Medical Properties Trust Inc (MPW) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Q1 2011 Medical Properties Trust Incorporated earnings conference call. My name is Ed, and I will be your operator for today.

At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

At this time, I'd like to turn the call over to Mr. Charles Lambert, Director of Finance. Please proceed sir.

Good morning. Welcome to the Medical Properties Trust conference call to discuss our first-quarter 2011 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 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 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 Charles, and thank all of you for listening in on today's first-quarter earnings release conference call. We always appreciate your interest in Medical Properties Trust.

As each of you knows, in April of 2010, we recapitalized the balance sheet by adding equity, paying off debt and increasing our credit facility. Upon completion, we had approximately $500 million in dry powder to make acquisitions. We told the market at that time that it may take us until the end of 2011 to put that money to work and once again comfortably cover our dividend. Earlier this year, we exceeded our timing goal by putting to work approximately $400 million about three quarters sooner than expected, and covering our dividend on a run rate basis.

Our acquisition opportunities continue to be strong. So in the middle of the first quarter of this year, we made the decision we were going to need more dry powder. We began reviewing appropriate capital access avenues and were delighted to learn that we were going to be able to access the unsecured market at a time when long-term rates were at one of their historical lows. Steve will go through this with you in more detail in a few minutes.

But our unsecured bond issue, along with improved credit facility, has once again given us approximately $500 million of dry powder. In just the first four months of this year, we have invested approximately $175 million with another $75 million signed pending regulatory approval. We feel very good about our pipeline and our ability to invest in a timely fashion. Once this money is put to work, we expect again to be in the high $90s million on a per-share basis for AFFO. This unsecured debt offering adds another rung in our ladder of choices of capital alternatives. This will greatly enhance our growth prospects as we move forward. In a few moments, Steve will give you the specifics of the impact to our earnings and balance sheet.

As we've previously explained, when discussing the performance of our portfolio, it can often get a little confusing when we are in an acquisitions mode as we have been for the past year. Due to the properties sold or loans repaid in 2010 and the investments made in 2010 and 2011, it is difficult to give you a same-store comparison. So please keep in mind that the numbers we are about to review are current portfolio numbers that include some recently acquired properties that are still in their operational ramp-up period. All three of our main sectors continue to post strong coverages with the acute care hospital sector at about 6.85 times. This number is down from the same period last year, due primarily to the one-time California Provider Tax. Prime actually will end up being a net beneficiary from the tax, but there are timing issues with the tax being paid and additional reimbursement being received.

The LTACH sector, at about 2.1 times, and the inpatient rehabilitation hospital facilities sector at about 3.2 times. Because of the abnormality of the California Provider Tax issue just discussed and the addition of new properties still in the ramp-up stage, our portfolio overall saw a decline in overall EBITDA coverage to about 5.35 times.

However, when looking at the same-store numbers only, our facilities continue to track the national trend of improved operations. Specifically when you compare the properties that have been in our portfolio for at least 24 months, we see increases in admissions of 7.4%, discharges of 4.3%, patient days of 2.8%, ER visits of 8%, and that revenue of 5.6%. In the early part of the first quarter, Monroe Hospital entered into an agreement with the Dominant Physician Group in Bloomington, Indiana. The agreement calls for various services to be performed by this group, along with moving their CT and MRI business to the Monroe Hospital. Much of this is still in the process of being implemented. However, we are already seeing significant improvements in operations. For example, surgeries are up 42% from April '10 to April 2011. Total revenue is up more than 10%. We are so far very pleased with the direction of the hospital.

River Oaks is well underway with its refurbishment efforts, and we continue to be excited about the prospects for this facility in the future. Our publicly reporting tenants have all seen strong increases in net operating revenues, admissions, and EBITDA. CHS, HMA, HealthSouth and RehabCare have all reported good results in each of these areas.

