Medical Properties Trust Inc (MPW) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Medical Properties Trust Second Quarter 2007 Earnings Conference Call. My name is Gina, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end [of] today's conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn today's presentation over to your host, Mr. Mike Stewart, Executive Vice President and General Counsel. Please go ahead, sir.

Good morning. Thank you for joining Medical Properties Trust Conference Call to review the Company's announcement yesterday regarding its results for the second quarter of 2007. With me today are Edward K. Aldag, Jr., Chairman, President and CEO of the Company and Steven Hamner, our Executive Vice President and Chief Financial Officer.

During the course of this call, we will make projections and certain other financial 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 or 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 us for our 2007 Second Quarter Earnings Call. In today's call, we will review the results for the second quarter and preview our expectations for the future of Medical Properties Trust. When the year began, we estimated that we would acquire $200 million of property in 2007. During the second quarter, we increased that estimate to $300 million.

This week, we are acquiring slightly more than $100 million in additional hospital properties, bringing the total investments for 2007 up to more than $245 million. Our total assets are currently are slightly over $900 million. With four and a half months left in 2007, we still feel good about our ability to hit the $300 million acquisition mark for 2007. But again, we are already $45 million over our original 2007 target.

Like all REITs, our stock has taken a real hit over the last few months, losing more than 20% of its value. However, the fundamentals of our company have not changed. We continue to generate strong dividends, paid out of cash flow. Our properties continue to perform very well, as I will go over in more detail in a few moments. For this reason, our Board approved and up to 3 million share repurchase program.

In addition to strong operations, our access to credit is in a good position during this market credit crunch. We have an existing credit facility with plenty of borrowing capacity. It is important to note during this apparent retreat from real estate and a threatened recession on the horizon, our stock is basically a healthcare stock and one that should perform well even in a recession.

Despite economic conditions, demand for healthcare will continue. Disease, aging of population, accidents and childbirth are conditions that will prevail, no matter what the economy is. Look at it this way. If the economy gets tough, your mom and dad living in the assisted living facility may have to move in with you, but if they get sick, they're still going to the hospital.

The vast majority of hospitals in this country are not owned by publicly traded -- operating companies. Furthermore, as you've heard me say numerous times, we are strong believers that healthcare is a local business. This often makes it hard for investors to get a good picture of the health of our tenants.

Obviously, much of the information one would need [directing us] the strength of our operators is sensitive to each of our operators. However, we felt it important to demonstrate to you the strength of our operators. And therefore, I'm going to walk you through some basic statistics with regard to our hospitals without referring to most of them by name.

First, let me go through the acute care hospitals. This will not include the investments that we announced this morning, which make up approximately 65% of our total portfolio. Of our 13 acute care hospitals, every one of them that was operating in the second quarter of 2006 experienced increased EBITDAR for the same period in 2007.

For those that were not open in 2006, they have all experienced increases in EBITDAR from the prior period. Only one of the hospitals experienced no growth in net patient revenue. All of the remaining ones saw strong increases in net patient revenue. Each of the hospitals that were open in the second quarter of 2006 showed decreases in operating expenses, further showing the proven experience of our operators.

DSI of Bucks County, one of our recently completed development hospitals continues to move in the right direction as it gets to a fully operational point. They doubled their surgeries performed in July. The hospital has received its Medicare billing number. They expect to have the final doctor offices and the MOB built out in October, allowing the remaining doctors to move in. The radiation therapy equipment is expected to be delivered soon.

Monroe Hospital has made tremendous progress. Vibra has done an outstanding job managing this hospital and lining up new positions with strong reputations to join the facility. We are currently in negotiations with some of the hospital's founders about leaving the facility to make way for improved operations and revenues, and are hopeful a resolution is close at hand.

One option that we always have is to terminate the existing lease, which will allow us to start fresh. In any event, we believe the prospects for this hospital remain strong. As a reminder, we have a full year's rental reserve on this facility.

