Medical Properties Trust Inc (MPW) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2009 Medical Properties Trust, Inc. Earnings Conference Call. My name is Sally and I'll be your operator for today. (Operator Instructions.) I would now like to turn the conference over to your host for today, Mr. Mike Stewart, Executive Vice President and General Counsel. Please proceed, sir.

Good morning. Welcome to the Medical Properties Trust Conference Call to discuss our fourth quarter and full year 2009 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 will be 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 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 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. Good morning, everyone, and thank you for joining us on today's fourth quarter year-end 2009 earnings call. I think we all can agree that 2009 was a year of significant challenges, as well as great change for the entire country. Despite a number of challenges that affected the economy, many businesses, and consumers, I am very pleased with the results of our company from both an operations and financial perspective and of the tremendous success our tenants continue to have in their operations.

Our business model was proven and sustained within this historic recession. As we begin a new year and a new decade, we are all well positioned for renewed growth. Over the past year we made measurable progress in strengthening our real estate platform through the continued increases in our EBITDA or lease coverage ratios and through the repositioning of selected assets. As examples, at Shasta Regional Medical Center and Bucks County Hospital, we completed tremendous turnarounds during the worst financial crisis this country has seen since the Great Depression.

By way of background on Shasta, in November 2008 we announced a new lease agreement at Shasta with Prime Healthcare. Since then, this tenant has done an exemplary job of managing the property. In 2009, Shasta outperformed our expectations. This is quite impressive considering the relative short time that Prime has been managing the facility. From a big picture perspective, we said that we expected to realize 20 million or more in profit participation from Shasta. In 2009, we recognized 1.4 million toward that amount. With the progress made there to date, we expect to receive an additional substantive amount in 2010.

Bucks County Hospital is another asset turnaround example and a real success story. After investing approximately 4 million in renovations and new equipment by our new tenant, the medical professionals at this asset began performing surgeries in September. Volume for January is expected to exceed 100 cases. The facility anticipates surgical cases to average 145 per month. From the outset our business objective has been to invest in selected hospitals where the value of operations is able to help protect the value of the real estate. Shasta and Bucks are proof that this strategy works.

Turning to our portfolio at large, we are delighted with the performance of our tenants for 2009. In spite of lingering macroeconomic challenges, the hospitals in our portfolio have continued to deliver increases in utilization, net revenue, and most importantly EBITDA, which further validate our business model for good and bad economic times.

Let's take a look at some highlights. Looking at fourth quarter 2009 versus 2008, our acute care hospitals improved from over five times coverage to more than 7.5 times coverage. For the entire year, the acute care hospitals improved from about 5.5 times to more than six times. The LTACs were up about 30 basis points, so approximately two times in 2009, compared with about 1.7 times in 2008. Our rehab hospitals were up about 40 basis points, so approximately three times in 2009, compared with 2.6 times for 2008.

Now, let's look specifically at some of our tenants. Prime Healthcare saw increases in total EBITDA for the first 11 months of 2009 of more than 120%, compared to 2008. Prime Healthcare is ranked by Thompson Reuters as one of the top 10 U.S. healthcare systems in the country and is the only for profit system in the top 10 to receive this recognition this year. Two of Prime's hospitals are recognized as part of the top 100 hospitals by Solucient Thompson Reuters and one of their hospitals was honored as a top 1% with the Premier CareScience Select Practice National Quality Award for superior patient outcomes.

Vibra, which represents about 2.5% of our total portfolio, generated an 18% increase in EBITDA or lease coverage ratio year-over-year. Other operators, Cornerstone, HealthSouth, Monroe Hospital, North Cypress, and Poplar Bluff, all saw significant increases in their EBITDA or lease coverage. Post-Acute, Pioneer Valley, and Mountain View were all either flat or slightly down in their EBITDA or lease coverage ratio year over year. However, the lowest coverage in this group was 3.31 times.

