Edgar Filing: MEDICAL PROPERTIES TRUST INC

10-K

Index to Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-32559

Medical Properties Trust, Inc.

MPT Operating Partnership, L.P.

(Exact Name of Registrant as Specified in Its Charter)


Maryland Delaware		20-0191742 20-0242069
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

1000 Urban Center Drive, Suite 501 Birmingham, AL		35242
(Address of Principal Executive Offices)		(Zip Code)

(205) 969-3755

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, par value $0.001 per share of

Medical Properties Trust, Inc.

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer (Medical Properties Trust Inc. only)	þ		Accelerated filer	¨

Non-accelerated filer (MPT Operating Partnership, L.P. only)	þ	(Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ

As of June 28, 2013, the aggregate market value of the 150,071,911 shares of common stock, par value $0.001 per share (“Common Stock”), held by non-affiliates of the registrant was $2,149,029,766 based upon the last reported sale price of $14.32 on the New York Stock Exchange. For purposes of the foregoing calculation only, all directors and executive officers of the registrant have been deemed affiliates.

As of February 28, 2014, 162,550,162 shares of Medical Properties Trust, Inc. Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 15, 2014 are incorporated by reference into Items 10 through 14 of Part III, of this Annual Report on Form 10-K.

Index to Financial Statements

TABLE OF CONTENTS


A WARNING ABOUT FORWARD LOOKING STATEMENTS		1

PART I
ITEM 1	Business	2
ITEM 1A.	Risk Factors	13
ITEM 1B.	Unresolved Staff Comments	31
ITEM 2.	Properties	32
ITEM 3.	Legal Proceedings	33
ITEM 4.	Mine Safety Disclosures	33

PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	34
ITEM 6.	Selected Financial Data	35
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	55
ITEM 8.	Financial Statements and Supplementary Data	57
ITEM 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	113
ITEM 9A.	Controls and Procedures	113
ITEM 9B.	Other Information	114

PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	115
ITEM 11.	Executive Compensation	115
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	115
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	115
ITEM 14.	Principal Accountant Fees and Services	115

PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	116
SIGNATURES		122

Index to Financial Statements

EXPLANATORY NOTE

This report combines the Annual Reports on Form 10-K for the year ended December 31, 2013, of Medical Properties Trust, Inc., a Maryland corporation, and MPT Operating Partnership, L.P., a Delaware limited partnership, through which Medical Properties Trust, Inc. conducts substantially all of its operations. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” “our company,” “Medical Properties,” “MPT,” or “the Company” refer to Medical Properties Trust, Inc. together with its consolidated subsidiaries, including MPT Operating Partnership, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to “our operating partnership” or “the operating partnership” refer to MPT Operating Partnership, L.P. together with its consolidated subsidiaries.

A WARNING ABOUT FORWARD LOOKING STATEMENTS

We make forward-looking statements in this Annual Report on Form 10-K that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. Statements regarding the following subjects, among others, are forward-looking by their nature:

•

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 and loans;

•

our ability to raise additional funds through offerings of debt and equity securities and/or property disposals;

•

our ability to obtain future financing arrangements;

•

estimates relating to, and our ability to pay, future distributions;

•

our ability to compete in the marketplace;

•

lease rates and interest rates;

•

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 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 and other securities, along with, among others, the following factors that could cause actual results to vary from our forward-looking statements:

•

the factors referenced in this Annual Report on Form 10-K, including those set forth under the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business;”

•

U.S. (both national and local) and European (in particular Germany) economic, business, real estate, and other market conditions;

Index to Financial Statements

•

the competitive environment in which we operate;

•

the execution of our business plan;

•

financing risks;

•

acquisition and development risks;

•

potential environmental contingencies and other liabilities;

•

other factors affecting the real estate industry generally or the healthcare real estate industry in particular;

•

our ability to maintain our status as a real estate investment trust, or REIT for U.S. federal and state income tax purposes;

•

our ability to attract and retain qualified personnel;

•

changes in foreign currency exchange rates;

•

U.S. (both federal and state) and European (in particular Germany) healthcare and other regulatory requirements; and

•

U.S. national and local economic conditions, as well as conditions in Europe and any other foreign jurisdictions where we own or will own healthcare facilities, which may have a negative effect on the following, among other things:

•

the financial condition of our tenants, our lenders, counterparties to our interest rate swaps and other hedged transactions and institutions that hold our cash balances, which may expose us to increased risks of default by these parties;

•

our ability to obtain equity or debt financing on attractive terms or at all, which may adversely impact our ability to pursue acquisition and development opportunities and refinance existing debt and our future interest expense; and

•

the value of our real estate assets, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing secured by our properties or on an unsecured basis.

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. Except as required by law, we disclaim any obligation to update such statements or to publicly announce the result of any revisions to any of the forward-looking statements contained in this Annual Report on Form 10-K to reflect future events or developments.

PART I

ITEM

1. Business

Overview

We are a self-advised real estate investment trust (“REIT”) focused on investing in and owning net-leased healthcare facilities. We have operated as a REIT since April 6, 2004, and accordingly, elected REIT status upon the filing of our calendar year 2004 United States federal income tax return. Medical Properties Trust, Inc. was incorporated under Maryland law on August 27, 2003, and MPT Operating Partnership, L.P. was formed under Delaware law on September 10, 2003. We conduct substantially all of our business through MPT Operating Partnership, L.P. We acquire and develop healthcare facilities and lease the facilities to healthcare operating companies under long-term net leases, which require the tenant to bear most of the costs associated with the property. We also make mortgage loans to healthcare operators collateralized by their real estate assets. In addition, we selectively make loans to certain of our operators through our taxable REIT subsidiaries, the proceeds of which are typically used for acquisition and working capital purposes. Finally, from time to time, we acquire a profits or other equity interest in our tenants that gives us a right to share in such tenants’ profits and losses.

Index to Financial Statements

Our investments in healthcare real estate, including mortgage and other loans, as well as any equity investments in our tenants are considered a single reportable segment as further discussed in Note 1 of Item 8 in Part II of this Annual Report on Form 10-K. All of our investments are currently located in the United States and Europe. At December 31, 2013 and 2012, we had $2.9 billion and $2.1 billion, respectively, invested in the following healthcare real estate assets:


	2013				2012
	(Dollars in thousands)
Real estate owned (gross)(1)	$	2,254,708	78.9	%	$	1,552,850	72.8	%
Mortgage loans		388,650	13.6	%		368,650	17.3	%
Other loans		160,990	5.6	%		159,243	7.5	%
Construction in progress		41,771	1.5	%		38,339	1.8	%
Equity and other interests		12,983	0.4	%		12,867	0.6	%

Total	$	2,859,102	100.0	%	$	2,131,949	100.0	%

(1)	Includes $240.5 million of healthcare real estate assets in Germany, which were acquired in November 2013.

Revenue by property type:

The following is our revenue by property type for the year ended December 31 (dollars in thousands):


	2013				2012				2011
General Acute Care Hospitals(1)	$	144,291	59.5	%	$	113,173	57.1	%	$	88,261	66.7	%
Long-Term Acute Care Hospitals		53,130	21.9	%		49,039	24.8	%		29,632	22.4	%
Rehabilitation Hospitals(2)		43,441	17.9	%		34,252	17.3	%		12,768	9.6	%
Wellness Centers		1,661	0.7	%		1,661	0.8	%		1,661	1.3	%

Total revenue	$	242,523	100.0	%	$	198,125	100.0	%	$	132,322	100.0	%

(1)	Includes two medical office buildings.

(2)	Includes $1.8 million in rental revenue from the healthcare real estate assets acquired in Germany in November 2013.

See “Overview” in Item 7 of this Annual Report on Form 10-K for details of transaction activity for 2013, 2012 and 2011. More information is available on the Internet at www.medicalpropertiestrust.com.

Portfolio of Properties

As of February 28, 2014, our portfolio consists of 114 properties: 90 facilities (of the 105 facilities that we own) are leased to 24 tenants, 15 are under development (including seven development projects with First Choice Emergency Room that started in 2014), and the remaining assets are in the form of mortgage loans to four operators. Our facilities consist of 51 general acute care hospitals, 24 long-term acute care hospitals, 31 inpatient rehabilitation hospitals, two medical office buildings, and six wellness centers.

At December 31, 2013, no one property accounted for more than 4% of our total assets.

Outlook and Strategy

Our strategy is to lease the facilities that we acquire or develop to experienced healthcare operators pursuant to long-term net leases. Alternatively, we have structured certain of our investments as long-term, interest-only mortgage loans to healthcare operators, and we may make similar investments in the future. Our mortgage loans are structured such that we obtain similar economic return as our triple-net leases. In addition, we have obtained

Index to Financial Statements

and will continue to obtain profits or other interests in certain of our tenants’ operations in order to enhance our overall return. 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 but are not limited to: physical rehabilitation hospitals, long-term acute care hospitals, general acute care hospitals, ambulatory surgery centers, and other single-discipline healthcare facilities.

A fundamental component of our business plan is the continued diversification of our tenant relationships, the types of hospitals we own and the geographic areas in which we invest. From a geography perspective, we have historically invested in the United States. However, in November 2013, we expanded our footprint into Europe (via Germany) by acquiring 11 rehabilitation facilities in Germany from RHM Klinik-und Altenheimbetriebe GmbH & Co. KG (“RHM”) and will continue to look for strategic opportunities outside the United States in the future. Expansion into the German market represents an attractive investment opportunity for us given Germany’s strong macroeconomic position and healthcare environment. Germany’s GDP, which is approximately $3,400 billion according to World Bank 2012 data, has been relatively more stable than other countries in the European Union due to Germany’s culture, which embodies stable business practices and monetary policy. In addition to cultural influences, government policies emphasizing sound public finance and a significant presence of small and medium-sized enterprises (which employ 60% of the employment base) have also contributed to Germany’s strong and sustainable economic position. The above factors have contributed to an unemployment rate in Germany of 5.3% as of July 2013, which is significantly less than the 11.0% unemployment rate in the European Union generally as of July 2013, according to Eurostat.

Highlights of the RHM portfolio include:

•

strategic locations within a national rehabilitative infrastructure;

•

in select locations, an integrated post-acute healthcare delivery model within the same campus;

•

service to a consistently growing aged population;

•

properties with spacious land relative to surrounding parcels; and

•

potential opportunity for additional investments in the future from RHM.

The RHM Portfolio Acquisition is structured similarly to our transactions in the United States. The real estate is leased under a long-term master lease structure with annual escalators. We undertook rigorous research and analysis evaluating the RHM Portfolio Acquisition, focusing on key healthcare issues like patient acuity, reimbursement stability, legal and regulatory outlook and clinical measures, in addition to customary real estate diligence procedures. The diligence process also included a detailed review of the German healthcare market with a particular focus on local hospital markets and payor environment.

RHM is a market leader in inpatient, rehabilitation, acute care and specialized services across Germany. RHM’s total portfolio consists of nearly 2,400 beds between its 14 facilities, including the 11 facilities associated with the RHM Portfolio Acquisition, and RHM’s planned growth provides an area of significant growth potential. Furthermore, occupancy at RHM’s facilities from 2010 – 2012 was substantially above Germany’s national average of 80%. The high occupancy rates allow for significant operating synergies and cost savings.

In addition to RHM’s strengths, the German rehabilitation healthcare system benefits from a strong industry framework. RHM leads as a top 15 rehab provider in this market, which demonstrates a stable and profitable profile with significant opportunities for consolidation in a highlyfragmented market. The growing aging demographic in Germany presents increasing opportunity.

Our revenue is derived from rents we earn pursuant to the lease agreements with our tenants, from interest income from loans to our tenants and other facility owners and from profits or equity interests in certain of our tenants’ operations. Our tenants operate in the healthcare industry, generally providing medical, surgical and

Index to Financial Statements

rehabilitative care to patients. The capacity of our tenants to pay our rents and interest is dependent upon their ability to conduct their operations at profitable levels. We believe that the business environment of the industry segments in which our tenants operate is generally positive for efficient operators. However, our tenants’ operations are subject to economic, regulatory and market conditions that may affect their profitability, which could impact our results. 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 portfolio.

Key factors that we consider in underwriting prospective tenants and in monitoring the performance of existing tenants include the following:

•

admission levels and surgery/procedure/diagnosis volumes by type;

•

the current, historical and prospective operating margins (measured by a tenant’s 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 public payors (including Medicare, Medicaid/MediCal, managed care, and pension funds in Germany) and private payors (including commercial insurance and private pay patients);

•

the effect of evolving healthcare legislation and other regulations on our tenants’ profitability and liquidity; and

•

the competition and demographics of the local and surrounding areas in which the tenants operate.

Healthcare Industry

Healthcare is the single largest industry in the United States (“U.S.”) based on Gross Domestic Product (“GDP”). According to the National Health Expenditures report dated January 2013 by the Centers for Medicare and Medicaid Services: (i) national health expenditures are projected to grow 6.1% in 2014; (ii) the average compound annual growth rate for national health expenditures, over the projection period of 2015 through 2022, is anticipated to be 6.2%; and (iii) the healthcare industry is projected to represent 18.3% of U.S. GDP in 2014.

In regards to Germany, the healthcare industry is the single largest industry like in the U.S. Behind only the U.S., Netherlands and France, Germany’s healthcare expenditures represent approximately 11.3% of its total GDP according to the Organisation for Economic Co-operation and Development’s 2011 data. Its healthcare system as compared to that of the U.S. is set forth below.

LOGO

Index to Financial Statements

The German rehabilitation market (which includes our facilities in Germany) serves a broader scope of treatment with over 1,233 rehabilitation facilities (compared to 1,165 in the U.S.) and 208.5 beds per 100,000 population (compared to 114.7 in the U.S.). Approximately 90% of the payments in the German system come from governmental sources. The largest payor category is the public pension fund system representing 39% of payments. Public health insurance and payments for government employees represent 46% of payments. The balance of the payments into the German rehabilitation market come from a variety of sources including private pay and private insurance. One particular focus area of investors in the German market is the healthcare industry because the German Social Code mandates universal access, coverage and a high standard of care, thereby creating a robust healthcare dynamic in the country.

The delivery of healthcare services, whether in the U.S. or elsewhere, requires real estate and, as a consequence, healthcare providers depend on real estate to maintain and grow their businesses. We believe that the healthcare real estate market provides investment opportunities due to the:

•

compelling demographics driving the demand for healthcare services;

•

specialized nature of healthcare real estate investing; and

•

consolidation of the fragmented healthcare real estate sector.

Our Leases and Loans

The leases for our facilities are “net” leases with terms generally 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 and certain other taxes, ground lease rent (if any) and the costs of capital expenditures, repairs and maintenance (including any repairs mandated by regulatory requirements). Similarly, borrowers under our mortgage loan arrangements retain the responsibilities of ownership, including physical maintenance and improvements and all costs and expenses. Our leases and loans typically require our tenants indemnify us for any past or future environmental liabilities. Our current leases and loans have a weighted-average remaining initial lease term of 13.2 years (see Item 2 for more information on remaining lease terms). Based on current monthly revenue, approximately 90% of our domestic leases and loans provide for annual rent or interest escalations based on either increases in the U.S. Consumer Price Index (“CPI”) or minimum annual rent or interest escalations ranging from 1% to 4%. In some cases, our domestic leases and loans provide for escalations based on CPI subject floors and ceilings (which is the case with our Ernest and Prime master leases (discussed below under “Significant Tenants”). In certain limited cases, we have arrangements that provide for additional rents based on the level of our tenants’ revenue.

Our master lease for our properties in Germany provides for annual rent increases of 2.0% from 2015 through 2017, and of 0.5% thereafter. On December 31, 2020 and every three years thereafter, rent will also be increased to reflect 70% of cumulative increases in the German consumer price index.

Finally, in some instances, we have profit or equity interests in our tenants to enhance our overall return.

RIDEA Investments

We have and will make equity investments, loans (with equity like returns) and obtain profit interests in certain of our tenants. These investments fall under a structure permitted by the Housing and Economic Recovery Act of 2008 (“RIDEA”). Under the provisions of RIDEA, a REIT may lease “qualified health care properties” on an arm’s length basis to a taxable REIT subsidiary (“TRS”) if the property is operated on behalf of such subsidiary by a person who qualifies as an “eligible independent contractor.” We view RIDEA as a structure primarily to be used on properties that present attractive valuation entry points.

Index to Financial Statements

At December 31, 2013, our RIDEA investments (excluding our RIDEA investment with affiliates of Ernest Health, Inc. (“Ernest”)) were $13.0 million with revenue of $5.4 million, yielding more than a 40% annualized return. Our Ernest operating investment of $96.5 million generated revenues in 2013, including interest income from our acquisition note, of $14.0 million, yielding an approximate 15% annualized return.

Significant Tenants

On December 31, 2013, we had total real estate and related investments of approximately $2.9 billion comprised of 107 healthcare properties in 25 states and in Germany. The properties are leased to or mortgaged by 27 different hospital operating companies.

Ernest leases 16 of these facilities pursuant to a master lease agreement. The original master lease agreement has a 20-year term with three five-year extension options and provides for an initial rental rate of 9%, with consumer price-indexed increases, limited to a 2% floor and 5% ceiling annually thereafter. At December 31, 2013, these facilities had an average remaining lease term of approximately 18 years. In addition to the master lease, we hold a mortgage loan on four facilities owned by affiliates of Ernest that will mature in 2032. The terms and provisions of these loans are generally equivalent to the terms and provisions of the master lease agreement. Finally, at December 31, 2013, we had one development project in process that will be leased to Ernest upon completion. Ernest represented 15.9% of our total assets at December 31, 2013 and 18.2% at December 31, 2012.

Affiliates of Prime Healthcare Services, Inc. (“Prime”) leases 14 facilities pursuant to master lease agreements. The master leases are for 10 years (initial expiration in 2022) and contain two renewal options of five years each. The annual escalators reflect 100% of CPI increases, along with a 2% minimum floor. At the end of the initial or any renewal term, Prime must exercise any available extension or purchase option with respect to all or some of the leased and mortgaged properties. The master leases include repurchase options, including provisions establishing minimum repurchase prices equal to our total investment. In addition to leases, we hold mortgage loans on three facilities owned by affiliates of Prime that will mature in 2022. The terms and provisions of these loans are generally equivalent to the terms and provisions of our Prime lease arrangements. Prime represented 24.5% of our total assets at December 31, 2013 and 27.9% at December 31, 2012.

