Medical Properties Trust Inc (MPW) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 Medical Properties Trust, Inc. Earnings Conference Call. My name is Stephanie, 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. Charles Lambert, Director of Finance. Please proceed.

Good morning. Welcome to the Medical Properties Trust Conference Call to discuss our fourth quarter and year-end 2010 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. Our press release was distributed this morning and furnished on Form 8-K with the Securities and Exchange Commission. 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 Security laws, the Company does not undertake a duty to update such information.

In addition, during the course of this 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 Regulation 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, Charles. In the second half of 2010, we renewed our acquisition activities announcing to the market that we anticipated investing $150 million in new properties in 2010, just half of our historical normal levels prior to the global recession. We ended the year by investing approximately $213 million, 42% ahead of projections. We acquired three new existing inpatient rehabilitation hospitals with an established, but new-to-MPT tenant, two new existing LTACH hospitals, and one in escrow, again with an established, but new-to-MPT tenant, and started a development of one new acute care hospital with an established operator, but one that was also new to MPT.

These acquisitions further improved our already strong tenant and geographic diversification, and continued to enhance our strong returns with a weighted average going in cash cap rate of almost 9.5%.

In addition, the six existing properties in this $213 million generate EBITDAR lease coverage of over 2.5 times, which is right in line with our existing LTACH and rehab hospitals. As we have said on recent calls, our acquisition pipeline is very strong and we expect 2011 investments to be back to normal levels. You will recall that we said in late 2010 that we expected to invest at least $300 million in new investments in 2011. Due to the [excess] that we are having, we are raising that guidance today to at least $350 million.

In January of this year, we have closed another $87 million of investments and have another $56 million at the stage where we are hopeful the transactions will close any day now. We continue to feel very positive about the hospital industry. Due to the fact that this fourth quarter earnings call is only three weeks after the year end, we do not have all of the financial data for most of our hospitals for the month of December, and in fact, most of our publicly-reporting tenants will not report their 2010 results until late February. So, we won't have the specific coverage numbers for you today.

However, it is clear that out portfolio continues to produce strong coverages. It appears that our acute-care hospital sector will most likely remain flat to slightly down, with EBITDAR coverage in the 6.5 times to 7 times. The LTACH portion, which was 2.17 times last year trailing 12 months, looks like it will end the year in the same range, and the rehab hospitals which were 3 times last year trailing 12 months, looks like it will end the year essentially flat as well.

As we indicated in 2010, and actually put to work on a small scale in early 2010, we will continue to take advantage of our hospital knowledge and make some RIDEA investments in several of our new facilities in 2011. We continue to see investment opportunities where we can achieve outsized returns, allowing MPT to increase its year-over-year organic growth.

The tenants in two of our properties with lease maturities in 2011 have notified us of their desire to purchase the properties at the expiration of the lease. Both of these properties aggregated investment by MPT of approximately $40 million. On one of the properties, we have reached an agreement to terms, but have not yet closed, and the other property is in the early stages of negotiations.

Monroe is very close to finalizing a new relationship with regards to its operations, and we hope to be able to report on that soon. With this being January the 27th, and having already closed approximately $87 million worth of properties with another $56 million expected to be eminent, combining to represent almost half of our 2011 acquisition guidance with 11 months remaining, we feel very good about our total investment outlook for 2011.

At this time, I'd like Steve Hamner to go over the actual operations, the operating results, for 2010. Steve?

Thank you Ed, and good morning, everyone. I'll briefly run through the highlights of the fourth quarter financial results, and then we'll open up the call for your questions.

For the fourth quarter of 2010, we reported normalized FFO of approximately $18.2 million, and adjusted FFO of approximately $18.6 million, or $0.17 per diluted share for each measure. This is in line with our outstanding guidance after adjusting for certain non-routine items, primarily consisting of gains on real estate sales, the write-off of accrued straight line rent associated with those sold properties, and settlement of litigation. The net effect of these items was an aggregate cost of $3.6 million, or $0.03 per diluted share.

In addition, we have normalized FFO by adding back the amount of deal cost associated with successful acquisition pursuits. These are costs that until accounting rules changed last year, were capitalized into the cost of the successful acquisitions. In 2010's fourth quarter, these costs totaled $713,000, or one penny per diluted share.

For the full year in 2010, these costs aggregated $2 million, or $0.02 per share. Net income for the quarter ended December 31 was $10.6 million, or $0.09 per diluted share, compared with $7.4 million or $0.09 per diluted share for the year-ago period, which by the way has been restated for the effects of the classification of certain operating results to discontinued operations.

