MEDICAL PROPERTIES TRUST, INC.
Registration No. 333-121883
As filed with the Securities and Exchange Commission on
December 30, 2005.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective
Amendment No. 1 to
Form S-11
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
Medical Properties Trust, Inc.
(Exact name of registrant as specified in its governing
instruments)
1000 Urban Center Drive, Suite 501, Birmingham, Alabama
35242
(205) 969-3755
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
Edward K. Aldag, Jr.
Chairman, President, Chief Executive Officer and Secretary
Medical Properties Trust, Inc.
1000 Urban Center Drive, Suite 501, Birmingham, Alabama
35242
(205) 969-3755
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
with a copy to:
|
|
|
Thomas O. Kolb
Matthew S. Heiter
Irene Graves
Baker, Donelson, Bearman, Caldwell & Berkowitz, PC
Suite 1600
420 20th Street North
Birmingham, Alabama 35203
(205) 328-0480 |
Approximate date of
commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any securities being registered
on this form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933,
check the following box: þ
If this Form is filed to register
additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering: o
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective
registration statement for the same
offering: o
If this Form is a post-effective
amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective
registration statement for the same
offering: o
If delivery of the prospectus is
expected to be made pursuant to Rule 434, please check the
following box: o
The Registrant hereby amends
this Registration Statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933
or until this Registration Statement shall become effective on
such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
Filed pursuant to Rule 424(b)(3)
Registration No. 333-121883
PROSPECTUS
25,411,039 Shares of Common Stock
This prospectus relates to 25,411,039 shares of common
stock of Medical Properties Trust, Inc. that the selling
stockholders named in this prospectus may offer for resale from
time to time. The registration of these shares does not
necessarily mean the selling stockholders will offer or sell all
or any of these shares of common stock. We will not receive any
of the proceeds from the sale of any shares of common stock by
the selling stockholders, but will incur expenses in connection
with the offering.
The selling stockholders from time to time may offer and resell
the shares held by them directly or through agents or
broker-dealers on terms to be determined at the time of sale. To
the extent required, the names of any agent or broker-dealer and
applicable commissions or discounts and any other required
information with respect to any particular offer will be set
forth in a prospectus supplement that will accompany this
prospectus. A prospectus supplement also may add, update or
change information contained in this prospectus.
Our common stock is listed on the New York Stock Exchange under
the symbol MPW. The last reported sales price on
December 28, 2005 was $9.80.
See Risk Factors beginning on page 17 of
this prospectus for the most significant risks relevant to an
investment in our common stock, including, among others:
|
|
|
|
|
We were formed in August 2003 and have a limited operating
history; our management has a limited history of operating a
REIT and a public company and may therefore have difficulty in
successfully and profitably operating our business. |
|
|
|
We may be unable to acquire or develop the facilities we have
under letter of commitment or contract or facilities we have
identified as potential candidates for acquisition or
development as quickly as we expect or at all, which could harm
our future operating results and adversely affect our ability to
make distributions to our stockholders. |
|
|
|
Our real estate investments are concentrated in net-leased
healthcare facilities, making us more vulnerable economically
than if our investments were more diversified across several
industries or property types. |
|
|
|
|
Our facilities and properties under development are currently
leased to eight tenants, five of which were recently organized
and have limited or no operating histories, and the failure of
any of these tenants to meet its obligations to us, including
payment of rent, payment of commitment and other fees and
repayment of loans we have made or intend to make to them, would
have a material adverse effect on our revenues and our ability
to make distributions to our stockholders. |
|
|
|
|
Development and construction risks, including delays in
construction, exceeding original estimates and failure to obtain
financing, could adversely affect our ability to make
distributions to our stockholders. |
|
|
|
Reductions in reimbursement from third-party payors, including
Medicare and Medicaid, could adversely affect the profitability
of our tenants and hinder their ability to make rent or loan
payments to us. |
|
|
|
The healthcare industry is heavily regulated and existing and
new laws or regulations, changes to existing laws or
regulations, loss of licensure or certification or failure to
obtain licensure or certification could result in the inability
of our tenants to make lease or loan payments to us. |
|
|
|
Loss of our tax status as a REIT would have significant adverse
consequences to us and the value of our common stock. |
|
|
|
Our loans to Vibra could be recharacterized as equity, in which
case our rental income from Vibra would not be qualifying income
under the REIT rules and we could lose our REIT status. |
|
|
|
|
Common stock eligible for future sale, including up to
25,411,039 shares of common stock that may be resold by our
existing stockholders upon effectiveness of the resale
registration statement of which this prospectus is a part, may
result in increased selling which may have an adverse effect on
our stock price. |
|
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus is
December , 2005.
TABLE OF CONTENTS
SUMMARY
The following summary highlights information contained
elsewhere in this prospectus. You should read the entire
prospectus, including Risk Factors and our financial
statements and pro forma financial information and related notes
appearing elsewhere in this prospectus, before making a decision
to invest in our common stock. In this prospectus, unless the
context suggests otherwise, references to MPT,
the company, we, us and
our mean Medical Properties Trust, Inc., including
our operating partnership, MPT Operating Partnership, L.P., its
general partner and our wholly-owned limited liability company,
Medical Properties Trust, LLC, as well as our other direct and
indirect subsidiaries.
Our Company
We are a self-advised real estate company that acquires,
develops and leases healthcare facilities providing
state-of-the-art healthcare services. We lease our facilities to
healthcare operators pursuant to long-term net-leases, which
require the tenant to bear most of the costs associated with the
property. From time to time, we also make loans to our tenants
and other parties. We were formed in August 2003 and
completed a private placement of our common stock in
April 2004 in which we raised net proceeds of approximately
$233.5 million. In July 2005 we completed the initial
public offering of our common stock in which we raised net
proceeds of approximately $125.7 million, after deducting
the underwriting discount and offering expenses. Our current
portfolio consists of 14 facilities that are in operation
and three facilities that are under development.
We focus on acquiring and developing rehabilitation hospitals,
long-term acute care hospitals, regional and community
hospitals, womens and childrens hospitals, skilled
nursing facilities and ambulatory surgery centers as well as
other specialized single-discipline and ancillary facilities. We
believe that these types of facilities will capture an
increasing share of expenditures for healthcare services. We
believe that our strategy for acquisition and development of
these types of net-leased facilities, which generally require a
physicians order for patient admission, distinguishes us
as a unique investment alternative among real estate investment
trusts, or REITs.
We believe that the U.S. healthcare delivery system is becoming
decentralized and is evolving away from the traditional
one stop, large-scale acute care hospital. We
believe that this change is the result of a number of trends,
including increasing specialization and technological innovation
within the healthcare industry and the desire of both physicians
and patients to utilize more convenient facilities. We also
believe that demographic trends in the U.S., including, in
particular, an aging population, will result in continued growth
in the demand for healthcare services, which in turn will lead
to an increasing need for a greater supply of modern healthcare
facilities. In response to these trends, we believe that
healthcare operators increasingly prefer to conserve their
capital for investment in operations and new technologies rather
than investing in real estate and, therefore, increasingly
prefer to lease, rather than own, their facilities. Given these
trends and the size, scope and growth of this dynamic industry,
we believe that there are significant opportunities to acquire
and develop net-leased healthcare facilities at attractive,
risk-adjusted returns.
Our management team has extensive experience in acquiring,
owning, developing, managing and leasing healthcare facilities;
managing investments in healthcare facilities; acquiring
healthcare companies; and managing real estate companies. Our
management team also has substantial experience in healthcare
operations and administration, which includes many years of
service in executive positions for hospitals and other
healthcare providers, as well as in physician practice
management and hospital/physician relations. We believe that our
managements ability to combine traditional real estate
investment expertise with an understanding of healthcare
operations enables us to successfully implement our strategy.
We have made an election to be taxed as a REIT under the
Internal Revenue Code, or the Code, commencing with our taxable
year that began on April 6, 2004 and ended on December 31,
2004.
1
Our principal executive offices are located at 1000 Urban Center
Drive, Suite 501, Birmingham, Alabama 35242. Our telephone
number is (205) 969-3755. Our Internet address is
www.medicalpropertiestrust.com. The information on our website
does not constitute a part of this prospectus.
Our Portfolio
|
|
|
Our Current Portfolio of Facilities |
Our current portfolio of facilities consists of 17 healthcare
facilities, 14 of which are in operation and three of which are
under development. Four rehabilitation hospitals and two
long-term acute care hospitals that are in operation were
acquired in 2004 and are leased to subsidiaries of Vibra
Healthcare, LLC, or Vibra, formerly known as Highmark
Healthcare, LLC, a recently formed specialty healthcare
provider with operations in six states. We refer to these
facilities in this prospectus as the Vibra Facilities. A seventh
facility in operation, a community hospital which has an
integrated medical office building, is leased to Desert Valley
Hospital, Inc., or DVH. We refer to this facility in this
prospectus as the Desert Valley Facility. Another facility in
operation, a long-term acute care hospital facility, is leased
to Gulf States Long Term Acute Care of Covington, L.L.C., or
Gulf States of Covington. We refer to this facility in this
prospectus as the Covington Facility. Our ninth facility in
operation, a rehabilitation hospital, is leased to Northern
California Rehabilitation Hospital, LLC, a Vibra subsidiary. We
refer to this facility in this prospectus as the Redding
Facility. Our tenth facility in operation, a long-term acute
care hospital, is leased to Gulf States Long Term Acute Care of
Denham Springs, L.L.C., or Gulf States of Denham Springs. We
refer to this facility in this prospectus as the Denham Springs
Facility. Our eleventh facility in operation, a community
hospital, is leased to an affiliate of DVH, Veritas Health
Services, Inc., or Veritas. We refer to this facility in this
prospectus as the Chino Facility. Our twelfth facility in
operation, a community hospital, is leased to another affiliate
of DVH, Prime Healthcare Services II, LLC, or
Prime II. We refer to this facility in this prospectus as
the Sherman Oaks Facility. All of the leases for the hospitals
described above have initial terms of 15 years.
Our current portfolio of facilities also includes a community
hospital, which we refer to in this prospectus as the West
Houston Hospital, and an adjacent medical office building, which
we refer to in this prospectus as the West Houston MOB, each of
which we developed. We refer to the West Houston Hospital and
the West Houston MOB together in this prospectus as the West
Houston Facilities. The West Houston Facilities are leased to
Stealth, L.P., or Stealth, a recently organized healthcare
facility operator. The initial lease term for the West Houston
Hospital began when construction commenced in July 2004 and will
end in November 2020. The initial lease term for the West
Houston MOB began when construction commenced in July 2004 and
will end in October 2015.
One facility under development is a womens hospital with
an integrated medical office building, which we refer to in this
prospectus as the Bucks County Facility, and is leased to Bucks
County Oncoplastic Institute, LLC, or BCO, a recently organized
healthcare facility operator. The initial lease term for the
Bucks County Facility will begin when construction commences and
will end 15 years after completion of construction. We
target completion of construction for the Bucks County Facility
for August 2006. Our second facility under development is a
community hospital, which we refer to in this prospectus as the
Monroe Facility, and is leased to Monroe Hospital, LLC, or
Monroe Hospital, a recently organized healthcare facility
operator. The initial lease term for the Monroe Facility began
when construction commenced in October 2005 and will end
15 years after completion of construction. We target
completion of construction for the Monroe Facility for October
2006. With respect to our third facility under development, we
have entered into a ground sublease with, and an agreement to
provide a construction loan to, North Cypress Medical Center
Operating Company, Ltd., or North Cypress, a recently-organized
healthcare facility operator, for the development of a community
hospital. The facility will be developed on property in which we
currently have a ground lease interest. We refer to this
facility in this prospectus as the North Cypress Facility. We
expect to acquire the land we are ground leasing after the
hospital has been partially completed. Upon completion of
construction, subject to certain limited conditions, we will
purchase the facility for an amount equal to the cost of
construction and lease the facility to the operator
2
for a 15 year lease term. In the event we do not purchase the
facility, the ground sublease will continue and the construction
loan will become due. In that event, we expect to seek to
convert the construction loan to a 15 year term loan
secured by the facility. We anticipate the North Cypress
Facility will be completed in December 2006. The leases for all
of the facilities in our current portfolio provide for
contractual base rent and an annual rent escalator. The leases
for the Vibra Facilities and the Bucks County Facility also
provide for percentage rent, which means that, in
addition to base rent, we will receive periodic rent payments
based on an agreed percentage of the tenants gross revenue.
The following tables set forth information, as of the date of
this prospectus, regarding our current portfolio of facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
|
Operating Facilities |
|
|
|
|
|
|
|
2005 | |
|
2006 | |
|
Purchase | |
|
|
|
|
|
|
|
|
2004 | |
|
Contractual | |
|
Contractual | |
|
Price or | |
|
|
|
|
|
|
Number of | |
|
Annualized | |
|
Base | |
|
Base | |
|
Development | |
|
Lease | |
Location |
|
Type |
|
Tenant |
|
Beds(1) | |
|
Base Rent | |
|
Rent(2) | |
|
Rent(2) | |
|
Cost(3) | |
|
Expiration | |
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Houston, Texas
|
|
Community hospital |
|
Stealth, L.P. |
|
|
105 |
(4) |
|
$ |
|
|
|
$ |
|
(5) |
|
$ |
4,749,005 |
(5) |
|
$ |
43,099,310 |
(6) |
|
|
November 2020(7) |
|
Bowling Green, Kentucky
|
|
Rehabilitation |
|
Vibra |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hospital |
|
Healthcare, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LLC(8) |
|
|
60 |
|
|
|
3,916,695 |
|
|
|
4,294,990 |
|
|
|
4,790,113 |
|
|
|
38,211,658 |
|
|
|
July 2019 |
|
Marlton, New
Jersey(9)
|
|
Rehabilitation
(10) |
|
Vibra |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hospital |
|
Healthcare, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LLC(8) |
|
|
76 |
|
|
|
3,401,791 |
|
|
|
3,730,354 |
|
|
|
4,160,390 |
|
|
|
32,267,622 |
|
|
|
July 2019 |
|
Victorville, California
(11)
|
|
Community hospital/medical |
|
Desert Valley Hospital, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
office building |
|
|
|
|
83 |
|
|
|
|
|
|
|
2,341,005 |
|
|
|
2,856,000 |
|
|
|
28,000,000 |
|
|
|
February 2020 |
|
New Bedford, Massachusetts
|
|
Long-term |
|
Vibra |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acute care |
|
Healthcare, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hospital |
|
LLC(8) |
|
|
90 |
|
|
|
2,262,979 |
|
|
|
2,426,320 |
|
|
|
2,767,624 |
|
|
|
22,077,847 |
|
|
|
August 2019 |
|
Chino, California
|
|
Community hospital |
|
Veritas Health Services, Inc. |
|
|
126 |
|
|
|
|
|
|
|
180,753 |
|
|
|
2,103,682 |
|
|
|
21,000,000 |
|
|
|
November 2020 |
|
Houston, Texas
|
|
Medical office building |
|
Stealth, L.P. |
|
|
n/a |
|
|
|
|
|
|
|
503,130 |
(5) |
|
|
2,049,415 |
(5) |
|
|
20,855,119 |
(6) |
|
|
October 2015 (7) |
|
Redding,
California(12)
|
|
Rehabilitation hospital |
|
Vibra Healthcare,
LLC(8) |
|
|
88 |
|
|
|
|
|
|
|
950,250 |
(13) |
|
|
1,913,949 |
(13) |
|
|
20,750,000 |
|
|
|
June 2020 |
|
Sherman Oaks, California
|
|
Community hospital |
|
Prime Healthcare Services II, LLC |
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
2,100,000 |
|
|
|
20,000,000 |
|
|
|
December 2020 |
|
|
Fresno, California
|
|
Rehabilitation |
|
Vibra |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hospital |
|
Healthcare, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LLC(8) |
|
|
62 |
|
|
|
1,914,829 |
|
|
|
2,099,773 |
|
|
|
2,341,835 |
|
|
|
18,681,255 |
|
|
|
July 2019 |
|
Covington, Louisiana
|
|
Long-term acute care hospital |
|
Gulf States Long-Term Acute Care of Covington, L.L.C. |
|
|
58 |
|
|
|
|
|
|
|
674,188 |
|
|
|
1,207,500 |
|
|
|
11,500,000 |
|
|
|
June 2020 |
|
Thornton, Colorado
|
|
Rehabilitation |
|
Vibra |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hospital |
|
Healthcare, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LLC(8) |
|
|
117 |
|
|
|
870,377 |
|
|
|
933,200 |
|
|
|
1,064,471 |
|
|
|
8,491,481 |
|
|
|
August 2019 |
|
Kentfield, California
|
|
Long-term |
|
Vibra |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acute care |
|
Healthcare, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hospital |
|
LLC(8) |
|
|
60 |
|
|
|
783,339 |
|
|
|
858,998 |
|
|
|
958,024 |
|
|
|
7,642,332 |
|
|
|
July 2019 |
|
Denham Springs, Louisiana
|
|
Long-term acute care hospital |
|
Gulf States Long Term Acute Care of Denham Springs, L.L.C. |
|
|
59 |
|
|
|
|
|
|
|
105,000 |
|
|
|
645,750 |
|
|
|
6,000,000 |
|
|
|
October 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
1,137 |
|
|
$ |
13,150,010 |
|
|
$ |
19,097,961 |
|
|
$ |
33,707,758 |
|
|
$ |
298,576,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
(1) |
Based on the number of licensed beds. |
|
|
(2) |
Based on leases in place as of the date of this prospectus. |
|
|
(3) |
Includes acquisition costs. |
|
|
|
(4) |
Seventy-one of the 105 beds will be acute care beds operated by
Stealth, L.P. and the remaining 34 beds will be long-term acute
care beds operated by Triumph Southwest, L.P. |
|
|
|
|
(5) |
Based on leases in place as of the date of this prospectus and
estimated total development costs. Does not include rents that
accrued during the construction period and are payable over the
remaining lease term following the completion of construction. |
|
|
|
|
(6) |
Estimated total development costs. |
|
|
|
|
(7) |
At any time during the term of the lease, the tenant has the
right to terminate the lease and purchase the facility from us
at a purchase price equal to the greater of (i) that amount
determined under a formula which would provide us an internal
rate of return of at least 18% or (ii) appraised value
assuming the lease is still in place. |
|
|
|
|
(8) |
The tenant in each case is a separate, wholly-owned subsidiary
of Vibra Healthcare, LLC. |
|
|
|
|
(9) |
Our interest in this facility is held through a ground lease on
the property. The purchase price shown for this facility does
not include our payment obligations under the ground lease, the
present value of which we have calculated to be $920,579. The
calculation of the base rent to be received from Vibra for this
facility takes into account the present value of the ground
lease payments. |
|
|
|
|
(10) |
Thirty of the 76 beds are pediatric rehabilitation beds
operated by HBA Management, Inc. |
|
|
|
(11) |
At any time after February 28, 2007, the tenant has the
option to purchase the facility at a purchase price equal to the
sum of (i) the purchase price of the facility, and
(ii) that amount determined under a formula that would
provide us an internal rate of return of 10% per year, increased
by 2% of such percentage each year, taking into account all
payments of base rent received by us. |
|
|
|
(12) |
Our interest in this facility is held in part through a ground
lease on the property. During the term of the ground lease, the
tenant will pay the ground lease rent directly to the ground
lessor or, at our request, directly to us. |
|
|
|
(13) |
Of the $20,750,000 million purchase price for this
facility, payment of $2.0 million is being deferred pending
completion, to our satisfaction, of a conversion of certain beds
at the facility to long-term acute care beds and an additional
$750,000 of the purchase price is being deferred and will be
paid out of a special reserve account to cover the cost of
renovations. The 2005 contractual base rent and the 2006
contractual base rent are calculated based on a purchase price
of $18.0 million. |
|
Facilities Under
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2005 | |
|
2006 | |
|
Projected | |
|
|
|
|
|
|
|
|
Number of | |
|
Annualized | |
|
Contractual | |
|
Contractual | |
|
Development | |
|
Lease | |
Location |
|
Type |
|
Tenant |
|
Beds(1) | |
|
Base Rent | |
|
Base Rent | |
|
Base Rent | |
|
Cost(2) | |
|
Expiration | |
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Houston, Texas
|
|
Community hospital |
|
North Cypress Medical Center Operating Company, Ltd. |
|
|
64 |
|
|
$ |
|
|
|
$ |
|
(3) |
|
$ |
|
(3) |
|
$ |
64,028,000 |
|
|
|
|
(4) |
Bensalem, Pennsylvania
|
|
Womens hospital/medical office building
(5) |
|
Bucks County Oncoplastic Institute, LLC |
|
|
30 |
|
|
|
|
|
|
|
|
(6) |
|
|
1,627,820 |
(6) |
|
|
38,000,000 |
|
|
|
August 2021(7) |
|
Bloomington, Indiana
|
|
Community
Hospital(8) |
|
Monroe Hospital LLC |
|
|
32 |
|
|
|
|
(9) |
|
|
|
(9) |
|
|
954,063 |
|
|
|
35,500,000 |
|
|
|
October 2021 (10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
126 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,581,883 |
|
|
$ |
137,528,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Based on the number of proposed beds. |
|
|
(2) |
Includes acquisition costs. |
|
|
(3) |
During construction of the North Cypress Facility, interest will
accrue on the construction loan at a rate of 10.5%. The interest
accruing during the construction period will be added to the
principal balance of the construction loan. In addition, during
the term of the ground sublease, North Cypress will pay us
monthly ground sublease rent in an annual amount equal to our
ground lease rent plus 10.5% of funds advanced by us under the
construction loan. |
|
|
(4) |
Expected to be completed in December 2006. If we purchase the
facility upon completion of construction, we will lease it back
to North Cypress for an initial term of 15 years. |
|
|
|
(5) |
Expected to be completed in October 2006. |
|
|
|
|
(6) |
Based on the lease in place as of the date of this prospectus,
estimated total development costs and estimated date of
completion. Assumes completion of construction in October 2006. |
|
|
|
|
(7) |
Following completion, the lease term will extend for a period of
15 years. |
|
|
|
|
(8) |
Expected to be completed in October 2006. |
|
|
|
|
(9) |
Based on the lease in place as of the date of this prospectus,
estimated total development costs and estimated date of
completion. Assumes completion of construction in October 2006. |
|
|
|
(10) |
Following completion, the lease term will extend for a period of
15 years. |
|
|
|
Our Current Loans and Fees Receivable |
On December 23, 2005, we made a $40.0 million mortgage
loan to Alliance Hospital, Ltd., or Alliance, an unrelated third
party. We refer to this mortgage loan in this prospectus as the
Alliance Loan. The Alliance Loan is secured by a community
hospital facility located in Odessa, Texas, which is
approximately 20 miles from Midland, Texas. The facility is
licensed for 78 beds, 28 of which are operated by
HEALTHSOUTH Rehabilitation Hospital of Odessa, Inc. The Alliance
Loan has a term of 15 years and is payable interest only
during the term of the loan, with the full principal amount due
at the end of
4
the 15 year term. The aggregate annual base interest is set
at an initial annual rate of ten percent. Beginning on
January 1, 2007 and on each January 1 thereafter,
Alliance will be required to pay additional interest equal to
the greater of (i) 3.5% or (ii) the rate of the CPI
increase for the prior year multiplied by the previous
years annualized base interest. As security for
Alliances obligations under the mortgage loan, all
principal, base interest and additional interest on the first
$30.0 million of the loan amount is guaranteed on a pro
rata basis by the shareholders of
SRI-SAI Enterprises,
Inc., the general partner of Alliance, until such time as
Alliance meets certain financial conditions. Additionally, we
have received a first mortgage on the facility and a first or
second priority security interest in all of Alliances
personal property other than accounts receivable, along with
other security. The Alliance Loan is cross-defaulted with all
other agreements between us or our affiliates, on one hand, and
Alliance or its affiliates on the other hand. The Alliance Loan
also contains representations, financial and other affirmative
and negative covenants, events of default and remedies typical
for this type of loan. As consideration for entering into this
arrangement, Alliance paid us a commitment fee equal to one half
of one percent of the loan amount on the closing date.
At the time we acquired the Vibra Facilities, we made a secured
acquisition loan to Vibra, the parent entity of our current
tenants in those facilities, to enable Vibra to acquire the
healthcare operations at these locations. The principal balance
of this loan is approximately $41.4 million and is to be
repaid over 15 years. Payment of the acquisition loan is
secured by pledges of membership interests in Vibra and its
subsidiaries. In addition, we have obtained guaranty agreements
from Brad E. Hollinger, the principal owner of Vibra, Vibra
Management, LLC and Senior Real Estate Holdings, LLC, D/B/A The
Hollinger Group, or The Hollinger Group, that obligate them to
make loan payments in the event that Vibra fails to do so.
However, we do not believe that these parties have sufficient
financial resources to satisfy a material portion of the loan
obligations. Mr. Hollingers guaranty is limited to
$5.0 million, and Vibra Management, LLC and The Hollinger
Group do not have substantial assets. Vibra pays interest on
this loan at an annual rate of 10.25% with interest only for the
first three years and the principal balance amortizes over the
remaining 12 year period. The acquisition loan may be
prepaid at any time without penalty. In connection with the
Vibra transactions, Vibra agreed to pay us commitment fees of
approximately $1.5 million. We also made secured loans
totaling approximately $6.2 million to Vibra and its
subsidiaries for working capital purposes. The commitment fees
were paid, and the working capital loans were repaid, on
February 9, 2005.
On June 9, 2005, in connection with our acquisition of the
Denham Springs Facility, we made a loan of $6.0 million to
Denham Springs Healthcare Properties, L.L.C., $500,000 of which
was held in escrow pending the resolution of certain
environmental issues related to the facility. The loan accrued
interest at a rate of 10.5% per year, adjusted each January
1 by an amount equal to the greater of (i) 2.5% or
(ii) the percentage by which the CPI increases from
November to November, provided that the increase in CPI for 2005
was to be prorated. The loan was to be repaid over 15 years
with interest only during the 15 years and a balloon
payment due and payable at the expiration of the 15 years.
On October 31, 2005, upon favorable resolution of the
environmental issues related to the facility, we purchased the
facility for a purchase price of $6.0 million, which was
paid by delivering the note evidencing the loan and releasing to
Denham Springs Healthcare Properties. L.L.C. the remaining
balance of all funds escrowed under the loan.
In connection with the development of the West Houston
Facilities, Stealth has agreed to pay us a commitment fee of
approximately $932,125, to be paid over 15 years beginning
in November 2005. The commitment fee is based on a percentage of
total development costs and may be adjusted upon determination
of actual development costs. We have agreed to make a working
capital loan to Stealth of up to $1.62 million, to be
repaid over 15 years. Stealth has borrowed
$1.3 million under this loan as of the date of this
prospectus. The promissory notes evidencing the loan and
commitment fee provide for interest at an annual rate of 10.75%
and are unsecured, but the promissory notes are cross-defaulted
with our related facility leases with Stealth. Stealth is
obligated to pay us a project inspection fee for construction
coordination services of $100,000 in the case of the West
Houston Hospital and $50,000 in the case of the adjacent West
Houston MOB. These fees are to be paid, with interest at the
rate of 10.75% per year, over
5
a 15 year period beginning in November 2005. The obligation
to pay these fees is evidenced by promissory notes and is
unsecured, but the promissory notes are cross-defaulted with our
related facility leases with Stealth. Any of the fees or the
working capital loan may be prepaid at any time without penalty,
except that a minimum prepayment of $500,000 is required for the
working capital loan.
In connection with our development of the Bucks County Facility,
BCO has agreed to pay us a commitment fee of $345,000. The
commitment fee is to be paid interest only beginning with the
first calendar month following the completion of construction,
with a balloon payment 15 years later. BCO is also
obligated to pay us a $75,000 construction inspection fee, which
will be paid interest only beginning with the first calendar
month following the completion of construction, with a balloon
payment 15 years later. Interest on these fees is set at
10.75% per annum. We also loaned BCO approximately
$4.0 million, the loan proceeds of which we hold in a
separate account as security for repayment of the loan and
BCOs obligations under the lease. This loan is to be
repaid no later than the date BCO receives a certificate of
occupancy for the Bucks County Facility, and bears interest at
the rate of 20% per annum, which interest is due monthly.
The obligation to pay these fees is unsecured and the obligation
to repay the loan is secured by the loan proceeds which we hold
in a separate account. The promissory notes evidencing the fees
and the loan are cross defaulted with our lease with BCO. These
fees and loans may be prepaid at any time without penalty.
In connection with our development of the Monroe Facility,
Monroe Hospital has agreed to pay us a commitment fee of
$177,500. The commitment fee is to be paid interest only
beginning with the first calendar month following the completion
of construction, with a balloon payment 15 years later.
Monroe Hospital is also obligated to pay us a $55,000 inspection
fee, which will be paid interest only beginning with the first
calendar month following the completion of construction, with a
balloon payment 15 years later. Interest on these fees is
set at 10.50% per annum. The obligation to pay these fees is
unsecured, but the promissory notes evidencing the fees are
cross defaulted for our lease with Monroe Hospital.
We intend to expand our portfolio by acquiring an additional
net-leased healthcare facility that we have under letter of
commitment and consider to be a probable acquisition as of the
date of this prospectus, which we refer to in this prospectus as
our Pending Acquisition Facility. Under the terms of the letter
of commitment relating to this facility, we expect the lease for
this facility to provide for contractual base rent and an annual
rent escalator. Letters of commitment constitute agreements of
the parties to consummate the acquisition transactions and enter
into leases on the terms set forth in the letters of commitment
subject to the satisfaction of certain conditions, including the
execution of mutually-acceptable definitive agreements. The
following table contains information regarding our Pending
Acquisition Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year One | |
|
|
|
|
|
|
|
|
|
|
Number of | |
|
Contractual | |
|
Loan | |
|
Lease | |
Location |
|
Type | |
|
Tenant | |
|
Beds(1) | |
|
Interest | |
|
Amount | |
|
Expiration | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Hammond,
Louisiana*(2)
|
|
Long-term acute care hospital |
|
Hammond Rehabilitation Hospital, LLC |
|
|
40 |
|
|
$ |
840,000 |
(3) |
|
$ |
8,000,000 |
|
|
|
June 2021 |
|
|
|
|
|
* |
Under letter of commitment. |
|
|
|
(1) |
Based on the number of licensed beds. |
|
|
(2) |
On April 1, 2005, we entered into a letter of commitment
with Hammond Healthcare Properties, LLC, or Hammond Properties,
and Hammond Rehabilitation Hospital, LLC, or Hammond Hospital,
pursuant to which we have agreed to lend Hammond Properties
$8.0 million and have agreed to a put-call option pursuant
to which, during the 90 day period commencing on the first
anniversary of the date of the loan closing, we expect to
purchase from Hammond Properties a long-term acute care hospital
located in Hammond, Louisiana for a purchase price between
$10.3 million and $11.0 million. If we purchase the
facility, we will lease it back to Hammond Hospital for an
initial term of 15 years. The lease would be a net lease
and would provide for contractual base rent and, beginning
January 1, 2007, an annual rent escalator. |
|
|
(3) |
Based on one year contractual interest at the rate of
10.5% per year on the $8.0 million mortgage loan to
Hammond Properties. We expect to exercise our option to purchase
the Hammond Facility in 2006. For the one year period following
our purchase of the facility, contractual base rent would equal
$1,079,925, based on 10.5% of an estimated purchase price of
$10,285,000. |
|
6
|
|
|
Our Acquisition and Development Pipeline |
We have also identified a number of opportunities to acquire or
develop additional healthcare facilities. In some cases, we are
actively negotiating agreements or letters of intent with the
owners or prospective tenants. In other instances, we have only
identified the potential opportunity and had preliminary
discussions with the owner or prospective tenant. We cannot
assure you that we will complete any of these potential
acquisitions or developments.
We employ leverage in our capital structure in amounts we
determine from time to time. At present, we intend to limit our
debt to approximately 50-60% of the aggregate cost of our
facilities, although we may exceed those levels from time to
time. We expect our borrowings to be a combination of long-term,
fixed-rate, non-recourse mortgage loans, variable-rate secured
term and revolving credit facilities, and other fixed and
variable-rate short to medium-term loans.
In October 2005, we entered into a credit agreement with Merrill
Lynch Capital which replaced the loan agreement dated
December 31, 2004 between us and Merrill Lynch Capital. The
credit agreement provides for secured revolving loans of up to
$100.0 million in aggregate principal amount. The principal
amount may be increased to $175.0 million at our request.
The amounts borrowed are secured by mortgages on real property
owned by certain of our subsidiaries and are guaranteed by us.
The facilities that we use to secure the amounts under the
credit agreement make up the borrowing base. The
borrowing base, and therefore borrowings, are limited based on
(i) the appraised value of the borrowing base and
(ii) rent income from and financial performance of the
operator lessees of the borrowing base. Interest on borrowings
under the credit agreement will accrue monthly at one month
LIBOR (4.39% at December 28, 2005), plus a spread which
increases as amounts borrowed increase as a percentage of the
borrowing base. We must also pay certain fees based on the
amount borrowed in any monthly period. The credit agreement
expires in October 2009, and may be extended by us for one
additional year upon payment of a fee. The credit agreement
contains representations, financial and other affirmative and
negative covenants, events of default and remedies typical for
this type of facility.
We have also entered into construction loan agreements with
Colonial Bank pursuant to which we can borrow up to
$43.4 million to fund construction costs for the West
Houston Facilities. Each construction loan has a term of up to
18 months and an option on our part to convert the loan to
a 30-month term loan upon completion of construction of the West
Houston Facility securing that loan. Construction of the West
Houston MOB was completed in October 2005, and construction of
the West Houston Hospital was completed in November 2005. We
have not yet exercised the option to convert the construction
loans to term loans. The loans are secured by mortgages on the
West Houston Facilities, as well as assignments of rents and
leases on those facilities, and require us to comply with
certain financial covenants. The loans bear interest at one
month LIBOR plus 225 basis points during the construction
period and one month LIBOR plus 250 basis points
thereafter. The Colonial Bank loans are cross-defaulted. As of
the date of this prospectus, there is $35.5 million
outstanding under the Colonial Bank loans.
Competitive Strengths
We believe that the following competitive strengths will enable
us to execute our business strategy successfully:
|
|
|
|
|
Experienced Management Team. Our management teams
experience enables us to offer innovative acquisition and
net-lease structures that we believe will appeal to a variety of
healthcare operators. We believe that our managements
depth of experience in both traditional real estate investment
and healthcare operations positions us favorably to take
advantage of the available opportunities in the healthcare real
estate market. |
|
|
|
Comprehensive Underwriting Process. Our underwriting
process focuses on both real estate investment and healthcare
operations. Our acquisition and development selection process
includes a |
7
|
|
|
|
|
comprehensive analysis of a targeted healthcare facilitys
profitability, cash flow, occupancy and patient and payor mix,
financial trends in revenues and expenses, barriers to
competition, the need in the market for the type of healthcare
services provided by the facility, the strength of the location
and the underlying value of the facility, as well as the
financial strength and experience of the tenant and the
tenants management team. Through our detailed underwriting
of healthcare acquisitions, which includes an analysis of both
the underlying real estate and ongoing or expected healthcare
operations at the property, we expect to deliver attractive
risk-adjusted returns to our stockholders. |
|
|
|
Active Asset Management. We actively monitor the
operating results of our tenants by reviewing periodic financial
reporting and operating data, as well as visiting each facility
and meeting with the management of our tenants on a regular
basis. Integral to our asset management philosophy is our desire
to build long-term relationships with our tenants and,
accordingly, we have developed a partnering approach which we
believe results in the tenant viewing us as a member of its team. |
|
|
|
|
Favorable Lease Terms. We lease our facilities to
healthcare operators pursuant to long-term net-lease agreements.
A net-lease requires the tenant to bear most of the costs
associated with the property, including property taxes,
utilities, insurance and maintenance. Our current net-leases are
for terms of at least 10 years, provide for annual base
rental increases and, in the case of the Vibra Facilities and
the Bucks County Facility, percentage rent. Similarly, we
anticipate that our future leases will generally provide for
base rent with annual escalators, tenant payment of operating
costs and, when feasible and in compliance with applicable
healthcare laws and regulations, percentage rent. |
|
|
|
|
Diversified Portfolio Strategy. We focus on a portfolio
of several different types of healthcare facilities in a variety
of geographic regions. We also intend to diversify our tenant
base as we acquire and develop additional healthcare facilities. |
|
|
|
Access to Investment Opportunities. We believe our
network of relationships in both the real estate and healthcare
industries provides us access to a large volume of potential
acquisition and development opportunities. The net proceeds of
our initial public offering will enhance our ability to
capitalize on these and other investment opportunities. |
|
|
|
Local Physician Investment. When feasible and in
compliance with applicable healthcare laws and regulations, we
expect to offer physicians an opportunity to invest in the
facilities that we own, thereby strengthening our relationship
with the local physician community. |
Summary Risk Factors
You should carefully consider the matters discussed in the
section Risk Factors beginning on page 17 prior
to deciding whether to invest in our common stock. Some of these
risks include:
|
|
|
|
|
We were formed in August 2003 and have a limited operating
history; our management has a limited history of operating a
REIT and a public company and may therefore have difficulty in
successfully and profitably operating our business. |
|
|
|
|
We may be unable to acquire the Pending Acquisition Facility or
facilities we have identified as potential candidates for
acquisition or development as quickly as we expect or at all,
which could harm our future operating results and adversely
affect our ability to make distributions to our stockholders. |
|
|
|
|
We expect to continue to experience rapid growth and may not be
able to adapt our management and operational systems to
integrate the net-leased facilities we have acquired and are
developing or those that we expect to acquire and develop
without unanticipated disruption or expense. |
|
|
|
Our real estate investments will be concentrated in net-leased
healthcare facilities, making us more vulnerable economically
than if our investments were more diversified across several
industries or property types. |
8
|
|
|
|
|
|
Failure by our tenants or other parties to whom we make loans to
repay loans currently outstanding or loans we are obligated to
make, or to pay us commitment and other fees that they are
obligated to pay, in an aggregate amount of approximately
$152.7 million, would have a material adverse effect on our
revenues and our ability to make distributions to our
stockholders. |
|
|
|
|
|
Our facilities and properties under development are currently
leased to only eight tenants, five of which were recently
organized and have limited or no operating histories, and the
failure of any of these tenants to meet its obligations to us,
including payment of rent, payment of commitment and other fees
and repayment of loans we have made or intend to make to them,
would have a material adverse effect on our revenues and our
ability to make distributions to our stockholders. |
|
|
|
|
Development and construction risks, including delays in
construction, exceeding original estimates and failure to obtain
financing, could adversely affect our ability to make
distributions to our stockholders. |
|
|
|
Reductions in reimbursement from third-party payors, including
Medicare and Medicaid, could adversely affect the profitability
of our tenants and hinder their ability to make rent or loan
payments to us. |
|
|
|
The healthcare industry is heavily regulated and existing and
new laws or regulations, changes to existing laws or
regulations, loss of licensure or certification or failure to
obtain licensure or certification could result in the inability
of our tenants to make lease or loan payments to us. |
|
|
|
|
Our use of debt financing will subject us to significant risks,
including foreclosure and refinancing risks and the risk that
debt service obligations will reduce the amount of cash
available for distribution to our stockholders. We have entered
into loan agreements pursuant to which we may borrow up to
$143.4 million, approximately $100.5 million of which
was outstanding as of the date of this prospectus. Our charter
and other organizational documents do not limit the amount of
debt we may incur. |
|
|
|
|
Provisions of Maryland law, our charter and our bylaws may
prevent or deter changes in management and third-party
acquisition proposals that you may believe to be in our best
interest, depress our stock price or cause dilution. |
|
|
|
We depend on key personnel, the loss of any one of whom could
threaten our ability to operate our business successfully. |
|
|
|
Loss of our tax status as a REIT would have significant adverse
consequences to us and the value of our common stock. |
|
|
|
Our loans to Vibra could be recharacterized as equity, in which
case our rental income from Vibra would not be qualifying income
under the REIT rules and we could lose our REIT status. |
|
|
|
|
Common stock eligible for future sale, including up to
25,411,039 shares that may be resold by our existing
stockholders upon effectiveness of the resale registration
statement of which this prospectus is a part, may result in
increased selling which may have an adverse effect on our stock
price. |
|
Market Opportunity
According to the United States Department of Commerce,
Bureau of Economic Analysis, healthcare is one of the largest
industries in the U.S., and was responsible for approximately
15.3% of U.S. gross domestic product in 2003. Healthcare
spending has consistently grown at rates greater than overall
spending growth and inflation. We expect this trend to continue.
According to the United States Department of Health and
Human Services, Centers for Medicare and Medicaid Services, or
CMS, healthcare expenditures are projected to increase by more
than 7% in 2004 and 2005 to $1.8 trillion and
$1.9 trillion, respectively, and are expected to reach
$3.1 trillion by 2012.
9
To satisfy this growing demand for healthcare services, a
significant amount of new construction of healthcare facilities
has been undertaken, and we expect significant construction of
additional healthcare facilities in the future. In 2003 alone,
$24.5 billion was spent on the construction of healthcare
facilities, according to CMS. This represented more than a 9%
increase over the $22.4 billion in healthcare construction
spending for 2002. We believe that a significant part of this
healthcare construction spending was for the types of facilities
that we target.
Our Target Facilities
The market for healthcare real estate is extensive and includes
real estate owned by a variety of healthcare operators. We focus
on acquiring, developing and net leasing to healthcare operators
facilities that are designed to address what we view as the
latest trends in healthcare delivery methods. These facilities
include:
|
|
|
|
|
Rehabilitation Hospitals: Rehabilitation hospitals
provide inpatient and outpatient rehabilitation services for
patients recovering from multiple traumatic injuries, organ
transplants, amputations, cardiovascular surgery, strokes, and
complex neurological, orthopedic, and other conditions. In
addition to Medicare certified rehabilitation beds,
rehabilitation hospitals may also operate Medicare certified
skilled nursing, psychiatric, long-term or acute care beds.
