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)

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

For the fiscal year ended December 31, 2015

¨	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.

Medical Properties Trust, Inc. Yes x No ¨ MPT Operating Partnership, L.P. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Medical Properties Trust, Inc. Yes ¨ No x MPT Operating Partnership, L.P. Yes ¨ No x

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.

Medical Properties Trust, Inc. Yes x No ¨ MPT Operating Partnership, L.P. Yes x 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).

Medical Properties Trust, Inc. Yes x No ¨ MPT Operating Partnership, L.P. Yes x 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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to 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 (Check one):


Medical Properties Trust, Inc.	Large accelerated Filer x	Accelerated Filer ¨	Non-accelerated Filer ¨ (Do not check if a smaller reporting company)	Smaller Reporting Company	¨

MPT Operating Partnership, L.P.	Large accelerated Filer ¨	Accelerated Filer ¨	Non-accelerated Filer x (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 12b-2 of the Act).

Medical Properties Trust, Inc. Yes ¨ No x MPT Operating Partnership, L.P. Yes ¨ No x

As of June 30, 2015, the aggregate market value of the 209,088,398 shares of common stock, par value $0.001 per share (“Common Stock”), held by non-affiliates of the registrant was $2,741,148,898 based upon the last reported sale price of $13.11 on the New York Stock Exchange on that date. For purposes of the foregoing calculation only, all directors and executive officers of the registrant have been deemed affiliates.

As of February 26, 2016, 237,846,536 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 19, 2016 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	32
ITEM 2.	Properties	32
ITEM 3.	Legal Proceedings	34
ITEM 4.	Mine Safety Disclosures	34

PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	35
ITEM 6.	Selected Financial Data	37
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	59
ITEM 8.	Financial Statements and Supplementary Data	61
ITEM 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	110
ITEM 9A.	Controls and Procedures	110
ITEM 9B.	Other Information	111

PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	112
ITEM 11.	Executive Compensation	112
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	112
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	112
ITEM 14.	Principal Accountant Fees and Services	112

PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	113
SIGNATURES		121

Index to Financial Statements

EXPLANATORY NOTE

This report combines the Annual Reports on Form 10-K for the year ended December 31, 2015, 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.

CAUTIONARY LANGUAGE REGARDING FORWARD LOOKING STATEMENTS

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

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our business strategy;

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our projected operating results;

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our ability to acquire or develop additional facilities in the United States or Europe;

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availability of suitable facilities to acquire or develop;

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our ability to enter into, and the terms of, our prospective leases and loans;

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

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our ability to obtain future financing arrangements;

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

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our ability to service our debt and comply with all of our debt covenants;

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our ability to compete in the marketplace;

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lease rates and interest rates;

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market trends;

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projected capital expenditures; and

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the impact of technology on our facilities, operations and business.

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:

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

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

Index to Financial Statements

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the competitive environment in which we operate;

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the execution of our business plan;

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financing risks;

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acquisition and development risks;

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potential environmental contingencies and other liabilities;

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

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

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our ability to attract and retain qualified personnel;

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changes in foreign currency exchange rates;

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U.S. (both federal and state) and European (in particular Germany, the United Kingdom, Spain and Italy) healthcare and other regulatory requirements; and

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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:

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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;

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

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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 across the United States and selectively in foreign jurisdictions. We have operated as a REIT since April 6, 2004, and accordingly, elected REIT status upon the filing of our calendar year 2004 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

Index to Financial Statements

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.

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, 2015 and 2014, we had $5.6 billion and $3.7 billion, respectively, in total assets made up of the following:


(dollars in thousands)	2015				2014
Real estate owned (gross)(1)	$	3,875,536	69.1	%	$	2,589,128	69.6	%
Mortgage loans		757,581	13.5	%		397,594	10.7	%
Other loans		664,822	11.9	%		573,167	15.4	%
Construction in progress		49,165	0.9	%		23,163	0.6	%
Other assets(1)		262,247	4.6	%		137,278	3.7	%

Total	$	5,609,351	100.0	%	$	3,720,330	100.0	%

(1)	Includes $1.3 billion and $784.2 million of healthcare real estate assets in Europe in 2015 and 2014, respectively.

Revenue by property type:

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


	2015				2014				2013
General Acute Care Hospitals(1)(2)	$	254,727	57.6	%	$	186,399	59.6	%	$	144,291	59.5	%
Rehabilitation Hospitals(2)		134,198	30.4	%		71,564	22.9	%		43,441	17.9	%
Long-Term Acute Care Hospitals		52,651	11.9	%		53,908	17.2	%		53,130	21.9	%
Wellness Centers(3)		302	0.1	%		661	0.3	%		1,661	0.7	%

Total revenue	$	441,878	100.0	%	$	312,532	100.0	%	$	242,523	100.0	%

(1)	Includes three medical office buildings.

(2)	Includes $83.0 million and $26.0 million in revenue from the healthcare real estate assets in Europe in 2015 and 2014, respectively.

(3)	We sold our six wellness centers in August 2015.

See “Overview” in Item 7 of this Annual Report on Form 10-K for details of transaction activity for 2015, 2014 and 2013. More information is available on the Internet at www.medicalpropertiestrust.com.

Portfolio of Properties

As of February 26, 2016, our portfolio consisted of 205 properties: 180 facilities (of the 191 facilities that we own) are leased to 28 tenants, 11 are under development (including 10 development projects with Adeptus Health, Inc.), and the remaining assets are in the form of mortgage loans to four operators. Our facilities consist of 110 general acute care hospitals, 23 long-term acute care hospitals, 69 inpatient rehabilitation hospitals, and three medical office buildings.

At December 31, 2015, no single property accounted for more than 2% of our total assets.

Index to Financial Statements

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 returns as our net leases. In addition, we have obtained 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 and that focus on the most critical components of healthcare. We typically invest in facilities that have the highest intensity of care including:

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Acute care – provide inpatient care for the treatment of acute conditions and manifestations of chronic conditions. They also provide ambulatory care through hospital outpatient departments and emergency rooms. Typically, hospital stays average anywhere from three to five days.

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Long-term acute – specialty-care hospital designed for patients with serious medical problems that require intense, special treatment for an extended period of time, typically requiring a hospital stay averaging in excess of three weeks.

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Inpatient rehabilitation – provide rehabilitation to patients with various neurological, muscular, skeletal orthopedic and other medical conditions following stabilization of their acute medical issues.

Diversification

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 tenant relationship perspective, see section titled “Significant Tenants” below for detail. See sections titled “Revenue by Property Type” and “Portfolio of Properties” above for information on the diversification of our hospital types. From a geography perspective, we have investments across the United States. See below for investment concentration in the United States and our global concentration at December 31, 2015⁽¹⁾:

LOGO

(1)	Represents investment concentration as a percentage of gross real estate assets assuming all real estate commitments are fully funded.

Index to Financial Statements

We continue to believe that Europe represents an attractive market in which to invest. With two joint ventures that we formed in 2015 with affiliates of Axa Real Estate (as described more fully in Item 7 of Part II of this Form 10-K), we now have investments in Germany, the United Kingdom, Italy and Spain.

In regards to Germany (the largest market in Europe that we are invested), we believe it is an attractive investment opportunity for us given Germany’s strong macroeconomic position and healthcare environment. Germany’s GDP, which is approximately $3,868 billion according to World Bank 2014 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 4.5% as of December 2015, which is significantly less than the 9.0% unemployment rate in the European Union generally as of December 2015, according to Eurostat.

Underwriting/Asset Management

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 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:

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admission levels by service type;

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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;

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the ratio of our tenants’ operating earnings both to facility rent and to other fixed costs, including debt costs;

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trends in the source of our tenants’ revenue, including the relative mix of public payors (including Medicare, Medicaid/MediCal, and managed care in the U.S. as well as equivalent payors in Germany, Italy, Spain, and the United Kingdom) and private payors (including commercial insurance and private pay patients);

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trends in tenant cash collections, including comparison to recorded net patient service revenues;

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the effect of any legal, regulatory or compliance proceedings with our tenants;

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the effect of evolving healthcare legislation and other regulations (including changes in reimbursement) on our tenants’ profitability and liquidity;

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

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evaluation of medical staff doctors associated with the facility/facilities, including specialty, tenure and number of procedures performed;

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evaluation of the operator’s and facility’s administrative team, as applicable, including background and tenure within the healthcare industry;

Index to Financial Statements

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market position relative to competition;

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compliance, accreditation, quality performance and health outcomes as measured by The Centers for Medicare and Medicaid Services (“CMS”) and Joint Commission; and

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the level of investment in health IT systems.

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 2015 by the CMS: (i) national health expenditures are projected to grow 5.3% in 2016; (ii) the average compound annual growth rate for national health expenditures, over the projection period of 2016 through 2024, is anticipated to be 5.8%; and (iii) the healthcare industry is projected to represent 19.6% of U.S. GDP by 2024.

In regards to Germany, the healthcare industry is also the single largest industry. Behind only the U.S., Netherlands and France, Germany’s healthcare expenditures represent approximately 11.3% of its total GDP according to the Organization for Economic Co-operation and Development’s 2011 data.

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:

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compelling demographics driving the demand for healthcare services;

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specialized nature of healthcare real estate investing; and

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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 to indemnify us for any past or future environmental liabilities. Our current leases and loans have a weighted-average remaining initial lease term of 14.8 years (see Item 2 for more information on remaining lease terms). Based on current monthly revenue, approximately 96% of our 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 0.5% to 5%. In some cases, our domestic leases and loans provide for escalations based on CPI subject to floors

Index to Financial Statements

and/or ceilings. In certain limited cases, we may have arrangements that provide for additional rents based on the level of a tenant’s revenue.

RIDEA Investments

We have and will make equity investments, loans (with equity like returns) and obtain profit interests in certain of our tenants. Some of 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. At December 31, 2015, our RIDEA investments totaled approximately $600 million.

Significant Tenants

On December 31, 2015, we had total assets of approximately $5.6 billion comprised of 202 healthcare properties in 29 states, in Germany, Italy, Spain and in the United Kingdom. The properties are leased to or mortgaged by 28 different hospital operating companies.

Affiliates of Prime Healthcare Services, Inc. (“Prime”) lease 17 facilities pursuant to master lease agreements. The master leases are for 10 years 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 none of the leased and mortgaged properties relative to each master lease. The master leases include repurchase options, including provisions establishing minimum repurchase prices equal to our total investment. At December 31, 2015, these facilities had an average remaining lease term of 7.2 years. In addition to leases, we hold mortgage loans on seven facilities owned by affiliates of Prime. The terms and provisions of these loans are generally equivalent to the terms and provisions of our Prime lease arrangements. Prime represented 18.4% of our total assets at December 31, 2015 and 20.0% at December 31, 2014.

Affiliates of Ernest Health, Inc. (“Ernest”) lease 22 facilities pursuant to a master lease agreement and other lease agreements, which includes one under development. The original master lease agreement entered into in 2012 has a 20-year term with three five-year extension options and provides for consumer price-indexed increases, limited to a 2% floor and 5% ceiling annually. At December 31, 2015, these facilities had an average remaining lease term of 16.5 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. Ernest represented 10.2% of our total assets at December 31, 2015 and 13.0% at December 31, 2014.

In December 2015, MEDIAN Kliniken S.à r.l., (lessee of 31 of our German facilities) merged with RHM Klinik-und Altenheimbetriebe GmbH & Co. KG. (“RHM”)(lessee of 15 of our German facilities) to form MEDIAN. MEDIAN leases 46 facilities pursuant to two master lease agreements. Each master lease agreement has a 27-year fixed term. The annual escalator for one master lease that represents approximately 15 facilities of the MEDIAN portfolio provides for fixed increases of 2% for 2016 and 2017 and additional fixed increases of 0.5% each year thereafter. In addition, at December 31, 2020 and every three years thereafter, rent will be increased to reflect 70% of cumulative increases in German CPI. The annual escalator for the other master lease that represents the remaining facilities of the MEDIAN portfolio provides for increases of the greater of 1% or 70% of the change in German CPI. MEDIAN represented 17.4% of our total assets at December 31, 2015 and 19.0% at December 31, 2014.

Index to Financial Statements

Affiliates of Capella Healthcare, Inc. (“Capella”) lease five facilities (four of which are leased pursuant to a master lease agreement). The real estate leases have 15-year terms with four 5-year extension options, plus consumer price-indexed increases, limited to a 2% floor and a 4% ceiling annually. At December 31, 2015, these facilities had an average remaining lease term of 14.7 years. In addition to the master lease, we hold a mortgage loan on two facilities that will mature in 2030. The terms and provisions of these loans are generally equivalent to the terms and provisions of the master lease agreement. We have closed on seven Capella properties and expect to close on an eighth during 2016. Capella represented 18.1% of our total assets at December 31, 2015.

No other tenant accounted for more than 6.2% of our total assets at December 31, 2015.

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 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”) established a seismic safety building standards program under the Office of Statewide Health Planning and Development (“OSHPD”) jurisdiction for hospitals built on or after March 7, 1973. It required the California Building Standards Commission to 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:

hospitals in California must conduct seismic evaluations and submit these evaluations to the OSHPD, Facilities Development Division for its review and approval;

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

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.

Index to Financial Statements

Since the Alquist Act, subsequent legislation has modified requirements of seismic safety standards and deadlines for compliance. Originally, hospital buildings considered hazardous and at risk of collapse in the event of an earthquake must have been retrofitted, replaced or removed from providing acute care services by January 1, 2008; however, provisions were made to allow this deadline to be extended to January 1, 2013.

Senate Bill 499 was signed into law that provided for a number of seismic relief measures, including criteria for reclassifying buildings into a lower seismic risk category. These buildings would have until January 1, 2030 to comply with structural seismic safety standards. Buildings denied reclassification must have met seismic compliance standards by January 1, 2013, unless further extensions were granted.

