Medical Properties Trust Inc (MPW) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2008 Medical Properties Trust Incorporated earnings conference call. My name is condition Danielle. I will be your coordinator for today. (OPERATOR INSTRUCTIONS) This conference is being recorded for replay purposes.

Now I would like to turn the presentation over to Mr. Mike Stewart, Executive Vice President and General Counsel. Please proceed.

Good morning. Thank you for joining the Medical Properties Trust conference call to review the company's announcement today regarding its results for the first quarter of 20608. 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 will 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 first quarter 2008 earnings call. Last quarter was one of the most exciting quarters in the history of Medical Properties Trust. During the quarter we reached an agreement to acquire an approximately $350 million diversified hospital portfolio which greatly increases our diversification, strength and size. To date, we have closed on all but three of the additional 20 properties we agreed to acquire during the first quarter. It took an all out effort by the entire team of MPT to complete the due diligence and legal documents in record time. It again demonstrated our staff's ability to perform in remarkable fashion for the benefit of our shareholders. The addition of these 20 new properties add seven new tenants in 14 states, 12 of which are new to MPT. Over half of the new properties are owned by publicly reporting companies. While our existing portfolio has performed well over the years, all of our existing tenants are private companies so information on their operations to the public has been limited. The addition of these publicly reporting companies to our portfolio should give investors even more comfort in our overall portfolio.

In addition to the $350 million plus acquisition agreement, we also agreed to sell three of our Vibra rehabilitation hospitals, Marlton, New Jersey; Bowling Green, Kentucky; and San Joaquin, California back to Vibra where upon they would sell them to a third party. This transaction, while temporarily diluted, is extremely important for two reasons. One, Vibra sold the properties to a third party for a significant premium and a cap rate significantly lower than the cap rate we currently have on our Vibra leases. This demonstrates the value of the Vibra properties and, in fact, our entire portfolio is much higher than some in the absence of comparable transactions have indicated. Vibra sold these properties for approximately 117% premium over what we paid for them four years ago which indicates a higher NAV calculation for MPT. And, two, the sale further decrease the Vibra concentration which at one time represented 100% of our portfolio. When the last of these 20 acquisitions are completed, which is expected shortly, and after the Vibra sale which occurred this week, our two largest tenants, Prime and Vibra, will have their representations in our portfolio decreased to 29% and 10% from 38% and 24% respectively at the end of 2007 and no one hospital will represent more than 6% of our total portfolio.

The performance of our existing portfolio was good in the first quarter. When looking at all properties, including those still in the ramp up stage, our hospitals increased their EBITDA or lease coverage ratio over the same period last year by 2% to 3.76 times. The [L TAX] increased 18% to 1.54 times and the rehabilitation hospitals increased 19% to 2.21 times. And when comparing same-store sales to the same period last year, the hospitals increased 17% to 5.59 times, the [L TAX] decreased 5% to 1.54 times and the realization hospitals increased 19% to 2.21 times. One property, River Oaks in Houston, a facility operated by Health Care Partners of America, has yet to met our or HPA's expectation. While we both at this point are disappointed with the performance, the strength of the parent company and their other hospitals and thus our guarantee will give HPA the time they need to get this hospital back on projections.

We still have two properties on our internal watch list, Monroe and Bucks County. First Monroe. The operator there has done a very good job of laying the ground work for the success of the hospitals. Surgeries are expected to exceed 250 this month. The new primary care physicians have begun to build a good base of business and from our standpoint we had hoped they would be further along financially than they are. They're still not yet cash flowing, although doing better than this time last year. Having laid the ground work for the success, the operator has begun marketing the facility to other operators. To date, the interest from perspective purchasers has been very encouraging. Bucks County. The operator there has been in discussion with several large and credit worthy operators about acquiring the facility and expect to have something worked out by mid summer. In the meantime, the operations there are doing much better than we had expected. Overall, the company is stronger today than it was a year ago.

We will continue to work to that goal each year and every year we will continue to manage this company for the long-term benefit of our share holders. We have done a good job over the last year and the first quarter of there year continuing to diversify and strengthen the portfolio and to grow and protect the dividend. We continue to have plenty of opportunities and we use our capital wisely in our growth efforts. For past four years we have successfully implemented our strategy and provided our investors with strong and dependable returns. Our dividend yield is still one of the highest in the health care REIT segment and we believe that as we keep diversifying our tenant base with good strong tenants demonstrating the strength of our current portfolio with strong dividends with decreasing pay out ratios which, by the way, improved this quarter to 90% of AFFO with sales such as the Vibra transaction improve our portfolio's value, our stock multiple will continue to improve. Now Steve will go over the first quarter financial results and update our status quo normal year run rate posted announced acquisition and Vibra transactions. Steve.

