Medical Properties Trust Inc (MPW) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Medical Properties Trust Earnings Conference Call. My name is [Karice], and I will be your coordinator for today. (Operator Instructions)

I would now like to hand the call over to your host for today, Mr. Charles Lambert, Director of Finance. Please proceed, sir.

Thank you.

Good afternoon. Welcome to the Medical Properties Trust Conference Call to discuss our fourth quarter 2011 financial results. With me today are Edward K. Aldag, Jr., Chairman, President and CEO of the Company; and Steven Hamner, Executive Vice President and Chief Financial Officer.

Our press release was distributed this afternoon and will be 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 federal security laws, the Company does not undertake a duty to update any 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 Reg G requirements. You can also refer to our website, at www.medicalpropertiestrust.com, for the most directly comparable financial measures and related reconciliations.

As you may have seen, we also issued a press release this afternoon announcing our expected acquisition of assets from and related transactions with Ernest Health, Inc., which we will discuss separately on this call. As a result of announcing the acquisition and applicable security law considerations, we will not be able to respond to questions from participants on today's call as we normally do. And we appreciate your understanding.

I will now turn the call over to our Chief Financial Officer, Steve Hamner.

Thanks, Charles, and good afternoon, everyone. Ed will be describing a major transaction momentarily. So I'll briefly run through an abbreviated summary of our fourth quarter 2011 financial results, then turn the call over to Ed.

For the fourth quarter 2011, we reported normalized FFO of approximately $20.5 million and AFFO of approximately $21.2 million, or $0.19 per diluted share for both measures. As of the end of last quarter, we had estimated on a quarterly basis our in-place normalized FFO run rate at $0.19 to $0.20 per share. So this quarter's result is well in line with our run rate estimate.

As a reminder, we make certain adjustments to normalized FFO. And in the fourth quarter, these included approximately $1 million in costs incurred to make acquisitions and about $2.5 million in straight-line rent write-off related to two property transactions. These transactions are more fully described in the press release.

Net income for the quarter ended December 31 was $12.7 million -- about $0.11 per share -- compared with net income of $10.6 million, or $0.09 per diluted share for the year-ago period. Capitalization metrics and other operating and financial metrics are presented in our earnings supplement that was posted to our website this afternoon.

We have previously described the fourth quarter acquisition of our Hoboken investments and the development agreements we entered into with Emerus. For 2011, we completed the acquisition of approximately $311 million of hospital real estate assets.

In order to provide an apples-to-apples comparison of expected run rate normalized FFO per share, with and without the Ernest transactions, we believe the portfolio existing on December 31 with our existing capital structure would generate annualized normalized FFO of between $0.69 and $0.73 per share. And by the way, that does not include about $0.03 per share that we expect on an annualized basis from our Florence development.

As we will discuss in more depth shortly, we expect that completion of the Ernest transactions will add approximately $0.19 per share or impressive accretion of 26%. These estimates do not include the effects, if any, of costs and litigation related to discontinued operations, debt refinancing costs, real estate operating costs, interest rate swaps, write-offs of straight-line rent, or other nonrecurring or unplanned transactions. They also do not include any earnings from RIDEA type investments and operations, and they do not include any revenue from releasing our River Oaks property. In addition, this estimate will change if market interest rates change, debt is refinanced, additional debt is incurred, assets are sold, other capital markets transactions take place, other operating expenses vary, or existing leases do not perform in accordance with their terms.

Let me provide a brief update on our tenants' operations. And as a reference -- consider that our portfolio-wide lease coverage at September 30, 2011 was approximately 5.22 times. During the fourth quarter, our portfolio continued to outperform. When looking at our mature facilities -- meaning they had been in our portfolio for at least 12 months -- our total portfolio EBITDA lease coverage increased 13% year-over-year and was up 10 basis points, to 6.07 times.

Specifically, when looking at each of our three sectors, all three were up year-over-year -- acute-care hospitals, up 16%; LTACs, up 11%; and inpatient rehabilitation facilities, up 5%. On a quarter-over-quarter basis, the acute hospitals were up 14 basis points, to just over eight times. The LTACs and IRFs were essentially flat, at almost 2.5 times and almost 3.5 times respectively.

The increases in EBITDA are not just from efficient operations, but also improved utilization in all three sectors. Monroe, our only property on our watch list, continues to improve its position, and we expect it to be paying rent sometime this year.

Prime Healthcare, one of our California operators, was recognized as one of the top 15 systems in the country based on better survival rates, fewer patient complications, better long-term outcomes, better adherence to accepted care protocols and patient safety standards, shorter hospital stays and higher patient satisfaction scores.