California’s AB 306 legislation permitted OSHPD to grant extensions 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, California SB 90 allows a hospital to seek an extension for seismic compliance 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 closed; and

financial hardship.

As of December 31, 2015, we have 13 facilities in California totaling investments of $547.1 million. Exclusive of approved SB 90 extensions at four facilities, all of our California buildings 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. Under our current agreements, our tenants are responsible for capital expenditures in connection with seismic laws. Further, we do not expect California seismic standards to have a negative impact on our financial condition or cash flows. We also do not expect compliance with California seismic standards to materially impact the financial condition of our tenants.

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 that may adversely affect our ability to compete are the following:

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we may have less knowledge than our competitors of certain markets in which we seek to invest in or develop facilities;

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

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

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

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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.

Index to Financial Statements

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 at least annually based 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, 2015, 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 federal healthcare laws and regulations that may affect our operations and those of our tenants. The discussion, however, does not address all applicable federal healthcare laws, and does not address state healthcare laws and regulations, except as otherwise indicated. These state laws and regulations, like the federal healthcare laws and regulations, could affect the operations of our tenants 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 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 federal, state, and local government healthcare laws, rules, 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 items and 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 in this section) 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, rules, and regulations, including healthcare laws, rules, 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 monetary 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

Index to Financial Statements

Statute. Nonetheless, the fact that a particular arrangement does not meet safe harbor requirements does not also 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, 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 certain 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 participation in federal healthcare programs. The statute also provides for a penalty of up to $100,000 for a circumvention scheme.

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, the Stark Law imposes strict liability on the parties to an arrangement and an arrangement must comply with every requirement of a Stark Law exception or the arrangement is in violation of the Stark Law.

The 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 federal government alleging that the defendant has defrauded the federal government. Whistleblowers may collect a portion of the federal government’s recovery — an incentive which increases the frequency of such actions. A successful federal False Claims Act case may result in a penalty of three times the 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.

Index to Financial Statements

Licensure. Our tenants 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, and suspension or decertification from federal and state healthcare programs.

EMTALA. Our tenants that provide emergency care are subject to the Emergency Medical Treatment and Active Labor Act (“EMTALA”). This federal law requires such healthcare 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 federal healthcare programs. 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.

Reimbursement Pressures. Healthcare facility operating margins continue to face significant pressure due to the deterioration in pricing flexibility and payor mix, increases in operating expenses that exceed increases in payments under the Medicare program, and reductions in levels of Medicaid funding due to state budget shortfalls.

Further, long-term acute care hospitals (“LTACHs”), which account for a significant percentage of our tenants, are continuing to face reimbursement pressures including resulting from the passage of the SGR Reform Act of 2013 (the “SGR Act”) in December 2013. The SGR Act impacted the provision of, and payment for, services provided by LTACHs to Medicare beneficiaries and imposed 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 are reimbursed at the rate otherwise paid under the IPPS unless the patient has met certain qualifications. Payment at the IPPS rate results in reduced reimbursement. The SGR Act also delayed full implementation of the so-called “25% rule” through fiscal year 2017 and reinstated the moratorium on establishing or increasing LTACH beds through September 30, 2017.

We cannot predict how and to what extent these or other initiatives will impact the business of our tenants, or whether our business will be adversely impacted.

Healthcare Reform. Though we have not provided a detailed discussion of the Patient Protection and Affordable Care Act ( the “Reform Law”), generally, the Reform Law provides expanded health insurance coverage through tax subsidies and federal health insurance programs, individual and employer mandates for health insurance coverage, and health insurance exchanges. The Reform Law also includes various cost containment initiatives, including quality control and payment system refinements for federal programs, such as 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. The Reform Law also increases health information technology standards for healthcare providers in an effort to improve quality and reduce costs. The Reform Law has led, and will continue to lead, to significant changes in the healthcare system. We cannot predict the continued impact of the Reform Law on our business, as some aspects benefit the operations of our tenants, while other aspects present challenges.

Index to Financial Statements

Employees

We have 50 employees as of February 26, 2016. As we continue to grow, we would expect our head count to increase as well. However, we do not believe that any adjustments to the number of employees will have a material effect on our operations or to general and administrative expenses as a percent of revenues. We believe that our relations with our employees are good. None of our employees are members of any union.

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. Information on or connected to our website is neither part of nor incorporated by reference into this Annual Report or any other SEC filings.

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. Some statements in this report including statements in the following risk factors constitute forward-looking statements. Please refer to the section entitled “Cautionary Language Regarding Forward Looking Statements” at the beginning of this Annual Report.

RISKS RELATED TO OUR BUSINESS AND GROWTH STRATEGY (Including Financing Risks)

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.

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 February 26, 2016, we had $3.4 billion of debt outstanding.

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

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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;

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

Index to Financial Statements

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

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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;

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

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

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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 $1.4 billion in variable interest rate debt (excluding any debt we have fixed with interest rate swaps) that we had outstanding as of December 31, 2015. If interest rates increase significantly, our operating results would decline along with the cash available for distributions to our stockholders.

In addition, 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 only have $125 million in debt maturities in 2016, 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 (“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 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 quarter ending December 31, 2015, the dividend restriction was 95% of normalized adjusted FFO. The indentures governing our 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 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.

From time-to-time, the lenders of our Credit Facility may adjust certain covenants to give us more flexibility to complete a transaction; however, such modified covenants are temporary, and we must be in a position to meet the lowered reset covenants in the future. See “Short-term Liquidity Requirements” section for a discussion of the resetting of our total leverage and unsecured leverage ratio in 2016.

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 and other debt instruments due to cross-default provisions, 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.

Index to Financial Statements

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 February 26, 2016, we had approximately $900 million in variable interest rate debt, which constitutes 27% 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 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 are then required to find another tenant-operator, such as the case was with our Monroe facility in 2014. The transfer of most types of healthcare facilities is highly regulated, which may result in delays and increased costs in locating a suitable replacement tenant. The sale or lease of these properties to entities other than healthcare operators may be difficult due to the added cost and time of refitting the properties. If we are unable to re-let the properties to healthcare operators, we may be forced to sell the properties at a loss due to the repositioning expenses likely to be incurred by non-healthcare purchasers. Alternatively, we may be required to spend substantial amounts to adapt the facility to other uses. There can be no assurance that we would be able to find another tenant in a timely fashion, or at all, or that, if another tenant were found, we would be able to enter into a new lease on favorable terms. Defaults by our tenants under our leases may adversely affect 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, Ernest, MEDIAN, and Capella) will have an even greater effect.

Index to Financial Statements

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, such was the case with our two South Carolina facilities – Bennettsville and Cheraw in 2015. 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, MEDIAN, Ernest, and Capella) because several properties 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 net leasing structure.

At December 31, 2015, we have 14 investments in the operations of certain of our healthcare facilities by utilizing RIDEA (or similar investments). These 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 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 limited experience with healthcare facilities in Germany, Italy, Spain, United Kingdom or anywhere else outside the United States.

We have limited 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, Italy, Spain and the United Kingdom, 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 MEDIAN 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 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 local real estate values or markets or the European economy as a whole, which may adversely affect our European investments.

In addition, the rents payable under our leases of foreign assets are payable in either euros or British pounds, 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

Index to Financial Statements

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.

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

As of December 31, 2015, our real estate portfolio included 202 healthcare properties in 29 states and in Germany, Italy, Spain and the United Kingdom of which 179 facilities were leased to 28 hospital operating companies and 14 of the investments were in the form of mortgage loans. Affiliates of Prime leased or mortgaged 24 facilities, representing 18% of our total assets as of December 31, 2015. Total revenues from Prime were $104 million, or 24% of our total revenue for the year ended December 31, 2015. Affiliates of Ernest leased or mortgaged 26 facilities (including one under development), representing 10% of our total assets as of December 31, 2015. Total revenues from Ernest were $62 million, or 14% of our total revenue for the year ended December 31, 2015. Affiliates of Capella leased or mortgaged 7 facilities, representing 18% of our total assets as of December 31, 2015. Total revenues from Capella were $29 million, or 6% of our total revenue for the year ended December 31, 2015. Finally, MEDIAN leased 46 facilities and represented 17% of total assets as of December 31, 2015. Total revenues from the combined MEDIAN-RHM were $79 million, or 18% of our total revenue for the year ended December 31, 2015.

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. 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.

We have now, and may have in the future, exposure to contingent rent escalators, which could hinder our growth and profitability.

We receive a significant portion of our revenues by leasing assets under long-term net leases that generally provide for fixed rental rates subject to annual escalations. These annual escalations may be contingent on changes in CPI, typically with specified caps and floors. Certain of our other leases may provide for additional rents contingent upon a percentage of the tenant’s revenues in excess of specified threshold. If, as a result of weak economic conditions or other factors, the CPI does not increase or the properties subject to these leases do not generate sufficient revenue to achieve the specified threshold, our growth and profitability may be hindered by these leases. In addition, if strong economic conditions result in significant increases in CPI, but the escalations under our leases are capped, our growth and profitability may be limited.

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

Index to Financial Statements

balances under our leases and loans, and could ultimately preclude collection of these sums. If a lease is assumed by a tenant in bankruptcy, we expect that all pre-bankruptcy balances due under the lease would be paid to us in full. However, if a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any secured claims we have against our tenants may only be paid to the extent of the value of the collateral, which may not cover any or all of our losses. Any unsecured claim (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.

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:

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private investors, including large private equity funds;

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healthcare providers, including physicians;

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other REITs;

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real estate developers;

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

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financial institutions; and

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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, or facilities we may acquire or develop in the future will face competition from other nearby facilities that provide services comparable to those offered at our facilities. 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 generally available to our facilities. In addition, competing healthcare facilities located in the areas served by our facilities 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 may 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 113 leased properties that are subject to purchase options as of December 31, 2015. For 91 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 13 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 nine leases, the purchase options approximate fair value. At December 31, 2015, 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 page 11 of this 2015 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 located in Europe 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. This influence could have a material adverse effect on us by impairing our relationship with the tenant or operator, negatively affecting our interest, or impacting the tenant’s or operator’s financial and operational performance, including their ability to pay us rent or interest. 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

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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:

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actual or anticipated variations in our quarterly operating results or distributions;

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changes in our funds from operations or earnings estimates or publication of research reports about us or the real estate industry;

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increases in market interest rates that lead purchasers of our shares of common stock to demand a higher yield;

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changes in market valuations of similar companies;

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adverse market reaction to any increased indebtedness we incur in the future;

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additions or departures of key management personnel;

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actions by institutional stockholders;

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local conditions such as an oversupply of, or a reduction in demand for, rehabilitation hospitals, long-term acute care hospitals, ambulatory surgery centers, medical office buildings, specialty hospitals, skilled nursing facilities, regional and community hospitals, women’s and children’s hospitals and other single-discipline facilities;

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speculation in the press or investment community; and

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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 future capital through a sale of additional equity securities.

Downgrades in our credit ratings could have a material adverse effect on our cost and availability of capital.

As of February 26, 2016, our corporate credit rating from Standard and Poor’s Ratings Service was BB+, and our corporate family rating from Moody’s Investors Service was Ba1. There can be no assurance that we will be able to maintain our current credit ratings. Any downgrades in terms of ratings or outlook by any or all of the rating agencies could have a material adverse effect on our cost and availability of capital, which could in turn have a material adverse effect on our financial condition and results of operations.

Index to Financial Statements

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 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; changes in foreign political, regulatory, and economic conditions; challenges in managing international operations (including the use of third-parties in providing accounting, legal, and other administrative functions); 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 equity 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 acquire, develop, and make mortgage investments in healthcare real estate. In addition, we selectively make RIDEA 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 equity 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.

Index to Financial Statements

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 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 nine 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:

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we may have to compete for suitable development sites;

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our ability to complete construction is dependent on there being no title, environmental or other legal proceedings arising during construction;

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we may be subject to delays due to weather conditions, strikes and other contingencies beyond our control;

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we may be unable to obtain, or suffer delays in obtaining, necessary zoning, land-use, building, occupancy healthcare regulatory and other required governmental permits and authorizations, which could result in increased costs, delays in construction, or our abandonment of these projects;

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we may incur construction costs for a facility which exceed our original estimates due to increased costs for materials or labor or other costs that we did not anticipate; and

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we may not be able to obtain financing on favorable terms, which may render us unable to proceed with our development activities.

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.

Index to Financial Statements

We may be subject to risks arising from future acquisitions of real estate.

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

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we may have no previous business experience with the tenants at the facilities acquired, and we may face difficulties in managing them;

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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;

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

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

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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. 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

Index to Financial Statements

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 adequate and customary for similarly situated companies in our industry. However, we cannot provide any assurances 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.

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 equity 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 an equity investment in the tenant, our return on investment maybe negatively affected.

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 (or similar studies) 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.

Index to Financial Statements

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.

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 24 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 an equity 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.

Index to Financial Statements

CMS’s increased attention on reimbursement for LTACHs and inpatient rehabilitation facilities (“IRFs”), and increased regulatory restrictions on LTACH and IRF reimbursement, has reduced reimbursement for some tenants that operate LTACHs and IRFs. CMS may continue to explore implementing other restrictions on LTACH and IRF reimbursement and possibly develop more restrictive facility and patient level criteria for these 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 10-13) 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 material 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 an equity 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 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 and receive payment under such 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. The failure to comply with these standards could jeopardize a healthcare organization’s Medicare certification and, in turn, its right to receive payment under the Medicare and Medicaid programs.

Further, many hospitals and other institutional providers are accredited by accrediting agencies such as the Joint Commission, a national healthcare 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 including under the Medicare and Medicaid programs. 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.

Finally, healthcare 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

Index to Financial Statements

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 has also disclosed an ongoing investigation by the United States Department of Justice into billing practices and patient confidentiality statutes.