Affiliates of IASIS Healthcare LLC (“IASIS”) leases four facilities under separate lease agreements. These leases have 15-year terms plus two renewal options of five years each, and they provide for CPI rent increases limited to a 2.5% ceiling annually. All of these leases are cross-defaulted with each other. IASIS represented 12.0% of our total assets at December 31, 2013 and 3% at December 31, 2012.

No other tenant accounted for more than 10% of our total assets at December 31, 2013.

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 remediate hazardous or toxic substance releases or threats of releases. There may also be certain obligations and liabilities on property owners with respect to asbestos containing materials. Investigation, remediation and monitoring costs may be substantial. The confirmed presence of contamination or the failure to properly remediate contamination on a property may adversely affect our ability to sell or rent that property or to borrow funds using such property as collateral and may adversely impact our investment in that property.

Generally, prior to completing any acquisition or closing any mortgage loan, we obtain Phase I environmental assessments (or their equivalent studies outside the United States) in order to attempt to identify potential environmental concerns at the facilities. These assessments are carried out in accordance with an appropriate level of due diligence and generally include a physical site inspection, a review of relevant environmental and health agency database records, one or more interviews with appropriate site-related

Index to Financial Statements

personnel, review of the property’s 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. Upon closing and for the remainder of the lease or loan term, our transaction documents require our tenants to repair and remediate any environmental concern at the applicable facility, and to comply in full with all environmental laws and regulations.

California Seismic Standards

California’s Alfred E. Alquist Hospital Facilities Seismic Safety Act of 1973 (the “Alquist Act”) required that the California Building Standards Commission adopt earthquake performance categories, seismic evaluation procedures, standards and timeframes for upgrading certain facilities, and seismic retrofit building standards. These regulations required hospitals to meet certain seismic performance standards to ensure that they are capable of providing medical services to the public after an earthquake or other disaster. The Building Standards Commission completed its adoption of evaluation criteria and retrofit standards in 1998. The Alquist Act required the Building Standards Commission adopt certain evaluation criteria and retrofit standards such as:

1) hospitals in California must conduct seismic evaluations and submit these evaluations to the Office of Statewide Health Planning and Development (“OSHPD”), Facilities Development Division for its review and approval;

2) hospitals in California must identify the most critical nonstructural systems that represent the greatest risk of failure during an earthquake and submit timetables for upgrading these systems to the OSHPD, Facilities Development Division for its review and approval; and

3) hospitals in California must prepare a plan and compliance schedule for each regulated building demonstrating the steps a hospital will take to bring the hospital buildings into substantial compliance with the regulations and standards.

Within the past several years, engineering studies were conducted at our hospitals to determine whether and to what extent modifications to the hospital facilities will be required. These studies were commissioned by our tenants, and it was determined that, for some of our facilities, capital expenditures may be required in the future to comply with the seismic standards.

Since the original Alquist Act, several amendments have been adopted that have modified the requirements of seismic safety standards and deadlines for compliance. OSHPD implemented a voluntary program to re-evaluate the seismic risk of hospital buildings classified as Structural Performance Category (“SPC-1”). Buildings classified as SPC-1 are considered hazardous and at risk of collapse in the event of an earthquake and must have been retrofitted, replaced or removed from providing acute care services by January 1, 2013. Senate Bill 499 was signed into law in October 2009 that provides for a number of seismic relief measures, including reclassifying HAZUS, a state-of-the-art loss estimation methodology, thresholds, which will enable more SPC-1 buildings to be reclassified as SPC-2, a lower seismic risk category. The SPC-2 buildings would have until January 1, 2030 to comply with the structural seismic safety standards. Any buildings that are denied reclassification will remain in the SPC-1 category, and these buildings must have met seismic compliance standards by January 1, 2013, unless further extensions are granted. Furthermore, the AB 306 legislation permits OSHPD to grant an extension to acute care hospitals that lacked the financial capacity to meet the January 1, 2013 retrofit deadline, and instead, requires them to replace those buildings by January 1, 2020. More recently, SB 90 allows a hospital to seek an extension for seismic compliance for its SPC-1 buildings up to seven years based on three elements:

the structural integrity of the building;

the loss of essential hospital services to the community if the hospital is close; and

financial hardship.

Index to Financial Statements

Exclusive of approved SB 90 extensions at four facilities, all of our California tenants (and building structures) are seismically compliant through 2030 as determined by OSHPD. For the four hospitals with SB 90 extensions, voluntary retrofit plans are underway and full compliance is expected in 2014 and 2015. Under our current leases, our tenants are fully responsible for any capital expenditures in connection with seismic laws. Thus, we do not expect the California seismic standards to have a negative impact on our financial condition or cash flows.

Competition

We compete in acquiring and developing facilities with financial institutions, other lenders, real estate developers, healthcare operators, 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 invest in or develop facilities;

•

some of our competitors may have greater financial and operational resources than we have;

•

some of our competitors may have lower costs of capital than we do;

•

our competitors or other entities may pursue a strategy similar to ours; and

•

some of our competitors may have existing relationships with our potential customers.

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 highly competitive environments, and patients and referral sources, including physicians, may change their preferences for healthcare facilities from time to time. The operators of our properties compete on a local and regional basis with operators of properties that provide comparable services. Operators compete for patients and residents based on a number of factors including quality of care, reputation, physical appearance of a facility, location, services offered, physicians, staff, and price. We also face competition from other health care facilities for tenants, such as physicians and other health care providers that provide comparable facilities and services.

For additional information, see “Risk Factors” in Item 1A.

Insurance

Our leases and mortgage loans require the tenants to carry property, general liability, professional liability, loss of earnings and other insurance coverages and to name us as an additional insured under these policies. We monitor the adequacy of such coverages on an annual basis upon insurance renewal. In addition, we have separately purchased contingent general liability insurance, 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, and contingent business interruption insurance. At December 31, 2013, we believe that the policy specifications and insured limits are appropriate given the relative risk of loss, the cost of the coverage and industry practice.

Healthcare Regulatory Matters

The following discussion describes certain material U.S. federal healthcare laws and regulations that may affect our operations and those of our tenants. However, the discussion does not address all applicable U.S. federal healthcare laws, and does not address state or non-U.S. healthcare laws and regulations, except as otherwise indicated. State laws and regulations, (and non U.S. laws and regulations in jurisdictions in which we own properties) like the U.S. federal healthcare laws and regulations, could affect the operations of our tenants

Index to Financial Statements

and, accordingly, our operations. In addition, in some instances we own a minority interest in our tenants’ operations and, in addition to the effect on these tenants’ ability to meet their financial obligations to us, our ownership and investment returns may also be negatively impacted by such laws and regulations. Moreover, the discussion relating to reimbursement for healthcare services addresses matters that are subject to frequent review and revision by U.S. Congress and the agencies responsible for administering federal payment programs. Consequently, predicting future reimbursement trends or changes, along with the potential impact to us, is inherently difficult.

Ownership and operation of hospitals and other healthcare facilities are subject, directly and indirectly, to substantial healthcare laws and regulations. Our tenants’ failure to comply with these laws and regulations could adversely affect their ability to meet their obligations to us. Physician investment in us or in our facilities also will be subject to such laws and regulations. Although we are not a healthcare provider or in a position to influence the referral of patients or ordering of services reimbursable by the federal government, to the extent that a healthcare provider engages in transactions with our tenants, such as sublease or other financial arrangements, the Anti-Kickback Statute and the Stark Law (both discussed below) could be implicated. Our leases and mortgage loans require the tenants to comply with all applicable laws, including healthcare laws. We intend for all of our business activities and operations to conform in all material respects with all applicable laws and regulations, including healthcare laws and regulations.

Applicable Laws

Anti-Kickback Statute. The federal Anti-Kickback Statute (codified at 42 U.S.C. § 1320a-7b(b)) 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 items or 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, punishable by 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 Office of Inspector General of the Department of Health and Human Services (“OIG”) has issued “Safe Harbor Regulations” that describe practices that will not be considered violations of the Anti-Kickback Statute. However, the fact that a particular arrangement does not meet safe harbor requirements does not mean that the arrangement violates the Anti-Kickback Statute. Rather, the safe harbor regulations simply provide a guaranty that qualifying arrangements will not be prosecuted under the Anti-Kickback Statute. We intend to use commercially reasonable efforts to structure our arrangements involving facilities in which referring physicians are investors and tenants, and other arrangements with physicians, so as to satisfy, or meet as closely as possible, safe harbor conditions. We cannot assure you, however, that we will meet all the conditions for the safe harbor.

Physician Self-Referral Statute (“Stark Law”). Any physicians investing in us or our 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,” including inpatient and outpatient hospital services, clinical laboratory services and radiology 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. Sanctions for violating the Stark Law include denial of payment, refunding amounts received for services provided pursuant to prohibited referrals, civil monetary penalties of up to $15,000 per prohibited service provided, and exclusion from the Medicare and Medicaid programs. The statute also provides for a penalty of up to $100,000 for a circumvention scheme.

Index to Financial Statements

There are exceptions to the self-referral prohibition for many of the customary financial arrangements between physicians and providers, including employment contracts, leases and recruitment agreements. Unlike safe harbors under the Anti-Kickback Statute, an arrangement must comply with every requirement of a Stark Law exception or the arrangement is in violation of the Stark Law.

Centers for Medicare and Medicaid Services (“CMS”) has issued multiple phases of final regulations implementing the Stark Law and continues to make changes to these regulations. While these regulations help clarify the exceptions to the Stark Law, it is unclear how the government will interpret many of these exceptions for enforcement purposes. Although our lease agreements require lessees to comply with the Stark Law, and we intend for facilities to comply with the Stark Law where we own an interest in our tenants’ operations, we cannot offer assurance that the arrangements entered into by us and our facilities will be found to be in compliance with the Stark Law, as it ultimately may be implemented or interpreted.

False Claims Act. The federal False Claims Act prohibits the making or presenting of any false claim for payment to the federal government; it is the civil equivalent to federal criminal provisions prohibiting the submission of false claims to federally funded programs. Additionally, qui tam, or whistleblower, provisions of the federal False Claims Act allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the federal government. Whistleblowers may collect a portion of the government’s recovery — an incentive which increases the frequency of such actions. A successful False Claims Act case may result in a penalty of three times actual damages, plus additional civil penalties payable to the government, plus reimbursement of the fees of counsel for the whistleblower. Many states have enacted similar statutes preventing the presentation of a false claim to a state government, and we expect more to do so because the Social Security Act provides a financial incentive for states to enact statutes establishing state level liability.

The Civil Monetary Penalties Law. Among other things, the Civil Monetary Penalties law prohibits the knowing presentation of a claim for certain healthcare services that is false or fraudulent, the presentation of false or misleading information in connection with claims for payment, and other acts involving fraudulent conduct. Penalties include a monetary civil penalty of up to $10,000 for each item or service, $15,000 for each individual with respect to whom false or misleading information was given, as well as treble damages for the total amount of remuneration claimed.

Licensure. The tenant operators of the healthcare facilities in our portfolio are subject to extensive federal, state and local licensure, certification and inspection laws and regulations including, in some cases, certificate of need laws. Further, various licenses and permits are required to dispense narcotics, operate pharmacies, handle radioactive materials and operate equipment. Failure to comply with any of these laws could result in loss of licensure, certification or accreditation, denial of reimbursement, imposition of fines, suspension or decertification from federal and state healthcare programs.

EMTALA. All of our healthcare facilities that provide emergency care are subject to the Emergency Medical Treatment and Active Labor Act (“EMTALA”). This federal law requires such facilities to conduct an appropriate medical screening examination of every individual who presents to the hospital’s emergency room for treatment and, if the individual is suffering from an emergency medical condition, to either stabilize the condition or make an appropriate transfer of the individual to a facility able to handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of an individual’s ability to pay for treatment. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer an individual or if the hospital delays appropriate treatment in order to first inquire about the individual’s ability to pay. Liability for violations of EMTALA includes, among other things, civil monetary penalties and exclusion from participation in the Medicare program. Our lease and mortgage loan agreements require our tenants to comply with EMTALA, and we believe our tenants conduct business in substantial compliance with EMTALA.

Index to Financial Statements

Regulatory and Legislative Developments. Healthcare continues to attract intense legislative and public interest. Many states have enacted, or are considering enacting, measures designed to reduce their Medicaid expenditures and change private healthcare insurance, and states continue to face significant challenges in maintaining appropriate levels of Medicaid funding due to state budget shortfalls. Healthcare facility operating margins may continue to be under significant pressure due to the deterioration in pricing flexibility and payor mix, as well as increases in operating expenses that exceed increases in payments under the Medicare program.

Further, long term acute care hospitals (“LTACHs”) account for a slightly more than 20% of our total real estate assets, and on December 26, 2013, President Obama signed into law H.J. Res. 59, the Bipartisan Budget Act of 2013, which includes the Pathway for SGR Reform Act of 2013 (the “SGR Act”). The SGR Act impacts the provision of, and payment for, the services provided by LTACHs to Medicare beneficiaries. For example, for cost reporting periods beginning on and after October 1, 2015, the SGR Act includes new criteria for LTACHs to be paid under the LTACH prospective payment system rather than the acute inpatient prospective payment system, or “IPPS,” rate. This “site-neutral” payment rate provides that LTACHs will be reimbursed at the rate otherwise paid under the IPPS unless the patient has met certain qualifications.

In addition, the SGR Act delays full implementation of the so-called “25% rule” for freestanding LTACHs for three years, through fiscal year 2017, and beginning on January 1, 2015, it reinstates the prior moratorium on establishing or increasing LTACH beds. The moratorium will extend through September 30, 2017. Under the 25% rule, if an LTACH admits more than the specified percentage of its patients from a single acute care hospital during a fiscal year, it will be paid at a rate comparable to the IPPS rate for patients above the specified percentage.

We cannot predict whether these or other initiatives will impact the business of our tenants, or whether our business will be adversely impacted. In instances where we own a minority interest in our tenant operators, in addition to the effect on these tenants’ ability to meet their financial obligations to us, our ownership and investment returns may also be negatively impacted.

Health Reform Measures. A detailed discussion of the Patient Protection and Affordable Care Act (the “Reform Law”) is not provided herein. However, generally, this legislation seeks to provide expanded health insurance coverage through tax subsidies, expanded federal health insurance programs, individual and employer mandates for health insurance coverage, and health insurance exchanges. The Reform Law also includes cuts to federal health care program funding, as well as heightened regulations on insurers and pharmaceutical companies. Various cost containment initiatives were adopted, including quality control and payment system refinements for federal programs, such as expansion of pay-for-performance criteria and value-based purchasing programs, bundled provider payments, accountable care organizations, geographic payment variations, comparative effectiveness research, and lower payments for hospital readmissions. Finally, heightened health information technology standards will be required for healthcare providers.

The Reform Law also requires that LTACHs and inpatient rehabilitation facilities, which also comprise a significant percentage of our tenants, report quality data to be set forth by the Secretary of Health and Human Services or face payment reductions beginning in 2014.

The Reform Law will likely lead to significant changes in the healthcare system. We cannot predict the possible impact on our business of this legislation, as some aspects could benefit the operations of our tenants, while other aspects could present challenges.

Employees

We have 38 employees as of February 28, 2014. We believe that any adjustments to the number of our employees will have only immaterial effects on our operations and general and administrative expenses. We believe that our relations with our employees are good. None of our employees are members of any union.

Index to Financial Statements

Available Information

Our website address is www.medicalpropertiestrust.com and provides access in the “Investor Relations” section, free of charge, to our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including exhibits, and all amendments to these reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Also available on our website, free of charge, are our Corporate Governance Guidelines, the charters of our Ethics, Nominating and Corporate Governance, Audit and Compensation Committees and our Code of Ethics and Business Conduct. If you are not able to access our website, the information is available in print free of charge to any stockholder who should request the information directly from us at (205) 969-3755.

ITEM 1A.

Risk Factors

The risks and uncertainties described herein are not the only ones facing us and there may be additional risks that we do not presently know of or that we currently consider not likely to have a significant impact on us. All of these risks could adversely affect our business, results of operations and financial condition.

RISKS RELATED TO OUR BUSINESS AND GROWTH STRATEGY

Adverse economic and geopolitical conditions and dislocations in the credit markets could have a material adverse effect on our results of operations, financial condition and ability to pay distributions to stockholders.

The global economy has experienced, over the past few years, unprecedented levels of volatility, dislocation in the credit markets, and recessionary pressures. These conditions, or similar conditions that may exist in the future, may adversely affect our results of operations, financial condition, share price and ability to pay distributions to our stockholders. Among other potential consequences, such a financial crisis may materially adversely affect:

•

our ability to borrow on terms and conditions that we find acceptable, or at all, which could reduce our ability to pursue acquisition and development opportunities and refinance existing debt, reduce our returns from our acquisition and development activities and increase our future interest expense;

•

the financial condition of our borrowers, tenants and investees, which may result in defaults under loans or leases due to bankruptcy, lack of liquidity, operational failures or for other reasons;

•

interest rates for those tenants in which we have an equity interest, a portion of which may be passed onto us in the form of lower returns on our investment;

•

the values of our properties and our ability to dispose of assets at attractive prices or to obtain debt financing collateralized by our properties; and

•

the value and liquidity of our short-term investments and cash deposits, including as a result of a deterioration of the financial condition of the institutions that hold our cash deposits or the institutions or assets in which we have made short-term investments, the dislocation of the markets for our short-term investments, increased volatility in market rates for such investment or other factors.

Limited access to capital may restrict our growth.

Our business plan contemplates growth through acquisitions and development of facilities. As a REIT, we are required to make cash distributions, which reduce our ability to fund acquisitions and developments with retained earnings. We are dependent on acquisition financing and access to the capital markets for cash to make investments in new facilities. Due to market or other conditions, we may have limited access to capital from the equity and debt markets. 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 or to meet our obligations, which could have a material adverse effect on our results of operations and our ability to make distributions to our stockholders.

