Medical Properties Trust Inc (MPW) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2008 Medical Properties Trust Inc. earnings conference call. My name is Lakisha and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this call. (Operator instructions) I would now 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 the Medical Properties Trust conference call to review the company's announcement today regarding its results for the second quarter of 2008. 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 our 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 good morning to all of you and thank you for joining us today. We're delighted to be able to report today that our financial, strategic and operational plans for MPT are right on track. Steve will go into more detail about the specific financial performance of the Company, but it is important to note that in following with our original goals for the Company, we have achieved tremendous success in 2008. To date for 2008, we have invested over $425 million, more than $200 million above our budget in various healthcare projects. This achievement has gone a long way to increasing the credit strength of our Company, diversifying our tenant base, diversifying our geographic base, and probably more importantly, diversifying our property base. In addition, and very important for our investors, we have greatly improved the dividend payout ratio.

We now have 49 properties and none of the properties represent more than 5.9% of our total portfolio. In fact, only 4 properties represent more than 5% each of our total portfolio. On average, our properties each represent 2% of the total portfolio. One of our goals is to continue to strengthen these numbers to lessen the potential impact any one property could have on our portfolio as a whole. We continue to make good progress on tenant diversification. We added 7 new tenants in the second quarter, making our largest tenants currently Prime at 33%, Vibra at 11%, HealthSouth at 8% and IASIS, CHS and North Cypress at 5% each. We also greatly increased our geographic diversification in the second quarter, adding 11 new states and 2 more just after the quarter closed, bringing the total number of states to 21.

While April, May and June are often slow months for healthcare facilities, our portfolio performed very well. When comparing all of our facilities, including those just acquired in the second quarter, every category had a better coverage in the second quarter of 2008, when compared to the first quarter of 2008, except the rehab hospitals which declined slightly, but still saw coverage of approximately 4.3 times.

In addition, each category saw increases from coverage from the second quarter of 2007 to the second quarter of 2008. Again, with the exception for rehab hospitals which were slightly down. The total coverage for acute care hospitals increased to 4.65 times in the second quarter from 4.17 times in the first quarter of 2008, and 3.27 times in the second quarter of 2007. The total coverage for the LTACH increased to 1.8 times in the second quarter of 2008, from 1.63 times in the first quarter of 2008 and 1.38 times in the second quarter of 2007.

We only had one rehab hospital after taking into account the facilities sold to Vibra in the second quarter of this year, in the first quarter of 2008 and the second quarter of 2007. We now have three rehab facilities with coverages of approximately 4.8 times, 5.7 times and 3 times respectively for the second quarter of 2008. The previously mentioned numbers including all of our facilities, including those that are still in their ramp-up stage like Buck's and Monroe, and includes River Oaks which had a negative coverage in the second quarter and announced their closing on June 23rd.

Several particular hospitals worth pointing out. Centinela, which was acquired by Prime late in 2007 and underwent a reorganization of its services, as you will recall had a negative coverage in the first quarter of 2008. Prime has completed their repositioning of this facility and it generated coverage in the second quarter of 2008 of approximately 2.5 times.

Paradise Valley, which in 2007 was slower to turn around than we had expected, continues to perform exceptionally well. You will recall that in the first quarter of 2008, it had coverage just over 3 times. In the second quarter, its coverage was more than twice that amount.

Monroe Hospital continues to show dramatic improvement. In the second quarter of 2007, it had negative coverage of almost 2 times. In this last quarter, it was essentially at a breakeven before rent, a significant increase over the same period last year. In addition, Monroe recently closed on the purchase of a substantial primary care practice in the Bloomington area, which added 5 new primary care physicians to the base. More importantly, the increase of this last practice brings the total number of patients seen by Monroe Hospital Primary Care Physicians from approximately 39,000 a year to over 70,000 a year. In addition, despite the normal slowdown in summer months, Monroe Hospital saw an increase in its patient revenue of 29% from the first quarter to the second quarter. One of the most dramatic improvements has been Bucks County. The operations have improved so dramatically, the original developer/operator, DSI, is considering taking the property off the market and continuing to operate it themselves. The surgical volumes increased from 243 in the first quarter to 275 in the second quarter.

But even more compelling are the cash collections numbers. In the fourth quarter of 2007, cash collections were just over $900,000. In the second quarter of 2008, they were over $3.5 million.

The one disappointing event we had in the second quarter was the closing of the River Oaks facility by Hospital Partners of America. MPT was given very little notice of their intent to close the facility. HPA's equity provider notified MPT in late May that they were replacing the senior management of HPA and making sweeping changes to the direction of the company. We tried to work with them to bring in a new operator before the facility closed, and were very close to doing so, but time ran out.