These hospitals are often the best medical alternative to
traditional acute care hospitals where under the Medicare
prospective payment system there is pressure to discharge
patients after relatively short stays. |
|
|
|
Long-term Acute Care Hospitals: Long-term acute care
hospitals focus on extended hospital care, generally at least
25 days, for the medically-complex patient. Long-term acute
care hospitals have arisen from a need to provide care to
patients in acute care settings, including daily physician
observation and treatment, before they are able to move to a
rehabilitation hospital or return home. These facilities are
reimbursed in a manner more appropriate for a longer length of
stay than is typical for an acute care hospital. |
|
|
|
Regional and Community Hospitals: We define regional and
community hospitals as general medical/surgical hospitals whose
practicing physicians generally serve a market specific area,
whether urban, suburban or rural. We intend to limit our
ownership of these facilities to those with market, ownership,
competitive or technological characteristics that provide
barriers to entry for potential competitors. |
|
|
|
Womens and Childrens Hospitals: These
hospitals serve the specialized areas of obstetrics and
gynecology, other womens healthcare needs, neonatology and
pediatrics. We anticipate substantial development of facilities
designed to meet the needs of women and children and their
physicians as a result of the decentralization and
specialization trends described above. |
|
|
|
Ambulatory Surgery Centers: Ambulatory surgery centers
are freestanding facilities designed to allow patients to have
outpatient surgery, spend a short time recovering at the center,
then return home to complete their recoveries. Ambulatory
surgery centers offer a lower cost alternative to general
hospitals for many surgical procedures in an environment that is
more convenient for both patients and physicians. Outpatient
procedures commonly performed include those related to
gastrointestinal, general surgery, plastic surgery, ear, nose
and throat/audiology, as well as orthopedics and sports medicine. |
|
|
|
Other Single-Discipline Facilities: The decentralization
and specialization trends in the healthcare industry are also
creating demands and opportunities for physicians to practice in
hospital facilities in which the design, layout and medical
equipment are specifically developed, and healthcare
professional staff are educated, for medical specialties. These
facilities include heart hospitals, ophthalmology centers,
orthopedic hospitals and cancer centers. |
|
|
|
Medical Office Buildings: Medical office buildings are
office and clinic facilities occupied and used by physicians and
other healthcare providers in the provision of healthcare
services to their patients. |
10
|
|
|
|
|
The medical office buildings that we target generally are or
will be master-leased and adjacent to or integrated with our
other targeted healthcare facilities. |
|
|
|
Skilled Nursing Facilities. Skilled nursing facilities
are healthcare facilities that generally provide more
comprehensive services than assisted living or residential care
homes. They are primarily engaged in providing skilled nursing
care for patients who require medical or nursing care or
rehabilitation services. Typically these services involve
managing complex and serious medical problems such as wound
care, coma care or intravenous therapy. They offer both short
and long-term care options for patients with serious illnesses
and medical conditions. Skilled nursing facilities also provide
rehabilitation services that are typically utilized on a
short-term basis after hospitalization for injury or illness. |
Our Formation Transactions
The following is a summary of our formation transactions:
|
|
|
|
|
We were formed as a Maryland corporation on August 27, 2003
to succeed to the business of Medical Properties Trust, LLC, a
Delaware limited liability company, which was formed by certain
of our founders in December 2002. In connection with our
formation, we issued our founders 1,630,435 shares of our common
stock in exchange for nominal cash consideration and the
membership interests of Medical Properties Trust, LLC. Upon
completion of our private placement in April 2004,
1,108,527 shares of the 1,630,435 shares of common
stock held by our founders were redeemed for nominal value and
they now collectively hold 1,047,088 shares of our common
stock. |
|
|
|
Our operating partnership, MPT Operating Partnership, L.P.,
was formed in September 2003. Our wholly-owned subsidiary,
Medical Properties Trust, LLC, is the sole general partner
of our operating partnership. We currently own all of the
limited partnership interests in our operating partnership. |
|
|
|
MPT Development Services, Inc., a Delaware corporation that we
formed in January 2004, operates as our wholly-owned taxable
REIT subsidiary. |
|
|
|
|
In April 2004 we completed a private placement of
25,300,000 shares of common stock at an offering price of
$10.00 per share. Friedman, Billings, Ramsey &
Co., Inc., which served as a lead underwriter in our initial
public offering, acted as the initial purchaser and sole
placement agent. The total net proceeds to us, after deducting
fees and expenses of the offering, were approximately
$233.5 million. |
|
|
|
|
On July 13, 2005, we completed an initial public offering
of 12,066,823 shares of common stock, priced at $10.50 per
share. Of these shares of common stock, 701,823 shares were
sold by selling stockholders and 11,365,000 shares were
sold by us. Friedman, Billings, Ramsey & Co., Inc. served as
the sole book-running manager and J.P. Morgan Securities Inc.
served as co-lead manager for the offering. Wachovia Capital
Markets, LLC and Stifel, Nicolaus & Company, Incorporated
served as co-managers for the offering. The underwriters
exercised an option to purchase an additional
1,810,023 shares of common stock to cover over-allotments
on August 5, 2005. We raised net proceeds of approximately
$125.7 million pursuant to the offering, after deducting
the underwriting discount and offering expenses. |
|
|
|
|
The net proceeds of our private placement and initial public
offering, together with borrowed funds, have been or will be
used to acquire our current portfolio of 17 facilities. Thus
far, we have spent approximately $234.6 million for the 12
existing facilities that we acquired, and funded approximately
$56.0 million of a projected total of $63.1 million of
development costs for the West Houston Facilities, approximately
$9.6 million of a projected total of $38.0 million of
development costs for the Bucks County Facility, approximately
$11.1 million of a projected total of $35.5 million of
development costs for the Monroe Facility and approximately
$18.7 million pursuant to the North Cypress construction
loan. In addition, we have loaned approximately |
|
11
|
|
|
|
|
$47.6 million to Vibra to acquire the operations at the
Vibra Facilities and for working capital purposes,
$6.2 million of which has been repaid. |
Our Structure
We conduct our business through a traditional umbrella
partnership REIT, or UPREIT, in which our facilities are owned
by our operating partnership, MPT Operating
Partnership, L.P., and limited partnerships, limited
liability companies or other subsidiaries of our operating
partnership. Through our wholly-owned limited liability company,
Medical Properties Trust, LLC, we are the sole general partner
of our operating partnership and we presently own all of the
limited partnership units of our operating partnership. In the
future, we may issue limited partnership units to third parties
from time to time in connection with facility acquisitions or
developments. In addition, we may sell equity interests in
subsidiaries of our operating partnership in connection with
facility acquisitions or developments.
MPT Development Services, Inc., our taxable REIT subsidiary, is
authorized to engage in development, management, lending,
including but not limited to acquisition and working capital
loans to our tenants, and other activities that we are unable to
engage in directly under applicable REIT tax rules. The
following chart illustrates our structure upon completion of our
initial public offering:
|
|
(1) |
We own and in the future expect to own interests in our
facilities through wholly owned or majority owned subsidiaries
of our operating partnership, MPT Operating Partnership, L.P.
Our operating partnership is a limited partner of MPT West
Houston MOB, L.P. and MPT West Houston Hospital, L.P., which
own, respectively, the West Houston MOB and the West Houston
Hospital. MPT West Houston MOB, LLC and MPT West Houston
Hospital, LLC, both of which are wholly-owned by our operating
partnership, are, respectively, the general partners of these
entities. Physicians and others associated with our tenant or
subtenants of the West Houston MOB own approximately 24% of the
aggregate equity interests in MPT West Houston MOB, L.P.
Stealth, the tenant of the West Houston Hospital, owns a 6%
limited partnership interest in MPT West Houston Hospital, L.P. |
12
Registration Rights Agreement and Resale Blackout Periods
In connection with a registration rights agreement we entered
into in April 2004 with the purchasers of common stock in our
April 2004 private placement, we agreed to file the registration
statement of which this prospectus is a part. We will be
permitted to suspend the use, from time to time, of this
prospectus (and therefore suspend sales of common stock under
this prospectus), for periods referred to as blackout
periods, if a majority of the independent members of our
board of directors determines in good faith that it is in our
best interests to suspend the use and we provide selling
stockholders written notice of the suspension. The cumulative
blackout periods in any rolling 12-month period may not exceed
an aggregate of 90 days and furthermore may not exceed 60 days
in any rolling 90-day period.
Restrictions on Ownership of Our Common Stock
The Code imposes limitations on the concentration of ownership
of REIT shares. Our charter generally prohibits any stockholder
from actually or constructively owning more than 9.8% of our
outstanding shares of common stock. The ownership limitation in
our charter is more restrictive than the restrictions on
ownership of our common stock imposed by the Code. Our board
may, in its sole discretion, waive this ownership limitation
with respect to particular stockholders if our board is
presented with evidence satisfactory to it that the ownership
will not then or in the future jeopardize our status as a REIT.
Distribution Policy
We intend to distribute to our stockholders each year all or
substantially all of our REIT taxable income so as to avoid
paying corporate income tax and excise tax on our REIT income
and to qualify for the tax benefits afforded to REITs under the
Code. The actual amount and timing of distributions, if any,
will be at the discretion of our board of directors and will
depend upon our actual results of operations and a number of
other factors discussed in the section Distribution
Policy.
The table below is a summary of our distributions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution per Share | |
Declaration Date |
|
Record Date |
|
Date of Distribution |
|
of Common Stock | |
|
|
|
|
|
|
| |
November 18, 2005
|
|
December 15, 2005 |
|
January 19, 2006 |
|
$ |
0.18 |
|
August 18, 2005
|
|
September 15, 2005 |
|
September 29, 2005 |
|
$ |
0.17 |
|
May 19, 2005
|
|
June 20, 2005 |
|
July 14, 2005 |
|
$ |
0.16 |
|
March 4, 2005
|
|
March 16, 2005 |
|
April 15, 2005 |
|
$ |
0.11 |
|
November 11, 2004
|
|
December 16, 2004 |
|
January 11, 2005 |
|
$ |
0.11 |
|
September 2, 2004
|
|
September 16, 2004 |
|
October 11, 2004 |
|
$ |
0.10 |
|
The two distributions declared in 2004, aggregating
$0.21 per share, were comprised of approximately
$0.13 per share in ordinary income and $0.08 per share
in return of capital. For federal income tax purposes, our
distributions were limited in 2004 to our tax basis earnings and
profits of $0.13 per share. Accordingly, for tax purposes,
$0.08 per share of the distributions we paid in January
2005 will be treated as a 2005 distribution; the tax character
of this amount, along with that of the April 15, 2005,
July 14, 2005 and September 29, 2005 distributions,
will be determined subsequent to determination of our 2005
taxable income.
Tax Status
As long as we maintain our REIT status, we will generally not
incur federal income tax on our income to the extent that we
distribute this income to our stockholders. However, we will be
subject to tax at normal corporate rates on net income or
capital gains not distributed to stockholders. Moreover, our
taxable REIT subsidiary will be subject to federal and state
income taxation on its taxable income.
13
Summary Financial Information
You should read the following pro forma and historical
information in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our historical and pro forma consolidated
financial statements and related notes thereto included
elsewhere in this prospectus.
The following table sets forth our summary financial and
operating data on an historical and pro forma basis. Our summary
historical balance sheet information as of December 31,
2004, and the historical statement of operations and other data
for the year ended December 31, 2004, have been derived
from our historical financial statements audited by KPMG LLP,
independent registered public accounting firm, whose report with
respect thereto is included elsewhere in this prospectus. The
historical balance sheet information as of September 30,
2005 and the historical statement of operations and other data
for the nine months ended September 30, 2005 have been
derived from our unaudited historical balance sheet as of
September 30, 2005 and from our unaudited statement of
operations for the nine months ended September 30, 2005
included elsewhere in this prospectus. The unaudited historical
financial statements include all adjustments, consisting of
normal recurring adjustments, that we consider necessary for a
fair presentation of our financial condition and results of
operations as of such dates and for such periods under
accounting principles generally accepted in the U.S.
The unaudited pro forma consolidated balance sheet data as of
September 30, 2005 are presented as if completion of our
probable acquisition had occurred on September 30, 2005.
The unaudited pro forma consolidated statement of operations and
other data for the nine months ended September 30, 2005 are
presented as if acquisition of the Desert Valley Facility, the
Covington Facility, the Chino Facility, the Denham Springs
Facility and the Redding Facility along with the completion of
our probable acquisitions had occurred on January 1, 2005,
and our December 31, 2004 unaudited pro forma consolidated
statement of operations are presented as if our acquisition of
the current portfolio of facilities (the six Vibra Facilities,
the Desert Valley Facility, the Covington Facility, the Chino
Facility, the Denham Springs Facility and the Redding Facility),
our making of the Vibra loans and completion of our probable
acquisitions had occurred on January 1, 2004. The pro forma
information does not give effect to any of our facilities under
development or probable development transactions. The pro forma
information is not necessarily indicative of what our actual
financial position or results of operations would have been as
of the dates or for the periods indicated, nor does it purport
to represent our future financial position or results of
operations.
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended | |
|
For the Year Ended | |
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Pro Forma | |
|
Historical | |
|
Pro Forma | |
|
Historical | |
|
|
| |
|
| |
|
| |
|
| |
Operating information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent income
|
|
$ |
26,273,517 |
|
|
$ |
18,364,389 |
|
|
$ |
32,808,106 |
|
|
$ |
8,611,344 |
|
|
|
Interest income from loans
|
|
|
6,368,607 |
|
|
|
3,562,857 |
|
|
|
9,037,049 |
|
|
|
2,282,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
32,642,124 |
|
|
|
21,927,246 |
|
|
|
41,845,155 |
|
|
|
10,893,459 |
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,645,242 |
|
|
|
2,986,790 |
|
|
|
6,193,653 |
|
|
|
1,478,470 |
|
|
|
General and administrative
|
|
|
5,595,416 |
|
|
|
5,595,416 |
|
|
|
5,057,284 |
|
|
|
5,057,284 |
|
|
|
Total operating expenses
|
|
|
10,357,499 |
|
|
|
8,699,047 |
|
|
|
12,023,286 |
|
|
|
7,214,601 |
|
|
|
Operating income
|
|
|
22,284,625 |
|
|
|
13,228,199 |
|
|
|
29,821,869 |
|
|
|
3,678,858 |
|
|
|
Net other income (expense)
|
|
|
(2,132,363 |
) |
|
|
(32,363 |
) |
|
|
(1,902,509 |
) |
|
|
897,491 |
|
|
Net income
|
|
|
20,152,262 |
|
|
|
13,195,836 |
|
|
|
27,919,360 |
|
|
|
4,576,349 |
|
|
Net income per share, basic
|
|
|
0.67 |
|
|
|
0.44 |
|
|
|
1.45 |
|
|
|
0.24 |
|
|
Net income per share, diluted
|
|
|
0.67 |
|
|
|
0.44 |
|
|
|
1.45 |
|
|
|
0.24 |
|
|
Weighted average shares outstanding basic
|
|
|
29,975,971 |
|
|
|
29,975,971 |
|
|
|
19,310,833 |
|
|
|
19,310,833 |
|
|
Weighted average shares outstanding diluted
|
|
|
29,999,381 |
|
|
|
29,999,381 |
|
|
|
19,312,634 |
|
|
|
19,312,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
As of September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Pro Forma | |
|
Historical | |
|
Historical | |
|
|
| |
|
| |
|
| |
Balance Sheet information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment in real estate assets
|
|
$ |
328,342,475 |
|
|
$ |
266,106,299 |
|
|
$ |
151,690,293 |
|
|
Net investment in real estate
|
|
|
323,877,215 |
|
|
|
261,641,039 |
|
|
|
150,211,823 |
|
|
Construction in progress
|
|
|
78,435,280 |
|
|
|
78,484,104 |
|
|
|
24,318,098 |
|
|
Cash and cash equivalents
|
|
|
36,896,094 |
|
|
|
100,826,702 |
|
|
|
97,543,677 |
|
|
Loans receivable
|
|
|
86,895,611 |
|
|
|
52,895,611 |
|
|
|
50,224,069 |
(1) |
|
Total assets
|
|
|
463,898,155 |
|
|
|
431,592,587 |
|
|
|
306,506,063 |
|
|
Total debt
|
|
|
80,366,667 |
|
|
|
40,366,667 |
|
|
|
56,000,000 |
|
|
Total liabilities
|
|
|
111,633,245 |
|
|
|
72,133,245 |
|
|
|
73,777,619 |
|
|
Total stockholders equity
|
|
|
350,127,410 |
|
|
|
357,321,842 |
|
|
|
231,728,444 |
|
|
Total liabilities and stockholders equity
|
|
|
463,898,155 |
|
|
|
431,592,587 |
|
|
|
306,506,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended | |
|
For the Year Ended | |
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Pro Forma | |
|
Historical | |
|
Pro Forma | |
|
Historical | |
|
|
| |
|
| |
|
| |
|
| |
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from
operations(2)
|
|
$ |
24,797,504 |
|
|
$ |
16,182,626 |
|
|
$ |
34,113,013 |
|
|
$ |
6,054,819 |
|
|
Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided by operating activities
|
|
|
|
|
|
|
16,094,005 |
|
|
|
|
|
|
|
9,918,898 |
|
|
|
Used for investing activities
|
|
|
|
|
|
|
(107,692,381 |
) |
|
|
|
|
|
|
(195,600,642 |
) |
|
|
Provided by financing activities
|
|
|
|
|
|
|
94,881,401 |
|
|
|
|
|
|
|
283,125,421 |
|
|
|
|
(1) |
Includes $1.5 million in commitment fees payable to us by
Vibra. |
|
|
|
(2) |
Funds from operations, or FFO, represents net income (computed
in accordance with GAAP), excluding gains (or losses) from sales
of property, plus real estate related depreciation and
amortization (excluding amortization of loan origination costs)
and after adjustments for unconsolidated partnerships and joint
ventures. Management considers funds from operations a useful
additional measure of performance for an equity REIT because it
facilitates an understanding of the operating performance of our
properties without giving effect to real estate depreciation and
amortization, which assumes that the value of real estate assets
diminishes predictably over time. Since real estate values have
historically risen or fallen with market conditions, we believe
that funds from operations provides a meaningful supplemental
indication of our performance. We compute funds from operations
in accordance with standards established by the Board of
Governors of the National Association of Real Estate Investment
Trusts, or NAREIT, in its March 1995 White Paper (as amended in
November 1999 and April 2002), which may differ from the |
|
15
|
|
|
|
methodology for calculating funds
from operations utilized by other equity REITs and, accordingly,
may not be comparable to such other REITs. FFO does not
represent amounts available for managements discretionary
use because of needed capital replacement or expansion, debt
service obligations, or other commitments and uncertainties, nor
is it indicative of funds available to fund our cash needs,
including our ability to make distributions. Funds from
operations should not be considered as an alternative to net
income (loss) (computed in accordance with GAAP) as indicators
of our financial performance or to cash flow from operating
activities (computed in accordance with GAAP) as an indicator of
our liquidity.
|
|
|
|
|
The following table presents a
reconciliation of FFO to net income for the nine months ended
September 30, 2005 and for the year ended December 31,
2004 on an actual and pro forma basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months | |
|
For the Year Ended | |
|
|
Ended September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Funds from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
20,152,262 |
|
|
$ |
13,195,836 |
|
|
$ |
27,919,360 |
|
|
$ |
4,576,349 |
|
Depreciation and amortization
|
|
|
4,645,242 |
|
|
|
2,986,790 |
|
|
|
6,193,653 |
|
|
|
1,478,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations FFO
|
|
$ |
24,797,504 |
|
|
$ |
16,182,626 |
|
|
$ |
34,113,013 |
|
|
$ |
6,054,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
RISK FACTORS
An investment in our common stock involves a number of risks.
Before making an investment decision, you should carefully
consider all of the risks described below and the other
information contained in this prospectus. If any of the risks
discussed in this prospectus actually occurs, our business,
financial condition and results of operations could be
materially adversely affected. If this were to occur, the value
of our common stock could decline and you may lose all or part
of your investment.
Risks Relating to Our Business and Growth Strategy
We were formed in August 2003 and have a limited operating
history; our management has a limited history of operating a
REIT and a public company and may therefore have difficulty in
successfully and profitably operating our business.
We have only recently been organized and have a limited
operating history. We are subject to the risks generally
associated with the formation of any new business, including
unproven business models, untested plans, uncertain market
acceptance and competition with established businesses. Our
management has limited experience in operating a REIT and a
public company. Therefore, you should be especially cautious in
drawing conclusions about the ability of our management team to
execute our business plan.
We may not be successful in deploying the net proceeds of our
initial public offering for their intended uses as quickly as we
intend or at all, which could harm our cash flow and ability to
make distributions to our stockholders.
Upon completion of our initial public offering, we experienced a
capital infusion from the net offering proceeds, which we have
used or intend to use to develop additional net-leased
facilities and to make a loan to an affiliate of one of our
prospective tenants. If we are unable to use the net proceeds in
this manner, we will have no specific designated use for a
substantial portion of the net proceeds from our initial public
offering. In that case, or in the event we allocate a portion of
the net proceeds to other uses during the pendency of the
developments, you would be unable to evaluate the manner in
which we invest the net proceeds or the economic merits of the
assets acquired with the proceeds. We may not be able to invest
this capital on acceptable terms or timeframes, or at all, which
may harm our cash flow and ability to make distributions to our
stockholders.
We may be unable to acquire or develop the Pending
Acquisition Facility, which could harm our future operating
results and adversely affect our ability to make distributions
to our stockholders.
Our future success depends in large part on our ability to
continue to grow our business through the acquisition or
development of additional facilities. We cannot assure you that
we will acquire or develop the Pending Acquisition Facility on
the terms described, or at all, because the transaction is
subject to a variety of conditions, including execution of
mutually-acceptable definitive agreements, our satisfactory
completion of due diligence, receipt of appraisals and other
third-party reports, receipt of government and third-party
approvals and consents, approval by our board of directors and
other customary closing conditions. We have incurred losses of
approximately $600,000 in connection with acquisitions that we
were unable to complete, consisting primarily of legal fees,
costs of third-party reports and travel expenses. If we are
unsuccessful in completing the acquisition or development of
additional facilities in the future, we will incur similar costs
without achieving corresponding revenues, our future operating
results will not meet expectations and our ability to make
distributions to our stockholders will be adversely affected.
We may not consummate the transactions contemplated by our
other arrangements, which could adversely affect our ability to
make distributions to our stockholders.
We have entered into letter agreements with DVH to fund a
$20.0 million expansion of the Desert Valley Facility and
with DSI to fund $50.0 million of acquisitions and
development facilities. Our funding of the expansion of the
Desert Valley Facility is subject to receipt of a development
agreement from DVH
17
which we may not receive until February 28, 2006. DVH is
not obligated to present us with a development agreement, and,
if it does not, we have no obligation to provide funding to DVH
for the expansion. If we enter into a development agreement, we
may not begin construction on the expansion for several months
after that time and the expansion could take up to approximately
one year to complete. Any acquisition or development of
facilities pursuant to the DSI commitment is subject to
DSIs identification, and our approval, of acquisition or
development facilities. DSI is not required to identify
facilities for acquisition or development and, if it does not,
we have no obligation to provide funding to DSI. We have also
entered into an arrangement to develop a hospital facility in
Oklahoma for an estimated total development cost of
$32.5 million, subject to adjustment, and entered into an
arrangement to acquire and leaseback a facility in Pennsylvania
and to make related loans for certain improvements to the real
estate and for working capital purposes for an estimated total
cost of $9.2 million, subject to adjustment. Each of these
transactions is subject to our completion of due diligence and a
number of additional conditions. Thus we may not engage in any
of these transactions in the near future, or at all, and may not
in the near future, or ever, generate any revenues from these
arrangements.
We may be unable to acquire or develop any of the facilities
we have identified as potential candidates for acquisition or
development, which could harm our future operating results and
adversely affect our ability to make distributions to our
stockholders.
We have identified numerous other facilities that we believe
would be suitable candidates for acquisition or development;
however, we cannot assure you that we will be successful in
completing the acquisition or development of any of these
facilities. Consummation of any of these acquisitions or
developments is subject to, among other things, the willingness
of the parties to proceed with a contemplated transaction,
negotiation of mutually acceptable definitive agreements,
satisfactory completion of due diligence and satisfaction of
customary closing conditions. If we are unsuccessful in
completing the acquisition or development of additional
facilities in the future, our future operating results will not
meet expectations and our ability to make distributions to our
stockholders will be adversely affected.
We expect to continue to experience rapid growth and may not
be able to adapt our management and operational systems to
integrate the net-leased facilities we have acquired and are
developing or those that we may acquire or develop in the future
without unanticipated disruption or expense.
We are currently experiencing a period of rapid growth. We
cannot assure you that we will be able to adapt our management,
administrative, accounting and operational systems, or hire and
retain sufficient operational staff, to integrate and manage the
facilities we have acquired and are developing and those that we
may acquire or develop. Our failure to successfully integrate
and manage our current portfolio of facilities or any future
acquisitions or developments could have a material adverse
effect on our results of operations and financial condition and
our ability to make distributions to our stockholders.
We may be unable to access capital, which would slow our
growth.
Our business plan contemplates growth through acquisitions and
developments of facilities. As a REIT, we are required to make
cash distributions which reduces our ability to fund
acquisitions and developments with retained earnings. We are
dependent on acquisition financings and access to the capital
markets for cash to make investments in new facilities. Due to
market or other conditions, there will be times when we will
have limited access to capital from the equity and debt markets.
During such periods, virtually all of our available capital will
be required to meet existing commitments and to reduce existing
debt. We may not be able to obtain additional equity or debt
capital or dispose of assets, on favorable terms, if at all, at
the time we need additional capital to acquire healthcare
properties on a competitive basis or to meet our obligations.
Our ability to grow through acquisitions and developments will
be limited if we are unable to obtain debt or equity financing,
which could have a material adverse effect on our results of
operations and our ability to make distributions to our
stockholders.
18
Dependence on our tenants for rent may adversely impact our
ability to make distributions to our stockholders.
We expect to qualify as a REIT and, accordingly, as a REIT
operating in the healthcare industry, we are not permitted by
current tax law to operate or manage the businesses conducted in
our facilities. Accordingly, we rely almost exclusively on rent
payments from our tenants for cash with which to make
distributions to our stockholders. We have no control over the
success or failure of these tenants businesses.
Significant adverse changes in the operations of any facility,
or the financial condition of any tenant, could have a material
adverse effect on our ability to collect rent payments and,
accordingly, on our ability to make distributions to our
stockholders. Facility management by our tenants and their
compliance with state and federal healthcare laws could have a
material impact on our tenants operating and financial
condition and, in turn, their ability to pay rent to us. Failure
on the part of a tenant to comply materially with the terms of a
lease could give us the right to terminate our lease with that
tenant, repossess the applicable facility, cross default certain
other leases with that tenant and enforce the payment
obligations under the lease. However, we then would be required
to find another tenant-operator.
On March 31, 2005, the leases for the Vibra Facilities were
amended to provide (i) that the testing of certain
financial covenants will be deferred until the quarter beginning
July 1, 2006 and ending September 30, 2006,
(ii) that these same financial covenants will be tested on
a consolidated basis for all of the Vibra Facilities,
(iii) that the reduction, based on loan principal
reductions, in the rate of percentage rent will be made on a
monthly rather than annual basis and (iv) that Vibra will escrow
insurance premiums and taxes at our request. Prior to execution
of this amendment, Vibra was not in compliance with certain of
the financial covenants in all of its leases with us.
The transfer of most types of healthcare facilities is highly
regulated, which may result in delays and increased costs in
locating a suitable replacement tenant. The sale or lease of
these properties to entities other than healthcare operators may
be difficult due to the added cost and time of refitting the
properties. If we are unable to re-let the properties to
healthcare operators, we may be forced to sell the properties at
a loss due to the repositioning expenses likely to be incurred
by non-healthcare purchasers. Alternatively, we may be required
to spend substantial amounts to adapt the facility to other
uses. There can be no assurance that we would be able to find
another tenant in a timely fashion, or at all, or that, if
another tenant were found, we would be able to enter into a new
lease on favorable terms. Defaults by our tenants under our
leases may adversely affect the timing of and our ability to
make distributions to our stockholders.
Failure by our tenants or other parties to whom we make loans
to repay loans currently outstanding or loans we are obligated
to make, or to pay us commitment or other fees that they are
obligated to pay, in an aggregate amount of approximately
$152.7 million, would have a material adverse effect on our
revenues and our ability to make distributions to our
stockholders.
In connection with the acquisition of the Vibra Facilities, our
taxable REIT subsidiary made a secured loan to Vibra of
approximately $41.4 million to acquire the operations at
the Vibra Facilities. Payment of this loan is secured by pledges
of equity interests in Vibra and its subsidiaries that are
tenants of ours. All leases and other agreements between us, or
our affiliates, on the one hand, and the tenant and
Mr. Hollinger, or their affiliates, on the other hand,
including leases for the Vibra Facilities, the lease for the
Redding Facility and the Vibra loan, are cross-defaulted. If
Vibra defaulted on this loan, our primary recourse would be to
foreclose on the equity interests in Vibra and its affiliates.
This recourse may be impractical because of limitations imposed
by the REIT tax rules on our ability to own these interests.
Failure to adhere to these limitations could cause us to lose
our REIT status. We have obtained guaranty agreements for the
Vibra loan from Mr. Hollinger, Vibra Management, LLC and
The Hollinger Group that obligate them to make loan payments in
the event that Vibra fails to do so. However, we do not believe
that these parties have sufficient financial resources to
satisfy a material portion of the loan obligations.
Mr. Hollingers guaranty is limited to
$5.0 million and Vibra Management, LLC and The Hollinger
Group do not have substantial assets. Vibra has entered into a
$20.0 million credit facility with Merrill Lynch, and that
loan is secured by an interest in Vibras receivables.
There was approximately
19
$12.9 million outstanding under the facility on
September 30, 2005. At March 31, 2005, Vibra was not
in compliance with a facility rent coverage covenant under its
Merrill Lynch credit facility. The Merrill Lynch credit facility
documents were subsequently amended to retroactively change the
rent coverage covenant from a by-facility rent coverage to a
consolidated rent coverage calculation, so that Vibra was in
compliance with the amended covenant at March 31, 2005. Our
loan is subordinate to Merrill Lynch with respect to
Vibras receivables.
We have also agreed to make a working capital loan to Stealth of
up to $1.62 million. Stealth has borrowed $1.3 million
under this loan as of the date of this prospectus. Stealth also
owes us commitment and other fees of approximately
$1.1 million. Payment of these fees and loan amounts is
unsecured. We have also agreed to make a construction loan to
North Cypress for approximately $64.0 million to fund the
construction of a community hospital in Houston, Texas, secured
by the hospital improvements, $18.7 million of which has
been loaned to North Cypress as of the date of this prospectus.
BCO owes us commitment and other fees of $420,000. BCO also owes
us approximately $4.0 million in connection with a loan we
made to BCO, the loan proceeds of which we have retained in a
separate bank account as security for BCOs loan repayment
obligations and its obligations under the lease for the Bucks
County Facility. Monroe Hospital owes us commitment and other
fees of approximately $232,500.
On December 23, 2005, we made a $40.0 million mortgage
loan to Alliance. As security for Alliances obligations
under the mortgage loan, all principal, base interest and
additional interest on the first $30.0 million of the loan
amount is guaranteed on a pro rata basis by the shareholders of
SRI-SAI Enterprises, Inc., the general partner of Alliance,
until such time as Alliance meets certain financial conditions.
Additionally, we have received a first mortgage on the facility
and a first or second priority security interest in all of
Alliances personal property other than accounts
receivable, along with other security. We are dependent upon the
ability of Vibra, Stealth, North Cypress, BCO, Monroe Hospital
and Alliance to repay these loans and fees, and their failure to
meet these obligations would have a material adverse effect on
our revenues and our ability to make distributions to our
stockholders.
Accounting rules may require consolidation of entities in
which we invest and other adjustments to our financial
statements.
The Financial Accounting Standards Board, or FASB, issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities, an interpretation of Accounting Research
Bulletin No. 51 (ARB No. 51), in
January 2003, and a further interpretation of FIN 46
in December 2003
(FIN 46-R, and
collectively FIN 46). FIN 46 clarifies the application
of ARB No. 51, Consolidated Financial
Statements, to certain entities in which equity investors
do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated
financial support from other parties, referred to as variable
interest entities. FIN 46 generally requires consolidation
by the party that has a majority of the risk and/or rewards,
referred to as the primary beneficiary. FIN 46 applies
immediately to variable interest entities created after
January 31, 2003. Under certain circumstances, generally
accepted accounting principles may require us to account for
loans to thinly capitalized companies such as Vibra as equity
investments. The resulting accounting treatment of certain
income and expense items may adversely affect our results of
operations, and consolidation of balance sheet amounts may
adversely affect any loan covenants.
The bankruptcy or insolvency of our tenants under our leases
could seriously harm our operating results and financial
condition.
Five of our tenants, North Cypress, Stealth, BCO, Monroe
Hospital and Vibra are, and some of our prospective tenants may
be, newly organized, have limited or no operating history and
may be dependent on loans from us to acquire the facilitys
operations and for initial working capital. Any bankruptcy
filings by or relating to one of our tenants could bar us from
collecting pre-bankruptcy debts from that tenant or their
property, unless we receive an order permitting us to do so from
the bankruptcy court. A tenant bankruptcy could delay our
efforts to collect past due balances under our leases and loans,
and could ultimately preclude collection of these sums. If a
lease is assumed by a tenant in bankruptcy, we expect
20
that all pre-bankruptcy balances due under the lease would be
paid to us in full. However, if a lease is rejected by a tenant
in bankruptcy, we would have only a general unsecured claim for
damages. Any secured claims we have against our tenants may only
be paid to the extent of the value of the collateral, which may
not cover any or all of our losses. Any unsecured claim we hold
against a bankrupt entity may be paid only to the extent that
funds are available and only in the same percentage as is paid
to all other holders of unsecured claims. We may recover none or
substantially less than the full value of any unsecured claims,
which would harm our financial condition.
Our facilities and properties under development are currently
leased to only eight tenants, five of which were recently
organized and have limited or no operating histories, and
failure of any of these tenants and the guarantors of their
leases to meet their obligations to us would have a material
adverse effect on our revenues and our ability to make
distributions to our stockholders.
Our existing facilities and the properties we have under
development are currently leased to Vibra, Prime Healthcare
Services, Inc., or Prime, Gulf States, North Cypress, BCO,
Monroe Hospital and Stealth or their subsidiaries or affiliates.
If any of our tenants were to experience financial difficulties,
the tenant may not be able to pay its rent. Vibra, North
Cypress, BCO, Monroe Hospital and Stealth were recently
organized, have limited or no operating histories and Vibra was
dependent on us for an aggregate amount of $47.6 million in
loans to acquire operations at the Vibra Facilities, for the
funds to purchase the Redding Facility which it sold to us at
the same time that it purchased that facility and for its
initial working capital needs. As of September 30, 2005,
Vibra had total assets of approximately $84.4 million (of
which approximately $29.7 million was goodwill and other
intangible assets), total liabilities of approximately
$92.6 million, a deficit in owners capital of
approximately $8.2 million, and for the nine months ended
September 30, 2005 had a loss from operations of
approximately $6.0 million and a net loss of approximately
$4.4 million. Each lease for the Vibra Facilities is
guaranteed by Brad E. Hollinger, chief executive officer of
The Hollinger Group, Vibra, Vibra Management, LLC and The
Hollinger Group. The lease for the Redding Facility is
guaranteed by Vibra, Vibra Management, LLC and The Hollinger
Group. However, we do not believe that these parties have
sufficient financial resources to satisfy a material portion of
the total lease obligations. Mr. Hollinger has not
guaranteed the Redding Facility lease and
Mr. Hollingers guaranty of the leases for the Vibra
Facilities is limited to $5.0 million, Vibra Management,
LLC and The Hollinger Group do not have substantial assets, and
Vibras assets are substantially comprised of the
operations at the Vibra Facilities and at the Redding Facility.
Stealth has provided to us unaudited financial statements
reflecting that, as of September 30, 2005, it had tangible
assets of approximately $7.7 million, including cash of
approximately $4.7 million, liabilities of approximately
$1.7 million and owners equity of approximately
$6.0 million. Stealth incurred substantial pre-opening and
start-up costs upon completion of construction of its
facilities. We cannot assure you that, should Stealths
equity be insufficient to cover its costs, it could access
additional debt or equity financing.
The lease for the Desert Valley Facility is guaranteed by Prime,
Desert Valley Medical Group, Inc., or DVMG, and Prime A
Investments, LLC, or Prime A. The Chino Facility lease is
guaranteed by Prime, Prime Healthcare Services, LLC, DVH and
DVMG. The Sherman Oaks Facility lease is fully guaranteed by
Prime, DVH, DVMG and Prime A until two years after the
commencement of the lease term, at which time the guarantee will
be limited to $5.0 million. This guaranty will be
terminated if Prime II achieves certain financial targets
for two consecutive fiscal years. DVH has provided to us
unaudited financial statements reflecting that, as of
September 30, 2005, it had tangible assets of approximately
$20.1 million, liabilities of approximately
$19.4 million and stockholders equity of
approximately $0.7 million, and for the nine months ended
September 30, 2005, had net income of approximately
$14.1 million. Prime has provided to us unaudited financial
statements showing that, as of September 30, 2005, it had
consolidated tangible assets of approximately
$53.8 million, consolidated liabilities of approximately
$23.2 million, and consolidated tangible net worth of
approximately $30.6 million and for the nine months ended
September 30, 2005, had consolidated net income of
approximately $15.1 million.
21
The leases for the Covington Facility and the Denham Springs
Facility are guaranteed by Gulf States and Team Rehab, L.L.C.,
or Team Rehab. Gulf States has provided to us unaudited
financial statements reflecting that, as of September 30,
2005, it had tangible assets of approximately
$19.1 million, liabilities of approximately
$9.9 million and stockholders equity of approximately
$9.2 million, and for the nine months ended
September 30, 2005 had net income of approximately
$0.8 million. Team Rehab has provided to us unaudited
financial statements reflecting that, as of September 30,
2005, it had tangible assets of approximately
$13.5 million, liabilities of approximately
$3.1 million and owners equity of approximately
$10.4 million, and for the nine months ended
September 30, 2005 had net income of approximately
$7.3 million. Guarantors of our leases with DVH and Gulf
States may not have sufficient assets for us to recover amounts
due to us under those leases. The failure of our tenants and
their guarantors to meet their obligations to us would have a
material adverse effect on our revenues and our ability to make
distributions to our stockholders. North Cypress is newly formed
and has had no significant operations to date. The ground
sublease and the facility leases related to the North Cypress
Facility require that, as of the commencement date of each
lease, the tenant shall have received from its equity owners at
least $15.0 million in cash equity. Until the necessary
letter of credit in an amount equal to one years base rent
is posted, our lease for the Bucks County Facility is
guaranteed to the extent of $5.0 million by 14 guarantors.
The guarantors have delivered financial statements which we
believe reflect the necessary financial wherewithal to satisfy
their guaranty obligations. Monroe Hospital has provided to us
unaudited financial statements reflecting that, as of
September 30, 2005, it had tangible assets of
$12.2 million, including cash of approximately
$3.2 million, liabilities of approximately
$3.4 million and owners equity of approximately
$8.9 million. The treasurer of Monroe Hospital also
certified at closing that the equity owners of Monroe Hospital
contributed to Monroe Hospital cash or cash equivalents in a
total amount of $9.75 million.
Our business is highly competitive and we may be unable to
compete successfully.
We compete for development opportunities and opportunities to
purchase healthcare facilities with, among others:
|
|
|
|
|
private investors; |
|
|
|
healthcare providers, including physicians; |
|
|
|
other REITs; |
|
|
|
real estate partnerships; |
|
|
|
financial institutions; and |
|
|
|
local developers. |
Many of these competitors have substantially greater financial
and other resources than we have and may have better
relationships with lenders and sellers. Competition for
healthcare facilities from competitors, including other REITs,
may adversely affect our ability to acquire or develop
healthcare facilities and the prices we pay for those
facilities. If we are unable to acquire or develop facilities or
if we pay too much for facilities, our revenue and earnings
growth and financial return could be materially adversely
affected. Certain of our facilities and additional facilities we
may acquire or develop will face competition from other nearby
facilities that provide services comparable to those offered at
our facilities and additional facilities we may acquire or
develop. Some of those facilities are owned by governmental
agencies and supported by tax revenues, and others are owned by
tax-exempt corporations and may be supported to a large extent
by endowments and charitable contributions. Those types of
support are not available to our facilities and additional
facilities we may acquire or develop. In addition, competing
healthcare facilities located in the areas served by our
facilities and additional facilities we may acquire or develop
may provide healthcare services that are not available at our
facilities and additional facilities we may acquire or develop.
From time to time, referral sources, including physicians and
managed care organizations, may change the healthcare facilities
to which they refer patients, which could adversely affect our
rental revenues.
22
Our use of debt financing will subject us to significant
risks, including refinancing risk and the risk of insufficient
cash available for distribution to our stockholders.
Our charter and other organizational documents do not limit the
amount of debt we may incur. We have targeted our debt level at
up to approximately 50-60% of our aggregate facility acquisition
and development costs. However, we may modify our target debt
level at any time without stockholder or board of director
approval. We cannot assure you that our use of financial
leverage will prove to be beneficial. In October 2005 we entered
into a $100.0 million credit agreement with Merrill Lynch
Capital, the principal amount of which may be increased to
$175.0 million at our request. We have also entered into
construction loan agreements with Colonial Bank pursuant to
which we can borrow up to $43.4 million. As of the date of
this prospectus, we had $100.5 million of long-term debt
outstanding.
We may borrow from other lenders in the future, or we may issue
corporate debt securities in public or private offerings. The
loans from Merrill Lynch Capital and Colonial Bank are secured
by the Vibra Facilities and the West Houston Facilities,
respectively. Some of our other borrowings in the future may be
secured by additional facilities we may acquire or develop. In
addition, in connection with debt financing from Merrill Lynch
Capital and Colonial Bank we are, and in connection with other
debt financing in the future we may be, subject to covenants
that may restrict our operations. We cannot assure you that we
will be able to meet our debt payment obligations or restrictive
covenants and, to the extent that we cannot, we risk the loss of
some or all of our facilities to foreclosure. In addition, debt
service obligations will reduce the amount of cash available for
distribution to our stockholders.
We anticipate that much of our debt will be non-amortizing and
payable in balloon payments. Therefore, we will likely need to
refinance at least a portion of that debt as it matures. There
is a risk that we may not be able to refinance then-existing
debt or that the terms of any refinancing will not be as
favorable as the terms of the then-existing debt. If principal
payments due at maturity cannot be refinanced, extended or
repaid with proceeds from other sources, such as new equity
capital or sales of facilities, our cash flow may not be
sufficient to repay all maturing debt in years when significant
balloon payments come due. Additionally, we may incur
significant penalties if we choose to prepay the debt.
Failure to hedge effectively against interest rate changes
may adversely affect our results of operations and our ability
to make distributions to our stockholders.
As of the date of this prospectus, we had approximately
$100.5 million in variable interest rate debt. We may seek
to manage our exposure to interest rate volatility by using
interest rate hedging arrangements that involve risk, including
the risk that counterparties may fail to honor their obligations
under these arrangements, that these arrangements may not be
effective in reducing our exposure to interest rate changes and
that these arrangements may result in higher interest rates than
we would otherwise have. Moreover, no hedging activity can
completely insulate us from the risks associated with changes in
interest rates. Failure to hedge effectively against interest
rate changes may materially adversely affect results of
operations and our ability to make distributions to our
stockholders.
Most of our current tenants have, and prospective tenants may
have, an option to purchase the facilities we lease to them
which could disrupt our operations.
Most of our current tenants have, and some prospective tenants
will have, the option to purchase the facilities we lease to
them. At the expiration of each lease for the Vibra Facilities,
each tenant will have the option to purchase the facility at a
purchase price equal to the greater of (i) the appraised
value of the facility, determined assuming the lease is still in
place, or (ii) the purchase price we paid for the facility,
including acquisition costs, increased by 2.5% per year from the
date of purchase. At any time after February 28, 2007, so
long as DVH, and its affiliates are not in default under any
lease with us or any of the leases with its subtenants, DVH will
have the option, upon 90 days prior written notice,
to purchase the Desert Valley Facility at a purchase price equal
to the sum of (i) the purchase price of the facility, and
(ii) that amount determined under a formula that would
provide us an internal rate of return of 10% per year, increased
by 2% of such percentage each year, taking into account all
payments of base rent received by us. These same purchase rights
also apply if we provide DVH with notice of the exercise of
23
our right to change management as a result of a default,
provided DVH gives us notice within five days following receipt
of such notice. If during the term of the lease we receive from
the previous owner or any of its affiliates, a written offer to
purchase the Desert Valley Facility and we are willing to accept
the offer, so long as DVH and its affiliates are not in default
under any lease with us or any of the subleases with its
subtenants, we must first present the offer to DVH and allow DVH
the right to purchase the facility upon the same price, terms
and conditions as set forth in the offer; however, if the offer
is made after February 28, 2007, in lieu of exercising its
right of first refusal, DVH may exercise its option to purchase
as provided above. So long as Gulf States is not in default
under any lease with us or in default under any sublease, Gulf
States will have the option to purchase the Covington Facility
or the Denham Springs Facility (i) at the expiration of the
initial term and each extension term of the respective lease, to
be exercised by 60 days written notice prior to the
expiration of the initial term and each extension term, and
(ii) within five days of written notification from us
exercising our right to terminate the engagement of the
tenants or its affiliates management company as the
management company for the facility as a result of an event of
default under the respective lease. The purchase price for
either of the Covington Facility or the Denham Springs Facility
purchase options will be equal to the greater of (i) the
appraised value of the facility based on a 15 year lease in
place, or (ii) the purchase price paid by us for the
facility, increased annually by an amount equal to the greater
of (A) 2.5% per annum from the date of the lease, or
(B) the rate of increase in the CPI on each January 1.