I do want to specifically mention our latest development project in Houston. This facility has far exceeded all of our expectations. This facility has run at near 100% capacity almost since opening. The facility opened the first of this year. We expected it to still be below a one-to-one lease coverage ratio for the first six months. In fact, for the first six months, the lease coverage ratio was right at two times and was more than four times in the second quarter.

Now, let me turn to Vibra. Excluding their Dallas and Portland LTACHs, which are in their LTACH demonstration period, the original six facilities plus the Redding facility improved their EBITDAR 86% over the same period last year. Dallas should begin generating positive EBITDAR in the first quarter of '08, with Portland contributing to the EBITDAR by the third quarter of '08. These two facilities alone are expected to generate almost $5 million to Vibra's bottom line once they are fully operational.

Now, on our other non-Vibra, non-acute care hospitals, our three Warm Spring facilities have increased their EBITDAR 272% from December of 2006 to June 2007. Their current EBITDA margin is 14%. Even the two Louisiana facilities, which have still not fully recovered from Hurricane Katrina, have showed improved operations in recent quarters. Their combined EBITDAR grew 45% from the fourth quarter of '06 through the second quarter of '07.

One the legislative front, we will continue to watch closely the SCHIPs legislation as it moves through Congress. However, the current versions of the bill are mostly very positive from MPT. We continue to be very pleased with where our company stands. We have strong properties in strong locations with strong operators. We will continue to work on diversifying our tenant base, as we have shown with the 100 plus million dollars in acquisitions that we announced today.

As I mentioned earlier, we view this current tightening of credit as a real opportunity for MPT, and we expect to take full advantage of it. Our current acquisition pipeline is stronger today than it's been in the last two years.

I thank you for your time and interest, and I will now ask Steve to review our detailed financial numbers for the second quarter, after which we'll be glad to take questions. Steve?

Thank you, Ed. I will go through the numbers briefly, so as to allow more time for questions later. And by the way, our quarterly report on Form 10-Q will be filed with the SEC later today and will at the time be available, both on the SEC's and our websites.

FFO related to continuing operations was $0.33 per diluted share for the second quarter ended June 30, 2007. There were certain transactions that affected this calculation that need description in order for our investors and analysts to better forecast future operations.

First, we elected to accept an early repayment of the $40 million mortgage loan that was secured by the Alliance Hospital in Odessa, Texas. The operator planned to sell, and in fact, did sell the hospital, and the buyer did not want to assume the mortgage loan. We had anticipated this possibility in December of 2005 when we made the loan, and accordingly required that the borrower agree to pay us substantial penalties in the event of a early repayment. The penalty provision resulted in our receipt in the second quarter of approximately $2.3 million or $0.05 per share.

We closed the repayment transaction in late May, thereby foregoing about one month of interest that we would have otherwise received in the second quarter. That amounted to a about $0.01 per share. So, our reported FFO of $0.33 per share is about $0.04 higher than the $0.29 per share that FFO would have been absent the repayment transaction with Alliance. Again, this was not a surprise to us. When we were negotiating with the operator, beginning really over two years ago, we recognized that we had more reinvestment risk in this transaction than other of our transactions.

Our goal then was to get paid enough in the event of early repayment to give us time to find and complete a replacement investment. In the case of Alliance, we received almost six months of interest payments. And that, in fact, is exactly how it worked out.

We made the decision to accept the prepayment because we were able to recycle the capital we had invested in Alliance into better assets, better that is because the assets are significantly larger in dollar size and number of locations, so we have better diversification, better located with much stronger demographics, have higher credit quality, and in fact, are better operated.

And we were able to complete this reinvestment within a little over two months of receipt of the Alliance proceeds. And that, of course, is the $117 million acquisition that Ed mentioned a little bit earlier. The reason I'm spending so much time on this is because for the second consecutive quarter, we have demonstrated our ability to produce strong returns even when anticipated cash flows to us are interrupted.