Back on the acquisitions front, we invested in four properties during the first quarter and have entered into a binding agreement pending regulatory approval on a fifth. Four of these properties are general acute care hospitals and one is an LTACH. The weighted average going-in cash cap rate is just over 10.5%. With two of these properties, we use their [idea] type structure where, in addition to the real estate, we invested in operations. We expect our returns on that portion of these two properties to significantly exceed the return on the real estate.

As we have stated before, our risk is only up to the amount of our investment. The annual revenue to MPT from these five properties, not including any RIDEA participation, is in excess of $25 million annually.

Prime Healthcare has once again been recognized for its quality patient care. For the second time now, Prime's West Anaheim Medical Center in Orange County has been named a Top 100 Hospital in the Nation by Thomson Reuters. In addition, in April of this year, HealthGrades identify the top 5% best-performing hospitals in the area of emergency medicine. Of the 31 California hospitals named, eight are Prime hospitals.

In January of this year, Governor Brown of California released his fiscal year state budget proposal which includes $1.7 billion in cuts to the Medi-Cal program. While there is no assurance these cuts will actually happen, our analysis, assuming no adjustments in operations which I have stated before is a bad assumption, shows that our lease coverage for Prime's hospitals would be reduced by only 30 basis points. However, it is important to note that the California Provider Tax for 2010 that I previously mentioned actually netted Prime a positive $27 million.

As most of you know, our federal healthcare reimbursement system is moving to a quality care reward system. All of our acute care hospitals participate in the IQR program, and thus are not subject to payment reductions for not reporting quality indicators. The 2012 CMS proposed inpatient Medicare payment decrease of 0.6% should have a negligible effect on our portfolio.

At this time, I'd like to ask Steve to review our financial performance. Steve?

Thanks Ed. Good morning everyone. As usual, I'll briefly run through the highlights of our first-quarter 2011 financial results, then describe our recently completed capitalization, and finally discuss our outlook for future periods. Then we'll open up the call for your questions.

For the first quarter of 2011, we recorded normalized FFO of approximately $20.4 million and adjusted FFO of approximately $21.2 million, or $0.18 and $0.19 per diluted share respectively. This is consistent with our estimate that we discussed on the last call in January.

As a reminder, we normalize FFO by adding back the amount of deal cost and, in 2011's first quarter, these costs totaled $2 million, or $0.02 per diluted share. This represents about 1% of the purchase price of property acquisitions during the quarter.

Net income for the quarter ended March 31 was $10.8 million, or $0.09 per diluted share, compared with a net loss of $2.8 million, or $0.04 per share, for the year-ago period, which you will recover was affected by the $12 million impairment charge. 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 March 31, 2011. This is up from the 79 million shares for the same period in 2010 and is primarily due to the common stock offering of 29.9 million shares completed in April of last year.

Turning to recent capital activities, Ed just mentioned and you are all aware of the transactions we recently completed. We amended our revolver by releasing collateral, reducing the interest rate grid by about 40 basis points, and extending the term by two years through October 2015. We have nine banks in the facility with existing commitments of $330 million, and we have the option, subject to market conditions, to increase that to $400 million during the next 30 months. At present, there are no drawings on the facility.

We also issued $450 million in unsecured ten-year notes at a fixed rate of 6.875%. With proceeds from the note offering, we repaid the $58 million balance on the old secured revolver, approximately $148 million in a syndicated term loan, and an $8 million bank loan. So as of today, we have approximately $720 million in total debt with maturities and fixed rates that are very attractive. Details of our debt structure may be found in the supplemental information that we posted on the Investor Relations section of our website this morning.

As of today, the Company has approximately $550 million in available resources through cash balances and credit facilities for investment in new hospital real estate. We announced this morning the pending acquisition of the Hoboken University Medical Center. The total investment for this transaction will approximate $75 million and will include 100% ownership of the real estate, which will be leased at a double-digit initial cap rate, a secured working capital loan of up to $20 million, and a $5 million convertible participating note.

In addition to this transaction, we expect to complete a separate transaction soon that would also involve partial ownership in the lessee operator. When added to our Covington hospital and Bucks County hospital, we will have five RIDEA type investments. Two of these have profits participation in less than 10% our tenants' operations, so they are not technically structured in accordance with RIDEA.