Only three hospitals--only three operators saw real decreases - CHS, Marina del Ray, and Healthtrax. Our CHS facilities are guaranteed by the parent company who continues to perform well. The other two operators have coverage of approximately three and one times. Although we made no new major acquisitions in 2009, seven of our properties saw significant additions or upgrades to our facilities. With regard to our other assets, we remain committed to finalizing transactions on the Sharpstown and River Oak campuses in Houston. At this time, we have no new update as to the potential timing of a transaction at either of these locations, however, we remain confident that we will recover our total investment in these two campuses. Please keep in mind that we have not included any revenue in our guidance from either River Oaks or Sharpstown.

Turning to other developments, in the fourth quarter we sold for $15 million our interest in Encino Hospital Medical Center facility to Prime Healthcare, the facility's current operator. At the same time, we issued a $20 million loan to Prime for the expansion of the Desert Valley Hospital facility. We consider this to be a very solid investment. Desert Valley Hospital is a signature facility for Prime. The asset sets the standard for integrated care because of its partnership with Desert Valley Medical Group, which is the region's largest multi-specialty medical practice.

Among small hospitals practicing in the U.S., Desert Valley has been named to the Thompson Reuters 100 top hospitals four times since 2003. The funds will be utilized for a 65-bed expansion that will bring the number of licensed beds to 148. We are very pleased to be a partner in this expansion, and given Prime's dependable track record we expect to achieve a solid return on our investment. I am also pleased to report that in the last quarter we reached an agreement to settle virtually all claims asserted by Stealth LP in the litigation involving the termination of leases at Houston Town and Country and medical office building in October 2006.

Steve Hamner will discuss details of the settlement a little later in the call. I would just like to add that we thought long and carefully about this and while the decision to pay anything to Stealth was a difficult one, we believe avoiding the significant defense cost and more importantly the time commitment that we would have incurred during a four-month trial was in the best interest of the company and shareholders. The amount we elected to pay is comparable to our estimated cost to continue to defend the claims through trial. It is beneficial to now have this behind us.

To sum up, we are pleased with the overall results of the past year and we are enthusiastic about the company's prospects. There are several notable macro trends driving this optimism. First, with regard to U.S. healthcare reform, we remain optimistic as we monitor the various reform proposals and the potential for no reform. We believe that both the Senate and House versions of reform will be slightly positive to neutral for hospitals and given the results that our hospitals have been showing over the past 18 months and in fact the past six years, we expect our hospitals to continue to perform well in the event of no healthcare reform. However, we believe there will be some form of healthcare legislation in the U.S. in the coming year and we believe that recent events have shown that hospitals would continue to play a significant and profitable role in the U.S. healthcare system.

We are seeing continued improvements in the credit markets. We are well positioned to weather--we were well positioned to weather the credit storm of 2008 and 2009 with our well thought out and designed capital structure, including being the first REIT to issue new equity in 2009. Our patience and prudence have paid off. We have an attractive pipeline and our projects are strong. While we continue to be conservative, due to increased stability in both the overall economy and the credit markets, the company currently expects to invest at least $150 million in healthcare real estate assets in 2010. So in summary, the dynamics of our business model remain strong, our portfolio continues to perform well, and we are excited about the prospects for strong growth in 2010 and beyond.

Now, our Chief Financial Officer, Steve Hamner, will go over our financial performance for the quarter and year-end in more detail. Steve?

Thanks, Ed. Good morning, everyone. I'll present the highlights of our financial results for the fourth quarter and full year and then we'll open up the call for your questions.

For the fourth quarter of 2009, we reported normalized funds from operations, or FFO, and adjusted FFO of approximately $13.2 million and $13.3 million, respectively, or $0.17 each per diluted share. Included in these calculations is $0.06 per share of non-routine expenses that we have historically excluded from the FFO estimates that we provide. So the resulting fourth quarter FFO and AFFO of $0.23 per share absent these expenses was in line with what we have previously estimated and that is a range of $0.89 to $0.93 per share FFO on an annualized basis.

