Medical Properties Trust Inc: Form 10-Q for the period ended Mar 31, 2024

The following discussion and analysis of the consolidated financial condition and consolidated results of operations are presented on a combined basis for Medical Properties Trust, Inc. and MPT Operating Partnership, L.P. as there are no material differences between these two entities. Such discussion and analysis should be read together with the condensed consolidated financial statements and notes thereto contained in this Form 10-Q and the consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2023.

Forward-Looking Statements.

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or future performance, achievements or transactions or events to be materially different from those expressed or implied by such forward-looking statements, including, but not limited to, the risks described in our Annual Report on Form 10-K and as updated in our quarterly reports on Form 10-Q for future periods, and current reports on Form 8-K as we file them with the SEC under the Exchange Act. Such factors include, among others, the following:

• the risk that Steward's bankruptcy prevents us from being able to recover deferred rent or our other investments in Steward and its affiliates at full value, within a reasonable time period or at all;
• the risk that property sales, loan repayments, and other capital recycling transactions do not occur as anticipated or at all, including the transaction described in Note 9 to the condensed consolidated financial statements;
• the risk that we are not able to attain our leverage, liquidity, and cost of capital objectives within a reasonable time period or at all;
• our ability to obtain debt financing on attractive terms or at all, as a result of changes in interest rates and other factors, which may adversely impact our ability to pay down, refinance, restructure, or extend our indebtedness as it becomes due, or pursue acquisition and development opportunities;
• macroeconomic conditions, including due to geopolitical conditions and instability, which may lead to a disruption of or lack of access to the capital markets, disruptions and instability in the banking and financial services industries, rising inflation and movements in currency exchange rates, and may negatively impact the financial condition of our tenants;
• the risk that the expected sale of three Connecticut hospitals currently leased to Prospect does not occur on the agreed upon terms or at all, and that we are otherwise unable to monetize our investment in Prospect at full value within a reasonable time period or at all;
• any downgrades in our credit ratings;
• the ability of our tenants, operators, and borrowers (including those of our joint ventures) to satisfy their obligations under their respective contractual arrangements with us;
• the ability of our tenants and operators to operate profitably and generate positive cash flow, comply with applicable laws, rules and regulations in the operation of our properties, to deliver high-quality services, to attract and retain qualified personnel, and to attract patients;
• the cooperation of our joint venture partners, including adverse developments affecting the financial health of such joint venture partners or the joint venture itself;
• the economic, political and social impact of, and uncertainty relating to, the potential impact from health crises (like COVID-19), which may adversely affect our and our tenants’ business, financial condition, results of operations, and liquidity;
• our success in implementing our business strategy and our ability to identify, underwrite, finance, consummate, and integrate acquisitions and investments;
• the nature and extent of our current and future competition;
• factors affecting the real estate industry generally or the healthcare real estate industry in particular;
• our ability to maintain our status as a REIT for income tax purposes in the U.S. and U.K.;
• changes in federal, state, or local tax laws in the U.S., Europe, South America, or other jurisdictions in which we may own healthcare facilities or transact business;
• federal and state healthcare and other regulatory requirements, as well as those in the foreign jurisdictions where we own properties;
• the value of our real estate assets, which may limit our ability to dispose of assets at attractive prices or obtain or maintain equity or debt financing secured by our properties or on an unsecured basis;
• loss of property owned through ground leases upon breach or termination of the ground leases;
• potential environmental contingencies and other liabilities;
• our ability to attract and retain qualified personnel;
• the risks and uncertainties of litigation or other regulatory proceedings and investigations; and
• the accuracy of our methodologies and estimates regarding environmental, social, and governance (“ESG”) metrics and targets, tenant willingness and ability to collaborate towards reporting ESG metrics and meeting ESG goals and targets, and the impact of governmental regulation on our and our tenants’ ESG efforts.

Key Factors that May Affect Our Operations

Our revenue is derived from rents we earn pursuant to the lease agreements with our tenants, from interest income from loans to our tenants and other facility owners, and from profits or equity interests in certain of our tenants’ operations. Our tenants operate in the healthcare industry, generally providing medical, surgical, rehabilitative, and behavioral health care to patients. The capacity of our tenants to pay our rents and interest is dependent upon their ability to conduct their operations at profitable levels. We believe that the business environment of the industry segments in which our tenants operate is generally positive for efficient operators. However, our tenants’ operations are subject to economic, regulatory, market, and other conditions (such as the impact of the COVID-19 pandemic) that may affect their profitability, which could impact our results. Accordingly, we monitor certain key performance indicators that we believe provide us with early indications of conditions that could affect the level of risk in our portfolio.