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. Based solely on the March 31, 2011 portfolio, plus the subsequent Hoboken acquisition and the April capital transactions, we estimate that annualized, normalized FFO per share would approximate between $0.67 and $0.71 per share. Just to reiterate, that's upon closing of the Hoboken transaction, which we anticipate will close sometime during 2011's third quarter.

In April, of course, we substantially modified the capital structure, as we've already discussed. So taking into account the new capital structure which is expected to provide at least $550 million in available resources and limiting our overall leverage to less than 50%, we would expect to invest approximately $330 million in future quarters. We believe the portfolio, after such investments, will generate normalized FFO of between $0.92 and $0.96 per share on an annualized basis once fully invested. This estimate assumes that average initial yields on new investments will range from 9.75% to 10.5%. We believe we will be able to complete these investments by the end of 2012. These estimates do not include the effects, if any, of costs and litigation related to discontinued operations, debt refinancing costs, real estate operating costs, just rate swaps, write-offs of straight-line rent, or other non-recurring or unplanned transactions. They also do not include any earnings from the RIDEA type investments in operations, and they do not include any revenue from releasing our River Oaks property or from the Florence development now under construction. In addition, this estimate will change if $330 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.

Before we go to questions, I want to inform you all about the timing of the filing of our first-quarter 10-Q. We are considering the possibility of revisions to our previously reported depreciation and amortization expense. The revisions would be related to only nine leases that we've treated as operating leases, the earliest of which commenced in 2007. In fact, we have previously sold two of the properties and leases on two more of the properties have been terminated. We have recently determined that it is possible that these leases should be treated as direct financing leases instead of as operating leases. Should we ultimately conclude that the lease classification should be different than what we have previously reported, the revisions would result in decreases in depreciation and amortization expenses and offsetting increases in net income in the periods from 2007 through 2010. A further result would be an offsetting reduction in the gain on sale of our Centinela hospital in 2010. The net effect of these revisions would be to increase net income in 2007 through 2009 and would result in a decrease in gain on sale and net income in 2010.

In the aggregate, we expect a net increase to net income would result if revisions are necessary. These revisions are not expected to impact previously reported FFO, cash flows, or EBITDA. Previously paid at accrued incentive compensation is also not affected because such compensation is not based on net income but on FFO measures that exclude the effects of real estate depreciation and amortization.

Generally, with respect to these leases, the determination of operating versus direct financing lease hinges on whether the form of certain lessee guarantees is substantive. The Company has historically not included such nonsubstantive guarantees in the calculation. From 2007 through 2010, two well-respected Big Four accounting firms have not determined differently.

Although we believe the revisions that we are evaluating are not material to investors who focus on FFO, the process of completing the accounting and making amendments to previously filed financial statements is time-consuming. If we ultimately conclude that revisions are necessary, we would expect to request a five-day automatic extension to the time to file our first-quarter 10-Q that would otherwise be filed by May 10.

Lastly, this morning, we posted to our website in the Investor Relations section supplemental information about our investments and capital structure. This is a result of inquiries and requests that we've received recently for such a package. Charles and I are happy to take your calls about the information in the package, and we would welcome suggestions for making the information even more helpful.

That concludes our remarks for today. I will turn the call back to the operator, and he will open it up for any questions that you may have.

(Operator Instructions). Michael Mueller, JPMorgan.

Good morning. It's Ralph Davies on the line with Mike. I was wondering, could you quantify the size of the RIDEA component of the investments that you've made?

The Bucks County is a RIDEA-type facility. That is approximately a $40 million investment, I believe. The Covington transaction is the first true RIDEA structured transaction. That's approximately a $15-ish million investment. We actually have an 18% ownership in the lessee. The recent transaction we did last quarter, Corinth Atrium, is also a RIDEA type. We own 9.9% of the lessee. That is a total investment of about $30 million.