If we elect to purchase the North Cypress Facility upon
completion of construction, at the expiration of the facility
lease the tenant will have the option, so long as no event of
default has occurred, to purchase our interest in the property
leased pursuant to the facility lease at a purchase price equal
to the greater of (i) the appraised value of the leased
property or (ii) the purchase price paid by us to tenant
pursuant to the purchase and sale agreement relating to the
hospital improvements plus our interest in any capital additions
funded by us, as increased by the amount equal to the greater of
(A) 2.5% from the date of the facility lease execution or
(B) the rate of increase in the CPI as of each
January 1 which has passed during the lease term; provided
that in no event shall the purchase price be less than the fair
market value of the property leased. After the first full
12 month period after construction of the West Houston MOB
and the West Houston Hospital, respectively, as long as Stealth
is not in default under either of its leases with us or any of
the leases with its physician subtenants, it has the right to
purchase the West Houston MOB or the West Houston Hospital at a
price equal to the greater of (i) that amount determined
under a formula that would provide us an internal rate of return
of at least 18% and (ii) the appraised value based on a
15 year lease in place. Upon written notice to us within
90 days of the expiration of the applicable lease, as long
as Stealth is not in default under either of its leases with us
or any of the leases with its physician subtenants, Stealth will
have the option to purchase the West Houston MOB or the West
Houston Hospital at a price equal to the greater of (i) the
total development costs (including any capital additions funded
by us, but excluding any capital additions funded by Stealth)
increased by 2.5% per year, and (ii) the appraised value
based on a 15 year lease in place. The Stealth leases also
provide that under certain limited circumstances, Stealth will
have the right to present us with a choice of one out of three
proposed exchange facilities to be substituted for the leased
facility. At the expiration of the lease for the Bucks County
Facility, BCO will have the option, upon 60 days prior
written notice, to purchase the facility at a purchase price
equal to the greater of (i) the appraised value of the
facility, which assumes the lease remains in effect for
15 years, or (ii) the total development costs,
including any capital additions funded by us, as increased by an
amount equal to the greater of (A) 2.5% per annum from the
date of the lease, or (B) the rate of increase in the CPI
on each January 1. If we do not approve a change of control
transaction involving BCO, BCO will also have the option,
exercisable for 30 days after our failure to approve the
change of control, to purchase the facility at the greater of
(i) the above formula for the
end-of-lease-term
purchase option or (ii) an amount that would provide us an
internal rate of return of 13%. At the expiration of the lease
for the Monroe Facility, Monroe Hospital will have the option,
upon 60 days prior written notice, to purchase the facility
at a purchase price equal to the greater of (i) the
appraised value of the facility, which assumes the lease remains
in effect for 15 years, or (ii) the total development
costs, including any capital additions funded by us, as
increased by an amount equal to the greater of (A) 2.5% per
annum from the date of the lease, or (B) the rate of
increase in the CPI on each January 1. At any time after
November 30, 2008, so long as Veritas and its affiliates
are not in default under any lease with us or any of the leases
with its
24
subtenants, Veritas or Prime Healthcare Services, LLC will have
the option, upon 90 days prior written notice, to
purchase the Chino Facility at a purchase price equal to the sum
of (i) the purchase price of the facility, and
(ii) that amount determined under a formula that would
provide us an internal rate of return of 11% per year,
taking into account all payments of base rent received by us. In
addition, if we receive notice that the lease for the parking
lot adjacent to the Chino Facility will not be renewed beyond
December 2013, that our rights under the parking lot lease are
or will be terminated, or that the parking lot may not be used
for parking for the facility, we have the right, upon
90 days prior written notice, or the put notice, to
cause Veritas to purchase the Chino Facility and our interest in
the parking lot lease at a purchase price equal to the sum of
(i) the purchase price of the facility, and (ii) that
amount determined under a formula that would provide us an
internal rate of return of 11% per year, taking into
account all payments of base rent received by us. Upon receipt
of the put notice, however, Veritas has the right, within
30 days following the put notice, to substitute one or more
properties to be used for parking for the facility. We are not
obligated to accept any substitute property which does not
satisfy applicable zoning and use laws, ordinances, rules or
regulations or which, in our sole discretion, would create an
undue burden or inconvenience for parking at the facility. At
any time after the tenth anniversary of the commencement of the
lease term for the Sherman Oaks Facility, so long as
Prime II and its affiliates are not in default under any
lease with us or any of the leases with its subtenants,
Prime A will have the option, upon 90 days prior
written notice, to purchase the facility at a purchase price
equal to the sum of (i) the purchase price of the facility
(including any additional financing by us) and (ii) that
amount determined under a formula that would provide us an
internal rate of return of 11% per year, taking into account all
payments of base rent received by us, but in no event would this
amount be less than the purchase price. Prime A also has
the right at any time while the guaranty is outstanding to
petition to purchase the facility for the same purchase price,
and we would then have the option to release the guaranty or
sell the property. Finally, if there is a non-monetary default,
other than an intentional default, that occurs before the tenth
anniversary of the lease date, and we desire to terminate the
lease, Prime A would also have the option to purchase the
facility, but at an internal rate of return to us of 12.5%.
All of our arrangements which provide or will provide tenants
the option to purchase the facilities we lease to them are
subject to regulatory requirements that such purchases be at
fair market value. We cannot assure you that the formulas we
have developed for setting the purchase price will yield a fair
market value purchase price. Any purchase not at fair market
value may present risks of challenge from healthcare regulatory
authorities.
In the event our tenants and prospective tenants determine to
purchase the facilities they lease either during the lease term
or after their expiration, the timing of those purchases will be
outside of our control and we may not be able to re-invest the
capital on as favorable terms, or at all. Any of these purchases
would disrupt our cash flow by eliminating lease payments from
these tenants. Our inability to effectively manage the turn-over
of our facilities could materially adversely affect our ability
to execute our business plan and our results of operations.
Property owned in limited liability companies and
partnerships in which we are not the sole equity holder may
limit our ability to act exclusively in our interests.
We own, and in the future expect to own, interests in our
facilities through wholly or majority owned subsidiaries of our
operating partnership. Stealth, L.P., the tenant of our West
Houston Hospital, owns a 6% limited partnership interest in MPT
West Houston Hospital, L.P., which owns the West Houston
Hospital. Physicians and others associated with our tenant or
subtenants of the West Houston MOB own approximately 24% of the
aggregate equity interests in MPT West Houston MOB, L.P., the
entity that owns our West Houston MOB. We may offer limited
liability company and limited partnership interests to tenants,
subtenants and physicians in the future. Investments in
partnerships, limited liability companies or other entities with
co-owners may, under certain circumstances, involve risks not
present were a co-owner not involved, including the possibility
that partners or other co-owners might become bankrupt or fail
to fund their share of required capital contributions. Partners
or other co-owners may have economic or other business interests
or goals that are inconsistent with our business interests or
goals, and may be in a
25
position to take actions contrary to our policies or objectives.
Such investments may also have potential risks pertaining to
healthcare regulatory compliance, particularly when partners or
other co-owners are physicians, and of impasses on major
decisions, such as sales or mergers, because neither we nor our
partners or other co-owners would have full control over the
partnership, limited liability company or other entity. Disputes
between us and our partners or other co-owners may result in
litigation or arbitration that would increase our expenses and
prevent our officers and directors from focusing their time and
effort on our business. Consequently, actions by or disputes
with our partners or other co-owners might result in subjecting
facilities owned by the partnership, limited liability company
or other entity to additional risk. In addition, we may in
certain circumstances be liable for the actions of our partners
or other co-owners. The occurrence of any of the foregoing
events could have a material adverse effect on our results of
operations and our ability to make distributions to our
stockholders.
Terrorist attacks, such as the attacks that occurred in New
York and Washington, D.C. on September 11, 2001,
U.S. military action and the publics reaction to the
threat of terrorism or military action could adversely affect
our results of operations and the market on which our common
stock will trade.
There may be future terrorist threats or attacks against the
United States or U.S. businesses. These attacks may
directly impact the value of our facilities through damage,
destruction, loss or increased security costs. Losses due to
wars or terrorist attacks may be uninsurable, or insurance may
not be available at a reasonable price. More generally, any of
these events could cause consumer confidence and spending to
decrease or result in increased volatility in the United States
and worldwide financial markets and economies.
Risks Relating to Real Estate Investments
Our real estate investments are and will continue to be
concentrated in net-leased healthcare facilities, making us more
vulnerable economically than if our investments were more
diversified.
We have acquired and are developing and expect to continue
acquiring and developing net-leased healthcare facilities. We
are subject to risks inherent in concentrating investments in
real estate. The risks resulting from a lack of diversification
become even greater as a result of our business strategy to
invest in net-leased healthcare facilities. A downturn in the
real estate industry could materially adversely affect the value
of our facilities. A downturn in the healthcare industry could
negatively affect our tenants ability to make lease or
loan payments to us and, consequently, our ability to meet debt
service obligations or make distributions to our stockholders.
These adverse effects could be more pronounced than if we
diversified our investments outside of real estate or outside of
healthcare facilities.
Our net-leased facilities and targeted net-leased facilities
may not have efficient alternative uses, which could impede our
ability to find replacement tenants in the event of termination
or default under our leases.
All of the facilities in our current portfolio are and all of
the facilities we acquire or develop in the future will be
net-leased healthcare facilities. If we or our tenants terminate
the leases for these facilities or if these tenants lose their
regulatory authority to operate these facilities, we may not be
able to locate suitable replacement tenants to lease the
facilities for their specialized uses. Alternatively, we may be
required to spend substantial amounts to adapt the facilities to
other uses. Any loss of revenues or additional capital
expenditures occurring as a result could have a material adverse
effect on our financial condition and results of operations and
could hinder our ability to meet debt service obligations or
make distributions to our stockholders.
26
Illiquidity of real estate investments could significantly
impede our ability to respond to adverse changes in the
performance of our facilities and harm our financial
condition.
Real estate investments are relatively illiquid. Our ability to
quickly sell or exchange any of our facilities in response to
changes in economic and other conditions will be limited. No
assurances can be given that we will recognize full value for
any facility that we are required to sell for liquidity reasons.
Our inability to respond rapidly to changes in the performance
of our investments could adversely affect our financial
condition and results of operations.
Development and construction risks could adversely affect our
ability to make distributions to our stockholders.
We are developing a womens hospital and integrated medical
office building in Bensalem, Pennsylvania which we expect to be
completed in August 2006, developing a community hospital in
Bloomington, Indiana which we expect to be completed in October
2006 and financing the development of a community hospital in
Houston, Texas which we expect to be completed in December 2006.
We expect to develop additional facilities in the future. Our
development and related construction activities may subject us
to the following risks:
|
|
|
|
|
we may have to compete for suitable development sites; |
|
|
|
our ability to complete construction is dependent on there being
no title, environmental or other legal proceedings arising
during construction; |
|
|
|
we may be subject to delays due to weather conditions, strikes
and other contingencies beyond our control; |
|
|
|
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; |
|
|
|
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 |
|
|
|
we may not be able to obtain financing on favorable terms, which
may render us unable to proceed with our development activities. |
We expect to fund our development projects over time.
Additionally, the time frame required for development and
construction of these facilities means that we may have to wait
years for a significant cash return. Because we are required to
make cash distributions to our stockholders, if the cash flow
from operations or refinancings is not sufficient, we may be
forced to borrow additional money to fund distributions. We
cannot assure you that we will complete our current construction
projects on time or within budget or that future development
projects will not be subject to delays and cost overruns. Risks
associated with our development projects may reduce anticipated
rental revenue which could affect the timing of, and our ability
to make, distributions to our stockholders.
Our facilities may not achieve expected results or we may be
limited in our ability to finance future acquisitions, which may
harm our financial condition and operating results and our
ability to make the distributions to our stockholders required
to maintain our REIT status.
Acquisitions and developments entail risks that investments will
fail to perform in accordance with expectations and that
estimates of the costs of improvements necessary to acquire and
develop facilities will prove inaccurate, as well as general
investment risks associated with any new real estate investment.
We anticipate that future acquisitions and developments will
largely be financed through externally generated funds such as
borrowings under credit facilities and other secured and
unsecured debt financing and from issuances of equity
securities. Because we must distribute at least 90% of our REIT
taxable income, excluding net capital gain, each year to
maintain our qualification as a REIT, our ability to rely upon
income from operations or cash flow from operations to finance
our growth and acquisition activities
27
will be limited. Accordingly, if we are unable to obtain funds
from borrowings or the capital markets to finance our
acquisition and development activities, our ability to grow
would likely be curtailed, amounts available for distribution to
stockholders could be adversely affected and we could be
required to reduce distributions, thereby jeopardizing our
ability to maintain our status as a REIT.
Newly-developed or newly-renovated facilities do not have the
operating history that would allow our management to make
objective pricing decisions in acquiring these facilities
(including facilities that may be acquired from certain of our
executive officers, directors and their affiliates). The
purchase prices of these facilities will be based in part upon
projections by management as to the expected operating results
of the facilities, subjecting us to risks that these facilities
may not achieve anticipated operating results or may not achieve
these results within anticipated time frames.
If we suffer losses that are not covered by insurance or that
are in excess of our insurance coverage limits, we could lose
investment capital and anticipated profits.
We have purchased general liability insurance (lessors
risk) that provides coverage for bodily injury and property
damage to third parties resulting from our ownership of the
healthcare facilities that are leased to and occupied by our
tenants. Our leases generally require our tenants to carry
general liability, professional liability, loss of earnings, all
risk, and extended coverage insurance in amounts sufficient to
permit the replacement of the facility in the event of a total
loss, subject to applicable deductibles. However, there are
certain types of losses, generally of a catastrophic nature,
such as earthquakes, floods, hurricanes and acts of terrorism,
that may be uninsurable or not insurable at a price we or our
tenants can afford. Inflation, changes in building codes and
ordinances, environmental considerations and other factors also
might make it impracticable to use insurance proceeds to replace
a facility after it has been damaged or destroyed. Under such
circumstances, the insurance proceeds we receive might not be
adequate to restore our economic position with respect to the
affected facility. If any of these or similar events occur, it
may reduce our return from the facility and the value of our
investment.
Capital expenditures for facility renovation may be greater
than anticipated and may adversely impact rent payments by our
tenants and our ability to make distributions to
stockholders.
Facilities, particularly those that consist of older structures,
have an ongoing need for renovations and other capital
improvements, including periodic replacement of furniture,
fixtures and equipment. Although our leases require our tenants
to be primarily responsible for the cost of such expenditures,
renovation of facilities involves certain risks, including the
possibility of environmental problems, construction cost
overruns and delays, uncertainties as to market demand or
deterioration in market demand after commencement of renovation
and the emergence of unanticipated competition from other
facilities. All of these factors could adversely impact rent and
loan payments by our tenants, could have a material adverse
effect on our financial condition and results of operations and
could adversely effect our ability to make distributions to our
stockholders.
All of our healthcare facilities are subject to property
taxes that may increase in the future and adversely affect our
business.
Our facilities are subject to real and personal property taxes
that may increase as property tax rates change and as the
facilities are assessed or reassessed by taxing authorities. Our
leases generally provide that the property taxes are charged to
our tenants as an expense related to the facilities that they
occupy. As the owner of the facilities, however, we are
ultimately responsible for payment of the taxes to the
government. If property taxes increase, our tenants may be
unable to make the required tax payments, ultimately requiring
us to pay the taxes. If we incur these tax liabilities, our
ability to make expected distributions to our stockholders could
be adversely affected.
28
Our performance and the price of our common stock will be
affected by risks associated with the real estate industry.
Factors that may adversely affect the economic performance and
price of our common stock include:
|
|
|
|
|
changes in the national, regional and local economic climate,
including but not limited to changes in interest rates; |
|
|
|
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. |
|
|
|
attractiveness of our facilities to healthcare providers and
other types of tenants; and |
|
|
|
competition from other rehabilitation hospitals, long-term acute
care facilities, medical office buildings, outpatient treatment
facilities, ambulatory surgery centers and specialty hospitals,
skilled nursing facilities, regional and community hospitals,
womens and childrens hospitals and other
single-discipline facilities. |
As the owner and lessor of real estate, we are subject to
risks under environmental laws, the cost of compliance with
which and any violation of which could materially adversely
affect us.
Our operating expenses could be higher than anticipated due to
the cost of complying with existing and future environmental and
occupational health and safety laws and regulations. Various
environmental laws may impose liability on a current or prior
owner or operator of real property for removal or remediation of
hazardous or toxic substances. Current or prior owners or
operators may also be liable for government fines and damages
for injuries to persons, natural resources and adjacent
property. These environmental laws often impose liability
whether or not the owner or operator knew of, or was responsible
for, the presence or disposal of the hazardous or toxic
substances. The cost of complying with environmental laws could
materially adversely affect amounts available for distribution
to our stockholders and could exceed the value of all of our
facilities. In addition, the presence of hazardous or toxic
substances, or the failure of our tenants to properly dispose of
or remediate such substances, including medical waste generated
by physicians and our other healthcare tenants, may adversely
affect our tenants or our ability to use, sell or rent such
property or to borrow using such property as collateral which,
in turn, could reduce our revenue and our financing ability. We
have obtained on all facilities we have acquired and are
developing and intend to obtain on all future facilities we
acquire Phase I environmental assessments. However, even if the
Phase I environmental assessment reports do not reveal any
material environmental contamination, it is possible that
material environmental liabilities may exist of which we are
unaware.
Although the leases for our facilities generally require our
tenants to comply with laws and regulations governing their
operations, including the disposal of medical waste, and to
indemnify us for certain environmental liabilities, the scope of
their obligations may be limited. We cannot assure you that our
tenants would be able to fulfill their indemnification
obligations and, therefore, any violation of environmental laws
could have a material adverse affect on us. In addition,
environmental and occupational health and safety laws constantly
are evolving, and changes in laws, regulations or policies, or
changes in interpretations of the foregoing, could create
liabilities where none exists today.
Costs associated with complying with the Americans with
Disabilities Act of 1993 may adversely affect our financial
condition and operating results.
Under the Americans with Disabilities Act of 1993, all public
accommodations are required to meet certain federal requirements
related to access and use by disabled persons. While our
facilities are generally in compliance with these requirements,
a determination that we are not in compliance with the Americans
with Disabilities Act of 1993 could result in imposition of
fines or an award of damages to private litigants. In addition,
changes in governmental rules and regulations or enforcement
policies
29
affecting the use and operation of the facilities, including
changes to building codes and fire and life-safety codes, may
occur. If we are required to make substantial modifications at
our facilities to comply with the Americans with Disabilities
Act of 1993 or other changes in governmental rules and
regulations, this may have a material adverse effect on our
financial condition and results of operations and could
adversely affect our ability to make distributions to our
stockholders.
Our facilities may contain or develop harmful mold or suffer
from other air quality issues, which could lead to liability for
adverse health effects and costs of remediating the problem.
When excessive moisture accumulates in buildings or on building
materials, mold growth may occur, particularly if the moisture
problem remains undiscovered or is not addressed over a period
of time. Some molds may produce airborne toxins or irritants.
Indoor air quality issues can also stem from inadequate
ventilation, chemical contamination from indoor or outdoor
sources and other biological contaminants such as pollen,
viruses and bacteria. Indoor exposure to airborne toxins or
irritants above certain levels can be alleged to cause a variety
of adverse health effects and symptoms, including allergic or
other reactions. As a result, the presence of significant mold
or other airborne contaminants at any of our facilities could
require us to undertake a costly remediation program to contain
or remove the mold or other airborne contaminants from the
affected facilities or increase indoor ventilation. In addition,
the presence of significant mold or other airborne contaminants
could expose us to liability from our tenants, employees of our
tenants and others if property damage or health concerns arise.
Our interests in facilities through ground leases expose us
to the loss of the facility upon breach or termination of the
ground lease and may limit our use of the facility.
We have acquired interests in two of our facilities, at least in
part, and one facility under development, by acquiring leasehold
interests in the land on which the facility is or the facility
under development will be located rather than an ownership
interest in the property, and we may acquire additional
facilities in the future through ground leases. As lessee under
ground leases, we are exposed to the possibility of losing the
property upon termination, or an earlier breach by us, of the
ground lease. Ground leases may also restrict our use of
facilities. Our current ground lease in Marlton, New Jersey
limits use of the property to operation of a 76 bed
rehabilitation hospital. Our current ground lease for the
Redding Facility limits use of the property to operation of a
hospital offering the following services: skilled nursing;
physical rehabilitation; occupational therapy; speech pathology;
social services; assisted living; day health programs; long-term
acute care services; psychiatric services; geriatric clinic
services; outpatient services related to the foregoing service
categories; and other post-acute services. These restrictions
and any similar future restrictions in ground leases will limit
our flexibility in renting the facility and may impede our
ability to sell the property.
Risks Relating to the Healthcare Industry
Reductions in reimbursement from third-party payors,
including Medicare and Medicaid, could adversely affect the
profitability of our tenants and hinder their ability to make
rent payments to us.
Sources of revenue for our tenants and operators may include the
federal Medicare program, state Medicaid programs, private
insurance carriers and health maintenance organizations, among
others. Efforts by such payors to reduce healthcare costs will
likely continue, which may result in reductions or slower growth
in reimbursement for certain services provided by some of our
tenants. In addition, the failure of any of our tenants to
comply with various laws and regulations could jeopardize their
ability to continue participating in Medicare, Medicaid and
other government-sponsored payment programs.
The healthcare industry continues to face various challenges,
including increased government and private payor pressure on
healthcare providers to control or reduce costs. We believe that
our tenants will continue to experience a shift in payor mix
away from fee-for-service payors, resulting in an increase in
the percentage of revenues attributable to managed care payors,
government payors and general industry trends
30
that include pressures to control healthcare costs. Pressures to
control healthcare costs and a shift away from traditional
health insurance reimbursement have resulted in an increase in
the number of patients whose healthcare coverage is provided
under managed care plans, such as health maintenance
organizations and preferred provider organizations. In addition,
due to the aging of the population and the expansion of
governmental payor programs, we anticipate that there will be a
marked increase in the number of patients reliant on healthcare
coverage provided by governmental payors. These changes could
have a material adverse effect on the financial condition of
some or all of our tenants, which could have a material adverse
effect on our financial condition and results of operations and
could negatively affect our ability to make distributions to our
stockholders.
The healthcare industry is heavily regulated and existing and
new laws or regulations, changes to existing laws or
regulations, loss of licensure or certification or failure to
obtain licensure or certification could result in the inability
of our tenants to make lease payments to us.
The healthcare industry is highly regulated by federal, state
and local laws, and is directly affected by federal conditions
of participation, state licensing requirements, facility
inspections, state and federal reimbursement policies,
regulations concerning capital and other expenditures,
certification requirements and other such laws, regulations and
rules. In addition, establishment of healthcare facilities and
transfers of operations of healthcare facilities are subject to
regulatory approvals not required for establishment of or
transfers of other types of commercial operations and real
estate. Sanctions for failure to comply with these regulations
and laws include, but are not limited to, loss of or inability
to obtain licensure, fines and loss of or inability to obtain
certification to participate in the Medicare and Medicaid
programs, as well as potential criminal penalties. The failure
of any tenant to comply with such laws, requirements and
regulations could affect its ability to establish or continue
its operation of the facility or facilities and could adversely
affect the tenants ability to make lease payments to us
which could have a material adverse effect on our financial
condition and results of operations and could negatively affect
our ability to make distributions to our stockholders. In
addition, restrictions and delays in transferring the operations
of healthcare facilities, in obtaining new third-party payor
contracts including Medicare and Medicaid provider agreements,
and in receiving licensure and certification approval from
appropriate state and federal agencies by new tenants may affect
our ability to terminate lease agreements, remove tenants that
violate lease terms, and replace existing tenants with new
tenants. Furthermore, these matters may affect new tenants
ability to obtain reimbursement for services rendered, which
could adversely affect their ability to pay rent to us and to
pay principal and interest on their loans from us.
Adverse trends in healthcare provider operations may
negatively affect our lease revenues and our ability to make
distributions to our stockholders.
We believe that the healthcare industry is currently
experiencing:
|
|
|
|
|
changes in the demand for and methods of delivering healthcare
services; |
|
|
|
changes in third-party reimbursement policies; |
|
|
|
significant unused capacity in certain areas, which has created
substantial competition for patients among healthcare providers
in those areas; |
|
|
|
continuing pressure by private and governmental payors to reduce
payments to providers of services; and |
|
|
|
increased scrutiny by federal and state authorities of billing,
referral and other practices. |
These factors may adversely affect the economic performance of
some or all of our tenants and, in turn, our revenues.
Accordingly, these factors could have a material adverse effect
on our financial condition and results of operations and could
negatively affect our ability to make distributions to our
stockholders.
31
Our tenants are subject to fraud and abuse laws, the
violation of which by a tenant may jeopardize the tenants
ability to make lease and loan payments to us.
The federal government and numerous state governments have
passed laws and regulations that attempt to eliminate healthcare
fraud and abuse by prohibiting business arrangements that induce
patient referrals or the ordering of specific ancillary
services. In addition, the Balanced Budget Act of 1997
strengthened the federal anti-fraud and abuse laws to provide
for stiffer penalties for violations. Violations of these laws
may result in the imposition of criminal and civil penalties,
including possible exclusion from federal and state healthcare
programs. Imposition of any of these penalties upon any of our
tenants could jeopardize any tenants ability to operate a
facility or to make lease and loan payments, thereby potentially
adversely affecting us.
In the past several years, federal and state governments have
significantly increased investigation and enforcement activity
to detect and eliminate fraud and abuse in the Medicare and
Medicaid programs. In addition, legislation has been adopted at
both state and federal levels which severely restricts the
ability of physicians to refer patients to entities in which
they have a financial interest. It is anticipated that the trend
toward increased investigation and enforcement activity in the
area of fraud and abuse, as well as self-referrals, will
continue in future years and could adversely affect our
prospective tenants and their operations, and in turn their
ability to make lease and loan payments to us.
We cannot assure you that we will meet all the conditions for
the safe harbor for space rental in structuring lease
arrangements involving facilities in which local physicians are
investors and tenants, and it is unlikely that we will meet all
conditions for the safe harbor in those instances in which
percentage rent is contemplated and we have physician investors.
In addition, federal regulations require that our tenants with
purchase options pay fair market value purchase prices for
facilities in which we have physician investment. We cannot
assure you that all of our purchase options will be at fair
market value. Any purchase not at fair market value may present
risks of challenge from healthcare regulatory authorities.
Vibra has accepted, and prospective tenants may accept, an
assignment of the previous operators Medicare provider
agreement. Vibra and other new-operator tenants that take
assignment of Medicare provider agreements might be subject to
federal or state regulatory, civil and criminal investigations
of the previous owners operations and claims submissions.
While we conduct due diligence in connection with the
acquisition of such facilities, these types of issues may not be
discovered prior to purchase. Adverse decisions, fines or
recoupments might negatively impact our tenants financial
condition.
Certain of our lease arrangements may be subject to fraud and
abuse or physician self-referral laws.
Local physician investment in our operating partnership or our
subsidiaries that own our facilities could subject our lease
arrangements to scrutiny under fraud and abuse and physician
self-referral laws. Under the federal Ethics in Patient
Referrals Act of 1989, or Stark Law, and regulations adopted
thereunder, if our lease arrangements do not satisfy the
requirements of an applicable exception, that noncompliance
could adversely affect the ability of our tenants to bill for
services provided to Medicare beneficiaries pursuant to
referrals from physician investors and subject us and our
tenants to fines, which could impact their ability to make lease
and loan payments to us. On March 26, 2004, CMS issued
Phase II final rules under the Stark Law, which, together
with the 2001 Phase I final rules, set forth CMS
current interpretation and application of the Stark Law
prohibition on referrals of designated health services, or DHS.
These rules provide us additional guidance on application of the
Stark Law through the implementation of bright-line
tests, including additional regulations regarding the indirect
compensation exception, but do not eliminate the risk that our
lease arrangements and business strategy of physician investment
may violate the Stark Law. Finally, the Phase II rules
implemented an 18-month moratorium on physician ownership or
investment in specialty hospitals imposed by the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003.
Although the moratorium imposed by the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 expired on
June 8, 2005, a bill introduced in the Senate essentially
would make the moratorium on physician ownership or investment
in specialty hospitals permanent with limited exceptions. If
enacted, the law would have a retroactive effective date of
June 8, 2005. We intend to use our good faith efforts to
structure our lease arrangements
32
to comply with these laws; however, if we are unable to do so,
this failure may restrict our ability to permit physician
investment or, where such physicians do participate, may
restrict the types of lease arrangements into which we may
enter, including our ability to enter into percentage rent
arrangements.
State certificate of need laws may adversely affect our
development of facilities and the operations of our tenants.
Certain healthcare facilities in which we invest may also be
subject to state laws which require regulatory approval in the
form of a certificate of need prior to initiation of certain
projects, including, but not limited to, the establishment of
new or replacement facilities, the addition of beds, the
addition or expansion of services and certain capital
expenditures. State certificate of need laws are not uniform
throughout the United States and are subject to change. We
cannot predict the impact of state certificate of need laws on
our development of facilities or the operations of our tenants.
In addition, certificate of need laws often materially impact
the ability of competitors to enter into the marketplace of our
facilities. Finally, in limited circumstances, loss of state
licensure or certification or closure of a facility could
ultimately result in loss of authority to operate the facility
and require
re-licensure or new
certificate of need authorization to re-institute operations. As
a result, a portion of the value of the facility may be related
to the limitation on new competitors. In the event of a change
in the certificate of need laws, this value may markedly
decrease.
Risks Relating to Our Organization and Structure
Maryland law, our charter and our bylaws contain provisions
which may prevent or deter changes in management and third-party
acquisition proposals that you may believe to be in your best
interest, depress our stock price or cause dilution.
Our charter contains ownership limitations that may restrict
business combination opportunities, inhibit change of control
transactions and reduce the value of our stock. To qualify
as a REIT under the Code, no more than 50% in value of our
outstanding stock, after taking into account options to acquire
stock, may be owned, directly or indirectly, by five or fewer
persons during the last half of each taxable year, other than
our first REIT taxable year. Our charter generally prohibits
direct or indirect ownership by any person of more than 9.8% in
value or in number, whichever is more restrictive, of
outstanding shares of any class or series of our securities,
including our common stock. Generally, common stock owned by
affiliated owners will be aggregated for purposes of the
ownership limitation. Any transfer of our common stock that
would violate the ownership limitation will be null and void,
and the intended transferee will acquire no rights in such
stock. Instead, such common stock will be designated as
shares-in-trust and transferred automatically to a
trust effective on the day before the purported transfer of such
stock. The beneficiary of that trust will be one or more
charitable organizations named by us. The ownership limitation
could have the effect of delaying, deterring or preventing a
change in control or other transaction in which holders of
common stock might receive a premium for their common stock over
the then-current market price or which such holders otherwise
might believe to be in their best interests. The ownership
limitation provisions also may make our common stock an
unsuitable investment vehicle for any person seeking to obtain,
either alone or with others as a group, ownership of more than
9.8% of either the value or number of the outstanding shares of
our common stock. Our board of directors, in its sole
discretion, may waive or modify, subject to limitations, the
ownership limit with respect to one or more stockholders if it
is satisfied that ownership in excess of their limit will not
jeopardize our status as a REIT. See Description of
Capital Stock Restrictions on Ownership and
Transfer.
Certain provisions of Maryland law may limit the ability of a
third party to acquire control of our company. Certain
provisions of the Maryland General Corporation Law, or the MGCL,
could have the effect of inhibiting a third party from making a
proposal to acquire us or of impeding a change of control
33
under circumstances that otherwise could provide the holders of
shares of our common stock with the opportunity to realize a
premium over the then-prevailing market price of such shares,
including:
|
|
|
|
|
business combination provisions that, subject to
limitations, prohibit certain business combinations between us
and an interested stockholder (defined generally as
a person who beneficially owns 10% or more of the voting power
of our shares or an affiliate thereof) for five years after the
most recent date on which the stockholder becomes an interested
stockholder, and thereafter imposes special appraisal rights and
special stockholder voting requirements on these combinations;
and |
|
|
|
control share provisions that provide that
control shares of our company (defined as shares
which, when aggregated with other shares controlled by the
stockholder, entitle the stockholder to exercise one of three
increasing ranges of voting power in electing directors)
acquired in a control share acquisition (defined as
the direct or indirect acquisition of ownership or control of
control shares) have no voting rights except to the
extent approved by our stockholders by the affirmative vote of
the holders of at least two-thirds of all the votes entitled to
be cast on the matter, excluding all interested shares. |
We have opted out of these provisions of the MGCL pursuant to
provisions in our charter. However, we may, by amendment to our
charter with approval of our stockholders, opt in to the
business combination and control share provisions of the MGCL in
the future.
Additionally, Title 8, Subtitle 3 of the MGCL permits
our board of directors, without stockholder approval and
regardless of what is currently provided in our charter and our
amended and restated bylaws, or bylaws, to implement takeover
defenses, some of which (for example, a classified board) we do
not presently have. These provisions may have the effect of
inhibiting a third party from making an acquisition proposal for
our company or of delaying, deferring or preventing a change of
control of our company under circumstances that otherwise could
provide the holders of our common stock with the opportunity to
realize a premium over the then-current market price of our
common stock.
Maryland law does not impose heightened standards or greater
scrutiny on directors in takeover situations. The MGCL provides
that an act of a director relating to or affecting an
acquisition or potential acquisition of control of a corporation
may not be subject to a higher duty or greater scrutiny than is
applied to any other act of a director. Therefore, directors of
a Maryland corporation are not required to act in the same
manner as directors of a Delaware corporation in takeover
situations.
Our charter and bylaws contain provisions that may impede
third-party acquisition proposals that may be in your best
interests. Our charter and bylaws also provide that our
directors may only be removed by the affirmative vote of the
holders of two-thirds of our stock, that stockholders are
required to give us advance notice of director nominations and
new business to be conducted at our annual meetings of
stockholders and that special meetings of stockholders can only
be called by our president, our board of directors or the
holders of at least 25% of stock entitled to vote at the
meetings. These and other charter and bylaw provisions may delay
or prevent a change of control or other transaction in which
holders of our common stock might receive a premium for their
common stock over the then-current market price or which such
holders otherwise might believe to be in their best interests.
Our board of directors may issue additional shares that may
cause dilution and could deter change of control transactions
that you may believe to be in your best interest. Our
charter authorizes our board, without stockholder approval, to:
|
|
|
|
|
issue up to 10,000,000 shares of preferred stock, having
preferences, conversion or other rights, voting powers,
restrictions, limitations as to distribution, qualifications, or
terms or conditions of redemption as determined by the board; |
|
|
|
amend the charter to increase or decrease the aggregate number
of shares of capital stock or the number of shares of stock of
any class or series that we have the authority to issue; |
|
|
|
cause us to issue additional authorized but unissued shares of
common stock or preferred stock; and |
34
|
|
|
|
|
classify or reclassify any unissued shares of common or
preferred stock by setting or changing in any one or more
respects, from time to time before the issuance of such shares,
the preferences, conversion or other rights and other terms of
such classified or reclassified shares, including the issuance
of additional shares of common stock or preferred stock that
have preference rights over the common stock with respect to
dividends, liquidation, voting and other matters. |
We depend on key personnel, the loss of any one of whom may
threaten our ability to operate our business successfully.
We depend on the services of Edward K. Aldag, Jr., William G.
McKenzie, Emmett E. McLean, R. Steven Hamner and Michael G.
Stewart to carry out our business and investment strategy. If we
were to lose any of these executive officers, it may be more
difficult for us to locate attractive acquisition targets,
complete our acquisitions and manage the facilities that we have
acquired or are developing. Additionally, as we expand, we will
continue to need to attract and retain additional qualified
officers and employees. The loss of the services of any of our
executive officers, or our inability to recruit and retain
qualified personnel in the future, could have a material adverse
effect on our business and financial results.
We may experience conflicts of interest with our officers and
directors, which could result in our officers and directors
acting other than in our best interest.
As described below, our officers and directors may have
conflicts of interest in connection with their duties to us and
the limited partners of our operating partnership and with
allocation of their time between our business and affairs and
their other business interests. In addition, from time to time,
we may acquire or develop facilities in transactions involving
prospective tenants in which our directors or officers have an
interest. In transactions of this nature, there will be
conflicts between our interests and the interests of the
director or officer involved, and that director or officer may
be in a position to influence the terms of those transactions.
In the event we purchase properties from executive officers or
directors in exchange for units of limited partnership in our
operating partnership, the interests of those persons with the
interests of the company may conflict. Where a unitholder has
unrealized gains associated with his limited partnership
interests in our operating partnership, these holders may incur
adverse tax consequences in the event of a sale or refinancing
of those properties. Therefore the interest of these executive
officers or directors of our company could be different from the
interests of the company in connection with the disposition or
refinancing of a property. Conflicts of interest with our
officers and directors could result in our officers and
directors acting other than in our best interest.
The MGCL provides that a transaction between a corporation and
any of its directors is not void solely because of a conflict of
interest so long as (i) the material facts are made known
to the other directors and the transaction is approved by a
majority of disinterested directors, even if less than a quorum;
(ii) the material facts are made known to stockholders and
the transaction is approved by a majority of votes cast by
disinterested stockholders; or (iii) the transaction is
fair and reasonable to the corporation.
Our executive officers have agreements that provide them with
benefits in the event their employment is terminated by us
without cause, by the executive for good reason, or under
certain circumstances following a change of control transaction
that you may believe to be in your best interest.
We have entered into agreements with certain of our executive
officers that provide them with severance benefits if their
employment is terminated by us without cause, by them for good
reason (which includes, among other reasons, failure to be
elected to the board for Mr. Aldag and failure to have
their agreements automatically renewed for Messrs. Aldag,
McLean, Hamner, McKenzie and Stewart), or under certain
circumstances following a change of control of our company.
Certain of these benefits and the related tax indemnity could
prevent or deter a change of control of our company that might
involve a premium price for our common stock or otherwise be in
the best interests of our stockholders.
35
The vice chairman of our board of directors, William G.
McKenzie, has other business interests that may hinder his
ability to allocate sufficient time to the management of our
operations, which could jeopardize our ability to execute our
business plan.
Our employment agreement with the vice chairman of our board of
directors, Mr. McKenzie, permits him to continue to own,
operate and control facilities that he owned as of the date of
his employment agreement and requires that he only provide a
limited amount of his time per month to our company. In
addition, the terms of Mr. McKenzies employment
agreement permit him to compete against us with respect to these
previously owned healthcare facilities.
All management rights are vested in our board of directors
and our stockholders have limited rights.
Our board of directors is responsible for our management and
strategic business direction, and management is responsible for
our day-to-day operations. Our major policies, including our
policies with respect to REIT qualification, acquisitions and
developments, leasing, financing, growth, operations, debt
limitation and distributions, are determined by our board of
directors. Our board of directors may amend or revise these and
other policies from time to time without a vote of our
stockholders. Investment and operational policy changes could
adversely affect the market price of our common stock and our
ability to make distributions to our stockholders.
The ability of our board of directors to revoke our REIT
status without stockholder approval may cause adverse
consequences to our stockholders.
Our charter provides that our board of directors may revoke or
otherwise terminate our REIT election, without the approval of
our stockholders, if it determines that it is no longer in our
best interest to continue to qualify as a REIT. If we cease to
be a REIT, we would become subject to federal income tax on our
taxable income and would no longer be required to distribute
most of our taxable income to our stockholders, which may have
adverse consequences on total return to our stockholders.
Our rights and the rights of our stockholders to take action
against our directors and officers are limited.
Maryland law provides that a director or officer has no
liability in that capacity if he or she performs his or her
duties in good faith, in a manner he or she reasonably believes
to be in our best interests and with the care that an ordinarily
prudent person in a like position would use under similar
circumstances. In addition, our charter eliminates our
directors and officers liability to us and our
stockholders for money damages except for liability resulting
from actual receipt of an improper benefit in money, property or
services or active and deliberate dishonesty established by a
final judgment and which is material to the cause of action. Our
bylaws and indemnification agreements require us to indemnify
our directors and officers for liability resulting from actions
taken by them in those capacities to the maximum extent
permitted by Maryland law. As a result, we and our stockholders
may have more limited rights against our directors and officers
than might otherwise exist under common law. In addition, we may
be obligated to fund the defense costs incurred by our directors
and officers. See Certain Provisions of Maryland Law and
of Our Charter and Bylaws Indemnification and
Limitation of Directors and Officers
Liability. Directors may be removed with or without cause
by the affirmative vote of the holders of two-thirds of the
votes entitled to be cast in the election of directors.
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,
36
when the interests of limited partners in our operating
partnership conflict with the interests of our stockholders. As
the general partner of our operating partnership, we have
fiduciary duties to the limited partners of our operating
partnership that may conflict with fiduciary duties our officers
and directors owe to our stockholders. These conflicts may
result in decisions that are not in your best interest.
Through a wholly-owned subsidiary, we are the general partner
of our operating partnership and our operating partnership,
through wholly-owned subsidiaries, is the general partner of
other subsidiaries which own our facilities and, should any of
these wholly-owned general partners be disregarded, then we or
our operating partnership could become liable for the debts and
other obligations of our subsidiaries beyond the amount of our
investment.
Through our wholly-owned subsidiary, Medical Properties Trust,
LLC, we are the sole general partner of our operating
partnership, and also currently own 100% of the limited
partnership interests in the operating partnership. In addition,
our operating partnership, through other wholly-owned
subsidiaries, is the general partner of other subsidiaries which
own our facilities. If any of our wholly-owned subsidiaries
which act as general partner were disregarded, we would be
liable for the debts and other obligations of the subsidiaries
that own our facilities. In such event, if any of these
subsidiaries were unable to pay their debts and other
obligations, we would be liable for such debts and other
obligations beyond the amount of our investment in these
subsidiaries. These obligations could include unforeseen
contingent liabilities.
Tax Risks Associated With Our Status as a REIT
Loss of our tax status as a REIT would have significant
adverse consequences to us and the value of our common stock.
We believe that we qualify as a REIT for federal income tax
purposes and have elected to be taxed as a REIT under the
federal income tax laws commencing with our taxable year that
began on April 6, 2004 and ended on December 31, 2004.
Our qualification as a REIT depends on our ability to meet
various requirements concerning, among other things, the
ownership of our outstanding common stock, the nature of our
assets, the sources of our income and the amount of our
distributions to our stockholders. The REIT qualification
requirements are extremely complex, and interpretations of the
federal income tax laws governing qualification as a REIT are
limited. Accordingly, there is no assurance that we will be
successful in operating so as to qualify as a REIT. At any time,
new laws, regulations, interpretations or court decisions may
change the federal tax laws relating to, or the federal income
tax consequences of, qualification as a REIT. It is possible
that future economic, market, legal, tax or other considerations
may cause our board of directors to revoke the REIT election,
which it may do without stockholder approval.
If we lose or revoke our REIT status, we will face serious tax
consequences that will substantially reduce the funds available
for distribution because:
|
|
|
|
|
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.
37
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:
|
|
|
|
|
85% of our ordinary income for that year; |
|
|
|
95% of our capital gain net income for that year; and |
|
|
|
100% of our undistributed taxable income from prior years. |
We intend to pay out our income to our stockholders in a manner
that satisfies the distribution requirement and avoids corporate
income tax and the 4% excise tax. We may be required to make
distributions to stockholders at disadvantageous times or when
we do not have funds readily available for distribution.
Differences in timing between the recognition of income and the
related cash receipts or the effect of required debt
amortization payments could require us to borrow money or sell
assets to pay out enough of our taxable income to satisfy the
distribution requirement and to avoid corporate income tax and
the 4% excise tax in a particular year. In the future, we may
borrow to pay distributions to our stockholders and the limited
partners of our operating partnership. Any funds that we borrow
would subject us to interest rate and other market risks.
We will pay some taxes and therefore may have less cash
available for distribution to our stockholders.
We will be required to pay some U.S. federal, state and
local taxes on the income from the operations of our taxable
REIT subsidiary, MPT Development Services, Inc. A taxable REIT
subsidiary is a fully taxable corporation and may be limited in
its ability to deduct interest payments made to us. In addition,
we will be subject to a 100% penalty tax on certain amounts if
the economic arrangements among our tenants, our taxable REIT
subsidiary and us are not comparable to similar arrangements
among unrelated parties. To the extent that we are or our
taxable REIT subsidiary is required to pay U.S. federal,
state or local taxes, we will have less cash available for
distribution to stockholders.
Complying with REIT requirements may cause us to forego
otherwise attractive opportunities.
To qualify as a REIT for federal income tax purposes, we must
continually satisfy tests concerning, among other things, the
sources of our income, the nature and diversification of our
assets, the amounts we distribute to our stockholders and the
ownership of our stock. In order to meet these tests, we may be
required to forego attractive business or investment
opportunities. Overall, no more than 20% of the value of our
assets may consist of securities of one or more taxable REIT
subsidiaries, and no more than 25% of the value of our assets
may consist of securities that are not qualifying assets under
the test requiring that 75% of a REITs assets consist of
real estate and other related assets. Further, a taxable REIT
subsidiary may not directly or indirectly operate or manage a
healthcare facility. For purposes of this definition a
healthcare facility means a hospital, nursing
facility, assisted living facility, congregate care facility,
qualified continuing care facility, or other licensed facility
which extends medical or nursing or ancillary services to
patients and which is operated by a service provider that is
eligible for participation in the Medicare program under
Title XVIII of the Social Security Act with respect to the
facility. Thus, compliance with the REIT requirements may limit
our flexibility in executing our business plan.
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
38
an annual rate of 10.25%. Our operating partnership loaned the
funds to our taxable REIT subsidiary to make these loans. The
loan from our operating partnership to our taxable REIT
subsidiary bears interest at an annual rate of 9.25%.
The Internal Revenue Service, or IRS, may take the position that
the loans to Vibra should be treated as equity interests in
Vibra rather than debt, and that our rental income from Vibra
should not be treated as qualifying income for purposes of the
REIT gross income tests. If the IRS were to successfully treat
the loans to Vibra as equity interests in Vibra, Vibra would be
a related party tenant with respect to our company
and the rent that we receive from Vibra would not be qualifying
income for purposes of the REIT gross income tests. As a result,
we could lose our REIT status. In addition, if the IRS were to
successfully treat the loans to Vibra as interests held by our
operating partnership rather than by our taxable REIT subsidiary
and to treat the loans as other than straight debt, we would
fail the 10% asset test with respect to such interests and, as a
result, could lose our REIT status, which would subject us to
corporate level income tax and adversely affect our ability to
make distributions to our stockholders.
Risks Relating to an Investment in Our Common Stock
The market price and trading volume of our common stock may
be volatile.
On July 13, 2005, we completed an initial public offering
of our common stock, which is listed on the New York Stock
Exchange. While there has been significant trading in our common
stock since the initial public offering, we cannot assure you
that an active trading market in our common stock will be
sustained. Even if active trading of our common stock continues,
the market price of our common stock may be highly volatile and
be subject to wide fluctuations. In addition, the trading volume
in our common stock may fluctuate and cause significant price
variations to occur. If the market price of our common stock
declines significantly, you may be unable to resell your shares
at or above your purchase price.
