Medical Properties Trust Inc (MPW) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2012 Medical Properties Trust earnings conference call. My name is Ian, I'll 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 the conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I'd now like to hand over to Mr. Charles Lambert, he's the Managing Director for Capital Markets. Please proceed, sir.

Good morning. Welcome to the Medical Properties Trust conference call to discuss our first-quarter 2012 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 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 securities 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. I will now turn the call over to our Chief Executive Officer, Ed Aldag.

Thanks, Charles, and good morning, everyone. in just a few minutes, I'll turn the call over to Steve to review the details of our quarterly results. He will also provide you with updated guidance for 2012, which will speak to our strong expectations for FFO per share in 2012, both supported by our recent Ernest transaction and approximately $300 million of additional 2012 investments, of which we believe $100 million is imminent.

Quickly, I want to note that we are updating on how we are providing guidance. In an effort to provide investors with a more subsequent picture of our outlook, going forward we will provide FFO per share guidance on a calendar year basis. We will also be providing you with our expectations for the run rate FFO per share at December 31, 2012, and plan to provide 2013 calendar year as we get closer to the end of 2012. I want to spend some time reviewing the strong performance of our portfolio, and why we believe our strategy and operational excellence positions MPT for predictable and continued success.

For the past few years, while our country and the rest of the world have experienced the most challenging economic environment in decades, the MPT portfolio has thrived. Our EBITDAR lease coverage ratios have grown from 3.2 times at the end of 2006 to more than 5.5 times to date, and our facilities have achieved improved performance across the board. It's worth noting that hospitals continue to have higher average lease coverages than other healthcare facilities. Part of the reason for our success is our ability to selectively invest in the highest quality operators. As we have discussed with you in the past, our knowledge of the hospital operator market is a distinguishing characteristic of MPT, one that is a key underpinning of our proprietary growth strategy, and a unique ingredient of our out performance. As further proof of hospitals' strong predicted performance, let's look at three of the country's largest for-profit hospital operators. While their admissions and adjusted admissions per bed have been relatively flat from 2007 through 2011, their EBITDA per bed has grown dramatically, and is up 22%, 91% and 105%. We continue to believe that the hospital industry is a great industry to be in during the tough times and the good times, and that our expertise positions MPT to benefit from these fundamentals.

As we all know, the demographic trends in this country are going to support continued demand for hospital services. We will always need a healthcare delivery system. It is our core belief that hospitals will remain the hub of our healthcare industry, and high-quality hospitals will lead the charge toward improving patient outcomes, driving down length of stay, and reducing overall healthcare costs. We believe that our diversified portfolio across the entire healthcare spectrum from acute care to post-acute care positions MPT and our shareholders to benefit from the growth opportunities supported by these market dynamics. MPT is the largest REIT investor in hospital properties, and our management team has a long history of driving industry-leading financial results. Given the out performance of our existing portfolio, our market-leading position and the low level of REIT ownership within the hospital sector, coupled with our recent acquisitions and strong pipeline, we believe we are well-positioned for continued success. We have also significantly improved our balance sheet, and continue to manage this asset to support our growth initiatives. Our current net debt to asset ratio is 40.3%. Our average debt tenure is 7.8 years, and our percent of floating debt is only 11%. We have continued to extend our debt maturities, and we have a proven track record of successfully and prudently accessing the capital markets to fund growth.

So now let me take a few minutes to provide you with some color on how we achieved our success, and why we expect to continue our positive growth trajectory. Our focused strategy to invest in high-quality hospital operators, diversify our portfolio and drive FFO growth through dynamic acquisitions continues to drive positive results. With our recent acquisition of Ernest Health, we continued to execute on this strategy, resulting in continued tenant and property mix diversification, and an expanded geographic footprint. In addition, Ernest also significantly accelerated our strategy to invest in operating assets under the RIDEA structure. Ernest is our largest operating RIDEA asset.