Key factors that we may consider in underwriting prospective deals and in our ongoing monitoring of our tenants’ (and guarantors’) performance, as well as the condition of our properties, include, but are not limited to, the following:

• the scope and breadth of clinical services and programs, including utilization trends (both inpatient and outpatient) by service type;
• the size and composition of medical staff and physician leadership at our facilities, including specialty, tenure, and number of procedures performed and/or referrals;
• an evaluation of our operators’ administrative team, as applicable, including background and tenure within the healthcare industry;
• staffing trends, including ratios, turnover metrics, recruitment and retention strategies at corporate and individual facility levels;
• facility operating performance measured by current, historical, and prospective operating margins (measured by a tenant's earnings before interest, taxes, depreciation, amortization, management fees, and facility rent) of each tenant and at each facility;
• the ratio of our tenants' operating earnings to facility rent and to other fixed costs, including debt costs;
• changes in revenue sources of our tenants, including the relative mix of public payors (including Medicare, Medicaid/MediCal, and managed care in the U.S., as well as equivalent payors in Europe, and South America) and private payors (including commercial insurance and private pay patients);
• historical support (financial or otherwise) from governments and/or other public payor systems during major economic downturns/depressions;
• trends in tenants' cash collections, including comparison to recorded net patient service revenues, knowing and assessing current revenue cycle management systems and potential future planned upgrades or replacements;
• tenants' free cash flow;
• the potential impact of healthcare pandemics/epidemics, legislation, and other regulations (including changes in reimbursement) on our tenants', borrowers', and guarantors' profitability and liquidity;
• the potential impact of any legal, regulatory, or compliance proceedings with our tenants (including at the facility level);
• the potential impact of supply chain and inflation-related challenges as they relate to new developments or capital addition projects;
• an ongoing assessment of the operating environment of our tenants, including demographics, competition, market position, status of compliance, accreditation, quality performance, and health outcomes as measured by The Centers for Medicare and Medicaid Services ("CMS"), The Joint Commission, and other governmental bodies in which our tenants operate;
• the level of investment in the hospital infrastructure and health IT systems; and
• physical real estate due diligence, typically including property condition and Phase 1 environmental assessments, along with annual property inspections thereafter.

Certain business factors, in addition to those described above that may directly affect our tenants and borrowers, will likely materially influence our future results of operations. These factors include:

• trends in interest rates and other costs due to general inflation and availability and increased costs from labor shortages could adversely impact the operations of our tenants and their ability to meet their lease obligations;
• changes in healthcare regulations that may limit the opportunities for physicians to participate in the ownership of healthcare providers and healthcare real estate;
• reductions (or non-timely increases) in reimbursements from Medicare, state healthcare programs, and commercial insurance providers that may reduce our tenants’ or borrowers’ profitability and our revenues;
• competition from other financing sources; and
• the ability of our tenants and borrowers to access funds in the credit markets.

CRITICAL ACCOUNTING POLICIES

Refer to our 2023 Annual Report on Form 10-K for a discussion of our critical accounting policies, which include investments in real estate, purchase price allocation, loans, credit losses, losses from rent and interest receivables, investments accounted for under the fair value option election, and our accounting policy on consolidation. During the three months ended March 31, 2024, there were no material changes to these policies.

Overview

We are a self-advised REIT focused on investing in and owning net-leased healthcare facilities across the U.S. and selectively in foreign jurisdictions. 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. The majority of our leased assets are owned 100%; however, we do own some leased assets through joint ventures with other partners that share our view that healthcare facilities are part of the infrastructure of any community, which we refer to as investments in unconsolidated real estate joint ventures. We also make mortgage loans to healthcare operators collateralized by their real estate assets. In addition, we may make loans to certain of our operators through our TRS, the proceeds of which are typically used for working capital and other purposes. From time-to-time, we may make noncontrolling investments in our tenants, which we refer to as investments in unconsolidated operating entities. These investments are typically made in conjunction with larger real estate transactions with the tenant that give us a right to share in such tenant’s profits and losses, and provide for certain minority rights and protections. Our business model facilitates acquisitions and recapitalizations, and allows operators of healthcare facilities to serve their communities by unlocking the value of their real estate assets to fund facility improvements, technology upgrades, and other investments in operations.

At March 31, 2024, our portfolio consisted of 436 properties leased or loaned to 53 operators, of which three are under development. We manage our business as a single business segment.

At March 31, 2024, all of our investments are located in the U.S., Europe, and South America. Our total assets are made up of the following (dollars in thousands):

Significant Tenant Update

Steward Health Care System

At March 31, 2024, affiliates of Steward lease 28 of our facilities across five different markets under a master lease totaling approximately $2.4 billion, along with eight properties pursuant to a separate master lease agreement that are part of the Massachusetts partnership with Macquarie Asset Management ("Macquarie") (our investment in this partnership approximates $406 million). In addition to the master leases, we hold working capital and other secured loans totaling approximately $346 million, which the working capital loan consists of multiple tranches with varying terms. We also have a $362 million loan due from affiliates of Steward that was made in 2021, proceeds of which were used to redeem a similarly sized convertible loan held by Steward's former private equity sponsor. Finally, we hold a 9.9% equity investment in Steward.

Operational and Liquidity Challenges

As disclosed in our Annual Report on Form 10-K for the year ending December 31, 2023, Steward delayed until early October 2023 paying a portion of its September 2023 rent and paid less than 30% of its required $70 million of rent and interest obligations (including our share of rent due to the Massachusetts partnership) for the 2023 fourth quarter.