We cannot assure you that the market price of our common stock
will not fluctuate or decline significantly in the future. Some
of the factors that could negatively affect our share price or
result in fluctuations in the price or trading volume of our
common stock include:
|
|
|
|
|
actual or anticipated variations in our quarterly operating
results or distributions; |
|
|
|
changes in our funds from operations or earnings estimates or
publication of research reports about us or the real estate
industry; |
|
|
|
increases in market interest rates that lead purchasers of our
shares of common stock to demand a higher yield; |
|
|
|
changes in market valuations of similar companies; |
|
|
|
adverse market reaction to any increased indebtedness we incur
in the future; |
|
|
|
additions or departures of key management personnel; |
|
|
|
actions by institutional stockholders; |
|
|
|
speculation in the press or investment community; and |
|
|
|
general market and economic conditions. |
Broad market fluctuations could negatively impact the market
price of our common stock.
In addition, the stock market has experienced extreme price and
volume fluctuations that have affected the market price of many
companies in industries similar or related to ours and that have
been unrelated to these companies operating performances.
These broad market fluctuations could reduce the market price of
our common stock. Furthermore, our operating results and
prospects may be below the expectations of public market
analysts and investors or may be lower than those of companies
with
39
comparable market capitalizations, which could lead to a
material decline in the market price of our common stock.
Future sales of common stock may have adverse effects on our
stock price.
We cannot predict the effect, if any, of future sales of common
stock, or the availability of shares for future sales, on the
market price of our common stock. Sales of substantial amounts
of common stock, or the perception that these sales could occur,
may adversely affect prevailing market prices for our common
stock. We may issue from time to time additional common stock or
units of our operating partnership in connection with the
acquisition of facilities and we may grant additional demand or
piggyback registration rights in connection with these
issuances. Sales of substantial amounts of common stock or the
perception that these sales could occur may adversely effect the
prevailing market price for our common stock. In addition, the
sale of these shares could impair our ability to raise capital
through a sale of additional equity securities.
An increase in market interest rates may have an adverse
effect on the market price of our securities.
One of the factors that investors may consider in deciding
whether to buy or sell our securities is our distribution rate
as a percentage of our price per share of common stock, relative
to market interest rates. If market interest rates increase,
prospective investors may desire a higher distribution or
interest rate on our securities or seek securities paying higher
distributions or interest. The market price of our common stock
likely will be based primarily on the earnings that we derive
from rental income with respect to our facilities and our
related distributions to stockholders, and not from the
underlying appraised value of the facilities themselves. As a
result, interest rate fluctuations and capital market conditions
can affect the market price of our common stock. In addition,
rising interest rates would result in increased interest expense
on our variable-rate debt, thereby adversely affecting cash flow
and our ability to service our indebtedness and make
distributions.
40
A WARNING ABOUT FORWARD LOOKING STATEMENTS
We make forward-looking statements in this prospectus that are
subject to risks and uncertainties. These forward-looking
statements include information about possible or assumed future
results of our business, financial condition, liquidity, results
of operations, plans and objectives. Statements regarding the
following subjects, among others, are forward-looking by their
nature:
|
|
|
|
|
our business strategy; |
|
|
|
our projected operating results; |
|
|
|
our ability to acquire or develop net-leased facilities; |
|
|
|
availability of suitable facilities to acquire or develop; |
|
|
|
our ability to enter into, and the terms of, our prospective
leases; |
|
|
|
our ability to use effectively the proceeds of our initial
public offering; |
|
|
|
our ability to obtain future financing arrangements; |
|
|
|
estimates relating to, and our ability to pay, future
distributions; |
|
|
|
our ability to compete in the marketplace; |
|
|
|
market trends; |
|
|
|
projected capital expenditures; and |
|
|
|
the impact of technology on our facilities, operations and
business. |
The forward-looking statements are based on our beliefs,
assumptions and expectations of our future performance, taking
into account all information currently available to us. These
beliefs, assumptions and expectations can change as a result of
many possible events or factors, not all of which are known to
us. If a change occurs, our business, financial condition,
liquidity and results of operations may vary materially from
those expressed in our forward-looking statements. You should
carefully consider these risks before you make an investment
decision with respect to our common stock, along with, among
others, the following factors that could cause actual results to
vary from our forward-looking statements:
|
|
|
|
|
the factors referenced in this prospectus, including those set
forth under the sections captioned Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations; Our
Business and Our Portfolio; |
|
|
|
general volatility of the capital markets and the market price
of our common stock; |
|
|
|
changes in our business strategy; |
|
|
|
changes in healthcare laws and regulations; |
|
|
|
availability, terms and development of capital; |
|
|
|
availability of qualified personnel; |
|
|
|
changes in our industry, interest rates or the general economy;
and |
|
|
|
the degree and nature of our competition. |
When we use the words believe, expect,
may, potential, anticipate,
estimate, plan, will,
could, intend or similar expressions, we
are identifying forward-looking statements. You should not place
undue reliance on these forward-looking statements. We are not
obligated to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise.
41
USE OF PROCEEDS
We will not receive any proceeds from the sale by the selling
stockholders of the shares of common stock offered by this
prospectus.
42
CAPITALIZATION
The following table sets forth:
|
|
|
|
|
|
our actual capitalization as of September 30, 2005; and |
|
|
|
|
|
our pro forma capitalization, as adjusted to give effect to
(i) a distribution of $0.18 per share declared on
November 18, 2005 and payable on January 19, 2006 to
stockholders of record on December 15, 2005; and
(ii) a loan funded through the Companys revolving
credit facility which was entered into in October 2005. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
September 30, 2005 | |
|
|
| |
|
|
|
|
Pro Forma, | |
|
|
Historical | |
|
As Adjusted | |
|
|
| |
|
| |
Long term debt
|
|
$ |
40,366,667 |
|
|
$ |
80,366,667 |
|
Minority interests
|
|
|
2,137,500 |
|
|
|
2,137,500 |
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 10,000,000 shares authorized;
no shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 100,000,000 shares authorized;
39,292,885 shares issued and outstanding at September 30,
2005
|
|
|
39,293 |
|
|
|
39,293 |
(1) |
|
|
Additional paid in capital
|
|
|
359,866,949 |
|
|
|
359,866,949 |
|
|
|
Accumulated deficit
|
|
|
(2,584,400 |
) |
|
|
(9,778,832 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
357,321,842 |
|
|
|
350,127,410 |
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
399,826,009 |
|
|
$ |
432,631,577 |
|
|
|
|
|
|
|
|
|
|
(1) |
Excludes (i) 79,500 shares of restricted common stock
awarded to one of our executive officers and employees in April
2005, 106,000 shares of restricted common stock awarded to our
founders in July 2005 and 490,680 shares of restricted common
stock awarded to our executive officers and directors in August
2005, all such awards under our equity incentive plan;
(ii) 100,000 shares of common stock issuable upon the
exercise of stock options granted to our independent directors
under our equity incentive plan, options for 46,664 shares
of which are vested; (iii) 5,000 shares of common
stock issuable in October 2007, 7,500 shares of common stock
issuable in March 2008 and 10,000 shares of common stock
issuable in October 2008 pursuant to deferred stock units
awarded under our equity incentive plan to our independent
directors; and (iv) 3,891,831 shares of common stock
available for future awards under our equity incentive plan. |
43
DISTRIBUTION POLICY
We intend to make regular quarterly distributions to our
stockholders so that we distribute each year all or
substantially all of our REIT taxable income, if any, so as to
avoid paying corporate level income tax and excise tax on our
REIT income and to qualify for the tax benefits accorded to
REITs under the Code. In order to maintain our status as a REIT,
we must distribute to our stockholders an amount at least equal
to 90% of our REIT taxable income, excluding net capital gain.
See United States Federal Income Tax Considerations.
The distributions will be authorized by our board of directors
and declared by us based upon a number of factors, including:
|
|
|
|
|
our actual results of operations; |
|
|
|
the rent received from our tenants; |
|
|
|
the ability of our tenants to meet their other obligations under
their leases and their obligations under their loans from us; |
|
|
|
debt service requirements; |
|
|
|
capital expenditure requirements for our facilities; |
|
|
|
our taxable income; |
|
|
|
the annual distribution requirement under the REIT provisions of
the Code; and |
|
|
|
other factors that our board of directors may deem relevant. |
To the extent not inconsistent with maintaining our REIT status,
we may retain accumulated earnings of our taxable REIT
subsidiaries in those subsidiaries. Our ability to make
distributions to our stockholders will depend on our receipt of
distributions from our operating partnership.
The table below is a summary of our distributions. We cannot
assure you that we will have cash available for future quarterly
distributions at these levels, or at all. See Risk
Factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution per Share | |
Declaration Date |
|
Record Date |
|
Date of Distribution |
|
of Common Stock | |
|
|
|
|
|
|
| |
November 18, 2005
|
|
December 15, 2005 |
|
January 29, 2006 |
|
$ |
0.18 |
|
August 18, 2005
|
|
September 15, 2005 |
|
September 29, 2005 |
|
$ |
0.17 |
|
May 19, 2005
|
|
June 20, 2005 |
|
July 14, 2005 |
|
$ |
0.16 |
|
March 4, 2005
|
|
March 16, 2005 |
|
April 15, 2005 |
|
$ |
0.11 |
|
November 11, 2004
|
|
December 16, 2004 |
|
January 11, 2005 |
|
$ |
0.11 |
|
September 2, 2004
|
|
September 16, 2004 |
|
October 11, 2004 |
|
$ |
0.10 |
|
The two distributions declared in 2004, aggregating
$0.21 per share, were comprised of approximately
$0.13 per share in ordinary income and $0.08 per share
in return of capital. For federal income tax purposes, our
distributions were limited in 2004 to our tax basis earnings and
profits of $0.13 per share. Accordingly, for tax purposes,
$0.08 per share of the distributions we paid in January
2005 will be treated as a 2005 distribution; the tax character
of this amount, along with that of the April 15, 2005,
July 14, 2005 and September 29, 2005 distributions,
will be determined subsequent to determination of our 2005
taxable income.
44
SELECTED FINANCIAL INFORMATION
You should read the following pro forma and historical
information in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our historical and pro forma consolidated
financial statements and related notes thereto included
elsewhere in this prospectus.
The following table sets forth our selected financial and
operating data on an historical and pro forma basis. Our
selected historical balance sheet information as of
December 31, 2004, and the historical statement of
operations and other data for the year ended December 31,
2004, have been derived from our historical financial statements
audited by KPMG LLP, independent registered public accounting
firm, whose report with respect thereto is included elsewhere in
this prospectus. The historical balance sheet information as of
September 30, 2005 and the historical statement of
operations and other data for the nine months ended
September 30, 2005 have been derived from our unaudited
historical balance sheet as of September 30, 2005 and from
our unaudited statement of operations for the nine months ended
September 30, 2005 included elsewhere in this prospectus.
The unaudited historical financial statements include all
adjustments, consisting of normal recurring adjustments, that we
consider necessary for a fair presentation of our financial
condition and results of operations as of such dates and for
such periods under accounting principles generally accepted in
the U.S.
The unaudited pro forma consolidated balance sheet data as of
September 30, 2005, are presented as if completion of our
probable acquisition had occurred on September 30, 2005.
The unaudited pro forma consolidated statement of operations and
other data for the nine months ended September 30, 2005 are
presented as if our acquisition of the Desert Valley Facility,
the Covington Facility, the Chino Facility, the Denham Springs
Facility and the Redding Facility along with the completion of
our probable acquisitions had occurred on January 1, 2005,
and our December 31, 2004 unaudited pro forma consolidated
statement of operations are presented as if our acquisition of
the current portfolio of facilities (the six Vibra Facilities,
the Desert Valley Facility, the Covington Facility, the Chino
Facility, the Denham Springs Facility and the Redding Facility),
our making of the Vibra loans and completion of our probable
acquisitions had occurred on January 1, 2004. The pro forma
information does not give effect to any of our facilities under
development or probable development transactions. The pro forma
information is not necessarily indicative of what our actual
financial position or results of operations would have been as
of the dates or for the periods indicated, nor does it purport
to represent our future financial position or results of
operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended | |
|
For the Year Ended | |
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Pro Forma | |
|
Historical | |
|
Pro Forma | |
|
Historical | |
|
|
| |
|
| |
|
| |
|
| |
Operating information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent income
|
|
$ |
26,273,517 |
|
|
$ |
18,364,389 |
|
|
$ |
32,808,106 |
|
|
$ |
8,611,344 |
|
|
|
Interest income from loans
|
|
|
6,368,607 |
|
|
|
3,562,857 |
|
|
|
9,037,049 |
|
|
|
2,282,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
32,642,124 |
|
|
|
21,927,246 |
|
|
|
41,845,155 |
|
|
|
10,893,459 |
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,645,242 |
|
|
|
2,986,790 |
|
|
|
6,193,653 |
|
|
|
1,478,470 |
|
|
|
General and administrative
|
|
|
5,595,416 |
|
|
|
5,595,416 |
|
|
|
5,057,284 |
|
|
|
5,057,284 |
|
|
|
Total operating expenses
|
|
|
10,357,499 |
|
|
|
8,699,047 |
|
|
|
12,023,286 |
|
|
|
7,214,601 |
|
|
|
Operating income
|
|
|
22,284,625 |
|
|
|
13,228,199 |
|
|
|
29,821,869 |
|
|
|
3,678,858 |
|
|
|
Net other income (expense)
|
|
|
(2,132,363 |
) |
|
|
(32,363 |
) |
|
|
(1,902,509 |
) |
|
|
897,491 |
|
|
Net income
|
|
|
20,152,262 |
|
|
|
13,195,836 |
|
|
|
27,919,360 |
|
|
|
4,576,349 |
|
|
Net income per share, basic
|
|
|
0.67 |
|
|
|
0.44 |
|
|
|
1.45 |
|
|
|
0.24 |
|
|
Net income per share, diluted
|
|
|
0.67 |
|
|
|
0.44 |
|
|
|
1.45 |
|
|
|
0.24 |
|
|
Weighted average shares outstanding basic
|
|
|
29,975,971 |
|
|
|
29,975,971 |
|
|
|
19,310,833 |
|
|
|
19,310,833 |
|
|
Weighted average shares outstanding diluted
|
|
|
29,999,381 |
|
|
|
29,999,381 |
|
|
|
19,312,634 |
|
|
|
19,312,634 |
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
As of September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Pro Forma | |
|
Historical | |
|
Historical | |
|
|
| |
|
| |
|
| |
Balance Sheet information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment in real estate assets
|
|
$ |
328,342,475 |
|
|
$ |
266,106,299 |
|
|
$ |
151,690,293 |
|
|
Net investment in real estate
|
|
|
323,877,215 |
|
|
|
261,641,039 |
|
|
|
150,211,823 |
|
|
Construction in progress
|
|
|
78,435,280 |
|
|
|
78,484,104 |
|
|
|
24,318,098 |
|
|
Cash and cash equivalents
|
|
|
36,896,094 |
|
|
|
100,826,702 |
|
|
|
97,543,677 |
|
|
Loans receivable
|
|
|
86,895,611 |
|
|
|
52,895,611 |
|
|
|
50,224,069 |
(1) |
|
Total assets
|
|
|
463,898,155 |
|
|
|
431,592,587 |
|
|
|
306,506,063 |
|
|
Total debt
|
|
|
80,366,667 |
|
|
|
40,366,667 |
|
|
|
56,000,000 |
|
|
Total liabilities
|
|
|
111,633,245 |
|
|
|
72,133,245 |
|
|
|
73,777,619 |
|
|
Total stockholders equity
|
|
|
350,127,410 |
|
|
|
357,321,842 |
|
|
|
231,728,444 |
|
|
Total liabilities and stockholders equity
|
|
|
463,898,155 |
|
|
|
431,592,587 |
|
|
|
306,506,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended | |
|
For the Year Ended | |
|
|
September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Pro Forma | |
|
Historical | |
|
Pro Forma | |
|
Historical | |
|
|
| |
|
| |
|
| |
|
| |
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from
operations(2)
|
|
$ |
24,797,504 |
|
|
$ |
16,182,626 |
|
|
$ |
34,113,013 |
|
|
$ |
6,054,819 |
|
|
Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided by operating activities
|
|
|
|
|
|
|
16,094,005 |
|
|
|
|
|
|
|
9,918,898 |
|
|
|
Used for investing activities
|
|
|
|
|
|
|
(107,692,381 |
) |
|
|
|
|
|
|
(195,600,642 |
) |
|
|
Provided by financing activities
|
|
|
|
|
|
|
94,881,401 |
|
|
|
|
|
|
|
283,125,421 |
|
|
|
|
(1) |
Includes $1.5 million in commitment fees payable to us by
Vibra. |
|
|
|
(2) |
Funds from operations, or FFO, represents net income (computed
in accordance with GAAP), excluding gains (or losses) from sales
of property, plus real estate related depreciation and
amortization (excluding amortization of loan origination costs)
and after adjustments for unconsolidated partnerships and joint
ventures. Management considers funds from operations a useful
additional measure of performance for an equity REIT because it
facilitates an understanding of the operating performance of our
properties without giving effect to real estate depreciation and
amortization, which assumes that the value of real estate assets
diminishes predictably over time. Since real estate values have
historically risen or fallen with market conditions, we believe
that funds from operations provides a meaningful supplemental
indication of our performance. We compute funds from operations
in accordance with standards established by the Board of
Governors of the National Association of Real Estate Investment
Trusts, or NAREIT, in its March 1995 White Paper (as amended in
November 1999 and April 2002), which may differ from the
methodology for calculating funds from operations utilized by
other equity REITs and, accordingly, may not be comparable to
such other REITs. FFO does not represent amounts available for
managements discretionary use because of needed capital
replacement or expansion, debt service obligations, or other
commitments and uncertainties, nor is it indicative of funds
available to fund our cash needs, including our ability to make
distributions. Funds from operations should not be considered as
an alternative to net income (loss) (computed in accordance with
GAAP) as indicators of our financial performance or to cash flow
from operating activities (computed in accordance with GAAP) as
an indicator of our liquidity. |
|
|
|
|
The following table presents a reconciliation of FFO to net
income for the nine months ended September 30, 2005 and for
the year ended December 31, 2004 on an actual and pro forma
basis. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months | |
|
For the Year Ended | |
|
|
Ended September 30, 2005 | |
|
December 31, 2004 | |
|
|
| |
|
| |
|
|
Pro Forma | |
|
Historical | |
|
Pro Forma | |
|
Historical | |
|
|
| |
|
| |
|
| |
|
| |
Funds from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
20,152,262 |
|
|
$ |
13,195,836 |
|
|
$ |
27,919,360 |
|
|
$ |
4,576,349 |
|
Depreciation and amortization
|
|
|
4,645,242 |
|
|
|
2,986,790 |
|
|
|
6,193,653 |
|
|
|
1,478,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations FFO
|
|
$ |
24,797,504 |
|
|
$ |
16,182,626 |
|
|
$ |
34,113,013 |
|
|
$ |
6,054,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
We were recently formed and did not commence revenue
generating operations until June 2004. Please see Risk
Factors Risks Relating to Our Business and Growth
Strategy for a discussion of risks relating to our limited
operating history. The following discussion should be read in
conjunction with our audited financial statements and the
related notes thereto included elsewhere in this prospectus.
Overview
We were incorporated under Maryland law on August 27, 2003
primarily for the purpose of investing in and owning net-leased
healthcare facilities across the United States. We also make
real estate mortgage loans and other loans to our tenants. We
have operated as a real estate investment trust
(REIT) since April 6, 2004, and accordingly,
elected REIT status upon the filing in September 2005 of our
calendar year 2004 Federal income tax return. Our existing
tenants are, and our prospective tenants will generally be,
healthcare operating companies and other healthcare providers
that use substantial real estate assets in their operations. We
offer financing for these operators real estate through
100% lease and mortgage financing and generally seek lease and
loan terms of at least 10 years with a series of shorter
renewal terms at the option of our tenants and borrowers. We
also have included and intend to include annual contractual rate
increases that in the current market range from 1.5% to 3.0%.
Our existing portfolio escalators range from 2.0% to 2.5%. In
addition to the base rent, our leases require our tenants to pay
all operating costs and expenses associated with the facility.
We acquire and develop healthcare facilities and lease the
facilities to healthcare operating companies under long-term net
leases. We also make mortgage loans to healthcare operators
secured by their real estate assets. We selectively make loans
to certain of our operators through our taxable REIT subsidiary,
the proceeds of which are used for acquisitions and working
capital. We consider our lending business an important element
of our overall business strategy for two primary reasons:
(1) it provides opportunities to make income-earning
investments that yield attractive risk-adjusted returns in an
industry in which our management has expertise, and (2) by
making debt capital available to certain qualified operators, we
believe we create for our company a competitive advantage over
other buyers of, and financing sources for, healthcare
facilities. For purpose of Statement of Financial Accounting
Standard No. 131, Disclosures about Segments of an
Enterprise and Related Information, we conduct business
operations in one segment.
At September 30, 2005, we owned nine operating healthcare
facilities and held a mortgage loan secured by another. In
addition, we were in the process of developing four additional
healthcare facilities that were not yet in operation. We had one
acquisition loan outstanding, the proceeds of which our tenant
used for the acquisition of six hospital operating companies.
The 13 facilities we owned and the one facility on which we had
made a mortgage loan were in nine states, had a carrying cost of
approximately $267.6 million and comprised approximately
62.0% of our total assets. Our acquisition and other loans of
approximately $46.9 million represented approximately 10.9%
of our total assets. We do not expect such loan assets at any
time to exceed 20% of our total assets. We also had cash and
temporary investments of approximately $100.8 million that
represented approximately 23.4% of our assets. Subsequent to
September 30, 2005, we used $25.7 million of cash to
pay down debt and approximately $13.8 million for
development expenditures. We expect to use a significant amount
of additional cash to acquire properties in the fourth quarter
of 2005 and the first quarter of 2006, after which we intend to
utilize borrowings under our existing revolving credit facility
and construction loan for additional acquisitions and
development expenditures.
Our revenues are derived from rents we earn pursuant to the
lease agreements with our tenants and from interest income from
loans to our tenants and other facility owners. Our tenants
operate in the healthcare industry, generally providing medical,
surgical and rehabilitative care to patients. The capacity of
our tenants to pay our rents and interest is dependent upon
their ability to conduct their operations at profitable levels.
We believe that the business environment of the industry
segments in which our tenants operate is generally positive for
efficient operators. However, our tenants operations are
subject to
47
economic, regulatory and market conditions that may affect their
profitability. Accordingly, we monitor certain key factors,
changes to which we believe may provide early indications of
conditions that may affect the level of risk in our lease and
loan portfolio.
Key factors that we consider in underwriting prospective tenants
and in monitoring the performance of existing tenants include
the following:
|
|
|
|
|
|
the historical and prospective operating margins (measured by a
tenants earnings before interest, taxes, depreciation,
amortization and facility rent) of each tenant and at each
facility; |
|
|
|
|
|
the ratio of our tenants operating earnings both to
facility rent and to facility rent plus other fixed costs,
including debt costs; |
|
|
|
|
|
trends in the source of our tenants revenue, including the
relative mix of Medicare, Medicaid/ MediCal, managed care,
commercial insurance, and private pay patients; and |
|
|
|
|
|
the effect of evolving healthcare regulations on our
tenants profitability. |
|
Certain business factors, in addition to those described above
that directly affect our tenants, will likely materially
influence our future results of operations. These factors
include:
|
|
|
|
|
|
trends in the cost and availability of capital, including market
interest rates, that our prospective tenants may use for their
real estate assets instead of financing their real estate assets
through lease structures; |
|
|
|
|
|
unforeseen changes in healthcare regulations that may limit the
opportunities for physicians to participate in the ownership of
healthcare providers and healthcare real estate; |
|
|
|
|
|
reductions in reimbursements from Medicare, state healthcare
programs, and commercial insurance providers that may reduce our
tenants profitability and our lease rates, and; |
|
|
|
|
|
competition from other financing sources. |
|
At November 30, 2005, we had 18 employees. Over the next
12 months, we expect to add five to 10 additional employees
as we acquire new properties and manage our existing properties
and loans.
Critical Accounting Policies
In order to prepare financial statements in conformity with
accounting principles generally accepted in the United States,
we must make estimates about certain types of transactions and
account balances. We believe that our estimates of the amount
and timing of lease revenues, credit losses, fair values and
periodic depreciation of our real estate assets, stock
compensation expense, and the effects of any derivative and
hedging activities will have significant effects on our
financial statements. Each of these items involves estimates
that require us to make subjective judgments. We intend to rely
on our experience, collect historical data and current market
data, and develop relevant assumptions to arrive at what we
believe to be reasonable estimates. Under different conditions
or assumptions, materially different amounts could be reported
related to the accounting policies described below. In addition,
application of these accounting policies involves the exercise
of judgment on the use of assumptions as to future uncertainties
and, as a result, actual results could materially differ from
these estimates. Our accounting estimates will include the
following:
Revenue Recognition. Our revenues, which are comprised
largely of rental income, include rents that each tenant pays in
accordance with the terms of its respective lease reported on a
straight-line basis over the initial term of the lease. Since
some of our leases provide for rental increases at specified
intervals, straight-line basis accounting requires us to record
as an asset, and include in revenues, straight-line rent that we
will only receive if the tenant makes all rent payments required
through the expiration of the term of the lease.
Accordingly, our management must determine, in its judgment, to
what extent the straight-line rent receivable applicable to each
specific tenant is collectible. We review each tenants
straight-line rent
48
receivable on a quarterly basis and take into consideration the
tenants payment history, the financial condition of the
tenant, business conditions in the industry in which the tenant
operates, and economic conditions in the area in which the
facility is located. In the event that the collectibility of
straight-line rent with respect to any given tenant is in doubt,
we are required to record an increase in our allowance for
uncollectible accounts or record a direct write-off of the
specific rent receivable, which would have an adverse effect on
our net income for the year in which the reserve is increased or
the direct write-off is recorded and would decrease our total
assets and stockholders equity. At that time, we stop
accruing additional straight-line rent income.
Our development projects normally allow for us to earn what we
term construction period rent. Construction period
rent accrues to us during the construction period based on the
funds which we invest in the facility. During the construction
period, the unfinished facility does not generate any earnings
for the lessee/operator which can be used to pay us for our
funds used to build the facility. In such cases, the
lessee/operator pays the accumulated construction period rent
over the term of the lease beginning when the lessee/operator
takes physical possession of the facility. We record the accrued
construction period rent as deferred revenue during the
construction period, and recognize earned revenue as the
construction period rent is paid to us by the lessee/operator.
We make loans to our tenants and from time to time may make
construction or mortgage loans to facility owners or other
parties. We recognize interest income on loans as earned based
upon the principal amount outstanding. These loans are generally
secured by interests in real estate, receivables, the equity
interests of a tenant, or corporate and individual guarantees.
As with straight-line rent receivables, our management must also
periodically evaluate loans to determine what amounts may not be
collectible. Accordingly, a provision for losses on loans
receivable is recorded when it becomes probable that the loan
will not be collected in full. The provision is an amount which
reduces the loan to its estimated net receivable value based on
a determination of the eventual amounts to be collected either
from the debtor or from the collateral, if any. At that time, we
discontinue recording interest income on the loan to the tenant.
Investments in Real Estate. We record investments in real
estate at cost, and we capitalize improvements and replacements
when they extend the useful life or improve the efficiency of
the asset. While our tenants are generally responsible for all
operating costs at a facility, to the extent that we incur costs
of repairs and maintenance, we expense those costs as incurred.
We compute depreciation using the straight-line method over the
estimated useful life of 40 years for buildings and
improvements, five to seven years for equipment and fixtures,
and the shorter of the useful life or the remaining lease term
for tenant improvements and leasehold interests.
We are required to make subjective assessments as to the useful
lives of our facilities for purposes of determining the amount
of depreciation expense to record on an annual basis with
respect to our investments in real estate improvements. These
assessments have a direct impact on our net income because, if
we were to shorten the expected useful lives of our investments
in real estate improvements, we would depreciate these
investments over fewer years, resulting in more depreciation
expense and lower net income on an annual basis.
We have adopted Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which establishes a single
accounting model for the impairment or disposal of long-lived
assets, including discontinued operations.
SFAS No. 144 requires that the operations related to
facilities that have been sold, or that we intend to sell, be
presented as discontinued operations in the statement of
operations for all periods presented, and facilities we intend
to sell be designated as held for sale on our
balance sheet.
When circumstances such as adverse market conditions indicate a
possible impairment of the value of a facility, we review the
recoverability of the facilitys carrying value. The review
of recoverability is based on our estimate of the future
undiscounted cash flows, excluding interest charges, from the
facilitys use and eventual disposition. Our forecast of
these cash flows considers factors such as expected future
operating income, market and other applicable trends, and
residual value, as well as the effects of leasing
49
demand, competition and other factors. If impairment exists due
to the inability to recover the carrying value of a facility, an
impairment loss is recorded to the extent that the carrying
value exceeds the estimated fair value of the facility. We are
required to make subjective assessments as to whether there are
impairments in the values of our investments in real estate.
Purchase Price Allocation. We record above-market and
below-market in-place lease values, if any, for the facilities
we own which are based on the present value (using an interest
rate which reflects the risks associated with the leases
acquired) of the difference between (i) the contractual
amounts to be paid pursuant to the in-place leases and
(ii) managements estimate of fair market lease rates
for the corresponding in-place leases, measured over a period
equal to the remaining non-cancelable term of the lease. We
amortize any resulting capitalized above-market lease values as
a reduction of rental income over the remaining non-cancelable
terms of the respective leases. We amortize any resulting
capitalized below-market lease values as an increase to rental
income over the initial term and any fixed-rate renewal periods
in the respective leases. Because our strategy to a large degree
involves the origination of long term lease arrangements at
market rates, we do not expect the above-market and below-market
in-place lease values to be significant for many of our
anticipated transactions.
We measure the aggregate value of other intangible assets to be
acquired based on the difference between (i) the property
valued with existing leases adjusted to market rental rates and
(ii) the property valued as if vacant. Managements
estimates of value are made using methods similar to those used
by independent appraisers (e.g., discounted cash flow
analysis). Factors considered by management in its analysis
include an estimate of carrying costs during hypothetical
expected lease-up
periods considering current market conditions, and costs to
execute similar leases. We also consider information obtained
about each targeted facility as a result of our pre-acquisition
due diligence, marketing, and leasing activities in estimating
the fair value of the tangible and intangible assets acquired.
In estimating carrying costs, management also includes real
estate taxes, insurance and other operating expenses and
estimates of lost rentals at market rates during the expected
lease-up periods, which
we expect to range primarily from three to 18 months,
depending on specific local market conditions. Management also
estimates costs to execute similar leases including leasing
commissions, legal costs, and other related expenses to the
extent that such costs are not already incurred in connection
with a new lease origination as part of the transaction.
The total amount of other intangible assets to be acquired, if
any, is further allocated to in-place lease values and customer
relationship intangible values based on managements
evaluation of the specific characteristics of each prospective
tenants lease and our overall relationship with that
tenant. Characteristics to be considered by management in
allocating these values include the nature and extent of our
existing business relationships with the tenant, growth
prospects for developing new business with the tenant, the
tenants credit quality, and expectations of lease
renewals, including those existing under the terms of the lease
agreement, among other factors.
We amortize the value of in-place leases to expense over the
initial term of the respective leases, which range primarily
from 10 to 15 years. The value of customer relationship
intangibles is amortized to expense over the initial term and
any renewal periods in the respective leases, but in no event
will the amortization period for intangible assets exceed the
remaining depreciable life of the building. Should a tenant
terminate its lease, the unamortized portion of the in-place
lease value and customer relationship intangibles would be
charged to expense.
Accounting for Derivative Financial Investments and Hedging
Activities. We expect to account for our derivative and
hedging activities, if any, using SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137 and
SFAS No. 149, which requires all derivative
instruments to be carried at fair value on the balance sheet.
Derivative instruments designated in a hedge relationship to
mitigate exposure to variability in expected future cash flows,
or other types of forecasted transactions, are considered cash
flow hedges. We expect to formally document all relationships
between hedging instruments and hedged items, as well as our
risk-management objective and strategy for undertaking each
hedge transaction. We plan to review
50
periodically the effectiveness of each hedging transaction,
which involves estimating future cash flows. Cash flow hedges,
if any, will be accounted for by recording the fair value of the
derivative instrument on the balance sheet as either an asset or
liability, with a corresponding amount recorded in other
comprehensive income within stockholders equity. Amounts
will be reclassified from other comprehensive income to the
income statement in the period or periods the hedged forecasted
transaction affects earnings. Derivative instruments designated
in a hedge relationship to mitigate exposure to changes in the
fair value of an asset, liability, or firm commitment
attributable to a particular risk, which we expect to affect the
Company primarily in the form of interest rate risk or
variability of interest rates, are considered fair value hedges
under SFAS No. 133. We are not currently a party to
any derivatives contracts.
Variable Interest Entities. In January 2003, the FASB
issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. In December
2003, the FASB issued a revision to FIN 46, which is termed
FIN 46(R). FIN 46(R) clarifies the application of
Accounting Research Bulletin No. 51, Consolidated
Financial Statements, and provides guidance on the
identification of entities for which control is achieved through
means other than voting rights, guidance on how to determine
which business enterprise should consolidate such an entity, and
guidance on when it should do so. This model for consolidation
applies to an entity in which either (1) the equity
investors (if any) do not have a controlling financial interest
or (2) the equity investment at risk is insufficient to
finance that entitys activities without receiving
additional subordinated financial support from other parties. An
entity meeting either of these two criteria is a variable
interest entity, or VIE. A VIE must be consolidated by any
entity which is the primary beneficiary of the VIE. If an entity
is not the primary beneficiary of the VIE, the VIE is not
consolidated. We periodically evaluate the terms of our
relationships with our tenants and borrowers to determine
whether we are the primary beneficiary and would therefore be
required to consolidate any tenants or borrowers that are VIEs.
Our evaluations of our transactions indicate that we have loans
receivable from two entities which we classify as VIEs. However,
because we are not the primary beneficiary of these VIEs, we do
not consolidate these entities in our financial statements.
Stock-Based Compensation. We currently apply the
intrinsic value method to account for the issuance of stock
options under our equity incentive plan in accordance with APB
Opinion No. 25, Accounting for Stock Issued to
Employees. In this regard, we anticipate that a substantial
portion of our options will be granted to individuals who are
our officers or directors. Accordingly, because the grants are
expected to be at exercise prices that represent fair value of
the stock at the date of grant, we do not currently record any
expense related to the issuance of these options under the
intrinsic value method. If the actual terms vary from the
expected, the impact to our compensation expense could differ.
In December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment, which is a revision of
SFAS No. 123, Accounting for Stock Based
Compensation. SFAS No. 123(R) establishes
standards for accounting for transactions in which an entity
exchanges its equity instruments for goods or services. The
Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires that the fair
value of such equity instruments be recognized as expense in the
historical financial statements as services are performed. The
impact of SFAS No. 123(R) will also be affected by the
types of stock-based awards that our board of directors chooses
to grant. Prior to SFAS No. 123(R), only certain pro
forma disclosures of fair value were required, which primarily
applies to stock options granted at the then current market
price per share of stock. Our existing equity incentive plan
allows for stock-based awards to be in the form of options,
restricted stock, restricted stock units and deferred stock
units. Currently, we expect that our board of directors will
make awards in the form of restricted stock, restricted stock
units and deferred stock units. The SEC has ruled that both
SFAS No. 123 and SFAS 123(R) are acceptable GAAP
until SFAS No. 123(R) becomes effective for our annual
and interim periods beginning January 1, 2006. However, we
have elected to continue following the guidelines of
SFAS No. 123 to account for our awards of restricted
stock. During the three and nine month periods ended
September 30, 2005, we recorded $555,409 and $602,403 of
expense for restricted shares issued to employees, officers and
directors.
51
Liquidity and Capital Resources
As of November 30, after the loan transactions described
below, we have approximately $38.2 million in cash and
temporary liquid investments. In October 2005, we entered into a
four-year $100.0 million secured revolving credit facility,
using proceeds to replace our existing $75.0 million term
loan, which had a balance of approximately $40.0 million.
We have borrowed approximately $65.0 million under the
revolving credit facility. The loan is secured by a collateral
pool comprised of several of our properties. The six properties
currently in the collateral pool provide available borrowing
capacity of approximately $68.5 million. We believe we have
sufficient value in our other properties to increase the
availability under the credit facility to its present maximum of
$100.0 million. Under the terms of the credit agreement, we
may increase the maximum commitment to $175.0 million
subject to adequate collateral valuation and payment of
customary commitment fees. In addition to availability under the
revolving credit facility, we have approximately
$43.0 million available under a construction/term facility
with a bank.
At September 30, 2005, we had remaining commitments to
complete the funding of four development projects aggregating
approximately $123.5 million as described below (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original | |
|
Cost | |
|
Remaining | |
|
|
Commitment | |
|
Incurred | |
|
Commitment | |
|
|
| |
|
| |
|
| |
North Cypress community hospital
|
|
$ |
64.0 |
|
|
$ |
12.2 |
|
|
$ |
51.8 |
|
West Houston community hospital and medical office building
|
|
|
64.0 |
|
|
|
54.2 |
|
|
|
9.8 |
|
Bucks County womens hospital and medical office building
|
|
|
38.0 |
|
|
|
11.4 |
|
|
|
26.6 |
|
Monroe County community hospital
|
|
|
35.5 |
|
|
|
0.2 |
|
|
|
35.3 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
201.5 |
|
|
$ |
78.0 |
|
|
$ |
123.5 |
|
|
|
|
|
|
|
|
|
|
|
We also have commitments of approximately $52.0 million to
purchase an existing healthcare facility, to purchase another
existing healthcare facility and make related loans and to
develop a healthcare facility. Although these commitments are
not binding on us and closing of the transactions is subject to
certain conditions, we expect to complete these transactions
during the first and second quarters of 2006. These possible
transactions are subject to various contingencies that must be
satisfied before definitive agreements are executed.
Accordingly, there is no assurance that these transactions will
be consummated.
We believe that our existing cash and temporary investments,
funds available under our existing loan agreements and cash flow
from operations will be sufficient for us to complete the
acquisitions and developments described above, provide for
working capital, and make distributions to our stockholders. We
also believe that additional capital resources will be available
to us to continue to execute our business plan of increasing our
healthcare real estate assets. We expect these resources will
include various types of additional debt, including long-term,
fixed-rate mortgage loans, variable-rate term loans, and
construction financing facilities. Generally, we believe we will
be able to finance up to approximately 50-60% of the cost of our
healthcare facilities; however, there is no assurance that we
will be able to obtain or maintain those levels of debt on our
portfolio of real estate assets on favorable terms in the future.
In the first nine months of 2005, we raised $126.2 million,
net of offering costs and expenses, from our IPO. We also
borrowed an additional $19.0 million on our term loan, for
a total of $75.0 million of loan proceeds on the term loan,
and subsequently repaid the term loan with proceeds from our
recently executed $100.0 million secured revolving credit
facility. The facility, and our expectations concerning future
financing activities are further described above under Liquidity
and Capital Resources. We also sold $1.1 million in limited
partnership units in our West Houston medical office building
partnership (a subsidiary of our Operating Partnership). Our
sale of such interests in certain of our healthcare facilities
is based on a strategy of encouraging physicians and other
parties to locate their practices in or near our healthcare
facilities; however, we do not consider this strategy integral
to our capital raising process.
52
In the first nine months of 2005, we made investments in four
existing healthcare facilities with an aggregate investment
value of $66.3 million, and net cash outlays of
$61.4 million, after subtracting contingent payments and
facility improvement reserves, and including a $6.0 million
first mortgage loan that was converted to a sale-leaseback
arrangement subsequent to September 30, 2005. We also
invested $53.8 million in our development projects. In
February 2005, Vibra reduced the principal amount of its loans
by $7.7 million. Our expectations about future investing
activities are described above under Liquidity and Capital
Resources.
Results of Operations
Our historical operations are generated substantially by
investments we have made since we completed our private offering
and raised approximately $233.5 million in common equity in
the second quarter of 2004 and since we completed our IPO and
raised approximately $125.6 million in common equity in the
third quarter of 2005. We also are in the process of developing
additional healthcare facilities that have not yet begun
generating revenue, and we expect to acquire additional existing
healthcare facilities in the foreseeable future. Accordingly, we
expect that future results of operations will vary materially
from our historical results.
|
|
|
Three Months Ended September 30, 2005 Compared to
Three Months Ended September 30, 2004 |
Net income for the three months ended September 30, 2005,
was $5,256,091 compared to net income of $2,628,938 for the
three months ended September 30, 2004, a 99.9% increase. We
completed our private offering of common equity early in the
second quarter of 2004, prior to which we had no revenues and
limited operations. At September 30, 2004, we had six
operating properties, one development property in the early
stages of construction and 10 employees. At September 30,
2005, we had nine operating properties, three development
properties (the Monroe County development project commenced in
October, 2005), and 17 employees.
A comparison of revenues for the three month periods ended
September 30, 2005 and 2004, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
|
|
2004 | |
|
|
|
Change | |
|
|
| |
|
|
|
| |
|
|
|
| |
Base rents
|
|
$ |
5,320,454 |
|
|
|
64.8 |
% |
|
$ |
2,874,033 |
|
|
|
57.0 |
% |
|
$ |
2,446,421 |
|
Straight-line rents
|
|
|
1,007,062 |
|
|
|
12.3 |
% |
|
|
1,142,186 |
|
|
|
22.7 |
% |
|
|
(135,124 |
) |
Percentage rents
|
|
|
643,757 |
|
|
|
7.9 |
% |
|
|
|
|
|
|
|
|
|
|
643,757 |
|
Interest from loans
|
|
|
1,218,785 |
|
|
|
14.8 |
% |
|
|
1,022,853 |
|
|
|
20.3 |
% |
|
|
195,932 |
|
Fee income
|
|
|
14,883 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
14,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
8,204,941 |
|
|
|
100.0 |
% |
|
$ |
5,039,072 |
|
|
|
100.0 |
% |
|
$ |
3,165,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue of $8,204,941 in the three months ended
September 30, 2005, was comprised of rents (85.0%) and
interest and fee income from loans (15.0%). All of this revenue
was derived from properties that we have acquired since
July 1, 2004. During the three month period ended
September 30, 2005, we received percentage rents of
approximately $644,000 from Vibra pursuant to provisions in our
leases that did not become effective until January 2005. Also,
the Desert Valley Victorville, Vibra
Redding and Gulf States Covington facilities, which
we acquired in the first six months of 2005, provided three
months of base rent revenue as compared to no revenue in 2004.
Straight-line rents decreased by approximately $135,000 in the
three months ended September 30, 2005 compared to the same
period of 2005 as a result of scheduled base rent increases
related to six Vibra properties. Interest income from loans in
the three months ended September 30, 2005 compared to the
same period in 2004 increased due to the Denham Springs mortgage
loan, which originated in the second quarter of 2005. Vibra
accounted for 83.8% and 100.0% of our gross revenues during the
three months ended September 30, 2005 and 2004,
53
respectively. The relative size of our Vibra revenue decreased
as a result of our diversification of tenants and will continue
to decrease as we acquire additional properties and lease them
to other tenants.
We expect our revenue to continue to increase in future quarters
as a result of expected acquisitions, completion of projects
currently under development, and lease rate escalations that
will become effective on January 1, 2006. We also expect
that the relative portion of our revenue that is paid by Vibra
will continue to decline as a result of continued tenant
diversification. Of the expected rental and other revenue
increases, none other than a 2.5% increase in Vibras
rental rate is expected from Vibra.
Depreciation and amortization during the three months ended
September 30, 2005, was $1,170,387, compared to $928,356,
during the three months ended September 30, 2004, a 26.1%
increase. All of the increased depreciation and amortization is
related to property acquisitions. We expect our depreciation and
amortization expense to continue to increase commensurate with
our acquisition and development activity.
General and administrative expenses in the three months ended
September 30, 2005 and 2004 totaled $1,990,971, and
$1,631,600, respectively, an increase of 22.0%. The increase is
due primarily to an increase in general office expenses as the
number of employees increased from ten to 17 since
September 30, 2004. We do not expect our general and
administrative expense to increase commensurate with our asset
growth. All of our leases are structured as net leases, such
that we are not responsible for property management or
maintenance. Accordingly, we believe that subsequent to our
adding five to ten employees over the next 12 months, we
will have sufficient human resources to sustain substantial
additional asset growth. During the three months ended
September 30, 2005, we also recorded $555,409 of share
based compensation expense related to restricted shares granted
to employees, officers and directors during the second and third
quarters of 2005.
Interest income (other than from loans) for the three months
ended September 30, 2005 and 2004, totaled $767,917 and
$188,568, respectively. Interest income increased primarily due
to higher cash balances in the three months ended
September 30, 2005, as a result of temporary investment of
proceeds from our IPO which closed in July, 2005, and the
underwriters exercise of their over-allotment option in
August, 2005. We expect earnings on our temporary investments to
decline substantially as we invest these proceeds in real estate
and other assets.