The Hoboken transaction is also RIDEA structured. The total transaction cost there is $75 million. What have I left out?

I want to clarify that the numbers that Steve is giving is the total investment there, not just the RIDEA apportion. He gave you the breakout on Hoboken a minute ago and you saw that the real estate portion there was $50 million, working capital was $20 million, and a convertible note for $5 million. So if you want the exact detail of the RIDEA section, you can call Steve off-line, and he'll get that to you.

Okay, got it. Then just for an update, I know in previous quarters you've talked about I think some swaps that you're putting in place at the back half of this year that result in interest savings. I'm just wondering. To the recent capital markets activities that you guys have executed, has that changed that, or are those still very much going to be coming into place over the remainder of the year?

No, it doesn't change it at all. It's $125 million of senior unsecured notes that convert from fixed to floating later this summer, and so we have already swapped that floater for a fixed at about an average 5.5% fixed rate for the next five years.

Great. Then finally, obviously a very different asset altogether, but you did see, on the back of some of the news regarding [RUG 4], earlier this week you saw the operators sell off pretty hard. I'm just wondering. Recognizing it's a very different reimbursement regime that you guys deal with, but do think that there's any potential flow-through in terms of your exposure to some of these operators, and do you think it will impact the transactional market at all in terms of maybe operators less interested in selling their real estate?

We don't have any of the operators that are heavily involved in the skilled nursing industry. As you know, we don't have any of that in our portfolio, and never have. I don't see that any negative effect of those operators are going to have any negative effect to our portfolio or to any of our operators' at all, which is why we have been saying that we weren't comfortable investing in that. I don't think it's going to have an effect on whether or not our hospital operators will continue to sell their real estate or not.

I was just thinking in terms of RehabCare specifically, that I think they did sell off.

(multiple speakers)

Several of them sold off, and one reason for that may be that their coverages are so much lower than ours. If you're talking about upwards of an 11% cut from CMS, when the skilled nursing facilities are generating lower -- low one-time coverage, 1.25 times coverage in many cases, you can see how that could be frightening. Just keep in mind our upwards of almost 5.5 times coverage. Again, the main point is it doesn't affect the hospital business.

Got it. Thank you.

Tayo Okusanya, Jefferies & Company.

Hi, it's Sohel Amir for Tayo actually. Just a quick question. Is there any way you can quantify the exposure to Medicare, Medicaid and private-payor sources?

It is generally the same that it has been throughout our portfolio. It is roughly 50% Medicare, roughly 40% private pay commercial insurance, and roughly 10% from Medicaid or Medi-Cal type reimbursements.

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

Jerry Doctrow, Stifel Nicolaus.

Just a couple of things. I think, Steve, the one you were trying to think about on the RIDEA was Monroe. Is that sort of a RIDEA structure as well?

No, not at all, Jerry. That's actually a straight lease. Now, we do have embedded in that lease percentage rents, but we are certainly not accruing -- or at least we're not recognizing percentage rent.

(inaudible) mentioned RIDEA or RIDEA-like Hoboken, Bucks, Covington, Corinth. What was your other one?

We had Shasta, which is (technical difficulty).

That's a good point. Hoboken, Bucks, Covington, Atrium. What's the fifth one guys?

Yes, Jerry, it's the one that I mentioned in my prepared remarks that is pending.

Just I wanted to just understand that a little bit better. So it was something like Hoboken that you're about to do with this structure. Can you tell me a little bit about sort of the tenant or the partner there? So who -- what's HUMC Hold Co.? Is it just sort of an LLC that's relatively thinly capitalized, or is there a deeper pocket operator there? Just how do you think about that risk in structuring that investment a little bit?

Good question, and let me just give a little perspective about our RIDEA type deals, because it's really a lot different than what you see over in the assisted-living and other senior housing sector. We don't acquire the operations. When we do a RIDEA deal, it is on top over and above our standard leases. The first thing we do is get a market rate lease, a very high yielding lease, again for example on Hoboken. That's a double-digit lease at a hospital that we are very excited about acquiring.

