Medical Properties Trust Inc (MPW) 2006 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2006 Medical Properties Trust Incorporated Earnings Conference Call. My name is Sharon and I will be your coordinator for today. [OPERATOR INSTRUCTIONS] I now would like to turn the presentation over to the General Counsel of the company, Mr. Mike Stewart, please proceed.

Good morning, thank you for joining the Medical Properties Trust conference call to review the company's announcement yesterday regarding its results for the second quarter of 2006. With me today are Edward K. Aldag, Jr., Chairman, President and CEO of the company and Steven Hamner our Chief Financial Officer.

During the course of this call we will make predictions and certain other statements that may be considered forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to known and unknown risk, uncertainties and other factors that may cause our financial results and future events to differ materially from those expressed in or underlying such forward-looking statements.

We refer you to the company's reports filed with the Securities and Exchange Commission for a discussion of the factors that could cause the company's actual results of future events to differ materially from those expressed in this call. The information being provided today is as of this date only and except as required by the federal securities laws, the company disclaims any obligation to update any such information.

In addition, during the course of the conference call, we will describe certain non-GAAP financial measures which should be considered in addition to and not in lieu of comparable GAAP financial measures. Please refer to our website at www.medicalpropertiestrust.com for the most directly comparable financial measures and related reconciliation. I will now turn the call over to our Chief Executive Officer, Ed Aldag.

Thank you Mike and thank all of you for joining our second investors' call of the year. Medical Properties Trust has had significant growth strides in the two plus years as our original equity funding in March of 2004. Our second quarter of 2006 had revenue of more than 82% over the same period last year, net income of more than 81% over the same period of last year and FFO of more than 88%.

Year to date, our FFO is on track, even if we have no further growth in the third or fourth quarters of this year, to be an increase of over 61% over 2005. We are still overall very pleased with where we are and where we think we will be by year end and on into 2007. However, we are disappointed with the pace of our acquisitions thus far in 2006.

Two things unexpectedly happened this summer. One, we underestimated the disruption we would have from summer vacations, not summer vacations by the MPT staff but from disruptions from the summer vacations of clients, lawyers and other advisors of our customers. And two, we spent a considerable amount of man hours working on two projects totaling $70 million that we turned down late in the due diligence process. Our pipeline of potential properties is still extremely large. Obviously, we won't close on all of these properties. However, we are still confident the potential acquisition market is very large.

As most of you know from our previous press release this week, our director of acquisitions has decided for personal reasons to return to his roots in commercial banking. We certainly wish him the very best. We have begun a national search for his replacement right away.

In the meantime, I will be re-assuming direct control of our acquisitions department. Even while this position is empty, we remain confident that we can close between $200 and $300 million on an annualized basis. With the right person in this position, someone who has the right kind of healthcare experience, we believe that this pace will even expand beyond to those numbers.

Year to date, we have closed on approximately $90 million of properties. We're currently working diligently on several more investments that we hope to be able to announce in the very near future. Again, we are confident that we will close at least $200 million before year end, but the timing is obviously behind where we had hoped to be.

In any event, with the acquisitions we have just announced, to development projects we have coming online in the fourth quarter and the investments we anticipate making soon, we expect that our dividends to our shareholders will continue to grow over the next two quarters and into 2007.

With the exception of the unanticipated summer delays, we are very bullish on the business plan and growth of the MPT prospects. On our existing portfolio, the second quarter was a very good quarter. Despite the normal summer slowdown in healthcare, the lease coverage for all of our different property types was strong.

The acute care sector was 6.51 times coverage, the [ltax] sector grew to 2.38 times and the rehab hospital sector grew to 1.89 times. [Vibra] continued its remarkable performance growing its base rent coverage to 2.07 times in the second quarter for their original six properties.

We are delighted to be able to announce several agreements reached with Vibra which will ensure that we have a first right of refusal on their future properties for five years on a pre negotiated terms. Included in these agreements are repayments on the operating loan, various lease enhancements and reductions in percentage rent. Steve will go into these in more detail in just a few moments.