Similar to FFO results, net income for the quarter includes the gain on the sale of our Montclair hospital and Sharpstown facility, of $2.9 million, related write-off of straight line rent of $1 million, and the settlement of litigation surrounding the former Bucks County tenant. We accepted a payment of $1.4 million on the $3.8 million of unpaid rent from 2007 and took a related $2.4 million charge for the remainder.

In comparison of these results to those of the same period a year ago, the per share amounts were affected by an increase in the weighted average diluted common shares outstanding to $110 million for the three months ended December 31, 2010. This is up from $79 million for the same period in 2009 and is primarily due to the common stock offering of 29.9 million shares that we completed in April of 2010.

I'll briefly review our present capitalization and commitments during the quarter, and through January 26 we have drawn $33 million on our lines of credit. And, we received approximately $63 million in repurchase and prepayment proceeds. As of today, the Company has approximately $345 million in available liquidity through cash balances and credit facilities for investment in new hospital real estate.

Ed mentioned earlier the $56 million in pending acquisitions that we expect to close in the next few weeks. In addition, we have another $153 million in properties under LOI that we are confident will also close as early as in February.

In at least two instances, these spending transactions include provisions that should allow us to earn attractive returns from our investment in the operators of our properties. In other words, RIDEA-type transactions.

We continue to operate with a very low debt ratio of 23% 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 do expect the leverage levels to increase in the near term as we execute pending acquisition and development agreements, but even when we are fully invested with our existing capital sources we expect our leverage to be less than 45%.

We have a $40 million revolver that matures in June of 2012, and $82 million of notes that come due in April 2013. Aside from our larger revolver, all our other outstanding loans are due after 2015 and it will continue to be a part of our strategy to stagger and to increase the tenor of our debt.

For the foreseeable future, 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 of annualized FFO based solely on assumptions about a specific portfolio, and that's what we have done again this quarter. So, based solely on the December 31, 2010 portfolio, plus the January acquisitions, we estimate that annualized, normalized FFO per share would approximate $0.68 to $0.72. The company further continues to estimate that its existing portfolio of assets plus approximately $345 million of assets expected to be acquired with available liquidity will generate normalized FFO of between $0.94 and $0.97 per share.

This estimate assumes that average initial yields on new investments will range from 9.75% to 10.5%. These estimates do not include the effects, if any, of cost and litigation related to discontinued operations, real estate operating costs, interest rate swaps, write-offs of straight line rent, or other non-recurring or unplanned transactions. They also do not include any earnings from RIDEA-type investments and operations, and they do not include any revenue expected from releasing our River Oaks property.

In addition, this estimate will change if $345 million in new acquisitions 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, other operating expenses vary, or existing leases do not perform in accordance with their terms.

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. Stephanie?

(Operator Instructions) Our first question comes from the line of Jerry Doctrow with Stifel Nicolaus, please proceed.

Good morning. You know, I think nice quarter, and looked out, played out just about the way I think we expected. I just had kind of two things I wanted to pursue. One was sort of acquisition pace, was just trying to get a little bit more color. I mean, clearly you've got a lot that you're about to close. You know, is it any particular property type, what's kind of motivating people to sort of sell development versus kind of in-place assets, just a little bit more color about the market would be helpful.

Jerry, the acquisition pipeline, those that we've closed and those that we expect to close shortly, and those that we're still working on, look very similar to our existing portfolio with the stuff from a dollar standpoint, the vast majority of it being acute care hospitals. As you know, roughly 75% of our portfolio is general acute care hospitals now, and that will continue to be the same going forward.

From the aspect of existing versus development, the majority of the hospitals, the facilities that we're working on, are existing facilities. There are some development as you know, from the ones that we've already closed. But, the vast majority of them are existing, established facilities.

From the standpoint of what's prompting everybody from our experience, they even threw out the global crisis, there was the need, but everybody was concerned about where the world was going to over the last year and a half. I think everybody is comfortable now that we've seen the worst of it, and are willing to continue to go forward. I don't think anybody thinks that the recovery is going to be a steep climb back up. It's going to be a long, steady climb, but I think everybody's comfortable that the worst is over.

Okay. And then just on the RIDEA, I mean, you've done some things before on like, some of the stuff I think with Prime where you got sort of a share of upside, but you had kind of a guaranteed base. So, I guess I just want to understand, in the RIDEA stuff, you'll get operating income and also probably take some operating risks -- again, a little bit more color there, the types of deals you do, how much of it you might do, why you think the risk is worth the upside, that kind of stuff?