According to Steward, its cash flows from operations have been impacted by challenges related to insufficient reimbursement revenue, increased costs and expenses, revenue cycle management, and a backlog of accounts payable. With a single exception, Steward historically paid rent timely until its late payment of a portion of September 2023. Earlier in 2023, Steward’s management had described to us its plans for continued improvements to profitability, improvements to collections of billed revenue, access to working capital liquidity, and sales of certain non-core assets. Based on these initiatives, the reported profitability of Steward's operations at our facilities, our cross-defaulted master lease structure, and the additional security of our overall collateral interests, we believed that Steward would be able to satisfy its rental obligations over the full term of our master leases. However, despite Steward obtaining additional working capital financing and selling its non-core laboratory business in the 2023 fourth quarter, Steward informed us in December 2023 that its cash collection challenges had become more pronounced and coupled with significant changes to vendor payment terms, their liquidity had been negatively impacted. To improve its liquidity position, Steward stated in December 2023 that it would be pursuing several strategic transactions, including the sale or re-tenanting of certain hospital operations and working with a third-party capital partner to divest of its managed care business. In addition, Steward stated it planned to intensify measures to improve cash collections and overall governance, including the establishment of a transformation committee comprised of newly appointed independent directors.

Separately, we engaged financial and legal advisors in the 2023 fourth quarter to advise us on options to maximize the ultimate recovery of our investments, including the recovery of unpaid rent and interest. To this point and while Steward was working to execute its stated plan, we agreed to fund a $60 million bridge loan (which we funded in January 2024) secured by our existing collateral as well as new second liens on the managed care business of Steward. In addition, we and certain of Steward’s asset backed lenders agreed to a new bridge facility in February 2024 and have funded an additional $75 million each to Steward during the 2024 first quarter (of which, up to $60 million advanced by certain of Steward's asset backed lenders could be put to us in 2025 if not previously paid by Steward or through liquidation of Steward's collateral). In addition to these fundings, we agreed to a forbearance agreement in which we consented to the deferral of unpaid rent and interest through December 2023, as well as a limited and tapering deferral of rent in 2024.

Due to the operational and liquidity challenges that Steward is experiencing, we moved to the cash basis of accounting for our leases and loans with Steward effective December 31, 2023. This resulted in the reserving of all unpaid rent and interest receivables at December 31, 2023 and the reversal of previously recognized straight-line rent receivables. In addition, we recorded impairment charges on certain real estate assets and on our 9.9% equity interest. In total, we recorded approximately $714 million of impairment and other charges in 2023.

Steward signed a letter of intent for the sale of its managed care business ("Stewardship") in February 2024. However, the sale price of Stewardship was less than what was anticipated earlier in 2024, and important regulatory and anti-trust approvals have not yet been forthcoming as soon as earlier planned. These circumstances have created a level of uncertainty about the likelihood, valuation, and timing of Steward's realizations of Stewardship. Moreover, as of the end of the first quarter of 2024, Steward had not signed any agreements for possible sales of its operations in or the re-tenanting of our hospital real estate. Meanwhile, Steward’s working capital deficit has continued to increase from December 31, 2023, despite the influx of cash and rent concessions from us and certain of Steward’s asset backed lenders as described earlier, which culminated in Steward's filing for reorganization relief under Chapter 11 protection of the United States Bankruptcy Code in the Southern District of Texas on May 6, 2024.

Due to the uncertainty concerning the sale of Stewardship, status of sales of Steward operations or the re-tenanting of our real estate, the ongoing operational and liquidity challenges, and new bankruptcy filing, we have recorded approximately $470 million of additional impairment charges in the quarter ending March 31, 2024, that fully reserve for the remaining value of our 9.9% equity investment in Steward and the $362 million loan due from affiliates of Steward along with the accrual for property taxes and other obligations not paid by Steward under its master leases. The equity investment and loan to Steward affiliates were included in “Investments in unconsolidated operating entities” on our condensed consolidated balance sheets and were adjusted for after comparing our carrying value of these investments to an updated fair value analysis of the underlying collateral, with assistance from a third-party, independent valuation firm.

At March 31, 2024, we have approximately $346 million of non-real estate investments in Steward, consisting of the working capital loan and other secured loans advanced in 2024. Based on the analysis discussed above, we believe these investments are fully recoverable at this time. However, no assurances can be given that we will not have any additional impairments in future periods.

Results of Operations

Three Months Ended March 31, 2024 Compared to March 31, 2023

Net loss for the three months ended March 31, 2024, was ($875.6) million, or ($1.46) per share compared to net income of $32.8 million, or $0.05 per diluted share, for the three months ended March 31, 2023. This decrease in net income is primarily driven by the $693 million of impairment charges in the first quarter of 2024 related to Steward and the international joint venture and an approximate $201 million unfavorable fair value adjustment to our investment in PHP Holdings, as described in Note 3 to the condensed consolidated financial statements, along with lower rent and interest from Steward. Normalized funds from operations (“FFO”), after adjusting for certain items (as more fully described in the section titled “Reconciliation of Non-GAAP Financial Measures” in Item 2 of this Quarterly Report on Form 10-Q), was $141.8 million for the 2024 first quarter, or $0.24 per diluted share, as compared to $222.2 million, or $0.37 per diluted share, for the 2023 first quarter. This 36% decrease in Normalized FFO is primarily due to lower revenues from Steward moving to the cash basis of accounting on December 31, 2023, higher interest expense, and lower revenues as a result of various disposals in 2023.