With that, I will turn the call over to Ed Aldag, who will discuss the acquisitions.

Thank you, Steve. And thank all of you for joining us on our call today.

We're excited to announce a major acquisition that will increase our FFO by approximately 26%, greatly improve our diversification ratios and increase our opportunity for internal growth. All of this will be accomplished while maintaining our conservative balance sheet that will allow MPT to continue to grow post closing of this acquisition.

Today, we announced that we have entered into a binding agreement with Ernest Health, Inc. of Albuquerque, New Mexico -- a 16-hospital LTAC and IRF chain -- to acquire 100% of the Company in an approximate $400 million transaction. The transaction consists of MPT acquiring 100% of the real estate for $300 million in a combination of traditional sale leasebacks and MPT type mortgages. Both will have our standard rates and terms. MPT will also invest approximately $97 million in the operating company.

Immediately upon the close of this acquisition, we will expand into 12 new markets in three new states, growing the size of MPT by approximately 25% in a single transaction. The economic result of this acquisition is that FFO accretion will be approximately 26%, resulting in FFO of $0.91 to $0.95 per share, which -- assuming a continued $0.80-per-share dividend -- is an 87% payout ratio. This investment, together with last year's acquisitions, helps to make MPT a stronger, more diversified company.

Post this transaction, our largest property will now only represent about 4% of our portfolio. This is an incredible accomplishment. Just a few years ago, this number was approximately 8%. From a tenant standpoint, we will be decreasing our concentration to the point where our largest tenant will now only represent approximately 20% of our portfolio.

We have known the Ernest management team for a very long time. We have watched them build Ernest into one of the premier operators of post-acute-care hospitals. We're delighted to have this opportunity to invest in their facilities and grow with them.

Today, in addition to myself, Steve Hamner and Charles Lambert -- all of whom most of you know well -- you're also going to hear from Emmett McLean, one of our founders and Chief Operating Officer -- who among other things is responsible for our asset management department -- and Rosa Hooper, our Director of Underwriting and Asset Management; and Tom Schultz, our Director of Healthcare Policy. Each of them, along with everyone in our company, has been involved in every aspect of underwriting Ernest. Steve and Charles will then walk you through the financial impact of MPT-LP acquisition.

Now, Emmett, Tom and Rosa will walk you through the specifics of Ernest Health. Emmett?

Thank you, Ed.

Ernest Health was founded in 2003 by a group of highly seasoned post-acute operators that have organically grown the business to 16 facilities comprised of eight inpatient rehabilitation facilities, called IRFs, and eight long-term acute-care facilities, called LTACs.

Ernest is located in nine states. And for the nine months ended September 30, 2011, net revenue was approximately $170 million. As of September 30, 2011, total assets exceeded $200 million.

Ernest focuses on underserved high-growth markets with rapid growth in the Medicare-eligible market. They thoroughly evaluate each market before deciding to locate in a specific market. The Company has significant upside through future growth opportunities. Their strategy is focused on delivering excellent patient care leading to superior clinical outcomes and a loyal recurring referral network. These attributes will be addressed later on in our presentation.

Like most successful organizations, Ernest's strength is its people -- both the strong local management at each of their facilities, as well as the leadership at the corporate level. During our onsite due diligence, we spent three weeks with two separate teams visiting each facility, and we were thoroughly impressed with the quality, experience and effectiveness of their people. Each of their facilities is beautiful, modern; and is aesthetically and efficiently laid out to achieve Ernest's strategy.

Their first facility was built in 2005. And a typical facility is a 40-bed IRF or LTAC, one story and approximately 50,000 square feet; although a few earlier facilities varied somewhat from this model.

Tom Schultz, our Director of Healthcare, will next discuss in more detail the importance of post-acute facilities in the healthcare industry. And Rosa Hooper, our Director of Asset Management and Underwriting, will follow Tom. And she will discuss more about Ernest.

I'll now turn it over to Tom Schultz.

Thank you, Emmett.

I am here to define the importance of inpatient rehabilitation hospitals, otherwise known as IRFs; and long-term acute-care hospitals, known as LTACs. The post-acute-care services represented by IRFs and LTACs are essential in the future healthcare system, regardless of the direction of healthcare reform. They help to bend the cost curve, which is a major goal of health reform.

First, let's discuss rehab hospitals. The role of rehab hospitals is set forth in legislation regulation and defined by the CMS 13 diagnostic groups. 60% of admissions to IRFs must fall within the CMS 13. Various proposals may move this requirement to 75%. Ernest Health will have no issues in dealing with this proposed change.

