Medical Properties Trust Inc (MPW) 2009 Q3 法說會逐字稿

Good day ladies and gentlemen, thank you very much for your patience, and welcome to the Medical Properties Trust Third Quarter Earnings Conference Call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Mike Stewart, Executive Vice President and General Counsel. Please proceed.

Good morning, welcome to the Medical Properties Trust Conference Call to discuss our third quarter financial results. With me today are Edward K. Aldag Jr., Chairman, President and Chief Executive Officer of the Company, and Steven Hamner, Executive Vice President and Chief Financial Officer.

A press release was distributed this morning and has been furnished on Form 8-K with the SEC. If you did not receive a copy, it is available on our website at www.MedicalPropertiesTrust.com in the investor relations section. Additionally, we are hosting a live webcast of today's call which you can access in that same section.

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 Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, 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 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 does not undertake a duty 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 note that in our press release, Medical Properties Trust has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg-G requirements. You can also 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 participating in today's Medical Properties Trust 2009 Third Quarter Earnings Call.

We continue to be very pleased with the performance of our portfolio. The repositioning of several properties, and the shape the Company is in including from liquidity and the organizational standpoint to have significant growth in 2010 and beyond.

Since our inception, we have discussed the benefits of investing in hospitals in both good and bad economic times. Everyone is clearly aware of the dire economic times the country has experienced for the last year-and-a-half. Despite these trying times, when other industries have seen to drastic decreases in operating results, and other REITs have seen declines in their occupancy levels of their commercial real estate, office buildings, apartments and the like, our portfolio of hospitals have continued to see increases in utilization, net revenue, and most importantly, EBITDA.

When comparing third quarter 2008 to third quarter 2009, our acute care hospitals improved from almost 5.5 times coverage to more than 6.5 times coverage. When comparing third quarter 2009 to second quarter 2009, despite the fact that the third quarter in any year is almost always the slowest quarter due to doctor and patient vacations, the increase was even better. A 23% increase in coverage from quarter to quarter.

Looking specifically within the hospital sector of our portfolio, Prime, our largest operator, continues to outperform. Their coverage year over year increased 48% and quarter over quarter increased 30%. Community Health Systems, another large hospital operator of ours, released their corporate-wide results earlier this last week. They too continued to show good results. We have three facilities leased to them, and all are cross-defaulted with the parent guaranty.

CHS announced a 7.2% increase in admissions year over year with net revenue increasing 12.1% and EBITDA increasing 8.3%. Health Management Associates, another one of our tenants, also released their corporate-wide results last week. They showed an increase in net revenue year over year of 5.8%, admissions of 5.4%, and EBITDA increasing 14%. All of the other hospitals, which represent single hospitals leased to private operators, had an average 6.3 times EBITDAR coverage. This includes the lowest performer, Monroe Hospital, essentially at a break-even, to our highest performer at 15.25 times. Next to Monroe, the lowest coverage here is approximately 3 times.

Acute care hospitals represent about 75% of our total portfolio and we are very pleased that they continue to out-perform everyone's expectations. The average EBITDAR lease coverage of more than 6.5 times is spread throughout this entire sector of our portfolio.

Our LTACH sector of our portfolio was flat for the third quarter year over year. The total EBITDAR coverage for the LTACHs was approximately 1.6 times. In our rehab hospital sector, the portfolio increased 27% year over year to just over 3 times coverage. This equates to a 7% increase quarter to quarter. All but one of our rehab hospitals are guaranteed by HealthSouth. HealthSouth, which reported earnings on Tuesday, reported a 153% increase in income from continuing operations. Our one other rehab hospital, operated by Post-Acute Care, had EBITDAR lease coverage well in excess of 5 times. The only disappointment in the quarter is that we have not yet resolved the non-performing asset River Oaks in Houston. Just to remind you, we have separated this into two distinct campuses. The north campus, River Oaks, and the south campus, Sharpstown. The expenses we incurred for these two campuses were more than we had hoped.

We are still working with several entities on the possible sales or leases of these facilities, and still feel confident we will recover our total investment on these two campuses.