Revenues

A comparison of revenues for the three months ended March 31, 2024 and 2023 is as follows (dollar amounts in thousands):

Our total revenues for the 2024 first quarter are down $78.9 million, or 23%, over the same period in the prior year. This decrease is made up of the following:

• Operating lease revenue (includes rent billed and straight-line rent) – down $60.8 million over the prior year, of which approximately $57 million is due to less revenue from our operators on a cash basis in the first quarter of 2024 as compared to the prior year. The majority of this decline is due to Steward as we recognized $60 million of rent revenue in

the 2023 first quarter (excluding revenue on Utah properties now leased to CommonSpirit), while receiving and recording only $9 million of rent revenue in the first three months of 2024.

Operating lease revenues in the 2024 first quarter further declined by approximately $17 million due to disposals and other leasing transactions in 2023. These decreases are partially offset by approximately $5.5 million in incremental revenue from acquisitions in 2023, capital additions, and the commencement of rent on two development properties in 2024; $3.3 million of favorable foreign currency fluctuations; and approximately $4.5 million from increases in CPI above the contractual minimum escalations in our leases.

• Income from financing leases – up $3.2 million primarily due to receiving cash of approximately $7 million for rent revenue from Prospect in the first quarter of 2024, whereas we did not receive any cash from this cash basis tenant in the 2023 first quarter. In addition, financing lease income was higher by $0.5 million from the increase in CPI above the lease contractual minimum escalations. These increases were partially offset by a $3.9 million decrease from the disposal of three Prime financing leases in the third quarter of 2023 as described in Note 3 to the condensed consolidated financial statements.
• Interest and other income – down $21.3 million from the prior year due to the following:
• Interest from loans – down $19.4 million, primarily due to a $16 million decrease in interest income related to Steward and the international joint venture and an approximate $5 million decrease from loan payoffs (including $1.9 million from the sale of our interest in the Priory syndicated term loan in the first quarter of 2024). These decreases are partially offset by approximately $0.7 million of higher income from annual escalations due to increases in CPI and $0.8 million of favorable foreign currency fluctuations.
• Other income – down $1.9 million from the prior year as we had less direct reimbursements from our tenants for ground leases, property taxes, and insurance.

Interest Expense

Interest expense for the quarters ended March 31, 2024 and 2023 totaled $108.7 million and $97.7 million, respectively. This increase is primarily related to an increase in borrowings on our revolving credit facility that carried higher interest rates (as variable rate debt) compared to the lower fixed interest rates of debt that was repaid in 2023, including the A$730 million Australian term loan facility paid off in the 2023 second quarter and the 2.550% Senior Unsecured Notes paid off in December 2023. Overall, our weighted-average interest rate was 4.2% for the quarter ended March 31, 2024, compared to 3.7% for the same period in 2023, as general interest rates have trended higher post the 2023 first quarter and our specific rates have increased due to a credit rating adjustment in March 2023.

Real Estate Depreciation and Amortization

Real estate depreciation and amortization during the first quarter of 2024 decreased to $75.6 million from $83.9 million in 2023. This decrease is primarily due to the sale of 11 properties related to the Australia Transaction (as described in Note 3 to the condensed consolidated financial statements) and three Prime properties in 2023. We also classified five Prime facilities as held for sale in the first quarter of 2024 and are no longer recording depreciation on these properties.

Property-related

Property-related expenses totaled $4.8 million and $7.1 million for the quarters ended March 31, 2024 and 2023, respectively. Of the property expenses in the first quarter of 2024 and 2023, approximately $2.3 million and $4.2 million, respectively, represents costs that were reimbursed by our tenants and included in the “Interest and other income” line on our condensed consolidated statements of net income.

General and Administrative

General and administrative expenses totaled $33.3 million for the 2024 first quarter, compared to $41.7 million for the 2023 first quarter. Approximately $4 million of this decrease is stock compensation expense related, of which approximately $1.5 million of this decrease is related to timing of when the 2024 awards were granted in the quarter. In regard to the 2024 stock grants, and as described in Note 6 to the condensed consolidated financial statements, certain stock awards have cash-settlement features that will be accounted for as liability awards verses equity awards and adjusted to fair value quarterly.

Excluding stock compensation expense, general and administrative expenses totaled $25.6 million in the 2024 first quarter, compared to $29.8 million in the prior year reflecting our ongoing efforts to manage our expenses.

(Loss) Gain on Sale of Real Estate

During the three months ended March 31, 2024, we disposed of three facilities and two ancillary facilities resulting in a net loss of $1.4 million.

Real Estate and Other Impairment Charges, Net

In the 2024 first quarter, we recognized $693 million of non-real estate impairment charges and fair value adjustments associated with our investments in Steward and the international joint venture as further described in Note 3 to the condensed consolidated financial statements. In the first quarter of 2023, we recorded an $89.5 million net impairment charge, of which $79 million related to the Australia Transaction and $11 million was a non-cash impairment charge on the three Prime properties as more fully described in Note 3 to the condensed consolidated financial statements.

Earnings from Equity Interests

Earnings from equity interests was $10.5 million for the quarter ended March 31, 2024, slightly below the $11.4 million for the same period in 2023, primarily due to lower revenue earned on our Italian joint venture.