Index to Financial Statements

Our indebtedness could adversely affect our financial condition and may otherwise adversely impact our business operations and our ability to make distributions to stockholders.

As of December 31, 2013, we had $1.4 billion of debt outstanding and $148.2 million in unfunded commitments.

Our indebtedness could have significant effects on our business. For example, it could:

•

require us to use a substantial portion of our cash flow from operations to service our indebtedness, which would reduce the available cash flow to fund working capital, development projects and other general corporate purposes and reduce cash for distributions;

•

require payments of principal and interest that may be greater than our cash flow from operations;

•

force us to dispose of one or more of our properties, possibly on disadvantageous terms, to make payments on our debt;

•

increase our vulnerability to general adverse economic and industry conditions; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

•

restrict us from making strategic acquisitions or exploiting other business opportunities;

•

make it more difficult for us to satisfy our obligations; and

•

place us at a competitive disadvantage compared to our competitors that have less debt.

Our future borrowings under our loan facilities may bear interest at variable rates in addition to the $205.0 million in variable interest rate debt (excluding any debt we have fixed with interest rate swaps) that we had outstanding as of December 31, 2013. If interest rates increase significantly, our operating results would decline along with the cash available for distributions to our stockholders.

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.

Most of our current debt is, and we anticipate that much of our future 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. Although we have no significant debt maturities in 2014, there is a risk that we may not be able to refinance debt maturing in future years 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. See Item 7 of Part II of this Form 10-K for further information on debt maturities.

Covenants in our debt instruments limit our operational flexibility, and a breach of these covenants could materially affect our financial condition and results of operations.

The terms of our unsecured credit facility and the indentures governing our outstanding unsecured senior notes, and other debt instruments that we may enter into in the future are subject to customary financial and operational covenants. For example, our unsecured credit facility imposes certain restrictions on us, including restrictions on our ability to: incur debts; create or incur liens; provide guarantees in respect of obligations of any other entity; make redemptions and repurchases of our capital stock; prepay, redeem or repurchase debt; engage in mergers or consolidations; enter into affiliated transactions; dispose of real estate; and change our business. In addition, the agreements governing our unsecured credit facility limit the amount of dividends we can pay as a percentage of normalized adjusted funds from operations, as defined, on a rolling four quarter basis. Through the

Index to Financial Statements

quarter ending December 31, 2013, the dividend restriction was 95% of normalized adjusted FFO. The indentures governing our 2011 and 2012 Senior Unsecured Notes also limit the amount of dividends we can pay based on the sum of 95% of funds from operations, proceeds of equity issuances and certain other net cash proceeds. Finally, our 2011 and 2012 Senior Unsecured Notes require us to maintain total unencumbered assets (as defined in the related indenture) of not less than 150% of our unsecured indebtedness.

Our continued ability to incur debt and operate our business is subject to compliance with the covenants in our debt instruments, which limit operational flexibility. Breaches of these covenants could result in defaults under applicable debt instruments, even if payment obligations are satisfied. Financial and other covenants that limit our operational flexibility, as well as defaults resulting from a breach of any of these covenants in our debt instruments, could have a material adverse effect on our financial condition and results of operations.

Failure to hedge effectively against interest rate changes may adversely affect our results of operations and our ability to make distributions to our stockholders.

Excluding our 2006 senior unsecured notes, as of December 31, 2013, we had $205.0 million in variable interest rate debt, which constitutes 14.4% of our overall indebtedness and subjects us to interest rate volatility. We may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as the $125.0 million of interest rate swaps entered into in 2010 to fix the interest rate on our 2006 senior unsecured notes. However, even these hedging arrangements 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 our results of operations and our ability to make distributions to our stockholders.

Dependence on our tenants for payments of rent and interest may adversely impact our ability to make distributions to our stockholders.

We expect to continue to qualify as a REIT and, accordingly, as a REIT operating in the healthcare industry, we are severely limited by current tax law with respect to our ability to operate or manage the businesses conducted in our facilities.

Accordingly, we rely heavily on rent payments from our tenants under leases or interest payments from operators under mortgage or other loans 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 our facilities, or the financial condition of our tenants, operators or guarantors, could have a material adverse effect on our ability to collect rent and interest payments and, accordingly, on our ability to make distributions to our stockholders. Facility management by our tenants and their compliance with healthcare and other laws could have a material impact on our tenants’ operating and financial condition and, in turn, their ability to pay rent and interest to us.

It may be costly to replace defaulting tenants and we may not be able to replace defaulting tenants with suitable replacements on suitable terms.

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 and loans with that tenant and enforce the payment obligations under the lease. The process of terminating a lease with a defaulting tenant and repossessing the applicable facility may be costly and require a disproportionate amount of management’s attention. In addition, defaulting tenants or their affiliates may initiate litigation in connection with a lease termination or repossession against us or our subsidiaries. If a tenant-operator defaults and we choose to terminate our lease, we then are required to find another tenant-operator. The transfer of most types of

Index to Financial Statements

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 our results of operations, financial condition, and our ability to make distributions to our stockholders. Defaults by our significant tenants under master leases (like Prime and Ernest) will have an even greater effect.

It may be costly to find new tenants when lease terms end and we may not be able to replace such tenants with suitable replacements on suitable terms.

Failure on the part of a tenant to renew or extend the lease at the end of its fixed term on one of our facilities could result in us having to search for, negotiate with and execute new lease agreements. The process of finding and negotiating with a new tenant along with costs (such as maintenance, property taxes, utilities, etc.) that we will incur while the facility is untenanted may be costly and require a disproportionate amount of management’s attention. 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. 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. Thus, the non-renewal or extension of leases may adversely affect our results of operations, financial condition, and our ability to make distributions to our stockholders. This risk is even greater for those properties under master leases (like Prime and Ernest) because several properties will have the same lease ending dates.

We have made investments in the operators of certain of our healthcare facilities and the cash flows (and related returns) from these investments are subject to more volatility than our properties with the traditional triple-net leasing structure.

Through December 31, 2013, we have made nine investments, totaling $109.5 million in the operations of certain of our healthcare facilities by utilizing RIDEA investments. These RIDEA investments include profits interest, equity investments, and equity like loans that generate returns dependent upon the operator’s performance. As a result, the cash flow and returns from these RIDEA investments may be more volatile than that of our traditional triple-net leasing structure. Our business, results of operations, and financial condition may be adversely affected if the related operators fail to successfully operate the facilities efficiently and in a manner that is in our best interest.

We have no prior experience with healthcare facilities in Germany or anywhere else outside the United States.

Neither we nor any of our affiliates has any experience investing in healthcare properties or other real estate-related assets located outside the United States. Investing in real estate located in foreign countries, including Germany, creates risks associated with the uncertainty of foreign laws and markets including, without limitation, laws respecting foreign ownership, the enforceability of loan and lease documents and foreclosure laws. German real estate and tax laws are complex and subject to change, and we cannot assure you we will always be in compliance with those laws or that compliance will not expose us to additional expense. The properties we acquired in connection with the RHM Portfolio Acquisition (as more fully described in Note 3 to Item 8 of this Form 10-K) will also face risks in connection with unexpected changes in German or European regulatory requirements, political and economic instability, potential imposition of adverse or confiscatory taxes, possible challenges to the anticipated tax treatment of the structures that allow us to acquire and hold

Index to Financial Statements

investments, possible currency transfer restrictions, the difficulty in enforcing obligations in other countries and the burden of complying with a wide variety of foreign laws. In addition, to qualify as a REIT, we generally will be required to operate any non-U.S. investments in accordance with the rules applicable to U.S. REITs, which may be inconsistent with local practices. We may also be subject to fluctuations in German real estate values or markets or the German and European economy as a whole, which may adversely affect our German and any other European investments.

In addition, the rents payable under our master lease with RHM and its affiliates are payable in euros, which could expose us to losses resulting from fluctuations in exchange rates to the extent we have not hedged our position, which in turn could adversely affect our revenues, operating margins and dividends, and may also affect the book value of our assets and the amount of stockholders’ equity. Further, any international currency gain recognized with respect to changes in exchange rates may not qualify under the 75% gross income test that we must satisfy annually in order to qualify and maintain our status as a REIT. Although we expect to hedge some of our foreign currency risk, we may not be able to do so successfully and may incur losses on our investments as a result of exchange rate fluctuations. Furthermore, we are subject to laws and regulations, such as the Foreign Corrupt Practices Act and similar local anti-bribery laws, that generally prohibit companies and their employees, agents and contractors from making improper payments to governmental officials for the purpose of obtaining or retaining business. Failure to comply with these laws could subject us to civil and criminal penalties that could materially adversely affect our results of operations, the value of our international investments, and our ability to make distributions to our stockholders. We are considering, and may make, additional investments in Europe, which may have similar risks as described above as well as unique risks associated with a specific country.

Our revenues are dependent upon our relationship with, and success of, our significant tenants.

As of December 31, 2013, our real estate portfolio included 107 healthcare properties in 25 states and in Germany of which 90 facilities are leased to 24 hospital operating companies and eight of the investments are in the form of mortgage loans. Affiliates of Prime leased or mortgaged 17 facilities, representing 24.5% of our total assets as of December 31, 2013. Total revenues from Prime were $77.5 million, or 32.0% of our total revenue for the year ended December 31, 2013. Affiliates of Ernest leased or mortgaged 20 facilities, representing 15.9% of our total assets as of December 31, 2013. Total revenues from Ernest were $48.9 million, or 20.2% of our total revenue for the year ended December 31, 2013. Affiliates of IASIS leased four facilities, representing 12.0% of our total assets as of December 31, 2013. Total revenues from IASIS were $12.1 million, or 5.0% of our total revenues for the year ended December 31, 2013.

Our relationships with our significant tenants, and their financial performance and resulting ability to satisfy their lease and loan obligations to us are material to our financial results and our ability to service our debt and make distributions to our stockholders. We are dependent upon the ability of our significant tenants to make rent and loan payments to us, and their failure or delay to meet these obligations could have a material adverse effect on our financial condition and results of operations. In addition, we are dependent on Ernest’s financial performance and future cash flows to avoid any impairment on our $96.5 million of RIDEA investments in them. For additional discussion of risks relating to our tenants’ operations and obligations to comply with applicable industry laws, rules and regulations, see “Risks Relating to the Healthcare Industry” below.

The bankruptcy or insolvency of our tenants or investees could harm our operating results and financial condition.

Some of our tenants/investees are, and some of our prospective tenants/investees may be, newly organized, have limited or no operating history and may be dependent on loans from us to acquire the facility’s operations and for initial working capital. Any bankruptcy filings by or relating to one of our tenants/investees 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 can be expected to 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

Index to Financial Statements

by a tenant in bankruptcy, we expect that all pre-bankruptcy balances due under the lease would be paid to us in full. However, if a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any secured claims we have against our tenants may only be paid to the extent of the value of the collateral, which may not cover any or all of our losses. Any unsecured claim (such as our equity interests in our tenants) 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.

At December 31, 2013, we had one facility in which the tenant was still working through the bankruptcy process. However, no assurances can be made that we will not incur loss revenues on this property in future periods.

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, including large private equity funds;

•

healthcare providers, including physicians;

•

other REITs;

•

real estate developers;

•

government-sponsored and/or not-for-profit agencies;

•

financial institutions; and

•

other lenders.

Some of these competitors may have substantially greater financial and other resources than we have and may have better relationships with lenders and sellers. Competition for healthcare facilities from competitors may adversely affect our ability to acquire or develop healthcare facilities and the prices we pay for those facilities. If we are unable to acquire or develop facilities or if we pay too much for facilities, our revenue, earnings growth and financial return could be materially adversely affected. Certain of our facilities, 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 tenants and thus our rental revenues, interest income, and/or our earnings from equity investments.

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. There is no assurance that the formulas we have developed for setting the purchase price will yield a fair market value purchase price.

In the event our tenants and prospective tenants determine to purchase the facilities they lease either during the lease term or after their expiration, the timing of those purchases will be outside of our control and we may not be able to re-invest the capital on as favorable terms, or at all. Our inability to effectively manage the turn-over of our facilities could materially adversely affect our ability to execute our business plan and our results of operations.

Index to Financial Statements

We have 69 leased properties that are subject to purchase options as of December 31, 2013. For 53 of these properties, the purchase option generally allows the lessee to purchase the real estate at the end of the lease term, as long as no default has occurred, at a price equivalent to the greater of (i) fair market value or (ii) our original purchase price (increased, in some cases, by a certain annual rate of return from lease commencement date). The lease agreements provide for an appraisal process to determine fair market value. For 12 of these properties, the purchase option generally allows the lessee to purchase the real estate at the end of the lease term, as long as no default has occurred, at our purchase price (increased, in some cases, by a certain annual rate of return from lease commencement date). For the remaining four leases, the purchase options approximate fair value. At December 31, 2013, none of our leases contained any bargain purchase options.

In certain circumstances, a prospective purchaser of our hospital real estate may be deemed to be subject to Anti-Kickback and Stark statutes, which are described on pages 10 and 11 of this 2013 Form 10-K. In such event, it may not be practicable for us to sell property to such prospective purchasers at prices other than fair market value.

We may not be able to adapt our management and operational systems to manage the net-leased facilities we have acquired or are developing or those that we may acquire or develop in the future without unanticipated disruption or expense.

There is no assurance that we will be able to adapt our management, administrative, accounting and operational systems, or hire and retain sufficient operational staff, to manage the facilities we have acquired and those that we may acquire or develop, including those properties currently located in Germany or any future investments outside the United States. Our failure to successfully 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.

Merger and acquisition activity or consolidation in the healthcare industry may result in a change of control of, or a competitor’s investment in, one or more of our tenants or operators, which could have a material adverse effect on us.

The healthcare industry has recently experienced increased consolidation, including among owners of real estate and healthcare providers. We compete with other healthcare REITs, healthcare providers, healthcare lenders, real estate partnerships, banks, insurance companies, private equity firms and other investors that pursue a variety of investments, which may include investments in our tenants or operators. We have historically developed strong, long-term relationships with many of our tenants and operators. A competitor’s investment in one of our tenants or operators, any change of control of a tenant or operator, or a change in the tenant’s or operator’s management team could enable our competitor to influence or control that tenant’s or operator’s business and strategy in a manner that impairs our relationship with the tenant or operator or is otherwise adverse to our interests, or that could adversely affect the tenant’s or operator’s financial and operational performance and their ability to pay us rent or interest, any of which could have a material adverse effect on us. Depending on our contractual agreements and the specific facts and circumstances, we may have consent rights, termination rights, remedies upon default or other rights and remedies related to a competitor’s investment in, a change of control of, or other transactions impacting a tenant or operator. In deciding whether to exercise our rights and remedies, including termination rights or remedies upon default, we assess numerous factors, including legal, contractual, regulatory, business and other relevant considerations.

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., R. Steven Hamner, and Emmett E. McLean 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 developed. Additionally, as we expand, we will continue to need to attract and retain additional

Index to Financial Statements

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.

The market price and trading volume of our common stock may be volatile.

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;

•

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, women’s and children’s hospitals and other single-discipline facilities;

•

speculation in the press or investment community; and

•

general market and economic conditions.

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 affect 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 on our securities or seek securities paying higher distributions. The market price of our common stock likely will be based primarily on

Index to Financial Statements

the earnings that we derive from rental and interest 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.

Ownership of property outside the United States may subject us to a different or greater risk than those associated with our domestic operations.

We currently have operations in Europe. International development, ownership, and operating activities involve risks that are different from those we face with respect to our domestic properties and operations. These risks include, but are not limited to, currency fluctuations, our ability to meet our annual REIT tests; changes in foreign political, regulatory, and economic conditions; challenges in managing international operations; challenges of complying with a wide variety of foreign laws and regulations; foreign ownership restrictions with respect to operations in countries; and changes in applicable laws and regulations in the United States that affect foreign operations. If we are unable to successfully manage the risks associated with international expansion and operations, our results of operations and financial condition may be adversely affected.

Changes in currency exchange rates may subject us to risk.

As our operations have expanded internationally where the U.S. dollar is not the denominated currency, currency exchange rate fluctuations could affect our results of operations and financial position. A significant change in the value of the foreign currency of one or more countries where we have a significant investment may have a material adverse effect on our financial position, debt covenant ratios, results of operations and cash flow.

Although we may enter into foreign exchange agreements with financial institutions and/or obtain local currency mortgage debt in order to reduce our exposure to fluctuations in the value of foreign currencies, we cannot assure you that foreign currency fluctuations will not have a material adverse effect on us.

RISKS RELATING TO REAL ESTATE INVESTMENTS

Our real estate, mortgage, and RIDEA investments are and are expected to continue to be concentrated in a single industry segment, making us more vulnerable economically than if our investments were more diversified.

We have acquired and have developed and have made mortgage investments in and expect to continue acquiring and developing and making mortgage investments in healthcare facilities. In addition, we have selectively made RIDEA investments and will continue to make such investments in healthcare operators. 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 solely in 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 as well as our return on our RIDEA investments. Consequently, our ability to meet debt service obligations or make distributions to our stockholders are dependent on the real estate and healthcare industries. These adverse effects could be more pronounced than if we diversified our investments outside of real estate or outside of healthcare facilities.

Our 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 expect to acquire or develop in the future will be net-leased healthcare facilities. If we or our tenants terminate the leases for these facilities or if

Index to Financial Statements

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.

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. Additionally, the real estate market is affected by many factors beyond our control, including adverse changes in global, national, and local economic and market conditions and the availability, costs and terms of financing. 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 have developed and constructed facilities in the past and are currently developing 14 facilities. We will develop additional facilities in the future as opportunities present themselves. 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. The time frame required for development and construction of these facilities means that we may have to wait for some time to earn significant cash returns. In addition, our tenants may not be able to obtain managed care provider contracts in a timely manner or at all. Finally, there is no assurance that future development projects will occur without 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.

We may be subject to risks arising from future acquisitions of healthcare properties.