Our facility in West Houston, the Town and Country Hospital, continues to be behind in its projections. They've struggled with obtaining needed managed care contracts in a timely fashion. We've been working closely with the physician limited partners and the corporate general partner and are still confident that this facility will be a very successful hospital in the not too distant future.

The facility is paying rent as planned and the financial performance is improving as you would expect in this ramp up period. Our two facilities in Louisiana that suffered from the after effects of Hurricane Katrina appear to have started their rebound. The lease coverage ratios have improved to 2.12 times over 1.66 times in the first quarter of '06 and 1.25 times in the fourth quarter of '05.

Our development projects continue to push along fine with the only current issue being a delay in Bloomington in delivery of some of the furnishings. This will push the project back slightly in its opening -- we had hoped the project would actually be able to open early due to the fact that construction will complete sooner than expected. But now it appears the hospital will open as originally planned in the fourth quarter.

On the legislative front, we expect that all of our hospitals will see good increases in reimbursement starting in the fourth quarter. The only exception we expect to see any decrease in reimbursement is our facility in Odessa, Texas, and the lease coverage is so high out there we will not see any negative effect.

At this time I'd like to turn it over to Steve Hamner, our Executive Vice President and Chief Financial Officer to go over the details of the second quarter financial results as well as review the Vibra operating loan paydown. Steve?

Thank you, Ed. I will review the operating results for the second quarter, discuss some significant transactions that occurred after the quarter ended, describe the general terms of our agreement with Vibra and then translate all of that into what we believe the remainder of the year will look like.

So let's start with the numbers. The June 30 quarter was uneventful, with respect to acquisitions as Ed has already described, so operating results are generally comparable to the first quarter of this year because our portfolio was comparable in both quarters. We generated marginally higher revenues as a result of increases to the lease space of the Town and Country hospital, but these were more than offset by higher share compensation expenses and marginally higher interest expense.

The increase share compensation was primarily related to the annual grant of deferred stock units to our independent directors and the fact that this amount was increased by approximately $300,000 over our expectations for the quarter. The deferred stock units granted to directors vest immediately upon the day of each annual meeting. And that of course happened in May during the second quarter. So the net effect on our comparable per share results, as compared to the first quarter, was zero for net income, and a negative $0.01 for FFO.

Ed has already provided a summary in comparison to last year's comparable results, so we won't go through that now, other than to reiterate that as a relatively small company on a steep growth curve, the changes from year to year are not necessarily indicative of future performance. We had hoped to acquire four hospitals in June and one in July that would have had an aggregate investment value of approximately $155 million.

For the reasons that you have already heard, we ended up terminating the acquisition of two of those hospitals, with a total value of $70 million, closing on two of the hospitals and we expect to acquire the fifth hospital very shortly. In addition, we announced two days ago the acquisition of Montclair Hospital in California, a $20 million, excuse me, a $25 million transaction, a facility that was not even in our pipeline at the time of our last quarterly earnings conference.

The aggregate value of the three hospitals we closed on since June 30, plus the one we expect to acquire shortly, is approximately $110 million, and the lease and loan rate averaged 10.1% for the initial cash rate and 11.0% on a GAAP basis. When, in just a few minutes we discuss our future FFO expectations, we will use this portfolio, including these acquisitions as a baseline for the estimate.

Before we go through that, though, let me describe the transactions that we expect to complete with Vibra in the very near future. In fact, we've been notified by Vibra that it should happen in a matter of days. Vibra has notified us that they expect to complete amendments to their existing credit agreements, and as a result, among other things, reduce our existing $41 million loan balance by approximately $12 million. And again, we expect that to happen within a few days.

Concurrent with that loan reduction payment, Vibra will also repurchase the Kentfield Long Term Acute Care Hospital for a price that approximates our original investment in the property, approximately $7.6 million. As a result of these transactions and certain percentage rent adjustments which I'll discuss momentarily, we expect that Vibra, again, on the normalized, on the pro forma portfolio that we have today, we expect that Vibra will represent no more than 35% of our investment and 35% of our total revenue.

