Medical Properties Trust Inc (MPW) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Medical Properties Trust earnings conference call. My name is Jennifer and I will be your operator for today.

At this time, all participants are in this listen-only mode and later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, [Sandy Dodd], Assistant General Counsel. Please proceed.

Good morning, welcome to Medical Properties Trust conference call to discuss our second quarter 2010 financial results. With me today are Edward K. Aldag, Junior, Chairman, President and Chief Executive Officer of the Company; and Steven Hamner, Executive Vice President and Chief Financial Officer.

Our 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're 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 Report 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 measures 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 reconciliations. I will now turn the call over to our Chief Executive Officer Ed Aldag.

Thank you, Sandy. The second quarter of 2010 was a watershed quarter for Medical Properties Trust. After very prudently safeguarding the Company's strong financial position throughout the recent world credit crisis, we were not forced as many other companies were to recapitalize our balance sheet. In contrast, our sound financial position enabled us to wait until the markets returned to a more normalized level and we were ready to begin our acquisition growth mode.

In the second quarter, we completed a very successful equity raise and entered into a new and expanded credit facility both of which Steve will go through in more detail momentarily. Through these actions, we greatly reduced our debt, eliminated all near-term debt maturity worries and provided MPT with more than $0.5 billion of liquidity to restart our acquisitions activity.

We took advantage of that liquidity right away as we have been saying for quite some time, the opportunities available to us in quality acquisitions are abundant. During the second quarter we acquired three properties for an aggregate investment of approximately $74 million.

Each of these properties is in an inpatient physical rehabilitation hospital leased to affiliates of Reliant Hospital Partners. They are located in Houston, Dallas and Austin, Texas. They each have 50 to 60 rehab beds and one has 25 skilled beds in addition to the rehab beds.

The facilities opened in January 2009, January 2008 and June 2008, respectively. The trailing 12 month EBITDAR lease coverage ratios at the time of acquisitions averaged above two times.

The going in cash cap rate on these existing on well performing properties was 9.7%. The leases have approximately 23 years remaining on their terms.

We also invested an additional $5 million in the prime Desert Valley Hospital as part of a previously announced total $20 million expansion. The expansion will add 65 private patient rooms to the current 83 bed campus.

The expansion will consist of 53 medical and surgical beds, a 12 bed coronary critical care unit, an all-inclusive cardiac surgical unit and two new cardiac cath labs. We are currently negotiating with several other operators that are not currently tenants of MPT for other hospitals all across the country.

We hope to be able to reports some more acquisitions in the near future. We still feel very confident about our ability to put our liquidity to work in a timely fashion.

With the addition of the Reliant hospitals and the disposition of the prime Centinela hospital announced during our last call, our exposure to our largest tenant has now been reduced to the 27.5% of our total assets. And as you've heard me say over and over, one of the most important measures of diversity for any REIT is the total exposure on the property-by-property basis. And in that regard, our largest exposure is now 6.5% of our total assets. The next largest facility is 4.9% of our total assets.

Now turning to the operations of our existing portfolio of tenants, we continue to be pleased with the overall performance as our portfolio continues to be one of the strongest in the healthcare REIT industry. In an effort to remove any seasonal abnormalities and to show what we believe are better indications of total performance, we're going to discuss EBITDAR lease coverage ratios in terms of trailing 12 month numbers.

In our hospital portfolio, when comparing the trailing 12 months quarter over quarter for Q1 2010 to Q2 2010, the coverage was slightly down. Overall the EBITDAR lease coverage ratio went from 6.93 times to 6.77 times.

In our LTAC portfolio when comparing the trailing 12 months quarter over quarter for Q1 2010 to Q2 2010, the coverage was flat. Overall the EBITDAR lease coverage ratio stayed the same at 2.15 times.

In our rehab hospital portfolio, when comparing the trailing 12 months quarter over quarter for the same periods, the coverage was slightly up. Overall the EBITDAR lease coverage ratio for the rehab hospitals increased from 3.1 times to 3.24 times.

All but one of our publicly reporting companies have reported their second quarter results and each saw increases in their volumes and their EBITDAs year over year for the same quarter. There's no news to report on our River Oaks campuses other than we continue to work with a purchaser for the South campus and we're working with several potential tenants to lease floors on the North campus.