We recorded no interest expense in the three months ended
September 30, 2005, because the capitalized cost of our
developments exceeded our outstanding loan balances during the
period. Capitalized interest was approximately $915,000 during
the three months ended September 30, 2005.
|
|
|
Nine Months Ended September 30, 2005 Compared to the
Nine Months Ended September 30, 2004 |
Net income for the nine months ended September 30, 2005,
was $13,195,836 compared to net income of $1,065,322 for the
nine months ended September 30, 2004.
A comparison of revenues for the nine month periods ended
September 30, 2005 and 2004, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
|
|
2004 | |
|
|
|
Change | |
|
|
| |
|
|
|
| |
|
|
|
| |
Base rents
|
|
$ |
12,936,876 |
|
|
|
59.0 |
% |
|
$ |
2,874,033 |
|
|
|
57.0 |
% |
|
$ |
10,062,843 |
|
Straight-line rents
|
|
|
3,784,801 |
|
|
|
17.3 |
% |
|
|
1,142,186 |
|
|
|
22.7 |
% |
|
|
2,642,615 |
|
Percentage rents
|
|
|
1,642,712 |
|
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
1,642,712 |
|
Interest from loans
|
|
|
3,463,894 |
|
|
|
15.8 |
% |
|
|
1,022,853 |
|
|
|
20.3 |
% |
|
|
2,441,041 |
|
Fee income
|
|
|
98,963 |
|
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
98,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$ |
21,927,246 |
|
|
|
100.0 |
% |
|
$ |
5,039,072 |
|
|
|
100.0 |
% |
|
$ |
16,888,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue of $21,927,246 in the nine months ended
September 30, 2005, was comprised of rents (83.8%) and
interest and fee income from loans (16.2%). All of this revenue
was derived from properties that we have acquired since
July 1, 2004. Our base and straight-line rents increased in
2005 due to owning
54
the initial six Vibra properties for a full nine months of 2005,
plus the addition of the three new facilities in 2005. During
the nine month period ended September 30, 2005, we received
percentage rents of approximately $1.6 million. Pursuant to
our lease terms with Vibra, we were not eligible to receive
percentage rent in 2004. Interest income from loans in the nine
month period ended September 30, 2005, increased based on
the timing and amount of Vibra loan advances and repayments in
2004 and 2005, and on the origination of the Denham Springs loan
in 2005. Vibra accounted for 88.4% and 100.0% of our gross
revenues during the nine months ended September 30, 2005
and 2004, respectively. See the discussion of future expected
results under the three month comparison above.
Depreciation and amortization during the nine months ended
September 30, 2005, was $2,986,790, compared to $928,356,
during the nine months ended September 30, 2004. All of the
increased depreciation and amortization is related to property
acquisitions. We expect our depreciation and amortization
expense to continue to increase commensurate with our
acquisition and development activity.
General and administrative expenses in the nine months ended
September 30, 2005, and 2004 totaled $5,109,854, and
$3,329,559, respectively, an increase of 53.5%. The increase is
due primarily to an increase in general office and compensation
expenses as the number of employees has increased from ten to 17
since September 30, 2004. See the discussion of future
expected results under the three month comparison above. During
the nine months ended September 30, 2005, we also recorded
$602,403 of share based compensation expense as a result of
restricted shares granted to employees, officers and directors
during the second and third quarters of 2005.
Interest income (other than from loans) for the nine months
ended September 30, 2005, and 2004, totaled $1,509,903 and
$667,857, respectively. Interest income increased due to the
amount of offering proceeds temporarily invested in short term,
cash equivalent instruments and to higher interest rates in 2005.
Reconciliation of Non-GAAP Financial Measures
Investors and analysts following the real estate industry
utilize funds from operations, or FFO, as a supplemental
performance measure. While we believe net income available to
common stockholders, as defined by generally accepted accounting
principles (GAAP), is the most appropriate measure, our
management considers FFO an appropriate supplemental measure
given its wide use by and relevance to investors and analysts.
FFO, reflecting the assumption that real estate asset values
rise or fall with market conditions, principally adjusts for the
effects of GAAP depreciation and amortization of real estate
assets, which assume that the value of real estate diminishes
predictably over time.
As defined by the National Association of Real Estate Investment
Trusts, or NAREIT, FFO represents net income (loss) (computed in
accordance with GAAP), excluding gains (losses) on sales of real
estate, plus real estate related depreciation and amortization
and after adjustments for unconsolidated partnerships and joint
ventures. We compute FFO in accordance with the NAREIT
definition. FFO should not be viewed as a substitute measure of
the Companys operating performance since it does not
reflect either depreciation and amortization costs or the level
of capital expenditures and leasing costs necessary to maintain
the operating performance of our properties, which are
significant economic costs that could materially impact our
results of operations.
The following table presents a reconciliation of FFO to net
income for the three and nine months ended September 30,
2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
For the Nine Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net income
|
|
$ |
5,256,091 |
|
|
$ |
2,628,938 |
|
|
$ |
13,195,836 |
|
|
$ |
1,065,322 |
|
Depreciation and amortization
|
|
|
1,170,387 |
|
|
|
928,356 |
|
|
|
2,986,790 |
|
|
|
928,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations FFO
|
|
$ |
6,426,478 |
|
|
$ |
3,557,294 |
|
|
$ |
16,182,626 |
|
|
$ |
1,993,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
Per diluted share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
For the Nine | |
|
|
Months Ended | |
|
Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net income
|
|
$ |
.14 |
|
|
$ |
.10 |
|
|
$ |
.44 |
|
|
$ |
.06 |
|
Depreciation and amortization
|
|
|
.03 |
|
|
|
.04 |
|
|
|
.10 |
|
|
|
.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations FFO
|
|
$ |
.17 |
|
|
$ |
.14 |
|
|
$ |
.54 |
|
|
$ |
.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution Policy
We have elected to be taxed as a REIT commencing with our
taxable year that began on April 6, 2004 and ended on
December 31, 2004. To qualify as a REIT, we must meet a
number of organizational and operational requirements, including
a requirement that we distribute at least 90% of our REIT
taxable income, excluding net capital gain, to our stockholders.
It is our current intention to comply with these requirements
and maintain such status going forward.
The table below is a summary of our distributions paid or
declared in the nine months ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Declaration Date |
|
Record Date |
|
Date of Distribution | |
|
Distribution per Share | |
|
|
|
|
| |
|
| |
August 18, 2005
|
|
September 15, 2005 |
|
|
September 29, 2005 |
|
|
$ |
.17 |
|
May 19, 2005
|
|
June 20, 2005 |
|
|
July 14, 2005 |
|
|
$ |
.16 |
|
March 4, 2005
|
|
March 16, 2005 |
|
|
April 15, 2005 |
|
|
$ |
.11 |
|
November 11, 2004
|
|
December 16, 2004 |
|
|
January 11, 2005 |
|
|
$ |
.11 |
|
We intend to pay to our stockholders, within the time periods
prescribed by the Code, all or substantially all of our annual
taxable income, including taxable gains from the sale of real
estate and recognized gains on the sale of securities. It is our
policy to make sufficient cash distributions to stockholders in
order for us to maintain our status as a REIT under the Code and
to avoid corporate income and excise tax on undistributed income.
Quantitative and Qualitative Disclosures about Market Risk
Market risk includes risks that arise from changes in interest
rates, foreign currency exchange rates, commodity prices, equity
prices and other market changes that affect market sensitive
instruments. In pursuing our business plan, we expect that the
primary market risk to which we will be exposed is interest rate
risk.
In addition to changes in interest rates, the value of our
facilities will be subject to fluctuations based on changes in
local and regional economic conditions and changes in the
ability of our tenants to generate profits, all of which may
affect our ability to refinance our debt if necessary. The
changes in the value of our facilities would be reflected also
by changes in cap rates, which is measured by the
current base rent divided by the current market value of a
facility.
If market rates of interest on our variable rate debt increase
by 1%, the increase in annual interest expense on our variable
rate debt would decrease future earnings and cash flows by
approximately $1,005,000 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
$1,005,000 per year. This assumes that the amount
outstanding under our variable rate debt remains approximately
$100.5 million, the balance as of the date of this
prospectus.
We currently have no assets denominated in a foreign currency,
nor do we have any assets located outside of the United States.
We also have no exposure to derivative financial instruments.
56
OUR BUSINESS
Our Company
We are a self-advised real estate company that acquires,
develops and leases healthcare facilities providing
state-of-the-art healthcare services. We lease our facilities to
healthcare operators pursuant to long-term net-leases, which
require the tenant to bear most of the costs associated with the
property. From time to time, we also make loans to our tenants.
We believe that the United States healthcare delivery
system is becoming decentralized and is evolving away from the
traditional one stop, large-scale acute care
hospital. We believe that this change is the result of a number
of trends, including increasing specialization and technological
innovation and the desire of both physicians and patients to
utilize more convenient facilities. We also believe that
demographic trends in the United States, including in particular
an aging population, will result in continued growth in the
demand for healthcare services, which in turn will lead to an
increasing need for a greater supply of modern healthcare
facilities. In response to these trends, we believe that
healthcare operators increasingly prefer to conserve their
capital for investment in operations and new technologies rather
than investing in real estate and, therefore, increasingly
prefer to lease, rather than own, their facilities. Given these
trends and the size, scope and growth of this dynamic industry,
we believe there are significant opportunities to acquire and
develop net-leased healthcare facilities that are integral
components of local healthcare delivery systems.
Our strategy is to lease the facilities that we acquire or
develop to experienced healthcare operators pursuant to
long-term net-leases. We focus on acquiring and developing
rehabilitation hospitals, long-term acute care hospitals,
ambulatory surgery centers, cancer hospitals, womens and
childrens hospitals, skilled nursing facilities and
regional and community hospitals, as well as other specialized
single-discipline facilities and ancillary facilities. We
believe that these types of facilities will capture an
increasing share of expenditures for healthcare services. We
believe that our strategy for acquisition and development of
these types of net-leased facilities, which generally require a
physicians order for patient admission, distinguish us as
a unique investment alternative among REITs.
Our management team has extensive experience in acquiring,
owning, developing, managing and leasing healthcare facilities;
managing investments in healthcare facilities; acquiring
healthcare companies; and managing real estate companies. Our
management team also has substantial experience in healthcare
operations and administration, which includes many years of
service in executive positions for hospitals and other
healthcare providers, as well as in physician practice
management and hospital/physician relations. Therefore, in
addition to understanding investment characteristics and risk
levels typically important to real estate investors, our
management understands the changing healthcare delivery
environment, including changes in healthcare regulations,
reimbursement methods and patient demographics, as well as the
technological innovations and other advances in healthcare
delivery generally. We believe that this experience gives us the
specialized knowledge necessary to select attractively-located
net-leased facilities, underwrite our tenants, analyze
facility-level operations and understand the issues and
potential problems that may affect the healthcare industry
generally and the tenant service area and facility in
particular. We believe that our managements experience in
healthcare operations and real estate management and finance
will enable us to take advantage of numerous attractive
opportunities to acquire, develop and lease healthcare
facilities.
We completed a private placement of our common stock in April
2004 in which we raised net proceeds of approximately
$233.5 million. Shortly after completion of our private
placement, we began to acquire our current portfolio of 17
facilities, consisting of 14 facilities that are in
operation and three facilities that are under development. Five
of the facilities that are in operation are rehabilitation
hospitals, four are long-term acute care hospitals, one is a
community hospital with an integrated medical office building,
one is a community hospital with an adjacent medical office
building and two are community hospitals. One facility under
development is a womens hospital with an integrated
medical office building. Our second facility under development
is a community hospital. With respect to our third facility
under development, we have entered into a ground sublease with,
and an agreement to provide a construction loan to, North
Cypress for the development of a community hospital. The
facility will be developed on
57
property in which we currently have a ground lease interest. We
expect to acquire the land we are ground leasing after the
hospital has been partially completed. Upon completion of
construction, subject to certain limited conditions, we will
purchase the facility for an amount equal to the cost of
construction and lease the facility to the operator for a
15 year lease term. In the event we do not purchase the
facility, the ground sublease will continue and the construction
loan will become due. In that event, we expect to seek to
convert the construction loan to a 15 year term loan
secured by the facility.
We completed an initial public offering of our common stock in
July 2005 in which, with the overallotment option that was
exercised in August 2005, we raised net proceeds of
approximately $125.7 million. With the net proceeds of our
initial public offering, along with our available cash and cash
equivalents, we intend to expand our portfolio of facilities by
acquiring or developing additional net-leased healthcare
facilities.
We employ leverage in our capital structure in amounts
determined from time to time by our board of directors. At
present, we intend to limit our debt to approximately 50-60% of
the aggregate costs of our facilities, although we may
temporarily exceed those levels from time to time. We expect our
borrowings to be a combination of long-term, fixed-rate,
non-recourse mortgage loans, variable-rate secured term and
revolving credit facilities, and other fixed and variable-rate
short to medium-term loans.
In October 2005, we entered into a credit agreement with Merrill
Lynch Capital which replaced the loan agreement dated
December 31, 2004 between us and Merrill Lynch Capital. The
credit agreement provides for secured revolving loans of up to
$100.0 million in aggregate principal amount. The principal
amount may be increased to $175.0 million at our request.
The amounts borrowed are secured by mortgages on real property
owned by certain of our subsidiaries and are guaranteed by us.
The facilities that we use to secure the amounts under the
credit agreement make up the borrowing base. The
borrowing base, and therefore borrowings, are limited based on
(i) the appraised value of the borrowing base and
(ii) rent income from and financial performance of the
operator lessees of the borrowing base. Interest on borrowings
under the credit agreement will accrue monthly at one month
LIBOR (4.39% at December 28, 2005), plus a spread which
increases as amounts borrowed increase as a percentage of the
borrowing base. We must also pay certain fees based on the
amount borrowed in any monthly period. The credit agreement
expires in October 2009, and may be extended by us for one
additional year upon payment of a fee. The credit agreement
contains representations, financial and other affirmative and
negative covenants, events of default and remedies typical for
this type of facility.
We have also entered into construction loan agreements with
Colonial Bank pursuant to which we can borrow up to
$43.4 million to fund construction costs for our West
Houston Facilities. Each construction loan has a term of
18 months and an option on our part to convert the loan to
a 30-month term loan upon completion of construction of the West
Houston Facility securing that loan. Construction of the West
Houston MOB was completed in October 2005, and construction of
the West Houston Hospital was completed in November 2005. We
have not yet exercised the option to convert the construction
loans to term loans. The construction loans are secured by
mortgages on the West Houston Facilities, as well as assignments
of rents and leases on those facilities. The terms of the
construction loan agreements prevent us from allowing the net
operating income of the facility used as collateral for any
calendar quarter to be less than 1.25 times the principal and
interest payments then due and payable under the promissory note
for the designated period until the loan is paid in full. In the
event that our net operating income falls below the minimum debt
service requirement, we must prepay a portion of the principal
balance of the promissory note so that the debt service
requirement is satisfied and maintained within 10 days of
our non-compliance. The construction loans bear interest at the
one month LIBOR plus 225 basis points during the
construction period and one month LIBOR plus 250 basis
points thereafter. The Colonial Bank loans are cross-defaulted.
As of the date of this prospectus, there is $35.5 million
outstanding under the Colonial Bank loans.
We believe that we qualify as a REIT for federal income tax
purposes and have elected to be taxed as a REIT under the
federal income tax laws commencing with our taxable year that
began on April 6, 2004 and ended on December 31, 2004.
58
Market Opportunity
According to the United States Department of Commerce, Bureau of
Economic Analysis, healthcare is one of the largest industries
in the United States, and was responsible for approximately
15.3% of United States gross domestic product in 2003.
Healthcare spending has consistently grown at rates greater than
overall spending growth and inflation. As the chart below
reflects, healthcare expenditures are projected to increase by
more than 7% in 2004 and 2005 to $1.8 trillion and
$1.9 trillion, respectively, and are expected to reach $3.1
trillion by 2012.
We believe that the fundamental reasons for this growth in the
demand for healthcare services include the aging and growth of
the United States population, the advances in medical
technology and treatments, and the increase in life expectancy.
As illustrated by the chart below, the projected compound annual
growth rate (or CAGR), from 2000 to 2030 of the population of
senior citizens is three times the rate projected for the total
United States population. This demographic trend is projected to
result in an increase in the percentage of United States
citizens who are age 65 or older from 12.4% in 2000 to 19.6% in
2030.
Source: United States Bureau of the Census
59
To satisfy this growing demand for healthcare services, there is
a significant amount of new construction of healthcare
facilities. In 2003 alone, $24.5 billion was spent on the
construction of healthcare facilities, according to CMS. This
represented more than a 9% increase over the $22.4 billion
in healthcare construction spending for 2002. The following
chart reflects the growth and expected growth in healthcare
construction expenditures over the period that began in 1990 and
ends in 2012:
We believe that the United States healthcare delivery
system is evolving away from reliance on the traditional
one-stop, large-scale acute care hospital to one
that relies on specialty hospitals and healthcare facilities
that focus on single disciplines. We believe that there will be
an increasing demand for more accessible, specialized and
technologically-advanced healthcare delivery services as the
population grows and ages. We own and have targeted for
acquisition and development net-leased healthcare facilities
providing state-of-the-art healthcare services because we
believe these types of facilities represent the future of
healthcare delivery.
We believe that United States healthcare operators are in the
early stages of a long-term evolution from a model that favors
ownership of healthcare facilities to one that favors long-term
net leasing of these facilities. We see two primary reasons for
this:
|
|
|
|
|
First, in our experience, financial arrangements such as bond
financing gave non-profit healthcare providers access to
inexpensive capital, usually at 100% of the building cost.
However, budget constraints on local governments and tighter
underwriting standards have greatly reduced the availability of
this very inexpensive capital. |
|
|
|
Second, in our experience, healthcare providers were reimbursed
on cost-based reimbursement plans (calculated in part by
reference to a providers total cost in plant and
equipment) which provided no incentive for healthcare providers
to make efficient use of their capital. With the evolution of
the prospective payment reimbursement system, which reimburses
healthcare providers for specific procedures or diagnoses and
thus rewards the most efficient providers, healthcare providers
are no longer assured of returns on investments in non-revenue
producing assets such as the real estate where they operate.
Accordingly, in recent years, healthcare providers have begun to
convert their owned facilities to long-term lease arrangements
thereby accessing substantial amounts of previously unproductive
capital to invest in high margin operations and assets. |
In summary, the following market trends have shaped our
investment strategy:
|
|
|
|
|
Decentralization: We believe that healthcare services are
increasingly delivered through smaller, more accessible
facilities that are designed for specific treatments and medical
conditions and that are located near physicians and their
patients. Based upon our experience, more healthcare services
are delivered in specialized facilities than in acute care
hospitals. |
60
|
|
|
|
|
Specialization: In our experience, the percentage of
physicians and other healthcare professionals who practice in a
recognized specialty or subspecialty has been increasing for
many years. We believe that this creates opportunities for
development of additional specialized healthcare facilities as
advances in technologies and recognition of new practice
specialties result in new treatments for difficult medical
conditions. |
|
|
|
Convenient Patient Care: We believe that healthcare
service providers are increasingly seeking to provide specific
services in a single location for the convenience of both
patients and physicians. These single-discipline centers are
primarily located in suburban areas, near patients and
physicians, as opposed to the traditional urban hospital setting. |
|
|
|
Aging Population: We believe that demographic trends in
the United States, including in particular an aging population,
will result in continued growth in the demand for healthcare
services, which in turn will lead to an increasing need for a
greater supply of modern healthcare facilities. |
|
|
|
Use of Capital: We believe that healthcare operators
increasingly prefer to conserve their capital for investment in
their operations and for new technologies rather than investing
it in real estate. |
Our Target Facilities
The market for healthcare real estate is extensive and includes
real estate owned by a variety of healthcare operators. We focus
on acquiring and developing those net-leased facilities that are
specifically designed to reflect the latest trends in healthcare
delivery methods. These facilities include:
|
|
|
|
|
Rehabilitation Hospitals: Rehabilitation hospitals
provide inpatient and outpatient rehabilitation services for
patients recovering from multiple traumatic injuries, organ
transplants, amputations, cardiovascular surgery, strokes, and
complex neurological, orthopedic, and other conditions. In
addition to Medicare certified rehabilitation beds,
rehabilitation hospitals may also operate Medicare certified
skilled nursing, psychiatric, long-term, or acute care beds.
These hospitals are often the best medical alternative to
traditional acute care hospitals where under the Medicare
prospective payment system there is pressure to discharge
patients after relatively short stays. |
|
|
|
Long-term Acute Care Hospitals: Long-term acute care
hospitals focus on extended hospital care, generally at least
25 days, for the medically-complex patient. Long-term acute
care hospitals have arisen from a need to provide care to
patients in acute care settings, including daily physician
observation and treatment, before they are able to move to a
rehabilitation hospital or return home. These facilities are
reimbursed in a manner more appropriate for a longer length of
stay than is typical for an acute care hospital. |
|
|
|
Regional and Community Hospitals: We define regional and
community hospitals as general medical/surgical hospitals whose
practicing physicians generally serve a market specific area,
whether urban, suburban or rural. We intend to limit our
ownership of these facilities to those with market, ownership,
competitive and technological characteristics that provide
barriers to entry for potential competitors. |
|
|
|
Womens and Childrens Hospitals: These
hospitals serve the specialized areas of obstetrics and
gynecology, other womens healthcare needs, neonatology and
pediatrics. We anticipate substantial development of facilities
designed to meet the needs of women and children and their
physicians as a result of the decentralization and
specialization trends described above. |
|
|
|
Ambulatory Surgery Centers: Ambulatory surgery centers
are freestanding facilities designed to allow patients to have
outpatient surgery, spend a short time recovering at the center,
then return home to complete their recoveries. Ambulatory
surgery centers offer a lower cost alternative to general
hospitals for many surgical procedures in an environment that is
more convenient for both patients and physicians. Outpatient
procedures commonly performed include those related to |
61
|
|
|
|
|
gastrointestinal, general surgery, plastic surgery, ear, nose
and throat/audiology, as well as orthopedics and sports medicine. |
|
|
|
Other Single-Discipline Facilities: The decentralization
and specialization trends in the healthcare industry are also
creating demands and opportunities for physicians to practice in
hospital facilities in which the design, layout and medical
equipment are specifically developed, and healthcare
professional staff are educated, for medical specialties. These
facilities include heart hospitals, ophthalmology centers,
orthopedic hospitals and cancer centers. |
|
|
|
Medical Office Buildings: Medical office buildings are
office and clinic facilities occupied and used by physicians and
other healthcare providers in the provision of outpatient
healthcare services to their patients. The medical office
buildings that we target generally are or will be master-leased
and adjacent to or integrated with our other targeted healthcare
facilities. |
|
|
|
Skilled Nursing Facilities: Skilled nursing facilities
are healthcare facilities that generally provide more
comprehensive services than assisted living or residential care
homes. They are primarily engaged in providing skilled nursing
care for patients who require medical or nursing care or
rehabilitation services. Typically these services involve
managing complex and serious medical problems such as wound
care, coma care or intravenous therapy. They offer both short
and long-term care options for patients with serious illness and
medical conditions. Skilled nursing facilities also provide
rehabilitation services that are typically utilized on a
short-term basis after hospitalization for injury or illness. |
Underwriting Process
Our real estate and loan underwriting process focuses on
healthcare operations and real estate investment. This process
is described in a written policy that requires, among other
things, completion of specific elements of due diligence at the
appropriate stages, including appraisals, engineering
evaluations and environmental assessments, all provided by
qualified and independent third parties. All of our executive
officers are involved in the acquisition and due diligence
process.
Our acquisition and development selection process includes a
comprehensive analysis of the targeted healthcare
facilitys profitability, financial trends in revenues and
expenses, barriers to competition, the need in the market for
the type of healthcare services provided by the facility, the
strength of the location and the underlying value of the
facility, as well as the financial strength and experience of
the prospective tenant and the tenants management team. We
also analyze the operating history of the specific facility,
including the facilitys earnings, cash flow, occupancy and
patient and payor mix, in order to evaluate its financial and
operating strength.
When we identify an attractive acquisition or development
opportunity based on historical operations and market
conditions, we determine the financial value of a potential
long-term net-lease arrangement based on our target long-term
net-lease capitalization rates, which currently range from 9.5%
to 11%, and fixed charge coverage ratios. We compare that
financial value to the replacement costs that we estimate by
consulting with major healthcare construction contractors,
engaging construction engineers or facility assessment
consultants as appropriate, and reviewing recent cost studies.
In addition, our due diligence process includes obtaining and
evaluating title, environmental and other customary third-party
reports. In certain instances we have acquired or may acquire a
facility from a tenant or proposed tenant at a purchase price in
excess of what our tenant or proposed tenant recently paid or
expects to pay for that same facility. The investment committee
of our board of directors has the authority to approve
acquisitions or developments of facilities that exceed
$10.0 million.
We seek to build tenant relationships with healthcare operators
that we believe are positioned to prosper in the changing
healthcare environment. We seek tenant relationships with
operators who, based on our financial and operating analyses,
have demonstrated the ability to manage in good and bad economic
conditions. In certain cases, we lend funds to prospective
tenants to assist them with their acquisition of the operations
at the facilities that we intend to acquire and lease to them
and for initial
62
working capital needs. See Our Portfolio Our
Current Portfolio of Facilities. In these instances, where
feasible and in compliance with applicable healthcare laws and
regulations, we seek to obtain percentage rents based on the
prospective tenants revenues in addition to our base rent.
Through our detailed underwriting of healthcare operations and
real estate, we expect to deliver attractive risk-adjusted
returns to our stockholders.
Asset Management
We actively monitor our facilities, including reviewing periodic
financial reporting and operating data, as well as visiting each
facility and meeting with the management of our tenants on a
regular basis. Integral to our asset management philosophy is
our desire to build long-term relationships with the tenants
and, accordingly, we have developed a partnering approach which
we believe results in the tenant viewing us as a member of its
team. We understand that in order to maximize the value of our
investments, our tenants must prosper. Therefore, we expect to
work closely with our tenants throughout the terms of our leases
in order to foster a long-term working relationship and to
maximize the possibility of new business opportunities. For
example, we and our prospective tenants typically conduct due
diligence in a coordinated manner and share with each other the
results of our respective due diligence investigations. During
the lease term, we conduct joint evaluations of local facility
operations and participate in discussions about strategic plans
that may ultimately require our approval pursuant to the terms
of our lease agreements. Our chief executive officer, chief
financial officer and chief operating officer also communicate
frequently with their counterparts at our tenants in order to
maintain knowledge about changing regulatory and business
conditions. We believe this knowledge equips us to anticipate
changes in our tenants operations in sufficient time to
strategically and financially plan for, rather than react to,
changing conditions.
In addition to our ongoing analyses of our tenants
operations, our management team actively monitors and researches
each healthcare segment in which we own and lease facilities in
order to help us recognize changing economic, market and
regulatory conditions. Our senior management is not only
involved in the underwriting of each asset upon acquisition or
development, but is also involved in the asset management
process during the entire period in which we own the facility.
Our Formation Transactions
The following is a summary of our formation transactions:
|
|
|
|
|
We were formed as a Maryland corporation on August 27, 2003
to succeed to the business of Medical Properties Trust, LLC, a
Delaware limited liability company, which was formed by certain
of our founders in December 2002. In connection with our
formation, we issued our founders 1,630,435 shares of our
common stock in exchange for nominal cash consideration, the
membership interests of Medical Properties Trust, LLC were
transferred to us and Medical Properties Trust, LLC became our
wholly-owned subsidiary. Upon its formation in September 2003,
our operating partnership assumed certain obligations of Medical
Properties Trust, LLC. Upon completion of our private placement
in April 2004, 1,108,527 shares of the
1,630,435 shares of common stock held by our founders were
redeemed and they now collectively hold 1,047,088 shares of
our common stock. Our founders agreed to the redemption of a
portion of their shares of our common stock for nominal
consideration primarily in order to facilitate the completion of
our April 2004 private placement. |
|
|
|
Our operating partnership, MPT Operating Partnership, L.P., was
formed in September 2003. Through our wholly-owned subsidiary,
Medical Properties Trust, LLC, we are the sole general partner
of our operating partnership. We currently own all of the
limited partnership interests in our operating partnership. |
|
|
|
MPT Development Services, Inc., a Delaware corporation that we
formed in January 2004, operates as our wholly-owned taxable
REIT subsidiary. |
|
|
|
In April 2004 we completed a private placement of
25,300,000 shares of common stock at an offering price of
$10.00 per share. Friedman, Billings, Ramsey & Co.,
Inc. acted as the initial |
63
|
|
|
|
|
|
purchaser and sole placement agent. The total net proceeds to
us, after deducting fees and expenses of the offering, were
approximately $233.5 million. |
|
|
|
|
On July 13, 2005, we completed an initial public offering
of 12,066,823 shares of common stock, priced at $10.50 per
share. Of these shares of common stock, 701,823 shares were sold
by selling stockholders and 11,365,000 shares were sold by us.
Friedman, Billings, Ramsey & Co., Inc. served as the sole
book-running manager and J.P. Morgan Securities Inc. served as
co-lead manager for the offering. Wachovia Capital Markets, LLC
and Stifel, Nicolaus & Company, Incorporated served as
co-managers for the offering. The underwriters exercised an
option to purchase an additional 1,810,023 shares of common
stock to cover over-allotments on August 5, 2005. We raised
net proceeds of approximately $125.7 million pursuant to
the offering after deducting the underwriting discount and
offering expenses. |
|
|
|
|
The net proceeds of our private placement and initial public
offering, together with borrowed funds, have been or will be
used to acquire our current portfolio of 17 facilities. Thus
far, we have spent approximately $234.6 million for the 12
existing facilities that we acquired, and funded approximately
$56.0 million of a projected total of $63.1 million of
development costs for the West Houston Facilities, approximately
$9.6 million of a projected total of $38.0 million of
development costs for the Bucks County Facility, approximately
$11.1 million of a projected total of $35.5 million of
development costs for the Monroe Facility and approximately
$18.7 million pursuant to the North Cypress construction
loan. In addition, we have loaned approximately
$47.6 million to Vibra to acquire the operations at the
Vibra Facilities and for working capital purposes,
$6.2 million of which has been repaid. |
|
Edward K. Aldag, Jr., William G. McKenzie, Emmett E.
McLean, R. Steven Hamner and James P. Bennett may be
considered our founders. Mr. Aldag is serving as chairman
of our board of directors and as our president and chief
executive officer. Mr. McKenzie is serving as our vice
chairman of the board. Mr. McLean is serving as our
executive vice president, chief operating officer, treasurer and
assistant secretary. Mr. Hamner is serving as our executive
vice president and chief financial officer. Mr. Bennett
formerly was an owner, officer, director of and consultant to
the companys predecessor, Medical Properties Trust, LLC,
but has not been affiliated with us since August 2003.
Our Operating Partnership
We own our facilities and conduct substantially all of our
business through our operating partnership, MPT Operating
Partnership, L.P., and its subsidiaries. MPT Operating
Partnership, L.P. is a Delaware limited partnership organized by
us in September 2003. Our wholly-owned limited liability
company, Medical Properties Trust, LLC, serves as the sole
general partner of, and holds a 1% interest in, our operating
partnership. We also currently own all of the limited
partnership interests in our operating partnership, constituting
a 99% partnership interest, but may issue limited partnership
units from time to time in connection with facility acquisitions
and developments. Where permitted by applicable law, we intend
to sell equity interests in subsidiaries of our operating
partnership in connection with, or subsequent to, the
acquisition and development of facilities.
Holders of limited partnership units of our operating
partnership, other than us, would be entitled to redeem their
partnership units for shares of our common stock on a
one-for-one basis, subject to adjustments for stock splits,
dividends, recapitalizations and similar events. At our option,
in lieu of issuing shares of common stock upon redemption of
limited partnership units, we may redeem the partnership units
tendered for cash in an amount equal to the then-current value
of the shares of common stock. Holders of limited partnership
units would be entitled to receive distributions equivalent to
the dividends we pay to holders of our shares of common stock.
As the sole owner of the general partner of our operating
partnership, we have the power to manage and conduct our
operating partnerships business, subject to the
limitations described in the first amended and restated
agreement of limited partnership of our operating partnership.
See Partnership Agreement.
64
MPT Operating Partnership, L.P. is a limited partner of MPT West
Houston MOB, L.P. and MPT West Houston Hospital, L.P., which
respectively own the West Houston MOB and the West Houston
Hospital. MPT West Houston MOB, LLC and MPT West Houston
Hospital, LLC, our wholly-owned subsidiaries, are the respective
general partners of these entities. Physicians and others
associated with our tenant or subtenants of the West Houston MOB
own approximately 24% of the aggregate equity interests in MPT
West Houston MOB, L.P. Stealth, L.P., the tenant of the West
Houston Hospital and an entity majority-owned by physicians,
owns a 6% limited partnership interest in MPT West Houston
Hospital, L.P.
In general, the management and control of the limited
partnerships or limited liability companies that own our
properties, such as MPT West Houston MOB, L.P. and MPT West
Houston Hospital, L.P., rests with our operating partnership or
its subsidiaries. The limited partners or other minority owners
in these entities will not participate in the management or
control of the business of the partnership or other entity.
Although the partnership agreements or limited liability company
agreements for future limited partnerships or limited liability
companies may vary, our current limited partnership agreements
require approval of the limited partners holding a majority of
the units in the partnership other than the general partner and
its affiliates to:
|
|
|
|
|
amend the partnership agreement in a manner that would: |
|
|
|
|
|
adversely affect the financial or other rights of the limited
partners who are not affiliates of the general partner or
positively affect the financial rights or other rights of the
general partner or reduce the general partners obligations
and responsibilities under the limited partnership agreement; |
|
|
|
impose on the limited partners who are not affiliates of the
general partner any obligation to make additional capital
contributions to the partnership; |
|
|
|
adversely affect the rights of certain limited partners without
similarly affecting the rights of other limited partners; |
|
|
|
|
|
merge, consolidate or combine with another entity; or |
|
|
|
determine the terms and the amount of consideration payable for
any issuances of additional partnership units to our operating
partnership, the general partner or any of their respective
affiliates. |
In general, each partner or other equity owner will share in the
partnerships profits, losses and available cash flow pro
rata based upon his percentage interest in the partnership. We
may hold properties we develop or acquire in the future through
structures similar to the structure through which we hold the
West Houston Facilities.
MPT Development Services, Inc.
MPT Development Services, Inc., our taxable REIT subsidiary, was
incorporated in January 2004 as a Delaware corporation. MPT
Development Services, Inc. is authorized to provide third-party
facility planning, project management, medical equipment
planning and implementation services, medical office building
management services, lending services, including but not limited
to acquisition and working capital loans to our tenants, and
other services that neither we nor our operating partnership can
undertake directly under applicable REIT tax rules. Overall, no
more than 20% of the value of our assets may consist of
securities of one or more taxable REIT subsidiaries, and no more
than 25% of the value of our assets may consist of securities
that are not qualifying assets under the test requiring that 75%
of a REITs assets consist of real estate and other related
assets. Further, a taxable REIT subsidiary may not directly or
indirectly operate or manage a healthcare facility. For purposes
of this definition a healthcare facility means a
hospital, nursing facility, assisted living facility, congregate
care facility, qualified continuing care facility, or other
licensed facility which extends medical or nursing or ancillary
services to patients and which is operated by a service provider
that is eligible for participation in the Medicare program under
Title XVIII of the Social Security Act with respect to the
facility.
65
MPT Development Services, Inc. will pay federal, state and local
income taxes at regular corporate rates on its taxable income.
MPT Development Services, Inc. has made, and from time to time
may make, loans to tenants or prospective tenants to assist them
with the acquisition of the operations at facilities leased or
to be leased to them and for initial working capital needs.
There are currently approximately $46.7 million in such
loans outstanding. See Our Portfolio Our
Current Portfolio of Facilities.
Depreciation
Generally, the federal tax basis for our facilities used to
determine depreciation for federal income tax purposes will be
our acquisition costs for such facilities. To the extent
facilities are acquired with units of our operating partnership
or its subsidiaries, we will acquire a carryover basis in the
facilities. For federal income tax purposes, depreciation with
respect to the real property components of our facilities, other
than land, generally will be computed using the straight-line
method over a useful life of 40 years, for a depreciation
rate of 2.50% per year.
Our Leases
The leases for our facilities are net leases with
terms requiring the tenant to pay all ongoing operating and
maintenance expenses of the facility, including property,
casualty, general liability and other insurance coverages,
utilities and other charges incurred in the operation of the
facilities, as well as real estate taxes, ground lease rent and
the costs of capital expenditures, repairs and maintenance. Our
leases also provide that our tenants will indemnify us for
environmental liabilities. Our current leases range from 11 to
16 years and provide for annual rent escalation and, in the
case of the Vibra Facilities and the Bucks County Facility,
percentage rent. Our leases require periodic reports and
financial statements from our tenants. In addition, our leases
contain customary default, termination, and subletting and
assignment provisions. See Our Portfolio Our
Current Portfolio of Facilities. We anticipate that our
future leases will have similar terms, including percentage rent
where feasible and in compliance with applicable healthcare laws
and regulations.
Environmental Matters
Under various federal, state and local environmental laws and
regulations, a current or previous owner, operator or tenant of
real estate may be required to investigate and clean up
hazardous or toxic substances or petroleum product releases or
threats of releases at such property and may be held liable to a
government entity or to third parties for property damage and
for investigation, clean-up and monitoring costs incurred by
such parties in connection with the actual or threatened
contamination, including substances currently unknown, that may
have been released on the real estate. These laws may impose
clean-up responsibility and liability without regard to fault,
or whether or not the owner, operator or tenant knew of or
caused the presence of the contamination. The liability under
these laws may be joint and several for the full amount of the
investigation, clean-up and monitoring costs incurred or to be
incurred or actions to be undertaken, although a party held
jointly and severally liable might be able to obtain
contributions from other identified, solvent, responsible
parties of their fair share toward these costs. Investigation,
clean-up and monitoring costs may be substantial and can exceed
the value of the property. The presence of contamination, or the
failure to properly remediate contamination, on a property may
adversely affect the ability of the owner, operator or tenant to
sell or rent that property or to borrow funds using such
property as collateral and may adversely impact our investment
in that property. In addition, if hazardous substances are
located on or released from our properties, we could incur
substantial liabilities through a private party personal injury
claim, a property damage claim by an adjacent property owner, or
claims by a governmental entity or others for other damages,
such as natural resource damages. This liability may be imposed
under environmental laws or common-law principles.
Federal regulations require building owners and those exercising
control over a buildings management to identify and warn,
via signs and labels, of potential hazards posed by workplace
exposure to installed asbestos-containing materials and
potentially asbestos-containing materials in their building. The
regulations also set forth employee training, record keeping and
due diligence requirements pertaining to
66
asbestos-containing materials and potentially
asbestos-containing materials. Government entities can assess
significant fines for violation of these regulations. Building
owners and those exercising control over a buildings
management may be subject to an increased risk of personal
injury lawsuits by workers and others exposed to
asbestos-containing materials and potentially
asbestos-containing materials as a result of these regulations.
The regulations may affect the value of a building containing
asbestos-containing materials and potentially
asbestos-containing materials in which we have invested.
Federal, state and local laws and regulations also govern the
removal, encapsulation, disturbance, handling and disposal of
asbestos-containing materials and potentially
asbestos-containing materials when such materials are in poor
condition or in the event of construction, remodeling,
renovation or demolition of a building. Such laws and
regulations may impose liability for improper handling or a
release to the environment of asbestos-containing materials and
potentially asbestos-containing materials and may provide for
fines to, and for third parties to seek recovery from, owners or
operators of real property for personal injury or improper work
exposure associated with asbestos-containing materials and
potentially asbestos-containing materials.
Prior to closing any facility acquisition, we obtain Phase I
environmental assessments in order to attempt to identify
potential environmental concerns at the facilities. These
assessments will be carried out in accordance with an
appropriate level of due diligence and will generally include a
physical site inspection, a review of relevant federal, state
and local environmental and health agency database records, one
or more interviews with appropriate site-related personnel,
review of the propertys chain of title and review of
historic aerial photographs and other information on past uses
of the property. We may also conduct limited subsurface
investigations and test for substances of concern where the
results of the Phase I environmental assessments or other
information indicates possible contamination or where our
consultants recommend such procedures.
While we may purchase many of our facilities on an as
is basis, we intend for all of our purchase contracts to
contain an environmental contingency clause, which permits us to
reject a facility because of any environmental hazard at the
facility.
Competition
We compete in acquiring and developing facilities with financial
institutions, institutional pension funds, real estate
developers, other REITs, other public and private real estate
companies and private real estate investors. Among the factors
adversely affecting our ability to compete are the following:
|
|
|
|
|
we may have less knowledge than our competitors of certain
markets in which we seek to purchase or develop facilities; |
|
|
|
many of our competitors have greater financial and operational
resources than we have; and |
|
|
|
our competitors or other entities may determine to pursue a
strategy similar to ours. |
To the extent that we experience vacancies in our facilities, we
will also face competition in leasing those facilities to
prospective tenants. The actual competition for tenants varies
depending on the characteristics of each local market. Virtually
all of our facilities operate in a competitive environment, and
patients and referral sources, including physicians, may change
their preferences for a healthcare facilities from time to time.
Healthcare Regulatory Matters
The following discussion describes certain material federal
healthcare laws and regulations that may affect our operations
and those of our tenants. However, the discussion does not
address state healthcare laws and regulations, except as
otherwise indicated. These state laws and regulations, like the
federal healthcare laws and regulations, could affect our
operations and those of our tenants. Moreover, the discussion
relating to reimbursement for healthcare services addresses
matters that are subject to frequent review and revision by
Congress and the agencies responsible for administering federal
payment programs. Consequently, predicting future reimbursement
trends or changes is inherently difficult.
67
Ownership and operation of hospitals and other healthcare
facilities are subject, directly and indirectly, to substantial
federal, state and local government healthcare laws and
regulations. Our tenants failure to comply with these laws
and regulations could adversely affect their ability to meet
their lease obligations. Physician investment in us or in our
facilities also will be subject to such laws and regulations. We
intend for all of our business activities and operations to
conform in all material respects with all applicable laws and
regulations.
Anti-Kickback Statute.
42 U.S.C. §1320a-7b(b),
or the Anti-Kickback Statute, prohibits, among other things, the
offer, payment, solicitation or acceptance of remuneration
directly or indirectly in return for referring an individual to
a provider of services for which payment may be made in whole or
in part under a federal healthcare program, including the
Medicare or Medicaid programs. Violation of the Anti-Kickback
Statute is a crime and is punishable by criminal fines of up to
$25,000 per violation, five years imprisonment or both.
Violations may also result in civil sanctions, including civil
penalties of up to $50,000 per violation, exclusion from
participation in federal healthcare programs, including Medicare
and Medicaid, and additional monetary penalties in amounts
treble to the underlying remuneration.
The Anti-Kickback Statute defines the term
remuneration very broadly and, accordingly, local
physician investment in our facilities could trigger scrutiny of
our lease arrangements under the Anti-Kickback Statute. In
addition to certain statutory exceptions, the Office of
Inspector General of the Department of Health and Human
Services, or OIG, has issued Safe Harbor Regulations
that describe practices that will not be considered violations
of the Anti-Kickback Statute. These include a safe harbor for
space rental arrangements which protects payments made by a
tenant to a landlord under a lease arrangement meeting certain
conditions. We intend to use our commercially reasonable efforts
to structure lease arrangements involving facilities in which
local physicians are investors and tenants so as to satisfy, or
meet as closely as possible, the conditions for the safe harbor
for space rental. We cannot assure you, however, that we will
meet all the conditions for the safe harbor, and it is unlikely
that we will meet all conditions for the safe harbor in those
instances in which percentage rent is contemplated and we have
physician investors. In addition, federal regulations require
that our tenants with purchase options pay fair market value
purchase prices for facilities in which we have physician
investment. We intend our lease agreement purchase option prices
to be fair market value; however, we cannot assure you that all
of our purchase options will be at fair market value. Any
purchase not at fair market value may present risks of challenge
from healthcare regulatory authorities. The fact that a
particular arrangement does not fall within a statutory
exception or safe harbor does not mean that the arrangement
violates the Anti-Kickback Statute. The statutory exception and
Safe Harbor Regulations simply provide a guaranty that
qualifying arrangements will not be prosecuted under the
Anti-Kickback Statute. The implication of the Anti-Kickback
Statute could limit our ability to include local physicians as
investors or tenants or restrict the types of leases into which
we may enter if we wish to include such physicians as investors
having direct or indirect ownership interests in our facilities.