We have hired Cushman & Wakefield to market the two River Oak campuses in Houston for us. Together with these facilities and our cross-collateral at another HPA facility in Redding, California, we expect to recover 100% of our investment in River Oaks.

The MPT portfolio is as strong as it has ever been. Despite some of the worst credit times this country has ever seen, and certainly a seriously sour REIT stock market, our properties continue to not only perform well, but to improve. Our credit position has improved each year and is stronger today than it has ever been.

We continue to see outstanding opportunities. Some of these opportunities have been a direct result of the current credit markets, and we hope to be able to take advantage of them. Any additional acquisitions or investments that we make will be accretive to the Company and will increase our credit quality and continue our diversification efforts. We are as excited about the future of this Company as we have ever been. At this time, Steve will go over the detailed performance of our second quarter and update our normalized run rate. Steve?

Thank you, Ed. Thank you all. I have just a few brief remarks and then we'll go right to any questions that you may have. This morning, we reported second quarter 2008 normalized funds from operations of $0.38 per diluted share and adjusted FFO also of $0.38 per share. For the six months ended June 30, the normalized FFO and adjusted FFO were $0.68 and $0.69 respectively per share. Under any measure, these are substantial increases over the same amounts in 2007, even though the share count increased substantially from 2007 to 2008.

This was a very active quarter for us from all perspectives, with numerous acquisitions, dispositions and financing transactions. Including the early July acquisitions of the last two properties in the HCP portfolio, we invested in 24 separate properties valued at over $425 million. We sold three properties, realizing cash proceeds of $105 million. We completed the issuance of $82 million in exchangeable notes, and we completed the initial $30 million funding of a new credit facility that may be expanded to up to $75 million. As Ed described, the result of all of this activity is that we are a much stronger Company than we were as we entered 2008. However, this kind of activity makes for what has come to be known as a noisy quarter for reporting purposes. So, I want to try to explain a little bit of the noise. Our reported $0.38 per share normalized FFO is adjusted to account for three transactions, the effects of which are unrelated to our current property operations and which we believe are generally nonrecurring.

Number 1, the write-off as we previously announced and quantified last quarter of approximately $9.5 million or $0.14 per share of accrued straight line rent related to the three Vibra properties that we sold during the quarter. Number 2, the write-off, again as we previously announced, of approximately $3.2 million, or $0.05 per share in fees related to the backup bridge loan that we needed to be able to commit to the HCP transactions. We very successfully avoided using that bridge facility and terminated it during the quarter, taking the write-off.

Number 3, the write-off of the uncollected amount of patient receivables that we financed for the Houston Town & Country Hospital for the period between lease termination in October of 2006 and final shutdown and disposition of the hospital upon its sale. We only recently substantially finalized our Medicare cost reporting reconciliation, and we believe any additional collection is speculative. These receivables have been previously reported as assets of discontinued operations, and this $2.1 million, or $0.03 per share, write-off is charged to discontinued operations.

We have included in normalized FFO the previously announced $7 million, or $0.11 per share early lease termination fee that we received as a result of the Vibra sale. As we have stated in previous calls, we continue to find opportunities to realize unscheduled fees and other revenue as a natural offshoot of our investing activities. And while we are unable to predict the amount and timing of any future such fees, we do believe we will periodically generate more of them, making this an appropriate component of FFO.

Having said that, had we not sold the 3 Vibra properties, and all other things equal, had not received the $7 million, $0.11 per share fee, we expect that we would have reported normalized FFO of approximately $0.30 per share, because we would have of course continued to receive the rents from Vibra.

So, however one considers the early termination fee, we had a very successful quarter, and as we'll reiterate momentarily, we expect more of the same in the near term. We believe it's also helpful to our investors to consider the further adjustments of backing out current straight line rent, loan cost amortization and share-based compensation, to calculate what we and others call adjusted FFO. And as you all will have noted from the press release, those adjustments also result in adjusted FFO for the second quarter of $0.38 per share.

Last quarter we updated our estimate of annualized FFO that we believe our existing portfolio should generate. If you remember, we based our estimate on completion of some pending acquisitions and on reinvestment of the Vibra sale proceeds. As of today, we have completed those transactions and investments and we reiterate our estimate that our in-place annualized FFO run rate approximates $1.21 per share. This includes no estimate for any possible early termination or similar fees and also does not include the effect of CPI escalators in excess of the minimums provided for in our existing leases. Our interest expense is of course another significant variable.

