the
initial term and any renewal periods in the respective leases,
but in no event will the amortization period for intangible
assets exceed the remaining depreciable life of the building.
Should a tenant terminate its lease, the unamortized portion of
the in-place lease value and customer relationship intangibles
would be charged to expense.
45
Real Estate and Depreciation: Depreciation is
calculated on the straight-line method over the estimated useful
lives of the related assets, as follows:
|
|
|
Buildings and improvements
|
|
40 years
|
Tenant origination costs
|
|
Remaining terms of the related
leases
|
Tenant improvements
|
|
Term of related leases
|
Furniture and equipment
|
|
3-7 years
|
Real estate is carried at depreciated cost. Expenditures for
ordinary maintenance and repairs are expensed to operations as
incurred. Significant renovations and improvements which improve
and/or
extend the useful life of the asset are capitalized and
depreciated over their estimated useful lives. In accordance
with SFAS No. 144, Accounting for the Impairment of
Long-Lived Assets and for Long- Lived Assets to Be Disposed
Of the Company records impairment losses on long-lived
assets used in operations when events and circumstances indicate
that the assets might be impaired and the undiscounted cash
flows estimated to be generated by those assets, including an
estimated liquidation amount, during the expected holding
periods are less than the carrying amounts of those assets.
Impairment losses are measured as the difference between
carrying value and fair value of assets. For assets held for
sale, impairment is measured as the difference between carrying
value and fair value, less cost of disposal. Fair value is based
on estimated cash flows discounted at a risk-adjusted rate of
interest.
Construction in progress includes the cost of land, the cost of
construction of buildings, improvements and equipment, and costs
for design and engineering. Other costs, such as interest,
legal, property taxes and corporate project supervision, which
can be directly associated with the project during construction,
are also included in construction in progress.
Loans: Loans consists of mortgage loans,
working capital loans and other long-term loans. Interest income
from loans is recognized as earned based upon the principal
amount outstanding. The mortgage loans are secured by interests
in real property. The working capital and other long-term loans
are generally secured by interests in receivables and corporate
and individual guaranties.
Losses from Rent Receivables and Loans: A
provision for losses on rent receivables and loans is recorded
when it becomes probable that the receivable or loan will not be
collected in full. The provision is an amount which reduces the
rent or loan to its estimated net realizable value based on a
determination of the eventual amounts to be collected either
from the debtor or from the collateral, if any. At that time,
the Company discontinues recording interest income on the loan
or rent receivable from the tenant.
Net Income (Loss) Per Share: The Company
reports earnings per share pursuant to SFAS No. 128,
Earnings Per Share. Basic net income (loss)
per share is computed by dividing the net income (loss) to
common stockholders by the weighted average number of common
shares and contingently issuable common shares outstanding
during the period. Diluted net income (loss) per share is
computed by dividing the net income (loss) available to common
shareholders by the weighted average number of common shares
outstanding during the period, adjusted for the assumed
conversion of all potentially dilutive outstanding shares,
warrants and options.
Income Taxes: For the period from
January 1, 2004 through April 5, 2004, the Company had
elected
Sub-chapter S
status for income tax purposes, at which time the Company filed
its final tax returns as a
Sub-chapter S
company. Since April 6, 2004, the Company has conducted its
business as a real estate investment trust (REIT) under
Sections 856 through 860 of the Code. In 2005, the Company
filed its initial tax return as a REIT for the period from
April 6, 2004, through December 31, 2004, at which
time it formally made an election to be taxed as a REIT. To
qualify as a REIT, the Company must meet certain organizational
and operational requirements, including a requirement to
currently distribute to shareholders at least 90% of its
ordinary taxable income. As a REIT, the Company generally is not
subject to federal income tax on taxable income that it
distributes to its shareholders. If the Company fails to qualify
as a REIT in any taxable year, it will then be subject to
federal income taxes on its taxable income at regular corporate
rates and will not be permitted to qualify for treatment as a
REIT for federal income tax purposes for four years following
the year during which qualification is lost, unless the Internal
Revenue Service grants the Company relief under certain
statutory provisions. Such an event could materially adversely
affect the Companys net income and net cash available for
distribution to shareholders. However, the
46
Company intends to operate in such a manner so that the Company
will remain qualified as a REIT for federal income tax purposes.
The Companys financial statements include the operations
of a taxable REIT subsidiary, MPT Development Services, Inc.
(MDS) that is not entitled to a dividends paid deduction and is
subject to federal, state and local income taxes. MDS is
authorized to provide property development, leasing and
management services for third-party owned properties and makes
loans to lessees and operators.
Stock-Based Compensation: The Company
currently sponsors the Medical Properties Trust, Inc. 2004
Amended and Restated Equity Incentive Plan (the Equity Incentive
Plan) that was established in 2004. The Company accounts for its
stock option plan under the recognition and measurement
provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB
No. 25) and related interpretations. Under APB
No. 25, no expense is recorded for options which are
excercisable at the price of the Companys stock at the
date the options are granted. Awards of restricted stock are
amortized to compensation expense over the vesting periods,
which range from three to five years, using the straight-line
method. Awards of deferred stock units vest when granted and are
charged to expense at the date of grant.
Fair Value of Financial Instruments: The
Company has various assets and liabilities that are considered
financial instruments. The Company estimates that the carrying
value of cash and cash equivalents, interest receivable and
accounts payable and accrued expenses approximates their fair
values. The Company estimates the fair value of unbilled rent
receivable based on expected payment dates, discounted at a rate
which the Company considers appropriate for such assets
considering their credit quality and maturity. The Company
estimates the fair value of loans based on the present value of
future payments, discounted at a rate which the Company
considers appropriate for such assets considering their credit
quality and maturity. The Company estimates that the carrying
value of the Companys debt should approximate fair value
because the debt is variable rate and adjusts daily with changes
in the underlying interest rate index.
Reclassifications: Certain reclassifications
have been made to the 2004 consolidated financial statements to
conform to the 2005 consolidated financial statement
presentation. These reclassifications have no impact on
stockholders equity or net income.
New Accounting Pronouncements: The following
is a summary of recently issued accounting pronouncements which
have been issued but not adopted by the Company at
December 31, 2005, and which could have a material effect
on the Companys financial position and results of
operations.
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123(R), Share-Based
Payment, which is a revision of SFAS No. 123,
Accounting for Stock Based Compensation.
SFAS No. 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its
equity instruments for goods or services. This Statement focuses
primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions.
SFAS No. 123(R) requires that the fair value of such
equity instruments be recognized as expense in the historical
financial statements as services are performed. Prior to
SFAS No. 123(R), only certain pro-forma disclosures of
fair value were required. SFAS No. 123(R) is effective
for the Company on January 1, 2006. The Company does not
expect SFAS No. 123(R) to have a material effect on
its financial position or the results of its operations.
In June 2005, the Emerging Issues Task Force (EITF)
reached a consensus on EITF
Issue 04-5,
Investors Accounting for an Investment in a Limited
Partnership When the Investor is the Sole General Partner and
the Limited Partners Have Certain Rights. EITF
Issue 04-5
will change the application of existing accounting
pronouncements that govern consolidation of variable interest
entities and voting interest entities when such an entity has a
sole general partner and limited partners with certain rights.
EITF
Issue 04-5
is effective immediately for all limited partnerships formed or
modified subsequent to June 29, 2005, and is effective for
all other limited partnerships for the first fiscal year
beginning after December 15, 2005. The Company does not
expect EITF
Issue 04-5
to have a material effect on its financial position or results
of its operations.
In October 2005, the FASB issued FASB Staff Position (FSP)
No. FAS 13-1,
Accounting for Rental Costs Incurred during a Construction
Period. This FSP addresses the accounting for rental costs
associated with operating leases that are incurred during a
construction period. The FSP states that rental costs associated
with
47
ground or building operating leases that are incurred during a
construction period should be recognized as rental expense. This
FSP is effective for the first reporting period beginning after
December 15, 2005. The Company does not expect FSP
No. FAS 13-1
to have a material effect on its financial position or results
of its operations.
|
|
3.
|
Real
Estate and Loans Receivable
|
Acquisitions
Following is a summary of the acquisitions made by the Company
in 2005 and 2004, including development properties that were
completed and placed in service:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price or
|
|
|
Acquisition Date or
|
|
|
|
|
Cost of
|
|
|
Date Placed in
|
Type of Facility
|
|
Location
|
|
Development
|
|
|
Service
|
|
Portfolio of three rehabilitation
and one long-term acute care hospitals
|
|
Bowling Green, KY
Fresno, CA
Marlton, NJ
Kentfield, CA
|
|
$
|
96,802,867
|
|
|
July 1, 2004
|
Portfolio of one rehabilitation
and one long-term acute care hospitals
|
|
Thornton, CO
New Bedford, MA
|
|
|
30,569,328
|
|
|
August 17, 2004
|
Community hospital
|
|
Victorville, CA
|
|
|
28,031,270
|
|
|
February 28, 2005
|
Long-term acute care
|
|
Covington, LA
|
|
|
11,510,737
|
|
|
June 9, 2005
|
Long-term acute care
|
|
Redding, CA
|
|
|
20,750,000
|
|
|
June 30, 2005
|
Long-term acute care
|
|
Denham Springs, LA
|
|
|
6,024,099
|
|
|
October 31, 2005
|
Community hospital
|
|
Chino, CA
|
|
|
21,059,479
|
|
|
November 30, 2005
|
Community hospital
|
|
Sherman Oaks, CA
|
|
|
20,032,151
|
|
|
December 30, 2005
|
Community hospital
|
|
Houston, TX
|
|
|
39,400,503
|
|
|
November 8, 2005
|
Medical office building
|
|
Houston, TX
|
|
|
17,008,873
|
|
|
October 7, 2005
|
The Company funded the 2004 acquisitions from its 2004 private
placement and the 2005 acquisitions and developments from its
2004 private placement, its 2005 IPO and from borrowings on its
term loan and revolving credit facility. The Company entered
into 15 year leases with the operators of the facilities
(with the exception of a 10 year lease of the medical
office building), which in certain instances were also the
sellers of the facilities. Each lease has renewal options which
are generally for three five year periods. The leases also
contain base rent escalation provisions based on the greater of
a fixed percentage or general levels of inflation. Some leases
contain provisions for the payment of percentage rents based on
the tenant exceeding a certain level of revenues in their
operations. Facilities with an aggregate cost of approximately
$60,000,000 are subject to repurchase options starting one year
after commencement of the leases.
