Medical Properties Trust Inc (MPW) 2007 Q3 法說會逐字稿

Ladies and gentlemen, welcome to your Third Quarter 2007 Medical Properties Trust, Inc. Earnings Conference Call. My name is Mike, I'll be your Operator today. At this time, all participants are in a listen-only mode.

(OPERATOR INSTRUCTIONS)

Please be advised, we will be taking questions at the conclusion of the presentation. And as a reminder, this call is being recorded for replay purposes. I would no like to turn the presentation over to your host for today's call, Mike Stewart, Executive Vice President and General Counsel. Please proceed, sir.

Good morning. Thank you for joining Medical Properties Trust Conference Call to review the Company's announcement today regarding its results for the third 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 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 Financial Officer, Steve Hamner.

Thank you, Mike. This morning, we reported our third quarter operating results along with some acquisition news. I'm going to summarize our quarterly operational metrics, provide some information about our in-place portfolio and briefly discuss our capital resources in light of overall credit market conditions. I'll then turn the call over to Ed for some additional qualitative discussion, and then, we'll be happy to take questions.

So, we'll start with a brief review of the earnings for the quarter. This morning, we reported funds from operations of $15,350,000 or $0.31 per diluted share. Now, included in that $0.31 per share is straight-line rent of approximately $0.02 per share that's related to the completion of the amendment of six of our leases with Vibra.

Some of you will recall that we announced late last year a series of amendments with Vibra in conjunction with their early prepayment of our loan to them. Included in these amendments was an extension of the terms of these leases for an additional five years and an increase in the lease rates. This quarter, we finalized that documentation retroactive to January 1 of this year, which is why these results are reflected in the third quarter numbers.

Not included in our reported FFO is about $415,000 of cost associated with the Town and Country facility that we sold in January of this year. I'll be happy to take detailed questions about the numbers in a few minutes, or you can feel free to call me after the end of this call. But, let's move on to current situation.

Late last week, we completed a series of transactions whereby we acquired the real estate for $75 million of the Centinela Hospital in Inglewood, which is a suburb of Los Angeles and leased it to Prime Healthcare Services, our largest operator. We had previously made a $25 million mortgage loan to another operator secured by that property so on a net basis this is a $50 million addition to our portfolio.

Year-to-date, we have invested over $316 million in healthcare real estate assets. Net of that, we disposed of $65 million in mortgage loans by taking early repayments, the Alliance loan -- the $40 million Alliance loan that we discussed last quarter and then the just mentioned $25 million loan on the Centinela facility.

On our last quarterly call, we mentioned that we expected at that time to complete an approximately $17 million acquisition that was related to the HPA transaction. We have not completed that $17 million acquisition, and it is possible, perhaps likely, that we will not. As of today then, we have owned hospital real estate under lease aggregating approximately $657 million on a pre-depreciation basis.

Our mortgage loans secured by hospital real estate total $185 million, and we have approximately $70 million in other loans including the $29 million Vibra loan. Our fixed rate debt remains at $259 million, as it was in the last quarter. We added, during this quarter, a $100 million bridge loan and increased our variable rate revolver debt, primarily for last week's purchase, to a total of $77 million.

We have previously disclosed that we expect to complete a new credit facility that will provide incremental borrowing capacity at a lower cost. The well-known conditions in the credit markets in recent months has caused that process to take longer than we thought it would. But as we sit here today, we are confident that we are close, very close, to completing that transaction.

We would expect to use funds from the new facility to repay the $100 bridge loan and our existing revolver. In addition, to any incremental capacity in the new facility, which we expect could be $60 million to $75 million, we also have approximately $42 million available from the forward component of the follow-on offering that we completed earlier this year.

In general then, we expect to enter 2008 with liquidity to allow us to acquire approximately $100 million in new assets. Our balance sheet and coverage capacity should allow us to do much more than that, but until credit markets begin to return to normal, we can't predict how accessible at a reasonable cost additional capital will be for us.

With that, I'll turn the call over to Ed after which we will take questions.

Thank you, Steve. Good morning. 2007 has been a very good year operationally for Medical Properties Trust. Our revenue, income and funds from operations continue to improve significantly from period to period. Our tenants also continue to see improvements in their operations.

It is important to note that while our stock often trades in the same direction as general real estate REIT stocks and has suffered unduly in this subprime debacle, our company's performance is dependent on the performance of our tenants, and our tenants have not been affected by the real estate subprime crisis.