Other (Including Fair Value Adjustments on Securities)

Other expense for the first three months of 2024 was $229.3 million, compared to $5.2 million in the prior year. For 2024, we recognized approximately $216 million in unfavorable non-cash fair value adjustments from our investments marked to fair value, primarily due to an approximate $201 million unfavorable adjustment to our investment in PHP Holdings. The remaining expense in the 2024 first quarter included a $7.8 million economic loss from the sale of our interest in the Priory syndicated term loan and approximately $5.9 million of expenses associated with responding to certain defamatory statements published by certain parties, including those who are defendants to a lawsuit we filed on March 30, 2023. For 2023, we incurred $8 million of expenses associated with responding to defamatory statements previously mentioned, partially offset by approximately $4 million of favorable non-cash fair value adjustments on our investment in Aevis and other investments marked to fair value during the first quarter of 2023.

With certain investments accounted for at fair value, such as our investment in PHP Holdings, we may have positive or negative fair value adjustments from quarter-to-quarter.

Income Tax Expense

Income tax expense includes U.S. federal and state income taxes on our TRS entities, as well as non-U.S. income based or withholding taxes on certain investments located in jurisdictions outside the U.S. The $10.9 million income tax expense for the three months ended March 31, 2024 is primarily based on the income generated by our investments in the U.K., Colombia, and Germany. In comparison, we incurred $3.5 million in income tax expense in the first quarter of 2023 that was net of a $5.0 million tax benefit recognized from the Australia Transaction.

We utilize the asset and liability method of accounting for income taxes. Deferred tax assets are recorded to the extent we believe these assets will more likely than not be realized. In making such determination, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based upon our review of all positive and negative evidence, including our three-year cumulative pre-tax book loss position in certain entities, we concluded that a valuation allowance of approximately $152 million should be reflected against certain of our international and domestic net deferred tax assets at March 31, 2024. In the future, if we determine that it is more likely than not that we will realize our net deferred tax assets, we will reverse the applicable portion of the valuation allowance, recognize an income tax benefit in the period in which such determination is made, and potentially incur higher income tax expense in future periods as income is earned.

Reconciliation of Non-GAAP Financial Measures

Investors and analysts following the real estate industry utilize funds from operations, or FFO, as a supplemental performance measure. FFO, reflecting the assumption that real estate asset values rise or fall with market conditions, principally adjusts for the effects of GAAP depreciation and amortization of real estate assets, which assumes that the value of real estate diminishes predictably over time. We compute FFO in accordance with the definition provided by 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, including amortization related to in-place lease intangibles, and after adjustments for unconsolidated partnerships and joint ventures.

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

We believe that the use of FFO, combined with the required GAAP presentations, improves the understanding of our operating results among investors and the use of normalized FFO makes comparisons of our operating results with prior periods and other companies more meaningful. While FFO and normalized FFO are relevant and widely used supplemental measures of operating and financial performance of REITs, they should not be viewed as a substitute measure of our operating performance since the measures do not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs (if any are not paid by our tenants) to maintain the operating performance of our properties, which can be significant economic costs that could materially impact our results of operations. FFO and normalized FFO should not be considered an alternative to net income (loss) (computed in accordance with GAAP) as indicators of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity.

The following table presents a reconciliation of net (loss) income attributable to MPT common stockholders to FFO and Normalized FFO for the three months ended March 31, 2024 and 2023 (in thousands except per share data):

LIQUIDITY AND CAPITAL RESOURCES

2024 Cash Flow Activity

During the first three months of 2024, we generated approximately $74.3 million of cash flows from operating activities, primarily consisting of rent and interest from mortgage and other loans. In addition, we received approximately $133 million during the quarter from sales of our interest in the syndicated Priory term loan, the remaining minority equity interest in Lifepoint Behavioral, and certain real estate properties. We used our operating cash flows, asset sale proceeds, and cash on-hand and borrowings under our revolving credit facility to fund our dividends (declared in November 2023) of $92.8 million, approximately $135 million of advances to Steward, on a secured basis, in order to protect our investments in Steward (see Note 3 to the condensed consolidated financial statements for further discussion), and other investing activities.

Subsequent to March 31, 2024, the following transactions occurred:

• we completed the sale of five properties to Prime for cash proceeds of $250 million along with a $100 million interest-bearing mortgage loan due in 2024;
• we completed the Utah Transaction (as discussed in Note 10 to the condensed consolidated financial statements) that generated cash proceeds of approximately $1.1 billion. With the proceeds from these asset sales, we paid off and terminated our $306 million Australian term loan facility that was due in May 2024 and reduced the outstanding balance on the revolving credit facility by $500 million;
• our Board of Directors declared a quarterly cash dividend of $0.15 per common share on April 12, 2024, that was paid on May 1, 2024, totaling approximately $90 million;
• on April 12, 2024, we amended the Credit Facility and certain other agreements to (i) reduce revolving commitments from $1.8 billion to $1.4 billion, (ii) apply certain proceeds from the Utah Transaction and other asset sales and debt transactions to repay the Australian term loan facility and certain other outstanding obligations, including revolving loans under the Credit Facility to the extent necessary to reduce the outstanding borrowings to no more than the amended $1.4 billion commitment, (iii) lower the maximum permitted secured leverage ratio from 40% to 25%, and (iv) waive the 10% cap on unencumbered asset value attributable to tenants subject to a bankruptcy event for purposes of determining compliance with the unsecured leverage ratio for the trailing four fiscal quarter period ended June 30, 2024, and for purposes of determining pro forma compliance with the unsecured leverage ratio for certain asset sale and debt transactions.