The Company has recorded the following assets from its
acquisitions in 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Land
|
|
$
|
10,760,000
|
|
|
$
|
10,670,000
|
|
Buildings
|
|
|
92,296,506
|
|
|
|
111,387,232
|
|
Intangible lease assets
|
|
|
4,351,229
|
|
|
|
5,314,963
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
107,407,735
|
|
|
$
|
127,372,195
|
|
|
|
|
|
|
|
|
|
|
The Company recorded amortization expense of $455,899 and
$166,713 in 2005 and 2004, respectively, and expects to
recognize amortization expense from existing lease intangible
assets of $644,412 in each of the next five years. Capitalized
lease intangibles have a weighted average remaining life of
approximately 14 years.
48
Development
Projects
In addition to properties acquired and placed in service during
2004 and 2005, the Company has the following development
projects in various stages of completion at December 31,
2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
|
|
|
Cost
|
|
|
Remaining
|
|
|
|
Commitment
|
|
|
Incurred
|
|
|
Commitment
|
|
|
North Cypress (Houston, TX)
community hospital
|
|
$
|
64.0
|
|
|
$
|
22.1
|
|
|
$
|
41.9
|
|
Bucks County, PA womens
hospital and medical office building
|
|
|
38.0
|
|
|
|
10.0
|
|
|
|
28.0
|
|
Monroe County, IN community
hospital
|
|
|
35.5
|
|
|
|
13.2
|
|
|
|
22.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
137.5
|
|
|
$
|
45.3
|
|
|
$
|
92.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In June, 2005, the Company made a loan to a local operator to
fund the construction and development of a community hospital
(North Cypress) in Houston, Texas. The Company has the option to
purchase North Cypress at the end of construction at which time
the Company will enter into a 15 year lease with the
operator. The Company has included this transaction in
construction in progress in its consolidated balance sheet.
In each of these three development projects, the Company has
15 year leases with options to renew. During the
construction period, the Company is accruing and deferring rent
based on the cost paid during the construction period. The
Company will recognize the accrued construction period rent,
including interest on the unpaid amount, over the 15 year
terms of the leases.
Leasing
Operations
Minimum rental payments due in future periods under operating
leases which have non-cancelable terms extending beyond one year
at December 31, 2005, are as follows:
|
|
|
|
|
2006
|
|
$
|
32,409,547
|
|
2007
|
|
|
33,146,411
|
|
2008
|
|
|
33,924,979
|
|
2009
|
|
|
34,729,119
|
|
2010
|
|
|
35,552,484
|
|
Thereafter
|
|
|
362,327,325
|
|
|
|
|
|
|
|
|
$
|
532,089,865
|
|
|
|
|
|
|
Loans
In conjunction with the Companys purchase of six
healthcare facilities in July and August 2004, the Company also
made loans aggregating $49.1 million to Vibra Healthcare,
LLC (Vibra). In February, 2005, Vibra repaid $7.8 million
of principal and interest, and as of December 31, 2005 the
balance of the loan was $41.4 million. The Company has
determined that Vibra is a variable interest entity. The Company
has also determined that it is not the primary beneficiary of
Vibra and, therefore, has not consolidated Vibra in the
Companys consolidated financial statements. For the years
ended December 31, 2005 and 2004, Vibra accounted for
approximately 83% and 100%, respectively, of the Companys
total revenues.
In December, 2005, the Company made a $40.0 million
mortgage loan to Alliance Hospital, Ltd. (Alliance), an
unrelated third party. The Alliance loan is secured by a
community hospital facility located in Odessa, Texas. The loan
has a term of 15 years, and provides for monthly payments
of interest only during the term of the loan, with the full
principal amount due at the end of the term.
The lessee of Bucks County is a newly formed entity. The Company
has recorded notes receivable of $4.3 million for certain
fees and deposits owed by the operator. Due to the limited
equity currently invested in the operator by its owners, the
Company has determined that the operator is a variable interest
entity. However, the Company is not the primary beneficiary of
the operator/VIE and has not consolidated the operator in the
Companys
49
financial statements. Substantially all other facilities are
subject to leases that have fair value repurchase options at the
end of the lease terms.
In December 2004, the Company closed two bank loans totaling
$43.0 million to finance the construction of the
Companys medical office building and community hospital
development projects in Houston, Texas. The loans carry a
construction period term of eighteen months, with the option to
convert the loans into thirty month term loans with a
twenty-five year amortization. The loans require interest
payments only during the initial eighteen month term, and
principal and interest payments during the optional thirty month
term. The loans are secured by mortgages on the two properties
which have a book value of $56.2 million at
December 31, 2005. The loans bears interest at a rate of
one month LIBOR plus 225 basis points (6.64% at
December 31, 2005) during the construction period and
one month LIBOR plus 250 basis points (6.89% at
December 31, 2005) during the thirty month optional
period. The loans have an aggregate balance of
$35.5 million at December 31, 2005 and no balance
outstanding at December 31, 2004.
In October, 2005, the Company signed a Credit Agreement for a
secured revolving credit facility to replace an existing term
loan. The agreement has a four year term and has an interest
rate of the
30-day LIBOR
plus a spread ranging from 235 to 275 basis points (7.14%
at December 31, 2005) depending upon the
Companys overall leverage ratio. The agreement also
requires the payment of certain fees and meeting financial
covenants which are typical of this type of credit agreement.
The Company was in compliance with all such covenants at
December 31, 2005. Outstanding balances are secured by
properties which have a book value of $122.8 million at
December 31, 2005. The Company may borrow up to
$100.0 million depending on the value of collateral
properties. The Company currently may borrow up to approximately
$74.2 million, which may be increased to the maximum by
substituting or by adding other properties as the Company may
elect. The Company may also request to increase the available
line of credit to a maximum of $175.0 million, with the
payment of additional fees. The facility had a balance of
$65.0 million at December 31, 2005.
Earnings and profits, which determine the taxability of
distributions to shareholders, will differ from net income
reported for financial reporting purposes due to differences in
cost basis, differences in the estimated useful lives used to
compute depreciation, and differences between the allocation of
the Companys net income and loss for financial reporting
purposes and for tax reporting purposes.
Total common distributions declared were $.62 per common
share in 2005 and $0.21 per common share in 2004. Of the
dividends declared in 2004, $0.129177 per common share is
treated as ordinary income for federal income tax purposes for
the year ended December 31, 2004. The remaining
distribution of $0.080823 is treated as ordinary income for
federal income tax purposes in the year ended December 31,
2005. Of the dividends declared in 2005, $0.536168 per
common share is treated as ordinary income for federal income
tax purposes for the year ended December 31, 2005. The
remaining distribution of $.083832 is treated as ordinary income
for federal income tax purposes in the year ending
December 31, 2006.
50
The following is a reconciliation of the weighted average shares
used in net income per common share basic to
the weighted average shares used in net income per common
share assuming dilution for the years ended
December 31, 2005 and 2004, respectively:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Weighted average number of shares
issued and outstanding
|
|
|
32,326,939
|
|
|
|
19,308,511
|
|
Vested deferred stock units
|
|
|
16,080
|
|
|
|
2,322
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares basic
|
|
|
32,343,019
|
|
|
|
19,310,833
|
|
Restricted stock awards
|
|
|
26,115
|
|
|
|
|
|
Common stock warrants
|
|
|
955
|
|
|
|
1,801
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares diluted
|
|
|
32,370,089
|
|
|
|
19,312,634
|
|
|
|
|
|
|
|
|
|
|
The Company has adopted the Medical Properties Trust, Inc. 2004
Amended and Restated Equity Incentive Plan (the Equity Incentive
Plan) which authorizes the issuance of options to purchase
shares of common stock, restricted stock awards, restricted
stock units, deferred stock units, stock appreciation rights and
performance units. The Company has reserved
4,691,180 shares of common stock for awards under the
Equity Incentive Plan. The Equity Incentive Plan contains a
limit of 300,000 shares as the maximum number of shares of
common stock that may be awarded to an individual in any fiscal
year.
Upon their election to the board, each of our independent
directors was awarded options to acquire 20,000 shares of
our common stock. These options have an exercise price of
$10 per option, vested one-third upon grant. The remainder
will vest one-half on each of the first and second anniversaries
of the date of grant, and expire ten years from the date of
grant. The Company has determined that the exercise price of
these options is equal to the fair value of the common stock.
Accordingly, the options have no intrinsic value as that term is
used in SFAS No. 123, Accounting for Stock-Based
Compensation. No other options have been granted.
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding at January 1, 2004
|
|
|
|
|
|
|
|
|
Granted
|
|
|
100,000
|
|
|
$
|
10.00
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
100,000
|
|
|
$
|
10.00
|
|
Granted
|
|
|
60,000
|
|
|
$
|
10.00
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(60,000
|
)
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
100,000
|
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant-date fair
value of options granted in 2005
|
|
$
|
1.86
|
|
|
|
|
|
Options exercisable at December 31, 2005, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Contractual Life
|
|
Exercise Price
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
(years)
|
|
|
$10.00
|
|
|
100,000
|
|
|
|
46,666
|
|
|
|
8.8
|
|
The Company follows APB No. 25 and related Interpretations
in accounting for options granted under the Incentive Plan. In
accordance with APB No. 25, no compensation expense has
been recognized for stock options.