In fact, our hospitals have improved their operations over the same period from last year. In the October 29th issue of Modern Healthcare, there's an article in which it was announced that hospitals across the country had record profits this past year. This is the fifth year in a row of increased profits by hospitals.

The article made a point that you've heard us -- heard from us since our inception. Well-run, well-positioned hospitals can make strong profits in today's healthcare environment. Specifically, let me walk you through our portfolio. When looking at our hospitals on a same store basis, in other words, just the hospitals that we had fully operational, during the same year-to-date period last year, our acute care hospitals increased their EBITDAR 7%, our LTACHs 7% and our rehab hospitals 4.31%.

When looking at our portfolio including those facilities that were in their ramp-up period for the same year-to-date period as last year, our acute care hospitals increases their EBITDAR lease coverage ratio 43%. The LTACH increased theirs 31%, and the rehab hospitals increased theirs 24%.

We continue to make improvements are out hospital in Bloomington, Indiana. We have added several key physician groups to our base there and are negotiating with several others. While the hospital has seen an increase in utilization, it still has a ways to go. We however continue to be optimistic about the prospects for success at this facility.

The two facilities we acquired in August have both seen remarkable improvement over the last quarter. They have increased their admissions by 11%, increased their average monthly revenue by almost 14% and most importantly, increased monthly EBITDA by approximately 50%. At Bucks County, we've seen revenue increase almost ten times since opening in April with EBITDAR reaching the black after just six months of full operations.

While the credit crisis has made access to capital tight for everyone, as Steve just went through with you, we are in a good position with regard to our liquidity and are in the process of exploring other avenues to access capital to take advantage of the opportunities that we have right now.

We have more potential investments than we've ever had. We continue to believe that we will be able to invest at least an additional $200 million plus in 2008. To that end, we are pleased to announce that we have opened an acquisitions office in Kansas City, Kansas, and have added Maurice Arbelaez as our Managing Director of Acquisitions. Maurice has over 27 years of healthcare experience.

In addition to Maurice, we've recently added two senior and two junior members to our Asset Management and Underwriting departments. We're delighted to have all of them on board and look forward to the future with them.

At this time Operator, we'll be glad to take questions.

Thank you, sir.

(OPERATOR INSTRUCTIONS)

And our first question comes from the line of Jerry Doctrow with Stifel Nicolaus. Please proceed.

Good morning. It's actually Dan Bernstein filling in for Jerry.

Good morning, Dan.

Good morning. I've got a question on future funding of acquisitions. Are -- you indicated that you have about $100 million of potential capacity. So the other $100 million, you're exploring other avenues. I was wondering if you might be able to go into that a little bit more?

Well, I think the difference -- the $100 million I mentioned and again, that assumes completion of the credit facility, which we believe is a good assumption, the $100 million I mentioned is what we will have liquidity immediately for. The $200 million that Ed mentioned, again it's just a reiteration of the projection we've made many times that we expect a minimum acquisition ability for us in any year is $200 million.

So yes, there is a gap there. We are assuming that we will be able to fill that gap. There's no assurance of that. But absolutely Ben, we're looking at quite a number of different financing strategies in the event that we're unable to access more relatively cheap capital, debt capital.

Whether that's going to prove out to be a good assumption or not, we don't know. If we are unable to access more capital, more debt capital, revolve-type capital is what I mean after completion of this facility, then we will need to look to different types of funding.

Dan, as I said earlier, this is obviously one of the most volatile credit markets that we've every seen. But, we have incredible opportunities like now -- right now, and we -- we're doing everything that we can to be sure that we can take advantage of those opportunities.

Are you seeing increased opportunities because of the dislocation in the credit markets, or more deals coming your way, or more opportunities to fund loans?

I think it's all of the above. Clearly, the tightness of the access to capital for everybody has caused everybody to relook at what their opportunities are out there. But, we right now have some outstanding opportunities that I hope we're able to take advantage of.

Okay. And as far as -- there was a jump in non-cash G&A. Is that just related to hiring the acquisitions manager and some of those junior officers?

It's that and share-based compensation, non-cash, share-based compensation.

Okay. And one final question, related to the Vibra restructuring, was there any additional paydown of the -- that loan?

No.

Okay.