The relief afforded under the April 12, 2024 amendment to the Credit Facility is limited to the relief specified in the amendment, including waiving the 10% cap on unencumbered asset value attributable to tenants subject to a bankruptcy event for purposes of determining compliance with the unsecured leverage ratio for the trailing four fiscal quarter period ended June 30, 2024 and for purposes of determining pro forma compliance with the unsecured leverage ratio for certain asset sale and debt transactions specified in the amendment. The amendment does not provide relief beyond its specific provisions and other adverse consequences of the Steward bankruptcy filing may occur;

• in May 2024, both S&P Global Ratings and Moody's downgraded our corporate ratings. These ratings declining could have a negative impact on us in the form of higher interest rates on any new or amended debt instruments we may enter into in the future;
• primarily as a result of this Quarterly Report on Form 10-Q not being filed timely, we are currently ineligible to file a new short-form registration statement on Form S-3 or access our existing registration statement on Form S-3 for sales of securities, including under our at-the-market ("ATM") program, until June 1, 2025, which may impair our ability to raise capital in the public markets. While we are able to use other registration avenues for public offerings, such avenues are less expeditious and efficient than a shelf registration statement on Form S-3. See "Risk Factors" for additional information; and
• on May 24, 2024, we closed on a secured loan facility with a consortium of institutional investors that provides for a term loan in aggregate principal amount of approximately £631 million (approximately $800 million) secured by a portfolio of 27 properties located in the U.K. currently leased to affiliates of Circle. The facility carries a fixed rate of 6.877% over its 10-year term, excluding fees and expenses, and is interest-only (payable quarterly in advance) through the maturity date. The facility is secured by first priority mortgages or similar security instruments on the relevant properties, including assignments of rents and security over accounts, and is non-recourse to us. We intend to use the majority of the net proceeds of the facility to pay down portions of our revolving credit facility and British pound sterling term loan due 2025, and to pay off our British pound sterling secured term loan due 2024 (approximately £105 million).

2023 Cash Flow Activity

During the first three months of 2023, we generated approximately $135.6 million of cash flows from operating activities, primarily consisting of rent and interest from mortgage and other loans. We used these operating cash flows (along with cash on-hand) to fund our dividends of $176.6 million.

Short-term Liquidity Requirements:

Our short-term liquidity requirements typically consist of general and administrative expenses, dividends in order to comply with REIT requirements, interest payments on our debt, and planned funding commitments on development and capital improvement projects, for the next twelve months. Our monthly rent and interest receipts and distributions from our joint venture arrangements are typically enough to cover our short-term liquidity requirements.

However, with increasing interest rates, loss of a substantial portion of cash rent and interest from Steward, possible debtor in possession financing ("DIP") of up to $75 million related to the Steward bankruptcy (of which we have funded $60 million to-date), and $1.4 billion of debt coming due within the next twelve months (post subsequent event activity discussed earlier), we have looked to other initiatives to improve cash flows including:

• in the first five months of 2024, we have raised $2.4 billion of liquidity (as previously discussed above under "2024 Cash Flow Activity") comfortably exceeding our initial full year liquidity target of $2.0 billion;
• completing the binding sale of three Connecticut facilities to Yale New Haven for $355 million, which has been approved by the state of Connecticut's Office of Health Strategy;
• extending the maturity of existing term loans (including the British pound sterling loan due 2025); and
• managing the form (cash or stock) and amount of our dividend requirements.

We believe these initiatives, along with liquidity of approximately $1.4 billion (including cash on-hand and availability under our $1.4 billion revolving credit facility) at May 24, 2024 (and including subsequent event activity discussed in Note 3 to the condensed consolidated financial statements), routine cash receipts of rent and interest, and the $100 million due from Prime in 2024, can fund our short-term liquidity requirements, including up to $75 million of DIP financing to Steward.

In addition to the cash flow improvement initiatives discussed above, we could see further cash flow upside from the monetization of our investment in PHP Holdings and any proceeds received from Steward's plan to divest of its managed care business and to transition operations to new healthcare operators (whether it be from a concurrent sale of our real estate or in the form of rent paid by the new lessee).

Long-term Liquidity Requirements:

Our long-term liquidity requirements generally consist of the same requirements described above under “Short-term Liquidity Requirements” along with the acquisition of real estate and the funding of debt maturities coming due after the next twelve months. At this time, we do not expect any material acquisitions of real estate in the foreseeable future.

As described previously, our monthly rent and interest receipts and distributions from our joint venture arrangements along with our current liquidity of approximately $1.4 billion at May 24, 2024, are typically enough to cover our short-term liquidity requirements. However, to address upcoming debt maturities (as outlined below), we may need to look to other sources, which may include one or a combination of the following:

• reducing our dividend (or moving to a stock dividend), while still complying with REIT requirements;
• further property sales or joint ventures, including the completion of the binding sale of three Connecticut facilities to Yale that is expected to generate $355 million;
• monetizing our investment in operators, including our investment in PHP Holdings;
• entering into new secured loans on real estate;
• extending the maturity of existing term loans;
• identifying and implementing cost reduction opportunities;
• entering into new bank term loans or issuing new USD, EUR, or GBP denominated debt securities; and
• sale of equity securities.

