Medical Properties Trust Inc (MPW) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2012 Medical Properties Trust earnings conference call. My name is Erica and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Charles Lambert, Managing Director. Please proceed.

Good morning. Welcome to Medical Properties Trust conference call to discuss our second-quarter 2012 financial results. With me today are Edward 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 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 the conference call we will describe certain non-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, 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 thanks to all of you for joining us today for our 2012 second-quarter earnings call. It is always rewarding when a good plan produces the results that you hoped for, and that is exactly what our second-quarter results show.

Since the beginning of 2011 through today, we have acquired more than $850 million in assets. During that time period we raised enough capital to meet those needs and still leave us with approximately $400 million in liquidity. We knew in late 2009 that the opportunities that lay in front of us would be positively transformative for Medical Properties Trust.

Just to remind you, we purposely elected to endure some short-term dilution in order to obtain the results you are seeing today. We will always manage this Company for the long term.

In every respect, the results of our second quarter were outstanding. Year over year, our revenue increased 46% and our normalized FFO is up 37% per share. We not only improved the year over year, we also saw strong gains compared with the first quarter, which are indicative of the underlying and sustainable trends we see emerging. Compared with the first quarter, our revenue increased 18% and our normalized FFO per share is up 22%.

Since our first acquisition, our portfolio has performed very well. Our investments are in some of the country's strongest hospitals with some of the country's strongest operators. Our EBITDAR coverages have consistently been some of the highest in the REIT industry. Hospitals are the linchpin of the healthcare delivery system. Regardless of what direction healthcare reform takes, hospital will continue to be a vital part of that system. It is our unique and deep understanding of hospital operations in the industry that has allowed us to achieve the results I just outlined.

This core knowledge is a differentiating characteristic that forms the foundation of our past and future successes. We believe this knowledge will allow us to continue to achieve strong operating results as we continue to grow our portfolio.

Last quarter, we told you that we expected to make at least $300 million in acquisitions through the end of this year. To date, we have achieved about $130 million of that and still believe that we will achieve at least an additional $200 million through the end of this year.

Turning to our property results, the mature operations in our portfolio -- and just to remind you that means the property as been in our portfolio operationally for at least 12 months -- continues to show an overall coverage of more than five times. The only real decline in our portfolio experience came from some of our acute care hospitals in the California market. This was due primarily to some reimbursement compressions in California.

However, offsetting this is the California Hospital Provider Fee program signed into law in September 2011 that is expected to be a net benefit to our California hospitals. Our acute care portfolio continues to have a coverage ratio of more than 6.5 times. Our LTACHs are at more than two times and our in-patient rehabilitation facilities are at about 3.5 times.

We saw no change in admissions at our facilities over the same period as last year and down only slightly from quarter to quarter. The summer months are almost always the slowest time for hospitals and these admission statistics match the results being reported all across the country by all types of operators. Approximately 42% of our tenants' revenue comes from sources other than governmental reimbursement. Ernest continues to perform exceptionally well with an EBITDAR coverage of 2.14 times compared to our expected two times coverage when we acquired them. Our non-Ernest RIDEA investments continue to demonstrate their strengths by generating a return on an annualized basis of 35% for the second quarter. We expect this to continue throughout the remaining quarters.

On the reimbursement front, you most likely know by now that CMS issued its final rule for fiscal year 2013. Medicare plans to increase payments to Ernest and LTACHs, an estimated 2.1% and 1.7%, respectively, and 2.3% for acute care hospitals.

Of note, the proposed rule strengthens the hospital value-based purchasing program or VBP. This program will adjust hospital payments beginning in fiscal year 2013 and annually thereafter, based on how well hospitals perform or improve their performance on a set of quality measures.

As mentioned in previous earnings calls, our portfolio includes some of the highest quality hospitals in the country in terms of delivery of care. For example, Prime Healthcare, a system of 18 hospitals, continues to achieve national recognition for its quality performance. 11 of Prime's hospitals were honored this year with an A hospital safety score by The Leapfrog Group, an independent, national, non-profit organization run by employers and other large purchasers of health benefits. Modern Healthcare published a feature story in June on the positive impact of health systems on patient care. Prime Healthcare was highlighted in the article as an example of health system quality.

With the announcement today of our second-quarter earnings we have demonstrated the result we have been expecting since we embarked on this strategy of taking advantage of the many investment opportunities we have before us. We continue to be optimistic about the acquisition pipeline and the opportunities that exist for the remainder of this year and into 2013. Our portfolio, which continues to be one of the strongest in the industry, continues to perform to our expectations.