Again, neither our success with respect to the Town and Country transactions last quarter, nor Alliance this quarter was accidental. Our lease, loan and other documents comprehended these types of risks, and we got paid for them. So, the important if somewhat long-winded points are these. With respect to any leases and loans that expose us to higher than typical reinvestment risk, we believe we will be well compensated in the event of prepayment.

And second, with the success that we've recently had with what have turned out to be short-term investments, we intend to take a closer look in the future at opportunities that may yield to us similar outsized returns over shorter time periods. And in fact, it is possible that in future periods, we will generate additional, what we'll call, bonus returns from our present portfolio.

Okay. Let's move on to the other second quarter transaction that deserves some explanation. Most of our investors are familiar with the circumstances around our termination last October of our leases related to the Houston Town and Country Hospital. Although we sold the real estate early this year, we have funded the cost of operating the hospital since the termination of the lease including the winding down of operations.

As of the end of the second quarter, we evaluated those costs and the likelihood that we would ultimately be reimbursed for them. And as a result, we recorded charges of about $2 million, or about $0.04 per share to discontinued operations. We do not expect to fund any additional material costs and accordingly, do not expect this to be a recurring charge.

A few brief words about future operations, and I'll speak briefly to the outlook for the remainder of the year and beyond. Subsequent to the completion of the $117 million in transactions that we've described this morning, our earning assets will be comprised approximately of the following.

Hospital real estate under leases, long-term leases, total of about $582 million, this is expected to yield to us on a GAAP basis approximately 12.5% over the terms of the leases. Through the end of the 2007, we estimate the cash rate on these to be about 10.4%. That cash rate and the GAAP rate obviously will converge closer each year of the typical 15-year lease terms.

Second, mortgage loans secured by hospital real estate, $227 million, these are presently yielding to us approximately 9.6% and will escalate each January at a minimum of 2%. Obviously, even though the leases and the loans are substantively equivalent from an economic perspective, from an accounting perspective even though we have built-in escalators, we don't straight-line the revenue on the mortgage loans.

Other line -- other loans including the Vibra loan, which you will remember started at $41 million and we've now reduced to about $29 million, we have a total of these other loans of about $70 million. These loans have various payment terms and are structured so that MPT has the opportunity to earn high, risk-adjusted returns and kicker-type participations, and in fact, we have done so. It's difficult to project the level of kicker and other participating type features on these loans, so we don't attempt to do so here.

We expect fee amortization into revenue to continue at about $100,000 per quarter. Our G&A in the second quarter was approximately $3 million, which included about $800,000 in share-based compensation. We expect G&A to increase marginally as we increase our investment portfolio and fill selected positions with new employees. However, we further expect that the G&A as a percentage of assets and revenue will continue to decline somewhat meaningfully.

As of June 30, we had $259 million in fixed rate debt at an average all-in GAAP rate of approximately 6.9%. The minimum remaining term on these balances is four years, our existing secured revolver, which on June 30 had a $20.5 million balance, had a spread of between 235 and 275 points over LIBOR, depending on our leverage levels.

However, we expect that spread to be reduced subject to completion of a new credit facility. For example, we are temporarily financing the acquisitions that we discussed this morning with a loan that is priced at 200 basis points over LIBOR. As Ed mentioned, we remain very positive about the likelihood that we will reach our 2007 acquisition target of $300 million. And obviously, the timing of any future acquisitions will affect the lease and interest revenue during the third and fourth quarters and into 2008.

With that Operator, we'll turn the call over to you for questions.

(OPERATOR INSTRUCTIONS)

And your first question is from the line of Tayo Okusanya with UBS. You may proceed.

Good morning, guys.

Good morning.

A couple of questions. Specifically, I just want to focus on some of your -- some of the assets. Monroe, I knew you gave a brief overview of the update. But, I guess what I'm really trying to understand is, you talked a little bit about potentially in a worst-case scenario, you would terminate the lease. But, the last time that we spoke, there were a whole bunch of initiatives going on that Vibra -- Vibra had going on there to try to improve overall operations. Can you give us a sense as [to] those initiatives are working or how you're feeling about that at this point?