Let me quickly walk you through our six original RIDEA investments. As you know, these investments, not including the Ernest transaction, total approximately $10 million. We began realizing the return on these investments last year. For 2012, we expect the return on our $10 million RIDEA investment to exceed 35%. As Steve will outline, this is reflected in our guidance for 2012. For Ernest, the RIDEA portion of the investment is close to $100 million. We expect the return on that portion of the investment to be 15% for the next couple of years, and to grow from there. This expected return is also included in our 2012 guidance. We believe that smart RIDEA investments can provide long-term upside opportunities.

Speaking of Ernest, as you know, we acquired its portfolio of 16 hospitals, eight IRFs and eight LTACHs on February 29. Ernest finished the first quarter approximately 4% ahead of their first-quarter 2012 budget. The $300 million real estate portion, which includes the $100 million in mortgages, EBITDA and lease coverage for the first two quarters was two times. Since the close of the transaction we've already moved forward with an agreement to fund the development of a 40-bed IRF for Ernest in Lafayette, Indiana for around $15 million.

Let's turn quickly to the operational performance of our tenants during the quarter. Over the years, our practice has been to provide an apples-to-apples comparison for EBITDAR lease coverage of our portfolio of properties that we have owned for at least 12 months. We have historically provided the coverage on a trailing 12-month year-over-year basis and a trailing 12-month quarter-over-quarter basis. For our acute care hospitals, EBITDAR lease coverage for 2010 included a higher than normal payment that covered a period of more than 12 months that was made by the State of California to hospitals in California, while the payment for 2011 was for a period of less than 12 months. We believe the more normalized amount is somewhere in between these two numbers. Remember, our reports from our properties lag our quarterly reports, and we therefore report property coverage one month behind our actual quarterly report. The year-over-year comparison for the acute care hospital EBITDAR coverage was 7.2 times for Q1 2012 compared with 7.8 times Q1 2011. For our LTACHs, the coverage climbed year over year from 2.4 times to 2.62 times and the IRFs year-over-year coverage remained consistent at 3.3 times. This strong performance led to an overall coverage north of 5.5 times. The quarter-over-quarter results for all three divisions were essentially flat.

Another very important leading indicator of operational results for our facilities historically has been utilization. Our acute care hospitals reported that utilization in the first quarter improved 5.7% sequentially, compared with the fourth quarter. In fact, only two of our acute care hospitals saw decreases, and these were very slight. Our LTACHs reported an increase in utilization of 3.7% and our IRFs reported an increase of 5.9%. Year after year, our tenants, which count among the nation's best hospitals, have demonstrated the ability to improve their EBITDA levels per bed. Our same-store lease coverage ratios have improved dramatically throughout the years, which has provided MPT the very best coverage in the industry.

We're pleased with the momentum we've already built so early in 2012, and we're confident about our future. While Steve will go through our 2012 and our run rate at December 31, 2012 guidance in more detail, let me point out that we believe we continue to build on our track record, and that we should achieve an FFO payout ratio of less than 80% on a run-rate basis by the end of this year. We remain confident that we are executing the right strategy for long term success. We have one of the strongest balance sheets in our industry. Our existing portfolio continues to shine above all REITs. Our pipeline of opportunities is substantial, and our RIDEA-related investment strategy is producing successful results. We believe we are very well positioned for future success. At this time I'd like to turn the call over to Steve to walk you through the financials in a little more detail.

Thank you, Ed. For the first quarter of 2012, we reported normalized FFO of approximately $22.5 million, and adjusted FFO of approximately $23.2 million or $0.18 to $0.19 per diluted share, respectively. As a reminder, we make certain adjustments to normalized FFO, and in the first quarter, these included approximately $3.4 million in costs incurred to make acquisitions, the great majority of which related to the $400 million Ernest transaction. Net income for the quarter ended March 31 was $10.6 million, about $0.08 per share, compared to net income of $10.8 million or $0.09 per share for the year-ago period.