Obviously, as we continue to acquire non-Vibra assets, we expect this portion that is represented by Vibra to continue to decline. For the benefit of the arrangements that we've negotiated with Vibra are several. Number one, Vibra has absolutely outperformed even our own very high expectations of it. And the willingness of third party lenders to provide incremental capital to Vibra at substantially lower rates than we were charging Vibra demonstrates Vibra's credit worthiness and their ability to begin expansion.

Secondly, Vibra lowers its cost of capital significantly and is able to begin retaining earnings for reinvestment and expansion. Third, we believe that this evidence, that is the Vibra strength and growth opportunities, will positively effect investors' assessment of MPT's earning stability and highlight the unique expertise that we have to find and underwrite successfully investments that bring bonus returns to our shareholders as Vibra certainly has and will continue to do.

Fourth, we negotiated a very favorable option with Vibra whereby MPT will have a firm right of refusal at pre-determined lease rates and terms on all of Vibra's future transactions for the next five years, or earlier if we acquire $200 million of assets related to Vibra.

In return, Vibra's percentage rent will be 1% starting with the $12 million loan reduction in the next few days and may be reduced to 0% subject to further repayment of the loan and new revenue from Vibra to replace the percentage rent that we would otherwise earn. And this revenue is expected to come from the first $50 million of additional properties that we have under the right of refusal.

Now I'll wrap up our prepared remarks in just a moment and move onto questions if there are any. But let me just take a moment to discuss our expectations for the remainder of the year. Just to revisit the math, we have made investments in health care real estate totaling $90 million and we expect to close another $20 million acquisition during the next two weeks, bringing the total to $110 million for the year.

We want to reiterate that we still expect to reach our $200 million goal by year end, and in that regard, we continue to work diligently on several acquisitions that we hope will get us there. However, based on a scenario that we do not acquire any additional properties over and above the $110 million, we believe our full year FFO would fall between $1.06 and $1.08 per share.

Approximately $0.03 per share of our reduction in full year FFO estimates is attributable to the reduction of the Vibra loan and the sale of Kentfield. Going forward, that will represent about a $0.07 per share effect on an annualized basis. Substantially all of the remainder of the estimate reduction is attributable to the previously discussed reasons behind the slower pace of acquisitions than we had planned and to a lesser extent rising interest rates.

Let me reiterate again that we believe we will be successful in making additional investment during the year. And of course any investment that we do make will be immediately additive to the FFO estimate that we've just made and that is based solely on our current portfolio.

Operator, at this time, we are prepared to take questions, and we turn this back over to you.

[OPERATOR INSTRUCTIONS] And our first question will come from the line of Steve Swett from Wachovia. Please proceed.

Hey guys.

Hey Steve, how are you doing?

Good. A couple of questions, Ed. Have you guys made any assumptions on incremental capital funding? Or is it just closing the outstanding acquisitions and then letting that income and your current balance sheet run forward in terms of backing your guidance?

With the guidance we're giving, there's no incremental share issuance in there. We still have a tremendous amount of liquidity available to us by virtue of a number of initiatives, including -- we've issued $85 million in unsecured notes in the last few weeks. We expect to raise that to $100 million shortly.

We are in negotiations with our revolver lender to increase the revolver capacity to as much as $225 million, and we of course have a number of properties that are unencumbered that will allow us as we projected during the year to acquire as much as $300 million before it becomes necessary to think about alternative forms of capital. So that's a long winded answer to your question.

Again, we're basing the guidance on the portfolio today and plus the $20 million deal that we expect to close shortly. And we can go all the way up to $300 million for the year without coming back for more equity.

Okay. And the second question, are there other assets in the portfolio that are subject to the repurchase agreements?

Yes. We have one facility, the original facility with the Desert Valley Group is subject to a repurchase, I believe, Steve, next year?