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/or 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 an equity 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 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/or to pay principal and interest on their loans from us. In instances where we have an equity 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 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 continue to increase 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 an equity 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 liability for 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 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 an equity investment in our

Index to Financial Statements

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 an equity 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 have a material adverse effect on 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 the transfer of a healthcare facility or 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, are subject to change, and may delay acquisitions of facilities. We cannot predict the impact of state certificate of need laws on our acquisition or 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.

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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 umbrella partnership real estate investment trust, “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.

We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.

We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, and maintaining personal identifying information and tenant and lease data. We purchase or license some of our information technology from vendors, on whom our systems depend. We rely on

Index to Financial Statements

commercially available systems, software, tools and monitoring to provide security for the processing, transmission and storage of confidential tenant data. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not prevent the systems’ improper functioning or the improper access or disclosure of our or our tenant’s information such as in the event of cyber-attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. The risk of security breaches has generally increased as the number, intensity and sophistication of attacks have increased. In some cases, it may be difficult to anticipate or immediately detect such incidents and the damage they cause. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a materially adverse effect on our business, financial condition and results of operations.

Changes in accounting pronouncements could adversely affect our operating results, in addition to the reported financial performance of our tenants.

Uncertainties posed by various initiatives of accounting standard-setting by the Financial Accounting Standards Board and the Securities and Exchange Commission, which create and interpret applicable accounting standards for U.S. companies, may change the financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of our financial statements. Proposed changes include, but are not limited to, changes in lease accounting and the adoption of accounting standards likely to require the increased use of “fair-value” measures.

These changes could have a material impact on our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in potentially material restatements of prior period financial statements. Similarly, these changes could have a material impact on our tenants’ reported financial condition or results of operations or could affect our tenants’ preferences regarding leasing real estate.

TAX RISKS ASSOCIATED WITH OUR STATUS AS A REIT

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

We believe that we qualify as a REIT for federal income tax purposes and have elected to be taxed as a REIT under the federal income tax laws commencing with our taxable year that began on April 6, 2004, and ended on December 31, 2004. The REIT qualification requirements are extremely complex, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Accordingly, there is no assurance that we will be successful in operating so as to qualify as a REIT. At any time, new laws, regulations, interpretations or court decisions may change the federal tax laws relating to, or the federal income tax consequences of, qualification as a REIT. It is possible that future economic, market, legal, tax or other considerations may cause our board of directors to revoke the REIT election, which it may do without stockholder approval.

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

•

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

•

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

•

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

Index to Financial Statements

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. Currently, 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 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.

In addition to current requirements, tax laws are always evolving. Changes to the tax laws, such as the Protecting Americans From Tax Hikes Act of 2015 (“PATH Act”) enacted on December 18, 2015, or interpretations thereof by the IRS, could materially and adversely impact us and our stockholders. The PATH Act included several law changes impacting REITs that have various effective dates. One of the more notable changes reduces the value of our assets that may consist of securities of one or more taxable REIT subsidiaries from 25% to 20% for taxable years beginning after December 31, 2017. Compliance with current and future changes to REIT requirements may limit our flexibility in executing our business plan.

If certain sale-leaseback transactions are not characterized by the Internal Revenue Service (“IRS”) 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

Index to Financial Statements

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 IRS 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 a market terms 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 affect 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 Healthcare, LLC (“Vibra”) facilities, one of our taxable REIT subsidiaries made a loan to Vibra to acquire the operations at those Vibra facilities. The acquisition loan bore interest at an annual rate of 10.25%. Our operating partnership loaned the funds to the taxable REIT subsidiary to make this loan. The loan from our operating partnership to the taxable REIT subsidiary bore 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 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.

ITEM 2.

Properties

At December 31, 2015, our portfolio consisted of 202 properties: 179 facilities (of the 188 facilities that we owned) were in operation and leased to 28 operators, 14 assets were in the form of first mortgage loans to four operators, and nine properties that were under construction. Our owned facilities consisted of 97 general acute care hospitals, 22 long-term acute care hospitals, 66 inpatient rehabilitation hospitals, and three medical office buildings. The 14 non-owned facilities were in the form of first mortgage loans to four operators. These non-owned properties consisted of 10 general acute care facilities, one long-term acute care hospital, and three inpatient rehabilitation hospitals to four operators.

Index to Financial Statements


	Total Properties		Total 2015 Revenue		Percentage of Total Revenue			Total Investment
	(Dollars in thousands)
*United States:*
Alabama		2	$	509		0.1	%	$	8,614
Arizona		9		21,188		4.8	%		220,447	(C)
Arkansas		2		9,311		2.1	%		278,646
California		13		66,120		15.0	%		547,085
Colorado		12		10,188		2.3	%		87,741	(C)
Connecticut		—		173		0.0	%		1,500	(D)
Florida		1		2,250		0.5	%		25,810
Idaho		4		12,461		2.8	%		102,196
Indiana		2		4,829		1.1	%		52,003
Kansas		3		11,050		2.5	%		97,372
Louisiana		4		12,351		2.8	%		131,326
Massachusetts		—		69		0.0	%		—	(D)
Michigan		2		2,274		0.5	%		40,743
Missouri		4		17,745		4.0	%		210,921
Montana		1		2,544		0.6	%		21,374
Nevada		1		9,826		2.2	%		83,598
New Jersey		7		27,688		6.3	%		338,847
New Mexico		2		5,911		1.3	%		53,081
Ohio		1		—		0.0	%		13,693	(C)
Oklahoma		2		9,354		2.1	%		277,742
Oregon		2		9,497		2.2	%		203,595
Pennsylvania		1		4,638		1.1	%		39,766
Rhode Island		—		60		0.0	%		—	(D)
South Carolina		6		12,321		2.8	%		213,509
Texas		58		87,541		19.8	%		917,314	(A)(C)
Utah		3		9,759		2.2	%		104,805
Virginia		1		1,072		0.2	%		10,915
Washington		—		—		0.0	%		163,191	(E)
West Virginia		1		2,563		0.6	%		21,109
Wisconsin		1		2,861		0.7	%		29,048
Wyoming		1		2,708		0.6	%		22,753

Total United States		146	$	358,861		81.2	%	$	4,318,744
*International:*
United Kingdom		1	$	4,365		1.0	%	$	41,629
Germany		46		78,541		17.8	%		978,530
Italy		8		—		0.0	%		97,364	(F)
Spain		1		111		0.0	%		13,668

Total international		56	$	83,017		18.8	%	$	1,131,191

Total		202	$	441,878		100.0	%	$	5,449,935	(B)

(A)	Includes our Twelve Oaks facility that is 55% occupied. Our total gross investment in the facility is $62.5 million.

(B)	Excludes domestic equity interests and accumulated depreciation and amortization. Includes other loans of $664.8 million.

(C)	Includes development projects still under construction at December 31, 2015.

(D)	Includes revenue related to properties that were disposed during 2015, including an existing loan related to the disposed property. We do not own any property in this state as of December 31, 2015.

(E)	Includes acquisition loan for Capella facility that has not converted to real estate at December 31, 2015.

(F)	Includes $97 million equity investment in eight facilities that is included in other assets on the balance sheet at December 31, 2015.

Index to Financial Statements


Type of Property *(includes properties subject to leases and loans)*	Number of Properties		Number of Square Feet		Number of Licensed Beds(C)
General Acute Care Hospitals(A)		107		15,080,765		9,557
Long-Term Acute Care Hospitals		23		1,209,361		1,304
Rehabilitation Hospitals(B)		69		7,716,590		10,439
Medical Office Buildings		3		96,106		—

		202		24,102,822		21,300

(A)

One of our general acute care hospitals, currently under development, with 387,500 square feet and 183 beds, is located in Spain. One of our general acute care hospitals, with 69,965 square feet and 28 beds, is located in the United Kingdom. Eight of our general acute care hospitals, with 822,000 square feet and 807 beds, are located in Italy. One of our general acute care hospitals, with 135,216 square feet and 160 beds, is located in Germany.

(B)	45 of our rehabilitation facilities, with 6.5 million square feet and 9,361 beds, are located in Germany.

(C)	Excludes our nine facilities that are under development.

The following table shows lease and mortgage loan expirations, for the next 10 years and thereafter (excludes properties under development), assuming that none of the tenants/borrowers exercise any of their renewal options (dollars in thousands):


Total Lease and Mortgage Loan Portfolio(2)	Total Leases/Mortgage Loans		Base Rent/ Interest(1)		% of Total Base Rent/Interest			Total Square Footage		Total Licensed Beds
2016		1	$	2,250		0.5	%		95,445		126
2017		—		—		0.0	%		—		—
2018		1		1,989		0.5	%		66,459		62
2019		2		4,994		1.2	%		307,706		136
2020		5		9,185		2.1	%		1,200,306		590
2021		2		10,609		2.5	%		327,234		212
2022		15		72,123		16.9	%		3,543,907		2,591
2023		4		12,380		2.9	%		912,652		851
2024		2		4,768		1.1	%		235,627		264
2025		8		20,375		4.8	%		1,337,203		969
Thereafter		144		287,843		67.5	%		14,762,129		14,086

Total		184	$	426,516		100.0	%		22,788,668		19,887

(1)	The most recent monthly base rent and mortgage loan interest annualized. This does not include tenant recoveries, additional rents and other lease/loan-related adjustments to revenue (i.e., straight-line rents and deferred revenues).

(2)	Excludes our nine 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 per share declared by us with respect to each such period.


	High		Low		Dividends
Year ended December 31, 2015
First Quarter	$	15.62	$	13.81	$	0.22
Second Quarter		15.42		13.04		0.22
Third Quarter		13.98		10.79		0.22
Fourth Quarter		12.21		10.59		0.22
Year ended December 31, 2014
First Quarter	$	13.66	$	12.09	$	0.21
Second Quarter		13.97		12.65		0.21
Third Quarter		14.14		12.18		0.21
Fourth Quarter		14.22		12.23		0.21

On February 26, 2016, the closing price for our common stock, as reported on the New York Stock Exchange, was $11.57 per share. As of February 26, 2016, there were 68 holders of record of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee name.

To qualify as a REIT, we must distribute at least 90% of our REIT taxable income, excluding net capital gain, as dividends to our stockholders. 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 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, 2010 through December 31, 2015, 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.

LOGO


	*Period Ending*
*Index*	12/31/10		12/31/11		12/31/12		12/31/13		12/31/14		12/31/15
Medical Properties Trust, Inc.		100.00		98.32		128.99		139.81		167.97		150.70
Russell 2000		100.00		95.82		111.49		154.78		162.35		155.18
NAREIT All Equity REIT Index		100.00		108.28		129.62		133.32		170.68		175.51
SNL US REIT Healthcare		100.00		114.49		137.46		128.83		171.57		159.09

The graph and accompanying text shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended.

Index to Financial Statements

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.

Medical Properties Trust, Inc.

The consolidated balance sheet and operating data have been derived from our audited consolidated financial statements. As of December 31, 2015, 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.


	2015(1)			2014(1)			2013(1)			2012(1)			2011(1)
	(In thousands except per share data)
OPERATING DATA
Total revenue	$	441,878		$	312,532		$	242,523		$	198,125		$	132,322
Real estate depreciation and amortization (expense)		(69,867	)		(53,938	)		(36,978	)		(32,815	)		(30,147	)
Property-related and general and administrative (expenses)		(47,431	)		(39,125	)		(32,513	)		(30,039	)		(27,815	)
Acquisition expenses(2)		(61,342	)		(26,389	)		(19,494	)		(5,420	)		(4,184	)
Impairment (charge)		—			(50,128	)		—			—			—
Interest and other income		3,444			8,040			3,235			1,281			96
Debt refinancing/unutilized financing (expense)		(4,368	)		(1,698	)		—			—			(14,214	)
Interest (expense)		(120,884	)		(98,156	)		(66,746	)		(58,243	)		(43,810	)
Income tax (expense)		(1,503	)		(340	)		(726	)		(19	)		(128	)

Income from continuing operations		139,927			50,798			89,301			72,870			12,120
Income (loss) from discontinued operations		—			(2	)		7,914			17,207			14,594

Net income		139,927			50,796			97,215			90,077			26,714
Net income attributable to non-controlling interests		(329	)		(274	)		(224	)		(177	)		(178	)

Net income attributable to MPT common stockholders	$	139,598		$	50,522		$	96,991		$	89,900		$	26,536

Income from continuing operations attributable to MPT common stockholders per diluted share	$	0.63		$	0.29		$	0.58		$	0.54		$	0.10
Income from discontinued operations attributable to MPT common stockholders per diluted share		—			—			0.05			0.13			0.13

Net income attributable to MPT common stockholders per diluted share	$	0.63		$	0.29		$	0.63		$	0.67		$	0.23

Weighted average number of common shares — diluted		218,304			170,540			152,598			132,333			110,629
OTHER DATA
Dividends declared per common share	$	0.88		$	0.84		$	0.81		$	0.80		$	0.80

Index to Financial Statements


	December 31,
	2015(1)			2014(1)			2013(1)			2012(1)			2011(1)
	(In thousands)
BALANCE SHEET DATA
Real estate assets — at cost	$	3,924,701		$	2,612,291		$	2,296,479		$	1,591,189		$	1,261,644
Real estate accumulated depreciation/amortization		(257,928	)		(202,627	)		(159,776	)		(122,796	)		(89,982	)
Mortgage and other loans		1,422,403			970,761			549,746			527,893			239,839
Cash and equivalents		195,541			144,541			45,979			37,311			102,726
Other assets		324,634			195,364			147,915			128,393			94,462

Total assets	$	5,609,351		$	3,720,330		$	2,880,343		$	2,161,990		$	1,608,689

Debt, net	$	3,322,541		$	2,174,648		$	1,397,329		$	1,008,264		$	676,664
Other liabilities		179,545			163,635			138,806			103,912			103,210
Total Medical Properties Trust, Inc. Stockholders’ Equity		2,102,268			1,382,047			1,344,208			1,049,814			828,815
Non-controlling interests		4,997			—			—			—			—

Total equity		2,107,265			1,382,047			1,344,208			1,049,814			828,815

Total liabilities and equity	$	5,609,351		$	3,720,330		$	2,880,343		$	2,161,990		$	1,608,689

(1)

Cash paid for acquisitions and other related investments totaled $1.8 billion, $767.7 million, $654.9 million, $621.5 million, and $279.0 million in 2015, 2014, 2013, 2012, and 2011, 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.