We had previously disclosed the debt and equity transactions that we completed during the quarter that were related to the Ernest transaction. The effects of these and other financial metrics are presented in our financial statements, and our earnings supplement that was posted to our website this morning, with further details available in the 10-Q that will be filed later today. And, of course, we will be happy to take any questions about those at the end of our prepared comments. We have also previously described the first-quarter acquisition of our Ernest investments, so I will not go through those in detail unless there are questions. In addition, during the quarter we placed into service and began collecting and recognizing lease revenue on our Florence, Arizona acute care hospital. This facility is expected to add approximately $0.02 per share on an annualized basis.

In the past, we have provided guidance based on an estimate of future results of operations, based solely on our in-place portfolio with no provision for the effects of possible acquisitions. Beginning this quarter, we will provide current fiscal year estimates based on our expectations of all activity during the year, including acquisitions and earnings from our investments and tenant operations. For the year ending December 31, 2012, we expect normalized FFO to be approximately $0.85 per diluted share. In arriving at this estimate, we took into account our portfolio as of March 31, second-quarter estimated acquisitions of $100 million, which we believe are imminent, placement into service of our three Emerus emergency hospitals during the fourth quarter, approximately $200 million of fourth-quarter acquisitions and approximately $3 million of revenue from our non-Ernest operating investments. That represents about a 30% annualized return on these investments. We also include approximately $11.7 million in earnings from our investment in Ernest operations, which represents an approximate 15% annualized return.

Importantly, going into 2013, the run rate for this portfolio is estimated to be approximately $1.06, which would result in a dividend payout ratio of approximately 75%. This 2013 estimate reflects only our projected December 31 assets. As we continue to make accretive acquisitions, we expect our 2013 results will improve even further. Also going into 2013, our debt would represent approximately 49% of our total assets, and we would have revolver debt of approximately $210 million. Our other debt and equity is expected to be unchanged from March 31. These estimates do not include the effects, if any, of debt refinancing cost, real estate operating cost, interest rate swaps, write-offs of straight line rent or other non-recurring or unplanned transactions. In addition, this estimate will change if market interest rates change, debt is refinanced, additional debt is incurred, assets are sold, other operating expenses vary, income from investments, intended operations vary from expectations, or existing leases do not perform in accordance with their terms.

Let me take just a moment to describe how we estimate our income from tenant operations, our so-called RIDEA investments. Beginning in 2010 and through today we have made investments in our tenants approximating $107 million, of which $97 million relates to Ernest. The remaining $10 million represents investments in six separate operating companies, all of which have demonstrated profitability sufficient to allow us to estimate the amount we expect to earn for the remainder of 2012 and 2013. We will recognize these earnings only as they occur, not based on our estimates. We believe these operators should generate returns through us of between 30% and 40% on an annualized basis.

The Ernest facility net operators were, of course, strongly profitable, even prior to our acquisitions. Based on their historical performance, their first-quarter results, and giving no credit for operations from future facilities, we have estimated that we will earn an annualized return of approximately 15% on our total investment of $97 million during 2012 and 2013. As new Ernest properties come online and as future profitability is demonstrated, we will adjust our estimates as appropriate. With that, I will turn the call back to the operator and we are prepared to take your questions.

Our first question comes from Tayo Okusanya from Jefferies. Please go ahead. You're on the call.

A couple questions, I just wanted to make sure I understand 2012 guidance correctly. The $11.7 million in earnings, in guidance from Ernest, does that also include the interest income you expect to earn on the laundry operating company?

Yes, it does.

Okay. I guess I understand what that number is. and when I look at the guidance of $0.85 and I compare it to a year ago or so, when we were kind of talking about what 2012 could look like, the idea was always once you guys had put all your liquidity to work you would end up in a range somewhere in the mid-$0.90s. We've kind of come out roughly at about $0.85 now for 2012 and you have put all that prior liquidity to work with the Ernest deal. Just kind of curious what the differences are between that initial target, and where we ended up in the year, if you could reconcile those two numbers.