Yes. Tayo, those are working very, very well. Vibra has done an outstanding job with those, and we have a tremendous amount of interest from the new -- from new primary physicians and some new specialties.

As I mentioned in the prepared remarks, we are in negotiations with some of the founders to have them exit the facility. If we're able to do that without terminating the lease, then everything will just continue along as -- on the progress that it's making. If we --.

Well, why would you want to -- I'm sorry. Why would you want some of the founders to exit the property though?

Some of the physicians that want to practice at the facility are not comfortable practicing with some of the original founders.

Oh, okay. Got it, fair enough.

And so if we terminate the lease, the -- all the momentum and new physicians that want to come would still continue to come.

Got it, okay. That's helpful. And then, the -- okay, that's fine. And then the second property, Prime, because I'm sure you guys probably saw the article that came out in the LA Times over the weekend that talked a little bit about what [Prem] has been doing over the past few years, and as well as the Anaheim hospital being rejected.

I just want to kind of get your sense of your reaction to this article that now talks about some of the positive things you have been doing, but also kind of some the negative things that -- in regards to some concerns that communities have that is putting more focus on making profits, versus actually the public need for a hospital in those areas.

Tayo, I won't comment on the direction and tone made by the reporter from that -- on that particular article. Let me address the facts. The facts are that the particular Anaheim situation was rejected by the Attorney General's Office with absolutely nothing to do with Prime. It had to do with their belief that the bidding process done by Anaheim Memorial was not completely -- not done completely right.

Okay.

Anaheim Memorial is in the process of reviewing that with the Attorney General's Office right now, and we don't expect that that particular situation is a dead situation. With regard to some of the comments made about Prime and the community-based hospitals, Prime has given to more charitable work in their hospitals than the vast majority of for-profit hospitals in the whole entire California market and probably most markets.

They've done an outstanding job of serving each of the communities that they're in, and certainly you're always going to have some conflict between people that believe all hospitals should be not-for-profit and those that have a problem with people making a profit and serving the community.

But, then just to follow up on that issue, since Prime is really divided -- Prime is really defined more or less by Prem. Everyone kind of knows him and some of the things that they put it in here about the markets' personal experiences over the past few years, none of that stuff bothers you as potential negative PR, or whatever you want to call it, around your largest tenants?

Well clearly, it does from a negative PR standpoint. But, none of those were issues that we were unaware of. They were issues that Prem made us aware of from the very first time we met with Prem. And they are issues that we have gotten comfortable with in the big scope of things, given what Prem has done -- on a going forward basis.

Okay, great. Thanks, for that. Next new question again, thank you for being generous with your time. The SCHIPs program, the increase in funding that the Democrats are proposing right now at the detriment of Medicare Part A, can you just talk a little bit about why you think that's a positive for you guys?

Well as you know, it's a positive on both the LTACH and the rehab portion of it. And we believe it's essentially a wash in the acute care side of it. Obviously, we have a long way to go before it's final, but that's where we are on it right now.

Okay. And if you -- it's a positive on the LTACH side because -- again, if you could just kind of remind me what [they're] proposing?

Sure. On the LTACH side, the first thing they're proposing is a moratorium on the development of new LTACHs.

Got it.

That obviously helps our existing LTACHs.

All right.

They're also proposing with doing away with the 25% rule for the freestanding LTACHs.

Great. All right, that's about it. Thanks, a lot.

Thank you, Tayo.

Your next question comes from the line of Jerry Doctrow of Stifel Nicolaus. You may proceed.

Thanks. And just to follow up on Tayo, just in terms of the fundamentals on the Prime stuff, do you have kind of your lease coverage numbers for them?

Yes. It's hard Jerry, to look at it from a period to period, because they've made so many acquisitions.

