Medical Properties Trust Inc (MPW) 2012 Q3 法說會逐字稿

Welcome to the Q3 2012 Medical Properties Trust earnings conference call. My name is Ellen and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Charles Lambert, Managing Director. Mr. Lambert, you may begin.

Thank you. Good morning. Welcome to the Medical Properties Trust conference call to discuss our third 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 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. Additionally, 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 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 today. First and foremost, please know that all of our thoughts and prayers go out to those in the path of Hurricane Sandy. We pray that you and all of your families are safe, dry and warm.

Today, we announced the continuation of a truly spectacular year for Medical Properties Trust. With today's announcement, we show a continuation of our strong performance resulting in an FFO payout ratio of 80% for the third quarter. We also announced that we've made an additional $259 million in acquisitions since our last call. Year-to-date in 2012, we have now made a total of $781 million in strategic acquisitions and commitments. This is a record level of acquisitions for us, and is approximately 80% higher than we have ever done in one year. And we still expect to complete additional acquisitions in the fourth quarter.

Based only on our existing portfolio, which includes the acquisitions announced to date, we expect our annual run rate FFO per share to be $1.08. Said in a slightly different way, if we made no further acquisitions, no more in the fourth quarter, and none in 2013, our 2013 FFO would be $1.08 per share. This equates to a payout ratio of 74% from our in-place portfolio.

We have a strong pipeline of potential acquisitions for next year. We will provide guidance for what we expect in 2013 as we get closer to year-end 2012. In any event, given our low cost of capital, and our ability to continue to invest in properties at an average going-in cash cap rate of 10%, we expect our acquisitions to be immediately accretive.

Our portfolio continues to produce one of the highest EBITDAR lease-covered ratios in the REIT universe. And I know most of you know this, but again, just to be sure we're all on the same page, we analyzed our lease coverage ratio using EBITDAR, not EBITDARM like some of our peers.

As a means to be conservative, we made the assumption that if we were to have to replace a management company, we would still have to pay a third-party a management fee. Our overall portfolio EBITDAR lease coverage for properties that have been in our portfolio for at least 12 months is right at five times.

Both the LTACHs and IRFs produced a good year-over-year increase to their coverage, with the LTACHs increasing to 2.5 times, and the IRFs to 3.6 times. The only decline we saw was in the acute care sector with an approximate 5% quarter-over-quarter decline. This is fairly normal for the third quarter over second-quarter results for the acute care hospital sector, and has been similarly reported by non-MPT hospitals all across the country. Our acute care hospital EBITDAR coverage for the third quarter was approximately 6 times.

Our ID investments continue to outperform. As we projected, the annualized return for our non-earnest operating investments exceeded 35%. Ernest continues to perform well, generating EBITDA more than 3% ahead of budget. We recently sold two properties, both LTACHs, one in the western part of the US, and one in the eastern part. These two properties were sold to third parties not affiliated with MPT or the tenant.

We sold these two properties for 27% more than our original cost, which equates to a 260 basis point cap rate compression. These two properties were not standout properties; they were right in the middle of the pack -- average performers in our portfolio. We believe this gain is indicative of the value of our total portfolio, which has grown from an EBITDAR lease-covered ratio of about 3.2 times in 2006 to about 5 times today.

Despite the political back-and-forth surrounding sequestration, we wanted to show you the strength of our coverages. We have used two different scenarios to illustrate this point. Both assume that our operators make no adjustments in how they operate. For example, we assumed no changes in patient mix or case mixed indexes, or reduction in expenses. These are obviously very conservative assumptions, because in all cases, our operators would make such changes.

But in any event, we ran two scenarios. One assumes a 5% across-the-board cut to Medicare, and the other assumes a 10% across-the-board cut to Medicare -- both significantly higher than the assumed 2% sequestration. In the first scenario, the 5% cut, our overall portfolio coverage would go down to approximately 4.25 times. Acute care hospitals would see an approximate 70 basis point drop, and LTACHs would see an approximate 50 basis point drop, and IRFs an approximate 40 basis point drop.

Under scenario two, with a 10% across-the-board cut to Medicare revenue, MPT's total portfolio coverage would see a drop of just more than 100 basis points. LTACHs would decline about 100 basis points to produce a coverage of slightly more than 1.5 times, while the IRFs would still have a coverage exceeding 2.5 times, or an approximate 80 basis point drop.