Shasta continues to exceed our expectations. You will recall that we have expected to realize a $20 million plus participation from Shasta. When we announced this structure last year, we were not sure the timing of the payment of that $20 million-plus, and most analysts thus ignored it in their models. While we are still not sure of the exact timing, we do want to report that Prime has done an outstanding job of managing Shasta, and the property is generating EBITDAR lease coverage this quarter in excess of 7 times. Due to this, we have recognized some of that $20 million this quarter and expect to receive more meaningful amounts in 2010.

Bucks County is turning into a real success story. The new tenant has invested approximately $4 million of their own dollars into renovations and new equipment. They began performing surgeries in September and are currently scheduling cases three days a week. The plan on having more than 60 physicians rotating their surgeries through the facility by January.

We expect that we will begin making acquisitions again in 2010. The pipeline is strong and the projects are strong. We are excited about the prospects for good growth levels next year, both in our existing portfolio and new acquisitions. At a time when other companies are having to deal with falling rental rates and higher vacancies, Medical Properties Trust is delighted to once again be able to report dramatically strong operating results for our portfolio.

Our portfolio is strong and we are well positioned for further growth in 2010. At this time, I'd like to ask Steve to go over the specifics of our financial performance for the quarter.

Thank you Ed, and good morning, everyone. I'll present the highlights of our financial results for the third quarter, and then we'll open the call up for questions.

For the third quarter of 2009, we reported normalized funds from operations, or FFO, of approximately $16.4 million, or $0.21 per diluted share. Adjusted FFO for the third quarter was about $16 million, or $0.20 per diluted share. Included in these calculations are $0.03 per share of non-routine expenses that we have historically excluded from the FFO estimates that we have previously provided. So, our third quarter FFO of $0.24 per share absent the non-routine expenses was on the high end of our guidance range of $0.89 to $0.93 per share annualized.

I will briefly describe these non-routine expenses, although I think most listeners are well aware of them, and have made adjustments to their models for them. As Ed mentioned, we incurred property level operating expenses related to our former HPA properties of approximately $1.2 million and about $200,000 more related to our Bucks County property, for an aggregate per share effect of about $0.02.

As we pointed out on our last call, we are no longer responsible for the property operating expenses of Bucks County.

As of September 30, we elected to begin recognizing rental income from our Healthtrax properties -- these are our wellness centers -- on the cash basis, and accordingly, have reserved approximately $600,000 or slightly less than $0.01 per share of previously-accrued rental income. For the foreseeable future, we expect to continue to receive cash payments of partial rent equivalent to about one-half of the contractual amount due. If this remains an accurate assumption, we will recognize on an annual basis, approximately $1 million less than our lease terms require.

During the quarter, we incurred approximately $736,000 or about $0.01 per share in legal expense related to the Houston Town and Country litigation. The trial of this matter is set to begin on November 16, with the hearing of numerous motions and challenges and jury selection is scheduled to begin on January 4, 2010. We expect a full trial will take as long as four months and result in additional legal costs of as much as $2 million, although it is possible that legal costs could exceed that.

We also point out as we have in the past that FFO includes non-cash interest expense of approximately $500,000 related to the adoption in early 2009 of new accounting for convertible debt. This change has no effect on cash flow and has been considered in our most recent estimate of annualized FFO.

Based then on the existing portfolio, we continue to expect to generate annualized FFO of between $0.89 and $0.93 per share, and we'll take just a minute to go over some of the more important assumptions in that estimate.

Today, our diluted shares outstanding are approximately $78.7 million. We continue to assume no revenue from the River Oaks and Sharpstown campuses in Houston. We also assume no significant changes in our debt balances and a current LIBOR reference of about 25 basis points. That's the 30-day rate and we pay an average rate of approximately 175 to 200 points over that rate on our variable-rate debt.

Further assumptions include quarterly G&A expenses similar to what we incurred in the first three quarters of this year on an annualized basis. The estimate does not include any property level expenses or litigation costs, write-offs of straight line rent, or other non-routine or unplanned transactions. As we've stated previously, this estimate will change, perhaps materially, if market interest rates change, assets are sold or acquired, the Sharpstown and River Oaks properties are sold or leased, other operating expenses vary, existing leases do not perform in accordance with their terms, or we materially alter our capital components.