Yes. Just what our current -- .

The overall lease coverage ratio for year-to-date on 2007 on Prime is over five times.

Okay, thanks. And I think -- it was a fairly clean quarter, and certainly we're all looking forward to finding out who the $117 million investment is with. But, I assume you're not going to tell me that. The one thing I just wanted to talk a little bit about more kind of environmentally, two things, a lot of the public hospital companies have reported.

And there have been a lot of issues again with bad debt and that sort of thing, and I guess that would mostly be an issue for your acute care hospitals. Are you seeing any of those issues, or you've got any concerns on the acute care hospital space? Or, does it create opportunities for you?

I think yes, on all of those questions, Jerry. We have seen a slight uptick in the bad debt on all of our acute care hospitals. But, we again believe that it is an opportunity for very strong operators. My -- I believe that the issue is more overblown in the public than it is in actual reality, but it is something that we watch very closely. And we've only had a slight increase in bad debt in our operators. And again, we do believe it to be an opportunity.

Okay. And there are still -- even with -- you talk about EBITDAR, I guess, improvements if I remember quickly, even if we separate out bad debt. I don't know if that comes below or above EBITDAR.

No, it's -- that is taken out.

Okay. Okay, thanks. And then just acquisition environment, we've heard different things just in terms of how the credit markets played out and stuff, and you've touched on this a little bit. But, I was wondering if you could just give us a little more color maybe by segment where you see investments going and what kind of rates and stuff? I don't know if you've disclosed where the 117, if that's acute care or it it's LTACHs or other things, but just if you can kind of go through those segments? What --?

Yes. The $117 million is acute care, and that's about all we've disclosed. We're literally finalizing the closing today. We'll disclose the rest of it shortly.

Okay.

But on the opportunity, since the credit crunch has started, we have seen a tremendous amount of upswing in our opportunities in all sectors -- in all of our sectors and the acute care, rehab and in the LTACH from literally all across the board, Jerry, from for profits, which we've always had a good market in to pretty good interest for the first time in not-for-profits and with some much larger operators than what is currently in our operator -- in our portfolio.

Okay. And just in terms of marketing and stuff, sourcing deals, I know there's only a couple of you guys really in the lead there. You've got your, I think an acquisitions person now. Where are you sort of sourcing the transactions? How are you generating those? How are people finding you?

We have two and a half full-time people in acquisitions. And I said a half, because we've recently hired a new young guy, who's splitting his time between acquisitions and underwriting. But, they're absolutely full time. And then, myself and Emmett McLean spend an awful lot of time -- of our time on the acquisitions, and we also involve [Gil] and Steve when we actually start negotiations, not all the way into the final negotiations, but when we start the marketing aspect of it with a real particular live client there.

But, it is all done with -- through relationships, through contacts, through all of the people that we know in the healthcare industry. We have -- we really haven't begun any national advertising campaign-type policies. We do a lot of speaking at various healthcare conferences and functions and mostly calling on potential customers.

Great, thanks.

Certainly.

Your next question comes from the line of Michael Mueller with JPMorgan.

Hey, good morning guys. It's actually Joe Dazio on the phone.

Hey, Joe.

A question on the stock buyback program, are there any restrictions on that, given that you have the forward sale pending still?

Well, they're not restrictions with regard to the forward sale. But obviously, we're subject to the same restrictions that everybody else is on the stock buyback programs. We -- the Company can't buy during our blackout periods, just like the officers and directors can't.

But, that's a good point to make, Joe, to remind everybody of. We do have this forward opportunity. When we did this secondary in February of this year, we held back 3 million shares. We can take down those 3 million shares any time we want to up until -- generally any time we want to up until February of 2008.

And when we do that, we get proceeds that are priced at the offering price, which was in the mid-15s. Now, that's adjusted for dividends but point being, we can and will sell shares, 3 million shares for something north of $15 probably. And so, it just makes a buyback program when we're trading in the 12s, and recently even lower, that much more compelling, and it's a good point to remind everybody of.