(2)	Includes $37.0 million, $5.8 million and $12.0 million in transfer taxes in 2015, 2014 and 2013, respectively, related to our property acquisitions in foreign jurisdictions.

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.


	2015(3)			2014(3)			2013(3)			2012(3)			2011(3)
	(In thousands except per unit data)
OPERATING DATA
Total revenue	$	441,878		$	312,532		$	242,523		$	198,125		$	132,322
Real estate depreciation and amortization (expense)		(69,867	)		(53,938	)		(36,978	)		(32,815	)		(30,147	)
Property-related and general and administrative (expenses)		(47,431	)		(39,125	)		(32,513	)		(30,039	)		(27,798	)
Acquisition expenses(4)		(61,342	)		(26,389	)		(19,494	)		(5,420	)		(4,184	)
Impairment (charge)		—			(50,128	)		—			—			—
Interest and other income		3,444			8,040			3,235			1,281			96
Debt refinancing/unutilized financing (expense)		(4,368	)		(1,698	)		—			—			(14,214	)
Interest (expense)		(120,884	)		(98,156	)		(66,746	)		(58,243	)		(43,810	)
Income tax (expense)		(1,503	)		(340	)		(726	)		(19	)		(128	)

Income from continuing operations		139,927			50,798			89,301			72,870			12,137
Income (loss) from discontinued operations		—			(2	)		7,914			17,207			14,594

Net income		139,927			50,796			97,215			90,077			26,731
Net income attributable to non-controlling interests		(329	)		(274	)		(224	)		(177	)		(178	)

Net income attributable to MPT Operating Partnership, L.P. partners	$	139,598		$	50,522		$	96,991		$	89,900		$	26,553

Income from continuing operations attributable to MPT Operating Partnership, L.P. partners per diluted unit	$	0.63		$	0.29		$	0.58		$	0.54		$	0.10
Income from discontinued operations attributable to MPT Operating Partnership, L.P. partners per diluted unit		—			—			0.05			0.13			0.13

Net income, attributable to MPT Operating Partnership, L.P. partners per diluted unit	$	0.63		$	0.29		$	0.63		$	0.67		$	0.23

Weighted average number of units — diluted		218,304			170,540			152,598			132,333			110,629
OTHER DATA
Dividends declared per unit	$	0.88		$	0.84		$	0.81		$	0.80		$	0.80

Index to Financial Statements


	December 31,
	2015(3)			2014(3)			2013(3)			2012(3)			2011(3)
	(In thousands)
BALANCE SHEET DATA
Real estate assets — at cost	$	3,924,701		$	2,612,291		$	2,296,479		$	1,591,189		$	1,261,644
Real estate accumulated depreciation/amortization		(257,928	)		(202,627	)		(159,776	)		(122,796	)		(89,982	)
Other loans and investments		1,422,403			970,761			549,746			527,893			239,839
Cash and equivalents		195,541			144,541			45,979			37,311			102,726
Other assets		324,634			195,364			147,915			128,393			94,462

Total assets	$	5,609,351		$	3,720,330		$	2,880,343		$	2,161,990		$	1,608,689

Debt, net	$	3,322,541		$	2,174,648		$	1,397,329		$	1,008,264		$	676,664
Other liabilities		179,154			163,245			138,416			103,522			102,820
Total MPT Operating Partnership, L.P. capital		2,102,659			1,382,437			1,344,598			1,050,204			829,205
Non-controlling interests		4,997			—			—			—			—

Total capital		2,107,656			1,382,437			1,344,598			1,050,204			829,205

Total liabilities and capital	$	5,609,351		$	3,720,330		$	2,880,343		$	2,161,990		$	1,608,689

(3)

Cash paid for acquisitions and other related investments totaled $1.8 billion, $767.7 million, $654.9 million, $621.5 million, and $279.0 million in 2015, 2014, 2013, 2012, and 2011, 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 units, 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, partners’ capital and discontinued operations, respectively.

(4)	Includes $37.0 million, $5.8 million and $12.0 million in transfer taxes in 2015, 2014 and 2013, respectively, related to our property acquisitions in foreign jurisdictions.

Index to Financial Statements

ITEM 7.

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

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. We 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’s minimum escalators range from 0.5% to 5%, 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 may require our tenants to pay percentage rents, which are based on the tenant’s revenues from their operations. Finally, we may acquire a profits or other equity interest in our tenants 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, 2015, our portfolio consisted of 202 properties leased or loaned to 28 operators, of which nine are under development and 14 are in the form of mortgage loans.

2015 Highlights

In 2015, we invested or committed to invest approximately $1.8 billion in healthcare real estate assets. These significant investments greatly strengthened our portfolio through geographic, tenant and property type diversification. We expanded total assets by 51%, increased revenues by 41%, and lowered our general and administrative expense as a percentage of revenue to less than 10%.

A summary of our 2015 highlights is as follows:

•

Acquired real estate assets, entered into development agreements, entered into leases and made new loan investments, totaling more than $1.7 billion as noted below:

•

Acquired Capella’s hospital portfolio including seven acute care hospitals throughout the U.S. and obtained a stake in their operations for a combined total of approximately $900 million. Also, acquired an eighth Capella facility (Kershaw) for $35 million later in the year.

•

Completed the sale-leaseback transaction of 31 MEDIAN facilities in Germany for an aggregate purchase price of €646 million;

Index to Financial Statements

•

Initiated long term relationship with AXA Real Estate Investment Managers to co-invest with AXA-advised accounts for the acquisition of acute care hospitals in Spain and Italy via a joint venture arrangement;

•

Executed a $19 million agreement to develop an inpatient rehabilitation hospital in Toledo, Ohio, acquired an inpatient rehabilitation facility and a long-term acute care hospital in Lubbock, Texas for an aggregate purchase price of $31.5 million, and acquired an inpatient rehabilitation hospital in Weslaco, Texas for $10.7 million all leased to Ernest;

•

Completed $30 million mortgage financing to Prime for a general acute care hospital in Port Huron, Michigan and subsequently purchased the real estate for $20 million, which reduced the mortgage loan accordingly;

•

Provided $100 million mortgage financing to Prime for three general acute care hospitals and one free-standing emergency department in New Jersey and acquired two general acute care hospitals in the Kansas City area for $110 million;

•

Acquired a 266-bed outpatient rehabilitation clinic located in Hannover, Germany from RHM for €18.7 million;

•

Executed an additional $250 million agreement with Adeptus Health for the development of acute care hospitals and free-standing emergency departments (completed four of these facilities in 2015); and

•

Completed construction and began recording rental income on 17 acute care facilities in Texas, Arizona, and Colorado with First Choice ER (a subsidiary of Adeptus Health) totaling approximately $102.6 million and an acute care facility and a medical office building in Birmingham, Alabama with UAB Medical West totaling $8.6 million.

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

•

Individual property diversification — On an individual property basis, we had no investment of any single property greater than 2% of our total assets as of December 31, 2015, down from 3.1% as of December 31, 2014; and

•

Geographic diversification — Investments located in California represented 9.8% of our total assets at December 31, 2015, down from 14.7% in the prior year. Investments located in Texas represented 16.4% of our total assets at December 31, 2015, down from 20.9% in the prior year. In addition, we further expanded our portfolio into Europe with the additional investments in Spain and Italy (as fully described in Note 3 in Item 8 of this Annual Report on Form 10-K).

•

Sold the real estate of a long-term acute care facility in Luling, Texas, and real estate of six wellness centers in the United States for a net gain; and

•

Increased our senior Credit Facility to $1.95 billion comprised of a $1.3 billion senior unsecured revolving credit facility and a $250 million senior unsecured term loan facility along with a $400 million accordion feature, issued €500 million of unsecured notes, and raised $817 million in equity to fund the acquisition activity mentioned above.

2014 Highlights

In 2014, we invested or committed to invest approximately $1.4 billion in healthcare real estate assets. These significant investments greatly strengthened our portfolio through geographic, tenant and property type diversification.

Index to Financial Statements

A summary of our 2014 highlights is as follows:

•

Acquired real estate assets, entered into development agreements, entered into leases and made new loan investments, totaling more than $1.4 billion as noted below:

•

Completed Step 1 of the two step acquisition of 32 MEDIAN facilities for €688 million by loaning €425 million to Waterland and MEDIAN;

•

Completed the acquisition of three RHM Klinik rehabilitation facilities located in Germany for a transaction valued at approximately €64 million incurring approximately €3 million of transfer and other taxes that have been expensed as acquisition costs;

•

Acquired an acute care hospital in Fairmont, West Virginia for an aggregate purchase price of $15 million from Alecto Healthcare Services (“Alecto”), made a $5 million working capital loan to the tenant and a commitment to fund up to $5 million in capital improvements;

•

Acquired an acute care hospital in Sherman, Texas for an aggregate purchase price of $32.5 million from Alecto and funded a $7.5 million working capital loan to the tenant;

•

Entered the United Kingdom healthcare market by acquiring an acute care hospital in Peasedown St. John, United Kingdom from Circle Health Ltd., through its subsidiary Circle Hospital (Bath) Ltd. valued at approximately £28.3 million incurring approximately £1.1 million of transfer and other taxes that have been expensed as acquisition costs;

•

Acquired a general acute care hospital and an adjacent parcel of land for an aggregate purchase price of $115 million from a joint venture of LHP Hospital Group, Inc. and Hackensack University Medical Center Mountainside;

•

Executed an additional $150 million agreement with Adeptus Health for the development of acute care hospitals and free-standing emergency departments; and

•

Completed construction and began recording rental income on the following facilities:

•

Northern Utah Rehabilitation Hospital — $19 million inpatient rehabilitation facility located in South Ogden, Utah;

•

Oakleaf Surgical Hospital — $30.5 million acute care facility located in Altoona, Wisconsin; and

•

First Choice ER — Completed 17 acute care facilities totaling approximately $80.3 million.

•

Sold the real estate of La Palma Community Hospital to Prime recognizing a gain on sale of $2.9 million;

•

Sold the real estate of our Bucks facility pursuant to a purchase option, resulting in a $3.1 million impairment charge;

•

Restructured our investment in Monroe Hospital by entering into a lease with an affiliate of Prime which had acquired the operations of the facility;

•

Completed a new $1.15 billion senior unsecured credit facility comprised of a $1.025 billion senior unsecured revolving credit facility and a $125 million senior unsecured term loan facility, issued $300 million of unsecured notes, and raised $138 million in equity to fund the acquisition activity mentioned above; and

•

Received investment grade rating on our unsecured debt of BBB- and a corporate credit rating upgrade from Standard & Poor’s Ratings Services to BB+.

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 completed our first international acquisition.

Index to Financial Statements

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 RHM. This acquisition expanded both our geographic and tenant diversity;

•

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 is 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 are leased to Prime pursuant to the master lease agreements;

•

Commenced construction of several facilities pursuant to a $100 million master funding and development agreement with First Choice ER to develop up to 25 free standing emergency rooms;

•

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

•

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

•

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; and

•

Issued $150 million of unsecured notes (as a tack on to the 2012 unsecured senior notes), completed a €200 million euro-denominated 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.

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 equity investments), periodic depreciation of our real estate assets, and stock compensation expense, along with our assessment as to whether an entity that we 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:

Index to Financial Statements

rent earned over the term of a lease, taking into account contractual rent adjustments 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: rent billed revenue and straight-line revenue. Rent billed 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 rent billed 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 may 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 rent billed revenue in the period earned.

We use direct finance lease (“DFL”) accounting to record rent on certain leases deemed to be financing leases, per accounting rules, 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 with a corresponding offset to deferred revenue during the construction period. When the lessee takes physical possession of the facility, we begin recognizing the deferred construction period revenue 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.

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 initially and recognized as income over the life of the loan using the interest method.

Investments in Real Estate: We maintain our 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 39 years for buildings and improvements.

Index to Financial Statements

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, such as was the case with our Monroe and Bucks facilities in 2014, 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, 2015; 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: For existing properties acquired for leasing purposes, we account for such acquisitions based on business combination accounting rules. 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 may utilize a number of sources, including available real estate broker data, independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, internal data from previous acquisitions or developments, 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 with independent parties, we do not expect the above-market and below-market in-place lease values to be significant for many of our transactions.

We measure the aggregate value of other lease intangible assets to be acquired based on the difference between (i) the property valued with new or in-place 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 (based on experience) 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.

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. At December 31, 2015, we have assigned no value to customer relationship intangibles.

Index to Financial Statements

We amortize the value of lease intangibles to expense over the term of the respective leases, which have a weighted average useful life of 25.6 years at December 31, 2015. If a lease is terminated, the unamortized portion of the lease intangible is charged to expense — as was the case with our Twelve Oaks facility in 2015.

Losses from Rent Receivables: For all leases, we continuously monitor the performance of our existing tenants including, but not limited to: admission levels and surgery/procedure volumes by type; current operating margins; ratio of our tenant’s operating margins both to facility rent and to facility rent plus other fixed costs; trends in revenue and patient mix; and the effect of evolving healthcare regulations on tenant’s profitability and liquidity.

Losses from Operating Lease Receivables: We utilize the information above along with the tenant’s payment and default history in evaluating (on a property-by-property basis) whether or not a provision for losses on outstanding rent receivables is needed. A provision for losses on rent receivables (including straight-line rent receivables) is ultimately 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 existing collateral, if any.