51
Had compensation expense for the Companys stock option
plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the methods
prescribed in SFAS No. 123, for the years ended
December 31, 2005 and 2004, the Companys net income
would have been decreased by $82,000 and $67,000, respectively,
and diluted earnings per share would have been reduced by $0.01
and by no cents, respectively.
The Company uses the Black-Scholes pricing model to calculate
the fair values of the options awarded, which are included in
the pro forma amounts above. For 2004, the following assumptions
were used to derive the fair values: an option term of four to
six years; no estimated volatility; a weighted average risk-free
rate of return of 3.63%; and a dividend yield of 1.00%. For the
2005, the following assumptions were used to derive the fair
values: an option term of four to six years; estimated
volatility of 27.75%; a weighted average risk-free rate of
return of 4.30%; a dividend yield of 4.80%
In addition to these options to purchase common stock, each
independent director was awarded 2,500 deferred stock units in
October, 2004, valued by the Company at $10.00 per unit,
which represent the right to receive 2,500 shares of common
stock in October 2007. In 2005, each independent director
received 2,000 deferred stock units, valued by the Company at
$9.68 per unit, which represent the right to receive
2,000 shares of common stock in October 2007. The Company
has recognized expense of $171,750 and $125,000 for the deferred
stock units awarded to its independent directors in 2005 and
2004, respectively.
In 2005, the Company awarded shares of restricted stock to
employees and directors under the Equity Incentive Plan. The
following is a summary of shares of restricted stock awarded in
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Value at Award Date
|
|
|
Outstanding at January 1, 2005
|
|
|
|
|
|
|
|
|
Awarded
|
|
|
678,680
|
|
|
$
|
10.10
|
|
Vested
|
|
|
(52,220
|
)
|
|
$
|
10.10
|
|
Forfeited
|
|
|
(5,000
|
)
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
621,460
|
|
|
$
|
10.10
|
|
|
|
|
|
|
|
|
|
|
The value of outstanding restricted shares is being charged to
compensation expense over the vesting periods which range from
three to five years. In 2005, the Company recorded compensation
expense of approximately $1.2 million for these restricted
share grants. For the restricted shares granted in 2005, the
Company expects to record compensation expense of approximately
$2.3 million in 2006.
|
|
8.
|
Commitments
and Contingencies
|
The Company has provided approximately $2.2 million of bank
letters of credit to two municipalities as security for its
obligations in two development projects. The Company has
deposited an equal amount of cash in separate accounts with the
bank as security for these letters of credit. The cash deposited
is recorded as other assets in the consolidated balance sheet at
December 31, 2005. Fixed minimum payments due under
operating leases with non-cancelable terms of more than one year
at December 31, 2005 are as follows:
|
|
|
|
|
2006
|
|
$
|
424,790
|
|
2007
|
|
|
432,248
|
|
2008
|
|
|
439,741
|
|
2009
|
|
|
447,270
|
|
2010
|
|
|
390,740
|
|
Thereafter
|
|
|
22,639,194
|
|
|
|
|
|
|
|
|
$
|
24,773,983
|
|
|
|
|
|
|
The total amount to be received from non-cancellable subleases
at December 31, 2005, is approximately $13.8 million.
52
The Company is defendant in a lawsuit wherein a plaintiff has
asserted breach of a consulting contract. The Company believes
the allegations in the lawsuit are without merit and intends to
vigorously defend itself. The Company has previously made
provision in its financial statements for the amount that it
believes is due under the contract and does not expect the
resolution of this matter to result in additional material costs.
|
|
9.
|
Fair
Value of Financial Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Book
|
|
|
Fair
|
|
|
Book
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Cash and cash equivalents
|
|
$
|
59,115,832
|
|
|
$
|
59,115,832
|
|
|
$
|
97,543,677
|
|
|
$
|
97,543,677
|
|
Interest receivable
|
|
|
1,354,387
|
|
|
|
1,354,387
|
|
|
|
419,776
|
|
|
|
419,776
|
|
Straight-line rent receivable
|
|
|
13,477,917
|
|
|
|
8,544,257
|
|
|
|
3,206,853
|
|
|
|
1,679,450
|
|
Loans
|
|
|
88,205,611
|
|
|
|
97,714,785
|
|
|
|
50,224,069
|
|
|
|
50,646,695
|
|
Long-term debt
|
|
|
100,484,520
|
|
|
|
100,484,520
|
|
|
|
56,000,000
|
|
|
|
56,000,000
|
|
Accounts payable and accrued
expenses
|
|
|
19,928,900
|
|
|
|
19,928,900
|
|
|
|
10,903,025
|
|
|
|
10,903,025
|
|
|
|
10.
|
Quarterly
Financial Data (unaudited)
|
The following is a summary of the unaudited quarterly financial
information for the years ended December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Month Periods in
2005 Ended:
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Revenues
|
|
$
|
6,480,528
|
|
|
$
|
7,241,777
|
|
|
$
|
8,204,941
|
|
|
$
|
9,621,953
|
|
Net income
|
|
$
|
3,559,934
|
|
|
$
|
4,379,811
|
|
|
$
|
5,256,091
|
|
|
$
|
6,444,511
|
|
Net income (loss) per share, basic
|
|
$
|
0.14
|
|
|
$
|
0.17
|
|
|
$
|
0.14
|
|
|
$
|
0.16
|
|
Weighted average shares
outstanding basic
|
|
|
26,099,195
|
|
|
|
26,096,021
|
|
|
|
37,606,480
|
|
|
|
39,359,578
|
|
Net income (loss) per share,
diluted
|
|
$
|
0.14
|
|
|
$
|
0.17
|
|
|
$
|
0.14
|
|
|
$
|
0.16
|
|
Weighted average shares
outstanding diluted
|
|
|
26,103,259
|
|
|
|
26,110,119
|
|
|
|
37,654,576
|
|
|
|
39,382,139
|
|
Revenues
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,039,072
|
|
|
$
|
5,854,387
|
|
Net income (loss)
|
|
$
|
(493,726
|
)
|
|
$
|
(1,069,892
|
)
|
|
$
|
2,628,938
|
|
|
$
|
3,511,029
|
|
Net income (loss) per share, basic
|
|
$
|
(0.30
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.10
|
|
|
$
|
0.13
|
|
Weighted average shares
outstanding basic
|
|
|
1,630,435
|
|
|
|
24,397,524
|
|
|
|
26,082,862
|
|
|
|
26,095,362
|
|
Net income (loss) per share,
diluted
|
|
$
|
(0.30
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.10
|
|
|
$
|
0.13
|
|
Weighted average shares
outstanding diluted
|
|
|
1,630,435
|
|
|
|
24,399,813
|
|
|
|
26,085,312
|
|
|
|
26,097,812
|
|
53
|
|
ITEM 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure
|
None.
|
|
ITEM 9.A.
|
Controls
and Procedures
|
We have adopted and maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in our reports under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding required disclosure. In designing
and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls
and procedures.
As required by
Rule 13a-15(b),
under the Securities Exchange Act of 1934, as amended, we have
carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
as of the end of the quarter covered by this report. Based on
the foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
are effective in timely alerting them to material information
required to be disclosed by the company in the reports that the
Company files with the SEC.
There has been no change in our internal control over financial
reporting during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
|
|
ITEM 9.B.
|
Other
Information
|
None.
PART III
|
|
ITEM 10.
|
Directors
and Executive Officers of the Registrant
|
The information required by this Item 10 is incorporated by
reference to our definitive Proxy Statement for the 2006 Annual
Meeting of Stockholders, which will be filed by us with the
Commission not later than April 18, 2006.
|
|
ITEM 11.
|
Executive
Compensation
|
The information required by this Item 11 is incorporated by
reference to our definitive Proxy Statement for the 2006 Annual
Meeting of Stockholders, which will be filed by us with the
Commission not later than April 18, 2006.
|
|
ITEM 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this Item 12 is incorporated by
reference to our definitive Proxy Statement for the 2006 Annual
Meeting of Stockholders, which will be filed by us with the
Commission not later than April 18, 2006.
|
|
ITEM 13.
|
Certain
Relationships and Related Transactions.
|
The information required by this Item 13 is incorporated by
reference to our definitive Proxy Statement for the 2006 Annual
Meeting of Stockholders, which will be filed by us with the
Commission not later than April 18, 2006.
|
|
ITEM 14.
|
Principal
Accountants Fees and Services.
|
The information required by this Item 14 is incorporated by
reference to our definitive Proxy Statement for the 2006 Annual
Meeting of Stockholders, which will be filed by us with the
Commission not later than April 18, 2006.