We may be subject to risks in connection with our acquisition of healthcare properties, including without limitation the following:

•

we may have no previous business experience with the tenants at the facilities acquired (such as with the German properties acquired in 2013), and we may face difficulties in managing them;

Index to Financial Statements

•

underperformance of the acquired facilities due to various factors, including unfavorable terms and conditions of the existing lease agreements relating to the facilities, disruptions caused by the management of our tenants or changes in economic conditions;

•

diversion of our management’s attention away from other business concerns;

•

exposure to any undisclosed or unknown potential liabilities relating to the acquired facilities; and

•

potential underinsured losses on the acquired facilities.

We cannot assure you that we will be able to manage the new properties without encountering difficulties or that any such difficulties will not have a material adverse effect on us.

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. Newly-developed or newly-renovated facilities may not have operating histories that are helpful in making objective pricing decisions. 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.

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 gains, each year to maintain our qualification as a REIT, our ability to rely upon income from operations or cash flows from operations to finance our growth and acquisition activities will be limited.

If our facilities do not achieve expected results and generate ample cash flows from operations or if we are unable to obtain funds from borrowings or the capital markets to finance our acquisition and development activities, 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.

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.

Our leases generally require our tenants to carry property, 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. For those properties not currently under lease, we carry such insurance. In addition, we carry general liability insurance and loss of earnings coverage on all of our properties as a contingent measure in case our tenant’s coverage is not sufficient. However, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes and acts of terrorism, which 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. We continually review the insurance maintained by our tenants and operators and believe the coverage provided to be customary for similarly situated companies in our industry. However, we cannot provide any assurances that we will continue to require the same level of insurance coverage of our tenants and operators, or that such insurance will be available at a reasonable cost in the future. Also, we cannot assure you that material uninsured losses, or losses in excess of insurance proceeds, will not occur in the future.

Index to Financial Statements

Our 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 fixtures and fixed 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, regulatory requirements, 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 and returns on our RIDEA investments, which in turn could have a material adverse effect on our financial condition and results of operations along with 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. In addition, if such taxes increase on properties in which we have a RIDEA investment in the tenant, our return on investment maybe negatively effected.

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 laws and regulations. Various environmental laws may impose liability on the 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 manage, 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 typically obtain Phase I environmental assessments on facilities we acquire or develop or on which we make mortgage loans, and intend to obtain on future facilities we acquire. However, even if the Phase I environmental assessment reports do not reveal any material environmental contamination, it is possible that material environmental contamination and liabilities may exist of which we are unaware.

Although the leases for our facilities and our mortgage loans generally require our operators 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 material violation of environmental laws could have a material adverse affect on us. In addition, environmental laws are constantly evolving, and changes in laws, regulations or policies, or changes in interpretations of the foregoing, could create liabilities where none exist today.

Index to Financial Statements

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 four of our facilities, at least in part, by acquiring leasehold interests in the land on which the facility is 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, which may limit our flexibility in renting the facility and may impede our ability to sell the property.

Our acquisitions may not prove to be successful.

We are exposed to the risk that some of our acquisitions may not prove to be successful. We could encounter unanticipated difficulties and expenditures relating to any acquired properties, including contingent liabilities, and acquired properties might require significant management attention that would otherwise be devoted to our ongoing business. In addition, we might be exposed to undisclosed and unknown liabilities related to any acquired properties. If we agree to provide construction funding to an operator/tenant and the project is not completed, we may need to take steps to ensure completion of the project. Moreover, if we issue equity securities or incur additional debt, or both, to finance future acquisitions, it may reduce our per share financial results. These costs may negatively affect our results of operations.

RISKS RELATING TO THE HEALTHCARE INDUSTRY

Reductions in reimbursement from third-party payors, could adversely affect the profitability of our tenants and hinder their ability to make payments to us.

Sources of revenue for our tenants and operators may include the Medicare and Medicaid programs, private insurance carriers and health maintenance organizations, among others. Efforts by such payors to reduce healthcare costs could 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 United States healthcare industry continues to face various challenges, including increased government and private payor pressure on healthcare providers to control or reduce costs. We believe that our tenants will continue to experience a shift in payor mix away from fee-for-service payors, resulting in an increase in the percentage of revenues attributable to managed care payors, government payors and general industry trends that include pressures to control healthcare costs. Pressures to control healthcare costs and a shift away from traditional health insurance reimbursement have resulted in an increase in the number of patients whose healthcare coverage is provided under managed care plans, such as health maintenance organizations and preferred provider organizations. In addition, due to the aging of the population and the expansion of governmental payor programs, we anticipate that there will be a marked increase in the number of patients relying 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. In instances where we have a RIDEA investment in our tenants’ operations, in addition to the effect on these tenants’ ability to meet their financial obligations to us, our ownership and investment interests may also be negatively impacted.

Over the past several years, CMS has increased its attention on reimbursement for LTACHs and IRFs, with CMS imposing regulatory restrictions on LTACH and IRF reimbursement. A significant number of our tenants operate LTACHs and IRFs. We expect that CMS will continue to explore implementing other restrictions on LTACH and IRF reimbursement, and possibly develop more restrictive facility and patient level criteria for these

Index to Financial Statements

types of facilities. These changes could have a material adverse effect on the financial condition of some 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 United States healthcare industry is heavily regulated and loss of licensure or certification or failure to obtain licensure or certification could negatively impact our financial condition and results of operations.

The United States healthcare industry is highly regulated by federal, state and local laws (as discussed on pages 10-12), 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. We are aware of various federal and state inquiries, investigations and other proceedings currently affecting several of our tenants and would expect such governmental compliance and enforcement activities to be ongoing at any given time with respect to one or more of our tenants, either on a confidential or public basis. As discussed in further detail below, an adverse result to our tenants in one or more such governmental proceedings may have a materially adverse effect on the relevant tenant’s operations and financial condition, and on its ability to make required lease and mortgage payments to us. In instances where we have a RIDEA investment in our tenants operations, in addition to the effect on these tenants’ ability to meet their financial obligation to us, our ownership and investment interests may also be negatively impacted.

Licensed health care facilities must comply with minimum health and safety standards and are subject to survey and inspection by state and federal agencies and their agents or affiliates, including the CMS, the Joint Commission, and state departments of health. CMS develops Conditions of Participation and Conditions for Coverage that health care organizations must meet in order to begin and continue participating in the Medicare and Medicaid programs. These minimum health and safety standards are aimed at improving quality and protecting the health and safety of beneficiaries. There are several common criteria that exist across health entities. Examples of common conditions include: a governing body responsible for effectively governing affairs of the organization, a quality assurance program to evaluate entity-wide patient care, medical record service responsible for medical records, a utilization review of the services furnished by the organization and its staff, and a facility constructed, arranged and maintained according to a life safety code that ensures patient safety and the deliverance of services appropriate to the needs of the community.

As an example, the Medicare program contains specific requirements with respect to the maintenance of medical records. Medical records must be maintained for every individual who is evaluated or treated at a hospital. Medical records must be accurately written, promptly completed, properly filed and retained, and accessible. Medicare surveyors may conduct on site visits for a variety of reasons, including to investigate a patient complaint or to survey the hospital for compliance with Medicare requirements. In such instances, Medicare surveyors generally review a large sampling of patient charts. If a pattern of incomplete medical records is identified, the hospital’s Medicare certification could be jeopardized if a plan of correction is not completed. In order for a health care organization to continue receiving payment from the Medicare and Medicaid programs, it must comply with conditions of participation, or standards, as set forth in federal regulations. Further, many hospitals and other institutional providers are accredited by accrediting agencies such as the Joint Commission, a national health care accrediting organization. The Joint Commission was created to accredit healthcare organizations that meet its minimum health and safety standards. A national accrediting organization, such as the Joint Commission, enforces standards that meet or exceed such requirements.

Surveyors for the Joint Commission, prior to the opening of a facility and approximately every three years thereafter, conduct on site surveys of facilities for compliance with a multitude of patient safety, treatment, and administrative requirements. Facilities may lose accreditation for failure to meet such requirements, which in turn may result in the loss of license or certification. For example, a facility may lose accreditation for failing to maintain proper medication in the operating room to treat potentially fatal reactions to anesthesia, or for failure to maintain safe and sanitary medical equipment.

Index to Financial Statements

Finally, health care facility reimbursement practices and quality of care issues may result in loss of license or certification. For instance, the practice of “upcoding,” whereby services are billed for higher procedure codes than were actually performed, may lead to the revocation of a hospital’s license. An event involving poor quality of care, such as that which leads to the serious injury or death of a patient, may also result in loss of license or certification. The Services Employees International Union (“SEIU”) has alleged that our tenant, Prime may have upcoded for certain procedures and may be providing poor quality of care, in addition to allegations of delaying the transfer of out-of-network patients to their preferred medical provider once they have stabilized. Prime has addressed these allegations publicly and has provided clinical and other data to us refuting these allegations. Prime has also informed us that the SEIU is attempting to organize certain Prime employees. Prime recently disclosed an ongoing investigation by the United States Department of Justice into billing practices and patient confidentiality statues.

The failure of any tenant to comply with such laws, requirements, and regulations resulting in a loss of its license would affect its ability to continue its operation of the facility and would adversely affect the tenant’s ability to make lease and principal and interest payments to us. This, in turn, 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 shareholders. In instances where we have a RIDEA investment in our tenants’ operations, in addition to the effects on these tenants’ ability to meet their financial obligations to us, our ownership and investment interests would also be negatively impacted.

In addition, establishment of healthcare facilities and transfers of operations of healthcare facilities are subject to regulatory approvals not required for establishment, or transfers, of other types of commercial operations and real estate. 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 a new tenant’s 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. In instances where we have a RIDEA investment in our tenants’ operations, in addition to the effect on these tenants’ ability to meet their financial obligations to us, our ownership and investment interests may also be negatively impacted.

Our tenants are subject to fraud and abuse laws, the violation of which by a tenant may jeopardize the tenant’s ability to make payments to us and adversely affect their profitability.

As noted earlier, the United States 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, federal and state governments have significantly increased investigation and enforcement activity to detect and eliminate fraud and abuse in the Medicare and Medicaid programs. It is anticipated that the trend toward increased investigation and enforcement activity in the areas of fraud and abuse and patient self-referrals will continue in future years. 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 tenant’s ability to operate a facility or to make lease and loan payments, thereby potentially adversely affecting us. In instances where we have a RIDEA investment in our tenants’ operations, in addition to the effect on the tenants’ ability to meet their financial obligations to us, our ownership and investment interests may also be negatively impacted.

Some of our tenants have accepted, and prospective tenants may accept, an assignment of the previous operator’s Medicare provider agreement. Such operators 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 owner’s operations and claims submissions. While we conduct due diligence in connection with the

Index to Financial Statements

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, and in turn their ability to make lease and loan payments to us. In instances where we have a RIDEA investment in our tenants’ operations, in addition to the effect on these tenants’ ability to meet their financial obligations to us, our ownership and investment interests may also be negatively impacted.

Certain of our lease arrangements may be subject to fraud and abuse or physician self-referral laws.

Although no such investment exists today, 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 Stark Law, and its implementing regulations, if our lease arrangements do not satisfy the requirements of an applicable exception, the ability of our tenants to bill for services provided to Medicare beneficiaries pursuant to referrals from physician investors could be adversely impacted and subject us and our tenants to fines, which could impact our tenants’ ability to make lease and loan payments to us. In instances where we have a RIDEA investment in our tenants’ operations, in addition to the effect on the tenants’ ability to meet their financial obligations to us, our ownership and investment interests may also be negatively impacted.

We intend to use our good faith efforts to structure our lease arrangements to comply with these laws; however, if we are unable to do so, this failure may restrict our ability to permit physician investment or, where such physicians do participate, may restrict the types of lease arrangements into which we may enter, including our ability to enter into percentage rent arrangements.

We may be required to incur substantial renovation costs to make certain of our healthcare properties suitable for other operators and tenants.

Healthcare facilities are typically highly customized and may not be easily adapted to non-healthcare-related uses. The improvements generally required to conform a property to healthcare use can be costly and at times tenant-specific. A new or replacement operator or tenant may require different features in a property, depending on that operator’s or tenant’s particular business. If a current operator or tenant is unable to pay rent and/or vacates a property, we may incur substantial expenditures to modify a property before we are able to secure another operator or tenant. Also, if the property needs to be renovated to accommodate multiple operators or tenants, we may incur substantial expenditures before we are able to re-lease the space. These expenditures or renovations may materially adversely affect our business, results of operations and financial condition.

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.

Certificate of need laws often materially impact the ability of competitors to enter into the marketplace of our facilities. In addition, 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 change.

Index to Financial Statements

RISKS RELATING TO OUR ORGANIZATION AND STRUCTURE

Maryland law and our charter and 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 the price of Medical Properties common stock 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 common stock. To qualify as a REIT under the Internal Revenue Code of 1986, as amended, or 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. 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, our common stock owned by affiliated owners will be aggregated for purposes of the ownership limitation. The ownership limitation could have the effect of delaying, deterring or preventing a change in control or other transaction in which holders of common stock might receive a premium for their common stock over the then-current market price or which such holders otherwise might believe to be in their best interests. The ownership limitation provisions also may make our common stock an unsuitable investment vehicle for any person seeking to obtain, either alone or with others as a group, ownership of more than 9.8% of either the value or number of the outstanding shares of our common stock.

Our charter and bylaws contain provisions that may impede third-party acquisition proposals that may be in the best interests of our stockholders. 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 common 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 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 issue operating partnership units to employees and/or third parties. Persons holding operating partnership units would have the right to vote on certain amendments to the partnership agreement of our operating partnership, as well as on certain other matters. Persons holding these voting rights may exercise them in a manner that conflicts with the interests of our stockholders. Circumstances may arise in the future, such as the sale or refinancing of one of our facilities, when the interests of limited partners in our operating partnership conflict with the interests of our stockholders. As the sole member of the general partner of the operating partnership, we have fiduciary duties to the limited partners of the operating partnership that may conflict with fiduciary duties that our officers and directors owe to its stockholders. These conflicts may result in decisions that are not in the best interest of our stockholders.

TAX RISKS ASSOCIATED WITH OUR STATUS AS A REIT

Loss of our tax status as a REIT would have significant adverse consequences to us and the value of our common stock.

We believe that we qualify as a REIT for federal income tax purposes and have elected to be taxed as a REIT under the federal income tax laws commencing with our taxable year that began on April 6, 2004, and ended on December 31, 2004. The REIT qualification requirements are extremely complex, and interpretations of

Index to Financial Statements

the federal income tax laws governing qualification as a REIT are limited. Accordingly, there is no assurance that we will be successful in operating so as to qualify as a REIT. At any time, new laws, regulations, interpretations or court decisions may change the federal tax laws relating to, or the federal income tax consequences of, qualification as a REIT. It is possible that future economic, market, legal, tax or other considerations may cause our board of directors to revoke the REIT election, which it may do without stockholder approval.

If we lose or revoke our REIT status, we will face serious tax consequences that will substantially reduce the funds available for distribution because:

•

we would not be allowed a deduction for distributions to stockholders in computing our taxable income; therefore we would be subject to federal income tax at regular corporate rates and we might need to borrow money or sell assets in order to pay any such tax;

•

we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and

•

unless we are entitled to relief under statutory provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify.

As a result of all these factors, a failure to achieve or a loss or revocation of our REIT status could have a material adverse effect on our financial condition and results of operations and would adversely affect the value of our common stock.

Failure to make required distributions would subject us to tax.

In order to qualify as a REIT, each year we must distribute to our stockholders at least 90% of our REIT taxable income, excluding net capital gains. To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any year are less than the sum of (1) 85% of our ordinary income for that year; (2) 95% of our capital gain net income for that year; and (3) 100% of our undistributed taxable income from prior years.

We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Differences in timing between the recognition of income and the related cash receipts or the effect of required debt amortization payments could require us to borrow money or sell assets to pay out enough of our taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. In the future, we may borrow to pay distributions to our stockholders and the limited partners of our operating partnership. Any funds that we borrow would subject us to interest rate and other market risks.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

To qualify as a REIT for United States 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 25% 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 REIT’s assets consist of real estate and other related assets. In addition, at least 75% of our gross income must be generated from either rents from real estate or interest on loans secured by real estate (i.e. mortgage loans). 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

Index to Financial Statements

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.

If certain sale-leaseback transactions are not characterized by the Internal Revenue Service as “true leases,” we may be subject to adverse tax consequences.

We have purchased certain properties and leased them back to the sellers of such properties, and we may enter into similar transactions in the future. We intend for any such sale-leaseback transaction to be structured in a manner that the lease will be characterized as a “true lease,” thereby allowing us to be treated as the owner of the property for U.S. federal income tax purposes. However, depending on the terms of any specific transaction, the Internal Revenue Service might take the position that the transaction is not a “true lease” but is more properly treated in some other manner. In the event any sale-leaseback transaction is challenged and successfully re-characterized, we might fail to satisfy the REIT asset tests or income test and, consequently could lose our REIT status effective with the year of re-characterizations.

Transactions with taxable REIT subsidiaries may be subject to excise tax.

We have historically entered into lease and other transactions with our taxable REIT subsidiaries and their subsidiaries and expect to continue to do so in the future. Under applicable rules, transactions such as leases between our taxable REIT subsidiaries and their parent REIT that are not conducted on an arm’s length basis may be subject to a 100% excise tax. While we believe that all of our transactions with our taxable REIT subsidiaries are at arm’s length, imposition of a 100% excise tax could have a material adverse effect on our financial condition and results of operations and could adversely effect the trading price of our common stock.

Loans to our tenants could be characterized as equity, in which case our income from that tenant might not be qualifying income under the REIT rules and we could lose our REIT status.

In connection with the acquisition in 2004 of certain Vibra facilities, one of our taxable REIT subsidiaries made a loan to Vibra to acquire the operations at those Vibra Facilities. The acquisition loan bears interest at an annual rate of 10.25%. Our operating partnership loaned the funds this taxable REIT subsidiary to make this loan. The loan from our operating partnership to the taxable REIT subsidiary bears interest at an annual rate of 9.25%.