Right. Please keep in mind that the [Pachino] facility and we announced this earlier this week was also subject to a repurchase agreement. We have renegotiated that repurchase agreement from a two-year which would have made it eligible for repurchase in December of next year, to a 10-year, which makes it eligible for repurchase not until 2016.

Now let me clarify that that Kentfield facility that we are going to resell to Vibra is not subject to a repurchase, that's the transaction that is beneficial to us and allows Vibra to better achieve its goals, so that was something that we were happy to do, we were not obligated to do that.

As all of you that have been following us since the beginning will recall, Kent Field is one of the facilities that we have always been concerned about long term. So this is a good strategic move for us.

Okay. And then on the Vibra agreement that you alluded to, I think you said that the percentage rent drops to 1%. Is that something that happens immediately, subject to this renegotiation?

It does, it happens immediately upon their repayment of the $12 million.

Okay, so it drops, that one percentage applies then, to -- I thought before it was like a staged reduction.

It was, that was the original agreement.

Okay, so that's been changed and that's a part of the reduction in guidance?

That's correct.

That's exactly right, yes.

Okay. And then last question on the departure of the acquisitions director. A couple questions, Ed. Was that related at all to the, I guess, the disappointing pace that you guys have alluded to? And do you have any expectations on timing? I know it took you a long time to fill that role before.

Yes -- no it was not. It is purely based on Robert's personal decision as some personal matters for Robert. You'll recall, he's only been here a short four months and he truly hasn't had any effect on the acquisitions one way or the other, positive or negative at this point. We hope to have his replacement in hand, it -- certainly well in advance of year end.

Okay, thanks.

And from JP Morgan, we have a question coming from the line of Mike Mueller. Please proceed.

Hi good morning guys.

Hi Mike, how are you doing?

Pretty good, pretty good. A few questions for you. Obviously I had some of the Vibra operating loan paid down, can you talk a little bit first about your expectation about subsequent pay downs? Are you expecting any more by year end? Any more in '07, what should we be thing about from here?

Yes -- no, this would be all of it we would expect by year end. We would expect that giving another 12 to 18 months they'd probably make another significant pay down. This is a pay down of $12 million plus the repurchase of almost $8 million on the Kentfield facility. So it's a reduction in our exposure to Vibra of almost - of more than $20 million. So we don't expect that they would have the ability to pay down much more than that any time between now and the next 12 to 18 months.

Okay. And Steven, when you mentioned 35% exposure to Vibra, can you clarify, was that based on revenues, was that based on the portfolio with all the developments coming on line and stabilized? Does that factor in the three acquisitions you just made plus the one you're going to make?

The answer is yes on all of that. It does take into all of that and it is, almost 35% both from an investment standpoint and a revenue projected standpoint with the developments coming online and the acquisitions we've just made.

Okay. And your guidance that you put out, you said there is nothing in it from an acquisitions perspective beyond the $110, but you're confident that you're going to do $200. Should we kind of take that to believe -- should we make the leap there that you're probably going to get the $200 but it could be more of a December event as opposed to a September/October event?

Well, I think the answer is probably yes. We have several significant opportunities that could happen in the next 30 to 60 days. But that would not get us to the $200. So if I were to make an assumption and I'm not because it's just too hard to time these. But the best assumption I guess I would have would be to do it ratably starting in October.

Okay. And last question. The way you're giving guidance now, it's a little bit of a departure from how you've done it before because it seems like you're taking, here's the portfolio today and that's what it's going to throw off. Is this the way you're going to give guidance going forward, for example when you roll out '07 guidance, whether it's on the Q3 call or the Q4 call? Do you think you're going to actually put some acquisition assumptions in there or is it just going to be a run rate number that ultimately would be a lot lower than where Street estimates are now because you think most folks have some sort of deal flow factored in there?