As we have said numerous times, we do not expect to see long-term cuts to today's rates. We believe any cuts will come in the form of cuts to the future growth in rates. And if we see any cuts, we believe the actual effect would generate no negative impact on MPT, because our properties would still be producing strong coverage ratios.

Furthermore, we continue to believe that regardless of what happens with the upcoming election or the federal budgets, we fundamentally believe that hospitals will remain at the core of our healthcare system. There have been numerous political changes throughout the history of the country, and hospitals have always remained a constant. We are confident that these institutions will continue to be the top of the pyramid in the healthcare delivery system in this country.

In summary, I want to point out again that our existing portfolio is now generating an FFO which produces a payout ratio based on our current dividend of 74%. Our portfolio continues to generate strong EBITDAR lease coverages; our pipeline for future growth looks robust; and our balance sheet is poised to take advantage of these opportunities.

At this time, I'd like to ask Steve to continue with the detailed financial results for the quarter, which further demonstrate the strength at MPT. Steve?

Thank you, Ed. The third-quarter financial results continue to prove the value of our strategy. We invest in high-return hospital real estate, and lease to operators who have proven, over decades of evolving hospital economics and regulations, that they are able to profitably navigate the largest and one of the most complex segments of the US economy.

So I will summarize the quarter's financial highlights. Normalized FFO was $33.4 million, a 71% increase over 2011's second quarter. On a per share basis, that translates into $0.25 per share in the third quarter of 2012, 39% higher than 2011's $0.18. We have now posted two quarters in a row of year-over-year per share FFO growth that exceeds 35%. And, as we have been predicting, our dividend payout ratio has correspondingly improved to 80% for the third quarter, with further improvements expected in 2012 and beyond.

The great majority of our FFO, of course, is derived from our lease and mortgage interest revenue. But also included in FFO in the third quarter is $3.5 million of income from our investment in earnest operations -- and this is included in interest income; and another $1.1 million in earnings from our six other investments and tenant operations. That $1.1 million is up 25% over last quarter, and reflects an annualized return exceeding 40% on approximately $10 million of total investments.

This continues to validate our strategy to limit our RIDEA-type investments to those in which we are able to acquire significant upside opportunity, over and above our already high real estate returns, at little incremental investment. Remember that we separately earn rent and mortgage interest of approximately $50 million annually from these operators.

There are two items that reconcile funds from operation to normalized FFO. Number one, costs associated with asset acquisitions, a $410,000; and secondly, the non-cash charge of accrued straight-line rent related to a facility that we sold during the quarter of about $1.6 million. I'll review this sale in further detail in just a moment.

Our strongly positive outlook regarding growth opportunities was once again confirmed by activity during the quarter. We added three general acute care hospitals to the prime relationship for a total investment of $210 million; commenced construction of a new $18 million inpatient rehabilitation hospital that will be added to the earnest master lease; entered LOIs to acquire two existing LTACHs during the fourth quarter, for an aggregate $31 million; and agreed to the terms of a $100 million proposal to fund the development of 25 full-service emergency facilities for a leading provider of these types of services.

The weighted going-in cash cap for these transactions exceeds 10%, and the majority of the rates increase by inflation each year. A few do have floors and ceilings on the CPI measures.

We also sold two properties during and after the quarter, as Ed has already described. Since acquisition in 2004, these properties generated an unlevered internal rate of return exceeding 15%. And to reiterate Ed's point, the cap rate, based on the sales price, represented a 260 point compression versus what we were earning at the time of the sales. That's an important data point for any investor's estimate of our portfolio NAV. And one of the several benefits of the sale is that it provides visibility into the market for these types of hospital assets.

We used our revolver to finance the third-quarter acquisitions and expect to use it for the fourth-quarter acquisitions. Other than these transactions, there were no other material changes in our capitalization during the quarter. And a summary of our debt is included in the supplemental that was released earlier this morning.

Turning to guidance, this morning, we are increasing our estimate of 2012 normalized FFO to $0.90 per diluted share, a $0.05 increase from our estimate from last quarter. In arriving at this estimate, we took into account our assets and debt as of September 30; acquisitions and dispositions since the end of the quarter that we have just described; placement into service of our three Emerus Emergency Hospitals during the quarter; and approximately $31 million of fourth-quarter acquisitions.