Jerry, first, just to clarify, in none of the transactions that we've done to date and in none that are in the pipeline now is there any downside risk, other than the level of our initial investment, in the operating side. And that, so far, has been fairly limited. The interest we have, regardless of their legal structure typically are structured more as profit interest, and we have upside and no funding risk -- again, other than we're clearly we're at risk on our initial investment.

Okay. So, it would -- it's -- while you're calling it sort of RIDEA and I'm sure legally it'll be RIDEA, the way I should be thinking of it is more like was it Centinela, where you basically had kind of a return, or a preferred return on a certain base level investment, and then you shared in sort of -- I can't remember if it was revenue or profits above that level, so it would be that kind of structure rather than what we're seeing, say in the senior housing area where people had taken the, both the upside and downside on the P&L?

That's exactly right, and the facility was Shasta.

Shasta, I'm sorry.

Not Centinela, it was Shasta, and again we have a similar arrangement at a very small hospital, our Covington Hospital down in the New Orleans area. And it is based on profits now. That was the beauty of RIDEA to us, is we could base that upside on profits rather than the revenue line, which is where we first structured the Vibra transaction, you remember, many years ago.

Yes, okay.

That was phenomenally successful for us, and for that matter, for Vibra. But, structuring it on the revenue line creates a high level of volatility that we don't have to deal with any more. We can do it just based solely on profits.

Okay. And when you would do that deal, should we assume that the initial base rent may be lower than what you've done on some of the more traditional triple-net stuff, and then you've got upside above that? Or should we be assuming --?

Not at all, Jerry. From the real estate standpoint, it'll look just like a traditional sell-leaseback with additional rates that we're doing. The profits interest is totally separate and our investment is totally separate.

Okay. Okay. That'd be great. I'll jump off and come back if I have more. Thanks.

Thanks, Jerry.

Your next question comes from the line of Michael Mueller with JPMorgan, please proceed.

Hi, good morning. It's [Ralph Davies] on the line with Mike. Just in regards to the loan repayment that you guys announced, can you give the economics in terms of the interest rate that was being paid on that?

Yes, I think we did that loan several years ago. So, I'll give you a guess. We're in the mid-tens, guys? We were earning mid-tens on that loan. It was a loan on the Marina Hospital in Marina Del Rey, California. We accepted repayment at par, and that's generally it.

Just to clarify, Ralph, that's not mid-teens, that's --

I said mid-tens. (multiple speakers)

Just making sure he heard you.

10.3, 10.4, something like that.

Okay, got it. And then, kind of along those lines, you talked about this $350 million gross investment target, but are there -- is there other stuff kind of coming due, or other repayment expected? Do you have kind of a net investment expectation for 2011?

Ralph, as I said earlier in the call, we've got actually three leases that mature in 2011. Two of them have already said that they wanted to repurchase them, one of them we've already reached terms, and the other one we're in negotiations. But, it's total [an aggregate] of $40 million there, so it's not a large number. The $350 million is a gross number.

Got it. Okay. And then the final question I had was just in terms of when you're thinking about these RIDEA opportunities, can you talk a bit about how you look at the economics of those deals versus the triple-net, and I don't know, maybe the yield that you need to see in order to do that type of deal, or --?

Well, as Ed just responded to Jerry there, they're two separate components. We get market rates on the lease, and because we are able to bring something, whether it's access to the transaction or something else, that's usually it, we get market rate on an operating investment also. And you know, that runs the scale really. In the case of the Shasta transaction, we had a ceiling on it of $15 million, and then we accepted an early payoff of that at a discounted rate. In most of the transactions, we won't have a ceiling, and so we expect the same kind of equity returns that the operator/investors put in these transactions, and we're hopeful of getting 20%-plus returns.

Thank you.

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

Hi, good morning. Can you give us an update on the leasing status at the North Campus of River Oaks, have you got any leases signed in place, and what would be the potential timing of rental income starting there?

Karin, it hasn't changed any from the last call. We still have the four tenants that we're working with there. They're actually waiting on us at this point. We've just started the renovations and we expect the rentals to commence there, in mid-Fall of 2011.

Great, that's helpful. Also can you just clarify the timing of the mortgage that was repaid this past quarter, and when you think the other two asset repurchases will take place, and the timing of that in 2011?

The mortgage was repaid at the end of the year.

Okay.

And the other two will be first of March, and sometime in June, I believe.

Helpful.

Yes, probably July.

Okay. Next question just relates to the property-related expense line. It was $2.3 million this quarter. That was a little high, relative to our numbers. Are there any one-time items in there, or what should we expect from a run rate there?