Like the Vibra loan discussed above, our taxable REIT subsidiaries have made and will make loans to tenants in our facilities to acquire operations or for working capital purposes. The Internal Revenue Service, or IRS, may take the position that certain loans to tenants should be treated as equity interests rather than debt, and that our interest income from such tenant should not be treated as qualifying income for purposes of the REIT gross income tests. If the IRS were to successfully treat a loan to a particular tenant as equity interests, the tenant would be a “related party tenant” with respect to our company and the rent that we receive from the tenant would not be qualifying income for purposes of the REIT gross income tests. As a result, we could be in jeopardy of failing the 75% income test discussed above, which if we did would cause us to lose our REIT status. In addition, if the IRS were to successfully treat a particular loan as interests held by our operating partnership rather than by our taxable REIT subsidiaries, we could fail the 5% asset test, and if the IRS further successfully treated the loan as other than straight debt, we could fail the 10% asset test with respect to such interest. As a result of the failure of either test, we 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.

ITEM 1B.

Unresolved Staff Comments

None.

Index to Financial Statements

ITEM 2.

Properties

At December 31, 2013, our portfolio consisted of 107 properties: 90 facilities (of the 98 facilities that we own) are in operation and leased to 24 operators, nine assets are in the form of first mortgage loans to four operators, and eight properties that are under construction. Our owned facilities consisted of 40 general acute care hospitals, 22 long-term acute care hospitals, 28 inpatient rehabilitation hospitals, two medical office buildings, and six wellness centers. The nine non-owned facilities on which we have made mortgage loans consist of four general acute care facilities, two long-term acute care hospitals, and three inpatient rehabilitation hospitals to four operators.


	Total Properties		Total 2013 Revenue		Percentage of Total Revenue			Total Investment
	(Dollars in thousands)
*Domestic:*
Arizona		4	$	10,131		4.18	%	$	200,844
California		14		62,203		25.65	%		542,827
Colorado		3		4,618		1.90	%		39,626	(C)
Connecticut		3		854		0.35	%		7,838
Florida		1		2,250		0.93	%		25,809
Idaho		4		10,481		4.32	%		99,224
Indiana		2		2,952		1.22	%		69,184
Kansas		3		6,739		2.78	%		95,282
Louisiana		5		9,928		4.09	%		137,875
Massachusetts		1		1,827		0.75	%		15,672
Michigan		1		1,419		0.58	%		10,743
Missouri		2		4,759		1.96	%		60,921
Montana		1		2,430		1.00	%		20,821
Nevada		1		9,566		3.94	%		81,441
New Jersey		2		17,032		7.02	%		126,151
New Mexico		2		5,619		2.32	%		53,082
Oregon		1		3,094		1.28	%		23,503
Pennsylvania		2		5,458		2.25	%		75,916
Rhode Island		2		374		0.15	%		3,737
South Carolina		4		9,519		3.93	%		95,606
Texas		32		57,346		23.66	%		658,559	(A)(C)
Utah		3		8,443		3.48	%		86,105	(C)
Virginia		1		1,071		0.44	%		10,915
Wisconsin		1		—		0.00	%		—	(C)
Wyoming		1		2,586		1.07	%		22,164

Total domestic		96	$	240,699		99.25	%	$	2,563,845
*International:*
Germany		11		1,824		0.75	%		240,503

Total		107	$	242,523		100.00	%	$	2,804,348	(B)

(A)	Includes our Twelve Oaks facility that is 55% occupied. Our total gross investment in the facility is $58.8 million.

(B)	Excludes construction in progress and other costs of $41.8 million, equity interests of $13.0 million, and accumulated depreciation and amortization. Includes other loans of $161.0 million.

Index to Financial Statements

(C)	Includes development projects still under construction at December 31, 2013.


Type of Property *(includes properties subject to leases and loans)*	Number of Properties		Number of Square Feet		Number of Licensed Beds(1)
General Acute Care Hospitals(A)		46		8,048,248		5,529
Long-Term Acute Care Hospitals		24		1,276,029		1,380
Rehabilitation Hospitals (B)		31		2,184,354		2,759
Wellness Centers		6		251,213		NA

		107		11,759,844		9,668

(A)	Includes two medical office buildings.

(B)	Eleven of our rehabilitation facilities, with 1.1 million square feet and 1,794 beds, are located in Germany.

(1)	Excludes our eight facilities that are under development.

The following table shows tenant lease expirations, including those related to direct financing leases, for the next 10 years and thereafter at our leased properties (excludes loans and properties under development), assuming that none of the tenants exercise any of their renewal options (dollars in thousands):


Total Lease Portfolio(2)	Total Leases		Base Rent(1)		% of Total Base Rent			Total Square Footage		Total Licensed Beds
2014		1	$	2,122		1.00	%		127,791		24
2015		2		4,155		1.97	%		137,977		161
2016		1		2,250		1.06	%		95,445		126
2017		—		—		—	%		—		—
2018		1		1,958		0.93	%		66,459		62
2019		8		6,525		3.09	%		558,919		136
2020		1		1,040		0.49	%		47,937		64
2021		4		15,275		7.22	%		459,059		278
2022		12		38,549		18.23	%		2,932,966		2,057
2023		4		11,840		5.60	%		912,652		851
Thereafter		56		127,754		60.41	%		5,237,896		4,810

Total		90	$	211,468		100.0	%		10,577,101		8,569

(1)	The most recent monthly base rent and income from direct financing leases annualized. This does not include tenant recoveries, additional rents and other lease-related adjustments to revenue (i.e., straight-line rents and deferred revenues).

(2)	Excludes our eight facilities that are under development.

ITEM 3.

Legal Proceedings

From time to time, there are various legal proceedings pending to which we are a party or to which some of our properties are subject to arising in the normal course of business. At this time, we do not believe that the ultimate resolution of these proceedings will have a material adverse effect on our consolidated financial position or results of operations.

ITEM 4.

Mine Safety Disclosures

None.

Index to Financial Statements

PART II

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

(a) Medical Properties’ common stock is traded on the New York Stock Exchange under the symbol “MPW.” The following table sets forth the high and low sales prices for the common stock for the periods indicated, as reported by the New York Stock Exchange Composite Tape, and the dividends declared by us with respect to each such period.


	High		Low		Dividends
Year ended December 31, 2013
First Quarter	$	16.04	$	12.14	$	0.20
Second Quarter		17.73		13.19		0.20
Third Quarter		15.50		11.47		0.20
Fourth Quarter		13.52		11.87		0.21
Year ended December 31, 2012
First Quarter	$	10.83	$	9.08	$	0.20
Second Quarter		9.69		8.66		0.20
Third Quarter		10.88		9.51		0.20
Fourth Quarter		12.07		10.35		0.20

On February 28, 2014, the closing price for our common stock, as reported on the New York Stock Exchange, was $13.19 per share. As of February 28, 2014, there were 55 holders of record of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee name.

If dividends are declared in a quarter, those dividends will be paid during the subsequent quarter. We expect to continue the policy of distributing our taxable income through regular cash dividends on a quarterly basis, although there is no assurance as to future dividends because they depend on future earnings, capital requirements, and our financial condition. In addition, our unsecured credit facility limits the amounts of dividends we can pay — see Note 4 of Item 8 of this Annual Report on Form 10-K for more information.

(b) Not applicable.

Index to Financial Statements

The following graph provides comparison of cumulative total stockholder return for the period from December 31, 2008 through December 31, 2013, among Medical Properties Trust, Inc., the Russell 2000 Index, NAREIT Equity REIT Index, and SNL US REIT Healthcare Index. The stock performance graph assumes an investment of $100 in each of Medical Properties Trust, Inc. and the three indices, and the reinvestment of dividends. The historical information below is not indicative of future performance.

Medical Properties Trust, Inc.

Total Return Performance

LOGO


	Period Ending
Index	12/31/08		12/31/09		12/31/10		12/31/11		12/31/12		12/31/13
Medical Properties Trust, Inc.		100.00		179.36		209.82		206.30		270.59		293.28
Russell 2000		100.00		127.17		161.32		154.59		179.86		249.69
NAREIT All Equity REIT Index		100.00		127.99		163.76		177.32		212.26		218.32
SNL US REIT Healthcare		100.00		127.74		152.40		174.48		209.49		196.34

ITEM 6.

Selected Financial Data

The following tables set forth are selected consolidated financial and operating data for Medical Properties Trust, Inc. and MPT Operating Partnership, L.P. and their respective subsidiaries. You should read the following selected financial data in conjunction with the consolidated historical financial statements and notes thereto of each of Medical Properties Trust, Inc. and MPT Operating Partnership, L.P. and their respective subsidiaries included in Item 8, in this Annual Report on Form 10-K, along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7, in this Annual Report on Form 10-K.

During the periods presented below, for those properties that have been sold, we reclassified the properties as held for sale and have reported revenue and expenses from these properties as discontinued operations for each period presented below. This reclassification had no effect on our reported net income.

Index to Financial Statements

Medical Properties Trust, Inc.

The consolidated balance sheet and operating data have been derived from our audited consolidated financial statements. As of December 31, 2013, Medical Properties Trust, Inc. had a 99.8% equity ownership interest in the Operating Partnership. Medical Properties Trust, Inc. has no significant operations other than as the sole member of its wholly owned subsidiary, Medical Properties Trust, LLC, which is the sole general partner of the Operating Partnership, and no material assets, other than its direct and indirect investment in the Operating Partnership.


	2013(1)(2)			2012(1)(2)			2011(1)(2)			2010(1)(2)			2009(1)(2)
OPERATING DATA		(In thousands except per share data)
Total revenue	$	242,523		$	198,125		$	132,322		$	104,825		$	102,072
Depreciation and amortization (expense)		(36,978	)		(32,815	)		(30,147	)		(20,148	)		(18,743	)
Property-related and general and administrative (expenses)		(32,513	)		(30,039	)		(27,815	)		(31,423	)		(24,806	)
Acquisition expense(3)		(19,494	)		(5,420	)		(4,184	)		(1,108	)		(40	)
Impairment (charge)		—			—			—			(12,000	)		—
Interest and other income		3,235			1,281			96			1,518			43
Debt refinancing (expense)		—			—			(14,214	)		(6,716	)		—
Interest (expense)		(66,746	)		(58,243	)		(43,810	)		(33,984	)		(37,650	)
Income tax (expense)		(726	)		(19	)		(128	)		(386	)		(252	)

Income from continuing operations		89,301			72,870			12,120			578			20,624
Income from discontinued operations		7,914			17,207			14,594			22,434			15,743

Net income		97,215			90,077			26,714			23,012			36,367
Net income attributable to non-controlling interests		(224	)		(177	)		(178	)		(99	)		(37	)

Net income attributable to MPT common stockholders	$	96,991		$	89,900		$	26,536		$	22,913		$	36,330

Income from continuing operations attributable to MPT common stockholders per diluted share	$	0.58		$	0.54		$	0.10		$	—		$	0.25
Income from discontinued operations attributable to MPT common stockholders per diluted share		0.05			0.13			0.13			0.22			0.20

Net income, attributable to MPT common stockholders per diluted share	$	0.63		$	0.67		$	0.23		$	0.22		$	0.45

Weighted average number of common shares — diluted		152,598			132,333			110,629			100,708			78,117
OTHER DATA
Dividends declared per common share	$	0.81		$	0.80		$	0.80		$	0.80		$	0.80

Index to Financial Statements


	December 31,
	2013(1)(2)			2012(1)(2)			2011(1)(2)			2010(1)(2)			2009(1)(2)
BALANCE SHEET DATA		(In thousands)
Real estate assets — at cost	$	2,296,479		$	1,591,189		$	1,261,644		$	1,017,059		$	965,299
Real estate accumulated depreciation/amortization		(159,776	)		(122,796	)		(89,982	)		(60,784	)		(42,126	)
Mortgage and other loans		549,640			527,893			239,839			215,985			311,006
Cash and equivalents		45,979			37,311			102,726			98,408			15,307
Other assets		172,248			145,289			107,647			78,146			60,412

Total assets	$	2,904,570		$	2,178,886		$	1,621,874		$	1,348,814		$	1,309,898

Debt, net	$	1,421,681		$	1,025,160		$	689,849		$	369,970		$	576,678
Other liabilities		138,681			103,912			103,210			79,268			61,645
Total Medical Properties Trust, Inc. Stockholders’ Equity		1,344,208			1,049,814			828,815			899,462			671,445
Non-controlling interests		—			—			—			114			130

Total equity		1,344,208			1,049,814			828,815			899,576			671,575

Total liabilities and equity	$	2,904,570		$	2,178,886		$	1,621,874		$	1,348,814		$	1,309,898

(1)	Reclassification, presentation and certain computational changes have been made for the results of properties sold and reclassified to discontinued operations.

(2)

Cash paid for acquisitions and other related investments totaled $654.9 million, $621.5 million, $279.0 million, $137.8 million, and $15.6 million in 2013, 2012, 2011, 2010, and 2009, respectively. The results of operations resulting from these investments are reflected in our consolidated financial statements from the dates invested. See Note 3 in Item 8 of this Annual Report on Form 10-K for further information on acquisitions of real estate, new loans, and other investments. We funded these investments generally from issuing common stock, utilizing additional amounts of our revolving facility, incurring additional debt, or from the sale of facilities. See Notes 4, 9, and 11, in Item 8 on this Annual Report on Form 10-K for further information regarding our debt, common stock and discontinued operations, respectively.

(3)	Includes $12.0 million in transfer taxes in 2013 related to our property acquisitions in Germany.

Index to Financial Statements

MPT Operating Partnership, L.P.

The consolidated balance sheet and operating data presented below have been derived from the operating partnership’s audited consolidated financial statements.


	2013(4)(5)			2012(4)(5)			2011(4)(5)			2010(4)(5)			2009(4)(5)
OPERATING DATA		(In thousands except per unit data)
Total revenue	$	242,523		$	198,125		$	132,322		$	104,825		$	102,072
Depreciation and amortization (expense)		(36,978	)		(32,815	)		(30,147	)		(20,148	)		(18,743	)
Property-related and general and administrative (expenses)		(32,513	)		(30,039	)		(27,798	)		(31,348	)		(24,743	)
Acquisition expense(6)		(19,494	)		(5,420	)		(4,184	)		(1,108	)		(40	)
Impairment (charge)		—			—			—			(12,000	)		—
Interest and other income		3,235			1,281			96			1,518			43
Debt refinancing (expense)		—			—			(14,214	)		(6,716	)		—
Interest (expense)		(66,746	)		(58,243	)		(43,810	)		(33,984	)		(37,650	)
Income tax (expense)		(726	)		(19	)		(128	)		(386	)		(252	)

Income from continuing operations		89,301			72,870			12,137			653			20,687
Income from discontinued operations		7,914			17,207			14,594			22,434			15,743

Net income		97,215			90,077			26,731			23,087			36,430
Net income attributable to non-controlling interests		(224	)		(177	)		(178	)		(99	)		(37	)

Net income attributable to MPT Operating Partnership, L.P. partners	$	96,991		$	89,900		$	26,553		$	22,988		$	36,393

Income from continuing operations attributable to MPT Operating Partnership, L.P. partners per diluted unit	$	0.58		$	0.54		$	0.10		$	—		$	0.25
Income from discontinued operations attributable to MPT Operating Partnership, L.P. partners per diluted unit		0.05			0.13			0.13			0.22			0.20

Net income, attributable to MPT Operating Partnership, L.P. partners per diluted unit	$	0.63		$	0.67		$	0.23		$	0.22		$	0.45

Weighted average number of units — diluted		152,598			132,333			110,629			100,708			78,117
OTHER DATA
Dividends declared per unit	$	0.81		$	0.80		$	0.80		$	0.80		$	0.80

Index to Financial Statements


	December 31,
	2013(4)(5)			2012(4)(5)			2011(4)(5)			2010(4)(5))			2009(4)(5)
BALANCE SHEET DATA		(In thousands)
Real estate assets — at cost	$	2,296,479		$	1,591,189		$	1,261,644		$	1,017,059		$	965,299
Real estate accumulated depreciation/amortization		(159,776	)		(122,796	)		(89,982	)		(60,784	)		(42,126	)
Other loans and investments		549,640			527,893			239,839			215,985			311,006
Cash and equivalents		45,979			37,311			102,726			98,408			15,307
Other assets		172,248			145,289			107,647			78,146			60,412

Total assets	$	2,904,570		$	2,178,886		$	1,621,874		$	1,348,814		$	1,309,898

Debt, net	$	1,421,681		$	1,025,160		$	689,849		$	369,970		$	576,678
Other liabilities		138,291			103,522			102,820			78,895			61,348
Total partners capital		1,344,598			1,050,204			829,205			899,835			671,742
Non-controlling interests		—			—			—			114			130

Total capital		1,344,598			1,050,204			829,205			899,949			671,872

Total liabilities and capital	$	2,904,570		$	2,178,886		$	1,621,874		$	1,348,814		$	1,309,898

(4)	Reclassification, presentation and certain computational changes have been made for the results of properties sold and reclassified to discontinued operations.

(5)

(6)	Includes $12.0 million in transfer taxes in 2013 related to our property acquisitions in Germany.

Index to Financial Statements

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operation

Unless otherwise indicated, references to “our,” “we” and “us” in this management’s discussion and analysis of financial condition and results of operations refer to Medical Properties Trust, Inc. and its consolidated subsidiaries, including MPT Operating Partnership, L.P.

Overview

We were incorporated in Maryland on August 27, 2003, primarily for the purpose of investing in and owning net-leased healthcare facilities. We also make real estate mortgage loans and other loans to our tenants. We conduct our business operations in one segment. With the acquisition of properties in Germany in November 2013, we now have healthcare investments in the United States and Europe. We have operated as a REIT since April 6, 2004, and accordingly, elected REIT status upon the filing of our calendar year 2004 United States 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 on a long-term basis ranging from 10 to 15 years with a series of shorter renewal terms at the option of our tenants and borrowers. We also have included and intend to include in our lease and loan agreements annual contractual minimum rate increases. Our existing portfolio minimum escalators range from 0.5% to 4%, while a limited number of our properties do not have an escalator. Most of our leases and loans also include rate increases based on the general rate of inflation if greater than the minimum contractual increases. In addition to rent or mortgage interest, our leases and loans typically require our tenants to pay all operating costs and expenses associated with the facility. Some leases also require our tenants to pay percentage rents, which are based on the level of those tenants’ revenues from their operations. Finally, we may acquire a profits or other equity interest in our tenants (which we refer to as RIDEA investments) that gives us a right to share in the tenant’s income or loss.