We look forward to our future success in creating value for our shareholders that better reflects our differentiated and market-leading fundamentals.

I will now ask Steve to walk through the details of this quarter's financial results. Steve?

Thank you, Ed. Just to set the stage for a little commentary I want to summarize the quarter's financial highlights.

Normalized FFO was $29.7 million, a 70% increase over 2011's second quarter. More portly that translates into a $0.22 per share normalized FFO in the second quarter of 2012, an impressive 37% increase over 2011's per share amounts. Included in FFO is $879,000 of earnings from investments we have made in the operations of certain of our tenants. This does not include Ernest, which is reflected in interest and fee income.

Our supplemental package released this morning includes a new schedule summarizing our results from these RIDEA type investments. Since the close of the quarter, we have already added another $100 million in 10% plus assets and we expect to add another $200 million before year-end. We will discuss our outlook momentarily, but the point is that our shareholders can look forward to continued growth in FFO per share.

As Ed has just described, these financial results are impressive not just because of the outstanding returns delivered to our shareholders, but also because they validate our long-term approach to our business plan. That sometimes includes excepting short-term quarter-to-quarter dilution in order to acquire predictable and growing long-term hospital real estate that generate high returns over up to a 30-year period or longer. After raising $1.3 billion in capital since early 2010, we have made investments in hospital assets of more than $1 billion at an average initial cash return approximating 10%.

It is these investments along with the effect of our improved cost of capital that account for the dramatic increase in our nominal and per-share results. Based on the second quarter's $0.22 per share our dividend payout ratio has improved to 91% from as high as 125% between the times we raised capital and made investments. Again, we expect continued improvements in our payout ratio as our FFO per share continues to grow. And we believe these conditions are likely to remain for the foreseeable future. The acquisition environment is attractive, and US and global economic conditions are generally expected to result in continued very low interest rates.

We had no changes to our capitalization during the quarter. Details of our debt are included in the supplemental package that was released this morning and we will be happy to take questions in a few minutes.

We funded the July investment of $100 million with cash and borrowed $25 million under our revolver for working capital and dividend purposes. So as of today, we have $375 million that is undrawn on the revolver. We have historically utilized multiple types of capital products to fund our acquisitions and operations, secure and unsecure term loans, unsecure 10-year bonds, convertible notes, bank debt and common equity through marketed and at the market offerings.

As participants in the market for all of these products we are able to access the best option in respect of cost, term and flexibility at the times we elect to raise capital. So at the same time that we have been executing on our acquisition plans, we have seen dramatic improvements in our cost of capital. Upon funding of the anticipated $200 million in remaining 2012 transactions, our leverage will approximate 47% with about a 5.2 times than the EBITDA ratio. We will have approximately $200 million drawn on the revolver which we would look to take out with more long-term capital. And as noted, we expect to have a range of alternatives to provide us the most efficient capital source for that takeout.

We have previously described our second-quarter and later acquisitions, so I won't belabor that other than to reiterate that we continue to achieve high real estate returns and we do not see any conditions that could reasonably lead to tightening. It is also important to remind you of the benefits that come from converting all of our Prime Healthcare investments to master lease and other cross default and cross collateralization arrangements.

This gives us even stronger credit support than Prime's already outstanding profitability and lease coverage. We extended the overall term of our relationship and we obtained an uncapped CPI escalation provision with an attractive floor.

Entering 2012, we had only three leases expiring. We have reached agreement in principal to extend two of those for an additional 10 years and we sold the facility underlying the third to the operator. In conjunction with agreeing to sell the third, we negotiated an early exercise to extend the lease of another facility that we leased to that same operator.

For the year ending December 31, 2012, our expectation of normalized FFO is approximately $0.85 per diluted share, unchanged from our estimate from last quarter. In arriving at this estimate we took into account our portfolio as of June 30, acquisitions of $100 million made since the end of the quarter, 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, and approximately $11.7 million in earnings from our investment in Ernest operations.

Based on these assumptions the run rate for this portfolio is estimated to be approximately $1.06. That is not an estimate for 2013. We expect to provide guidance on 2013 later this year which will include, among other things, our estimate of the effects of acquisitions and capital activities in 2013.

These estimates do not include the effects, if any, of debt refinancing costs, real estate operating costs, interest rate swaps, write-offs of straight-line rent or other nonrecurring 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 and tenant operations vary from expectations, or existing leases do not perform in accordance with their terms.