We made no changes to our capital components during the quarter, so as of December 30, we had approximately $566 million in borrowings. That included fixed-rate debt of $344 million, with a weighted average rate of approximately 7.4% and variable rate debt of $222 million with a weighted average rate today of approximately 2.3%.

As of September 30, we had about $13.1 million in cash and approximately $68 million available under our revolving credit facilities. Again, similar to the last several quarters, we have no meaningful maturities until November 2010 at which time a $30 million term loan is due. Also, one of our revolvers is scheduled to mature in November 2010. However, we may extend that through November 2011 for a nominal fee. That facility currently has a balance of approximately $96 million.

We have unfunded commitments to complete certain expansion and refurbishment projects within our existing portfolio that total approximately $8.8 million. We have no commitments to acquire or develop any new facilities. Considering this and the capital resources and commitments that we've already described, we believe we have more than enough liquidity for the near term. With the plans that we've laid out on our previous calls regarding even further enhancements to our liquidity, we are confident that we will have attractive alternatives over the next two years to satisfy our debt maturities prior to that time.

This includes more than $300 million in unencumbered assets that will become available by November 2010 when we repay the $30 million term loan.

This concludes our prepared remarks for the day. I will now turn the call back over to the operator to queue your questions. Operator?

Thank you very much, sir. (Operator Instructions) Our first question comes from the line of Michael Mueller of JPMorgan, please proceed.

Hi, this is [Mike Lewis], on Mike's line. I wanted to ask about the profit participation on Shasta. I believe you said in your comments that you started to receive some of the $20 million and I'm wondering how much that was, and if you can give a little more detail there.

We started to recognize the $20 million, Mike, and the way we're treating that because of the structure of the lease, is as straight line rent. We've actually been accruing the straight line rent since the commencement of that lease but reserving fully for it until we had the evidence that led us to believe that we're actually going to collect in accordance with the lease. And, we reached that hurdle, as Ed said, the hospital is doing very, very well. And so, we have recognized the straight line rent for 2009 that we had previously reserved for. That amounted to a little over $1 million, and that would be -- our expectation going forward under the current arrangement would be about $1.2 million in recognition of additional rent per year. The cash collections we actually expect will be more than that, and we are unable to predict exactly when the cash will be paid to us. But it will be, we believe, in the early years of this lease rather than across the whole 10 years of the lease.

Okay, great. Just one more question, about the property operating expenses, it looks like they went up despite, they went up sequentially despite taking the Bucks County lease out, or adding -- signing the Bucks County lease and taking that out of that line item. Was that all due to River Oaks and Sharpstown coming in more expensive than you thought?

Yes.

Okay, thank you.

Thank you very much sir, ladies and gentlemen your next question comes from the line of Jerry Doctrow of Stifel Nicolaus. Please proceed.

Thanks, I guess staying with River Oaks for a minute, so we expect operating expenses to just kind of stay about that level, or bounce around?

They should stay at that level, Jerry.

Okay. And then obviously we've been talking about this one for a few quarters now and the sense I had is that a sale was close. I guess I understand that these things are never exactly predictable, but in terms of something yet this year, versus first half of next year, just any additional color on how we should be thinking about that?

You're right, and it's hard to predict with exact certainty, and you never know. I think that for planning purposes, first quarter, something on half of it in the first quarter of next year would be good planning.

Okay, okay, great. That's helpful. G&A I think was -- fell this quarter, I think Steve, you provided sort of guidance, if I understood you, that would run about the average for the first three quarters. Just curious what happened this quarter and did I understand you right in terms of the way we should project and go forward?

You did understand, I think taking the average of the first three quarters is probably going to be the most accurate assumption, and Jerry, it's really just a matter of you know, we're still relatively small, so normal variances in different line items including D&O insurance and professional fees, and annual meeting and proxy cost, and so forth, can make a $200,000 or more difference from quarter to quarter, which is why I think the best way to do it is just take the average of the three quarters we've reported so far.