Finally, we believe our G&A annualized run rate approximates $18 million, but the quarterly amounts are expected to fluctuate, particularly with respect to the calculation of share-based compensation. For example, this quarter's share-based compensation aggregated approximately $1.8 million, but by the fourth quarter of this year we expect that to decline to $1.3 million, and approximately half of that amount relates to performance-based awards that GAAP requires us to expense, even though we have not met the performance targets yet, and may in fact not meet the performance targets at all.

Let me give you a few metrics that may be common to many of your models, and then we'll go into questions. These amounts are as of today. If any of you need the details as of the quarter-end, we'll take your phone calls later today. Feel free to call Charles or myself.

Total fixed rate debt is approximately $341 million, with a rate of approximately 7.5%. Total variable debt is approximately $265 million with a weighted average rate of approximately 4.5%. In addition to the nominal interest rates I've described, we expect to amortize approximately $600,000 of loan fees and costs on a quarterly basis. None of our credit facilities have a maturity earlier than November 2010. As of today, there are 66,338,724 shares outstanding. The weighted average shares outstanding during the second quarter were 64,991,168, and for the first six months of 2008 was 59,013,695. We have no plans at this time to issue additional common shares.

We have approximately $32 million of cash and availability under our credit facilities. At this point, Operator, we will be happy to open the call to questions.

(Operator Instructions). Our first question comes from line of Karin Ford from KeyBanc Capital Markets. Please proceed.

Hi. Good morning.

Good morning, Karin.

First question is just on Buck's County. Did -- can you tell us what the coverage is currently, given the improved operations, and whether or not you'll expect the terms of the rent to change if the operator decides not to sell?

Karin, the property has reached a breakeven before rent, so it is not covering the rent at this particular point from an operational standpoint. The terms of the transaction should not change unless we decide to take advantage of the President's change in the law that was signed a couple of weeks ago.

In which case you guys would -- ?

May take an equity position.

Okay. Is -- are they current on rent today?

Pardon me?

Is the operator current on the rent payments as of today?

No, not today. They would be. They are prepared to be. It's only recently, literally within the last week or so that they have decided that it probably is something they want to do to take the property off the market. We had been negotiating with a replacement tenant, and part of the negotiation was to bring all the rent current, and as we have changed, or are considering changing horses, I guess is more accurate, we may take some of that rent that they would otherwise pay and put it into the equity of the operation, which would be a very attractive way for us, in fact, to increase our returns over and above the rent rate that we would otherwise get, and participate in the growth and the value of that company, which we think is likely to be substantial.

But, Karin, you remember that we have a guarantee there, their parent company which is very substantial.

And how big potentially would that equity investment be?

We haven't got that far in the discussions. Literally this is just in the last couple of days.

Okay. Can you give us an update on the sale of the Shasta Hospital?

Well, we're not involved in that sale, just to make it perfectly clear. HPA is managing that sale. They are communicating with us, and it's our understanding from them that they have gotten at least one letter of intent, the details of which we're -- we haven't seen, but we understand it's a relatively encouraging offer. They started marketing that property in probably mid-June and, so, six weeks later it's probably a little early to measure what the results may be, although as I say the initial results -- and of course our own evaluation of the value of that property remain encouraging.

What's your current basis on River Oaks?

Approximately $34 million, $34.5 million.

So your current estimate is that between the sale of River Oaks and your interest in the sale of Shasta, you'll recover the entire $34 million?

That is correct.

Okay. Just a housekeeping item. Can you tell us which line items on your income statement all the charges were in. I guess you mentioned the one was in discontinued ops, but can you just tell us where the other two were -- the other two charges?

Well, yes, the $2.1 million that I mentioned was in discontinued ops. The write-off of the straight line rent was in discontinued ops. And the write-off of the loan fees was not.

Okay. And then finally, what did you say your balance was your line -- was on your line at the end of the quarter? I missed that.

Well, I didn't give particular balances on each of the facilities. We have in total $265 million in variable rate debt outstanding. That's all under various lines. We have available about $32 million under those lines, so we look at it fungibly.

Okay. Thank you very much.

Thanks, Karin.

Our next question comes from the line of Steve Swett from KBW. Please proceed.

Thank you. Good morning.

Hey, Steve.

Just a followup on the Houston River Oaks Hospital. Is that rent going to be off reflected in the third quarter, or are you going to be able to make that up from the various other interests that you have with HPA?