In regards to our Florence and Twelve Oaks facilities, we analyzed whether or not a provision of loss was needed at December 31, 2015 based on the outstanding receivables due to us. However, after reviewing the tenant’s business, all available credit enhancements (such as letters of credit) and subsequent cash receipts, we believe no such provision was needed at this time. However, no assurances can be given that future provisions of losses will not be taken.

Losses on DFL Receivables: Allowances are established for DFLs based upon an estimate of probable losses for the individual DFLs deemed to be impaired. DFLs are impaired when it is deemed probable that we will be unable to collect all amounts due in accordance with the contractual terms of the lease. Like operating lease receivables, the need for an allowance is based upon our assessment of the lessee’s overall financial condition; economic resources and payment record; the prospects for support from any financially responsible guarantors; and, if appropriate, the realizable value of any collateral. These estimates consider all available evidence including the expected future cash flows discounted at the DFL’s effective interest rate, fair value of collateral, and other relevant factors, as appropriate. DFLs are placed on non-accrual status when we determine that the collectability of contractual amounts is not reasonably assured. While on non-accrual status, we generally account for the DFLs on a cash basis, in which income is recognized only upon receipt of cash.

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 on a loan-by-loan basis (using the same process as we do for assessing the collectability of rents as discussed above) 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.

Stock-Based Compensation: During the years ended December 31, 2015, 2014, and 2013 we recorded $11.1 million, $9.2 million, and $8.8 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 total shareholder return (factoring in stock price appreciation and dividends paid) 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

Index to Financial Statements

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 work with 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 — such as was the case with our 2013 performance awards in which 550,000 shares were forfeited because the related market conditions were not achieved for the period of January 1, 2013 through December 31, 2015. If awards vest faster than our original estimate, we will record a catch-up of expense, which we did in the 2014, 2013 and 2012 fourth quarters due to our 2012, 2011, and 2010 stock awards being earned earlier than expected.

Fair Value Option Election: Our investment in Capella in 2015 (including the acquisition loan and equity investment in the operator) was structured similarly to our 2012 investment in Ernest. Due to this, we elected to account for certain investments in Capella like we did for Ernest, using the fair value option method. This 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.

These investments include the following at December 31, 2015: (in thousands):


Asset (Liability)	Total Fair Value
Mortgage loan	$	310,000
Acquisition loans		603,552
Equity investment		7,349

Total	$	920,901

We measure the estimated fair value of most of these investments utilizing Level 2 and 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 and Capella are recorded at fair value based on Level 2 inputs by discounting the estimated cash flows using the market rates which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities. Our acquisition loans and equity investments in Ernest and Capella are recorded at fair value based on Level 3 inputs, by using a discounted cash flow model, which requires significant estimates of our investee such as projected revenue and expenses and appropriate consideration of the underlying risk profile of the forecast assumptions associated with the investee. 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 use of a capitalization rate, discount rate (which is based on a weighted-average cost of capital), and market interest rates, and our unobservable input includes an adjustment for a marketability discount (“DLOM”) on our equity investment of 40% at December 31, 2015.

In regards to the underlying projection of revenues and expenses used in the discounted cash flow models, such projections are provided by Ernest and Capella. However, we will modify such projections (including underlying assumptions used) as needed based on our review and analysis of their historical results, meetings with key members of management, and our understanding of trends and developments within the healthcare industry.

Index to Financial Statements

In arriving at the DLOM, we started with a DLOM range based on the results of studies supporting valuation discounts for other transactions or structures without a public market. To select the appropriate DLOM within the range, we then considered many qualitative factors including the percent of control, the nature of the underlying investee’s business along with our rights as an investor pursuant to the operating agreement, the size of investment, expected holding period, number of shareholders, access to capital marketplace, etc. To illustrate the effect of movements in the DLOM, we performed a sensitivity analysis below by using basis point variations (dollars in thousands):


Basis Point Change in Marketability Discount	Estimated Increase (Decrease) In Fair Value
+100 basis points		$(122)
- 100 basis points		122

Because the fair value of Ernest investments and Capella investments noted above approximate their original cost, we did not recognize any unrealized gains/losses during 2015.

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, 2015 and 2014, we determined that we were not the primary beneficiary of any of our variable interest entities because we do not control the activities (such as the day-to-day operations of the hospital) that most significantly impact the economic performance of these entities.

Disclosure of Contractual Obligations

The following table summarizes known material contractual obligations (including interest) as of December 31, 2015, 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)	$	131,147	$	—	$	—	$	—	$	131,147
2011, 2012, and 2014 Senior Unsecured Notes		69,750		139,500		139,500		1,195,531		1,544,281
2013 and 2015 Senior Unsecured Notes(5)		34,215		68,431		285,671		586,548		974,865
Revolving credit facility(2)		23,742		1,134,954		—		—		1,158,696
Term loans		6,421		11,679		252,456		—		270,556
Operating lease commitments(3)		5,119		10,282		9,699		140,049		165,149
Purchase obligations(4)		210,030		128,584		—		—		338,614

Totals	$	480,424	$	1,493,430	$	687,326	$	1,922,128	$	4,583,308

(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.

Index to Financial Statements

(2)	As of December 31, 2015, we have a $1.3 billion revolving credit facility. However, this table assumes the balance outstanding under the revolver and rate in effect at December 31, 2015 (which was $1.1 billion as of December 31, 2015) 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 $171.1 million of future expenditures related to development projects.

(5)	Our 2013 and 2015 Senior Unsecured Notes are Euro-denominated. We used the exchange rate at December 31, 2015, (or 1.09) in preparing this table.

Off Balance Sheet Arrangements

We own interests in certain unconsolidated joint ventures as described under Note 3 to Item 8 of this Annual Report on Form 10-K. Except in limited circumstances, our risk of loss is limited to our investment in the joint venture and any outstanding receivables. We have no other material off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources except those described above under “Disclosure of Contractual Obligations”.

Liquidity and Capital Resources

2015 Cash Flow Activity

We generated cash of $207.0 million from operating activities during 2015, 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 $183.0 million and certain investing activities including the additional funding of our development activities.

In regards to other financing activities in which we used such net proceeds to ultimately fund our approximate $2 billion of acquisitions in 2015 and the remainder of our development activities, we did the following:

On August 19, 2015, we completed a public offering of €500 million aggregate principal amount of 4.00% senior unsecured notes. In addition, on September 30, 2015, we entered into an amendment to our existing amended and restated revolving credit and term loan agreement, dated as of June 19, 2014. The amendment, among other things, increased our revolver availability to $1.3 billion and increased borrowings under our term loan by $125 million.

On August 11, 2015, we completed an underwritten public offering of 28.75 million shares (including the exercise of the underwriters’ 30-day option to purchase an additional 3.8 million shares) of our common stock, resulting in net proceeds of approximately $337 million, after deducting estimated offering expenses.

Index to Financial Statements

On January 14, 2015, we completed an underwritten public offering of 34.5 million shares (including the exercise of the underwriters’ 30-day option to purchase an additional 4.5 million shares) of our common stock, resulting in net proceeds of approximately $480 million, after deducting estimated offering expenses.

2014 Cash Flow Activity

We generated cash of $150.4 million from operating activities during 2014, primarily consisting of rent and interest from mortgage and other loans, which with cash on-hand, was principally used to fund our dividends of $144.4 million and certain of our investing activities including the additional funding of our development properties.

In regards to other financing activities in which we used such net proceeds to ultimately fund our $767.7 million of acquisitions in 2014 and to fund other investment activities, we did the following:

On March 11, 2014, we completed an underwritten public offering of 7.7 million shares of our common stock, resulting in net proceeds of approximately $100 million, after deducting estimated offering expenses. We also granted the underwriters a 30-day option to purchase up to an additional 1.2 million shares of common stock. The option, which was exercised in full, closed on April 8, 2014 and resulted in additional net proceeds of approximately $16 million.

On April 17, 2014, we completed a $300 million senior unsecured notes offering.

On October 17, 2014, we entered into an amendment to our revolving credit and term loan agreement to increase the current aggregate committed size of the facility to $1.15 billion with an additional $400 million accordion available increasing the total aggregate capacity to $1.55 billion. The amendment also increased the alternative currency sublimit under the facility to €500 million and amended certain covenants in order to permit us to consummate and finance the MEDIAN transaction.

We established an at-the-market equity offering program in January 2014 under which we may sell up to $250 million in shares. In 2014, we sold 1.7 million shares resulting in net proceeds of $22.6 million.

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, was 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 11.5 million shares of common stock (including 1.5 million 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. Furthermore, 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 12.65 million shares of our common stock (including 1.65 million 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.

Debt Restrictions and Covenants

Our debt facilities impose certain restrictions on us, including, but not limited to, restrictions on our ability to: incur debt; create or incur liens; provide guarantees in respect of obligations of any other entity; make

Index to Financial Statements

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 Credit Facility limits the amount of dividends we can pay to 95% of normalized adjusted funds from operations, as defined in the agreements, on a rolling four quarter basis. The indentures governing our 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 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.

In addition to these restrictions, the Credit Facility contains customary financial and operating covenants, including covenants relating to our total leverage ratio, fixed charge coverage ratio, secured leverage ratio, unsecured leverage ratio, consolidated adjusted net worth, and unsecured interest coverage ratio. This facility also contains customary 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, 2015, 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:

On February 22, 2016, we completed a $500 million senior unsecured notes offering, proceeds of which were used to repay borrowings under our revolving credit facility. At February 26, 2016, our availability under our revolving credit facility plus cash on-hand approximated $900 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 $22.6 million has been sold through February 26, 2016). Proceeds from our at-the-market equity program may be used for general corporate purposes as needed.

We have approximately $125 million in debt principal payments coming due in 2016 (see debt maturity schedule below) and $210 million in expected funding of commitments for ongoing development projects and for the acquisition of the final MEDIAN property in 2016. We believe our current availability under our revolving credit facility plus cash on-hand, our 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, and dividends in order to comply with our REIT requirements for the next twelve months.

As noted above, our debt facilities are subject to certain financial and non-financial covenants. In particular, our Credit Facility currently requires us to maintain a total leverage ratio of 70% and an unsecured leverage ratio of 77.5%, which we are in compliance with at December 31, 2015. In June 2016, the total leverage ratio will reset to 60%, and in September 2016, the unsecured leverage ratio will reset to 65%. We expect to comply with these reset leverage requirements by reducing debt through asset sales, retention of cash generated from our monthly rent and interest receipts, and other access to capital through joint ventures, our at-the-market equity offering program and equity offerings. We may also seek to extend the covenant reset dates; however, no assurances can be made that such extensions will be approved by our lenders. If an event of default occurs and is continuing under the Credit Facility, the entire outstanding balance may become immediately due and payable which could have a material adverse impact to the Company.

Index to Financial Statements

Long-term Liquidity Requirements:

Exclusive of the revolving credit facility (which we can extend for an additional year to June 2019), we have less than $150 million in debt principal payments due between now and June 2019 (see debt maturity schedule below). In addition, we have $339 million in commitments for ongoing development projects and for the acquisition of the final MEDIAN property. With our availability under our revolving credit facility plus cash on-hand of approximately $900 million along with monthly cash receipts from rent and loan interest, and the availability under our at-the-market equity offering program, we believe we have the liquidity available to fund our operations, debt and interest obligations, firm commitments, and dividends in order to comply with our REIT requirements currently.

However, access to capital is an integral part of our business plan. In order to fund debt maturities coming due in 2019 and later years, to comply with Credit Facility covenants noted above under “Short-term Liquidity Requirements”, or as we consider strategic investment opportunities, we believe additional capital will be needed and we may access one or a combination of the following:

•

proceeds from strategic property or other asset sales,

•

amending our current Credit Facility,

•

entering into new bank term loans,

•

issuing new U.S. dollar or Euro denominated debt securities, including senior unsecured notes,

•

entering into joint venture arrangements, and/or

•

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 of December 31, 2015, principal payments due on our debt (which exclude the effects of any discounts, premiums, or debt issue costs recorded) are as follows (in thousands):


2016	$	125,299
2017		320
2018		1,112,781
2019		250,000
2020		217,240
Thereafter		1,643,100

Total	$	3,348,740

Results of Operations

Our operating results may very significantly from year-to-year due to a variety of reasons including acquisitions made during the year, incremental revenues and expenses from acquisitions made in the prior year, revenues and expenses from completed development properties, property disposals, annual escalation provisions, foreign currency exchange rate changes, new or amended debt agreements, issuances of shares through an equity offering, etc. Thus, our operating results for the current year are not necessarily indicative of the results that may be expected in future years.

Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014

Net income for the year ended December 31, 2015, was $139.6 million compared to net income of $50.5 million for the year ended December 31, 2014. This increase is primarily due to additional income generated

Index to Financial Statements

from our 2015 acquisitions and from completed development projects. In addition, we incurred $50.1 million of impairment charges in 2014 — see note 3 to Item 8 of this Form 10-K for further details. FFO, after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $274.8 million, or $1.26 per diluted share for 2015 as compared to $181.7 million, or $1.06 per diluted share for 2014, a 19% increase on a per share basis. This increase in FFO is primarily due to the increase in revenue from acquisitions and the completion of development projects during 2015.

A comparison of revenues for the years ended December 31, 2015 and 2014 is as follows (dollar amounts in thousands):


	2015				2014				Change
	(Dollar amounts in thousands)
Rent billed	$	247,604	56.0	%	$	187,018	59.9	%	$	60,586
Straight-line rent		23,375	5.3	%		13,507	4.3	%		9,868
Income from direct financing leases		58,715	13.3	%		49,155	15.7	%		9,560
Interest and fee income		112,184	25.4	%		62,852	20.1	%		49,332

Total revenue	$	441,878	100.0	%	$	312,532	100.0	%	$	129,346

Our total revenue for 2015 is up $129.3 million or 41.4% over the prior year. This increase is made up of the following:

•

Rent billed — up $60.6 million over the prior year of which $8.6 million is from our annual escalation provisions in our leases, $47.0 million is from incremental revenue from acquisitions made in 2015, and $11.9 million is incremental revenue from development properties that were completed and put into service in 2015. Approximately $3.7 million of base rents were recorded in 2014 related to our disposed properties but none was recorded in the current year. This increase is partially offset by $6.8 million attributable to the decline in the Euro.