We've also engaged a team to begin the hurricane renovations for that campus. We're still very encouraged by the ultimate prospects of returning the North campus to productivity at a level greater than when before it closed.

On Monroe, we are currently negotiating with four major systems about taking over operations there. At this time, we're unable to get into any more specifics than that due to restrictions under various confidential confidentiality agreements.

To reiterate my statement at the beginning of the call, this past quarter was truly a watershed quarter for MPT. We're stronger in every aspect today than we have ever been and we are excited about the future. Steve, at this time, I would like to ask you to go over the financial results and our equity offering and the credit facility in more detail.

Thanks, Ed, and good morning, everyone. I will run through the highlights of our second quarter results, provide a brief review of the recap activities and then we will open up the call for your questions.

For the second quarter of 2010, we reported this morning normalized FFO of approximately $14.9 million and adjusted FFO of approximately $27.7 million or on a per-share basis, $0.14 and $0.27 respectively. This is in line with our estimates after adjusting for certain non-routine items primarily consisting of property related expenses and other expenses that aggregate to about $1.9 million or $0.02 per share.

Excluding the non-routine items, the per-share calculation was $0.16. The announcement that was released earlier this morning has a detailed table describing these items, so I will go through them just briefly and address any further questions a little later.

Primarily due to the repayment by Prime of $40 million in operating loans that had been made by one of our taxable REIT subsidiaries, we reduced our deferred tax asset by about $1.2 million. Secondly, we incurred about $1 million for expenses at DART properties, primarily River Oaks and Sharpstown.

A new accounting pronouncement became effective this year that requires us to expense acquisition costs as incurred instead of capitalizing them to the cost of the acquired asset. We incurred a little more than $900,000 in acquisition cost during the quarter of which cost $600,000 related to the successful acquisition of the Reliant assets. Almost all the remaining $300,000 relates to possible acquisitions that are still live.

In the past, none of this would have been expensed in this quarter and at least the $600,000 would have been capitalized. On the positive side, we finally and completely settled all remaining litigation regarding the former Houston Town & Country and received almost $900,000 in indemnity payments from the plaintiff who sued us.

The aggregate effect of these amounts again was to reduce FFO and AFFO by about $1.9 million or $0.02 per share. Separately included in AFFO but excluded from FFO for the quarter is $10 million or $0.10 per share of additional rent related to the Shasta Regional Medical Center.

As we had previously disclosed, the Company collected $12 million during the quarter of which almost $2 million had been recognized previously through accrual of straight line rent. The remaining $10 million will be recognized as billed rent that is over the remaining term of the lease which is about another 8.5 years.

Regarding net income, for the three months ended June 30, was $6.2 million or about $0.06 per diluted share compared with the prior year of $7.9 million or $0.09 per share. Net income includes the effects of debt restructuring cost of $6.2 million or $0.06 per share related to the cash tender offer of our 2011 exchangeable notes and the termination of two term loans and severance of about $2.8 million or $0.02 per share related to the previously announced departure of one of our executives.

Taking a look at these numbers for this quarter versus a year ago, the per-share amounts were affected by an increase in the weighted average diluted common shares outstanding to $103.5 million for the three months ended June 30, 2010. This is up from 78.6 million shares for the same period in 2009 and is primarily due of course to the common stock offering of almost 30 million shares completed in April of this year. So revenues for the three months ended June 30 were $31.2 million compared with the year-ago quarter of $29.3 million.

I would now like to briefly review the recapitalization initiatives we completed during the quarter through which we have created a very strong platform for renewed growth for MPT at a time when we believe the opportunities for acquisitions have not been better. We took several actions to shore up capital over this time period.

First completing a stock offering of almost 30 million shares for almost $280 million in net proceeds. We also sold Centinela Hospital back to Prime for $75 million and received $40 million from Prime in early payments on operating loans.

We received the $12 million from Prime and full payment of Shasta additional rents as I just mentioned. And aside from providing a substantial infusion of liquid capital from these transactions, they also had the intended effect as Ed just mentioned of reducing our overall exposure decline to about 27.5% of total assets.

As we have said earlier, we do you expect to continue to invest in Prime properties as they have proven to be very effective and capable operators. That being said, we further expect that our investments in tenets other than Prime will outpace investments that we make in Prime going forward.