54
PART IV
|
|
ITEM 15.
|
Exhibits
and Financial Statement Schedules.
|
(a) Financial
Statements and Financial Statement Schedules
|
|
|
|
|
|
|
|
|
  |
Index of Financial Statements
of Medical Properties Trust, Inc. which are included in
Part II, Item 8 of this Annual Report on
Form 10-K:
|
|
|
|
|
|
|
|
|
  |
Report of Independent Registered
Public Accounting Firm
|
|
|
37
|
|
|
|
|
|
  |
Consolidated Balance Sheets as of
December 31, 2005 and 2004
|
|
|
38
|
|
|
|
|
|
  |
Consolidated Statements of Income
for the Years Ended December 31, 2005, 2004 and for the
Period from Inception (August 27, 2003) through
December 31, 2003
|
|
|
39
|
|
|
|
|
|
  |
Consolidated Statements of
Stockholders Equity for the Years Ended December 31,
2005, 2004 and for the Period from Inception (August 27,
2003) through December 31, 2003
|
|
|
40
|
|
|
|
|
|
  |
Consolidated Statements of Cash
Flows for the Years Ended December 31, 2005, 2004 and for
the Period from Inception (August 27, 2003) through
December 31, 2003
|
|
|
41
|
|
|
|
|
|
  |
Notes to Consolidated Financial
Statements
|
|
|
43
|
|
|
|
|
|
  |
Index of Consolidated Financial
Statement Schedules
|
|
|
|
|
|
|
|
|
  |
Schedule III Real
Estate and Accumulated Depreciation
|
|
|
61
|
|
|
|
|
|
  |
Schedule IV Mortgage
Loan on Real Estate
|
|
|
63
|
|
|
|
|
|
  |
Index of Financial Statements
of Vibra Healthcare, LLC
|
|
|
|
|
|
|
|
|
  |
Report of Independent Registered
Public Accounting Firm
|
|
|
64
|
|
|
|
|
|
  |
Consolidated Balance Sheets as of
December 31, 2005 and 2004
|
|
|
65
|
|
|
|
|
|
  |
Consolidated Statement of
Operations and Changes in Members Deficit for the Year
Ended December 31, 2005 and the Period May 14, 2004
(date of inception) to December 31, 2004
|
|
|
66
|
|
|
|
|
|
  |
Consolidated Statement of Cash
Flows for the Year Ended December 31, 2005 the Period
May 14, 2004 (date of inception) to December 31, 2004
|
|
|
67
|
|
|
|
|
|
  |
Notes to Consolidated Financial
Statements
|
|
|
68
|
|
(b) Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
|
3
|
.1(1)
|
|
Registrants Second Articles
of Amendment and Restatement
|
|
3
|
.2(2)
|
|
Registrants Amended and
Restated Bylaws
|
|
3
|
.3(3)
|
|
Articles of Amendment to Second
Amended and Restated Articles of Incorporation
|
|
4
|
.1(1)
|
|
Form of Common Stock Certificate
|
|
4
|
.2(1)
|
|
Registration Rights Agreement
among Registrant, Friedman, Billings, Ramsey & Co.,
Inc. and certain holders of the Registrants common stock,
dated April 7, 2004
|
|
10
|
.1(1)
|
|
First Amended and Restated
Agreement of Limited Partnership of MPT Operating Partnership,
L.P.
|
|
10
|
.2(1)
|
|
Amended and Restated 2004 Equity
Incentive Plan
|
|
10
|
.3(1)
|
|
Employment Agreement between the
Registrant and Edward K. Aldag, Jr., dated
September 10, 2003
|
|
10
|
.4(1)
|
|
First Amendment to Employment
Agreement between the Registrant and Edward K. Aldag, Jr.,
dated March 8, 2004
|
55
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
|
10
|
.5(1)
|
|
Employment Agreement between the
Registrant and Emmett E. McLean, dated September 10, 2003
|
|
10
|
.6(1)
|
|
Employment Agreement between the
Registrant and R. Steven Hamner, dated September 10, 2003
|
|
10
|
.7(1)
|
|
Amended and Restated Employment
Agreement between the Registrant and William G. McKenzie, dated
September 10, 2003
|
|
10
|
.8(1)
|
|
Lease Agreement between MPT West
Houston MOB, L.P. and Stealth L.P., dated June 17, 2004
|
|
10
|
.9(1)
|
|
Lease Agreement between MPT West
Houston Hospital, L.P. and Stealth L.P., dated June 17, 2004
|
|
10
|
.10(1)
|
|
Third Amended and Restated Lease
Agreement between 1300 Campbell Lane, LLC and 1300 Campbell Lane
Operating Company, LLC, dated December 20, 2004
|
|
10
|
.11(1)
|
|
First Amendment to Third Amended
and Restated Lease Agreement between 1300 Campbell Lane, LLC and
1300 Campbell Lane Operating Company, LLC, dated
December 31, 2004
|
|
10
|
.12(1)
|
|
Second Amended and Restated Lease
Agreement between 92 Brick Road, LLC and 92 Brick Road,
Operating Company, LLC, dated December 20, 2004
|
|
10
|
.13(1)
|
|
First Amendment to Second Amended
and Restated Lease Agreement between 92 Brick Road, LLC and 92
Brick Road, Operating Company, LLC, dated December 31, 2004
|
|
10
|
.14(1)
|
|
Third Amended and Restated Lease
Agreement between San Joaquin Health Care Associates
Limited Partnership and 7173 North Sharon Avenue Operating
Company, LLC, dated December 20, 2004
|
|
10
|
.15(1)
|
|
First Amendment to Third Amended
and Restated Lease Agreement between San Joaquin Health
Care Associates Limited Partnership and 7173 North Sharon Avenue
Operating Company, LLC, dated December 31, 2004
|
|
10
|
.16(1)
|
|
Second Amended and Restated Lease
Agreement between 8451 Pearl Street, LLC and 8451 Pearl Street
Operating Company, LLC, dated December 20, 2004
|
|
10
|
.17(1)
|
|
First Amendment to Second Amended
and Restated Lease Agreement between 8451 Pearl Street, LLC and
8451 Pearl Street Operating Company, LLC, dated
December 31, 2004
|
|
10
|
.18(1)
|
|
Second Amended and Restated Lease
Agreement between 4499 Acushnet Avenue, LLC and 4499 Acushnet
Avenue Operating Company, LLC, dated December 20, 2004
|
|
10
|
.19(1)
|
|
First Amendment to Second Amended
and Restated Lease Agreement between 4499 Acushnet Avenue, LLC
and 4499 Acushnet Avenue Operating Company, LLC, dated
December 31, 2004
|
|
10
|
.20(1)
|
|
Third Amended and Restated Lease
Agreement between Kentfield THCI Holding Company, LLC and 1125
Sir Francis Drake Boulevard Operating Company, LLC, dated
December 20, 2004
|
|
10
|
.21(1)
|
|
First Amendment to Third Amended
and Restated Lease Agreement between Kentfield THCI Holding
Company, LLC and 1125 Sir Francis Drake Boulevard Operating
Company, LLC, dated December 31, 2004
|
|
10
|
.22(1)
|
|
Loan Agreement between Colonial
Bank, N.A., and MPT West Houston MOB, L.P., dated
December 17, 2004
|
|
10
|
.23(1)
|
|
Loan Agreement between Colonial
Bank, N.A., and MPT West Houston Hospital, L.P., dated
December 17, 2004
|
|
10
|
.24(1)
|
|
Loan Agreement between Merrill
Lynch Capital and 4499 Acushnet Avenue, LLC, 8451 Pearl Street,
LLC, 92 Brick Road, LLC, 1300 Campbell Lane, LLC, Kentfield THCI
Holding Company, LLC and San Joaquin Health Care
Associates, LP, dated December 31, 2004
|
|
10
|
.25(1)
|
|
Payment Guaranty made by the
Registrant and MPT Operating Partnership, L.P. in favor of
Merrill Lynch Capital, dated December 31, 2004
|
|
10
|
.26(1)
|
|
Purchase Agreement among THCI
Company, LLC, THCI of California, LLC, THCI of Massachusetts,
LLC, THCI Mortgage Holding Company, LLC and MPT Operating
Partnership, L.P., dated May 20, 2004
|
|
10
|
.27(1)
|
|
Purchase and Sale Agreement among
MPT Operating Partnership, L.P., MPT of Victorville, LLC, Prime
A Investments, L.L.C., Desert Valley Health System, Inc., Desert
Valley Hospital, Inc. and Desert Valley Medical Group, Inc.,
dated February 28, 2005
|
56
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
|
10
|
.28(1)
|
|
Lease Agreement between MPT of
Victorville, LLC and Desert Valley Hospital, Inc., dated
February 28, 2005
|
|
10
|
.29(1)
|
|
Purchase and Sale Agreement among
MPT Operating Partnership, L.P., MPT of Bucks County Hospital,
L.P., Bucks County Oncoplastic Institute, LLC, Jerome S.
Tannenbaum, M.D., M. Stephen Harrison and DSI Facility
Development, LLC, dated March 3, 2005
|
|
10
|
.30(1)
|
|
Employment Agreement between the
Registrant and Michael G. Stewart, dated April 28, 2005
|
|
10
|
.31(1)
|
|
Letter of Commitment between MPT
Operating Partnership, L.P. and Monroe Hospital Operating
Hospital, dated February 28, 2005
|
|
10
|
.32(1)
|
|
Letter of Commitment between MPT
Operating Partnership, L.P., Covington Healthcare Properties,
LLC and Denham Springs Healthcare Properties, LLC, dated
March 14, 2005
|
|
10
|
.33(1)
|
|
Letter of Commitment between MPT
Operating Partnership, L.P. and North Cypress Medical Center
Operating Partnership, Ltd., dated March 16, 2005
|
|
10
|
.34(1)
|
|
Letter of Commitment between MPT
Operating Partnership, L.P., Hammond Healthcare Properties, LLC
and Hammond Rehabilitation Hospital, LLC, dated April 1,
2005
|
|
10
|
.35(1)
|
|
Letter of Commitment between MPT
Operating Partnership, L.P. and Diversified Specialty
Institutes, Inc., dated March 3, 2005
|
|
10
|
.36(1)
|
|
Amendment to Letter of Commitment
between MPT Operating Partnership, L.P. and Diversified
Specialty Institutes, Inc., dated March 31, 2005
|
|
10
|
.37(1)
|
|
Letter of Commitment between MPT
Operating Partnership, L.P., MPT of Victorville, LLC and Desert
Valley Hospital, Inc., dated February 28, 2005
|
|
10
|
.38(1)
|
|
Amendment to Purchase and Sale
Agreement among MPT Operating Partnership, L.P., MPT of Bucks
County Hospital, L.P., Bucks County Oncoplastic Institute, LLC,
DSI Facility Development, LLC, Jerome S. Tannenbaum, M.D.,
M. Stephen Harrison and G. Patrick Maxwell, M.D., dated
April 29, 2005
|
|
10
|
.39(1)
|
|
Sublease Agreement between MPT of
North Cypress, L.P. and North Cypress Medical Center Operating
Company, Ltd., dated as of June 1, 2005
|
|
10
|
.40(1)
|
|
Net Ground Lease between North
Cypress Property Holdings, Ltd. and MPT of North Cypress, L.P.,
dated as of June 1, 2005
|
|
10
|
.41(1)
|
|
Purchase and Sale Agreement
between MPT of North Cypress, L.P. and North Cypress Medical
Center Operating Company, Ltd., dated as of June 1, 2005
|
|
10
|
.42(1)
|
|
Contract for Purchase and Sale of
Real Property between North Cypress Property Holdings, Ltd. and
MPT of North Cypress, L.P., dated as of June 1, 2005
|
|
10
|
.43(1)
|
|
Lease Agreement between MPT of
North Cypress, L.P. and North Cypress Medical Center Operating
Company, Ltd., dated as of June 1, 2005
|
|
10
|
.44(1)
|
|
Net Ground Lease between Northern
Healthcare Land Ventures, Ltd. and MPT of North Cypress, L.P.,
dated as of June 1, 2005
|
|
10
|
.45(1)
|
|
Amendment to the First Amended and
Restated Agreement of Limited Partnership of MPT Operating
Partnership, L.P.