Federal Physician Self-Referral Statute. Any physicians
investing in our company or its subsidiary entities could also
be subject to the Ethics in Patient Referrals Act of 1989, or
the Stark Law (codified at
42 U.S.C. § 1395nn). Unless subject to an
exception, the Stark Law prohibits a physician from making a
referral to an entity furnishing designated
health services paid by Medicare or Medicaid if the
physician or a member of his immediate family has a
financial relationship with that entity. A
reciprocal prohibition bars the entity from billing Medicare or
Medicaid for any services furnished pursuant to a prohibited
referral. Financial relationships are defined very broadly to
include relationships between a physician and an entity in which
the physician or the physicians family member has
(i) a direct or indirect ownership or investment interest
that exists in the entity through equity, debt or other means
and includes an interest in an entity that holds a direct or
indirect ownership or investment interest in any entity
providing designated health services; or (ii) a direct or
indirect compensation arrangement with the entity.
The Stark Law as originally enacted in 1989 only applied to
referrals for clinical laboratory tests reimbursable by
Medicare. However, the law was amended in 1993 and 1994 and,
effective January 1,
68
1995, became applicable to referrals for an expanded list of
designated health services reimbursable under Medicare or
Medicaid.
The Stark Law specifies a number of substantial sanctions that
may be imposed upon violators. Payment is to be denied for
Medicare claims related to designated health services referred
in violation of the Stark Law. Further, any amounts collected
from individual patients or third-party payors for such
designated health services must be refunded on a timely basis. A
person who presents or causes to be presented a claim to the
Medicare program in violation of the Stark Law is also subject
to civil monetary penalties of up to $15,000 per claim, civil
money penalties of up to $100,000 per arrangement and possibly
even exclusion from participation in the Medicare and Medicaid
programs.
Final regulations applicable only to physician referrals for
clinical laboratory services were published in August 1995. A
proposed rule applicable to physician referrals for all
designated health services was published in January 1998. In
January 2001, CMS published the Phase I final
rule, which finalized a significant portion of the 1998 proposed
rule. On March 26, 2004, CMS issued the second phase of its
final regulations addressing physician referrals to entities
with which they have a financial relationship (the
Phase II rule). The Phase II rule
addresses and interprets a number of exceptions for ownership
and compensation arrangements involving physicians, including
the exceptions for space and equipment rentals and the exception
for indirect compensation arrangements. The Phase II rule
also includes exceptions for physician ownership and investment,
including physician ownership of rural providers and hospitals.
The new regulation revised the hospital ownership exception to
reflect the 18-month moratorium that began December 8, 2003
on physician ownership or investment in specialty hospitals,
which was enacted in Section 507 of the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003.
The Phase II rule became effective on July 26, 2004.
Although the 18-month moratorium imposed by Section 507 of
the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 expired on June 8, 2005, a bill introduced in
the Senate essentially would make the moratorium permanent with
limited exceptions. If enacted, the law would have a retroactive
effective date of June 8, 2005.
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. 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
69
August 15, 2005, CMS published the fiscal year 2006 Final
Rule for inpatient rehabilitation facilities, or IRFs. The Final
Rule adopts a number of refinements to the IRF prospective
payment system, including an
across-the-board 1.9%
decrease in the standard payment amount based on evidence that
coding increases instead of increases in patient acuity have led
to increased payments to IRFs. The Final Rule also includes a
3.6% market basket increase and increases from 19.1% to 21.3%
the payment rate adjustment for IRFs located in rural areas.
Further, the Final Rule reduces the outlier threshold for cases
with unusually high costs from $11,211 to $5,132. In addition,
the Final Rule contains policy changes including the adoption of
new labor market area definitions which are based on the new
Core Based Statistical Areas announced by the Office of
Management and Budget, or OMB, late in 2000. These increases are
expected to benefit those tenants of ours who operate IRFs.
These increases benefit those tenants of ours who operate IRFs.
On May 7, 2004, CMS issued a Final Rule to revise the
classification criterion, commonly known as the
75 percent rule, used to classify a hospital or
hospital unit as an IRF. The compliance threshold is used to
distinguish an IRF from an acute care hospital for purposes of
payment under the Medicare IRF prospective payment system. The
Final Rule implements a three-year period to analyze claims and
patient assessment data to determine whether CMS will continue
to use a compliance threshold that is lower than 75% or not. For
cost reporting periods beginning on or after July 1, 2004,
and before July 1, 2005, the compliance threshold will be
50% of the IRFs total patient population. The compliance
threshold will increase to 60% of the IRFs total patient
population for cost reporting periods beginning on or after
July 1, 2005 and before July 1, 2006, to 65% for cost
reporting periods beginning on or after July 1, 2006 and
before July 1, 2007, and to 75% for cost reporting periods
after July 1, 2007. On July 14, 2005, Senators Rick
Santorum and Ben Nelson introduced legislation in response to
the Final Rule entitled Preserving Patient Access to
Inpatient Rehabilitation Hospitals Act of 2005. The
legislation seeks to limit the scope of the Final Rule so that
additional research may be conducted on the clinical criteria
for reimbursement of IRFs. The bill would implement the
compliance and enforcement threshold at 50 percent for two
years and apply retroactively to facilities that lost their IRF
status and payments on or after July 1, 2005, if such
facilities are in compliance with the 50 percent threshold.
The bill was referred to the Senate Committee on Finance on
July 14, 2005. The Budget Reconciliation Conference
Agreement, which was approved by the Senate on December 22, 2005
and which will be considered for final passage by the House
following its return from recess on or about January 31,
2006, contains a provision that would extend the phase-in period
of the 75 percent rule for one additional year. The
bill would require facilities to meet a 60% threshold starting
in fiscal year 2006, 65% in fiscal year 2007 and 75% in fiscal
year 2008. We do not know whether the legislation will be passed.
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),
70
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 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 Budget Reconciliation Conference Agreement requires the
Secretary of Health and Human Services to develop and implement
a plan within eight months of passage to address issues
regarding physician investment in specialty hospitals including
concerns with proportionality of investment return, bona fide
investment, annual disclosure of investment information, and the
appropriate care of Medicare and charity care patients. In
addition, the agreement continues the CMS suspension of
enrollment of new specialty hospitals until the issuance of the
mandated report. We cannot predict whether the bill will be
passed.
Any acquisition or development of specialty hospitals must
comply with the current application and interpretation of the
Stark Law and, if enacted, the provisions of the Budget
Reconciliation Conference Agreement. 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 limit
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
71
an applicable exception under the Stark Law. We intend to
structure all of our leases, including leases containing
percentage rent arrangements, to comply with applicable
exceptions under the Stark Law and to comply with the
Anti-Kickback Statute. We believe that strong arguments can be
made that percentage rent arrangements, when structured
properly, should be permissible under the Stark Law and the
Anti-Kickback Statute; however, these laws are subject to
continued regulatory interpretation and there can be no
assurance that such arrangements will continue to be
permissible. Accordingly, although we do not currently have any
percentage rent arrangements where physicians own an interest in
our facilities, we may be prohibited from entering into
percentage rent arrangements in the future where physicians own
an interest in our facilities. In the event we enter into such
arrangements at some point in the future and later find the
arrangements no longer comply with the Stark Law or
Anti-Kickback Statute, we or our tenants may be subject to
penalties under the statutes.
The California Department of Health Services recently adopted
regulations, codified as Sections 70217, 70225 and 70455 of
Title 22 of the California Code of Regulations, or CCR,
which establish minimum, specific, numerical licensed
nurse-to-patient ratios for specified units of general acute
care hospitals. These regulations are effective January 1,
2004. The minimum staffing ratios set forth in
22 CCR 70217(a) co-exist with existing regulations
requiring that hospitals have a patient classification system in
place. 22 CCR, 70053.2 and 70217. The licensed
nurse-to-patient ratios constitute the minimum number of
registered nurses, licensed vocational nurses, and, in the case
of psychiatric units, licensed psychiatric technicians, who
shall be assigned to direct patient care and represent the
maximum number of patients that can be assigned to one licensed
nurse at any one time. Over the past several years many
hospitals have, in response to managed care reimbursement
contracts, cut costs by reducing their licensed nursing staff.
The California Legislature responded to this trend by requiring
a minimum number of licensed nurses at the bedside. Due to this
new regulatory requirement, any acute care facilities we target
for acquisition or development in California may be required to
increase their licensed nursing staff or decrease their
admittance rates as a result. Governor Schwarzenegger issued two
emergency regulations in an attempt to suspend the ratios in
emergency rooms and delay for three years staffing requirements
in general medical units. However, this action was appealed and
on June 7, 2005, the Superior Court overturned the two
emergency regulations. The Schwarzenegger administration
appealed that ruling; however, the Governor withdrew the appeal
in November 2005.
On May 7, 2004, CMS issued a Final Rule to update the
annual payment rates for the Medicare prospective payment system
for services provided by long term care hospitals. The rule
increased the Medicare payment rate for long-term care hospitals
by 3.1% starting July 1, 2004. On May 6, 2005, CMS
issued a Final Rule to update the annual payment rates for 2006.
Beginning July 1, 2005, the Medicare payment rate for
long-term care hospitals will increase by 3.4% for patient
discharges through June 30, 2006. Medicare expects
aggregate payment to these hospitals to increase by
$169 million during the 2006 long-term care hospital rate
year compared with the 2005 rate year. Long-term care hospitals,
one of the types of facilities we are targeting, are defined
generally as hospitals that have an average Medicare inpatient
length of stay greater than 25 days. In addition, the final
rule contains policy changes including the adoption of new labor
market area definitions for long-term care hospitals which are
based on the new Core Based Statistical Areas announced by the
Office of Management and Budget, or OMB, late in 2000.
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
72
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.
In addition to the legislation and regulations discussed above,
on January 12, 2005, the Medicare Payment Advisory
Committee, or MedPAC, made extensive recommendations to Congress
and the Secretary of HHS including proposing revisions to DRG
payments to more fully capture differences in severity of
illnesses in an attempt to more equally pay for care provided at
general acute care hospitals as compared to specialty hospitals.
Furthermore, MedPAC made significant recommendations regarding
paying healthcare providers relative to their performance and to
the outcomes of the care they provided. MedPAC recommendations
have historically provided strong indications regarding future
directions of both the regulatory and legislative process.
Insurance
We have purchased general liability insurance (lessors
risk) that provides coverage for bodily injury and property
damage to third parties resulting from our ownership of the
healthcare facilities that are leased to and occupied by our
tenants. Our leases with tenants also require the tenants to
carry general liability, professional liability, all risks, loss
of earnings and other insurance coverages and to name us as an
additional insured under these policies. We expect that the
policy specifications and insured limits will be appropriate
given the relative risk of loss, the cost of the coverage and
industry practice.
Employees
We employ 17 full-time employees and one part-time employee as
of the date of this prospectus. We anticipate hiring
approximately five to 10 additional full-time employees during
the next 12 months, commensurate with our growth. We
believe that our relations with our employees are good. None of
our employees is a member of any union.
Legal Proceedings
We are not involved in any material litigation nor, to our
knowledge, is any material litigation pending or threatened
against us.
OUR PORTFOLIO
Our Current Portfolio
Our current portfolio of facilities consists of 17 healthcare
facilities, 14 of which are in operation and three of which are
under development. The Vibra Facilities consist of four
rehabilitation hospitals and two long-term acute care hospitals.
The Desert Valley Facility is a community hospital with an
integrated medical office building. The Covington Facility is a
long-term acute care hospital facility. The Redding Facility is
a rehabilitation hospital. The Denham Springs Facility is a
long-term acute care hospital. The Chino Facility is a community
hospital. The Sherman Oaks Facility is a community hospital. All
of the leases for the hospitals described above have initial
terms of 15 years. Our current portfolio of facilities also
includes the West Houston Hospital and the adjacent West Houston
MOB, each of which we developed. The initial lease term for the
West Houston Hospital began when construction commenced in July
2004 and will end in November 2020. The initial lease term for
the West Houston MOB began when construction commenced in July
2004 and will end in October 2015. One facility under
development is the Bucks County Facility. The initial lease term
for the Bucks County Facility will begin when construction
commences and will end 15 years after completion of
construction. We target completion of construction for the Bucks
County Facility for August 2006. Our second facility under
development is the Monroe Facility. The initial lease term for
the Monroe Facility began when construction commenced in October
2005 and will end 15 years after completion of
construction. We target completion of construction for the
Monroe Facility for
73
October 2006. With respect to the third facility under
development, we have entered into a ground sublease with, and an
agreement to provide a construction loan to, North Cypress for
the development of a community hospital. The facility will be
developed on property in which we currently have a ground lease
interest. We expect to acquire the land we are ground leasing
after the hospital has been partially completed. Upon completion
of construction, subject to certain limited conditions, we will
purchase the facility for an amount equal to the cost of
construction and lease the facility to the operator for a
15 year lease term. In the event we do not purchase the
facility, the ground sublease will continue and the construction
loan will become due. In that event, we expect to seek to
convert the construction loan to a 15 year term loan
secured by the facility. We anticipate the North Cypress
Facility will be completed in December 2006. The leases for
all of the facilities in our current portfolio provide for
contractual base rent and an annual rent escalator. The leases
for the Vibra Facilities and the Bucks County Facility also
provide for percentage rent based on an agreed percentage of the
tenants gross revenue. The following tables set forth
information as of the date of this prospectus regarding our
current portfolio of facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
|
Operating Facilities |
|
|
|
|
|
|
|
2005 | |
|
2006 | |
|
Purchase | |
|
|
|
|
|
|
|
|
2004 | |
|
Contractual | |
|
Contractual | |
|
Price or | |
|
|
|
|
|
|
Number of | |
|
Annualized | |
|
Base | |
|
Base | |
|
Development | |
|
Lease | |
Location |
|
Type |
|
Tenant |
|
Beds(1) | |
|
Base Rent | |
|
Rent(2) | |
|
Rent(2) | |
|
Cost(3) | |
|
Expiration | |
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Houston, Texas
|
|
Community hospital |
|
Stealth, L.P. |
|
|
105 |
(4) |
|
$ |
|
|
|
$ |
|
(5) |
|
$ |
4,749,005 |
(5) |
|
$ |
43,099,310 |
(6) |
|
|
November 2020(7) |
|
Bowling Green, Kentucky
|
|
Rehabilitation
hospital |
|
Vibra
Healthcare,
LLC(8) |
|
|
60 |
|
|
|
3,916,695 |
|
|
|
4,294,990 |
|
|
|
4,790,113 |
|
|
|
38,211,658 |
|
|
|
July 2019 |
|
Marlton,
New
Jersey(9)
|
|
Rehabilitation
(10)
hospital |
|
Vibra
Healthcare,
LLC(8) |
|
|
76 |
|
|
|
3,401,791 |
|
|
|
3,730,354 |
|
|
|
4,160,390 |
|
|
|
32,267,622 |
|
|
|
July 2019 |
|
Victorville,
California(11)
|
|
Community
hospital/medical
office building |
|
Desert Valley
Hospital, Inc. |
|
|
83 |
|
|
|
|
|
|
|
2,341,005 |
|
|
|
2,856,000 |
|
|
|
28,000,000 |
|
|
|
February 2020 |
|
New Bedford,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Massachusetts
|
|
Long-term
acute care
hospital |
|
Vibra
Healthcare,
LLC(8) |
|
|
90 |
|
|
|
2,262,979 |
|
|
|
2,426,320 |
|
|
|
2,767,624 |
|
|
|
22,077,847 |
|
|
|
August 2019 |
|
Chino, California
|
|
Community
hospital |
|
Veritas Health Services, Inc. |
|
|
126 |
|
|
|
|
|
|
|
180,753 |
|
|
|
2,103,682 |
|
|
|
21,000,000 |
|
|
|
November 2020 |
|
Houston, Texas
|
|
Medical office building |
|
Stealth, L.P. |
|
|
n/a |
|
|
|
|
|
|
|
503,130 |
(5) |
|
|
2,049,415 |
(5) |
|
|
20,855,119 |
(6) |
|
|
October 2015 (7) |
|
Redding,
California(12)
|
|
Rehabilitation hospital |
|
Vibra
Healthcare,
LLC(8) |
|
|
88 |
|
|
|
|
|
|
|
950,250 |
(13) |
|
|
1,913,949 |
(13) |
|
|
20,750,000 |
|
|
|
June 2020 |
|
Sherman Oaks, California
|
|
Community hospital |
|
Prime Healthcare Services II, LLC |
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
2,100,000 |
|
|
|
20,000,000 |
|
|
|
December 2020 |
|
Fresno, California
|
|
Rehabilitation
hospital |
|
Vibra
Healthcare,
LLC(8) |
|
|
62 |
|
|
|
1,914,829 |
|
|
|
2,099,773 |
|
|
|
2,341,835 |
|
|
|
18,681,255 |
|
|
|
July 2019 |
|
Covington, Louisiana
|
|
Long-term acute
care hospital |
|
Gulf States
Long-Term
Acute Care of
Covington,
L.L.C. |
|
|
58 |
|
|
|
|
|
|
|
674,188 |
|
|
|
1,207,500 |
|
|
|
11,500,000 |
|
|
|
June 2020 |
|
Thornton, Colorado
|
|
Rehabilitation |
|
Vibra |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hospital |
|
Healthcare, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LLC(8) |
|
|
117 |
|
|
|
870,377 |
|
|
|
933,200 |
|
|
|
1,064,471 |
|
|
|
8,491,481 |
|
|
|
August 2019 |
|
Kentfield, California
|
|
Long-term |
|
Vibra |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acute care |
|
Healthcare, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hospital |
|
LLC(8) |
|
|
60 |
|
|
|
783,339 |
|
|
|
858,998 |
|
|
|
958,024 |
|
|
|
7,642,332 |
|
|
|
July 2019 |
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
|
Operating Facilities |
|
|
|
|
|
|
|
2005 | |
|
2006 | |
|
Purchase | |
|
|
|
|
|
|
|
|
2004 | |
|
Contractual | |
|
Contractual | |
|
Price or | |
|
|
|
|
|
|
Number of | |
|
Annualized | |
|
Base | |
|
Base | |
|
Development | |
|
Lease | |
Location |
|
Type |
|
Tenant |
|
Beds(1) | |
|
Base Rent | |
|
Rent(2) | |
|
Rent(2) | |
|
Cost(3) | |
|
Expiration | |
|
|
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Denham Springs, Louisiana
|
|
Long-term acute care hospital |
|
Gulf States Long Term Acute Care of Denham Springs, L.L.C. |
|
|
59 |
|
|
|
|
|
|
|
150,000 |
|
|
|
645,750 |
|
|
|
6,000,000 |
|
|
|
October 2020 |
|
|
|
|
|
|
|
|
1,137 |
|
|
$ |
13,150,010 |
|
|
$ |
19,097,961 |
|
|
$ |
33,707,758 |
|
|
$ |
298,576,624 |
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Based on the number of licensed beds. |
|
|
(2) |
Based on leases in place as of the date of this prospectus. |
|
|
(3) |
Includes acquisition costs. |
|
|
|
(4) |
Seventy-one of the 105 beds will be acute care beds operated by
Stealth, L.P. and the remaining 34 beds will be long-term acute
care beds operated by Triumph Southwest, L.P. |
|
|
|
|
(5) |
Based on leases in place as of the date of this prospectus and
estimated total development costs. Does not include rents that
accrued during the construction period and are payable over the
remaining lease term following the completion of construction. |
|
|
|
|
(6) |
Estimated total development costs. |
|
|
|
|
(7) |
At any time during the term of the lease, the tenant has the
right to terminate the lease and purchase the facility from us
at a purchase price equal to the greater of (i) that amount
determined under a formula which would provide us an internal
rate of return of at least 18% or (ii) appraised value
assuming the lease is still in place. |
|
|
|
|
(8) |
The tenant in each case is a separate, wholly-owned subsidiary
of Vibra Healthcare, LLC. |
|
|
|
|
(9) |
Our interest in this facility is held through a ground lease on
the property. The purchase price shown for this facility does
not include our payment obligations under the ground lease, the
present value of which we have calculated to be $920,579. The
calculation of the base rent to be received from Vibra for this
facility takes into account the present value of the ground
lease payments. |
|
|
|
|
(10) |
Thirty of the 76 beds are pediatric rehabilitation beds
operated by HBA Management, Inc. |
|
|
|
(11) |
At any time after February 28, 2007, the tenant has the
option to purchase the facility at a purchase price equal to the
sum of (i) the purchase price of the facility, and
(ii) that amount determined under a formula that would
provide us an internal rate of return of 10% per year, increased
by 2% of such percentage each year, taking into account all
payments of base rent received by us. |
|
|
|
(12) |
Our interest in this facility is held in part through a ground
lease on the property. During the term of the ground lease, the
tenant will pay the ground lease rent directly to the ground
lessor or, at our request, directly to us. |
|
|
|
(13) |
Of the $20,750,000 million purchase price for this facility,
payment of $2.0 million is being deferred pending
completion, to our satisfaction, of a conversion of certain beds
at the facility to long-term acute care beds and an additional
$750,000 of the purchase price is being deferred and will be
paid out of a special reserve account to cover the cost of
renovations. The 2005 contractual base rent and the 2006
contractual base rent are calculated based on a purchase price
of $18.0 million. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
|
|
|
|
|
Number of | |
|
Annualized | |
Location |
|
Type |
|
Tenant |
|
Beds(1) | |
|
Base Rent | |
|
|
|
|
|
|
| |
|
| |
Houston, Texas
|
|
Community hospital |
|
North Cypress Medical Center Operating Company, Ltd. |
|
|
64 |
|
|
$ |
|
|
Bensalem, Pennsylvania
|
|
Womens hospital/medical office building
(5) |
|
Bucks County Oncoplastic Institute, LLC |
|
|
30 |
|
|
|
|
|
Bloomington, Indiana
|
|
Community
hospital(8) |
|
Monroe Hospital, LLC |
|
|
32 |
|
|
|
|
(9) |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
126 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
[Additional columns below]
[Continued from above table, first column(s) repeated]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2006 | |
|
Projected | |
|
|
|
|
Contractual | |
|
Contractual | |
|
Development | |
|
Lease | |
Location |
|
Base Rent | |
|
Base Rent | |
|
Cost(2) | |
|
Expiration | |
|
|
| |
|
| |
|
| |
|
| |
Houston, Texas
|
|
$ |
|
(3) |
|
$ |
|
(3) |
|
$ |
64,028,000 |
|
|
|
|
(4) |
Bensalem, Pennsylvania
|
|
|
|
(6) |
|
|
1,627,820 |
(6) |
|
|
38,000,000 |
|
|
|
August 2021(7) |
|
Bloomington, Indiana
|
|
|
|
(9) |
|
|
954,063 |
|
|
|
35,500,000 |
|
|
|
October 2021(10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
2,581,883 |
|
|
$ |
137,528,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Based on the number of proposed beds. |
|
(2) |
Includes acquisition costs. |
|
(3) |
During construction of the North Cypress Facility, interest will
accrue on the construction loan at a rate of 10.5%. The interest
accruing during the construction period will be added to the
principal balance of the construction loan. In addition, during
the term of the ground sublease, North Cypress will pay us
monthly ground sublease rent in an annual amount equal to our
ground lease rent plus 10.5% of funds advanced by us under the
construction loan. |
|
(4) |
Expected to be completed in December 2006. If we purchase this
facility upon completion of construction, we will lease it back
to North Cypress for an initial term of 15 years. |
|
|
(5) |
Expected to be completed in October 2006. |
|
|
|
(6) |
Based on the lease in place as of the date of this prospectus,
estimated total development costs and estimated date of
completion. Assumes completion of construction in
October 2006. |
|
|
|
(7) |
Following completion, the lease term will extend for a period of
15 years. |
|
75
|
|
|
(8) |
Expected to be completed in October 2006. |
|
|
|
(9) |
Based on the lease in place as of the date of this prospectus,
estimated total development costs and estimated date of
completion. Assumes completion of construction in October 2006. |
|
|
|
(10) |
Following completion, the lease term will extend for a period of
15 years. |
|
|
|
Vibra Facilities and Loans |
General. We own or ground lease the six Vibra Facilities
located in Bowling Green, Kentucky; Marlton, New Jersey; Fresno,
California; Kentfield, California; Thornton, Colorado; and New
Bedford, Massachusetts. We acquired these facilities from Care
Ventures, Inc., an unaffiliated third party, in July and August
2004 for an aggregate purchase price of approximately
$127.4 million, including acquisition costs. The purchase
price was arrived at through arms-length negotiations with Care
Ventures, Inc., based upon our analysis of various factors.
These factors included the demographics of the area in which the
facility is located, the capabilities of the tenant to operate
the facility, healthcare spending trends in the geographic area,
the structural integrity of the facility, governmental
regulatory trends which may impact the services provided by the
tenant, and the financial and economic returns which we require
for making an investment. The Vibra Facilities are leased to
subsidiaries of Vibra. Our leases of the Vibra Facilities
require the tenant to carry customary insurance which is
adequate to satisfy our underwriting standards.
Vibra is an affiliate of The Hollinger Group. Vibra has been
recently formed and had engaged in no meaningful operations
prior to entering into the leases for the Vibra Facilities in
July and August 2004. The principals of The Hollinger Group have
extensive experience in developing, acquiring, managing and
operating specialty healthcare facilities and senior care
facilities. Mr. Hollinger, the principal owner of Vibra and
the founder and chief executive officer of The Hollinger Group,
has 18 years experience in all phases of senior care and
healthcare activities. For financial information respecting
Vibra and its subsidiaries, see the audited financial statements
included elsewhere in this prospectus.
Vibra Loans and Fees Receivable. At the time we acquired
the Vibra Facilities, MPT Development Services, Inc., our
taxable REIT subsidiary, made a loan of approximately
$41.4 million to Vibra to acquire the operations at these
locations. We refer to this loan as the acquisition loan. The
acquisition loan accrues interest at the rate of 10.25% per year
and is to be repaid over 15 years with interest only for
the first three years and the principal balance amortizing over
the remaining 12 year period. The acquisition loan may be
prepaid at any time without penalty. In connection with the
Vibra transactions, Vibra agreed to pay us commitment fees of
approximately $1.5 million. MPT Development Services, Inc.
also made secured loans totaling approximately $6.2 million
to Vibra and its subsidiaries for working capital purposes. The
commitment fees were paid, and the working capital loans were
repaid, on February 9, 2005.
As security for the acquisition loan, Vibra has pledged to us
all of its interests in each of the tenants of the Vibra
Facilities, and Mr. Hollinger has pledged to us his entire
interest in Vibra. In addition, Mr. Hollinger, The
Hollinger Group and Vibra Management, LLC, another affiliate of
Mr. Hollinger, have guaranteed the repayment of the
acquisition loan; however, The Hollinger Group and Vibra
Management, LLC do not have substantial assets and the liability
of Mr. Hollinger under his guaranty is limited to
$5.0 million. See Lease Guaranties and
Security.
Vibra has entered into a $20.0 million credit facility with
Merrill Lynch, and that loan is secured by an interest in
Vibras receivables related to the Vibra Facilities. There
was approximately $12.9 million outstanding under the
facility on September 30, 2005. Our loan to Vibra is
subordinate to Merrill Lynch with respect to Vibras
receivables. At March 31, 2005, Vibra was not in compliance
with a facility rent coverage covenant under its Merrill Lynch
credit facility. The Merrill Lynch credit facility documents
were subsequently amended to retroactively change the rent
coverage covenant from a by facility rent coverage to a
consolidated rent coverage calculation, such that Vibra was in
compliance with the amended covenant at March 31, 2005.
Leases. Each lease for the Vibra Facilities provides
that, so long as the acquisition loan is outstanding, after
January 1, 2005, and beginning with the calendar month
after the month in which aggregate gross revenues for the Vibra
Facilities exceed a revenue threshold, the tenant will pay, in
76
addition to base rent, percentage rent in an amount equal to 2%
of revenues for the preceding month. The percentage rent will be
paid on a quarterly basis. Each calendar month thereafter during
the term of each lease, the percentage rent will be decreased
pro rata based on the amount of the principal reduction of the
acquisition loan during the previous calendar month; however,
the percentage rent will not be decreased below 1% of revenues.
On March 31, 2005, the leases for the Vibra Facilities were
amended to provide (i) that the testing of certain
financial covenants will be deferred until the quarter beginning
July 1, 2006 and ending September 30, 2006,
(ii) that these same financial covenants will be tested on
a consolidated basis for all of the Vibra Facilities,
(iii) that the reduction in the rate of percentage rent
will be made on a monthly rather than annual basis and
(iv) that Vibra will escrow insurance premiums and taxes
related to the Vibra Facilities at our request. Prior to
execution of this amendment, Vibra did not meet the fixed charge
coverage ratios required by the lease agreements for the Vibra
Facilities. One covenant required that each Vibra Facility
maintain a ratio of earnings before interest expense, income tax
expense, depreciation expense, amortization expense and base
rent (EBITDAR) to total debt payments plus base rent,
measured at the end of each quarter, in excess of 125%. The
second covenant required that each Vibra Facility maintain a
ratio of EBITDAR to base rent, measured at the end of each
quarter, in excess of 150%. In the event that either ratio for
any Vibra Facility was below the required level for two
consecutive fiscal quarters, an event of default would have
occurred.
Capital Improvements. The tenant under each lease for the
Vibra Facilities is responsible for all capital expenditures
required to keep the facility in compliance with applicable laws
and regulations. Beginning on July 1, 2005, each tenant was
required to begin making quarterly deposits into a capital
improvement reserve account for the particular facility in the
amount of $1,500 per bed per year, except that the first
deposit will be pro-rated based on one-half of a year. On each
January 1 thereafter, the payment of $1,500 per bed per year
into the capital improvement reserve will be increased by 2.5%.
All capital expenditures made in each year during the term of
the lease will be funded first from the capital improvement
reserve, and the tenant is required to pay into its respective
capital improvement reserve such funds as necessary for all
replacements and repairs.
Lease and Loan Guaranties and Security. We have obtained
guaranty agreements from Mr. Hollinger, Vibra, Vibra
Management, LLC and The Hollinger Group that obligate them to
make loan and lease payments in the event that Vibra or the
tenants for the Vibra Facilities fail to do so. We believe that
these agreements are important elements of our underwriting of
newly-formed healthcare operating companies because they create
incentives for their owners and managements to successfully
operate our tenants. However, we do not believe that these
parties have sufficient financial resources to satisfy a
material portion of the total lease or loan obligations.
Mr. Hollingers guaranty is limited to
$5.0 million, Vibra Management, LLC and The Hollinger Group
do not have substantial assets and Vibras assets are
substantially comprised of operations at the Vibra Facilities.
The guaranties of Vibra, Vibra Management and The Hollinger
Group relating to the leases for the Vibra Facilities and the
Vibra loan are of equal priority with the guaranties relating to
the lease for the Redding Facility.
Each lease for the Vibra Facilities is cross-defaulted with all
other leases and other agreements between us, or our affiliates,
on the one hand, and the tenant and Mr. Hollinger, or their
affiliates, on the other hand, including the lease for the
Redding Facility and the Vibra loan. In addition, Vibra has
pledged to us all of its interests in each of the tenants, and
Mr. Hollinger has pledged to us his interest in Vibra. As
security for the leases for the Vibra Facilities, each of the
tenants for the Vibra Facilities has granted us a security
interest in all personal property, other than receivables,
located at the Vibra Facilities. The management fees that the
tenants for the Vibra Facilities pay to Vibra Management, LLC
are subordinated to the rents payable to us under the leases for
the Vibra Facilities.
We have included the audited and unaudited consolidated
financial statements for Vibra as of and for the year ended
December 31, 2004 and as of and for the nine months ended
September 30, 2005. We believe that the financial
statements of Vibra are the most meaningful financial
information respecting the ability of Vibra to make the lease
and loan payments which it is obligated to make to us. We do not
77
believe that historical financial information on the Vibra
Facilities prior to our acquisition of those facilities would be
meaningful because the facilities had three different owners in
the year prior to our acquisition. Also during that time, the
owners did not lease those facilities to lessees but operated
the facilities themselves, and the facilities were not operated
in the same manner as they are currently being operated. We also
believe that the financial statements of the guarantors provide
limited financial information due to the limited resources which
those guarantors possess. We do not believe the financial
statements of the Vibra guarantors other than Vibra would be
helpful to prospective investors. Therefore, we have provided
the financial statements of Vibra Healthcare, LLC, which
includes consolidated financial information on the actual
lessees of the Vibra Facilities and the parent entity, which is
one of the guarantors of the leases and the borrower under the
Vibra loan.
Purchase Option. At the expiration of each lease for the
Vibra Facilities, each tenant will have the option to purchase
the facility at a purchase price equal to the greater of
(i) the appraised value of the facility, determined
assuming the lease is still in place, or (ii) the purchase
price we paid for the facility, including acquisition costs,
increased by 2.5% per annum from the date of purchase.
Depreciation and Real Estate Taxes. The following table
sets forth information, as of December 31, 2004, regarding
the depreciation and real estate taxes for the Vibra Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation | |
|
|
|
|
Federal Tax Basis | |
|
| |
|
2004 Real Estate | |
|
|
| |
|
Annual | |
|
|
|
| |
|
|
Land | |
|
Buildings | |
|
Rate | |
|
Method | |
|
Life in Years | |
|
Taxes | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Bowling Green, KY
|
|
$ |
3,070,000 |
|
|
$ |
35,141,658 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
$ |
24,750 |
|
|
|
0.07 |
% |
Thornton, CO
|
|
|
2,130,000 |
|
|
|
6,361,481 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
|
186,188 |
|
|
|
2.18 |
% |
Fresno, CA
|
|
|
1,550,000 |
|
|
|
17,131,255 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
|
102,359 |
|
|
|
0.61 |
% |
Kentfield, CA
|
|
|
2,520,000 |
|
|
|
5,122,332 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
|
91,201 |
|
|
|
1.28 |
% |
Marlton, NJ
|
|
|
|
|
|
|
32,267,622 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
|
321,903 |
|
|
|
1.00 |
% |
New Bedford, NJ
|
|
|
1,400,000 |
|
|
|
20,677,847 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
|
251,476 |
|
|
|
1.14 |
% |
General. This facility, licensed for 60 beds, is an
approximately 62,500 gross square foot rehabilitation
hospital located in Bowling Green, Kentucky, which is
approximately 60 miles from Nashville, Tennessee.
Construction of the facility was completed in 1992. We acquired
a fee simple interest in this facility on July 1, 2004 for
a purchase price of approximately $38.2 million including
acquisition costs.
Lease. This facility is 100% leased to 1300 Campbell
Lane Operating Company, LLC, a wholly-owned subsidiary of Vibra,
pursuant to a 15-year net-lease with the tenant responsible for
all costs of the facility, including, but not limited to, taxes,
utilities, insurance and maintenance. The tenant has three
options to renew for five years each. Beginning on July 1,
2005, the per annum base rent is equal to 12.23% of the purchase
price, including acquisition costs. On January 1, 2006 and
on each January 1 thereafter, the base rent will be
increased by 2.5%.
General. This facility, licensed for 76 beds, is an
approximately 89,139 gross square foot rehabilitation
hospital located in Marlton, New Jersey, which is approximately
15 miles from Philadelphia, Pennsylvania. Construction of
the facility was completed in 1994. We acquired a ground lease
interest in this facility on July 1, 2004 for a purchase
price of approximately $32.3 million including acquisition
costs. We ground lease the property on which the facility is
located from Virtua West Jersey Health System, a New Jersey
non-profit corporation, pursuant to a ground lease dated
July 15, 1993. The initial term of the ground lease expires
in 2030. We have the right to renew the ground lease for an
additional term of 35 years upon the satisfaction of
certain conditions as set forth in the ground lease.
78
Lease. This facility is 100% leased to 92 Brick Road
Operating Company, LLC, a wholly-owned subsidiary of Vibra,
pursuant to a 15 year net-lease with the tenant responsible
for all costs of the facility, including, but not limited to,
taxes, utilities, insurance and maintenance. The tenant has
three options to renew for five years each. Beginning on
July 1, 2005, the per annum base rent is equal to 12.23% of
the purchase price, including acquisition costs. On
January 1, 2006 and on each January 1 thereafter, the
base rent will be increased by 2.5%.
HBA Management, Inc., or HBA, has subleased the entire
third floor of the hospital facility, approximately
26,896 square feet, for the operation of a
30-bed pediatric
comprehensive rehabilitation unit and related office use,
together with certain fixtures, furnishings and equipment
located in the subleased premises. The current term of the
sublease expires on August 31, 2013. HBA has the option to
extend the sublease term for two additional terms of five years
each. Base annual rent due under the sublease through
September 30, 2005 is approximately $1,112,980 per annum,
with adjustments annually thereafter. In addition to base annual
rent, HBA is required to pay its proportionate share of all
reimbursable expenses.
General. This facility, licensed for 62 beds, is an
approximately 78,258 gross square foot rehabilitation
hospital located in Fresno, California. Construction of the
facility was completed in 1990. We acquired a fee simple
interest in this facility on July 1, 2004 for approximately
$18.7 million including acquisition costs.
Lease. This facility is 100% leased to 7173 North
Sharon Avenue Operating Company, LLC, a wholly-owned subsidiary
of Vibra, pursuant to a 15 year net-lease with the tenant
responsible for all costs of the facility, including, but not
limited to, taxes, utilities, insurance and maintenance. The
tenant has three options to renew for five years each. Beginning
on July 1, 2005, the per annum base rent is equal to 12.23%
of the purchase price, including acquisition costs. On
January 1, 2006 and on each January 1 thereafter, the
base rent will be increased by 2.5%.
General. This facility is an approximately
141,388 gross square foot rehabilitation hospital located
in Thornton, Colorado, which is approximately 10 miles from
Denver, Colorado. The facility is licensed for 70 rehabilitation
beds, 24 long-term care beds and 23 psychiatric beds.
Construction of the original facility was completed in 1962 with
additions completed as recently as 1975. We acquired a fee
simple interest in this facility on August 17, 2004 for a
purchase price of approximately $8.5 million including
acquisition costs.
Lease. This facility is 100% leased to 8451 Pearl
Street Operating Company, LLC, a wholly-owned subsidiary of
Vibra, pursuant to a 15 year net-lease with the tenant
responsible for all costs of the facility, including, but not
limited to, taxes, utilities, insurance and maintenance. The
tenant has three options to renew for five years each. Beginning
on August 17, 2005, the per annum base rent is equal to
12.23% of the purchase price, including acquisition costs. On
January 1, 2006 and on each January 1 thereafter, the
base rent will be increased by 2.5%.
|
|
|
New Bedford, Massachusetts |
General. This facility, licensed for 90 beds, is an
approximately 70,657 gross square foot long-term acute care
hospital located in New Bedford, Massachusetts, which is
approximately 45 miles from Boston, Massachusetts.
Construction of the original facility was completed in 1942 with
additions completed as recently as 1995. We acquired a fee
simple interest in this facility on August 17, 2004 for a
purchase price of approximately $22.0 million including
acquisition costs.
Lease. This facility is 100% leased to 4499 Acushnet
Avenue Operating Company, LLC, a wholly-owned subsidiary of
Vibra, pursuant to a 15 year net-lease with the tenant
responsible for all costs of the facility, including, but not
limited to, taxes, utilities, insurance and maintenance. The
tenant has three
79
options to renew for five years each. Beginning on
August 17, 2005, the per annum base rent is equal to 12.23%
of the purchase price, including acquisition costs. On
January 1, 2006 and on each January 1 thereafter, the
base rent will be increased by 2.5%.
General. This facility, licensed for 60 beds, is an
approximately 43,500 gross square foot long-term acute care
hospital located in Kentfield, California, which is
approximately 15 miles from San Francisco, California.
Construction of the facility was completed in 1963 with the last
renovations in 1988. We acquired a fee simple interest in this
facility on July 1, 2004 for a purchase price of
approximately $7.6 million including acquisition costs.
Lease. This facility is 100% leased to 1125 Sir
Francis Drake Boulevard Operating Company, LLC, a wholly-owned
subsidiary of Vibra, pursuant to a 15 year net-lease with
the tenant responsible for all costs of the facility, including,
but not limited to, taxes, utilities, insurance and maintenance.
The tenant has three options to renew for five years each.
Beginning on July 1, 2005, the per annum base rent is equal
to 12.23% of the purchase price, including acquisition costs. On
January 1, 2006 and on each January 1 thereafter, the
base rent will be increased by 2.5%.
West Houston Facilities
General. In June 2004, we entered into agreements with
Stealth and GPMV to develop the West Houston Hospital and the
adjacent West Houston MOB in Houston, Texas. GPMV completed
development of the 105 bed, 121,884 gross square foot West
Houston Hospital in November 2005. Seventy-one beds are acute
care beds operated by Stealth and 34 are long-term acute care
beds operated by Triumph Southwest, L.P., or Triumph, a tenant
of Stealth. A third-party developer completed development of the
adjacent 120,000 gross square foot West Houston MOB on the
property in October 2005. Pursuant to the agreements with
Stealth and GPMV, we have formed two Delaware limited
partnerships, MPT West Houston Hospital, or the hospital limited
partnership, which owns the West Houston Hospital, and MPT West
Houston MOB, L.P., or the MOB limited partnership, which owns
the adjoining West Houston MOB. Stealth will be required to
maintain insurance that is adequate to satisfy our underwriting
standards.
West Houston GP, L.P., an affiliate of GPMV, holds a 25% general
partnership interest in Stealth. The limited partners of
Stealth, which currently hold a 75% interest, consist of 85
physicians. The sole business of Stealth is the operation of the
West Houston Hospital offering multi-specialty services and the
West Houston MOB. Because those facilities are still in the
construction phase, Stealth has had no meaningful operations to
date. Our operating partnership owns an approximate 94% limited
partnership interest in the hospital limited partnership and
Stealth owns an approximate 6% limited partnership interest. MPT
West Houston Hospital, LLC. a wholly-owned limited liability
company of our operating partnership, owns the 0.1% general
partnership interest in the hospital limited partnership.
Currently, our operating partnership owns approximately 76% of
the limited partnership interests in the MOB limited partnership
and MPT West Houston MOB, LLC, a wholly-owned subsidiary of our
operating partnership, owns the 0.1% general partnership
interest. Physicians and others associated with our tenant or
subtenants of the West Houston MOB own approximately 24% of the
aggregate equity interests in the MOB limited partnership.
The hospital limited partnership and MOB limited partnership
each own a fee simple interest in the land on which the
facilities were constructed, as well as adjacent undeveloped
land. In addition, Stealth has an option, exercisable until
November 2010, to reacquire approximately 14.5 acres of
land owned by the hospital limited partnership, which land is
located adjacent to the land on which the facilities are being
constructed. The option price for this parcel is equal to the
original cost, plus any amounts subsequently paid by us with
respect to this parcel. Stealth also has a right of first offer,
exercisable until November 2010, to purchase this parcel should
we determine to sell it to a third party. In consideration for
Stealths agreement to limit the term of the foregoing
option and right of first offer, we have agreed to pay Stealth
80
up to $3.5 million, upon its request and in $500,000
increments, which amount will be payable over such period as may
be requested by Stealth. Any additional amounts paid will be
included in total development costs, will increase the rental
payable to us and will be added to the purchase price if Stealth
elects to purchase the parcel. We have no further obligation to
honor any payment requests after August 31, 2006.
In connection with the development of the West Houston
Facilities, we are entitled to a commitment fee of approximately
$932,125. This fee is to be paid 15 years from the date of
completion of the hospital facility, with interest thereon at
the rate of 10.75% per year, and is unsecured but is
cross-defaulted with the leases we have with Stealth at the West
Houston Facilities. Stealth is to commence making monthly
interest payments beginning in December 2005.
In addition, MPT Development Services, Inc., our taxable REIT
subsidiary, has agreed to make a working capital loan to Stealth
in an amount up to $1.62 million. Stealth has borrowed
$1.3 million under this loan as of the date of this
prospectus. This loan is to be repaid 15 years from the
date of completion of the West Houston Hospital, with interest
at the rate of 10.75% per year, and is unsecured but
cross-defaulted with the leases we have with Stealth at the West
Houston Facilities. The loans are not guaranteed. The leases
contain certain debt coverage ratio and other financial
covenants, the default of which would constitute a default under
the loans. Stealth is obligated to commence making monthly
interest payments beginning the first month after completion of
the West Houston Hospital. Either the fee or the working capital
loan may be prepaid at any time without penalty, except that a
minimum prepayment of $500,000 is required for the working
capital loan.
If either we or Stealth determine in good faith, after
consultation with healthcare counsel, that healthcare law
prohibitions or restrictions require the physician-limited
partners to divest their ownership interests in Stealth, we have
agreed to issue up to $6.0 million of limited partnership
interests in the hospital limited partnership to Stealth to be
used as part of the consideration to completely redeem the
physician-limited partners ownership interests in Stealth.
We have agreed to lend Stealth the $6.0 million to purchase
the limited partnership interests in the hospital limited
partnership, which loan would accrue interest at the rate of not
less than 10.75% per year, and would be paid over
10 years. We do not expect this transaction to be necessary.
Development Agreements. The hospital limited partnership
has paid GPMV $542,480 of a development fee of approximately
$700,000 and $175,223 of a construction management fee of
approximately $200,000. The hospital limited partnership has
also agreed to pay GPMV a contingent funds fee of approximately
$450,000. The MOB limited partnership has paid the developer
$440,000 of a development fee of approximately $550,000 and
$240,000 of a construction management fee of approximately
$300,000. The MOB limited partnership has also agreed to pay the
developer a contingent funds fee of approximately $350,000.