Turning to the debt side of our recapitalization activities, during the second quarter we completed a new $450 million credit facility which included a $300 million revolver and a $150 million secured term loan B facility. And by the way, we just received a commitment for an additional $30 million under the accordion features of the revolver.

We used the proceeds of the equity offering in the new term loan to retire our former revolver facility as well as our $30 million term loan with KeyBanc and a separate $64 million term loan and we also paid down a second revolver for approximately $40 million. In addition, we announced a cash tender offer for our November 2011 exchangeable notes and approximately $113.2 million or 82% of the aggregate principal amount of the notes were tendered. Subsequent to expiration of the tender offer, an additional $3.1 million of notes were retired.

As a result, we have about $21.7 million outstanding under this offer as of June 30 which has an interest coupon to us of 6 1/8%. So in terms of debt maturing, we now have only about $120 million in total maturities looking out over the next five years. The remainder of our funded debt, about $267 million, does not mature until 2016.

Lastly during the quarter, we completed two interest rate swaps for an aggregate of $125 million in notional amounts. This includes $65 million that was scheduled to begin floating in July 2011 for five years with the remaining $60 million scheduled to begin floating in October of that same year also for five years.

On a blended basis, we are presently paying approximately 7.7% fixed interest on those notes. However as a result of the swap transactions, we will be paying a fixed rate of only about 5.7% starting on August 1, 2011 and November 1, 2011 respectively. That represents a savings of approximately $2.5 million per year, again commencing in August of next year.

As of August 4, 2010 the Company had approximately $450 million in available liquidity through cash balances and credit facilities for investment in new hospital real estate. This does not include the $30 million commitment under the the accordion that we recently received.

Of the $450 million, $341 million is represented in revolver facilities and the remainder represented by net cash of approximately $109 million. So in closing, as a result of these recapitalization measures, we are operating today with a very low debt ratio of 22% of net debt to gross real estate assets and our net debt to recurring EBITDA on our last quarter annualized basis is only 2.7 times. We have no near debt maturity issues and we have substantial access to liquidity in order to pursue attractive investment opportunities in healthcare real estate.

Moving to guidance, historically our policy has been not to provide estimates of future quarterly financial results. We have provided estimates on annualized FFO based solely on assumptions about a specific portfolio and that's what we have done again this quarter.

Based solely on the June 30, 2010 portfolio, the Company estimates that annualized normalized FFO per share would approximate $0.60 to $0.64. The Company further continues to estimate that its existing portfolio of assets plus approximately $450 million of assets expected to be acquired with available liquidity will generate normalized FFO of between $0.94 and $0.97 per share on an annualized basis once fully invested. This estimate assumes that initial yields on new investments will range from 9.75% to 10.5%.

Total debt to total asset value subsequent to acquisition of $450 million of new properties is expected to be approximately 43%. These estimates do not include the effects if any of cost and litigation related to discontinued operations, real estate operating cost, interest rate swaps, ons write-offs of straight-line rent or other nonrecurring or unplanned transactions. In addition, this estimate will change if $450 million in new transactions are not completed or such investments initial yields are lower or higher than the range of 9.75% to 10.5%, market interest rates change, debt is refinanced, assets are sold, the Sharpstown and River Oaks properties are sold or leased, other operating expenses vary or existing leases do not perform in accordance with their terms.

This further includes estimated G&A expense of approximately $5.5 million to $6 million per quarter of which approximately $1.5 million is estimated to be non-cash share-based compensation expense. As I mentioned earlier, included in G&A this quarter is approximately $600,000 in acquisition costs related to successful and completed acquisitions.

Again, this reflects a new accounting pronouncement that requires such costs that previously were capitalized into the cost of the acquired assets to be expensed in the period incurred. Our future quarterly estimate of G&A does not include any such estimates.

Finally this excludes other unique and non-routine items of income expense such as write-offs of straight-line rent, asset impairments, property sales, lawsuit recoveries and other similar items. That concludes our prepared remarks for today. I will now turn the call back to the operator and she will open it up for any questions that you may have. Operator?

(Operator Instructions) Jerry Doctrow, Stifel Nicolaus.