|
|
10
|
.46(1)
|
|
Construction Loan Agreement
between North Cypress Medical Center Operating Company, Ltd. and
MPT Finance Company, LLC, dated June 1, 2005
|
|
10
|
.47(1)
|
|
Purchase, Sale and Loan Agreement
among MPT Operating Partnership, L.P., MPT of Covington, LLC,
MPT of Denham Springs, LLC, Covington Healthcare Properties,
L.L.C., Denham Springs Healthcare Properties, L.L.C., Gulf
States Long Term Acute Care of Covington, L.L.C. and Gulf States
Long Term Acute Care of Denham Springs, L.L.C., dated
June 9, 2005
|
|
10
|
.48(1)
|
|
Lease Agreement between MPT of
Covington, LLC and Gulf States Long Term Acute Care of
Covington, L.L.C., dated June 9, 2005
|
|
10
|
.49(1)
|
|
Promissory Note made by Denham
Springs Healthcare Properties, L.L.C. in favor of MPT of Denham
Springs, LLC, dated June 9, 2005
|
57
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
|
10
|
.50(1)
|
|
Purchase and Sale Agreement among
MPT Operating Partnership, L.P., MPT of Redding, LLC, Vibra
Healthcare, LLC and Northern California Rehabilitation Hospital,
LLC, dated June 30, 2005
|
|
10
|
.51(1)
|
|
Lease Agreement between Northern
California Rehabilitation Hospital, LLC and MPT of Redding, LLC,
dated June 30, 2005
|
|
10
|
.52(1)
|
|
Ground Lease Agreement between
National Medical Specialty Hospital of Redding, Inc. and
Guardian Postacute Services, Inc., dated November 14, 1997
|
|
10
|
.53(1)
|
|
Ground Lease Agreement between
West Jersey Health System and West Jersey/Mediplex
Rehabilitation Limited Partnership, dated July 15, 1993
|
|
10
|
.54(1)
|
|
Amendment No. 1 to Ground
Lease Agreement between National Medical Specialty Hospital of
Redding, Inc. and Ocadian Care Centers, Inc., dated
November 29, 2001
|
|
10
|
.55(1)
|
|
Form of Indemnification Agreement
between the Registrant and executive officers and directors
|
|
10
|
.56(1)
|
|
Lease Agreement between Bucks
County Oncoplastic Institute, LLC and MPT of Bucks County, L.P.,
dated September 16, 2005, as corrected.
|
|
10
|
.57(1)
|
|
Development Agreement among DSI
Facility Development, LLC, Bucks County Oncoplastic Institute,
LLC and MPT of Bucks County, L.P., dated September 16, 2005.
|
|
10
|
.58(1)
|
|
Funding Agreement among DSI
Facility Development, LLC, Bucks County Oncoplastic Institute,
LLC and MPT of Bucks County, L.P., dated September 16, 2005.
|
|
10
|
.59(1)
|
|
Purchase and Sale Agreement among
MPT Operating Partnership, L.P., MPT of Bloomington, LLC,
Southern Indiana Medical Park II, LLC and Monroe Hospital,
LLC, dated October 7, 2005.
|
|
10
|
.60(1)
|
|
Lease Agreement between Monroe
Hospital, LLC and MPT of Bloomington, LLC, dated October 7,
2005.
|
|
10
|
.61(1)
|
|
Development Agreement among Monroe
Hospital, LLC, Monroe Hospital Development, LLC and MPT of
Bloomington, LLC, dated October 7, 2005.
|
|
10
|
.62(1)
|
|
Funding Agreement between Monroe
Hospital, LLC and MPT of Bloomington, LLC, dated October 7,
2005.
|
|
10
|
.63(1)
|
|
First Amendment to Lease Agreement
between MPT West Houston Hospital, L.P. and Stealth, L.P., dated
September 2, 2005.
|
|
10
|
.64(4)
|
|
Credit Agreement dated
October 27, 2005, among MPT Operating Partnership, L.P.,
the borrower, and Merrill Lynch Capital, a division of Merrill
Lynch Business Financial Services, Inc., as Administrative Agent
and Lender, and Additional Lenders from Time to Time a Party
thereto.
|
|
10
|
.65(1)
|
|
Lease Agreement among Veritas
Health Services, Inc., Prime Healthcare Services, LLC and MPT of
Chino, LLC, dated November 30, 2005.
|
|
10
|
.66(1)
|
|
Purchase and Sale Agreement among
MPT Operating Partnership, L.P., MPT of Chino, LLC, Prime
Healthcare Services, LLC, Veritas Health Services, Inc., Prime
Healthcare Services, Inc., Desert Valley Hospital, Inc. and
Desert Valley Medical Group, Inc., dated November 30, 2005.
|
|
10
|
.67(1)
|
|
Loan Agreement among MPT Operating
Partnership, L.P., MPT of Odessa Hospital, L.P., Alliance
Hospital, Ltd. and SRI-SAI Enterprises, Inc., dated
December 23, 2005.
|
|
10
|
.68(1)
|
|
Promissory Note by Alliance
Hospital, Ltd. In favor of MPT of Odessa Hospital, L.P., dated
December 23, 2005.
|
|
10
|
.69(1)
|
|
Purchase and Sale Agreement among
MPT Operating Partnership, L.P., MPT of Sherman Oaks, LLC, Prime
A Investments, L.L.C., Prime Healthcare Services II, LLC,
Prime Healthcare Services, Inc., Desert Valley Medical Group,
Inc. and Desert Valley Hospital, Inc., dated December 30,
2005, as corrected.
|
|
10
|
.70(1)
|
|
Lease Agreement between MPT of
Sherman Oaks, LLC and Prime Healthcare Services II, LLC,
dated December 30, 2005, as corrected.
|
|
10
|
.71(5)
|
|
First Amendment to Lease Agreement
between MPT West Houston Hospital, L.P. and Stealth, L.P., dated
September 2, 2005.
|
|
10
|
.72(5)
|
|
Second Amendment to Lease
Agreement between MPT West Houston Hospital, L.P. and Stealth,
L.P., dated February 28, 2006.
|
58
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Title
|
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
23
|
.1(5)
|
|
Consent of KPMG LLP
|
|
23
|
.2
|
|
Consent of Parente Randolph, LLC
|
|
31
|
.1(5)
|
|
Certification of Chief Executive
Officer pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934 (1)
|
|
31
|
.2(5)
|
|
Certification of Chief Financial
Officer pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934 (1)
|
|
|
32(5)
|
|
Certification of Chief Executive
Officer and Chief Financial Officer pursuant to
Rule 13a-14(b)
under the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350(1)
|
|
|
(1)
|
Incorporated by reference to the Registrants Registration
Statement on
Form S-11
filed with the Commission on October 26, 2004, as amended
(File
No. 333-119957).
|
|
(2)
|
Incorporated by reference to the Registrants quarterly
report on
Form 10-Q
for the quarter ended June 30, 2005, filed with the
Commission on July 26, 2005.
|
|
(3)
|
Incorporated by reference to the Registrants quarterly
report on
Form 10-Q
for the quarter ended September 30, 2005, filed with the
Commission on November 10, 2005.
|
|
(4)
|
Incorporated by reference to the Registrants current
report on
Form 8-K,
filed with the Commission on November 2, 2005.
|
|
(5)
|
Included in this
Form 10-K.
|
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MEDICAL PROPERTIES TRUST, INC.
R. Steven Hammer
Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
Date: March 31, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this Report has been signed by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Edward K. Aldag,
Jr.
Edward
K. Aldag, Jr.
|
|
Chairman of the Board, President,
Chief Executive Officer and Director (Principal Executive
Officer)
|
|
March 31, 2006
|
|
|
|
|
|
/s/ Virginia A.
Clarke
Virginia
A. Clarke
|
|
Director
|
|
March 31, 2006
|
|
|
|
|
|
/s/ Bryan L. Goolsby
Bryan
L. Goolsby
|
|
Director
|
|
March 31, 2006
|
|
|
|
|
|
/s/ R. Steven Hammer
R.
Steven Hammer
|
|
Executive Vice President, Chief
Financial Officer and Director (Principal Financial and
Accounting Officer)
|
|
March 31, 2006
|
|
|
|
|
|
/s/ G. Steven Dawson
G.
Steven Dawson
|
|
Director
|
|
March 31, 2006
|
|
|
|
|
|
Robert
E. Holmes, Ph.D.
|
|
Director
|
|
|
|
|
|
|
|
/s/ William G.
McKenzie
William
G. McKenzie
|
|
Vice Chairman of the Board
|
|
March 31, 2006
|
|
|
|
|
|
/s/ L. Glenn Orr,
Jr.