In addition, at the beginning of 2010, CMS implemented a comprehensive set of revised patient criteria and admission policies that IRFs must satisfy. IRFs have been proven to produce quality outcomes and return patients to their normal lives faster than other alternatives. They measure and are accountable for the quality of the care they provide. They are an integral part of the continuum of care and are consistent with the goals of healthcare reform.

LTACs provide a different kind of post-acute care. They assist short-term acute-care hospitals, discharge medically complex patients who require long lengths of stay averaging 25 days. Many LTAC administrations come directly from intensive care units at short-term acute-care hospitals. Patients can also be admitted directly from other settings, such as nursing homes.

The LTAC portion of the industry is less well-defined than IRFs. But a study commissioned in 2009 by the Medicare Payment Advisory Commission, with research performed by the Research Triangle Institute, has stated that a need exists for LTAC services to care for the nation's medically complex patients. Bipartisan legislation to adopt admission criteria for LTACs similar to that in use with IRFs has been introduced in recent sessions of Congress and will undoubtedly pay us in the future. Ernest Health already conforms to the likely criteria that will be implemented. This is important, because 70% of all LTAC patients are Medicare patients, and 60% are defined by 16 diagnosis-related groups similar to the CMS 13 diagnoses that define rehab admissions.

Current legislation calls for the reinstitution of the 25% rule for all LTACs effective for LTACs with cost-reporting periods beginning July 1, 2012. Currently, freestanding LTACs are not subject to these rules. Ernest LTACs will be affected by this change if it occurs in a nonmaterial manner.

The LTAC industry is currently in discussions with legislators and regulators to extend the current suspension of the 25% rule as it pertains to freestanding LTACs. Acute-care hospitals are enthusiastic about the role of LTACs and support their development.

The RTI study shows that LTACs reduce the average length of stay for patients in acute-care hospitals by 1.4 days prior to their admission to an LTAC. This allows the acute-care hospitals to achieve higher operating margins. LTACs have a special per-stay reimbursement for Medicare patients. The RTI study also stated that LTACs reduced readmissions to acute-care hospitals, saving them dollars -- another objective of healthcare reform.

Acute-care hospitals are finding it difficult to provide post-acute care. Many are closing their IRF and LTAC units. IRFs and LTACs are a critical part of the healthcare continuum. Ernest Health is a significant provider of these services. IRFs and LTACs will survive and prosper under any scenario of healthcare delivery. They are consistent with the goals of healthcare reform.

Now, here's Rosa Hooper.

Thank you, Tom.

Ernest's business strategy is to develop and operate post-acute-care facilities in underserved tertiary markets with high Medicare-eligible growth potential. Generally, these nonurban markets lack the post-acute-care infrastructure to serve the full spectrum of high-acuity patients. This provides Ernest significant first-move advantages and creates substantial barriers to entry.

Ernest does significant market research to determine the most advantageous markets to consider. Their research begins with a detailed analysis of the Medicare discharges which are appropriate for post-acute services. If the statistics from this analysis support the community need for post-acute services, the next step is to spend a significant amount of time in that market meeting with the local providers -- hospitals, physicians, discharge planners and skilled nursing administrators.

Ernest's goal is to complement the care of the current market providers, rather than compete with them. They educate the providers that their goal is to collaborate with them on patient care. In several cases, a local hospital was willing to close their competing hospital units because they knew that they could not operate them as efficiently and make a profit. In some cases, the providers actually asked Ernest to consider their market. This market-level background work that Ernest does on the front end serves to engrain them into the community and to make it more difficult for competitors to infiltrate the market.

Ernest works with some of the preeminent healthcare providers in the country -- HCA, CHS, Trinity Health, Banner Health, and Baylor, just to name a few. Three of the systems which they work with were recently named in the top 20% for quality by Thomson Reuters. One system that they work with is part of the premier ACO Implementation Collaborative. In almost all instances, Ernest is the sole community provider of post-acute services. And in several instances, they are the sole provider in the state.

As such, the Ernest facility improves the quality of life for patients and their families who are in need of post-acute services, because they no longer have to travel great distances for these services. In only one of the primary service areas which Ernest serves do they have direct competition from a freestanding post-acute facility.

The leadership of Ernest has significant experience in providing post-acute services. They have designed a prototype facility which is cost-effective and offers the most efficient operation possible. Once land is acquired, they can be ready to take their first patient in 12 months.

Additionally, the sites that are chosen offer the ability to expand should the need be established. One of their facilities -- Greenwood, South Carolina -- is currently taking advantage of their additional acreage and expanding their facility to accommodate the growing need of that market.