That's virtually 100% the [DSI] receivable write-off, the litigation that we settled.

Got it. So that number should go down close to zero, from a run rate perspective?

Yes.

Next year? Okay. Helpful. And what type of G&A expectations do you have in your guidance?

Well, we haven't changed, I think, from the last several quarters. We've said $5.5 million to $6 million-plus, and it's been on the higher side of that, so close to $6 million. Now, what's also included in there, you'll note, is that $713,000 of deal cost. And so, when we've previously said $5.5 million to $6 million run rate on G&A, it has not included that, because again, previously that's been capitalized. So, it's just not, it's just literally not possible to predict what that deal cost amount is going to be quarter to quarter, because it's going to track the level of acquisitions.

Makes sense. The final question is, just on the acquisitions, can you just talk about your financing plan for that? I know you probably, the next leg will come off your line of credit. Can you talk about what your permanent financing would then be, and what your cost of debt financing is today?

Yes, there's any number of alternatives, and those alternatives will be evaluated and selected at the appropriate time, which will be as we draw down their revolver. Right now, as we discussed we've got close to $350 million of availability. Ed mentioned a couple of properties we'll take proceeds on, so that'll give another $30 million or $40 million, and then depending on the timing of the acquisitions. That will determine, obviously, when we need to think about refunding the revolver.

We are constantly in communication with capital sources about joint venture financing possibilities. The public markets are wide open on almost every type of product, be it preferred to high yield debt to convert. I think even the bank debt is alive again, so there are a number of alternatives that we can't predict which one will be appropriate at the time we need them.

Can you just give us an order of magnitude as to what you could raise, say either high yield or bank debt at, today?

Well, I think given an attractive use, we could raise several hundred million dollars. I don't think that's an issue, at least that's what your investment banking colleagues tell us.

And what's the rate they're telling you on that today?

Well again, it depends, it depends on the nature of the transaction, it depends on what the product is. High yield really is almost a misnomer today. I think we're seeing high yield deals done in sub-sevens, in some cases. Converts are being done in the very low single digits. Preferreds, actually, you're beginning to see some of that again in the seven-handle range. So, we -- we don't make assumptions on that until we get real close to doing it, because obviously those markets can close and the pricing can change pretty rapidly.

No, that's --

The key to us is, we're still investing, at 10%-plus going in cap rates. And it's clearly our goal to get the lowest cost of capital, but we can make significant accretive investments when capital costs are much higher than they are right now.

It's very helpful, thank you for the color.

Thanks, Karin.

(Operator Instructions) Your next question comes from the line of Jerry Doctrow with Stifel Nicolaus, please proceed.

Thanks. I think you may have touched on this in the response to the question from Karin, but I didn't pick it up. There are a couple development properties that I think we have coming on, sort of fourth quarter. One is the rework of River Oaks, and then the one in Arizona, the new facility. Just wanted to again, clarify timing on that. Was that what you were saying, Fall of --?

For the River Oaks, it is, it will be Fall of 2011. For the Arizona project, it'll be the early part of 2012.

Okay. All right, that's helpful, thanks.

Thanks.

Your next question comes from the line of Frank Morgan with RBC Capital Markets. Please proceed.

Good morning. You'd spoken a little bit about your ability to grow the asset base, and no real change in the kind of assets or the mix of assets that you're looking to acquire, but I'm just curious. Are you starting to see, given the superior yields that you can get on these assets, are you starting to see more players come into this market? Do you feel like, from a competitive standpoint, that has anything changed there?

Right, not many, but there are some. But all of us know that some of the other REITs have looked at it from time to time, but it really takes a specialized management team focusing on hospitals to invest in hospitals. So, there's not a whole lot of it out there, but as you've also heard me say, that we certainly welcome the competition. We think that the competition actually would be good for the market, from an education standpoint, both on the investor side and on the operator side.

And from your perspective, in terms of these returns that you're talking about, kind of north of 10% yield, no change there either in the current marketplace? Is that what you're saying, no real change?

That's correct.

Again, that's on a weighted average basis. We see returns on both the north and south side of that range, but weighted average we're still getting 10%-plus returns.

Okay, thank you very much.

Thanks, Frank.

With no further questions in queue, I will now like to turn the call over to Mr. Ed Aldag for any closing remarks. Please proceed.

Stephanie, thank you very much, and to all of you, we always welcome your interest, and please don't hesitate to call on Charles, Steve or myself later on in the day if you have any follow-up questions. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.