Well, remember we're putting this liquidity to work during the year. Ernest didn't come on until March 1. The next $100 million we expect will be in the second quarter and then another $200 million in the fourth quarter. So by the fourth quarter, we'll actually be on a run rate of basically roughly $0.26 to $0.28 and I think that does get you way above that mid-$0.90s estimate that we provided several quarters ago.

I think part of what you're leaving out as well is the offering that we did just recently in conjunction with the Ernest transaction, we still have approximately $400 million in liquidity to put to work.

Okay. Got it, okay. And then the additional $400 million or so of liquidity that you're going to be putting to work, the $100 million in second quarter and then the $200 million in fourth quarter, could you talk a little bit about just what those deals are, the probability of those deals closing or whether that's just something in the pipeline you're still working on? And then also if the 2013 run rate of $1.06 includes permanent financing for those two big chunks of acquisitions you're going to be doing in the back half of this year?

Yes. On the $300 million, the $100 million we believe is very imminent, obviously a deal that we are working on. It will look just like the rest of our portfolio. It won't be any surprises there. The other $200 million again obviously is further down the line because of the timing that we expect it to be, but it, too, is our traditional property types that we're working on.

Okay. And are you using permanent financing for that deal in your 2013 numbers, or is it just the run rate with that deal kind of sitting on the line of credit?

That's right. The latter, Tayo. We have not turned out the line of credit for the $200 million deal.

Got it. That's helpful. Anything new on River Oaks and Monroe? Could you give us updates on those two assets?

Yes, there is. On River Oaks, we have signed a lease with the lead tenant there, and the construction is progressing well. And the lead tenant actually takes up approximately 30%, is that right? Approximately 30% of the total space. And then on Monroe, it continues to perform well. We continue to have a good amount of interest from folks knocking on our door wanting to acquire the facility, but there's no additional things to report at that point.

Okay. Monroe, are you getting rent from it yet?

We're accruing rent.

Okay, accruing, okay, got it. All right. I'm done. Thank you.

Thank you for your question. We have another question. This one is from the line of Daniel Bernstein at Stifel Nicolaus. Please go ahead, Daniel.

I just had a question on the Kindred leases. When do those expire? It looked like in your supplemental, that's pretty far off perhaps, but I just wanted to make sure I understood that, and then are you looking at any of the LTACHs that Ventas may be marketing at this point?

The Kindred leases that we have, remember they were acquired through the Triumphant and Rehab Care acquisitions. So the remaining term on those are pretty far out, 7 to 10 years and then the -- actually more than that. And then the second part of your question was are we looking at the Ventas properties? No, we have not, other than just looking at them very briefly, we have not done anything serious with them.

Okay. And maybe more of a housekeeping question here, what -- you have an idea of what the straight line rents are going to be this year, assuming there's some timing with the Ernest acquisition? I just wanted to make sure we were thinking about the right number.

Yes. what you see this quarter is kind of what you're going to get based on our about $1.4 million.

And I guess the other question I had was on the 15% return you're talking about, if I recall correctly from last earnings call, a portion of that is non-cash. Is that still going to be the case? I guess there were some minimum payments that had to be done in cash, but what portion of the 15% return is going to be cash this year?

We actually expect that it all will be. You remember the way that it's structured, we get a preferred return that staggers up to the 15% and takes what, I think three years to get to that point.

But you expect all of it to be in cash based on the --

All of it in 2013, most of it in 2012.

Okay. I think I'm good. Thank you.

Thank you. We have another question for you. This question is from the line of Karin Ford at KeyBanc Capital Markets. Please go ahead, Karin.

I wanted to ask Tayo's guidance question maybe a little differently. I think on the fourth-quarter call you had said that following the Ernest acquisition, you were expecting the FFO run rate to be $0.91 to $0.95. And could you just reconcile what changes are incorporated between that range and the $0.85? I assume it's the acquisitions, the operating income that's now in there, the bond issuance. Is there anything else that accounts for the differential there?

Yes. On a run rate basis you're comparing it not to the $0.85. You need to compare it to the $1.06.