L.
Glenn Orr, Jr.
|
|
Director
|
|
March 31, 2006
|
60
SCHEDULE III REAL
ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost at December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Costs
|
|
|
Additions Subsequent to
Acquisition
|
|
|
2005
|
|
|
Accumulated
|
|
|
Date of
|
|
Date
|
|
Depreciable
|
|
Location
|
|
Type of Property
|
|
Land
|
|
|
Buildings
|
|
|
Improvements
|
|
|
Carrying Costs
|
|
|
Land
|
|
|
Buildings (1)
|
|
|
Total
|
|
|
Depreciation
|
|
|
Construction
|
|
Acquired
|
|
Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bowling Green, KY
|
|
Rehabilitation hospital
|
|
$
|
3,070,000
|
|
|
$
|
33,570,541
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,070,000
|
|
|
$
|
33,570,541
|
|
|
$
|
36,640,541
|
|
|
$
|
1,258,895
|
|
|
1991
|
|
|
July 1, 2004
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thornton, CO
|
|
Rehabilitation hospital
|
|
|
2,130,000
|
|
|
|
6,013,142
|
|
|
|
|
|
|
|
|
|
|
|
2,130,000
|
|
|
|
6,013,142
|
|
|
|
8,143,142
|
|
|
|
200,438
|
|
|
1962, 1975
|
|
|
August 17, 2004
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fresno, CA
|
|
Rehabilitation hospital
|
|
|
1,550,000
|
|
|
|
16,363,153
|
|
|
|
|
|
|
|
|
|
|
|
1,550,000
|
|
|
|
16,363,153
|
|
|
|
17,913,153
|
|
|
|
613,618
|
|
|
1990
|
|
|
July 1, 2004
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kentfield, CA
|
|
Long term acute care hospital
|
|
|
2,520,000
|
|
|
|
4,765,176
|
|
|
|
|
|
|
|
|
|
|
|
2,520,000
|
|
|
|
4,765,176
|
|
|
|
7,285,176
|
|
|
|
178,694
|
|
|
1963
|
|
|
July 1, 2004
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marlton, NJ
|
|
Rehabilitation hospital
|
|
|
|
|
|
|
30,903,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,903,051
|
|
|
|
30,903,051
|
|
|
|
1,158,864
|
|
|
1994
|
|
|
July 1, 2004
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Bedford, NJ
|
|
Long term acute care hospital
|
|
|
1,400,000
|
|
|
|
19,772,169
|
|
|
|
|
|
|
|
|
|
|
|
1,400,000
|
|
|
|
19,772,169
|
|
|
|
21,172,169
|
|
|
|
659,072
|
|
|
1962, 1975, 1992
|
|
|
August 17, 2004
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Victorville, CA
|
|
Acute care general hospital
|
|
|
2,000,000
|
|
|
|
24,994,553
|
|
|
|
|
|
|
|
31,270
|
|
|
|
2,000,000
|
|
|
|
25,025,823
|
|
|
|
27,025,823
|
|
|
|
521,371
|
|
|
1994
|
|
|
February 28, 2005
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covington, LA
|
|
Long term acute care hospital
|
|
|
821,429
|
|
|
|
10,238,246
|
|
|
|
|
|
|
|
10,737
|
|
|
|
821,429
|
|
|
|
10,248,983
|
|
|
|
11,070,412
|
|
|
|
149,464
|
|
|
1985
|
|
|
June 9, 2005
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denham Springs, LA
|
|
Long term acute care hospital
|
|
|
428,571
|
|
|
|
5,340,130
|
|
|
|
|
|
|
|
24,099
|
|
|
|
428,571
|
|
|
|
5,364,229
|
|
|
|
5,792,800
|
|
|
|
11,148
|
|
|
1965
|
|
|
June 9, 2005
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redding, CA
|
|
Rehabilitation hospital
|
|
|
|
|
|
|
19,952,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,952,023
|
|
|
|
19,952,023
|
|
|
|
249,400
|
|
|
1993
|
|
|
June 30, 2005
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sherman Oaks, CA
|
|
Acute care general hospital
|
|
|
5,290,000
|
|
|
|
13,586,688
|
|
|
|
|
|
|
|
32,151
|
|
|
|
5,290,000
|
|
|
|
13,618,839
|
|
|
|
18,908,839
|
|
|
|
|
|
|
1956
|
|
|
December 30, 2005
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chino, CA
|
|
Acute care general hospital
|
|
|
2,220,000
|
|
|
|
18,027,131
|
|
|
|
|
|
|
|
59,479
|
|
|
|
2,220,000
|
|
|
|
18,086,610
|
|
|
|
20,306,610
|
|
|
|
37,623
|
|
|
1972
|
|
|
November 30, 2005
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Houston, TX (Hospital)
|
|
Acute care general hospital
|
|
|
8,039,948
|
|
|
|
31,360,555
|
|
|
|
|
|
|
|
|
|
|
|
8,039,948
|
|
|
|
31,360,555
|
|
|
|
39,400,503
|
|
|
|
130,416
|
|
|
2005
|
|
|
November 8, 2005
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Houston, TX (MOB)
|
|
Medical Office Building
|
|
|
1,534,727
|
|
|
|
15,474,146
|
|
|
|
|
|
|
|
|
|
|
|
1,534,727
|
|
|
|
15,474,146
|
|
|
|
17,008,873
|
|
|
|
91,216
|
|
|
2005
|
|
|
October 7, 2005
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,004,675
|
|
|
$
|
250,360,704
|
|
|
$
|
|
|
|
$
|
157,736
|
|
|
$
|
31,004,675
|
|
|
$
|
250,518,440
|
|
|
$
|
281,523,115
|
|
|
$
|
5,260,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
COST
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
122,057,232
|
|
|
$
|
|
|
Additions during the period
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
159,308,147
|
|
|
|
|
|
Additions to carrying cost
|
|
|
157,736
|
|
|
|
122,057,232
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
281,523,115
|
|
|
$
|
122,057,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
December 31, 2003
|
|
|
ACCUMULATED DEPRECIATION
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
1,311,757
|
|
|
$
|
|
|
Additions during the period
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,948,462
|
|
|
|
1,311,757
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
5,260,219
|
|
|
$
|
1,311,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The gross cost for Federal income tax purposes is $260,184,632. |
62
SCHEDULE IV MORTGAGE
LOAN ON REAL ESTATE
MEDICAL
PROPERTIES TRUST, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
Column D
|
|
Column E
|
|
|
Column F
|
|
|
Column G
|
|
|
Column H
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to
|
|
|
|
|
|
|
Final
|
|
Periodic
|
|
|
|
|
Face
|
|
|
Carrying
|
|
|
Delinquent
|
|
|
|
Interest
|
|
|
Maturity
|
|
Payment
|
|
Prior
|
|
|
Amount of
|
|
|
Amount of
|
|
|
Principal or
|
|
Description
|
|
Rate
|
|
|
Date
|
|
Terms
|
|
Liens
|
|
|
Mortgages
|
|
|
Mortgages
|
|
|
Interest
|
|
|
Long-term first mortgage loan:
|
|
|
|
|
|
|
|
Payable in
monthly
installments
of interest
plus
principal
payable in
full at
maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alliance Hospital
|
|
|
10.0
|
%
|
|
2020
|
|
|
|
|
(1
|
)
|
|
$
|
40,000,000
|
|
|
$
|
40,000,000
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,000,000
|
|
|
$
|
40,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to this schedule on the following page.
|
|
|
(1) |
|
There were no prior liens on loan as of December 31, 2005.
|
|
(2) |
|
The mortgage loan was not delinquent with respect to principal
or interest.
|
|
(3) |
|
Reconciliation of Mortgage Loans on Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Balance at beginning of year
|
|
$
|
|
|
|
$
|
|
|
Additions during year:
|
|
|
|
|
|
|
|
|
New mortgage loans and additional
advances on existing loans
|
|
|
46,000,000
|
|
|
|
|
|
Interest income added to principal
|
|
|
|
|
|
|
|
|
Amortization of discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,000,000
|
|
|
|
|
|
Deductions during year:
|
|
|
|
|
|
|
|
|
Settled through acquisition of
real estate
|
|
|
6,000,000
|
|
|
|
|
|
Collection of principal
|
|
|
|
|
|
|
|
|
Foreclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
40,000,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
63
Report
of Independent Registered Public Accounting Firm
To the Sole Member of
Vibra Healthcare, LLC:
We have audited the accompanying consolidated balance sheet of
Vibra Healthcare, LLC and subsidiaries (the Company)
as of December 31, 2005 and 2004, and the related
consolidated statements of operations and changes in
members deficit, and cash flows for the year ended
December 31, 2005 and the period from inception
(May 14, 2004) through December 31, 2004. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Vibra Healthcare, LLC and subsidiaries as of
December 31, 2005 and 2004, and the results of their
operations and their cash flows for the year ended
December 31, 2005 and the period from inception
(May 14, 2004) through December 31, 2004 in
conformity with accounting principles generally accepted in the
United States of America.