I'll briefly outline these non-routine expenses. As Ed mentioned, in November we reached an agreement to settle all but one claim asserted by Stealth LP related to the termination in October 2006 of leases of the Houston Town and Country Hospital and medical office building. We paid $2.7 million to settle claims for which Stealth was seeking more than $330 million. At the time, we estimated that legal fees alone to defend the claims in a four-month jury trial would have been at least $2 million and could have well exceeded that figure. Given this, and even though we continue to deny any liability or wrongdoing, we believe it was in our interest to agree to the settlement and put this distraction behind us.

In early January, the single remaining claim that Stealth had against us for which they were seeking more than $20 million was dismissed at no additional cost to us. Six of Stealth's limited partners continue to press certain claims against Memorial Herman Health System in Texas and we are also named as defendants in this action. In fact, these claims are presently being tried in State District Court in Houston. Stealth itself has indemnified us for our costs regarding this claim and we do not expect further material costs related to this litigation. As in most litigation, however, there is no assurance that we will not incur additional material costs.

With respect to our reported results, the litigation costs for the fourth quarter, including the settlement payments, aggregated approximately $3.8 million, or $0.05 per share. Also, during the quarter we incurred property level operating expenses related to our former HPA properties of approximately $1.3 million for an aggregate per share effect of about $0.01.

Net income for the three months ended December 31, 2009 was $7.4 million, or $0.09 per diluted share. That compares with net income of $1.4 million, or $0.02 per diluted share for the same period one year ago. Per share levels for FFO, AFFO, and net income were affected by increase in the weighted average diluted common shares outstanding for the fourth quarter of 2009 to 78.8 million shares, compared to 65.1 million shares for the same period in 2008. Total revenues for the three months were $33 million, compared to $29.5 million last year, an increase of over 11%. For the full year 2009, normalized FFO was $61.5 million, or $0.79 per diluted share. AFFO for the full year was $63.2 million, or $0.81 per diluted share. Excluding litigation costs and property expenses, annual per share amounts were $0.90 and $0.92, respectively.

Net income for the full year ended December 31, 2009 was $36.3 million, or $0.45 per share, compared with $32.7 million, or $0.50 per diluted share for the full year 2008. Again, per share levels were affected by an increase in the weighted average diluted common shares outstanding for the full year 2009 to 78.1 million, compared to 62 million for the full year 2008. Total revenues for the full year were $129.8 million, up over 11% compared to 2008's $116.8 million.

Based on the existing portfolio, we continue to estimate that annualized FFO per share will fall in a range of $0.89 to $0.93. 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 $78.8 million. We continue to assume no revenue from the River Oaks and Sharpstown campuses in Houston. This estimate also contemplates no significant changes in our debt structure and a current LIBOR reference of about 30 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 during 2009 on an annualized basis. This estimate does not include any property level expenses or litigation costs, write-off 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.

In November, we put an at the market program in place and we have the ability to sell up to $50 million of stock under that plan. During the fourth quarter, solely in order to test the systems of the three separate placement agents, we sold 30,000 shares at an average price per share of $10.25.

We made no changes to our capital components during the quarter, so as of December 31, we had approximately $585 million in borrowings, and that is the gross amount before deducting discounts and issuance costs. That included fixed rate debt of $355 million with a weighted average rate of approximately 7.4% and variable rate debt of $230 million with a weighted average rate today of approximately 2.3%.

As of December 31, we had about $15.3 million in cash and approximately $58 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 of this year. However, we may extend that through November 2011 for a nominal fee. At December 31, that facility had a balance of approximately $96 million. We have unfunded commitments to complete certain expansion and refurbishment projects within our existing portfolio that total approximately $10.8 million. We have no commitments to acquire or develop any new facilities.

Considering all of this and the capital resources and commitments that we've already described, we believe we have more than enough liquidity for the near term. As well, given the dramatic improvements we've seen in the credit markets during the past six months, we are confident that we have several attractive alternatives to satisfy our debt maturities over the next two years, and in addition provide affordable capital to execute our acquisition and investment plans.

That 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. (Operator Instructions.) Your first question comes from the line of Jerry Doctrow with Stifel Nicolaus. Please proceed.

Hi. Good morning.

Good morning, Jerry.