I think it's the latter, Mike, for a couple of reasons. Number one, we are clearly a company that we don't think should trade on necessarily its current run rate. We have a significant amount of growth ahead of us for the foreseeable future. We buy very large, very complex assets, keeping in mind that we don't just go in and underwrite the real estate. We underwrite the operator as if we were actually making an investment in that operator and in fact that's the way we look at it.

And so that takes longer than a traditional just straight real estate investment and it brings the opportunity to find more issues. And we found those issues obviously in the last few weeks, we had to terminate two acquisitions -- that was very disappointing to us but the fact that our due diligence procedure goes much further than just the real estate is going to make that happen sometimes.

So, that's again kind of long winded but the point is we're not confident, I don't think anybody can be confident with picking the timing and the amount of acquisitions when any single acquisition can materially affect our guidance. We think it's best just to show where we are today. We think if we stop today where the stock price is today, there is still room for growth in that stock price and people can make their own assumptions about the timing of the acquisitions.

Okay, so, just to clarify here where you're talking about doing $200 million or so of transactions this year and I'm assuming you would still stick with that $200 or $200-plus million next year for '07. When you actually roll guidance out, you're not going to have any acquisitions in that number?

That's correct.

Okay.

We're going to show what the portfolio is doing and it's very simply arithmetic for people to figure out how much $1 of additional investment brings to the bottom line.

Okay.

People know our cap rates and people know our debt costs and as long as we're still financing acquisitions with debt, that's the way we're going to do it.

Okay, great, thanks.

And we have from the line of [Ray Abi] from Unitech International Corp., please proceed.

My question is are you planning and dividend increase this year or early next year?

Our policy has been to increase the dividend as our adjusted funds from operations increased. We haven't set the dividend for third or fourth quarter, certainly not for 2007, that will be done at the next regular meeting of the board. But again, our anticipation is, because we've acquired in the last few weeks and real shortly $110 million in new assets we'll bring a significant amount of additional funds from operations to the bottom line. Based on our history, one would expect to see the dividend come up commensurate with that.

And Ray, while the board certainly hasn't taken up the issue yet as I said in my prepared statements, we do expect the dividend to grow over the next two quarters.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS] And we do have a question coming from the line of John [Messanick] from [Washstar] Advisors. please proceed.

Good morning. Could you talk a little bit about development projects? It seems as though, kind of future ones, it seems as though the shift has kind of changed, you were heavily into development the last year or so and now more focused on acquisitions of existing properties.

John that was planned as we said in our early earnings calls of this year and then later on, we have purposely gone after acquisition of existing properties as opposed to development deals. We do have some development transactions that we're working on and I had hoped that we will have somewhere between $50 and $100 million of development projects this year. I still believe that to be the case.

And would you -- what would you think the mix is going forward, '07, '08? Would you try and, would we maybe be one, in terms of our total investments, maybe one third development, two thirds acquisitions? Or is it tough to say just because we don't know where the market is?

Well, it's tough to nail it down exactly, but I think the percentage will be closer to 20% development deals and 80% acquisition deals.

Okay, thank you. Oh, what about just kind of competition for acquisitions. I know you kind of gave some general color that they're still - it's still competitive but there are still lots of opportunities. Are you seeing an increase in competition or?

We still have not seen any increase in competition. The competition still continues to be from -- primarily from mortgage financing. But we certainly have heard that some of the other healthcare REITs are beginning to look at the hospital sector but we haven't yet run up against any of them.

Okay. Thanks for the work.

Certainly.

Thank you. And our next question will come from the line of Paul Morgan from FBR. Please proceed.

Good morning.

Hey Paul.

Hi, going back to the Vibra restructuring, is liquidity -- you made it sound like the credit agreement amendment is with the same source that they had originally had all along.

It is -- they shopped it and had other opportunities and elected to go with their existing provider.

Okay. The percentage rent adjustment, going from two to one, you made it sound like it's immediately upon the $12 million. But then you alluded going to zero. What's the timing of that?