With that, we will take any questions and I will turn the call back to the operator.

(Operator Instructions). Tayo Okusanya, Jefferies.

Good morning, everyone. Couple of questions. First one, the new disclosure is very helpful. I am just trying to make sure I really understand what it is telling me particularly around Ernest. The operating revenues of $4.7 million of operating revenue, what is in that number? Is that the interest income from the 15% loan and the -- whatever portion of the net income you get from operations as well as the rental income from the assets as well, the 2012 assets?

No, it does not include rental or interest income based on the assets. In other words, we have got four assets under mortgage loans so that is not included. That is strictly the 15% interest on the $93 million acquisition loan.

Yes but 15% of $93.2 million is just about $1.5 million. This is a $4.7 million number.

I'm not sure I followed that arithmetic. 15% of $93 million for the roughly, what, four months that we had the property I think that is the calculation that will get you the $4.7 million.

How am I getting this wrong? All right. Okay, I see it. That's helpful. And then what about the [PO] operation of Ernest itself? The $3.3 million in equity that you have in the operations were roughly 50% investment in the Company. Operationally how is the Company's [sales] doing?

Well, it is doing exceptionally well. As I said in the prepared remarks we underwrote it originally to be at this point about the 2 times EBITDAR in coverage and into about a 2.14 times coverage.

That's helpful. Then the $200 million of acquisitions that you are expecting in fourth-quarter 2012. Could you just give us a general sense how that process is going and whether it is going to be to the same tenant or to a different tenant. If you could just give us some specifics about that pipeline.

Sure. It will be a mixture of new and existing tenants and it will be heavily weighted toward the general acute care hospitals.

That's helpful. And I always ask this question every single quarter. Just an update on Munro as well as River Oaks.

River Oaks continues to progress very well. There is really no additional update there. The construction is still on schedule to complete some time in the first part of 2013, the first quarter in 2013, at which time occupancy will take place and on Munro, it operationally is doing about the same, which is well. There are some negotiations that we have been having but we are not in a position at this point to have any additional discussions about that right now.

That's helpful. Any additional leasing at River Oaks at this point?

No.

Okay. That's helpful. Thank you.

Daniel Bernstein, Stifel Nicolaus.

Good morning. I just wanted to ask on the previous prime leases there was a cap on the CPI, right? I think it was 5%. Is that the right number?

No. It varied from lease to lease. There was generally a nominal limit on how much it could escalate, but it was not based on CPI. So, getting that escalation is a very important and very valuable outcome of the master lease restructuring. And also note there were little if any fixed floors on the old leases and now since we have established a floor, you will see that reflected in a little bit higher run rate on the straight-line rent.

Okay. And was there any cross collateralization between properties before or is that all new?

It varied and to the extent that there was cross collateralization it had burn-off provisions. So the properties had done so well for so long that most of those burn-off provisions had been achieved by Prime. So we had very -- at the time we did the master lease we had very little cross collateralization.

Okay. That's good. And then on the pipeline. I just wanted to explore that just a little bit further in terms of post-Supreme Court ruling and you have the capital gains potential tax increasing. Has there been a change in terms of the volume of assets or portfolios that you are seeing? Do you think hospitals are more willing to sell now today than before, for whatever reason? I am just trying to understand if seller attitudes have changed at all.

They really haven't. As I said when we first started this way back when with healthcare reform, we really didn't care which way it went. We felt comfortable that from the hospital sector we would be in a good position either way. And we haven't seen -- we didn't see any decline in appetite to do additional business before the ruling and we haven't seen any increase post the ruling. It is still very strong.

Okay. And also just on the pipeline, are you assuming any debt with these acquisitions? Or is this all draws or whatever financing you are going to do within your capital structure?

Well, for the next $200 million we just make the assumption that we will use the revolver to draw and then as we just noted in our prepared comments we will have a number of alternatives, we believe, for making that more permanent when the time comes.

Do you have a particular tendency at this point or inclination as to whether you had rather do equity or debt to term out the revolver or still to be determined?

Well, it is still to be determined and we will always take advantage of the most efficient form of capital, including the cheapest and the point being that we are participants in almost every capital product market now, which gives us a tremendous amount of flexibility and has served, among other things, to overall lower our cost of capital.

Thank you very much for having me on. I will jump off.

Karin Ford, KeyBanc Capital Markets.