Stealth is obligated to pay MPT Development Services, Inc., our
taxable REIT subsidiary, a project inspection fee for
construction coordination services of $100,000 in the case of
the West Houston Hospital and $50,000 in the case of the
adjacent West Houston MOB. These fees are being paid, with
interest at the rate of 10.75% per year, over a
15 year period beginning in November 2005. The total
development costs for the facilities, including acquisition
cost, development services fee, commitment fee, project
management fee, and construction costs, are estimated to be
$42.6 million for the hospital facility and
$20.5 million for the medical office building. During the
construction period, we advanced funds pursuant to requests made
in accordance with the terms of the development agreements
between us and the developers. We have agreed to fund 100% of
the total development costs for the West Houston Hospital and
the adjacent West Houston MOB. Our agreement with Stealth
provides that $17,006,803 of this funding will be in the form of
an equity contribution for the West Houston Hospital, with the
remaining funding being in the form of debt, and for the
adjoining West Houston MOB, our agreement with Stealth provides
that $5.0 million of the funding will be in the form of an
equity contribution or subordinated debt, with the remaining
funding being in the form of debt. If we obtain third-party
construction financing, the debt portion of the development
costs will be provided by the third-party lender.
81
Leases. The facilities were leased to Stealth during the
construction phase with rent accruing until the completion dates
and the accrued rent to be paid over the remaining lease term.
Following the completion dates, the lease term will extend for a
period of 15 years for the West Houston Hospital and
10 years for the West Houston MOB. Stealth will have three
options to renew each lease for a period of five years each. On
January 1, 2006 and on each January 1 thereafter, the base
rent for the West Houston Hospital will increase 2.5% and the
base rent for the West Houston MOB will increase 2.0%. The
leases are net-leases with Stealth responsible for all costs and
expenses associated with the operation, maintenance and repair
of the facilities. Triumph has subleased an entire floor of the
West Houston Hospital in order to operate 34 long-term acute
care beds. The sublease is for a term of 180 months
following the completion of the construction of the West Houston
Hospital. The sublease grants to Triumph options to extend the
term of the sublease for three additional periods of five years
each. The sublease requires Triumph to pay rent in an amount
equal to 12% of all rent and other charges payable by Stealth to
us under our lease with Stealth, with certain exclusions. The
sublease provides that Stealths obligations under the
sublease are conditioned upon the execution of a guaranty by
Triumph HealthCare of Texas, L.L.C. and Triumph HealthCare,
L.L.P. The sublease grants Stealth the right to relocate Triumph
to a new facility to be constructed adjacent to and attached to
the West Houston Hospital. In order to exercise the relocation
right, Stealth must give Triumph at least 270 days
notice prior to the date of such relocation. Triumph must vacate
the subleased premises on or before the relocation date
specified in the notice from Stealth, which cannot be earlier
than 270 days after the date of the relocation notice.
Triumph has subleased 9,726 square feet of net rentable
area in the West Houston MOB for use as a medical office
exclusively for the practice of medicine, the operation of a
medical office and the provision of related administrative
services, or medical related use. The sublease is for a term of
120 months following the earlier of the date of final
completion of the leasehold improvements, or the date on which
Triumph commences business in the subleased premises. The
sublease grants to Triumph options to extend the term of the
sublease for four additional periods of five years each. The
sublease requires Triumph to pay annual base rent for years one
through ten calculated at $20 per net rentable square foot.
Beginning on the first anniversary of the lease and on each
anniversary date thereafter, base rent is increased to an amount
equal to 1.02 times or 102% of the base rent payable in the
previous year. The lease also requires Triumph to pay its pro
rata share of annual operating expenses, taxes and insurance
relating to the West Houston MOB. The sublease provides that
Stealths obligations under the sublease are conditioned
upon the execution of a guaranty by Triumph HealthCare of Texas,
L.L.C. and Triumph HealthCare, L.L.P. The West Houston MOB
sublease with Triumph also runs concurrently with Stealths
lease with us. In the event our lease with Stealth is
terminated, the sublease on the hospital with Triumph is also
terminated.
Purchase Option. After the first full 12 month
period after construction of each of the West Houston Facilities
is completed, as long as Stealth is not in default under either
of its leases with us or any of the leases with its physician
subtenants, Stealth has the right to purchase the West Houston
MOB and the West Houston Hospital at a purchase price equal to
the greater of (i) that amount determined under a formula
that would provide us an internal rate of return of at least 18%
or (ii) the appraised value based on a 15 year lease
in place. To arrive at the appraised value, each of the parties
chooses an appraiser. If the appraisals obtained are not
materially different, (meaning a 10% or more variance), 50% of
the sum of each appraised value is used as the option price, if
the two appraisals are materially different, then the two
appraisers appoint a third appraiser and the appraisers
valuation which differs greatest from the other two appraisers
is excluded and 50% of the sum of the two remaining
determinations is used as the option price. The costs of the
appraisal process are borne equally by the parties. Upon written
notice to us within 90 days of the expiration of the
applicable lease, as long as Stealth is not in default under
either of its leases with us or any of the leases with its
physician subtenants, Stealth will have the option to purchase
the West Houston MOB or the West Houston Hospital at a price
equal to the greater of (i) the total development costs
(including any capital additions funded by us, but excluding any
capital additions funded by Stealth) increased by 2.5% per
year, or (ii) the appraised value based on a 15 year
lease in place. To arrive at the appraised value, each of the
parties chooses an appraiser. if the appraisals obtained are not
materially different, (meaning a 10% or more variance), 50% of
the sum of each appraised value is used as the option price. If
the two appraisals are materially different, then the two
appraisers appoint a
82
third appraiser and the appraisers valuation which differs
greatest from the other two appraisers is excluded and 50% of
the sum of the two remaining determinations is used as the
option price. The costs of the appraisal process are borne
equally by the parties.
The leases also provide that under certain limited
circumstances, the tenant will have the right to present us with
a choice of one out of three proposed exchange facilities to be
substituted for the leased facility. The tenant will have the
right to propose substitute facilities, if not in default, at
any time prior to the expiration of the term, if (i) in the
good faith judgment of the tenant the facility becomes
uneconomic or unsuitable for its primary intended use,
(ii) there is an eviction or interference caused by any
claim of paramount title, or (iii) if for other prudent
business reasons, the tenant desires to terminate the lease. The
tenant will have the obligation to substitute facilities if it
has discontinued use of the facility for a period in excess of
one year, and we have not exercised our right to terminate the
lease. Each proposed substitution facility must:
(i) provide us with an annual return on our equity in such
facility, or yield, substantially equivalent to our yield from
the original facility (ii) provide us with rent with a
substantially equivalent yield taking into account any cash
adjustment paid or received by us and any other relevant
factors, and (iii) have a fair market value in an amount
equal to the fair market value of the original facility, taking
into account any cash adjustment paid or received by us. If we
elect to consummate the exchange, the existing lease would
terminate and the parties would enter into a new lease for the
substituted facility. If we elect not to proceed with the
exchange. the tenant would have the right to terminate the lease
and purchase the leased facility for appraised value, determined
assuming the lease is still in place.
Right of First Offer to Purchase. At any time during the
term of the applicable lease for either of the West Houston
Facilities, as long as Stealth is not in default under either of
its leases with us or any of the leases with its physician
subtenants, we are required to notify Stealth if we intend to
sell either facility to a third party. If Stealth wishes to
offer to purchase the facility, it must notify us in writing
within 15 days, setting forth the terms and conditions of
the proposed purchase. if we accept Stealths offer,
Stealth must close the purchase within 45 days of the date
of our acceptance.
Security. The leases for the West Houston Facilities are
cross-defaulted and are guaranteed by West Houston G.P., L.P.
and West Houston Joint Ventures, Inc., affiliates of Stealth. To
secure its performance of its lease obligations under the West
Houston Hospital lease, Stealth obtained a certificate of
deposit in the amount of $1,905,234; however, Stealth did not
execute or deliver the documents required by us to perfect our
security interest in the certificate of deposit. The certificate
of deposit matured in July 2005 and has not been renewed. The
sublease between Stealth and Triumph requires Triumph to obtain
a certificate of deposit in the amount of $400,000 to secure the
performance of its obligations under its sublease with Stealth.
However, subject to execution of definitive agreements, we,
Stealth and Triumph have agreed that Triumph shall obtain and
deliver to us a $400,000 letter of credit, in lieu of the
certificate of deposit, to be held by us. The sublease has been
assigned to us as collateral security for Stealths
performance under its lease. Under the lease and the sublease,
each of Stealth and Triumph are required to give us a security
interest in these certificates of deposit and to enter into
control agreements with us and the issuing banks which provide
that the banks will follow our instructions regarding the
certificates of deposit. Once the West Houston Hospital
commences operations, Stealth is required to substitute a letter
of credit in the amount of $1,905,234 in place of the $1,905,234
certificate of deposit; and on May 1, 2005, the sublease
required that Triumph substitute a letter of credit in the
amount of $1.0 million in place of the $400,000 certificate
of deposit. Triumph has not yet made this substitution. The
lease further provides that the Stealth letter of credit may be
released in two increments of 50% of the total amount of the
letter of credit over a two year period following the date on
which Stealth generates a total rent, excluding additional
charges, coverage from EBITDAR of at least 200% for 12
consecutive months.
Stealth has provided to us unaudited financial statements
reflecting that, as of September 30, 2005, it had tangible
assets of approximately $7.7 million, including cash of
approximately $4.7 million, liabilities of approximately
$1.7 million and owners equity of approximately $6.0
million. Neither of the guarantors has any substantial assets,
other than its interest in Stealth.
83
Capital Improvements. Stealth is responsible for all
capital expenditures required to keep the West Houston
Facilities in compliance with applicable laws and regulations.
Beginning on January 1, 2005, Stealth is required to make
monthly deposits into a capital improvement reserve in the
amount of $3,000 per year in the case of the West Houston
MOB and $2,500 per bed per annum in the case of the West
Houston Hospital. On each January 1 thereafter, the payment into
the capital improvement reserve will be increased by 2.0% in the
case of the West Houston MOB and by 2.25% in the case of the
West Houston Hospital. All capital expenditures made in each
year during the term of the lease will be funded first from the
capital improvement reserve, and the tenant will pay into its
respective capital improvement reserve such funds as necessary
for all replacements and repairs.
Depreciation and Real Estate Taxes. The following table
sets forth information, as of December 31, 2004, regarding
the estimated depreciation and real estate taxes for the Houston
Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated | |
|
|
|
Estimated | |
|
|
Federal Tax Basis | |
|
Depreciation | |
|
2005 Real Estate | |
|
|
| |
|
| |
|
| |
|
|
Land | |
|
Buildings | |
|
Annual Rate | |
|
Method | |
|
Life in Years | |
|
Taxes | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
West Houston Hospital
|
|
$ |
8,400,000 |
|
|
$ |
34,200,000 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
$ |
1,324,860 |
|
|
|
3.11 |
% |
West Houston MOB
|
|
|
1,800,000 |
|
|
|
18,700,000 |
|
|
|
2.5 |
|
|
|
Straight-line |
|
|
|
40 |
|
|
|
637,550 |
|
|
|
3.11 |
|
Chino Facility
General. On November 30, 2005, Prime Healthcare
Services, LLC exercised a purchase option assigned to it by
Veritas, and purchased a fee simple interest in the Chino
Facility from Kasirer Family Holdings #4, LLC, or KFH. On
the same date, Prime Healthcare Services, LLC sold the Chino
Facility to us for a purchase price of approximately
$21.0 million. The purchase price for the facility was
determined through arms-length negotiations with Prime based
upon our analysis of various factors. These factors included the
demographics of the area in which the facility is located, the
capability of the tenant to operate the facility, healthcare
spending trends in the geographic area, the structural integrity
of the facility, governmental regulatory trends which may impact
the services provided by the tenant, and the financial and
economic returns which we require for making an investment. Also
on November 30, 2005, Prime Healthcare Services, LLC
assigned to us all of its right, title and interest in a lease
for a parking lot adjacent to the facility, or the parking lot
lease. The parking lot lease expires in December 2013.
The Chino Facility, located in Chino, California, which is
approximately 35 miles from Los Angeles, California, is an
approximately 113,388 square foot community hospital
facility, built in 1972. The facility is currently licensed for
126 beds.
Lease. This facility is 100% leased to Veritas, an
affiliate of Prime, and the prior operator of the facility. The
principals of Prime have experience in developing, acquiring,
managing and operating hospital facilities. The lease is a
15 year net-lease with the tenant responsible for all costs
of the facility, including, but not limited to, taxes,
utilities, insurance and maintenance. Veritas has three options
to renew for five years each. Currently, the annual base rent is
equal to 10% of the purchase price, or the annual rate of
$2.1 million. On January 1, 2007, and on each
January 1 thereafter, the base rent will be increased by an
amount equal to the greater of (i) 2% per year of the
prior years base rent or (ii) the percentage by which
the CPI as published by the United States Department of Labor,
Bureau of Labor Statistics on January 1 shall have increased
over the CPI figure in effect on the immediately preceding
January 1, annualized based on the highest annual rate
effective during the preceding year if the previous years
base rent is for a partial year. The lease requires Veritas to
carry customary insurance which is adequate to satisfy our
underwriting standards.
Lease Guaranties and Security. The Chino Facility lease
is guaranteed by Prime, Prime Healthcare Services, LLC, DVH and
DVMG. The guaranty is an absolute and irrevocable guaranty. The
lease is cross-defaulted with any other leases or other
agreements between us or any of our affiliates and Veritas, any
guarantor and any of their affiliates, excluding any lease
related to the Sherman Oaks facility. In addition, as security
for the lease, Veritas has granted us a security interest in all
personal property, other than receivables, located at the Chino
Facility, subject to purchase money liens on equipment. Prime
84
Healthcare Services, LLC has also granted us a security interest
in certain of its personal property leased or subleased to
Veritas and located at the Chino facility. Prime, an affiliate
of Veritas and a guarantor of the lease, has provided to us
unaudited financial statements showing that, as of
September 30, 2005, it had consolidated tangible assets of
approximately $53.8 million, consolidated liabilities of
approximately $23.2 million, and consolidated tangible net worth
of approximately $30.6 million and for the nine months ended
September 30, 2005, had consolidated net income of
approximately $15.1 million.
Reserve for Extraordinary Repairs. Veritas is responsible
for all maintenance and repairs and all extraordinary repairs
required to keep the facility in compliance with all applicable
laws and regulations and as required under the lease. Veritas is
required to make quarterly deposits into a reserve account in
the amount of $2,500 per bed per year. Beginning on
January 1, 2007 and on each January 1 thereafter, the
payment of $2,500 per bed per year into the improvement
reserve will be increased by 2%. Amounts drawn from the reserve
are to be replenished at the rate of
1/12th of
the total drawn per month until completely replenished.
Purchase Options. At any time after November 30,
2008, so long as Veritas and its affiliates are not in default
under any lease with us or any of the leases with its
subtenants, Veritas or Prime Healthcare Services, LLC will have
the option, upon 90 days prior written notice, to
purchase the facility at a purchase price equal to the sum of
(i) the purchase price of the facility, and (ii) that
amount determined under a formula that would provide us an
internal rate of return of 11% per year, taking into
account all payments of base rent received by us.
If we receive notice that the parking lot lease will not be
renewed beyond December 2013, that our rights under the parking
lot lease are or will be terminated, or that the parking lot may
not be used for parking for the facility, we have the right,
upon 90 days prior written notice, or the put notice,
to cause Veritas to purchase the Chino Facility and our interest
in the parking lot lease at a purchase price equal to the sum of
(i) the purchase price of the facility, and (ii) that
amount determined under a formula that would provide us an
internal rate of return of 11% per year, taking into
account all payments of base rent received by us. Upon receipt
of the put notice, however, Veritas has the right, within
30 days following the put notice, to substitute one or more
properties to be used for parking for the facility. We are not
obligated to accept any substitute property which does not
satisfy applicable zoning and use laws, ordinances, rules or
regulations or which, in our sole discretion, would create an
undue burden or inconvenience for parking at the facility.
Commitment Fee. We were paid a commitment fee of $105,000
in connection with this transaction.
Depreciation and Real Estate Taxes. The following table
sets forth information, as of December 31, 2004, regarding
the depreciation and real estate taxes for the Chino Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Tax Basis | |
|
Depreciation | |
|
|
|
2004 Real Estate | |
|
|
| |
|
| |
|
Life | |
|
| |
|
|
Land | |
|
Buildings | |
|
Annual Rate | |
|
Method | |
|
in Years | |
|
Taxes | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Chino, California
|
|
$ |
2,220,000 |
|
|
$ |
18,780,000 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
$ |
103,927 |
|
|
|
1.05 |
% |
Redding Facility
General. On June 30, 2005, Ocadian Care Centers,
LLC, or Ocadian, assigned a long-term ground lease for land
located in Redding, California to Northern California
Rehabilitation Hospital, LLC, a subsidiary of Vibra. On the same
date, Ocadian sold the facility located on the land, which we
refer to in this prospectus as the Redding Facility, to the
Vibra subsidiary, subject to the ground lease. Also on
June 30, 2005, the Vibra subsidiary assigned this ground
lease interest to us and we purchased the Redding Facility. On
the same date, we subleased the land and leased the Redding
Facility back to the Vibra subsidiary. The term of the ground
lease expires on November 16, 2075. See Lease
below for more detail. The Vibra subsidiary has subleased the
operations and the right to occupy the Redding Facility back to
Ocadian during a transition term until the Vibra subsidiary
obtains certain healthcare licenses necessary to operate the
Redding Facility. The Vibra subsidiary will manage the facility
on behalf of Ocadian during this transition term. Upon receipt
of the healthcare licenses, the sublease and
85
management agreement between the Vibra subsidiary and Ocadian
will terminate. The Vibra subsidiary expects this sublease and
management arrangement to continue for about 30 to 60 days from
the date of this prospectus.
The Redding Facility contains approximately 70,000 square feet
of space and is currently licensed for a total of 88 beds
including 14 acute care beds, 24 rehabilitation beds and 50
skilled nursing beds. The Vibra subsidiary intends to convert a
portion of the Redding Facilitys licensed skilled nursing,
general acute care and rehabilitation beds to long-term acute
care beds.
Our purchase price for assignment of the ground lease interest
and for the Redding Facility was $20,750,000 million; however,
payment of $2.0 million of the purchase price is being
deferred pending completion, to our satisfaction, of the
conversion of certain beds to long-term acute care beds, and an
additional $750,000 of the purchase price is being deferred and
will be paid out of a special reserve account to pay for
renovations. The Vibra subsidiary used and will use the proceeds
from the concurrent sale and assignment to us to acquire the
Redding Facility and the operations at the facility, upgrade
equipment, make certain renovations, convert certain beds to
long-term acute care beds and for working capital. The purchase
price for the Redding Facility was arrived at through
arms-length negotiations based upon our analysis of various
factors, including the demographics of the area in which the
facility is located, the capability of the tenant to operate the
facility, healthcare spending trends in the geographic area, the
structural integrity of the facility, governmental regulatory
trends which may impact the services provided by the tenant, and
the financial and economic returns which we require for making
an investment.
The Redding Facility is owned by MPT of Redding, LLC. Currently,
our operating partnership owns all of the membership interests
in this limited liability company; however, we have agreed,
subject to applicable healthcare regulations, to offer up to 20%
of the interests in the limited liability company to local
physicians and other persons.
Lease. The Redding Facility is 100% leased to Northern
California Rehabilitation Hospital, LLC, a Vibra subsidiary, for
a 15-year term, with three options to renew for five years each.
The lease is a net-lease with the tenant responsible for all
costs of the facility, including, but not limited to, taxes,
utilities, insurance and maintenance. Currently, the annual base
rent is equal to 10.5% per year of the purchase price actually
paid. On each January 1, beginning on January 1, 2006,
the base rent will be increased by an amount equal to the
greater of (A) 2.5% per year of the prior years base
rent, or (B) the percentage by which the CPI on
January 1 shall have increased over the CPI in effect on
the then just previous January 1. The lease requires the
tenant to pay an annual inspection fee of $5,000. The annual
inspection fee will increase by 2.5% each January 1 during
the lease term. The lease also requires the tenant to carry
customary insurance which is adequate to satisfy our
underwriting standards.
Reserve for Extraordinary Repairs. Beginning on
January 1, 2006, the tenant will be required to make
deposits into a reserve account equal to $1,500 per bed,
increasing on each subsequent January 1 by the greater of
2.5% or the increase in CPI for the previous year. Any amounts
drawn from the reserve would be replenished 1/12th of the amount
drawn per month, until completely replenished.
Lease Guaranty and Security. The lease is guaranteed by
Vibra, Vibra Management, LLC and The Hollinger Group, and is
cross-defaulted with all other leases and other agreements
between us, or our affiliates, on the one hand, and the tenant
and Mr. Hollinger, or their affiliates, on the other hand,
including the leases for the Vibra Facilities and the Vibra
loan. The guaranties of Vibra, Vibra Management and The
Hollinger Group of the lease for the Redding Facility are of
equal priority with the guaranties relating to the leases for
the Vibra Facilities and the Vibra loan. We believe that these
agreements are important elements of our underwriting of
newly-formed healthcare operating companies because they create
incentives for their owners and managements to successfully
operate our tenants. However, we do not believe that these
parties have sufficient financial resources to satisfy a
material portion of the total lease obligations. We have
included the audited and unaudited consolidated financial
statements for Vibra Healthcare, LLC as of and for the year
ended December 31, 2004 and as of and for the six months
ended June 30, 2005, respectively.
86
In addition, as security for the lease, the tenant has granted
us a security interest in all personal property other than
receivables, and subject to the prior lien of any purchase money
lender, with respect to tangible personal property, located at
and to be located at the facility, and an assignment of rents
and leases. The tenant has also made a cash deposit with us in
an amount equal to three months base rent under the lease.
Commitment Fee. We received a commitment fee equal to
0.5% of the purchase price.
Depreciation and Real Estate Taxes. The following table
sets forth information, as of June 30, 2005, regarding the
depreciation and real estate taxes for the Redding Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Tax Basis | |
|
Depreciation | |
|
|
|
2004 Real Estate | |
|
|
| |
|
| |
|
Life | |
|
| |
|
|
Land |
|
Buildings | |
|
Annual Rate | |
|
Method | |
|
in Years | |
|
Taxes | |
|
Rate | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Redding, California
|
|
$ |
|
|
|
$ |
20,750,000 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
$ |
49,681 |
|
|
|
1.1 |
% |
General. On December 30, 2005, we acquired a fee simple
interest in the Sherman Oaks Facility from Prime II and Prime A
for a purchase price of approximately $20.0 million.
The purchase price for the facility was determined through
arms-length
negotiations with Prime and its affiliates based upon our
analysis of various factors, including the demographics of the
area in which the facility is located, the capability of the
tenant to operate the facility, healthcare spending trends in
the geographic area, the structural integrity of the facility,
governmental regulatory trends which may impact the services
provided by the tenant, and the financial and economic returns
which we require for making an investment. The Sherman Oaks
Facility is located in Sherman Oaks, California, which is
approximately 14 miles from Los Angeles, California.
The facility is an approximately 135,000 square foot
community hospital facility, currently licensed for 153 beds.
Construction of the original facility was completed in 1956 with
additions completed as recently as 1980. Also on [December 30,
2005], Prime A assigned to us all of its right, title and
interest in an air rights agreement which gave G&L Realty
Partnership, L.P., an unrelated third party, air rights, support
rights, access rights and other rights for the construction, use
and maintenance of a parking structure building adjacent to the
Sherman Oaks Facility. The air rights agreement gives us the
right to use a portion of the parking areas on the parking
structure.
Lease. The facility is 100% leased to Prime II, an
affiliate of Prime. The principals of Prime have experience in
developing, acquiring, managing and operating hospital
facilities. The lease is a 15 year net-lease with the tenant
responsible for all costs of the facility, including, but not
limited to, taxes, utilities, insurance and maintenance. Prime
II has three options to renew for five years each. The initial
annual base rent is equal to 10.5% of the purchase price, or the
annual rate of $2.1 million. On January 1, 2007, and on each
January 1 thereafter, the base rent will be increased by an
amount equal to the greater of (i) 2% per year of the prior
years base rent or (ii) the percentage by which the CPI on
January 1 shall have increased over the CPI figure in
effect on the immediately preceding January 1, annualized
based on the highest annual rate effective during the preceding
year if the previous years base rent is for a partial
year. The lease requires Prime II to carry customary
insurance which is adequate to satisfy our underwriting
standards.
Lease Guaranties and Security. The Sherman Oaks Facility
lease is unconditionally and irrevocably guaranteed by Prime,
DVH, DVMG and Prime A until two years after the commencement of
the lease term, and that after that date, Prime, DVH, DVMG and
Prime A will guaranty the obligations under the Sherman Oaks
lease for up to $5.0 million. Thereafter, when
Prime II satisfies certain financial conditions under the
lease, the lease guaranty will terminate. As security for the
lease, Prime II has granted us a security interest in all
personal property, other than receivables and inventory located
at the Sherman Oaks Facility, subject to purchase money liens on
equipment. Prime has provided to us unaudited financial
statements showing that, as of September 30, 2005, it had
consolidated tangible assets of approximately
$53.8 million, consolidated liabilities of approximately
$23.2 million, and consolidated tangible net worth of
approximately $30.6 million and for the nine months ended
September 30, 2005, had consolidated net income of
approximately $15.1 million.
87
Reserve for Extraordinary Repairs. Prime II is
responsible for all maintenance and repairs and all
extraordinary repairs required to keep the facility in
compliance with all applicable laws and regulations and as
required under the lease. Prime II is required to make
quarterly deposits into a reserve account in the amount of
$2,500 per bed per year. Beginning on January 1, 2007
and on each January 1 thereafter, the payment of $2,500 per
bed per year into the improvement reserve will be increased
by 2%, and that amounts drawn from the reserve are to be
replenished at the rate of 1/12th of the total drawn per month
until completely replenished.
Purchase Options. The letter of commitment provides that
at any time after the tenth anniversary of the commencement of
the lease term, so long as Prime II and its affiliates are
not in default under any lease with us or any of the leases with
its subtenants, Prime A will have the option, upon
90 days prior written notice, to purchase the
facility at a purchase price equal to the sum of (i) the
purchase price of the facility (including any additional
financing by us), and (ii) that amount determined under a
formula that would provide us an internal rate of return of
11% per year, taking into account all payments of base rent
received by us, but in no event would this amount be less than
the purchase price. Prime A also has the right at any time
while the guaranty is outstanding to petition to purchase the
facility for the same purchase price, and we would then have the
option to release the guaranty or sell the property. Finally, if
there is a non-monetary default, other than an intentional
default, that occurs before the tenth anniversary of the lease
date, and we desire to terminate the lease, Prime A would
also have the option to purchase the facility, but at an
internal rate of return to us of 12.5%.
Commitment Fee. We have been paid a commitment fee of
$100,000 in connection with this transaction.
Depreciation and Real Estate Taxes. The following table
sets forth information, as of June 30, 2005, regarding the
depreciation and real estate taxes for the Sherman Oaks Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Tax Basis | |
|
Depreciation | |
|
|
|
2005 Real Estate | |
|
|
| |
|
| |
|
Life | |
|
| |
|
|
Land | |
|
Buildings | |
|
Annual Rate | |
|
Method | |
|
in Years | |
|
Taxes | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Sherman Oaks, California
|
|
$ |
1,785,714 |
|
|
$ |
18,214,286 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
$ |
210,200 |
|
|
|
1.05 |
% |
Facility Expansion. We have agreed to fund up to
$5.0 million for the purpose of expanding our Sherman Oaks
Facility. The lease provides that the parties will use their
commercially reasonable efforts to enter into an agreement
respecting the timing and terms of this funding, but in no event
shall the funding occur later than 15 days later than the
closing date. Upon execution of a definitive development
agreement,, Prime II will be obligated to pay us a fee in
cash equal to 0.5% of the maximum amount that can be funded. The
expansion amount will be treated as a capital addition under the
lease and, accordingly as such expansion costs are funded, the
annual rent payable under the lease will increase by an amount
equal to the
then-current lease rate
multiplied by the amount of expansion cost incurred. Such
additional rent will continue to be payable for the remaining
term of the lease. For purposes of the repurchase options
contained in the lease, the purchase price will be increased by
the total cost of the addition. We will not generate any
revenues from this transaction until Prime II begins
drawing the committed funds.
General. On February 28, 2005, we acquired a fee
simple interest in the Desert Valley Facility located in
Victorville, California, which is approximately 75 miles
from Los Angeles, California. The approximately
122,140 square foot community hospital facility, built in
1994, is licensed for 83 beds and has an integrated medical
office building comprising approximately 50,000 square
feet. We acquired the facility from Prime A, an
unaffiliated third party but an affiliate of Prime, for a
purchase price of approximately $28.0 million. The purchase
price was determined through arms-length negotiations with Prime
based upon our analysis of various factors. These factors
included the demographics of the area in which the facility is
located, the capability of the tenant to operate the facility,
healthcare spending trends in the geographic area, the
structural integrity of the facility, governmental regulatory
trends which may impact the services provided by the tenant, and
the financial and economic returns which we require for making
an investment.
88
Lease. This facility is 100% leased to DVH, an affiliate
of Prime. The principals of DVH have experience in developing,
acquiring, managing and operating acute care hospital
facilities. The lease is a 15 year net-lease with the
tenant responsible for all costs of the facility, including, but
not limited to, taxes, utilities, insurance and maintenance. DVH
has three options to renew for five years each. Currently, the
annual base rent is equal to 10% of the purchase price, or the
annual rate of $2.8 million. On January 1, 2006, and
on each January 1 thereafter, the base rent will be increased by
an amount equal to the greater of (i) 2% per year of
the prior years base rent or (ii) the percentage by
which the CPI as published by the United States Department of
Labor, Bureau of Labor Statistics on January 1 shall have
increased over the CPI figure in effect on the immediately
preceding January 1, annualized based on the highest annual
rate effective during the preceding year if the previous
years base rent is for a partial year. The lease requires
DVH to carry customary insurance which is adequate to satisfy
our underwriting standards.
DVH has subleased approximately 40,110 square feet of space
in the medical office portion of the facility to its affiliate,
Desert Valley Medical Group, Inc., or DVMG, for office use. The
DVMG lease requires DVMG to pay rent of $50,138 per month,
to be adjusted commencing on January 1, 2006 by changes in
the CPI. The DVMG sublease expires on December 31, 2011.
DVH has also subleased approximately 500 square feet of
space in the facility to Network Pharmaceuticals, Inc. for the
operation of a pharmacy. The pharmacy sublease requires the
tenant to pay rent of $2,000 per month. The pharmacy
sublease currently expires on May 15, 2007, subject to the
pharmacys option to renew for a term of 10 years.
Lease Guaranties and Security. The Desert Valley lease is
guaranteed by Prime A, Prime and DVMG. The guaranty is an
absolute and irrevocable guaranty. The lease is cross-defaulted
with any other leases between us or any of our affiliates and
DVH, any guarantor and any of their affiliates. In addition, as
security for the lease, DVH has granted us a security interest
in all personal property, other than receivables, located at the
Desert Valley Facility, subject to purchase money liens on
equipment. Desert Valley Hospital, Inc. has provided to us
unaudited financial statements reflecting that, as of
September 30, 2005, it had tangible assets of approximately
$20.1 million, liabilities of approximately
$19.4 million and stockholders equity of
approximately $0.7 million, and for the three months ended
September 30, 2005, had net income of approximately
$14.1 million.
Prime, the parent of DVH and a guarantor of the lease, has
provided to us unaudited financial statements showing that, as
of September 30, 2005, it had consolidated tangible assets
of approximately $53.8 million, consolidated liabilities of
approximately $23.2 million, and consolidated tangible net
worth of approximately $30.6 million and for the nine month
period ended September 30, 2005, had consolidated net
income of approximately $15.1 million.
Reserve for Extraordinary Repairs. DVH is responsible for
all maintenance and repairs and all extraordinary repairs
required to keep the facility in compliance with all applicable
laws and regulations and as required under the lease. DVH is
required to make quarterly deposits into a reserve account in
the amount of $2,500 per bed per year. Beginning on
January 1, 2006 and on each January 1 thereafter, the
payment of $2,500 per bed per year into the improvement
reserve will be increased by 2%. All extraordinary repair
expenditures made in each year during the term of the lease are
to be funded first from the reserve, and DVH is to pay into the
reserve such funds as necessary for all extraordinary repairs.
Purchase Options. At any time after February 28,
2007, so long as DVH and its affiliates are not in default under
any lease with us or any of the leases with its subtenants, DVH
will have the option, upon 90 days prior written
notice, to purchase the facility at a purchase price equal to
the sum of (i) the purchase price of the facility, and
(ii) that amount determined under a formula that would
provide us an internal rate of return of 10% per year,
increased by 2% of such percentage each year, taking into
account all payments of base rent received by us. These same
purchase rights also apply if we provide DVH with notice of the
exercise of our right to change management as a result of a
default, provided DVH gives us notice within five days following
receipt of such notice. If during the term of the lease we
receive from the previous owner or any of its affiliates a
written offer to purchase the Desert Valley Facility and we are
89
willing to accept the offer, so long as DVH and its affiliates
are not in default under any lease with us or any of the
subleases with its subtenants, we must first present the offer
to DVH and allow DVH the right to purchase the facility upon the
same price, terms and conditions as set forth in the offer;
however, if the offer is made after February 28, 2007, in
lieu of exercising its right of first refusal, DVH may exercise
its option to purchase as provided above.
Depreciation and Real Estate Taxes. The following table
sets forth information, as of December 31, 2004, regarding
the depreciation and real estate taxes for the Desert Valley
Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Tax Basis | |
|
Depreciation | |
|
|
|
2004 Real Estate | |
|
|
| |
|
| |
|
Life | |
|
| |
|
|
Land | |
|
Buildings | |
|
Annual Rate | |
|
Method | |
|
in Years | |
|
Taxes | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Victorville, California
|
|
$ |
2,000,000 |
|
|
$ |
26,000,000 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
$ |
289,905 |
|
|
|
1.07 |
% |
Facility Expansion. We have also entered into a letter
agreement with DVH pursuant to which, subject to certain
conditions, we have agreed to fund up to $20.0 million for
the purpose of expanding our Desert Valley Facility. Subject to
DVH providing us a development agreement, which it is not
obligated to do, we have agreed to begin funding and DVH has
agreed to begin drawing funds before February 28, 2006, in
accordance with a disbursement schedule to be provided in the
development agreement at the time of the first draw. Upon
receipt and approval of the development agreement, DVH is
obligated to pay us a fee in cash equal to 0.5% of the maximum
amount that can be funded. This fee will be adjusted following
the full and final funding of the expansion to a sum equal to
0.5% of the actual amount funded. Except for any adjustments to
the fee that may result from funding less than the maximum
amount, the fee is non-refundable. If DVH fails to provide a
development agreement to us by February 28, 2006, we will
have no further liability or obligation to provide the funding.
The $20.0 million expansion amount will be treated as a
capital addition under the lease and, accordingly, as such
expansion costs are funded, the annual rent payable under the
lease will increase by an amount equal to the then-current lease
rate multiplied by the amount of expansion cost incurred. Such
additional rent will continue to be payable for the remaining
term of the lease. For purposes of the repurchase options
contained in the lease, the purchase price will be increased by
the total cost of the addition. DVH is not obligated to present
us with a development agreement, and, if it does not, we have no
obligation to provide funding to DVH for the expansion. We will
not generate any revenues from this transaction unless and until
we and DVH execute a definitive development agreement and DVH
begins drawing the committed funds.
Covington, Louisiana
General. On June 9, 2005, we acquired a fee simple
interest in a long-term acute care facility located in
Covington, Louisiana, which is approximately 35 miles from New
Orleans, Louisiana. The purchase agreement also provided for us
to make a $6.0 million loan to Denham Springs Healthcare
Properties, L.L.C., as well as our prospective purchase of a
long-term acute facility in Denham Springs, Louisiana. We
acquired the facility in Covington, Louisiana, which we refer to
as the Covington Facility, from Covington Healthcare Properties,
L.L.C., an unaffiliated third party. The Covington Facility
contains approximately 43,250 square feet of space and is
licensed for 58 beds.
The purchase price for the Covington Facility was
$11.5 million. This purchase price was arrived at through
arms-length negotiations based upon our analysis of various
factors. These factors included the demographics of the area in
which the facility is located, the capability of the tenant to
operate the facility, healthcare spending trends in the
geographic area, the structural integrity of the facility,
governmental regulatory trends which may impact the services
provided by the tenant, and the financial and economic returns
which we require for making an investment.
The Covington Facility is owned by MPT of Covington, L.L.C.
Currently, our operating partnership owns all of the membership
interests in this limited liability company; however, we have
agreed that, subject to applicable healthcare regulations, we
will offer up to 30% of the equity interests in this limited
liability company to local physicians.
90
Lease. The Covington Facility is 100% leased to Gulf
States Long Term Acute Care of Covington, L.L.C. for a 15-year
term, with three options to renew for five years each. The lease
is a net-lease with the tenant responsible for all costs of the
facility, including, but not limited to, taxes, utilities,
insurance, maintenance and capital improvements. Currently, the
annual base rent is equal to 10.5% of the purchase price plus
any costs and charges that may be capitalized. On each
January 1, the base rent will increase by an amount equal
to the greater of (A) 2.5% per year of the prior
years base rent, or (B) the percentage by which the
CPI for November shall have increased over the CPI in effect for
the then just previous November; provided, however, on
January 1, 2006, the adjustment shall be prorated. The
lease requires the tenant to carry customary insurance which is
adequate to satisfy our underwriting standards.
Lease Guaranty and Security. The lease is guaranteed by
Gulf States and Team Rehab. The lease is cross-defaulted with
our loan agreement with Denham Springs Healthcare Properties,
L.L.C. and will be cross-defaulted with our lease of the Denham
Springs Facility if we purchase that facility. In addition, as
security for the lease, the tenant has granted us a security
interest in all personal property, other than receivables and
operating licenses, located and to be located at the facility.
Pursuant to the lease, the tenant has obtained and delivered to
us an unconditional and irrevocable letter of credit, naming us
beneficiary, in an amount equal to $598,500. At such time as the
operations in the facility have generated EBITDAR coverage of at
least two times the base rent for eight consecutive fiscal
quarters, the letter of credit may be reduced to an amount equal
to three months of the base rent then in effect. If, however,
after satisfying the conditions necessary to reduce the letter
of credit to three months base rent, EBITDAR coverage
subsequently drops below two times base rent for two consecutive
fiscal quarters, the amount of the letter of credit is to be
increased to six months base rent.
Gulf States has provided to us unaudited financial statements
reflecting that, as of September 30 2005, it had tangible
assets of approximately $19.1 million, liabilities of
approximately $9.9 million and stockholders equity of
approximately $9.2 million, and for the year ended
September 30, 2005 had net income of approximately
$0.8 million. Team Rehab has provided to us unaudited
financial statements reflecting that, as of September 30,
2005, it had tangible assets of approximately
$13.5 million, liabilities of approximately
$3.1 million and owners equity of approximately
$10.4 million, and for the year ended September 30,
2005 had net income of approximately $7.3 million.
The lease requires that, as of the commencement date of the
lease and at all times during the lease term, the tenant and its
affiliates, Team Rehab, Gulf States and Gulf States of Denham
Springs, L.L.C., will maintain an aggregate net worth of
$9.0 million.
Repair and Replacement Reserve. The tenant is responsible
for all maintenance, repairs and capital improvements at the
facility. To secure this obligation, the tenant has deposited
with us $34,000 in a regular reserve account. In addition, the
tenant has deposited with us $150,247 in a special reserve
account for immediate repairs, which repairs are to be
undertaken as soon as practicable. In the event amounts in the
regular reserve are utilized, the tenant must replenish the
reserve to the $34,000 level.
Purchase Options. The lease provides that so long as the
tenant is not in default under the lease, our lease for the
Denham Springs Facility, if we purchase that facility, or any
sublease, and no event has occurred which with the giving of
notice or the passage of time or both would constitute such a
default, the tenant will have the option to purchase the
facility (i) at the expiration of the initial term and each
extension term of the lease, to be exercised by
60 days written notice prior to the expiration of the
initial term and each extension term, and (ii) within
five days of written notification from us exercising our
right to terminate the engagement of the tenants or its
affiliates management company as the management company
for the facility as a result of an event of default under the
lease. The purchase price for those options shall be equal to
the greater of (i) the appraised value of the facility,
assuming the lease remains in effect for 15 years and not
taking into account any purchase options contained therein, or
(ii) the purchase price paid by us for the facility,
increased annually by an amount equal to the greater of
(A) 2.5% per year from the date of the lease, or
(B) the rate of increase in the CPI on each January 1.
Commitment Fee. We received a commitment fee at the
closing of the purchase of the Covington Facility of $90,000.
91
Depreciation and Real Estate Taxes. The following table
sets forth information, as of December 31, 2004, regarding
the depreciation and real estate taxes for the Covington
Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Tax Basis | |
|
Depreciation | |
|
|
|
2004 Real Estate | |
|
|
| |
|
| |
|
Life | |
|
| |
|
|
Land | |
|
Buildings | |
|
Annual Rate | |
|
Method | |
|
in Years | |
|
Taxes | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Covington, Louisiana
|
|
$ |
821,429 |
|
|
$ |
10,678,571 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
$ |
36,625 |
|
|
|
0.32 |
% |
Denham Springs, Louisiana
General. On June 9, 2005, we entered into a
definitive purchase, sale and loan agreement, or purchase
agreement, relating to the acquisition of the Covington Facility
and the making of a $6.0 million loan to Denham Springs
Healthcare Properties, L.L.C., an unrelated third party. The
purchase agreement also provided for the purchase and leaseback
of the Denham Springs Facility, for a purchase price of
$6.0 million and on substantially the same terms as applied
to our purchase of the Covington Facility. The Denham Springs
Facility is located in Denham Springs, Louisiana, which is
approximately 10 miles from Baton Rouge, Louisiana, The
Denham Springs Facility contains approximately
36,000 square feet of space and is licensed for 59 beds.
On June 9, 2005 we made a loan of $6.0 million to
Denham Springs Healthcare Properties, L.L.C., $500,000 of which
was held in escrow pending the resolution of certain
environmental issues related to the facility. The loan accrued
interest at a rate of 10.5% per year, adjusted each January
1 by an amount equal to the greater of (i) 2.5% or
(ii) the percentage by which the CPI increases from
November to November, provided that the increase in CPI for 2005
was to be prorated. The loan was to be repaid over 15 years
with interest only during the 15 years and a balloon
payment due and payable at the expiration of the 15 years.
The loan could be prepaid at any time without penalty.
On October 31, 2005, upon favorable resolution of the
environmental issues related to the facility, we purchased the
facility for a purchase price of $6.0 million, which was
paid by delivering the note evidencing the loan and releasing to
Denham Springs Healthcare Properties. L.L.C. the remaining
balance of all funds escrowed under the loan. The purchase price
for the Denham Springs Facility was arrived at through
arms-length negotiations based upon our analysis of various
factors, including the demographics of the area in which the
facility is located, the capability of the tenant to operate the
facility, healthcare spending trends in the geographic area, the
structural integrity of the facility, governmental regulatory
trends which may impact the services provided by the tenant, and
the financial and economic returns which we require for making
an investment.
We have formed a Delaware limited liability company, MPT of
Denham Springs, L.L.C., which made the $6.0 million loan
and owns the Denham Springs Facility. Our operating partnership
currently owns all of the membership interests in this limited
liability company; however, we have agreed, subject to
applicable healthcare regulations, to offer up to 30% of the
interests in this limited liability company to local physicians.
Lease. At the time we purchased the Denham Springs
Facility, we leased 100% of the facility to Gulf States Long
Term Acute Care of Denham Springs, L.L.C. for a
15-year term, with
three options to renew for five years each. The lease is a
net-lease with the tenant responsible for all costs of the
facility, including but not limited to taxes, utilities,
insurance, maintenance and capital improvements. The lease
requires the tenant to pay base rent in an amount equal to
10.5% per annum of the purchase price plus any costs and
charges that may be capitalized. On each January 1, the
base rent will be increased by an amount equal to the greater of
(A) 2.5% per annum of the prior years base rent,
or (B) the percentage by which the CPI on November 1
shall have increased over the CPI in effect on the immediately
preceding November 1; provided, however, on January 1,
2006, the adjustment shall be prorated. The lease will also
require the tenant to carry customary insurance which is
adequate to satisfy our underwriting standards.
Guaranty, Security. The lease is guaranteed by Gulf
States and Team Rehab. As security for the lease, the tenant has
granted us a security interest in all personal property, other
than receivables and
92
operating licenses, located and to be located at the facility.