At present, Steve, we continue to believe that there is more than sufficient collateral value for us to continue to accrue the rent.

Okay. And, then, Ed, perhaps you could just provide a little more color on your comments on the acquisition environment -- the types of facilities you're looking at, and who, if anybody, out there may be competing against you?

Steve, it continues to be the primary three types of products that make up the vast majority of our portfolio, which are acute care hospitals, rehabs and LTACHs. We have a lot of opportunities that are more heavily weighted than has been in the recent past on the rehab and LTACH portion. Some of that is by design to have the same dollars invested in smaller size properties to help diversify -- help with our diversification both geographically tinted and a property base. There are some other unique opportunities that we're looking at that we certainly aren't prepared to get into at this particular point that take advantage of some of the changes to the REIT laws.

Okay, thanks.

Our next question comes from the line of Jerry Doctrow from Stifel Nicolaus. Please proceed.

Thanks. Just on CPI, because you indicated that's a potential upside, is it CPI with the fuel and stuff, and in it, or is it the core CPI that your leases are tagged to?

I'm sorry, Jeffrey, I was distracted.

Basically, is it core CPI or is the CPI with the food and fuel that -- which tends to be higher that your leases are tied to?

It's -- my mind is blank on the label now. It's all US households. It's the full CPI -- includes food, fuel and everything.

Okay.

And just to provide you a little bit more background, we have about $950 million of our investments are subject to CPI increases. Of those, though, about $650 million, and I may be off a little bit, are also subject to minimum escalations. Those minimum escalations have a weighted average of about 2.2%.

Okay.

So, when you take into account what you think inflation may be for this year and how it may affect our portfolio, included in our straight line rent, of course, are those minimum increases.

Okay. Okay. And the $650 million is within the $950 million, or are they two separate?

Yes, that's correct.

Okay.

So most of the leases, of course, have minimum escalators and, as I say, that's about 2.2% on about 2/3 to 70% of the portfolio.

Okay. And I said -- two other things. In terms of -- you said you're not -- don't need equity at this point, but you had talked about other ways to potentially raise capital, joint ventures and other things. Is there anything going on in that area or -- when you get to the point you've spent the $32 million and you need additional capital, is -- I guess you can expand the line, but at some point does equity or are there other sources out there for potential equity?

Yes, we continue to focus on certain limited property sales and that is an encouraging process for us, because we discover more and more that our properties really are substantially -- have substantially grown in value, almost any way you look at it, and there are market participants who are eager to talk to us about certain types of properties, and we are -- further down the line on that with other potential properties than others, but that is probably the most optimistic now.

Sales can take any number of forms. And then as Ed said, we don't have to buy necessarily new properties to improve our yields. With the new RIDEA passing along with the President's housing bill, we really have some very good opportunities to capture some significant potential upside. We are very encouraged about many parts of the market, both generically across the healthcare market and specifically with respect to some of our properties and some of our tenants, and other potential tenants who have actually come to us with the same types of thoughts.

Okay. And just -- that's the other thing I wanted to actually probe a little bit more. I'm familiar with the basics of your idea. So you would take -- say if we take Bucks' example that you mentioned. You would take Bucks. You would buy -- you would create a TRS that would lease the facility from you, potentially at a lower rent. It would engage some party, maybe the existing party as a manager, but you would capture the upside to the extent that properties -- your properties improved. Is that basically what we're talking about?

It is, Jerry, but more likely it would be a joint venture rather than seeing us own it 100%.

Okay. So the TRS would be -- you would create the joint venture that would lease it -- the joint venture would lease the facility from you and you would have an equity interest in that entity.

That's correct.

Okay. Okay. And, so, we would have a greater volatility potentially of the ups and downs of the hospital operations, but potentially a lot bigger return down the road.

If we do it, Jerry. It's going to make an awful lot of sense for us to do it.

And you're right. On that incremental increase in potential revenue, that there is clearly volatility, but we would still be capturing the real estate return and, you're right, it may involve some concession or compromise on our current lease rate but we would still have a very nice real estate return that would retain the volatility characteristics that it has already. It's only the increment when we get into operating income that would have the incremental volatility.

Okay. Alright. Thanks, that's all for me.

Thanks, Jerry.

Our next question comes from the line of Peter Costa from FTN Midwest Securities. Please proceed.

Hi. Question regarding Prime Healthcare's practice of dropping out of network. When they buy hospitals, and now they've been sued by the State of California for balance billing the patients. Do you have some way of quantifying the risk to you, and have you been able to look at whether their bad debts are, in fact, collectable -- I'm sorry, their receivables are, in fact, collectable, or are they bad debts? How do we get a comfort that something's not going to happen there to change Prime Healthcare's practices of either dropping out of network or balance billing the patients?