Thank you, Ed. I have got some very brief remarks and then we'll go right to questions. This morning we reported funds from operations of $0.29 per diluted share and adjusted FFO of $0.30 per share. Because some parts of several transactions will straddle both the first and second quarter reporting periods, I want to start out by pointing out a couple things about the FFO calculation and expectations about next quarter's results. I will then briefly, as Ed described, go through some key measures concerning our existing portfolio and expected operations through the remainder of 2008, and then we will wrap up with questions.

Funds from operations. Our portfolio of health care real estate assets was stable the entire quarter notwithstanding the heavy activity in the acquisition and other transactions. We neither acquired nor sold any assets during the quarter. Obviously, however, we did announce several major transactions that had some effect on the FFO calculations. The most significant transaction of course was the acquisition of $357 million in assets from a single seller and the equity and debt offerings related to those transactions. As Ed described, we expect to complete those acquisitions very shortly. Even though we did not acquire any of the properties prior to quarter's end, we did add 695,000 shares to our diluted weighted average share count for the quarter as a result of the sale of 12.65 million new shares in late March. We certainly haven't made any adjustments to our reported FFO to net out the added share count, but it is important to note that excluding these additional shares our reported FFO would have been $0.30 and AFFO $0.31.

The other significant announcement during the quarter was the agreement to sell Vibra three of the facilities that we had previously leased to Vibra. Although we closed that sale, as Ed has just discussed, only earlier this week, it was clearly our intent to sale the properties as of the end of the first quarter. So we account for the three facilities at March 31, 2008, as if they already were discontinued operations. So you will notice that we have presented approximately $80 million of real estate held for sale and about $2.8 million as income from discontinued operations. We have also accrued straight line rent receivable of approximately $9.4 million that we will write off, but not until the second quarter after we have completed the sale of the properties which, of course, we have now done. Accounting rules precluded us from taking that write off during the first quarter, even though at that time we were aware we would not collect that $9.4 million over the term of the lease.

Other part of the transaction, including a gain on sale of approximately $9.4 million and $7 million in lease termination fees are expected to be recognized in the second quarter and, again, we have already closed those transactions so that expectation is pretty firm. As we think is customary with most REITs, we expect to measure future quarters FFO before the write off of straight line rent and of course the gain on sale.

So let talk about future operations just for a minute to remind everyone of our practices. We periodically provide information about our existing portfolio and operations that is meant to help our investors evaluate the future financial performance. Because obviously we have made, recently made significant changes to the portfolio, it is probably a good time to update you on those metrics. I think the simplest way actually is just to call your attention to the description in this morning's press release about our expected portfolio performance. When we complete the transactions the remaining acquisitions, including the $12 million Vibra property, we expect a balance sheet comprised substantially of leased facilities, mortgage loans and other operating type loans. The press release this morning describes the cash yields we expect from each of those asset categories, our cost of financing them, and our expectations concerning corporate level expenses.

Based on those measures we believe that if we do no more than complete the acquisitions we have already announced, our annualized FFO run rate will approximate $1.16 per diluted share. However, that scenario assumes that of the $90 million in book value of the Vibra assets we sold, we only reinvest the $12 million that is pending now. What is probably more likely is that we reinvest all of that value in which case we would expect an annualized FFO run rate of approximately $1.21. With that, operator, we will open the call for questions and we will certainly try to address any of your questions. I will suggest, however, that questions concerning individual model inputs may be better handled by followup phone calls which Charles and I will be happy to take. That process will allow us to give more detailed responses regarding the larger issue questions about rather than addressing spread sheet assumption that may not be relevant to all of the callers on the line. So with that, operator, if you'd like to queue up the calls.

Yes, sir. (OPERATOR INSTRUCTIONS). Your first question will come from the line of Jerry Doctrow with Stifel Nicolaus. Please proceed good morning.

Good morning, Jerry.

I had a couple of things, I wanted to clarify. I think, Ed, you were saying that in terms of Bucks and Monroe that both were likely being marketed for sale. So, is, did I guess I just want to understand that that is kind of the most likely outcome and do you assume that those sales kind of in your guidance with this run rate number or not?

Well, it is not necessarily a sale from our standpoint, Jerry. It is a sale from the operator's standpoint. Our assumptions and belief is that we will continue to be the lessor in those situations.

Okay. And you get the approval on whoever the new operator is?

Absolutely.

Okay. And in Monroe, do you have sort of an interest in the operating entity as well? I couldn't remember exactly that transaction you structured.