Now, in addition, we have an interest in the operator. In the case of Hoboken, it's a convertible participating loan of $5 million. That basically gives us, in this case, 25% of the earnings of the lessee. So we are limited in our risk with respect to that to the $5 million investment in the convert. We are not responsible for operating the hospital; we are not responsible for funding the hospital. That's not to say that the hospital couldn't do poorly, and we are subject to risk of loss of that investment. Obviously, we do a lot of underwriting and we don't expect that to happen.

This particular operator is an affiliate of the operator of the Bayonne Medical Center, which we announced I think in February of this year, about a $58 million transaction. That hospital is doing exceptionally well. They have brought together a very strong management team that has demonstrated, at least through Bayonne and appears to be in Hoboken, of being able to take previously not-for-profit hospitals and turn them around. That's exactly what we expect to see on Hoboken.

Now, Hoboken and Bayonne will be, to a certain extent, cross-collateralized. So while Hoboken is a new entity, again, we have a fair amount of cross-collateralization across default provisions against the very, very profitable Bayonne Medical Center.

Is there anything else in terms of security deposits or that sort of thing that's in addition or it's mostly the cross-default that'd be added?

Yes. They are one-year letters of credit at both facilities. Certainly, you know the working capital loan we made is secured by receivables, equipment, and everything. Then like I say, we've got the cross-default provisions, cross-collateral that is with the two facilities.

That structure where you got an entity that may be relatively young but has got some track record in that structure, so would it be typical for the types of deals you might be doing go forward or --?

Not necessarily. Covington of course we did with affiliates of Vibra. The reason we'll do these is because we have something to bring to the operator. Just take Covington for example. You'll remember Covington was owned by a company that went into bankruptcy, and so we recaptured our Covington hospital. It was very profitable, remained profitable all the way through bankruptcy. We collected all of our rent, but because the parent was in bankruptcy, that was a default and we recaptured it. So now we have a hospital that's very profitable that we need an operator for, and so we evaluated a number of operators, including affiliates of Vibra who we ultimately decided on because we had something to deliver, something of value.

First of all, we restructured our lease. We got improved economics on the lease, and then we required that the operator recognize that we were bringing value and we negotiated what that value was, and we ended up with 18% of the operations because we were able to bring a very attractive transaction to the operator. So it's not always going to be with thinly capitalized new operators.

Just two things -- any risk that having been through some of these restructuring -- restatements before, any chance that the 10-Q is delayed further, or do you think it's just within that five-year period -- or five-day period? to?

We will do it in five years. We think it's the five days. It's just a lot of number crunching. Again, we haven't concluded that it's necessary, but we just didn't feel like we should get off this call without alerting people to the possibility that there would be a delay.

I appreciate that. Then just last thing, one other thing that's been talked about being on the fed's target list is provider tax. So if the feds were to do away with that gimmick, if you will, or procedure, does that create some risks (inaudible) a big benefit to Prime?

I don't think so. As a part of their overall income, it's not that big a piece and it's only been there one year and they were very profitable prior to that.

That's all for me. Thanks.

Bill Grant, Morgan Stanley.

At the outset, you mentioned there were lots of moving parts with the Company's income statement and balance sheet. The future operations outlook certainly includes quite a number of pro forma adjustments. So I'm wondering. When do you think you'll be in a position to raise the common dividend? Thanks.

Yes, the goal there is to get back to 75% to 80% payout on a consistent basis. That's based on AFFO. Again, with the type of acquisition velocity that we've got, with the relatively low cost of capital that we find ourselves with, at least relative to recent periods, we're very hopeful that we'll achieve that payout ratio sooner than later.

So what does that mean?

We can't predict from quarter to quarter -- we never have -- what earnings would be. We think we're going to get to 75% to 80% payout soon. When we do, I believe the Board will begin considering dividend increases.

There are no further questions at this time.

Thank you all for listening in today and your interest,. As always, if you have any questions, please don't hesitate to call myself, Steve or Charles. Thank you very much.

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