/s/ Parente Randolph, LLC
Harrisburg, Pennsylvania
March 27, 2006
64
Vibra
Healthcare, LLC and Subsidiaries
Consolidated
Balance Sheet
December 31,
2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
December 31, 2005
|
|
|
2004
|
|
|
Assets
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,018,829
|
|
|
$
|
2,280,772
|
|
Patient accounts receivable, net
of allowance for doubtful collections of $1,689,000 and $777,000
at December 31, 2005 and 2004, respectively
|
|
|
22,751,868
|
|
|
|
17,319,154
|
|
Third party settlements receivable
|
|
|
575,658
|
|
|
|
346,141
|
|
Prepaid insurance
|
|
|
1,969,240
|
|
|
|
719,480
|
|
Deposit for workers
compensation claims
|
|
|
|
|
|
|
1,375,000
|
|
Other current assets
|
|
|
964,268
|
|
|
|
518,650
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
29,279,863
|
|
|
|
22,559,197
|
|
Restricted investment
|
|
|
100,000
|
|
|
|
|
|
Property and equipment, net
|
|
|
17,638,222
|
|
|
|
2,662,546
|
|
Goodwill
|
|
|
22,629,663
|
|
|
|
24,510,296
|
|
Intangible assets
|
|
|
5,140,000
|
|
|
|
4,260,000
|
|
Deposits
|
|
|
4,028,604
|
|
|
|
3,485,387
|
|
Deferred financing and lease costs
|
|
|
1,970,073
|
|
|
|
1,543,424
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
80,786,425
|
|
|
$
|
59,020,850
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Members
Deficit
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current maturities of long-term
debt
|
|
$
|
58,377
|
|
|
$
|
|
|
Current maturities of obligations
under capital leases
|
|
|
471,548
|
|
|
|
|
|
Accounts payable
|
|
|
5,080,042
|
|
|
|
5,142,345
|
|
Accounts
payable related parties
|
|
|
233,977
|
|
|
|
262,144
|
|
Accrued liabilities
|
|
|
6,260,283
|
|
|
|
4,387,292
|
|
Accrued insurance claims
|
|
|
1,054,202
|
|
|
|
1,441,516
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
13,158,429
|
|
|
|
11,233,297
|
|
Accrued insurance claims
|
|
|
2,470,507
|
|
|
|
|
|
Deferred rent
|
|
|
6,501,674
|
|
|
|
2,460,308
|
|
Long-term debt
|
|
|
51,572,156
|
|
|
|
49,141,945
|
|
Long-term obligations under
capital leases
|
|
|
17,860,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
91,562,975
|
|
|
|
62,835,550
|
|
Members deficit
|
|
|
(10,776,550
|
)
|
|
|
(3,814,700
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and
members deficit
|
|
$
|
80,786,425
|
|
|
$
|
59,020,850
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
65
Vibra
Healthcare, LLC and Subsidiaries
Consolidated Statement of Operations and Changes in
Members Deficit
For the Year ended December 31, 2005, and the Period
May 14, 2004
(date of inception) to December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Net patient service revenue
|
|
$
|
129,334,067
|
|
|
$
|
48,266,019
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Cost of services
|
|
|
90,828,708
|
|
|
|
34,528,924
|
|
General and administrative
|
|
|
15,708,954
|
|
|
|
5,631,229
|
|
Rent expense
|
|
|
21,149,624
|
|
|
|
8,859,233
|
|
Interest expense
|
|
|
6,056,709
|
|
|
|
2,293,402
|
|
Management
fee Vibra Management, LLC
|
|
|
2,636,886
|
|
|
|
982,668
|
|
Depreciation and amortization
|
|
|
1,384,821
|
|
|
|
302,194
|
|
Bad debt expense
|
|
|
912,469
|
|
|
|
776,780
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
138,678,171
|
|
|
|
53,374,430
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,344,104
|
)
|
|
|
(5,108,411
|
)
|
Non-operating revenue
|
|
|
2,382,254
|
|
|
|
1,293,711
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(6,961,850
|
)
|
|
|
(3,814,700
|
)
|
Members
deficit beginning
|
|
|
(3,814,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members
deficit ending
|
|
$
|
(10,776,550
|
)
|
|
$
|
(3,814,700
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
66
Vibra
Healthcare, LLC and Subsidiaries
Consolidated Statement of Cash Flows
For the Year ended December 31, 2005, and the Period
May 14, 2004
(date of inception) to December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,961,850
|
)
|
|
$
|
(3,814,700
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,384,821
|
|
|
|
302,194
|
|
Provision for bad debts
|
|
|
912,469
|
|
|
|
776,780
|
|
Changes in operating assets and
liabilities, net of effects from acquisition of business:
|
|
|
|
|
|
|
|
|
Patient accts. receivable including
third party settlements
|
|
|
(7,211,018
|
)
|
|
|
(4,801,250
|
)
|
Prepaids and other current assets
|
|
|
(1,596,402
|
)
|
|
|
(2,257,611
|
)
|
Deposits
|
|
|
1,304,283
|
|
|
|
(133,671
|
)
|
Accounts payable
|
|
|
(90,470
|
)
|
|
|
2,146,675
|
|
Accrued liabilities
|
|
|
3,956,184
|
|
|
|
1,608,634
|
|
Deferred rent
|
|
|
4,041,366
|
|
|
|
2,460,308
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(4,260,617
|
)
|
|
|
(3,712,641
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Net asset settlement from seller
|
|
|
2,516,951
|
|
|
|
|
|
Purchase of restricted investment
|
|
|
(100,000
|
)
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,162,556
|
)
|
|
|
(167,900
|
)
|
Assets acquired in business
acquisition
|
|
|
(284,292
|
)
|
|
|
201,280
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing
activities
|
|
|
970,103
|
|
|
|
33,380
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit
facility
|
|
|
115,535,779
|
|
|
|
|
|
Repayments of revolving credit
facility
|
|
|
(105,541,745
|
)
|
|
|
|
|
Borrowings under capital leases
|
|
|
2,181,898
|
|
|
|
|
|
Repayment of capital leases
|
|
|
(207,648
|
)
|
|
|
|
|
Borrowings under other long-term
debt
|
|
|
99,000
|
|
|
|
6,050,458
|
|
Repayment of long-term debt
|
|
|
(7,761,471
|
)
|
|
|
|
|
Payment of deferred financing costs
|
|
|
(277,242
|
)
|
|
|
(90,425
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
4,028,571
|
|
|
|
5,960,033
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
738,057
|
|
|
|
2,280,772
|
|
Cash and cash
equivalents beginning
|
|
|
2,280,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents ending
|
|
$
|
3,018,829
|
|
|
$
|
2,280,772
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
6,056,709
|
|
|
$
|
2,293,402
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Deferred financing costs funded by
revolving credit facility and MPT leases
|
|
$
|
352,627
|
|
|
$
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
Business acquisition adjustment of
goodwill
|
|
$
|
636,318
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Building and equipment acquisition
funded by MPT capital lease
|
|
$
|
14,270,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
License acquisition funded by MPT
capital lease
|
|
$
|
880,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Lease deposit funded by MPT capital
lease and notes
|
|
$
|
472,500
|
|
|
$
|
3,296,365
|
|
|
|
|
|
|
|
|
|
|
Equipment purchases funded by
capital leases
|
|
$
|
539,405
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Notes issued relating to acquisition
|
|
$
|
|
|
|
$
|
38,093,842
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
67
VIBRA
HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year ended December 31, 2005, and the Period
May 14, 2004
(date of inception) to December 31, 2004
|
|
1.
|
ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Vibra Healthcare, LLC (Vibra and the
Company) was formed May 14, 2004, and commenced
operations with the acquisition of four independent
rehabilitation hospitals (IRF) and two long-term
acute care hospitals (LTACH) located throughout the
United States on July 1, 2004 and August 17, 2004,
respectively. On June 30, 2005, Vibra acquired an IRF that
has been converted to a LTACH effective January 1, 2006.
Vibra, a Delaware limited liability company (LLC),
has an infinite life. The members liability is limited to
the capital contribution. Vibra was previously named Highmark
Healthcare LLC until a name change in December 2004.
Vibras wholly-owned subsidiaries consist of:
|
|
|
Subsidiaries
|
|
Location
|
|
92 Brick Road Operating Company LLC
|
|
Marlton, NJ
|
4499 Acushnet Avenue Operating
Company LLC
|
|
New Bedford, MA
|
1300 Campbell Lane Operating
Company LLC
|
|
Bowling Green, KY
|
8451 Pearl Street Operating
Company LLC
|
|
Thornton, CO
|
7173 North Sharon Avenue Operating
Company LLC
|
|
Fresno, CA
|
1125 Sir Francis Drake Boulevard
Operating Company LLC
|
|
Kentfield, CA
|
Northern California Rehabilitation
Hospital, LLC
|
|
Redding, CA
|
The Company provides long-term acute care hospital services and
inpatient acute rehabilitative hospital care at its hospitals.
Patients in the Companys LTACHs typically suffer from
serious and often complex medical conditions that require a high
degree of care. Patients in the Companys IRFs typically
suffer from debilitating injuries including traumatic brain and
spinal cord injuries, and require rehabilitation care in the
form of physical, psychological, social and vocational
rehabilitation services. The Company also operates eleven
outpatient clinics affiliated with six of its seven hospitals.
|
|
|
Principles
of Consolidation
|
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries controlled through
its sole membership interests in limited liability companies.
All significant intercompany balances and transactions are
eliminated in consolidation.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
|
|
|
Cash
and Cash Equivalents
|
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents. Cash equivalents are stated at cost which
approximates market.
68
VIBRA
HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Patient
Accounts Receivable
|
Patient accounts receivable are reported at net realizable
value. Accounts are written off when they are determined to be
uncollectible based upon managements assessment of
individual accounts. The allowance for doubtful collections is
estimated based upon a periodic review of the accounts
receivable aging, payor classifications and application of
historical write-off percentages.
Inventories of pharmaceuticals and pharmaceutical supplies are
stated at the lower of cost or market value. Cost is determined
on a
first-in,
first-out basis. These inventories totaled $530,849 and $363,720
at December 31, 2005 and 2004, respectively, and are
included in other current assets in the accompanying
consolidated balance sheet.
The restricted investment consists of a five year certificate of
deposit with a local bank pledged as collateral for a letter of
credit benefiting the California Department of Health Services
(CDHS). CDHS can draw on the letter of credit to
reimburse any Medicaid overpayments.
Property and equipment are stated at cost net of accumulated
depreciation. Depreciation and amortization are computed using
the straight-line method over the lesser of the estimated useful
lives of the assets or the term of the lease, as appropriate.