No, we do not. The operating entity is still a joint venture, between the local physicians and now Vibra, I think now Vibra. They came in about this time last year.

Okay. Okay. That's helpful. And then, I guess what I would like to do is talk a little bit more just about acquisition environment. I mean it sounded like you are finding attractive sort of opportunities out there. If I could categorize sort of the two kinds of major things you have done to date, one was kind of sort of start up operators in this venture kind of financing with Vibra and some degree Prime and now this much more, this purchase with HCP which is kind of more traditional REIT sort of stuff if you will. So go forward in terms of either property types or types of operators, where do you see your niche and maybe where do you see returns?

Jerry, it will be very similar to our now existing portfolio which is a mix of all of the above. It is a mix of strong operators that everybody has heard of and the operators similar to the ones that have have been in our portfolio in the past. The opportunities that we have out there are literally very, very strong. We have the ability, we have the opportunities to invest in very short order at least $1 billion in additional properties. Obviously, addressing the issue of capital there, and the capital markets is more of a driving factor there than the available properties. The additional deals will be accretive to the portfolio. They will be in the cap rate ranges of 9 plus to 11 plus. As I said, they will certain blue accretive going forward.

Okay.

Same property types.

Basically focused on acute care sort of a range of hospitals.

That's correct.

Okay. And then just last thing and I will jump off kind of since you raised it. So how are you thinking about sort of the use of capital? If you can kind of maybe, Steve, touch on sort of what's available to you in terms of dry powder here and when you mig have to return to capital markets?

Presently we have as we sit here today we have about $150 million of availability, that's under our revolving lines. We have $51 million that needs be used to complete the transaction with the single seller and another $12 million for the committed Vibra transaction which leaves us about $90 million available again under the lines. In so far as going back to increase that with additional, just traditional common equity, that's not in the, in the near term future we think for us at, with today's capital markets environment. But we do have roughly $90 million available.

And then on top of that you get cash in from the Vibra sale.

That's included in there because we -- Yes, we have cashed that sale.

Right. Right. Okay. Thanks a lot.

Thanks, Jerry.

Your next question will be from the line of Omotayo Okusanya with UBS. Please proceed.

Yes, good morning. Yes. Good morning. Just a couple of quick questions. The assets on the watch list, could you tell us what the coverage ratio is on those two assets are at this point?

Tayo, the coverage ratio on the Bucks is still, I am sorry on Monroe, is still negative but less negative than it was this time last year. It is about a one times negative right now. And on the Bucks facility, it is about a 0.2 times coverage right now.

Okay.

And that's through February.

Got it. Okay. The second question, the last earnings call the guidance that you gave was $1.21 X any acquisitions, you announced acquisitions but guidance still stayed at 1.21. I am trying to understand, I was under the impression quite a few of your recent deals would be slightly accretive and you reiterated that on the call but still it is like the numbers, the guidance numbers don't seem to reflect that.

Well, I think, we did probably when we had that call in January clearly we did expect, although we had not announced at that time, we did expect the $357 million to be nominally accretive. We thought at that time I think the consensus was that we had absolutely had seen the worst of the credit environment. And of course we found out going into February and then March that we had not seen the worst of the credit environment. And when we launched the road show for the offerings that we did to financial the acquisitions, I think we launched that on the same day that Bear Stearns fiasco became public. So we clearly had at the end of that transaction, a higher cost of capital and in both regards, debt and equity than we had expected. Still believing though, that the transaction is probably nominally dilutive and we elected to go forward because of the intangible benefits of the transaction overnight.

We trade a share of stock that for another for the same share of stock with a company that's substantially bigger, better capitalized, better able to face and take advantage of growth opportunities, greatly more diversified with tenants that provide visibility into the operations we previously didn't have. So we absolutely recognize by that time that the acquisition, the HCP acquisition was not going to provide immediate, in any case, share FFO accretiveness. Now, going forward, we end up trading out of the Vibra properties which the three properties have substantial cash flow to us, keeping in mind we had a GAAP rate on those properties probably exceeding 14% and cash rate just above 13%. And but, nonetheless, we elected to trade out of those properties. We will reinvest that but not at 13% cash rates. And, again, we think the intangible benefits for making that trade clearly outweigh the dilution by making the company stronger, lessening the dependence on Vibra, and giving us opportunities for investing into other operators.

Got it. Last question, we started to hear incremental negative news from a Medicaid perspective. A lot of states are having budget deficits, states like Florida and California beginning to attempt to cut or revise down Medicaid reimbursements in the next fiscal year. How do you guys think about and the potential impact it could have to your portfolio or to your tenants?