Yes, Peter, obviously we pay an awful lot of attention to all of those questions you just asked, and let me point out a clarification on that. They do not always cancel the managed care contracts. They normally will come in -- they will always come in and cancel the managed care contracts that are losing money. Managed care contracts that you just absolutely cannot make money on. But they have a large number of managed care contracts currently at a number of their facilities. So, it is a misnomer to think that they come in and cancel them all.

Now, what effect would out-of-network strategy -- doing away with an out-of-network strategy have on the Prime Healthcare revenues? Our analysis, along with theirs, is that it would have less than a 5% impact on their total patient revenue. So it's a very negligible impact. On the bad debt for the patient billings, none of the additional billings that they've done for -- that they did for the patients that you're referring to were included on their books. So, if they collected any dollars, that would be additional benefit. There is no additional write-off there for -- inability to collect any of it.

Another way of saying that is the coverages that Ed mentioned earlier, to the extent they relate to Prime, do not include any so-called balance billed patient receivables.

That's great. Thank you very much.

Certainly.

Our next question comes from the line of Tayo Okusanya from UBS. Please proceed.

Hi. Yes, good morning, actually. All my questions have been answered, so thank you very much.

Great. Thanks, Tayo.

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

Yes. Hi. Following up on a capital plan question from before. Can you talk about whether or not you have an idea of any asset sales for '08 already lined up? If so, what a rough number could be that we should think of, and is the strategy going to be more along the lines of selling assets, paying down debt to have some dry powder, or is it going to be more likely timed with new investment activity?

Yes, I think to answer the second part of your question first, Mike, it would have been on the timing and the amount, and we do believe that there's another property in the roughly $20 million to $30 million range that has some likelihood that we might sell in the foreseeable future, and whether we would match that up against another acquisition or pay down debt or something else, we just can't tell you right now. But, beyond that, there are other more significant amounts that we think we might be able to access through value increases in our portfolio.

But, Mike, all of them will be strategic and opportunistic that we do.

Okay. And then any idea of the timing for the resolution with River Oaks, in terms of that?

It could happen this quarter. It could happen -- but more likely you're probably looking at somewhere between now and the next 9 months.

Okay. Okay. Thank you.

Alright, thanks, Mike.

Our next question is a followup question from Karin Ford from KeyBanc Capital Markets. Please proceed.

Thanks. Does the $1.21 guidance for '08 include any additional acquisition activity?

No. It's our existing portfolio today, which is very close to what you see on the financial statements. In July, we closed on the last two HCP properties, and that's been it.

Okay. What type of hurdle rates would you guys expect to receive on an investment in an operator under RIDEA?

Yes. We're just not prepared to get into that discussion at this point. We're just not far enough along.

But would you say it's significantly in excess of the 10% to 10.5% you guys are getting on -- ?

Absolutely.

It needs to be in excess of a real estate return.

Yes. It needs to be an operating-type return.

Okay. Are there any other properties other than the ones that you guys talked about today that you see could have any operating issues a-la River Oaks?

Well, Karin, as I said earlier, all of our properties are doing very well with the exception of the ones that I went over, and all of those are doing much better than they were doing, with the exception obviously of the River Oaks situation. Now we are not aware, or even have a hint, of any properties in any type of situation like that.

Okay. And did your experience at River Oaks cause you to change your underwriting methods in any way, given that you guys fairly recently acquired that asset?

Karin, we are still in the process of working with all of the parties involved in determining exactly all of the facts that happened at River Oaks. As I mentioned in my prepared remarks, the equity provider has come in and totally replaced all of the senior management, and we're in the process of evaluating that.

Do you expect that you likely will change things that you do in your underwriting as a result of River Oaks?

Well, Karin, I think that our underwriting -- we knew that River Oaks was a turnaround facility and we underwrote it in such a manner that we were heavily collateralized. We have a closed facility that we still expect to receive 100% of our investment and costs from this closure back, so I think that we were -- our underwriting was exactly right on target. We'll have to wait and see what evolves on exactly what happened with the failure of River Oaks a little bit further down the line.

Okay. Thanks very much.

Thank you.

At this time, there are no more questions. I'd like to turn the call back over to Edward Aldag. Please proceed.

Thank you, operator, and thank all of you for listening again today, and, as always, please don't hesitate to call on any one of us here at the Company. Thank you very much.

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