•

Straight-line rent — up $9.9 million over the prior year of which $6.8 million is from incremental revenue from acquisitions made in 2015, $4.1 million is incremental revenue from development properties that were completed and put into service in 2015. This increase is partially offset by $0.8 million attributable to the decline in the Euro and a $3.1 million write-off of straight-line rent related to our Luling and Twelve Oaks properties.

•

Income from direct financing leases — up $9.6 million over the prior year of which $0.8 million is from annual escalation provisions in our leases and $8.8 million is from incremental revenue from acquisitions made in 2015.

•

Interest from loans — up $49.3 million over the prior period of which $1.8 million is from our annual escalation provisions in our loans and $45.6 million is primarily from new loans, partially offset by the repayment of loans in 2015 and $4.2 million attributable to the decline in the Euro.

Real estate depreciation and amortization during 2015 was $69.9 million compared to $53.9 million in 2014 primarily due to the incremental depreciation/amortization from the facilities acquired in 2015 and the development properties completed in 2014 and 2015. In addition, we accelerated the related lease intangible of our Twelve Oaks, Luling, and Healthtrax properties resulting in an additional $1.1 million of expense.

During 2014, we recorded a $3.1 million real estate impairment charge on our Bucks facility and a $47.0 million impairment charge on our Monroe facility — see Note 3 to Item 8 of this Form 10-K for further details.

Acquisition expenses increased from $26.4 million in 2014 to $61.3 million in 2015 primarily as a result of the completion of the MEDIAN and Capella acquisitions. Included in the 2015 and 2014 acquisition expenses are $37.0 million and $5.8 million, respectively, of real estate transfer taxes associated with our international properties.

Index to Financial Statements

General and administrative expenses in 2015 totaled $43.6 million, which is 9.9% of revenues, down from 11.9% of revenues in the prior year. The decline 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 $6.4 million from the prior year due to higher compensation expense, travel and international administrative expenses, which are up as a result of the growth and expansion of our company. On a go forward basis, we would expect our general and administrative expense to be in the $11 million range per quarter assuming no significant changes in our operations.

Interest expense for 2015 and 2014 totaled $120.9 million and $98.2 million, respectively. This increase is related to higher average debt balances in the current year associated with our 2014 Senior Unsecured Notes (entered into in April 2014), our 2015 Senior Unsecured Notes and our new and expanded Credit Facility. In addition, we incurred $4.4 million in fees and expenses primarily associated with the bridge loan entered into during the 2015 third quarter. Our weighted average interest rate was 4.3% for 2015, down from 5.4% in 2014. 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.

Other income (including our earnings from equity and other interests) was down $4.6 million in 2015 primarily due to the $2.9 million gain on the La Palma property sale in 2014 along with foreign currency transaction gains in 2014. Our earnings from equity and other interests increased slightly from 2014 due to increased investee earnings, partially offset by lower income from our interest in Bucks as the property was sold in August 2014 — this interest generated about $1 million of income annually.

Income tax expense was $1.5 million for 2015 up from $0.3 million in 2014, primarily due to the increase in income in certain of our European entities. As noted in Note 5 to our consolidated financial statements in Item 8 to this Form 10-K, we have a significant valuation allowance established for certain domestic and foreign entities at December 31, 2015 due to cumulative losses and our current expectation of future taxable income. However, if such income from these entities exceed our current expectations in 2016, we may need to reverse the valuation allowance, which would result in higher income taxes subsequently.

Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013

Net income for the year ended December 31, 2014, was $50.5 million compared to net income of $97.0 million for the year ended December 31, 2013. This decrease was due to the $50.1 million of impairment charges taken in 2014 — see note 3 to Item 8 of this Form 10-K for further details — along with higher interest and acquisition expenses, partially offset by increased revenues from deals completed in the year. FFO, after adjusting for certain items (as more fully described in Reconciliation of Non-GAAP Financial Measures), was $181.7 million, or $1.06 per diluted share for 2014 as compared to $147.2 million, or $0.96 per diluted share for 2013, a 23% increase on a dollar basis. This 23% increase in FFO is primarily due to the increase in revenue from acquisitions and the completion of development projects during 2014.

A comparison of revenues for the years ended December 31, 2014 and 2013 is as follows (dollar amounts in thousands):


	2014				2013				Change
	(Dollar amounts in thousands)
Rent billed	$	187,018	59.9	%	$	132,578	54.7	%	$	54,440
Straight-line rents		13,507	4.3	%		10,706	4.4	%		2,801
Income from direct financing leases		49,155	15.7	%		40,830	16.8	%		8,325
Interest and fee income		62,852	20.1	%		58,409	24.1	%		4,443

Total revenue	$	312,532	100.0	%	$	242,523	100.0	%	$	70,009

Index to Financial Statements

Our total revenue for 2014 is up $70.0 million or 28.9% over the prior year. This increase is made up of the following:

•

Rent billed — up $54.4 million over the prior year of which $2.8 million is from our annual escalation provisions in our leases, $45.9 million is from incremental revenue from acquisitions made in 2014 and late 2013, and $9.2 million is incremental revenue from development properties that were completed and put into service in 2014. Approximately $1 million of base rents were recorded in 2013 related to our Monroe property but none was recorded in the current year.

•

Straight-line rent — up $2.8 million primarily due to incremental revenue from acquisitions made in late 2013 and 2014 and from development properties that were completed and put into service in 2013 and 2014, partially offset by the $2.8 million write-off of unbilled rent related to our Gilbert, La Palma, and our wellness center properties.

•

Income from direct financing leases — up $8.3 million over the prior year of which $0.6 million is from annual escalation provisions in our leases and $7.7 million is from incremental revenue from acquisitions made in 2013.

•

Interest from loans — up $4.4 million over the prior period of which $1.5 million is from our annual escalation provisions in our loans and $4.2 million is primarily from new loans, partially offset by the repayment of loans in late 2013 and 2014.

Real estate depreciation and amortization during 2014 was $53.9 million compared to $37.0 million in 2013 primarily due to the incremental depreciation/amortization from the facilities acquired in 2014 and the development properties completed in 2013 and 2014.

Acquisition expenses increased from $19.5 million to $26.4 million primarily as a result of the international acquisitions completed in 2014 and continued activity to pursue potential deals. Included in the 2014 and 2013 acquisition expenses are $5.8 million and $12.0 million, respectively, of real estate transfer taxes associated with our international properties.

General and administrative expenses in 2014 totaled $37.3 million, which is 11.9% of revenues, down from 12.4% 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 $7.2 million from the prior year due to higher compensation expense (from increased head count and higher cash compensation due to improved financial/operational performance) along with $2.5 million in higher travel and international expenses as a result of our growth and expansion in 2014.

Interest expense for 2014 and 2013 totaled $98.2 million and $66.7 million, respectively. This increase is related to higher average debt balances in the current year associated with our 2014 Senior Unsecured Notes and our expanded Credit Facility along with the 2013 Senior Unsecured Notes and $150 million tack on offering to our 2012 Senior Unsecured Notes which were only partially outstanding in 2013. Our weighted average interest rate was 5.4% for 2014, down from 6% in 2013.

In 2014, we incurred $1.7 million in additional financing expenses of which $1.4 million related to fees associated with a committed unutilized interim bridge loan that served as a back stop for the partial financing of the MEDIAN transaction. The remaining $0.3 million related to the write-off of certain debt issue costs associated with the replacement of our old credit facility.

Index to Financial Statements

Other income (including our earnings from equity and other interests) was up $4.8 million in 2014 primarily due to the $2.9 million gain on the La Palma property sale along with foreign currency transaction gains. Our earnings from equity and other interests was down from 2013 due to lower income from our interest in Bucks as the property was sold in August 2014 — this interest generated about $1 million of income annually.

In addition to the items noted above, net income for 2014 and 2013 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 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.

Index to Financial Statements

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, 2015, 2014, and 2013 ($ amounts in thousands except per share data):


	For the Year Ended
	December 31, 2015			December 31, 2014			December 31, 2013
FFO information:
Net income attributable to MPT common stockholders	$	139,598		$	50,522		$	96,991
Participating securities’ share in earnings		(1,029	)		(895	)		(729	)

Net income, less participating securities’ share in earnings	$	138,569		$	49,627		$	96,262
Depreciation and amortization:
Continuing operations		69,867			53,938			36,978
Discontinued operations		—			—			708
Gain on sale of real estate		(3,268	)		(2,857	)		(7,659	)
Real estate impairment charge		—			5,974			—

Funds from operations	$	205,168		$	106,682		$	126,289
Write-off of straight line rent		3,928			2,818			1,457
Acquisition expenses		61,342			26,389			19,494
Debt refinancing and unutilized financing expenses		4,367			1,698			—
Loan and other impairment charges		—			44,154			—

Normalized funds from operations attributable to MPT common stockholders	$	274,805		$	181,741		$	147,240

Per diluted share data:
Net income, less participating securities’ share in earnings	$	0.63		$	0.29		$	0.63
Depreciation and amortization		0.32			0.31			0.24
Gain on sale of real estate		(0.01	)		(0.01	)		(0.04	)
Real estate impairment charge		—			0.04			—

Funds from operations	$	0.94		$	0.63		$	0.83
Write-off of straight line rent		0.02			0.02			0.01
Acquisition expenses		0.28			0.15			0.12
Debt refinancing and unutilized financing expenses		0.02			—			—
Loan and other impairment charges		—			0.26			—

Normalized funds from operations	$	1.26		$	1.06		$	0.96

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, 2015:


Declaration Date	Record Date	Date of Distribution	Distribution per Share
November 12, 2015	December 10, 2015	January 14, 2016	$	0.22
August 20, 2015	September 17, 2015	October 15, 2015	$	0.22
May 14, 2015	June 11, 2015	July 9, 2015	$	0.22
February 23, 2015	March 12, 2015	April 9, 2015	$	0.22
November 13, 2014	December 4, 2014	January 8, 2015	$	0.21
August 21, 2014	September 18, 2014	October 15, 2014	$	0.21
May 15, 2014	June 12, 2014	July 10, 2014	$	0.21
February 21, 2014	March 14, 2014	April 11, 2014	$	0.21
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

On February 19, 2016, we announced that our Board of Directors declared a regular quarterly cash dividend of $0.22 per share of common stock to be paid on April 14, 2016, to stockholders of record on March 17, 2016.

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 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 or foreign currency exposure. For interest rate hedging, 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. For foreign currency, 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, 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

Index to Financial Statements

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 December 31, 2015, our outstanding debt totaled $3.3 billion, which consisted of fixed-rate debt of $1.9 billion (including $125.0 million of floating debt swapped to fixed) and variable rate debt of $1.4 billion. If market interest rates increase by one-percent, the fair value of our fixed rate debt at December 31, 2015 would decrease by approximately $4.5 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 $0.2 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 $0.2 million per year. This assumes that the average amount outstanding under our variable rate debt for a year is $1.4 billion, the balance of our revolver and term loan at December 31, 2015.

Foreign Currency Sensitivity

With our investments in Germany, Italy, Spain and the United Kingdom, we are subject to fluctuations in the Euro and British Pound to US dollar currency exchange rates. Increases or decreases in the value of the Euro to US dollar and the British Pound to US dollar exchange rates may impact our financial condition and/or our results of operations. Based solely on operating results for 2015 and on an annualized basis, if the Euro exchange rate were to change by 5%, our FFO would change by approximately $2.6 million. Based solely on operating results for 2015 and on an annualized basis, if the British Pound exchange rate were to change by 5%, our FFO would change by less than $0.3 million.

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, 2015 and December 31, 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 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 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, 2015, based on criteria established in Internal Control—Integrated Framework (2013) 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, AL

February 29, 2016

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, 2015 and December 31, 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 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 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, 2015, based on criteria established in Internal Control—Integrated Framework (2013) 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, AL

February 29, 2016

Index to Financial Statements

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Consolidated Balance Sheets


	December 31,
	2015			2014
	(Amounts in thousands, except for per share data)
ASSETS
Real estate assets
Land	$	315,787		$	192,551
Buildings and improvements		2,675,803			1,848,176
Construction in progress and other		49,165			23,163
Intangible lease assets		256,950			108,885
Net investment in direct financing leases		626,996			439,516
Mortgage loans		757,581			397,594

Gross investment in real estate assets		4,682,282			3,009,885
Accumulated depreciation		(232,675	)		(181,441	)
Accumulated amortization		(25,253	)		(21,186	)

Net investment in real estate assets		4,424,354			2,807,258
Cash and cash equivalents		195,541			144,541
Interest and rent receivables		46,939			41,137
Straight-line rent receivables		82,155			59,128
Other loans		664,822			573,167
Other assets		195,540			95,099

Total Assets	$	5,609,351		$	3,720,330

LIABILITIES AND EQUITY
Liabilities
Debt, net	$	3,322,541		$	2,174,648
Accounts payable and accrued expenses		137,356			112,623
Deferred revenue		29,358			27,207
Lease deposits and other obligations to tenants		12,831			23,805

Total liabilities		3,502,086			2,338,283
Commitments and Contingencies
Equity
Preferred stock, $0.001 par value. Authorized 10,000 shares; no shares outstanding		—			—
Common stock, $0.001 par value. Authorized 500,000 shares; issued and outstanding — 236,744 shares at December 31, 2015 and 172,743 shares at December 31, 2014		237			172
Additional paid-in capital		2,593,827			1,765,381
Distributions in excess of net income		(418,650	)		(361,330	)
Accumulated other comprehensive loss		(72,884	)		(21,914	)
Treasury shares, at cost		(262	)		(262	)

Total Medical Properties Trust, Inc. Stockholders’ Equity		2,102,268			1,382,047
Non-controlling interests		4,997			—

Total Equity		2,107,265			1,382,047

Total Liabilities and Equity	$	5,609,351		$	3,720,330

See accompanying notes to consolidated financial statements.