Remember, the fourth quarter was a run rate. That was a full year, and what we're guiding here is for 2012, which starts with this quarter as $0.18 and then builds to about $0.25 in the fourth quarter, to sum to the $0.85.

Okay. So the fact that the Ernest acquisition didn't close till the end of March is part of it -- part of that gap and then the bond issuance is part of the gap, too?

You're going backwards. You got to compare it to the $1.06 number, not to the $0.85 number. It didn't go backwards. It went up.

Okay. Maybe I'll follow up with you guys offline on that. Just another question on the $1.06, just to be clear, that assumes that the $300 million that you're doing for the balance of this year is financed on your line. Correct?

That's right.

Okay. And then appreciate the color on how Ernest is performing so far. Can you give us a fixed charge coverage on the op co investment? I know you gave us the coverage for the real estate.

Well, it's not a coverage question, Karin, because we essentially get 80% of the cash flow. Whatever the cash flow is, or whatever the earnings are, we get 80% of it, is essentially the equation.

Okay. How can you help us sort of model what that cash flow growth is going to be over time? Can you give us some operating metrics, or things like that at Ernest, to help us be able to predict what that's going to be going forward?

Well, as we said earlier, we expect over the next two years that it will -- that we will collect 15% on our $100 million investment there for the next two years. And then it will grow from that point as those properties continue to -- the existing portfolio continues to improve and the addition -- more so from the addition of the additional properties like the one in Lafayette that we're financing.

Okay. The final question is on the new development, can you give us an expected yield on that, and when we should expect to see rent start to flow there?

Well, again, we've not in several years given specific returns. This will be right down the fairway with what we've guided, which is 9.5% to 11%. The completion would be about 12 months. So probably second quarter of 2013 is when we would expect revenue from that facility.

Okay, thanks.

Thank you for your question. We have another question. This one is from the line of Frank Morgan, RBC Capital Markets. Please go ahead, Frank.

I was curious what your operators, has been their assessment on the proposed rule for LTACH payments. It seems like that's better than what most people expected, but I was wondering if you could give us any color on what their view of the rule is and its impact on their business prospects and on coverage. Then maybe also any comments on the outlook for IRFs? Thanks.

Well, Frank, I think if you'll remember the conversation that we had, while it may be different than what everybody else thought, it's right in line with what we had thought it was going to be. I think all of our operators are obviously pleased with it, compared to what some of the analysts were concerned about. I think most of our operators, if not all of them, thought that the analysts' concerns were overdone. So while they're certainly happy that it's not what the analysts were projecting, I think that their expectations were much more in line with what our expectations were.

From the rest of the rules, as we've said previously, the 25% rule, we have very nominal negative effect from that going forward. Even with the potential glitch as the more -- the extension of the moratorium was written, that only affects four of our properties and on a very nominal basis there. And then I think the other part of your question was what our expectations about the IRFs, and those continue to be very strong. Now very strong obviously is a positive increase, as opposed to a negative increase. So we feel good about all three sectors of our hospital portfolio.

I got you. And I'm just curious about why the stock doesn't seem to have reacted more positively, with a conceptually better operating environment for some of your customers like LTACHs and IRFs. Do you have any theories on like why it hasn't responded more, because I agree with you. I think that the rule for LTACHs and IRFs are better, incrementally better. Do you have any theories on why the stock hasn't responded more favorably to what most people would believe is good news?

Well, Frank, if you go back and look at what the rules came out, it responded very favorably. I think we were up in a day, the day after that ruling came out or shortly thereafter close to $0.30 to $0.40 that day. That traded back down, so it was only up about $0.10 that day. I think there was an awful lot of inter-day profit taking going on and then you have the overall market aspects, and I think people were kind of in a wait and see from this particular call. It's clear from some of the questions that we had earlier this morning about our guidance, that it's been confusing for people, the way our guidance has been giving it in the past, but this is an increase and what our expectations have been and we've just got to do a better job of being sure that people understand that.

Okay. That's fair. Thanks.