Based only on these assumptions, plus the developments that will come online during 2013, the normalized FFO run rate, as of January 1, 2013, is, as Ed has just said, estimated to be approximately $1.08 per share, representing a dividend payout ratio of less than 75%. Now just to reiterate, 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 acquisition and capital activities in 2013.

But because we are able to invest at cash cap rates that have exceeded 10% this year, combined with our low cost of capital, we remain highly confident that our acquisitions in 2013 will be strongly accretive from day one of the acquisitions, with annual inflation adjustments improving that accretion each year. Any level of acquisitions therefore further improves our outlook for FFO in 2013. This strategy, focused on lease revenue from hospital real estate, is what will account for the great majority of our future earnings growth.

As usual, 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.

And with that, I will turn the call back to the Operator and we will take questions.

(Operator Instructions). Jana Galan, Bank of America Merrill Lynch.

2012 has clearly been very successful in terms of sourcing acquisitions, and I was wondering what the pipeline looks like currently? And should we, going forward, be thinking about this $400 million per year run rate? Or given the results this year, should that be a little bit higher?

As we said earlier, we have not given an exact number for what we expect 2013 to be. The pipeline is very robust. It is probably more heavily weighted toward the acute care sector than it is the post-acute care sector, as I've stated in previous calls. We certainly hope and expect that it will be much closer to this year's total acquisition than the prior year's averages. But we'll update with a firm number later in the year.

Thank you. And then how should we think about the funding of acquisitions? Will you be looking at further dispositions? Or are you thinking more of a 60% equity/40% debt going forward?

Yes, we actually do think there could be opportunities for limited dispositions. The market rates that we achieve with the sale of two LTACH hospitals are very encouraging to us. And we believe that that market continues to grow and will be available, should we selectively want to sell certain properties, which we will consider.

The debt markets, as probably everyone on this call knows, are at historic lows with respect to market interest rates, so that is very attractive and abundantly available to us as we sit here today. And as the stock price has improved over recent weeks and months, that makes it more attractive for us to reach that mix, as you point out, Jana, of roughly 60%/40%.

Thank you. And then just a quick question on -- it looks like you have three leases maturing at the end of this year. I was just curious if you expect to renew? Or are you looking -- marketing it to other tenants?

There are three, you're right. We absolutely expect to renew two of those; I'm having trouble coming up with the third. Oh, yes, I'm sorry, I'm just -- to two of them, we're already in the process of -- we've extended them and are working on documentation for renewal in the third. I'm sorry, I just don't remember. I'll have to get back to you.

Okay, thank you very much.

Daniel Bernstein, Stifel Nicolaus.

I'm actually happy to be on the call here with -- essentially with power. I guess I wanted to ask you, what is the actual cap rate on the sale of the assets in the fourth quarter? Are you able to disclose that?

Yes. It's about 9.5%. And those were paying us in excess of 12.5% at the time we sold.

And then you just -- you get the cap rate because of the lease coverage and effectively whatever demand there was out there for the offsets and --?

Right.

Okay. And then I just want to understand, the emergency room, freestanding emergency room development, I mean, what makes those assets attractive to invest in? And it's different than urgent care, correct? These are not urgent care facilities.

You're right, Dan -- absolutely different from urgent care. These are roughly 6000-ish square foot facilities. They're freestanding on attractive retail locations, including out-pads. They are staffed 24/7 by emergency Board-qualified physicians, which is one way that makes them significantly different than urgent care. They do fairly advanced procedures. Obviously, if there's something life-threatening, the patient will be stabilized and then moved to a more appropriate facility.

We think it is an absolutely attractive new development in healthcare delivery. As you know, we already have a relationship with another emergency provider. And in that case, Emerus are actually licensed hospitals. The $100 million that we just announced, those hospitals -- or those facilities will not be licensed as hospitals, but absolutely will provide top-flight emergency care with Board-certified physicians.

And they're actually licensed emergency rooms. Not all states have the ability to have this type of facility. But in the states where these facilities are and plan to be, they're actually licensed emergency rooms. Very similar to a hospital, obviously, without the overnight stay.