Just a couple things. Maybe with G&A first, Steve, I know you gave some guidance basically it's going to be the same I think in 2010 as '09. You kind of bounced around a bit. I mean, I think that was one of the reasons we were a couple pennies light maybe this quarter. Just any sense of is there quarterly fluctuation or anything else there we should be thinking about that moved it kind of up and down?

No. We really think it's kind of a ratable quarterly run rate based on the annualized amount and this quarter's level. There's really no seasonality or a cyclicality to the G&A cost.

And this quarter is fairly typical?

That's right.

Okay, thanks. And then, you talked about the debt, obviously, and you've clearly got some time - November 2010 and then 2011 - somewhat more. I was just wondering if we can get any more color. I mean, if you were out financing today kind of how would you rank your--maybe your--how various alternatives look - equity versus debt, fixed versus floating? Secured debt you were talking about doing. I'm just trying to get a little more color there of how you're thinking about it.

Yes. The alternatives we have and are actively considering today really include the entire range. Based on market conditions as we sit here right now, we believe we could favorably refinance the revolver. Now that will clearly involve a step up in the costs. We're paying 175 over now. And we would expect to see that bump up by at least 100 to 250 points. We also expect we'd be able to increase the amount of the revolver. At the same time, the convert market and the high yield markets are both wide open right now and especially compared to cost of even six months ago the pricing that we would expect under those plans are fairly attractive.

Equity, again, when it comes time to issue equity--and there's no thought of that in the near term--we're certainly a lot happier at $10 to $10.50, where we've recently been before the last couple of days anyway, than where we were six months ago in the $5 and $6 range when there was a lot of pressure to issue equity and firm up the balance sheet. And as Ed said, we think our patience and the longer term maturities that we had on our balance sheet have really paid off. And so, when we do go to refinance we'll just be in a much, much better situation than we would have been had we made that decision six months ago.

Okay. And you had talked about acquisitions, at least 150 I think was the number that you were using. So in that case, is there a need to issue equity? It sounds like you don't feel you need to do it just to do refinancings. But if we see acquisitions would we then logically see equity as well?

Well, that will be driven obviously by the velocity, the timing, and the amount of acquisitions. Now, we've said we expect to do 150 this year. And no different than prior years when we were active in the acquisition markets. It's very lumpy. The assets we buy are very expensive on a per asset basis. So it could be significantly more than the 150 and--which it's just logical that in order to maintain the prudent balance sheet that we have, at some point we would be required to go back for more equity.

Okay. And just the last thing, Ed, I think with the press release it just happens to say like 15 million in terms of the sale of Encino and I think the loan to--back to Prime. And I thought you said 20 million on the call. So I was just trying to clarify.

It is a $20 million loan to Prime, 15 of which has been funded to date.

Okay. Maybe I just misread it, too. Okay. And I think, Ed, we've talked about this before, but just my last question then I'll jump off. It sounds like a couple of the--your bigger brethren out there are starting to talk a little bit more about sort of acute care. And does--what do you see the competitive situation sort of being like as we go forward?

Well, as you and I have discussed, there still aren't many out there that are also talking about it. And those that are, there's plenty of room for all of us. It's a very, very large market. We have yet to run up against each other. And we believe that the market is so large that it actually will be beneficial to us to have some additional of our peers out there investing in acute care hospitals to help tell the story to the investor world.

All right. Great. Thanks.

Thanks, Jerry.

Your next question comes from the line of Karin Ford with KeyBanc. Please proceed.

Hi. Good morning. Just another question on the investment front. What's your preferred type of asset you'd like to acquire today? Are you looking to invest with existing clients or new clients? What type of timing and what type of pricing are you looking for on that front?

Karin, the investments will look very similar to what we have now. Our portfolio now is about 75% acute care with the remaining portion split fairly evenly between rehabs and inpatient. And that will continue to be what we'll look like going forward. That's what our pipeline looks like. From an existing versus new, most of the pipeline is with new customers. There is some out there with some existing customers. But the vast majority of it is with new customers. The cap rates--the going in cap rates, there's a pretty wide spread and without getting into the specifics of each individual project, it would be safe to say that the investments are north of 10. Was there another question that you asked?