Well, Tayo, as we have said since we started this company we expected there would always be cuts to Medicaid which is why we have little exposure to Medicaid. We have to na real exposure to Florida. We have the one brand new property there and the Medicaid numbers there are are extremely small. Let's take California where we have the largest exposure in properties and the largest exposure to Medicaid or MediCal with the proposed reductions that the governor actually signs and is being litigated right now, we would expect our hospitals out there may see, may see as much as a 2% decrease in their total revenue. A very nominal to no effect on our coverage ratios.

Okay. That's helpful. Thank you.

Thank you, Tayo.

Your next question is from the line of Karin Ford with Keybanc Capital Markets. Please proceed.

Hi, good morning. Just a couple of questions of clarification on the new guidance. On apples to apples basis from how you gave us guidance from last quarter, you are down $0.05, correct?

I don't think so. Now are you talking about the $1.16 we put in there?

Right.

Yes, but see that's before we reinvest the Vibra proceeds.

Okay.

And so we expect to do that. In fact, there, we will close the next Vibra deal, the $12 million deal we announced shortly. There are two other Vibra deals that would total another roughly $35 to $40 million that we are not committed to yet. One reason we are not committed to those is because there are so many other opportunities we are evaluating with what to do with the capital that we do have. So assuming that we have totally reinvested the Vibra proceeds, we are apples to apples flat from last quarter's guidance.

And that's $80 million total of additional proceeds to invest, is that right?

About 90 million.

We have about 80 to 90 million available now.

Okay. And is that equal to the availability on the line or are you getting additional cash in from Vibra that will boost the availability.

No, the availability on the line is after receipt of the Vibra proceeds. We closed Vibra on Tuesday of this week, paid down the line so now we have available $150 million all available under the line.

Okay. Fair enough. Last quarter you guys had mentioned you were in negotiations on a few of your '09 expirations. Just wanted an update on the status of that.

We are still in negotiations with them on that.

Karin, I don't think that came from the quarterly call because those are properties we just acquired.

Okay. That's on -- Okay. G&A I guess last time, last quarter you were expecting sort of a $4.2 million quarter run rate. It looks like it is up a little bit to 4.4 this quarter and that's going to be a good run rate going forward. Can you just talk about why the increase?

It's primarily I think last quarter we were at 1.750 million roughly on the share-based compensation, that has climbed a little bit and then frankly I couldn't tell you where the other 100,000 came from right now.

Okay. And then finally, the Vibra percentage rent because they paid down their loan you will not be receiving that in 2Q, correct?

That's correct.

Okay.

We have collected part of it through closing but it will be going away going forward. Correct.

Fair enough. Thank you.

Right. Right.

Thanks.

Sure. Thank you, Karin.

Your next question is from the line of Joseph Dazio with JPMorgan. Please proceed.

Hey, good morning, guys.

Hey, Joe.

Just one guidance clarification again. Sorry to beat a dead horse, but does the $1.16 assume that the 90 million of Vibra properties are sold?

Yes.

Okay. That doesn't include any acquisitions though just the sale occurring.

The $1.16 includes the Vibra acquisition we are committed to which is very small, it is $12 million. It doesn't assume any other acquisitions.

Okay. And then when you guys originally announced that sale I think the press release noted that you had something like 55 million of properties in non-binding agreement, but then I think the press release noted like between 12 and 50? Is there anything you can explain there.

The 50 and 55 are equal. We said 55 I think earlier as we were first getting into looking at the transaction. It is actually 50. The 12, we will do 12. We are committed to 12. We will close on that I think probably within days. We don know if we will close on the remainder of the 50. That's why I mentioned earlier there's another roughly $35 to $40 million of properties that we have not signed a binding commitment on for Vibra but that may be available to us.

Let me be sure we clarify that, Vibra is committed to selling to us. We haven't committed to buying from Vibra yet.

Okay. Just last question. In the last 12 to 18 months I guess the dividend growth kind of leveled off as you guys got to the 90% pay out. Now that you are sort of there, do you think dividend growth in the future will kind of approximate earnings growth and (inaudible) a little bit more?

Joe, I think as we have always said once we guided down to this point it would probably lag just slightly behind the FFO growth.

Okay. Thanks a lot, guys.

Thanks, Joe. At this time, there are no more questions in the queue. I would now like the turn the presentation back over to Mr. Ed Aldag for any closing remarks.

Again if you for going today's call. As always, if you have any questions don't hesitate to call on Steve Hamner, [Charles Lambert] or myself. Thank you very much. Bye bye.

Ladies and gentlemen, this concludes your presentation, you may now disconnect. Have a great day.