Well, going to zero will be dependent upon doing additional deals with Vibra. Part of the agreement that we made with them is that we have a first right of refusal on their properties, all of their properties, for the next five years or $200 million, whichever comes first. As those additional properties are done by us and that's at our option, then the percentage rent will be ratcheted down based on those numbers.

But I mean, how? I mean, you disclosed, at least in your Q, that you had one deal with them in the pipeline. I mean, how? For example, is that -- I don't know if that's still there or not, but if that got done, how much from a modeling perspective, how much would your percentage rent percentage go down?

Now off that deal that was identified in the Q.

Okay. So going from the one to zero, I mean, how should we think of it from a modeling perspective? I mean, is the 1% a pretty good number for the next 12, 18 months or not?

Well, it's dependent upon deals we do with Vibra. As Ed mentioned, the one that we've already disclosed in the Q is not included in that $200 million.

Okay.

And just like, I guess any other deal, we're not at this point giving any estimates on other deals we do with Vibra.

Okay. And then the Kentfield, that was your option, like you say, it had been one of the underperforming properties. I know that the covenants are being opposed in the third quarter. Is there a relationship between the liquidity source, the Kentfield repurchase, the change in the percentage ramps and -- altogether, that this is kind of a workout of the situation to put them on a footing that enabled them to pay down the loan and move forward and acquire more properties?

No, it's not a workout. I mean, somebody --

Well, you reduced their percentage of rent for no gain to you.

You'll have to repeat the question Paul.

Okay. All at the same time, that you're repurchasing Kentfield, you're cutting the percentage rents, they're paying down the loan and just trying to relate those altogether and whether there was any relationship to the fact that the covenants are being imposed in the third quarter.

What do you mean covenants are being opposed?

You delayed them in position of the lease covenants until July 1st of this year and that's what I'm talking about.

Oh you said impose?

Yes.

I'm sorry, I thought you said opposed. No, they meet the covenants with or without Kentfield. The whole purpose is to better our credit profile with respect to Vibra to lessen the total amount of exposure we have to Vibra. To improve the quality of the revenue that comes from Vibra and to give Vibra the opportunities to continue to bring us new deals.

Paul, Kentfield is actually performing very well right now. It's a long term prospect that we've always had trouble with. Kentfield is a very old property. It is going to need some significant renovations or totally repositioning if that facility is going to do well long term, in our opinion.

So this was a great opportunity for us to get the Kentfield facility out of our portfolio and continue to reduce our overall risk to Vibra. But Vibra is performing as a management team exceptionally well. Their properties are performing exceptionally well. As I mentioned in my prepared remarks, their lease coverage ratio on their original six properties including Kentfield is over two times right now.

So we have the opportunity in our reduction of the existing percentage rent to lock Vibra up for a considerable amount of time so that we don't lose a tenant that has proven to be one of the very best operators in the country.

Do you have a sense on how much the straight-line rent has been recognized on the Kentfield?

About $400,000.

$400,000 to date. And then that $17 million project in Dallas is still on track?

Yes.

It is. Okay, thank you.

And we have a follow-up question coming from the line of Mike Mueller from JPMorgan. Please proceed.

Hi, are you guys there?

Yes, hey.

Just real quick, on the $0.07, I think that's the number you threw out for annual dilution from these Vibra dealings, can you just break that down? How much of it came, just in rough terms, from the actual sale of the property versus how much is attributable to the lower percentage rents and just kind of lower lease rate?

Well, I don't have that in front of me. I can get back to you on that.

Okay. I mean, does your gut tell you offhand it's half and half, if it's a lot more from sale?

I'll get back to you with the right answer.

Okay, thanks.

And, ladies and gentlemen, this concludes our question-and-answer session. I will now turn the mike back over to Mr. Aldag for closing remarks.

Thank you, [Sharon]. Well, thank all of you for your time today. As always, please don't hesitate to call Steve or myself, and we look forward to talking to all of you again soon. Thank you.

Again, thank you, ladies and gentlemen, for your participation in today's conference. You may now disconnect and have a good day.