However, there is no assurance that conditions will be favorable for such possible transactions or that our plans will be successful. As described in the "Risk Factors" section of this Form 10-Q, as a result of this Quarterly Report on Form 10-Q not being filed timely, we are currently ineligible to file a new shelf registration statement on Form S-3 or access our existing registration statement on Form S-3 for sales of securities, including under our ATM program, until June 1, 2025, which may impair our ability to raise capital in the public markets. While we are able to use other registration avenues for public offerings, such avenues are less expeditious and efficient than a shelf registration statement on Form S-3. See "Risk Factors" for additional information.

Principal payments due on our debt (which exclude the effects of any discounts, premiums, or debt issue costs recorded) as of May 24, 2024 are as follows (in thousands):

Contractual Commitments

We presented our contractual commitments in our 2023 Annual Report on Form 10-K. Except for the payoff and termination of our Australian term loan facility on April 18, 2024, and the changes noted below, there have been no significant changes through May 24, 2024.

The following table updates our contractual commitments schedule as of May 24, 2024 (in thousands):

(1) This column represents obligations post May 24, 2024.

Distribution Policy

The table below is a summary of our distributions declared during the two year period ended March 31, 2024:

On April 12, 2024, we announced that our Board of Directors declared a regular quarterly cash dividend of $0.15 per share of common stock that was paid on May 1, 2024, to stockholders of record on April 22, 2024.

It is our policy to make sufficient distributions to stockholders in order for us to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended, and to efficiently manage corporate income and excise taxes on undistributed income. However, our Credit Facility limits the amount of dividends we can make- see Note 4 to the condensed consolidated financial statements for further information.

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 or foreign currency exposure. For interest rate hedging, these decisions are principally based on our policy to match 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. For foreign currency hedging, these decisions are principally based on how our investments are financed, the long-term nature of our investments, the need to repatriate earnings back to the U.S., and the general trend in foreign currency exchange 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.

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.

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 March 31, 2024, our outstanding debt totaled $10.1 billion, which consisted of fixed-rate debt of approximately $8.3 billion (after considering interest rate swaps in-place) and variable rate debt of $1.8 billion. If market interest rates increase by 10%, the fair value of our debt at March 31, 2024 would decrease by approximately $200.3 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 market.

If market rates of interest on our variable rate debt increase by 10%, the increase in annual interest expense on our variable rate debt would decrease future earnings and cash flows by $12.0 million per year. If market rates of interest on our variable rate debt decrease by 10%, the decrease in interest expense on our variable rate debt would increase future earnings and cash flows by $12.0 million per year. This assumes that the average amount outstanding under our variable rate debt for a year is $1.8 billion, the balance of such variable rate debt at March 31, 2024.

Foreign Currency Sensitivity

With our investments in the U.K., Germany, Spain, Italy, Portugal, Switzerland, Finland, and Colombia, we are subject to fluctuations in the British pound, euro, Swiss franc, and Colombian peso to U.S. dollar currency exchange rates. Although we generally deem investments in these countries to be of a long-term nature, are typically able to match any non-U.S. dollar borrowings with investments in such currencies, and historically have not needed to repatriate a material amount of earnings back to the U.S., increases or decreases in the value of the respective non-U.S. dollar currencies to U.S. dollar exchange rates may impact our financial condition and/or our results of operations. Based solely on our 2024 operating results to-date and on an annualized basis, a 10% change to the following exchange rates would have impacted our net income, FFO, and Normalized FFO by the amounts below (in thousands):

Medical Properties Trust, Inc. and MPT Operating Partnership, L.P.

We have adopted and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b), under the Securities Exchange Act of 1934, as amended, we have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Other than as noted below, there have been no material changes to the Risk Factors as presented in our Annual Report on Form 10-K for the year ended December 31, 2023.

Steward’s deteriorating financial condition has material adversely affected our operating results and financial condition, and Steward’s recent Chapter 11 filing adds further risks and uncertainties that could materially adversely affect us.

On May 6, 2024, Steward filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas. At March 31, 2024, affiliates of Steward lease 28 of our facilities under a master lease totaling approximately $2.4 billion, along with eight properties pursuant to a separate master lease agreement with one of our unconsolidated joint ventures in which our investment is approximately $406 million. In addition to the master leases, we hold a working capital and other secured loans totaling approximately $346 million, which the working capital loan consists of multiple tranches with varying terms. We also have a $362 million loan due from affiliates of Steward that was made in 2021, and we hold a 9.9% equity investment in Steward. At March 31, 2024, our aggregate investments in Steward and its affiliates represented approximately 18.5% of our total assets. In addition, our approximately $220 million loan to an international joint venture is collateralized by the equity of Steward held by an investor in both Steward and the international joint venture. Subject to approval by the bankruptcy court (including with regards to financing terms), we separately anticipate entering into agreements to provide debtor-in-possession financing to Steward of up to $75 million.