No. Just to remind everybody, that's loan been paid down. It was paid down over the past year by $12 million, from $41 million to $29 million where it has its balance today. Actually, let me clarify that. We are getting monthly payments now of principal as that loan amortizes. So, that repayment is coming in monthly.

That's all the questions I have. Thank you.

Thanks, Dan.

And our next question comes from the line of Tayo Okusanya with UBS. Please proceed.

Hello?

Tayo.

Hey, Tayo.

Hi, how are you?

Good morning.

Good morning. A quick question, in regards to Prime Health Services, that's now your largest tenant, and you do make some statements in the press release that you intend going forward to reduce your exposure to Prime. Is there anything specifically in your acquisitions pipeline that gives you confidence about that? Or, is it just more of a 2008 goal?

No. There is, Tayo. Of our immediate pipeline, the opportunities that I've been referring to throughout this morning's call, none of those are Prime-related acquisitions. As I've stated from the very beginning, it is our goal to keep all of our tenants below the 30% level, and I'm not exactly sure when we'll get back to that point with Prime. But, we're confident that we can reduce our exposure to them and any other tenant.

Okay. Can you talk about coverage ratios and -- at your major tenants at this point and what you're seeing in regards to trends, rent coverage ratios? I know you talked about that [EBITDA] all going up. But in regards to the actual coverage ratio, how is that --?

Yes. Tayo, it -- I gave it to you earlier this morning in the form of the EBITDAR, because it's a little bit misleading because the coverages have increased so dramatically, because we had a number of hospitals that were in the ramp-up period from this time last year. Our lease coverages are substantially higher today than they were this time last year.

But, if you look at the EBITDAR coverages -- the EBITDAR increases that I gave you in the earlier call, I showed you that all of our hospitals are doing exceptionally well with the exception of the Monroe facility, which is coming along.

Yes. And can you give more details in regards to Monroe at this point, anything significant that's happened over the past three months?

It has. The very significant things that have happened, as you know, the original founders of the hospital were bought out. We have brought in a number of new physician groups, and we've seen a total increase in utilization of the facility. And we're in final negotiations with a couple of other physician groups to bring them into the fold as well.

Thank you.

Thank you.

Thank you, Tayo.

And the next question comes from the line of Michael Mueller with JPMorgan. Please proceed.

Hi.

Hey, Mike.

Hi.

In terms of the credit pricing, can you just talk about your short and long-term debt costs today as you see them?

Yes. Today, just to remind you, our -- we have actually two revolvers. One is a single-property revolver with a total availability of $42 million. The other, of course, is the secured revolver that we've had outstanding since 2005. That facility cost up to 275 over LIBOR, depending on leverage. And of course, we haven't announced -- because we're not absolutely certain yet, we haven't announced what the new cost or the cost of the new facility will be, although we're highly confident that it will be substantially below that 275 over.

Just for example, the $100 million bridge that we used to buy the HPA facilities in August was priced at LIBOR plus 175. So something in that neighborhood, perhaps a little higher or lower, depending on conditions is what we expect the new facility to come in at.

Okay. And in terms of acquisition pricing, can you talk about -- at least the range, I'm sure all the deals are different, but just a range of initial yields that you're looking at, and any commentary on whether that's higher or lower because of what's going on in the credit markets?

All across the board, Mike, it's higher. It's at least 50 basis points higher and in some cases, higher than that. But, where as in the middle of summer, we were looking at deals in the just above nine range, the lowest that we're looking at right now is in the 9.5, all the way up to 11.

Okay. You mentioned about $200 million of acquisitions for next year, anything known in terms of dispositions at this point?

No. If we look across the portfolio, of course, things can change, but no, there's nothing that we're aware of that would end up being disposed of.

Okay. And then last question, in terms of the dividend and dividend growth, can you just talk about how we should think of that going forward as you kind of move into 2008?

Well, the Board will meet next week and as is usual, make the dividend announcement at that time. But just generically speaking, I think you should continue to see us do what we have said we were going to do from the beginning, which is to begin ramping down the payout ratio as the growth flattened.

And I think that's even emphasized, given the credit issues in the marketplace right now that you should expect to see our payout ratio increase, and we still expect it should be decreasing.

Okay, thank you.

Thank you, Mike.

(OPERATOR INSTRUCTIONS)

And our next question comes from the line of James Kumpel with Friedman Billings Ramsey. Please proceed.