Thank you for your question. We have another question. This one is from the line of Todd Stender of Wells Fargo Securities. Please go ahead, Todd.

Just looking at potential sources of funds, how do you kind of incorporate that into your budget? Are you looking at asset sales and would you consider using preferred equity?

As you know, because you've been with us for a very long time, we have over the years had selected asset sales. We don't have anything that we are actively marketing, but historically there always seems to be something that comes up that makes sense for whatever reason, and we do expect some of those on a very selective basis, but nothing in the plans or in the works right now. We certainly have had the ability over our years to access all forms of the capital market, and with our recent upgrade from the credit rating agencies, and access to those markets, the unsecured debt markets, we feel very good about our ability to continue to access those markets. We have not accessed the preferred stock market to date. We don't need capital right now, and when we do, we certainly will continue to look at all aspects of it.

Okay. Thanks, Ed. And just going back to the two development projects, with timing and expected yields you provided, how about obtaining licenses state by state, can you just kind of give us some broad strokes? Looking at Indiana and Texas and how far along the operators are in obtaining licenses, just some of the requirements around that?

Just so happens that those two particular states are very workable states, Texas probably being the most workable. That won't be an issue at all in the construction completion timing standpoint.

And the same goes for Indiana?

Yes.

Okay. Thanks.

Thank you for your question. We have a question from the line of Tayo Okusanya. Please go ahead. You're in the call.

Yes. Just kind of going back to this guidance question again, the 2013 $1.06 number, if you were to exclude the $200 million of acquisitions for fourth quarter, which is kind of a new thing that you've announced, and I was -- What would that number be compared to that $0.93 and $0.97 guidance you gave before for 2012 on a run rate basis?

Well, it's not actually a new number, Tayo. All we've done is identified the timing of it. We've said from the beginning of the year, actually late in 2011, can't remember what year we're in, and then I said again once we did the Ernest transaction, we still expected that we would do $300 million of acquisitions for the remaining portion of 2012. So all we've done is to update you further on the timing of that, and the $100 million we think is imminent and the $200 million will be done by the fourth quarter.

Tayo, we can't off the top of our heads, give you the difference in the $1.06, but Charles would be happy to walk you through that on another call.

Yes, exactly. I think it definitely would be helpful to all of us in the investment community if there could be some type of reconciliation done between the old number and the new number, so we just kind of get a sense of exactly what's changed, because it does sound like there's a lot of confusion around it. Also in regards to River Oaks, I'm just curious, the North Campus, is that still under redevelopment at this point?

It's the only campus we have left, Tayo. We sold South Campus years ago.

Right. And you just moved -- you just had a tenant move in that's taken up 30% of the space, you said. Is the building itself physically completed?

No. I've said we've signed the lease. They haven't moved in yet. The construction --

Okay. When is the completion date again for the building?

The total completion, we're probably looking at Q1 of 2013.

Q1 of 2013, okay. That helps me understand that. Okay, thank you.

Thank you for your question. And we have a third question from the line of Daniel Bernstein of Stifel Nicolaus. Please go ahead, Daniel.

Yes. On the development you're doing with Ernest, are there other development projects that you're looking at? I guess Ernest does both LTACHs and IRFs. So are you looking at maybe doing development for both property types?

Well, Dan, I'm sure you know, there's still the moratorium on the LTACHs right now. So right now, all we're doing with them is the IRFs, and they do have additional projects planned, as we've stated when we bought that portfolio. That we expected to grow with them, that there was a lot of pent-up demand because they had not had access to capital for the past few years. So there are a number of properties that we expect to be doing with them in the near future, and at the appropriate time, we'll announce when those are.

Okay. That's all I had. Thank you.

Thank you very much. There's no further questions for you.

Okay. Well, thank you all very much. If you have any questions about the guidance, please don't hesitate to call Steve or Charles or myself and we'll walk you through it. Thank you.

Thank you, ladies and gentlemen. That concludes your conference call. You may now disconnect. Thank you very much for joining us. Do enjoy the rest of your day today.