As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, we moved to the cash basis of accounting for all leases and loans with Steward effective December 31, 2023. This resulted in the reserving of all unpaid rent and interest receivables at December 31, 2023 and the reversal of previously recognized straight-line rent receivables. In addition, we recorded impairment charges on certain real estate assets and on our 9.9% equity interest in Steward. In total, the Company recorded approximately $700 million of impairment and other charges as of December 31, 2023. Due to Steward’s ongoing operational and liquidity challenges and new bankruptcy filing, we recorded approximately $470 million of additional impairment charges in the quarter ending March 31, 2024 that fully reserves for the remaining value of our 9.9% equity investment in Steward and the $362 million loan due from affiliates of Steward along with the accrual for property taxes and obligations not paid per Steward under its master leases. In addition, we recorded a $220 million unfavorable fair value adjustment in the quarter ending March 31, 2024 to fully reserve for our loan to the international joint venture. We cannot assure you that we will not have any additional impairments in future periods.

Steward’s bankruptcy filing constitutes a default under the terms of our master leases and loan agreements with Steward, and imposes a stay on our ability to exercise contractual rights with respect to these defaults. The bankruptcy filing bars us from collecting pre-bankruptcy debts from Steward, unless we receive an order permitting us to do so from the bankruptcy court. While we expect to engage in negotiations with Steward and other stakeholders and to pursue all legal remedies to maximize our recovery with respect to our Steward investments, the outcome of any such negotiations and remedies is uncertain at this time and will be subject in all cases to the approval of the bankruptcy court. In addition, there is a risk that third parties may seek to bring claims against us in Steward’s bankruptcy proceeding.

If our Steward master leases are rejected by the bankruptcy trustee, in whole or in part, we would have only a general unsecured claim for damages. Any unsecured claim (including our equity interest in Steward) 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 materially harm our financial condition. Moreover, any secured claims we have against Steward may only be paid to the extent of the value of the collateral, which may not cover any or all of our losses.

Steward’s filing and other defaults under its master leases may give us the right to terminate the leases and seek one or more replacement operators for these facilities. However, the process for transferring the operations of healthcare facilities is highly regulated, which may result in delays and increased costs in locating a suitable replacement tenant. 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 Steward properties, we may be forced to sell the properties at a loss.

In addition, the terms of our unsecured credit facility and the indentures governing our outstanding unsecured senior notes are subject to customary financial, operational, and reporting covenants, including covenants relating to our total leverage ratio, fixed charge coverage ratio, secured leverage ratio, consolidated adjusted net worth, unsecured leverage ratio, and unsecured interest coverage ratio. The terms of our unsecured credit facility also require us to maintain a minimum amount of total unencumbered assets and a 10% cap on unencumbered asset value attributable to tenants subject to a bankruptcy event, such as Steward. In April 2024, the lenders under our unsecured credit facility agreed, among other things, to waive the 10% cap on unencumbered asset value attributable to tenants subject to a bankruptcy event for purposes of determining compliance with the unsecured leverage ratio for the trailing four fiscal quarter periods ended June 30, 2024, and for purposes of determining pro forma compliance with the unsecured leverage ratio for certain asset sale and debt transactions. The amendment does not provide relief beyond its specific provisions and other adverse consequences of the Steward bankruptcy filing may occur. Such waiver and modified covenant are temporary, and we will be required to meet the standard covenant threshold when the waiver period expires on September 30, 2024, unless extended. Our continued ability to incur debt and operate our business is subject to compliance with the covenants in our debt instruments, breaches of which could result in defaults and cross-defaults that could have a material adverse effect on our financial condition and results of operations.

Steward is early in its bankruptcy proceedings and the ultimate outcome of such proceedings is uncertain. At this time we are unable to predict the timing of any of the foregoing matters or the timing for a resolution of the Steward bankruptcy proceeding.

As a result of this Quarterly Report on Form 10-Q not being filed timely, we are currently ineligible to file a new short-form registration statement on Form S-3 or access our existing registration statement on Form S-3 for sales of securities, including under our ATM program, which may impair our ability to raise capital on terms favorable to us, in a timely manner or at all.

Form S-3 permits eligible issuers to conduct registered offerings using a short-form registration statement that is automatically effective and allows the incorporation by reference of past and future filings and reports made under the Exchange Act. In addition, Form S-3 enables eligible issuers to conduct primary offerings “off the shelf” by registering an indeterminate amount of specified securities which, combined with automatic effectiveness and the ability to forward incorporate information, allows issuers to access the capital markets in a more expeditious and efficient manner than raising capital in a standard registered offering pursuant to Form S-11.

As a result of this Quarterly Report on Form 10-Q not being filed timely, we are currently ineligible to file a new short-form registration statement on Form S-3 or access our existing registration statement on Form S-3 for sales of securities, including under our ATM program, until June 1, 2025, which may impair our ability to raise necessary capital to repay our debt obligations as they become due, pursue acquisition and development opportunities, and execute our business strategy. If we seek to access the capital markets through a registered offering during the period of time that we are unable to use a registration statement on Form S-3, we may experience delays in the offering process due to SEC review of a registration statement on Form S-11, experience downward pressure on our share price given that we will have to disclose the offering prior to formal commencement, and incur increased offering and transaction costs. If we are unable to raise capital through a registered offering, we would be required to conduct financing transactions on a private placement basis, subject to pricing, size and other limitations for equity raises under the NYSE rules, or seek other sources of capital, which are not guaranteed. The foregoing limitations on our financing approaches could have a material adverse effect on our results of operations, liquidity and financial position.