Just a general one. You have addressed some of this, Ed, as you use started because I came on a few minutes late. But I guess I was just curious on the hospital side sort of how you're seeing basically operator plans play out given kind of healthcare reform, some of the reimbursement changes, and you touched on some of your public companies reporting but I haven't had a chance to look at any of that yet.

And your sense is that's I guess really also how it impacts sort of their demand for capital, their willing to do deals, that are kind of thing.

I said all but one of our publicly reporting companies had reported -- I believe [Isis] was actually reporting this morning at the same time that we were. But all of them have reported good admissions, good EBITDA numbers. All of the hospital operators that we're currently negotiating with on properties are much in the same position that we are.

They're back in the growth mode. They feel very good about where they are going forward under the new healthcare legislation and we feel good about hospitals in general.

As I have said previously on calls like this in other meetings that we feel very good about the general acute care hospital in general under healthcare legislation and where they will be as the top of the pyramid for healthcare delivery systems going forward.

And are there any types of investment activity or outpatient -- or you know, is it stimulating deals? Just any sense about -- given reform, given that we're going to see the influx of new insured patients out a few years, what is it doing to people's kind of investment thinking?

Jerry, we haven't seen any additional move toward the outpatient. We have seen a large number of operators that have had plans for a while to replace facilities, to upgrade their facilities now going forward with those plans. So most of what -- almost all of what we are talking about looks exactly like our current portfolio, the inpatient acute care hospitals.

Michael Mueller, JPMorgan.

It's Ralph Davies on the line with Mike. I just wanted to walk through the $0.60 to $0.64 of guidance that you provided. And if you look at that relative to what you have done over the first part of the year, that implies a run rate of about $0.14 a quarter.

And if you look at that on a sequential basis, so $0.16 after you factor in those one-times, $0.15 if you exclude the operating expenses I guess will probably keep going. I guess it just -- it looks kind of flat going forward and I'm just wondering if that may be a little conservative given natural rental growth, etc.

Let me just clarify the guidance. I don't know how many -- how long you've been listening to our calls. But our policy because we're relatively new even though we've been public now five years and we're relatively small even though we are at $1.4 billion now.

Our policy has been especially in growth mode like we are right now, not to try to give quarterly guidance because it's just too difficult to predict the timing and amounts of the acquisition activity. So it becomes a target that moves all the time and nobody can possibly hit it.

So our $0.60 to $0.64 per share annualized estimate is based solely on the June 30, 2010 balance sheets. It assumes no acquisitions, it assumes no growth in the rental rates through the contractual adjustments.

It assumes nothing. For example, I went through the interest rate swap transaction that we did. It doesn't assume any of those things. It's just to give some level of guidance as to what the portfolio was doing on a status quo basis.

Now going to the next part of our guidance, if we successfully invest our ability available liquidity which today again before the recent commitment on the accordion is about $450 million, then we expect that level of the portfolio to generate on a run rate basis $0.94 to $0.97 or more.

So absolutely, the $0.60 to $0.64 should not be looked at as our estimate of our quarterly earnings for the foreseeable future. It is not that at all. That is not our estimate.

We fully expect to continue to make accretive acquisitions. In our view, we're confident that they will be material in size and so the hope, the plan and the expectation is that we will be at that higher run rate sooner rather than later.

Sorry, I think my question wasn't very clear. I was just talking about core portfolio performance. So recognizing that that is not going to be where the numbers actually come out. I guess I was just -- it looks to me that you're kind of implying that your core portfolio will perform essentially kind of a flat basis relative to where you are right now.

So I guess what you're saying is you're not assuming any contractual -- so within the core portfolio, you're not assuming any contractual rental growth in those numbers to get there. So, okay, so excluding acquisitions etc., you still could get -- you still could potentially beat them then, that kind of end of year guidance?

Well, yes, excluding acquisitions, we expect it would be $0.60 to $0.64.

Our escalators happen for the most part in January of every year.

Tayo Okusanya, Jefferies & Co.

I guess from the acquisitions perspective, I know you didn't make positive comments that you like what you see out there in regards to the pipeline and pricing and things like that. But I guess what are you waiting for before you decide to put some of your well-earned liquidity to work?

We're not waiting on anything. As you know, we've already put to work $74 million of that. And as I said previously on the call, we are currently negotiating with a number of other hospital operators and we hope to be able to announce those acquisitions soon.