We selectively make loans to certain of our operators through our taxable REIT subsidiaries, which they use 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.

At December 31, 2013, our portfolio consisted of 107 properties: 90 facilities (of the 98 facilities that we own) are leased to 24 operators, eight are under development, and nine are in the form of mortgage loans to four operators.

2013 Highlights

In 2013, we leveraged our expertise in healthcare real estate, finance and operations to continue executing our strategy to grow and diversify our portfolio of hospital-only investments. We expanded total assets by 33%, increased revenues by 22%, and completed our first international acquisition.

A summary of the 2013 highlights is as follows:

•

Acquired real estate assets, entered into development agreements, entered into leases and made new loan investments, totaling more than $700 million as noted below:

•

Completed the €184 million acquisition of 11 German facilities in a sale/leaseback transaction with a new tenant to us, valued at approximately $250 million (including transfer taxes of $12 million). This acquisition expanded both our geographic and tenant diversity;

Index to Financial Statements

•

Completed the $281.3 million acquisition of the real estate of three general acute care hospitals from affiliates of IASIS Healthcare LLC (“IASIS”) via a sale/leaseback transaction;

•

Acquired the real estate of Esplanade Rehab Hospital in Corpus Christi, Texas (now operating as Corpus Christi Rehabilitation Hospital) for $15.8 million, which will be leased to Ernest under the 2012 master lease;

•

Acquired the real estate of two acute care hospitals in Kansas from affiliates of Prime for a combined purchase price of $75 million. These properties will be leased to Prime pursuant to the master lease agreements;

•

Commenced construction of several facilities pursuant to a master funding and development agreement with First Choice Emergency Room, LLC (“First Choice”) to develop up to 25 free standing emergency rooms. One of these facilities was completed in the fourth quarter of 2013. At December 31, 2013, six other facilities were under construction.;

•

Financed the development of inpatient rehabilitation facilities in South Ogden, Utah and Post Falls, Idaho for a total of $33.5 million, which will be leased to Ernest under the 2012 master lease; and

•

Provided a $20 million mortgage financing to Alecto Healthcare Services for the 204-bed Olympia Medical Center.

With these new investments, many of our diversification metrics have improveds including:

•

Individual property diversification — On an individual property basis, we had no investment of any single property greater than 3.9% of our total assets as of December 31, 2013, down from 4.6% as of December 31, 2012.

•

Geographic diversification — Investments located in California represented 18.7% of our total assets at December 31, 2013, down from 24.0% in the prior year. Investments located in Texas represented 22.7% of our total assets at December 31, 2013, down from 23.6% in the prior year. In addition, we further expanded our portfolio into Europe with the RHM portfolio acquisition (as fully described in Note 3 in Item 8 of this Annual Report on Form 10-K)

•

Sold the real estate of an inpatient rehabilitation facility, Warm Springs Rehabilitation Hospital of San Antonio, for $14 million, resulting in a gain on sale of $5.6 million;

•

Sold two long-term acute care hospitals in Texas and Arizona, CHG Cornerstone Hospital of Houston, L.P. and Cornerstone Hospital of Southeast Arizona, for total cash proceeds of $18.5 million, resulting in a $2.1 million gain on the sale.

•

Issued $150 million of unsecured notes (as a tack on to the 2012 unsecured senior notes), completed a €200 million euro-denominated (approximately $275 million) long-term fixed rate debt transaction at an annual coupon of 5.75%, and raised $313 million in equity to fund our acquisition activity above.

2012 Highlights

In 2012, we achieved a number of important milestones, including increasing our assets beyond the $2 billion mark, driving revenues above $200 million and exceeding any previous year’s investment total. A summary of the 2012 highlights is as follows:

•

Acquired real estate assets, entered into development agreements, entered into leases, made new loan investments, made RIDEA investments and committed to new development projects totaling more than $800 million as noted below:

•

Made loans to and acquired assets from Ernest for a combined purchase price and investment of $396.5 million, consisting of $200 million to purchase real estate assets, a first mortgage loan of $100 million, and $96.5 million in RIDEA investments made up of an acquisition loan for $93.2 million and an equity contribution of $3.3 million. This acquisition was the single largest investment ever made by us and included our largest RIDEA investment. With this acquisition, we took ownership of 16 new facilities and opened opportunities for future growth;

Index to Financial Statements

•

Funded a $100 million mortgage loan secured by the real property of Centinela Hospital Medical Center. Centinela is a 369 bed acute care facility that is operated by Prime. This mortgage loan is subject to cross-default with other mortgage loans to Prime and certain master lease agreements;

•

Acquired the real estate of the 380 bed St. Mary’s Regional Medical Center, an acute care hospital in Reno, Nevada for $80 million and the real estate of the 140-bed Roxborough Memorial Hospital in Pennsylvania for $30 million. The acquired facilities are leased to Prime pursuant to master lease agreements.

•

Acquired the real estate of a 40-bed long-term acute care hospital in Hammond, Louisiana for $10.5 million and leased the facility to the operator under a 15-year lease. As part of this transaction, we made a secured working capital loan of $2.5 million as well as a revolving loan of up to $2.0 million. In addition, we have made a $2.0 million RIDEA investment for a 25% equity ownership in the operator of this facility.

•

Entered into an agreement to develop and lease an acute care facility in Altoona, Wisconsin for $33.5 million, which will be leased to National Surgical Hospitals. The facility is expected to be completed in the third quarter of 2014.

•

Agreed to fund the construction of an inpatient rehabilitation hospital in Spartanburg, South Carolina that will be operated by Ernest. This facility opened in the third quarter of 2013.

•

Entered into an agreement with Ernest to develop and lease a 40-bed rehabilitation hospital in Lafayette, Indiana, which opened in the 2013 first quarter.

•

Amended the current lease on our Victoria, Texas facility with Post Acute Medical to extend the current lease term to 2028, and we agreed to develop and lease a 26-bed facility next to the existing facility. The new facility was completed in the fourth quarter of 2013.

•

Committed to fund $100 million to First Choice ER, LLC in development financing for up to 25 freestanding emergency room facilities.

•

Signed our lead tenant for the Twelve Oaks property representing approximately 55% of the building. Operations commenced for this tenant in January 2013;

•

Restructured our investments with Prime whereby all of our leases are now under one master lease. In addition to the security that a master lease provides, we improved the annual rental escalation provisions on our Prime properties.

•

Sold the real estate of two long-term acute care facilities, Thornton and New Bedford, to Vibra for total cash proceeds of $42 million. The sale of Thornton was completed on September 28, 2012, resulting in a gain of $8.4 million. The sale of New Bedford was completed on October 22, 2012, resulting in a gain of approximately $7 million; and

•

Established a $100 million term loan facility, issued $220 million of unsecured notes, and $220 million in equity and increased our revolving credit facility by $70 million for the purpose of funding our acquisition activity above.

2011 Highlights

In 2011, our primary business goals were to continue our growth pattern, improve diversification of our portfolio, recapitalize our balance sheet with longer-term unsecured debt, and increase our access to liquidity. We took the following actions to achieve these goals, among others:

Acquired real estate assets, entered into leases, made new loan investments and obtained RIDEA investments in several tenants totaling approximately $330 million as noted below:

•

Gilbert Hospital real estate — a 19-bed, 4-year old general acute care facility located in a suburb of Phoenix, Arizona for $17.1 million. We acquired this asset subject to an existing lease that expires in May 2022.

Index to Financial Statements

•

Atrium Medical Center at Corinth real estate — a 60-bed long-term acute care facility in the Dallas area for $23.5 million. Facility is subject to a lease that expires in June 2024. In addition, through one of our affiliates, we invested $1.3 million to acquire a 10% interest in the operations of the facility. We also made a $5.2 million working capital loan.

•

Bayonne Medical Center real estate — a 6-story, 278-bed acute care hospital in the New Jersey area of metropolitan New York for $58 million. Facility will be leased to the operator under a 15-year lease.

•

Alvarado Hospital real estate — a 306-bed general acute care facility in San Diego, California for $70 million. This facility will be leased to the operator under a 10-year lease.

•

Northland LTACH Hospital real estate — a 35-bed long-term acute care facility located in Kansas City for $19.5 million. We acquired this asset subject to an existing lease that expires in 2028.

•

Vibra Specialty Hospital of DeSoto real estate — a 40-bed long-term acute care facility in Desoto, Texas for $13.0 million. This facility will be leased for a fixed term of 15 years. In addition, we have made a $2.5 million equity investment in the operator of this facility for a 25% equity ownership.

•

New Braunfels real estate — a 40-bed long-term acute care facility in New Braunfels, Texas for $10.0 million. This facility will be leased for a fixed term of 15 years. In addition, we have made a $1.4 million equity investment for a 25% equity ownership in the operator of this facility and funded a $2.0 million working capital loan.

•

Emerus development project — entered into agreements with a joint venture of Emerus Holding, Inc. and Baptist Health System, to acquire, provide for development funding and lease three acute care hospitals for $30.0 million in the suburban markets of San Antonio, Texas. The three facilities will be leased under a master lease structure with an initial term of 15 years and three five-year extension options. One of these facilities opened in October 2012, and the other two opened in the 2013 first quarter.

•

Hoboken University Medical Center real estate — a 350-bed acute care facility located in Hoboken, New Jersey. The total investment for this transaction was $75.0 million, comprising $50.0 million for the acquisition of the real estate, a secured working capital loan of $15.1 million, and the purchase of a $5.0 million convertible note which provides us with the option to acquire up to 25% of the hospital operator which we converted $1.6 million into a 9.9% equity interest in the 2012 first quarter . The lease with the tenant has an initial term of 15 years.

•

Substantially modified our credit profile by refinancing most of our secured debt with unsecured debt by issuing $450 million of senior unsecured notes with a fixed rate of 6.875% due in 2021. In connection with these notes, we amended our existing credit agreement to go unsecured on our revolving credit facility, extend the maturity to October 2015 and lowered our interest rate spread.

•

Sold our Morgantown and Sherman Oaks facilities for $41 million, resulting in gains of $5.4 million.

With the financing activities and property sales noted above, we funded our 2011 acquisition activity as well as paid off certain loans (including the remaining portion of our 2006 Exchangeable notes) and extended our debt maturities.

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 our revenues, credit losses, fair values (either as part of a purchase price allocation, impairment analysis or in valuing certain of our Ernest investments), periodic depreciation of our real estate assets, and stock compensation expense, along with our assessment as to whether an entity that we

Index to Financial Statements

do business with should be consolidated with our results, have significant effects on our financial statements. Each of these items involves estimates that require us to make subjective judgments. We rely on our experience, collect historical and current market data, and develop relevant assumptions to arrive at what we believe to be reasonable estimates. Under different conditions or assumptions, materially different amounts could be reported related to the critical accounting policies described below. In addition, application of these critical 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 include the following:

Revenue Recognition: We receive income from operating leases based on the fixed, minimum required rents (base rents) per the lease agreements. Rent revenue from base rents is recorded on the straight-line method over the terms of the related lease agreements for new leases and the remaining terms of existing leases for acquired properties. The straight-line method records the periodic average amount of base rent earned over the term of a lease, taking into account contractual rent increases over the lease term. The straight-line method typically has the effect of recording more rent revenue from a lease than a tenant is required to pay early in the term of the lease. During the later parts of a lease term, this effect reverses with less rent revenue recorded than a tenant is required to pay. Rent revenue as recorded on the straight-line method in the consolidated statements of income is presented as two amounts: billed rent revenue and straight-line revenue. Billed rent revenue is the amount of base rent actually billed to the customer each period as required by the lease. Straight-line rent revenue is the difference between rent revenue earned based on the straight-line method and the amount recorded as billed rent revenue. We record the difference between base rent revenues earned and amounts due per the respective lease agreements, as applicable, as an increase or decrease to straight-line rent receivable.

Certain leases provide for additional rents contingent upon a percentage of the tenant’s revenues in excess of specified base amount/threshold (percentage rents). Percentage rents are recognized in the period in which revenue thresholds are met. Rental payments received prior to their recognition as income are classified as deferred revenue. We also receive additional rent (contingent rent) under some leases based on increases in the consumer price index or where the consumer price index exceeds the annual minimum percentage increase in the lease. Contingent rents are recorded as billed rent revenue in the period earned.

We use direct finance lease accounting (“DFL”) to record rent on certain leases deemed to be financing leases rather than operating leases. For leases accounted for as DFLs, future minimum lease payments are recorded as a receivable. The difference between the future minimum lease payments and the estimated residual values less the cost of the properties is recorded as unearned income. Unearned income is deferred and amortized to income over the lease terms to provide a constant yield when collectability of the lease payments is reasonably assured. Investments in DFLs are presented net of unamortized and unearned income.

In instances where we have a profits or equity interest in our tenant’s operations, we record income equal to our percentage interest of the tenant’s profits, as defined in the lease or tenant’s operating agreements, once annual thresholds, if any, are met.

We begin recording base rent income from our development projects when the lessee takes physical possession of the facility, which may be different from the stated start date of the lease. Also, during construction of our development projects, we are generally entitled to accrue rent based on the cost paid during the construction period (construction period rent). We accrue construction period rent as a receivable and deferred revenue during the construction period. When the lessee takes physical possession of the facility, we begin recognizing the accrued construction period rent on the straight-line method over the remaining term of the lease.

We receive interest income from our tenants/borrowers on mortgage loans, working capital loans, and other long-term loans. Interest income from these loans is recognized as earned based upon the principal outstanding and terms of the loans.

Index to Financial Statements

Commitment fees received from development and leasing services for lessees are initially recorded as deferred revenue and recognized as income over the initial term of a lease to produce a constant effective yield on the lease (interest method). Commitment and origination fees from lending services are also recorded as deferred revenue and recognized as income over the life of the loan using the interest method.

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 weighted-average useful life of approximately 38 years for buildings and improvements.

When circumstances indicate a possible impairment of the value of our real estate investments, we review the recoverability of the facility’s carrying value. The review of the recoverability is generally based on our estimate of the future undiscounted cash flows, excluding interest charges, from the facility’s use and eventual disposition. Our forecast of these cash flows considers factors such as expected future operating income, market and other applicable trends, and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a facility on an undiscounted basis, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the facility. We do not believe that the value of any of our facilities was impaired at December 31, 2013; however, given the highly specialized aspects of our properties no assurance can be given that future impairment charges will not be taken.

Acquired Real Estate Purchase Price Allocation: We allocate the purchase price of acquired properties to net tangible and identified intangible assets acquired based on their fair values. In making estimates of fair values for purposes of allocating purchase prices of acquired real estate, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property 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.

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 of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s 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 lease term. We amortize any resulting capitalized below-market lease values as an increase to rental income over the lease term. Because our strategy to a large degree involves the origination and acquisition of long term lease arrangements at market rates relative to our acquisition costs, we do not expect the above-market and below-market in-place lease values to be significant for many of our future transactions.

We measure the aggregate value of other lease 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 when acquired. Management’s 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 our 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 intangible assets acquired. In estimating carrying costs, management 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 be about six 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.

Index to Financial Statements

Other intangible assets acquired may include customer relationship intangible values, which are based on management’s evaluation of the specific characteristics of each prospective tenant’s 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 tenant’s 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 have a weighted average useful life of 18.6 years at December 31, 2013. The value of customer relationship intangibles, if any, 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. If a lease is terminated, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense. At December 31, 2013, we have assigned no value to customer relationship intangibles.

Loans: Loans consist of mortgage loans, working capital loans and other long-term loans. Mortgage loans are collateralized by interests in real property. Working capital and other long-term loans are generally collateralized by interests in receivables and corporate and individual guarantees. We record loans at cost. We evaluate the collectability of both interest and principal for each of our loans to determine whether they are impaired. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is considered to be impaired, the amount of the allowance is calculated by comparing the recorded investment to either the value determined by discounting the expected future cash flows using the loans effective interest rate or to the fair value of the collateral if the loan is collateral dependent.

Losses from Rent Receivables: A provision for losses on rent receivables (including straight-line rent receivables) is recorded when it becomes probable that the receivable will not be collected in full. The provision is an amount which reduces the receivable to its estimated net realizable value based on a determination of the eventual amounts to be collected either from the debtor or from the collateral, if any.

Stock-Based Compensation: During the years ended December 31, 2013, 2012, and 2011 we recorded $8.8 million, $7.6 million, and $7.0 million, respectively, of expense for share-based compensation related to grants of restricted common stock and other stock-based awards. Starting in 2010, we granted annual performance-based restricted share awards that vest based on the achievement of certain market conditions as defined by the accounting rules. Typical market conditions for our awards are based on our stock price levels or our total shareholder return (stock price and dividends) including comparisons of our total shareholder returns to an index of other REIT stocks. Because these awards are earned based on the achievement of these market conditions, we must initially evaluate and estimate the probability of achieving these market conditions in order to determine the fair value of the award and over what period we should recognize stock compensation expense. Because of the complexities inherently involved with these awards, we use an independent consultant to assist us in modeling both the value of the award and the various periods over which each tranche of an award will be earned. We use what is termed a Monte Carlo simulation model which determines a value and earnings periods based on multiple outcomes and their probabilities. We record expense over the expected or derived vesting periods using the calculated value of the awards. We record expense over these vesting periods even though the awards have not yet been earned and, in fact, may never be earned. If awards vest faster than our original estimate, we will record a catch-up of expense, which we did in the 2013 and 2012 fourth quarters due to our 2010 and 2011 stock awards being earned earlier than expected.

Fair Value Option Election: We elected to account for certain investments acquired on February 29, 2012, as part of the Ernest transaction, using the fair value option method, which means we mark these investments to fair market value on a recurring basis. Any changes in the fair value of these investments are non-cash adjustments that will not impact our financial condition or cash flows unless we decided to liquidate these investments.