Hi, good morning.

Good morning, Jim.

Good morning, Jim.

Hey, can you just remind us of the nature of the change in the Vibra lease terms? And I know you talked about annual rents going up. Can you talk about the actual cash rents within the restructured lease terms?

The cash rents go up -- what -- the element that affects the cash in the straight-line rents was to increase the escalator. Remember, these six leases have flat escalations that were at 2.5% annually. We increased those to 2.65% and extended the terms of these leases, the initial terms, by five years.

In return, just to back up almost a year, most of the people on the call, I think, will be familiar with the fact that we adjusted the timing of the ramp-down of their percentage rent so that over the course of this year, you've seen the percentage rent be reduced substantially from where it was last year.

So, the net impact of that is essentially that you get higher straight-line rents, and you get lower near-term cash collections? Is that correct?

Well, with the respect to the percentage rent, yes, the cash collections are lower than what they would have been on a very near-term basis. Remember, the percentage rent was scheduled to go away, substantially go away, in any case.

And when we recognized that Vibra was performing, to the extent that they were able to pay down the loan extremely early by a significant amount, which is what was the driver for taking down the percentage rent in the original agreement, we decided, let's capture what we can by giving up on that percentage rent, increasing the overall cash rent that we'll collect over the life of the lease.

And there were other elements to the agreement, including specifically and very importantly, we get a right of first refusal at pre-determined rates and terms for the next $200 million of deals that Vibra does. Now, we've taken down some of those. We've rejected some of what Vibra otherwise would have done through us. But, it gave us the opportunity to capture more, very, very strong Vibra revenue at a time that Vibra was actually becoming stronger from a credit perspective itself.

Jim, you've already seen the reduction in the percentage rents.

Yes. Can you just remind us when kind of that crossover point happens when the cash -- the annual cash rents are going to exceed what they would have been under the prior agreement?

Really, I'd be happy to go through that with you on a separate call, Jim. But, it's kind of revisiting --.

Okay.

Before you came on the account what we went through earlier --.

I appreciate it.

During the call.

Okay. I guess on the second one, if you could go through the deal-related terms on that $75 million deal in Inglewood and whether it's consistent with previous Prime deals, I think at about 10.5% cap rate?

Yes. We haven't disclosed our cap rates on acquisitions for some time now. But, the Prime transaction at Inglewood is consistent with our most recent Prime transactions.

Okay. And I guess the last question, if I may is, can you talk about some of the dynamics that may have shifted the second quarter to third quarter FFO and AFFO going down sequentially?

You'll have to explain that further.

Or, I guess, can you talk about some of the various dynamics that may have happened from second quarter to third quarter that led FFO of 33 I guess that you reported last quarter --?

Oh well, 33 -- yes remember, Jim, 33 last quarter included $0.05 -- I think $0.05, $0.04 or $0.05 in a prepayment penalty that we took --.

And you got $0.03 this quarter, so, it's essentially flat.

$0.03 this quarter, on what?

On the prepayment penalty.

No, that comes -- that comes next quarter, Jim. We haven't reported the prepayment penalty that we earned last week yet.

Okay. Okay, very good, well I appreciate it, thank you.

And our next question is a follow-up from the line of Tayo Okusanya. Please proceed.

No. Actually, my question has been answered. Thank you.

And we have a follow-up from the line of Jerry Doctrow with Stifel Nicolaus. Please proceed.

Hi. I just wanted to -- trying to remind myself. You have a $138 million convertible out?

Right.

And is that -- that's cash conversion up to the principal, have -- if I'm correct. Have you thought about the accounting changes that are coming up and how that might affect -- impact FFO?

Well we have, and I think we mentioned that, in fact, in last quarter's 10-Q. We've not been able to quantify that yet, because I think the accounting community's still working on that.

But yes, it will affect FFO. It won't affect cash at all. What it does obviously is reallocate the cost of a convertible issue like that between the equity cost and the debt cost and puts more over -- of it onto the debt cost, which increases the interest payment, or the interest allocation. It doesn't do anything to the cash transactions.

Okay, thank you.

And at this time, there are no other questions. I'll turn it back to management for closing remarks.

Thank you all, for listening. Thank you all for your interest. And as always, please don't hesitate to call Steve or myself with any follow-up questions. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. Thank you very much, and have a great day.