Okay. And then, the -- I guess debt, you talked about it, obviously, you're not under the gun near term, in terms of maturities, but November 2010 is not that far away. So, are you thinking about -- I think before you've talked about other options. One was secured debt, obviously, that you need to get the term loan sort of paid off. I guess I wanted to just get a little bit more sense or a little more color on what the options are, particularly if you're starting to make new investments again and you need additional amounts of capital. So, how would you be approaching capital markets, what's your sense about cost, that kind of thing?

Well, I'm happy to share with you kind of the indications that we're getting from the investment banks in particular. The market is, as I'm certain you know, much more open than it was six months ago. And, much more affordable. We are considering any number of a range of alternatives, including unsecured and secured high yield debt, restructuring the bank debt, new convertible issues, and a couple of others. And generally, whereas six to nine months ago we would have been looking at double digits, up around a 12 coupon on most of that, that's come down substantially to where we'd be looking at probably a 9 handle. And that's really where we are today, having made no commitments. But, continue to evaluate those alternatives. At the same time, and on a similar parallel track, evaluating acquisition alternatives and the idea of course is to maximize the efficiency of restructuring the balance sheet. At the same time, we're able to make accretive acquisitions, and so those two parallel tracks continue to move. But there's nothing in the immediate future, I don't believe.

Okay. and then I guess just the last thing, I guess just maybe a little more color on your thinking about health reform, and also particularly just in California, any issues with Medicaid and stuff, they're giving the -- you know, the big exposure you've got in that state and their generally crummy budget situation?

Well, Jerry, despite how close Congress tells us we are to a package, no one knows exactly what that's going to look like now. Too many versions of it. However, one theme throughout all of the versions that we believe is that the hospitals will do fairly well in healthcare reform. We still feel, as we've stated over the last year, that from our operator standpoint it will be mutual to slightly negative, so we believe it will have very little effect on our operators and thus no effect on Medical Properties Trust.

From an indication in California that we talk with Prime constantly about the potential changes to Medi-Cal and Medicare and the other changes to various other programs, and Prime believes that they will do very well under all of the proposed changes out there right now.

Okay. Okay. Thanks.

(Operator Instructions) Our next question comes from the line of Karin Ford of KeyBanc Capital Partners, please proceed.

Hi, good morning. Just back to property operating expenses, you said $2 million is a good run rate from here, and that's solely now due to just River Oaks and Sharpstown?

No, I think $2 million may be a little high, in that $2 million-plus line item that you're looking at, that includes the $600,000 of Healthtrax reserve.

Uh-huh.

So I think a better run rate is probably in the $1 million to $1.2 million on a quarterly basis for River Oaks and the HPA properties.

Okay. and I know we've talked about this in the past, that it -- that those expenses aren't in your guidance. Given that those expenses have been in your reports now for a few quarters, do you think it may make sense to start including real estate operating expenses in your guidance?

Well we give our guidance the way we do so the analysts and investors can make their own assumptions about that. As Ed said, we think at least half of that River Oaks situation will be resolved by the first quarter of '10, there's no assurance of that. So, I would think we would continue to give as much information as we can about the expectations on those expenses, and that allows everybody to make their own assumptions.

Okay. Which half of River Oaks is more likely to close in 1Q, is it the sale portion or the lease portion?

Karen, we're just not prepared to go over that at this point.

Okay. Can you give a general sense for cap rates today?

It's awfully hard, because it's a fairly wide spread of cap rates, literally running from probably slightly around 9 all the way up to 11, depending on the particular property and the strength of the operator and the history of the particular property. It's a wider spread than I think we've ever had before, but there's not a whole lot happening right now so it's hard to give you an exact number of what, that's just our best guesstimate of where we could do deals, both selling and acquiring.

And you're seeing more deals come across your desk today?

Yes, we are. Pipeline today is better than it's ever been.

Okay. I think, I think that's it, thank you.

Okay.

Thank you very much, ma'am. That will conclude our Q&A session for today. I'd like to turn the call back over to our speakers for any closing remarks. Gentlemen?

Thank all of you again for participating and your interest, and again, as always, if you have any further questions after the call, please feel free to call Charles Lambert, Steve Hamner, or myself. Thank you very much.

Thank you very much sir, and thank you ladies and gentlemen for your participation in today's conference call. This concludes your presentation for today, and you may now disconnect. Have a good day.