Index to Financial Statements

These investments include the following at December 31, 2013: (in thousands):


Asset (Liability)	Fair Value
Mortgage loans	$	100,000
Acquisition loan		98,033
Equity investments		3,300

Total	$	201,333

We measure the estimated fair value of these investments utilizing Level 3 of the fair value hierarchy. Under current accounting guidance, Level 3 represents fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Our mortgage loans with Ernest are recorded at fair value by discounting the estimated cash flows using the current rates which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities. Our acquisition loan and equity investments are recorded at fair value by using a discounted cash flow model, which requires significant estimates of our investee such as projected revenue and expenses and appropriate discount rates based on the risk profile of comparable companies. We classify these loans and equity investments as Level 3, as we use certain unobservable inputs to the valuation methodology that are significant to the fair value measurement, and the valuation requires management judgment due to the absence of quoted market prices. For these cash flow models, our observable inputs include capitalization rates and market interest rates, and our unobservable input includes our adjustment for a lack of marketability discount on our equity investment of 40% at December 31, 2013.

At December 31, 2013, the cost basis of these investments approximated their fair value, which resulted in no unrealized gains/losses during 2013.

To illustrate the effect of movements in our unobservable inputs, we performed a sensitivity analysis below by using basis point variations in our discount rates (dollars in thousands):


Basis Point Change in Marketability Discount	Estimated Increase (Decrease) In Fair Value
+100 basis points	$	(320	)
- 100 basis points		320

Principles of Consolidation: Property holding entities and other subsidiaries of which we own 100% of the equity or have a controlling financial interest evidenced by ownership of a majority voting interest are consolidated. All inter-company balances and transactions are eliminated. For entities in which we own less than 100% of the equity interest, we consolidate the property if we have the direct or indirect ability to control the entities’ activities based upon the terms of the respective entities’ ownership agreements. For these entities, we record a non-controlling interest representing equity held by non-controlling interests.

We continually evaluate all of our transactions and investments to determine if they represent variable interests in a variable interest entity. If we determine that we have a variable interest in a variable interest entity, we then evaluate if we are the primary beneficiary of the variable interest entity. The evaluation is a qualitative assessment as to whether we have the ability to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance. We consolidate each variable interest entity in which we, by virtue of or transactions with our investments in the entity, are considered to be the primary beneficiary. At December 31, 2013 and 2012, we determined that we were not the primary beneficiary of any of our variable interest entities because we do not control the activities that most significantly impact the economic performance of these entities.

Index to Financial Statements

Disclosure of Contractual Obligations

The following table summarizes known material contractual obligations (including interest) as of December 31, 2013, excluding the impact of subsequent events (amounts in thousands):


Contractual Obligations	Less Than 1 Year		1-3 Years		3-5 Years		After 5 Years		Total
2006 Senior Unsecured Notes(1)	$	6,985	$	138,048	$	—	$	—	$	145,033
2011 and 2012 Senior Unsecured Notes		53,250		106,500		106,500		955,438		1,221,688
2013 Senior Unsecured Notes(5)		15,804		31,609		31,609		306,491		385,513
Revolving credit facility(2)		4,646		108,872		—		—		113,518
Term loans		3,669		105,283		13,984		—		122,936
Operating lease commitments(3)		2,610		5,582		5,421		43,238		56,851
Purchase obligations(4)		148,235		—		—		—		148,235

Totals	$	235,199	$	495,894	$	157,514	$	1,305,167	$	2,193,774

(1)

The interest rates on these notes are currently variable rates, but we entered into interest rate swaps to fix these interest rates until maturity. For $65 million of our $125 million senior notes, the rate is 5.507% and for $60 million of our $125 million senior notes the rate is 5.675%. See Note 4 of Item 8 to this Form 10-K for more information.

(2)	This assumes balance and rate in effect at December 31, 2013 ($105.0 million as of December 31, 2013) remains in effect through maturity. This also reflects unused credit facility fees assuming balance remains in effect through maturity.

(3)	Most of our contractual obligations to make operating lease payments are related to ground leases for which we are reimbursed by our tenants along with corporate office and equipment leases.

(4)	Includes approximately $146.2 million of future expenditures related to development projects.

(5)	Our 2013 Senior Unsecured Notes are Euro-denominated. We used the exchange rate at December 31, 2013, (or 1.37) in preparing this table.

Liquidity and Capital Resources

2013 Cash Flow Activity

We generated cash of $140.8 million from operating activities during 2013, primarily consisting of rent and interest from mortgage and other loans, which with cash on-hand, were principally used to fund our dividends of $120.3 million and certain of our investing activities.

From a financing perspective, on October 10, 2013 we closed on a €200 million euro-denominated (approximately $275 million at December 31, 2013) 7 year fixed rate debt transaction at an annual coupon of 5.75%. In addition, on August 20, 2013, we completed an offering of 11,500,000 shares of common stock (including 1,500,000 shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares) resulting in net proceeds (after underwriting discount and expenses) of $140.4 million. Futhermore, in August 2013, we completed a $150 million tack on offering to our 2012 Senior Unsecured Notes, resulting in net proceeds of $153.3 million (reflective of the pricing premium we received). Finally, we completed an offering of 12,650,000 shares of our common stock (including 1,650,000 shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares) in February 2013, resulting in net proceeds (after underwriting discount) of $172.9 million. Proceeds from these financing activities and strategic property disposals during the year (generating approximately $32 million) were used to fund our acquisitions and development activities.

2012 Cash Flow Activity

We generated cash of $105.3 million from operating activities during 2012, primarily consisting of rent and interest from mortgage and other loans, which with cash on-hand, was principally used to fund our dividends of $104.0 million and working capital needs. To fund the Ernest transaction in February 2012, we completed an

Index to Financial Statements

offering of 23,575,000 shares of our common stock (including 3,075,000 shares sold pursuant to the exercise in full of the underwriters’ overallotment option), resulting in net proceeds (after underwriting discount) for $220.1 million. In addition, in February 2012, we completed a $200 million offering of senior unsecured notes, resulting in net proceeds, after underwriting discount, of $196.5 million, which we also used to fund the Ernest transaction.

In March 2012, we closed on a $100 million senior unsecured term loan facility and exercised the $70 million accordion feature on our revolving credit facility, increasing the total commitment under that facility to $400 million. We also sold five properties during the year generating $71.2 million of additional funds.

Proceeds from the new term loan facility, our revolving credit facility and property sales were used to fund our investments in the year (excluding Ernest) and further cash outlays on our development projects.

During the fourth quarter 2012, we sold 1.1 million shares of our common stock under our at-the-market equity offering program, at an average price of $11.84 per share resulting in net proceeds of $13.2 million.

2011 Cash Flow Activity

We generated cash of $79.3 million from operating activities during 2011, which along with proceeds from our 2011 senior unsecured notes of $450 million, borrowings on our revolving credit facilities of $89.6 million, proceeds from the sale of our Morgantown and Sherman Oaks properties of $41.1 million and other receipts, were used to fund our dividends of $89.6 million, make principal payments on our debt of $246.3 million (including the buyback of 86.6% of our 9.25% exchangeable senior notes due 2013 (“2008 exchangeable notes”)), and fund new investments in the year.

In April 2011, our Operating Partnership and a wholly owned subsidiary of our Operating Partnership closed on a private offering of $450 million unsecured senior notes. These notes mature in 2021 and the interest rate is fixed at 6.875% per year. Contemporaneously with the closing of the notes, we repaid and terminated our $150 million term loan facility and our $9 million collateralized term loan facility. In connection with the notes offering, we amended our existing credit agreement, which provided for, at the time, a $330 million unsecured revolving credit facility (increased to $400 million in 2012) that matures in October 2015. We paid down in full this revolving credit facility’s outstanding balance with the proceeds from the notes offering. In the 2011 third quarter, we used proceeds from our 2011 senior unsecured notes offering to repurchase 86.6% of the outstanding 2008 exchangeable notes at a weighted average price of 118.4% of the principal amount (or $84.1 million) plus accrued and unpaid interest pursuant to a cash tender offer.

Debt Restrictions and Covenants

Our debt facilities impose certain restrictions on us, including restrictions on our ability to: incur debts; create or incur liens; provide guarantees in respect of obligations of any other entity; make redemptions and repurchases of our capital stock; prepay, redeem or repurchase debt; engage in mergers or consolidations; enter into affiliated transactions; dispose of real estate or other assets; and change our business. In addition, the credit agreement governing our revolving credit facility and the term loan entered into in 2012 (“2012 Term Loan”) limit the amount of dividends we can pay as a percentage of normalized adjusted funds from operations, as defined in the agreements, on a rolling four quarter basis. Through the year ending December 31, 2013, the dividend restriction was 95% of normalized adjusted FFO. The indentures governing the senior unsecured notes entered into in 2011 and 2012 also limit the amount of dividends we can pay based on the sum of 95% of funds from operations, proceeds of equity issuances and certain other net cash proceeds. Finally, these notes require us to maintain total unencumbered assets (as defined in the related indenture) of not less than 150% of our unsecured indebtedness.

In addition to these restrictions, our revolving credit facility and 2012 Term Loan contain customary financial and operating covenants, including covenants relating to our total leverage ratio, fixed charge coverage ratio, mortgage secured leverage ratio, recourse mortgage secured leverage ratio, consolidated adjusted net worth, facility leverage ratio, and borrowing base interest coverage ratio. This facility also contains customary

Index to Financial Statements

events of default, including among others, nonpayment of principal or interest, material inaccuracy of representations and failure to comply with our covenants. If an event of default occurs and is continuing under the facility, the entire outstanding balance may become immediately due and payable. At December 31, 2013, we were in compliance with all such financial and operating covenants.

In order for us to continue to qualify as a REIT we are required to distribute annual dividends equal to a minimum of 90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gains. See section titled “Distribution Policy” within this Item 7 of this Annual Report on Form 10-K for further information on our dividend policy along with the historical dividends paid on a per share basis.

Short-term Liquidity Requirements: As of December 31, 2013, we have only $0.3 million in debt principal payments due in 2014 — see debt maturity schedule below. At February 28, 2014, our availability under our revolving credit facility plus cash on-hand approximated $300 million. In addition, we established an at-the-market equity offering program in January 2014 under which we may sell up to $250 million in shares (of which $12.5 million has been sold through February 28, 2014) which may be used for general corporate purposes as needed. We believe that the liquidity available to us, our current monthly cash receipts from rent and loan interest, and the availability under our at-the-market equity offering program is sufficient to fund our operations, debt and interest obligations, our firm commitments (including capital expenditures, if any, and expected funding requirements on our development projects), dividends in order to comply with REIT requirements, and our current investment strategies for the next twelve months.

We are currently in advanced negotiations for the acquisition or development and leaseback of hospital facilities from several sellers with an aggregate investment value of up to $500 million. All of the proposed transactions involve general acute care hospitals in the United States. Each of the potential transactions is contingent upon, among other things, the negotiations and execution of definitive agreements and the completion of satisfactory due diligence and there is no assurance that all or any of them will be completed. Depending upon the timing of the closing of these transactions, if they close at all, we may fund some or all of the purchase prices with proceeds from capital sources in addition to those described above, including the issuance of debt or equity securities.

Long-term Liquidity Requirements: As of December 31, 2013, we have less than $0.6 million in debt principal payments due between now and when our revolving credit facility is set to expire in October 2015. With our liquidity at February 28, 2014 of approximately $300 million along with our current monthly cash receipts from rent and loan interest and with the availability under our at-the-market equity offering program, we believe we have the liquidity available to us to fund our operations, debt and interest obligations, dividends in order to comply with REIT requirements, and firm commitments (including capital expenditures, if any, and expected funding requirements on our development projects) for the next several years. However, in order to fund our investment strategies post 2014 or to fund investments greater than our current investment goal for 2014, we may require additional external capital, which we believe is currently available in the market such as the following:

•

issuance of new debt securities, including senior unsecured notes,

•

sale of equity securities,

•

entering into joint venture arrangements,

•

proceeds from strategic property sales,

•

expanding our current revolving credit facility and/or

•

bank term loans.

However, there is no assurance that conditions will remain favorable for such possible transactions or that our plans will be successful.

Index to Financial Statements

As of December 31, 2013, principal payments due on our debt (which exclude the effects of any discounts or premiums recorded) are as follows (in thousands):


2014	$	265
2015		105,283
2016		225,299
2017		320
2018		12,781
Thereafter		1,074,860

Total	$	1,418,808

Results of Operations

We began operations during the second quarter of 2004. Since then, we have substantially increased our income earning investments each year (see “Overview” section in this item for more details), and we expect to continue to add to our investment portfolio, subject to the capital markets and other conditions described in this Annual Report on Form 10-K. Accordingly, we expect that future results of operations will vary from our historical results.

Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

Net income for the year ended December 31, 2013, was $97.0 million compared to net income of $89.9 million for the year ended December 31, 2013. This increase was primarily related to acquisitions made in 2012 and 2013, partially offset by higher interest expense due to additional debt incurred in 2013 and strategic dispositions in 2012 and 2013. FFO, after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $147.2 million, or $0.96 per diluted share for 2013 as compared to $119.4 million, or $0.90 per diluted share for 2012, a 7% increase on a per share basis. These increases are primarily the result of the same transactions described herein.

A comparison of revenues for the years ended December 31, 2013 and 2012 is as follows (dollar amounts in thousands):


	2013					2012				Change
	(Dollar amounts in thousands)
Base rents	$	132,580		54.7	%	$	118,374	59.7	%	$	14,206
Straight-line rents		10,706		4.4	%		7,911	4.0	%		2,795
Percentage rents		(2	)	—	%		1,509	0.8	%		(1,511	)
Income from direct financing leases		40,830		16.8	%		21,728	11.0	%		19,102
Interest from loans		58,153		24.0	%		48,128	24.3	%		10,025
Fee income		256		0.1	%		475	0.2	%		(219	)

Total revenue	$	242,523		100.0	%	$	198,125	100.0	%	$	44,398

Base rents for 2013 increased 12.0% versus the prior year as a result of $1.8 million in additional rent generated from annual escalation provisions in our leases and $15.5 million of incremental revenue from the properties acquired or completed in 2012 and 2013 including the Hammond acquisition, three IASIS acquisitions, the RHM acquisition, and completed development properties. This is partially offset by the $3.1 million of revenue from our Monroe facility that was recorded in 2012 but not in 2013. Straight-line rent increased 35.3% as a result of the RHM acquisition, the Hammond acquisition in the 2012 fourth quarter and our Twelve Oaks, Little Elm, and Lafayette development deals that came online in 2013.

Income from direct financing leases is higher than the prior year as a result of $17.1 million of incremental revenue from the Ernest transaction (additional quarter in 2013) and the new Corpus Christi, Roxborough, Reno, Saint John, and Providence facilities along with $2.0 million of additional income generated from our annual escalation provisions. Interest from loans is higher than the prior year due to the $4.0 million, $0.5 million, and $5.2 million of incremental interest related to the Ernest, Hoboken, and Centinela loans, respectively.

Index to Financial Statements

Real estate depreciation and amortization during 2013 was $37.0 million compared to $32.8 million in 2012 due to the incremental depreciation from the facilities acquired in 2012, the IASIS and RHM acquisitions in 2013 and the development properties completed in 2013.

Acquisition expenses increased from $5.4 million to $19.5 million primarily as a result of the RHM and IASIS acquisitions in 2013 along with continued activity to pursue potential deals. As part of the RHM acquisition in the fourth quarter of 2013, we incurred approximately $12 million in real estate transfer taxes on which we earn an investment return, but are included in acquisition expenses.

General and administrative expenses in 2013 totaled $30.1 million, which is 12.4% of revenues, down from 14.4% of revenues in the prior year. The drop in general and administrative expenses as a percentage of revenue is primarily due to our business model as we can generally increase our revenue significantly without increasing our headcount and related expense at the same rate. On a dollar basis, general and administrative expenses were up slightly from the prior year, as we incurred more stock compensation expense than 2012. This increase in stock compensation expense is the result of certain performance award hurdles being met earlier than expected due to the total shareholder return performance over the last three years.

We recognized $3.6 million of earnings from equity and other interests (part of our RIDEA investments) in certain of our tenants in 2013 up from $2.9 million in 2012. This increase over 2012 is due to the timing of when such investments were made and since we elected to record our share of the investee’s earnings on a 90-day lag basis starting in 2012.

Interest expense for 2013 and 2012 totaled $66.7 million and $58.2 million, respectively. This increase is related to higher average debt balances in the current year associated with our €200 million denominated 2020 Senior Unsecured Notes issued in 2013 and the $150 million tack on offering to our 2012 Senior Unsecured Notes. Our total weighted average interest rates were consistent at 6% in 2013 and 2012. See Note 4 to our consolidated financial statements in Item 8 to this Annual Report on Form 10-K for further information on our debt activities.

In addition to the items noted above, net income for 2013 and 2012 was impacted by discontinued operations. See Note 11 to our consolidated financial statements in Item 8 to this Form 10-K for further information.

Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011

Net income for the year ended December 31, 2012, was $89.9 million compared to net income of $26.5 million for the year ended December 31, 2011. This increase was primarily related to acquisitions made in 2012 and the debt refinancing charges that were incurred in 2011, partially offset by higher interest expense due to additional debt incurred in 2012. FFO, after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $119.4 million, or $0.90 per diluted share for 2012 as compared to $78.0 million, or $0.71 per diluted share for 2011, a 27% increase on a per share basis. These increases are primarily the result of the acquisitions in 2012.

A comparison of revenues for the years ended December 31, 2012 and 2011 is as follows (dollar amounts in thousands):


	2012				2011				Change
	(Dollar amounts in thousands)
Base rents	$	118,374	59.7	%	$	104,231	78.8	%	$	14,143
Straight-line rents		7,911	4.0	%		5,277	4.0	%		2,634
Percentage rents		1,509	0.8	%		1,457	1.1	%		52
Income from direct financing leases		21,728	11.0	%		—	—	%		21,728
Interest from loans		48,128	24.3	%		21,136	16.0	%		26,992
Fee income		475	0.2	%		221	0.1	%		254

Total revenue	$	198,125	100.0	%	$	132,322	100.0	%	$	65,803

Index to Financial Statements

Base rents for 2012 increased 13.6% versus the prior year as a result of the additional rent generated from annual escalation provisions in our leases and $12.3 million of incremental revenue from the properties acquired or completed in late 2011 and 2012. Income from direct financing leases is solely related to the Ernest transaction and the new Roxborough and Reno facilities. Interest from loans is higher than the prior year due to the $19.2 million, $2.6 million, and $5.1 million of incremental interest related to the Ernest, Hoboken, and Centinela loans, respectively.