Good morning. Just a couple more questions. The restructure of the Prime lease. To get all the additional favorable provisions that you got from Prime on the new lease, did you have to change anything, given them back anything and is there any change to either the cash or the GAAP rent under those leases?

No. It was structured to be neutral in so far as the cash payments. As I mentioned on the GAAP payments we now have a floor of an annual increase so that affects the straight-line rent.

So the 2Q -- I saw the straight-line went up quite a bit in 2Q. That is a good run rate for straight-line going forward?

No. It is not because it doesn't affect -- it isn't affected yet in 2Q by the Prime and I think it was fairly flat from first to second quarter.

Okay. Second question is on the asset that you sold. How much was that sold for and what was the cap rate on that?

Well, you can see in the reconciliation, the FFO reconciliation that that asset generated a GAAP loss of about $1.4 million. And the accounting doesn't work this way, but as I mentioned a few minutes ago, I think that was really a combination of selling that asset and extending the lease on another asset, which doesn't get value obviously. So the point being that is not a good comparable when you start talking about cap rates because it doesn't include all of the economic terms and the overall agreement.

Okay. No, yes, I get it. I just want to make sure that we are modeling it properly going forward.

Okay. And then, finally, can you just give us some indicative rates that you're seeing on some of the options that you are looking at for permanent? Can you talk about where you think you can do either secured or unsecured debt today?

Well, we are not looking at right now. Now obviously we keep our eye on the market. You can look at where we have got two issues of 10 year bonds trading and one of those is well down into the 5s and the other is slightly above that, maybe approaching as much as 6%. There is an anecdotal I guess preferred market developing that is kind of being driven by some of the bank regulations. [Perpetual, Aquino tip] preferred probably we would be looking in somewhere in the 6 and 7 range and bank debt, obviously, remains extremely cheap.

But again, we will look at all of those alternatives when we need to raise more capital and make the best decision of what is available at that time.

That's helpful. And finally what is the interest rate on the new loan on Centinela?

We haven't given cap rates now for a couple of years on individual assets. But it is well within the range that we have given between 9.5% and 11% that we have been giving recently as a target.

Thanks very much.

Todd Stender, Wells Fargo.

Good morning. Steve, your commentary on the sources and uses of funds is very helpful. So, thanks for that. Did I get this right, the current line balance sounds like it is about $25 million?

That's right.

Okay and that will ramp up to include the Q4 acquisitions.

That is the anticipation, correct.

And then going back on Karin's question regarding the permanent capital. What kind of terms do you look at? Are you looking at bank term loans that might be on the shorter side, say, five to seven years? Or do you do you prefer to match fund your long-term leases with stuff at least 10 years?

Just to be clear, we are not looking at anything right now. There is no immediately planned capital raise. In general speaking at a higher level in general we like (multiple speakers) lower rates. And in the bank market you can probably get as you describe probably five to seven. Unsecured markets again are very very strong right now. We believe we could issue if we wanted to today, 10-year unsecured bonds fixed at something between 5.5% and 6%. And again our -- we will mitigate -- all things equal, we will mitigate toward longer term and lower rates. But those market conditions will be apparent at the time that we need more capital and we will make that kind of decision then.

Okay. Thank you. And just looking at the competition, if you can describe what you're seeing out there for the asset type that you look at and really maybe describe or comment on the competition that you are seeing for your anticipated acquisitions in Q4.

There is a fair amount of competition on the post-acute sector. There still isn't a tremendous amount of competition on the acute care sector. We are seeing some more than we have in the past; some old lenders are getting back into that business but nothing that has taken anything away from us that we have wanted at this point.

Okay and also being a developer in a hospital space. How about new supply out there? Can you maybe comment on what you're seeing as well?

Well, this has been the same answer literally since the beginning of this Company. We could do a development deal a day. There's that much potential development out there. We are clearly not going to do that much development transactions. The credit is still fairly tight out there for the operators, and we want to make sure that when we do a development transaction, it has got all of the pieces to the puzzle together. We certainly need some additional development deals in this country from a delivery -- healthcare delivery system and so we'll do it from time to time, but nowhere to the extent that we could possibly do it.

Okay. That is helpful. Thank you.

We have no further questions at this time. I will now turn the call over to Ed Aldag for any closing remarks.

Erica, thank you very much and we greatly appreciate all of your interest today. If you have any questions please don't hesitate to call Charles, Steve or myself and we will get back with you with the answers. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect and have a great day.