Index to Financial Statements

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Net Income


	For the Years Ended December 31,
	2015			2014			2013
	(Amounts in thousands, except for per share data)
Revenues
Rent billed	$	247,604		$	187,018		$	132,578
Straight-line rent		23,375			13,507			10,706
Income from direct financing leases		58,715			49,155			40,830
Interest and fee income		112,184			62,852			58,409

Total revenues		441,878			312,532			242,523
Expenses
Real estate depreciation and amortization		69,867			53,938			36,978
Impairment charges		—			50,128			—
Property-related		3,792			1,851			2,450
Acquisition expenses		61,342			26,389			19,494
General and administrative		43,639			37,274			30,063

Total operating expenses		178,640			169,580			88,985

Operating income		263,238			142,952			153,538
Other income (expense)
Interest and other income (expense)		595			5,481			(319	)
Earnings from equity and other interests		2,849			2,559			3,554
Debt refinancing and unutilized financings expense		(4,368	)		(1,698	)		—
Interest expense		(120,884	)		(98,156	)		(66,746	)
Income tax expense		(1,503	)		(340	)		(726	)

Net other expenses		(123,311	)		(92,154	)		(64,237	)

Income from continuing operations		139,927			50,798			89,301
Income (loss) from discontinued operations		—			(2	)		7,914

Net income		139,927			50,796			97,215
Net income attributable to non-controlling interests		(329	)		(274	)		(224	)

Net income attributable to MPT common stockholders	$	139,598		$	50,522		$	96,991

Earnings per share — basic
Income from continuing operations attributable to MPT common stockholders	$	0.64		$	0.29		$	0.59
Income from discontinued operations attributable to MPT common stockholders		—			—			0.05

Net income attributable to MPT common stockholders	$	0.64		$	0.29		$	0.64

Weighted average shares outstanding — basic		217,997			169,999			151,439

Earnings per share — diluted
Income from continuing operations attributable to MPT common stockholders	$	0.63		$	0.29		$	0.58
Income from discontinued operations attributable to MPT common stockholders		—			—			0.05

Net income attributable to MPT common stockholders	$	0.63		$	0.29		$	0.63

Weighted average shares outstanding — diluted		218,304			170,540			152,598

See accompanying notes to consolidated financial statements.

Index to Financial Statements

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income


	For the Years Ended December 31,
(In thousands)	2015			2014			2013
Net income	$	139,927		$	50,796		$	97,215
Other comprehensive income (loss):
Unrealized gain on interest rate swap		3,139			2,964			3,474
Foreign currency translation (loss) gain		(54,109	)		(15,937	)		67

Total comprehensive income		88,957			37,823			100,756
Comprehensive income attributable to non-controlling interests		(329	)		(274	)		(224	)

Comprehensive income attributable to MPT common stockholders	$	88,628		$	37,549		$	100,532

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, 2015, 2014 and 2013

(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, 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

Net income		—		—		—		—		—		50,522			—			—			274			50,796
Unrealized gain on interest rate swaps		—		—		—		—		—		—			2,964			—			—			2,964
Foreign currency translation loss		—		—		—		—		—		—			(15,937	)		—			—			(15,937	)
Stock vesting and amortization of stock-based compensation		—		—		777		—		9,165		—			—			—			—			9,165
Distributions to non-controlling interests		—		—		—		—		—		—			—			—			(274	)		(274	)
Proceeds from offering (net of offering costs)		—		—		10,656		11		138,162		—			—			—			—			138,173
Dividends declared ($0.84 per common share)		—		—		—		—		—		(147,048	)		—			—			—			(147,048	)

Balance at December 31, 2014		—	$	—		172,743	$	172	$	1,765,381	$	(361,330	)	$	(21,914	)	$	(262	)	$	—		$	1,382,047

Net income		—		—		—		—		—		139,598			—			—			329			139,927
Sale of non-controlling interests		—		—		—		—		—		—			—			—			5,000			5,000
Unrealized gain on interest rate swaps		—		—		—		—		—		—			3,139			—			—			3,139
Foreign currency translation loss		—		—		—		—		—		—			(54,109	)		—			—			(54,109	)
Stock vesting and amortization of stock-based compensation		—		—		751		2		11,120		—			—			—			—			11,122
Distributions to non-controlling interests		—		—		—		—		—		—			—			—			(332	)		(332	)
Proceeds from offering (net of offering costs)		—		—		63,250		63		817,326		—			—			—			—			817,389
Dividends declared ($0.88 per common share)		—		—		—		—		—		(196,918	)		—			—			—			(196,918	)

Balance at December 31, 2015		—	$	—		236,744	$	237	$	2,593,827	$	(418,650	)	$	(72,884	)	$	(262	)	$	4,997		$	2,107,265

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,
	2015			2014			2013
	(Amounts in thousands)
Operating activities
Net income	$	139,927		$	50,796		$	97,215
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		71,827			55,162			38,818
Amortization and write-off of deferred financing costs and debt discount		6,085			5,105			3,559
Direct financing lease accretion		(8,032	)		(6,701	)		(5,774	)
Straight-line rent revenue		(26,187	)		(16,325	)		(11,265	)
Share-based compensation expense		11,122			9,165			8,833
Gain from sale of real estate		(3,268	)		(2,857	)		(7,659	)
Impairment charges		—			50,128			—
Straight-line rent write-off		2,812			2,818			1,457
Other adjustments		(1,967	)		520			(70	)
Decrease (increase) in:
Interest and rent receivable		(5,599	)		(3,856	)		(13,211	)
Other assets		(8,297	)		764			1,855
Accounts payable and accrued expenses		26,540			6,209			23,867
Deferred revenue		2,033			(485	)		3,177

Net cash provided by operating activities		206,996			150,443			140,802
Investing activities
Cash paid for acquisitions and other related investments		(2,218,869	)		(767,696	)		(654,922	)
Net proceeds from sale of real estate		19,175			34,649			32,409
Principal received on loans receivable		771,785			11,265			7,249
Investment in loans receivable		(354,001	)		(12,782	)		(3,746	)
Construction in progress		(146,372	)		(102,333	)		(41,452	)
Other investments, net		(17,339	)		(13,126	)		(52,115	)

Net cash used for investing activities		(1,945,621	)		(850,023	)		(712,577	)
Financing activities
Additions to term debt		681,000			425,000			424,580
Payments of term debt		(283	)		(100,266	)		(11,249	)
Payment of deferred financing costs		(7,686	)		(14,496	)		(9,760	)
Revolving credit facilities, net		509,415			490,625			(20,000	)
Distributions paid		(182,980	)		(144,365	)		(120,309	)
Lease deposits and other obligations to tenants		(10,839	)		7,892			3,231
Proceeds from sale of common shares, net of offering costs		817,389			138,173			313,330
Other financing activities		(5,326	)		—			—

Net cash provided by financing activities		1,800,690			802,563			579,823

Increase in cash and cash equivalents for the year		62,065			102,983			8,048
Effect of exchange rate changes		(11,065	)		(4,421	)		620
Cash and cash equivalents at beginning of year		144,541			45,979			37,311

Cash and cash equivalents at end of year	$	195,541		$	144,541		$	45,979

Interest paid, including capitalized interest of $1,425 in 2015, $1,860 in 2014, and $1,729 in 2013	$	107,228		$	91,890		$	58,110
Supplemental schedule of non-cash investing activities:
Mortgage loan issued from sale of real estate	$	—		$	12,500		$	—
Supplemental schedule of non-cash financing activities:
Dividends declared, not paid	$	52,402		$	38,461		$	35,778

See accompanying notes to consolidated financial statements.

Index to Financial Statements

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Consolidated Balance Sheets


	December 31,
	2015			2014
	(Amounts in thousands, except for per unit data)
ASSETS
Real estate assets
Land	$	315,787		$	192,551
Buildings and improvements		2,675,803			1,848,176
Construction in progress and other		49,165			23,163
Intangible lease assets		256,950			108,885
Net investment in direct financing leases		626,996			439,516
Mortgage loans		757,581			397,594

Gross investment in real estate assets		4,682,282			3,009,885
Accumulated depreciation		(232,675	)		(181,441	)
Accumulated amortization		(25,253	)		(21,186	)

Net investment in real estate assets		4,424,354			2,807,258
Cash and cash equivalents		195,541			144,541
Interest and rent receivables		46,939			41,137
Straight-line rent receivables		82,155			59,128
Other loans		664,822			573,167
Other assets		195,540			95,099

Total Assets	$	5,609,351		$	3,720,330

LIABILITIES AND CAPITAL
Liabilities
Debt, net	$	3,322,541		$	2,174,648
Accounts payable and accrued expenses		84,628			74,195
Deferred revenue		29,358			27,207
Lease deposits and other obligations to tenants		12,831			23,805
Payable due to Medical Properties Trust, Inc.		52,338			38,038

Total liabilities		3,501,696			2,337,893
Commitments and Contingencies
Capital
General partner — issued and outstanding — 2,363 units at December 31, 2015 and 1,722 units at December 31, 2014		21,773			14,055
Limited Partners:
Common units — issued and outstanding — 234,381 units at December 31, 2015 and 171,021 units at December 31, 2014		2,153,769			1,390,296
LTIP units — issued and outstanding — 292 units at December 31, 2015 and 292 units at December 31, 2014		—			—
Accumulated other comprehensive loss		(72,884	)		(21,914	)

Total MPT Operating Partnership, L.P. capital		2,102,658			1,382,437
Non-controlling interests		4,997			—

Total Capital		2,107,655			1,382,437

Total Liabilities and Capital	$	5,609,351		$	3,720,330

See accompanying notes to consolidated financial statements.

Index to Financial Statements

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Consolidated Statements of Net Income


	For the Years Ended December 31,
	2015			2014			2013
	(Amounts in thousands, except for per unit data)
Revenues
Rent billed	$	247,604		$	187,018		$	132,578
Straight-line rent		23,375			13,507			10,706
Income from direct financing leases		58,715			49,155			40,830
Interest and fee income		112,184			62,852			58,409

Total revenues		441,878			312,532			242,523
Expenses
Real estate depreciation and amortization		69,867			53,938			36,978
Impairment charges		—			50,128			—
Property-related		3,792			1,851			2,450
Acquisition expenses		61,342			26,389			19,494
General and administrative		43,639			37,274			30,063

Total operating expense		178,640			169,580			88,985

Operating income		263,238			142,952			153,538
Other income (expense)
Interest and other income (expense)		595			5,481			(319	)
Earnings from equity and other interests		2,849			2,559			3,554
Debt refinancing and unutilized financings expense		(4,368	)		(1,698	)		—
Interest expense		(120,884	)		(98,156	)		(66,746	)
Income tax expense		(1,503	)		(340	)		(726	)

Net other expenses		(123,311	)		(92,154	)		(64,237	)

Income from continuing operations		139,927			50,798			89,301
Income (loss) from discontinued operations		—			(2	)		7,914

Net income		139,927			50,796			97,215
Net income attributable to non-controlling interests		(329	)		(274	)		(224	)

Net income attributable to MPT Operating Partnership partners	$	139,598		$	50,522		$	96,991

Earnings per unit — basic
Income from continuing operations attributable to MPT Operating Partnership partners	$	0.64		$	0.29		$	0.59
Income from discontinued operations attributable to MPT Operating Partnership partners		—			—			0.05

Net income attributable to MPT Operating Partnership partners	$	0.64		$	0.29		$	0.64

Weighted average units outstanding — basic		217,997			169,999			151,439

Earnings per unit — diluted
Income from continuing operations attributable to MPT Operating Partnership partners	$	0.63		$	0.29		$	0.58
Income from discontinued operations attributable to MPT Operating Partnership partners		—			—			0.05

Net income attributable to MPT Operating Partnership partners	$	0.63		$	0.29		$	0.63

Weighted average units outstanding — diluted		218,304			170,540			152,598

See accompanying notes to consolidated financial statements.

Index to Financial Statements

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income


	For the Years Ended December 31,
(In thousands)	2015			2014			2013
Net income	$	139,927		$	50,796		$	97,215
Other comprehensive income (loss):
Unrealized gain on interest rate swap		3,139			2,964			3,474
Foreign currency translation (loss) gain		(54,109	)		(15,937	)		67

Total comprehensive income		88,957			37,823			100,756
Comprehensive income attributable to non-controlling interests		(329	)		(274	)		(224	)

Comprehensive income attributable to MPT Operating Partnership partners	$	88,628		$	37,549		$	100,532

See accompanying notes to consolidated financial statements.