This is equivalent to a Certificate of Need?

(multiple speakers) No, the state -- it's not a Certificate of Need state; it's states where the licensure for those hospitals are actually -- I mean, for those facilities, are actually emergency rooms. But they're not in Certificate of Need states.

Okay. So it does provide some level of barrier to entry?

That's right.

Okay.

Yes. It's very different than an urgent care.

Okay. And is there a timing on the -- these are development -- this is development funding and a lease-back at the end, correct? And so what are the timing of the development? I assume you're going to get some interest income or morning on the initial construction morning that you provide. Is that correct?

Well, we will, Dan. We don't recognize that, though. We absolutely earn it, but the accounting rules say we capitalize that into the cost of the facility, and then it ends up increasing the rate. As the announcement says, we think there will be up to 25 of these facilities closing, anticipated on the first several early -- very early, in fact, in 2013. We expect all 25 to have been commenced within 18 months of signing and completed within 30 months of signing.

Okay. And I know New Jersey is a real mess right now, and I hope all your patients at your facility in New Jersey is doing okay. But have you had any word from your New Jersey acute care hospital whether everything is okay there or not?

Yes, Dan. We've actually stayed in contact with all the facilities up in that part of the country all throughout the night. We were getting reports literally throughout the night. So if I still sound a little groggy, it's because I was up with them.

But the initial reports are fairly good. I don't want to give a complete report until we have all the information. Obviously, our facility in Hoboken was evacuated before the storm. That was made public as evacuation was going on. I think of all the facilities, that's probably the one that we'll look at the most closely. I think the reports from all of the others are pretty good.

Okay. Okay, well, thank you, and I will talk to you soon. Thank you for taking my call. Thanks.

Thanks, Dan.

(Operator Instructions). Michael Mueller, JPMorgan.

Hi. Can you hear me? (multiple speakers) Okay, great. Great. A few questions. First of all, the First Choice -- following up on that, are the new facilities -- it looks like everything they have now is in Texas, what, Dallas, Houston, Austin, if I'm correct. Will the expansion facilities be in Texas as well? Or going to different geographies?

They will be in Texas and some of the surrounding states.

Okay. And then I was wondering, I think on the last quarter call -- I'm working remotely, so I don't have everything with me -- you talked about $200 million of fourth-quarter acquisitions. I was wondering if you could just reconcile that to maybe what closed in the third quarter, what you've announced so far that could be hitting in the fourth quarter? Would some of that move forward into the third quarter? Just maybe tie the two together, if you could?

Well, the $200 million would have made the $759 million or the (multiple speakers) $781 million -- be $800 million exactly. And as I said earlier in the call, we expect to still have some additional fourth-quarter closings, though I think that we will certainly meet the full $800 million.

Okay. So -- but some of that $200 million -- some of that, it sounds like some of the stuff you're talking about closing in the fourth quarter now, but maybe some that was moved into the third quarter, is that the right way to think of that?

Well, I think you're talking about the $100 million development line for First Choice, and that is correct.

Okay. Great. And then last question. The 2012 guidance, it went from $0.85 to $0.90. It went up a nickel. The 2013 run rate went up about $0.02 from $1.06 to $1.08. What is -- what's the disconnect there, the difference why '13 goes up significantly less than what the fourth quarter is? Is it asset sale, the two asset sales are back-end loaded and that's going to -- that's impacting the run rate and kind of pulling that -- you know, the $0.05 bump in this quarter down toward the two? Is that what the impact is?

No, I mean, it's basically the timing, Mike. And including the -- not only timing, but the rates that we've got and will get in the rest of the fourth quarter are meaningfully higher than what we had modeled -- which I think, if you recall, we've been saying that we expect to close deals in 2012 between [9.5] and [11]. And so we've -- where we model, we used the lower end of that, the rates have actually been, as I say, meaningfully higher. And --

So it's a combination of higher rate and timing. Obviously, when we gave the $1.06, now the $1.08, it was all at a 12-31-2012 number. And so for the 2012, up to $0.90, we made acquisitions quicker in the year than we had originally anticipated.

At better rates.

Okay. Okay, thank you.

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

Ellen, thank you very much. And again, thank all of you for listening today. And as always, please don't hesitate to call any of us with any questions you may have. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.