As we have mentioned, Ernest currently operates 16 facilities in 13 locations. On three of their campuses, they have both long-term acute-care and inpatient rehabilitation services. All of their facilities are Joint Commission accredited.

As part of our due diligence, we spent time at each of the 16 facilities meeting with the management teams and reviewing their financial performance, operations, clinical compliance metrics, and the market that they serve. In each instance, we encountered a culture of quality service and healing that was pervasive. In many of the facilities, the management team has been in place since the facility was being built. These management teams and the staff that they lead deliver a quality product to the patients that they serve, and the results are patient outcomes that are above national benchmark averages in such metrics as patient satisfaction, discharge setting, acute-care readmission and, for the inpatient rehabilitation facilities, improvement in functional independence measurement.

Of note is the fact that each of their mature inpatient rehabilitation facilities has consistently ranked in the top 10% of over 800 inpatient rehabilitation facilities in the United States as measured by the Uniform Data System for Medical Rehabilitation. The market research, large catchment area afforded by their sole community provider status and quality care all result in facilities that have a high occupancy and operate at a substantial margin.

Steve, I'll turn it back over to you now.

Thank you, Rosa.

The transactions are structured to allocate the $400 million enterprise value into four general components. First we will purchase 12 hospital facilities for an aggregate purchase price of $200 million and lease these back to Ernest under a master lease that provides for a 20-year initial term with an initial 9% cash lease rate. The lease may be extended for three periods of five years each, and the rate escalates at CPI each year between 2% and 5%. The fixed minimum portion of this escalator results in a GAAP or straight-line rate of 10.8%. Second, we will make a mortgage loan secured by first lien interest in four facilities, and the mortgage loan will have substantially identical terms to the master lease. The two arrangements, lease and loan, will be cross-defaulted and cross-collateralized.

Third, after segregating the real estate, the operating company is valued at $100 million. Of this, an MPT affiliate will provide loan proceeds of $93.2 million. That loan will bear interest at 15%, with varying current and accrual rates.

And finally, a venture comprised of key employees of Ernest will contribute $3.5 million in equity. And an MPT affiliate will contribute $3.3 million in equity. For purposes of our run rate normalized FFO estimates, we do not assume any income related to our equity investment. We expect to [delect] the fair value option in accounting for this investment. This structure is crafted to achieve tax efficiency and to comply with the requirements of the TRS and RIDEA provisions in the REIT section of the tax code.

We expect to initially finance the transactions with a combination of borrowings on our line, which we plan to increase to $400 million pursuant to the accordion provisions in the credit agreement, a new unsecured $80 million term loan, and proceeds from other debt and equity capital markets transactions. Based on this possible financing structure, we expect that subsequent to completion of the transactions, we will have approximately $2 billion in total assets.

Ed described earlier some of the most important benefits of the transactions, such as improved operator and facility-level concentration, improved geographic diversification, improved dividend payout ratio, and our relationship with a strong and experienced management team.

In addition to these, our capital and financial metrics will also be improved, including -- our net debt to gross real estate is expected to approximate 41%; 53% of our leases will not mature until at least 2020, 10 years out; and 50% of our debt does not mature until 2021, and less than $51 million in debt matures in the next three years.

With that, I'll turn the call back to Charles Lambert for additional financial analysis.

Thanks, Steve.

As you've already heard, this transaction is extremely positive to MPT shareholders in a number of ways before the diversification is immediately accretive to FFO, and it increases the Company's critical mass. This will all occur while we maintain our commitment to a conservative balance sheet with credit statistics in line with our historical standards and financial policy.

Additionally, we'll be well positioned for future growth. We currently have only two properties with secured debt, or less than 1% of our pro forma total assets. And with such a large unencumbered pool, we have a tremendous amount of financial flexibility for the future. Post this transaction, as Steve mentioned, we will have a $400 million revolver and very limited debt maturities in the near term. This liquidity positions the Company to take advantage of growth opportunities and design a capital structure with staggered maturities going forward.

Since our inception, MPT has maintained a conservative financial structure while achieving tremendous growth and total return for our shareholders. And in this transformational transaction, we will continue to demonstrate growth while maintaining a solid balance sheet that's well-positioned for the future.

Ed?

Thank you, Charles.

Again, this is an exciting opportunity for us, and one that truly propels MPT to the next level. As Charles previously mentioned, due to the various SEC requirements, we will not be taking questions at this time. But if you need further clarification on any specific aspects of the items discussed on today's call, please do not hesitate to call on Charles Lambert at 205-969-3755, and he will direct your questions to the proper people.

Thank you very much for your interest in today's call. And this concludes our call.

Ladies and gentlemen, that concludes today's Conference. Thank you for your participation. You may now disconnect.