No, that covered it. Thank you.

Okay.

Did you mention what your expected yield is going to be on the new Desert Valley investment?

We didn't, but that becomes part of our existing--we have a mortgage on that facility and it becomes part of that mortgage, so it will carry the same rate.

Same rate? Okay, that's helpful. Is any of your floating rate debt hedged today?

No.

No, okay. And then, finally, is there any Shasta participation assumed in your guidance number?

What's in the guidance is the straight line rent component and that's about $100,000 a month. And again, that's an accounting requirement that we have to follow. We expect to collect more than that during 2010. How much more, we haven't said. But the operations at Shasta have--as Ed said earlier, have been above our expectations. And so, we would expect the cash component of our participation to be higher than the accounting component.

And what was the cash component in--for 2009?

There was no cash collected in 2009.

Okay. Thanks very much.

(Operator Instructions.) Your next question comes from the line of Philip DeFelice with Wells Fargo Securities. Please proceed.

Hey, guys. It's Phil for Todd Stender.

Hi, Phil.

How's it going?

Fine, how are you doing?

Great, thanks. With the sale of the Encino Hospital and Medical Center to Prime, did you provide any seller financing with that?

No.

No. And let me clarify. Karin asked a question about the rate and what we did on the rate, I misspoke. The rate on Encino was a higher rate than we have on Desert Valley. And so, when we reinvested in Desert Valley we're achieving the same higher Encino rate.

I see. Okay, thanks. Can you comment on the state of the lending environment for hospitals with regards to life insurance companies? Anything you're hearing on that front?

Well, it's--there's never been a very deep market there, at least not in recent history. And certainly what appeared to have been developing back in 2007 is no longer developing, obviously. There's little CMBS activity anywhere. There's little life company kind of whole loan activity anywhere on hospitals. And so, that's not a big part of our planning when we talk about capital access.

Great. Thanks, Steve. Most of our questions have been covered already. So, that's all.

Your next question comes from the line of [Mateo Aqusania]. Please proceed.

Hi, thank you. It's actually [Salim] on behalf of [Teo] with Jefferies. Just two quick questions. One, in regard to potential Medicaid rate cuts in California, for example, is it safe to assume that coverage ratios are strong enough to withstand any impact on business?

Well, two things, there, Salim. We have a relatively small exposure to state Medicaid throughout our portfolio. It's a little bit higher in California than it is overall in the portfolio, but it's still a relatively light amount. And so, the answer is absolutely that we don't expect the coverages to go down.

Okay. And secondly, I mean, as you kind of begin to embark in any potential capital raising initiatives and you decide to go down the line of doing some asset recycling, can you please shed some more light on what type of assets you would be willing to--could potentially be sold and if any characteristics that would put a specific asset off limits?

Well, Salim, we're not actively marketing any of our properties for recycling. So any recycling we do with properties is going to be opportunistic and it is certainly going to be accretive to the company. We're not going to sell an asset that we believe is performing well and providing us with a good return, and then reinvesting it at a lower return. So if we do any property recycling, asset recycling, it will be accretive to the company. But we are not actively marketing any properties out there right now.

Got you. Thank you. That's it for me.

Thank you.

We have a follow-up question from Karin Ford with KeyBanc. Please proceed.

Hi, thanks. Just one quick follow-up. I think you had said either on the last call or sometime previously that you thought one of the two River Oaks transactions--campus transactions would happen in 1Q 2010. Is that still your thinking?

Karin, as I said on the last call, it could be as early as 1Q or much later. We're still working on that one particular property. It's the south campus that could literally happen this quarter or later. It's just taking a long time.

Okay. Thanks very much.

All right.

This concludes the Q&A portion. I will now hand the call over to Mr. Ed Aldag. Please proceed.

Again, we thank all of you for listening in today. And as always, if you have any questions, please don't hesitate to call myself, Steve, or Charles Lambert. Thank you very much.

Ladies and gentlemen. That concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.