Index to Financial Statements

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Consolidated Statements of Capital

For the Years Ended December 31, 2015, 2014 and 2013

(Amounts in thousands, except per unit data)


	General Partner					Limited Partners										Accumulated Other Comprehensive Loss			Non- Controlling Interests			Total Capital
	General Partner					Common					LTIPs
	Units		Unit Value			Units		Unit Value			Units		Unit Value
Balance at December 31, 2012		1,357	$	10,630			134,978	$	1,052,056			221	$	—		$	(12,482	)	$	—		$	1,050,204

Net income		—		972			—		95,748			—		271			—			224			97,215
Unrealized gain on interest rate swaps		—		—			—		—			—		—			3,474			—			3,474
Foreign currency translation gain		—		—			—		—			—		—			67			—			67
Unit vesting and amortization of unit-based compensation		9		88			802		8,745			71		—			—			—			8,833
Proceeds from offering (net of offering costs)		242		3,133			23,922		310,197			—		—			—			—			313,330
Distributions to non- controlling interests		—		—			—		—			—		—			—			(224	)		(224	)
Distributions declared ($0.81 per unit)		—		(1,282	)		—		(126,748	)		—		(271	)		—			—			(128,301	)

Balance at December 31, 2013		1,608	$	13,541			159,702	$	1,339,998			292	$	—		$	(8,941	)	$	—		$	1,344,598

Net income		—		508			—		49,769			—		245			—			274			50,796
Unrealized gain on interest rate swaps		—		—			—		—			—		—			2,964			—			2,964
Foreign currency translation loss		—		—			—		—			—		—			(15,937	)		—			(15,937	)
Unit vesting and amortization of unit-based compensation		8		92			769		9,073			—		—			—			—			9,165
Proceeds from offering (net of offering costs)		106		1,382			10,550		136,791			—		—			—			—			138,173
Distributions to non- controlling interests		—		—			—		—			—		—			—			(274	)		(274	)
Distributions declared ($0.84 per unit)		—		(1,468	)		—		(145,335	)		—		(245	)		—			—			(147,048	)

Balance at December 31, 2014		1,722	$	14,055			171,021	$	1,390,296			292	$	—		$	(21,914	)	$	—		$	1,382,437

Net income		—		1,399			—		138,199			—		—			—			329			139,927
Sale of non-controlling interests		—		—			—		—			—		—			—			5,000			5,000
Unrealized gain on interest rate swaps		—		—			—		—			—		—			3,139			—			3,139
Foreign currency translation loss		—		—			—		—			—		—			(54,109	)		—			(54,109	)
Unit vesting and amortization of unit-based compensation		8		111			743		11,011			—		—			—			—			11,122
Proceeds from offering (net of offering costs)		633		8,175			62,617		809,214			—		—			—			—			817,389
Distributions to non- controlling interests		—		—			—		—			—		—			—			(332	)		(332	)
Distributions declared ($0.88 per unit)		—		(1,967	)		—		(194,951	)		—		—			—			—			(196,918	)

Balance at December 31, 2015		2,363	$	21,773			234,381	$	2,153,769			292	$	—		$	(72,884	)	$	4,997		$	2,107,655

See accompanying notes to consolidated financial statements.

Index to Financial Statements

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Consolidated Statements of Cash Flows


	For the Years Ended December 31,
	2015			2014			2013
	(Amounts in thousands)
Operating activities
Net income	$	139,927		$	50,796		$	97,215
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		71,827			55,162			38,818
Amortization and write-off of deferred financing costs and debt discount		6,085			5,105			3,559
Direct financing lease interest accretion		(8,032	)		(6,701	)		(5,774	)
Straight-line rent revenue		(26,187	)		(16,325	)		(11,265	)
Unit-based compensation expense		11,122			9,165			8,833
Gain from sale of real estate		(3,268	)		(2,857	)		(7,659	)
Impairment charges		—			50,128			—
Straight-line rent write-off		2,812			2,818			1,457
Other adjustments		(1,967	)		520			(70	)
Decrease (increase) in:
Interest and rent receivable		(5,599	)		(3,856	)		(13,211	)
Other assets		(8,297	)		764			1,855
Accounts payable and accrued expenses		26,540			6,209			23,867
Deferred revenue		2,033			(485	)		3,177

Net cash provided by operating activities		206,996			150,443			140,802
Investing activities
Cash paid for acquisitions and other related investments		(2,218,869	)		(767,696	)		(654,922	)
Net proceeds from sale of real estate		19,175			34,649			32,409
Principal received on loans receivable		771,785			11,265			7,249
Investment in loans receivable		(354,001	)		(12,782	)		(3,746	)
Construction in progress		(146,372	)		(102,333	)		(41,452	)
Other investments, net		(17,339	)		(13,126	)		(52,115	)

Net cash used for investing activities		(1,945,621	)		(850,023	)		(712,577	)
Financing activities
Additions to term debt		681,100			425,000			424,580
Payments of term debt		(283	)		(100,266	)		(11,249	)
Payment of deferred financing costs		(7,686	)		(14,496	)		(9,760	)
Revolving credit facilities, net		509,415			490,625			(20,000	)
Distributions paid		(182,980	)		(144,365	)		(120,309	)
Lease deposits and other obligations to tenants		(10,839	)		7,892			3,231
Proceeds from sale of units, net of offering costs		817,389			138,173			313,330
Other financing activities		(5,326	)		—			—

Net cash provided by financing activities		1,800,690			802,563			579,823

Increase in cash and cash equivalents for the year		62,065			102,983			8,048
Effect of exchange rate changes		(11,065	)		(4,421	)		620
Cash and cash equivalents at beginning of year		144,541			45,979			37,311

Cash and cash equivalents at end of year	$	195,541		$	144,541		$	45,979

Interest paid, including capitalized interest of $1,425 in 2015, $1,860 in 2014, and $1,729 in 2013	$	107,228		$	91,890		$	58,110
Supplemental schedule of non-cash investing activities:
Mortgage loan issued from sale of real estate	$	—		$	12,500		$	—
Supplemental schedule of non-cash financing activities:
Dividends declared, not paid	$	52,402		$	38,461		$	35,778

See accompanying notes to consolidated financial statements.

Index to Financial Statements

MEDICAL PROPERTIES TRUST, INC. AND SUBSIDIARIES

MPT OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

1. Organization

Medical Properties Trust, Inc., a Maryland corporation, was formed on August 27, 2003, under the General Corporation Law of Maryland for the purpose of engaging in the business of investing in, owning, and leasing healthcare real estate. Our operating partnership subsidiary, MPT Operating Partnership, L.P., (the “Operating Partnership”) through which we conduct all of our operations, was formed in September 2003. Through another wholly-owned subsidiary, Medical Properties Trust, LLC, we are the sole general partner of the Operating Partnership. At present, we directly own substantially all of the limited partnership interests in the Operating Partnership and have elected to report our required disclosures and that of the Operating Partnership on a combined basis except where material differences exist.

We have operated as a real estate investment trust (“REIT”) since April 6, 2004, and accordingly, elected REIT status upon the filing in September 2005 of the calendar year 2004 federal income tax return. Accordingly, we will generally not be subject to U.S. federal income tax, provided that we continue to qualify as a REIT and our distributions to our stockholders equal or exceed our taxable income.

Our primary business strategy is to acquire and develop real estate and improvements, primarily for long-term lease to providers of healthcare services such as operators of general acute care hospitals, inpatient physical rehabilitation hospitals, long-term acute care hospitals, surgery centers, centers for treatment of specific conditions such as cardiac, pulmonary, cancer, and neurological hospitals, and other healthcare-oriented facilities. We also make mortgage and other loans to operators of similar facilities. In addition, we may obtain profits or equity interests in our tenants, from time to time, in order to enhance our overall return. We manage our business as a single business segment. All of our properties are located in the United States and Europe.

2. Summary of Significant Accounting Policies

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

We continually evaluate all of our transactions and investments to determine if they represent variable interests in a variable interest entity (“VIE”). If we determine that we have a variable interest in a VIE, we then evaluate if we are the primary beneficiary of the VIE. The evaluation is a qualitative assessment as to whether we have the ability to direct the activities of a VIE that most significantly impact the entity’s economic performance. We consolidate each VIE in which we, by virtue of or transactions with our investments in the entity, are considered to be the primary beneficiary.

At December 31, 2015, we had loans and/or equity investments in certain VIEs, which are also tenants of our facilities (including but not limited to Ernest, Capella and Vibra). We have determined that we are not the primary beneficiary of these VIEs. The carrying value and classification of the related assets and maximum

Index to Financial Statements

exposure to loss as a result of our involvement with these VIEs are presented below at December 31, 2015 (in thousands):


VIE Type	Maximum Loss Exposure(1)		Asset Type Classification		Carrying Amount(2)
Loans, net	$	984,512		Mortgage and other loans	$	921,930
Equity investments	$	54,033		Other assets	$	6,232

(1)

Our maximum loss exposure related to loans with VIEs represents our current aggregate gross carrying value of the loan plus accrued interest and any other related assets (such as rents receivable), less any liabilities. Our maximum loss exposure related to our equity investment in VIEs represent the current carrying values of such investment plus any other related assets (such as rent receivables) less any liabilities.

(2)	Carrying amount reflects the net book value of our loan or equity interest only in the VIE.

For the VIE types above, we do not consolidate the VIE because we do not have the ability to control the activities (such as the day-to-day healthcare operations of our borrowers or investees) that most significantly impact the VIE’s economic performance. As of December 31, 2015, we were not required to provide financial support through a liquidity arrangement or otherwise to our unconsolidated VIEs, including circumstances in which it could be exposed to further losses (e.g., cash short falls).

Typically, our loans are collateralized by assets of the borrower (some assets of which are on the premises of facilities owned by us) and further supported by limited guarantees made by certain principals of the borrower.

See Note 3 for additional description of the nature, purpose and activities of our more significant VIEs and interests therein.

Investments in Unconsolidated Entities: Investments in entities in which we have the ability to influence (but not control) are typically accounted for by the equity method. Under the equity method of accounting, our share of the investee’s earnings or losses are included in our consolidated statements of net income, and we have elected to record our share of such investee’s earnings or losses on a 90-day lag basis. The initial carrying value of investments in unconsolidated entities is based on the amount paid to purchase the interest in the investee entity. Subsequently, our investments are increased/decreased by our share in the investees’ earnings and decreased by cash distributions from our investees. To the extent that our cost basis is different from the basis reflected at the investee entity level, the basis difference is generally amortized over the lives of the related assets and liabilities, and such amortization is included in our share of equity in earnings of the investee. We evaluate our equity method investments for impairment based upon a comparison of the fair value of the equity method investment to its carrying value. If we determine a decline in the fair value of an investment in an unconsolidated investee entity below its carrying value is other — than — temporary, an impairment is recorded.

Cash and Cash Equivalents: Certificates of deposit, short-term investments with original maturities of three months or less and money-market mutual funds are considered cash equivalents. The majority of our cash and cash equivalents are held at major commercial banks which at times may exceed the Federal Deposit Insurance Corporation limit. We have not experienced any losses to date on our invested cash. Cash and cash equivalents which have been restricted as to its use are recorded in other assets.

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 those acquired as part of a property acquisition. 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

Index to Financial Statements

consolidated statements of net income is presented as two amounts: rent billed and straight-line revenue. Rent billed 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 rent billed 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 may provide for additional rents contingent upon a percentage of the tenant’s revenue in excess of specified base amounts/thresholds (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 when the consumer price index exceeds the annual minimum percentage increase in the lease. Contingent rents are recorded as rent billed revenue in the period earned.

We use DFL accounting to record rent on certain leases deemed to be financing leases, per accounting rules, rather than operating leases. For leases accounted for as DFLs, the 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.

Tenant payments for certain taxes, insurance, and other operating expenses related to our facilities (most of which are paid directly by our tenants to the government or appropriate third party vendor) are recorded net of the respective expense as generally our leases are “triple-net” leases, with terms requiring such expenses to be paid by our tenants. Failure on the part of our tenants to pay such expense or to pay late would result in a violation of the lease agreement, which could lead to an event of default, if not cured.

Index to Financial Statements

be obtained in connection with the acquisition or financing of the respective property, internal data from previous acquisitions or developments, 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 our facilities, 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 the lease term. We amortize any resulting capitalized below-market lease values as an increase to rental income over the lease term.

We measure the aggregate value of lease intangible assets acquired based on the difference between (i) the property valued with new or in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. 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.

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 these intangible assets to expense over the initial term of the respective leases. If a lease is terminated, the unamortized portion of the lease intangibles are charged to expense.

Goodwill: Goodwill is deemed to have an indefinite economic life and is not subject to amortization. Goodwill is tested annually for impairment and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. The impairment testing involves a two-step approach. The first step determines if goodwill is impaired by comparing the fair value of the reporting unit as a whole to its book value. If a deficiency exists, the second step measures the amount of the impairment loss as the difference between the implied fair value of goodwill and its carrying value. We have not had any goodwill impairments.

Real Estate and Depreciation: Real estate, consisting of land, buildings and improvements, are maintained at cost. Although typically paid by our tenants, any expenditure for ordinary maintenance and repairs that we pay are expensed to operations as incurred. Significant renovations and improvements which improve and/or extend the useful life of the asset are capitalized and depreciated over their estimated useful lives. We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets, including an estimated liquidation amount, during the expected holding periods are less than the carrying amounts of those assets. Impairment losses are measured as the difference between carrying value and fair value of the assets. For assets held for sale, we cease recording depreciation expense and adjust the assets’ value to the lower of its carrying value or fair value, less cost of disposal. Fair value is based on estimated cash flows discounted at a risk-adjusted rate of interest. We classify real estate assets as held for sale when we have commenced an active program to sell the assets, and in the opinion of management, it is probable the asset will be sold within the next 12 months.

Index to Financial Statements

Construction in progress includes the cost of land, the cost of construction of buildings, improvements and fixed equipment, and costs for design and engineering. Other costs, such as interest, legal, property taxes and corporate project supervision, which can be directly associated with the project during construction, are also included in construction in progress. We commence capitalization of costs associated with a development project when the development of the future asset is probable and activities necessary to get the underlying property ready for its intended use have been initiated. We stop the capitalization of costs when the property is substantially complete and ready for its intended use.

Depreciation is calculated on the straight-line method over the useful lives of the related real estate and other assets. Our weighted-average useful lives at December 31, 2015 are as follows:


Buildings and improvements			38.9 years
Tenant lease intangibles			25.6 years
Leasehold improvements			22.1 years
Furniture, equipment and other			9.3 years

Losses on DFL Receivables: Allowances are established for DFLs based upon an estimate of probable losses for the individual DFLs dee