Real estate depreciation and amortization during 2012 was $32.8 million, compared to $30.1 million 2011 due to the incremental depreciation from the properties acquired in late 2011 and 2012.

Acquisition expenses increased from $4.2 million to $5.4 million primarily as a result of increased acquisition levels in 2012.

General and administrative expenses in 2012 totaled $28.6 million, which is 14.4% of revenues, down from 20.5% of revenues in the prior year, as revenues in 2012 were up significantly over the prior year. The drop in general and administrative expenses as a percentage of revenue is primarily due to our business model as we can generally increase our revenue significantly without increasing our headcount and related expense at the same rate. On a dollar basis, general and administrative expenses were up slightly from the prior year.

We recognized $2.9 million of earnings from equity and other interests (RIDEA investments) in certain of our tenants in 2012, which is up significantly over the 2011 same period due to the timing of when these investments were made in the prior year along with improved results from each of our profit and equity investees during 2012.

Interest expense (including debt refinancing costs) for 2012 and 2011 totaled $58.2 million and $58.0 million, respectively. In 2011, we recorded a charge of $14.2 million related to our debt refinancing activities. Excluding this charge, our interest expense is up $14.4 million due to higher debt balances associated with our 2012 senior unsecured notes and 2012 Term Loan. See Note 4 to our consolidated financial statements in Item 8 to this Annual Report on Form 10-K for further information on our debt activities.

In addition to the items noted above, net income for 2012 and 2011 was impacted by discontinued operations. See Note 11 to our consolidated financial statements in Item 8 to this Form 10-K for further information.

Reconciliation of Non-GAAP Financial Measures

Investors and analysts following the real estate industry utilize funds from operations, or FFO, as a supplemental performance measure. FFO, reflecting the assumption that real estate asset values rise or fall with market conditions, principally adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assumes that the value of real estate diminishes predictably over time. We compute FFO in accordance with the definition provided by the National Association of Real Estate Investment Trusts, or NAREIT, which represents net income (loss) (computed in accordance with GAAP), excluding gains (losses) on sales of real estate and impairment charges on real estate assets, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.

In addition to presenting FFO in accordance with the NAREIT definition, we also disclose normalized FFO, which adjusts FFO for items that relate to unanticipated or non-core events or activities or accounting changes that, if not noted, would make comparison to prior period results and market expectations potentially less meaningful to investors and analysts.

We believe that the use of FFO, combined with the required GAAP presentations, improves the understanding of our operating results among investors and the use of normalized FFO makes comparisons of our operating results with prior periods and other companies more meaningful. While FFO and normalized FFO are relevant and widely used supplemental measures of operating and financial performance of REITs, they should not be viewed as a substitute measure of our operating performance since the measures do not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain

Index to Financial Statements

the operating performance of our properties, which can be significant economic costs that could materially impact our results of operations. FFO and normalized FFO should not be considered an alternative to net income (loss) (computed in accordance with GAAP) as indicators of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity.

The following table presents a reconciliation of net income attributable to MPT common stockholders to FFO and normalized FFO for the years ended December 31, 2013, 2012, and 2011 ($ amounts in thousands except per share data):


	For the Year Ended
	December 31, 2013			December 31, 2012			December 31, 2011
FFO information:
Net income attributable to MPT common stockholders	$	96,991		$	89,900		$	26,536
Participating securities’ share in earnings		(729	)		(887	)		(1,090	)

Net income, less participating securities’ share in earnings	$	96,262		$	89,013		$	25,446
Depreciation and amortization:
Continuing operations		36,978			32,815			30,147
Discontinued operations		708			2,041			4,562
Gain on sale of real estate		(7,659	)		(16,369	)		(5,431	)
Real estate impairment charge		—			—			564

Funds from operations	$	126,289		$	107,500		$	55,288
Write-off of straight line rent		1,457			6,456			2,471
Acquisition costs		19,494			5,420			4,184
Debt refinancing costs		—			—			14,214
Write-off of other receivables		—			—			1,846

Normalized funds from operations	$	147,240		$	119,376		$	78,003

Per diluted share data:
Net income, less participating securities’ share in earnings	$	0.63		$	0.67		$	0.23
Depreciation and amortization:
Continuing operations		0.24			0.25			0.28
Discontinued operations		—			0.01			0.04
Gain on sale of real estate		(0.04	)		(0.12	)		(0.05	)

Funds from operations	$	0.83		$	0.81		$	0.50
Write-off of straight line rent		0.01			0.05			0.02
Acquisition costs		0.12			0.04			0.04
Debt refinancing costs		—			—			0.13
Write-off of other receivables		—			—			0.02

Normalized funds from operations	$	0.96		$	0.90		$	0.71

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.

Index to Financial Statements

The table below is a summary of our distributions declared for the three year period ended December 31, 2013:


Declaration Date	Record Date	Date of Distribution	Distribution per Share
November 7, 2013	December 3, 2013	January 7, 2014		$0.21
August 15, 2013	September 12, 2013	October 10, 2013		$0.20
May 23, 2013	June 13, 2013	July 11, 2013		$0.20
February 14, 2013	March 14, 2013	April 11, 2013		$0.20
October 30, 2012	November 23, 2012	January 5, 2013		$0.20
August 16, 2012	September 13, 2012	October 11, 2012		$0.20
May 17, 2012	June 14, 2012	July 12, 2012		$0.20
February 16, 2012	March 15, 2012	April 12, 2012		$0.20
November 10, 2011	December 8, 2011	January 5, 2012		$0.20
August 18, 2011	September 15, 2011	October 13, 2011		$0.20
May 19, 2011	June 16, 2011	July 14, 2011		$0.20
February 17, 2011	March 17, 2011	April 14, 2011		$0.20

We intend to pay to our stockholders, within the time periods prescribed by the Internal Revenue Code (“Code”), all or substantially all of our annual REIT taxable income, including taxable gains from the sale of real estate and recognized gains on the sale of securities. It is our policy to make sufficient cash distributions to stockholders in order for us to maintain our status as a REIT under the Code and to avoid corporate income and excise taxes on undistributed income. However, our unsecured credit facility limits the amounts of dividends we can pay — see Note 4 to our consolidated financial statements in Item 8 to this Form 10-K for further information.

ITEM 7A.

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. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates.

In addition, 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 impacted also by changes in “cap” rates, which is measured by the current base rent divided by the current market value of a facility.

Our primary exposure to market risks relates to fluctuations in interest rates and foreign currency. The following analyses present the sensitivity of the market value, earnings and cash flows of our significant financial instruments to hypothetical changes in interest rates and exchange rates as if these changes had occurred. The hypothetical changes chosen for these analyses reflect our view of changes that are reasonably possible over a one-year period. These forward looking disclosures are selective in nature and only address the potential impact from these hypothetical changes. They do not include other potential effects which could impact our business as a result of changes in market conditions. In addition, they do not include measures we may take to minimize our exposure such as entering into future interest rate swaps to hedge against interest rate increases on our variable rate debt.

Index to Financial Statements

Interest Rate Sensitivity

For fixed rate debt, interest rate changes affect the fair market value but do not impact net income to common stockholders or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact net income to common stockholders and cash flows, assuming other factors are held constant. At December 31, 2013, our outstanding debt totaled $1.4 billion, which consisted of fixed-rate debt of $1.2 billion million (including $125.0 million of floating debt swapped to fixed) and variable rate debt of $205.0 million. If market interest rates increase by one-percentage point, the fair value of our fixed rate debt at December 31, 2013 would decrease by $11.7 million. Changes in the fair value of our fixed rate debt will not have any impact on us unless we decided to repurchase the debt in the open markets.

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 $2.1 million 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 $2.1 million per year. This assumes that the average amount outstanding under our variable rate debt for a year is $205.0 million, the balance of our revolver and term loan at December 31, 2013.

Foreign Currency Sensitivity

With our acquisition of the properties in Germany in 2013, we are subject to fluctuations in U.S. and Euro currency exchange rates that may, from time to time, affect our financial condition and results of operations. Increases or decreases in the value of the Euro relative to the US dollar may impact the amount of net income we report. Based solely on operating results in 2013 on an annualized basis (and adjusted for real estate transfer taxes that were a one-time acquisition expense), if the Euro exchange rate were to change by 1%, our net income would change by $0.1 million, respectively.

We view our net investment in foreign subsidiaries that have a functional currency other than the U.S. dollar as long-term. As a result, we have not entered into any type of derivative to hedge our net investment. However, we have entered into Euro denominated debt, which works as a natural hedge for a significant portion of such investment.

Index to Financial Statements

ITEM 8.

Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

of Medical Properties Trust, Inc.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) present fairly, in all material respects, the financial position of Medical Properties Trust, Inc. and its subsidiaries at December 31, 2013 and December 31, 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Birmingham, Alabama

March 3, 2014

Index to Financial Statements

Report of Independent Registered Public Accounting Firm

To the Partners

of MPT Operating Partnership, L.P.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a) present fairly, in all material respects, the financial position of MPT Operating Partnership, L.P. and its subsidiaries at December 31, 2013 and December 31, 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework 1992 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

/s/ PricewaterhouseCoopers LLP

Birmingham, Alabama

March 3, 2014

Index to Financial Statements

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Consolidated Balance Sheets


	December 31,
	2013			2012
	(Amounts in thousands, except for per share data)
ASSETS
Real estate assets
Land	$	154,858		$	108,456
Buildings and improvements		1,578,336			1,052,479
Construction in progress and other		41,771			38,339
Intangible lease assets		90,490			51,966
Real estate held for sale		—			25,537
Net investment in direct financing leases		431,024			314,412
Mortgage loans		388,650			368,650

Gross investment in real estate assets		2,685,129			1,959,839
Accumulated depreciation		(144,235	)		(110,888	)
Accumulated amortization		(15,541	)		(11,908	)

Net investment in real estate assets		2,525,353			1,837,043
Cash and cash equivalents		45,979			37,311
Interest and rent receivables		58,499			45,289
Straight-line rent receivables		45,829			35,860
Other loans		160,990			159,243
Other assets		67,920			64,140

Total Assets	$	2,904,570		$	2,178,886

LIABILITIES AND EQUITY
Liabilities
Debt, net	$	1,421,681		$	1,025,160
Accounts payable and accrued expenses		94,311			65,961
Deferred revenue		23,787			20,609
Lease deposits and other obligations to tenants		20,583			17,342

Total liabilities		1,560,362			1,129,072
Commitments and Contingencies
Equity
Preferred stock, $0.001 par value. Authorized 10,000 shares; no shares outstanding		—			—
Common stock, $0.001 par value. Authorized 250,000 shares; issued and outstanding — 161,310 shares at December 31, 2013 and 136,335 shares at December 31, 2012		161			136
Additional paid-in capital		1,618,054			1,295,916
Distributions in excess of net income		(264,804	)		(233,494	)
Accumulated other comprehensive loss		(8,941	)		(12,482	)
Treasury shares, at cost		(262	)		(262	)

Total Equity		1,344,208			1,049,814

Total Liabilities and Equity	$	2,904,570		$	2,178,886

See accompanying notes to consolidated financial statements.

Index to Financial Statements

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Income


	For the Years Ended December 31,
	2013			2012			2011
	(Amounts in thousands, except for per share data)
Revenues
Rent billed	$	132,578		$	119,883		$	105,688
Straight-line rent		10,706			7,911			5,277
Income from direct financing leases		40,830			21,728			—
Interest and fee income		58,409			48,603			21,357

Total revenues		242,523			198,125			132,322
Expenses
Real estate depreciation and amortization		36,978			32,815			30,147
Property-related		2,450			1,477			724
Acquisition expenses		19,494			5,420			4,184
General and administrative		30,063			28,562			27,091

Total operating expenses		88,985			68,274			62,146

Operating income		153,538			129,851			70,176
Other income (expense)
Interest and other (expense) income		(319	)		(1,662	)		18
Earnings from equity and other interests		3,554			2,943			78
Debt refinancing expense		—			—			(14,214	)
Interest expense		(66,746	)		(58,243	)		(43,810	)
Income tax expense		(726	)		(19	)		(128	)

Net other expenses		(64,237	)		(56,981	)		(58,056	)

Income from continuing operations		89,301			72,870			12,120
Income from discontinued operations		7,914			17,207			14,594

Net income		97,215			90,077			26,714
Net income attributable to non-controlling interests		(224	)		(177	)		(178	)

Net income attributable to MPT common stockholders	$	96,991		$	89,900		$	26,536

Earnings per share — basic
Income from continuing operations attributable to MPT common stockholders	$	0.59		$	0.54		$	0.10
Income from discontinued operations attributable to MPT common stockholders		0.05			0.13			0.13

Net income attributable to MPT common stockholders	$	0.64		$	0.67		$	0.23

Weighted average shares outstanding — basic		151,439			132,331			110,623

Earnings per share — diluted
Income from continuing operations attributable to MPT common stockholders	$	0.58		$	0.54		$	0.10
Income from discontinued operations attributable to MPT common stockholders		0.05			0.13			0.13

Net income attributable to MPT common stockholders	$	0.63		$	0.67		$	0.23

Weighted average shares outstanding — diluted		152,598			132,333			110,629

See accompanying notes to consolidated financial statements.

Index to Financial Statements

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)


	For the Years Ended December 31,
(In thousands)	2013			2012			2011
Net income	$	97,215		$	90,077		$	26,714
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate swap		3,474			(251	)		(8,590	)
Foreign currency translation gain		67			—			—

Total comprehensive income		100,756			89,826			18,124
Comprehensive income attributable to non-controlling interests		(224	)		(177	)		(178	)

Comprehensive income attributable to MPT common stockholders	$	100,532		$	89,649		$	17,946

See accompanying notes to consolidated financial statements.

Index to Financial Statements

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Equity

For the Years Ended December 31, 2013, 2012 and 2011

(Amounts in thousands, except per share data)


	Preferred				Common				Additional Paid-in Capital			Distributions in Excess of Net Income			Accumulated Other Comprehensive Loss			Treasury Stock			Non-Controlling Interests			Total Equity
	Shares		Par Value		Shares		Par Value		Additional Paid-in Capital			Distributions in Excess of Net Income			Accumulated Other Comprehensive Loss			Treasury Stock			Non-Controlling Interests			Total Equity
Balance at December 31, 2010		—	$	—		110,225	$	110	$	1,051,785		$	(148,530	)	$	(3,641	)	$	(262	)	$	114		$	899,576

Net income		—		—		—		—		—			26,536			—			—			178			26,714
Unrealized loss on interest rate swaps		—		—		—		—		—			—			(8,590	)		—			—			(8,590	)
Stock vesting and amortization of stock-based compensation		—		—		561		1		6,982			—			—			—			—			6,983
Purchase of non-controlling interests		—		—		—		—		(441	)		—			—			—			(83	)		(524	)
Extinguishment of convertible debt		—		—		—		—		(3,070	)		(2,431	)		—			—			—			(5,501	)
Distributions to non-controlling interests		—		—		—		—		—			—			—			—			(209	)		(209	)
Dividends declared ($0.80 per common share)		—		—		—		—		—			(89,634	)		—			—			—			(89,634	)

Balance at December 31, 2011		—	$	—		110,786	$	111	$	1,055,256		$	(214,059	)	$	(12,231	)	$	(262	)	$	—		$	828,815

Net income		—		—		—		—		—			89,900			—			—			177			90,077
Unrealized loss on interest rate swaps		—		—		—		—		—			—			(251	)		—			—			(251	)
Stock vesting and amortization of stock-based compensation		—		—		854		1		7,636			—			—			—			—			7,637
Distributions to non-controlling interests		—		—		—		—		—			—			—			—			(177	)		(177	)
Proceeds from offering (net of offering costs)		—		—		24,695		24		233,024			—			—			—			—			233,048
Dividends declared ($0.80 per common share)		—		—		—		—		—			(109,335	)		—			—			—			(109,335	)

Balance at December 31, 2012		—	$	—		136,335	$	136	$	1,295,916		$	(233,494	)	$	(12,482	)	$	(262	)	$	—		$	1,049,814

Net income		—		—		—		—		—			96,991			—			—			224			97,215
Unrealized gain on interest rate swaps		—		—		—		—		—			—			3,474			—			—			3,474
Foreign currency translation gain		—		—		—		—		—			—			67			—			—			67
Stock vesting and amortization of stock-based compensation		—		—		811		1		8,832			—			—			—			—			8,833
Distributions to non-controlling interests		—		—		—		—		—			—			—			—			(224	)		(224	)
Proceeds from offering (net of offering costs)		—		—		24,164		24		313,306			—			—			—			—			313,330
Dividends declared ($0.81 per common share)		—		—		—		—		—			(128,301	)		—			—			—			(128,301	)

Balance at December 31, 2013		—	$	—		161,310	$	161	$	1,618,054		$	(264,804	)	$	(8,941	)	$	(262	)	$	—		$	1,344,208

See accompanying notes to consolidated financial statements.

Index to Financial Statements

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows


	For the Years Ended December 31,
	2013			2012			2011
	(Amounts in thousands)
Operating activities
Net income	$	97,215		$	90,077		$	26,714
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		38,818			35,593			35,477
Amortization and write-off of deferred financing costs and debt discount		3,559			3,457			9,289
Premium on extinguishment of debt		—			—			13,091
Direct financing lease accretion		(5,774	)		(3,104	)		—
Straight-line rent revenue		(11,265	)		(8,309	)		(7,142	)
Share-based compensation expense		8,832			7,637			6,983
Impairment charge		—			—			564
(Gain) loss from sale of real estate		(7,659	)		(16,369	)		(5,431	)
Provision for uncollectible receivables and loans		—			—