The lease is cross-defaulted with the lease for the Covington
Facility. The lease also required the tenant to obtain and
deliver to us an unconditional and irrevocable letter of credit
from a bank acceptable to us, naming us beneficiary thereunder,
in an amount equal to $315,000, and provides that at such time
as the operations in the facility have generated EBITDAR
coverage of at least two times the base rent for eight
consecutive fiscal quarters, the letter of credit may be reduced
to an amount equal to three months of the base rent then in
effect. If, however, after satisfying the conditions necessary
to reduce the letter of credit to three months base rent,
EBITDAR coverage subsequently drops below two times base rent
for two consecutive fiscal quarters, the letter of credit will
be increased to six months base rent.
Gulf States has provided to us unaudited financial statements
reflecting that, as of December 31, 2004, it had tangible
assets of approximately $11.1 million, liabilities of
approximately $9.3 million and stockholders equity of
approximately $1.8 million, and for the year ended
December 31, 2004 had net income of approximately
$2.0 million. Team Rehab has provided to us unaudited
financial statements reflecting that, as of December 31,
2004, it had tangible assets of approximately
$21.3 million, liabilities of approximately
$9.2 million and owners equity of approximately
$12.1 million, and for the year ended December 31,
2004 had net income of approximately $1.7 million.
The lease for the Denham Springs Facility will require that, as
of the commencement date of the lease and at all times during
the lease, the tenant and its affiliates, Team Rehab, Gulf
States and Gulf States Long Term Acute Care of Covington,
L.L.C., will maintain an aggregate net worth of
$9.0 million.
Repair and Replacement Reserve. The lease required the
tenant, on the commencement date of the lease, to deposit
$56,000 into a reserve account as security for the tenants
obligation to make certain repairs under the lease. In the event
amounts in the regular reserve are utilized, the tenant will be
required to replenish the reserve to restore it to the $56,000
level. The tenant was also required under the lease to make a
deposit of $398,590 into a special reserve account for use in
making certain immediate repairs to the facility, which are to
be made as soon as practicable.
Purchase Options. The lease provides that so long as the
tenant is not in default, and no event has occurred which with
the giving of notice or the passage of time or both would
constitute a default under the lease, the lease for the
Covington Facility, or any sublease, the tenant will have the
option to purchase the facility (i) at the expiration of
the initial term and each extension term of the lease, to be
exercised by 60 days written notice prior to the
expiration of the initial term and each extension term, and
(ii) within five days of written notification from us
exercising our right to terminate the engagement of the
tenants or its affiliates management company as the
management company for the facility as a result of an event of
default under the lease. The option purchase price shall be
equal to the greater of (i) the appraised value of the
facility, assuming the lease remains in effect for 15 years
and not taking into account any purchase options contained
therein, or (ii) the purchase price paid by us for the
facility, increased annually by an amount equal to the greater
of (A) 2.5% per annum from the date of the lease, or
(B) the rate of increase in the CPI on each January 1.
Commitment Fee. We received a commitment fee at closing
in the amount of $60,000.
Depreciation and Real Estate Taxes. The following table
sets forth information, as of November 30, 2004, regarding
the depreciation and real estate taxes for the Denham Springs
Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Tax Basis | |
|
Depreciation | |
|
|
|
2004 Real Estate | |
|
|
| |
|
| |
|
Life | |
|
| |
|
|
Land | |
|
Buildings | |
|
Annual Rate | |
|
Method | |
|
in Years | |
|
Taxes | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Denham Springs, Louisiana
|
|
$ |
428,571 |
|
|
$ |
5,571,429 |
|
|
|
2.5 |
% |
|
|
Straight-line |
|
|
|
40 |
|
|
$ |
24,720 |
|
|
|
0.41 |
% |
North Cypress Facility
General. On June 13, 2005, we closed a series of
transactions, effective as of June 1, 2005, with North
Cypress, an unaffiliated third party, pursuant to which North
Cypress is to develop a community hospital in Houston, Texas. We
ground lease two parcels of land, the hospital tract and the
parking area tract, from the owners of those tracts pursuant to
two separate ground leases. Also, we and the owner of
93
the hospital tract entered into a purchase and sale agreement
pursuant to which we can acquire the hospital tract for
approximately $4.7 million. We then subleased the hospital
tract and the parking area tract to North Cypress, which
sublease requires North Cypress to construct the hospital
improvements. We refer to this sublease as the ground sublease.
The ground sublease has a term of 99 years. We agreed to make a
construction loan, secured by the hospital improvements, to
North Cypress for approximately $64.0 million, the amount
necessary for construction of the improvements, with interest at
10.5% per annum, which interest is deferred and added to the
principal balance of the loan during the construction period,
and for a term ending upon completion of construction. Subject
to certain limited conditions, we will purchase from and lease
to North Cypress the hospital improvements upon completion
pursuant to a second purchase and sale agreement and a
post-construction lease. In the event we do not purchase the
improvements upon completion of construction, the ground
sublease will continue and the construction loan will become
due. In that event, we expect to seek to convert the
construction loan to a 15 year term loan with interest at
10.5% per annum, secured by a mortgage on the hospital
improvements. If we purchase the improvements, the ground
sublease will terminate and be replaced with the
post-construction lease, which is a lease of the hospital tract,
the land, the hospital improvements and a sublease of the
parking area tract. We refer to this lease as the facility lease.
Commitment Fee. In connection with the transaction, North
Cypress paid us a commitment fee in the amount of $640,280,
$100,000 of which was paid in cash and $540,280 of which was
added to the principal balance of the construction loan.
Leases. We entered into two ground leases, one for the
hospital tract and one for a parking area tract, with the
current owners of that land. We then ground subleased the two
tracts to North Cypress. If we purchase the hospital tract, the
ground lease for the hospital tract will terminate. If we
purchase the hospital improvements at the end of the
construction term, the ground sublease will terminate and be
replaced by the facility lease which will have a term of
15 years with three options to renew for five years each.
The ground sublease and the facility lease are each a net-lease
with the tenant responsible for all costs of the facility,
including, but not limited to, all rent and other costs and
expenses due and payable under the ground lease, taxes,
utilities, insurance, maintenance and capital improvements. Rent
pursuant to the ground sublease during the construction period
is a monthly amount equal to the sum of (A) the product of
(i) 10.5% multiplied by (ii) the total amount of funds
disbursed under the construction loan as of the date this
payment is due divided by 12 plus (B) the sum of all rents
paid under the ground leases. Subsequent to the completion of
construction of the hospital improvements, base rent under the
ground sublease will be an amount equal to 10.5% multiplied by
the total amount of funds disbursed under the construction loan
plus the sum of all rents paid pursuant to the ground leases.
The facility lease requires the tenant to pay monthly rent in an
annual amount equal to 10.5% multiplied by the total amount of
the funds disbursed under the construction loan plus the sum of
all rents paid pursuant to the ground leases. On January 1,
2006, and on each January 1 thereafter, the base rent will
increase by an amount equal to the greater of (A) 2.5% per
year of the prior years base rent, excluding the ground
lease rent component, or (B) the percentage by which the
CPI on January 1 shall have increased over the CPI figure
in effect on the then just previous January 1. The leases
require the tenant to carry customary insurance which is
adequate to satisfy our underwriting standards. The facility
lease requires the tenant to pay us, commencing on the
commencement date of the facility lease and on each
January 1 during the term thereof, an amount equal to
$7,500 to cover the cost of the physical inspections of the
facility, which fee will, on each January 1, be increased
by 2.5% per annum. In addition to this ongoing inspection fee,
the MPT lender is entitled to receive an inspection fee of
$75,000 to cover the lenders inspection costs during the
construction period.
Capital Improvement Reserve. The ground sublease and the
facility lease require the tenant, beginning on the date that
construction of the facility has been completed, to make annual
deposits into a reserve account in the amount of $2,500 per bed
per year. These leases also provide that on each January 1
thereafter, the payment of $2,500 per bed per year into the
capital improvement reserve will be increased by 2.5%.
94
Capital Contributions and Net Worth Covenant. The ground
sublease and the facility lease require that, as of the
commencement date of each lease, the tenant shall have received
from its equity owners at least $15.0 million in cash
equity. So long as tenant maintains the consolidated net worth
required under each lease, such cash equity may be used for
acquisition, pre-opening and operating expenses of the facility
and shall not be distributed to tenants equity owners. The
ground sublease and the facility sublease contain net worth
covenants which tenant must satisfy.
Security. The tenant must deliver to us upon execution of
the ground sublease a security deposit in the approximate amount
of $6.7 million. The security deposit can be cash or a
letter of credit. At the execution of the facility lease the
security deposit amount shall be equal to 10.5% times the total
development costs of the hospital improvements. At the time that
the operations from the facility have sustained EBITDAR coverage
of at least two times the then current base rent for two
consecutive fiscal years, the amount of the security deposit can
be reduced by one half.
Management. North Cypress is newly formed and has had no
significant operations to date. North Cypress has executed a
contract with Surgical Development Partners, LLC, a hospital
management company, to manage the day-to-day operations of the
hospital, including staffing, scheduling, billing and
collections, governmental compliance and relations, and other
functions. Surgical Development Partners, LLC has made a
substantial equity investment in North Cypress. We have the
right to require North Cypress to replace the management company
under certain conditions.
Purchase Options. Pursuant to the terms of the facility
lease, so long as no event of default has occurred, at the
expiration of the facility lease the tenant will have the option
to purchase our interest in the property leased pursuant to the
facility lease at a purchase price equal to the greater of
(i) the fair market value of the leased property or
(ii) the purchase price paid by us to tenant pursuant to
the purchase and sale agreement relating to the hospital
improvements plus our interest in any capital additions funded
by us, as increased by the amount equal to the greater of
(A) 2.5% from the date of the facility lease execution or
(B) the rate of increase in the CPI as of each January 1
which has passed during the lease term; provided no event shall
the purchase price be less than the fair market value of the
property leased.
Sale Proceeds Distributions or Syndication. The facility
lease also provides that if during the term of the facility
lease we sell our interest in the property, then the net sales
proceeds from the sales shall be distributed as follows:
(A) to us in the amount equal to the purchase price paid by
us to the tenant pursuant to the purchase and sale agreement
relating to the hospital improvements plus an amount which will
provide us with an internal rate of return of 15% and
(B) the balance of the net proceeds shall be divided
equally between us and the tenant. In addition, subject to
applicable healthcare regulations, we will offer to tenant and
any physician which owns an interest in tenant the opportunity
to purchase up to an aggregate 49% of the limited partnership
interest in MPT of North Cypress, L.P., our subsidiary that owns
the property. The right to purchase is applicable during the
period which is not less than six months or more than nine
months subsequent to the commencement date of the facility
lease. The price for the limited partnership interest shall be
determined on the basis of the historical cost of our assets.
General. On September 16, 2005, we acquired a fee
simple interest in 15 acres of land located in Bucks
County, Pennsylvania, which is approximately 15 miles from
Philadelphia, Pennsylvania, for a purchase price of
approximately $5.4 million pursuant to an agreement with
Glenview Corporate Center Limited Partnership. On the same date,
we entered into an agreement with Bucks County Oncoplastic
Institute, LLC, or BCO, and DSI Facility Development, LLC, or
the developer, each an unaffiliated third party, to develop a
womens hospital facility with an integrated medical office
building on the land. The total development costs to develop the
facility, including the cost of the land, are estimated at
approximately $38.0 million. To date, including the
acquisition costs of the land, we have incurred approximately
$8.8 million of the total development costs.
95
Lease. We have formed a Delaware limited partnership, MPT
of Bucks County, L.P., to own the facility. We have entered into
a lease with BCO for both the land and the improvements. The
lease will extend for the construction term and 15 years
thereafter with BCO having two five-year renewal options and a
third option to renew the lease until August 15, 2035. The
lease is a net-lease with BCO responsible for all costs of the
facility, including, but not limited to, taxes, utilities,
insurance and maintenance. The lease will require BCO to pay
monthly rent in a per annum amount equal to 10.75% multiplied by
the total amount of the funds disbursed under the development
agreement. The lease provides that on January 1, 2007, and
on each January 1 thereafter, the base rent will be
increased by an amount equal to the greater of (A) 2.5% per
annum of the prior years base rent, or (B) the
percentage by which the CPI has increased over the CPI figure in
effect on the previous January 1. The lease further
provides that, upon completion of construction, and beginning
with the calendar month after the completion date, BCO will pay,
in addition to base rent, percentage rent in an amount equal to
1.75% of revenues for the preceding month. The lease also
requires BCO to carry customary insurance which is adequate to
satisfy our underwriting standards. The lease requires BCO to
pay us on January 1, 2006 an amount equal to $7,500 to
cover the cost of the physical inspections of the facility,
which fee will, beginning on January 1, 2007, and
continuing on each January 1 thereafter, be increased by
2.5% per annum. In addition to the inspection fee, the total
development costs also include a fee equal to $75,000 to cover
our inspection of the facility during the construction period.
We loaned BCO the funds for this fee, which loan bears interest
at a rate of 10.75%.
Capital Improvement Reserve. The lease requires BCO to be
responsible for all maintenance and repairs and all
extraordinary repairs required to keep the facility in
compliance with all applicable laws and regulations and as
required under the lease. The lease will also require BCO,
beginning on the completion of construction of the facility, to
make annual deposits into a reserve account in the amount of
$2,500 per bed per year. The lease provides that beginning on
the first January 1 after the completion of construction,
the payment of $2,500 per bed per year into the improvement
reserve will be increased by 2.5%. The lease provides that all
extraordinary repair expenditures made in each year during the
term of the lease will be funded first from the reserve, and
that BCO will pay into the reserve such funds as necessary for
all extraordinary repairs.
Development Agreements. We have agreed to pay DSI
Facility Development, LLC, an affiliate of BCO, a developer fee
of $515,000, a construction management fee of $687,500 and a
developer bonus based upon the cost savings if the facility is
completed for less than the estimated total development costs.
Security. As security for the lease, BCO has granted us a
security interest in all personal property, other than
receivables, located and to be located at the facility, which
security interest is subject to any lien of any purchase money
equipment lender. The lease requires BCO to obtain and deliver
to us an unconditional and irrevocable letter of credit from a
bank acceptable to us, naming us beneficiary thereunder, in an
amount equal to one years base rent under the lease. BCO
substituted a cash deposit for the letter of credit, which we
will continue to hold until a certificate of occupancy is
issued, and we loaned BCO the funds for this cash deposit, which
loan bears interest at the rate of 20% per annum. At the time
the letter of credit is delivered, we will retain the cash
deposit and it shall be applied toward the promissory note. As a
condition to closing and as a continuing covenant under the
lease, BCO is required to achieve a tangible net worth of
$5.0 million, which may be satisfied by an equity
injection, operating earnings or approved line of credit. Until
BCO satisfies such covenant, our lease for the Bucks
County Facility is guaranteed to the extent of $5.0 million
by 14 guarantors. The guarantors have delivered financial
statements which we believe reflect the necessary financial
resources to satisfy their guaranty obligations. The lease will
be cross-defaulted to any other lease or agreement between the
parties. BCO is newly formed and has had no significant
operations to date.
Purchase Options. The lease provides that so long as BCO
is not in default under any lease with us or any of the leases
with its subtenants, at the expiration of the lease BCO will
have the option, upon 60 days prior written notice, to purchase
the facility at a purchase price equal to the greater of
(i) the appraised value of the facility, which assumes the
lease remains in effect for 15 years, or (ii) the
total development costs, including any capital additions funded
by us, as increased by an amount equal to the
96
greater of (A) 2.5% per annum from the date of the lease,
or (B) the rate of increase in the CPI on each
January 1. If we do not approve a change of control
transaction involving BCO, BCO shall also have the option,
exercisable for 30 days after our failure to approve the
change of control, to purchase the facility at the greater of
(i) the above formula for the end-of-lease-term purchase
option or (ii) an amount that would provide us an internal
rate of return of 13%.
Commitment Fee. At closing, BCO executed a promissory
note in favor of us for the $345,000 commitment fee, which note
bears interest at a rate of 10.75% and is payable interest only
with a balloon payment approximately 15 years following
completion of construction.
Bloomington, Indiana
General. On October 7, 2005, we purchased
12 acres of land in Bloomington, Indiana, which is
approximately 50 miles from Indianapolis, Indiana, from
SIMP II. As an accommodation to SIMP II, we also
agreed to hold title to an additional 34 acres to be
retransferred to SIMP II for nominal consideration upon the
approval of the subdivision of the land. That land has now been
retransferred. We also entered into funding and development
agreements with Monroe Hospital, LLC, or Monroe Hospital, and
Monroe Hospital Development, LLC, or Monroe Development, an
affiliate of Surgical Development Partners, LLC, to develop a
community hospital on the 12 acre parcel. The total
development costs to develop the facility, including the cost of
the land, will be approximately $35.5 million. To date,
including the acquisition costs of the land, we have incurred
approximately $11.1 million of the total development costs.
Lease. We have formed a Delaware limited liability
company, MPT of Bloomington, LLC, to own the facility. We are
leasing 100% of the land and all improvements to be constructed
thereon to Monroe Hospital for the construction period.
Following construction, the lease will continue for a term of
15 years with three options to renew for five years each.
The lease is a net-lease with the tenant responsible for all
costs of the facility, including, but not limited to, taxes,
utilities, insurance, maintenance and capital improvements. The
lease requires the tenant to pay monthly rent in a per annum
amount equal to 10.50% multiplied by the purchase price of the
land and the total amount of the funds disbursed under the
funding and development agreements. During the construction
period, the rent will be deferred and will be paid after the
construction period over the 15 year lease term. On
January 1, 2007, and on each January 1 thereafter, the base
rent will be increased by an amount equal to the greater of
(A) 2.5% per annum of the prior years base rent,
or (B) the percentage by which the CPI on January 1 shall
have increased over the CPI figure in effect on the then just
previous January 1. The lease also requires the tenant to carry
customary insurance which is adequate to satisfy our
underwriting standards. The lease requires the tenant to pay, on
the commencement date and on each January 1 thereafter, an
amount equal to $5,000 to cover the cost of the physical
inspections of the facility, which fee will, beginning on
January 1, 2006, and continuing on each January 1
thereafter, be increased by 2.5% per annum. In addition, to
the inspection fee, we are entitled to a fee equal to $50,000 to
cover our inspection of the facility during the construction
period. We loaned Monroe Hospital the $55,000 for these
inspection fees, which loan bears interest at a rate of
10.5% per annum, is payable interest only following the
completion date and matures 15 years thereafter.
Repair and Replacement Reserve. The lease requires Monroe
Hospital to be responsible for all maintenance and repairs and
all extraordinary repairs required to keep the facility in
compliance with all applicable laws and regulations and as
required under the lease. The lease also requires that the
tenant, beginning on the completion of construction of the
facility, to make annual deposits into a reserve account in the
amount of $2,500 per bed per year. The lease also provides
that beginning on the first January 1 after the completion of
construction, and on each January 1 thereafter, the payment of
$2,500 per bed per year into the improvement reserve will
be increased by 2.5%.
Development Agreements. We have agreed to pay Monroe
Development a developer fee of $750,000 and an additional fee of
$250,000 for post-construction services.
Security. As security for the lease, Monroe Hospital has
granted us a security interest in all personal property, other
than receivables, located and to be located at the facility. As
further security for the Lease, Monroe Hospital has caused its
wholly owned subsidiary, Monroe Hospital Outpatient ASC, LLC to
grant
97
us a security interest in all its personal property, other than
receivables, located or to be located at the facility. The
tenant also obtained and delivered to us an unconditional and
irrevocable letter of credit from a bank acceptable to us,
naming us beneficiary thereunder in an amount equal to one
years base rent under the lease. Monroe Hospital is newly
formed and has had no significant operations to date. As a
condition to closing, Monroe Hospital was required to achieve,
and as a continuing covenant under the lease Monroe Hospital is
required to maintain, a tangible net worth of $6.0 million.
Monroe Hospital has provided to us unaudited financial
statements reflecting that, as of September 30, 2005, it
had tangible assets of $12.2 million, including cash of
approximately $3.2 million, liabilities of approximately
$3.4 million and owners equity of approximately
$8.9 million. The treasurer of Monroe Hospital also
certified at closing that the equity owners of Monroe Hospital
contributed to Monroe Hospital cash or cash equivalents in a
total amount of $9.75 million.
Management Agreement. Monroe Hospital has executed a
contract with Surgical Development Partners, LLC, a hospital
management company, to manage the
day-to-day operations
of the hospital, including staffing, scheduling, billing and
collections, governmental compliance and relations, and other
functions. Surgical Development Partners, LLC made a
$3.0 million cash equity investment in Monroe Hospital. We
have the right to require Monroe Hospital to replace the
management company under certain conditions.
Purchase Options. The lease provides that so long as
Monroe Hospital is not in default under any lease with us or any
of the leases with its subtenants, at the expiration of the
lease Monroe Hospital will have the option, upon 60 days
prior written notice, to purchase the facility at a purchase
price equal to the greater of (i) the appraised value of
the facility, which assumes the lease remains in effect for
15 years, or (ii) the total development costs,
including any capital additions funded by us, as increased by an
amount equal to the greater of (A) 2.5% per annum from
the date of the lease, or (B) the rate of increase in the
CPI on each January 1.
Commitment Fee. At closing, Monroe Hospital executed a
promissory note in favor of us for $177,500 commitment fee,
which note bears interest at a rate of 10.5% and is payable
interest only with a balloon payment approximately 15 years
following completion of construction.
Our Current Loan
On December 23, 2005, we made a $40.0 million mortgage
loan to Alliance, an unrelated third party. We refer to this
mortgage loan in this prospectus as the Alliance Loan. The
Alliance Loan is secured by a community hospital facility
located in Odessa, Texas, which is approximately 20 miles
from Midland, Texas. The facility is licensed for 78 beds, 28 of
which are operated by HEALTHSOUTH Rehabilitation Hospital of
Odessa, Inc. The Alliance Loan has a term of 15 years
and is payable interest only during the term of the loan, with
the full principal amount due at the end of the 15 year
term. The aggregate annual base interest is set at an initial
annual rate of ten percent. Beginning on January 1, 2007
and on each January 1 thereafter, Alliance will be required
to pay additional interest equal to the greater of (i) 3.5%
or (ii) the rate of the CPI increase for the prior year
multiplied by the previous years annualized base interest.
Absent a third partys bona fide offer to acquire a
majority of Alliances equity interest or substantially all
of Alliances assets, Alliance may not prepay the Alliance
Loan prior to the eighth loan year. In the event that Alliance
prepays the Alliance Loan following such a bona fide offer or
during the eight, ninth, or tenth loan years, Alliance must pay
us a yield maintenance premium. Following the tenth loan year,
Alliance may prepay the Alliance Loan without penalty or
premium. As security for Alliances obligations under the
mortgage loan, all principal, base interest and additional
interest on the first $30.0 million of the loan amount is
guaranteed on a pro rata basis by the shareholders of SRI-SAI
Enterprises, Inc., the general partner of Alliance, until such
time as Alliance meets certain financial conditions.
SRI-SAI Enterprises, Inc. also pledged all of its general
partnership interest in Alliance to us as security for
Alliances obligations. Additionally, we have received a
first mortgage on the facility and a first or second priority
security interest in all of Alliances personal property
other than accounts receivable, along with other security. The
Alliance Loan is cross-defaulted with all other agreements
between us or our affiliates, on one hand, and Alliance or its
affiliates on the other hand. The Alliance Loan also contains
representations, financial and other affirmative and negative
covenants, events of default and remedies
98
typical for this type of loan. As consideration for entering
into this arrangement, Alliance paid us a commitment fee equal
to one half of one percent of the loan amount on the closing
date.
We intend to expand our portfolio by acquiring our Pending
Acquisition Facility, which we consider to be a probable
acquisition as of the date of this prospectus, under the terms
of the letter of commitment relating to this facility. The lease
for this facility will provide for contractual base rent and an
annual rent escalator. Letters of commitment constitute
agreements of the parties to consummate the acquisition
transactions and enter into leases on the terms set forth in the
letters of commitment subject to the satisfaction of certain
conditions, including the execution of mutually-acceptable
definitive agreements. The following table contains information
regarding our Pending Acquisition Facility as of the date of
this prospectus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year One | |
|
|
|
|
|
|
|
|
|
|
Number of | |
|
Contractual | |
|
Loan | |
|
Lease | |
Location |
|
Type | |
|
Tenant | |
|
Beds(1) | |
|
Interest | |
|
Amount | |
|
Expiration | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Hammond,
Louisiana*(2)
|
|
Long-term acute care hospital |
|
Hammond Rehabilitation Hospital, LLC |
|
|
40 |
|
|
$ |
840,000 |
(3) |
|
$ |
8,000,000 |
|
|
|
June 2021 |
|
|
|
|
|
* |
Under letter of commitment. |
|
|
|
(1) |
Based on the number of licensed beds. |
|
|
(2) |
On April 1, 2005, we entered into a letter of commitment
with Hammond Healthcare Properties, LLC, or Hammond Properties,
and Hammond Rehabilitation Hospital, LLC, or Hammond Hospital,
pursuant to which we have agreed to lend Hammond Properties
$8.0 million and have agreed to a put-call option pursuant
to which, during the 90 day period commencing on the first
anniversary of the date of the loan closing, we expect to
purchase from Hammond Properties a long-term acute care hospital
located in Hammond, Louisiana for a purchase price between
$10.3 million and $11.0 million. If we purchase the
facility, we will lease it back to Hammond Hospital for an
initial term of 15 years. The lease would be a net lease
and would provide for contractual base rent and, beginning
January 1, 2007, an annual rent escalator. |
|
|
(3) |
Based on one year contractual interest at the rate of
10.5% per year on the $8.0 million mortgage loan to
Hammond Properties. We expect to exercise our option to purchase
the Hammond Facility in 2006. For the one year period following
our purchase of the facility, contractual base rent would equal
$1,079,925, based on 10.5% of an estimated purchase price of
$10,285,000. |
|
General. On April 1, 2005, we entered into a letter
of commitment with Hammond Healthcare Properties, LLC, the
current owner of the property, or Hammond Properties, and
Hammond Rehabilitation Hospital, LLC, the current tenant of the
property, or Hammond Hospital, both unaffiliated third parties,
to provide a mortgage loan to Hammond Properties and enter into
a put-call option arrangement relating to our purchase of the
facility from Hammond Properties and our leaseback of the
facility to Hammond Hospital or its affiliates.
The facility is a long-term acute care hospital located in
Hammond, Louisiana, which is approximately 45 miles from
New Orleans, Louisiana. The facility contains approximately
23,835 square feet of space and is licensed for
40 beds.
The letter of commitment provides that, under the mortgage loan
transaction, we will lend to Hammond Properties the sum of
$8.0 million, which will bear interest at the rate of 10.5%
per year and be payable interest only on a monthly basis with a
balloon payment due and payable at the expiration of the
put-call option period described below or, if the put-call
option is exercised, at closing of our purchase of the facility.
The letter of commitment provides that the loan will be secured
by a first mortgage on the facility and by the other collateral
and guaranteed as described below.
The letter of commitment provides that, at the time of the
mortgage loan closing, we will enter into a put-call option
agreement with Hammond Properties providing that either party
will have the option, exercisable within 90 days following
the one year anniversary of the loan closing, to cause the
purchase and sale of the facility, subject to applicable
conditions, for a purchase price of the greater of
(i) $10,285,714 or (ii) the quotient determined by
dividing the annual rental payments by .105 (but not to exceed
$11.0 million). The purchase price was arrived at through
arms-length negotiations based upon our analysis of
various factors, including the demographics of the area in which
the facility is located, the capability of the tenant to operate
the facility, healthcare spending in the geographic area, the
structural integrity of the facility, governmental regulatory
trends which may impact the services provided by the facility,
and the financial and economic returns which we require for
making an investment.
99
If the put-call option is exercised, we will form a Delaware
limited liability company, MPT of Hammond, LLC, which will own
the facility. Initially, our operating partnership will own all
of the membership interests in this limited liability company;
however, the letter of commitment provides that, at some point
following closing, we have agreed, subject to applicable
healthcare regulations, to offer up to 30% of the interests in
this limited liability company to local physicians.
Lease. The letter of commitment provides that, if the
put-call option is exercised, we will lease 100% of the facility
to Hammond Hospital or its affiliate for a
15-year term, with
three options to renew for five years each. The letter of
commitment provides that the lease will be a net-lease with the
tenant responsible for all costs of the facility, including, but
not limited to, taxes, utilities, insurance, maintenance and
capital improvements. The letter of commitment provides that the
lease will require the tenant to pay base rent in an amount
equal to 10.50% per annum of the purchase price plus any
costs and charges that may be capitalized, which base rent will
be payable in monthly installments. The letter of commitment
provides that, on each January 1 beginning January 1,
2007, the base rent will be increased by an amount equal to the
greater of (A) 2.5% per annum of the prior years
base rent, or (B) the percentage by which the CPI on
January 1 shall have increased over the CPI figure in effect on
the then just previous January 1. The letter of commitment
provides that the lease will require the tenant to carry
customary insurance which is adequate to satisfy our
underwriting standards.
Repair and Replacement Reserve. The letter of commitment
provides that the tenant, commencing on the date we purchase the
facility, will make annual deposits into a reserve account. We
expect that the lease will provide that on each January 1
following the date we purchase the facility, the payment into
the reserve account will be increased, and that all
extraordinary repair expenditures made in each year during the
term of the lease will be funded first from the reserve, and the
tenant will pay into the reserve such funds as necessary for all
extraordinary repairs.
Security. The letter of commitment provides that, as
security for the mortgage loan and the lease, Hammond Properties
or the tenant, as the case may be, will grant us a security
interest in all personal property, other than receivables,
located and to be located at the facility. The letter of
commitment requires Hammond Properties and the tenant to obtain
and deliver to us an unconditional and irrevocable letter of
credit from a bank acceptable to us, naming us beneficiary
thereunder, in an amount equal to six months debt service
or base rent under the lease, as the case may be, and that at
such time as the operations in the facility have generated
EBITDAR coverage of at least two times the base rent for eight
consecutive fiscal quarters, the letter of credit may be reduced
to an amount equal to three months of the base rent then in
effect. If, however, after satisfying the conditions necessary
to reduce the letter of credit to three months base rent,
EBITDAR coverage subsequently drops below two times base rent
for two consecutive fiscal quarters, the letter of credit will
be increased to six months base rent. The letter of
commitment provides that the lease will be cross-defaulted with
any other lease or agreement between the parties. The letter of
commitment provides that the loan and lease will be jointly and
severally guaranteed by Hammond Properties, certain affiliates
of Hammond Properties and Gulf States Health Services, Inc. For
information about the financial condition of Gulf States Health
Services, Inc., see the description of the Covington and Denham
Springs facilities above.
Purchase Options. The letter of commitment provides that
the lease will provide that so long as the tenant is not in
default, and no event has occurred which with the giving of
notice or the passage of time or both would constitute a default
under its (and its affiliates) leases with us or any of our
affiliates or any of the leases with its subtenants, the tenant
will have the option to purchase the facility at the expiration
of the initial term and each extension term of the lease. The
letter of commitment provides that the purchase price shall be
equal to the greater of (i) the appraised value of the
facility, assuming the lease remains in effect for 15 years
and not taking into account any purchase options contained
therein, or (ii) the purchase price paid by us for the
facility, increased annually by an amount equal to the greater
of (A) 2.5% per annum from the date of the lease, or
(B) the rate of increase in the CPI on each January 1. The
parties will agree upon the notice and closing periods
applicable to these purchase options.
Net Worth Covenant. The letter of commitment provides
that the loan and lease documents will require that, as of the
loan closing and throughout the loan and lease terms, Hammond
Properties,
100
Hammond Hospital and Gulf States Health Services, Inc. must
maintain an aggregate tangible net worth in an amount to be
mutually agreed upon with us.
Commitment Fee. The letter of commitment provides that we
will be entitled to a commitment fee at the closing of the loan
equal to $80,000, $25,000 of which has already been paid. The
letter of commitment further provides that we will be entitled
to a commitment fee at the closing of the sale transaction equal
to 1% of the purchase price, less the amount of all commitment
fees previously paid.
We cannot assure you that we will acquire or develop the Pending
Acquisition Facility on the terms described in this prospectus
or at all, because the transaction is subject to a variety of
conditions, including negotiation and execution of
mutually-acceptable definitive agreements, our satisfactory
completion of due diligence, receipt of appraisals that support
the purchase price set forth in the commitment letter and other
third party reports, obtaining of government and third party
approvals and consents and approval by our board of directors,
as well as satisfaction of customary closing conditions.
Our Acquisition and Development Pipeline
We have also entered into the following arrangements which,
because of the various contingencies that must be satisfied
before these transactions can be completed, we do not consider
to be probable acquisitions or developments as of the date of
this prospectus.
|
|
|
Diversified Specialty Institutes, Inc. Acquisition and
Development Funding |
General. On March 3, 2005, we entered into a letter
agreement with Diversified Specialty Institutes, Inc., or DSI.
An affiliate of DSI is the proposed tenant of the womens
hospital and medical office building in Bensalem, Pennsylvania
that we have contracted with to develop and leaseback. The
letter agreement provides that, subject to DSI identifying
facilities for acquisition or development, which it is not
required to do, and subject to certain other conditions set
forth in the letter agreement, we have agreed to make available
to DSI or its affiliates acquisition and development funding in
the total amount of $50.0 million to be used to finance the
potential future acquisition or development of healthcare
facilities, in each case subject to our due diligence and
approval. The arrangement will remain outstanding until
March 2, 2006, and be available to finance any acquisition
facility or development facility that is subject to definitive
agreements as of March 2, 2006, notwithstanding that the
closing or completion of the acquisition facility or development
facility may not have occurred as of March 2, 2006. We have
agreed that the definitive documents relating to the arrangement
must close by February 28, 2006.
DSI is not required to identify facilities for acquisition or
development and, if it does not, we have no obligation to
provide funding to DSI. If funds are drawn from the arrangement
to fund an acquisition or development facility, as applicable,
we expect to enter into definitive documents with DSI. With
respect to any development facility, we expect to enter into a
development agreement with a developer, which may be an
affiliate of DSI, to develop the development facility.
Commitment Fee. The letter agreement provides that we are
entitled to a fee equal to 1% of the aggregate purchase price or
development costs of any facilities we acquire pursuant to this
arrangement, $100,000 of which was paid when the letter
agreement was signed. The remainder of the fee will be due and
payable at the closing of future projects, with the fee on each
project being equal to 1% of that projects purchase price.
We have agreed to give DSI a credit on future payments of fees
for the $100,000 paid at the execution of the letter agreement.
Lease. We expect to form a Delaware limited liability
company or a limited partnership to own each facility acquired
or developed pursuant to the commitment. The letter of
commitment provides that, at the time of our purchase of any
acquisition or development facility, we intend to lease back to
the applicable tenant 100% of the land and all improvements,
including improvements to be constructed in the case of a
development facility, for a
15-year term, with
three options to renew for five years each, so long as the
options are exercised at least six months prior to the
expiration of the lease or the applicable extended term. The
letter of commitment provides that each lease will be a
net-lease with the tenant responsible for all costs of the
facility, including, but not limited to, taxes, utilities,
insurance and maintenance.
101
For each development facility, the letter agreement provides
that the tenant will pay monthly rent during the construction
period in a per year amount equal to 10.75% multiplied by the
total amount of the funds disbursed under the development
agreement. The letter agreement also provides that the lease
relating to a development facility to require the tenant to pay,
following the completion of construction of the facility, base
rent in an amount equal to 10.75% per year of the total
development costs, payable in monthly installments. For an
acquisition facility, we expect the lease to require the tenant
to pay us base rent equal to 10.75% of the purchase price of the
facility. The letter agreement provides that each lease will
provide that commencing on the first January 1 following
the commencement of the lease with respect to an acquisition
facility, and on the first January 1 following the
construction completion date with respect to a development
facility, and on each January 1 thereafter, the base rent
will be increased by an amount equal to the greater of
(A) 2.5% per year of the prior years base rent,
or (B) the percentage by which the CPI on January 1
has increased over the CPI figure in effect on the then just
previous January 1. The letter of commitment also provides
that each lease for an acquisition facility and a development
facility will require the tenant to carry customary insurance
which is adequate to satisfy our underwriting standards.
The letter agreement provides that each lease will require the
tenant to pay us on the commencement date of the lease an amount
equal to $7,500 to cover the cost of the physical inspections of
the facility. The letter agreement also provides that this
inspection fee will increase at the rate of 2.5% per year
starting on the first January 1 following the commencement
date of the lease, in the case of an acquisition facility, or
the completion date, in the case of a development facility. In
addition to the inspection fee, we also expect the tenant to pay
us a fee equal to $75,000 per development facility to cover
our inspection of the development facility during the
construction period.
Capital Improvement Reserve. The letter agreement
provides that each lease will require, commencing on the date
that construction has been completed with respect to a
development facility, or on the date of commencement of the
lease with respect to an acquisition facility, the tenant to
make annual deposits into a reserve account in the amount of
$2,500 per bed per year. The letter agreement also provides
that each lease is expected to provide that on each
January 1 thereafter, the payment of $2,500 per bed
per year into the improvement reserve will be increased by 2.5%.
We expect that the lease will require all extraordinary repair
expenditures made in each year during the term of the lease will
be funded first from the reserve, and the tenant will pay into
the reserve such funds as necessary for all extraordinary
repairs.
Security. The letter agreement provides that, as security
for each lease, the tenant will grant us a security interest in
all personal property, other than receivables, located and to be
located at the facility. The letter agreement provides that each
lease will be cross-defaulted with any other leases between the
tenant, or its affiliates, and us, or our affiliates. The letter
agreement provides that each lease will require the tenant to
obtain and deliver to us an unconditional and irrevocable letter
of credit from a bank acceptable to us, naming us beneficiary
thereunder, in an amount equal to one years base rent
under the lease.
The letter agreement provides that each lease will require that,
as of the commencement date of the lease, the tenant to have a
tangible net worth of no less than $5.0 million in cash
equity or shall have access to a working capital line of no less
than $5.0 million that is personally guaranteed by
Dr. Tannenbaum and such other persons as may be approved by
us.
Purchase Options. The letter agreement provides that each
lease will provide that so long as tenant is not in default, and
no event has occurred which with the giving of notice or the
passage of time or both would constitute a default under its,
and its affiliates, leases with us or any of our affiliates or
any of the leases with its subtenants, at the expiration of the
initial term of the lease, and at the expiration of each
extended term thereafter, upon at least 60 days prior
written notice, tenant will have the option to purchase the
facility at a purchase price equal to the greater of
(i) the appraised value of the facility, or, in the case of
a development facility (ii) the total development costs
(including any capital additions funded by us), as increased by
an amount equal to the greater of (A) 2.5% per year
from the date of the lease, or (B) the rate of increase in
the CPI on each January 1, or, in the case of an
acquisition facility,
102
(ii) the amount of (A) the purchase price paid for the
facility, including costs of third party reports, legal fees and
all other acquisition costs.
On November 17, 2005, we entered into a letter of
commitment to develop a hospital facility in Oklahoma for an
estimated total development cost of $32.5 million, subject
to adjustment. On December 27, 2005, we entered into a
letter of commitment to acquire and leaseback a facility in
Pennsylvania and to make related loans for certain improvements
to the real estate and for working capital purposes for an
estimated total cost of $9.2 million, subject to
adjustment. These transactions are subject to our completion of
due diligence.
We cannot assure you that we will acquire or develop any of the
facilities in our acquisition and development pipeline on the
terms described in this prospectus or at all, because each of
these transactions is subject to a variety of conditions,
including negotiation and execution of mutually-acceptable
definitive agreements, our satisfactory completion of due
diligence, receipt of appraisals that support the purchase price
set forth in the letter agreements and other third party
reports, obtaining of government and third party approvals and
consents, approval by our board of directors, and in certain
cases our proposed tenants acquisition of the facility
from the current owner, as well as satisfaction of customary
closing conditions.
We have also identified a number of opportunities to acquire or
develop additional healthcare facilities. In some cases, we are
actively negotiating agreements or letters of intent with the
owners or prospective tenants. In other instances, we have only
identified the potential opportunity and had preliminary
discussions with the owner or prospective tenant. We cannot
assure you that we will complete any of these potential
acquisitions or developments.
103
MANAGEMENT
Our Directors and Executive Officers
Our business and affairs are managed under the direction of our
board of directors, which consists of eight members, three of
whom are members of our senior management team and five of whom
our board of directors has determined to be independent in
accordance with the listing standards established by the New
York Stock Exchange, or NYSE. Each director is elected to serve
until the next annual meeting of stockholders and until his
successor is elected and qualified. The current terms of our
present directors will expire at our 2006 annual meeting of
stockholders. The following table sets forth certain information
regarding our executive officers and directors:
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
Edward K. Aldag, Jr.
|
|
|
41 |
|
|
Chairman of the Board, President and Chief Executive Officer |
R. Steven Hamner
|
|
|
48 |
|
|
Director, Executive Vice President and Chief Financial Officer |
William G. McKenzie
|
|
|
47 |
|
|
Vice Chairman of the Board |
Emmett E. McLean
|
|
|
50 |
|
|
Executive Vice President, Chief Operating Officer, Treasurer and
Assistant Secretary |
Michael G. Stewart
|
|
|
50 |
|
|
Executive Vice President, General Counsel and Secretary |
Virginia A. Clarke
|
|
|
46 |
|
|
Director |
G. Steven Dawson
|
|
|
47 |
|
|
Director |
Bryan L. Goolsby
|
|
|
54 |
|
|
Director |
Robert E. Holmes, Ph.D.
|
|
|
63 |
|
|
Director* |
L. Glenn Orr, Jr.
|
|
|
65 |
|
|
Director |
|
|
|
* |
|
Mr. Holmes has been designated as our lead independent
director. |
The following is a summary of certain biographical information
concerning our directors and executive officers:
Edward K. Aldag, Jr. is one of our founders and has
served as our president and chief executive officer since August
2003, and as chairman of the board since March 2004.
Mr. Aldag served as our vice chairman of the board from
August 2003 until March 2004 and as our secretary from August
2003 until March 2005. Prior to that, Mr. Aldag served as
an executive officer and director with our predecessor from its
inception in August 2002 until August 2003. From 1986 to 2001,
Mr. Aldag managed two private real estate companies,
Guilford Capital Corporation and Guilford Medical Properties,
Inc., that had aggregate assets valued at more than
$500 million. Mr. Aldag played an integral role in the
formation of investor groups, structuring the financing, and
closing the transactions. Guilford Medical Properties, Inc.
owned numerous rehabilitation hospitals across the country and
net-leased them to four different national healthcare providers.
Mr. Aldag served as president and a member of the board of
directors of Guilford Medical Properties, Inc. from its
inception until selling his interest in the company in 2001.
Mr. Aldag was the president and a member of the board of
directors of Guilford Capital Corporation from 1998 to 2001 and
from 1990 to 1998 served as executive vice president, chief
operating officer and a member of the board of directors.
Mr. Aldag received his B.S. in Commerce & Business
from the University of Alabama with a major in corporate finance.
R. Steven Hamner is one of our founders and has
served as our executive vice president and chief financial
officer since September 2003 and as a director since February
2005. In August and September 2003, Mr. Hamner served as
our executive vice president and chief accounting officer. From
October 2001 through March 2004, he was the managing director of
Transaction Analysis LLC, a company that provided interim and
project-oriented accounting and consulting services to
commercial real estate owners
104
and their advisors. From June 1998 to September 2001, he was
vice president and chief financial officer of United Investors
Realty Trust, a publicly-traded REIT. For the 10 years
prior to becoming an officer of United Investors Realty Trust,
he was employed by the accounting and consulting firm of
Ernst & Young LLP and its predecessors. Mr. Hamner
received a B.S. in Accounting from Louisiana State University.
Mr. Hamner is a certified public accountant.
William G. McKenzie is one of our founders and has served
as the vice chairman of our board of directors since September
2003. Mr. McKenzie has served as a director since our
formation and served as the executive chairman of our board of
directors in August and September 2003. From May 2003 to August
2003, he was an executive officer and director of our
predecessor. From 1998 to the present, Mr. McKenzie has
served as president, chief executive officer and a board member
of Gilliard Health Services, Inc., a privately-held owner and
operator of acute care hospitals. From 1996 to 1998, he was
executive vice president and chief operating officer of the
Mississippi Hospital Association/ Diversified Services, Inc. and
the Health Insurance Exchange, a mutual company and HMO. From
1994 to 1996, Mr. McKenzie was senior vice president of
Managed Care and executive vice president of Physician
Solutions, Inc., a subsidiary of Vaughan HealthCare, a private
healthcare company in Alabama. From 1981 to 1994,
Mr. McKenzie was hospital administrator and chief financial
officer and held other management positions with several private
acute care organizations. Mr. McKenzie received a Masters
of Science in Health Administration from the University of
Colorado and a B.S. in Business Administration from Troy State
University. He has served in numerous capacities with the
Alabama Hospital Association.
Emmett E. McLean is one of our founders and has served as
our executive vice president, chief operating officer and
treasurer since September 2003. Mr. McLean has served as
assistant secretary since April 2004. In August and September
2003, Mr. McLea