And how do you guys look at that in context with acquisitions for the rest of the year? Is it going to be -- are you going to kind of use it to supplement your growth? Or, do you think it's sort of one of the other --?

Well, no. It -- again, you've got to look at the price of the stock and what we think the stock is worth and whether we can, long term, invest in a hospital real estate that will offset the dilution of not buying back the stock. So, it's an ongoing evaluation.

Okay. And then Steve, you mentioned I think fee amortization in the quarter. Is that the same thing as percentage rent? Or, is that something else?

No. The fee amortization is just -- when we do a deal, we typically get anywhere from 50 to 100 plus points commitment fee, and that has to be amortized over the life of the -- over the term of the lease. And so, it's just -- anecdotally, that just is about where we'd expect for at least the foreseeable future, just based on the acquisition activity and what we're amortizing now.

Okay. And then, would you know how much percentage rent was then in --?

Yes. Percentage rent was $130,000 for the quarter.

Okay. And then, a couple -- one last question. Vibra, you kind of ran through a bunch of stats quickly there. Did you happen to give what the current coverage is for the whole portfolio?

Just stand by just a minute.

For the LTACHs, the Vibra portfolio is just under 1.9 year-to-date, and the rehabs are just under 1.8.

Great, thank you.

And that includes the -- two of the start-up ones.

Your next question comes from the line of [Asha Dewhurst] with FBR. You may proceed.

Good morning. Thanks for taking the questions. I have a couple of modeling questions. There was a big jump in straight-line rent. Can you just explain that to me, and if that's something as a steady to use going forward?

Yes. The jump quarter-over-quarter is because, remember last quarter, we sold back to Prime two properties that were under lease, and then, we restructured that into a loan structure. So when we did that, we had to write off the straight-line rent affiliated with those two properties. And so, that caused a -- an abnormally low straight-line rent in the first quarter.

Okay. So, a 3 million number is something we can use going forward?

Well, the straight-line rent obviously will change as the investment level changes.

Yes.

Right, and as the escalators continue to kick in. On a status quo portfolio, then yes, for the next couple of quarters, you would expect the straight-line rent to be consistent, but, it's going to change obviously every quarter.

Right, thank you. On the buyback, you haven't commenced that yet. When do you plan on starting the buyback activity --?

Well, we will evaluate that periodically, and when conditions are right in the market, we will be in the market.

Okay. Ed, can you tell me how much rent was associated with that one hospital that was sold in the quarter?

Well just to clarify, it was a mortgage loan that was repaid, and I guess -- is the question the amount of interest?

Yes.

Included? That would be about $660,000.

And can you just -- in your Prime relationship, can you remind me what percentage they are as a tenant and a percent of the pipeline?

Yes. We don't have that as a percent of the pipeline, but Ed, you've got that?

Yes. It's -- as a percent of our total asset, they're at 36% right now.

That's as of June the 30th, so it's actually lower than that with the announcement we made this morning.

Okay.

And then, the second question was --?

Oh, the pipeline.

Oh, the pipeline, yes.

Truly right now, the only thing -- the only potential build that we have in the pipeline is if Anaheim gets revived, but, they are in a growth mode.

Okay. And their percent of total rent would be lower than that 36%, or total revenues for you?

It'd be about the same.

Okay. One final question on the 8-K you guys filed recently with the new partnership units, how would that affect -- what would be the modeling impact on that?

That would be absolutely zero. That's -- that was an amendment to the partnership agreement to allow us to issue partnership interest as share-based compensation rather than restricted shares or units.

Okay. Well, thank you very much for your time.

Thank you.

Certainly.

That concludes the Q&A session. I will turn it back to management for any closing remarks.

Again, thank all of you for your time and interest. As always, Steve and I are available for any questions one on one. Please feel free to call us. Thank you, very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.