The general range of useful lives is as follows:
|
|
|
|
|
Building under capital lease
|
|
|
Lesser of 15 years or remaining lease term
|
|
Leasehold improvements
|
|
|
Lesser of 15 years or remaining lease term
|
|
Furniture and equipment
|
|
|
2-7 years
|
|
In accordance with Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No 144), the Company reviews
the realizability of long-lived assets whenever events or
circumstances occur which indicate recorded costs may not be
recoverable.
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill and other
intangible assets with indefinite lives are no longer subject to
periodic amortization but are instead reviewed annually or more
frequently if impairment indicators arise. The review requires
the Company to estimate the fair value of its identified
reporting units and compare those estimates against the related
carrying values. Identifiable assets and liabilities acquired in
connection with business combinations accounted for under the
purchase method are recorded at their respective fair values.
For each of the reporting units, the estimated fair value is
determined using multiples of earnings before interest, income
taxes, depreciation, amortization and rents (EBITDAR) from
current transaction information.
Management has allocated the intangible assets between
identifiable intangibles and goodwill. Intangible assets, other
than goodwill, consist of values assigned to certificates of
need (CONs) and licenses. The useful life of each
class of intangible assets is as follows:
|
|
|
|
|
Goodwill
|
|
|
Indefinite
|
|
Certificates of Need/Licenses
|
|
|
Indefinite
|
|
69
VIBRA
HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Deferred
Financing and Lease Costs
|
Costs and fees incurred in connection with the MPT acquisition
note and leases and the Merrill Lynch revolving credit facility
have been deferred and are being amortized over the term of the
loans and leases using the straight-line method, which
approximates the effective interest method. Amortization expense
was $203,220 and $47,000 for the year ended December 31,
2005 and the period May 14, 2004 to December 31, 2004,
respectively.
Insurance
Risk Programs
Under the Companys insurance programs, the Company is
liable for a portion of its losses. The Company estimates its
liability for losses based on historical trends that will be
incurred in a respective accounting period and accrues that
estimated liability. These programs are monitored quarterly and
estimates are revised as necessary to take into account
additional information. The Company has accrued $3,524,709 and
$1,441,516 related to these programs at December 31, 2005
and 2004, respectively. A deposit for workers compensation
claims of $1,375,000 at December 31, 2004, consisted of
cash provided to Vibras insurance carrier to fund
workers compensation claims. In February 2005, Vibra used
$1,375,000 of its borrowing base on the Merrill Lynch loan to
collateralize a letter of credit for the claims and the cash
deposit was refunded.
Deferred
Rent
The excess of straight line rent expense over rent paid is
credited to deferred rent on a monthly basis. At
December 31, 2005 and 2004, rent expense exceeded rent paid
on a cumulative basis by $6,501,674 and $2,460,308, respectively.
Revenue
Recognition
Net patient service revenue consists primarily of charges to
patients and are recognized as services are rendered. Net
patient service revenue is reported net of provisions for
contractual adjustments from third-party payors and patients.
The Company has agreements with third-party payors that provide
for payments to the Company at amounts different from its
established rates. The differences between the estimated program
reimbursement rates and the standard billing rates are accounted
for as contractual adjustments, which are deducted from gross
revenues to arrive at net patient service revenue. Payment
arrangements include prospectively determined rates per
discharge, reimbursed costs, discounted charges and per diem
payments. Retroactive adjustments are accrued on an estimated
basis in the period the related services are rendered and
adjusted in future periods as final settlements are determined.
Patient accounts receivable resulting from such payment
arrangements are recorded net of contractual allowances.
A significant portion of the Companys net patient service
revenue is generated directly from the Medicare and Medicaid
programs. As a provider of services to these programs, the
Company is subject to extensive regulations. The inability of a
hospital to comply with regulations can result in changes in
that hospitals net patient service revenue generated from
these programs. The following table shows the percentage of the
Companys patient service receivables from Medicare and
Medicaid.
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
Medicare
|
|
|
52
|
%
|
|
|
46
|
%
|
Medicaid
|
|
|
26
|
%
|
|
|
21
|
%
|
70
VIBRA
HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table represents the Companys net patient
service revenues from the Medicare and Medicaid programs as a
percentage of total consolidated net patient service revenue:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Period May 14, 2004
|
|
|
|
December 31,
|
|
|
to December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Medicare
|
|
|
66
|
%
|
|
|
63
|
%
|
Medicaid
|
|
|
12
|
%
|
|
|
13
|
%
|
Concentration
of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of cash and cash
equivalents and patient accounts receivables. The Company
deposits its cash with large banks. The Company grants unsecured
credit to its patients, most of whom reside in the service area
of the Companys facilities and are insured under
third-party payor agreements. Because of the geographic
diversity of the Companys facilities and non-governmental
third-party payors, Medicare and Medicaid represent the
Companys primary concentration of credit risk. Cash and
cash equivalent balances on deposit with any one financial
institution are insured to $100,000.
Fair
Value of Financial Instruments
The Company has various assets and liabilities that are
considered financial instruments. The Company estimates that the
carrying value of its current assets, current liabilities and
long-term debt approximates their fair value.
Income
Taxes
Vibra and its subsidiaries have elected to be a LLC for federal
and state income tax purposes. In lieu of corporate income
taxes, the member of a LLC is taxed on its proportionate share
of the Companys taxable income or loss. Therefore, no
provision or liability for federal or state income taxes has
been provided for in the consolidated balance sheet or
consolidated statement of operations.
In July and August 2004, Vibra entered into agreements with
Medical Properties Trust, Inc. (MPT) to acquire the operations
of six specialty hospitals. MPT, a healthcare real estate
investment trust based in Birmingham, Alabama, acquired the real
estate for approximately $127.4 million and assigned to
Vibra its rights to acquire the operations of the hospitals from
Care One Realty (Care) of Hackensack, New Jersey for
approximately $38.1 million net of cash acquired and
$7.5 million of liabilities assumed which was financed by
MPT. The assignment of the LLC interests to Vibra transferred
the operations, assets and liabilities of each LLC. The purchase
price of the operations has been allocated to net assets
acquired, and liabilities assumed based on appraisals. The
excess of the amount of purchase price over the net asset value,
including identifiable intangible assets, was allocated to
goodwill. The purchase price was negotiated based on
managements evaluation of future operational performance
of the hospitals as a group under Vibra. The results of
operations of the hospitals acquired have been included in the
71
VIBRA
HEALTHCARE, LLC AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys consolidated financial statements since the date
of acquisition. The following table summarizes the acquisition
date and other relevant information regarding each hospital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Type
|
|
|
Beds
|
|
|
Acquisition Date
|
|
|
Marlton, NJ
|
|
|
IRF
|
|
|
|
46
|
(1)
|
|
|
July 1, 2004
|
|
Bowling Green, KY
|
|
|
IRF
|
|
|
|
60
|
|
|
|
July 1, 2004
|
|
Fresno, CA
|
|
|
IRF
|
|
|
|
62
|
|
|
|
July 1, 2004
|
|
Kentfield, CA
|
|
|
LTACH
|
|
|
|
60
|
|
|
|
July 1, 2004
|
|
New Bedford, MA
|
|
|
LTACH
|
|
|
|
90
|
|
|
|
August 17, 2004
|
|
Thornton, CO
|
|
|
IRF
|
|
|
|
117
|
(2)
|
|
|
August 17, 2004
|
|
(1) Vibra subleases a floor of the Marlton building to an
unaffiliated provider which operates 30 pediatric rehabilitation
beds which are in addition to the 46 beds operated by Vibra.
(2) This includes beds operating as LTACH, skilled nursing
(SNF) and psychiatric. Colorado regulations require an IRF
license designation for LTACH beds.
Information with respect to the businesses acquired in these
transactions is as follows:
|
|
|
|
|
Notes issued, net of cash acquired
|
|
$
|
38,093,842
|
|
Liabilities assumed
|
|
|
7,477,988
|
|
|
|
|
|
|
|
|
|
45,571,830
|
|
Fair value of assets acquired:
|
|
|
|
|
Patient accounts receivable
|
|
|
(13,640,825
|
)
|
Property and equipment
|
|
|
(2,749,840
|
)
|
CONs/Licenses
|
|
|
(4,260,000
|
)
|
Other
|
|
|
(410,869
|
)
|
|
|
|
|
|
Cost in excess of fair value of
net assets acquired (goodwill) at December 31, 2004
|
|
$
|
24,510,296
|
|
Adjustment of fair value of
acquired accounts receivable
|
|
|
636,318
|
|
Post closing working capital
adjustment received from Seller in December 2005
|
|
|
(2,516,951
|
)
|
|
|
|
|
|
Cost in excess of fair value of
net assets acquired (goodwill) at December 31, 2005
|
|
$
|
22,629,663
|
|
|
|
|
|
|
On June 30, 2005, under the terms of a purchase agreement,
Vibra acquired the building, equipment, inventory and license of
an 88 bed specialty hospital in Redding, California, for
$15.4 million. The hospital currently operates with 24 IRF
beds and 54 skilled nursing beds. The hospital is also licensed
for 14 acute care beds that are currently not in service. On
January 1, 2006, Vibra converted the existing 24 IRF beds
to LTACH. During 2006 Vibra expects to convert 30 of the SNF
beds to LTACH. Simultaneously with the closing of the
acquisition, Vibra entered into an agreement with MPT for the
sale of the building associated with this hospital to MPT and
leased it back from MPT under an $18 million capital lease.
An additional $2.75 million can be drawn under the lease
agreement upon the completion of certain building renovations
and the LTACH conversion. The purchase price of the operations
has been allocated to net assets acquired, and liabilities
assumed based on an appraisal. The land on which the hospital is
built is subject to a land lease, which Vibra assumed from the
seller. The