We are not going to announce acquisitions until they close. We announced that we're working on the $74 million hospitals because of the equity offering and the requirements with the securities filings.

But as has always been our policy, we will wait until we close. So we have a lot that we're working on right now. But we're not going to get into any detail on that because things happen, until they actually close.

Fair enough. Any updates on River Oaks and Monroe at this point?

Well, as I said earlier in the call on River Oaks, we continue to work with the potential purchaser for the South campus. We are moving forward on the North campus as a multi-tenanted building. It will most likely end up with three or four tenants.

We're currently negotiating with several operators to take floors there. We have begun the process of putting together a team to not only do the hurricane renovations, but also [let do some] configuration because of the multi-tenanted as opposed to one tenant.

We still expect that on the North campus that we will end up with a productivity rate much higher than where we were even before that particular facility closed. On Monroe, we are currently negotiating with four different hospital systems about taking over there and as I said in my script earlier, that's all we can say right now because of confidentiality agreements we've entered into with those entities.

(Operator Instructions) Todd Stender, Wells Fargo Securities.

Your current pipeline that you're referencing, are these in general, are these direct deals? Are they getting better pricing than say if they were widely marketed or are they widely marketed?

It's a combination, Todd. Most of them are direct deals with the operators. But like the three that we just closed on recently, they were actually a situation where one of the deals was being widely marketed.

We knew the operator or the developer actually in that case owned two other hospitals with the same operator. And we made an offer for all three of them.

So this is as situation where one of the properties was being widely marketed but nobody was making an offer on the other ones because they weren't technically for sale. For the most part, we're dealing directly with the operator or the end-user.

Any similarities on the markets that you're seeing or health systems or is it pretty spread out would you say with some of these deals?

Well similarities being that for the most part, 90% plus of them are for-profit entities. They are located all across the country.

They are the -- the mix looks very similar to our existing portfolio which is approximately 70, 75% general acute care hospital with remaining being post acute care. But good strong operators.

Finally, just with your comfort with Prime, Prime I think you mentioned is now 27% of your assets. Would your comfort level still be if it was 20%; 20, 25% I guess for your level and then part two is what do the rating agencies say? Do they have a certain threshold that they like to see?

Well clearly if it goes down from 27.5 to the range to 22% that you mentioned, where obviously we remain comfortable, we have been comfortable with Prime when they've been as high as 38%. They are particularly strong operators and as we always try to point out and I think Ed did earlier on the call is, we really look at our hospitals on a location basis and no single Prime hospital now represents more than about 6% of our total assets. So we remain comfortable with Prime. And I'm sorry, Todd, I forgot the second part of your question.

(multiple speakers) the rating agencies.

The rating agencies. Well, you know, obviously our debt is rated and they take a very close look at tenant base and very few of our tenants actually are rated.

When we did our last rated deal, Prime wasn't rated by at least one of the agencies. So clearly that goes into the mix of credit underwriting. But it has not impaired us from either accessing financing or acquiring additional assets.

Karin Ford, KeyBanc Capital Markets.

This is [Austin Worshim] here with Karin Ford. I was just trying to get a sense of how much you guys are spending to build out the North campus at River Oaks.

We haven't finished that analysis yet. We've just started the process of meetings with the architects and the contractors. So as soon as I have that number, we will let you know.

But when Ed said earlier that our expectation on the North is that the yield will be substantially higher and stronger than what we had originally, that includes adding in a fairly significant but broad estimate of the additional cost that we will be putting into that over the next few months.

That partly answers my next question. I mean, how much of that buildout do you think then will come from the insurance proceeds versus what you guys will have to spend out of profit?

That's what I was about to comment on. That's an unknown right now because as you could imagine, dealing with insurance companies on this type of issue is a lot of fun. And so there's not an agreement between the two parties as to exactly what mix that will be.

But one of the problems that we've had is that it's been taking so long that it's just been a delay. But we're going to go forward and work that out as we go along with the insurance companies.

There are no further questions at this time. I would turn the call back over to Ed Aldag for closing remarks.

Again, thank all of you for your interest. If you have any further questions after the call or later in the day, please feel free to call Charles Lambert, Steve or myself. Thank you very much.

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